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We talk about four common myths when dealing with your financial security. 1. Max out your 401k. 2. All debt is bad debt. 3. 529s are just for college. 4. Life insurance is too expensive.
Strategies for your financial future. Complex topics made simple and actionable, so when it comes to your money, you're making smart decisions.
The following program is sponsored by JT Financial Group which is solely responsible for its content. Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory Services offered through J.W. Cole Advisors, Inc. (JWCA)JT Financial Group and JWC/ JWCA are unaffiliated entities.
Josh Tirado: Welcome to the
making smart decisions podcast.
I'm your host, Josh Tirado.
And for this episode, we are going
to launch into some myth busting.
in media currently, it seems as though
there is a plethora of misinformation
and it seems that being first or
having your topic be popular is
more important than being correct.
there are a lot of common myths out
there surrounding finances, and I
want to debunk several of them.
My goal is to actually provide
you with a little bit of
background information on it.
so you can make your own smart
decision about whether it's a myth
or whether or it applies to you.
So the first one is some advice
that I, when new clients come in,
that they've received from the HR
department or that they've heard
and it's maxed out your 401k.
I hear that day in and day
out to me that's a myth.
I don't think that's a
right fit for everyone.
So maximize your 401k to put in the
total amount you can put in, ends up
being a significant amount of money, or
it could be a significant percentage.
My, this is a rule of thumb.
My rule of thumb is to contribute
enough to get the employer match.
So maybe be very clear about this.
Also, if there is no employer match
or legally, there needs to be one, but
it's minimal and it's not every year.
You may have better options outside
of a 401k, , the main advantage of
your 401k is to max out your employer
match, not max out the 401k plan.
I say that because if you put in
a dollar and your employer matches
it with a dollar, you immediately
have a hundred percent return on
your money without taking any risk.
And there's also tax advantages to it.
However, if your employer
only matches, say up to the.
3% or $3 that you're putting in
and they don't match above that.
And you're putting in 9%, 12%,
15% something really large.
And they're only matching
that first piece.
The rest of it is still an address.
But there may be other better options.
Oftentimes the investment options
inside your 401k plan are quite
limited as to what's in there.
the fees can be high they've changed
rules around several years ago to
make fee disclosure more prominent
and make fee disclosure clearer.
However, in a lot of cases, you still
don't get the full picture unless
you really dig into the numbers
with all the fees are so your 401k.
Can be more expensive than it needs to be.
Your options can be limited.
And the rules concerning 401k versus
other types of investments are different.
So depending your situation, it could be
advantageous because you can take a loan.
It might not be advantageous because
it's very locked up and there might be.
A vesting period before that money
is all yours to take with you.
So there's a lot of pros and cons
here, but what I want to say is maximum
foreign case, not always the best option.
You want to put it enough
to get the employer match.
So you get an immediate
return on your money.
And then above that, take a serious
look at, should I do a different IRA
on my own and have control over it?
Should I do a Roth IRA?
Should I do a brokerage account, so
it's not necessarily tied up until I
reach age 59 and a half, and I could
use the money sooner for something else.
Maybe I have short and intermediate
term goals where this money doesn't
have to go towards retirement, but
rather I have a goal that's coming up
in the next two years, five years, 10
years that I need to save for, to reach
rather than have it be tied up for.
The tax advantages are great,
but they're tied to retirement.
So what I'm saying is that whole max out
your 401k, not always the best solution.
Second myth I want to go over
is the concept of all debt is
bad debt and don't get me wrong.
I have a number of clients
who at one point in their
life were in substantial debt.
And they managed to get it all paid
off and they're quite successful.
And sometimes the debt is for education.
Sometimes the debt was
for launching a business.
There's a million different
reasons to have debt.
It's not always credit card debt
or somebody made poor decisions.
They might just have a lot of debt.
They worked very hard to get out of the
debt and now they're very debt averse.
They don't want to go back into debt.
And they make that conscious decision.
When I say, okay, you
could leverage some day.
Versus paying it all off and
long-term here are the numbers
that works out better for you.
If you did not pay all cash and you were
to use some debt and they understand
that, and they're willing to forgo
that to sleep soundly at night,
they don't want to have any debt.
So they make that decision.
Other people understand
it and leverage debt.
For instance, a business it's very hard in
a lot of cases to start a business without
taking on some sort of debt or you start
the business, but to grow and reach next.
You need more money and oftentimes rather
than using your cash reserves, if you're
lucky enough to have any borrowing some
money, especially at very low interest
rates is a much smarter decision where
you keep your cash on hand for any needed.
