018 Your Money Questions Answered

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This is the affluent entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom, because that's what it really means to be an affluent entrepreneur.

Welcome to this episode of the affluent entrepreneur show. And this one is a special episode. We are live. We're doing this one live. And primarily what I want to do is a lot of you have been sending me questions and questions about money, about wealth, about what you should do. And in this episode, I'm going to go through some of those questions. We're going to answer those questions. So if you have money questions, if you have some of these things that are going on, business, money, entrepreneurship, wealth, those kinds of things, send them in to me. DM me with them. Send them to me. Let's get them out there. Let's get you going. Let's get you rocking and rolling. This show, the affluent entrepreneur show, and doing these lives are special. They're just for you. This is all about you. This is all about how do we make sure that you're moving forward financially. You know, my core belief, one of my core beliefs, is that financial independence is a birthright. We just need to understand how to go out and claim it. And the world doesn't teach us that. The schools don't teach us, that the media doesn't teach us that we got to find another place. So welcome to the show and welcome to a place where we can have frank and sane and safe conversations around the world. The topic of money, the topic of wealth, the topic of living your best life without being judged, without being canceled, without having any of those things go on. So I appreciate each and every one of you for being here. So let's get to some questions. So this first question comes in and I'm going to read the question and then we'll answer. It says, should I put more money against my mortgage or invest in instead? So here's an interesting question and I don't know enough about this person. I don't have enough of the context. And one is, is that what's the age of the person that's asking the question? Because if you are, let's say, less than 40 in that realm, what I would tell you is that make investing the priority because then you get your money into the investing game. See, too many people, especially right now, they're sitting back saying, well, the market's really high. What do I do about the market? Is it time to get in? Should I get in now? Should I not get in? Should I wait for a dip? Okay. Timing the market is a fool's game. Timing the market is the fool's game. When you look at the statistics, even people that are professional managers of shows or funds and everything, they don't have the ability to time the market. And so if you think you have the ability to time the market, it's a mistake. So it's not timing that matters, it's time in that matters. So I want to get you in the game because what that does is that gets time on your side when you start to build wealth, when you're trying to build your investments. The compounding effect is not on at the beginning, it's at the end once we have time on our side. If, for those of you that are on Facebook or LinkedIn, you'll be able to see this for Instagram, unfortunately you won't be able to see it. But you can watch the recording here because if we look at the compound effect, it's an exponential curve like that. And so we need to eat up this time down at the bottom. The flat part. The flat part needs to be eaten up so we can get the accelerated growth in your investments. And so that's why I say if you're under 40, I want you investing rather than accelerating your pay down of your mortgage. You'll have time to get the pay down of your mortgage. And most likely your mortgage is at the, as a probably the lowest interest rate that you're going to find in today's time. So those of you that have been with me and see some of the stuff, like in the affluence movement, we talk about something called the wealth priority ladder. Paying down your mortgage is up. The Ladder a little ways. Let's make sure that you're putting money into your investments. Let's make sure that you're putting money to your retirement. The people that I work with, I want them to be putting away 15 to 25% of their income. If you're maxing out 15 to 25% of your income, then we can talk about accelerating pay down of debt and that type of thing. So first things first. I want investment growth because, because I want to use time on my side to get the compound effect before I start accelerating my debt. Now if I'm over 40, then I may look at it differently depending on what kind of investment portfolio I have. We still need to think about how are we going to take care of retirement. But getting into retirement, we want to make sure that we want to be as close to debt free as possible because that takes a burden off your shoulders. So hopefully that helps. Question of should I put more money against my mortgage or invest instead? Second is a similar question that came in. This question is about 401k. Should I use my keep putting money in my 401k? But I want to buy a house. I want to buy a house and I need to save for a down payment. So there's a couple things here. Typically what I tell people is I want you to buy a home. If you're going to buy a home, I want 20 to 25% down minimum. 