Guided Path 1-5 Income Planning for Investors Ages 25 to 40

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In this episode, Zacc Call and Laura Hadley discuss how individuals aged 25-40 can enhance their income planning strategies and capitalize on the amount of time they have to invest. Zacc and Laura discuss: How to increase your earning power, four ‘financial fires’ that can impact your income, where you can put your next dollar to organize your income, and more.

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[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have, whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics to practical, actionable steps. [00:00:17] Our mission is to guide motivated people to become financially successful. Welcome everybody. We're back on The Financial Call. This is guided path season one, episode five. Feeling good that we're already at episode five. I know we're getting there. We're making some progress. I think we only have one more episode left in the season. [00:00:36] Yeah. Yeah. I used to record every other week to every three weeks and I think we're keeping up a pretty good cadence. Right. Today is income planning for investors ages 25 to 40. We actually thought we would do one that was just under age 55, but then we realized that there are so many nuances and differences between someone who's let's call it a [00:01:00] 30 year old is in a very different circumstance than a 50 year old. [00:01:04] And so we felt like it would be better to break it apart into two segments and just do younger than 40 and then 40 to 55. So this will be really good. And we'll go through the main points for somebody who is at that age group. So if you're trying to figure out how to go through the order of understanding these financial planning concepts, we believe income planning is first, whether you are young and trying to organize your income to save. [00:01:28] Or whether you are wise and later in years, and you're trying to organize your income to spend either way you're organizing income first, and then we'll move on to investments. In other topics, I think this will be fun for our younger listeners. This will be a little bit more applicable. Maybe they don't have a pension, or they are not thinking about social security. [00:01:47] So this is what you can do for me. And we actually had a lot of listeners to the one that was finances for dummies. And it was like finances for dummies.dot, dot, I mean, millennials. And that [00:02:00] was the first one that you and I did together. And that shot to the top of our downloads immediately. And I don't know if it was just all of your friends that decided to listen, or if you told people about it. [00:02:10] But I feel like a lot of people enjoyed that because I think a lot of people relate with being a dummy financially. This is intimidating. My brother, who's incredibly intelligent. He's an engineer and he gets concepts really quickly. He understands math really well. Even he told me last time we talked about finances that he said, you know, it's just a world where I feel really intimidated, but hopefully we get people through it. [00:02:32] So there are three main topics today. If you are aged 25 to 40, we believe that these are the three things you should be focusing on, one increasing your earning power. And by the way, these are all income focused conversations. So we're not saying. You should ignore investments, estate planning, and taxes. This is all within the income realm. [00:02:52] You should be working on one, increasing your earning power. And two, there are four financial fires that could impact your [00:03:00] income. So we'll go over what those are. And then lastly, where do you put your next dollar? So you're trying to save, or maybe you're already saving some, then you don't know where to put your next dollar. [00:03:10] And we want to go through the order in which you should organize in. So that's our agenda today. You ready for it? Laura? I love that. We're excited. It's just the two of us today. We have. Increasing earning power first. So this is an interesting concept because I believe that someone who's 25 to 40 is time rich. [00:03:29] They might be asset poor, but they are time rich. And that's a hard concept for them to understand because they don't feel rich at all, but they are time rich. Whereas like their parents they're time poor. They don't have a lot of time to earn money, but they may have more assets. And like, if we think about, let's say somebody is earning $150,000 a year, that's a really good income. [00:03:53] If you wanted to replace that $150,000 income per year, you would have to end when we do [00:04:00] the math on, I'm going to grab my calculator. That is somewhere around here. Or is that well, maybe not. I did the same thing. That's really funny. We use our phones to video us and the two of us are looking everywhere for our calculator, our phone. [00:04:18] Apparently we rely heavily on those. We each have a financial calculator app that allows you to do that. It's funny. I totally, when we were prepping this episode, I thought I'll just pull my phone out. That'll be easy. That'll be super easy. Okay. So Excel can do the same thing. So let's say. That we want to know, well, actually this, we don't even need a future value. [00:04:39] So what we're going to do is we're going to say $150,000. And if that was, let's say that we were doing that based on like a dividend rate of two and a half percent, that's like a $6 million portfolio, meaning you would need a $6 million portfolio in order to earn $150,000 a year based off of the dividends that [00:05:00] pay out alone. [00:05:00] That's right. If you just wanted to spend the day. That's right. And let's say that someone said, you know what, I'm not just going to spend the dividends. I'm actually going to draw down some of the principle. And we changed that equation to say, well, let's use 5% instead of two and a half percent dividend rate, they're actually doing a 5% withdrawal. [00:05:19] They're going to need half as much because they're taking twice the withdrawal. So $3 million. So I don't think a lot of people take a step back and realize that their hundred and $50,000 a year income is worth somewhere between 3 million and $6 million. This is what we mean by time. Rich. I think part of the reason they don't think that way is because they think, well, I have to go to work to get it. [00:05:41] Yeah. It's not just giving me just flowing through dividends. I am working and I'm making the dividends for them. Sure. Getting that with your time, which is good. So keep that in mind, you’re time rich. And we're going to talk about also, let's just talk about, because you brought this up before we started and I thought this is really good [00:05:59] way of looking [00:06:00] at it, but what a dollar is worth to a 25 year old versus a 55 year old. Yeah. And I think this is kind of fun. We just ran the numbers right before to see if you're young and you're earning money. You might feel a little discouraged that you're not making as much as your parents or maybe some of your older siblings, but this can be encouraging to see we ran the math on a dollar in your twenties. [00:06:20] So at age 25, if you earned a dollar and invested. How much would that be worth at age 65 in retirement, 40 years, a long time, but it's a dollar now, just a dollar. If you invested it at age 65, that would be worth $45. And twenty-five cents that $1 at a 10% growth rate, which is pretty aggressive, but reasonable. [00:06:44] If you're able to buy stocks and hold onto them. So $45, I mean, think about it a thousand. Into 45,000. So it's the same math, but a dollar turns into $45 