Some people call it dry powder you
can borrow the money and leverage it.
And then you can also on top
of it, get tax advantages
or write offs for that debt.
So leveraging that debt and what
other people would, a lot of people
referred to as OPM other people's.
Utilizing that debt is
a really smart choice.
And in the end, we'll
put you further ahead.
There's of course, bad debt.
You don't want to run up credit cards
at 20%, 25% interest, especially to buy
consumer goods that you don't really need.
But all that's not bad.
I recently got a new car used,
but new to me on the used car, the
financing was right around 2% and made
a lot more sense to me rather than
buying the car to finance it at 2%
interest and use my money for other
things, invest it, grow the business.
Do what have you that provides a
return, same thing for a mortgage.
Some people are blessed where they can
put down a large amount of money to
buy their house, or you can just buy.
And this market is so crazy.
Sometimes that's what you have to
do to win the bid, to get the house.
If you do that, I still have as you
take a mortgage out afterwards, because
when you can get a mortgage that is
around 2% or 3% with positive tax
implications on it, that's amazing.
You can borrow the money at 2%
or 3% and do something else with
your cash, where it stays liquid.
It stays available to you and you can
get a better return on it elsewhere.
So paying off the house earlier,
putting down a huge down, down
payment, long-term when you when
you have your advisor run the next.
You may actually be behind by doing that
rather than putting down less and using
your other money for other purposes.
So when I say all debt is bad, all
that is not bad, you can finance
a car, you can finance a house.
Those you can finance your business.
Those options can work out really well.
If you are one of those people
though, that absolutely needs.
Be debt-free to be comfortable.
Then we do that and work around it.
Just know that in many cases, if you
can deal with a little uncomfort and
go with some debt, it can benefit you.
I have some clients who are
older the house has paid off,
but we'd looked at again.
Each house like house mountain, house,
insert, whatever house you, you think
of where you'd want to spend some time.
they're able to refinance their
house and use some of those
proceeds to buy the second property.
And that property gives them a
lot of joy and helps achieve their
goals of where they want to be and
where they want to spend their time.
that results in a mortgage.
But they're trading off that mortgage, a
very low interest rate for an asset that
will most likely appreciate, and they get
to really enjoy it for a lot of years.
So it's a good trade-off.
So all I'm going to say is approach
debt, all debt is not not bad.
There's another thing.
Good rule of thumb that I advise
if you own your home and you have
more than 20% equity in the home,
I advise clients to get a HELOC
or a home equity line of credit.
Generally speaking in this current
environment, it is relatively easy
to get little to no fees at all
for opening one and usually little
to no fees for maintaining it.
Now it's a home equity line of credit.
So the bank looks at it and
says, okay, have all this equity.
We're willing to give you a line of
credit extended for whatever it is.
Say, 50,000 bucks.
You're not using the 50,000 is sitting on
the sidelines, but you're approved for it.
It's set up.
You can use it if you had to, if there
was an emergency, but if there is
an emergency and you need the money,
generally speaking, it takes too long to
set up the home equity line of credit.
So you don't get the money fast enough.
And if things are bad finance
wise or say you lost your job.
They're less likely to give you the
line of credit, because now you're
say you're unemployed or you're
injured or something has happened.
So get it while the times you're good.
If you have the equity
in the house, set up the.
Don't use it, but no, it's there
for an extra rainy day fund, just in
case we still want to have savings.
We still don't have cash on hand, but in
case of a true emergency, you can write
a check out of your home equity line of
credit and have access to that money.
And now your home, which you're
not going to sell, but you
want to maintain that asset.
You now have access to some of
the equity in that property.
all that is not bad debt Next
myth: 529s are just for college.
And this comes into play when
people say what if my kids
don't want to go to college?
Or the economy is changing?
Hey, I think my kid is entrepreneurial
or maybe my child wants to go
to technical school and college.
Isn't going to be the
the road that they take.
There's been changes all along,
but at the most recent changes
529s have become very flexible.
You don't have to use them for college.
You use them for masters degree,
doctorates, trade school, technical
school, private high school.
I know some people that are
using the 529 money to help
pay for private kindergarten.
It's also been extended.
We're now can cover room and board
books, materials, supplies, not just to.
if you're thinking about putting the
money aside for your child and you're like
my child might not want to do college.
Maybe they want to be a chef.
Maybe they're going to be a welder.
Maybe you want to use it because they're
trying to go to some sort of specialty
high school, maybe it's well, my kid got
a full ride to college, full scholarship.
