139: The Easiest Way To Lower Your Tax Bill - Direct Indexing with Public

24:27Their own strategy, their own thesis and have the same approach. And again, I think within a broader public portfolio, you're not limited to just one direct index. You're not limited to owning individual stocks or options or whatever. You can make your portfolio how you want it to be. So if you want to have a couple of different direct indexes, you want to build your own, you want to own stocks, crypto bonds on the side, like that's all up to you. And it all works really well sort of within the same app, within the same great web experience. I could not be more excited for generated assets to turn into investable generated assets.

24:59I remember when it first came out a couple of months ago, I was so fascinated by it. I went to generatedassets.com, right? That's all you got to do, generatedassets.com. And I typed in, it's kind of like a prompt, like a chat GPT prompt. It's like, hey, like, what do you want to like invest in? Right. And so I was like, okay, I want to invest in the top 20 companies whose revenue per employee is the highest in the S &P 500. And it gave me like the 20 companies whose revenue per employee were the highest. And it back tested it to show me if I had invested in this exact strategy, like 10 years ago or five years ago, like how it would have performed against the S &P 500.

25:36And then I was able to publish that strategy onto like, you know, the list or whatever, because you can go to generatedassets.com and see like the best performing, like created indices that people like come up with here. I'm looking at some of them on the top list right now. It says future prosperity list, tech and innovation titans, elite resurrection protocol, chip duopoly, the A16Z universe. Like there's some like really cool things that people can come up with here. And so I guess what you're saying is you are very close now with direct indexing to be able to say, hey, come up with something cool with generated assets.

26:11And maybe here pretty soon, you could be able to invest into those ideas that you come up with. Yeah, that's totally right. Something we're actively working on and excited to talk more about it in the future. So many of our listeners are in the early stages of their wealth building journey, and maybe they've got their first$10 ,000 to$20 ,000 saved up and they're looking, trying to figure out how to deploy it. What advice would you give these people that are just getting started? Should they get into direct indexing right away? Or some of the listeners just stick to the basics with traditional ETFs for now?

26:42And is there a certain crossover point where you think maybe it's their first 100K, 200K or wherever, where then direct indexing might make more sense for them to initiate versus traditional ETFs? Yeah. I mean, listen, I think we've worked hard to bring that barrier down. I mean, I think that the waterfall of like standard personal finance advice is the same, which is like invest in your 401k, get the full match, max that out, then start talking about tax advantage savings outside of that, right? With you got to understand your own liquidity needs and when you're going to need money in the near future.

27:13But with that sort of disposable income, manage it with tax exposure through again, 401k IRA. But once you're done with that, again, having that same idea in mind of how do I get the best after tax return that sort of those tax advantaged accounts present, and that's sort of what the top of the waterfall is, as you get an individual accounts, we really think direct indexing on a recurring basis is one of the best products that you could invest in because it's going to, again, solve for that diversification, those long-term compounding uncorrelated returns across a broad borbolio of diversified assets.

27:45It's going to do it at low fees and it's really built to solve for great after-tax returns. So, So, you know, and again, you can start that a thousand bucks. You can do a thousand bucks up front, a hundred bucks a month, that sort of thing. Whatever your sort of disposable income can support. I think it's a phenomenal product for anyone in that sort of early stage of their savings or people that are later. Right. Again, it's a great news. It's a great new strategy, even for people that own quite a lot of ETFs, because, again, our view is that it's going to outperform in the long run. Stephen, this has been incredibly valuable.

28:13I'm sure our listeners are going to love this episode. The work you've been doing at public to level the playing field for retail investors is incredibly important and inspiring to me. And I know our audience is going to walk away with just kind of this clear understanding of how to think about direct indexing as a whole and the tax optimization of it. So where can people go to learn more about it on public and get started with direct indexing? Come to public.com. Check it out. All the information's there. I also make it make myself very easy to find online, whether that's Reddit, Twitter, et cetera.

28:47Frankly, find me on any of the platforms. Happy to have a chat about it or help you get started. Austin also knows how to tag me and if you find him on socials. So again, happy to talk to, happy to talk to current customers, future customers, whatever I can do to be helpful. Steven, thank you so much, my friend. We can't wait to have you back to talk about generated assets when that of course gets really figured out and launched here. Who knows when that'll be, but I'm excited for that to take place, man. And thanks again for joining us and educating our listeners and just walking us through such an important innovative milestone in Publix history here and just unlocking a insane tax optimization strategy now for the masses.