by age 65. And so we ran the same numbers. If a [00:07:00] 50 five-year-old earned a dollar and invested. At age 65. So in 10 years, their dollar would be worth $2 and 60 cents. [00:07:08] So not nearly as much. So your dollar that you earn at age 25 is a lot more valuable than a 50 year dollar. And during that window, the 50 five-year-old gets two and a half times their investment. And during the 20 five-year-olds window, they get almost 45 and a half times. They're valued. That's insane. And that's compounding now. [00:07:29] I made a mistake earlier when I was punching it in the calculator and I only put 30 years and maybe this is just because I am getting older. I think that 25 and 65 are closer together. And so I was like, oh, it's about 30 years. Right? So I punched it in for 30 years and the number was $17 and 45 cents. [00:07:46] And that blows my mind. It helps you, if you can imagine your growth and you can do this, if you plot your growth on alignment. It's pretty flat for the first decade or two. In fact, you go from $1 to [00:08:00] 17 and a half dollars in the first 30 years, and then you go from 17 and a half to 40 was $45 in the last decade. [00:08:09] It's fast once you've grown it. But I think the moral of all of this is a dollar is worth more to a 25 year old invested than a 55 year old. And it takes time. So don't get discouraged at the beginning if you're not seeing huge growth, but over time it does make a big difference. So in terms of increasing earning power, I'll oftentimes, I mean, you can only cut the budget so far. [00:08:31] And I think sometimes. People think that every financial advisor is going to tell them, you just need to stop getting coffee. You need to stop doing this. You stop buying clothes, eating out. And there's also a level of living a life that you can actually enjoy and spend time with people because sometimes you need to spend money to be able to create experiences and spend time with people. [00:08:52] So there's definitely a balance to find that. And for a lot of people, I don't think it's talked about enough that if [00:09:00] you are in your twenties, your job is to get promotions. Your main focus needs to be increasing. Now don't get me wrong. I'm not saying spend whatever you want and rack up debt. Now, if you're managing your credit cards where you're paying them off every month, and we're going to talk about the four financial fires here in a minute, but if you're handling these four financial potential fires as well, I think your job is to figure out how to make more money for sure. [00:09:22] And that's what a lot of people are focusing on in their twenties. They're getting an education investing in themselves, trying to work themselves up the ladder to earn more. And that's really what you should be focusing on in your early twenties and thirties. Why do you think it is that they don't talk about that? [00:09:35] Maybe they do. And maybe you're closer to this age. So did you feel like you got any advice from people that said, Hey. Your financial planning needs to be, make more money. Not necessarily. I mean, everyone pushes college and schooling, but no, I feel like they talk more about budgeting the defense side of things, playing defense, rather than offense. [00:09:54] Just trying to earn more, increase your potential for sure. My wife and I have [00:10:00] that conversation often. And it's funny because the more defense we try to talk about the harder it is, the more offense we try to focus on, it's almost more exciting to think about making more money and earning more. [00:10:11] Obviously there's a limit. We see people that make a half a million dollars a year and spend every dime and we see people. $50,000 a year and have extra leftover. You have to have a goalie. You know what I mean? You have to have someone there, so that is increasing your earning power. So that's the first of our three sections. You really should be focusing on that. [00:10:30] And we don't think that you're hearing that enough for. The public education system or other financial planning conversations like play some reasonable defense, but you really need to focus on your offense right now. And don't be afraid to spend some money to invest, to increase your earning power, to go to college. [00:10:48] Or if you're starting a business that's going to require. Some money and time and that's okay. Some of the wealthiest people that I know are actually most of the wealthiest people I know are business owners and they have taken a big [00:11:00] risk and spent a bunch of money early on in a business. They found a way to make money there and it didn't pay. [00:11:05] From quite a few years sometimes, but yeah, I agree. And that's a good point when you're younger, you're able to take on more risk because you have that time, your time bridge. So you can do things that are a little bit more risky and it's not going to ruin your plan. You have some time to make up for it. [00:11:20] Let's maybe talk about that for a second, because the concept of taking on risk, let's say you're thinking about starting a business. But you also are not playing very good defense. Here's where the budgeting actually matters. If you're thinking about taking on starting a business, but your burn rate is $10,000 a month of spin. [00:11:39] It's going to be really hard for you to start a business and immediately make $150,000. Cause you need that extra 30 for taxes and healthcare and a few other things. So defense does matter. And if your burn rate is $4,000 a month and you have a built up savings or maybe it's three or $2,000 a month because you're young and you really don't have kids and you don't have a mortgage or you don't have as [00:12:00] much. [00:12:01] The ability to take on that risk of a business that you start, let's say you're in it for two or three years, you'll probably learn a ton. And if it fails, that's okay. That's totally fine. If it doesn't feel fine, but it's okay. Now for me, in my situation where I have ten-year-old twins and a 13 year old daughter, if my business, if I just tried to start a business and it failed. [00:12:24] And I had to cut back well, that's life altering for some of my kids because they're on soccer teams and dance teams and things that are important, but they're not essential. So if we have to cut all non-essential expenses, because I took a risk and it went belly up, my kids will lose friends. That's an impact. [00:12:43] That's a lot different than when you're early on. And so somebody who's in there, this is 25 to 40 somebody who's in their thirties to 40 may already feel the same way I do. And in that case, you need to figure out a way to play really good defense and you need to have a good emergency fund if the [00:13:00] business isn't working out. [00:13:00] But anyway, I just wanted to point out that the risk of starting a business is actually a lot lower when you're younger. Now the ironic part about that is usually. It's harder to get credibility. When you're younger, we see this in the financial advisor space, that young people who are financial advisers, oftentimes don't get trusted as much because folks are trying to find somebody who's been around the block to manage their money. [00:13:23] Exactly. But there's nothing wrong with, in fact, let me tell you a story. I had a client who in his trust, he has money set aside to help his kids start business. But in order to start the business, they have to go work for somebody else in the same type of business that they want to start for about three or four or five years. [00:13:42] Interesting. The whole goal is they go work for someone else. They learn the actual business itself and they learn what. They think it would