Your first steps toward building wealth

We cleaned up the captions for reading and swapped in a few of our words, like “workshop” for “webinar.” Otherwise, the words are the speakers’ own. Check the six notes above as you read.

Why investing matters

0:00Valerie Escobar: Great, thank you so much, Matt. Hello, everybody. Today’s presentation, I really tailored it to be as basic as possible. And really, when it comes to investing, simple really is a magical thing. You don’t need to be fancy in order to start making returns and to make your money work for you, so please ask questions. No question is too simple. Surely somebody else has it. Even the most sophisticated clients that I have sometimes ask questions that they feel are silly or fundamental, and they’re absolutely wonderful to have. All right, so let’s get into it here. So why investing? Why does it even matter? Well, in 1950, you could buy a car, a new car, for $1,500. And so, for some people, they say, well, investing is too tricky, I’ll just keep things in cash. And so, if you buried your $1,500 in the backyard and then took it out today, thinking, okay, I’m ready to buy a new car. Guess what? That $1,500 would absolutely not buy you a brand new car today.

1:01This is called inflation. Investing is one of the ways that you can grow your money so that it keeps up with inflation. So that $1,500 back then would now be enough to buy a car. Another reason why investing matters is that it allows you to have this nest egg, this bucket of money that you can use for the unexpected. So let’s say you’re still working and your car breaks down, or your heater goes out and you really need to fix it. Having that cash available is something that is going to be really helpful for you. And even if you’re not working, let’s say you’re on Social Security, you’re already retired. Again, having a nest egg or a bucket of money that you can access will be really important. Because Social Security doesn’t allow you to have a big lump sum taken out. You can only use what’s coming into you every month. Another reason is because investing allows you to grow your money while you sleep. And this is one of the key truths about wealth: that the wealthy, they are able to not have to do anything. They can literally be sleeping, and their money is still working for them. You want your money to be growing well past the point where you are working and putting in your own labor.

2:24So, often, I hear people say, well, I don’t have any money to invest, right? Well, one thing that I think really strikes home is how people say they have no money, yet they can find money to do things like buy lottery tickets. The poorest 1% of zip codes spend 5% of their income on tickets. So, somehow, people in the lowest-income zip codes found $600 of their income in order to buy tickets. Whereas, compared to the richest 1% of zip codes, they spent .15% of their income, so a fraction of a fraction compared to the poorest. Let’s say that we took that $600, and we invested it instead of buying lottery tickets. Over a period of 5 years, if you grow that at 4%, you’d end up with $3,250 [putting in $600 each year]. That is significantly more than having a whole pile of used lottery tickets that you did not win on, and $0.

How a 401(k) works

3:27Valerie Escobar: Okay, so how do I get started with investing? One of the best ways to do it is through a retirement plan. I use the 401(k) retirement plan because this is something that is usually available to a lot of people. If you’re a teacher, maybe there’s going to be a 403(b) plan. If you’re a government employee, perhaps there’s a thrift savings plan. There’s all sorts of different letters and things that they call retirement plans. IRAs, for people that do not work for anybody else, but maybe for themselves [anyone with income from work can open an IRA]. So lots of different instruments and accounts. A brokerage account is the same way, but we’re going to talk about the 401(k), because this is something that so many people just don’t take advantage of. So again, your 401(k) is offered by your employer, whoever it is you work for. Your money goes from your paycheck into that 401(k). So if we consider this little bucket here of money to be your retirement plan, a little bit of your money from your paycheck goes directly into this bucket.

4:34And oftentimes, your employer will also give you money. So, if you say, I’m going to put $100 on my paycheck, the employer will say, I will also put $100 of money into that same bucket. So, it’s like free money. One of the biggest things [mistakes] is not to take advantage of that free money. Well, what’s so great about this, anyways? Well, aside from the fact that there’s free money, one of the biggest things with a traditional 401(k), we’re going to talk about that, is that you can save on taxes immediately. So again, let’s say that your paycheck’s for $1,000. If you put $100 into your 401(k), now you only have to pay taxes on the other $900. So don’t save, you pay taxes on the full $1,000. Save $100, you only pay taxes on the difference, which is $900.

