Rich Habits Podcast - 31: Demystifying the Alphabet Soup of Finance

Episode Date: September 25, 2023

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz demystify the alphabet soup of finance. Specifically, we dive deep into 8 commonly used acronyms you might hear us finance nerds use in conversation. Our goal of this podcast is to make personal finance and investing as approachable as possible. By breaking down these terms, we're hoping our listeners will feel more confident and secure in their own financial decisions, allowing them to build those rich habits we talk about all of the time. ---Be sure to check out Public's new ⁠⁠High Yield Cash Account paying 5.1% APY.⁠⁠ This is higher than anything else on the market and is FDIC insured up to $5M. ---Earn 5.1% APY using a Public HYCA, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Opt-in and share your email, ⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠Learn more about our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠4-module video course!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Download our FREE Budget Template, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Robert: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/RobertJCroak⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Austin: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/austinhankwitz⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Contact: [e-mail] ---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

Welcome back to the Rich Habits podcast, a top five business podcast on Spotify. My name is Austin Hankwitz, and I'm joined by my co-host Robert Croke. Robert is a seasoned entrepreneur in his 50s with more than 200 million in company exits under his belt, and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world. Now, as the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives.

One from an industry veteran, which is Robert and the other myself, someone who's still young and in the process of building wealth and figuring it all out. Now, Robert, I'm really excited about this episode. So walk us through what we're going to be talking about today. In today's episode of the Rich Habits podcast, we're going to be. demystifying the alphabet soup of finance. Specifically, we're going to be breaking down the confusing acronyms us finance nerds use on a daily basis. After receiving countless questions about DCA, REIT, IRA, ETF, and other commonly used acronyms, we thought it was only right to dedicate an entire episode to defining and demystifying these terms. I'll go with this podcast is to always make

personal finance and investing as approachable as possible. By breaking down these terms, we're hoping our listeners will feel more confident and secure in their own financial decisions, allowing them to build those rich habits we talk about all the time. So I heard DCA, R-E-I-T-F. I think this episode's not just going to be useful for the person just getting started and trying to figure this all out. But we'll also be sure to share our favorite ETFs, REITs, HYSAs, things the more experienced listener listening right now can get inspired by. So, Robert, kick us off. Yes, we're going to start number one with dollar cost averaging. The term DCA is thrown around all the time and we're going to break it down for you.

This term is arguably the most important because it's the investment strategy. We believe every single one of you should be implementing into your own portfolios. It's a verb and it's very simple. To dollar cost average means you're allocating a specific amount of money, for example, $50 or $100 a month every month to be invested in the stocks and ETFs we talk about no matter what the price is at that current time. Yeah, by dollar cost averaging your $50 or $100 every month into the stock market, you're buying the top, the bottom, the middle, and everywhere in between. So by following this strategy, you'll be taking the emotion out of investing and be entirely focused on investing consistently. Remember, Robert and I always say it's not about timing

the market, it's about time in the market. And the easiest way to invest and have that time in the market is to consistently do it through dollar cost averaging or a DCA strategy. Keeping on this sort of investing theme, our next acronym is ETF or exchange traded fund. We use this acronym quite often here on the podcast. An exchange traded fund is simply a basket of a market. stocks. This basket increases and decreases in value as the underlying stocks inside of the basket increase and decrease as well. The basket can be more heavily weighted towards certain stocks, or maybe only invests into a certain type of stock. There are even thematic ETFs, which are baskets of stocks that all fall into one theme. For example, an ETF Robert really likes AIQ is

an artificial intelligence-focused ETF. Their basket of stocks, only include AI-related companies. ETSs are incredibly important for the average investor as they allow anyone the opportunity to own a diversified basket of stocks without having to go out and buy and pick the individual stocks itself, something that could become very expensive over time. I strongly suggest people don't go out and buy single stocks and invest until they have that base that we talk about of like 100K

invested into diversified ETFs, something we talk about all the time. I just really want to see people have the base before they go out and start stock picking on their own. For example, one share of AIQ right now is $27.

So if you compare that $27 investment over going out and purchasing all 93 stocks inside of that ETF we talk about, that could cost you tens of thousands of dollars. ETFs give investors exposure to diversified strategies we wholly believe in for a fraction of the cost.