be a viable business before they take dad's money and invest it in their own houses. Yeah. I thought that was fascinating. Okay. Well, we'll move on. But the bottom line is [00:14:00] the value of your income is high. [00:14:02] The value of your dollar invested today is high and you are timeless. Even though you're asset poor. That's fine. Yes. You’re time rich, which gives you a lot of ability to become asset rich later, if you do it right. So next we have the four financial fires and this has to help you reduce your risk throughout. [00:14:19] We talked about the risk of starting a business. These four things are really important to help you. Not too much risk, if that makes sense. So these are the four things you really need to be careful of to not ruin your entire financial plan. Um, and we went over this a couple of different ways. I did an episode with Emily Tate. [00:14:38] She's an educator. This was back in November of, oh my gosh. I can't remember. I think it was 2020. Yeah, it was during the COVID times. That's right. She has a bunch of educators that she works with and she feels like they're underserved from a financial wellness standpoint, which I totally. And so we did this episode on the podcast to talk [00:15:00] specifically to teachers about some of the biggest risks to their financial picture. [00:15:04] So we'll go over what the four financial fires are, but if you want to actually go through an experience like that, flushed out in a lot of detail, then that's where you're going to find it. Okay. So the four financial fires, one not having an emergency fund to having high interest. Three, we call this ruined. [00:15:23] If the unthinkable occurs, this is death in a family, death of a primary breadwinner, and then for missing out on free money. Now the last one isn't, it's like a little campfire. It's not a house fire. It's not the end of the world, but it's on. And you should put that fire out. So let's dive into it. How do you look at emergency funds? [00:15:42] So not having an emergency fund is financial fire one, but I feel like Laura, you've dealt with this a lot in your advisory practice. How do you tell people how much to have, how do you tell people where to start. It's a daunting thing. It is daunting and it's, some people might think it's weird that it's the first thing [00:16:00] to have on the list. [00:16:01] They might think their high interest debt is more important or a 401k, but really if you don't have an emergency fund and something happens, it can ruin everything else. Then you have to put some money on a credit card and then you're racking up more debt. So it really is the first step. A good rule of thumb for people is three to six months worth. [00:16:19] Your living needs. So if you need $5,000 a month to live off of, you want between 15 and $30,000 in an emergency fund, safe, accessible, probably in the banker, an online savings account, something that's really accessible, even if it's not earning a 10. It's good to have it. That's a lot of money. I remember when I was in my twenties. [00:16:38] And my wife and I, it just felt like we were just struggling to come up with five or $10,000. And I felt like when we got it to $10,000, I felt incredibly rich. Like I thought we had made it. Now. I know that inflation happened more than a decade ago. Maybe that number [00:17:00] 10,000 back then is like 20 or 30 today, but it's still. [00:17:03] I don't know, like, tell me your thoughts on this Laura. Like how does someone knock it discouraged by the fact that. That's a lot of money. If somebody is making $6,000 a month and they're trying to set aside three to six months worth, and that's a lot to start with. I mean, just hit a thousand dollars, just have something, just a little buffer in case something were to happen. [00:17:22] So don't stress too much about it. It's just good to have something. So a thousand dollars I think is a great place to start and just work up as you can. In baby steps and work your way forward. Celebrate like the little success of that. If you don't have an emergency fund, you're going to rack up more credit card interest debt because the water heater goes out. [00:17:43] Car tires need to be replaced. You're going to put that on a credit card and then you'll be back into this next category even further, which is high interest debt. There are a lot of opinions about the two methods that you hear about the most. And I think this is like the left brain people fighting the right brain people. [00:18:00] Yeah. The analytical versus kind of the emotional side of things. And well, you talk about the emotional side, that's the snowball effect. So you pay off your loan. Balance first. And so it's easier to pay off the first balance and it feels good. It's exciting. It's like checking something off the list. So if you're a list person, you love checking things off the list that's encouraging to you. [00:18:22] I think the snowball method is great. Get it paid off. Put that extra payment that you were using towards that debt towards your next. Next lowest balance debt, get it paid off and continue that way. And there's a dopamine hit when you pay off the debt, you get a little bit of reward for that mental. Yeah, that's exciting. [00:18:38] So that's the emotional side. I guess the other side would be the high interest method. This is more of the mathematical analytical. This is paying off the balance of your debt with the highest interest rate. First, if we run the numbers, yeah. This probably saves you more money, but if your highest interest debt is also your highest balanced debt, that can be a little discouraging. [00:18:59] I think to [00:19:00] people, so know yourself either way. It works great. I think either way can work. It does depend on how would you say, I mean, we're pretty okay. Either way, depending on whatever is going to create success in this person's financial life, let's do it. But, I do find that if let's say that they have a small debt at a 3% interest, And they have a medium sized debt at 18% interest. [00:19:27] We're not going to ignore those interest rates and just be like, you do use the snowball method. That 's true. You have to at least be within reason on the math. Right? Probably people don't focus on the emotional side of financial planning enough, but you can't completely ignore the numbers. So you ran this. [00:19:43] So what we're talking about now is how long it will take you to pay off $15,000. Tell us about this. Yeah. So we ran the numbers. If you were paying $250 a month or $3,000 a year on a $15,000 debt, if it has a 4% interest rate that would take you [00:20:00] seven years to pay off, if it was a 16% interest rate, it's 12 years to pay off. [00:20:06] And if it's a 19% interest rate, it's 18 years to pay off. So we're just illustrating the power of those interest rates. This is the reverse of compound interest for you. This is compound interest against you. For sure. Now we chose 16.17. Remind me, that was the average credit card credit card. Yes. Yeah. [00:20:25] It's been a while since we built out the slides, but I think that's what it is. Cause it's pretty exact. So if you have a big credit card, that's sitting there racking up 16% interest. It's going to take a lot longer to pay that off almost twice as much as a 4% interest. Exactly brutal. That's really good. [00:20:41] So the idea there is interest rates. Work through it. And this is another way of looking at how much interest you'd pay. So somebody with the same debt that you were talking about $15,000 in debt, and if they were going to pay it off in five years at each interest rate, [00:21:00] meaning they decided to correct me. If I'm wrong, they're saying someone has $15,000. [00:21:03] And they just decide no matter what it is, I'm paying it off in five years. No matter what the interest rate is. Yep. That's right. Okay. So we're comparing 4% interest against 19. We do see 19% on credit card debt because the average was 16. There are some that are in their twenties, but 19% interest. So it was 3,300. [00:21:23] In interest paid at 4% and 4,900 interest paid at 19%. So it's, and we're not saying like you had to pay the payments for a certain amount longer. We're saying they chose to pay off at the same amount of time, five years. And it was $127 more. If you have a higher interest, right. That's exactly right. So we don't go through this to scare people. [00:21:45] It's just to help you realize how much money you're losing with those high interest rates. So this can affect which method you choose, the snowball effect or the high interest method. And it's probably sometimes a good mix of both. Yeah, I agree. So we're going [00:22:00] to give you an example then Sally and. And they both have $15,000 in credit card debt with a 19% interest rate. [00:22:07] So can you explain what the difference is? Like what is Sally doing different from Jill? So they have the same debt, same interest rate. Sally is going to pay hers off in 18 years. Jill's going to get hers paid off in five years. So maybe you're stuck in a situation. You already have $15,000 of debt and a 19% interest rate. [00:22:24] Some people are in this situation. Is impacted by what you do about it. So Sally's going to take an extra 13 years to pay it off. And her total amount that she will pay in interest is $36,000. Just an interest on a $15,000 that, that doesn't include the 15,000 principal paid back. Just the interest. Oh man. [00:22:44] So. $51,000 ish, $15,000 loan. Crazy. But maybe talk about the monthly payments. Sally's paying $250 a month towards the debt. Yeah, that's right. And so the difference between Sally and Jill is that Jill is going to [00:23:00] sacrifice a little bit of her monthly income. It's not easy. I mean, Jill's going to make a sacrifice. [00:23:05] Explain the outcome for Jill. Yeah. So Jill pays an extra, almost $150 a month. She is only going to pay a little over $9,000 in interest. So it's really a difference of $27,000 in interest that Sally has paid over dill just for that extra $150 month and 13 years. Jail finishes 13 years earlier. Yeah. Can you imagine that carrying the debt for 13 years longer, 13. [00:23:31] So think about it, so what is that? $159 more a month? Is that right? So Jill is paying $159 more a month, and she's doing that for five years and then she gets to be done with it. Whereas Sally doesn't have to put that extra $159 towards. But she is going to have to pay for 13 years longer. Brutal. Okay. So once again, like you said, not trying to scare people, but hopefully you can feel a little bit of motivation that like don't [00:24:00] let the magic of compound interest work against. [00:24:02] You got to be on your side. That's where you can create some financial freedom. So fire number three is being ruined. If the unthinkable occurs, I actually had an appointment today, right before lunch and her husband passed. And fortunately enough, he had life insurance and they had assets and I think she's going to be fine, but. [00:24:25] If she doesn't have life insurance available to her and they don't have other investments, this can be pretty tough. It can be really tough. And so we believe in buying life insurance, the concept of life insurance is you have an income that would go away. If that person passes, that's your risk. That's your insurable need is what they call it. [00:24:46] So you. Solve for the insurable need. And we try to do that with as low cost as possible. We typically focus more on for young people term life insurance, try to get it as low cost as possible for the time period you need. [00:25:00] And then as your assets go up, at some point you have enough assets that you don't need that life insurance. [00:25:06] So you could just stop it or you could continue until it terminates until the term is over. That's the concept. Permanent life insurance costs a little bit more, a lot more actually. You put money into a cash value and you can invest it. And it has higher costs built into it. If you're talking to someone about permanent life insurance, you need to really pump the brakes and understand that they can be very, very applicable and very good in some circumstances. [00:25:31] They don't fit every circumstance and most young people, 25 to 40 year olds probably just need term life insurance. Do anything. Yeah, for sure. Okay. So let's see, we talked about when to drop life insurance, and talked about making sure that you have it. My personal life insurance goal is. We talked about this in that episode, finances for dummies. [00:25:49] I can't get more life insurance because I've had cancer in the past. And unfortunately I've had three surgeries. My cancer is very, it's not going to kill me. It's not a huge risk, but insurance [00:26:00] companies don't like that. They're not going to give me a reasonable rate. They probably would just deny me. And I don't want that on my record, by the way, you have a life insurance record who people don't know that really. [00:26:10] But if you apply and get rejected, then that shows up on your record and other insurance companies might say, I don't really want to take this person because MetLife denied them. New York life might not take them. So something to be aware of. So I actually don't even get myself checked until I talk to the underwriters to get a feel for whether or not I'm going to be approved. [00:26:28] But anyway, that's the long story short. So my life insurance goal is really to build enough assets as fast as I can. And make Capita as valuable as I can so that if I happen to pass away, my partners could buy me out. And the investments that I've made already can help take care of my wife. You have to think about it independently and in your situation, but I wish that I would have purchased life insurance on my own, rather than through my employer. [00:26:54] Some employers allow you to carry that over. After you leave. And mine told me that they [00:27:00] did, but I was paying $70 a pay period for my $1.7 million of life insurance. And so that's $140 a month. And then roughly when I left the conversion, they told me I could keep it. I was like, great. And so then the conversion was $1,200 a month, $140 a month. [00:27:20] So it's like, you can keep it, but you won't want it. And I couldn't afford it. And I think that's a good point. Some people will say, you don't need life insurance until you have a mortgage or kids or whatever, but in your situation, you'd probably say get it as soon as you can, because you don't know what your health is going to do. [00:27:37] And when you might become uninsurable, let's see, I was 20. Six or seven. I think when I first got diagnosed, I guess I wouldn't recommend that people go over insure themselves just because of potential health concerns, because most people don't experience some type of black mark on their health record. [00:27:56] Like. But I would consider layering it in. [00:28:00] So in other words, maybe instead of going to $2 million of life insurance, because you think you're going to earn a lot of money later and have a bigger need. Maybe you do half a million dollars of life insurance for 30 years. And then in five years, if you're still healthy, add another half a million, you could just add that way. [00:28:16] You don't have to pay big premiums for what you don't need. Anyway, that's probably the route I would take. Okay. Financial fire. Number four is missing. We