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Traditional vs. Roth: HALP!
These days, it’s becoming more common for employers to not only offer 401(k) options, but also offer two “buckets” so to speak, in which your money can grow. The traditional (or pretax) bucket, and the Roth bucket. Put simply, the traditional/pretax bucket receives tax-free contributions, which see tax-free growth until the day you take your money out. At that time, it’s taxed at the current tax rate.
With a Roth account, you make contributions that have already been taxed, but then as the money grows and compounds, none of the gains are taxed. (The catch: the first contribution to the Roth has to be at least five years old to be truly tax free.) So on the day you’re ready to withdraw, it’s all yours for the taking. No taxes. (Woohoo!)
So, why wouldn’t you put contributions toward the Roth? That’s a good question. Most people might find that the Roth provides greater benefits for them in the long run. However, depending on your personal situation, both buckets can provide advantages. This may be worth discussing with an retirement account representative for personal navigation. It’s also important to note that your employer’s contributions will always go into the traditional or pretax bucket, per IRS regulations.
So how much should be going into these accounts? (Asking for a friend….)
As you probably know, a good place to start is to understand how much your employer is willing to match, and if you can, contribute at least that percentage. For example, if your employer matches up to 3 percent, you should strive to contribute at least 3 percent. Some employers might match 50 percent of, say 6 Percent. So, for every whole percentage you give, your employer will match half of that up to 6 Percent (which mathematically really is 3% once you contribute 6% of your salary). If you’re not sure, ask your account representative, or HR.
Now again, if you’re like me, you might be comfortably sitting at the same percent, with your employer matching, and not thinking about it any further. But as I started to consider the balance in my 401(k), I couldn’t help but wonder … “What will my balance look like in 30-40 years? Will it be enough to retire or should I be contributing even more? How do I even know?!”
So here is where it gets real. As you get comfortable with your take-home pay, challenge yourself to increase your 401(k) contributions by 1 percent each year – it may seem small,but with all the time ahead of you until retirement, small and gradual increases will start to compound (think: snowball), and overtime, you’ll see great effects. If it’s not too scary, you might even consider putting away 10 percent and see just how impactful that could be! (But DISCLAIMER: this is where you’ll want to seek the counsel of your retirement plan account representative to determine what is best for your personal situation.)
My own account representative advised me to consider this: Use your current annual salary as a measuring tool. By the time you turn 30, do you have your current annual salary in your 401(k) account? By the time you turn 40, do you have three times your current (40-year-old) salary in your account? How about this … by the time you turn 67, do you think you could have 10 times your (then) salary in your 401(k) account?
This got me thinking (and, quite honestly, made me feel a little embarrassed.) But not to worry – if you are behind, that’s certainly no reason to brush it off or feel defeated. Remember, time is on your side! It’s simply a reference point or a goal to work toward. Even if you can get closer to where you want to be, you won’t be losing out.
I know, it might seem like retirement planning isn’t even on your radar. You’re just trying to manage your grocery bills and house payments or rent, right? But there are a lot of tools and retirement calculators out there that are easy to use, like this one. Start using them, and you might just find that you actually enjoy planning for your own retirement. Too far? OK.
And lastly, a little disclaimer (because we like those). I am not a financial advisor, so please make sure to consult with one of those amazing, qualified professionals to determine your own unique retirement plan.
Article Contributed By: Heidi Lengacher
Contact Us: facethefearfw@gmail.com
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401(k): HALP!
If you’re like me, you’ve probably sat through a 20-minute session or two on setting up your 401(k) account. And if you’re like me, you walked out nodding like you heard some really great advice, but it sounded more like a foreign language. You might have checked the boxes for the “most recommended” allocations for your age group and called that “good enough.” You may not even know how much is going toward your 401(k) each paycheck, or what the balance is currently, or if that’s “good” or “bad” … or…. OK, how much does it matter? HALP!
While it’s sometimes difficult to imagine retirement or know how to plan for it so early, I couldn’t help but wonder about my own future.
For most of us, our employer offers us a 401(k) account – but we’re in charge of contributing. So, let’s consider how those contributions actually impact the outcome (account balance) and, more importantly, the value on the day we are ready to cash out.
The 401(k)
A 401(k) account is a tool employers offer as an incentive for their employees to save and plan for their retirement. It’s a type of savings/investment account that allows your money to grow tax deferred.
