The Personal Finance Podcast - Should I Max Out My Account At The Beginning Of The Year?

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Starting point is 00:00:56 Find your advisor at IG Private Wealth.com. What's up everybody and welcome to this episode of Money Q&A. My name is Andrew. I'm the founder of MasterMoney.com. And today on Money Q&A, we have a bunch of fantastic questions. Should I invest all my money in retirement accounts early in the year or wait and dollar cost average throughout the year? The second one we're going to be answering is what is the minimum age to add somebody as an authorized user to your credit card?

Starting point is 00:01:32 So if you want to start your kids off, with a great credit score. We're going to tell you exactly how to do that with someone like a teenager in your household. And then lastly, is it best to start a business before you start real estate investing? We're going to talk about the power and the benefits of an LLC inside of a real estate business. Now, if you have any questions about this episode, hit me up on Instagram at Master MoneyCo

Starting point is 00:01:56 or hit us up on TikTok as well at Master Money Co. and follow us on Spotify, Apple Podcasts, or whatever podcast player, you love listening to this podcast. And if you want to help out the show, leave a five-star rating and review on Apple Podcasts or Spotify. I can't thank you guys enough for leaving those five-star ratings and reviews. Those are absolutely helping us spread the word and teach other people how they too can build well within their lives. Thank you to each and every single one of you who have done that. Now, if you're ready to get into these questions, let's get into it. Should I invest all my money and max out my retirement accounts early in the year?

Starting point is 00:02:40 So this is a question that I get a lot. And this concept is called front loading, meaning every year when the new year rolls around, maybe you have some extra cash available and you invest all the money to max out your retirement accounts early on in the year instead of wading and dollar cost averaging throughout the year. And this can happen for a number of reasons. Maybe you get a year-end bonus. You had some great performance and you have a bunch of cash left over and you want to figure out, what do I need to do with this cash so that I can utilize it the best way possible?

Starting point is 00:03:10 Or maybe you maxed out your Roth IRA early last year, which has a low limit, $6,000 per year. And you saved your money over the course of the rest of the year and you don't know what to do with those dollars. Should you invest them all so you can get more money into your Roth or should your dollar cost average throughout the year? Or maybe you're just getting started investing and you didn't know that hoarding your cash in a savings account is not the most optimal place to put those dollar dollar bills. So if you're in this situation, if you have cash up front and you don't know what to do with it, you should invest it up front early on in the year. So many studies have shown that if you invest this money up front, you're going to be much better off than dollar cost averaging throughout the year. So if you have

Starting point is 00:03:49 this cash available, the best thing to do is go ahead and max out those retirement accounts if those are part of your plan. If retirement accounts are a big part of your plan, then definitely make sure that you go in and just invest that money into the retirement accounts. Now, we're going to talk about a couple of reasons why here, but just know, statistically speaking, you are much better up. Now, we have an episode talking about should you invest all your money up front or should your dollar cost average. We talk about those studies in that episode.

Starting point is 00:04:14 I will link it up down below so you can check that out as well and in the show notes because that episode, we do a really deep dive into some of those studies. So what I'm going to do is I'm going to give you five reasons why you were going to want to do this. The first one is stocks usually go up over time. Now, stocks go up more than they go down when investing your dollars. In our episode with Brian Ferraldi, he talks about this and mentions that stocks go up much more frequently than they go down. In fact, we've talked about this in our bear market episode where stocks are usually on the rise over 900 days during a bull market. And it's only about 200 plus days where they are going down in a bear market. And you can do a little thought

Starting point is 00:04:53 experiment on this. If you had a million dollars right now and you had to invest it over the course of a hundred years, would you invest that entire lump sum right away so that that million dollars can get started and getting to work or would you invest $10,000 a year just to see what would happen over the course of that hundred years? Well, most people would want to put that money to work right away. If you want to grow that money as large as you possibly can, if that's the final goal, then you would put that money to work right away. So with that same logic, then you would want to put your money into the market as soon as possible because over time, you just want that money to grow. So the sooner you can get your dollars into the market so that it can grow means that compound