5:27Another really nice thing to do, and this is, again, another huge building block for building wealth, is that the savings are automatic. Once you sign up, oftentimes people forget that they’re saving to their 401(k). So suddenly that $900 that ends up in their bank account, that’s all they use. They’re just used to it, and they forget that that other money is there. And that’s really that habit that you want to get started with. So, with a 401(k) or any kind of savings plan, just getting it started, even if it feels like a really small amount, is a great way to go. Thirdly, is that it grows like a snowball rolling downhill. So much about building wealth is about time. And oftentimes, what is so hard is that you say, oh man, all I’ve got is 100 bucks, right? And so, it’s going to double, and I’m going to get 200. Great. That’s not really all that impressive, and it takes so long. Yes, the beginning part of that curve is really hard, but one day, that $100 is going to continue to compound and grow. You’re going to get $100,000, and now doubling $100,000 is $200,000. That is significant. And so, again, it’s just a matter of wading through that early part where the savings doesn’t seem to really accumulate to anything. You will eventually get to the point where you start to see some real returns.

Stocks and bonds, explained

6:46Valerie Escobar: Okay, so let’s back up. We know how and where we have the opportunity to invest, so your 401(k) plan is one of them. A brokerage account could be another one. So if you go to a place like Fidelity, or Merrill Lynch, or Robinhood, all of those places allow you to invest. But what is it even? So, from a large picture, investing is when you use your money to buy something that you hope will make you more money. So, if you use your money to buy a car, that car’s probably going to become worth a lot less over time, so that’s not really an investment. If you use that money to buy, for example, a franchise, let’s say you say, oh, I love Crumbl cookies. People pay a fortune for those cookies. I will make a lot of money if I buy a store. That’s true. It could very well make you a lot of money. But the problem with that is often that a lot of us don’t have hundreds of thousands of dollars in order to buy a Crumbl cookie store, any store. And actually, let me back up really quick, just to answer a quick question I just saw that popped up about people that are self-employed. So, there are things called solo 401(k)s that are available to people that are self-employed, SEP IRAs, SIMPLE IRAs, traditional IRAs, Roth IRAs. So lots and lots of different options for self-employed people that are similar. But it’s kind of all the same thing, that you really can put that money away and save yourself on taxes, even as a self-employed person.

8:25So back to the Crumbl cookies, right? So we buy a store, we’re making lots of money, and that’s great, but what if I don’t have enough money to buy a whole store? Then, let’s just buy a little bit of that company, and that’s called buying a stock. When you buy a stock, it means that you become a part owner. So if Crumbl Cookies does really well one year, they get tons of profits. You as a stock owner, your price of your stock is also going to go up. Likewise, if Crumbl Cookies does really terrible in one year and they start to lose money, your stock price will also go down. So you get to participate in the ownership and the ups and downs of that company, but you can do it without having to buy an entire company. Let’s talk about a different way to be able to invest.

9:16Let’s say that instead of buying a piece of Crumbl Cookies, you’re saying, you know what, I’m going to lend some money to Crumbl Cookies. From that, what it does is it provides you with a lot more stability. So, let’s say you say, I’m going to buy $1,000 of stocks, and it goes up and down, and you’re like, I don’t feel comfortable with that. Instead, you say, I’m going to lend $1,000 to Crumbl, and what they are going to do is give you a bond. With that bond, you lend the money to them. They pay you interest. And so, let’s say the bond is a 5% bond. They will pay you annually 5% of the $1,000 that you lent them every single year for however long you decided that you were going to lend them money. So a lot like if you buy a house or a car, you have to make payments to the bank every year. In this case, you’re slowly owning it. But the payments that you make to the bank, it’s the same way that the company is making those payments to you.