29:21Awesome. Thanks for having me, guys. Robert, what a super fun conversation we just had with Stephen Sykes, the chief operating officer at Publix.com. As a reminder, direct indexing,$1 ,000 minimum. Get started if you literally think about it like this. Hey, I'm building my portfolio. Robert and Austin think that I should be investing 65 to 85 % of my net new income, net new investments into these like core holdings, right? We talk about core satellite holdings. 65 to 85 % should go to the core holdings, which are ETFs and index funds like the S &P 500, like the NASDAQ 100 and things of that nature.

29:57So now, instead of putting net new capital into buying shares of VOO, QQQ, SPY, whatever other S &P or NASDAQ ETFs and index funds you like to buy, you can put that net new capital into direct indexing on public.com and start to take advantage of the tax loss harvesting that comes with that. I'm telling you guys, tax loss harvesting is insane. We've been direct indexing for the last about 16, 17, 18 months. I direct indexed$20 ,000 in the S &P and I had tax loss harvested so far like 2 ,200 of that, which is like 11 % in about a year and a half, right? So I'm not saying that you're going to see the same 11 % tax loss harvest of what you invest, right?

30:40So if you put in 100K, I'm not going to say you're going to tax loss harvest$10 ,000 in the first year, year and a half like we have. Because again, tax loss harvesting is opportunistic as to what the actual markets are doing. It has nothing to do with the platform you use. It's all about what the markets are doing here. But at the end of the day, why not? Why not, Robert? Yeah, I think it's all just about one of the best things we do here is really seeking out the best strategies for all walks of life to help people keep more money and really take advantage of tax strategies like this. And so I'm really excited about this episode.

31:15I hope everyone takes notes, goes to public, reads up on it and sees if it's a good fit for them. Because at the end of the day, anything we can do to put more money in the pockets of our listeners, that's what we're here for. It's really a no brainer. Like I'm telling you guys, like if you are someone that's like, oh, I don't know if this is right for me. I guess taxes are something you like to do and pay, right? I don't. So tax loss harvesting is always right for me. But yeah, do your own research, figure out what's right for you. In our opinion, 99.5 % of people direct indexing is the way to go when it comes to investing into the index funds and ETFs we talk about, especially now with just a thousand dollar minimum.

31:50Like before it's like, whoa, I didn't have 20, 50, 80, 100,$250 ,000 to do this. Like I can't do it. It's like valid, super valid excuse. If you have$1 ,000 invested into VOO or QQQ, you should be direct indexing it on public.com, period. End of story. All right, Robert. So now it is time to jump into the Q &A section of this episode. But before we do that, I got to give you guys a quick reminder as to why our podcast is called Rich Habits. The name of our podcast is Rich Habits for a reason, because the behavior we have with our money is the most important aspect when it comes to building wealth.

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32:59Or maybe you're a business owner like us, and you want to automatically set aside 33 % of revenue for taxes. Sequence connects to all of your financial accounts, personal, business, credit cards, loans, all of the things that you can think of, which gives you one nice clean map so you can automate everything in one place. GetSequence.io puts your finances on autopilot, routing your money exactly where you want it to go. GetSequence.io is a financial lifesaver if you're someone who loves a good sinking fund. You can build smart rules and even add conditional logic, make it easier for you to hit your financial goals.

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34:13Check it out at GetSequence.io front slash Rich Habits Podcast to start automating your finances and focus on what matters most. All right, Robert, our first question for the Q &A section of this episode comes from Alex F. on Instagram. Alex says, I believe I have an interesting situation. While I have received great advice from successful friends and family, I'd love to get y 'all's take on it. My name is Alex, I'm 25, and I live at home. I have roughly$19 ,600 in student loan debt that starts to accrue interest this December. It's broken down into four groups,$3 ,600,$4 ,500,$5 ,500, and another$5 ,500, all at different interest rates that Alex put here, but we don't want to confuse you all.

34:55So four different groups. I also just purchased a truck that's going to cost$870 a month between insurance and my vehicle loan. I just graduated with a bachelor's in civil engineering this past May, and I've passed my FE. For the past year, I've been working as a project manager for a subcontractor and I just landed an entry civil engineering job starting at the end of this month. I will be taking home$4 ,744 every month. Considering I have nothing in retirement or any investments, I'd like to take the next year to supercharge what I can. In doing so, I would likely need to only put the minimum payments toward my student loans.