Starting point is 00:05:30 interest is going to start working for you. Now, a lot of people right now at the time I'm recording this, we just entered it into a bear market. A lot of people are asking me, Andrew, should I wait because there's a bear market? Well, when there's a bear market, guess what? Good stocks and good companies are on sale. And the S&P 500, for example, if you're investing in something like the S&P 500, 500 of the largest companies in the U.S. stock market. Those are all great companies, and they only keep the great companies within the S&P 500. So all of a sudden, 500 amazing companies are on sale. The stock market is the only time where I see people not wanting to buy things on sale. So if you can train your brain to think that, hey, these stocks are on sale. I need to buy more

Starting point is 00:06:14 of these stocks because they're at a discounted rate. This is the way to think about it. This is the money psychology you need to have. Now, should you hoard cash to wait for a recession instead of investing your dollars? No, you should get those dollars invested. If you're investing, make sure that you're investing consistently every single month, no matter what. It doesn't matter what the market does. It doesn't matter what the media says. It doesn't matter what social media says. Most people have no idea what they're talking about. And if anybody is predicting the market, then do not listen to that person, write that person off. This is something that is so important for you to understand early on because there is so much noise out there, but the best investors out there

Starting point is 00:06:51 can ignore the noise. The second reason you want to do this is because you can actually postpone your taxes until later in the year. So if you do this up front and you're doing in something like a pre-tax account, maybe it's in a 401k or an IRA, then you don't have to pay taxes on that money early on in the year. So you can put your dollars into these retirement accounts and you don't have to pay taxes until later on in the year. Same thing goes for the Roth IRA as well. You're sheltering your money from taxes for the entire year. Now contributing to these retirement accounts does not impact your FICA taxes. So make sure you take note of that as well because if you're going to utilize this for this strategy, it does not impact your FICA taxes. You will still have to pay those. So yes, you will be paying

Starting point is 00:07:33 the same amount of taxes by the end of the year. But this is important because by the end of the year, the money that you save on taxes early in the year can be invested in your portfolio and can grow for you rather than for the government. So basically, you're going to get some extra leverage early in the year that you would not have otherwise because you're avoiding those taxes early on in the year. So this is just going to help you compound a little bit more. Now, reason number three is the tax-free growth. So since you're getting cash into those investments early, you are avoiding giving big bank roles to Uncle Sam. So especially if you're investing in a pre-tax retirement account, front-loading shields more of your investment earnings from taxes since you'll be getting more of your

Starting point is 00:08:14 into pre-tax retirement accounts sooner. So the sooner you can get your dollars into these pre-tax retirement accounts, the faster your money can compound and grow, you can get that tax-free growth there as well. Reason number four, if you're planning on leaving your job at some point this year, maybe you're pursuing a better job so that you can get a raise. So your current employer may not be willing to pay you what you're worth. So you're going to go and try to find a better job throughout the year.

Starting point is 00:08:37 Well, this is a reason to potentially go and max out something like your employer-sponsored plan so that you can get your max before you actually leave. And frontloading gives you that option to actually max out that account no matter when you leave. So maybe you're thinking about leaving in June and it's January. So in January, you front load and max out that 401K, so you actually have it maxed out for the year. And then if you leave and your new employer doesn't have a 401K, well, you already got all of your money into that 401k so that you're good to go. Or maybe you've been saving for 30 or 40 years and you're going to achieve your retirement goal as well. Then if you're going to retire this year, you

Starting point is 00:09:09 definitely want to see if you can try to front load it to get some extra. cash into that retirement accounts because that's something you're not going to be able to do once you have that job because you're not going to be able to open a 401k unless you're self-employed. Now word to the wise, on these employer-sponsored plan, there's one thing that you want to look out for here. The first one is make sure you're not losing out on your employer match by front-loading. Specifically, if you're doing something like your 401k or a Roth 401K, make sure you're not losing out on the employer match because that would be a very bad thing. And some employers will not let you front load and give you the match at the same time. So you want to check with your