10:18And then, with the bond that you buy, at the end of the term, so let’s say it’s a 5-year term, they will pay you back the principal. So, if you gave them $1,000, they were paying you interest for 5 years. At the end, they will give you back that $1,000. This is, of course, in a very, very simplified world. The price of bonds could go up and down. Also, Crumbl could go out of business, or whatever company you buy from could go out of business. In that case, you would lose all of your money. But it is simply a different way that you can use your money, give it to somebody else, and have it grow over time.

Diversification: the chicken race

10:58Valerie Escobar: So now we’re thinking, okay, I understand the idea of buying either a stock or a bond, and I use some of my money to buy into a company. But now which company do I buy into? This picture here represents a whole bunch of publicly traded companies. So, oh man, I really love Target, but I love 3M too, which one should I pick? Trying to pick exactly which company is really tough. One of the ways that I would consider it is trying to just pick at a game of chance. This little video that I’m going to show you, this is actually from my farm, and a bunch of chickens are about to run on screen. And so, let’s play a game and pretend that you’re going to guess what color the chicken is that runs on the screen. If you guess right, then you’ve doubled your money, and if you guessed wrong, you’ve lost your money, right? All right, so if you guess the color white, you won, right? There’s lots of other chickens, some are spotted, some are solid-colored, you just really don’t know. And the truth is that so many people will tell you that being able to pick the right color of chicken, being able to pick the exact stock is the only way to make money investing. That is absolutely not true. In fact, people that are speculating and trying to pretend they know, those are the ones that generally end up losing money.

12:23And so, one way to help avoid this is what we call diversification. And so diversification is when we go and we buy a whole bunch of chickens of a whole bunch of different colors and put them all together. When you put them together, in this case, this is called a chicken run, that giant cage they’re in. It can be wrapped up into different packages. One can be called a mutual fund. Another one is called an exchange-traded fund, or an ETF. So, a mutual fund or an ETF, they’re both like buckets that are full of different types of stocks, or a cage here full of different types of chickens. This allows you, instead of having to decide which chicken’s going to be the winner, you can just say, I don’t know of any of these chickens. One of them’s going to win. Then you are able to participate in the winnings there. Okay, so we went over quite a few different things, and so here’s just a quick recap of those items.

13:25The first piece we talked about are stocks. Stocks are owning a piece of the company, whatever company that’s out there that’s publicly traded, for example, Target or Crumbl or 3M. When you own a stock, you participate in the highs and lows of that stock. The second way that you can invest is by buying a bond. A bond is essentially lending money to a company. That company will pay you an interest, and then pay you back that original money called the principal. They’ll give that back to you at the end. There’s so many different types of companies to choose from. So there’s not only the biggest companies here in the United States, which are generally listed in the S&P 500, which is an index. But there’s also medium-sized companies and small companies, and there’s companies in other countries, and there’s just a wide range of industries. So there’s just so very, very many types of companies to pick from. The best practice is to diversify. In other words, buy a whole bunch of different types of companies. Instead of just trying to pick which one is the magical company that’s going to be a shooting star for you and make you a ton of money.

14:37The last piece that we wanted to reflect on are what we call either ETFs, or exchange-traded funds. So, mutual fund and ETFs are both very similar, but I like ETFs. We’re just going to focus on that for this conversation. There’s both stock ETFs or bond ETFs. So, you can buy both. Both of them allow you to have a basket of those different types of investments for different companies.

How much in stocks and how much in bonds

15:02Valerie Escobar: So now the question is, okay, well, I have stocks and I have bonds. Which one should I buy? The difference is really about what’s called volatility. Volatility is how much something moves. Usually we think of volatility when it moves down, but it also counts when it moves up. We’re going to look at an example for 2020. If you remember 2020, this was when the pandemic hit. Things are really pretty wild here, and so this is a really great example as to what can happen. Let’s say at the beginning of 2020, I gave you $10,000, and I said, you can invest it however you want. And to keep things simple, you’re going to say, I’m going to invest in stocks, that’s a generic term, stocks. I’ve had clients that are colorblind, and so now I’m sensitive to that. But basically, this line here that drops really low, and then at the end goes up high, that’s the stock line.