35:31Now I'm being told that it would be better to pay as much as I possibly can toward my student loans. I can knock them out in the next one and a half years if I did this. The minimum I'd put toward my 401k if I did that simultaneously was 6 % or about$285 a month. This is to get the available 3 % match that you guys talk about. What would you guys suggest I do? The minimum monthly payment for the student loans is$205 and it will allow me to invest upwards of$1 ,000 monthly between my Roth IRA and my 401k, 1K, assuming everything above that goes to the student loans. So long story short, pay off the student loans fast or invest.

36:06Robert, what's your take? Alex, I think you're getting some bad advice. First and foremost, if you're making$4 ,700 a month, I would not have an$870 a month truck payment. First and foremost, that is way too much payment for what you're making. Secondarily, I would break down these student loans and the first one at$3 ,650, 2.75 % interest The second one,$4 ,500 at$4.99. And even probably the third one, I would keep paying the minimums. What I would think to do is knock out the$5 ,500 one at 6.53 % interest, leave the others go because they're mostly considered lower interest, and the arbitrage you could make in the stock market and by investing in these ETFs would favor you generously.

36:55That's my first take on this. Secondarily, you have to look forward to that you're living at home right now, but if you wanted to move out on this$4 ,755 salary with a$900 a month car payment, you're not leaving any wiggle room to invest or pay rent, whether you had a roommate or not. So I would be very careful on what you do. I would only knock out the high interest student loan debt, and I would work on getting some money put into investment accounts like we talk about, traditional brokerage, Roth IRA, and build those up on top of the 401k before I went all in to pay off these low interest student loan debts.

37:36Yeah, I totally agree, right? So at$4 ,745 a month is what you're taking home. You've got an$870 a month car payment. I agree. I think that's too much. I think you should sell the car, find something that is not as high as insurance, maybe borrow$15 ,000,$20 ,000 versus you probably ended up borrowing$45 or$55. Oh, I got a new job. I'm out of college. I can afford the payment. It's a recipe for disaster. You're putting$900 a month into a depreciating asset. So here's what I would do. Don't worry about trying to pay specific parts of the student loans in the segments or anything. Just pay the minimum, the$205 every month.

38:10That's the minimum of the student loans. Keep paying the minimum. Invest as much as you can for the next 12 to 18 months, continue living at home, and get your total invested capital between your Roth IRA and your brokerage account on public.com at or above that$19 ,600 of student loan debt. We only encourage people to start paying down their student loans aggressively after they have an equivalent amount or more invested in the stock market. Because let's say you took that$20 ,000 and you spent the next one and a half years paying it down and now you have no student loan debt. Congratulations, your student loans are now at zero.

38:45Your net worth is essentially$20 ,000 higher. However, if you took that same$20 ,000 and invested it, congrats, your net worth is also$20 ,000 higher, and it's going to perpetually compound decade after decade after decade. Remember, stock market doubles, historically speaking, every seven years. So this$20 ,000 would double, double, double, and double again, and that'd be$320 ,000 over the next 21 to 28 years, whatever that ended up being, right? So it's like you could absolutely be setting yourself up to have hundreds of thousands of dollars more in retirement by focusing on getting your stuff invested first before paying down the student loans aggressively.

39:24I cannot agree more. The truck, it's too much. I'm excited for you. You got the big boy truck. Unfortunately, you can't afford it. Let's talk numbers. 47, 45. You said that you're contributing, what is it here? $285 a month to the 401k. Your rent when you move out one day, because you're not going to live with your parents forever, single, you're probably going to be paying about $2 ,200. That's what it is here in Nashville. You're maxing out your Roth IRA at$585. And then you got this$870 payment that leaves you about$800 after everything's said and done with just the stuff I talked about. $800 to buy groceries, plus utilities, plus save for a big purchase, plus say for a trip, like 800 bucks a month, I'd rather that be much closer to a thousand or$1 ,200 a month because your car payment went from 900 to 500 or 900 to 400, right?

40:16So let's figure out how to get rid of that car, get that monthly payment much lower and get as much invested as you can before paying down those student loans. Yeah, I had a situation the other day that just falls right in line with this. There was a girl that walked in, two girls walked into the elevator with me and the girl had the Louis Vuitton purse, all Lululemon clothing. And she had the Lububu doll, a lot of L's there. And she had a brand new cell phone and she was telling her friend how she didn't have enough money to pay her car payment that month. But I'm sitting there thinking, wow, she has dripped head to toe with every consumer item you could have, but doesn't have the money in her account.