Part of the incentive could be your employer’s match. Not all employers provide a match. (*cough, cough* This is something you should look into if you don’t know.) Anyway, for every “X amount” you contribute, your employer will also contribute or match “Y amount.” As a rule of thumb, you’ll want to take advantage of this match, so you’re not walking away from the money they’re willing to offer you. (It’s basically free money, people!) Beyond that, you can save as much as you’d like each year, up to the contribution limit, which is determined by the government annually. (P.S. The pretax contribution limit for 2019 is $19,000. You’re welcome).
One major difference between a 401(k) and a traditional savings account is that you really shouldn’t withdraw your 401(k) money until you reach retirement age (which the government has decided is 59 ½ years old). If you do withdraw funds before then, you will pay a hefty 10% penalty. Yikes. While that 10% penalty may seem unfair, think of this as part of a sweet deal that you and the government have shaken hands on. You need to save money as quickly as possible for retirement, right? And you’d rather not pay taxes on that money now, so it will reap the full advantage of compound interest (aka grow faster). The government says, “OK, I won’t take taxes on that money now, because I would like you to have money to retire eventually. BUT, the one condition is that you can’t use that money to buy a new Ferrari prior to 59 ½ (unless you wanna pay a 10% penalty).” Remember, the government wasn’t born yesterday.
OK, so you’re putting this money in regularly – what happens to it after it hits your account? Remember that “most recommended” option you checked after you glanced over the pie chart? That allocation option determines a mixture of stock and bond mutual funds where your money goes to grow. The company holding your account (such as Fidelity, MassMutual,etc.), will keep track of all this for you (*takes deep sigh of relief*).
While there may be predetermined blends of “conservative” or “aggressive” allocations, you can customize your selections — if you so choose — and those selections can be changed at any time. For some people, taking advantage of aggressive models might seem scary – to diversify, and put large amounts of valuable (vulnerable) money out there. But it’s good to keep in mind that time is on our side here.
So, if you start to watch your account, you might see the balance fluctuate day to day; but just because the market may take a dip or seem “low” does not necessarily mean that you’ve lost a lot. It could actually be a good time to buy in, as the more time you have ahead, the more time the market has to correct itself and grow – to your benefit.
And lastly, a little disclaimer (because we like those). I am not a financial advisor, so please make sure to consult with one of those amazing, qualified professionals to determine your own unique retirement plan.
Stay tuned for Part 2 of this article coming Thursday!
Article Contributed By: Heidi Lengacher
Contact Us: facethefearfw@gmail.com
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Drop It Dow Low: What is the Dow Jones?
You may (or may not) have heard that the Dow Jones has been dropping it like it’s hot lately, dipping 1,150 points just last week. World events and uncertain economic conditions can result in market volatility — when the stock market changes moods faster than your teenage sister. But, what exactly is the Dow Jones? And why has it been making major money moves recently?
The Dow Jones Industrial Average (DJIA) is a stock market index that includes 30 large, U.S. publicly-traded companies and acts as a thermometer, testing the overall health of the U.S. marketplace. Sounds a lot like the S&P 500 index, right?
Here are several key differences between the S&P 500 and the DJIA:
S&P 500 Dow Jones (DJIA) Founded in 1957 Founded in 1896 500 of the largest U.S.-based publicly-traded companies across all industries 30 of the largest U.S.-based publicly-traded companies across all industries (originated with just 12 companies solely in the industrial sector) Companies selected by S&P Committee (owned by McGraw Hill Financial) Companies selected by Dow Jones & Co. Averages Committee Companies selected based upon specific qualification criteria No defined criteria for how a company is selected — generally, must be a large leader in their industry Stocks within the index are weighted by market capitalization (market cap = # of outstanding shares x market price) Stocks within the index are price-weighted (the higher the stock’s market price, the more influence it will have on the index’s performance) Often considered the “single best indicator” of stock market performance, because of its broad and diverse collection of companies across all industries Most well-known stock market index. But, because if its exclusivity (only represents 30 of over 3,000 US public companies), it is more an indicator of blue-chip stocks than the market overall OK, now that we’ve got a grasp on what the Dow Jones Index is, let’s talk about why it’s been dropping faster than your bank account after a trip to Target.
The stock market can be affected by many factors, such as political changes, natural disasters, inflation, interest and exchange rates, and unexpected world events — just to name a few. Most recently, when the Dow Jones stumbled and fell by 4 percent in early October, it was likely due to sipping a cocktail of rising Treasury yields, the increased Federal Funds rate, and the China-U.S. trade war. Just like how you get a little wobbly after drinking one too many cocktails, the stock market also gets shaky (see: volatile) when too many uncertain events are mixed together at the same time. The stock market: it’s just like us.
