Q&A: LLC vs. Sole Prop, Consolidating Investments, and the Avalanche Method

0:00Hey everyone and welcome back to the Rich Habits Podcast, a top five business podcast on Spotify, question and answer edition. You might be surprised if you're watching on video right now to see Robert and I sitting next to each other in his office. We've built a nice little studio specifically for this episode. We might come back and use it a little bit more in the future. But we are really excited to be in person together here answering your questions. Yes, couldn't be more excited to have Austin here in sunny South Florida. And we get to film in person for only the second time in over a year.

0:37So this is going to be fun answering all of your amazing questions in today's episode. But before we jump into the questions, we have to give our title sponsor, public.com, their flowers. As you might know, public.com is the all-in-one investing platform. And now they've launched options trading. And with it, they're doing something no other brokerage has ever done before. Public is sharing 50 % of their options trading revenue directly with you, the customer. So whenever you trade options on public, you get something back. And of course, there are no commissions or per contract fees either. By sharing 50 % of their options revenue, you'll know exactly how much they make from your options trades because public is literally giving you half of it.

1:23In other words, it's a much more transparent approach to options with no fees and you get something back on every single trade. So go to public.com and activate options trading by March 31st and lock in your lifetime rebate. And as a quick reminder, this was paid for by public investing. You must activate this options account by March 31st for the revenue share. And, you know, options are not suitable for all investors and do carry significant risk. Full disclosures, however, are in the podcast description. Go check that out. And of course, This is US members only. With that being said, let's jump into our very first question brought to us by May.

2:03May says, hey everyone, I am seriously your biggest fan. Your podcast has changed my life completely. I have a couple of questions that maybe you can clear up for me. I used an app called Fidelity to buy my first index fund. It's kind of a weird app and I'm having a hard time understanding it. I'm wondering if you're able to shed light on where I should go to buy index funds on a regular basis that's a little bit easier to use. Right now I'm using Cash App, Fidelity, and SoFi for all of my investing needs. Robert, you want to kick this one off? Yeah, May, great question. And it's really kind of a complex one, but we're going to break it down the best we can.

2:38In this situation, I think you should condense down. I would look at public.com because it is, in my opinion, the easiest platform to use. And with public, what is great about them is you can do your crypto purchases there. You can invest in music royalties, treasury bills. There's so many different aspects of it, but the UX, the user experience is so simple. So for people just starting out, it's definitely our favorite platform. So I would start there, but there are many other platforms that we use as well, but I think public would be the start. Public.com, super easy to use, May. You're going to love it.

3:13I think what's also important to mention, and Robert called this out, is you don't want to have all of your investments scattered across 17 different investment accounts that you can't keep track of, right? The only way you're going to be able to meaningfully build wealth throughout your life is being able to easily track how that is being built, right? You want to know exactly how much is being invested, where that's being invested, what funds, stocks, or assets you have that money inside of. And it's really hard to do that if you have 12 different accounts you have to check up on every single week or month or quarter, however often you rebalance your portfolio.

3:48So do your best to consolidate that if that's on public, if that's on an Excel spreadsheet, But whatever you got to do, don't do this. Cash App, Fidelity, SoFi, don't do any of that, right? Consolidate on public and get after it. And really, it's not a one-size-fits-all approach. So do what works best for you. Figure out the platforms that are the easiest because I'm going to tell you what, if you're nervous or scared that you're going to make a mistake, you're not going to be consistent. That's why we want you to use what works best for you because this is never going to be a one size fits all kind of educational process or learning curve.

4:24So just really understand what works best for you, consolidate it down, and then be able to be consistent. Those are the key takeaways here. Yeah, Robert, we're actually on a live stream last night, I think it was on TikTok, Robert and I go live every Thursday night around eight o 'clock p.m. Eastern time. And there was a woman who had added a comment in the chat that said, I'm starting to invest for the first time and I'm using Cash App. Is that okay? Of course it's okay because you're starting to invest, right? You're taking that first baby step toward the right direction. So what we're saying here to Robert's point is it doesn't matter what app you use.

