Rich Habits Podcast - 48: The 3 Most Important Financial Mistakes to Avoid in 2024

Episode Date: January 22, 2024

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz share their top three financial mistakes to avoid in 2024: carrying a balance on your credit cards, borrowing from your 401(k), and being addicted to instant gratification ---Skip the waitlist and invest in blue-chip art for the very first time by signing up for Masterworks: ⁠https://www.masterworks.art/richhabits⁠Purchase shares in great masterpieces from artists like Pablo Picasso, Banksy, Andy Warhol, and more.---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] ---See important Masterworks disclosures: https://www.masterworks.com/cdPast performance is not indicative of future results. No money is being solicited. No sale can occur until the offering statement for a particular offering has been qualified by the SEC. Offers may be revoked at any time. Contacting Masterworks involves no commitment or obligation.Offering circulars and important disclosures are available at masterworks.com/cd.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.

Amazon presents Laura versus Fruitflies. Swarming your fruit and terrorizing your kitchen, these little freaks multiply at a rate that would make a rabbit say, yo. Chill. But Laura shopped on Amazon and saved on cleaning spray, countertop wipes, and fly traps. Hey, fruit flies, your baby boom ends here. Save the Everyday with Amazon. Hey everyone and welcome back to the Rich Habits podcast, a top 10 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 I actively advise some of the most well-known fintech companies around the world. 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 in the process of building wealth and figuring it all out. Robert, what are we going to be talking about in today's episode? In today's episode of the Rich Habits podcast, we're going to share the three most common mistakes we see people make with their money, causing them to delay their wealth building journey. To build wealth, you only need to do a few things correctly, whereas there are countless mistakes people make to destroy it. By avoiding these mistakes, not just in 2024, but throughout your entire life, you'll be giving yourself the absolute best chance to retire financially free.

Retiring financially free should be every single person's goal, right? And what does that mean? that means you have more income coming in every single month from your investments than you have expenses going out every single month to live your life. That is financial freedom. Now, we're going to talk about three mistakes specifically that we think are so important for people to avoid in 24 and throughout the rest of their lives. So I can't wait to get into this, especially mistake number three, Robert. It's one of my favorites. So let's dive in. Mistake number one, carrying hefty balances on your credit card. Just the other day I was watching a financial audit video from Caleb Hammer and he had this woman in her mid-20s that shared with him that she had more than $7,000 in credit card debt and she was

still spending on the cards and not paying them off and just making the minimum payments. And she said this kind of joyously. The biggest mistake the middle class in America makes is carrying these balances on their credit cards. It doesn't matter if it's a few hundred or a few thousand dollars. You just have to learn to never carry a balance on your credit card if you can help it. Yeah, Robert, actually, I just looked up here. The average American is in $4,000 of credit card debt right now, which if you carried this $4,000 debt throughout the entire year of 2024 by just making those joyous minimum payments, you would have paid over $1,000 in interest to the bank and you'd still be in credit card debt.

Credit cards are robbing you. of your financial future. I mean, seriously, this is such a big mistake people make. People have to understand if you want to build wealth and if you want your net worth to begin to tick up in a positive direction, you have to stop borrowing money with your credit card to supplement your lifestyle. I think that last sentence is the most important, right? I have a credit card. I've got several credit cards. I love the rewards. I love using them. I love my cash back. I think I got over like $2,000 a half thousand dollars last year of cash back on my different credit cards. But the borrowing money with your credit card to supplement your lifestyle is the mistake people make, right?