16:02And so what you see is that as the pandemic started to become apparent, all of a sudden, the value just drops. And so if you looked at your statement, your investment accounts around February, March, you would have noticed that you’ve lost $4,000 [about $3,000] of that. That, for a lot of people, made your stomach drop, because you didn’t know. You didn’t know if it was just going to keep on going down, or if it was going to recover, or what it was going to do. A lot of people sold at that point, and they just said, I can’t take it, I don’t know what’s going to happen, I quit. If you did, you would have been stuck there, right? You’d only have $7,000, and that would be it. But if you said, I’m not going to do anything, over time, you were rewarded, because you got your $10,000 back. But then, by the end of the next year, you are up to $15,239.

16:56Let’s say, on the other hand, you say, you know what, I hate the volatility of stocks, I want something that’s much more predictable. So instead, you buy bonds. This line that’s much smoother is the bond line. And so, again, during this time when the pandemic really started to set in, we see a little bit of a drop. But nowhere near what we saw with stocks. And it starts to increase. And at the end of the two-year period that we’re looking at here, we have $585 more than we started with. So you didn’t have to endure the up and down, but you also didn’t make a ton of money. If instead you decided to diversify, you put half of it in stocks, half of it in bonds. Then this light blue line in the middle, this would have been your outcome. It did drop, not quite as much as the stocks. And it did go up much more than the bonds, and so at the end, you would have ended up with $12,829. So that’s what it looks like if we go with 50-50 allocation between the two.

17:55So again, I’m going to go back to just re-emphasize the point about stocks and bonds, and exactly the movement that they have. Here, these chickens represent what stocks look like, right? They’re pretty unpredictable, they fly all over the place. You just don’t really know the movement that you’re going to get, and so it can be tough to predict exactly what’s going to happen. Whereas over here with bonds, these ducks represent bonds. The price in general, if you bought the bond for $1,000, you can usually sell it for around that same $1,000. There’s different things, like interest rates or the economy, the state of the economy, that can impact the price of that bond. But for the most part, they’re pretty mellow. They just hang out, and they don’t do a whole lot. So now the question is, well, how much of each should I buy, right? Should I do two chickens and a duck? So, two-thirds stocks to one-third bonds?

18:52It depends. Like everything else, it depends. We were talking about retirement plans, so 401(k)s. One of the biggest ways to decide is taking into account when you’re going to retire. Time is always the biggest tool, or the best tool that you have, as far as an investor goes. The more time that you have, the more volatility you can endure. So, in other words, if the markets drop, you can wait for it to recover, and it will recover, right? Barring the end of the world or the end of our civilization, so far in the time that the stock market has been in existence, it has always recovered. And so, if you’re going to retire really, really soon, you probably don’t want to be as aggressive. But if you have a long time until you’re going to retire, then you’re going to want to be more aggressive. More aggressive means more stocks, in general. And more conservative means more bonds.

19:50Secondly, how do you feel about staying invested, even if you see the money in your account drop? Again, in the beginning of 2020, when people saw those stocks drop, the ones that sold, they maybe thought that they could endure risk. But as it turns out, they can’t. And it is really good to know that about yourself before you necessarily go in there. So, if someone’s a brand new investor and they come to me and they say, I’m not really sure how I feel, then we’re going to start more conservative. As they learn and get comfortable with it, then we can become more aggressive. People are going to be much more affected by losing money than not making money, if that makes sense. And so, stay on the more conservative side if you’re in doubt. Then you can slowly ramp up, add more stocks to your account, as you get more comfortable with it.