4:59It's whatever works for you so that you can be consistent and you're always motivated and continually adding more to the markets over time. Amen. That is perfect. All right. Our next question comes from Mikas. Mikas says, I recently found your podcast on Spotify and I've gained so much knowledge. And even though I'm only on episode 10, I'm learning a lot. Now, here's the deal. My student loan debt is currently around the$90 ,000 to$100 ,000 mark. And I'm a little confused by when you guys say that I should be attacking consumer debt aggressively. How does someone attack consumer debt aggressively?

5:34Does that mean the snowball, the avalanche method? What should I be focused on here? All right, I'm going to try and take a first stab at this one, Robert. When we say that, and the reason we say that here is if we think about our financial picture holistically here for a moment, what's really important is you want to be focused on that high interest debt. Robert always talks about arbitrage with your money, right? So for example, I have a 3 % interest rate on my mortgage. I've got a mortgage of about$250 ,000. I would much rather take that$250 ,000 and invest it into the S &P 500, which we know returns 8, 9, 10, 11 % annually over a long period of time, then use it to pay off something that's only charging me 3 % interest, right?

6:15That 10 % minus the 3 % interest is that 7 % arbitrage that Robert alludes to. Now, when you're ready to pay off the consumer debt, the high interest consumer debt, if that's credit cards, if that's student loans, personal loans, whatever that might be, the best way that Robert and I mathematically like to approach it is the avalanche method. Here's what we mean by that. If you guys listen or have heard of Dave Ramsey, you probably heard of the snowball method. That's what he uses. And, you know, it works for people. I get that. But mathematically speaking, it's not the fastest and most effective way to pay off your debt.

6:47And that's what Robert and I want to do. So the avalanche method, essentially what you're doing here is you're focusing on paying off the debt with the highest amount of interest every single loan there. So for example, if you have credit card debt, that's a 30 % interest and you have student loan debt, that's only an 8 % interest. You want to pay off the 30%. You can't out invest high interest credit card debt. Now, as we think about the avalanche method for you here, Mikas, what you want to be doing is you want to write down on a piece of paper or whatever you can do, but write down all your different loans and the interest rates next to them, and then categorize them in priority of highest interest rate first.

7:25When you do that, you know exactly what loan needs to be paid off that month. Now, Robert, talk a little bit more about what it means to attack the debt aggressively? What changes does Mikas have to do on a weekly, monthly basis with his money to ensure success? Yeah, you crushed that. And there's just a couple of things I want to add. And that is really having that hard conversation with yourself, your wife, your husband, whatever it is in your situation to understand. You have to take this very, very seriously because, and that's why we say, attack it aggressively. Because if you just make these minimum payments and you're casual about it, you're never gonna get to a position of that positive arbitrage where you're building towards your future wealth because you're always gonna be backpedaling trying to pay on these high interest payments.

8:12So what we say and what we mean by this is do whatever you have to do. Look at all your bills, do that honest budget to figure out exactly where you're at each month and then make drastic changes. I see people every single week and every single month that make little changes but they're still paying on these high interest debts for years and years and years. You're not going to do that because you're watching the Rich Habits podcast. You're going to stop in your tracks right now, sit down with a notepad, figure it out, and then you're going to go hard on getting these paid off. That might mean taking a second job.

8:47That might mean getting a side hustle on weekends, whatever it takes, selling items for your house. I don't care what you do as long as you take it seriously and you attack it with vigor to get these high interest debts paid off as soon as possible. Because as we always say, you can't out invest high interest debt. So you have to be very serious about it and get after it right away. And I mean, listen, Robert, you just gave three examples on how people could put more money in their bank account every month, the side hustle, the second job, the selling the items. Sometimes, you know, getting aggressive with consumer debt also means making sure more money doesn't leave the bank account.

9:25So you're not buying those brand new on cloud shoes. You're not buying the Lululemons. You're not eating out with your buddies. You're not going to the bar, right? You're putting more money, being intentional with how you're spending your money so that you can then allocate this margin that you've created in your budget to paying off this debt. Our next question comes from Michelle. Michelle says, I've heard you mention these new options opportunities on public.com. I've clicked and I've created the account. I've locked in my 50 % rebate, but something mentioned on the disclosure caught my eye that I'm not sure what it meant.

