Q&A: S&P 500 vs. Nasdaq 100, Retained Earnings, & Saving for a Newborn

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0:57hey everyone and welcome back to the rich habits podcast question and answer edition which means you ask us questions and we answer the questions you ask us we answer them as if we were in your shoes you ask us questions on instagram via dms or inside of the rich habits network also via dms and sometimes via email at richhabitspodcast at gmail.com. These episodes are my favorite, Robert, because we get to hear straight from the audience and we do get some interesting questions sometimes. I love it, but just a quick heads up, folks. Interest rates are falling, but you can still lock in a 6 % or higher yield with a bond account at public.com.

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2:47Go check out public.com slash rich habits. So our first question comes from Blake E. Blake says, my wife and I are hoping to have children in 2026. We've talked about her being a stay-at-home mom due to the cost of child care, but also don't know what steps to take financially to even consider saving money. Can we afford this? How do we even think about having children from a financial perspective? We don't know where to start. What do we do? The first piece of advice that we can give Blake is to listen to episode 72 of the podcast. It's called Financial Checklist for Parents, Current, and Future.

3:20If you're a future parent, Blake, which it seems like you guys are hoping you will be, there's a ton of things, action items that you need to be considering when it comes to having this potential child that this episode lays out for you very simply. So go listen to episode 72 first and foremost. But Robert, what's your perspective on this? I'm glad to see people planning ahead, but just make sure that you don't plan ahead so much because life can happen and things can go wrong. And so not to be morbid, but just make sure you understand, don't go buy the big house ahead of time. Don't go upgrade the car ahead of time.

3:52Just do the basics and make sure you have all your bases covered. Do you have the emergency fund set up? Do you have your base being built or is it built already financially that$100 ,000? because what you want to do is plan ahead, but not so far ahead that you're setting yourself up in a way that maybe isn't necessary. We had a question a while back on an episode and they were talking about two years in advance, upgrading the car and upgrading the house. And I just don't think it's necessary and I don't think it's a great idea. It's really good to look at it from the perspective of what is the added cost?

4:28Like we said in the checklist episode, what is the added cost going to be for this new child and how do I prepare for that? And use this time, the rest of 24 and into 25 and into 26, to allow you to prepare financially based on what you believe the costs are going to be for this added family member. Yeah, I think just to dig deeper on that, Robert, it's important, you know, Blake really laid it out here. He said, my wife is going to be working or my wife is staying at home. What do the financials look like? Because we know childcare can be$2 ,000 or$3 ,000 a month depending on what that looks like and what types of facilities you're going to.

5:04And we also know people that work full time that also make two, three,$4 ,000 a month. So in my opinion, Blake, I would shop around at different child care facilities, ask, get quotes, get different wait list times. I know it's a big thing to get on the wait list for really good ones like that. Just to get an understanding of like, how much is it going to cost me if I did want my wife here to continue to work? How much is that trade-off, right? How much are we really making after expenses? And then finally, back to Robert's point, stack cash. You have no idea what 2026 might bring. I have absolutely no idea what your insurance will cover, what it won't cover, all the other different expenses that come with having a child that are unexpected.

5:41So having that buffer of$10 ,000,$20 ,000,$30 ,000 between you and life, knowing that you do have a child on the way is a really, really big sleep well at night type mentality. But I also think for Blake, do the math, do the honest budget without your wife's income. Say you decide she's going to be stay at home. When is that cut off? Is it at six months? Is it four months? Is it three months? Or is it after she has the child and she gets that leave? So I would really figure out what is the honest budget based on that. So you can make sure that with your salary alone and whatever other investments you have, that you can meet the financial needs your family is going to need without her income.

6:22And then compare that to her income versus the add expenses of childcare to figure it out. I'm right there with you. So our next question comes from Lisa D. Lisa says, Hey guys, I love your podcast. Here's my question. I'm 62. I have no children and I've never been married. I'm still working a full-time job. Do I need life insurance? I believe I opted out of my work policies, life insurance for 2025. I've never went out and got life insurance, but I don't know. Do I need it? If I did get it, who would it go to Robert? What do you think about this question? Yeah, Yeah, I think it's a great question.

