Aug 22

How Investing Impacts Your Financial Plan - Childfree Wealth Podcast Ep. 38

​​The Childfree Wealth Podcast, hosted by Bri Conn and Dr. Jay Zigmont, CFP®, is a financial and lifestyle podcast that explores the unique perspectives and concerns of childfree individuals and couples. In this episode, Bri & Dr. Jay discuss how investing impacts your financial plan.

This podcast is part of a larger series on investing. When it comes to investing, people often can feel overwhelmed. While investing itself can be simple, it does take time to understand it. In this specific episode, they discuss how investing impacts your financial plan. Knowing the implications of the investments you make can help you save on taxes, headaches, & fees.

Resources:
Podcast: Ep. 31: Investing 101
Podcast: Ep. 32: Invest in What You Understand
Podcast: Ep. 37: Where to Invest
Article: Choosing the FILE Lifestyle - Financial Independence, Live Early
Book: The Simple Path to Wealth by JL Collins
Podcast: Ep. 34: The Simple Path to Wealth
Podcast: Ep. 33: The Gardener & the Rose with Heather & Scott

Be sure to join the conversation by emailing us at podcast@childfreewealth.com, following Childfree Wealth on social media!

Instagram: https://www.instagram.com/childfreewealth/
Facebook: https://www.facebook.com/ChildfreeWealth
LinkedIn: https://www.linkedin.com/company/childfree-wealth/

Disclaimer: This podcast is for educational & entertainment purposes. Please consult your advisor before implementing any ideas heard on this podcast.

Transcript

Dr. Jay

Hey Childfree Wealth listeners. So we've been talking about investing, we've been talking about understanding investing before you do it, we talk about what you should invest in, & then we talked about stocks, ETFs, bonds, all that fun stuff where which is the accounts like the 401k, the IRAs, brokerage accounts. And now we talk about how does it impact your investing? So you need to think about your investments to say, look, if I invest in X will get me to my goal at the time I need so I am going to bring back my favorite structure of this, which is quizzing Bri and see what she comes up with.


We'll have fun with this one because we don't really know where this going in it. You should learn by now. If I'm the one leading the discussion, you never know where you'll end up.


So Bri, talk to me kind of like about risk and reward and like, should I put everything in the stock market? Some of it. How do I decide about that?


Bri

It's all going to depend on your individual goals. And when you want the money, if you want the money sooner, then… the easiest example I can think of… If you're going to buy a house in the next 3 to 5 years, you're not going to necessarily want to be dumping that money in the stock market because if it comes time to buy that house and you need that down payment, that market could be up or it could be down and you might not have that money available.


However, if you're looking out like 10, 20, 30 or 40 years from now, in general, the standard rule is our history shows that the stock market goes up over time. Now, it might be down from the past year in like let's say it's down in 2023 from what it was in 2022. Okay. But in general, it's up higher than it was back in 2000.


So it's going to vary based on when you want the money is kind of the general rule.


Dr. Jay

So let's say I mean, I'm going to buy that house. What should I invest it in?


Bri

If you're talking about a down payment, you should be putting your down payment in a high yield savings account because then you're earning interest on it, but you are not risking not having that down payment for a house.


Dr. Jay

Okay, so short term, put it in there. How about my emergency fund where I invest that in.


Bri

High yield savings account. You're going to park it there and let it sit because you don't want to have the stock market be down when you need that emergency fund.


Dr. Jay

So by the way, I point those two out because other common ones are saying, look, I need my money to has a job. Its job is to be there for emergencies, or for a down payment. That's it. I've already invested it now, how about, you know, as I'm kind of looking through this, let's run through some goals and see how this impacts our investing.


I'm going to start a business at some point. I don't know when. I don't know. Maybe a couple of years, maybe five years. I don't know. Like I just know I want to start a business at some point. Do I still put in the high yield savings?


Bri

If you do not have an emergency fund or money set aside to start this business and money to cover expenses for the first year or so after starting a business, I would put it in the high yield savings account because you just don't know how a business is going to go.


Dr. Jay

Okay, we'll come back to starting a business. We do a separate episode on that one. Now, Bri, I know you and I have had this discussion. Oh, I have debt. Do I pay that off first or put in the stock market?


Bri

Pay it off.


Dr. Jay

All of it.


Bri

Yep.


Dr. Jay

So I know we did an episode on student loans just recently. I got to pay off my new loans before I invest in the stock market?