9:58It said I had to open a margin account. Can you all explain to me what a margin account is and why I need one to trade options? Okay, Michelle, great question. And I'm sure other people listening right now probably also have that question if they have gone onto public and created one of these option trading accounts. Essentially, what a margin account is, is one, go listen to our, I think a recent episode, we talked about how a guy took a margin loan on his portfolio. But essentially, what you're doing here is you're going into debt to invest. Now, before everyone freaks out, no, we're not telling people to go into debt to invest.

10:33However, the underlying financial instrument of option contracts have a leverage aspect to them. If that's calls, puts, whatever your strategy is, they have a leverage opportunity that come with them. And that is what they want to make sure that you understand, right? Again, we're not telling people to go leverage themselves up to their eyeballs and go all in on Tesla stock. That's silly. But you do need to know if you do purchase a call option, you're essentially making a leveraged bet on a stock price to go up, just like if it was a put option, a leverage bet for the stock price to go down. Or if you do what I do, you actually own all 100 shares of stock, which honestly is I think the only way people should be thinking about options, but you own 100 shares of stock and then you write a covered call option contract against the stock you already own, allowing you to generate income inside of your portfolio passively.

11:29Robert and I had a whole webinar where we explained all of this. We sat down together for about an hour and a half. We had visuals, we had guests, we even had people from the NEOS team, right? The Wall Street experts that have been doing this for 20 years come in and demystify everything. There's going to be a link in the show notes below to go watch the replay there. But Robert, do you have any perspective here about this sort of misnomer of what a margin account might be as it relates to trading options? Yes, I do. And I love that explanation. And you got really excited about that and really went down the rabbit hole here.

12:02So I'm going to back this train up. I don't know if there's a song lyric that can go with this, but we're going to back this train up. We shouldn't even be worried about this. If we're just getting started, we're just getting into investing. We just opened our first account and we're excited to get the VOO or the Bitcoin or whatever. We don't care. Neither should you be worried about options trading or any of that stuff, margins, any of that. You want to do the basics. You want to get your basics dialed in, get that first hundred K invested, saved, and and really making you this passive income.

12:36And then you can start to really implement these advanced tactics. So many people get excited about investing, and then they jump over all of these important steps that are so important in the beginning. And that is learn the basics, get yourself dialed in with that first$100 ,000, and then come back to us and we can talk about some advanced strategies. So that's my takeaway. Get it simple, get it dialed and get it consistent. Even Warren Buffett said recently that he told to his wife, he said, when I pass away, I want you to do two things. I want you to put my money in VOO and treasury bills because it's simple, it's basic, and it's tried and true.

13:16So don't get ahead of yourself. Get the basics dialed first. Then we can talk about the advanced strategies. And you know, Robert, you mentioned the first$100 ,000. And I think it's really important for people to realize that that is the goal, right? At the end of the day, a lot of us are starting to invest for the very first time here. And$100 ,000 is really intimidating. But that's the long-term goal. But how can we kind of break that down into smaller bite-sized chunks of investment account value? So maybe take off some zeros. Get your first$1 ,000 into the markets. Maybe your first$100. That's just these little baby steps.

13:51Then you have your$1 ,000, then$10 ,000, then$20 ,000,$50 ,000,$100 ,000. Don't be discouraged when you hear Robert and I say, you want to get that first 100K as like, oh my gosh, I'm never going to have$100 ,000 to invest, not in my financial situation. That might be okay. That might be your reality. But do you have 100? Do you have 1 ,000? Where can you start and take those baby steps to begin moving toward your wealth building journey in a meaningful way? Yeah. And I want to actually bring that back up again. And thank you for making me remember that point is one of my earliest videos that did like 10 million views was about that because I got so sick of seeing all these fake gurus saying, if you only have$5 ,000 or$10 ,000, don't bother starting investing because it won't do you any good.

14:37And it's just the worst advice ever. Because if you be consistent, even with a hundred or like you said, 500 or a thousand dollars, and you're putting that in every month or whatever it is, it could be a hundred dollars a month. As long as you're being consistent over time and letting compound interest do its job. You will create wealth. It's just all about understanding that you have to be committed to being consistent and don't worry about the dollar amount because so many people think, even now after we've been at this for over a year, people think that you need to have$20 ,000 or$50 ,000 to get started and it's just not accurate and it's so important for everyone to understand this.