Target-date funds and setting up your 401(k)

20:47Valerie Escobar: Now, I really like the easy button. I’m a financial adviser, right? This is my profession. The investing piece is not something that I love, because I just don’t want to watch the news every day. I don’t want to continuously monitor the economy and see what’s unemployment doing, what’s the housing starts, what’s manufacturing doing. That’s just overwhelming noise for me. We luckily have an investment team, that that’s their job, that they like to do that. But for my sake and my peace of mind, I diversify. One really easy way to diversify without even doing a little bit of work is by picking what’s called a target date fund. I’m going to give you a little bit of a breakdown on what this means over here. So, VFIFX, this that I have listed here, it’s called a ticker. This is the nickname, the shortcut name for a mutual fund, in this case. The full name of the mutual fund is Vanguard Investor Target Retirement 2050 Fund.

21:50Vanguard is the name of the company that’s actually managing the fund for me. So let’s say I decide I’m going to buy VFIFX. I’m going to give my money to the Vanguard, effectively. Vanguard’s going to be the one to say, okay, I’m going to invest your money in different places. And the target here is that by the time I retire in 2050, or approximately 2050, I’ll have the money I need to do that. And it’s not an exact science, but basically what happens is as we start to approach retirement, we become more and more conservative. So again, less stocks and more bonds. And so Vanguard is doing that for me. I don’t have to look at the different types of stocks or bonds, or when I’m going to make the trades, or when the allocation needs to change. I just buy the fund and then not think about it. For 2050, it would be appropriate for people that are about the age 40 now and plan on retiring at 65. And so that is a way that you would be able to decide, okay, which target date fund is appropriate for me.

22:56Often this is available in a lot of retirement plans, but I’m seeing them more and more available just to retail investors, as well. All right. And so if you have a 401(k), and again, this is for people that work for a company, you would ask your HR person, who’s my 401(k) with? They would give you a website. Just go into the website, pick a contribution amount. So again, if your employer says, we will give you 4%, I highly, highly recommend that you put in at least 4% to get started. From there, pick your investments. Again, that target date fund is a really good choice, especially if you’re just starting out, or you don’t want to think about it. It’s a great choice there. And then, much like going to the dentist, you want to come back once a year at least. I guess you should go every 6 months to a dentist, but really, I think once a year in general tends to be enough. Just check on your investments, and check on your 401(k), and say, man, this is really starting to get big. Usually I would say it’s around $50,000 that I would say, okay, maybe we can start to do a little bit more customization. Based on the stage of life that they’re in, or plans that they have.

24:15But during those annual checkups, increase your contribution by at least 1%. Your goal should be to max it out. So the amount that the IRS, they put a limit on it, and it usually increases every year, you want to have it to be the absolute most. I think that’s a great goal for anybody that has it there. If you are self-employed, then that usually means that you go to one of the brokerage companies, again, like Fidelity or Schwab. You can open up an IRA and just put some money in there, and again, those target dates. Or at least you would have different ETFs that are available to you in order to start making some decisions as to what you want to be invested in.

Four pro tips

24:59Valerie Escobar: Pro tips. 401(k)s, IRAs, any kind of retirement plan, these are not for emergencies. I’ve had so many people that they think, okay, well, I get my free money, and then I can pull it right back out. That is not what it’s for. When you pull that money back out, you will pay a penalty to the IRS, so there’s a 10% penalty. Plus the money is taxed. And so the power in those retirement plans is for a long time in the future. There are lots of exceptions, there’s all sorts of different ways to access money in a 401(k) or any retirement plan. But as a rule of thumb, just don’t consider it available at all for you for emergencies. Secondly, time is your most powerful ally. Withdrawals rob you of your time. Just putting that money away and then not thinking about it for a really long time. You’ll be surprised by how much money all of a sudden is there when you didn’t do anything but leave it invested. Adding just a little bit over that time is so powerful.

