What’s the eighth wonder of the world? Listen in to find out! This week, Josh & Austin discuss the importance of investing when you are young. They discuss having an emergency fund, paying off debt, and how to practically invest your money after you start getting a steady income. The Invested Dads are passionate about young people learning this lesson, especially because it can have a huge impact on a successful retirement.
Main Talking Points
[2:18] – Emergency Fund
[6:10] – College Debt & Saving
[8:35] – Time & Investing
[15:44] – “I’m Scared To Lose My Money”
[20:20] – Methods of Paying off Debt
[26:20] – Dad Joke of the Week
[27:17] – Practical Applications for Young Investing
[34:33] – Tips for Investing Young
[41:23] – Good Vehicle for Savings
Links & Resources
032: Understanding Different Account Types
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast. That’s the podcast where we take you on a journey to better your financial future. Today, we’re going to discuss something that Josh and I are pretty passionate about.
Josh Robb:
That’s right. Cake versus yeast donuts, which is the best?
Austin Wilson:
Okay, so first of all, I have to go with the answer’s yes. I like both, but if I were to gun to my head, how to choose. I’m going to go yeast.
Josh Robb:
Yup. Yeast?
Austin Wilson:
I like the fluff.
Josh Robb:
Yeah. It’s lighter. You can have six without feeling as full as you can a couple of cake doughnuts.
Austin Wilson:
Or 12 if they’re hot.
Josh Robb:
Yes. Oh man. When they’re warm.
Austin Wilson:
Like crispy cream when they had the light on or whatever, you can go get free ones. Oh, they melt in your mouth.
Josh Robb:
Exciting.
Austin Wilson:
But real, we’re actually talking about fun things, not quite donuts. So not quite that fun, but pretty fun. We are going to be discussing investing specifically as it relates to young people. So we’re going to talking about some pros, some cons, some numbers, some statistics bring a nerd out a little bit and we’re really going to answer the big question. “Should I invest when I’m young?”
Josh Robb:
Yeah. That’s what a lot of people ask us especially when they’re coming out of college or early 20s is, “There’s a lot of things going on, is it all right if I wait because I have student loan debt. I’m looking at maybe getting a house, I’m maybe just getting married, I got to buy a car.” All that fun stuff, leaving college adds up and they said, “Okay maybe if I just wait a little bit on this investing thing, I’ll be making more money later. I can save more.” And so that’s, you’re right, a big question we get. And so one of the things we’d like to talk about with young people are there’s a lot going on in your life and so that’s break that down a couple of different pieces and work through the things you should be doing as a young investor and a young person that’s going to be financially savvy, putting all these pieces together.
Austin Wilson:
And we may not be spring chickens.
Josh Robb:
Yes.
Austin Wilson:
Though we’re close enough, but this isn’t that far-
Josh Robb:
It’s not too far to that.
Austin Wilson:
… from all we’ve been doing. So hopefully we can provide a little bit of insight that helps people in very practical ways.
[2:18] – Emergency Fund
Josh Robb:
Yep. And the first thing, we’re going to just walk through this list. The first thing is an emergency fund. And you’ve heard us talk about this in the past. But the idea there is life is not guaranteed to be simple and easy.
Austin Wilson:
Wait, what?
Josh Robb:
In fact, usually when you have plans for something and you start saving up, “I’m going to do this.” Something else is going to come along and need that money, right? Everybody’s been there, right? I’m going to save it for this cool vacation and then your car needs new tires or whatever. And so that’s the idea of an emergency fund. It’s there for the emergencies that shows up. Because the worst thing that could happen to someone is they don’t have that money available and they’re forced to find the money in ways that’s going to cost them down the road. Like putting money on a credit card. I have my own opinions on credit cards. I think they’re fine if you can control your spending and you pay them off every month to avoid the interest because credit cards can charge you a lot of interest, 24% or more
Austin Wilson:
Craziness.
Josh Robb:
It’s crazy. And if you don’t have the means to pay for something and he put it on a card and it takes you a couple of months or a year to pay it off, you’re paying extra money on that. So an emergency fund is the first provider. So young people, that’s what we say first and foremost is you need to be able to cover those unforeseen events. Now, depending on where you’re at and your situation, and I know we’ve talked about this in prior episodes, it depends sometimes it’s three months, six months. If you’re single, you want to be a little bit more conservative because you don’t have other income to offset you. But if you’re married and you’re both working, that’s dual income, you could float your way through with less of a safety net.
Austin Wilson:
Or if you’re the sole provider, you should probably err on the side of conservative and have more saved up.
Josh Robb:
Yep. Now, if you’re renting and having some roommates, maybe there’s fewer costs you have to worry about. Just take that in consideration, but have some money set aside that if your car breaks down, if something happens, you have some money to cover those needs.
Austin Wilson:
And a practical note on the emergency savings is do it, get it out of your sight.
Josh Robb:
Yes.
Austin Wilson:
So when you build that up, a practical thing that I’ve done with my family’s emergency fund is open up an online only savings account that’s not tied. It’s not at your bank.
Josh Robb:
You don’t see it every day.
Austin Wilson:
Yep. So you can just automatically transfer it over there, and then you never look at it. It just sits there and actually those online only accounts can provide a little bit better interest too. So kind of a double benefit there.
Josh Robb:
Yep. And you mentioned the other thing too, is make it automatic. If you’re saving towards this emergency fund, you don’t have it quite where you want it yet, automate your savings there. Make it automatic. Don’t rely on yourself remembering and keeping enough money there to do it because everybody knows, if you don’t have any idea what that money’s for, it’ll find a way to spend itself.
Austin Wilson:
That’s right. It’ll disappear on its own. And automation is key into a lot of things. That’s what we’re talking about today. So automate, automate, automate. If you don’t have to think about it and it just happens, you’re like, “Oh, I guess it happened.”
