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What Happens if I Stop Investing for a Year?

October 28, 20260 comments♥ 0
00:00 On this episode of the Personal Finance Podcast, what happens if you stop investing for a year? What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of MasterMoney.com. And today on the Personal Finance Podcast, we're going to be diving into your questions on this Money Q&A. If you guys have any questions, make sure you join the Mastermoney newsletter by going to Mastermoney.com. slash newsletter. And don't forget to follow us on Apple Podcasts, Spotify, YouTube, or whatever podcast player, you love listening to this podcast on it. And if you want to help out the show, consider leaving a five-star rating and review on Apple Podcast, Spotify, or your favorite
00:52 podcast player. Now, before we dive into this Q&A, quick housekeeping, we are taking a small group of people in for one-on-one coaching. If you are interested in that, shoot me an email, and or at mastermoney.com. The only requirement is that you have to make over a hundred hundred thousand dollars per year in household income but if you are interested feel free to reach out and we will hook you up with a team to get more information all right so in today's episode we're going to be going through six of your questions we're also going to be going through the scam of the week this week which is very very timely which i think is going to be really important for a lot of people to hear and we're going to be talking first about asset location so we talk about asset allocation so
01:29 we talk about asset allocation on this show all the time the mix of stocks and bonds you should have but we're also going to talk a little bit about asset location and where some of your assets should go. We're going to be talking to a 21 year old in New York City who has $30,000 in cash and they are trying to take through how to budget, how to figure out liquidity. We're talking to someone who has vested company stock. And if they should hold on to those shares, if they should sell those shares, we're going to be going through when it's okay to pause retirement contributions and what happens and what is the impact for pausing those retirement contributions. And we're going to talk about these seven streams of income and if that's something you should have or if that is a myth.
02:08 Plus, we're going to go through should someone cash out their 401K to pay off credit card. So this is an action-packed episode. I am really, really excited for this. Again, if you want to send in your question, feel free to shoot me an email and you may get your question to answer them on the show just like this. So if that's something you're into, let's get into it. All right, the first question is from Josette. She said, the one money problem I'm trying to solve right now is investing for the first time.
02:37 My specific issue is understanding not just the asset allocation, which I pretty much grasp the concept that the S&P 500 is basically unbeatable, but more importantly, I'm trying to understand asset location. I am a government employee with a pension and I'm maxing out my 457B plan, which is 100% invested in the key row price retirement 255 trust class J. not sure if I should be managing that myself or allowing it to choose the right investments for me. Now, as a government employee, I do not qualify for an HSA, so I am limited, I believe, to my backdoor Roth IRA and taxable brokerage account for retirement preparation. However, I'm not sure how much of which ETF slash other investments belong in which account.
03:23 I have heard that SCHD and SCHG are great, but have too many dividends for a taxable brokerage account. B&D is good for balance and diversification, but also should not go in your taxable brokerage account. I just want to make sure I am investing in the smartest way that produces the largest retirement portfolio possible without costing me a ridiculous amount in taxes. I also want to make sure that I am utilizing all of my retirement resources I have at my disposal. So this is a wonderful, wonderful question, Joe said. And I think you thinking about this is really, really important, especially as you start to build out a portfolio, which I think based on how much you're investing currently, is probably going to be pretty large. So for many people out there listening,
04:04 the 457B at the time I'm recording this, has a $24,500 per year yearly max. And if you're over the age of 50, you also have what is called a catch-up contribution at $8,000 per year. And if you're over the age of 60, there is now a super catch-up contribution that's $11,250 that you could also put in.
04:23 And just for reference, the IRA max out is going to be $7,500 per year. Now, making sure that we use every single resource, source available to us. When we do have extra income coming in, during our highest income years is going to be super, super important. And for Josette, she wants to make sure that she is getting as much as she possibly can into these accounts. So one of the things that you could ask is can you stack a 403B and a 401k. So 457b limits are separate. So you could defer $24,500 to each of these if you wanted to, but you want to ask HR, hey, do we offer a 403B or a 401k or even a 401A
05:03 besides the 457B? That is one of the options just to see if you can request. It is not very common yet, but it is something that can be offered from time to time. Now, a couple of other things to think through is maybe a Roth, 457B, if you have that available, that could be a good option, or a mega backdoor Roth. Now, a mega backdoor Roth is unlikely for a 457B, but if they do have 401k or 401A options, then that may allow you to do after tax contributions, which would allow you to then transfer some of those to the Roth and be able to do a mega backdoor Roth if that is an option for you. So it's worth looking into that as well. And if you have no HSA, a health FSA, still leaves tax on known medical costs. You know, you could go look at $3,400 per year right now
05:48 at the time I'm recording this. That could be one of the things to do. Now, the backdoor Roth is a great option. And I think for many of us out there, this is the first thing I do every single year is I make sure I max out my Roth IRA for myself and for my wife. $7,500 per year is what you can get into these accounts. And I typically try to do this in January. If you are a high earner and you've already maxed out your Roth IRA or done a backdoor, start saving for the January contribution now. So that then when January rolls around, which is only a couple of months away at the time I'm recording this, you have the money just there that you can already do that backdoor contribution. I think that's really important. And so if you are someone who makes over $153,000 per year in
06:31 your single, or you make $242,000 a year or more in your joint, then you're going to have to do a backdoor Roth IRA, meaning that you contribute money into a traditional IRA, then convert those dollars to a Roth IRA. That's how high earners can get their money still into a Roth IRA, even though we do have these income limits. So it's just one of those things to note for anybody who has not heard that. Now, there is something called the pro rata rule that every person listening who does a backdoor Roth needs to understand because all pre-tax IRA balances on December 31st make part of a conversion taxable. And so you want to understand the pro rata rule before you do this. The 457B isn't an IRA. So it doesn't count towards your pro rata rule. And if you file form
07:16 8606 every year, that's really important to make sure that when you do the backdoor Roth, everything is kosher. Now let's have a conversation though, and I think you should continue to the backdoor Roth about asset location. So SCHG, which you mentioned, is a growth fund yielding about 0.4%. And SCHD yields about 3.1 to 3.2%. So SCHD is the most popular dividend ETF in the country right now. SCHD is a cost effective, meaning you can buy multiple shares of SCHD It's like at $33 or $35 a share right now at the time I'm recording this. And it is something that is a very powerful fund if you are looking to live off dividends. Now, why would someone be interested in this?
