Retirement planning can be confusing, especially when you have to navigate the differences between various account types like the Roth 401(k) and Roth IRA.

In this comprehensive guide, I’ll break down how each of these accounts works and provide a recommendation on which one(s) you should prioritize for your unique financial situation.

Whether you have access to an employer-sponsored 401(k) plan or are self-employed, understanding the tax advantages and investment options within each account is crucial for building long-term, tax-efficient wealth. Let’s dive in.

Roth 401(k) Basics

A Roth 401(k) is a type of 401(k) plan that offers distinct tax advantages compared to a traditional 401(k):

• Contributions: Roth 401(k) contributions are made with after-tax dollars, whereas traditional 401(k) contributions are pre-tax.
• Withdrawals: Qualified Roth 401(k) withdrawals in retirement are 100% tax-free, unlike withdrawals from a traditional 401(k).
• Tax Benefits: While a Roth 401(k) doesn’t provide an upfront tax deduction, it allows your investments to grow completely tax-free over time.
• Contribution Limits: Both Roth and traditional 401(k) plans have the same annual contribution limit – $19,500 as of 2020, plus an additional $6,000 catch-up contribution for those over age 50.

The key difference comes down to when you pay taxes – upfront with a Roth 401(k) or in retirement with a traditional 401(k). This makes the Roth 401(k) an incredibly powerful tool for building long-term, tax-free wealth.

The Advantages of the Roth 401(k)

There are several key reasons why the Roth 401(k) is an incredibly powerful retirement savings tool:

1. Employer Matching: Any employer matching contributions to your 401(k) will be made to the traditional 401(k) portion, even if your own contributions are going to the Roth 401(k). This is essentially “free money” that can supercharge your tax-free growth.
2. Flexible Withdrawals: Unlike a Roth IRA, there are no income limits to contribute to a Roth 401(k). This makes it a valuable option for high-income earners who are ineligible for a Roth IRA.

Given these advantages, prioritizing contributions to a Roth 401(k) over a traditional 401(k) is often the optimal strategy, especially for younger investors with decades until retirement.

Roth 401(k) vs. Roth IRA

While the Roth 401(k) and Roth IRA share similar tax treatment, there are some key differences to consider:

1. Investment Options: Roth 401(k) plans typically offer a limited menu of mutual funds pre-selected by your employer. Roth IRAs, on the other hand, provide full investment flexibility – you can buy individual stocks, bonds, ETFs, and more.
2. Contribution Limits: Roth 401(k)s have a much higher annual contribution limit ($19,500 in 2020) compared to Roth IRAs ($6,000 in 2020). This makes the Roth 401(k) a superior option for maxing out tax-free retirement savings.
3. Income Limits: There are no income restrictions to contribute to a Roth 401(k), unlike a Roth IRA which phases out for higher-income earners.

For most investors, the best strategy is to max out contributions to a Roth 401(k) first, up to the employer match, and then supplement with additional contributions to a Roth IRA. This allows you to take advantage of the higher limits of the Roth 401(k) while also benefiting from the greater investment flexibility of the Roth IRA.

The Best Investments for Your Roth 401(k)

When it comes to choosing investments within your Roth 401(k), your options will be limited to the specific funds offered by your employer’s plan. However, there are a few general guidelines:

• Target Date Funds: Many 401(k) plans, including Roth 401(k)s, utilize target date funds as the default investment option. These all-in-one funds hold a diversified mix of stocks and bonds that automatically adjust their asset allocation as you approach your target retirement year.
• Index Funds: In addition to target date funds, your Roth 401(k) may offer a selection of low-cost index funds tracking broad market indexes like the S&P 500 or total US bond market. These can be an excellent core holding.
• Minimum Fees: Regardless of the specific funds available, aim to keep investment fees as low as possible, ideally under 0.20%. High-cost funds can eat away at your long-term returns.

The key is to understand what your Roth 401(k) is currently invested in and ensure the funds align with your risk tolerance and retirement timeline. Don’t be afraid to call your HR department to get the details.

Putting It All Together: The Best Retirement Savings Strategy

When it comes to prioritizing your retirement contributions, here’s the optimal approach:

1. Contribute to Your Roth 401(k) Up to the Employer Match: This allows you to take full advantage of any “free money” provided by your employer’s matching contributions.
2. Max Out Your Roth IRA Contributions: After hitting the employer match, focus on maxing out your annual $6,000 Roth IRA contribution limit. This gives you more investment flexibility compared to the Roth 401(k).
3. Contribute the Rest to Your Roth 401(k): If you still have funds available to save for retirement, go back and max out your Roth 401(k) contributions up to the $19,500 annual limit.

By utilizing both the Roth 401(k) and Roth IRA in this manner, you can supercharge your tax-free retirement savings and set yourself up for long-term financial success.

Remember, the most important thing is to just get started. Don’t get bogged down trying to find the “perfect” approach – the best strategy is the one you’ll actually stick with consistently.

Check out my Ultimate Guide to Investment Accounts to get a comprehensive overview of all your retirement savings options and learn how to prioritize them based on your unique financial situation.

The post Roth 401(k) vs. Roth IRA: The Best Retirement Account for Tax-Free Wealth appeared first on Rose Han.

The Fidelity’s Index Funds

I’m going to talk about which of Fidelity’s index funds are the best ones to invest in, and I’m also going to show you how and where to buy them.

Index funds are a great way to get started investing safely, without doing hours and hours of research on individual stocks. They’re the best way to create a diversified investment portfolio that grows your money big time over the long run. And Fidelity is known for being one of the most reputable, low-cost index fund providers in the industry. I also happen to be a long-time user of Fidelity, so not only do I know the platform inside out, but I’ll also take you on a tour of my account so that you can see what investing at Fidelity really looks like. So if you’re interested in buying some Fidelity index funds, then keep reading!

So let’s get right into it!

• First, I’m going to talk about the most important criteria to look for before investing in Fidelity index funds, or any index fund in general
• Then, I’m going to give you a list of the best Fidelity index funds that meet these criteria.
• And finally, I’m going to talk about how to buy them, including how much to buy and in what combination.

What is Index Fund?

First off, I don’t want to assume anything, so allow me to explain what an index fund is before I get into all the other stuff. An INDEX FUND is a pooled investment vehicle that gives you an instant slice of ownership in hundreds of different stocks, all in one easy purchase. It’s called an index fund because the stocks in the fund are chosen by an index, rather than by some super-smart, overpaid money manager. Indexes you might have heard of are the S&P 500, the Nasdaq, and the Dow Jones. So an S&P 500 index fund will have all the 500 stocks in the S&P 500 index. And a Dow Jones index fund will have all 30 stocks in the Dow Jones index.

Ok, now with that out of the way, let’s talk about what criteria to look for in Fidelity index funds.

IMPORTANT CRITERIA

First Criteria

There’s a couple of things you want to look at when buying an index fund, and the first thing is the expense ratio. The expense ratio is how much money is being skimmed off the top from your investment every year. In other words, it’s an annual fee for investing in the fund. If you want to avoid paying this fee, your only other alternative would be to go out and buy every single stock in the fund yourself. That’s obviously quite labor-intensive and not feasible, so I certainly don’t mind paying a fee to the index fund to do all that work for me. That being said, I want to keep that fee as low as possible. What can I say, I’m cheap!

A good rule of thumb is to look for an expense ratio of under 0.20%. For example, here’s a Fidelity index fund, the Fidelity Total Market Index Fund. If you invested $1000 in this fund, you’d pay an annual fee of only $0.15. Peanuts! However, if you invested in this fund, the Fidelity Women’s Leadership Fund, your annual fee would be 1.12% or $11.20 a year. It doesn’t sound like a huge difference, but compounded over time, a small difference in fees adds up to hundreds of thousands of dollars! Don’t believe me? Check this out:

This chart the difference that fees make in your investments. A difference of 1% in annual fees reduces your nest egg by $42k at the end of 30 years! Crazyyyyyy. So when you’re looking to invest in Fidelity index funds – or any index fund in general – the expense ratio is the #1 criteria. To find a fund’s expense ratio, just pull up the fund summary page, and look for the section that says “Gross Expense Ratio”. Again, you’re looking for funds with an expense ratio of 0.20% or less.