But, not to fear. Similarly to how you will drink lots of water, take an Advil, and eat greasy food to bounce back after a night out, the stock market bounces back, too. Usually, the severity of the market fall will determine how long it will take to rebound. Small corrections can be overcome in just a few days, whereas a full-blown financial crisis may take years to recover from (think: the 2008 Great Recession).
To recap: the Dow Jones is the most well-known market index, comprised of only 30 companies across various industries, and is used to evaluate general trends in the stock market. Recently, the Dow Jones took a big tumble due to a woozy cocktail of world events and interest rate changes. But, don’t worry. Analysts remind us that the market often panics over everything and can sometimes be a bit overdramatic…#Relatable. So, for now, be prepared to ride the roller coaster of market volatility, because over the long-term, the market always trends upward. Ask Warren Buffett.
Congratulations! You now know what the Dow Jones is and why it’s been in the headlines lately. But, this article was not meant to be an in-depth analysis of the Dow Jones (because ain’t nobody got time for dat). If you’d like to dig in a little deeper to the topics covered above, feel free to click on any of the hyperlinks (including that one) to become a Dow Jones expert. You’re welcome.
Written By: Kaitlyn Duchien (@ktaylor1395)
Contact Us: facethefearfw@gmail.com
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Taking Stock: What is the S&P 500?
Standard and Poor: Is this the title of my autobiography? Or a stock market index? Honestly, both.
The Standard & Poor’s (S&P) 500 is a stock market index consisting of 500 of the largest publicly-traded U.S. companies, measured by market capitalization. In other words, the S&P 500 is a exclusive group of 500 hot-shot companies that–as a whole–provide a glimpse at how the U.S. economy is doing overall.
In order to enter the exclusive S&P 500 club, companies need to meet some pretty intense qualifications. Just to name a few, the company must have:
- Headquarters in the United States
- A market cap of $5.3 billion or more (market cap = $ of shares x # of shares outstanding)
- Positive earnings in the last 4 most recent quarters
- Actively trading at a reasonable price, with the majority of its shares held by investors (instead of sitting on a shelf waiting to be sold)
But, even after meeting all of these requirements (and then some), a company is still not guaranteed to be included in the S&P 500 index. Think of the S&P 500 like Regina George and The Plastics — they’re rich, famous, and everybody wants to be in their group.
OK, so now that you know what the S&P 500 is, why does it matter to you? Well, think of it this way. When you go on Amazon to buy literally anything, the first thing you do is check the reviews on the product to make sure it’s a reasonable investment, right? You want to poll the masses to see what the general public has to say first, preventing you from spending your hard-earned money on a sketchy product that takes six months to be delivered and, when it arrives, might not even be “as pictured.” Overall, the more five-star reviews the product has, the better.
The S&P 500 is similar in the sense that it provides the public a simple gauge to understand how the stock market is performing overall, which will help us guide our investment decisions. This is also why the S&P 500 is a popular index to invest in through mutual funds and other sources, as it pools some of the largest companies across the U.S. into one collective group, rather than investing into each individual company separately. It’s the same reason why you would probably buy a TV on Amazon with 5,000 4.5-star reviews, rather than a TV with only one five-star review. Crowd-sourcing (on Amazon) and diversification (in your investment portfolio) makes all the difference, people.
Congratulations, you now know what the S&P 500 is and why it matters to you! But, this article was not meant to be an in-depth analysis of the S&P 500 (because ain’t nobody got time for dat). If you’d like to dig in a little deeper to the topics covered above, feel free to click on any of the hyperlinks (including that one) to become an S&P expert. You’re welcome.Written By: Kaitlyn Duchien (@ktaylor1395)
Contact Us: facethefearfw@gmail.com
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Why Buy Life Insurance?
As a millennial, life insurance is likely not high on a list of financial priorities. With rent, student loan payments, and other essentials, life insurance premiums can seem like an unnecessary expense. When you’re young and healthy (read: invincible), what’s the benefit of life insurance?
I had these same objections just a few months ago. But then I learned more about the benefits, and I bought my first personal life insurance policy.
Here are a few reasons why:
- The cheapest time to buy life insurance was yesterday
Life insurance gets more expensive every year, so why not buy it as cheap as possible? For a 25 year old male in good health, the premium could be as low as $18 a month! This policy would provide a tax-free $100,000 death benefit to your designated beneficiary if you die any time in the 20 year policy period.[1]
- Buying now secures your insurability for life
Let’s say you buy that 20 year term policy. If in 10 years you develop a significant health problem that could prevent you from buying more life insurance in the future, you are still protected. Even if you couldn’t buy life insurance because of your health impairment, if you currently hold a term policy, you can convert it into a permanent one, albeit for a higher premium, and keep it for life.
