68: Financial Concepts You Need to Know

0:28Shopping is hard, right? and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify. My name is Austin Hankwitz and I'm joined by my co-host Robert Croke. Robert is a seasoned entrepreneur in his 50s with lifetime revenues across all of his businesses of more than$300 million. And I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business, and I actively advise some of the most well-known fintech companies around the world, as the show name might suggest, every episode.

1:03We talk about rich habits as they relate to business, finance, and mindset, but we try and bring you two unique perspectives, one from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. So Robert, what are we going to be talking about in today's episode? In this episode of the Rich Habits Podcast, we're going to be explaining three of the most misunderstood concepts in personal finance and investing. Because these concepts are so misunderstood, even in 2024, many people completely avoid the learning curve, and in my opinion, it's a huge mistake, causing you to leave so much money on the table.

1:44By the end of this episode, you'll completely understand the key differences in popular terms we hear on a daily basis, allowing you to make better decisions with your money. So Austin, what's the first misunderstood concept? The first misunderstood concept is the term differences between dividends and capital gains. So if you're listening to the show, you're likely an investor, right? You've probably invested into the popular ETFs we talk about all the time, VOO, VGT, QQQ, things of that nature. However, you might also be an investor into single stocks. We've talked about Google and NVIDIA and Apple and Microsoft, things like that.

2:24Now, new investors often confuse the price action associated with these investments as the best way to track their returns. Now, when you're tracking your investments, you should, of course, be checking in on the price of that investment because we want this to go up over time, but you should also be keeping track of the dividends that are paid to you, the shareholder. These are the cash payments paid to your brokerage account for simply owning the stock. And chances are you get paid those dividends every three months and they go up every single year if the company is raising their annual dividend.

2:59This is a great point, Austin. And most people just forget about is that 75 % of the total returns from the S &P 500 over the last 40 years came from dividends paid to investors. So of course, we wanna see the price of our investments go up over time, but the dividends paid to you are equally as important. And that's just something we need people to understand and really hammer home in this episode. You know, and there's a popular strategy that we think everyone should be doing with their dividends and it's called DRIP, D-R-I-P. And it simply stands for Dividends Reinvestment Plan. And it's exactly what it sounds like.

3:39So just make sure you turn on your drip settings inside of your brokerage account. So you're always optimizing your long-term returns and reinvesting those dividends that you're making. Robert, I want to restate the fact that you just said that 75 % of the total returns of the S &P 500 over the last 40 years, right? So if you bought$10 ,000 worth of the S &P 500 back in 1984, the total return of that investment over the last 40 years, 75 % of that number, 75 % came from reinvesting dividends. If you are making the mistake of letting your dividends sit in your brokerage account and not turning on that drip setting so they're reinvested every single quarter, year, whatever, however often you're getting your dividends, you are leaving so much money on the table.

4:29Yeah, this is a point that I think this whole episode, I almost feel like, why did we wait so long to make this episode? Because I feel it just really goes along well with our underlying message for the Rich Habits brand and what we do every single day. And that is getting people to understand that every little strategy we talk about is a way for people to better leverage their money and their investments and their savings. And I love this because it's just so many of these points no one talks about. Robert, I just did the math for our listeners because I want to really hammer home on this point.

5:04$10 ,000 invested into the S &P 500 in 1984 would be worth$750 ,000 today. If you did not reinvest your dividends back into the S &P 500, like we're telling you to do, that$750 ,000 would only be worth$187 ,000. dollars. Can you believe that? That's what we're trying to help people understand here is that you are making a mistake by not logging onto your brokerage account right now and making sure your drip setting is turned on. I love this episode. This really works me up because time is your friend in investing and too many people don't realize that. Well, let's talk about the second sort of concept here that is misunderstood, which is the difference between savings rate and the rate of return.

5:49So I would argue that concept is probably the most important one for people to understand as they're building their base. I know a lot of listeners right now already have built their base, right? $50 ,000 to$100 ,000. But if you're still trying to get to that first $100 ,000, listen up to this concept. The savings rate versus the rate of return in your portfolio and understanding those two different things, right? No one's talking about this, Robert, and it is blowing my mind. So let's call it this. If you're making$80 ,000 a year at your job and your side hustle, right? You're making 80K a year and you save and invest 10 % of that.