08:01 Well, if you wanted to instead make sure that you are putting money into a portfolio and not having to draw down on that portfolio, but instead you want to live off the income it produces, that is when you would look at something like at SCHD, a dividend ETF that could be interesting. Now, SCHD typically has 100 different dividend stocks inside of it and is a very low cost dividend ETF as well. It is one that I looked at for years and years and it is very powerful. We're about it actually do a YouTube video on it. So if you want to deep dive on that, please let me know. But when it comes to dividends, you know, a lot of people like to have dividends in Roths. The reason why they like to have dividends in Roths is Azure portfolio grows.
08:42 And if you have a pretty large portfolio, it's going to spit off a pretty decent amount of income. And when you're spitting off income inside of a Roth, what happens? Well, that money is completely tax-free. You don't have to pay a diamond taxes on the dividends inside of that portfolio. So if your strategy is to have a dividend portfolio, having an inside of a Roth isn't a bad idea. Now, if you had it inside of a taxable account, is at the end of the world? No, it's not the end of the world because your taxable account income is still taxed at a significantly lower rate than your actual income. So when money comes in on your taxable account, you still will have a much better situation than you would on your traditional income. But SCHD is something like if I was going to build a really big
09:24 portfolio of SCD, a good spot to consider would be your Roth just because that money would grow tax-free. Now SCHG that was mentioned is also a growth fund, but it's yielding a smaller percentage, but it is a growth fund, meaning you anticipate to have higher growth. So if you have some like low growth things and then you have some high growth things. The higher growth things, you also want to consider having inside of a Roth just because of that tax-free growth. This is why getting more dollars in a Roth is really important because you can have tax-free growth options when you're thinking about asset location. Okay. Now bonds are a little bit different. Bonds are taxed as ordinary income. Okay. S-C-H-D are usually taxed as qualified. They're taxed at
10:08 lower rates because they're qualified. So you can have it in a taxable account and it's a tax drag, but it's not really a tax disaster. If you wanted to do that in that route, you could. But since interest on bonds or are taxes ordinary income, you could put them in like something like a 457B and your highest expected growth should always be considered as the Roth. The Roth should have the highest expected growth. And then in your taxable, like one of the things that I like to hold in my taxable is just broad-based, low turnover index funds, things like the S&P 500, things like the total market index fund. Those are the types of things that I'm not. I'm not. I'm I like to hold inside of my taxable because it's tax efficient to hold those inside of a taxable.
10:44 Now, SCHD and SCHD and an S&P 500 fund overlap heavily in large US stocks. So you want to just make sure that you're looking at that when you're looking at your asset allocation. And the S&P 500 is a great core holding and a core holding in a lot of different portfolios that I hold in my kids' portfolios and my wife's portfolios. There's a lot of different core holdings where I hold an S&P 500 index fund, which can be really, really powerful. Now, one other thing to note is that the target date fund, a target date fund can be a wonderful fund. It's not optimal for every single person, but it can be a wonderful fund that rebalances your portfolio and diversifies your portfolio without you having to lift a finger. So if your goal is just to, hey, I want to go to work, I want to come back and make sure that I am having an optimized portfolio,
11:30 there's a lot of them out there. I just looked at a Vanguard one yesterday that was returning right around 10% to investors over the course of the last decade. and it was holding total stock market index fund inside of it, an international index fund inside of it, and a little bit of bond exposure as well. And it was a great fund to hold. I mean, that would be a target date fund that you could literally have something. That would be comparable to something like a robo advisor where it's automatically rebalancing for you, but it's inside of just one specific fund and you don't have to pay those robo advisor fees. And the expense ratio on that fund was like 0.06%. So it is really, really cost effective to look at something like that if you wanted to go that
12:06 route. And so a couple of things I would say here is for you, the order of operations I would consider is one, making sure that you have an emergency fund in a high yield savings count. If you don't have six months of expenses in a high yield savings count, that's really important. Then is number one. Two, is the 457 maxed out if you are going to continue to do that. That would be something I would consider, especially as a higher earner if your income is as high as I am anticipating that it is right now. If your income is higher, a 457 is going to help you with your tax efficiency, then doing that backdoor Roth, I think is really, really important. And then looking into, you know, do you have the option for a 401k or do you have the option for a 40403B? You may not, but it's definitely worth checking into because then you could do something like the mega backdoor Roth if that's available. And then lastly, looking at your taxable brokerage account, a taxable brokerage account, especially if you want to retire early, is a wonderful account. In fact, this year I've been really prioritizing and hammering away at my taxable brokerage account and getting a lot more dollars in there because I think it is so powerful. to have that additional flexibility.
13:07 And the tax efficiency is so much better than what most people think it is. And so for some reason, the taxable brokerage account has gotten this bad name for being tax inefficient. But specifically, it's much more tax efficient than most people realize. It's not a Roth, but it is something that is absolutely fantastic when you're looking for some efficiency. So I think for a lot of people out there, you know, as a high earner, that's the way that I would look at that, is getting dollars in those accounts and trying to maximize them as
13:34 much as you possibly can. You're thinking about this the right way, Joe said. I think this is really, really important to make sure that you're on top of this and you are thinking through this process in the right way. You got your asset allocation down first and now you're saying, hey, I want to understand asset location. Hopefully this helps a little bit. But in fact, you know, if you're investing just in broad-based index funds or target date funds, you can have them in all these different accounts. But if you get more specific like those dividend funds, looking at things like potentially either taxable or the Roth IRA can be really, really helpful for funds, just like that. But amazing work so far, and if you have any other questions, please let me know.