6:55And Lisa, I think you don't need it. In my opinion, I don't know what you would need it for unless you were going to do some sort of trade with another friend of yours that might not have any children and isn't married. A friend of mine, we did that where we traded 5 % of each other's net worth for the future. But yeah, I think, you know, I don't know of a reason you would want to expend that money to life insurance versus investing it and giving yourself a better life that you have now. So that would be my takeaway. So if anyone has a better idea of why you would want it or need it, I'd love to hear it because I don't know of a reason.

7:30And just to remind everyone, Robert and I are big believers in the fact that life insurance is not an investment. Lisa didn't say, do I need to invest toward retirement? She said, do I need life insurance? And as you all know, life insurance is a way for you to supplement your survivor's lifestyles when you're gone. So if you have a, Lisa, a husband and two kids, and you're the primary breadwinner, and you're taking home$150 ,000 a year, and you die, then your husband and your two children who are not working and who do not take home any income would be stranded. They don't know what they would be doing, right?

8:04So that's what the purpose of a life insurance policy is. Say, hey, here's$2 million, park it in the stock market, you know, let it grow accordingly. Take your 4%, 5%, 6%, get the 80%, 90%, 100%, 120 ,000 a year from it. and that's how you take care of your loved ones. It's not a, I'm going to go invest it with the IUL and then borrow against it to go start an LLC with an Airbnb business trying to go make a billion dollars on a yacht. That's crazy. That's some TikTok guru stuff. That is not life insurance. That is a scam. So Lisa, no, don't get scammed with IULs and whole life insurance. And then two, for whatever reason, again, I don't think you need life insurance, but if you did want to get it, go get a term life insurance policy and put it in someone's name.

8:46maybe they'd be just lucky to have you. Who knows? But I don't think you need it, Lisa. We need those I heart fake guru shirts. We need to make those now and we need to wear those because man, the information I see out there, I just shake my head. I could have a whole channel just based on reacting to these crazy concoctions these people come up with. And you can always tell with the fake gurus, you can tell they've never done it because they just have no idea what they're talking about. And they're reading some sort of answer from chat GPT and it just cracks me up. It's just so funny to see people that actually know what they're talking about and actually have lived it.

9:20And it's like they live and breathe it versus like someone trying to pretend they know something because chat GPT told them so. Yeah, exactly. Yeah. I mean, there's nothing like real life experience. And that's why, you know, you and I have such a good gig because of the 30 year age gap. It's just fantastic. So our next question comes from Trite N. Trite says, how do I invest my company's cash flow? My company needs about$200 ,000 every year of cash flow to keep it going. We sit, though, on$400 ,000 of cash flow, doing nothing in our checking and savings account. So I've got this$200 ,000 discrepancy here.

9:57How do I invest this money accordingly in my company to just make the most out of it? Robert, you want to take this one? Yeah, I'll start out. I think that's great. You're in a good position. How I would look at it is no one should ever be sitting on$400 ,000 if they're not using at least$200 ,000,$300 ,000 of it a month just because you don't want to have that money, dead money, sitting in your account. So I would look at it that I would at least get$200 ,000 of it invested. You could do a company crypto account on Coinbase. You could do a brokerage account that you enter into with the company and get that money invested.

10:31You could do a high-yield savings account, make that 4.5%, 5%. There's so many things you could be doing with this money to earn money. So please don't let it sit in there one more day. Take some of the things we talk about here, make the phone calls, do the emails, do the research and get this money working for you. Right there with you, Robert. I personally would not put my company money and invest it, but I would park it into like a high yield savings account, T-bills, things like that. Like, for example, if I was in trite shoes and I knew that$200 ,000 moves into my account every couple weeks, couple months, whatever, and I need to make sure I have that buffer, one, make sure you have that buffer, right?