Starting point is 00:09:43 HR department to make sure you can still get that match if you're going to front load because that's 100% free money and you definitely don't want to lose out on that. So if that's the case, do not front load just consistently invest throughout the year. And then you also want to check that you're actually allowed to front load on these employer sponsored plans. Some places are not fire friendly. So you want to make sure that you can actually do this as some companies just don't allow you to do this. So those are the two things to check with employer sponsor plans. Obviously with your Roth IRA, if it's something that you do yourself or if it's with a personal IRA that you do yourself and it has nothing to do with your company, then that is thrown out the window. But if it's something where

Starting point is 00:10:21 it's your employer's sponsor plan, it's your 401K through work or it's your Roth 401K through work or your 403B, all of these different things, make sure that you check on those pieces so that you can understand, should I be doing this and what is the best decision for my situation? Is it best to start a business first before investing into real estate for more tax relief? So when it comes to this question, the first thing I would tell you to do is definitely talk to your CPA or an accountant to figure out what the best situation is for your personal situation. But I'm going to tell you my thoughts on this because I would rather have an LLC with my rental properties under an LLC,

Starting point is 00:10:58 then not having it under an LLC. Now, if it's your first property, I understand if you just want to keep it in your name, but as you start to grow over time, I would definitely consider it having it an LLC. And the reason why you want your properties in an LLC, and this is the main reason, because you can get a lot of the main write-offs

Starting point is 00:11:13 with rental properties without having an LLC, and a lot of people don't know that, but you can. But the LLC is going to help you with your liability. Now, liability is the main reason why you would want to do this. You want to protect your own purpose, personal assets from anybody that's going to try to come after you. So that's the main purpose of it. It's to draw a line between your personal assets, the investments that you've worked to grow, maybe your stocks, your bonds, your retirement accounts, those types of things, and then your business

Starting point is 00:11:40 assets. So your property assets that you have inside of each of those LLCs. Now, I know some people who open a new LLC for every single property. I don't think you have to go that crazy, but I just think having an LLC, if you're going to have multiple properties and you plan on being a real estate investor over time is something that is a very smart thing to do. And that's really why, because once you draw that line in the sand, the risk should start and the risk should end at your LLC. It should not carry over to your personal assets. But LLCs have requirements that you need to follow. So there is more paperwork involved. There's more things that you have to do with an LLC. So just understand that here early on. The first one is within LLC, you have to keep the property in good

Starting point is 00:12:19 repair. And you always should be doing this no matter what. You don't want to be a slum lord. And if you're slum more, you need to get out of the real estate business whatsoever. You need to be able to create good, clean housing for people. The second one is you must hold the title of the property within the LLC. And then you have to run the LLC like a business because there's a number of different things that you have to do, like keeping corporate records and stuff like that. So making sure that you understand that there's a little extra work. So that's why if it's your first property, do you have to do this? No. But it is helpful to keep and draw the line in the sand. So if you want to be a real estate investor, it's very helpful to do this early on.

Starting point is 00:12:54 Now, there are some other things that are pros for this as well. The first one we talked about was asset protection. The second one was tax advantages. So, for example, if you use a vehicle for business, then you may be able to write that off under your LLC where you wouldn't be able to do that on your personal side. So for example, if you use a vehicle for business, you may be able to write that off under that LLC.

Starting point is 00:13:15 You can write off your expenses. You can do all these different things as a pass-through to your LLC. Now, one other thing to note here is with an LLC, when you have a property inside of the LLC, you get the benefit of pass-through taxation. So many corporate owners usually pay double tax. They pay tax on their business and they pay tax on their personal income tax as well. But this is not the case with a real estate LLC. So when you own a property through your LLC, you can actually avoid this double taxation.