Couldn't agree more. ETFs are an incredibly powerful wealth building tool, and it allows the everyday investor like myself and Robert to be able to invest into all 500 names in the S&P 500 with just a couple hundred dollars or even less. Really, really good call out, and it's a really important acronym to understand. I just think it's so important for everyone to, to really understand that last concept, because we deal with it every single day. I deal with hundreds of people a month that want to start investing, and they think the way to do that is to dive right into individual stocks. And they just don't realize they're never going to outperform unless they get extremely

lucky or they're extremely gifted. They're just not going to outperform the VOOs or the QQQs or the AIQs of the world by individually picking stocks themselves. that's why we like to see that base created first. Robert, take us in to the third acronym. Yes, R-E-I-T. We've all heard the term REIT, Real Estate Investment Trust. This is a great one.

We always talk about REITs, so we're going to dive in. A REIT is a single company that owns, operates, or finances, income-generating real estate. Think about it like this. Reets are essentially mutual funds, However, instead of people pooling their money together to buy stocks or bonds, they're pooling their money together to invest in income producing real estate. By owning stocks and REITs, the average investor is now earning dividends, aka cash payments

from the company, without having to actually buy, manage, or sell the properties themselves. This is why I love REITs if you're looking for exposure to the real estate market and want to be truly passive, have this truly passive income. REITs are definitely the way to go. REITs also invest in most real estate property types. Think apartment buildings, cell phone towers, data centers, hotels, medical facilities, offices, warehouses, and even retail centers. If you want to invest in a broad variety of REITs, check out the ETF VNQ.

It's Vanguard's real estate ETF, and you all now know what an ETF stands for and means. So there you go. All right. our next acronym is HYSA. HYSAs have become incredibly popular over the last several months with interest rates now above 5%. An HYSA, or high yield savings account, is a savings account that has a high yield. By high yield, I mean they're paying you an interest rate that is categorized as quote unquote high, which I guess is very subjective, but you can think of high as being something about 1% or or so below the federal funds rate, which right now is about 5.5%. So, you know, a good high yield savings account is paying you over that 4.5% range. For example, Wealthfront has a high yield savings account paying 4.8%. So that's definitely a high yield savings account. Now, instead of

parking your emergency fund inside of a checking account, earning essentially zero in interest, you can instead park the funds inside of an HYSA paying nearly 5%. A. L.L.A.A. A. allowing you to earn an extra $1,000 per year on your $20,000 emergency fund. Now, I'm not saying $1,000 is a life-changing amount of money. It's not going to make you a millionaire, but it's certainly better than a poke in the eye with a sharp stick as what my dad says. Yes, to keep in mind here with the high-yield savings, we're just giving you another strategy to get your money out of a traditional checking or savings account

that's making close to zero and get it. somewhere that's still obtainable and it's still safe, but yet you're earning income from it. So like Austin said, it's not going to be game-changing money for anyone, but it's certainly better than going backwards and making nothing. Now here's something important to consider. That $1,000 you earned in interest is subject to income tax at both state, local, and federal levels. So be sure to set aside a few hundred dollars. So when Uncle Sam comes knocking next year, you'll have it set aside to pay those taxes. You'll receive some paperwork from Wellfront or wherever you open the account that will let you know how to pay those taxes and add that additionally to your tax form.

Now, speaking of earning interest income and keeping up with inflation and taxes, what's our fifth acronym? One of our favorite, the Treasury Bill, T-bills. These aren't exactly an acronym, but it fits well within this episode. So given the high yield savings breakdown, and that's T-bills, aka Treasury Bills. These are U.S. debt securities that mature over a period of time, usually four weeks, six months, or a year. Think about it like this. Treasury bills are essentially IOUs issued by the U.S. government. They need to raise money to spend on infrastructure like bridges and roads, and they raise it by taking on debt. they get the cash up front from us, you call it $100, then after 12 months they pay back the $100 plus the interest.