- It’s not for you – it’s for your loved ones
The main reason most people buy life insurance is to provide their family with tax-free money in the event of an untimely death. But what if you’re single and have no kids? Well, there are still plenty of people affected by your death! Your funeral expenses need covered, which can be $10,000 or more. Also, any co-signers on a loan you have may still have to pay that loan if you die. That $100,000 policy protects your family members. And remember, if you get married and have kids, but become uninsurable, you can convert the term policy into a permanent one.
Life insurance when you’re young is inexpensive and has long-lasting benefits. It protects your insurability in the event of future health problems, and protects your family in the event of a premature death.
Still not convinced? Or do you have other personal finance questions? Let’s talk! Face The Fear is here to help millennials make smart financial decisions that fit their lifestyle. Contact us at: facethefearfw@gmail.com
[1] Protective Classic Choice Term, Male, Indiana, Age 25, $100,000, 20 year term
Article Contributed By: Xavier Serrani
Contact Us: facethefearfw@gmail.com
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Face the Fear Podcast -Intro
Episode 1: Hi Friends! Nicole Ellsworth and Kaitlyn Duchien here. We are two motivated millennials facing the fear of our financial futures. Join us on the journey, as we dive into topics such as investing, retirement planning, life insurance, budgeting, and so much more!
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Welcome!
Welcome to Face the Fear!
We are Nicole Ellsworth and Kaitlyn Duchien, two motivated millennials on a journey to face the fear of our financial future.
We created this safe space where we will dive into topics like retirement, budgeting, student loans, investing, insurance, financial terms, etc. We are passionate about educating ourselves and others in the process. Join us as we change the conversation around finances and approach our future with confidence.
If you like us, follow us here, Facebook, Twitter, Instagram and subscribe to our podcast: Face the Fear. (Social media links are on the top right of this page.)
*Disclaimer: We are not here to give legal financial advice. We highly encourage you to bring the topics we discuss to a financial professional, who is qualified to address your specific financial goals.*
It’s time for some real talk, and we are so excited that you are here to join us!
Until next time – Face the Fear!
–Nicole and Kaitlyn
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Welcome to Face the Fear!
Hi Friends! Nicole Ellsworth and Kaitlyn Duchien here. We are two motivated millennials facing the fear of our financial futures. Join us on the journey, as we dive into topics such as investing, retirement planning, life insurance, budgeting, and so much more.
YouTube: https://www.youtube.com/channel/UC5PcXSzVvR9KZKWm4Ihh3pg
Instagram: @Face.The.Fear
Twitter: @Face_The_Fear
Facebook: https://www.facebook.com/FaceTheFearFW/
Podcast: Face the Fear (on iTunes, Spotify, and Stitcher)
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Stocks and Bonds, James Bonds
Stocks and Bonds, James Bonds
When you think of the word “stock,” what comes to mind? You may think of the New York Stock Exchange. Or, maybe (if you’re like me), you think about how much you need to stock up on Peppermint Ice Cream before it goes out of stock again after the holiday season (just me?…okay).
What about bonds? Do you picture a strapping Daniel Craig wearing a pristine black tuxedo, casually armed with a Walther P99 pistol, in hot pursuit of a criminal? Because I sure do.
No matter what comes to mind, we’re going to dive in to the definitions of stocks and bonds (the financial kind, sorry Daniel Craig), discuss what they are, and why they are important to us.
Let’s start with stocks. By definition, a stock is a type of financial security that allows the stockholder the right to ownership in a company. When someone purchases a company’s stock, they are buying a piece of that company, including the right to claim a portion of the company’s earnings (if they have any — aka if the company makes any money, which you sure hope they do if you invested in them).
Think of stock like a piece of pizza. Say you and three other friends are hanging out on a Saturday night and suddenly the midnight munchies strike.
All four of you decide to put in 2 bucks per person to buy a medium pizza for $8. When the pizza arrives, each person owns the right to ¼ of the pizza (or 2 pieces each), since you each contributed $2 for an $8 pizza with 8 slices total. #Math
Now, obviously a pizza can’t magically grow in size. But for this example, let’s say that it can. Imagine the pizza miraculously doubles in size. Now, you own the right to 4 slices of pizza! Well, since you’re on a diet and you really shouldn’t eat more than two slices of pizza, you decide to sell those two extra slices to a new friend who (conveniently) stopped by after you all ordered the pizza.