20 to 25% down minimum. That's, that's a lot. In some markets that's a lot of money that you got to create a down payment for. So what I will typically do is give someone a little leeway. A little leeway. If it's their first time home purchase. If it's their first time home purchase, then instead of having to worry, I'm willing to allow people to go to 10% down. Okay, 10% down. So you can get into that first home purchase. However, however, let's get real clear. The home you buy, it does not exceed the housing cost, does not exceed 25% of your income, your household income. So not just yours but you and your spouse, we want to make sure it doesn't exceed 25% of your household income. Because what I don't want you to do is be house rich and cash poor. And then all of a sudden when things happen, you can't support the house. Okay? You can't, can't support your living. So we want to be smart about it. So first things first, if it's a first time home purchase, I Will tell the people, you can go to 10% down, which is going to put more debt. But we want to make sure that that debt doesn't exceed 25% of my income. Otherwise I want 20% down. Now, first thing that I would look at is, again, if I'm maxing out my retirement account, then we can allocate income for the down payment fund. If I'm not maxing out my retirement account, then I don't have a problem with folks saying, well, let me split it. Let me slow down my investing so I can push the accelerator down to get the down payment. So here's how I would do it. Let's say that you have $1,000 that you're investing right now. I might take and split it and go $500 is going to my down payment fund, and I'm going to put that in a high yield cash account because I don't want to take risk in the Marketplace Place. And 500 will go into my retirement account or into my investing account and do it that way. And so you're able to do that. Now, the key here is again, age comes into this. How long do I have? When do I want to buy the house? If I want to buy the house in a year, that changes the equation than if I want to buy the house in five years. Now, here's a word of warning. In most markets right now, the real estate markets are going absolutely bonkers. They're going crazy. Okay, okay. You might feel like, oh, my gosh, I'm gonna miss the market, that the house is gonna run away from you. Listen, stock markets, real estate markets, everything starts to go in cycles. It goes up, it comes down, it goes up, it comes down. If you start to get the feeling, the tug that I gotta get in right now, I gotta get in right now, otherwise I'm gonna miss this opportunity. You're making an emotional decision with your finances. And when you make emotional decisions with your finances, when your emotions go up, your financial intellect goes down. But we don't make emotional decisions with our finances. We make logical decisions, we make economic decisions, and we do it in that format. So we want to make sure that when you're going into. And houses are emotional purchases. All right? So here's the thing. I got a new addition coming to the family. Okay? New addition coming, family. And it's not my granddaughter. My granddaughter is due in three weeks. In three weeks. Okay? So my granddaughter's doing three weeks. But for some reason, my wife and I decided we were going to get a Puppy. So we've got a new addition coming to family Budo. The little puppy is going to come to us now. We were on, we were on the list, okay. We were on the list, okay? And we were down at 103 on the list. And this is driving to emotions. And so we said, they said to us, you have six to 12 months before you're going to get your puppy. And I said, okay. Well, last week she sent me a text. Not only did she send me a text, she says, we have a puppy for you. The little boy that you wanted. We have a little puppy for you. And she sent me a picture and she sent me a video. What do you think that did? I mean, that, that is, that that's like evil. All right. The emotions and everything. And so we're getting a puppy earlier than we thought. We're getting a puppy next week. So you're going to. You'll die when you see this. So cute. So a sheep, a doodle. So it's going to be a big one when it grows up. But my point is this. When you make emotional decisions, you tend to make decisions that you might not otherwise make. So a house is an emotional decision. A residence is emotional decision. A second home or a rental property is less emotional of a decision. So we need to be aware of, of where our emotions are in the things that we're doing. And so when you decide you're gonna buy the house, we don't chase the house, we don't chase the market. If the market's getting away from us, we back off and we let it come back to us or we wait or we do something else. Because when we do that, when we chase the market, we tend to make irrational decisions in doing that. So 401k versus down payment. I would go ahead and slow down your investments, build the down payment, get into the house the right way. No more than 25% of your income going towards your housing costs. If it's first time home purchase, you can go with 10% down. Otherwise 20 to 25% down. What I like to see is rather than a 30 year loan, a 15 to 20 year loan, I want to get that interest off of there. I just worked with a client, we moved their loan down from a 30 year to a 20 year is going to save them $148,000 in interest. $148,000 that they don't. That they're not going to pay. See, remember, compounded interest works for you, compounded interest works against you. Depends whether you're receiving it or whether you're paying it. So hopefully that helps. Next question comes in. So I have a large investment in a single company. How do I reduce my risk? This is a great question. First off, this can happen for you if you happen to be working like my wife works for a publicly traded company and as part of the publicly traded company, she gets stock options and she gets the ability to buy stock at a discounted rate. And the tendency is that you can end up having a large block of stock in a single company which happens to be your employer, but