Josh Robb:
Yeah. There you go. That’s the concept of paying yourself. You make it a priority to set aside the money. The other thing to do along with that is if you get extra money, that’s unexpected birthdays, tax refund. That’s an easy way to quickly build up that emergency fund because it wasn’t money you’re counting on. So it shows up instead of spending it, sock it away, put it in that savings account until it’s where that level you like it and then that can go back to being your fund spend money. But in the short term a tax refund or a birthday cash or something like that, that’s an easy way to build up that account quickly.
Austin Wilson:
Yup.
Josh Robb:
All right. So that covers the short term and the reason why that’s first and primary is if I am… let’s say I want to save for my retirement. I’m going to open up a Roth IRA to save or some sort of retirement account. If a short-term need shows up and I’m putting my money towards retirement, I’m going to get frustrated because now I’m going to have to either pull money out with a penalty or find some other way to cover that.
Austin Wilson:
We do not like any of those options.
[6:10] – College Debt & Saving
Josh Robb:
No. That’s why that’s why short-term needs need to take priority first. Get that taken care of before you look long-term. Once that emergency fund is set up though, then it becomes this balancing act or what I like to say, moderation of balancing all the different goals that you have for your life. So if you’re a young person, chances are, you’re going to have some sort of debt. Most college students coming out, have some sort of college debt. Again, my views on college debt. I don’t think there’s something wrong with it because you’re adding… there’s a value to that debt. It’s not like you are getting a car with debt where the minute you drive it off the lot it’s losing value and it’s depreciating over time.
Your education provides an opportunity that was not available without incurring that debt. So as little debt as possible obviously, but having some college debt in my opinion gives you value for it. Now, that’s the other key is make sure that there is value there. So depending on what your major is, will determine how much debt you should take.
Austin Wilson:
That basket weaving… probably rather low.
Josh Robb:
And there’s some great jobs out there that just don’t pay a lot, but they’re fulfilling in other ways that you just don’t need $300,000 of debt to do those jobs. All right? I had a friend who I knew was getting his master’s in Library Science. Now you can do a lot of things with that, but librarians don’t get paid a lot of money. And so make sure that, that debt load matches what you’re going to earn so you can pay it off. And so there’s awesome stuff you can do with all these different degrees, but make sure that when I leave school and I’m going to find a job that it’ll pay me enough to get me to pay off that debt. So coming out of there, that’s one goal you’re going to have, paying off this debt.
The other goal is, “I’m going to save, I’m going to be saving.” Like I mentioned, maybe for a house, maybe for a wedding that’s coming up, for kids, all the fun stuff that costs money kids aren’t cheap. I need to say for.
Austin Wilson:
How do you know?
Josh Robb:
Yes, I know I got four of them. They’re very expensive. But those are short-term goals and I need to find a way to save for it. And then I’ve got to balance those two goals with the long-term goal of retirement. Because if I’m in my 20s, I’m not looking for retirement and probably for another 30 plus years. And so that’s the thing where it’s like, “Okay, I got all these goals, all different timeframes. What am I going to do?” And that’s where that moderation comes in.
Austin Wilson:
So you mean people should be thinking about long-term goals even in their early 20s.
Josh Robb:
Yes. And that’s where we’re going to get to next is we’re going to be throwing out some stats and some reasons why waiting is not the best idea for retirement.
[8:35] – Time & Investing
Austin Wilson:
Yeah, so Josh…
Josh Robb:
Yes.
Austin Wilson:
Time, father time. Think the guy with the hat and the clock.
Josh Robb:
Yeah, beard and all that fun stuff.
Austin Wilson:
We should have some picture with us with like a clock around the neck.
Josh Robb:
Oh, man.
Austin Wilson:
That would be pretty bolly.
Josh Robb:
If you had bet that the S&P 500 before it hit all 10 buys, you weren’t cutting your hair. If you were growing your beard out during that time.
Austin Wilson:
Oh wow. My wife would not be happy.
Josh Robb:
Man, that would have been a decent beard.
Austin Wilson:
It could have been a little… Yeah, Okay. So father time. Let’s talk about time as it relates to young people. So you mentioned that for a young person coming out of school, they’re 22 years old or whatever, not going to be retiring for 30 or 40 years. 30, 40 years is a long time.
Josh Robb:
It is.
Austin Wilson:
It’s longer than these people have been alive. So why would you want to care about something that’s so far away when honestly there are things that you could use that money for in other places now.
Josh Robb:
Yes. So the reason for that is compounding and they always give this, and again, I’ve looked it up online. No one can track it back to the actual quote, but they say, Albert Einstein said, compounding is the eighth great wonder of the word.
Austin Wilson:
Eighth wonder of the world.
Josh Robb:
Now they can’t officially find that quote. But it’s a great quote, regardless of who originally said it.
Austin Wilson:
That’s right. If they even made it up. It makes sense.
Josh Robb:
Who cares. It is true because the power of compounding is really unmatched by any other scientific concept and what it can do for someone who takes advantage of it. And so what we’re talking about is the ability for the money you earn to be earning more each time. So here’s an example is if I have a dollar and it doubles to two, and then that doubles, it doesn’t go to three it goes to four because each dollar now is doubling. And then, so one to two, two to four, four to eight, eight to 16, 16 to 32. And so the idea is the longer you have to let this compound, and that was a extreme example. Things don’t double quickly like that in investing, but the concept there is that’s the compounding over time is each then additional dollar is added to that base to then compound on it.
Austin Wilson:
Yeah, for example, if you have a dollar and you invest and you get the average return in the stock market about 80%, yep, you have a dollar eight and then that dollar eight earns a dollar eight and then that earns a dollar 8% per year. That is the example that we’re talking about. And wow. It is incredible.
Josh Robb:
Yep. And that’s huge because you have your money working for you. And the key is you’re adding new money while it’s also growing. And that’s the ability for people to invest and create that wealth over time. So compounding is what we’re referencing. That’s why the younger you are, the sooner you get started, or the longer time you have, the more your money will compound and the better it is. Or better way of putting it for people, the less you’ll have to invest because you’re letting it grow. And so we have done some stats and some stuff here on talking through that. And so the first thing I have is very depressing when I talk to people that are older, because this shows the missed opportunity of compounding.