Second Criteria

The second criterion to look for is the automatic reinvestment of your dividends. Let me explain: When you invest in the stock market, you get dividends monthly or quarterly, and they look something like this. And every time you get a dividend deposit, you don’t want that cash to just sit there. You want to use that cash to buy more stocks. That way, you can make money on your money. Your dividends buy you more stocks, which in turn pays you more dividends, which you use to buy more stocks – and so on and so forth. That’s called compound interest, and omg, it’s like the best thing ever!

This chart shows you the difference between reinvesting your dividends and NOT reinvesting your dividends. If you invested $100k to start and you reinvest your dividends as I told you, you’d have $152,662.49 today. But if you didn’t reinvest your dividends, you’d have only $81,963.34. Moral of the story? Reinvest your dividends.

Two Forms of Index Funds

And the way to do that is by investing in Fidelity index funds that are MUTUAL FUNDS, not ETFs. Index funds can come in two forms –  mutual funds and ETFs. For example, you can invest in an S&P 500 mutual fund, or an S&P 500 ETF. The end result with either is that you’ll own a slice of the S&P 500 index. However, ETFs don’t do automatic reinvestment of your dividends. Only mutual funds do! So the second criteria to look for when buying Fidelity index funds is to make sure that it’s a MUTUAL FUND, not an ETF. The way to do that is by pulling up the ticker symbol for the fund, and confirming that it says “Mutual Funds” up here in the upper left corner.

Third Criteria

Ok, and now for the third criteria: transaction fees. Transaction fees are whatever the fund charges you to buy into the fund and to cash out of the fund. Some funds charge you for both, other funds don’t charge you for anything. Obviously, we’re going for the funds that don’t charge you anything. That’s right! We’re looking for free 99!

The good news is, if you have an account at Fidelity, you’re not going to pay any transaction fees to buy any of Fidelity’s mutual funds. But if you have an account at Vanguard, for example, they’ll probably charge you a transaction fee of like $50 or something crazy if you want to buy a Fidelity fund. So bottom line: if you have your brokerage account at Fidelity, you won’t have to worry about transaction fees.

The best fidelity index funds

Ok and now for the best Fidelity index funds! First of all, these are all mutual funds, no ETFs on this list, because I strongly believe that dividend reinvestment is a non-negotiable feature. Second of all, this list of funds is not an explicit recommendation to buy – it’s just a resource to help you jumpstart your research. So with that disclaimer out of the way, here we go!

For domestic stocks, Fidelity Total Market Index Fund or ticker symbol (FSKAX), the expense ratio of 0.015%

For international stocks, Fidelity International Index Fund (FSPSX), the expense ratio of 0.035%

For emerging market stocks, Fidelity Emerging Markets Index Fund (FPADX), the expense ratio of 0.075%

For U.S. government bonds, Fidelity Intermediate Treasury Bond Index Fund (FUAMX), the expense ratio of 0.03%

For U.S. government bonds, Fidelity Inflation-Protected Bond Index Fund (FIPDX), the expense ratio of 0.05%

For real estate, Fidelity® Real Estate Index Fund (FSRNX), expense ratio 0.07%

I made a handy PDF download for you with a list of all these funds, their ticker symbols, and expense ratios, and links to the Fidelity fund summary pages, so grab it HERE!

How to buy fidelity index funds

And now, let’s talk about how to buy these funds. Once you decide which fund you want to buy, the rest is super easy. You type in the ticker symbol in the search bar, pull up the fund summary page, and click BUY.

You’ll see that you need to specify a dollar amount. All of the funds I mentioned here have no investment minimums, so you can literally buy $1 if that’s all you have.

But assuming you have more than $1 to invest, the question you need to ask yourself is how much to buy of each fund – in other words, what asset allocation you want. Asset allocation is the particular mix of investments that you have in your portfolio, and it’s THE number one decision you need to make before you pull the trigger on any of these Fidelity index funds. For example, if you have $10k of investments and $5k of that is in stock funds, and $5k is in bond funds, then your asset allocation is 50% stocks / 50% bonds. Generally, the longer your time horizon, the more you want to have in stocks. It’s also a good idea to mix in other asset classes, like real estate, in order to make your portfolio as bulletproof as possible throughout any economic conditions.

The most basic asset allocation is doing a split between stocks and bonds. Jack Bogle, the founder of Vanguard and also considered by many to be the OG of index funds, recommends subtracting your age from 100 and owning that much in stocks. So if you’re 30 years old, you’d own 70% in stocks, and 30% in bonds. If you’re investing $10k into Fidelity index funds, then you could buy $7k of Fidelity Total Market Index Fund (FSKAX) and $3k of Fidelity Intermediate Treasury Bond Index Fund (FUAMX).

Here’s a slightly fancier asset allocation, recommended by David Swensen, who’s the legendary manager of Yale’s endowment fund. He helped Yale grow its endowment fund from $2b to $27b over the last 34 years, so to me – whatever he recommends is gold. He recommends the following asset allocation:

David Swensen recommendation:

• 30% in Domestic Equity
• 15% in International Equity
• 10% in Emerging Markets
• 15% in U.S. Treasuries
• 15% in inflation-protected U.S. Treasuries
• and 15% in real estate

So if you have $10k to invest and you’re using Fidelity index funds, your portfolio would have 6 different funds in it and look something like this:

Again, you can refer to my free PDF download, which I’ve linked in HERE. It has all this info in there, with pie charts that explain these recommended asset allocations as well as a list of the Fidelity index funds you can use.

FINAL THOUGHTS

So there you have it! Now you know:

• What criteria to look for when investing in Fidelity index funds
• You have a list of the best Fidelity index funds that meet these criteria
• And you also know how to buy them and how much to buy of each

Investing doesn’t have to be hard or complicated. Index funds are the best way for a beginner to start. Investing with low-cost index funds using a proven asset allocation (like the ones I showed you by Jack Bogle and David Swensen) is a no-brainer way to create lots of wealth over the long run. If you’re sitting on some cash and you want to start putting your money to work, I highly recommend choosing one of those asset allocations and getting started asap with Fidelity index funds. The key here is to start now, perfect later! Because every day you wait is another day when your hard-earned money isn’t working for you.

The post Fidelity Index Funds For Beginners (DETAILED TUTORIAL) appeared first on Rose Han.

For those of you that don’t know, Michael Burry is the hedge fund manager featured in the movie, The Big Short. He became famous for seeing the real estate bubble that was forming in the years leading up to the 2008 financial crisis. His fund made $700 million betting against subprime mortgages. He’s also made a killing shorting overpriced tech stocks during the 2000 dot com bubble, and he’s made a ton of money for his investors over the years.

Basically, when Michael Burry talks, people listen. So, now he’s saying that index funds might crush one day, and that like most bubbles the longer it goes, the worst the crash will be.

If you’re thinking of investing in index funds or if you’re already invested in index funds, you might be wondering what to make of his prediction.

In this article, I’ll explain Michael Burry’s index fund bubble prediction in layman’s terms, so that anyone can understand. I’ll also examine each of his points one by one and present both sides of the argument. And finally, I’ll end with my own personal thoughts on whether or not you should be worried about the index fund bubble.

Let’s start with a quick explanation of Michael Burry’s index fund bubble prediction. In his exact words, “The dirty secret of passive index funds is the distribution of daily dollar value traded among the securities within the indexes they mimic. In the Russell 2000 index, for instance, the vast majority of stocks are lower volume, lower value traded stocks, yet through indexation and passive investing, hundreds of billions of dollars are linked to stocks like this. The S&P 500 is no different. The theater keeps getting more crowded, but the exit door is the same as it always was.”

So, here’s what this means in plain English. An index is a basket of hundreds and sometimes thousands of different stocks. And an index fund is a fund that mirrors the returns of a particular index by holding the same stocks as that index. Take the S&P 500 for example, an S&P 500 index fund has to buy all the stocks in the S&P 500 index. If Apple is in the S&P 500 index, which it is, then all S&P 500 index funds have to own Apple stock also.

There are a lot of S&P 500 index funds out there, both mutual funds and ETFs, so that’s a lot of money invested in Apple stock. So, what Michael Burry is saying, is that in order to keep up with the demand from passive investors, these index funds are all piling into a limited supply of stocks, which would be the equivalent of a movie theater becoming more and more crowded while the exit door remains the same size.