6:23Well, that's$8 ,000 that you've now invested into the markets. That's great. Now that same$8 ,000 invested earning 10 % per year is only spitting out$800 of portfolio income over that one year period. No one got rich off of$800 a year, but they certainly got rich off of$8 ,000 per year, So the savings rate of that 10 % is definitely going to move the needle for you more as you build your base than the 800 is. So savings rate is more important than rate of return as you build up to that first$100 ,000. Now, as you've grown your portfolio to let's call it$80 ,000, that same 10 % return is now completely replacing your savings rate.

7:07And when it then grows to$250 ,000, that 10 % return is the exact same as a maxing out your 401k for the year. So understanding how important it is to lean into the savings rate as you build your base and then rely on the rate of return after you've built your base for long-term wealth creation is so important, Robert. I love this example, and it excites me to watch you when you nerd out on numbers because, you know, I think sometimes when people listen to our podcast or other people's podcasts, they might get lost in the numbers and think that it's above their head, but it really isn't. It's a lot simpler than people think, you know, and so this is just such a great example.

7:47And especially with the Roth IRA, we all know we can contribute up to$7 ,000 per year into this account. So if you have 70 K in your account and it returns 10%, that's$7 ,000 right there. So add on top of that, your$7 ,000 contribution. Now you're cooking with gasoline. The power of compound growth is incredible. And everyone who's starting out needs to understand this. I really wish we could, like we said, tattoo savings rate versus rate of return on your forehead and remember it because it's just such a critical, critical understanding and step in people's wealth building journeys. I couldn't agree more.

8:26I mean, this is what's going to make building your base actually get built. Because when we say 50 ,000 or 100 ,000, people are like, oh my gosh, can't do it. No way. Not for me. And it's really hard to understand compound interest when you only have$10 ,000 in a brokerage account,$5 ,000 in a brokerage account, because you're only getting$500,$1 ,000 a year. It's like, oh, whatever. Investing's not for me. I don't make that much money from it, whatever. But as you learn about how important the savings rate is and then get the base built, now the rate of return can really take hold of your investment and can really begin to push your net worth up in the right direction by doing nothing.

9:04Right? First, it was sacrifice, side hustle, do what you could to save more. Now you're living life normal, no more sacrifice, no more side hustle. You're just contributing here and there. But the rate of return is now taking care of all of the heavy lifting for you. You just have to get the base built first. Yeah, I had a call yesterday with a friend's daughter who's 19 years old. She's sharp. She listens to our podcast. She's really on top of it. And she had an accident recently and it was really shitty, but she got a settlement of $10 ,000. And one of her first calls was to me and say, I have this money now.

9:36It's in my bank account. What should I do? And it really illustrates the power of financial literacy because we should do the numbers real quick. If she puts this$10 ,000 away into this basket of index funds, and let's say at 20 years old till 65, so 45 years at an 8 % interest, how much would she have, Austin, just on that one lump sum addition, even if she didn't add any more money. 2.1 million dollars after adjusted for inflation. Isn't that crazy? That blows my mind. And that's why I love it when we have episodes like this, where we can really illustrate for people to have this long term outlook and stick with it, because it's the best feeling on earth when you wake up every single day and your accounts are compounding.

10:26I love it when I get up in the morning and I look at my accounts and I'm like, oh, I'm up X amount of thousands of dollars today as I slept last night. And that is the best part is getting people to understand. Don't look right in front of your face for the returns and what's going to happen. Look at it 10, 20, 30 years down the road. I love it. And you know, Robert, I think a pro tip that our listeners should consider here is as you start investing and get more excited about it, start tracking your net worth. Like seriously, like do it once a month, once every three months, but like do it often enough where you can see the incremental difference that you're making with your sacrifice, with your side hustles, with this new habits, rich habits that you are implementing in your daily life.

11:07Because if you're doing these things and you don't see like, you know, it's like, oh, I'm doing all this hard work, but I don't see anything from it. You're not going to stick to it, right? Personal finance is 80 % behavior and 20 % head knowledge. So we're trying to help you stick to the behavior side of the equation. While the head knowledge is important, behavior is what's actually going to move the needle for you. And so if you can stick to this sort of, you know, always investing, always ensuring that you're maxing out your Roth IRA and just living below your means and doing the things that you should be doing with your money and you're seeing the improvements, you're going to stick to it.