26:03Third, don’t panic when the market drops. A lot of clients come to me, and they’re kind of ashamed, and they say, I don’t really look at it. I don’t even think about it. That actually makes them a fantastic investor, because when you’re not looking at your investments all the time, you don’t have any reason to panic. When you don’t panic, you don’t make bad decisions. And so, if you are saying, oh my gosh, the stock market’s dropping, my value has gone way down, I can’t stomach this. Stay the course, wait for you to at least break even. Then change your mind about your risk tolerance, and say, okay, now I’m going to become more conservative. But don’t sell at the bottom, just wait until you see a recovery. And the fourth point is ask questions as you go. I’ve been doing this for over 20 years now, and I’m constantly learning more and more about investing. The landscape just continues to change, and so there is never a point when you should not be asking questions.

Roth or traditional IRA?

27:02Valerie Escobar: All right, so one great question that I hear a lot is, what about a Roth IRA versus a traditional IRA? So, to clarify the difference, it’s about paying taxes now or later. With a traditional IRA, you pay taxes later. So, let’s say that you have a really high income. For a general rule, let’s just say that you’re in the 23% tax bracket and above. We’re going to say that’s your high income. In that case, you’re paying a lot in taxes. You probably want to do a traditional IRA to help reduce those taxes. And another consideration is saying, I make a lot of money now. But in the future, when I retire, I probably won’t be pulling out that much money, because the truth is, I don’t really spend a lot. I just happen to be making a lot right now. If you’re in a little bit of a lower tax bracket, so anything below the 23% tax bracket, maybe a Roth makes more sense.

28:03With a Roth, you don’t save on taxes right now, so you’re paying taxes at the lower rates that you’re at now. But in the future, when you pull that money out, it’s grown, and it all comes out tax-free. The Roth is a really, really powerful tool. So even for people that are really high earners, if they can stomach just paying the taxes, it feels really good to be able to have a bunch of tax-free money later on. So lots of rules of thumbs, but I think that’s kind of the biggest one, is just, okay, where am I on the tax bracket scale? And then also, when I’m looking at my money, and I’m saying, okay, I need to save tax money, I just don’t have enough to pay for taxes. Then putting a little bit into that traditional IRA can help. It’s not a one-for-one, right? So if you owe $100 in taxes, putting $100 in an IRA won’t make all your taxes go away, but it helps a little bit.

Q&A: a first step, ETFs and values-based investing

29:10Valerie Escobar: All right, so that’s it for my specific presentation. I’m happy to answer any other questions. Matt, do you see any?

29:26Matt Iverson-Comelo, host: No, but one question that occurs to me is, if someone’s pretty new to investing, what’s the best first thing that they could do after this workshop? Any thoughts on that, on what’s a good next step from taking the information and applying it?

29:44Valerie Escobar: Yeah, so again, this is no sales pitches, right? And so I’m not advocating for any specific company, but there are what are called robo-advisers out there. Wealthfront is one example, Betterment is another example, and you can just Google them, and make sure that they have FDIC insurance. But I think simply setting up one of those accounts and starting to just put a little bit of money into it, every paycheck, is the absolute best thing. Just get into the habit they’re always saving money. You want to get your emergency fund up and running. I love the idea of, I’m going to keep putting in, pick a dollar amount, $100 into my bank savings account until I get to $1,000. Once I get to that, my next step is going to be open up a robo-adviser investment account, and then just start putting in $25, $50, whatever it is. But I think just getting that habit started is a fantastic step.

30:49Okay, so the main difference between an ETF, an exchange-traded fund, and a mutual fund, more and more, the difference is getting pretty much nil. ETFs trade, or are priced throughout the day, and mutual funds are just priced once a day. It used to be that exchange-traded funds were cheaper, and that they were really only based on an index. So you’d be like, okay, I can only just buy very passive funds. Whereas with mutual funds, they would be like, okay, it’s for, I don’t know, one very specific strategy. That’s no longer really the case, and so the differences are pretty much minimal now.