Starting point is 00:13:44 That's why so many wealthy people own properties within their businesses, because you can avoid the double taxation if you have a property there. And you can report business profits or losses at a lower rate than your individual returns. So taxation on business is much lower than taxation on individuals. You can actually lower your taxes by doing this. And then some other benefits is that allows you for flexibility. It helps you earn business credit, a number of other things as well. Now, here's the one thing to note here.

Starting point is 00:14:14 And this is the big thing to note because when you get into real estate investing, this is one of the biggest deals that comes into play, is it is much harder to get financing if you're buying a property in an LLC. It is way harder because if you're using private lenders, more power to you. That's fine. If you're trying to get a loan from a bank

Starting point is 00:14:32 or a mortgage broker, which most people do to start off if they don't know any private lenders, well then you're going to have a much harder time getting it through an LLC. So what you want to do is talk to your lender, talk to the mortgage broker, and say, hey, this is what I want to do.

Starting point is 00:14:45 How can I go about doing this? Do I need to buy the property in my name and then own it for a year and then transfer it over to the LLC? How can I go about doing this over time? And they're going to try to walk you through it and explain it to you. Because the paperwork is way more difficult if you're buying in the business right off the bat because a lot of times they're more happy to see your W2 than they are seeing your bank account that has hundreds of thousands of dollars in it's the weirdest thing, but that's exactly how they operate. So to the banks, it is much more risky to loan money to a business who is just starting out

Starting point is 00:15:14 than it is to loan money to a person who has W-2 income coming in. So talking through that piece of it, and this may be the reason why you don't want an LLC right off the bat for your first property, so that you can get those loans. Now, if you're house hacking, you don't want an LLC, you want it in your personal name so that you can get those low loans, like an FHA loan with 3.5% down. So there's just a number of different things that you want to consider here.

Starting point is 00:15:35 But if you're going to be a real estate investor for a long time, I would definitely consider putting your properties in an LLC to draw that line in the sand and have that asset protection right in play. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's sponsor jobs help you stand out and hire faster. Your post jumps up to the top of the page, making sure it reaches the right candidates. And it makes a huge difference.

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Starting point is 00:18:52 What is the minimum age to be an authorized user? So if you want to start building credit for your kids, one of the best things that you can do is put them on your credit card as an authorized user. Now, there's a number of caveats here. If you're not responsible with your money, then absolutely do not do. this. But if you are responsible with your money, then this is a great option for you to allow you to start building credit for your teenager. So what do I mean by being responsible with your money? Well, first of all, with this credit card, you need to keep the balance low every month because you want that credit utilization rate to be low so that over time your credit score will go up.

Starting point is 00:19:30 So for example, if you have $10,000 on a credit card and you use $1,000 of it every single month and then pay off that $1,000 every single month, then you're using 10% of your credit utilization rate. Now, most people with a really high credit score, meaning credit scores over 800, studies have shown you 7% or less of their credit utilization rates. You want to keep that number very low. The second thing you want to do is make sure that you're paying off your card every single month. Because if you're not paying off your card every single month, you are going to really hurt your credit and you're going to hurt the person who's the authorized user on the card credit. So you do not want to do this whatsoever if you're not paying off the card in full every

Starting point is 00:20:11 single month. Now, I like to pay off my cards weekly. The reason why is I just stay on top of it every single week. It doesn't help your credit in any way to pay it off weekly, but I like to stay on top of it so that I know exactly where my balances are. So this is just part of my weekly plan every single week. Take a look at my credit cards. Get rid of that balance so that I can't get into any trouble throughout the month. And then the last thing you want to do is you want to leave it open for an extended period of time, even if you're not really using the car, maybe put your gas on there or something every single month so that the credit history can stay open and it can stay long for your child. So your child can keep this open if they're a authorized user or you can keep it open so that you have the longest

Starting point is 00:20:48 form of credit history still on their credit report because immediately when you close this, your credit scores will take a slight decrease. But in addition, what's going to happen is their longest credit history will automatically be eliminated. So you want to keep it open longer if you can. Now, another thing to note, you only need a couple of years of credit history to really make an impact. You don't need to be doing this for someone who's like your toddler who's five years old. You can wait till they're a teenager before you actually do this with them. And it's a great teaching moment that's going to show them, hey, here's why I'm doing this. You need to have credit for these reasons.