They don't need to pay for their
undergrad, but they're going to go
back for their master's or something.
The money.
So it's becoming extremely flexible.
If you want the tax benefit from
it, you have to use it for a
qualified educational expense.
So if your child is entrepreneurial and
you want to perhaps give them a seed
money for a business or give them down
payment for a house or something the
money, if it comes out of the 529 will
not have the tax advantages anymore.
So for many of my clients, I tell them
to straddle the fence some money into
a 5 29 for education, some money into a
brokerage account, if they want to put
it aside, near market for the child.
So they can use that money
completely unencumbered in
whatever way can benefit the child.
Now caveat, I make sure that the clients
can take care of their longterm goals.
First, the education for the
child comes after once they make
sure they've taken care of their.
We're important goals because
you can borrow for college,
you can't borrow to retire.
So we cover that first college.
Second.
So 529s are great.
They become a lot more flexible.
They're not just for college.
More people can use them.
So what if you put money in a
5 29 for your child and they
decide either they don't need.
Or they don't go that route of
education where they can't use a 5 29.
What happens to it?
Bear in mind, the 5 29 is actually
in the parent's name and the
child is listed as a beneficiary.
The money simply stays in the parent's
name and continues to grow tax deferred.
And then it's treated just
like another IRA that they can
access after age 59 and a half.
So the money can stay invested, stay in
your name and just be used for retirement.
If you're trying.
Doesn't need it for any
sort of educational expense.
You do not lose out on the money.
Also the money can we
transfer from child to child?
You can transfer it between cousins.
You can go to a niece or nephew.
You can use it for yourself.
You can use it for your spouse.
If you have to go back to school.
they become much, much more flexible,
not nearly as restrictive as they
once were when they started out.
don't think it's just for college, but
you might want to do it in conjunction
with a brokerage account or other savings.
So you have a.
The last myth I want to address today
is that life insurance is too expensive.
Life insurance is not a fun topic.
It really isn't.
But I just wanna put this in context.
When I first got licensed to
do insurance and investments my
insurance license came first.
I was 20, the very first
person I ever approached.
About selling life insurance too.
And I sold life insurance to the
person was younger, the cost was lower.
Okay.
We set it up properly for his budget.
Several months in decided
that it was too expensive.
He was young.
Do you want to bother with it?
And he dropped his life insurance.
He canceled the policy, not right
away, but within the next year.
And this is sad.
It's unfortunate.
And I'm not trying to make an
example of this, but I just want to
say this for educational purposes.
He drops the insurance about a
year later, he is in a motorcycle
accident and he passes away and
he didn't have the insurance.
Now at that point there was
no beneficiaries, no spouse.
Yes.
It took a financial toll on his
family and his parents have to
pay for things and bury him.
It could have been much more
financially devastating if there's
other people relying on him.
But at the end of the day, it's
still, and we're talking 20 plus
years later, it still bothers me
that he thought it was too expensive.
He didn't see the need.
He dropped the coverage and then
shortly thereafter, he passes.
So please don't think life
insurance is too expensive.
And I know there's lots of advertisements
on TV and people always harping about,
oh, how cheap it is for $15 a month.
A certain person age this in good health.
Can you have a jillion
dollars for $15 a month?
You see those advertisements all the time.
Yes.
99.9% of the time.
There are too good to be true,
but that being said, if you're
in good enough health to get
insurance, as long as you qualify.
The insurance is generally
not that expensive.
There are many different types of
policies, may different types of plans.
You can get something in place that, that
suits your needs and more than likely
is affordable or is less than you think.
Please don't ignore it.
Please.
Don't think the stuff you get at work.
If you get insurance from work is enough.
In every client I've ever met with
the amount of insurance they're
getting from work is not enough.
Even if they pick up the
supplemental, additional insurance.
It is not enough.
And if they switched jobs,
it doesn't go with them.
So your own insurance, your own
life insurance is important.
It also applies to disability.
Insurance, not as expensive as you
would think, especially if you're a
business owner, because you can get
the insurance to cover your business,
to keep your business running.
If you get injured, not just
necessarily pay you out.
So it's great.
As you can still draw money from the
business, but the insurance policy is
paying to keep your business up and
running until you can go back to work.
There are options out there and
please do not wait til it's too late.
These items are not that expensive.
You can get them.
So those are four very common myths that
many clients, many financial articles,
many TV shows I see all touch on.
And depending on your situation,
they're going to be false
for the majority of people.
Thanks for your time and go
forward and make smart decisions.