Right now that's about 5%, which is nice when there's uncertain economic times. And one thing to keep in mind with a Treasury bill is there is no taxes on your gains for state and local. So this is a nice part of the strategy and why we love Treasury bills. Yeah, it's a bit more nuanced than that, right? So for example, you're actually, you know, buying. the T bills with the interest already baked into the purchase price but Robert is correct long story short these are risk-free ways to earn interest on your money and with public.com you don't have to wait that six or 12-month holding period

you can just put money in take money out anytime you'd like and you will be earning interest on it throughout that time and to Robert's point you don't have to pay state or local taxes on the interest you earn so no you know setting aside money for Uncle Sam on the state and local level. You do, though, have to have to pay those federal taxes, so keep that in mind. Now, speaking of the feds, let's talk about a acronym or two that were very widely used in March and April of this year that people didn't really know about until the debacle of Silicon Valley Bank. We're talking about FDIC and SIPC. So these are essentially the government

agencies that ensure your money is going to be there in case of insolvency. at the bank or brokerage account. Remember everything that happened with Silicon Valley Bank earlier this year, FDIC, or the Federal Deposit Insurance Corporation, exists to ensure that every dollar up to 250,000, you deposit into your local bank is insured in case the bank files for bankruptcy, aka Bankception, if you guys have seen the movie Inception.

Now, this is the same deal with SIPC, you know, but for brokerage accounts, right? So SIPC or Securities Investor Protection Corporation ensures that $500,000 of your stocks and cash inside of your Fidelity or Vanguard or public.com account are insured and will be recovered in case these brokerages file for bankruptcy or become insolvent for whatever reason, right? Your money is not gone. I just had to deal with this in an extreme fashion the other day. I had a couple reach out and they must have emailed me six times in the course of one day

asking what to do because they were finally ready to invest and they were afraid to pull the trigger on their brokerage account and put their money in after they figured out all the paperwork and were ready to go because they said that the money did not have FDIC coverage and I had to explain to them that it had better coverage with SIPC coverage because of the higher dollar amount in their brokerage account. So this is so great that we're covering this today because people are just scared and they're also fearful of getting ripped off, which makes perfect sense in light of what has happened in the last couple of years in the finance world. So it was really nice to cover this on today's podcast. 100% right. FDIC is the bank.

SIPC is your investment account. And they're both insured. So get your money invested. Speaking of investing, let's talk about the last acronym. number seven, the IRA, the individual retirement account. You guys hear me preach this to the mountain tops every single day, and we're going to break it down for you today. This is by far the most important acronym of the entire list, because if you understand how to use this acronym to your advantage, retiring wealthy is inevitable. The IRA or individual retirement account is

exactly what it sounds like. It's a retirement account tied to you, the individual. The retirement account is attached your Social Security and has nothing to do with your employer. This is not a 401k. This is an individual retirement account. Very important distinction. Everyone is assigned an IRA assuming you have a Social Security number. You can claim your IRA by using any online brokerage you'd like. Simply create an account on Wealthfront or Vanguard, for example, then open the account through them. If you need any help, just use the customer service. they will walk you through it. It is very simple. It's like a bank account, so you'll need to provide your

social security number, your address, and your other sensitive information, but it's okay, these accounts are awesome. And I think the IRA is one of the most important wealth building tools, known to mankind, and everyone listening, if you're over 18 years of age, you should have an IRA, a Roth IRA specifically. Once opened up, you'll now be able to deposit money from your checking account into your individual retirement account, your IRA. Once deposited, it's time to invest that money into anything you'd like. But as always, we recommend index funds like V-O-O-O and QQQ. You're only allowed to deposit right now up to $6,500 per year.

So be sure to try your best to max that out every single year. By the way, these contribution limits tend to increase and will certainly increase over time. So always keep that in mind and do your best. to max out that Roth IRA. These acronyms might seem intimidating at first, but hopefully we've done a good job of breaking them down into easy to understand terms with actionable insights along the way.

We want all of you to take what you've learned today and apply it into your wealth-building strategies, hence the name Rich Habits. What a great takeaway, Robert. Now, before we jump into our question and answer segment, let's take a moment to hear from our sponsors. The highs, the lows, the soaring spirits, and the gut punches. The stock market's volatility has been a good reminder of why we diversify our portfolios.