11:37Yeah, I love it. And aren't we building a net worth tracker that we're going to have inside the community as well? Yes. Stay tuned for that. We've got a lot of things that we're working on behind the scenes here. Hopefully should be done by the end of July. But yes, we've got a lot of cool products, courses, things of that nature that are going to be coming out very soon that are very, very cool. Now, the last concept, I think people misunderstand. It is a nerdy one, Robert, but we all watch CNBC. We look at the Wall Street Journal. We read these financial publications online. And a lot of them, as we look at the Amazons, the Microsoft, the NVIDIAs, they talk about some of these companies that report corporate profits, net income, right?

12:15And what I want people to understand is net income or profits that you might see on the headlines are not really profits. They are in the eyes of the IRS. But when we think about this from an investor perspective, I want you to kind of switch your mindset here. So understanding the difference now between corporate profits and free cash flow is really, really important. Because in my opinion, If you can predict how much money Amazon, NVIDIA, Microsoft, Salesforce, how much money these companies are depositing and net new cash into their bank accounts, you can predict roughly where their stock price is headed.

12:54So here's an example I want to talk about. As we break this down, Robert, I want everyone to think about the term free cash flow as new cash added to a company's bank account. Just like Robert, if I was to give you$10 ,000 and you spent$6 ,000 of it throughout the month of June on your living expenses, that$4 ,000 you actually have left, that's the free cash flow, right? Super simple stuff here. So net new cash added to a bank account after these people spend on their, you know, whatever corporate expenses they have. Now, corporate profits are different because they include line items categorized as non-cash expenses.

13:32Here's a couple examples. depreciation, amateurization, capitalization, all these isations, right? But again, all of these line items that are these non-cash expenses, they might be a line item of millions of dollars or even billions of dollars, but that's not actual cash that's leaving the bank account of these companies. So Robert, I know we're kind of in the weeds here. You do a good job of breaking things down for our listeners. So I want you to sort of break things down a little bit more than I have for the people listening. I would say depreciation is the easiest one to explain. So for example, and we'll keep it in simple numbers so it helps, is let's say that I was Amazon and I bought another warehouse for logistical purposes.

14:16Let's assume I spent$100 million on the warehouse. Let's also assume I'm able to depreciate$10 million of that every year for the next 10 years. Well, I bought the warehouse with debt, so I didn't, of course, actually spend $100 million in cash, and the$10 million I'm able to write off of my taxes at a loss isn't cash either. So follow along here. That$10 million, however, will show up as a loss on my income statement, lowering my corporate taxes. It will not show up in my free cash flow because I never paid the$10 million to someone. I'm simply taking advantage of the U.S. tax laws that are laid out there for all of us and understanding how the companies use these tax strategies will help everyone listening become better investors and learn how to focus on that cashflow and be able to build your business better and with less stress on how you're gonna finance it.

15:16We could go down a rabbit hole of amortization, what are the best types of loans to use to be able to do these types of projects. And it's just really all about understanding depreciation, I think is the easiest one. and the most important one to understand? Cash is king, especially from an investor perspective. If I'm investing into a company that is continually printing cash by operating their business, their free cash flow margin on that revenue is 10, 20, 30%. That means every$100 million in revenue that company generates,$20 million,$30 million of that is net new cash that stays in their bank account.

15:52That is a good thing to see because that's net new cash the company can then take to issue a dividend, to buy back their stock, to do these specific things, they're going to send their stock price higher over time. So that's what I look for as an investor. I'm always keeping an eye on free cash flow. I do, of course, care about net income, profits, things of that nature. But as an investor, I always want to make sure that the companies I'm investing into are generating more and more cash for their shareholders over time. And a lot of people just look at revenue and profits. They don't care about the cash.

