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Episode #510 - Wisdom For Our Children: Spending, Saving, And Investing

Roger: "It's a common misperception that simple is simplistic. It couldn't be farther from the truth. So, let's keep it simple… stupid?"

Hey there, welcome to the Retirement Answer Man show. Roger Whitney here. 

This is the show dedicated to helping you not just survive retirement. But to have the confidence to lean in and rock retirement. No, I'm not calling you stupid. Keep it super simple as another play on that acronym, because stupid's a bad word. I used to not let my kids say stupid. 

It is true, though, that we very often overcomplicate our relationships, our workout routines, our careers, and definitely our money. It's not needed. Keeping it simple, elegantly simple, is nowhere near simplistic, it actually can be very sophisticated, but it's so hard to do in this world that just tries to overcomplicate everything.

Today we're going to finish up our series on wisdom for our children. around the financial aspects of spending, saving, and investing. We have a lot of input from you, my friend, and we're going to share a lot of the comments that you had. 

We may not be able to share all of them because we have Mark Trautman who teaches a financial literacy course at a high school, it's his passion. He and I have a conversation around some of the principles he teaches the youth, but we will have a lot of these. pieces of wisdom around all the domains that we've talked about in a resource that we want to give to you so you can peruse it, and maybe there's a concept or a little baby conversation you can have with someone in your life, whether it's a child, grandchild, friend, nephew, niece, that might spark something in them because it's a lot of little baby steps here.

We're going to share that via PDF in our 6-Shot Saturday email, which is our weekly newsletter. If you think the podcast is good, the newsletter is amazing, and you can sign up for that at sixshotsaturday.com and receive that resource, but for now, let's get on with the show.

All right. Starting tomorrow, October 26, is open enrollment for the Rock Retirement Club. It will be open to new members. We're bringing in a cohort until November 1st, and this is your chance to get all of the resources and education to very quickly build your retirement plan of record, which is the foundation for having confidence in your plan.

And you're going to have all the resources surrounding you to not just simply create that plan, but then have confidence and learn to adjust as life unfolds. Now, we are live tomorrow for an online meetup, October 26 at 7pm, where I'm going to teach about the four financial pillars that you need to have as part of your retirement plan.

I'm also going to repeat that session on Saturday, the 28th, so you can learn what those pillars are if you're not familiar with them, and then how the club can empower you to go get them in place. Go to livewithroger.com or rockretirementclub.com. To learn more there with that, let's get to your wisdom.

WISDOM FOR OUR CHILDREN

Today, we're going to share financial wisdom on what wisdom on finances for the youth. And I'm just going to read some of the ones that I highlighted from the many that you all shared. And this is part of, well, this is the model of the club. unofficially of the show is walk with the wise and become wise.

One of the ways that we, you and I can rock retirement is being around people that actually want to do that, that can support us and give us resources and encourage us, and we can do the same for them. That is a critical component of it. Well, it works that way for your children too, or for your niece or your nephew, people that you love on is walking with people. A lot of this with your kids, they need to find some people that they can have these conversations with because that's unusual and that way they don't feel by themselves.

Anyway, okay. We're just going to go down a list of a few of these before we get to my conversation with Mark Trautman. Wow, we got a lot of Marks today.

LEARN TO INVEST IN YOURSELF

The first one is from Mark Ross, a coach for our show.

Mark says, 

"Learn to build wealth over time. Start early, start small, be persistent. Along the way, learn how to spend what matters most, including the things that bring you joy. Invest in yourself."

That is probably for the younger people that invest in yourself is one of the least understood.

We think of investing in our 401k and spending money there, but investing in yourself, I think is one of the best places to spend money for the youth, the youth in terms of skill sets, et cetera. Troy, the financial planner that we hired, is 29. We were having a conversation about this the other day and an area that he needs to invest in himself - and we'll likely do the investment with him because we're investing in him - is presentation. We talked about Toastmasters and other programs where that kind of skill, the return on investment of that could be huge for someone that's younger. So that invest in yourself Mark, I think, is a critical one.

HOW TO CREATE WEALTH

Okay, Mark number two, different Mark. 

"Beware of temporal discounting. That's the tendency to value rewards less as they become more distant in time."

Very true, human nature. Stay disciplined, contributing to your retirement account. Increase your savings every time you get a raise. Never interrupt the miracle of compound returns. Vividly imagine your future self. Don't discount how glad they'll be that you invested early."

That being said, make sure to leave a little extra to make memories today. That's that balance part, but that's a great idea, Mark, in terms of if you're 25, it's hard to think of your future self, but when you do these things consistently, that's a gift.

Talk to that person. If your name is Sally, talk to 45-year-old Sally, if you're 25 and say, what would Sally tell me? What would she be happy if I did? That's a great idea. 

Next one is from Susie Anne Wolf. I like this one. 

"A budget is your only friend that will tell you the truth about how much money you should really spend on any given category."