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17:53 every home. All right, the next question. Hi, Andrew. Hope you are doing well. I just started listening to the podcast, and I love it. And I just feel really stuck right now, and I was hoping you could answer some of my questions. I just started my first job after college, and I am 21 years old. This year, I will make about $115,000 before tax.
18:17 Amazing for a 21-year-old. I just moved to New York City, and I have about $30,000 that was passed down to me sitting in a regular savings account through my bank. And currently, my take-home monthly income is about $5,000. $800. I'm currently getting my 401k match, which is 4%. My question is this. I am currently paying $2,500 a month for rent. My dad doesn't think I should start a Roth IRA yet because he thinks I need liquidity. But I can max it out right now with my $30,000 in savings. And I wanted your opinion on what you think I should do with this large sum of cash that I have barely growing. My second question is about budgeting. I just don't know how much of my monthly income I should be saving
18:56 and investing versus spending. All right. So this is a great question. And I'm going to talk through this A, first of all, amazing that you are thinking about this at 21 and you are starting this at 21. The first thing I would say to you before anything else is developing these financial habits that we're about to talk about right here is the most important thing that you can do. If you can maintain these habits and not try to go with the flow of what everyone else is doing in New York City, I promise you, you will be a very wealthy person because you have the most valuable asset of all, which is time. And so what we're going to talk about here is what you should do potentially currently, but it's also going to be one of the things that as you start to build out these habits,
19:36 just note that doing some of these is going to be setting you up forever. You are laying the foundation to build up one of these strongest financial houses that you possibly can. And at 21 years old, you have no idea how much time you really have. And you could get to the point in time where you reach age 30 and you look back and you say, wow, I am so. glad that I started that now. I didn't fall prey or I didn't get tempted to fall into the New York lifestyle where I'm out every single night, you know, paying $30 for a drink or I am out, you know, spending $5,000 per year on my gym membership unless that's something you really value. And so in reality, I'm going to give you kind of a framework here to think about this and get the ball rolling
20:16 as someone who is younger and starting to make good money. So the first thing I would do is a, the $30,000. Let's talk about that. I would consider moving that in just a, a high yield savings account. And a regular savings account is going to pay you close to nothing. And so moving it right off the bat to a high yield savings account is going to be helpful. My favorite ones are linked up down below in the show notes if you want to check those out. And the reason why we're doing this is we want to do some math and figure out, okay, how much are we spending every single month? And how do we make sure that we have six months of expenses saved in an emergency fund? So this is a gift. This is going to allow you to have that $30,000 saved in an
20:51 emergency fund and have the ability to be able to really get the ball rolling on that. So if you spend $4,000 per month, which probably is not happening in New York City, but if you are because you're frugal, that would be about $24,000 worth of this would be saved into an emergency fund. Now, because you have a new job, you're in a new city, high rent points, all of those things are going to be making sure that you are on the higher end first and making sure you have that six months on hand. And then we go from there, okay?
21:17 If you have any high interest debt whatsoever, obviously we want to pay that off first. And then we're going to go into this list. All right. First is looking at the Roth. The Roth allows you to put $7,500 per year into this account. And this is going to be the point in time where as you see, because you're younger and you're not at the income limits yet, you can put money in a Roth. It can grow tax-free and you can pull the money out tax-free. Now let's do a little fun math here.
21:41 Okay. I'm going to pull up an investment calculator and I'm going to say, okay, if we're starting from zero, investing $0 whatsoever and we start to max out our Roth IRA, from the age that you currently are now, 21, all the way till age 65. Maybe you stop earlier than that, but I want to have fun with this exercise. And let's say that you do it all the way until age 65. And you got the average rate of return of the market at a 10% rate of return. And you did this once a year, every single year with $7,500 per year. Now, in fact, you'd probably be putting a lot more than that into this account because
22:21 Roth limits go up every couple of years. and lately they've been going up every year, but every couple of years, and it's based on inflation and a number of other things. But let's just see exactly where you would land inside of that Roth IRA. All right, you would land with $4,894,8505
22:40 inside of your Roth IRA. Now, let's say you already had an emergency fund in place, you had a little cash on hand, and you decided, okay, you know what, actually, I've got this $30,000, I'm also going to invest that money as well. this would increase the amount that you have during this time frame to $6.8 million. Okay. So this is the importance of getting invested early. If you have a foundation like this, it went from 4.8 to 6.8, a $2 million difference because you have so much time for this money
23:13 to compound that $30,000, if you invested it, could turn into $6.8 million. So if you have a cushion in place, Like if you have something in place or you have a lifeline in place with your emergency fund, this is why it's so important to kind of get that built up as fast as possible. So you can get money like this moved into your investment accounts and moving it into there quickly. So that's just the starting point and just some math that I wanted to show you really quickly as we went through this. Okay. The Roth is going to be the starting point. If your employer offers a 401K, you also first, even before the Roth,
23:46 want to get that 401k match all the way up to the match, then you go to the Roth. then once you finish the Roth, going back to your 401k is going to be a great move and a great way to look into this, okay? Because this is a very, very powerful thing. A 4% match on your current income right now is $4,600 per year. That is free money, a free $4,600 per year that you can go and use and build wealth over time. And so this is free money that can be added to your investments. So let's say we took that $7,500 and we looked at this again.