15:18And just to piggyback on that here for a second, while you were talking, I pulled up my investment calculator. $100 a month invested into the S &P 500, which over the last 90 years has returned an average of 11.88 % annually. $100 a month for the next 30 years is $622 ,000, right? That's just$100 a month. And you think, oh my gosh, that's nothing. I'm not even going to bother investing because$100 isn't going to get me anywhere. It's going to get you to 622 ,000. So always start. There's always a reason to start and do not be taken back by a big number like 10 ,000, 100 ,000, a million, right?

15:57That's the end goal, but we have to take baby steps to get there. Before we jump into our next question, I just want to remind everyone that public is officially the cheapest way to trade options. That's because they're doing something no other brokerage has done before. They're sharing 50 % of their options revenue directly with you, the customer. Whenever you trade options on public, you get something back minimizing your transaction costs. So go to public.com and activate options trading before March 31st to lock in your lifetime rebate. Public.com, the cheapest way to trade options. And just as a reminder, we're pulling some of these questions from the public app.

16:38Robert and I both post there pretty frequently. You'll see our posts. You can comment below it, whatever your question might be. We also pull these questions from our email address, richhabitspodcast at gmail.com, as well as our Instagram account, richhabitspodcast. So if you have a question for the podcast and you want to get it answered, send us a DM, an email, a comment, anything you can do to get in touch with us. We are all over the place. Now, our next question comes from Mondanith. I hope I said that right. Sorry if I didn't. Hi, Austin and Robert. My husband and I do not qualify for a Roth individual retirement account because of our income.

17:12I know that there is something called a backdoor Roth IRA and we're trying to figure out how to do that. Do we just contribute the maximum of$7 ,000 all in one go or do we transfer money every month into the account? We're kind of confused on what to do. Okay, so what you want to do here is contribute as much as you plan to contribute throughout the entire year in one go. If that's 7 ,000, 5 ,000, up to 7 ,000, do it in one go. And then after you contribute that money, you need to convert the account, the traditional IRA into a Roth IRA. I had someone tell me recently that they were making the mistake of putting it into a traditional IRA and then they would move the money to a separate Roth IRA or they didn't convert the account.

17:58They just moved the money. They just like, oh, one to the next. Like, no, you have to convert the account from a traditional IRA into a Roth IRA. And once you've done that and it's all converted, I think it's the form 8606. I think that's the name of the form that you have to make sure your accountant files on your behalf there. And then only then will you take that$7 ,000 and begin investing it into the markets. Yeah. The only thing I would add is a little pro tip. And that is if you have any other money sitting in other traditional brokerage accounts, maybe with another vendor or somewhere else, is to make sure that you get that migrated as well, because you don't want to cash that out.

18:38You want to migrate it along with the other funds just to be safe and make sure you follow the rules. Yeah, it's called the pro rata rule, I believe, Robert. And it's definitely important. So make sure that this 7 ,000 is the only money you have in a traditional IRA anywhere out there in the ethos. Our next question comes from Nevada. Nevada says, Austin and Robert, I'm almost 45 years old. I have a fully funded emergency fund. I maxed out my retirement accounts. I'm doing everything correctly, but I'm a little confused about the difference between mutual funds and ETFs. At the moment, I have all of my money invested into an S &P 500 mutual fund.

19:15However, you guys always talk about the S &P 500 ETFs. What the heck is the difference? Robert, want to walk us through that? You hear us talk about these ETFs all the time, and we don't really talk about mutual funds that much. And there's several reasons. But the number one reason for me is the management fees. Mutual funds are much more expensive because they're actively managed. So they're not going to perform as well overall as like a VOO, like we talk about these ETFs that are low cost and very efficient. Number two in this kind of stratosphere of advantages is tax efficiencies. ETFs are much more tax efficient for you in the long run than a mutual fund is.

19:57And we could talk about that for ours, but it's very important to understand that. And number three is diversification. With these ETFs and that flexibility, you just have much more ability to diversify your funds in your portfolios through these ETFs. That's why we like them so much. You know, and additionally here, Robert, ETFs, they're not just so flexible, but what's cool about them is they don't have the minimum investments, right? And when we talk about flexibility, I mean, shout out to that person who commented on our live stream of the night. You know, she said that she started buying VOO on Cash App with just$3, right?