40:52And she showed her friend her account. And I'm like, guys, that's not the way to live. You have to be able to have some financial breathing room. Otherwise you're always going to be working just to survive. and we don't want to see that for anyone that follows the Rich Abbott's podcast. And, you know, Alex F., I fell for the same trap. When I graduated college, I went and I bought a three - or four-year-old Lexus IS250 F Sport. It was my dream car since high school. I wanted one so bad, and I finally bought one. I was like, I can afford that$440 a month car payment and the$275 a month insurance.

41:29So all in, what is that? $715 a month is what I was paying for that car. And I had it for like, I don't know, 18, 24 months. It was awesome. I loved it. And then I realized I looked around and I was like, wow, I've not maxed out my Roth IRA yet. And I don't think I'll be able to do it this year. And I was like, wait a second, why am I spending$700 a month on a car? Why don't I get rid of this car, drive a beater, a crappy car instead that I pay cash for, and then free up the$700 a month. So that's what I did. I ended up buying a 2005 Lexus ES 330. I paid like five or $6 ,000 for it. I ended up lowering my monthly insurance from the 275 down to 110.

42:15So now I freed up$600 a month. Well, you know what? Maxing out your Roth IRA is 580 something a month. So now I can max out my Roth IRA for the first time every month. Right? So it's like, that's the type of sacrifice that I made to ensure that I had long-term financial freedom. And it's not that I couldn't afford it, quote unquote, because theoretically I could afford the payment. Yeah, it's great. But at the cost of what? And for me, I understood, and I'm sure you guys understand now too, because we had this episode called how to 70 extra money, every dollar invested in your 20s turns into$70 in retirement.

42:49For me, it was at the cost of tens, hundreds, maybe millions of dollars that wouldn't be in my retirement account in my 60s and my 70s. So it's like, is it really worth driving a four-year-old Lexus that I thought was amazing? So now I drive a much cooler car, which I'm really excited about. It's a 4Runner. But I guess what I'm trying to say here is that make sacrifices in your early 20s. You just graduated college, dude. You don't deserve a new truck. Get that through your brain. I didn't deserve a new Lexus. It doesn't matter. But when you're older and you've got tens, if not hundreds of thousands invested, then yeah, go get the truck.

43:27That's cool. But right now, just take it down a notch. You're in your 20s. This is when you save money, you grind, you put in the work, and you do the right things for the next seven or eight years until you're 30. And then you'll wake up and look around and you're like, whoa, I've got a couple hundred thousand invested, tens of thousands in my emergency fund, and I should be able to afford a home soon. That's how you should be thinking about this. Yeah, I think that's a great takeaway. And personal finance is personal, so just make sure you adjust accordingly. But nowhere in this scenario should people be starting out so cash poor without leaving themselves any breathing room because they feel they need to have a$900 a month truck payment.

44:07It just doesn't make sense unless you're already crushing it and you have hundreds of thousands of dollars put away and you're putting away tens of thousands of a year from investing. So our last question comes from Jessica on Instagram. Jessica says, first, I have to tell you, I've been listening to your podcast for the last two years. It has completely changed my retirement trajectory. And I feel so confident now with investing my money. I'm self-employed and make about a hundred thousand a year. I'm struggling with how much money to keep in my business high yield savings account, which I use to pay for inventory.

44:37I'm wondering if I'm keeping too much in this account and could be investing more of it. I essentially transfer all extra income from my business beyond payroll and everyday expenses to a high yield savings account, I have two to three significant inventory buying events that take place each year where I spend anywhere between$40 ,000 and$80 ,000 each time I do that. So my high yield savings normally fluctuates between$10 ,000 to$90 ,000 depending on the time of year and averages around $50 ,000. I'm 43, have$100 ,000 in my solo Roth,$100 ,000 in my Roth IRA, and$58 ,000 in my bridge account. My total income for 2024 was$422 ,000.

45:16My cost of goods sold, aka buying the inventory, was$220 ,000. And this year, I've already maxed out my Roth IRA and contributed$23 ,000 to my solo Roth 401k. Thank you for all your help, Jessica. Robert, you want to kick this one off? So yeah, Jessica, congratulations. You seem to be in a pretty good spot. One glaring thing that bothers me a little bit is it seems like your inventory versus sales is a little bit high. I would assume that your inventory would be at 30 % of your total revenue. So being at 50 % is a little high to me. So I would look at maybe raising your prices or trying to renegotiate your inventory.