11:12You know, this is not an investment. Your investment is your company. Your company is making all this money. Like, have that cash flow. That's totally fine. Don't worry about, like, optimizing$2 worth or$2 ,000 worth to earn an extra four bucks, right? Have your business rock and roll. Now, with the other couple hundred thousand dollars, what to do with it, there's two things, right? One, you can pay yourself that money and then you yourself can go invest it in your own brokerage accounts, retirement accounts, tax advantage this, tax advantage that. We love that. Or two, you can take that money and park it in like a business high yield savings account or a business, you know, APY checking account or something.

11:45So for example, I'm on NerdWallet right now and they've got Live Oak Bank, Axos Bank, Grasshopper, US Bank, First Internet Bank, Prime Bank Alliance, all these different bank accounts that allow you to earn your business to earn 3.7, 4.1, 3.3, 4.2, 4.25 % APY on this money that you're just kind of parking. Now, in my opinion, if it were me, I wouldn't just park this money. I would understand very clearly, trite, exactly how much money I need on a monthly, quarterly, and annual basis to run my business. Make sure that there's no cash flow surprises and hiccups. Once I understood that entirely, I would then literally pay myself as an owner, an owner's draw, owner's distribution of that money that I'm owed.

12:34And then I would set aside my money for taxes and then I'd go invest that money as the owner. That's what I do all the time. I make sure as my own business, I pay myself a salary. And then if there's profits left over, I'm not keeping those profits in the business. My business already has its like$20 ,000,$30 ,000 buffer. We have that. So any additional profits, they're going to me. And I'm going to set aside money for taxes. And then I'm going to go invest that money like I've done alongside Robert here into cryptocurrencies or index funds or startups or anything else in between to allow me to personally grow my wealth.

13:05I'm not letting my business sit on nearly a quarter million dollars of cash just for fun. Yeah, never, ever, ever for everyone out there listening, don't sit on cash. I know it feels cool. I know it looks cool. But at the end of the day, you know what's cooler? Waking up with profits every single day because it's invested and it's letting compound interest do its job. And like Austin alluded to, I don't mean long-term risky investments. Just getting that 4 % or 5 % in a high-yield cash account. Maybe you put some of it in a blended portfolio of all liquid ETFs that can make you 8 % or 10 % a year, 12 % a year.

13:43There's a lot of things to do. Maybe you go invest and you buy out a competitor. Maybe you invest in new machinery, but you should always have your money having pressure on it. You want to make sure your money is always active and has velocity so it's growing rather than sitting there. I had a one-on-one call a few months ago with a couple who had a thriving business, but for the last 12, 14 years, because they got wronged by a financial advisor, they had$6 million collectively sitting in their checking and their savings account making zero. And if I would have met them 10 or 12 years ago, that$6 million would already be$12,$15,$18 million because I would never let anyone leave their money parked.

14:27So I hope this helps you and everyone else listening. Now, I just want to reiterate, your business should have savings. It's called retained earnings, right? Every business needs to have that buffer so the business doesn't have to go into credit card debt or take on a loan or something crazy. And only you, Trite, know what that number is. For me and my business, it's like 20 or 30 grand. If we've got 20, 30K sitting over here in the checking account that we use for a buffer, we're fine. We're golden. Everything's great. Everything above that gets paid out as owner distributions and profits, and I get the money and I go invest it.

14:58So trite, have that call it 20, 30 ,000 buffer. Only you know what that number is. But once you figure out that number, trite, have everything beyond that actually put to work. If that means it's in a company high yield savings account, which you could do, but more importantly, it's in your own checking account. Then you go invest it in your name as the business owner. So there's a couple of ways to think about it, but you're going to figure it out. Love it. Well, listen up folks. Time could be running out to lock in a 6 % or higher yield at public.com, you can lock in 6 % or higher yield with a bond account.

15:30But remember, your yield is not locked in until the time of purchase. So you might want to act fast, lock in that 6 % or higher yield with a diversified portfolio of high yield and investment grade corporate bonds only at public.com forward slash rich habits. Again, public.com forward slash rich habits. Now our next question comes from Josh. Josh says, Hey, guys, I love your podcast so much. It's really changed my perspective on investing. I'm 23, married, and make about$60 ,000 a year at my 9 to 5. My partner makes$30 ,000 a year, and we have a few side hustles online like TikTok and YouTube, and they bring in roughly$20 ,000 a year total.