So between you, me, and the 70,000 other weekly listeners here, I was actually able to speak with the guy that created several years ago, the Chase Sapphire Reserve and the Chase Sapphire preferred credit cards. And he told me that the data showed that only 37% of people who have these high profile, $500 annual fee cards, with all the cool travel parks and this, this, that, and the other, right? You're supposed to be a rich person to be able to afford this card. You should be able to pay it off, right? No, only 37% of people actually paid their cards off every single month. It's disgusting. Yeah, it's just crazy how people can live years and years and sometimes decades carrying credit card balances and not realize how incredibly detrimental it is to their future success and financial freedom because you just can't out-invest high-interest debt. We talk about it all the time. And it's just so important for people to

really put their foot down. Maybe this is the year. Maybe if we harp on it enough, people will listen, put their foot down, get rid of the high-interest debt and move forward in a cash flow positive manner towards financial freedom. You know, just to kind of bring things back to that first example of the woman that you mentioned with $7,000 of credit card debt, let's say she carried that $7,000 all throughout 2024, making those minimum payments. And she also scraped together $7,000 to invest into her Roth IRA. Well, the market goes up about 10% a year. So let's just assume that happens. She'll make $700. But she'll pay over $2,000 in interest on her 30% APR credit cards. Right. So when we say you can't out invest high interest debt, that's what we're talking about.

This woman's better off using the same $7,000 that she'd try to invest in the markets and just pay off her credit card debt because she's saving over $2,000 of interest. Well, let's get into mistake number two. This one's a rough one. Borrowing from your 401K. Let us be clear. When you borrow from your 401k and it's actually done correctly, the balance inside your 401k doesn't change,

but the problem is it's never done correctly. No kidding, man. I mean, people always make the mistake of saying, oh, I'll just pay it back. That's no problem. I'm borrowing money from myself. I'm paying interest to myself. It's not a big deal.

Blah, blah, blah, blah, blah. Because they keep this lackadaisical mentality about it, and since it's not actually alone with penalizing interest, they delay paying it back, or they just keep getting in this vicious cycle of borrowing and paying and borrowing and paying and never having your money to actually build wealth for you. Now, the average American millionaire built their wealth

by consistently investing toward their retirement accounts, including a 401K. So if you're taking this for granted, granted by not regularly contributing toward it and you're also borrowing money against it and from it, you're setting yourself up for failure. I don't care if the loan is to go buy a house, if it's to go pay off for student loans, whatever other excuse you can come up with. Money that's not working for you in the markets is dead money. So, so true. We talk about this all the time and dipping into your retirement is just never a

good idea. You need to let compound interest work for you and by taking money out of your retirement accounts, you're setting yourself up to be caught inside a vicious cycle where you're always justifying your actions instead of letting this money do its job, staying put, compounding and building for your financial future. You know, Robert, we had a really good episode a few weeks ago talking about, you know, how to get that first 100K in the markets. I have an idea. Here's the easiest way not to get the first 100k in your markets, right? You borrow all the money out And you never let it grow. You never let it build.

You never let it compound on itself. You just keep borrowing the money out to go buy this or pay that. But you're still, you know, investing toward your retirement. You feel good about it because you see it coming out at your paycheck. But it's all just going nowhere. Borrowing from your 401K is such a big mistake people make because they think that, oh, if I borrow from my 401K, I won't have to pay the interest. It's not really debt.

It'll be fine. You are borrowing from your future, right? You are borrowing from the 65-year-old you who's like, man, I wish you didn't take out that $50,000 and it never paid it back because you never did it right, that $50,000 would not be worth $400, but you decided you wanted to go buy the boat. You decided you wanted to go, upgrade the kitchen, whatever the reason is, man. It's just, it's wild. I see it every day when I'm dealing with clients that I'm working with where they have a nice house, they have the nice car, they have the nice motorcycle, they have the boat. They think that is what financial freedom

means because they have all these toys, all of these depreciating assets, but they don't realize at 30 years old, 40 years old, 50 years old, that they may have a negative net worth. And that's really, really rough. When you're that far along in your financial career, your financial life, you're not building towards a net worth that gives you financial freedom. And it's even worse when you have a negative net worth and you're in big time debt and not allowing yourself to ever be able to step off the hamster wheel and really build towards wealth. So it's really rough. And I hate to see people in that situation. but in most instances they do it to themselves. Some people just have bad luck. I've had bad luck in the

past where I've done deals or I've done investments and they went awry and I lost a bunch of money and you know, that's money that's hard to replace. But in most instances, people do it to themselves and it's just really, really rough. So that leads us into number three, mistake number three, instant gratification. Now this mistake is my favorite because it's the easiest to conceptualize, but the hardest to actually implement, avoiding instant gratification. These two mistakes we just talked about are symptoms of this mindset flaw. People keep swiping those credit cards to buy the dumb shit to impress people they don't like. It's ridiculous.

