033 Your Money Questions Answered

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Hey there, and welcome to this episode of the Athlone Entrepreneur Show. This one is another one that's run by you because it's a Q and A show. We're going to answer some questions that have come in on finances, money, on wealth, and what they should do. So stay tuned.

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 athlete. On entrepreneur.

Hey there. Welcome to this episode of the affluent Entrepreneur Show. This one, we're answering questions. This one is a show based upon what you asked for, so we can help you out to start shifting your financial trajectory. Listen, here's the thing. This show was created for you, by you, with you. This is what it's about. This is why I created it. I could spend a lot of time just talking and putting stuff out there, which we do. I do solo shows. I think by far the most important aspect of the show is when I hear from you, questions, comments, struggles, so I can help, so I can guide you, so I can be, in a sense, your money mentor in your back pocket. So if you have questions just like these folks do did, do me a favor, send them to me. DM me, you know, Facebook me, you know, let me know what those questions are. Let's bring them on the show. Let's get them answered. Let's keep you moving forward. And some of the questions, I actually might bring you live on the show and we'll coach you and we'll work through you and we'll mentor you right there on the spot and make it happen. So please, please, please, let's do that. All right, can we. So let's get on with it. We've got a couple of questions that have come in. I think there's some really good questions that probably are around for a lot of people these days. And so I want to make sure that we get some of these answers. The first question that has come in is actually from Instagram and Penny Graham asks this. Does it make sense to refinance a home at 2.5% to take out cash to invest in stocks or a rental property? Now this is a great question and I get this question often. They say, well, interest rates are so low, I should take all the equity out of my house and let me go and invest it. Here's the thing, okay. And that may be the case, you may do it, but there's some risks. There's some things that I think we need to be aware of. One, we're talking about your place, you live, your residence and interest rates are low, Stock market is high. Is there a correction in our future in the stock market? Yep. I can tell you with a hundred percent certainty that there will be a stock market correction. What I don't know is when. What I don't know is for how long. And if someone tries to tell you, absolutely they know exactly what's going to happen with the stock market run, because no one does. Even the high, high, high level professionals, some of the people I have conversations with, they don't know. So here's the thing. If we take, if we borrow against our residents to go invest in the stock market and the stock market declines, then what? How are you with respect to sustaining that? Are you willing to stay the course? Because in the long term, the market will correct, it'll, they'll come back, it'll recover and it'll continue to grow. If you look at the history of the stock market, that's what it has done. But in the short term, there's volatility. So here's a couple things. Now, I don't know enough about this person and if they were in front of me, and this is why sometimes I want to do some of these live, is that I don't know enough about this person. But if this person, say, is 30 years old, then they have a long term view, they have a long Runway to recover. If this person, say, is 60 years old, they don't. So the thoughts might be different. But before we even get to that point, here's some questions that I would ask. One, do they have other debt? Do they have consumer debt? Destructive debt. Do they have credit card debt, student loan debt, things like that? I would rather us start getting that paid down before we start borrowing more in the anticipation or expectation that we're going to make a ton more. Okay. Because the market will correct. We just don't know when and for how long. It is a volatile thing. Okay. Now the second thing, and actually probably should have been the first thing is this. Do they have a comfort fund? If you think about the wealth priority ladder, the first thing is a comfort fund. I want you to have $1,500 or one month's expenses in a high yield cash account to give you the ability to breathe if something happens. The statistics show that most people in, in the US today cannot sustain themselves. If they get a $1,000 emergency expense, something that's unexpected, they cannot sustain themselves. In other words, they're going to have to go into debt, sell something or, or not be able to pay for it if the transmission goes out and it's a thousand bucks. Okay? So first things first. I want to make sure that they have a, their comfort fund in place. I want to make sure they have a debt plan in place before they do that. And then I want to look at. Okay, does it make sense? I'm not keen on borrowing to go into investing because of the volatility. Now, I will caveat that in the sense that if we're leveraging a property to get into real estate, I might do that. That is because that real estate will create cash flow and appreciation. But I will not go into it with this 5% down stuff. I want 20 to 25 to 30% down. That lowers your returns and it takes a lot more cash to get in. But I want to have enough cushion, enough margin for error that the rents will cover it. And I don't have a huge mortgage. See, sometimes we don't think about the psychological impact of