16:08So altogether, we'll make about$110 ,000 this year in 2024. We built a small home, debt-free, on some land that we purchased for a really good deal. I've been saving since I got my first job at 14 years old. The home is worth about$200 ,000, and I just started investing in the S &P 500. So here's my question. Should I be investing in the NASDAQ or the S &P 500? I noticed the NASDAQ had returned 156 % over the last five years where the S &P 500 has only returned 90%. Why would I put my money in something that's not gone up as much as the other one? Should I just go all in on the NASDAQ? What a really, really great question, Robert.

16:45I love these types of questions because it means that people like Josh and other listeners are going in and they're doing the research. They're not just typing in VOO on their portfolio, but they're looking at the performance of it, right? They're actually trying to do the research, and I love this. So just to break down the differences here. As you all know, we are big believers in owning low-cost index funds and ETFs that track the S &P 500, the NASDAQ, and things of that nature. Austin, what is all this stuff you're talking about? The S &P 500 stands for the Standard & Poor's 500. It's a list of 500 companies inside the United States that are the largest and most profitable companies that exist.

17:25Large and profitable. I like the sound of that. Now, the NASDAQ 100 are the 100 largest companies traded on the NASDAQ exchange. There's no, like, real profitability metrics there. It's just the largest companies by market cap, which is, like, their price tag, essentially. So when you own both of them, you've got big blue chip profitable companies on one side with the S &P 500. And then you have massive, you know, technology companies mainly on the other side with the NASDAQ. Yes, the NASDAQ has done incredibly well over the last five years. It's up 156%, which is awesome compared to the 90 % the S &P has done, which is why we tell you all to own all of it, right?

18:06So some years, the NASDAQ might outperform the S &P like we've seen recently, right? And then other years, it might flip-flop. The S &P might perform better, or it might flip-flop again, and maybe the Dow Jones will outperform all three of those there. So it's just really important to have this diversified bucket of, call it, five to seven ETFs and index funds that allow you to have exposure to all of these different sort of buckets of stocks that exist in the United States. Yeah, I think the key takeaway here, great explanation, is diversity. You're going to hear people online every single day that you should go all in on the winners.

18:42But guess what? Nobody knows when all in on the winners is the right strategy because no one can time the market. That's why we always want you to have a balanced portfolio. We want you to have active management in your portfolios, but we always want to have diversity. So then that way, you know, when the tides are great and you're up a lot, you're winning. but then also you're mitigating your risk on the downside as well. And that is why you can't just look at, well, Bitcoin is up the most this year, so all my money should be in Bitcoin. Or the NASDAQ is up the most this year, or a meme coin, or whatever it is, that's why you want to hold a little bit of all of it.

19:20And I'm not saying get spread super thin. I'm not saying own 40 index funds and 40 stocks and 40 cryptos. But I'll tell you what, you could probably own five index funds, five stocks and five cryptos and outperform 98 % of the market because you're not going to be overly diversified. When you're wrong and you're all in on one sector, you go broke and you're starting again. So I would rather leave some money on the table and make better than average gains than go all in on one topic, trying to YOLO my net worth to make it all. So just keep that in mind. And I hope that helps illustrate why diversity is so important.

19:58I think it's a great breakdown, Robert. And just to reiterate, I pulled up some real-time data here for you, Josh. So as you all might remember, 2022 was a wreck for the stock market. The S &P 500 fell, the NASDAQ fell, single stocks fell by like 70, 80%. I mean, Metastock was down like 60, 70%. It was crazy. Netflix went down, Amazon went down, everyone went down in 2022. So the S &P 500 from its peak to trough was 24.5 % of a drawdown, whereas the NASDAQ was a 38.5 % drawdown. So the NASDAQ fell an additional 14 % during the same period of time than the S &P 500. So if you're like me, like, well, I would rather have my money in the thing that didn't go down all that much, right?