16:25It's a big misconception here and a big concept that you need to understand as an investor. Yeah, we could spend hours and hours breaking these points down just because I think it just is so helpful getting the listeners to understand the bigger macro picture of why a company does what and all of the tax breaks and all of this because it's just the way of the wealthy and the way these large corporations grow to such behemoths is understanding all of these strategies and being able to legally take advantage of them, which benefits them, growth, and their investors. So I love this episode. I do too, Robert.

17:04I think a fun example, I remember back in 2021, kind of to lean into this depreciation example you gave, I bought a SUV. I paid$50 ,000 for it and I put 10 % down to buy it, right? So$5 ,000 of cash actually left my bank account. But I used some IRS tax code depreciation thing. My accountant told me to do it. And I was able to bonus depreciate the entire$50 ,000 value of the car against my business. So I showed a$50 ,000 loss, which means that's$50 ,000 I don't have to pay taxes on, right? Of profits. I showed a$50 ,000 loss and I only spent$5 ,000 of cash. That's what we're trying to explain to you guys.

17:46Companies do this all the time. Apple, Amazon, NVIDIA, Microsoft, Google. They're always doing these things to help bring down their tax liability, which means their profits are not always aligned with the actual cash that they're generating for shareholders. And we're trying to tell you, look at the cash. Don't care about so much the net income and the profits on the income statement. Look at that cash flow statement and care about the cash. Now, Robert, talking about analyzing single stocks and getting excited about Amazons and Teslas and NVIDIAs, There's an up-and-coming research platform used by over 5 million investors called Mobi that helps them make better informed decisions.

18:23Between their consistent market updates and their individual stock picks, it's been really great becoming weekly users of this platform ourselves. Yeah, I didn't even know about Mobi last year, and now I can't get enough of their weekly stock picks. I just love how straightforward they are. And they don't make analysis overly complicated, which is so key for everyone listening and why I love it. You all heard me talk about analysis paralysis being such a huge issue for investors. And I feel like Moby does a great job helping retail investors be more efficient with their time and not overcomplicate things, especially those who are ready to diversify into single stocks after you've built up your base.

19:04And the other thing is, too, is their Instagram. I think they nail it with their graphics on Instagram and really flushing out a point in a single graphic. So I would check that out as well. Yeah, their Instagram is awesome, Robert. I agree. I actually like their email updates. You know, I get those email updates every single week and they're pretty straightforward. I do, though, do my research and I did do some back testing on their 2023 stock picks and they did average a return of 30 percent. And their 2022 stock picks during a bear market averaged a return of 35 percent, which is pretty interesting.

19:37Yeah, you know that the ultimate goal of the Rich Habits community is to help you take back control of your money. And I believe that Mobi is one of those tools that will really help you just do that. So check out the link for Mobi Premium in the show notes and in our stand stores. And as always, let us know if you have any questions. But I love Mobi. I'm really excited to be working with them and so glad you brought them to the table, Austin. Yeah, Mobi's great. I was looking at their platform the other week and they talked about how I think it was late October that they picked Kava. We all know what Kava is, right?

20:09The place to get those salads at. Kava stock is up like 150 % since they did their analysis on it. It's unreal. So yeah, go check out Mobi. Obviously, we're not saying every stock they pick is going to be perfect, but it's a pretty cool place to get inspired if you want to find new single stocks. All right, Robert, let's now jump into the Q &A section of the podcast. If you have a question to ask us, be sure to shoot us a DM on Instagram at richhabitspodcast or shoot us an email at richhabitspodcast at gmail.com. Our first question comes from Adrian C. Adrian says, I have a whole life insurance policy, but I want to cancel it now after watching your episode with George Campbell.

20:44Before I do though, I want to get your perspective on my situation. I pay$300 a month in my premium. It has a$500 ,000 death benefit, and I already have$7 ,000 built up inside the cash value that I can borrow from. Would you cancel it in my situation? Robert, I would cancel it. Again, we've talked about how terrible of a product these IULs and whole life insurance policies are. You literally can save 80 % of that monthly premium, have the exact same death benefit on a term life insurance policy. And I did the math actually here for you, Adrian. So from 42, which is how old you said you were in the DM to 67 years old, right?