Love that Susie Anne Wolf on a budget. A budget's not going to lie to you. It's not going to placate you. It's not going to try to make you feel good. It's a reflection, ultimately, of what you value. where you're spending your money. I think of a net worth that way as well, in that when you build a net worth and do that systematically, and I think that's going to be one of the pieces of wisdom, that's one of the reasons why I love the net worth statement.

A budget will do that too. It's going to show you where you're spending your money. And if you can make the connection, is this what I value in my life? I'm spending all this money on my Xbox profiles for Call of Duty, and you could even take that a step further. Well, if I've spent 100, let's say, on COD points for Call of Duty, how long did I have to work to earn that 100 before taxes? How many hours of my life did I just spend on this thing? 

Start to make connections, and a budget is the only thing that's going to tell you that. Because we are very good at rationalization and telling ourselves stories. So, I love that.

Jeff shares another wisdom related to what I'm talking about, which is 

"Start tracking your net worth on an annual basis. It can provide you great insight to the ups and downs, can also make you feel proud as you see it increase over time. You just might be amazed at the increases. It can be valuable to look back as you age, also teaches you how debt can negatively impact your net worth, can show you the magic of compounding."

A great place to start for your children is build your net worth worksheet, which, hey, Nicole, we're going to put that into 6-Shot Saturday. 

With my kids, well with Spencer, we're going to do it with Emma. We haven't done it with Emma yet. That's one thing that I started to do with Spencer is let's put down a net worth statement, and he doesn't own a lot, he doesn't have a lot because he's just starting out in his career. 

But now he has a basis and Jeff says every year, I do it every six months stylistically. I know some people that do it monthly, but it starts to create a cycle of intentionality. Because as Jeff said, and we were talking about related to the budget, it's going to show you the results of all your decisions in black and white. 

It's a really good friend. It could be a tough friend, but a good friend is a tough friend, right? They hold you to it. When you see what happens when you splurge and you have credit card debt, they'll see the impacts of the consistent savings. One way that I found that this helps a lot is when you have bad markets, as you build up wealth, you can zoom out and look at your net worth over time and give you more perspective, even though you're "down" in the interim.

So that's a great idea, Jeff. 

Kevin says related to all of these says, 

"Never live beyond your means. It's okay to be frivolous or even waste money, but make sure you can afford it."

Never living beyond your means is a huge one. 

Gene shares one that I like, and I'm going to try to paraphrase it. 

"Life brings challenges to all of us, and undoubtedly you will need the money for emergencies that crop up."

Gene says, 

"Do not allow yourself to dip into your retirement fund. Even if you can only put in 10 a month, keep at it."

Great advice, because when you start out, it's like, what, 10 a month? That's like spitting in the wind. I'm never going to make any progress. You will. It's the habits that you're building.

I like this too. 

This is your money, not your spouse's or partner's money, not your children's money, not your parents money. Guard it jealously as you mature. Learn to make it grow in a conservative manner. 

Joel says,

"Who is rich? The person who is satisfied with what they have."

Interesting book on this topic.

I’m part of the way through it, The Scarcity Brain, which talks about how the world is trying to make us just consume and always feel like we don't have enough. 

Pete says it simply, 

"Spend less than you make."

Spend less than you make. Then you make that is how you get rich, and I'll expand a little bit, Pete here. Keep it simple though, I love that, is how do you get rich? How do you create wealth the way that you create wealth? And this is a common misperception, especially with younger generations because we think of Wealthy people is they sold a company at an IPO. They're crypto wealthy. They trade stocks, et cetera. It's all this manufactured stuff. 

But if you break it down to the basics, the way that you create wealth in a financial sense, it doesn't matter whether you own a business or you work for an employer, you earn a dollar and then you spend less than that dollar for the overhead and wants of your life. So, let's assume you earn a dollar, and it costs you 80 cents to live.

Your life, that 20 cents differential is what we call free cash flow, and then you get to choose what to do with those 20 cents. You can do five things with money. You can spend it. You can save it as cash, like an emergency fund. You can invest it in 401k or Roth or what have you, or in real estate. You can pay down debt with it. Or you can give it away. 

So, step one is, earn the dollar and spend less than the dollar in this case, 20 cents. That is excess cash flow. That's how you create wealth. That is wealth that you can capture, and if you do that with many dollars, over a very long period of time, that is how wealth is created.

The investment part of it, sure, you can hit a big winner, but that's a very binary, it happens, or you go the other direction. Investing is meant to preserve and grow your wealth over very long periods of time. But the number one item is to spend less than you make, and then be intentional about what you do with the amount that you have left over.

Love that, Pete. 

Vicky says, 

"Pay yourself first. Make saving money your first priority and automatically deposit or bill pay your money to a high yield savings account for emergency fund or brokerage account if you have at least one year of emergency funds. Your future self will thank you."

I like the idea of paying yourself first.

Profit First is a great book by Mike Michalowicz. I think we've had him on the show a year or two ago about that book. Because if you don't pay yourself first, there's always things that that money is going to go to. There's always the window that needs to be replaced or the thing that you want. You have to pay yourself first.