Austin Wilson:
Yes, the cost of waiting.
Josh Robb:
Yeah, the cost of waiting is what we call this. And so if you are age 20 and you just set the goal that I’m going to save $6,000 a year, that’s 500 bucks a month, from now until age 65, I’m not going to increase. I’m just going to save $6,000 a year. And you get that 8% return that Austin was talking about, that’s the longer term average for the market. If you did $6,000 a year from 20 day 65, you would have $2.5 million saved at the end. Awesome.
Austin Wilson:
That’s a lot of money.
Josh Robb:
All you do is put in $6,000 a year. That’s great. Now if you say, “Well, that’s a great idea, but I’m really busy. I’m a 30 year old and I’m going to start that.” If you did it from 30 to age 65, and you put in your $6,000 a year or on 8%, you’d have just over $1.1 million, which is meaning you missed out on 1.3, almost $1.4 million.
Austin Wilson:
For 10 years.
Josh Robb:
By waiting 10 years.
Austin Wilson:
Yeah.
Josh Robb:
All right. And then to depress people even more, if you’re 40 years old. So that’s when a lot of people really get serious about saving when you talk about retirement and stuff, that’s when they have that ability to start kicking in more money into their 401(k). If you waited to 40 to start, you put your $6,000 in a year earned your 8%, at age 65, you’d only have, and I say only. It’s almost half a million dollars, $473,000. Still a lot of money but you missed out on over $2 million of all that money being able to grow into your contributions.
Austin Wilson:
That’s why compounding while it’s great, it’s also a double edged sword. Because if you don’t take advantage of it, it’ll hurt you. Because it works just as much as it works in your favor, not taking advantage of it is working against you.
Josh Robb:
Yep. Another way of looking at that is we show these three people. We have Karen, John and Tom, we just made up the names. I don’t know anybody that particularly subscribes to these people, but we just had to pick some names. So Karen listened to that advice. She started at 20 and she said, “I’m going to invest $5,000 per year for five years. So I’m going to put $25,000 in and then I’m going to wait till age 65. I’m one of the only invest for five years.”
Austin Wilson:
Yup. $25,000 of her own money.
Josh Robb:
Yes. All right. And then John, he listened to our advice but he didn’t hear this podcast until he was 25 years old. So he said, “You know what, I’m going to do $5,000 a year and I’m going to do for 10 years because I’m late, I need to play some catch up.” So he’s going to put in $50,000 twice as much as Karen did. All right, then poor old Tom here, Tom, he missed out. He waited until he was 35. So 15 years later than Karen. He says, “All right, I’m going to do $5,000 a year just like they did. I’m going to do it from now until I’m turning 65. So I’m going to do it for the rest of the time. I’m going to put $5,000 in.” So Tom ends up putting in $155,000, right? So Karen’s got 25,000 in, John’s got 50 and Tom’s got $155,000 in. All right?
Now I think I’ll used a 10% rate on this just for simplicity sake. But regardless, the percent doesn’t matter because the differences are the same, give or take. At age 65, Karen will have $1.6 million from her initial investment.
Austin Wilson:
From $25,000 of investment.
Josh Robb:
Yeah, she put in 25,000, she gets 1.6 because she allowed that to grow. John also gets 1.6 million, but he had to put twice as much in as Karen did because he waited five years. And then poor old Tom, he waited till he’s 35. He only has half of what they do. He has $845,000.
Austin Wilson:
And he put in multiples of what they put in.
Josh Robb:
$155,000. Yes. That again is just an example. Again, we just ran the stats on these, made up people just to show you that the sooner you can get those dollars compounding the better. And that’s key. And this comes back to that moderation is you don’t have to go all in and take every dollar you earn and save it, but setting that habit. And that’s the other thing that we’re going to talk about is creating the habits. Setting just the habit of saving. Setting some money aside, not spending all of it will go a long way to helping you grow. And even a couple of dollars at 20 is more powerful than a couple of dollars at 30 or 40. And so just even putting a little bit in, at a young age, matters.
[15:44] – “I’m Scared To Lose My Money”
Austin Wilson:
So Josh, what would you say if a young investor who watches, they’ve seen the news, they watched March and February happen this year, right? What would you tell a young investor who says, “I am scared that if I start investing that I’m going to lose all my money.”
Josh Robb:
Yes. That’s the other cool thing about time.
Austin Wilson:
Time.
Josh Robb:
Time is more valuable, more powerful than the volatility. And so the longer time I have, the less when I invest matters. So if I come in at a market top and start putting my money in and it drops, if I have enough time that becomes less and less relevant. And so going back, we created this guy. I love naming them. So this guy was Bob. Bob was the worst investor in the world. And I say that in that he was a great saver. He actually put money away every month. He put it in a savings account that when he felt good about it, he’d invest that money. Unfortunately for Bob, his timing was horrible. Every time he felt good about putting his money in, guess what, it was right before the market dropped.
Austin Wilson:
He’s buying tops.
Josh Robb:
Yes, he is buying at the absolute top. And since we can look backwards in time and know when it is…
Austin Wilson:
We’ll try to pick those tops.
Josh Robb:
We can simulate the worst timing Bob in the world. And so if Bob started back in the ’70s and was getting ready for retirement, now heading into retirement. We simulated. If he did saving about $2,000 a year, and every decade he increased that by $1000, just simulating growth of his income. The dollars don’t matter, because we’re going to talk percentages. But the idea is he saves every year. He does his job of saving. It’s just a matter of when does he choose to invest? To get your point of that fear of getting into the market. So we simulate that and say, “How did Bob do out through his whole working career?” If we do real historical returns back into the ’70s through now, he would average over a five and a half percent return on his portfolio, which is less than the eight, but it’s still a decent return considering he only put money in right before it dropped. So the compounding and in fact, he would contribute it based on our parameters that we set up. $259,000 throughout his whole working career. He would end up with 760 some thousand dollars.
Austin Wilson:
Yeah, he dropped a lot of money.