So, Apple stock is very liquid and easy to buy and sell in large volumes. But stocks of smaller companies in indexes like the Russell 2000, these stocks are not as liquid and readily available to trade. And so, what Michael Burry is saying, if all the Russell 2000 index funds own these thinly traded stocks, then what’s going to happen if everyone runs for the exit door at the same time? With all these huge index funds piling into a finite number of stocks, we’re getting a crowded movie theater with the same size exit door.

The second part of his index fund bubble prediction is that passive index investing is distorting stock prices, which he says is making stocks more vulnerable to a nasty correction. In his words, “Passive investing has removed price discovery from the equity markets. This is very much like the bubble in synthetic asset-backed CDOs before the financial crisis, in that price-setting in that market was not done by fundamental security analysis, but by massive capital flows based on Nobel approved models of risk that proved to be untrue.”

Okay. That’s a lot of financial jibberish. Let’s unpack this. In a healthy market, people buy stocks because of their underlying intrinsic value. People will do a detailed analysis of companies. They’ll look at the company’s cash flows and profits, and they’ll come up with a reasonable buying price for that stock, based on what they find in their research. This is what Burry is referring to as price discovery. For example, let’s say Apple stock is trading at $300.

However, based on the company’s future prospects, is $300 too low, or is it too high, or is it just right? So, that’s what price discovery is all about. It’s about doing the research to find out what is a good price to pay for a stock. Index funds don’t do any of this, because their mandate is simply to just buy whatever stocks are in the index regardless of price. If it’s in the index, they buy it.

Compare this to active investors like Warren Buffet. He’s super selective about the stocks that he buys, and he’ll only buy the stocks at a price that he thinks is fair given the longterm prospects of the company. So, investors like Warren Buffet and this whole process of price discovery, is what keeps stock prices in line with reality. Without price discovery, then all stocks would maybe just go to the moon because nobody’s really looking at whether this company warrants that high of a price.

So, according to Michael Burry, if most of the money going into the stock market is by index fund investors, then no one is doing price discovery, and stock prices are getting totally distorted. And the market has a way of eventually correcting distortions like that. He’s comparing price distortions caused by index funds to what happened in 2008 with CDOs.

CDOs are fancy financial products, short for Collateralized Debt obligations, and these are fancy financial products that give investors exposure to subprime mortgages. And the problem there was that no one was taking the time to do price discovery on these CDOs. If they had, they would have realized that CDO prices were totally out of whack and that the subprime mortgages underlying those CDOs, were very close to default and on very shaky ground. But because no one was doing this price discovery, CDO prices got totally out of whack. Everyone bought them when they really shouldn’t be. And eventually, when the subprime borrowers started defaulting on the mortgages, the CDO prices came crashing back down to reality. And this is what triggered the domino effect that turned into the 2008 financial crisis. So now, Michael Burry is comparing the CDO bubble in 2008 to the index fund bubble.

That’s a pretty dramatic statement. So, we’ll dive deeper into whether or not this is true later in this article. He also says that the index fund bubble could be even worse because of derivatives.

Derivatives are fancy financial instruments that give investors exposure to stocks without actually buying the stocks. Derivatives create leverage, because they essentially 10X your profit or loss, whereas you’d only make 1X profit or loss if you own the stock direct. So, derivatives allow you to make leveraged bets on stocks. Essentially, magnifying profits and also magnifying losses. “Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds, pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008.” Again, what does this mean in plain English?

What Michael Burry is referring to, is how index funds use derivatives to help them match their benchmark index. For example, for Vanguard’s most popular index fund, VTSAX, they track a total stock market index, and this fund that specifically states on their website, “…to help stay fully invested and to reduce transaction costs, the fund may invest to a limited extent in derivatives.” Most index funds use some derivatives to stay on track with their index. So, Michael Burry is saying that any big market moves could be like 10 times worse, due to the leverage created by derivatives. So, to summarize the key points of Michael Burry’s index fund bubble theory, one, due to the growing amounts of index fund dollars going into a limited supply of stocks, a crash in the index fund bubble would be like everyone in a crowded movie theater running forward the same exit door.

Two, since index funds don’t do any price discovery on the stocks that they’re buying, this is distorting stock prices, and this is going to make them very vulnerable to a nasty correction. Three, the index funds losses could be magnified due to their use of derivatives. Everything Michael Burry says in his argument, it sounds extremely well thought out and valid. But before we take his theory at face value, let’s go through each of these points one by one. His first point about the crowded movie theater and the same size exit door, this is absolutely true. The thing is, this is true of any investment, not just index funds. For example, Tesla stock, stocks all have a pretty fixed daily trading volume and there is a limited number of Tesla stock. So, if everyone who owns Tesla stock tried to sell it at once, that would cause the stock price to crash. So, yes, all the index funds are piled into the same supply of stocks, and so his point is absolutely valid.

He’s not really saying anything new. If everyone who owns something sells it all at the same time, it’s going to crash. But here’s the thing, this crowded movie theater and same size exit door situation is only an issue, if, everyone runs for the exit door at once. Though Michael Burry is making a huge assumption that everyone would run for the exit door at once. But why would people do that? Most index fund investors buy and hold investors. The vast majority would only sell either to cash out for retirement or when they’re re-balancing their portfolios. Sure, there’s always going to be panic selling, as well as some day traders selling to do short term stuff. But it’s hard to imagine everyone in the movie theater running for the exit door at once. There might be a lot of people running for the exit door, but not everyone.

Plus any price drops caused by panic selling would be temporary, because a lot of the people who run for the exit door, will eventually want to get back into the theater. Now let’s talk about the second part of his argument where he’s saying that there is no longer any price discovery and that is distorting the stock prices. So, Michael Burry is absolutely right about index funds eliminating price discovery. Index funds don’t do price discovery, and they just buy whatever stocks are in the index regardless of whether the price makes sense or not. So, the rise of passive investing via index funds, means that fewer and fewer investors in the market are doing price discovery. However, I disagree that index funds are totally distorting everything. While it’s true that fewer investors are doing price discovery due to the rise of passive investing, there’s always going to be stock pickers like Warren Buffet looking for deals.

If prices get really distorted, some smart active investor like Warren Buffet is going to notice, and they’re going to make a profit on that distortion until eventually, the price goes back to a more reasonable level. As a very exaggerated example, imagine if Apple was so distorted due to index funds buying up the stock, and Apple stock went to like $5,000 a share. Again, just an exaggerated example, now if Apple stocks stayed at $5,000 a share, that’s definitely a bubble and we would all be worried. However, I guarantee you, people would notice and they would short the stock, in other words, sell it until the price came back down to earth. So, my take on Michael Burry’s argument is that, yes, index funds are causing distortions in stock prices. However, those distortions are always temporary, because there will always be smart active investors exploiting any obvious dislocations in price.

Now let’s talk about the last point of Michael Burry’s index fund bubble theory, derivatives. Now, derivatives are a double-edged sword, because they can magnify profits but they can also magnify losses. And as we all know, derivatives were the cause of a lot of the notorious market crashes in history, like the 2008 financial crisis. And you might remember the implosion of Long-Term Capital Management, which was a hedge fund that blew up in 1998, and they had to be bailed out in order to prevent a catastrophe. Basically, in the financial world, derivatives are like weapons of mass destruction. So, when I heard Michael Burry mention derivatives and index funds, I got a little worried and decided to do some research. Because if index funds are using derivatives the way those huge wall street banks and hedge funds were doing, then we should all be very, very, very worried.

I did a deep dive into the prospectus of one of the index funds that I own, FSKAX, which is the Fidelity Total Market Index Fund. In the schedule of investments, as of February 28, 2019, you can see the entire list of stocks that the fund holds, as well as the dollar amounts and actual stock holdings. So, you can see here that their actual stock holdings totaled $59.5 billion. You can also see that FSKAX is holding $1.7 billion in money market funds. So, that brings FSKAX’s total investments to 61.2 billion. Then, right below that, you can also see the funds derivative positions. As you can see, they hold some futures contracts, which are one type of derivative. And the total notional amount of these futures contracts is roughly $141 million. That’s just a fraction of the funds’ total assets. They even state it right here.