24:21 And we said, okay, well, now you're getting an extra $4,500 every single year, which would bump this up to $12,000. And so instead of having $4.8 million, you'd have $7.8 million just by taking that match over the course of the next 44 years because you have so much time on hand. Now, you may be want to retire early. I'm just giving you the example of how powerful time can be. It is a $3 million difference in your situation if you got a 401k match that, was at a 4% rate and you took it. So just really important to understand that. I want to do the math
24:57 so that you can see this. Okay, budgeting. Rent is about 43% of your take home pay or about 26% of gross, which is normal for New York City, but it is heavy. So if transportation can be reduced, if you take the subway, you know, my sister lives in New York City, she works on Wall Street. I know she takes a lot of trains and subways and a lot of different things that she has to do all the time. She's commuting all the time. She reads a lot of books because she's commuting constantly. and if you can really reduce your transportation expenses, that'll help out with the rent costs significantly. Now I know there's Ubers, there's Waymos, there's all different kinds of stuff that you could do. But it's really important to reduce some of those costs if your rent continues to go up
25:35 so that you can make sure that you still have a balanced budget of 60% or less of your income going towards those needs. Okay. That's going to be really, really important. And then watching out for lifestyle creep, your friends are going to want to go out all the time. They're going to want to travel. New York City is a very expensive city. Your costs when it comes to things like groceries, your costs when it comes to things like going out or doing things is going to be higher than someone in the middle of Alabama. And it's just part of doing business. So focusing on your income number and increasing that income every single year is very, very important when you are in a high cost of living city like where you are. So I would make sure that you are getting money into.
26:19 these accounts, you have the emergency fund in place just to protect you against anything that could happen in life. But then thirdly, is that you reduce the costs where you can, an area is that don't really matter to you. Once you learn the skill of spending and you understand how to spend wisely, it'll transform the way that you manage money. So I hope this was truly helpful. I would maintain the $30,000 in terms of liquidity for the emergency fund and making sure that you have that on hand if you have no liquidity whatsoever. But if you can get to the pointed time where you have an emergency fund, then investing huge chunks when you're young can be very, very helpful. So I hope this answers your question. If you have any other questions, though, please feel free
26:57 to reach out. All right, the next question is from Frank. Shout out to Frank because Frank has a great situation here. So I've been listening to the pod for about four months now and getting married, and it's helping my wife and I tremendously with budgeting, investing, paying down debts, and overall putting us in the right direction. So thank you. Well, thank you, Frank. I'm really excited that it's helping you. And congrats to you for taking action. I currently have about $27,000 of company stock from my job that is already vested. I have two more vests coming in November, 2006, and May of 2007. That will equate to about $7,500 each in today's market.
27:36 My question is, should I take the vested stock, sell it, and put the cash in a high-yield savings account, or let it sit? I know there's tax implications if I sell, and my wife and I would like to use the money to purchase a home once we have our debt-manageable and emergency fund stocked. Thanks for all you do best, Frank. So Frank, first of all, let's talk about this for a second. If these are RSUs, I don't know if they're RSUs or employee stock purchase plan, it doesn't either one there, but RSUs and ESPPs are really, really important when it comes to understanding how to manage them. Now, I actually talk about these a lot and think about these a lot with a lot of folks in Master Money Academy and a lot of folks in a bunch of different situations, especially some of our higher and or coaching that we're doing in these one-on-one sessions.
28:18 and a lot of times when we think about these, we want to think about, okay, what is the risk of having this company stock on hand? Well, the risk is your income comes from this company, and now you have a net worth building in this company stock as well. And so at Vest, I think we need to understand first the tax implications and then secondly what to do with that money. So how are RSU's tax? Well, this is actually a very important thing to understand because at Vest, the full value is taxed as ordinary income on your W2. Okay, the full value of those RSUs is going to be taxed as ordinary income. So that has probably already happened.
28:54 And then your cost basis is the vest date value. So selling only taxes the change since then. Okay. So once your money vests, when you sell, it only is going to be impacted by the change since the date that your money vests. So let's say, for example, it vests at $100 and then you saw it at $20. The difference, the $20 is where you are going to be paying taxes. Okay. Held over one year after Vest, you get the long-term rates. So if you hold the stock over one year, you get the long-term rates, one year or less, you get short-term capital gains rates.
29:28 And so it's important to understand that and it's tax as ordinary income. That's the difference between the two. If you believe in the company and you feel as that you can hold chunks of it for a year to lower that tax will, you can do that, but it may not make a huge, huge difference for you. Now, your withholdings. The withholdings that you have, typically, on an RSU, can be less than what you would actually have to pay in taxes. So a lot of times companies will automatic withhold about 22%. That's like the go-to for a lot of different companies. And so then if you are in the 30% tax bracket or the 32% tax bracket, then you could have a surprise tax bill that you did not anticipate. So you want to check how much your withholding is at your current company and then see if you need to
30:10 adjust your withholding based on what they are withholding within your RSUs. Okay. So if that's the case, that's the starting point is how is RSU's tax? Well, you can get a surprise tax bill if they don't withhold enough. So it's really important to understand. But let's talk about why you should consider selling or not selling. Not selling is what you would do if you believe in the company long term. Like if I worked for Nvidia or Google or Amazon, I'd probably be holding onto those shares. But if I worked for a company that I felt as though I didn't know what the future actually holds.
30:42 You know, you're working at a company. Everyone's raw, ra, shish, can bother saying this thing's going to the moon. But in reality, what you don't want to do is, is have this concentration of your income and your net worth, meaning the stock options that you have on hand, all coming from one single company. That's a huge concentration risk. And so for me, in that situation,
31:00 when I used to get stock options, I would sell them. I would sell them for cash and then utilize them in the way that I would as income. I would treat it as income coming in once they're sold. So not expecting that when they vest in 2007, I'm going to anticipate this as income. but once they're vested, then they're yours. And so that's when I would anticipate the tax implications.
31:23 I would anticipate some of the other things. And I would sell those shares. I would take the income and I would put it in the exact order that I was prioritizing. So if you are prioritizing buying a home, if you and your wife want to buy a home, selling those shares and then putting them in a high yield savings count would be the place to consider putting those if you were going to use them for a home. Why? Because you don't want to invest to those dollars.
31:44 The market goes down. Then when you're ready to buy a home, all of a sudden your money is cut. and half. And so instead, putting those in a high yield savings count is great. And so your timeline sounds like it's three to five years. So it shouldn't be in stocks, let alone in a single stock. And so that's where I would take those dollars and put them in a high yield savings count. Again, we have our favorites down below if you don't have one. And that's the way I would look at this. So a couple of things I would say here is, in my opinion, this is just my personal opinion. You can do what you want and do your own research on this. But I would look at the company stock.