Josh Robb:
Yeah, he’d have over $500,000 growth on his money even when every time he invested it, it dropped. And so in fact, I think the last three big bear markets he experienced, he never dropped below his investment in amount because he had so much growth at that point. He still lost money, but it never dropped below his contribution amount. And again, that shows the power of compounding in time.
Austin Wilson:
And something that we really talk and care a lot about is systematic timing of your investments. So if you are normal, you’re working person, you have a paycheck coming in every couple of weeks, every month, whatever, if you automate that saving once every month or whatever, and you’re automatically buying once a month, then you will not ever time as bad as Bob.
Josh Robb:
That’s right.
Austin Wilson:
And what’s going to happen is that you’ll buy sometimes when it’s expensive, but you’re also sometimes going to buy when the market’s down because you’re buying regardless. And what’s that called Josh?
Josh Robb:
That is called dollar cost averaging.
Austin Wilson:
Music to my ears.
Josh Robb:
Yes, you’re averaging the cost if each dollar that you’re buying is really… you take those words and spread it out. Dollar cost averaging is saying, “I don’t care what the price is, I’m going to buy every set time period and I’m going to do that over a long period of time and I’m going to average out the cost throughout that time.” So if someone dollar cost average from 2007 through 2009, guess what? Not only did they buy everything cheaper as it went down, they bought things as it went back up and over that long run, they averaged out that price to really mute all that volatility from their purchasing side of things. So it’s the best way of investing and you’re right. 401(k)s, they do that automatically. So you have your paycheck, every paycheck, your 401(k) is making a contribution for you if you’ve elected to do that. That’s dollar cost averaging. Most people are doing that. If they’re contributing to that 401(k), that’s how it works.
You can do that yourself by, again, just automating your movement. Saying, “Okay, every time I get paid, I’m going to have this amount of money moved into an investment account and invested. It doesn’t matter what’s going on. I’m not going to put any emotion into it. I’m just going to let it happen. It’s huge.
[20:20] – Methods of Paying off Debt
Austin Wilson:
Dollar cost averaging. Remember that. But between that and compounding, those are the things you need to think about as a young person when it comes to investing. So debt, you mentioned debt earlier, a lot of people coming out of college, student loans, maybe they have a car loan, maybe they have all of these things. You have credit card debt who knows what it could be. So debt. I’ve heard a couple of terms that you can use to pay off debt and I want to hear your opinion on them. So one is called, somehow they’re both related to winter. Like, I don’t know. So be ice man and tell me, what’s the difference between snowball and avalanche and which is better.
Josh Robb:
Yeah. So, and again, these terms are just used to describe the concept. So the snowball method, if you take a snowball, it starts out small in your hand and if you roll that down a Hill, you’re going to grow over time, right? The snowball is going to roll and pick up more snow and get bigger and bigger. So the concept with the snowball method is you list all of your debts, take everything you have, list all the debts in order from smallest balance to largest balance. So if I owe $20 on this department store credit card or whatever, this something that I purchased and then I have this $20,000 student loan debt or something that I’m still paying down. I order them smallest to largest, and I pay the minimum amount on everything, but the smallest debt that’s on my list.
And I put as much money as I can towards that, pay that off, and since it’s the smallest dollar amount, it will be paying that down pretty quickly. And then once that’s done, I take all that payment, move it to the next one and you just work your way up the debt level from smallest size to largest size. And so Northwestern’s Kellogg School of Management did a study back in 2012 and they found that consumers who use this method to pay down debt are more likely to you eliminate all their debt than trying to pay it off using the avalanche method. All right? Now, let me explain the avalanche method and tell you why some people choose that route. So the avalanche method is the opposite. You go from highest interest rate down to lowest interest rate, and you focus on the highest interest rate first.
The cost of being that’s where I’m paying my most money from interest standpoint. And so I pay the minimum on everything, but the highest interest rate and then work my way down. Now, again, credit card debt is a high interest rate, which a lot of times there’s a smaller debt than maybe a student loan debt. So again, the order could be similar or close, but the concept there is you’re focusing on interest rate. Now, the reason why people choose that is from just straight math, you’re actually going to pay less money over the whole timeframe using the avalanche method because I’m saving interest over however many years, it takes me to pay off that debt. Either of those methods work. Statistically, they found from those research that you do better with snowball method and the reason for that, they found it’s psychological. Smaller debt dollar amount means I get it done quicker.
Austin Wilson:
Get a win.
Josh Robb:
I get a win right away. It feels good.
Austin Wilson:
Yeah, do it again.
Josh Robb:
Look at this, I’m making progress, let’s keep going, right? Whereas if I’m tackling the largest interest rate and it maybe happens to be my biggest balance…
Austin Wilson:
It’s going to be there awhile.
Josh Robb:
It may take a little while and I may get frustrated. So my answer is whatever method you’re most likely to stick to, do that. And so just a quick example, I put this scenario and I gave two different debts to Susie and Joe, same amount of debts, they just wanted the avalanche one did the snowball. I’m not going to go through all the details, but when I ran the numbers, the difference was minimal. In other words, interests especially if you’re going to pay it off over a year or two, it won’t compound enough because you don’t give it enough time. We just talked about the power of time. You don’t get enough time for it to compound that either one matters. Just get the job done. So if you’re an analytical person and saving every penny matters, maybe the avalanche method works because you know, you’re saving money and you can stick with it. If you need to get those wins and you want to see those drop away and then go the snowball method. Either way, just stick with it.
Austin Wilson:
Do what works for you but make sure that you have a plan and you stick with it. That’s the key there. So moderation Josh. I think if listeners would have a tally for every time in every episode that you’ve said moderation, they’d have a notebook full by now.