The notional amount of futures purchased as a percentage of net assets is 0.2%. 0.2% is peanuts. That’s how much some mutual funds charge in annual management fees alone. So, my conclusion is that derivatives are a very small portion of an index fund’s overall assets, so they’re really not something to worry about. Derivatives are actually more of a problem for leveraged index funds and synthetic index funds, which are specific types of funds that use derivatives to get exposure to stocks without actually owning those stocks. For example, the UltraPro S&P 500 or UPRO, is an ETF that uses derivatives to give you three times the returns of the S&P 500. The prospectus specifically states. “The fund invests in derivatives as a substitute for investing directly in stocks. And that investing in derivatives may be considered aggressive and may expose the Fund to greater risks, and may result in larger losses or smaller gains, than investing directly in the reference assets underlying those services.”

Bottom line, unless you’re an experienced trader, stay away from these leveraged funds that use a lot of derivatives and you will be just fine. The reality is, the future is uncertain and Michael Burry could very well be right. But there’s plenty of experts and arguments that support the other side as well. Warren Buffet is a master investor who’s been around much longer than Michael Burry has. And he is a believer in index funds. To quote Warren Buffet, “A low-cost index fund is the most sensible equity investment for the great majority of investors.” He also is putting his money where his mouth is. Because in his 2013 letter to shareholders, he shared that he has instructions in his own will to invest 90% of his wife’s money into a very low-cost S&P 500 index fund. So, apparently Warren Buffet isn’t worried about an index fund bubble, and if he’s not worried then I don’t think you should be either.

Now, even if you are worried about an index fund bubble, Warren Buffet has some advice for you. So, in his letter to shareholders, he says, “The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance. The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs.” So, accumulating shares over a long period of time is a strategy known as, dollar-cost averaging, and it’s the safest way to invest in index funds.

In this article, I go into detail about how to do dollar-cost averaging. So, you should definitely check it out. Here’s something else I want you to keep in mind, Michael Burry has been right many times in the past, but that doesn’t guarantee that he’ll be right about everything going forwards.

No one has a crystal ball and no one really knows what the future holds. So, I think you need to be careful about making sweeping decisions, such as refusing to invest at all in index funds, just because of what one expert is saying. History has shown that investing in the stock market via low-cost index funds has been a very successful profitable strategy. Lots of millionaires have happened because of low-cost index fund investing, and Michael Burry is basically saying that everything as we know it, the stock market as we know it, is going to change drastically. So, that’s a very dramatic prediction to make. So, I’m going to really question it before I just believe it. If you don’t have any factual basis of your own, it’s pretty easy to get spooked by headlines like this. It also doesn’t help that the news loves to sensationalize stories like this, because stories about pending market crushes and bubble predictions and disaster and financial catastrophe, these kinds of stories always get tons of clicks. And the news is out there to get clicks, to get eyeballs on their stories.

So, bottom line, there will always be something scary in the news, and it could make you second guess your entire investing strategy if you let it. But the more educated you are, the more you can filter all the news and the noise out and just stick with your investing plan. It’s important to educate yourself so that you can base your financial decisions on facts, not emotions.

The post Index Fund Bubble (SHOULD WE BE WORRIED?) appeared first on Rose Han.

This also applies to you if you have a full-time job but you have a side gig that brings in 1099 income.

Just because you don’t have a 401(k) doesn’t mean you’re screwed. I used to have a 401(k), and when I quit my corporate job and started working for myself, I figured out that there are OTHER ways to save and invest for the future.

So if you want to learn more about how to use IRAs and take FULL advantage of all the tax-friendly ways to save for retirement, then watch the video below or keep reading!

If you’re self-employed, there are TWO types of IRAs you need to have.

The first type is either a Roth or Traditional IRA

Everyone – whoever you are, whether you’re self-employed or you work for a company – is allowed to have a Roth or a Traditional IRA. They’re both amazing ways to save for retirement, and there’s really no reason not to take full advantage of them. So the first step for you as a self-employed individual is to open a Roth IRA or a Traditional IRA.

A Roth IRA allows you to make after-tax contributions, and any growth and withdrawals you make in retirement are totally tax-free, forever. A Traditional IRA allows you to make pre-tax contributions, and the growth is tax-free, but any withdrawals you make in retirement are taxed at your regular income tax rates. So both types gives you tax benefits, but you get the tax benefits of the Roth on the back end, and you get the tax benefits of the Traditional on the front end.

Roth and Traditional IRAs allow you to contribute up to $6k per year (as of 2019). The goal is to max out these contribution limits every year, otherwise you’re leaving a lot of money on the table. If the government gives you a way to pay less taxes, then you should take it, right?! Why pay any more taxes than you need to?

SEP IRA

Once you’ve opened either a Roth or Traditional IRA, the second type of IRA you need to have is the SEP IRA. Most people who have corporate jobs get a 401(k) with their employer.

But for you, since you don’t have a 401(k), what you can do instead is to open a SEP IRA (which stands for Simplified Employee Pension).

SEP IRAs allow you to put away up to 25% of your income or $56k, whichever is lower. And that’s 25% of your NET income, so after all the expenses that you report. So if you make $100k net income in one year, then you can contribute $25k into your SEP IRA!

The best part is that you can write-off any contributions you make to a SEP IRA, so it’s a really good way to reduce the taxes you have to pay that year. It’s like… why pay any more taxes than you need to?

Contributing to my SEP IRA saves me thousands of dollars in taxes every year, not to mention it helps me save serious bucks for retirement. I’ve talked to WAY too many freelancers and solopreneurs who don’t know about this tax loophole, and this is a HUGE MISTAKE.

So ideally, you have a SEP IRA, and you have a Roth or Traditional IRA, and you are maxing out BOTH.

Now if you’re a full-time employee and you have a 401(k), but you also make income on the side as a solopreneur, then you are allowed to have a SEP IRA as well. But tax laws are so complicated and there’s always exceptions and whatnot, so the best way to know for sure for YOUR financial situation is to talk to your accountant.

But in general, you are allowed to have both a 401(k) and a SEP IRA, as long as you stay within annual contribution limits. As of 2019, you’re allowed to put up to $56k per year tax-free into your SEP IRA and or a 401(k).

There are other retirement savings options for self-employed people, but in my opinion, they aren’t as good as the SEP IRA. The SIMPLE IRA is another option, but the annual contribution limit is much lower than the SEP IRA – $12.5k vs $56k, so I don’t recommend the SIMPLE IRA over the SEP. And there’s also the Solo 401(k), but that requires a lot more paperwork and administrative stuff than a SEP IRA, and in general, it’s not really worth the hassle unless you’re over 50 years old. I’m not going to get into the specifics of Solo 401(k)s in this video, but just know that if you’re self-employed and you want to be able to save a TON of tax-free money for retirement, a SEP IRA is a super easy and hassle-free option.

To open a SEP IRA, all you have to do is choose a brokerage that offers the SEP IRA as an account option. I currently have my SEP IRA at Fidelity and I love it, but there’s a lot of other really great brokerages out there to choose from.

Vanguard is great for anyone who wants to invest in index funds, although Fidelity is good for that too.

Betterment is a roboadvisor app that I love, because they offer professionally designed investment portfolios that you can choose from and customize for your goals and your risk tolerance.

Other brokerages that offer SEP IRAs are TD Ameritrade, E-Trade, Charles Schwab, and Interactive Brokers.

Once you’ve setup your SEP IRA and you want some ideas on what to do with it, make sure to subscribe to my YouTube channel.  

The post IRA for Self Employed (EVEN BETTER THAN A 401K!) appeared first on Rose Han.

That’s why in this blog post, I’m going to show you 5 short-term investment options that pay anywhere from 2% to 18%.

Watch the video below or keep reading!

Inflation is a real thing

I remember a time when a latte used to cost like $3. Now, it’s $5. Not that that’s stopped me from my occasional (ahem… daily) oat milk latte. I also remember what I used to rent out a studio in NYC that cost $2500, now that same place is $3500. Thank god I don’t live in NYC anymore.

Moral of the story? Not enough people consider the effects of inflation, but you SHOULD! That’s why any extra money that you have sitting around that you don’t need for rent and bills in the next month or so, you should try to earn a return on it whenever possible. So that’s where these 5 short-term investments come in!

