AAR61 - Drafting Our Finances

0:00You guys have loved the recent Money Debates episodes so much, and we've actually loved making them. So this episode will be similar to those, but definitely not the same. So frame your mind around thinking of high-octane sports betting, roulette gambling, you know, stuff in that vein, but with absolutely zero of the risk and only a tiny, tiny bit of the reward. And I think that that sounds like a beautiful combination. So we'll see you there. Okay, so it's time for some real talk. I have a serious problem with shoes, like legitimate. Like my wife has opinions about a type of a problem. So when I find a pair of shoes that I absolutely love and they're three or$400, I don't just buy them outright.

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2:21good day everyone and welcome back to at any rate my name is evan rate and we are here to help you make sustainable financial changes without breaking a sweat please welcome back again today my guest andrew saver and i have a i have a big upfront question for him are you much of a gambler? I don't like to think of myself as a gambler these days. I don't like to identify that way. But in high school, hopefully my high school teachers aren't listening to this. Me and my buddies would play blackjack any chance we got in class, in between classes. And then we also used to do like poker nights. I don't know if you ever did any of that, but that was definitely high school memories.

3:01The card game I probably played the most has been Solitaire. and I don't know what that you can infer whatever you want to infer about me by that but hey man I'm about it what were you guys betting for back then was it money was it dollars was it cigarettes in high school no it was I won a few like spam sushis my buddy used to bring those in those are something else I don't know if you ever been to hawaii and had one i've never been to hawaii and i want to though man and then homemade too yeah out of here i was like let's let's trade homes for a little while yeah never happened but we're betting on a family we're betting on who gets who gets his family so today's episode setup like i said is going to be uh inspired a bit on the the previous money debates episodes but today is going to be more of a sort of sports draft kind of situation so andrew and i are going to be alternating picks back and forth so i will as the host very generous host take the first pick and then i'll give the second one andrew uh we'll alternate back and forth um each person gets you know we'll say a minute minute and a half or you could just go on for as long as you want defending their pick we want to try and convince each other that um that we've picked the best thing and uh these rules are not entirely entirely solidified yet but we can challenge or steal or argue on things uh before moving on if we want if we feel really strongly about something we can try and argue why we might deserve that one more and in the end we're going to give each other you know a draft grade we're going to have to have to agree to some to some degree on who won and in addition you listeners are going to be able to decide who you think won and you can easily easily override us if we get enough votes one way or the other.

4:58So as always, feel free to comment below or email us at evan.einvestingforbeginners.com if you have any strong thoughts about who has the better argument or the better hair or whatever thing you want to grade us on. Does that all sound good, Andrew? Just don't tell me the emails that you won and I'll be happy. Just only share with me the emails where they said I won. Cool. Well, I probably won't be forwarding you any information then.

5:28Love it. Don't be checking your email inbox. So starting off, starting off on the first topic, we have the best safe investment in quotes, safe investment. The options are high yield savings account CDs or certified deposits, treasury bonds or money market funds of those. I think you can probably guess which one I'm going to take. I am going to take high-yield savings accounts, but we'll let you go ahead and draft first before I defend my argument. Which one are you going to take? Oh, so I am still picking, and then you're going to make your argument for yours. Do I get a chance to argue as well?

6:05Yep, yeah, yeah, yeah. Okay, okay. Treasure bonds, high-yield savings.

6:13So every time I've done a draft like this, fantasy football, fantasy baseball, people always steal the pick I want to take. And so you are, I think the number one draft choice is a high-earned savings account. So am I allowed to also draft that if you're drafting that? That makes it not very fun. Yeah, no, we can't draft the same thing. You can maybe find a way to steal it if you want. Alright, alright, alright. I will be the high-finance, ultra-high net-worth individual, and I will say treasury bonds are better. Fancy pants. Very, very fancy pants. So defend the high-old savings account, although I don't think I need to defend it too much to Andrew since he already agrees that that's number one.

6:57High-old savings account, for those of you that don't know, are basically savings accounts. Basically, they function the same as a normal savings account for you, except for the fact that they earn you a higher interest rate. This is all just based on how much profit margin that the company that's owning the savings account is willing to take on. This number will also fluctuate depending on what the overall interest rate is for the United States. So it'll fluctuate over time, but it will always be significantly, significantly higher than a normal savings account rate. We're talking a normal savings account rate might be 0.1%, 0.3%, somewhere down there below half a percent return.