45:51But I do agree with you on one thing. And that is you might be saving too much of the business's revenue for these inventory buying periods to where you're only getting it into high yield savings, which is good because a lot of business owners don't even do that. They just leave it sitting in a checking account, rotting away and making no money. But I would really look deeply to see, can you tighten that up a little more so much isn't sitting in the high-yield savings account? And get that into these other accounts you have, like your Roth. And I think you said you had a traditional brokerage account as well.

46:27Because you just don't want to have an overage sitting in that high-yield savings year in and year out when it could be earning a lot more money. But keep crushing it. Look at those two things, and I think you'll find a better path forward to build more wealth and maybe save yourself some money on inventory. Just don't ever, anyone that owns a business, don't ever sit comfortably by and not check pricing. We just did it the other day with our box providers for Silly Bands, where we renegotiated a deal, and I was able to knock$0.09 a box off of a box that we use a lot of. We probably use$5 ,000 or$6 ,000 of that box size a year.

47:05Nine cents might not sound like much, but it is extra money to go to the bottom line. So always make sure you audit your expenses relative to your inventory. So I'm going to take the other side. Jessica, I think that your$50 ,000 in a high-yield savings account on average is pretty perfect. If you're doing$422 ,000 a year in revenue, and half of that is inventory, I'd imagine you're also, I mean, you said you made$100 ,000 last year, which means that of the, let's call it$200 ,000 difference, half of that is going to, you know, operating expenses, probably like payroll and rent and, you know, utilities, things like that to operate your business.

47:48So I'm always under the assumption that people should keep an emergency fund for their business, just like they have an emergency fund for themselves. My general emergency fund for my business is about a month and a half of payroll, which is what I think is about perfect. So for me, it's about$15 ,000 to$20 ,000 I just always have in my business checking account. So for you having about$50 ,000, knowing that you're going to spend$40 ,000 to$80 ,000 on these significant buying events for your inventory, I think it's perfect, right? Let's call it maybe$10 ,000 or$15 ,000 of that$50 ,000 is like your emergency fund.

48:21So you can make payroll in case a processor, a payment processor, like doesn't pay you on time or whatever, or like a credit card's weird or you have to make a last minute payment somewhere. Like you've got enough wiggle room where you're not going to be, you know, strapped for cash, but you also have enough where like, if you need to spend, you know, 30 or$40 ,000 on a 48 hour notice on inventory, because there's a big sale on your provider, or maybe you've got a bulk order in from someone else and you have to like get rid of it. Right. So it's like, you have some wiggle room there. And I like the 50, I wouldn't want to see it more than 50, but I also wouldn't want to see it less.

48:55I think you nailed it. I think 50 ,000, given the numbers that you've shared, makes a lot of sense. And you're doing a great job by using your solo Roth 401k and your Roth IRA and your bridge account as a business owner. I hope you're using carry.com to do that. They make it super simple. Go check them out. But yeah, great job. Yeah. I mean, the only thing is, I think that's a beautiful takeaway is she said she has 10 to 90 ,000, depending on the time of the year. And just 90 ,000 is too much. I'm right there with Austin. I think that$50 ,000 range average is perfect. And, you know, just always understand is all the business owners that follow this podcast, make sure you keep an eye on this.

49:30I think this is an important question because I just talked about this the other day in the Rich Habits Network Private Live, and that is so many business owners aren't thinking ahead. They wait till the holiday season to buy the things they need for the holiday season. And then you're always paying these upcharges and these surcharges for these holiday season pricing swings. So just always be ahead of it. So I really appreciate that Jessica is, and I love this question. Everyone, thanks so much for tuning into this week's episode of the Rich Habits podcast. Be sure to go check out direct indexing on public.com.

50:04You need to be doing it. Take advantage of these tax loss harvesting opportunities. I don't care how much you have in the S &P or in the NASDAQ via VOO or QQQ. I think some of that deserves to be parked in some direct indexing on public so you can take advantage of those tax loss harvesting opportunities. As always, be sure to subscribe to the Rich Habits newsletter. There's a link to that in the show notes below. And don't forget to check out the Rich Habits Network, our community for our biggest fans. We're up to 750 plus people now hanging out with us, where every Tuesday night we host a two-hour long live stream.

50:38We have eight hours of video coursework. You can hit us up in the DMs or post questions, and we'll definitely get to it. And all the fun stuff that comes with being a community member inside of the Rich Habits Network. Yes. Thank you all for stopping by. It means the world to us. We appreciate the shares on the podcast, the five-star reviews, because we all have friends and family members that need a little nudge in the right direction. And we're here to bring that value. So make sure you share the podcast with a friend and we'll see you next time. Thanks everyone. And have a great start to your week.

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