Financial Advisors React To Money YouTubers (Part 4)

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1:00Humphrey Yang:We got another react show. I've been told this is going to be a lot of kumbaya because it's some of our favorite financial YouTube channel. Brian, I am so excited for this. Let's see what the content team has for us. It's come to my attention that a lot of you are investing in ETFs and index funds that own the same things. So there's this website right here where you can put in two ticker symbols of ETFs and you can see how much overlap there is. You can see here with the ETF that tracks the S &P 500, VOO, and QQQ, which is the one that tracks the NASDAQ, that there is a 50 % overlap by weight and 85 % number of overlapping holdings.

1:33QQQ only has 101 holdings. That means 84 % of the stocks you are buying in QQQ are already in VOO. That's not necessarily a bad thing. QQQ is more concentrated in technology, so you will get more of a return out of QQQ when that sector does well. But I've seen some portfolios where people buy VOO and SPY at the same time, and SPY is just It's the same thing. It's just by a different company. So you can see that the overlap by weight is 99 % and there are 496 overlapping holdings. That's not good. What you want is something like this. This is VOO and SEHD. And as you can see, it's only 7 % overlap by weight with 43 overlapping holdings.

2:07Yes, that's still a lot. But considering the S &P 500 has 500 stocks, you're just not going to be able to avoid that that much. So anytime you're composing a portfolio, you just want to be mindful of this. You can't have some overlap, of course, but too much like 80 % plus would just be a little bit redundant.

2:22Humphrey Yang:You know, I've shared the story that I had some friends and family come to me and I asked them when I looked at their 401k, I said, what was your decision point on all the different funds? And they said, I chose every fund that had the word growth in it. And I was like, all these funds are doing the exact same thing. So I like how Humphrey actually shared the tool there. So we're not stuck knowing how to do this. And what I love too, is when it comes to building a portfolio, obviously you can do it yourself and you can use these tools, but there are amazing tools out there like Target Retirement Index funds, where rather than you deciding which individual ETFs or which individual holdings am I going to go buy, I can just answer two questions.

2:59How much do I want to save? And when do I think I need that money? And I can buy a Target Retirement Index that models to that and I won't have to worry about those allocation decisions just yet. And here's a common misconception I want to address. If you're invested in something like VOO, Vanguard's S &P 500 ETF, you're not getting any small cap exposure at all. VOO only includes large cap stocks. It is stable, it is predictable, it is the 500 largest companies in the US, but it is not the entire market. This is a really important distinction to make because many investors feel like when they're invested in VOO or some fund that tracks the S &P 500, that they're invested in the entire market.

3:44And that is simply not the case. They're invested in large cap stocks only without any exposure to these smaller companies, which could represent an opportunity. If you want to have a well diversified portfolio, and if you want to take advantage of having exposure to all different segments of the market, you might want to make sure that you're including all segments of the market within your portfolio. Yeah. A lot of people don't realize when we talk about S &P 500, because that's often the most quoted representation of the market. It actually does not represent the market per se. It represents an asset class inside of the total market.

4:17Now, it's a large asset class. It's an asset class that gets a lot of attention. It's an asset class that drives a lot of the performance of the overall market, but it is a singular asset class. It's why we tell our clients all the time, hey, be careful comparing your total portfolio performance to the S &P 500 because you're comparing the entire portfolio to one single sliver. That's a great point that Aaron is making.

4:39Humphrey Yang:Look, diversification, as you get closer and closer to landing the airplane and of needing to actually use the resources, you're going to realize that there's a lot of value to having VU, which is the S &P 500, but also having small cap, having international, having something as boring as bonds and even cash reserves. Diversification will be your friend because guess what? As things get volatile or you have to make choices to pull money at times that might not be perfect, you're going to really appreciate that you got different things to consider using at different times when other things are struggling.