31:34Matt Iverson-Comelo, host: And just a plug for those who haven’t signed up. I know a lot of you will probably have signed up for Advisers Give Back. But if you haven’t, and you’d like to work with a pro bono financial adviser like Valerie, who can’t take you as a client, but also can’t promote any specific products, is just there to help, as part of their way of giving back, you can sign up at Advisers Give Back. There’s a QR code, obviously, here as well. Looks like there’s a couple questions that came in:

32:17I’d like to know how to limit harmful externalities when investing. Is there a way to ensure your returns on investments don’t have harmful environmental or social effects by supporting unscrupulous companies?

32:30Valerie Escobar: That’s a fantastic question. So there are companies out there that call themselves ESGs, is kind of a term, Environmental Social Governance. And so they’re ESG funds. They say, okay, we put a screen on our fund to make sure that our companies are green, or that they have good governance. Or they have female CEOs, and things like that. One of the biggest problems, though, is that when you look under the cover of those funds, you’ll see that it’s usually exactly the same as just a regular mutual fund. And so those screens are a little bit of just window dressing.

33:17And so, green funds, I think that’s the hardest one, is that you’ll see, okay, that they have Exxon in there. They have a lot of these oil companies, because the truth is, yes, these oil companies are starting to invest in some green technologies. Because they feel that that’s the future, right? And so they have a ton of money. So putting a percentage of their huge funds into green makes them a really big contributor to the green industry. But is that really what you’re trying to accomplish? And so, that leads to the second piece that’s saying, yes, if I want to be a very impactful investor in a green technology or some social impact. The best way to do it, honestly, is to make money on investing in whatever diversified way that you can. With the proceeds, use that to do good in the world. Because I’ve yet to run into a company, aside from companies that do require you to be extremely wealthy, frankly, that you say, our minimum is a $500,000 investment. You can invest with us, but it’s very high risk, right? It’s a very small company. We’re investing in a technology that’s not proven. You could lose your money.

34:26And so it’s pretty tough to use your funds to be sure that you’re investing that way. So yes, ESG is something that you could search for. But I just don’t really promote it because I haven’t seen it being anything that really delivers on the promise. I did see another question come in. For a Roth IRA, if I’m in a lower income bracket, does this make sense? I do think so, right? You’re like, I’m not paying a lot in taxes now, and so I might as well put your money in there. Then when it grows later on, just have it grow tax-free, and then you can take it out tax-free. I definitely think using a Roth makes a lot of sense. How do you know if you’re over-investing? Oh, that’s a fantastic question. When I build financial plans for clients to determine how much to invest, the first thing that I always look at is the biggest, highest, hardest goal to accomplish. Which is generally retirement, right? Because you can’t get a loan for retirement or anything like that.

35:30And so, one, it’s like, have I put enough money away for retirement? If the answer is yes, then you say, okay, maybe I don’t need to keep adding to that. Now I’m saying, okay, do I have enough in emergencies? Do I have enough funds that are available for shorter-term goals, for buying a house or paying for college? And so just mapping out all of these little buckets that you have, and making sure that there’s enough money in there. And then once that’s done, honestly, the rest of it, you should use it for enjoying your life. But I think that over-investing is not something that I run into very often, unfortunately, but it is absolutely something that is existing.

Q&A: fees, savings accounts and starting at 50

36:12Matt Iverson-Comelo, host: There are a couple more questions. Can you please go over fees for investments? Any general information is helpful.