7:35High yield savings account is usually going to be minimum about 3 % up to 5.5%, again, depending on where interest rates are in general. and this makes them great not only because they're earning you an interest rate but they're still just as accessible as any other old savings account out there pull money in pull money out put money in whenever you want it's completely liquid and accessible to you and there's nothing fancy that you need to do to gain the returns the only additional thing you need to do is file a separate tax form to pay taxes on the interest that you gain in the account but that's that's never going to be a big deal and that's never going to be enough trouble or downside to make it not worth doing um and it's just incredibly stable easy place to put your money without having to make any decisions on money whatsoever and leaving it liquid but why do you feel strongly about the treasury bonds or do you high net worth individual right um so you basically drafted the sga of the world and i'm drafting so you're going with the populace and i'm going with the analytical better option, which is Jokic, who if you look at his statistics, he should get MVP every single time.

8:45SGA is my favorite player, so that's ironic. Really? Oh, man, we're going to have trouble. Like, this conversation just went really south. But doesn't that make sense for each of our personalities that it would be SGA and Jokic? I feel like that aligns too. Everything's aligning right now. I didn't know you were such a flopper. That's the thing. Oh, okay. You didn't realize how much talent I had. That's what you mean. I'm not just tall and big. Oh, man. We're going to play pickup, and you're going to bring your army of refs, and then I don't have no chance. They're going to be AI refs. We're going to set up a bunch of cameras.

9:26All right. So, treasury bonds. What's great about treasuries and that whole market is it can be very, very complex and there's a lot of ways to make money with it so when you look at the way banks make money the way insurance companies make money they're buying all sorts of treasury bonds treasury bills so there's a lot of flexibility there you'll generally earn a higher rate than a high yield savings account but it depends like we've had a very weird interest rate environment for years and so that hasn't always been true that treasuries earn higher than high yield savings accounts though that started to become true lately that's a whole other conversation some of the downsides to treasury bonds treasury bills is you have to have I think with bills I think you can buy those online direct from the treasury but like if you're going to buy bonds you have to have$10 ,000 or something then you have to pick up the phone.

10:34It's very inconvenient. So I think mathematically, statistically, if you want to earn a higher return, most of the time going with the treasury would probably earn you more, but it's definitely way more work. And there's not even a guarantee that it'll always earn because you'll have to lock your money in versus a high-yield savings account if interest rates go higher. that should step change higher. So yeah, I mean, if you want the analytical better option, I would say you draft treasury bonds. Well, since the category is safe investment, because I feel like treasury bonds are probably a lot less known in general than high yield savings accounts.

11:18Are treasury bonds just as safe as a high yield savings account? Are they just as secure or even more secure kind of guaranteed? I guess it depends how much money you're talking about. when we start getting above the FDIC limits, I don't even know what those are these days. I'd have to look, but when you're going above FDIC, you are essentially betting on that high-yield savings bank. And if they go... It hasn't happened in a while, but technically, if they go bankrupt, up to you lose that money unless they get bailed out uh with the treasury the only way you lose money is if the u.s government defaults which also could happen as well so you're really kind of picking your risk in my opinion i don't know which one you think is safer yeah i i mean i would say treasury bond um because if something's happening with the u.s that's damaging treasury bonds then i think it's probably going to damage high old savings accounts too you know that everything is just kind of going downhill to some degree.

12:31But the FDIC insured limit is still$250 ,000. So I would agree with you. If you're planning to keep that much money in a high-hold savings account or more than that much money in a high-hold savings account, then don't do it. Keep it below that amount and put that money elsewhere, like into bonds, for example. I think that at that point, diversification is definitely the safest way to go about things. Because like Andrew said, if, if, you know, I, I use SoFi, if, if I have$500 ,000 in a SoFi account, that'd be amazing. But second step, and then SoFi goes bankrupt, the government will say, oops, okay, we'll cover you for 250 ,000.

13:08But my other 250 ,000 is just in the wind. It's gone. It turns into, turns into nothing for me and it follows the company through their bankruptcy. So definitely don't go above that limit. But yeah, I would say that treasury bonds, while the safer option, I think all the other upsides for high-hold savings account make it kind of potentially a better safe investment, even if not technically as safe in some ways. So second category here. So this one you'll get to pick first. We have best compounding investment. And the options are real estate, individual stocks, crypto, and index funds. Again, we're telegraphing.

13:46And if listeners know us at all to any degree, I think we know which one I'm picking. It's going to be stocks, individual stocks every day of the week. I will line up and pick that first. A lot of obvious things, but if you look at the billionaires list, this is something we've talked about a lot. And so many of them have built their wealth through individual stocks, whether that's working at a company like Steve Ballmer and just accumulating a lot of shares or being part of the founding team or being a founder like Warren Buffett. All of these different ways to build massive amounts of wealth through an individual stock.

14:37and there are obviously a lot more risks. It's probably not for most people. Most people should probably just diversify and call it a day. But for the, I guess, the dreamers, the people who enjoy looking at businesses and willing to take the extra risks, I think individual stocks are great compounders. And I think if you're doing it correctly, which is a whole nother like that's so up for debate but if you're doing it correctly you can manage the risks pretty well but i will i will say like if you want to beat the market it's really uphill battle and you got to find your advantage and use it very well and stick to it which is very hard so you got to be you got to have an advantage you got to have the discipline to stick with it and the fortitude to stick with it and not bail out, which is a lot easier.