talked about this fire, not being as big of a fire, but the bottom line is don't miss out on a 401k match or an HSA match. A lot of employers allow you to get a match of some type. [00:28:37] And there are some tricks to this because for example, sometimes if you max out your 401k contributions in June, some people think that's great. Like, look how good I did. I hit my whole annual goal in June. And then the employer stops matching you July through December. And so you want to be careful. Most employers have the math figured out [00:29:00] so that they will contribute only ours is a match of 4% on a 5% contribution. [00:29:06] That's a typical 401k plan. And then if somebody maxes out in the middle of the year, they'll miss out on the 4% of their pay for the rest of the. So I think that's probably one thing to be aware of. That's more of a detailed strategy, but the bottom line is don't miss out on the free money. What else would you add to that? [00:29:24] Just thinking about the math of it. Some people think that they're earning 4%, but they don't realize that you're putting in 4%. If you're getting a 4% match, that's a hundred percent return and you're not going to get that anywhere else. So at least put enough into your 401k to get that for you. And we have an example of Jeff and Susan. [00:29:41] So Jeff and Susan both make $50,000 a year. And Jeff decides to earn, these are just, you're not seeing anything here for those people who are watching. You're just seeing us, but Jeff decides he's going to earn more money outside the. So he decides not to contribute to the 401k plan. Whereas [00:30:00] Susan contributes directly to her 401k plan and gets a match. [00:30:03] This is a very typical plan. She gets a 4% match on her 5% contribution. Jeff gets no match. So Laura run us through the outcome here. What happens for these. If they both earn 9%, they're invested the same way. They're earning the same amount on their investments. After 20 years, Jeff has $177,000, which is fantastic. [00:30:25] Good job, Jeff, right? Yes. Great job, Susan. However has $318,000. After 20 years. It's hard to look at that and realize there's 150, almost a hundred. It's just shy of $150,000 of difference between the two numbers because. Of the match, that's it? Yeah. That's someone else's money. Get it. They always say there's no such thing as something free, but this is basically free. [00:30:52] Yeah, that's true. I also had somebody once tell me, well, I can earn more than 4% on my own and say, well, you can, but your [00:31:00] 4% match on a 4% contribution is not a 4% return. That's a 100% return. You're doubling your money immediately. And so don't get confused by the percentages. It's 4% of your income, not a 4% return. [00:31:13] So, how do you prioritize your financial fires? This depends on your individual situation. So this isn't necessarily in particular. But if you have a lot of high-interest debt, you're going to need to hit that a little bit harder. And maybe you back off a little bit on your life insurance, because you're trying to get every dollar of monthly cash flow towards your high interest debt. [00:31:36] And so you don't want to over insure yourself. So you'll have to balance that a little bit as well as if you don't have any emergency fund, that's a higher priority than maybe Laura, someone, like you said, Hit at least a minimum, a thousand dollars to $10,000, maybe they're doing okay. So they can put more money towards the 401k and get the free money in the match. [00:31:56] What else would you say about how you prioritize these four fires? [00:32:00] I think it just depends on the person. Maybe having a little bit of everything is a good place to be, have that emergency fund work on that high interest debt, finding a good balance that works for you. And you can just run the numbers if you're an analytical guy or. [00:32:14] That's going to say. All right. All analytical people, guys. No. Okay. So yeah. So this is the four financial fires. And once you have this done, once you feel like you're through it, you can now move on to what we consider, where do you put your next dollar? So we do a presentation by the way, if you are an employer or anybody out there that has a group of people that need this type of presentation, we have. [00:32:38] A three-part series, which goes through overcoming a financial crisis, preventing a future financial crisis, and then building a strong financial picture, or strong financial situation. So those three go in order and we do them in a three-part session for people they're usually. Well, we did them in like 45 minutes each, which gave us a way to teach people how to [00:33:00] think about their planning. [00:33:01] All right. So let's talk about IRAs versus Roths. I feel like this is a hot topic and we're going to be talking about that later entirely. I think this is our number one downloaded podcast episode is to roth or not to Roth if. Which makes me wonder if I've just gone downhill because I recorded that one before. [00:33:20] It was like one of the first three that I recorded and I launched all three of those at the same time to barely get started. And maybe it's had more time, but it's always been the top downloaded episode. So basically from day one, this has gone down here. But all right. Run us through, like, what are people missing with this Roth conversation? [00:33:41] Yeah. This is a really common question that we have in something important to know to differentiate the traditional versus Roth is the type of tax account that it is. So it's not the type of account you have your IRAs and your 401ks. And then you have your traditional and Roth inside of those [00:34:00] accounts. [00:34:00] So when you're talking about your 401k, you can have your traditional 401k and your Roth 401k. So both, so it's important to differentiate what I usually call that account type and tax type, right? So their account type is IRA 401k or simple SEP for self-employed people. I mean, there's so many different account types, but then the tax type is whether or not it's traditional or. [00:34:25] Or like a non-retirement account. Yes. Thank you. And the question between, should you do traditional or Roth contributions? It really comes down to one thing. Basically the traditional you're deferring the taxes. You're putting all the money in. You're not paying taxes on it. It grows throughout your life. [00:34:42] And then in retirement, when you take funds out of it, you owe taxes on the whole balance that you have in that account. The rough side, you actually pay the taxes. Now the net amount goes into the account. It grows. Free. And then in retirement, when you take the funds out, all of it is tax free. So a lot [00:35:00] of people have the misconception. [00:35:01] Well, I'm putting less money into the account now. And if it's going to grow tax free, the balance is going to be bigger later. And I won't have to pay taxes on a bigger balance. So they think Roth is always better. If we have $10,000, we put it into the traditional. So we invest the whole 10,000. It has a good growth rate. [00:35:21] It doubles over your life. So it's $20,000. And then in retirement, let's say you have a 15% tax rate. And this, I used to 25, 25. I'd want it easier math than that, Laura. Perfect. We like twenty-five. We like easy say you have a 25% tax rate. You pay 25% on the 20,000, you're left with $15,000 of spendable dollars after taxes. [00:35:44] That's the traditional route. If we go the rough route, you pay taxes on it. Now let's say it's the same tax rate. You pay 25% on it. Now that 10,000 is then decreased to about seven and a half thousand. And then that seven and a half thousand has the same growth