5:13You want to get to a point where you have enough investments that are spinning off capital or growing such that your passive income is greater than your burn. That's the definition of rich. And you can do the math, right? Well, okay, if I'm going to need$120 ,000 a year, I'll get 6 % on that. I need to save 2 million. All right, this is how many years I have to work. I'll assume the market will go up 8 % a year. You can kind of do the math around how much you should be saving and putting in low cost index funds. So that's the goal. You want to be rich. You want an absence from anxiety. You want to be able to live well without having the obligation.

5:40If you decide to keep working, which I would suggest anyone does, it's a choice. I love that. What he basically said is I want to build up a pot of assets that can work harder than I can. It can generate and create more than I need to live off of. And what I've done that, he used the term rich. I don't call that rich. I call that financial independence.

5:57Humphrey Yang:Yeah. I think a lot of people, our first typical tool to building wealth is going and getting that first job. But as soon as you start working that first job, you've got to figure out if you ever plan on having the flexibility or freedom to work because you choose to, you've got to start owning assets that will replace you. The earlier you start saving, investing, and really leverage that component of time, the easier all this gets. Because remember, if you're in your 20s, you are a billionaire of time. Make sure you're leaning into that because Scott's exactly right. You want to build an army of dollar bills so that you are making money, whether you're choosing to work or whether you're choosing to go on vacation, they're going to be working no matter what you've got going on.

6:39Why are so many people bad with money, myself included? When you look at the popular culture around money, it seems impossibly complicated. And there's a reason for that because Wall Street makes it very complicated. Wall Street is filled with genuinely complex investment products. So that's the bad news. So when people say, wow, this is really complex, They're absolutely right. It is. The good news is you can sweep all of that off and onto the floor because you don't need any of it. And what you do need, what will make you wealthy over time is the soul of simplicity. But that's not a message you're ever going to get on TV or in the papers because there's no money to be made in putting that message out there.

7:19Or on the Internet. The Internet is filled with people that speak very confidently with all caps and their captions. and there's really bold music and there's complex ideas and complex graphs. And when I look at you in this book, you just wrote one book when there's so many courses you could have sold. There's so many sub books you could have written about how to become rich. And my question, JL, is why aren't you a grifter? There's a great grift to get in on. And why just do one little book like this? You know, it's my mother's fault. Really? Yeah, she instilled a conscience in me. I've cursed her for that ever since.

8:00I'd be so much wealthier if she hadn't given me a conscience. It's amazing that building wealth can be incredibly simple. It's not necessarily easy, but it can be simple. But we have an entire financial industry built around making you believe that it has to be more complicated than it actually is.

8:16Humphrey Yang:J.L. Collins, if you didn't know who that was, Simple Path to Wealth. A lot of people love his writings. I love seeing him in interviews, too. is because he is aligned to what we have tried to build as we've created the financial order of operations. In a lot of ways, building wealth is pretty simple. Doesn't mean it's easy. Don't mishear us. If it was easy, everybody would do it, but it is relatively simple. If you understand, we even talk about the three ingredients to wealth. Can you live a disciplined life, meaning you live on less than you make, use that to create margin or money that you actually put to work and give it enough time through compounding growth and voila, you're going to end up just like JL Collins talked about with the simple path to wealth.

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9:52keep your jobs moving just like that at Lowe's. Do I stop living paycheck to paycheck as someone who graduated with six figures of student loans? Number one is building a checking fund or a month ahead fund. After dealing with overdraft fees and anxiety around checking my bank account, I decided to intentionally save one month of expenses and keep it in my checking account. This way I never have to worry about the timing of my next paycheck and when my bills are going to be pulled because I know I have that money set aside and ready to go. You can start building your own checking fund by adding a line item in your budget and allocating a little bit each month.

10:23Even just$5 or$10 a month will help build this up over time. And speaking of budgeting, number two is manually tracking all of my expenses. I've tried the automated apps, but I found that I was really bad about just ignoring it. Seeing exactly where your money is going and manually tracking helps you stay accountable and also see where you can make improvements in your finances. I use my annual budget planner to make a plan for my finances across the entire year. This helps so much to understand where my money is actually going and how much I have left over to go towards my other goals. And if there's absolutely nowhere that you can make improvements or cut back, you know that number three is going to be the most important thing to focus on and that is increasing your income.