Josh Robb:
Yes, that is something that I harp on a lot in that when you see the world, it’s not black and white. There’s a lot of shades in between and it’s not just a one or the other for a lot of things in life and investing is that way. Financial planning is not a here’s one way that fits everybody. You make adjustments for everybody’s situation and that’s where that moderation comes in. Should I pay down more debt? Should I save? Well, what are your goals? What’s your situation? What stress kind of load does that put on you? There’s some people that just are anxious about debt. If that’s the case, you really need to focus on that because for your emotional wellbeing, don’t hold that debt any longer than you have to. But then for other people debts are relevant to them.
They know I’ll get it done when I need to. To me, the win is seeing that growth in that compound and seeing that value. And so it’s different for everybody, but that moderation means I’m not neglecting one goal for another and that’s where it comes in. And we’re going to give you some tips at the end of this podcast, on ways you can get through each of these and enhance or better manage each of these pieces, but from a debt standpoint and an investing standpoint, I don’t see as one or the other. I think you should be doing both, especially at those young age. That 20 to 30 timeframe is huge for compounding, for both sides. If I allow my debt to go from 20 to 40, guess how much that was allowed to come on, because that’s compounding the other direction.
Austin Wilson:
It’s going the wrong way.
Josh Robb:
And so I need to focus on both sometimes in my life and maybe one over the other. If I’m going to be preparing to buy a house, I may want to eliminate other debts so that when I’m getting my mortgage, I’m not penalized and getting additional interest charged for me because my burden’s too high. Or I may need to slow down my long-term investing for short-term investing to get a down payment. I understand all that. That’s where that moderation comes in, but I don’t neglect one whole goal and completely eliminate it for something else.
[26:20] – Dad Joke of the Week
Austin Wilson:
Right. There’s puts and takes. It’s just a matter of giving every dollar, a place where it should go and planning for it. So Josh, I heard that you brought me something to work today.
Josh Robb:
Did I did. All right. I just lost it. I had to pull it up. Hang on a second. There it is. Okay, I’ll give you. All right, dad joke of the week.
Austin Wilson:
Dad joke of the week.
Josh Robb:
What kind of shoes do ninjas wear?
Austin Wilson:
What kind of shoes do ninjas wear.
Josh Robb:
Remember this is a joke. Not like a historical fact.
Austin Wilson:
Okay because I was about to give you the real answer. It’s like true ninjas don’t wear shoes.
Josh Robb:
That’s right. No, you know what they wear, sneakers. That’s what they wear.
Austin Wilson:
Sneakers. Okay, and back to…
Josh Robb:
Side note, by the way-
Austin Wilson:
Side note, you don’t wear shoes.
Josh Robb:
… I’m allergic to cats, but we have a cat because-
Austin Wilson:
So funny.
Josh Robb:
… my daughters wanting a cat and guess what, we have a cat. It’s an outdoor cat though so I’m safe. But guess what the name of that cat is, Ninja.
Austin Wilson:
It’s Ninja the cat?
Josh Robb:
It’s Ninja. It’s a sneaky little cat. It tries to get in the house all the time.
Austin Wilson:
It’s like Houdini.
Josh Robb:
Yeah, it’s crawling on stuff.
[27:17] – Practical Applications for Young Investing
Austin Wilson:
All right. Back to your regularly scheduled podcast. So let’s talk about being practical.
Josh Robb:
Yes.
Austin Wilson:
I like being practical. Yeah, apply this.
Josh Robb:
We think we’re practical people.
Austin Wilson:
Let’s apply this. Some goals that you could, these are not perfect. These are very high level, but some goals that you could set for your long-term savings over time.
Josh Robb:
Yeah. So a lot of people ask that question. How do I know if I’m on track? That’s the question, right? And so they said, “Is there a number I need to know? I need to save by certain ages?”
Austin Wilson:
How much should I have saved by 30, 40, whatever.
Josh Robb:
Yeah, at 30 how much money should I have? And again, everybody’s financial plan is different. So I may say you need $60,000 because that’s how much to get you on track to your end goal. Then the next person who walks into my office may need $90,000. Who knows the dollar. So it’s a hard answer, but Fidelity Investments, which is the nation’s largest retirement plan provider, they have on their website a timeline that is a rule of thumb. So they just say from a high level standpoint, if you want to use these benchmarks as a checkpoint of, “Am I at least on track to what the average person in the US is doing?” At age 30, you should have one times your salary. So if I make a $100,000 at 30, I should have saved $100,000.
Austin Wilson:
In your retirement.
Josh Robb:
Retirement, some sort of savings that’s designed for that long-term. Like if you’re looking for retirement, that’s what I was looking for. All right? And the same is true if I’m $60,000, I need to save 60. The dollar amount still matter it’s percentage. So one times my salary. When I turned 40-
Austin Wilson:
10 more years.
Josh Robb:
… I need three times my salary.
Austin Wilson:
So you need to save two times your 30 salary in your 30s. Does that make sense?
Josh Robb:
I guess.
Austin Wilson:
Did I say that right?
Josh Robb:
But Keep in mind, everything’s growing over that time.
Austin Wilson:
Exactly.
Josh Robb:
So if I got hired at $30,000 when I was 20, right? I’m an entry level person, but by 30, maybe my $20,000 job, I’ve had increased salary promotions. Now I’m making 50. So, that number is moving along with your track. So you got to keep that in mind.
Austin Wilson:
Got you. Yeah, for sure.
Josh Robb:
At 50, you need six times, your salary. 60, you need eight times your salary, and then at 67, which is full retirement age right now for social security purposes, you need 10 times your salary. And that’s really what this is all based off of that a retiree can live off of 10 times the salary they had when they left which is assumptions are built into that. Like for instance, part of your income will be offset by social security because that’s why they’re using that 67 age. And then second all, that you’re going to spend less in retirement than you were making while you were working. So they have some assumptions built in there, but that’s a rule of thumb, not a hard line, but just to check point, especially early on that, “Am I at least on track?”
Austin Wilson:
Yeah, as you get older, it’s probably wise to sit down with someone who can go through your actual numbers, your actual situation, look at what you actually think you’re going to need to spend in retirement and your lifestyle you want to have and all that stuff. You can get very detailed especially as you get closer to retirement, but yeah, as a 20 or 30 year old, this is a bougie, right?