rate as the [00:36:00] traditional route. It doubles. [00:36:01] You have $15,000. You don't owe any taxes on that 15,000. So then you have again, $15,000 of spendable dollars in retirement. So if your tax rates are the same now and in retirement, it doesn't matter if you go the traditional versus Roth wizardry for people, they get so upset and they're like, no, no, no, no, no, no. [00:36:22] You picked numbers. That just happened to work out that way. And it's not the case. As long as the tax rate is the same. And the growth rate is the same, which the growth rate is typically the same. You're going to invest very similarly in the two portals. So if as long as the tax rate is the same, you end up with the same spendable dollars. [00:36:40] And if you really want to, you can play with Excel and redo this and figure it out over and over again and prove us wrong. We'll send you a gift card. Yeah. I remember when I first learned this, I was that person. I was sitting by myself at home with an Excel file. Like there's no way, there's no way. And I kept getting to the same number anyway. [00:36:59] So here we [00:37:00] go. You get to the same spendable number. So a lot of people might say, well, then it doesn't. And to a certain degree, if the conditions are the same and what I mean by conditions is tax rate. If your tax rate's the same, then it matters. If your tax rate is going to change, it definitely is impactful what you do here. [00:37:17] Yeah. And for most people, that's the case, their tax. Rate's not going to be the same now as it will be in the future. So if you think about it, if your tax rate is going to be less in retirement, well, let's pay the taxes, then let's do traditional. Defer the taxes now, save it till retirement and pay taxes. [00:37:33] Then I had a guy that was a doctor making four or $500,000 a year and making Roth contributions to his 401k. So then therefore he's paying a tax rate on those contributions of 28. At that time, the tax rates were different. 20 and 33 33. He was paying a high tax rate and they're very frugal people, he and his wife. [00:37:55] So their income dropped to about $80,000 when they retired, because they just [00:38:00] don't spend very much. And now they're paying almost nothing in taxes, comparing. And I was just like, whoa, whoa, whoa, hold on. We have got to do traditional here because it's only a couple of years when you could pull that same money out at 10 and 12% tax rates instead of 22 to 32 ish tax rates. [00:38:19] So they could have saved 10 to 20% if they had thought just like you described. Kind of fun. You can't control a lot of things about taxes, but this is one way you can control it a little bit. The other scenarios are true. If your tax rate is going to rise, maybe your income is going to increase by quite a bit. [00:38:35] Yeah. Do that Roth, pay that lower tax rate now and let it grow tax. Something else to think about if you want to ultra max out your contribution, so their contribution limits on your 401k. And if you think about it, if you're doing traditional, some of the money that you're putting in, you're going to owe taxes on. [00:38:50] So it's not all your money, but if you're putting it into a Roth, it is all your money. You've already paid taxes on it. So you're essentially ultra Maxine it out. [00:39:00] Everything that you're putting into the 401k is your. So, if you're wanting to get the most amount you can in then Roth is like someone who is over 50 years old can put $27,000 right now into a 401k. [00:39:12] This recording will stay up for a while and that number will change. So look it up before. It's changed every year. So look it up before you take that as the rule or call us. But if somebody puts $27,000 of traditional in their 401k, Versus somebody else puts $27,000 of Roth. Those are two very different numbers because the Roth person had to take maybe another five to $7,000 of their other income to cover the tax. [00:39:39] And so it's kind of like investing $35,000 in a traditional that's a good point, Laura. And that's what we call that ultra max funding, your contribution limits, and that's for somebody, they might do that, even though they're in a high tax bracket, they might do that just to try to push more towards retirement that way. [00:39:59] Now just keep in [00:40:00] mind. I don't know if I would, if I was in a high tax bracket, I think I'd still do. And this is actually what I actually do so well, let's just talk about this for a second and I'll be real. I do traditional contributions because I don't want to experience that high tax break. Then I do after tax investment. [00:40:18] So in other words, let's say I have $35,000 to invest. I'm going to max out the 401k with traditional, save the taxes, the extra money that I was willing to use for taxes for a Roth contribution will be because I did traditional. I don't have to use that money on taxes. So I take that money and I just put it in a joint brokerage account with my wife and we just buy normal investments in the joint brokerage account. [00:40:41] So I'm not saying. You can't invest more if you do traditional, right? You just put it in a normal brokerage account instead of sending it to the government as taxes for a Roth contribution. Love that. The last thing to think about with traditional versus Roth is tax management in retirement. So if you have a little bit of both, [00:41:00] you have traditional contributions and Roth contributions and actually help you control your taxes even more in retirement. [00:41:07] You can control what taxes you're paying. If you're taking traditional contributions or distributions out, those are taxable to you. If you're getting close to rolling over into the next tax bracket, where you would pay more, well, we can stop your traditional distributions and start pulling from the Roth, which are completely tax-free. [00:41:28] And that prevents you from going over into the next tax bracket. And that's complicated. We'll talk more about taxes in our later seasons. But that's just something to keep in mind. It does give you a little bit more control in retirement. If you have a little bit of both and your match from the companies will always be traditional, even if you do Roth. [00:41:45] So we see that with some people that if they're doing Roth contributions themselves, they're getting matching in traditional money. And so when they retire, they actually end up with both sources. That's an okay way to diversify as well. I like that. Okay. [00:42:00] So we've tried to simplify this because. So far, I don't think we've simplified it at all for people. [00:42:05] So this isn't like personalized advice, but we're trying to tell you where most people lie. If you're the typical person and the tax rates go 10%, then 12 22, 24, 30 to 35 37. So depending on your tax rate, that's typically where you would decide and we're of the opinion. 