SOME AUDIO ADVICE

Now we have a few audio ones that are sort of a grab bag and I just wanted to get some other voices than mine since we're in monologue day for at least this session. So, let's go to wisdom from Steve. 

Steve: Hi, Roger. This is Steve from Cincinnati, and I was responding to your request for life lessons that we can pass on to our children.

I've had one here for a little while that I'm not sure where it's reading, I got it from, but it's from Mother Teresa, and it really hit me, especially raising kids and I think this is a valuable lesson for our kids as they raise their kids. 

But the story from Mother Teresa says, 

"You will teach them to fly, but they will not fly your flight. You will teach them to dream, but they will not dream your dream. You will teach them to live, but they will not live your life. Nevertheless, in every flight, in every life, in every dream, the print of the way you taught them will remain."

I hope others find this useful also, but I think it's great advice.

Roger: I love that, Steve, and this is where you and I are going to have to navigate this in that we are there to enrich and empower them to move forward. But where they move forward is their life, not ours. Man, as a parent, usually we have to navigate that to some extent when they're in their teens. We're there to empower. But it's their choice on what that journey is. I love that. 

Here's one from Jay. 

"If it sounds too good to be true, it probably is."

That's simple. Love it, Jay. Sounds too good to be true, it probably is. 

Also, Jay says, 

"Be aware of automated payment tools. They can be a great time saver, and they can become behaviorally invisible, resulting in no reconsideration with prices increases or change in need."

This is true, like with Apple Pay or one click buy on Amazon, the world is trying to take away the friction where we can spend lots of money without even really noticing. I love that, Jay. 

All right let's go to another one from Jim. 

Jim: Hello, Roger and listeners. This is Jim. I have a few nuggets of information that I think the next generation needs to know.

Number one. A house is first to home, but it can also be a key long-term investment. Once you get on the home ownership ladder, don't get off, for you never know when the house market prices will surge, and then you may find it difficult to reenter the home ownership market. 

Number two. Keep your transport costs to a minimum.

I feel this is best done to live as close to the workplace as feasible. This gives you more travel cost-saving options and more time at home for a better quality of life. 

Number three. Look at all investments. You make stocks, bonds, homes, rental properties with a 10-year investment horizon. Have the funds to write out any investment you make for 10 years. It may take that long for your investment to pay off or to at least break even. But, if that old rule of thumb, buy low, sell high, comes in quicker than 10 years and it suits you, well then, go reap that profit. 

Number four. In life and in any financial investment, you will win some and you will lose some. Enjoy the ride, learn from it all, and then move on to the next thing. 

Roger, thanks for the opportunity to share my opinions on your show, which in no way should be construed as specific advice for any of your listeners. 

Regards, Jim. 

Roger: Love the disclaimer there at the end. 

One thing I'll say about the house ownership part, Jim, from my experience, especially as you start to build success, like I see my son who's been thinking about buying a pickup truck, although he has a paid for car, it's been interesting to see him navigate that and he's actually holding back. I'm surprised he hasn't bought one. The same thing goes with a house. 

My experience is if you have success quicker than you expected on the home ownership front, it's very easy to buy a house that you can "afford" out of ego, out of desire, out of whatever you want to call it, and it can actually become a trap. 

You want to make sure you have healthy cashflow and don't put that into jeopardy, and that's one reason why we've held off on building the Colorado house is we could swing it, but I've been down that road before, and I'm going to stay in a home that I can easily afford than to try to stretch. We're navigating that, but that can be a downside. But thanks for sharing those thoughts, Jim. 

Next one is from Tom, and this one's health related, but Tom is a pretty wise guy. I know Tom, so I'm definitely going to share it. 

Tom: Hello, Roger. This is Tom. The thing I think kids should know is that you either take time to be healthy or you'll take time to be sick.

You only get one rocket ship to go around earth on. Take care of it. That means getting enough sleep. Eat right most of the time, and exercise. Obesity is a robber. It'll rob you of life from your years and years for your life, and although it's a struggle for all of us, it's really difficult for some, but it's worth the battle.

I think another thing is you want to ask yourself, what do you want to be doing in 20 years? And what are you doing to make sure you can do those things? 

The next thing I would think of is the golden rule. I think you treat other people the way you would like them to treat you, and it makes life a lot easier for all of us.

Don't spend more than you can afford. Obviously being able to do things in the future means you're going to be able to afford to do them. So that's very important.

When things get tough and they will, for most of us, it's nice to have faith to fall back on. So think about that and develop that as you get along with your own life and with those of your relationships, that's it.

Thanks. 

Roger: Thanks for the wisdom, Tom. You are. One to listen to our next comment comes from Mid-American mom, and I had a chuckle as she put a little bit of a promo for a forum that she moderates. I'm not familiar with it, but I get it. I get it. So, let's listen to Mid-American Mom. 

Mid-American Mom: Hi, Roger. 

This is Mid-American Mom, also known as Mid_AM over on Reddit. That's where I happen to moderate the retirement subreddits. 

It was really intriguing and exciting when I received your email on the weekend asking about wisdom for the listeners in October.

One piece of financial advice. When it comes to investing, set it and forget it until 50.