Josh Robb:
This a good point. Yes, and the other thing with that, like you mentioned, is when you are closer to retirement, building an actual retirement plan is very useful to project forward and say, “Okay, here’s what I’m doing. What would that look like at the year I’d like to retire? Do I have enough saved?” So with that comes the assumption, “Well, how much can I take out of my portfolio.” The average person, if there’s a couple and you’re both alive in your early 60s, life expectancy for both of you or for one of you that one of you will survive until your 90s is very high. In fact, the life age expectancy is in the early 90s.
Austin Wilson:
Yeah, it’s definitely going up.
Josh Robb:
That’s saying that if you have a couple, one of you is going to see the 90s, at least one of you and so you need to plan for that. So they used to have this rule a 4% rule, meaning I could withdraw 4% every year from my portfolio. The first year I retire, I take 4% out. Then every year after that, I’d be able to increase it for inflation and I would not run out of money for my retirement. That used to be a great rule of thumb. People are living longer.
Austin Wilson:
Yes.
Josh Robb:
Cost of healthcare, everything is getting expensive. It’s debatable now. There’s a lot of research out there. Now there’s some things you could do to make that work and there’s actually, you can take a little higher withdrawal rate based on certain rules and criteria, but in general, that’s another way figuring out. If you say, “I know how much I’m going to spend in retirement or know how much I want to spend in retirement.” And you could then divide that by 4%.
Austin Wilson:
I’m doing an example.
Josh Robb:
Do it right here. Yeah.
Austin Wilson:
This is live.
Josh Robb:
Live right here. He’s got his calculator.
Austin Wilson:
I need $100,000 in retirement.
Josh Robb:
Because I had that right here. Go ahead.
Austin Wilson:
I’m going to divide that by 4%. So I need to have two and a half million dollars.
Josh Robb:
Correct.
Austin Wilson:
Saved up for retirement if I want to be able to withdraw $100,000 to live on in retirement.
Josh Robb:
Yup. So then that becomes your target. It’s like, “Okay, now that I know I need two and a half million dollars, how do I get there? What do I need to save to get there?” Then you work backwards from there. What I need to say.
Austin Wilson:
Because yeah, theoretically, if you’re earlier in your career, you know how much money you make now you could high level as soon you get up inflation style raise over time and inflate your salary by 3% a year or whatever until you retire, then find out how much that would be. And that’s how you can back into a number.
Josh Robb:
Yep. And so again, that’s a lot more useful closer yard to retirement because again, what I spend now with four young kids will be different than what my wife and I will spend in future years when it’s just the two of us. But with everything inflated, the dollar amounts may be similar, but what we’re spending it on and how much we’re spending as a percentage of what we’re bringing in will change.
Austin Wilson:
Josh, you could have some really expensive tastes by then.
Josh Robb:
You never know. Donuts could get really expensive.
Austin Wilson:
Build that in.
Josh Robb:
Yes. And so some estimates or some goals there that’s a good benchmark. I was going to point out too that when we’re talking about that savings, right? And the reason why this part especially for young people, is the median. So 15 percentile that middle person of retirement people from 32 to 65.
Austin Wilson:
Big range.
Josh Robb:
Yep. But those are the people. $5,000, that’s how much they have saved in retirement account.
Austin Wilson:
That’s abysmal.
Josh Robb:
Yes. That is sad.
Austin Wilson:
That’s a big word.
Josh Robb:
I mean, again, the young age’s at 30, 32-ish, but that’s 10 years of working. If you get out of college and start working, you’ve already had 10 years in the median, the middle age or in the middle saved for all those ages is $5,000. So, that’s the point where this is huge. You can really set yourselves up for success if you start saving early.
Austin Wilson:
What that also means is that half of the people have less than $5,000 saved.
Josh Robb:
Yes, that’s even scarier.
Austin Wilson:
Because when you’re looking at statistics in big groups, in this specific instance it’s better to use this style when you’re looking for median, middle versus mean because there are some crazy savers out there who would skew things very high and we don’t want to do that. So middle, $5,000.
[34:33] – Tips for Investing Young
Josh Robb:
Now they’re taking… Yeah, so the idea there is you don’t want to be in that position where working past an age where safely you can do that, but you’re forced to that’s the worst scenario is that you need to retire and you can’t. And that’s the goal that us as financial advisors trying to avoid it’s what can we do now to avoid that down the road? Let’s talk about that. We’re going to work through some tips then. “Okay, So I’m 20, I’m in my early 20s, early to mid 20s. Maybe I’m early 30s. These tips work for anybody, but the idea is, okay, what can I do then to help myself out? So we’re going to give you some tips for a couple of different things. So the first one is debt payoff, right? We talked about that. The snowball, avalanche method, I don’t care which one you do.
Austin Wilson:
Pick one.
Josh Robb:
Yes. Automate that, right? If I’m going to pay off that debt instead of waiting till the end of the month and seeing what money is there at the beginning of the month, I’m going to budget and plan for getting a good chunk of that money to pay down that debt.
Austin Wilson:
Now this is after your emergency fund.
Josh Robb:
Yes. Emergency fund is first. You’ve got that set up, and then I’m focusing on those three goals we were talking about. The debt short-term and the long-term goals. So I’m making it automated and additional surprise money. Again, that was a great way to build your emergency fund, guess what? It’s a great way to pay down debt.
Austin Wilson:
Great way to pay out debt, yup.
Josh Robb:
That’s right. Oh, I got some extra money.
Austin Wilson:
Boom, knock it off.
Josh Robb:
I’m not going to spend it. I’m going to throw that at one of my debts. So again, that’s a great thing to do. Rule of thumb. The next thing is mortgage, right? I’m going to get a mortgage. Most people get a 30 year mortgage. Now, mortgage rates are historically low. I mean, we’re talking…
Austin Wilson:
We’re talking 30 years of three and change.
