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August 8, 2021 9:00 am
Listen and learn as Landon Holland and Peter Richon talk about the basics of financials while Peter Richon a well-known fiduciary in the Raleigh area answers some questions during this episode hope you enjoy it.
Although you plan for success planning matters radio and welcome into the program. This is planning matters radio.
I am Peter Rochon found her advisor at Sean planning on his online it rich on landing.com and have a new voice on the air for today's program of our youngest members of the team. Sean planning Landon Holland and Landon takes care of producing many of these radio programs so Landon 17 yes 17 years old, 17, and has been listening to a lot of the financial discussions in language and start to pick up on some of the things landing asking a lot of pretty smart questions for 17-year-old I have for sure because a lot of us of the really interesting to me and I like that I can have the best of both worlds because I like editing and then I can also learn more about financial stuff that I don't really know about next get a jump on for the future. Yet well at 17 years old. If you get a good handle on your money start to really think about it and act intentionally with it you will be in great shape in the future because it probably took me until at least my mid to late 20s before I really started in my opinion, making wise financial decisions.
My past, my background as I was running several talk radio stations and I actually got to run the board for Dave Ramsey when I was 24, 25 years old.
He came to town and this guy's message was stay out of credit card debt.
By all means necessary in any way.
You cannot like oh yeah spot on. So I mean you're starting to earn a little bit of money you got a paycheck coming in you doing great work here, by the way, appreciate all your doing what you doing with your money. What will your financial goals. Have you thought about what you want to have happen with your money really save up earn more.
I know we've spoken about personally a Roth IRA. Save right now so that I can put those savings into a Roth IRA. You mentioned the Roth IRA absolutely.
That's spot on.
That's the one that if I'm 17 upon you in your shoes. That's that's what I'm doing and the reason why is the future tax implications. The understand the difference between a traditional IRA or Roth IRA yet. I know Roth IRA is something that you can open up when you're 59 1/2 and that's mainly used for retirement. You.
So the big difference is the tax implications. So for either one of them. They are considered retirement account. Write a 401(k), a 403B TSP and an IRA, a Roth IRA ASAP IRA a simple IRA. All of those are different parts of the tax code and and for like a 401(k) is literally the tax code section 401 subcode K is where gets his name. That's the where you will find it in the 70,000 pages of Internal Revenue Code tax code, but all it says is that you are specifically earmarking dollars today for retirement in the future, and with all of those retirement accounts across the board.
They are intended for retirement so you are technically not supposed to touch them until you're 59 1/2, but because you are specifically earmarking them for retirement and placing them in these tax qualified accounts you get. Special advantages for that with a traditional IRA. The advantages that you don't have to pay tax today. You can actually save that money and put it away and you get to do that before Uncle Sam sees it before any taxes are taken out and from now until the time that you use that money. It grows and you don't have to pay tax on it. But here's the catch. They're going to tax every dollar. At some point in time so you don't have to pay tax. Now you don't have to pay tax while it's growing, but with a traditional IRA or a traditional 401(k) when you use those dollars in retirement.
In the future. That's when they get tax so the story that I tell to illustrate the difference between a traditional IRA or Roth IRA is there's a farmer with the bag a seat. The tax man comes up to him and says hey Mr. farmer you're going to owe tax sometime so your choice. You want to pay tax on the bag of seeds now and I'll leave you alone forever when you grow your property harvested as 100% tax-free or I'll let you keep your bag of seeds now become harvest time. I'm gonna tax you on the harvest right which is the better deal seeds.
Of course okay so that's the Roth IRA you're paying tax on the seeds and you get to keep all of the harvest and the other thing if you think about it when you invest money your your goal is growth.
Yeah, I invest my money because I want to grow, so if my money grows from $1000-$5000 to $10,000 check yeah I'd rather have $10,000 to pay tax on $1000. So if you're letting your accounts grow tax-deferred and then you're paying taxes later.
Guess what the IRS's goal is for you to grow your money to the gets tax more money in the future. So again, why I think right now, the Roth IRA makes sense not just for you but for a lot of people.
They need to really be looking at the Roth IRA. The rules on it are that you cannot put in more than $6000 in a given year. So Dave Ramsey would recommend the baby steps. These are basically step-by-step instructions toward how to handle your finances get out of debt and build group and grow wealth. The first three are really about getting out of debt.
So baby step number one is. Have a what he calls the baby emergency account. That's $1000 in the bank. Once you have $1000 in the bank is not meant to make you feel comfortable.