32:12 I would personally, if I was in your situation, I would go and sell those shares and I would move that money into, again, this is not financial advice. You got to do your own research, but I would move those shares into a high yield savings guy if my goal was to buy a home. So here's what I would say is a look up each lots vest date basis and understand the basis of your RSUs if that's what they are. And then sell losses and small gains first. So if there are losses, you could sell those first for the tax implications. If you have a really big gain on a lot of them, then it may be worth waiting until the one-year mark based on the tax implications,
32:47 but not the cost of staying concentrated. So like if the cost of staying concentrated could cause your company to go down, if you're in a high-risk company or a high-risk industry, then that would be a situation where I would still consider selling. And then proceeds in order would go to emergency fund, debt, and then towards your house fund in a high-yield savings out if that's your priority.
33:07 Making sure, and with the, the caveat that you are hitting your retirement goals because buying a house is a luxury. It is not something that is just a prudent financial decision. So it's a luxury to have on hand. And then if you are going to keep some company stock, I like to keep it out of a very small slice of the overall portfolio. Five to 10 percent around there would be the price that I would be looking for outside of that. Then you have too much of your income and your net worth relying on one single company. And that is concentration risk. That is just not worth taking. So that's how I think about it.
33:39 If you have any questions on that, please let me know. And thank you so much for sending in the question. All right. So we're going to talk about the financial scam of the week because there are a lot of scams that are going on right now because of midterm elections. Now, anytime there's an election going on, you're going to get a lot of different text messages. You're going to get a lot of messages about a number of different things.
33:59 So there's a couple of different financial scams that I want you to understand. Now, midterms are a couple of weeks away. This is pretty much something that you need to understand though. Anytime there are elections going on. And I'm going to talk through a couple of different ones. First is campaign or investment pools. So there are people that are going around saying you can get a guaranteed return if your candidate wins, plus they'll push you to recruit friends, meaning a bunch of people pool money together.
34:22 If a candidate wins, then you all get X amount of dollars back and you reap the rewards of having a pool of money all put together. Avoid these at all costs. If you are interested in one of those things, I would say that you need to get your priority right when it comes to your money. That is not something you should be doing, okay? Secondly, other of these things called packs. And if you've never seen packs, there's a lot of fake ones out there.
34:43 And these are things where there's packs and super packs. And they look legitimate. If you donate here, you know, people are saying, you know, this could, you know, help your cause. I would avoid those at all costs, if you can. Third, is there's fake merch out there. There's political merchandise that people are creating these stores for based on a lot of these different things that are happening right now. and with that political merchandise,
35:09 the merch never shifts and they just keep your money. If you're looking at political merchandise on a random website, for example, you want to be very cautious about putting your credit card information into that website. And then there's the voter registration texts. These are the ones that I have seen to be the most common. I've actually asked a couple of friends like,
35:25 hey, what kind of messages are you getting to kind of warn you all as well to see if there's anything out there that I'm not seeing? And most of them are getting these voter registration texts saying, hey, you're not registered with a link to a false page. that kind of steals your personal information. So it'll say, hey, you're not registered right now. You go to register because you thought you were registered. You give all your information,
35:45 your social security, your home address, everything you can. It takes that information. And it all of a sudden it has stolen your information. And the websites look legit. They look real. They look like government websites, but in fact or not. And they can steal your information that way. So how do you spot some of these? A couple of ways. One is urgency. urgency is the number one way to spot any scam when it comes to a financial scam. If they are trying to push you to do something really quickly, avoid that at all costs. Two, is any donation promising a return. Like this is something that drives me up a wall.
36:19 If you are donating money, but you're expecting a return, that is absolutely ridiculous. Those two do not go a hand in hand. That is not an investment. Please do not invest in political campaigns. It's freaking ridiculous. Three is an unsolicited text or email saying your registration has a problem. you've got to be really cautious with this stuff now, very cautious with this stuff to make sure that you're on on track with this. And then four is a registered pack spending heavily on fundraising, consulting,
36:44 all these different things that you probably don't understand. So if you want to check your registration yourself, you can go to vote.gov. That's the place where you can actually check if you are registered. And if you want to check for merch sellers, you can go to the Better Business Bureau if you're going to buy merch. And so these are just a couple of different things that you want to make sure that you're looking at. If you want to verify a PAC or a committee, you can go to FEC.gov before giving to make sure they are legitimate. And so you want to double check on a lot of this stuff because the FBI is reporting a lot of different of these scams and they're happening more and more and more. And a lot of times you may be asking yourself, well, how do they get my
37:19 information? How do they know my information? And that is from usually data brokers. They can go to a data broker website and they can get all of your information, things like your name, your address, phone number, all these simple things that you feel as though should be private. Well, data brokers sell that information to scammers just like this. They can publish, if you Google your name or your address and quotations, you'll see a lot of different things there. And the more information that's out there, the more believable these scams can get. And that's why I use a service called delete me. So delete me will remove your personal information from these different websites and it will make sure that your information is continuously getting removed. And it's very important to do this because again,
37:59 if a scammer gets a piece of your information, they can start to scam you in a number of different ways. And the reason why I'm so gung-ho on this stuff, by the way, is because I had my identity stolen. So I know how painful it is to have to go through all of this. And so a service like Delete Me is absolutely amazing. They remove your personal information from these data brokers, and they continuously keep checking and making sure that your personal information stays removed and is constantly getting removed. And so if you go to join deleteme.com slash pfp20, you can get 20% off of Delete Me. And again, this is a service I have been using for a very long time. They are an awesome service. Can't recommend them enough because they save me so much time. If you try to get your
38:39 information removed from these data brokers on your own, it would take you hundreds and hundreds of hours. And in fact, Delete Me has a little thing when they send you a report that tells you how many hours they will actually save you. So very, very important stuff, making sure you get your information removed. Now, always be checking for these scams. Always get updates on scams like this because you want to understand, even if you're someone who is like really on top of this stuff, they can still get you when you're in a rush. They can still get you when your mind's not all the way there. There have been times where I've clicked a link. And I talk about this stuff all the time. There have been times I clicked a link and I started to put in information. I'm like, wait a minute,
39:13 I don't know if this is actually real. Back up for a second because I'm moving super fast and I'm going through a bunch of different things. So it can happen to anyone. So make sure you're on top of this. I do not want any wealth builders getting scammed. All right. The next question is from Erellano, is there a time where stopping to contribute to retirement is a good idea, like job change, school moving from two household incomes to one, and how impactful can this be for a year if we don't max out our Roth IRAs in a 23-year plan? Currently, I'm 34 in planning to retire at the age of 57. So, this is a wonderful question, because many times we have a lot of things that can happen in life.