20:34You could not do that with a mutual fund. Normally they have minimum investments where you have to put in $3 ,000, right? But you can go buy fractional shares of the S &P 500 index via VOO or SPY anytime you'd like, if that's Cash App or public. And something else about mutual funds too that are really important to know is, you know, they do not have the same flexibility that ETFs do from a purchasing price perspective, right? So I can go on to public right now if I wanted to and buy VOO for whatever it's trading at at the moment. Whereas with a mutual fund, I would have to allocate my funds to the mutual fund.

21:10And then at the end of the trading day, and only at the end of the trading day, the mutual fund executes the purchase for me, right? So I don't really get the flexibility to choose when my money gets deployed. It's deployed by someone else's time schedule. So at the end of the day here, Nevada, if you want to move money from a mutual fund into an ETF, that's totally up to you. However, for our convenience, flexibility, and autonomy, we choose ETFs, specifically VOO, SPY, QQQ, VGT, things of that nature. All right, our next question comes from Nick. Nick says, hi, Austin and Robert. I'm a huge fan of the show.

21:48I actually found you guys a couple months back. I binged all of your episodes. I now listen to each and every one of them as they drop every single week. And I'm up 16 and a half percent on my investments that I've opened because of you guys. Thank you so much. Nick, we are really, really excited for you, man. So here's my question. I want to start a cottage bakery out of my home and I live in California, which means I likely need some protection. So I'm trying to do my research as it relates to an LLC or a sole proprietorship. Can you please share the pros and cons of each? Robert, you've opened more businesses than I have fingers and toes on my body.

22:27So can you walk through the pros and the cons of the LLC versus the sole proprietorship? Yes, Nick, this is a slam dunk in a very easy one. Great question, and I'm so glad you asked it because so many people don't understand the difference or don't take it seriously enough to understand the importance of knowing the difference. So let's go with the LLC first. The LLC is going to give you better asset protection, obviously limited liability corporation. So it gives you that protection against an inside attack, an outside attack, or anything that can go wrong during the life cycle of this business.

23:03Also, it's a separate legal entity separate from the owner, unlike a sole proprietor, which flows through directly to the owner. So you don't have that separation. And then number three, I would say would be credibility. When you have that LLC, it's separate, it's established, you're paying your taxes, right? You've set it up well, you have that credibility, which may help you in funding, getting investors, et cetera, et cetera. But then you also have the tax benefits. So then when we talk about the sole proprietor, I've alluded to some of them, but the main thing is, is that you're the only owner of that entity.

23:41So it passes through directly to you. So you don't have that separation like the LLC would, uh, in a sole proprietorship. And so, and also because you're unincorporated, it really makes it a little bit tougher. So I'm always going to tell anyone to do an LLC to start. Then as you advance and make more money, you might want to look at an S corp that would give you some tax advantages, especially in California, you'll need them. But with the S Corp, we generally want to stick with a basic LLC till we're making over like 75k a year in profit. But in this instance, I would say, open that LLC, make sure you don't use a home address, make sure you have a business phone number, do it right, have an operating agreement in play.

24:26And in your instance, really, really important to remember, and this is a tip no one really talks about, check out and make sure you have that correct NAICS number because how you get rated with that NAICS number can make or break your business funding efforts when you get you're building the business and you might want to have business credit or credit line or whatever. Having the algorithm know exactly where to put you and rate your business is going to be so important down the road. So LLC for the win. Great question and good luck. What a great question from Nick. Now as a quick follow up, Robert, as I'm like tuning in here.

25:02When people create their LLC, can you talk a little bit about what a registered agent is and when people, you know, the type of businesses that might need a registered agent, you know, from the anonymity perspective? Yeah, a registered agent is one of those secret hacks that I talk about all the time with Austin, without Austin, that I've never heard anyone else really talking about except for lawyers and maybe CPAs. And what a registered agent means is, and it's a simple, simple hack that costs you$0, but might be life-saving later on as you're building wealth, is having someone besides you as the registered agent on that LLC.