32% and up, which for a couple is about $330,000. [00:42:32] And for an individual person, 165,000 from that level and up, there's a really good case for doing traditional contributions only and deferring all those taxes. It's very rare that I see someone, I do have clients at that rate in retirement, but it's less common. And then if you're below 22%, if you're experiencing the 10 and 12% tax brackets, to me, that's a no brainer. [00:42:57] You need to be doing Roth country. And just so [00:43:00] everybody knows again, this is another thing I'll say that might date this podcast episode a little bit, but in 2025, that's the last year of these tax rates. These tax rates are scheduled to go up in 2026. Now that could all change based on. Whatever Congress decides to do in the meantime, if they can't get anything done, which is what I usually count on when I'm talking about Congress is just that they won't come to an agreement. [00:43:24] If they can't come to an agreement to extend or change this, it automatically sunsets. And we go back to 10, 15, 25, 33 instead of 10, 12, 22, 24. So the bottom line is it's about 3% more taxes. In 20, 26, anyway, bottom line, if you're in the 12 to 10% tax brackets, you should be doing growth. And then that 22 and 24%, that's the, it depends area. [00:43:50] That's kind of hard. And we talk with a lot of people on this screen. It depends on your personal views. What's going to happen with taxes in retirement. And it's not a bad idea to do a little bit of [00:44:00] both. Maybe if you feel strongly one way or the other, then you can do that. It's not a black and white answer. [00:44:04] It's more of a gray area. Yeah. You might have a job where you. I'm at the very beginning of my earnings here, I'm going to make twice as much money in the future. You should be doing Roth. If you're in a job where you get smaller cost of living adjustments and you think tax rates will probably the brackets for tax rates will go up at about the same pace as your income, then that's where you might consider more traditional. [00:44:26] And I really liked what you said. Doing a little bit of both. Some people might even wait a little bit more one way or the other, but they'll do a little bit of both. And we see retirees. I love working with retirees when they have multiple tax structures, because all of a sudden, I don't have to worry about I'm like, oh, you're getting close to that level where you have to pay an extra couple thousand dollars a year for your part B premiums, because your income at about 180,000. [00:44:49] Let's just stop pulling from your IRA at that time. And we'll pull from your Roth. And I don't have to tell him, are you sure you want to go on that vacation because it's going to cost you an extra $3,000 in [00:45:00] Medicare next year. We don't have to worry about that. We just do the vacation. Let's pull it from the Roth and we're good. [00:45:05] I like that. So that goes through Roth versus tradition. And then I think basically we just need to talk for a bit about, I feel like we've done a decent amount on the growth compounding of growth, but we haven't really told people how much to save. I look here and see oh 1% or 3% or 5%, but like, that's pretty doable. If you're one of those early savers and you have five times your income. You're probably going to be set by time. [00:46:49] You reached 65, even if you didn't invest another dollar, it says funded when you've met your goal. So at 30 years old, who has already saved five times their income at an 8% growth rate. And if they [00:47:00] just wait until 65, they're probably going to reproduce their same income, which is pretty cool. That is cool. [00:47:05] But five times your income is quite a lot of people haven't quite gotten to those levels, but anyway, hopefully that gives you a way to be able to see it without having to punch in too much detail and too many numbers. Now we do have a version where we punch in a bunch of numbers and we even have, and by the way, we call this the simple version, because we have software that you can put in all the variables of income, changing and investment assumptions. [00:47:27] So much, but the bottom line is if you want us to run the savings, you need an estimator or send it to you. It basically shows you, okay, how much are you saving now? How much time do you have? What will that need to be? Like, what is your number? You're probably too young for this, but a while ago they had, I can't remember who it was. [00:47:44] Might've been like mass mutual or. One of these insurance companies had this commercial, I'm holding up my arm like this and you don't know why yet just everybody holds on, I'll get there. I'll get there. They were like holding this huge number in their arms as they were [00:48:00] walking down the. And the whole concept was like, that's their number for retirement? [00:48:04] And so, people would be walking down the street and somebody would have like 567,245. And then the next person would have like 3.2 million and they're walking around with their number. It was a really clever commercial. This tool gives you your name. It tells you exactly what your number should be at retirement to reproduce the income that you're talking about today. [00:48:23] And I think that's useful, but you're welcome to use it. We're happy to give it to you. I'm kind of going through this fast because we've covered a lot of this. Don't you think? But if you're the analytical gal, you can ask us for this and we'll send it to you. Very well-played Laura. Okay. Lastly, let's talk about how you would order this because we really want to just bring this home. [00:48:42] If you're trying to say. And you have, you've taken care of the financial fires and you're already focusing on increasing your earnings power. And this is where there are a lot of different opinions and we could probably debate all day about what the next thing [00:49:00] to do is. We've come up with a couple of ideas. [00:49:02] And I think if you're a self-employed person and you're in your twenties to thirties and your business is not yet established, I think that's probably a priority. Put your money towards your business. Let me think about it. Let me give you an example. If Capita decides to take a hundred thousand dollars less in profits at the firm, and we hire a financial advisor to help take care of clients and to help find clients that will cost our firm for the first couple of years, but then over time that advisors activities will pay back and we'll probably make all that money back that we've paid the financial advisor for first couple of years. [00:49:40] We'll make all of it back in a couple years after that. And then every year after that, it's well above and beyond. An investment into a financial advisor for Capita is a better return than if we took that hundred thousand dollars and bought any stocks or bonds or anything like that. That's different though, because the investment in the financial [00:50:00] advisor requires time and systems and work. [00:50:03] Whereas the investment in a portfolio probably doesn't require any work from us, but the bottom line is you probably will get a higher rate of return. Investing in your own business first. And then when the business becomes so profitable that you're comfortable taking some money out and you want to diversify your risk because some of the most risk Laden people I know are self-employed individuals. [00:50:25] That's true. They have everything, their whole life, their whole retirement is centered around whether or not that business can sell. It's good to diversify throughout your career as well. What do you think about it? Concept of paying down debt versus getting the 401k match. That's like one of the next big ones. [00:50:43] Yeah. And this is one, a lot of times it does depend, it gets, it depends on your interest rate on that debt. What that is a lot of times, if you can, I think it's good to at least get your match. So if you need to put in 5% to the 401k to get that 4% match, I think it's a good idea to get that free [00:51:00] money. [00:51:00] That's a hundred percent return. So I don't think you have an interest rate that's 100%. Yeah. So I think it's a good idea to at least get them. But also pay down the debt. Maybe don't put anything over what's required in the 401k until you pay down the debt. It does depend, which is sometimes a hard answer, but going through looking at your situation, you might just have to choose and find a good balance. [00:51:22] So if I'm hearing