In theory, this is how buying a stock works. You own a portion of the company. When the company grows and earns profits, you are entitled to a percentage of those profits. You can then sell your portion of ownership in the company to someone else for more than you originally paid for it. By the way, that’s the ONLY way to make money with a stock — the company must grow so that you can sell your portion for more than you bought it for.
What happens if the company loses money and the stock price goes down? Well, that’s the risk of investing — which is especially risky if you invest in just ONE company or sector of the market. If the one company you invested in (Target, for example) or sector of the market (all retail stores), suddenly goes out of business (don’t panic…this is just a hypothetical example), then you would lose all of your money very quickly. Thankfully, investors have alternative options, such as mutual funds, that allows you to invest in many different companies across many different market sectors at one time — thus limiting your overall risk.
Okay, so now that we know what a stock is and how it can earn us money, let’s talk about bonds. Sorry, we’re still not talking about you, Daniel Craig.
Unlike stocks, bonds do not represent ownership in a corporation. Instead, bonds are a type of loan that an investor can make to a company or to the government, which in turn, promises to return a fixed interest rate to the investor over a specific period of time. Ideally, at the end of the bond’s lifetime, the investor will be repaid her entire initial payment, plus a fixed rate of interest. This is why bonds are often called “fixed-income securities” — because they provide a fixed amount of income (in the form of interest payments) to the investor. Shocking, I know.
Because bonds promise to pay back your initial investment plus a fixed interest rate, they are said to be less risky than stocks, which do not have a fixed rate of return and do not promise to return the money invested. However, bonds are not completely risk-free. The amount of risk you take with a bond depends largely on who is borrowing your money. In real world terms, you know that it’s a lot less risky to loan your mom a dollar than that one friend who is a notorious mooch and never pays anyone back. (I’m talking to you, Karen).
Applying that same concept to investing, a bond issued by a young, relatively unstable company is much more risky than a Treasury bond, which is issued by the federal government and is essentially risk-free. Why is a Treasury bond risk-free, you ask? Well, the federal government has this amazing authoritative power called TAXATION, which means it can always raise taxes in order to pay back the interest on its Treasury bonds. As much as a normal company would simply LOVE to force its customers to buy their products (or else!), unfortunately, they can’t do that. This means that corporate bonds may not always be able to keep their promises of paying the investor a fixed interest rate, thus creating risk. Usually, the more risky the bond, the higher the interest rate will be. On the flip side, Treasury bonds usually have the lowest interest rates on the market. Low risk, low returns. High risk, high returns. You get it.
Believe it or not, we’ve just barely scratched the surface of stocks and bonds. Tragic, I know. I don’t want to bore you to tears, so we’ll leave it at that for now.
But, before you go, one last question. Why do stocks and bonds matter? Even if you don’t plan on being the next Warren Buffett, you should feel confident in understanding stocks and bonds, and identifying where they fit into your investment portfolio (Note: If you’ve got a 401(k) or retirement savings plan, chances are you’re already investing in several stocks and bonds, whether you realize it or not. Congratulations!)
(QUICK DISCLAIMER: I am NOT a financial professional, so please consult one of those fantastic, educated, and far-more-qualified individuals BEFORE you dive into investing or making changes to your retirement plan). As a very general rule of thumb (not specific to every individual’s situation), the younger you are, the more your money may be invested in stocks and less in bonds. As you age and grow closer to retirement, the percentage of your money invested may gradually shift from stock-heavy to bond-heavy. The reason for this is, when you’re young, you have the advantage of time on your side to ride the up-and-down roller coaster of the stock market. Even when there is a market correction and you lose a portion of your portfolio, you still have decades before retirement to earn that money back. However, the closer you get to retirement, the less time your portfolio has to bounce back after a market correction. Thus, safer investment options like bonds will help prevent you from losing your entire life savings to a market drop right before you were planning on retiring and moving to Hawaii. AloNAH, you don’t want that to happen.
Alright, now you know what stocks and bonds are and why they matter! Woot woot! Next step, consult with your financial professional to collaborate on an investing plan that is specifically designed to meet your lifestyle goals.
And, don’t forget to check back here for new, exciting content to be released very soon!
Written By: Kaitlyn Duchien (@ktaylor1395)
Contact Us: facethefearfw@gmail.com