#1 – High interest savings accounts

The first one is high interest savings accounts. This isn’t really an investment – it’s a bank account, but there are some savings accounts that pay a lot more than the traditional brick and mortar bank. These are called online-only savings accounts.

The best thing about them is that they’re FDIC-insured. Which means that if anything happens to the bank, your money is going to be safe no matter what, because it’s insured by the federal government.

Meaning that they’ll step in and replace the money if anything happens to the bank. There are some good ones that pay up to 2% interest, such as the Betterment savings account and the Wealthfront Cash account.

#2 – Money market mutual funds

The second short-term investment option is money market mutual funds. The money market is a place to park short-term cash. It’s an investment, but it’s very secure.

Examples of money market investments are 1 month, 3 month, 6 month Treasury bond. You’re pretty much guaranteed the return of your principal, plus a little bit of interest, because it’s such a short duration bond.

So a money market mutual fund is a basket of a bunch of these little money market instruments in one easy fund. What’s good about that is that you get the diversification, so your credit risk is spread around many different issuers and bonds. You can often expect around 2% interest – they’ve very similar to high interest savings accounts in terms of what they pay.

However there’s ONE key difference that’s actually really big. The after-tax returns could be a lot better than a savings account. For example, if you put your money into a money market mutual fund that does municipal bonds, then you avoid all taxes. Because municipal bonds (“munis”) are exempt from state tax, city taxes, and federal taxes. Which means, the AFTER-tax return of a money market mutual fund could be better than savings accounts!

Also U.S Treasury money market bond funds also avoid state and city taxes, so you always want to think about what the after-tax return is.

To invest in a money market mutual fund, you need a brokerage account and it’s the same type of account that you would use to buy stocks and bonds. There’s a couple extra steps to invest in money market mutual funds, but especially if taxes are a concern for you. Then money market mutual funds are a great short term investment option.

#3 – P2P Lending

The third short term investment option for you is peer to peer lending on a platform like LendingClub. Peer to peer lending is a type of lending that happens outside of banks where individuals like you can also lend money to individuals like you. The most reputable peer to peer lending platform that I’ve heard of is called LendingClub. And this is a platform where you sign up, you create an account and then you tell them how much money you want to invest and they’ll invest your money in different loans for you.

And all the borrowers on LendingClub are people just like you and they’re just looking for short term personal loans. And all of these loans have $25 denominations. And so if you want to invest say $1,000 which is actually their investment minimum, then your money would be spread out across, what is it? I can’t do the math, shit. What’s the math? 40. So if you have $1,000 to invest in LendingClub, then you would have 40 different notes of $25 each. And this is great because then you’re diversified across 40 different borrowers.

At LendingClub, they say that you can earn anywhere from 4% to 7% returns a year. So this is a pretty juicy return. However, I would only consider LendingClub if you have at least 2,500 to invest. Even though their investment minimum is only $1,000 they recommend even $2,500. Because with $2,500 you get your investments spread out across 100 different notes of $25 each. And they say that just based on historical data and the rate of default of a typical note that you get the best probability of actually earning this %4 to 7% return if you diversify across 100 notes.

So again, I would only consider a LendingClub if you have at least $2,500 to invest. But it’s still a great short term investment option to consider.

#4 – Investing in the stock market with a conservative allocation

And the fourth short term investment option that I have for you is to invest actually in the stock market, but with a very conservative allocation. And this is really easy to do through robo advisors like Betterment, where you tell them how much money you want to invest and when you need that money by and they will invest the money for you in a very conservative portfolio of stocks and bonds. Where most of the money will be in stable bonds, but you’ll have a small percentage say 30% ish in stocks.

So the good thing about this option is that you get some potential upside as their projections say you can make up to 18% on your money. But of course this is all dependent on how the stock market plays out and there is a small chance of you actually ending up with a little less money than you started with if the market timing isn’t ideal for you. So it’s all about probabilities. Of course, the upside is you’ll end up with way more than you would have ended up doing anything else with the money. But you have to be okay with actually taking that small chance of ending up with a little bit less than you started with.

However, that’s not the end of the world, because it’s all about timing. So if in one or two years when you need that money, it’s not where you want it to be. You can just keep it in there longer because as you know, the stock market in the long run always goes up. So it’s not a matter of if, but it’s a question of when your money will grow. I would only do this if you’re flexible on the timing of when you need this short term money. So if you’re okay with, you expect it to use it in two years, but you’re okay with waiting two and a half years, then this could be an interesting option for you.

It’s really up to you. Some people prefer the safety and security of knowing that their principal is always going to stay the same and they’ll just make a little bit of interest and other people prefer to take a little bit of risk and put some money in the stock market so that they can end up with more money than they would’ve ended up with otherwise.

So to do this, I recommend using a robo advisor like Betterment or Ellevest. I actually did a couple of videos on robo advisors, so you can check those out here. But these robo advisors, you just tell them what your time horizon is. One year, two year, it can be really short and they’ll allocate your money into a nice short term investment portfolio.

#5 – Certificates of deposit

And the fifth and final short term investment option for you is certificates of deposits, also known as CDs. CDs have a fixed maturity and they are not as flexible as savings accounts and money market mutual funds and even the Betterment short term stock portfolio that I talked about because they have a locked withdrawal period. Meaning that if you buy say a three month CD, then you cannot withdraw this money until those three months are over. And if you do, you would have to pay hefty, hefty penalties and fees. So it’s just not an option.

So it’s similar to a savings account, but it has a fixed maturity and no liquidity before that. And CDs, you can buy these either through your bank or at a brokerage. And I have found some CDs that are currently paying up to 2.3%. It’s really easy, just Google best CD rates and you’ll find a list of banks that are offering the best ones.

Final Thoughts

So as for my final thoughts, I think it really depends on what you need your short term investment money for, and that will help you decide which of these five options is the best for you. If your money is for an emergency fund, then you need to know that, that money is going to be there and there’s no fluctuation in the principle of value and you also need to know that it’s liquid, meaning that you can withdraw it any time whenever you need it.

In that sense, for an emergency fund, a CD is not ideal because there is fixed withdrawal times and I would say the stock market allocation, the conservative stock market allocation option is not ideal because the stock market will do what it does when it does. I would say for an emergency fund, a good short term investment for that would be either the high interest savings accounts or the money market mutual funds.

And then as for anything else, like if you’re saving up for a big purchase but you just want that money to be building up some interest and returns in the meantime, then something like LendingClub or the Betterment conservative stock allocation, those kinds of things could be an interesting option to look into because best case scenario is you’ll end up with a lot more money than you could’ve ever saved up on your own.

And the worst case scenario is the timing isn’t ideal and you have to wait a little bit longer for the market to recover or further returns to get you to where you want to be.

I know that not everyone is ready to always just dive right into stock market investing right away. So short term investing is a good way to just dip your toes into the financial world. So I hope this video has helped!

The post Best Short Term Investments (EARN UP TO 18%) appeared first on Rose Han.

But what about once you’ve opened it? What next? A Roth IRA is completely useless if you don’t INVEST the money in your Roth IRA.

In this blog post, I’m going to go over 3 of the best Roth IRA investments. Anyone of these investments can make you a tax-free MILLIONAIRE.

I’ll also make a recommendation on how to decide which is the best strategy for YOU. As with so many things in life, there’s never one right answer – because the best investment for you may not be the best investment for me – so I want you to be as educated as possible so that you can be in full control of what happens to your money.

Watch the video below or keep reading!

Use your Roth IRA for growth-focused investments

Since with the Roth IRA, you’ll never have to pay taxes on your investment gains, it makes sense to use your Roth IRA for high growth investments. Because typically, more profits = more taxes – but not if those investments are inside your Roth IRA.

Not only this, but the Roth IRA is a long-term vehicle so it also doesn’t make sense to invest for passive income in your Roth IRA. You can’t live off the money anyway until you turn 59.5, so instead of focusing on passive income, why not focus on growth?

This rules out a lot of investments. For example, bonds, or money market investments like CDs and short-term Treasuries. Because you don’t want to “waste” the tax shield of the Roth IRA on investments that return only 1% or 2%, or worse… 0%.