39:54 We have talked to, for example, in Master Money Academy, I've talked to people for who are dealing with child care issues, meaning they have to spend a lot of money on child care. And during this season of life, you know, they can't invest as much as they want to. And sometimes they even have to pause to kind of get their income up to par where they can actually begin to invest again because child care is so expensive. Or they just got married and they had a wedding and they had to take a lot of their investment money and put it towards a wedding. Or like Arirano said here, they went from two incomes down to one or they lost a job or
40:24 all these different things. And there was a time frame. There was a year where I had to do this. I was starting up a couple of different businesses. My wife was working and her job was kind of paying our bills while I was starting up these different businesses. But I paid myself $0 for one year while I was getting the businesses going and getting them started. And when we did this that year, it was actually a pretty impactful thing and I'll show you exactly why. Now, when does it make sense to pause investing?
40:49 One is if you have no emergency fund, because if life happens to you and you have a lot of things raining down on you, all of a sudden, if you have no emergency fund on hand, you're going to have to go into debt. And that is going backwards when it comes to your money. So if you have no emergency fund, it would make sense there. Two, is if you have high interest debt, that is another reason to pause investing and get as many dollars invested as you possibly can. Three, if you have a temporary income drop or your expenses temporarily rise for a short season of time and you don't have enough to go around in all these different places, those are all
41:22 going to be the things where it could make sense to stop. But in all these scenarios, I want you to try to keep your employer match because that at least is free money. And that's 100% rate of return that typically you can't get anywhere else. Now, let's look at the math of this, right? Because the example that Errolano said here was that the math of, let's look at something like maxing out two Roths. Okay. So the 2006 Roth limit is $7,500 each. So for a couple, this is going to be about $15,000.
41:50 Now, $15,000 invested once. at the age of 34, compounded for 23 years, assuming a 7% rate of return would be about $71,108, valued at the age of 57. And if you got a 10% rate of return, it'd be about $134,315. Now, these are hypothetical nominal returns. They're not adjusted for inflation, but it gives you the example of exactly what skipping $15,000 in one year
42:19 could cost you. It can cost you anywhere from $70,000 to $130,000, plus. plus in retirement from missing that one specific year. So here's a couple of things that I will say is you don't want to make this a habit. You don't really want this to go multiple years because it is a big impact on your long-term dollars when it comes to your portfolio. And so to soften this blow, a couple of things that you can do. One, partial contributions are going to be zero contributions every single time.
42:47 If you can get two grand or 100 bucks a month into at least your Roth IRA for the years that you are struggling or the years that you just don't have enough. enough money to go around. Awesome. That's something you should consider. And that is something you should get as much as you possibly can in there because it's going to keep the habit alive. And it's also going to help you just get those dollars. You could see how much that money can grow over time. And it's going to be able to soften the blow a little bit. Two is that 2026 Roth contributions are allowed until April of 2007. So if you get through the entire year and you get towards the end of the year and you're saying, I can't get all of it maxed out for this year. But you still have actually until April
43:23 until tax day of the next year to contribute for your 2026 contributions, which is awesome. If you are on one income, you can still have a spousal IRA, which I think most people need to double check. You can have a spousal IRA or Roth IRA. If you felt as though you couldn't have two Roth IRAs because one person's not working, you can have a spousal IRA. And Roth contributions can come back out tax minus the penalty free as a last resort if you needed to. So those are all just things to consider. Now, is it the end of the world if you miss a year? of contributions because you're trying to start a business or because you just had a baby or just because you went down to one income. No, the risk that you're taking is just losing out on compound
44:02 interest. But if you can get a little bit of money in there or you just feel as though, this is worth the risk for the lifestyle change that I'm going to make, great. Just don't make it a habit. Don't make it a habit that all of a sudden every year this is happening. And if you're taking a vacation to Tahiti instead of maxing out your Roth IRA, well, that's probably something I wouldn't do because that vacation to Tahiti is costing you about $70,000 to $134,000. So, Just making sure that you understand that is super important. But great, great question. I truly appreciate you asking it.
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45:44 Lisa.com promo code PFP. It's kind of amazing how much can change in just a single year. year. Every summer, the kids are a little bigger, a little more independent, and life looks a little different than it did the year before. And it reminds me that while we can't predict the future, we can prepare for it. That's one of the reasons I like PolicyGenius. See, PolicyGenius isn't an insurance company. They're an online marketplace that lets you compare life insurance quotes from some of America's top insurers side by side for free. And their licensed team helps you compare coverage, prices, and terms, answers your questions, and even handles the paperwork so
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47:09 You can even test different scenarios to see how much faster you could eliminate your debt by paying a little, extra every single month. And one habit I personally use is my five minute money drill. Every morning, I check Monarch and I check my spending. I check my accounts. I check my investments and make sure everything is on track. That's what I love about Monarch. It helps you stop guessing and start making progress towards your financial goals. Write your own money story with Monarch. Use code pfp at monarch.com to get your first year of Monarch core half off at just $50. That's 50% off your first year at monarch.com with code PFP. The next question is from Jeff. Jeff says, hi, Andrew, I enjoy the show, but I am not sure if you read these, but thought I'd be interesting to hear what other people in the
47:57 community have to say. The general assumption is that a millionaire has seven streams of income. I'd be curious to hear what other people actually have. Like I believe dividends and capital gains are considered income, but those are reinvested. So I don't see the money until I sell. I'd be curious to hear what other streams, others leverage. All right, perfect. This is a wonderful question. For everyone out there listening right now, if you're listening on Spotify or YouTube or Apple Podcasts,
48:23 leave a comment down below and let me know what your streams of income are. Now, I'm going to explain what counts as a stream of income, what doesn't in a second here. But I think it's really important to make sure that you understand where all of this came from. Now, this is a commonly traced study from the IRS, okay? The IRS looked at, you know, some of the higher earners, and it listed seven categories of income on tax returns. Okay.