10:59I know this is annoying to hear and very obvious, but when your debt is almost twice your annual salary, like mine was, increasing my income was really the only chance that I had to make progress. I job hopped every one to two years. I got certificates in my field. I started pet sitting. I did bank account and credit card returning, I did couponing. Honestly, anything that I could do to earn a dollar or save a dollar helped so much in getting ahead of my finances. What McKenzie laid out there is basically, if you want something you've never had, like financial security, financial peace, financial confidence, you got to be willing to do things you've never done.

11:30And she implemented some easy ones. Hey, I'm going to put a little bit extra in my checking account. I call that a slush fund. I'm going to have a little bit of slush fund inside of my checking account. I'm going to start tracking where my money goes. And I'm going to figure out how can I use my shovel in the most effective manner to begin working towards some of these financial goals. But it took very intentional steps in order to do that. It just happened overnight.

11:51Humphrey Yang:The budgeting component is so powerful because nobody, nobody wants to go track how they're doing it. And by the way, know thyself. She said that she didn't like the automated apps. You might be okay with the automated apps. And then I love that she talked about, look, after you figure out the two levers, you know, the big lever that I think a lot of people know is, hey, I got to go cut expenses, but that's only going to get you so far. You can go pull the lever of you need to go figure out how you create more income because that's going to probably be the biggest driver that gets you over into that next level of wealth is how much money you can go increase your shovel and start putting it in the bank spot by earning more money.

12:29The secret to financial success isn't discipline. It's removing the need for discipline altogether. And that's exactly why automation is one of the most powerful things that you can do for your finances. When you rely on manual decisions to save, invest or pay bills, you leave room for inconsistency. Some months you'll be on top of it. And then other months when life gets busy, you'll fall behind. So we're doing two things. First, we're automating your entire money system. Bills and fixed expenses. You want to set up direct debits for rent, for mortgage, for utilities, for insurance, for debt repayments.

13:00This prevents late fees and also protects your credit score. Then you want to automate your savings and investments. schedule automatic transfers to your savings, your investment accounts, your retirement fund, then you want to pay yourself first. You want to put that into your own pocket before paying anyone else. And then the rest is your everyday spending. Use a separate account or a card for your fund money, your daily expenses. This makes budgeting effortless because when the money's gone, you know that it's gone. The second thing you want to do is review and adjust your financial plan because your financial plan isn't set in stone.

13:29Continuously check in with yourself and ask yourself, are my automated savings and investments still aligned with my goals? Has my income increased? If so, can I increase my savings rate?

13:39Humphrey Yang:I'm not willing to throw out discipline because I absolutely love the component of discipline, meaning you live on less than you make. But I do completely agree with her in the aspect of make it automatic for the people. If you can automate your financial life, you really can make this almost a journey that walks as close to inevitable as possible. Yeah, discipline is required, but I think even automating stuff takes an element of discipline to do that. What she's trying to do is she wants to make the good decisions as easy as possible. These things happen automatically, automatically, automatically, automatically, and they make the bad decisions relatively hard.

14:13What she did is she said, after I have all my automated spending, all my automated saving, all my money going where it has to go, the thing that's left over at the very end is the spending. That's the one where I get to be manual. If you spend first and try to wait till the end of the month to save, what you're going to find out is oftentimes when you get to the end of the month, there is no money left over. So if you can pay yourself first and automate it, you're likely going to set yourself up to be more successful moving forward. So if I were in my 20s or early 30s again, I would do this every single paycheck so I don't end up broke.

14:45And this is coming from a 35-year-old self-made millionaire. The very first thing is we want to set up direct deposit through our employer. We don't want to be taking pictures of our paycheck and doing that mobile deposit. That is not what millionaires do. Now, here's where people make their first mistake. Let's say you make$1 ,000 for this paycheck. They have all of it go to a single account. This is incorrect. We don't want to do this. Instead, we want to decide how much we can save up front and have that automatically deposited into our high yield savings account. Not a regular savings account.