Bri

Well, your student loans as of today are probably 6% or higher, and average market return is 7 to 10%. Plus you have to pay taxes. So at the end, you're really just it's a wash. So I would pay off student loans.


Dr. Jay

I would actually argue that it's not a wash because you've got to figure out risk. So it's 7 to 10% on average in the stock market. Yeah, on average. And we never know. And the thing that is a risk free tax free return. Now, by the way, I am sure we're going get some hate in the comments on that one.


But the reality check is I need my money to go towards my goals. If my goal is to retire, my goal is to start a business. My goal is to embrace FILE. My goal is paying off debt is an investment effectively. You are getting a risk free tax free return. Now, Bri, alright, how about I go this way, do I pay off my mortgage before I invest?


Bri

Well, it's dependent on your goals. As you know, we've had conversations with people who have mortgages, that are like 2.93, three and a half percent. If they would rather have their house paid off, go right ahead. But I know other people who are like, I'm not paying my house off. If your mortgage is, my personal rule is 5% and higher, pay it off.


Get get going, get that stuff paid off if it's below that. Okay. You know, I will take your time now, Dr. Jay. And I do have disagreements about debt, but in general, I think these are good rules.


Dr. Jay

And by the way, there's no 100% rule like, you know, if you've been found hundred percent rolls, well, then there's always gray, I think in the house, one financially the numbers people go, well, I'm paying off my house, I can write off the interest on my taxes. That is correct. But mostly I'll take the standard deduction. So you're not actually taking that deduction.


So that's the first thing to remember. Second thing is, if you have an interest rate, I mean, right now, mortgage rates were in June 2023 are like six and seven. Yeah, I'm paying off that mortgage first because once again, same argument as the student loans. Now people go, well, but but I might be able to make more in the stock market. You might, you might also make a lot less we don't know.


Yeah. The the hard part of this is when it gets the lower interest rates on the mortgage, it's more of an emotional thing, you know, are you going to lower your expenses and feel better by paying the house off? I'm okay with that. You know, I'm not going to argue that. That being said, once you're out of consumer debt, I'm going to say at least get the match on your 401(k), you know, and that's kind of one of those balancing acts.


So keep in mind, if you get a match for your 401(k) at work, let's say they match 3%. If you pay 6%, they match half, so they get 3%. That's free money, but only if you're going to be there for as long as that match takes. So if you don't plan on being there for three years or whatever it is to get to that, well then paying off your debt now, okay, let's say we've paid off our debt.


We're past that. Because if I go too deep into that we’ll have a whole separate discussion on debt, so how do I find the right balance between stocks, bonds, crypto or whatever else?


Bri

It is going to be dependent on how much you understand about the market and the risk and how much you're able to tolerate. Because we've had conversations with people who small dips in the market, make them panic, and then we've had other conversations with people who are like, Well, if I lose it all tomorrow, “Oh, well,” so there's no one right answer.


It's just going to be… depend on what you need. And typically target date funds, those are funds where you can buy them and they throughout the years will rebalance themselves to be more conservative. So more bonds as you get closer to retirement as a way to kind of quote unquote, protect yourself and protect your retirement. So many people as they get closer to retirement, are going to say, “I want something a little bit more safe because I need to have income and I want to make sure that I have income because I'm no longer going to be working a job,” whereas, you know, somebody who's 25 like me and is going to be working for next couple of decades can typically take on a little bit more risk if you're just looking at the general age.


Dr. Jay

So there used to be a general rule that your bonds should equal your age and now that is crazy. So like I'm a 30 year old, so I'd be like 70% in stocks, 30% in bonds, and I'm like, that's super conservative in my mind, in the 60/40 is a classic, you know, balanced, saying, hey, you know, I'm taking a little right now much and then get closer retire 50/50. I don't know.


Those are all like good numbers to start with the discussion but then it depends on the person. So we're doing book club and one of our books is actually The Simple Path to Wealth. And then he says, okay, the answer is VTSAX & chill, which is I put 100% in the whole U.S. stock market and call it a day.


What do you think?


Bri

I don't love only having one specific fund, but if that works for you and you like it, go right ahead. Personally, I'm not comfortable with that. That's one of my things. A risk right there is I don't like the idea of having just one fund.


Dr. Jay

Well, but I mean, having two funds that buy the same thing underneath is going to help you.


Bri

I know. I just like to have a little bit of everything, primarily stocks at this point, but bonds are okay too. I like the little bit of protection.