that's a whole lot of risk in one basket. That's a whole lot of risk in one basket where we might get ourselves in into trouble with it and we tend to want to diversify. Now you may be in a situation where you've got stock in your own company. It may, I don't know, they didn't tell me in this, it could be that they have a large investment where like I have an investment in a single company that I invested in prior to their IPO and then they IPO'd and they've run up to the hundreds, multiple hundreds of dollars a share. So the amount of the investment has gone up tremendously. And as a percentage of my portfolio, it's starting to push up against the risk factors. In other words, I don't want a single investment to be more than 5 to 10%, typically 5% of my holdings. Because if it's more than that, if I have a holdings large investment in one single stock, one single company, and that company goes south on us or has a problem, then your whole portfolio goes south. Your whole financial future is resting on the value of that one investment. And so we don't ever want to do that. We want to diversify. So assuming that this is not a privately held company, because if it's a privately held company, you may not have the ability to sell it. They probably have it restricted on you and you may not have the ability to sell it. But if it's not a privately held company, what I would probably do is just start. You can do dollar cost averaging into companies, but you can do dollar cost averaging out of companies and just start to divest yourself. Now here's the thing. When you start to divest yourself and buy other, other investments, there's a tax impact there. So you're going to want to talk to your tax advisor to see what that impact is. If you've held it over a year, at least under the current rules, you'll pay it at the Capital gains rate in the US if you held it less than a year, you'll be at ordina. So you may want to look at that. Now if you have other holdings that you have losses on that you're losing money on, you might do something called loss harvesting. So you, you sell a stock, one stock for a gain, you sell another stock for a loss and they offset each other and you lower the tax. But I would just take a piece of it each month or so and start liquidating and diversifying that portfolio if you can. Now, you know, 401k, maybe the stock is in your 401k, maybe it's in your retirement account and it's a single company stock. You can diversify inside that account possibly by buying other funds or looking at other investments. And there is no tax effect for you because it's inside the fund. The other way to diversify in doing this is you can pull money out of your 401. A lot of people don't really know this is that you can pull money out of the 401k or your retirement account if they allow for it without penalties and without tax. It's called an in service in service distribution. You go to the HR department, you say, I want to do an in service distribution. Do you allow for it? And they'll typically allow for a little bit. Now let me tell you why you might want to do this. And I did this with my wife. When you are Investing through a 401k, they give you just a handful of investment options and you're, you're corralled by the investment options that they give you. You don't have a lot of variety. And so one of the things that you can do is if you want to diversify is you take money out of it and you use it to invest somewhere else. So what we did with my wife was we took an in service distribution from her 401 directly, okay, keyword directly into an IRA account. So there was no tax withheld. It was rolled over into an IRA account. So it's still in a tax shielded entity. And in that IRA account we had more flexibility to invest it into other things. So you can diversify it that way. So hopefully that helps. Next question is, what is an hsa? Great question. HSA Health Savings Account. This is something that a lot of people may be exposed to, especially when you have the open period, open enrollment period for your medical plans and that type of thing. A health savings account is a special savings account where you can put money away for health Care for medical costs. But it's a special account in the sense that it only works. It has to be. You put it in place in conjunction with what they call a high deductible medical plan. So in other words, you're going to be bearing the burden of some of your medical costs of high deductible plans, thousands of dollars, okay? Now, if you're a relatively healthy person and you're not using the medical insurance, you may get away with a high deductible plan and be okay with doing that. And so you end up lower premiums because it's a high deductible plan and you able to put money away into this HSA account. Here's the benefits of this and why I love HSAs so much is it's one of the only accounts that are what we call triple tax advantaged. Okay? When you put money into an HSA, you get a tax deduction, okay? Just like an IRA, just like a 401, you get a tax deduction for it. And the current limits are $3,600 for an individual, $7,100 for a married couple. So you could literally, as a married couple, put $7,000 into an HSA, take a deduction for it, and not pay tax on the $7,000. Now, that's the first tax advantage. The second tax advantage is that the money in the HSA doesn't just sit in the hsa, you can invest it. So I can put it in an index fund, I can put in an etf, I can put it in other investments, and it grows over time, and it grows tax defer. In other words, all that growth, all that appreciation, all the gains, I don't pay tax on, okay? So that's the second tax advantage. The third tax advantage is this. If I draw the money out of the plan.