Starting point is 00:21:21 And it's really going to be an awesome thing that you can kind of do together. Now, if you want to give them a little bit of spending money, you can also give them an authorized user credit card if you need to use it for college or something along those lines. that's also a great option as well and gives them access to a card if you want to do that. And if you don't trust them to have access to a card, then just keep it to yourself. You don't have to give them a card, but you can still have them as an authorized user if you're responsible with the card. Now, your boy talked about this a little bit on the gram the other day. And there was a few comments of people saying, well, you can't do this until you're 18. My bank didn't let me do it until my child turned 18.

Starting point is 00:21:54 So this is very bank specific, but a lot of the large banks, and I'm going to get into the banks here in a second, of which ones actually will allow you to do it. A lot of the large banks will allow you to do this. So very specific banks, maybe like a credit union or something like that, may not allow you to do this. But this is something that's fantastic for most people because the large banks will allow you to do this. And guess what?

Starting point is 00:22:13 Your boys got your back per usual. So what I'm going to do is I'm going to go through some of these banks and tell you which ones are going to allow you to do this and what age they're going to allow you to start opening up cards as an authorized user. So the first one is American Express. So American Express, you can do it. And they have to be at least 13. Bank of America, you can do it and there's no limit to the age.

Starting point is 00:22:33 You can open it at any age. Capital One, you can do it and there's no limit to the age. City, you can do it and there's no limit to the age. Chase, you can do it and there's no limit to the age. Discover, you can do it and they have to be 15 years old or older. Synchraney bank, you can do it and there's no limit to the age. US bank, you could do it and you have to be 16 years old or older. And then Wells Fargo, you can do it and there's no limit to the age.

Starting point is 00:22:59 So some of the biggest banks out there will let you do it and there's no limit. And if there is a limit, starting at 15, 16 years old is absolutely fine. You don't need to be starting super early like we talked about. Now, the source for this is credit cards.com. I'll link up the article down below so that you could check that out as well because it's a great article to actually read if you're interested in doing this. Now I'm going to go through step by step. If you want to add somebody as an authorized user, how can you actually do this?

Starting point is 00:23:24 So the first one is you just want to log into your credit card profile and then you're going to find the account where your credit card is. You're going to open up your profile, find the account exactly where your credit card is, the main hub for your credit card. Like if you're going to go pay off your credit card, open that portion up of your bank. And then what you're going to do is look for a portion that says add authorized user or order a card for someone else. And then you just follow the steps. So you're going to put in their name, their information, probably their social security number, and some other information. And then once complete, the card with the user's name should arrive.

Starting point is 00:23:57 in the mail. And if you're having trouble doing this online, if it's giving you a little issue or it's a little finicky, then it's also just great to go ahead and call them up because they'll be able to walk you through the steps as well. So if you have a minor, if you have a teenager and you want to start building their credit, this is an amazing option for you and it's a fantastic way for you to build up their credit so that they have a great early head start in life. Thank you so much for listening to this episode of Money Q&A. If you guys have any questions, you know where to hit me up. Hit me up on Instagram at Master Money Co or TikTok at Master Money Co. And just let me know, add this to the money Q&A episode.

Starting point is 00:24:34 Thank you guys so much for listening to this episode. I truly appreciate each and every single one of you. You guys mean the world to me. And I want to help you and be able to serve you as much as I possibly can. So we'll see you on the next episode.

The Personal Finance Podcast - Should I Max Out My Account At The Beginning Of The Year?

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