Dr. Jay

So when I look at clients portfolios and we'll, we'll kind of dove into this a little bit more when we do book club, I want them to have about 20% international exposure. So there's kind of like a balancing act there to be 100% in stocks. I'm okay with, you know, kind of like in general the concept makes sense. Should you get a little more conservative in your later years? Maybe. It depends on your structure.


Like, for example, I have some clients who have a pension. You have a pension that's effectively taking the span of the bonds in some cases as your fixed income. So you take more risk on your stocks. That being said, there is a way they call margin and or leveraged ETF where you can actually borrow money to buy stocks.


I'm never going to recommend that. Some people will, but I just don't. I can't take the risk of taking debt to invest & end up owing more than I started with. Yeah, I can't do it. I just. I just can't. And if you want a planner that is going to help you with that, I'm not the right one. But in theory, if you took margin or you took some big shots, you might get your goals faster. You might also end up with less money than you started with. Yeah, you know, I think the hard part of this is how your… what you buy impact your your goals is like it's more gut feel than science.


You know I want to get to my goals fast possible goal. But if I take too many chances then I might not get to my goal. Well, that's the problem. And a little bit of bonds can set that off or whatever else it is. I think my general rule is if your investments are keeping you up at night, either one of two things happened.


Either you don't understand what you’re invested in or you took on too much risk. If that means we got to like put more in cash or more in bonds so you can sleep fine, the numbers wise is not the right answer, but what's the value of you sleeping? Well.


Bri

Exactly. 


Dr. Jay

So here's one of the big ones. Actually two of the big ones that I see in the shopping. Me one if you're looking to die with zero, that's a different goal set. So your investing will shift. Two, if you don't really have a goal of retirement. So you're following FILE than FIRE. It's also going to change your goal set, which may also change your investing.


It's also going to change which accounts are in taxes and all that. I think the hard part is making sure your investing matches you. Now let's go back to crypto for a second because everybody wants to talk about crypto. So I, I'm pretty deep in the crypto literature and you know, trying to understand it. And one of the things I saw recently say, somebody said, Hey, this is a crypto expert.


His recommendation was that 1% of your portfolio should be in crypto if it goes to zero doesn't impact you. If it goes to the moon, you make a lot of money. I'm okay with that. Like, but as long as you understand what crypto is like, 1% and you wanna take a gamble, I don't care. Seriously, I'm not going to fight you over it.


But 1%. If you put 100% of your money into crypto, you're going to have less hair than I do. I mean, and I'm bald, like, you know, I mean, it's just kind of cool. It's all over the place. Yeah, well, you know, I need gold. It’s an inflation hedge. Well, we'll go back to understanding what it is, but how it impacts you.


Gold in the long run has not beat the stock market, so if you're looking for an inflation hedge in gold, then you're worried the economy is going to die. Well, then you better stock up on ammo and liquor because that's what you’re going to need. More importantly, I mean, you can make your investments in whatever you want. I think the other part of when I talk about how it impacts your financial plan, is investing in you might be a better investment than the stock market.


That may mean you go back to school, that might be in you to get a new job. If you haven't caught the the podcast episode yet, you catch the episode that we did with Heather and Scott where they talk about investing in Heather so she can actually write a novel and change her life. Financially, I don't know if it's the right answer.


Probably not, because authors either make a lot of money or no money. But it was the better answer for them. Yeah, so the investments don't only have to be in the stock market. Another one of how it impacts is buying a house. So Bri do you plan on buying a house?


Bri

We go back and forth on this. I have a hard time with the idea of settling in one place, but we've also both come to the conclusion that we are very particular in what we want, so we will most likely build a house one day.


Dr. Jay

Yeah, the reality check is you'll build a house & you won't stay there through your retirement.


Bri

Yeah.


Dr. Jay

And you know, I think it used to be considered one of the pillars of your retirement to have a house. My wife and I recently put our house up on the market and actually sold the day after we put it up. That was great. We’re probably by the time you’re listening to this, going to be renting and probably going to rent for the rest of our life because the mobility is worth it.


Now, by the way, we actually made money on our house. Still, the house you buy to invest in is not the same house you would buy to live it. So if you're saying I'm buying a house, an investment, well then I better see you buying like a three door four or, you know, something multifamily because that's where the investment is.



Well, no, I'm buying this house because someday the land might go up. No. That's a different thing. You're just justifying it as an investment. But what happens is we much like what's our investment, what are our goals, what’s our life together and we can miss our life on the way by.


Bri

Yep.