So assuming you’re not about to retire like next year, you want growth-focused investments for your Roth IRA. In other words… you want to invest in STOCKS. Let’s talk about the 3 ways to invest in stocks for your Roth IRA.

#1 – Target Date Funds

By far the easiest investment for your Roth IRA is a Target Date Fund (or TDF for short). A target-date fund is a mutual fund that contains 3-4 different index funds. Essentially, it’s a “fund of funds”. You’ll usually see a domestic stock fund, an international stock fund, a domestic bond fund, and sometimes an international bond fund.

TDFs automatically pick a blend of investments for you based on your approximate age, and then it readjusts that blend as you approach retirement age. That’s why the name of a TDF always has a year attached to it. For example, the Fidelity Freedom Index 2055 Fund – this is for the appropriate TDF for a 30-year-old who would retire sometime around the year 2055.

Every TDF has a target retirement year as part of the fund name, so finding the right TDF for you is really easy. You just figure out which year someone your age would retire, and you invest in a good TDF with that year.

A 2055 fund is going to be more heavily weighted towards stocks than, say, a 2025 fund. That’s because if you’re planning to retire very soon, you don’t have the luxury of waiting for a recovery in the event of a stock market downturn. So having more bonds gives you stability.

If more American owned TDFs during the last recession, they would have been much better off. I know it’s a sensitive topic, but when you hear about people who lost half of their retirement in the 2008 stock market crash, many of them had too much of their portfolio in stocks, and or they sold everything and missed out on the recovery.

Ramit Sethi, personal finance guru and best selling author of I Will Teach You To Be Rich recommends TDFs for the vast majority of people. He talks about how TDFs are the ultimate set-it-and-forget-it investment, and they cost a lot less than using a roboadvisor.

Sure, you can achieve higher returns with other investing strategies (like the ones I’ll tell you about later in this video), but these other investing strategies all require more work and more effort. Which most people aren’t willing or able to do. That’s why TDFs are the logical choice for MOST people.

So given how easy and automated they are, TDFs are a no-brainer investment option for your Roth IRA.

#2 – Index Funds

The second Roth IRA investment I want to talk about is index funds. This strategy is similar to TDFs, except it’s much more DIY. The TDF gives you a complete, optimally allocated portfolio in one convenient package. With index funds, you have to basically build it yourself. You not only have to decide on asset allocation and find the right index funds for it, but you also need to rebalance your portfolio at least once a year.

This option is good for you if you want a little more control over your investments than a TDF.

For you, Type A nerds and control freaks out there… you’ll probably want to do it this way. I’m with you. I personally do index funds in one of my accounts.

I follow an asset allocation recommended by David Swensen, the legendary portfolio manager of Yale’s $30B endowment fund.

He recommends allocating:

• 30% in Domestic Stocks
• 15% in International Stocks
• 10% in Emerging Markets
• 15% in U.S. Treasuries
• 15% in inflation-protected U.S. Treasuries
• and 15% in Real Estate

There are hundreds of different asset allocations you could choose from. There’s no one right answer – you just want to understand the pros and cons and decide on something. I picked David Swensen’s asset allocation because I like that it doesn’t have too many eggs in one basket – in other words, no single asset class dominates the portfolio. This means that throughout ANY economic cycle or season, my portfolio is positioned to benefit. Yet it’s still very growth-focused because most of it is in stocks. It’s just a slightly fancier version of the asset allocation of a typical TDF.

For a more in-depth explanation on how to invest in index funds for your Roth IRA, make sure to download my
Roth IRA Investing Starter Kit. It’s full of step-by-step instructions on different asset allocations to choose from, which index funds to buy, and how much of each index fund to buy. It’s an epic resource that I’ve created specifically for you, and I know you’re gonna LOVE it, so click here to download it!

Once you decide on an asset allocation, the next step is to find low-cost index funds that fit those allocations. The key is make sure that the expense ratio is under 0.20%. If you’re thinking of doing index funds for your Roth IRA, check out this other blog post right here. There, I go into much more detail about index funds.

#3 – Individual Stocks

The 3rd and most advanced way to invest your Roth IRA is by buying individual stocks.

At the heart of it, the whole idea when buying individual stocks is that you’re trying to buy good companies at a good price. You don’t want to buy bad companies at a good price, and you don’t want to buy good companies at a bad price.

Investing in individual stocks is the FASTEST way to build wealth. That’s how Warren Buffett did it, and this is how I personally invest the vast majority of my portfolio as well. However, it’s also the most labor-intensive way to invest your Roth IRA. There’s a bit of a learning curve, as it requires you to read financial statements to determine the financial health of the company, and it involves a good amount of research.

In order to invest in individual stocks for your Roth IRA, you want to ask yourself the following questions:

• Do I understand this company and the industry its in? Or do I have no idea how this company even makes money?
• Do you trust the CEO and management team to do the right thing?
• Does this company have good cashflow now and will it continue to have good cash flow in the future?
• Does this company have too much debt or other things that might compromise its ability to weather an economic downturn? A quick way to tell whether a company has too much debt is to look at a ratio called the debt-to-asset ratio. This tells you how much a company owes relative to how much it owes. In general, you want to invest in companies that own twice as much as it owes. I talk more about debt metrics in my Roth IRA Investing Starter Kit.
• Can I buy the stock at a reasonable price, given the company’s earnings and its earnings potential? One quick way to tell if the stock is trading at a reasonable price is to look at its PE ratio. The PE ratio is a metric that compares the price of the stock, divided by its earnings per share. The lower the PE ratio, the cheaper the price relative to profits. In other words, more bang for the buck!

Again, my Roth IRA Investing Starter Kit provides detailed instructions on how to find a stock’s PE ratio, as well as how to use it to make good investing decisions. So definitely check it out, it’s a great PDF resource and I’ve included the downloaded link below.

Recommendations on how to choose

And now, for some recommendations on how to go about choosing the best Roth IRA investment for YOU.

First and foremost, you want to be realistic about what you’re ACTUALLY going to do. There’s nothing more useless than an amazing investing strategy that you don’t really want to follow through with.

The 3rd option of picking individual stocks – obviously it sounds like fun and can be very lucrative – but 99% of people don’t have the time or the desire to put in that kind of work.

It’s kinda like if you’re trying to lose weight and you need to choose a diet plan, sure the keto diet where you can lose 20 pounds of fat in 1 week sounds great, but if you’re too busy to count carbs and going keto is not realistic, then you’re better off choosing an easier diet plan. The results might not be as sexy or fast, but it’ll work, because you’ll actually do it.

So here’s my recommendation:

• If you’re a lazy investor and you want to invest the money in your Roth IRA with as little effort as possible, go with TDFs. If your eyes glaze over at the thought of managing your own investments, then don’t force yourself to do something you don’t want to do. Life is too short for that! Lots of people retire millionaires doing just TDFs, so I strongly recommend TDFs for the lazy, hands-off investor.
• For the slightly more DIY investor, I recommend index funds. It can be very rewarding to learn about different asset allocations, learn the pros and cons of each, and then decide for yourself what you want to do. It gives you a sense of empowerment and control over your finances.
• And for the very DIY investor, I suggest learning how to invest in individual stocks. All you type A nerds out there… I see you! Just be prepared to roll up your sleeves, learn some accounting terminology, and do a bit of number crunching.

So that pretty much sums up 3 really awesome ways to invest your Roth IRA. And make sure to grab my Roth IRA Investing Starter Kit if you haven’t already.

The post Best Roth IRA Investments (3 STRATEGIES THAT WORK) appeared first on Rose Han.

And definitely stay tuned for the last tip, which is pretty unconventional, but I did this with my tax refund and it totally changed my life.

So watch the video below or keep on reading!

#1 – Invest it in a money market fund

The money market is a place to park your cash short-term and earn a decent yield of 2-3%. When you invest in the money market, you’re lending your cash to short-term borrowers (meaning loans with maturities less than 1 year). So it’s a very safe place to keep cash because there’s hardly any interest rate risk, and generally very little credit risk.

And………

I don’t know about you, but earning 2-3% on my money is WAY better than my savings account, which pays close to zero!

By the way, investing your tax refund into a money market fund would make a GREAT starter emergency fund, because if you ever need it, you can just get your cash out the next day, but meanwhile, the money isn’t just sitting there doing nothing.