debt. There's the mathematical impact of debt, the financial impact of debt. We know that we have a payment that we got to write every month and it's going out. But what is the burden doing to your psyche? What is the burden doing to your emotions? The burden of having debt on your shoulders can be hugely detrimental to your level of quality of life. And as you get closer to retirement age, as you get up in years, I want that debt to decline. I don't want you in debt. Because think about it. What we need to do is if we get to a point where we've got no debt, then the only burden, financial burden we have is Living expenses. We build the money machine. Remember, we say for affluent entrepreneurs, they have two machines. Their business machine creates cash flow. See, the mistake is they think that the business machine creates freedom. It doesn't. The business machine creates cash flow. We use the cash flow from the business machine to create a second machine. And this is where they fail. They don't take the time to build the second machine. The second machine is a money machine. That's what gives you freedom. And so if we end up with no debt and we have a money machine that's producing income cash flow for us, which includes real estate, which includes stocks and portfolio and other investments, now we have the freedom of loan. Okay, so hopefully that helps. You got a low interest rate, Two and a half percent. Yeah. You could borrow it, but I think you need to look at the totality of your financial picture. Do I have the comfort fund? Do I have other debt? Do I have a plan in place when I'm going to be out of debt? And am I taking now the equity out of my residence where I live to a point where if there's a dip in the market or I have a problem with the job, I don't have the cushion to sustain it because now I have higher payments? I wouldn't do it. That's just kind of what I think in a nutshell. Hopefully that helps. That leads me to the next question. Next question is, someone came in. It was anonymous. I didn't. I don't know who sent this in, but it's a great, great question. Says, I'm thinking of moving my traditional 401 from a former employer. Should I do that? So there's a couple questions here. Let me take them step by step. I'm thinking of moving my traditional 401 from my employer. Should I do that? The first thing I would say is that most of the time, most of the time I tell people not to leave their money in an old employer's 401. And there's a couple reasons for that. One, as years go by, you become further and further removed and detached from that old employer. And you don't know what's going on over there and you don't know what changes they're making. And yeah, they'll send you their reports, they'll send you their. Their letters and all that stuff, but you don't have the fingers on the pulse like you did when you were actually working there. So that's one thing. Now, if your company, if your old employer has this stellar Cadillac 401k plan, it is freaking amazing. And they've got great choices of funds in there and they're low expenses and all that stuff. I might leave it. But most of them don't have that. Most of them don't have that. Most of them have very limited investment choices. And as you age, you want to shift and change your investments to fit your risk profile and your needs at that time. And you may not have that flexibility in doing that. Second, that many of the 401 plans have high, high expenses. So I might. In those cases where I have a plan that doesn't have investment choices or I have high expenses, I'd probably roll it out of the 401 plan and roll it out into an IRA. Now, I would do it direct, especially if It's a traditional 401. It's a traditional 401. I don't want to take the money out because then I could get hit with penalties and tax on it. So I'll direct do a direct rollover to an IRA account. And now I have more investment choices. I can put it into low cost, low expense types of investments that fit my current circumstances. Now, the other question that they ask is, could I roll it to a Roth account and do it that way? So for those that don't know, know this. There. Let me just kind of summarize. There's two types of retirement accounts that you can have. One is what they call a Roth, and the other is a traditional. This person was talking initially about a traditional. Now they're asking about, can I roll it from a traditional to a Roth? Here's the difference. The traditional retirement, you don't pay tax on, you get a tax deduction, you pay lower taxes today. In other words, if I'm going to put $6,000 in a traditional IRA, which is the limit today, unless you're over 50, I would reduce my income by $6,000. That means I save tax on the $6,000 because I don't pay tax on it. And that $6,000 goes into an IRA, gets invested, and then when I pull the money out after age 59 and a half, I pay tax on the money that I put in and the earnings on that money. Okay, so I get a tax. The traditional. I get a tax deduction today, tax benefit today, and I pay tax later. And this will typically be done when we believe that our tax rates in the future will be lower than they are today and we'll take the tax deduction. Or I'm in a high, high income bracket today and I'm going to be in a lower income bracket later. The Roth doesn't is the opposite. In other words, I don't get a deduction today that $6,000 into a Roth IRA or a Roth 401K. I get no deduction. I pay the tax on the $6,000 today that goes into the account and then that grows until I decide to take it out. And when I take it out in the future, I don't pay tax on it. Not only do I not pay tax on the 6000, but I don't pay tax on the earnings either. Okay. So often, often people will