Dr. Jay

So the house you want to buy is, is that because it's an investment or because you want.


Bri

Uh no, it’s because I want a house on the lake with a pool and a hot tub and tennis court and all this stuff that is very frivolous. But I just like it. 


Dr. Jay

Then it's not part of your investing plan.


Bri

Not at all. It is my blow money on a lot of things that I probably don't need but want.


Dr. Jay

All right. Well, we're talking about house, let's talk about the other one that fits in now which is owning real estate in general rental properties. Now, this is where I talk about mixing recipes causes you trouble. If you found the Grant Cardone 10x, I'm going to leverage everything and have a whole lot of debt. You can't mix it with the Dave Ramsey, I got no debt plan. It doesn't work. 


People go well, but I can borrow money, other people's money to buy rentals. And then I have the rental income. That is true. Downside is if we get like a COVID period where people weren’t paying their rents, you're on the hook. Yeah. Downside is that loan is in your name. Downside is you own that debt and you go well, but I can leverage my credit. Cool.


So then I usually ask them, well, when you take a loan out on your house to invest in the stock market? People go no. Well then why would you do it to invest in a rental property? And this is where it gets kind of weird.


And some people go, well, you know, “Do not believe in rentals or real estate?” No, I believe in it. I just want you to buy it with cash or the other way. Do you buy a real estate investment trust and let a company manage it & you just get the real estate income, there's ways to do it without taking out debt.


That's parts of this.


Bri

Yeah. And do you really want to be a landlord? Like that's another thing too. People easily say, “Oh, I can have property when you do it.” Okay, but you're still going to have to deal with the big problems and write the checks for that. And I don't think everybody thinks about that when they go to buy a real estate investment property.


Dr. Jay

Well, if you're going to pay a management company, you might as well just buy a real estate investment trust (REIT) and you can buy other properties. You can buy like, you know, a commercial property or a health care property or self-storage or real estate residential. You can buy whatever you want and still be invested and not have to worry about the hot water heater blowing.


Yeah, I've owned rental property. It's a giant pain in the butt. Sometimes it works, sometimes it doesn't. It's okay if you want to do that. People buy rentals because they feel like they understand them and that's okay. Some people do, some people don't, but they're not valuing at risk of that loan, you know? Well, housing prices always go up.


Not always. They have there lately. It's pretty crazy. But you don't want to buy at the top of the market and then have the market crash.


Bri

Exactly.


Dr. Jay

Yeah. You know, I was looking at a real estate affordability index and don't quote me exactly, but they were looking at the top metros and some like for the metros, it was actually still worth it to buy versus rent. I think that came out in May of 2023, so it may have changed, but the affordability is really not there. 


Rent sucks, housing prices suck, they're all bad. Like all housing is messed up. But buying the house is not necessarily gonna make it more affordable. And by the way, if you're going to buy it on a 40 year mortgage, I don't even want to talk about it because that's kind of crazy. Yeah, I mean, you'll be dead before the place is paid off, but I don't know.


I mean, the hard part of this is, you know, we're talking about how does the investment impact your financial plan? And before you do that, you have to feel what your life is and what you want to be when you grow up and what your life plan is and what your financial plan is. Most people are like, I don’t know. So they just like dump it in their retirement fund and put it in a target date fund. You know what? If you do that, I'm okay with it. Like, seriously, you just putting it away for the future. Fine after you paid off your debts. People go, “Well, well…” Pay off the debts first. That credit card, 20% interest that turn you in some cases up over 30.


Student loans. Same thing. I mean, so I think we need to shift the terminology and see that paying off debt is also an investment that helps our plan. But it's also a matter about your plan, not somebody else's. If retirement's not your goal, don't make it your goal. Do something else. Invest in your time, invest in your life.


I think that's one of those things where, you know, we have a everybody on ESG and we go into a discussion on investing, meeting about some of your values. Just talk about what it be, what it means to be a fiduciary and making sure the client's interests are first. Well, I believe your interests are first. And you having a life you enjoy, not always just adding more zeros.


So, Bri, if you had one set of advice for people on how to make their investment match their their goals or their plans, what would it be?


Bri

Figure out your goals first. And then from there you can build on your investing because it's going to be different for everybody. And don't just listen to your friend or whatever some person on the Internet tells you that, well, I guess we’re people on the Internet, but that's not always true. But make it match your goals and figure those out first.


Dr. Jay

We may be people on the Internet, but we’re not saying buy this, sell that. We're trying to give you the things to think about.


Bri

Very true.