you right, you get the match first, then you would tackle one of the debt methods to pay down. And then once you have high interest debt or debt beyond like a mortgage and car that they're low interest, once you've taken care of all that, then you come back and put more towards the 401k is what you're thinking. [00:51:42] I think I agree with that. It's hard. So situational, I have to talk to the person and when they plan on using the money, cause that could change everything. And then there's also the concept of the HSA. Or the 401k. So let's say you're getting the match in the 401k, you taking care of high-interest debt. [00:51:59] So [00:52:00] now you are at a point where you have more money you can save. And the HSA is the only triple tax-free account that exists. You put money in tax-free it grows. Tax-free take it out. Tax-free if you use it for health care expenses. So it's one of the only accounts that is triple tax for. And that's why you hear so many great things about it. [00:52:19] Now, the problem is a lot of people don't invest the money in the HSA. So all that growth is wasted. It sits in cash. For the most part, I personally like to put my deductible or out-of-pocket max, depending on how you feel about risk. So let's say you have an out-of-pocket max of 7,000. You could keep that in cash. [00:52:35] And then once you have money over that in the HSA, invest that, and that way you at least feel like, well, I know that I'm not going to lose money and then have to withdraw it because somebody in my family needed a surgery. That's the HSA. But if you're getting a match on the HSA, you for sure should do that, that even further solidifies. [00:52:52] So I would get the match in the 401k, the match in the HSA. And then finally after that, I would go back to [00:53:00] potentially putting more in the 401k and then going back to getting more in the HSA, that order. Gosh, Laura, I'm kind of having a hard time. I think I would go match 401k match HSA, max out, HSA back to 401k after that. [00:53:16] Okay. It is just because of that triple tax free benefit. And some people say, well, what if I don't have that many expenses in healthcare? I'm like, lucky you, you'll see it someday. And also when you turn 65, if you want, you can pull that money out of the HSA and spend it like an IRA. And so that's fine. You just have to pay some taxes on it as income, which I've never had anybody need to do that. [00:53:37] They've always been able to use their HSA for health care expenses. Now, some people. Well, we talked about IRAs and Roth. So that's, if you're eligible, there are income limits to get the deduction for IRAs and income limits for being able to even just contribute to a Roth. So some people won't be eligible for Roth and IRA contributions, but let's just pause for a second because you've pointed this out on other [00:54:00] episodes or other presentations we do. Sometimes people get confused and they think, well, I make too much money. I can't put money in my Roth 401k, and this is a great point. There are no income limits for your 401k. [00:54:12] You can max it out. You can put it into the traditional 401k or the Roth 401k, no matter how much money you make, these income limits come into play. When we're talking. IRAs, which are very similar to 401k's, but it's separate from your employer. So if you;re wanting to do IRA contributions or Roth IRA contributions, that's when you have to be aware of those income and the, I stands for individual. [00:54:35] And so it has different rules and it impacts you differently. That's great, Laura, thank you. So then, depending on, some people, if they're eligible, might make contributions to the 401k. To get the match, HSA matches HSA, max out, back to the 401k. And then they may also potentially put money in like a Roth IRA as well. [00:54:55] And then after that you have just non retirement [00:55:00] opportunities like rental properties and maybe small businesses. And for me, I do a joint brokerage account. We've already talked about that a little bit. I have money transferred every month from my bank account to a brokerage account at TD Ameritrade. [00:55:14] And it works out great. And I even have my investment team at Capita just by my strategy every month when the money hits. And I don't have to think about it. And it's great. It's the same concept as the 401k people do so well in the 401k because it's automated. I wish. That I could have it pulled, you know what I probably could, but pulled from my paycheck. [00:55:34] I probably should just change it to pull from my paycheck. Cause then you don't even see it in the first place. It doesn't hit your bank and then leave your bank. It just never hits your bank, but that's why people are so successful with their 401ks and HSA is because of the automated nature. Uh, benefit with the brokerage accounts is you have more access to it with the 401ks, with the IRAs. [00:55:53] You can't take money out of it before age 59 and a half, or else you have some penalties. That's not the case with these brokerage accounts. You could take out [00:56:00] money earlier and be able to have experiences or pay for kids' education. Um, so you do have some more flexibility, but you have to know yourself. [00:56:07] If you know, you might spend it. If you have access to it, then maybe it is a good idea. Yeah. All the time people want the restriction because they know themselves. Yeah. Because they know themselves, but some people don't have that problem. So they'd rather have it in an account. That's a little bit more flexible for them. [00:56:21] Okay. So let's go through a summary here. We're wrapping up today. One, this is for income planning for investors, age 25 to 40. And we've told you first. Find a way to make more money, play some more offense. You do need some defense, but play some more offense to be aware of the four financial fires and then three, where do you put your next dollar? [00:56:45] And we gave some ideas as to where we would put our next dollar and talked about, but that's going to be individualized. So don't think there's only one way to go on this. Definitely think about it in terms of your situation and what's available to [00:57:00] you through your employer. And what kind of matching you get, and you may end up bouncing back and forth as you save more. [00:57:06] Is there anything else you'd add to that, Laura? I think we covered plenty covered tons. Yeah, that was awesome. Okay. That's it. This podcast is intended for informational purposes only and is not a substitute for personal advice from Capita. This is not a recommendation. Or solicitation to buy or sell any security past performance is not indicated or for future results. [00:57:37] There can be no assurance that investment objectives will be achieved. Different types of investments involve varying degrees of risk, including the loss of money invested. Therefore, it should not be assumed that future performance of any specific investment [00:58:00] or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. [00:58:10] Further. Capita does not PR by legal. Tax advice, please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast, certain of the information discussed during this pod. Is based upon forward-looking statements, information and opinions, including descriptions of anti anticipated, mark get changes and expectations of future activity. [00:58:48] Capita believes that such statements, information and opinions are based upon reasonable estimates, and assumptions. How. [00:59:00] Forward-looking statements, information and opinion are in hair only uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. 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