To pay qualified medical expenses, my deductibles, hospital bills, doctor's bills, if I pull the money out of the plan, it's not taxable. It pull it out 100% tax free. So those are the three levels of tax advantage of an HSA tax deduction. When you put it in, it grows tax free. You can withdraw it for medical expenses completely tax free. Now here's the other thing about it. Now, some people you don't, there's some nuances to it that you can use. You don't have to reimburse yourself or pay those tax bills immediately. You can actually let the fund grow tax free and then reimburse you years later if you want to. You Got to keep the receipts and keep it dialed in. And if you don't use the money, so you put $7,000 in, in 2021, but you don't use the money in 2021, 7,000 rolls to 2022 and you put another 7,000 in 2022, if that's the limit. So it's like another retirement account. Here's the other beautiful thing behind it. When you reach age 65, you can actually draw it out without penalties, even if you're going to use it for non medical expenses. So HSA account, couple things to know. Health savings account. You put money in, it's tax deductible. If you take the money out, it's used for medical expenses. It's not taxable, but it has to be paired with a qualified high deductible medical plan, which typically will be offered by your employer. Or when you set up your medical insurance, you get a high deductible plan that's qualified for an hsa. So hopefully that answered that question. And I got one more question we're going to finish with. Okay, new business. This person wrote in, he says, I, she said, I'm starting a new business. I just started a new business. I'm in my, my first year of business, second year of business, and I'm questioning, do I do a 401 solo 401k or do I do a SEP IRA? So here's my belief about this. The solo 401k, for a lot of reasons I think is probably better than the SEP because of a lot of reasons. One, you can put the employer, so the company can put money in for me. So I have a solo 401k. And in that solo 401k, I take money off of my salary and put money in myself up to, because of my age, I can go to $26,000. If you're not over 50, you're going to be at 19,500. But the company, my company can match it.

And so you get company contributions. So the 401k is a richer plan, I believe, because you have salary deferral, you got the employer contribution. But here's the challenge with it. A Solo 401 has to be set up before the end of the year. Before the end of the year. Okay. So you can't set up a plan for 2020. You can set up a plan for 2021, a SEP IRA, though, you could open up that SEP IRA plan at any time up until your tax filing. So you actually can set it up after the year end and kind of backdate it, retroactively contribute. So that's one of the benefits with that. The other thing is that if you have a SEP and you're doing Roth conversions, this is a more advanced strategy. It can affect your Roth conversions if you have high income. But here's the way I look at this. If I can do a solo 401k and, and it's before the year end and so two ends, I have predictable income that I know I can make the contributions, then I would go with a solo 401k. If my income is volatile because I'm new in business, then I probably wouldn't do the solo 401k because I don't know that I can make the contributions on a regular basis. Bottom line is that I can get at the end of the year for the sep, the SEP ira, and look back and say, here's what my profit was and I can put money in the 401k. It's going to be more systematic. So you need to have a bit more predictability of your income. So being that's your second year in business, I don't know where your income is, but if it's growing or it's static and it's predictable, then you might be able to work with a 401k. So those are the questions that came in. Do me a favor for those of you that are out there. Let me know if you have questions. Money questions, wealth questions, investment questions, entrepreneurship, business questions to let me know. I'll bring you on the show. I'll bring your questions on the show. Let's get them answered. Okay, this is one of those Q and A sessions, Q and A live episodes. And so just send me your questions, post them. If you're not following our Facebook group, go to the Affluent Entrepreneur Facebook group. Join me in doing that and let's rock and roll. Let's keep you moving forward. Remember I said that financial independence is a birthright. Let's give you the path to make that happen because you're not going to learn it in school, you're not going to learn it from media, and you certainly aren't going to learn it by just looking around. Let's give you the path to make it happen and do it the right way. I want you to live an affluent life. An affluent life. It's not necessarily an opulent life, but it is a life of meaning. It's a life of impact. It's a life of peace, and it's a life of fruitfulness. So let's make that happen. And you guys have a blessed, blessed Thursday. As you come in, let me know. Carrie, I'm so glad that that helped, that some of the questions apply to you. If you have questions, shoot them my way. Let's rock and roll. Let's have some fun. Let's, let's do more. The more questions I have, the more often I'll be doing this. I'll come in live, we'll have the conversations. I'll bring some of you on live. Let's have some fun. And if you haven't followed the show, go to the affluent entrepreneur Show. Subscribe. Do me a favor, leave a review. Leave a review because I pick reviews and I read them on the air. And if your review gets read on the air, you get a chance to have a one on one laser coaching session with me. So let's make that happen. All right? All right. Cheers to you all. You guys have a great, great day and we'll talk soon. Cheers. Bye. Thank you for listening to the affluent entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group and I'll see you there. Foreign.

And that's it for this episode of Building your money machine where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple podcast, or wherever you're listening to this podcast and rate and review view the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright and I want to help each and every one of you claim it. Thanks so much.