48:47 Now the write-up says that only about 29% of the people in the study had more than three streams of income when they looked at this. But either way, their tax form categories, not just side hustles, okay? So what counts as income? One is earned income. Earned income is your salary.
49:02 It's your wages. It's your bonuses. It's your self-employment. All of those things are earned income. Two, portfolio income. This can be things from dividends. It can be interest. It can be capital gains.
49:13 Portfolio income is something that I think most people listening to this podcast have or should consider having if they don't already. Three is passive income and passive income is something that can be truly passive, but there's not much passive income options out there or business income. So this could be things like rental income or business profits or royalties. All those things could be passive income. Reinvested dividends in a taxable account or taxed the year they're paid, even if you never see the cash. So if you have something like a job, plus a brokerage account, plus a high-yield savings account, then you already have a couple of streams of income right there
49:48 that allows you to see how this works. Now, most people have a few streams here. They have the W-2 job, and if you have a spousal income, then you have two incomes, because if there's two people making an income, that's two different sources of income. You have index fund dividends or index fund income.
50:05 You have a high-yield savings account or CD or treasury interest. All of those can be considered different sources of income. Plus, you have capital gains from selling a business, or freelancing or a rent of property, then all of those can be different sources. And then later on in life, you could have pension income, you could have Social Security income,
50:20 you could have retirement account withdrawals, you could have an annuity. So there's all these different ways that you can think about income streams and how many you have. I personally like to have a lot of different income streams. Now, I'm not going to say you need seven income streams because I don't think you do.
50:35 But I like to have a bunch of different ones. So usually when I have a business, I try to look at all the different income streams that that business can generate. For those of you who don't know, I have a lot of businesses that I invest in, a lot of businesses that I own. And I'll give you a couple of different examples, okay? So there are different ways that you can earn an income. And if you look at a business, and let's say you own a coffee shop, okay? If you own this coffee shop, well, what's the number one way that you can have an income stream? Selling coffee. That's number one, okay? But I have
51:07 walked into a coffee shop and they have sold ice cream. That's income stream number two. They have sold pastries. That's income stream number three. Why? Because pastries is a different category than coffee, but a lot of people who are getting coffee also usually want some breakfast or maybe a light snack or some lunch or whatever else. And so you can look at this coffee shop and say, okay, three things right there. Dersers, pastries, and third is going to be coffee. But when you walk into a Starbucks or whatever else, what else did they sell? They sell merchandise. They sell cups. They sell coffee beans. So there is two more streams of income. right there, consumables that you can take home. And so these are the types of things that I think
51:47 about when I start a business is I want to have multiple streams of income. And you can treat your personal finances the same way. What are a couple different ways that you can diversify your income sources. So you're not just relying on one single thing. If you're relying on one person's income and one person's income only and you don't have a portfolio or you don't have an emergency fund or you don't have these other things in place, well, then all of the sudden, relying on that one income means that you are one other person's decision away from having no income because that person's boss can just say, hey, come into my office on a Friday afternoon, you're fired. Now you have no income streams. So that's the most dangerous position that you can be in. And I think for many of us
52:22 out there, we need to make sure that we have at least a couple of different things to fall back on. So your emergency fund is income protection. That's why I talk about the emergency fund so much is it's protecting your income. But secondly, if you have a portfolio in place or you have other ways that you are building wealth, that could be super helpful. So what are some of my personal income streams. Well, me personally, one is businesses, a business portfolio, and I have a number of different ones. So that's multiple streams in it of itself, okay? And that can be something that can be considered one stream for this, what I'm talking about here, but honestly, it's tons of different streams and I diversify the income sources in each of those businesses, just like I talk about
52:56 with the coffee shop example, okay? So I have a ton of different income streams just within the businesses alone. Two is portfolio income. Now, I don't live off any portfolio income whatsoever. I'm building my portfolios to grow larger and larger because I have big goals with those portfolios. And so that is the second one. Three is I have W2 income. So I have W2 income where I work with companies and we couldn't do like a 1099 contract. And so I actually do have a W2 income with with companies that I work with, which is newer. But it is something I have to do based on some of the things that we're doing. So that's the third way. 1099 income is things like consulting, being a contractor for people, helping people with certain things. So I have 1099 income as well.
53:35 that's the fourth way. Five is royalties. I earn royalties for a number of different things, investing in businesses to a bunch of different things. So royalties is the fifth one. And so those are the five major income streams that I have. I used to have real estate income, which was six, sold all my properties. I don't have any properties currently. So those are the five major income streams. Now, number one is really probably 12 to 24 different income streams total. But those are the five major ones that I currently have. So do you need seven income streams? No. You do not. need seven income streams. Do you need to diversify some income streams so that you don't rely on just one income stream? I think you do. I think you should not rely just on your job W2 income. I think
54:15 you should diversify as much as you can. And part of that is just taking a chunk of your money as it comes in and putting it into your portfolio or putting it into your Roth IRA or your HSA. That's why we preach this stuff is because it's so important to diversify those income streams. You're not just relying on one single thing. You have fallback plans. You have backup plans. You have ways that you can access cash in different ways. That way, if someone else makes that decision on your behalf where your income streams go down to zero, you have some fallback things to go back on. So really, really important. But A, I think if you want to make a lot of money, you got to grow that primary income first, take that primary income and then put it into other diversified sources
54:54 that are going to allow you to grow that stuff as time goes on. So really, really great question. And I think it's really important for us to note, you know, how that works. Thank you so much for sending it in. If you have any of their questions on that, let me know. All right, the last question for today is from Nick. Nick says, hey, Andrew, I really enjoy your content and find your podcast, the only one I can consistently listen to and find value. Well, thank you so much, Nick. I'd never grow tired of hearing that stuff. Thank you so much. I've gotten myself in a bit of a pickle financially and could use your advice. I've racked up about $7,000 with a credit card debt on two different cards. I want to get rid of that debt as quickly as possible because of the high APR.