So whether you want to build an emergency fund or you just want to park your cash somewhere until you decide what you really wanna do with it, consider putting it into a money market fund.

Although there’s different ways to invest in the money market, funds are the best way for individuals to access the money market because they’re low-cost and diversified, which maximizes your return while reducing your credit risk. Some popular low-cost funds you can look into to jumpstart your research are FDLXX or VMFXX (you can just Google them).

#2 – Invest in real estate crowdfunding for dividends

Your tax refund probably isn’t enough to buy an entire investment property, but it’s enough to get into real estate via one of those real estate crowdfunding platforms, like Fundrise. These platforms make real estate investments accessible to small investors by buying properties with funds that have been crowdsourced online.

What I like about Fundrise investments – and real estate investments in general – is that they offer a balance of dividends and growth. Since I’m young, I definitely want growth, and with the dividends I can either reinvest them right back into the fund, or just spend it on other things. The minimum investment is only $500, and the whole onboarding process is super easy.

It’s so easy (and more fun) to just blow your tax refund on a new handbag or on a vacation, but I’m trying to get you to think about ways to use your tax refund wisely, by investing it into things that will last and keep paying you dividends in the future for many years to come.

#3 – Buy stocks using the “Magic Formula”

Another way to invest your tax refund wisely for the future is by putting it into stocks. And I don’t mean just any stocks – I’m talking about buying stocks the SMART way.

I know financial advisors and personal finance gurus love to say “Buy low-cost index funds, diversify, and invest for the long-term”, but none of them address the fact that the stock market has been going up up up for more than 10 years. It’s made record highs and has been on the longest bull run in history. So I don’t know about you, but I’m not comfortable with buying stocks at the top of the market right now.

So what’s a girl to do?!

Luckily there’s a solution. It’s called Magic Formula investing, which is like diversification on steroids. Based on two simple financial metrics, it filters through all the thousands of companies you COULD invest in and shows you only the CHEAPEST and BEST ones. Between 1988 to 2004, this method outperformed the market by MORE than double! 30% compared to  the market’s 12.3%.

The idea is that if you’re buying GOOD companies for CHEAP, then your risk is super low since there isn’t much more room for the stock to go down. Here’s the book – The Little Book that Still Beats the Market by Joel Greenblatt, and it explains this very simple yet powerful strategy in detail. It’s only ~150 pages long and readable in one day!

#4 – Pay off your smallest piece of debt

If you have some debt, whether it’s student loans, your car loan, or credit cards, one awesome thing you can do with your tax refund is to kickstart a massive debt payoff plan.

Debt is a huge mental burden and unconscious drain on your energy. It holds you back from embodying a true abundance mindset, because you’re always playing catch up and your cashflow is always going out the door vs into your savings and investments.

I recommend paying off your smallest piece of debt first. I know that the typical advice is to pay off the highest interest debt first, and there’s definitely a lot of financial logic to that. But you get a lot more satisfaction from wiping out a whole account, vs chipping away slowly on a bigger one. It feels like a much bigger “win”.

And because 90% of money is behavioral, it’s important to keep you motivated with easy wins along the journey. So if you have outstanding balances on multiple credit cards and student loan accounts here and there, use your tax refund to wipe some of them out (or at least to pay off a big chunk)!

#5 – Quit your job…!

That’s right… I said it! This is actually what I did several years ago when I got my tax refund. I was working on Wall Street and I really wasn’t happy with my job, but I didn’t know what I wanted to do next either. My job was so stressful and demanding that I didn’t even have the time, space, or energy to figure out what I wanted to do instead!

It was like being stuck in a hamster wheel. So right around April of 2015, I got a huge tax refund and I used this money – along with a bonus I got at work – as a savings cushion to quit my job.

I took the whole summer off, and I used that time to travel, read a ton of books, explore my hobbies, and it really helped me figure out what I was passionate about and what kind of life I really wanted to create. I tear up whenever I think about it, because I really don’t know where I would be if I hadn’t set aside the money to make that happen, because you guys – having the TIME and SPACE to think about your dreams and explore – is PRICELESS!

With just $5k, you can spend the entire summer in cheap places like Bali or Berlin and have a blast. That’s what I did in Bali – your room might be $500, scooter $200, food and other expenses $500, your flight $1000.

You can even have a job lined up after your time off, so this doesn’t have to be some crazy leap into the unknown. But if you haven’t been satisfied at your job, or you want to start working for yourself and need some free time to figure out how to do that, your tax refund might be the perfect chance to do it!

Alright now I want to hear from YOU.

What are YOU planning to do with this year’s tax refund?

Join me in the comments below and let’s motivate each other to make smarter decisions with our money!

That’s all for today, thanks so much for reading. If you liked this post, please share it with your friends so we can open up the conversation around money AND build a sisterhood of financially savvy, empowered women.

Always remember to go after your dreams unapologetically and to live life on YOUR terms. Cheers

The post 5 Smart Ways to Invest Your Tax Refund (That You Haven’t Thought Of!) appeared first on Rose Han.

Keep more of what you make

I used to pay at least half of what I made in taxes to the government, but now, I pay a fraction of what I used to – just by tweaking a few things. So in this post, I’ll explain 6 investing tax loopholes that will help you reduce your tax bill so you can keep more of what you make… legally.

The bottom line is, if you want to pay less in taxes, you have to reduce your “income”. The best way to do this is to quit your job, not make any money, and live off food stamps. Just kidding! (haha)

But seriously, if you want to pay less taxes, you have to lower the income that the government views as taxable. This doesn’t mean making less money – it just means you need to switch over to certain types of income that AREN’T taxable. This is called tax-exempt income. The more tax-exempt income you have vs. not tax-exempt income, the less taxes you’ll pay.
You also want to maximize your tax deductions. These are certain expenses you can report that reduce your taxable net income. The more tax deductions you take, the less taxes you’ll pay.
Did you know that Warren Buffett pays less taxes than his secretary? That’s because a lot of his income is tax-exempt AND he takes a lot of tax deductions. It might seem unfair, but tax laws are skewed way in favor of investors and business owners. That’s why I want you to start investing your money too! Although we can’t all be like Warren Buffett, there are a lot of ways to reduce your tax bill, even if you don’t own a business or have a lot of money.

1. 401(k)

The easiest way to reduce your taxes is by putting money away into a 401(k). In general, you owe taxes on everything you make, as SOON as the money comes through the door. But with a 401(k), the IRS let’s you contribute a chunk of your paycheck to it FIRST, and THEN they’ll charge you taxes on whatever’s left. The end result is that you pay taxes on a much smaller amount, AND you get to save & invest with tax-free earnings.

Here’s an example:

• Let’s say your salary is $5000 a month. You decide to save $500 every month into your 401(k), which lowers your taxable income to $4500. If your tax rate is 40%, then instead of owing $2000 you’ll only owe $1800. That’s $200 that stays with YOU instead of going to the government.
• Plus you’ll be really happy with yourself for building up a nest egg in your 401(k). You’ll be able to save your money SO much faster in a 401(k) account. Especially if your employer offers to match your contributions dollar-for-dollar. That’s basically free money that is ALSO tax-free. Hell yeah! I’m ALL over that.

FYI 401(k)s are meant to help you save for retirement, so you generally can’t touch the money until you turn 59.5. And you can only open a 401(k) if you work for an employer that offers one. So if you don’t get a 401(k) through work OR you’re self-employed (like me!), this next tip is for you.

2. SEP IRA

The SEP IRA is the equivalent of a 401(k), and it’s for all you freelancers, self-employed peeps, and business owners.  It lets you put away up to 25% of your net income into a tax-free investment account. This saves me at least $2000 in taxes every year, plus it motivates me to save for retirement.

I’ve talked to WAY too many freelancers and independent contractors who don’t know about this tax loophole, and this is a HUGE MISTAKE. If you’re self-employed, definitely look into SEP IRAs. It’s like… why pay any more taxes than you need to? So if there’s only ONE thing you take away from this video, it’s this…. OPEN A SEP IRA!!!

3. HSA

This one’s my FAVORITE. An HSA is a lot like a 401(k) or SEP IRA, in the sense that any contributions you make to it immediately reduces your taxable income. HSAs allow you to pay for qualified health-related expenses with tax-free money, and you don’t have to wait til you’re retired to spend it! So HSAs are amazing because you can reduce your healthcare costs AND reduce your taxes. I use my HSA to pay for my contact lenses, acupuncture visits, and you can even use it for massages if you get a prescription from your doctor.