decide, especially if they're younger, is to go into a Roth option. And in the Roth option, they'll say, I'm going to pay tax on all the income today. I'm going to put it in the Roth, let it grow tax free, and when I take it out, I get it tax free. So those are the two things. And could you roll a traditional IRA out into a traditional 401 into a Roth? And the answer is possibly. This is what we call a Roth conversion. And when you do a Roth conversion, you will pay the tax today at today's tax rates, which may not be a bad thing because we're anticipating that tax rates are going to go up. But each person's situation is specific and individual. We need to look at each individual circumstance to make that decision. You would pay the tax on it now, you would put it into a Roth, and then the rest of that, the net amount after you pay the tax would then grow tax free and you would have the same treatment as Roth. So you could do that. But there is also limitations on doing some Roth contributions. But we may have to do a Roth. But if we're going to do a conversion, we can get away with it. So hopefully that makes sense. I would look at one. What are the investment options in your old employer's plan? What are the cost structures and the expenses in there? If the investment options are too narrow or too slim or not good, if the costs are too high, fees are too high, I would roll it out. And then it's up to your individual circumstances and everything. Whether you roll it into another traditional plan or you roll it into a Roth plan, the Roth plan will, will make it so you pay taxes on it today. And traditional means that you won't pay taxes until you draw it out at retirement. Okay, I hope that helps. I hope that helps. Let's go to question number three. These are great questions that are coming in. This came from. I actually was doing a live keynote and this question came in from the audience. So I was doing a keynote for a dear, dear friend of mine, Britt Siva. Her Thrivers Society Live was off the charts. It was amazing. Great question came in during that session, said, these are a group of hairstylists, but this, it doesn't matter whether you're a hairstylist or not. This question applies for everyone that might be in the situation, and that is this as a stylist. They said it can be difficult to work every day on your feet until 65. Okay. And it is. It's hard. You're working your hands. I, I have chiropractors that are doing the same that have the same issues with that and says, does it make sense to contribute to an IRA if we can't get to the money early in there? And so what they were alluding to here is this, is that if we're putting money into a retirement account, I can't really touch that money until age 59 and a half without getting hit with a penalty. If you try to withdraw money out of a traditional retirement account before age 59 and a half, you're going to get hit with, at least at the federal level, a 10% penalty. And there may be state penalties, depending on the state you live in. And so they're saying, if I turn around and I'm putting money into this retirement, but I know that I'm not going to be able to work all the way till 59 and a half or 65. In their case, they said 65. Does it make sense to even put it in? Because I'm not going to be able to get at the money without the penalties. Okay, couple of things, is that there are ways to get at the money, but there's other things to consider. The answer to this, and I know that I'm going to say it depends again, but the answer to this question depends on what else you have. If this is all you have, you have this and you might have Social Security. If this is all you have and you think that you're not going to work past age 55, and then this needs to last you until you're dying breath, then we need to think through one, drawing out early. Because when you draw out early, you actually lose all that earnings and that growth over time. That's 1, 2. There is a penalty. If you draw out before age 59 and a half, you get and pay, like I said, the 10% penalty. You're going to pay tax on it. If it's A traditional IRA account, then you're going to pay the tax and the penalty on it if you drop beyond 59. But there's a couple of exclusions, exceptions, and I'm just going to throw these out there for you to consider. One, you can actually draw out of an IRA without penalty. You'll still pay tax if you're unemployed and you're using it to pay for health insurance premiums. Okay. That may not apply to a lot of people. Second, okay, you may start drawing out of your IRA if you are on permanent disability. Now, you might look at it as this person's a stylist and say, I can't use my hands and I may be on permanent disability, or I can't stand because of my back. I don't know. But if you qualify under the permanent disability exception, you. You can actually draw out without getting hit with a penalty. But the one that I think you need to possibly consider is this. There is the ability to what we call annuitize your IRA. So let's say I wanted to retire at 55 and I wanted to start drawing out at 55. I can do what they call substantially equal periodic payments. Substantially equal periodic payments, where they do a calculation. There's a formula calculation. There's a couple of different ways to do it. And your financial advisor can do the calculation where they look at how much you have in there, what your time frame is, life expectancy, and they come up with this formula and you draw out the same amount each year. Now, here's the caveat. The way that this thing works is that they'll say you will be allowed to draw out the money every year without penalty. You'll still pay tax on it, so you can get at it without penalty. But.