And then people borrow from their 401k to buy the boat or the jet ski because they want to have more fun this summer. That's all fine and dandy, but news flash, just because you have credit and capital is available to you, it doesn't mean you should use it, especially if you're not consistently investing towards your financial freedom. I'm not saying you shouldn't have fun throughout your wealth building journey, but you have to put your financial freedom and security first. So, so important. Keeping up with the Joneses needs to be a thing of the past, unless the Joneses are going to pay your mortgage when you're 74 years old. And guess what? Nobody's going to be there for you to do that. So it's important you take care of yourself because while you're setting your,

self up for financial freedom. It's also great because you're going to set up your kids and their kids, if done right. I see it all the time when parents want to keep their kids happy. They live beyond their means. They're buying things they can't afford using those credit cards, using that 401k loan, even though they know they shouldn't. They know they shouldn't buy the new boat. They know they don't need the new jet ski. If you really want a jet ski, go buy a used one or create a new business or a side hustle that that money can then pay for it. That would help tremendously and at least not put you in further debt. Yeah, I mean, you know, they go to Disney and they spend $4,000. They don't have $4,000, but they spend it because they're swiping that credit card.

The kids want a cool car when they turn 16. So they go borrow 10, 15, 20 grand from the 401K. They spend $2,000 on a kid's fourth birthday to impress their friends to make it seem like they got some money. It's ridiculous. To everyone listening and following along, delayed gratification is the key to ensuring financial freedom in retirement. Devising a plan, sticking to the plan, and executing. This is what mature adults do. Stop falling for everything else.

I'm getting ready to buy a jet ski for myself and even for me. Before I make a fun, frivolous purchase, I always find a new bucket of income to pay for it. So I'm never actually withdrawing money from my. retirement or investment accounts to get that new fun toy, it's coming from a new source of income. So my retirement investment accounts are always growing and moving towards the right direction. Because as we said earlier, if you don't have this steadfast mindset, you're always going to be borrowing against your future. 2024 is going to be the year where you stop making financial mistakes.

You're not going to carry that credit card balance anymore. You're going to pay it off. You're not going to go take out a 401k loan because you want to renovate the kitchen. You're going to let your money grow and compound. And more importantly, you're not going to fall victim to instant gratification. You're going to have delayed gratification. You're going to make a plan. You're going to devise, make, and execute upon the plan because like Robert said, that is what mature adults do.

You're not a child. You're a mature adult and you're capable of doing these things. And by not making these financial mistakes and implementing the rich habits we talk about all the time. You will be just fine this year. I love it. And I'm sorry if any of you own jet ski dealerships out there or boat dealerships, we are not coming for you. We are just saying that people need to be financially stable and have their base built and consistently building towards their financial freedom because then they can buy the boat later on when they're in retirement and actually use it and get great fun out of it rather than it being sitting in a driveway.

or sitting in a storage building and you use it three times during the summer, while still paying that monthly payment and that high interest every single month. So before we jump into the question and answer segment, let's take a moment to hear from this episode sponsor. You know, Austin, the easiest mistake for established investors to avoid is tunnel vision. We talk about diversification, but it's not just about diversifying among business sectors. It's investing in assets that hold low correlation to public equities. And one old faithful asset that's risen in popularity a ton with high-powered asset managers is fine art.