When you're younger, decide one fund, two funds, how many funds that you would be interested in and then also risk tolerance, and then when you get to 50, start thinking about, does this feel appropriate for you at that time as you're moving into retirement and then at retirement. 

As for a non-financial piece. Please consider donating your dollars or hours to your favorite charity or faith community.

Then as for advice on retirement, just one piece is so hard. So when it comes to retirement, please come up with goals as a couple, but then do not forget to have them as an individual. 

Roger: Great advice, Mid-American Mom.

I appreciate that. Our last bit of advice is going to come from Ron. 

Ron: Hi, Roger. I wish I had better prepare my children for the death of a parent. My wife and I had discussed what we wanted the other spouse to do after our deaths, but we did not share that with our children, which created an issue with me dating and getting remarried after their mother's death.

I didn't anticipate how this would affect them, and the difference in ages and perspectives.

My thoughts at age 63 were different than my daughter's at age 27. 

Roger: Great piece of advice. Not financial, but it's important to have these conversations to help keep that strong family. Now, I want to thank everybody that has contributed to this series. We'll do this again and we'll compile all of these, and we'll share that list via PDF organized by topic.

In 6-Shot Saturday, and again, you can sign up for that at sixshotsaturday.com.

Lot of common themes here, and when I think about the money, a lot of this has to do with intentionality in building healthy habits. So that things happen on autopilot.

Let’s move on to our chat with Mark and talk about some of the wisdom that he teaches high schoolers in his financial literacy course.

AN INTERVIEW WITH MARK TRAUTMAN

So, to help me help you think about how to save and invest, I wanted to bring on a good friend of mine, Mark Trautman. Hi, Mark. 

Mark Trautman: Hi, how are you? 

Roger: Mark is a retired finance guy. In retired life, he has a passion for helping the younger generation understand basic financial concepts so they can master the money game and hopefully create a better life.

I know you've done a lot of work with your daughter, and you teach a class at high school, right? 

Mark Trautman: That's correct. Yes. I've been doing that for about seven years now. So this is the high school teaching. My daughter for 23 years because she's 23.

Roger: Yeah, and I met your daughter on the cruise and she's a sharp money lady.

So, when it comes to saving and investing, what are the two or three key things that we need to understand? 

Mark Trautman: Well, certainly you need to save in order to invest, right? Then the compounding aspect is the biggest lever you have, and age is your biggest benefit because you have a longer runway.

That's why I really enjoy teaching high school students, especially seniors, because they're getting ready to go out into the real world. Many of them have jobs, so they have the ability to save and as a result of having a job, they have the ability to even invest in things like a Roth IRA, which I'm sure we'll touch on in some point, but just that concept of compounding and how it works. I think a lot of people have maybe heard the concept, but don't really see it in action.

I sometimes will use an example of a penny that doubles every day versus a million dollars, and which would you rather have at the end of a month? And long story short, the penny takes a long time to build, but over the course of that month becomes well over a million dollars, but most of it occurs at the end.

Roger: It makes me think of Einstein who said, "Compound interest is the eighth wonder of the world."

To add on to that, that we usually don't quote is he who understands it, earns it. He who doesn’t pays it. Compounding is a very important concept. 

So go through a simple example of compounding and how this can be harnessed for someone that's trying to build wealth for their future.

Mark Trautman: Well, so the easiest thing that I do with the high school students is, of course, I just say who wants to be a millionaire and everyone in the class raises their hand, of course, and I explained that it's actually fairly simple to do if you were to just max out your Roth IRA from the time you start working, whether that's right out of high school or after college, and I've used the example of 6000 a year, and if you do that, And I also talk about this concept of you started at age 22, versus the friend who says, I can't do that right now. I've got a lot on my plate. I'm going to wait till 10 years later to start and fast forward to age 65 and the person that started at age 22 and only saved for 10 years versus the person that started at age 32 and saved all the way through till age 65. The person that started earlier, even though they only contributed 60, 000 in that example for 10 years, and the other person contributed 216 starting at age 32, all the way to 67. The person that started earlier has about 2. 1 million using a 9 percent compounding, which is the historical rate of return of equities. It's just a hypothetical number. Of course, it's not guaranteed, but the 32-year-old has 1. 4 million. 

So even though the person started later and saved a lot more, the earlier person kind of won the game by starting so early and that's just the effect of compounding. I explained to them that you're not going to be the one that stops, if you continue, it becomes well over 3 million. 

Roger: So, this is the idea of earning money on your money and then earning money on the money that you earned compounding over time.

That is sort of a mind bend when you look at that example, someone that saved 60 grand over 10 years versus someone that saved a couple hundred thousand over 30 years, but started later is going to have less money. 

Mark Trautman: Yeah.

Roger: Can you go through very briefly the penny example because I think this idea of compounding is a critical one for anybody that wants to build wealth to understand.

Mark Trautman: Yeah, so I use this example just to kind of show how compounding works and the riddle is, would you rather have a million dollars or a penny that doubles every day for 30-day month, which one would you choose? And some people think it's a trick question. So, well, I guess I should pick the penny because why would he ask the question if otherwise, right?