Once you start, has to go for the longer of five years or until you reach age 59 and a half. Now, in my case, I said 55 years old. And if you're 55 years old and decide to start taking equal payments, you know, five years puts you at 60 years old, 59 and a half. That's right. In the same neighborhood. So it doesn't change anything. But watch what happens. Let's say that you want to start drawing an IRA out of the IRA at equal periodic payments, and you're age 40. Well, five years would put you at 45. But the rule says you got to draw it out for five years or 59 and a half, whichever is greater, whichever is longer. So because you're at age 40 now, you got to draw it out for almost 20 years. So you got to go all the way to 59 and a half, 19 and a half years. That means that the amount you're going to be able to draw is going to be smaller. Okay? So you can get at the money without penalty. There are some exceptions. You just need to talk to the financial advisor, see if you qualify to make that happen. There is another way to do this, another thing to do, and that is this. Depending on your age and depending on, and we talked about this briefly in the prior question, and that is this. If you draw in, draw or you contribute to a Roth IRA instead of a traditional ira, you don't take the tax deduction today. That will grow tax free. When you take the money out, you can take it tax free. Here's the key. Prior to age 59 and a half, you can actually draw out of a Roth IRA the contributions you made, not the earnings, because the earnings will be subject to, to penalty if you do that. But if you say over time you put $100,000 into a Roth IRA, you could literally draw the $100,000 out and not be subject to penalty or tax because it was after tax contributions. Now, I don't recommend it, but it is one way to allow you the flexibility to dip into the IRA earlier because it's a Roth IRA and not a traditional Iraq. But here's why I don't recommend it. You put the money in, and while the money's in there, it's invested and it's growing at compounded growth. As soon as we start taking the money out, you stop all that growth, you lose the growth on the money you're taking out. I want it in there as long as we possibly can. So it'll grow as much as possible. So there's a lot of things to consider there. But I think that you have options. You just got to look at your situation, your circumstances, when you think you're going to need it and what might fit. All right, there are some nuances that get you out of that, that 10% penalty. All right, last question before we close this one out is this. And this came in as a dm, and then it says, I'm just starting out. What should I think about if investing, if I only have 1,000 to $10,000, how should I start? What should I start? Okay, great question. I love this question. Here's the thing. First off, I want you to take a long term view, okay? We're not in this to say, what can I make a bundle overnight? So we're not Putting it in bitcoin, we're not putting it in anything like that. That's highly volatile. We're taking a long term view. Now, I talked about this in one of the other questions also. I'm going to take the money that I have that I'm thinking of investing, I'm going to put it into a high yield cash account, just to put it aside and get it out of sight, out of mind for a moment. Okay? So I'm assuming you do that. But before we invest it, before we invest it, I need to make sure, I want you to make sure. Do you have your comfort cushion, your comfort fund in place, that $1,500 or one month's expenses? If you don't, we're not going to invest that money. We're going to use, leave that money in the high yield cash account and use that just in case something happens. So you have breathing room number two. Do you have a debt plan in place? If you don't have a debt plan in place and you have debt destructive or consumer debt, not productive debt that's producing more cash flow and building net worth, things like that, then what I'd like you to do is make sure you get a debt plan in place. If you need to figure out how to get a debt plan in place, here's where I want you to go. I want you to go to melabraham.com no debt and get my debt breakthrough calculator to help you put that plan in place. In fact, better yet, here's what I want all of you to do is to go and just join my free seven day money plan challenge. Money plan workshop. It's free and we're going to walk through debt. We're going to talk. It's about how do we build a plan, a money plan in place that gives you an unshakable foundation for your financial future. Go to the and we'll hook this all up in the show notes. Go to the money plan workshop.com, themoney plan workshop.com and jump in. Go through the whole thing in seven days. I'll walk you through it. The debt breakthrough