15:39It sounds a lot easier than it actually is. And you got to have, I think, experience to be able to figure out how to do that for yourself. So definitely comes with a lot more risks. I would say it's a very individual strategy, but I would also say it's the best compounding you can find outside of building your own business or joining a startup and building it yourself, I would say it's a better way to build wealth compared to real estate. Well, my pick is real estate. No, it's not. My pick, it might surprise you. If I were to go first, I probably would have picked individual stocks. Really? Not because individual stocks is what I do or would choose to do myself in general.

16:28But if we're talking about the best access to compounding or investments, inarguably the ceiling for individual stocks is basically infinitely higher than an index fund could ever be. And I know that, of course, reaching that ceiling or going above the ceiling for index funds is not easy to do with individual stocks. But the fact that it's at least accessible and possible for some people and with work you can get there potentially, I think that that ceiling makes it in a lot of ways the better compounding investment. Again, just because you have the higher ceiling. But of course, my backup pick will be index funds.

17:11I think index funds are definitely the more accessible and more statistically likely way to earn a good compounding rate. But again, they're never going to have as high of a ceiling. So for anybody that doesn't know, an index fund is basically indexing or tracking some portion of the overall market. And that's what makes it a fund is it's accumulating several or hundreds, in many cases, stocks into a single stock. So that when you buy a single stock like VOO, I love VOO, index fund from Vanguard, and that one stock indexes and accumulates the top 500 companies in the stock market. and through that single stock, through that single fund that you purchase.

17:53The great thing about this is it easily diversifies you. Say, I don't know, what is the current number one company on the S &P 500? It's been trading off between Apple and NVIDIA. Okay, okay. Well, let's say both Apple and NVIDIA went bankrupt tomorrow. It would affect VOO, but it wouldn't affect VOO to the degree in which, if you were invested directly in Apple and NVIDIA, If you were directly and both of them went bankrupt, well, your investments went entirely to zero. But in something like an index fund, that drop is going to be nowhere near as significant because there's so many other stocks still making up that fund, and it'll just get replaced by the next two stocks that come up into the top 500.

18:35So it's a much safer way to go about things. It's much easier. There's, frankly, just to be honest, there's no decision making that has to go into it whatsoever. Basically, no time that has to go into it whatsoever. and statistically you will still beat most individual investors out there. Again, the ceiling will never be quite as high if you are on the outskirts of those statistics, but if you're in the majority of those statistics, then you would actually be earning more money just by investing in VOO than going out and trying to pick Apple or NVIDIA individually. So going back to our MBA metaphor, I feel like this is the jewel and bead is individual stocks.

19:16If he's not injured, you're going to get like a really high upside versus like the everyday, like never missed a game player, you know, where you're like, you're going to give this guy a contract and you know, you're going to get that value from him. Right. Right. We can argue the index funds are LeBron. I think we could argue that just consistent. Yeah. I mean, over the hill LeBron. Sure.

19:43that's a bit harsh that's a bit harsh but yeah Joel can be nuts when he's not injured but he's usually injured that's true and I think that's he's usually sprained sprained something severely yeah I agree with that again for most people LeBron is gonna he's maybe not again we're not talking about Miami Heat back in the day LeBron but current day LeBron he's not gonna score some crazy high numbers but he's just gonna keep on trucking and he hardly ever gets injured and he's just just running through things consistently. But again, if you think that you can manage to not be injured and manage to do well in individual stocks, then you can have a very, very high ceiling for compounding.

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22:59Join at functionhealth.com slash beginners and use gift code beginners25. What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. Beautiful. So our third category here is going to be best account for inheritance. So this is the best account if you were to receive an inheritance right now or to receive some massive bonus. I think we talked about this last time. If you're on$10 ,001 on the street walking around this morning, best place to put that. Our options are either Roth IRA, brokerage, meaning just like a normal taxable brokerage account, a health savings account, an HSA, or a 529 savings plan.

23:39529 savings plan, for those that don't know, is basically focused on saving for your child's educational expenses in the future. And it has some tax advantages to it. I have a feeling that for this one, we're probably going to want to pick the same thing, but I am going to take the Roth IRA. Roth IRA, we talked about it many, many times. Many people have as well, so I won't dive into it too much, but it's a fantastic account because it gives you all of the investment flexibility that you might want, whether you're a stock picker like Andrew or whether you invest in the overall market like me or you're a swing trader.