36:19Valerie Escobar: Yes. So, let’s say, we were talking about Vanguard before, that target date fund. Vanguard itself, they will charge a fee. And so they’re called internal expenses. Morningstar is a really good source. If you look for a fact sheet, F-A-C-T sheet for the ticker for whatever it is that you’re investing, in there, it should outline the different types of fees. A really low fee would be something that’s like 0.1%. Something that’s a really high fee is more like 1.5%. So those are the internal expenses. There are still some mutual funds that have loads. You don’t really see them as much anymore. But if there’s an A share, so if you’re American Funds A share something or other, those will usually have an extra fee. That’s like a 5% fee that you pay right up front. And so that’s a different type that usually you can avoid. You just have to read the fees. Trading fees is another one. So depending on the company that you’re with, it should be able to tell you pretty clearly. Or you need to ask the questions and make sure that it tells you exactly how much they’re charging you to make some trades.

37:49I know for me, as an adviser, we manage accounts for clients. So if they pick the trades and they want to do it on our platform, it’s really expensive. And I tell the clients that, I was like, don’t do it that way. Use something that’s more of a brokerage account that you should do for yourself, that it’s cheaper. How do I find a HYSA? So I believe that’s High Yield Savings Account, is what this person is referencing. If you Google high-yield savings accounts. Really, the biggest things that I look at is, as you check, like I said, I like to make sure that there are FDIC insurance. The way that these online banks work, and with high-yield savings accounts, these are generally going to be online banks, because they don’t have brick and mortar. They don’t have a store to maintain, they don’t have as many employees to pay for. That’s why they’re able to pay higher expenses.

38:51Or pay you more of a yield. And so what they do is they partner with other banks. That’s how they get their insurance so that, just like at a regular bank, you’re able to have that. So yeah, I think just googling it, looking at what they are, if they have FDIC insurance, look for reviews. Jenius Bank is another one that I’ve used. J-E-N-I-U-S is how it’s spelled. Marcus, I believe, is another one. And so, really, you want to just look at it and see what the reviews are, if other people have used them. Then that should be able to get you what you need. When does it make sense to open a brokerage compared to retirement? Great question. Just regular old savings account, right? You want to make sure that you have enough for emergencies. I really do like balancing it out and saying, okay, I want to make sure first that I have enough to meet my retirement goal. And then after that, that you have a little bit in brokerage. That’s a tough question to ask without knowing the specific. If I’m working with a client, and I know this client is in a situation where they’re saying, my goal is to have a sabbatical in 5 years.

40:19And in 5 years, they’re going to be 50. When they’re 50, that’s not old enough to be able to pull money from their retirement account. So I’m going to say, okay, we’re going to use some brokerage money to be able to fund your sabbatical. And so knowing what your goal is, that will help you understand what kind of account to open, because a brokerage account, you’re not going to pay those penalties. You will pay capital gains tax, so it’s just taxed differently. But having a balance in each, I think is really helpful.

40:55Matt Iverson-Comelo, host: There’s another question here. The question is, I’m 50, is it worth it to open a mutual fund? If so, how much should my initial investment be to make it worth it?

41:13Valerie Escobar: Yeah, so absolutely talk to an adviser, because it depends, right? If you’re working and you have some discretionary income to put some money in there, absolutely. You’re 50, so that means that you probably have another 40 years that you’re going to be needing money. And so time is still absolutely on your side. Without knowing your situation specifically, making sure that you put some money aside in that retirement account, but after you have your emergency fund funded. At least $1,000 to start with. After that, I think like 6 months worth of spending is a really good number to try and achieve for emergency spending. But then after that, anything that’s above that, you can put it in brokerage. That is money that you do not need in an emergency, because if the stock market is doing poorly, you don’t want to have to sell. You can touch your emergency fund instead. And so that’s that long-term money. So if you’re 50 now, that’s the money that you’re going to use when you’re 70.

42:47Matt Iverson-Comelo, host: Most of all, I want to thank Valerie for taking time out of her very busy day and to put these slides together. Incredibly helpful. If you have other further questions, you can send an email to info@advisersgiveback.org, and we can forward it on to Valerie and get you an answer. So thanks again, Valerie, really appreciate your time.

43:20Valerie Escobar: Thank you, so good to be with you.

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