UBS even recently released their yearly art report. Austin, walk us through it. Yeah, this UBS report found investors holding $50 million or more in assets are allocating, on average, 30% of their entire portfolio to fine art. But you don't need nearly that much money to actually invest. invest in artwork anymore because today's sponsor Masterworks has brought fractional investing to the art market and both Robert and I have already started our own collections now Masterworks has generated over 45 million in art sales and delivered the profits to investors just like you those investors didn't need an art history degree or high profile art market connections because Masterworks has over

300 offerings from household names like Picasso banksie basquiat and out of those offerings, each of their exits thus far, have delivered a profit to investors. Over 8904,000 people have signed up for MasterWorks so far. And if you want to skip their wait list, because you're a rich habits listener, you get priority access, but you have to go to masterworks.com art slash rich habits. Again, that's masterworks.com. Art slash Rich Habits. There's going to be a link in the description below to go check out Masterworks. So our first question comes from Sam Q. Sam says, Hey guys, I love the podcast. Thanks for sharing the wealth of information. Here's my question. I'm 37 years old with a Roth IRA that consists of various mutual funds, as well as a few single stocks. I've been noticing

that these mutual funds have a high net expense ratio when compared to VOO or SPY, which are the ones you you guys talk about on your podcast? Would it be worth selling my current mutual funds and then taking that money and putting it into the one or two big ETFs you mentioned like VOO, since they have a pretty similar investment profile and a smaller expense ratio? Thanks in advance and keep up the strong work. Sam, yes, you should absolutely do that. So Sam actually shared the four tickers of the mutual funds that he's in and all of them have underperformed the S&P 500, despite claiming that they're tracking it. right listen sam get out of the mutual funds that charge you 80 basis points 90 basis points one whole

percent on your money put that money into these awesome index funds we always talk about qqqq v o o spy moat vgt these big big index funds that should be the anchor of your retirement portfolio and save some extra money and get better returns right i love it sam kue great question the more specificity you guys provide in your questions the more value we can bring ring. And this is great because you hear me specifically talk about, you know, that positive arbitrage in as much of your dollar going to you rather than in these high fees or underperforming asset classes. So that's why we're always preaching these ETFs that we talk about just because in index funds, because we want you guys to optimize your earnings on your money.

And just as a quick lesson for everyone listening right now, if you're curious how your retirement investing and your if it's mutual funds or ETFs, whatever you're invested into for forms in relation to the S&P 500, you can go to Seeking Alpha.com, type their ticker into their search bar, scroll down a little bit and you will see a one, three, five, and 10 year chart that shows how that specifics funds price and total return has compared during those time intervals to the S&P 500's price and total return. I did this for Sam's mutual fund, ANCFX, and it has underperformed from a total return perspective against the S&P 500 by more than 50% over the last 10 years. Unbelievable.

And too many people, this is a great point, Austin, and we should really hammer this home more often. So many people, when they see a market pullback like we saw in September, October, or we saw last week with the markets and crypto pulling back. They all of a sudden, they start to panic and they think, oh, no, clean, sparks going down or VOO is a little bit sideways this week or, you know, maybe meta's down a little bit or Tesla's down. And really one of the best practices I believe people can do to help them understand things from a macro level is zoom out. Look at the five year return. Look at the 10 year return because what that also helps you realize is that when you have underperforming assets and you go,

I'm just going to let it go because Uncle Bill told me to do that. No, don't do that. Because when you zoom out five years, 10 years, 20 years in your wealth building journey, that 2% that you might be able to optimize or three or even 5% year over year by having better performing assets is going to turn into hundreds of thousands, if not millions of dollars in your portfolio over that 20, 30, 40 years. So always optimize where you can to get the best returns for you. Really good question, Sam. We appreciate it. And just as a reminder, if you have a question to ask go shoot us a direct message on Instagram at Rich Habits Podcasts. That's where we get all of our questions. We've got hundreds of questions. Unfortunately, we could never get back to because we get questions

every single day. It's so hard for us. But don't forget to ask them because you might end up on an episode of the Rich Habits podcast. Our next question comes from Anne. Anne says, hi, Austin and Robert, happy new year. I really enjoy the Rich Habits podcast. I look forward to every Monday and Thursday to the new releases. My question is about the equity options trading, which you will. US ETFs have the most liquid options. Okay. Anne, great question. And for people who might be confused right now, let me break it down.