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dot art forward slash rich habits. And to see important disclosures, go to masterworks.com forward slash CD. Now before we jump into Q&A, just want to share with you all. I personally have three pieces that I've invested into on Masterworks. I've been using the platform, actually, since I was even before a content creator. I was still working at a medicis. I really believe in the company. I've got hundreds of dollars. invested with them. I like the platform. Two thumbs up for me. However, do your own diligence. Do what you got to do. Go check them out on the internet. But don't forget, if you want to skip the wait list, use the link in the description. All right, time for everyone's favorite segment of a

podcast question and answer. Don't forget if you have a question to ask us, shoot us a direct message on Instagram at Rich Habits Podcast and we'll definitely get back to it. And thank you, everyone. For your patience, we get about 300 DMs a week. And so it takes a long time for us to get back to people sometimes, but we always try to, so thanks for always being patient. Okay, first question is from Alyssa R. Alyssa says, my husband and I have an extra $2,000 per month that we're just piling into a high-gold savings account at the moment. We want to reallocate the money because we feel like we've got the emergency funds sort of covered. Should we reallocate the funds to my son's 529 account, invested toward retirement, maybe pay down the house? What do we do? Alisa, I think this is a

great question and you covered your bases. In my opinion, I would invest towards retirement. And if you have a low interest rate on the mortgage on the house, I would not touch it. Contrary to what Dave Ramsey says, if you have a low interest rate, let's say 6% or below on your home, I would leave those payments go and start stockpiling your money towards retirement. Get that Roth IRA opened up and get it maxed out. I also like the idea of the 529 account. As you all know, I just open up a 529 account for my nephew. He was just born a month or two ago now.

And I put $3,000 into it, and I'm going to invest $150 every month from his birth now up to age 18. And that account should have around $95,000 inside of it by the time he turns 18 and is ready to go to college. And again, here, here's the kicker. If he doesn't want to go to college, that's totally fine. I can take $35,000 of that $95,000, roll it over into a Roth IRA for him. And now he has $1.4 million after adjusted for inflation when he turned 65 to retire off of. Right? That's generational wealth.

That's what we're talking about here. And that's just 35 of the 95. The other 60 could be used for other college expenses for his siblings. So I like the $5.39 account. I also like the retirement. I think this person, Alyssa, here, is definitely thinking in the right direction, and I'm really, really excited for them. Let's go on to question number two, Gloria S. Love the podcast.

My husband and I are both doctors, and the only debt we have is our house, 3% interest. Congrats. We've been saving our money inside of a traditional checking account, but we're going to move it to a high-yield savings account. We don't have Roth IRAs yet, and I'm a bit nervous about messing up the backdoor Roth IRA given our income. What should we be doing with all of this extra income considering we're child free? Should we get a financial advisor? This question is incredible because, one, you are essentially a dink, right? Dual income, no children.

And I think you mentioned in that message that you are child free by choice. So good for y'all. Get your bag. Go have some fun. Do the travels. Do whatever you want to do, right? That's awesome. I think in this instance, getting a financial advisor is going to be a really good idea.

For most people, financial advisors don't make sense until they have hundreds of thousands, if not millions of dollars to be invested. You all are probably making that much money in a year, let alone can be able to invest that towards some sort of strategy like in six, 12, 18 months. So I really think a financial advisor finding a good financial advisor is a good idea here because not only are they going to be able to map out your financial picture from an income perspective and investing perspective, but they're also probably going to share with you an idea of sort of this bridge account is what I like to call it. Now a bridge account is just a loose term here

for a traditional online brokerage. Think public.com or a Robin Hood or, you know, anyone can go open up a little traditional brokerage account, normal taxable brokerage account. And how I think about these accounts is in how they fit into my personal strategy. You're 40 and you all are probably making combined $400,000 to $600,000 per year salary. And you probably now have the ability to invest 100,000, maybe 200,000 of that per year. And unfortunately, you can only invest up to, call it, 50,000 between the two of you toward your 401ks every year and another 12,000 between the two of you to your Roth IRAs every year, right? That leaves a lot of money, $150,000 per year that you're sitting on that needs to be working for you. That's not working for you.