24:13You can be absolutely anything out there as long as it's trading on the stock market in some way. you will be able to invest in that through a Roth IRA. And then all of your contribution, or all of your gains that you earn through that account are going to be entirely tax free. And so that means over time, if you earn 5 % on something, you're not going to have to pay any taxes on that 5%. That 5 % is just going to stay there and continue compounding and go make another 5%. So you can compound things very quickly. And again, in whatever way you want with a Roth IRA and the downside to a Roth IRA for something like an inheritance is you can only put so much in that account at a given time.

24:53And that is definitely a big downside, depending on how much you're gaining from your inheritance. If your inheritance is, I mean, there, there are some, some like backdoor conversion rollover plans that you can do. I'm not much of an expert on those, so I'm not going to speak to them. If somebody in the comments wants to potentially give more detail on that, feel free to. But that is the big downside. So if your inheritance is going to be$500 ,000, I would only put so much in a Roth IRA because it's going to take you, oh geez, math, like 50 years or something to get it all in a Roth IRA based on the contributions limits.

25:27but if your inheritance is a more I don't know what the average inheritance is for different people but if it's a more I would say reasonable inheritance maybe$20 ,000 $30 ,000 or not some crazy crazy sum of money then you can get that into a Roth IRA within a couple years and again have all the flexibility in the world that you want and maybe in the meantime you keep it in the high old savings account we'll go back to that keep it in the high old savings account grow a little bit and then as you're able to add it add it into the Roth IRA so that I'll rest my case there so your team's got some synergies here I see well I'm just drafting purely on talent and just trusting that all the best talent exactly yeah we're just building a super team and so my choice for best account for inheritance is brokerage and brokerage is great because in inheritance there's this step up rule for taxes so just as an example let's say I'm investing for my children.

26:28And so let's say I had$500 ,000 as my cost basis for my entire stock portfolio. And then it grew to a million dollars and then I died and it wasn't inherited by my children. There's a step up as the rules are now. And so their cost basis on that same portfolio would now be a million dollars instead of$500 ,000. So there's still great tax advantages to having a brokerage as part of an inheritance. And then there's a lot of flexibility with that too. So you don't have a lot of the different rules that you might have for like an HSA or a retirement account and things like that.

27:10I can't think of any downsides there after I just presented it that way. So I rest my case. Very confident, very confident. What about, so can you explain a bit more about that, that step up rule? So their cost basis would basically double from, from what it was when it was under your tutelage. That's definitely not the right use of that word. So, so does that mean that they would pay lower taxes on that amount of money or what would that step up do for them? Yeah. So it doesn't have to be double. Let's say I bought Apple and I put 150 bucks in it and then it turned into$10 ,000. so when they inherit those Apple shares they have$10 ,000 worth of Apple shares if I would have sold the money and then given it as cash and an inheritance I would have paid all the tax on all that capital gains from what I say$150 ,000 to$10 ,000 versus if it's just in the account the stocks are held, I die they get those shares of stock and if they chose to sell as soon as they which I would be so disappointed but you know at least I wouldn't see it so it's fine if they sold that day they wouldn't pay the capital gains I would have had to pay they just paid their own capital gains which in that case is zero because they're selling at that 10 ,000 cost basis okay understood so are you saying that your plan is dependent on the parent having the money in a certain account before they pass yeah were you thinking of this differently yeah i mean i was thinking of it well i mean we could argue that that could be a fair way to go about it i was arguing that the inheritance was just cash but it is definitely a fair clarification that that money could be you know in something specific and that if it was in something like a brokerage account then that can that can change the equation yeah i mean i've still heard that like the roth ira would have been even better because then the isn't it basically like the tax advantages continue or something I mean I would think so yeah because I don't see why they wouldn't so you'd be able to just continue compounding on it but again that's assuming that that money was already in there and you're not adding it yourself after the fact yeah so your original argument still stands on that yeah but that is an interesting way to go about it um i will kind of give a just a a follow-up shout out to the to the 529 i think 529 plans are fantastic um for compounding for for children's children's expenses and can provide even more tax advantages because of how you're able to spend it because you know the accounts we're talking about a roth ira uh brokerage account um you're still going to be paying taxes when you spend on but a 529 you can just go spend on it tax free and that's a that's that's a big advantage to have for that account.

30:08I don't think quite as good as Roth IRA brokerage, but another good option here. So that leaves me with Roth IRA and Andrew with the brokerage account. Moving on to the next topic here, we've got two more, or sorry, three more left here. Next one is the best side income idea. One of these will hit close to home, but first one we've got is freelancing, second rental property, dividend investing, and content slash podcast. So, which one? Do I get to draft first on this one? You just drafted first on the last one. Okay, okay. There was a question mark at the end. You're not feeling great about your team, I think.

30:51And you're hoping for any advantage you can get. I feel good. I think you just showed your cards there, buddy. Back to his blackjack face. Alright. So, obviously, it's my turn. so I'm going to go first. I'm going to draft actually freelancing on this one.