It's actually meant to make you feel uncomfortable that you only have $1000 but it's meant to keep you motivated because you want to get more than that, but you can't until you complete baby step number two baby step number two is lining up all of your debts smallest to largest and knocking out all of the debts except for your house right you don't have the house yet you have to worry about that, but do you have any debts of any payments and debts that your I set up a payment plan with my mom to get a computer. Okay you have any other debts, and the other payments payments wise of phone bill that they take care of okay so you have to debts that the phone and the computer what they would want you to do is pay those off okay so that would be the first primary focus is pay those off then you build up baby step number three your fully funded emergency account and the purpose of an emergency account is to prevent emergencies. It won't prevent the actual occurrence it will prevent it from being an emergency because if I have a tire that pops which I did this past weekend we were driving back from my wife's 40th birthday party we came from the mountains were driving home back across 64 across Jordan Lake and all of a sudden I get an alert your tires gone flat. We pull over. The next gas station and the tire was completely flat. I pulled it off and it had just been eaten away on one side will come back home $800 for four new tires because if you get one.
You gotta get to the other two were not in great shape either, so for new tires plus alignment $800 if I don't have an emergency account. That's if that's an emergency. I'm going into debt to take care of that. But if I do have an emergency account. It's not really an emergency I can stroke a check and make the problem go away. It's just an inconvenience.
So that's the purpose of having that emergency account there now you know what an emergency account is not going to do a lot of for you, spending well.
You don't want to spend it. That's right. It's kinda sitting over there gathering dust.
But it's also not to grow a whole lot right year you keep in general, your emergency account you're keeping it in the bank and so over the course of the last year, banks have been paying .01% interest. Like less than 1%. However, inflation has been closer like five or 6%.
So, truthfully, at the end of the day, the emergency account has lost value because it's not buying as much as it did at the beginning of the year. So that's why we have an upper limit to the emergency account. Now you're 17 so we got you saving out until retirement time so will put you through what was formally full retirement age age 65 and let's say for the next 10 years you maxed out your Roth IRA saving $6000 a year and let's assume that you are relatively aggressive in your investments and you earn 8% per year is actually not a highly highly aggressive rate of growth assumption let's let's assume that you grow your account by 8% per year 1.08+ year next year's contribution of $6000 and we save for the next 10 years up until you're 28 years old so at 28 saving $6000 a year and getting 8% growth you would have just under $100,000 be $99,872 and let's say at that point you stopped saving okay and instead of saving. We just let that $99,000 grow at 8%. From that point forward. Okay, so now we stopped contributing by the time you're 65 you've saved for 10 years $6000 a year so you saved a total of $60,000. There would be one $0.86 million in that account.
$1,860,000 hundred and $60.75 for just saving for 10 year saving 10 years $6000 a year So let's compare that. What if we didn't save for the next 10 years you didn't save anything for the next 10 years, but after the 10th year you started saving and working to save $6000 every year for the rest of your life on that point forward we get the same 8% growth. How much do you have by the time you retire now here we been saving now for 38 years for that one. You would have one .321 million $1,321,895 but you would've had to of put in almost $240,000 of compare to the 60 they got to the 1.8 million. Okay so that's the time value of money when you look at the curve and it's it's it's showing you compound interest and how money grows over time if you missed the first part you don't miss the first part you missed the last part where it's growing like a hockey stick and that's what all Young's savers or earners, or anyone with the job needs to realize that the earlier you start saving the more is going to be there later when I started my career back when I was running the radio station. I was actually working for a decent company that offered me a 401(k) and even matched on that 401(k) built up like $15,000 and that 401(k) well at 24 years old that $15,000 to be represented new car right to go out and buy a car with that so I ripped out my 401(k). I paid the tax on it that paid the 10% penalty. In addition to that, so I ended up only getting like 65, 70% of what I had saved anyway. $10,000 and I went out and bought a nice green Honda civic right that $15,000 today. Had I let that grow, not even adding anything to it but just let it in that account to grow would have been putting the well on my way toward much better looking retirement like that that first several years of saving is important now is do another one where you actually save $6000 a year for the rest of your your life until 65 $3,182,056 is what you would have getting 8% growth 8% assume growth rate on average over time and and and I made that just a linear 8%. It's not really how the real world works. The market doesn't give you 8% every year. But if you averaged 8% of these are ballpark numbers for so start saving now that guided advice get advice thank you.
Yeah what other questions you have said is you came in.
He said he'd been listening to some these podcasts you been trying to figure out you know some of the things about the financial world. He sounds like you had some questions. What kind of questions got most of and reading the amazing book which actually, the author is Peter Sean. Okay I love it love it was more about money markets and it says that it can be treated like a savings. Also, you can only write certain checks yet and only certain amounts on this check yet now say you are thinking about it and you wrote a check off of that account and it wasn't to go through because you went over the amount you are supposed to spend on that account that month.