yet because you can't put them legally into these retirement accounts. So in that instance, go to a public.com, go to a fidelity or a Robin Hood, deposit this $50,000, $150,000 per year and begin investing it thoughtfully into what matters to you. So for me, I would invest that toward income generating stocks. Think the ETF SPYI. It'll pay you 1% every single month or 12% distribution yields a year, or maybe you want to invest that into something that's really thematic that you believe in, like climate change or electric vehicles or something else, right? So I would definitely think about a bridge account, but Robert, I want to hear your take. Yeah, in this situation, I always recommend having a financial advisor. I would always recommend a fiduciary, so keep that in mind. You want to

have an advisor that has your best interest in mind, and you want to make sure that those fees are nice and low, so the money is all going to you. But you have to have a advisor. You have to have an advisor that has your best interest in mind, and you have to look at it from a holistic standpoint. It's not just about what you make, it's about what you keep. And in this instance, with you both being high earners, the key here is having someone that's going to give you the proper tax strategies, the proper retirement strategies, so you understand the best overall way for you to build the wealth you desire. And that comes with all of these various strategies. So you might want to consider having a real estate portfolio because this will help you offset some of your earnings as well because at the end of the day, there's more

to just what you make. It's about having the strategies that you put around that to create the most wealth for you and your husband. What a beautiful answer, Robert. That was great. That was great. All right. Our last question comes from Ivo. Ivo says I'm loving the podcast. Since we can't out invest high interest debt, should I take out a 401k loan to pay off my high interest debt? This question always throws me off because I would never want to tell anyone to borrow from their future, right, 401k retirement, to pay off a mistake that they can simply work harder, side hustles, overtime, things like that, aka payoff debt, to put themselves in a better financial position. I want people and their money to be working for them.

I want compound interest. I want, you know, it's time in the market, right? That's what's so important here. However, I am definitely empathetic to a. situation where I don't know this guy's situation right this is all we got from the DM but maybe he is 30,000 dollars in credit card debt at 30% APR that's $9,000 a year in interest he's paying on those credit cards at that point I think that would make sense right if you have the funds to say let me borrow this 30k off of my 401k put it now to pay off this high interest debt and then make sure I pay back that 30,000

during the specified amount of time, so I'm not paying fees, I'm not paying interest, I'm not actually taking this as a withdrawal, I'm not getting hit with taxes, right? Actually follow the rules and pay the money back. I don't really see anything wrong with that. However, that's not reality for a lot of people. They take out the loan. They feel, oh, no, it's great. It's gone.

I have to worry about anymore. Oh, my retirement, whatever. That'll figure itself out. And that's the reality a lot of people unfortunately take. So it really depends on this person's situation. I wish I had more information. But Robert, what's your perspective on this? I couldn't agree with you more.

In most instances, I say absolutely not. Do not borrow against your future. But the opportunity cost here might make sense depending on what that loan would look like from the 401K. So in this instance, I would say flush out the details, what are the terms? And if they're favorable where that positive arbitrage of paying it off with this loan is in your favor, that I would say do it, but like Austin said, you have to make sure you pay it back timely and per the contract because otherwise you will have penalties and fees and you could end up in a worse spot than where you started. End up in a worse spot than where you started. Want to just

emphasize that, right? Because we know the taxes and penalties and all that stuff, you're going to end up with half the amount of money. It's very, very bad if things go wrong here. So just please keep that in mind. Everyone, thank you all so much for listening to the rich, Habits Podcast this week. If you have a question, don't forget, send us a DM on Instagram at Rich Habits Podcast. If you've not yet joined our Discord group, Rich Habits Podcast, Discord, there's a link in the show notes below. You click the link, you download the Discord app, and now you're a part of hundreds of other people inside this growing community. We're talking to each other. We're giving feedback on episodes. We're suggesting new episodes. It's a really, really cool community.

Be sure to join that. You can maybe meet some like-minded people. And also, don't forget, we have have the four-module video course, the Rich Habits Wealth Building Blueprint, where we talk about earning more income, paying off your debt, building your credit, and investing for the future. There's also a link to that in the description as well. Love it. And thank you all from the bottom of my heart and Austin's heart for always supporting us in the Rich Habits podcast and community. So if you love the podcast, please leave us a great rating, share with a friend, share with your barber, your aunt, your uncle, anyone you can. We're working.

working hard here to bring you great information every single week in the Rich Habits Podcast and Community. Oh, and last call out, this episode, the Alphabet Soup Idea acronym here, this was suggested to us in an email. Someone sent us a Rich Habits Podcast at Gmail email, and this is what they suggested like three days ago. And Robert were like, oh my gosh, we have to make this episode. So if you have an episode suggestion, let us know we might make it.

Thanks, everyone. Have a great start to your week.