20:41Where on the flip side, is the NASDAQ outperforming? Yeah, it's more to the upside and more to the downside as we saw in 2022, which is why we say have both, right? Don't go all in on a single thing. Never go all in on Bitcoin or a single stock or even a single ETF, right? Have a diversified portfolio of low-cost index funds and ETFs that have performed well over the last several decades and these blue chip stocks and cryptos, and you're gonna be just fine. So Josh, two thumbs up from us. Really excited that you listened to the show and what a great question. Now, our next question comes from Tim W.

21:14Tim says, I love the podcast and I've learned a bunch so far. I have a dividend question for you. I've grown my annual dividends from$154 a year in 2022 to over$2 ,200 this year. My goal is to double it again to$4 ,400 in 2025. I've invested into SPYI, QQQI, Disney, Verizon, and CVS. I have a traditional IRA. I have my bridge account on public, and I have a 401k with Vanguard. Now, here's my question. Does it matter where my dividends kick back to? In other words, I've been moving along with SPYI inside of my bridge account and I'm enjoying it. But I recently bought some QQQI inside my IRA. If I want to enjoy these monthly dividends, does it make sense for me to receive them inside of retirement accounts I can't necessarily touch?

22:08Thank you both for the show. I'm super excited that you're going to answer my question. This is a really, really good one, Robert, and I'll take a first stab at it. So if you're someone like me who loves passive income and you make that money every single month and it hits your brokerage account and you can't wait to take it out and either go spend it or go reinvest it somewhere else or do something cool with that couple hundred bucks or a couple thousand dollars, depending on how big your portfolio is, then you want to be doing that in your bridge account. Because if you do it in a retirement account, sure, you'll get that money and it'll get deposited to your brokerage account inside your Roth IRA, for example, but you can't take it out.

22:42because if you take it out, you got to pay the taxes, you got to pay the fees, you got to pay all the other stuff. So what we're saying is if you want to enjoy passive income, make sure you're generating those monthly distributions and dividends inside of a brokerage account like you can on a taxablepublic.com account that allows you to enjoy it, take it out, and have all the fun. Now, we're not saying don't put QQQI or SPYI in your retirement account. We think it's a great idea, and I have it in mind. And what I do, though, is I get paid that money on a monthly basis, and it's now sort of like, dry powder, new money that I can invest every single month and always dollar cost average into my other index funds in that account, like VOO, IBIT, QQQ, VGT, stuff like that.

23:23So just know the differences there. If you do make this money and you want to enjoy it, you need to be doing it and generating it inside of a bridge account that you have access to and not exactly a retirement account that you can't really touch until you're nearly 60 years old. I don't think there's anything I can add to that response. That was incredible. I'm just blown away. So I love it. Great question. And Tim, just keep doing what you're doing and just you knock that out of the park. Well, I appreciate that. Now, before we jump into our last question, we have all had that moment where we think to ourselves, man, I wish I'd bought that stock in that company sooner.

23:57Good news for you listeners is you don't have to have that wish anymore because there's an app that makes investing fun and easy to understand. As you all know, it's Griffin, spelled G-R-I-F-I-N. It's the first app that automatically buys stocks in the companies you shop at every time you actually make a purchase. It's like turning your everyday spending into an investment habit built around your life. And honestly, it's pretty genius. Yeah, absolutely. I've been using Griffin and it's a game changer for me. Here's how it works. Whether you're grabbing groceries at Walmart, paying your Shopify subscription or shopping on Amazon, Griffin automatically invests$1 into that company's stock.

24:35And if you want, you can increase it to more than$1 per purchase. That's just the base rate. The idea is simple. Be part of the growth and benefits from the brands you're using every day. You're already spending money at these companies. So why not get a piece of the ownership every single time? We've said that so many times, Robert, helping people move their mindset from consumerism to being an investor. And Griffin helps you do that automatically. I've been a believer in Griffin for years now. I even invested in the company in 2021. It is so easy to use. just download the Griffin app, connect your favorite credit or debit cards or bank account to the app and start passively investing into the companies you shop at.