By the way, not everyone is eligible to open an HSA. Because it’s such a juicy hookup by the IRS, you’re only allowed to have one if your health insurance is a high-deductible plan (i.e. low monthly payments but higher out-of-pocket expenses). Having an HSA-enabled plan makes a lot of sense for you if you’re pretty healthy, you hardly ever visit the doctor, but you want a tax-savvy way to cover your medical expenses when you need it.

4. Munis

Now let’s talk about some ways to make tax-free income! Municipal bonds or “munis”, are bonds issued by local governments – such as cities, counties, and states – to fund things like infrastructure and water projects. The best way to invest in munis is through municipal bond funds, which are funds that hold hundreds of bonds from hundreds of different municipalities. This helps you diversify and spread out your credit risk.

Short-term municipal bond funds can be a relatively safe place to park your cash while earning some tax-free interest. As of today – March 2019 – you can expect to make a yield of around 1.65%, which doesn’t sound like much, but if you factor in the tax benefit, you get a tax-equivalent yield of about 2.50%. Of course – this is NOT a recommendation to buy, as municipal bonds do have their risks, but if you want to do more research on this, check out VMSXX or VWITX.

5. 1031 Exchange

If you own rental property or you want to own rental property one day, this one’s for you. Real estate tends to go up a lot in value, which is great but you have to pay major taxes on the gains if you were ever to sell. With capital gains tax at 20%, we’re talking a big chunk of change when it comes to real estate. But Uncle Sam has structured the tax law in such a way that you could get away with never paying the tax on your real estate gains for the rest of your life. This is 100% legal, through something called a 1031 exchange.

In a 1031 exchange, you pay zero taxes on the gains when you sell your investment property, as long as you roll over your profits into a new property of equal or higher value. This is basically a tax break offered by the government to help you grow your real estate portfolio. Think about it, normally when you sell you have to pay full capital gains tax on any profits you’ve made. If you reinvested that money into something else, you’d have 20% less buying power because you had to pay your taxes.

But in a 1031 exchange, you could sell your property and pocket all the gains without having to pay any taxes on it, as long as you reinvest it into a new investment property. People do this all the time, trading in a duplex for a triplex, and then trading that in for a multifamily building, and then trading that in for an apartment building, and so on and so forth. There’s definitely a lot of advantages to investing in real estate, and this tax loophole is one of them.

6. Roth IRA

This is a good one too. Roth IRAs are another way to avoid paying taxes on your investments. Any stocks, bonds, or assets you hold in your Roth IRA can grow tax-free until you retire. And when you retire, any income you get or withdrawals you make from your Roth are tax-free as well. So for anything you buy inside of a Roth IRA, you’ll never have to worry about taxes again. A key feature of Roth IRAs is that there is no immediate tax savings today (because any money you put into it has to be with your after-tax earnings), but you get huge tax benefits on the back end when you retire. All your gains, dividend payments, and interest income from your investments will never ever be subject to taxes for the rest of your life. A great combination is to have a 401(k) + a Roth IRA, or for us self-employed folks, a SEP IRA + a Roth IRA. Maxing out your contributions to both would mean you’re saving as much as possible for retirement AND not paying any more in taxes than you need to.

Now I want to hear from you!

Which is your favorite investing tax loophole and why?

Let me know in the comments below!

That’s it for today. Thanks for stopping by! Please share this post with your friends – sharing is caring so let’s empower as many of our sisters as possible with financial literacy. Make sure to join my email list, and always remember to live life on YOUR terms. Cheers!

The post 6 Ways to Reduce Your Taxable Income in 2019 (Loopholes You Need To Start Using!) appeared first on Rose Han.

So you really don’t need much to at least get started investing in stocks. In fact, most of you have at least some amount of money to invest, however small. However I don’t think the psychological and emotional aspects of investing are addressed enough (fear, risk, doubt, etc.). So there are some things to consider when figuring how much to start out with, such as:

• What kind of investing you wanna do
• Your experience
• Your comfort level with risk

I’ll be explaining all that in this post, so let’s get into it! Watch the video below or keep reading to find out more.

You don’t need much!

There’s a common misconception that you need a lot of money to start investing. Maybe back in the day that was true, but nowadays, technology makes it so easy for regular investors like us to access the stock market. Account minimums, investment minimums, and crazy high trading commissions are all a thing of the past.

Don’t confuse trading with investing

Another reason why people think they need a lot of money to start investing is because they’re confusing stock trading with investing. Stock trading DOES require a lot of money. It’s fast-paced, adrenaline-pumping and it  involves studying price charts to take advantage of short-term moves in stock prices. If you only have $100 you’ll probably get wiped out before you get a chance to realize what happened. So to be trading stocks, you definitely need at least a few thousands dollars – in my opinion. I don’t really recommend stock trading for anyone because it’s so technical and emotionally demanding, and it’s really not appropriate for most people.

But investing in stocks is a totally different story…

Use apps to get started for as little as $5

There are some great investing apps out there that let you get started with as little as $5. Stash and Acorns are two of my favorites. Thanks to a feature they offer called fractional investing, you can get a fully diversified portfolio with any amount of money. Diversification is a great strategy for anyone who doesn’t know how to pick individual stocks and wants to spread out their risk.

If you prefer to invest in individual stocks, almost all the major online brokerages have no account minimums and really low trading commissions. Robinhood is a relatively new app that charges zero commissions – although I haven’t used it myself, I’ve heard good things about it, and if you don’t have a lot of money to invest, it makes sense to avoid paying fees and commissions as much as possible. If you’re buying $100 worth of stock, it’s not cost-effective to pay $4.95 make that trade.

Fractional share investing

Another really cool app that I recently discovered is called Stockpile, which lets you buy fractional shares of any stock you want. So you don’t even need enough money to buy a whole stock! If you want to invest in big stocks like AMZN (which costs around $1670 per share), Google (which costs around $1179 per share), or Chipotle (which costs around $616 per share), you can with whatever amount you have.

The point I’m trying to make is this: If you want to get started investing in stocks, don’t worry about account minimums and investment minimums and things of that nature. Whether you have $5, $50, or $500, there’s really no restrictions on how much you need to get started.

Also consider your comfort level

In fact, rather than asking “How much money do I need to get started?”, I think what you should really be asking yourself is, “How much do I feel comfortable with?” Investing means you’re putting your money at risk, so the #1 consideration should really be your comfort level. If you’re a total beginner, you’re probably a little nervous. Maybe you don’t trust the stock market or you just don’t like seeing the value of your account fluctuate without understanding why. In my opinion, getting comfortable emotionally with the act of investing is the most important hurdle, and for that you can start with any amount of money.

So try starting small with, say, $100. Or maybe for you, it’s more. Just ask yourself, how much am I comfortable with risking? Everyone is different, so it should be an amount that kinda gets you excited but not so much that it stresses you out. The point is to dip your toes into the water, get some skin in the game, and start learning the flow of the market, not to give you indigestion!

You can always start small and add more. I started investing with just a couple hundred dollars, and now, after so many years I’m comfortable seeing my portfolio go up and down every day in the thousands. I actually love it because market volatility also means there’s upside. But it takes a little time to get used to that feeling, so start with an amount you’re comfortable with and then build up from there.

Start with what you have

The bottom line is – there’s REALLY no rules on how much you need to get started investing in stocks. Don’t be one of those people who say, “One day, when I have more money, then I’ll start investing.” Start with what you have, even if it’s just $5!

Whether you invest $5 or $5000, you’ll start to experience firsthand what it means to have money working for you. My first dividend check ever was probably only like $0.50 but it was still really frickin’ cool to see my money working for me, and at a young age, it was a powerful experience.

Now I’d love to hear from you:

Have you started investing in stocks? Why or why not?

Let me know in the comments below because I’d love to know!

Thanks for reading! I appreciate you sooooo much. If you liked this post, please share it with your friends so we can empower as many people with financial literacy.

Always remember to go after your dreams unapologetically and to live life on YOUR terms. Cheers!

To your wealth,

Rose

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