15:13So we're not talking about Chase, Wells Fargo, Bank of America. These are the worst places to keep the majority of your cash. So if it's 10%, 20%, 5%, whatever you can comfortably save, have it automatically go here and the rest can go into your checking account. Now, the reason why we don't want to use Bank of America, Chase, Wells Fargo is because they pay such a low cash on your cash. And the high yield savings accounts are paying well over 300 times more. And here's an example. This is our bank and they're paying us passive income every single month. We do nothing. This is just our money sitting here earning us passive income.

15:43Next, I'd set up an automated transfer every single month to contribute money to a Roth IRA. Now, ideally, we want to contribute at least 10 % of our income here, but just do whatever you can for now. Now, one mistake people make with the Roth IRAs is they deposit money and they just leave it there. This is also incorrect. We want to take this money and invest it into index funds so the money grows over time. So for example, if we invest$583 per month for 40 years, earning just a modest 7 % return, this is after inflation, we have$1.4 million and all the money in this Roth IRA is tax-free as long as you withdraw the profits in retirement.

16:18And lastly, here's what we do with the money in your checking account. Part of this money is gonna go towards your living expenses. And ideally we want this to be less than 60 % of our income. And the rest of it just goes towards the fun stuff. Don't feel guilty about buying that coffee or that boba or that video game. We gotta have fun while we're young. And for more ways to be a rich nerd, be sure to follow.

16:35Humphrey Yang:What I liked is he paid himself first. A lot of discipline there, a lot of structure, automated the entire process, exactly what you were talking about earlier, but make the good habits as easy as possible. And also that structure allows it to make those bad habits that much harder. I love the method that if you set it up this way and you have these things happen automatically, you really inhibit your ability to get off track or lose track of what it is that you're trying to do. So I thought that was great. I think that's a great system to set up inside of your personal cash flow. Doggy want to retire.

17:06No work, no fetch. Just nap in sun and chew toys all day. How do you get there? Doggy need bones. Lots of bones. Saved over time. Then wise old doggy say, open Roth IRA. Doggy say, what that? Wise doggy smile. Roth IRA equals magic bone box. You put bones in now. Let them grow. Tax free. Doggy say, wait, no tax? Wise doggy nod. You already pay tax once. Now they grow in peace. Doggy work job Earn bones Put some in Rothbox Each year Just a little Money grow with time Gotta be a real dog person

17:47Humphrey Yang:I love this Turn into big pile No tax when doggy retire I really bought into the whole dog language Zero bark from IRS Hey, Bo, I wanna know What's your favorite doggy bone box?

18:04The Roth would be my favorite bone box For sure everything was great that's all right we love Roth IRAs we love putting our money to work there are reasons you want to do that if you can figure it out early on you can set yourself up for financial success so whatever your bones are whatever it is that you're working towards Roth IRA is likely going to be a great tool to help you and Doggy get there my wife's dog is

18:28Humphrey Yang:probably the most loved dog in the world I think my wife loves the dog more than maybe even me and he didn't have to do the doggy Rothbone box. I don't know. I'm trying to, it's hard to get serious after all that broken dog language, the dog-splaining that just went down. Oh, that dog-splaining? Dog-splaining, that's what it was. What's amazing is I love all these YouTubers laid out that, again, building wealth does not have to be complicated. It does not have to be complex. It's fairly simple, but it's not easy. So if you can figure it out early on, the path becomes that much easier. Guys, we absolutely love creating content to help you accelerate your journey to building financial independence.

19:17Humphrey Yang:I mean, we had some big heavy hitters in there. I mean, I always love it whenever we have a J.L. Collins clip in there. He always just feels like your favorite uncle who's kind of just laying out some facts. And I like to think that if you come to our channel and you go to our website, moneyguy.com slash resources, you're also going to be overwhelmed with just the common sense, the simplicity, and all the tools that are also help you build your path to financial independence. I'm your host, Brian Preston, Mr. Bo Hanson, MoneyGuy team, out.

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