21:21Retirement age, you could take that same$300 per month of a premium you're paying, invest it in the S &P 500, have the average return of 10 to 12 % per year. And that is$550 ,000 in retirement, right? So that's your death benefit, right? You want to go get 500 grand like for your children or whatever, like that's it right there. And if you want, you're still worried about this, like go take out$35 a month, go use the link in the show notes below with Sherience, tell Russ that Austin and Robert sent you. He's a really great guy. You'll love him. And take that$35 a month and go get half a million dollars of life insurance through term life as a death benefit there for your situation.

21:58We just think that the whole life, you're just getting screwed, man. You're just getting screwed. Yeah. The expenses are just so high. IULs are worse. And you know, you just have to look at it that these insurance policies, the only person making a lot of money is the person selling it to you. So Austin, I thought it was a great breakdown and I couldn't agree more. And I just don't like it. Term life, if you're going to do something, is great. But otherwise, it's just not a good strategy. Adrian, literally do this. Go shop at Shurience. Figure out how much a$500 ,000 death benefit is going to be for you for the next, let's call it 30 years, right, to 72 years old.

22:33It'll be$35, maybe$40 a month. Take that difference of the$300 you're doing already. Let's call it$260,$250. Take that difference and go invest it in the S &P 500. You're still going to come out with way more money than you would if you stayed in this whole life insurance policy. So please do not fall victim to these high commission salesmen, as we call them, and do some research. We appreciate you listening to the episode with George and we wish you the best, man. All right. Our next question comes from Samuel B. Samuel says, I have$22 ,000 in student loans and I have$20 ,000 invested in my Roth IRA.

23:09My wife and I are moving to Florida for her graduate program, which is luckily getting paid for by scholarships. Her program's in Tallahassee, Florida. And when we get there, we want a house hack. We have$15 ,000 saved for a down payment. We have no credit card debt, no car loans, and we're looking to buy maybe a duplex or a triplex and of course live in the other sections. Are we jumping the gun here? Should we save and invest more beforehand? Together we make about$70 ,000 a year. My salary is$50 ,000 and I make$20 ,000 a year with side hustles. Robert, you should probably take this one. Yes, definitely, Samuel.

23:41Yul, thanks for asking the question. Let me touch on the real estate side first, and then maybe Austin can touch on the student loan side. I would say, I don't think you're jumping the gun. $15 ,000 is a little light because it's gonna really lower what you can qualify for when you consider closing costs and everything to purchase a home. But the first thing I would look at is if you have that$15 ,000 or$20 ,000, you could get yourself into about a$350 ,000 duplex using the Fannie Mae 5 % mortgage. So that is one way you could tackle this in a house hack, which then overall would really improve your financial situation.

24:17Because even if you'd bought a duplex and lived in one side of it, that would greatly reduce your monthly expenses. So I like where your head's at, but you'll just have to do the math and make sure it works. And then also with the two of you making collectively 70K a year, you need to also have a really long look at your budget to figure out your debt to income ratio. so you can see how much you should be putting away for saving and investing to buy a property or to get into your 401ks or your Roth IRAs. So I would be looking at that as well. And then Austin, what are your thoughts on the student loan since we don't know the interest rate on that versus the 20K that's invested in the Roth IRA?

24:59Yeah, so of course it's a great idea to have your 20 ,000 in the Roth IRA because that's gonna grow into millions in retirement. So that's awesome that you've done that so far, Samuel. I would say if I were you, your wife's going for this program in Tallahassee. Of course, you guys just move out there. I would rent for a year. I would not jump the gun on the house hacking just yet because here's the deal. When you give yourself the breathing room to rent for a year, making$70 ,000 a year between the two of you. She's full-time in school, so you're working full-time yourself. So as you rent for a year, you're now giving yourself the opportunity to find the right communities in Tallahassee, right?

25:35I'm sure you can pop onto Zillow or Realtor.com or whatever and try and find that perfect duplex, but you're not really living in the city. So it's hard for you to find that right pocket of where you want to invest in real estate because that's the most important thing, Robert, location, location, location. And so if you live in Tallahassee, you rent for a year, go find an apartment, 12, 15, 1800 bucks a month, 2000, I don't know what Tallahassee rents are. But if you rent in Tallahassee for a year, you now give yourself the opportunity to one, save a larger down payment. Two, find the right location for the duplex you want to buy so you can house hack.