Josh Robb:
30 years is still a long time to have debt. So if you can do stuff to pay it off earlier, that’s great for you frees up some cashflow. So here’s some tips, the first one is instead of paying monthly, pay bimonthly, which means twice a month. So if I just switched my payment, pay the same amount, but just break it in half and pay by monthly. I’ll end up because of how bimonthly works, paying an extra payment a year. Because of how the time flow because there’s extra five weeks in a month and all that fun stuff. That’ll save me four years off of my mortgage.
Austin Wilson:
That’s awesome.
Josh Robb:
Just by splitting it to bimonthly. Round your payments up. So if my mortgage is 466, I’m just going to round it up to 500. If it’s 889, maybe I round up to 1,000. Whatever you want to do. Round it up to whatever numbers comfortable in your budget, but pay some extra amount. Any extra dollar goes in there is going towards your principal with no interest.
Austin Wilson:
That is the bonus.
Josh Robb:
Yes. It’s huge.
Austin Wilson:
It’s great.
Josh Robb:
Another one, make an extra payment each quarter. So just four times a year, you just make one extra payment. You budget that out, you plan for it but doing that, will cut your mortgage by almost a third. So you’ll knock almost 10 years off of your mortgage just paying those four extra year. So there’s just some tips to do check refinancing periodically.
Austin Wilson:
Especially right now.
Josh Robb:
Again, historically low rates. So if you have a mortgage, now’s a good time to check for, but refinancing could save you money because if you get a lower interest rate, but you keep your payments the same, guess what? You’re paying an extra all the time.
Austin Wilson:
Or you could refinance from a 30 to a 15.
Josh Robb:
Yes and shorten your time.
Austin Wilson:
And shorten your time.
Josh Robb:
Yep. So those are some tips of paying down debt and mortgages, especially some extra stuff. The other tips we’re going to talk through are for saving. So we talked about you’re getting out of college, you get your first really big boy job, big girl job, right? I got this full-time thing. I’m a professional now, I’m all grown up. You get that first paycheck and it’s got some extra numbers you’re not used to seeing, right? Pays a little bit more than your part-time summer job. Most people tend to then spend that money. So there’s two things we’re going to talk about that really set you apart and set you up for success. The first is controlling or slowing your growth of spending.
And so your lifestyle habits really impact your long-term success. I’ve done retirement plans where they have the same dollar amount, say between two different people, but their spending really makes a difference on whether they’re successful or not. So if you have a million dollars saved and you want to spend $100,000 a year, because that’s what it costs you to take care of all the things you like to do, or if you have a million dollars saved and you have a $40,000 threshold.
Austin Wilson:
Big difference.
Josh Robb:
Huge difference on success.
Austin Wilson:
Exactly.
Josh Robb:
And that’s something that you have full control over, my spending habits.
Austin Wilson:
So like if you graduate college, you were a college student for probably four years, maybe longer and you probably had to live pretty affordably because you didn’t have a lot of money. If you carry, maybe not everything, but carry some of those frugal habits into your early adulthood, just be smart. You will set yourself up very, very well. Okay, so here’s the example, you had a great performance review. Your boss says, “Wonderful job, Josh. I’m going to increase your salary by 4% next year. Great job.” What is a good way to prevent that lifestyle creep and help yourself out with your long-term goals?
Josh Robb:
Yeah. We call that the 50/50 rule. This rule means every time I get a raise, I’m going to take half of that raise, increase my savings, whether I’m using the 401(k) Roth IRA or whatever I’m going to increase. So if percentages if it, 4%, I take 2% of my salary, increase my savings. The other 2% I’d add to my budget because things do go up in cost. I do need to allow to increase. That 50/50 rule allows you to increase your savings periodically without much discomfort because it’s new money you never had. So it’s not like you’re taking money away from anywhere. And it also slows down that growth of your spending because you are no longer adding 4% more to your budget. You’re only adding 2%. So it slows your spending down. So we did that chart and what it does for someone that is really increases their savings while decreasing their need of withdrawal later on.
It’s huge. It’s a double whammy there and it’s very efficient. And the other thing it does is it allows you to get to those savings rates you hear people talking about, right? You should be saving 15% of your salary. That’s what a lot of people use as that threshold of your target. Well, how do I get there? If I looked at my budget, my household budget said, “I need to find 15% savings.” It’s impossible. This money’s going there for a reason. I need food budget for my kids. I need car costs, I need the utility bills, all that stuff. My mortgage, where do I find 15%? Well, if I get there by every year taking half of my raise-
Austin Wilson:
You’ll get there.
Josh Robb:
… how do I get to 15%? If I get 2% a raise it, if I get 4% I take half a year.
Austin Wilson:
You’ll get there.
Josh Robb:
It doesn’t take too long, right? Eight years and I’m already at 15%. And so again, that’s the savings. And then as your salary grows up, it’ll also increase your savings because if you’re taking a percent of your salary, that’s great. And so huge fit, 50/50 rule, start implementing that as soon as possible. Now you may say, “I don’t know if I could do half.” That’s fine. If you get 3%, take 1%, increase your savings.
Austin Wilson:
Anything.
Josh Robb:
It doesn’t matter. Just periodically increasing your savings amount is huge. And again, let’s say I get a promotion. It’s mid year, “Well, how do I do that?” Well, you could do it right then or you could just set that task to say, “Okay, at the end of the year, I’m going to readjust it. However you want to do it, but just increase that savings. It’s huge.
[41:23] – Good Vehicle for Savings
Austin Wilson:
Huge. So what is a good vehicle for this savings that young people should really look into?
Josh Robb:
Yeah. So the first thing, and we’ve talked about this before. If your company has a 401(k) and they offer a company match, at least put in that amount to get that company match, all right? Free money.
Austin Wilson:
I’m not going to lie, every time I hear 401(k), I hear Phoebe say 4-0-1-wonk.
Josh Robb:
4-0-1-wonk.
Austin Wilson:
That’s what she says on friends. So anyway, yes. 401(k), great option. You cannot do better than free money. I don’t care what you say.
Josh Robb:
Right. Yeah, your return on that is 100%.