So many people pick the penny and I say, you know, you'll have a chance to change your mind. So, day one is a penny. Day two is 2 cents, 4 cents, 8 cents, and so forth. You get to day 10, you're a third of the way through the month. It's only $5.12, not much. This can't possibly get to over a million dollars, maybe I'll switch, maybe I'll go to a million dollars.

Then I bring it all the way out to day 15. Now you're halfway through the month. It's only $163. 84. They're saying there is no way that this possibly can become a million dollars in just 15 days. We're already halfway there and it's only 163. 

Fast forward, you do actually cross the 1 million mark on day 28 and it becomes 1. 3 million. And guess what happens the next day? 2. 6 million. The day after, 5. 36 million on day 30. But most of that compounding happens right near the end. 

So, the magic is really at the tail end because it's not a linear graph line, and I use the example of Warren Buffett. Why is he worth so much? And he's done it all through investing.

Two reasons. One is he has had very high rates of return. He hasn't had a penny that doubles every day, but he's compounded in the double-digit range for most of his life. He's also, what is he? 92 years old right now. I think it was something like, I don't know the exact figure, but I believe something in the neighborhood of 90 percent of his wealth has occurred after his age 65, something to that effect.

It's because of that kind of tail end experience in the compounding curve.

Roger: This is the power of compounding, but also the hindrance of it in terms of behavior, because like you said, you're 15 days into that penny compounding and it doesn't look like much. You feel a little bit like a schmuck. I should have just taken the million dollars. 

Not understanding that the power compound gets bigger and bigger and bigger over time. So, if you think of a chart, most of the magic is at the tail end, which is for someone that's younger, not when you're 20, but when you're 50 or 60, when you need to harvest this money, and so it takes a lot of discipline to stay with it. 

Mark Trautman: Yeah. At the beginning, it's all about your savings, right? 

Roger: Right. 

Mark Trautman: If you're saving 6, 000 a year, Year one, you have 6, 000. Let's say you made 10%. That's going to be 600. Your year two contribution in 6, 000 has a much larger impact than that 600 interest or compounding effect that you got in year one using hypothetical 10 percent to make the math easy.

So it's all about savings and how much you're saving in the early part. What is really interesting is when you get to this point, it's called kind of referred to as a crossover point where now, and it's probably down the line, 10, 15 years down the line where you are savings your 6, 000 that your saving every year into that account is far less than the account itself is earning as a result of compounding.

That's where you start to realize, well, now compounding has taken over all the heavy lifting and the savings is still important, but it's not as contributory as the compounding effect. 

Roger: So, compounding for someone that's younger is critical in investing., And you could argue that compounding is critical for lots of different things, for health choices, for relationships, etc.

Those things compound as well, sometimes in a negative trajectory and sometimes in the positive. So compounding is something that as a younger person you have to harvest.

Let's go on to a second concept.

Mark Trautman: One thing, because a lot of people don't think about this if you have a lot of credit card balances, compounding works in the opposite direction. You have the average credit card rate maybe in the neighborhood of 20 or 25 You are compounding in the negative direction at a significant rate So when people ask me, for example, should I pay off my credit card balance or start investing?

Well, if you're paying 22 percent on your credit card, there is no better investment than just wiping that out. So, compounding does work in the opposite direction if you're a debtor, especially at a high rate. 

Roger: Then once you wipe that out, you also want to work on the discipline of controlling spending so that can compound in your favor rather than against you.

Mark Trautman: Right. Correct. 

Roger: Compounding is critical. So, let's move beyond having an emergency fund and everything else. If a younger person is going to save consistently, that 20-year-old saving the 6, 000 a year, where is the best place to save that? 

Mark Trautman: Well, like you said, once you've kind of established your emergency fund, you don't have any credit card debt and so forth for the long term to really take advantage of this compounding, if you can do it in a tax-free way or a tax advantage way, that would be the optimal way to do it.

There is one way and that's using a Roth IRA, and especially if you're in a lower tax bracket. So, the way that works, especially for a younger person, and this is how I kind of explain it to my high school students. Many of them have part time jobs, for example, they can contribute to a Roth IRA because the only requirement is that you have earned income.

Even if you're under 18, you can still have a Roth IRA. You may need a parent as a custodian of that account, but it is still your account. The other interesting fact is that you don't actually have to be the one that contributes the money to that account. 

I always say to the students, if you have a very generous parents or a grandparent, and let's say, hypothetically, you made 3, 000 in your summer job, you could open a Roth IRA and contribute 3, 000 to that account, and that person may say, I can't do that. I need the money for whatever. Well, your parent or grandparent could actually fund that account to the extent of your earned income or 6, 000 would be the maximum you could put in. If you made more than 6, 000 or actually 6, 500, I believe it is this year.

And then that compounds tax free and you're not getting a tax advantage for putting the money in, but most likely you're effectively to 0 percent tax bracket anyway, because you're earning less than the standard deduction so this is a perfect opportunity to fund a long-term account. 