Anne is trying to figure out what US ETFs are popular enough where she has liquidity, which means people want to buy what she's selling and she can buy what other people are selling, where if she wants to collect premium, aka sell a covered call or something, she can do that pretty easily. Now, I have had great success with most of Vanguard. ETFs. They're very liquid. A lot of people are buying and selling the option chain over there every single day and every single week. So if you're using Vanguard's ETFs, I would imagine you have great liquidity. Alternatively, SPY also has a ton of liquidity. Normally just any of the big US ETFs that

are tracking and index will have a lot of liquidity. And as a quick reminder, Anne, if you don't want to be trading your own covered calls against the S&P 500 and you'd rather someone else do it for you, something I also do. You can just purchase shares of SPYI, I there is the difference. That's the NEOS ETF that sells covered calls against the S&P 500. It has a 12% annual distribution yield. And it performed, I think it was up 18.5% in 2023, which is more than the 11% their competitors saw. So they outperform the entire category of covered call ETFs in 23. But to answer your question, and SPY, V-O-O-Q-Q-Q-Q-G-T, any of these big ETFs that people are treating on a daily basis to track the performance of an index is probably going to be a good bet for you.

Great question, Ann, and Austin, even better breakdown just so we don't go over everyone's heads because it's always our goal here on Rich Habits to break down all of the different strategies in business, mindset, and investing to help the average person and even the person that's growing their wealth, understand the various strategies because we're always talking about diversification and there's more ways to kind of skin the cat and figure out how to build wealth. So this is a great way in an additional strategy you can add to your wealth building journey. But great breakdown, Austin, and great question, Ann, thank you. So our final question comes from Albert L. He says, I have set up custodial Roth IRAs for all of my

minor children. I plan on paying them through my small business of auto-dea. detailing. My children help me drive the cars as well as fill up some of my spray bottles. How can I pay them in the most legit way possible? I'm not sure it's worth putting them on a payroll, but I do want to know how to take money from my business bank account and pay my children so that they can realize income, allowing me then to take that income and invest it toward their Roth IRAs. Robert, do you want to take a step at this one first? Yeah, I love this. And we talk about this strategy several times in 2023 of how you can do this. And so the way to look at it for 2024 is you can put each child on payroll. And the way the law works, you don't actually have to run it through payroll.

You could 1099 them. You could do it as stated income. And you can do up to $13,850 for each child. So this is a great, great strategy. And I love the fact, Albert, that you're thinking like this. more people with children have to realize that if you can show stated income, earned income for your kids, it could be sweeping the floor, it could be pictures in your social media, whatever it is, you get that right off against your profits and you're helping your children build their wealth as well. So it's an incredible strategy that more people need to implement if they own that small business like you do. Yeah, what's really important here is whenever you're paying, your children, you have to make sure the money they're receiving is coming from your business

bank account. It's not coming from your personal account. It's not coming from your wife's account, right? As long as that money is coming from the business bank account and is headed toward their individual bank account or even straight to their Roth IRA, you're in the clear. Just make sure you don't pay them in cash, right? That's not we want to be doing here. And don't forget when it comes tax time to tell your accountant that you paid your children and that is a deduction, right, off of your profits here as your business and also make sure that now that your kids are making money, they have to actually tell the IRS to what Robert said. They're making money and they got to fill out the proper tax forms, right? So as long as you're doing the tax stuff correctly, you're going to be

just fine, Albert. I love it. This is a great question and really, really smart strategy for not only yourself, but your children. Awesome. Everyone, thank you so much for hanging out with us on this episode of the Rich Habits podcast. If you're not yet sharing your email address with us, be sure to do that. There's a Google form in the description below. You click the link, you sign in to authenticate that you're a real person, and then it just will share your email. All as well, you won't get any spam, but what you will get are invitations to participate in our monthly money challenges. We have these rich habits challenges that come through via email to you. January, we talk about automating investing, tracking your net worth, diversification,

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