Would that be shown as a bad check so it would probably have an additional cost to.
If you have money in the account.
They're not going to show it like is a bad check but you do have a limit inside of a money market with how many checks you're supposed to be able to write per month. You know, banks, the little secret is that they don't actually produce anything they don't make widgets they don't make goods. There's nothing that people buy from them. They provide storage for your money and the way that they make money is off of the fines and the penalties that they assess people who don't know how to handle their money once they've trusted them to store it in overdraft fees. In bounced check fees or of the concept called arbitrage. If you come in with $1000 is a Hague bank II need you to keep the safe for me hold onto it. My checking account and I come in and say hey I got an emergency.
I didn't plan for. I need to borrow $1000. Well, they've given you one half of 1% for sitting your money. There when I borrow it there to charge me 9% is called arbitrage is the difference in interest rates right so that that's the way the banks make their money. They also offer different types of accounts for different purposes.
So your checking account usually is the first one that will think of in the bank and that's where transactions happen.
The purpose for a checking account is for the deposits to go in and the expenses to come out and that's the one that allows you the most transactions. In fact, they don't limit your transactions. You can have as many as you want, but the interest is pretty pitiful.
I once you've got enough in your checking account to cover probably 1 to 2 months worth of expenses and you're not going to write any bad checks, you're not going to overdraft that you're not in the balance.
Anything you got enough money to come in every month or every week or every pay period to cover the expenses for that same pay. I once you've got like 1 to 2 months worth in the checking account generally want to spill over to a savings account and the savings account doesn't have as many transactions but also offers a slightly higher interest rate the money market account is one step beyond the savings account. Generally, they allow you very limited transactions in the money market maybe one or two checks can be written off of it per month, but it has a slightly higher interest rate than even the savings account.
To me there's not much of a value in the money market. You can have one if you want, but between the checking in the savings account at a bank. That's really all I need a bank for I don't want to keep more money than is necessary in a bank because of paying next to nothing. So my checking account is where I keep about 2 to 3 months worth of expenses. My savings account. I keep a little bit more than that.
That's where the emergency account is 3 to 6 months worth of expenses over and above that if I kept more money than that at my bank.
I would be losing the opportunity to make that money work for me in my investments because if we stick your $6000 a year in a bank.
It's not getting 8% growth. It's getting .01% growth. And if you want to see these numbers change pretty dramatically.
Let's change the interest rate the .01% and by the time you're 65, you got. Basically what you put it so that that growth that we got from investing that money is gonna be real important well is says that CDs are protected against inflation. They are more protected than a checking or savings account were about about interest rate date that's that's why so they are not protected against inflation but CDs I am dedicating my money for a longer period of time. This this is no transactions are going to happen from this right.
This is, I have some money right here that I do not need for one year or three years and I put in a CD and they're going to pay me a slightly higher interest rate.
So a three year CD right now is getting like one 1 1/2% is not protected against inflation but it's better than the checking account in the savings account there were paying .01% or half of 1%. So the purpose was to have safe money that better kept up with inflation. But right now in this low interest rate environment. They're not keeping up with true inflation and I actually would look elsewhere even for money that you want to keep safe. There are better interest rates available in other places. If interest rates decline bonds go up in inheritance value in in the in their inherent value. Yes yeah yeah so this is an interesting concept, but it has to do with supply and demand on the open market. Okay if I buy a bond today and that bond is $10,000 and is paying me for percent for one year. Okay. And then interest rates go up, and now they're 5%, so a new investor, you come in behind me and you're like well I also got $1000 and I want to buy a bond, but now it's paying 5% well why would you buy my bond if I wanted to get out of it is mind only paying 4% in order for me to make my bond attractive for you to buy. I got a lower my price because interest rates have gone up so in a rising interest rate environment. The price of bonds actually goes down and vice versa, if I bought a bond that is going to pay me 5% for 10 years and then interest rates go down, and you step in and you say I want to buy a bond, but now you can only get one 3% so I got this 5% one over here that I'll sell you but I'm to charge you $12,000 instead of the 10,000 so as interest rates have come down theoretically. Bond values should have gone up, but were in a weird environment where they haven't. So right now the price and the interest rate of bonds are both pretty low, but as interest rates start to climb. Hopefully at some point in time for savers. It would be a good thing.
As they start to climb the value of those bonds can go down and they will go down and so bonds were once considered like a safer kind of investment but were actually seeing that not only are they paying a pretty low interest rate but they are not. The gold standard of safety that people once thought they were is actually on money market mutual funds and it says that the risk level is kind like low rates more in the green yes pretty low, but it sounds pretty risky to me because it's not protected by the FDIC right question. So when you have money in the bank is protected by the FDIC up to certain limits, so the FDIC's is the Federal Deposit Insurance Corporation is actually an insurance Corporation that is behind the banks that says that you as an account holder. If you open an account with the bank within the US, and that bank goes belly up goes out of business. The FDIC will step in and help to ensure and protect you as an individual and your deposit up to a certain level that levels $250,000.