Now, the other advantage of a Roth IRA versus traditional and the traditional wouldn't make sense for somebody in a very low or no tax bracket to begin with, is that those contributions are fully accessible.

You can take out your contributions at any time, penalty and tax free. So, I say it's not because a lot of young people like, I don't want to say for retirement, I don't want to put that money away and never be able to touch it again until I'm 59 and a half. I say, well, technically you can get access to those contributions at any time.

So don't be afraid to make that contribution. Of course, try to avoid taking it out, but just know that if you really need it, it is accessible. 

Roger: So, the key here is a Roth IRA, you put money in after tax and you can put up to 6, 500 here in 2023, as long as you have earned income, whether it's a part time job, whether you're just starting out in your career, et cetera.

As long as you have the earned income, that money can go in there and the key thing I think you said was, I think really smart is you don't have to be the one that put the money in there. I contribute to my kids Roth IRAs through college as they had part time jobs, and now they're taking that over because they have earned income.

You're talking about grandparents, etc. We all get gifts for Christmas and birthdays and things like that, and sometimes it's money. We always have immediate things we want to purchase, whether it's that fancy keyboard or that dress or that suit or whatever it is. I don't know if anybody buys dresses and suits at that age, but the key is, all that money, if you just put a hundred dollars a year in that you got from some random gift that you got and you compound that over a long period of time, you could potentially just buy a house for that money later in life versus whatever is the flavor of the day.

Those are the choices that we face as we're trying to compound for having options in the future. 

Mark Trautman: Yeah, and I would say thinking about your audience, who is probably mostly retirement focused, and maybe that grandparent themselves, if you are already giving money to, let's say a grandchild, this might be a great opportunity to introduce the concept of compounding and investing for long term by saying, hey, you know, to your grandchild, if you're making, let's say 2, 000 in the summer, I'm happy, or I would be willing to, if I'm going to be giving you a gift anyway, why don't I help fund or help you set up that Roth IRA for your future?

I have found that people that have done that, especially younger people, as they get older, it's very easy for them to carry the ball forward, like you said, than it is for them to actually have to open it up themselves. Having that account already open and established and seeing what it has done by the generosity of a parent or grandparent. It's very easy for them to continue that going forward much easier than saying, hey, you should open this account. You've just gotten a job, blah, blah, blah. So, it's a way to kind of instill that in them at a young age and likely they will carry it forward. 

Roger: Right. One of the biggest barriers to giving money to children or to grandchildren that I experience in working with clients is they don't want to rob them of their problems. They don't want to be the savior financially. They want them to be able to mature as adults. And they feel like giving them money would rob them of all that stress that creates that growth.

This is a way of getting around that. I literally was just having this conversation the other day of, well, rather than give them money to solve their problems, you could do this Roth and plant these seeds that can grow over a long period of time. It actually, I think, mentally helps in the gifting process.

Mark Trautman: As the grandparent or parents seeing that account grow and seeing how that child or grandchild views that, it is very rewarding I have found because I’ve done that with my daughter, and I’ve also done it with some nieces and nephews. It's rewarding to you as well It's not just rewarding to them.

Roger: Now if you are someone that is trying to save for the future and build wealth and we're throwing out sixty-five hundred dollars could go into a Roth. You may be like; I can't afford that. I have my car payment. I'm just starting out. I have rents and apartments, and such are high. Remember compounding. 

If it's 50 a month that you set on autopilot, that compounded over 30, 40 years will make a difference, even though it feels like it's a waste of time, potentially, because it doesn't seem like enough.

It doesn't really matter what it is. It's part of building that habit and the fact that the compounding is more important than the amount. Given the time frame that you're looking at. 

Mark Trautman: Yeah, and the way I also explain it to, we talk about savings and savings rates and so forth in the class and I kind of throw out this idea of try to save at least 20 percent of everything you earn and that will set you up pretty well for life going forward.

That 6500 is 15 percent of a 43, 000 salary. 43, 000 may sound like a lot, but knowing the salaries of a lot of kids that are coming out of college right now, they're making 40 plus, I've seen even almost a hundred in some cases. So that's 6, 500 is not really as much of a challenge as you might think, especially if you do it right when you start, because it's very hard to kind of go back and rewind your expenses once they're established.

But once you first start your job, let's say you're in college or high school and you're making a couple thousand dollars in the summer and all of a sudden you come out of school and you're making 40 or 50, 000. At that point, saving 15 20 percent is very easy because even net of that you're making far more.

So I find it the easiest time to really set a decent savings rate is when you have these adjustments in life of income. One of which would be your first job or anything like a major raise or promotion or something like that. Those are the easiest times to make those savings rate adjustments.

Roger: This goes to compounding of habits. We're used to you know, if you earn a dollar, taxes are taken out right away. Let's just round it to 10 percent just for Social Security. I know it's a little less, but we'll round it to that. You're used to not getting that 10 percent because it happens automatically, and you never see it. The concept here is to get used to, whether it's 10 percent or 20%, going to savings that you never see, and you naturally will adjust to that.