calculator. All of that stuff is in there. It's all the stuff. The key. It's a seven day crash course to get your money plan in place. So do you have the debt plan in place? Are you building a peace of mind fund in there? In the sense of peace of mind, meaning something that's longer term, in other words, especially for entrepreneurs. I want you to have nine to 18 months worth of expenses in a high yield cash account that's set aside to sustain you. If God forbid, something happens, we have a pandemic, you have a health issue. All those things that can hit us after we've kind of looked at all of that. And I walked through that whole thing in my episode on the Wealth Priority Calculator. We'll hook up that episode in the show notes too. So you can see the hierarchy of doing that. Then I would just, I would go very basic. One of the key rules that I teach everyone in the affluence blueprint or when I work with them is, is this, is that we do not invest in things we don't understand. We do not invest in things we do not understand. And so what I don't want you doing is trying to go into. One of my key investing rules is at the beginning stages, when you have a substantial portfolio is different. At the beginning stages, you do not invest in individual stocks. It's too risky. It's too risky. I want you to invest in a basket of stocks because if, if one goes bad, it doesn't take your whole portfolio down. This take your whole wealth down. If one goes bad, you have all the other ones that are holding it up. But if I invest in one stock and that goes bad, I'm toast. That's a technical term. I'm toast. So I want you to look at low cost index funds, broader market index funds or ETFs to help you do that. That's a basket of funds. It's low cost, it's low fee. Over time you'll track the market, which is anywhere between 8 and 12%. Long term, if you're looking at this, if you need any of this money, if you need any of this money in three to five years, you're not going to put it in the market. It's going to be in a high yield cash account and that's it. You're not going to risk it to the volatility of the market. Okay. Hopefully that helps you. Hopefully that gives you some perspective of what to do. And these were great questions that came in. Do me a favor, if you got more questions, send them to me, reach out to me. Let's get them on here, let's get them answered. Let's keep you moving forward. Let's get you facing the right direction. Here's why this is important. I had a conversation today before I close out. Not really going to answer the question per se, but let's, just so you understand what's Happening. One of my one on one clients who happened to be talking to someone else, they're selling their home and someone they talked to told them, oh my God, you're going to sell your home. You've got 60 days to figure out and reinvest that money, otherwise you're going to pay tax on it. I'm sorry, not true. Not true. It's a primary residence. Primary residence. And under the current rules, if you sell a primary residence that you a qualified primary residence that you've lived in two of the last five years, you can exclude up to half a million dollars in gain from taxes if you're married, 250,000 if you're single. This is why I want you to bring these questions to me. Because she asked. Someone got the wrong input. Let's get you the right input. Let's get you pointed the right direction. Now they can walk peacefully into the sale of their home knowing that all that money's coming to them tax free. They can put the money away and do with it. They don't have to rush into another buying decision. So let's keep you pointed the right direction. Let's get you rocking and rolling and making right decisions in the right way at the right time. All right? I look forward to seeing you in the next episode, sharing your perspectives. Some of the things that come in, please reach out to me, let me know and if you haven't done so already, follow the show, leave me a review, leave me a rating, take a screenshot of it, tag me in it. If I read it on the air, you and I will get a chance to get on a one on one laser coaching session. We can talk money, we can talk wealth, we can talk business, we can talk life. Whatever you need, we're going to make it happen. The whole idea is I'm here for you. I want to be your mentor, your friend on this financial journey. I look forward to seeing you in the next episode. And until then, always, always remember to live a life that outlives you change. 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.

And that's it for this episode of Building youg 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 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 show your birthright and I want to help each and every one of you claim it. Thanks so much.