55:33 I can't really eliminate any discretionary spending as I currently pay 70% of my income to needs, and I have a plan with my boss to gradually increase my income, and I am looking at the possibility of a second job, but that will be difficult as I have a child and a wife attending master school. I have a 401k for my previous job valued about $11,000, but other than that, I don't have any investments. I also have about $20,000 in student loans that I have to start making payments on this month. My question is, should I withdraw my 401k to pay off the credit card debt and restores? start my retirement account. I understand I will owe taxes and the withdrawal and will be giving up a good chunk of change to withdraw, but I am only 27 years old and I feel like I can recoup the
56:12 losses over time and eliminate my credit card balance and the stress along with it. I'd really appreciate your advice and I'm looking forward to your next episode. So Nick, this is a tough position to be in with a young family and this is a tough situation to be in if you end up doing this. Now, what is the cash out cost? Let's just look at this for a second. Let me do the math. really quick. Before 59.5 on ordinary income plus a 10% additional tax, this can cost a couple of different things. If you're in the 12% tax bracket, it would cost you approximately $8,580 is what you would net out if you took that money out. And so it would be, you know, 1,100 for the 10% penalty and about 1,320 for the federal tax. If you're in the 22% tax bracket, you would net about $7,480
56:59 and the penalty would be the same. But the federal tax would be $2,000. $420. So I did the math for you beforehand. If you left it invested until the age of 65, $11K could become $143,900 at a 7% rate of return and $411,400 at a 10% rate of return. So there are better ways to attack the $7,000 than taking it out. I'll put it that way first. I would call both issuers, and most people don't know this, and first ask if you can lower the APR and say, can we negotiate this interest rate? I cannot pay this balance at the current APR. Can you please lower the APR?
57:37 Give them the stop story. Tell them, hey, I've got a little baby here. I've got a family. And I'm just trying to do the best possible thing for my finances. Okay? Two, you can look at something like a zero percent balance transfer card if your credit allows you.
57:50 The fees are often 3 to 5 percent to transfer this over. But if you feel as though you could pay this off in a year, if you really locked in at 0% if you could get this money done, I would say do that first. Then making sure that you're making minimums on all the cards and then paying off the lowest balance first
58:06 is super important because I want you to make sure that you're getting after it and getting some wins there and getting that done. And then from there going step by step. If you have extra money coming in, I want you to throw the extra dollars, I don't care if it's $10, $20, $30, $40, $50 towards this. If you have stuff to sell in the house,
58:21 I want you to sell that stuff in the house and throw it towards this. But I would not interrupt compound interest in your 401K because of the opportunity costs of having $143,900 or $411,400, depending on the rate of return of your hypothetical returns inside of this account. It's a $100,000 decision for a $7,000 credit card debt. And I would be cautious about taking dollars and putting it towards that. Now, let's think about student loans for a second too because that does restart.
58:53 If that does restart, you know, you want to make just the minimum payments on the student loans until you get the credit card debt. done, then you can go back to these student loans for that time frame. Now, other options that you have on hand, and I don't like any of these options, but these are just backup options you can think through. There's a personal loan that will lower your interest rate potentially, but you want to get it off as fast as possible. There's closing costs, things like that. So you just want to be cautious about that. I don't love it, but this is just another option to think through. A lot of times those go at like 11, 12%. It's still really high interest debt. You would still really need to attack it, but I want you to think through that too. Secondly, is 401K loans. Really
59:26 don't want you to do that either because it's interrupting common interest for a short period of time. But if it does allow you to do a 401k loan, you could usually do like 50% or so of the 401k. Those would be in my last two resorts if I looked at this route. And then lock in some dates on your income. I think increasing your incomes would be the number one thing you want to focus on. I know you and your employer are working on that. Side hustle wise, if you have time, you could drive. Like, this is where I'm actually a proponent of doing things like Uber Eats. If it makes sense based on like, you know, evenings, weekends.
59:53 You know, if you can take every extra dollar that you make from Uber Eats or something like that and put it towards your debt to get that paid off, that's when I'm a proponent of it, not for like long term or anything like that. But in the short run, to get your income increase to get that dead paid off, I think that's super, super important. So thank you so much for sending that question. I truly appreciate it. I hope this is helpful. If you listen to the episode I just did on 19 different ways to pay off debt faster, that episode gives you a ton of tactics and tips that I would love for you to check out. Even the micro payments, I think it's so important to do stuff like that. You will get ahead and you will get it paid off quickly if you do
01:00:26 that kind of stuff. So don't pull from your 401k if you can at all cost. That is the last thing I want you to do. Instead, look at some of these other options that are here. Well, thank you guys so much for listening to this episode of Money Q&A. If you guys have any questions, feel free to shoot me an email and send in your question there. If you join the newsletter, you can just respond to any of those newsletters. And I, you may get your question answered here on the show. Also, if you want to work with me one-on-one, again, shoot me an email, Andrew at mastermoney.com. If you make over 100,000, $100,000 per year. If you don't make over $100,000 per year, you can join Master Money Academy, where you have group coaching every single week. In fact, I'm about to do a coaching call right after this
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01:01:41 I hope we did that today. If we did, consider leaving a five-star rating and review or subscribing to the show or both. And share this with a family member or friend who can learn more about money. All right, thank you guys so much for being here. I truly appreciate each and every single one of you. and we will see you on the next episode.