If you can establish that habit early to where, yeah, whatever I earn, I'm always saving 20%. You never really notice it. Going backwards is hard though. 

Mark Trautman: We did that with my daughter once she started getting any kind of money, whether it was a gift or whatever, and she literally would save 20% all the time, and she does it to this day. Actually. She raised her savings rate over time and now it's back down to 20% 'because she has more expenses, but it's just ingrained in her to save this 20%. Also automating is the best approach, you know, so if you can automate it coming out of your paycheck, for example, you don't see it, you don't get used to it being there or at minimum having that automatic transfer the day or day after that paycheck hits. So it's not sitting there and you see it and then it feels like it was taken away from you as opposed to never received. 

Roger: The last concept I want to talk about.

We mentioned the Roth IRA, but obviously, if you have a job, you may have a 401k, you may have a Roth option, there's after tax investing, all of those things are tactical things that will come in and out of favor, depending on lots of things.

The things that we're talking about are the most important things. These are the pillars where those tactics can come and go. So that's one reason why we're not going down the rabbit hole of all the different potential options. 

The last thing I want to talk about is when I'm investing as a younger person for the long term, meaning for my 40, 50, 60-year-old self, what is a good rule of what I actually put that money into? 

Mark Trautman: Yeah, so we talked about the account type, and then the question is, what goes in the account? And this is where a lot of people, especially new people, get. A little confused. They're like, I bought my Roth IRA. Well, the Roth is just the container. Then the question is, what do you put in it?

For my students, I like to use the KISS concept, but it is super simple. You don't need a wide array of securities. You don't need to be a stock jockey and buy the flavor of the day. I'm a big proponent of just keeping it very simple, buying a broad-based index fund, keeping costs as low as possible, and just go that route. That's what I did most of my career and, or most of my investing career, and it works great. You don't need to worry about is this stock going up or this index of this market sector outperforming this other market sector, you basically just buy the entire market and call it a day. So I like to just keep it as simple as possible. That can be done with one index fund and that's it.

Roger: Mark had a career in finance, investment management. I've had 30 years as a financial advisor, financial planner, and we say, you can pretty much ignore all the news on the markets and the best thing to buy this year, et cetera, and just get into the flow of the world economy by buying, assuming this is for a long term growth of capital, again, for your 40, 50 year old self, just get into the flow of markets at a low cost and don't worry about it.

Now, when we talk about the markets, I want to make a distinction here, Mark. You and I, I think, are talking stocks, equities. 

Mark Trautman: Yeah, for a young person, I think that makes the most sense. I mean, this is a person that has 40, 50, maybe even more years ahead of them. So, they have the capacity to be able to handle that.

Roger: That can be scary. If you look at markets day to day and see headline news of the world's coming to an end, stocks are going into a bear market. Obviously, last year was a horrible market, and that may mean that a younger person will put their dollar in, and that dollar could be cut in half or at least cut by a third in the next year.

That can be disconcerting when they've saved that money. Why would they not put it into just a savings account instead? 

Mark Trautman: Well, it's just really because of the rates of return historically, right? Of course, you can't assume that rates historical will be the same rates going forward but history is the best guide we have and you know right now you can get a Savings rate of 5%, which is much higher than it was a couple of years ago, when it was basically zero and stocks over the long term had much higher rates of return.

Again, the name of the game in compounding is time and rate of return and the amount you save. Those are the three critical factors in the calculation. 

So, if you can stomach some volatility, which you would have to with an equity portfolio, equity focused portfolio in exchange for that higher rate of return, you will most likely come out well ahead as a result of accepting that volatility.

The way I like to help people with that is it's great if you had a grandparent who's putting the money in the account and you have a number of years and you can see that benefit even with the volatility because they don't feel it's their money is much because it wasn't their 50 hours that they spend at the ice cream shop, scooping ice cream. Now half of it is gone because the market went down 50 percent in a short period of time.

In some cases, it's a family member. I will just show them my own account and experience and show them what has happened, or you can just get a chart of the S&P 500, for example, and look at it over very short periods of time, but then also look at it over extended periods of time and all those little blips that happened along the way diminish as you zoom out.

So, you look at like the 1987 crash was when I first started working as a matter of fact. I was on a margin desk on that day, and that was down 30%. But you look at a chart today, you can almost barely see it. 

Roger: I think the key thing here is if you're investing in your future self, you have to remember the game that you're playing.

You're not playing the game of what is it valued at next year or the year after. We're harnessing compounding. You're playing the 40, 50-year game, which means that this volatility actually becomes your friend long term, even though it feels like an enemy on the short term. We won't have to go too far down this rabbit hole, but as you're saving consistently into something that is bouncing all over the place, like an equity stock index, it actually becomes your friend on the short term, because when we have those big drops in the markets, you get to buy more shares with your dollars.

Like if you put 6, 000 in a year and the market goes down by 50%, well, now you get to buy twice as many shares for the same dollar amount, which now you actually accelerate the compounding with more volatility. The key is remembering what game you're playing with these monies that we're talking about in terms of building long term wealth.