Austin Wilson:
It’s free.
Josh Robb:
Every dollar it’s just new. It’s a hundred. Yes, great. That’s awesome. And so that’s the first thing. So once you get to that match, I’m going to be honest, savings in a 401(k) above that is great because it’s easy to do. You can make those adjustments right away. You just talk to your payroll people and just say, “I need to increase it.” It’s automatically done.
Austin Wilson:
Lowers taxes.
Josh Robb:
Lowers your tax bill or if you choose the Roth 401(k) option, you get the tax free later on. But either way, you get tax advantage savings. It’s doing something for you tax wise. So I have no problem going above that match. I will say though, a Roth IRA outside of that retirement account or the Roth 401(k) does the same thing. It’s after tax money. So you pay tax now, but you never pay tax again.
So if I put a dollar in and it grows to 10, I’ve only paid tax $1, but I now have 10 tax free dollars. And so it’s great. So my personal opinion is get the match and then look into Roth savings whether it’s in the 401(k) or outside. In the 401(k) is also nice because you can get an automatic pretty easy plus there’s a larger limit to that piece. There’s not the minimum amount… or the maximum you can put in is about $6,000 per year. Within the 401(k), it’s the 195 that you can do normally. So you get some advantage either way, but a Roth outside of the 401(k) is a great vehicle because there’s also some additional benefits that if you do need to touch the money for a down payment on a house, for certain things, you can get that money out.
Every dollar you put into a regular Roth IRA can also be pulled out without any tax or penalty because you already been taxed on that money. So there’s some flexibility there, but Roth IRAs, huge after the company match.
Austin Wilson:
We actually did an entire episode on account types and what those look like. So if you’re more interested in learning about those we’ll link the episode below. In the show notes so you can check that out. So Josh, this sounds like an awful lot for especially young person may be coming out of school. If they didn’t go to school for finance, especially, this could be really daunting. So what advice can you give listeners who are just wondering what to do and how to make this happen?
Josh Robb:
Yeah, the big thing is and there’s a quote that we’d like to use, failing to plan is planning to fail. Meaning if you don’t have a plan in place, well, not only will you not only know if you’re doing well, there’s just no idea of success. And so we think having a plan is huge. And for a lot of people trying to do that on your own is really hard. It’s very daunting task. So having an advisor you trust is huge. And so we encourage everybody no matter what your age is to find an advisor you trust that you’re willing to work with to set up these long-term goals, to not only look at these retirement goals, but say, “Okay, working backwards, what are some of the short-term goals I need to achieve to get there? If I’m hoping to buy a house in three years, what do I need to do now to make that an achievable goal?” So finding an advisor that you trust and working with a plan with them together.
Austin Wilson:
That’s huge.
Josh Robb:
Now, some retirement places, they may have someone there you could talk to. So it may not have to be an outside advisor. Some 401(k) plans and stuff like that offer those services. So if it’s available to you with no additional costs, use those. Take advantage of those especially while you’re young. That just say, “Okay, here’s what I need to do. Let me know if I’m on the right track, they can help you along that way.” But if you need some more complex or you’ve got multiple goals you’re working towards college savings, those types of things, finding a an advisor and we recommend a fee only advisor in that it removes some conflict of their recommendations. But if there’s someone you trust, that’s who I… trust is the most important thing.
If there’s someone you know and trust, no matter their form of compensation, use them. That’s key. That’s huge. Well, what do you think? Anything else? Have we touched on everything from a standpoint?
Austin Wilson:
I think that the habits are the key.
Josh Robb:
It really is.
Austin Wilson:
When you are in your 20s and you are getting started, forming those habits young, is going to be amazing. If you do it right, it’s going to be amazing in your long-term success. But if you don’t really those are the most impactful years in either way. So if you make poor choices in your early years, those are going to hurt you the worst in the long-term too. So making good choices and making them automatic when you’re young is just absolutely paramount.
Josh Robb:
Yeah, you said it right. Habits will build the person that you’ll become and it takes awhile for those habits to become routine, but making yourself do that… And we’re you’re talking, eating right, working out, all those things, it doesn’t happen overnight. The same is true with investing. It doesn’t happen overnight, but setting yourself up to say, “I will save this month. I’m going to set $10 aside, and I’m going to put it in a savings account, and it will be there at the end of the month. I’m not going to touch it.” Building those habits, the habits more important than the dollar amount. Like you said, it’s huge and it will make the long-term success of when you do have more money floating around that habit will show you and teach you what you need to do with that extra money.
Austin Wilson:
Absolutely.
Josh Robb:
It’ll be less painful for you to set that money aside and say, “Oh, I know why I’m saving this. It’s okay. Because I’ll need it in the future and I’ll be glad I did.
Austin Wilson:
Yeah. To keep you on track with your long-term investment that we have just been talking about, we do have a free gift for you. It’s a brief list of eight principles of timeless investing. It’s on our website, check it out. It’s a wonderful PDF you can take with you and do whatever you want with it. So check that out if you would like some help and just some good checking points to make sure you’re on track there. Josh, how can people help us to just grow and support this podcast?
Josh Robb:
Yeah, so obviously, like we’ve said in the past, subscribe to us, so you get these updates. So when we release a new episode, leave a review, especially on Apple Podcasts that helps with ranking, helps more people find us. Email us. If you have any questions, if something popped up in this episode, that you said, I need to know a little more about, shoot us an email. We’d love to talk with you. Or if you have a suggestion for a topic, we’d love to hear those because we want to talk about what you guys want to hear about.
Austin Wilson:
What’s that email?
Josh Robb:
The email is hello@theinvesteddads.com.
Austin Wilson:
And we do read every email.
Josh Robb:
Yes, we do. And then also share this episode. If you have some young people in your life that you think would be beneficial to hearing this, make sure you share this with them.
Austin Wilson:
All right. Well, until next Thursday, have a good week.
Josh Robb:
All right, we’ll talk to you later.
Austin Wilson:
Bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe, and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only, and should not be relied upon for investment decisions.
Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results, indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