Nobody should keep $250,000 in the bank but they protect up to $250,000. The reason why that exists is because back in the Great Depression. What caused a lot of the hardship was that people ran to the banks and try to pull all of their money out all at once. Will the banks didn't actually have all of that money because they had loaned it out to other investors to other people and so when everybody goes to the bank all once he says give me my money in the bank says hey we don't have it that creates a panic that creates a scare. And so the insurance industry actually stepped in and helped to bail banks out during that time, and that's why insurance has some tax advantages with life insurance and annuities that banks don't offer, but a money market mutual fund is actually offered by the brokerage industry they don't have FDIC insurance. If you put your money in a brokerage account it's not insured and protected by the Federal Deposit Insurance Corporation, it can and has the potential to at some point time lose value.
Well, they offer what is essentially a holding tank and says yes you have placed your money with us because you want to invest it, but maybe you're not ready to invest it quite yet. Maybe you just want to hold it here until a time that you're ready to find something to investing, so they offer was recalled, money market mutual funds which basically are 11. Share one one dollar they they have a a dollar per per-share unit price. So if I have $1000 I bought a thousand units of the money market mutual fund and it's designed to keep its price at one dollar per share and if that brokerage firm goes out of business and goes belly up. Yeah, I could lose that money that's where it's different than the FDIC insured deposit of the bank but in all likelihood that brokerage firm is not going to go out of business while I'm sitting around waiting to find something to invest in at least hopefully it's not.
And there are still some protections there, just not the same as FDIC's insurance binds certain brokerage type of investment accounts. How would you get your money out like a regular account or yeah I mean you basically have them transfer the shares have them cash out the shares or transfer the shares to wherever you want them to send it to the destination. So for instance if I've got a brokerage account and I own Apple and Amazon and Netflix and a handful of other stocks or I own of a growth fund, mutual fund, and I need $10,000 out of it.
I contact the financial institution. I told him I need enough liquidated to create the $10,000 in cash and then I need the $10,000 sent to my bank and no send it to the bank at the end of the business day, though, so the positions and the next business day. The cash is there instead of the shares that I used to own and then they send it to my bank where I can withdraw. Generally, if you don't see yourself not using the money for 10 years. If you can't.
If you can't envision it being invested for 10 years or more, really shouldn't be invested for 10 minutes because if if I've got enough for a down payment on my house say I had $50,000 and I'm not quite ready to buy a house just yet and so I'm like well in the meantime, I'd like to make some return on investment with my $50,000 and I put in the market and then coded hits and we lose 30%.
Right now I don't have $50,000. Now I've got $35,000.
We lost 30% of my money so I go to use it when I want to buy the house. A year later and it's down in value. You know III don't have the money to buy the house and I have not achieved my goal of return on investment and we don't know when those downturns are going to come.
So unless you can. In less you can say I'm going to leave this money invested for like five or 10 years and really closer to 10 years.
You really shouldn't invest if you got an immediate reason that you're going to need that money.
And when I say immediately next one to three years where you are planning on using the money. It shouldn't be invested well so that was just a few of the questions I see in your book Landon. You've got several other questions here. Then we'll talk about those on on on maybe later programs but it's good that you are thinking about these kind of things where you are in life is going to be a lot of opportunity to be in a good financial money situation later on in life to know these things and be thinking about them now on an end to act on them, but what we do is we try to help people put plans together ever sign planning right so if you need a plan. Ladies and gentlemen, this is just kind of an overview of some of the things that we would talk about knocking lead you through the process as well and our team here, we care about our clients. We try to do right by them. We talk with them and meet with them personally. We are here as a resource when they do have financial questions come up and we will put a plan together so you know what the job is and what the what the goal is for each dollar in each investment that you have. So if you'd like to take advantage of that opportunity. If you like to get the optimize retirement plan put together for your goals.
Give us a call 919-300-5886 919-300-5886 visit online or Sean planning.com it looks like Rich on planning.com and Landon thanks for being a guest on the program and talk a little about your personal financial situation. I know that's not always always easy but thanks for per-share. Of course any time.
Also, don't forget the book understanding your investment options made by your very own Peter shot.
You can get that on the website.
Is it rich on planning.com you can request your free copy.
Thanks to then talk to you soon there on planning matters radio is planning matters radio the content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy you are encouraged to think investment tax or legal advice from an independent professional advisor.
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