Mark Trautman: Yeah, I agree with that. That's why I also like the idea of if you automate it and you do it on, let's say, a monthly basis, you're not sitting there saying, let's say, versus putting all of the money in on day one every year, which mathematically actually makes more sense because on average, the market goes up more than it goes down, but psychologically, sometimes it's beneficial to put that money in evenly over the course of the year so then you didn't buy on that one worst day or the lowest day of the year with all of those assets. It makes it a lot easier, and basically what you're saying is dollar cost averaging in it. And psychologically, it does make a lot of sense.

Mathematically, it's actually better to put all the money in on January 1st, every year, because the market goes up approximately 75 percent of the time or 75 to 80 percent. So, you would come out ahead by doing that, but psychologically, sometimes it's a little smoother and easier to do it on a monthly basis, for example, or as you get your paychecks.

Roger: Yeah. The three key lessons on building wealth and becoming a millionaire potentially by investing is,

One, harness compounding. 

Two, save in a tax efficient vehicle, Roth IRA is the best place to start as part of that. You don't have to be the one to contribute. You may be able to be help your grandparents, or your parents help contribute to accelerate that growth.

Third, keep it super simple. I don't want to say stupid, keep it super simple and get in the flow of the long-term markets because you're playing a much longer game and that you can harness that for your benefit. 

Mark Trautman: Yeah and go have fun and don't worry about markets. Ignore the noise. 

Roger: Yeah. If you're saving 20 percent and you're doing these things, you can pretty much feel comfortable that you're taking care of your future self so you can go enjoy your young life. 

Trust me, Mark and I are older. Go enjoy it. 

Mark Trautman: Yes, absolutely. 

Roger: Thanks for sharing all your wisdom, Mark. 

Mark Trautman: Absolutely, happy to be here. 

TODAY’S SMART SPRINT SEGMENT

On your marks, get set...

and we're off to take a little baby step we can take in the next seven days to not just rock retirement, but rock life! Rock life! 

Okay, we're coming up to the holidays and we've had a ton of book recommendations for ourselves, but also for younger people, the youth. I want to challenge you from a gifting standpoint.

I'm going to boil it down to three potential books that you can give your children or a younger person that is easily consumable but has wisdom around a lot of the stuff that we talk about. 

A lot of great books on financial literacy. Let's start there. I'm going to recommend the first book, which is called Stacked: Your Super Serious Guide to Modern Money Management by Emily Guy Burken and Joel Saul Sehy.

We've had Joel on the show when the book launched. Joe has a very approachable, non-intimidating way, an engaging way, to talk about a very holistic subject around life insurance and healthcare and investing and what I really like about this book. Especially for younger folk, it's very approachable.

It's not intimidating. You're not going to have any crazy charts and he runs it like a boy scout or a girl scout where you get badges. So, he gamifies it, Emily and Joe do. So that would be my number one recommendation around financial literacy for someone that's younger than us that's maybe a little bit intimidated by it.

Another on the financial side would be JL Collins is The Simple Path to Wealth I'm reviewing that with my kids as well. 

Okay, the non-financial side. I guess I'll give you two on the non-financial side. My number one recommendation would be Areté by Brian Johnson, the creator of the heroic training platform.

Here's why I would recommend the book. One is I have a great respect for Brian. He is the real deal. He lives what he does and what I like about the book is it can be much more approachable than his videos and his training because he's an intense guy and that's not everybody's flavor. I get that. 

One thing I really like about the book, it's a thick book.

It's really well made, but every chapter is a page or page and a half. So, it's not a huge commitment to flip to a page and read about the moment of decision, the golden you, or all these heroic concepts that come from some of the greatest thinkers in history. It's a really simple book to read and it's very similar to the second book that I was going to suggest Which is The Daily Stoic by Ryan Holiday. Again, literally daily reading of a piece of ancient wisdom, and a little bit of commentary from Ryan Holiday.

Both of these books are amazing. I would lean towards the heroic book, I love them both actually, so it doesn't matter to me, but I think one of these, or a combination of a financial book and a non-financial book that are very approachable, in little bite sized pieces is a way to help people take little baby steps. That's the key when we're trying to talk to people that are young, we're the gray hairs and we want to approach them where they're going to hear. It's not about what we have to say. 

So those would be my recommendations, and I suggest you consider that as your smart sprint.

CONCLUSION

All right, next month, we're going to really focus on your questions. We didn't have every episode have your questions answered and they get piled up and I want to focus on helping you take little baby steps on things that are specific to you, your questions, your problems, or your anxieties in your own words.

That's where I want to make sure we focus. So, we're going to do that next month. In addition to that, we're going to bring back the Bring It On segment and continue to focus and noodle on the non-financial side. 

As always, we're going to do our best to do that in a dignified way, be curious in a way where we're focused on you and we're not going to talk about products for money, et cetera, because we want to just literally walk this journey with you towards rocking retirement.

Hope you have a great week.






The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All performance references are historical and do not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax, or financial advisor before making any decisions.