019R - How to Start with VTSAX

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1 - 55 Jonathan Mendonsa Alright guys were back in the studio the fire is spreading. Brad's here with me today and when we going over this last week's episode with Jim Collins from JL Collins NH dotcom. And Jim is the originator of the stock series. This particular blog series literally transformed the way that I think about investing and the way that Brad thinks about investing. Basically it transformed the way that everybody in the FI community thinks about investing. It is one of the pinnacle articles that everybody looks to. It's one of the most influential articles that I've ever read a completely crystalised index investing for me and it was a treat a true treat to be able to go through it with Jim on an hour and a half long podcast and just get a walk through it one step at a time for you guys what a storyteller. So I am unbelievably excited about how this last week's episode went. I'm unbelievably excited to share with you guys. And now to get a chance to talk about it even more with Brad. How are you doing today Brad.
Jonathan_Catchphrases, indexfunds, stocks
55 - 59 Brad Barrett Hey I'm doing great Jonathan. Anything going on in your life.
59 - 63 Jonathan Mendonsa I don't know maybe one or two little things. My wife. We had the baby on Sunday.
63 - 64 Brad Barrett Really congrats man.
64 - 78 Jonathan Mendonsa Yeah we're actually. She let me she gave me like an hour and a half reprieve to come to this podcast I'm on a very short tether right now. But she said you can go do this. And then you got to get your tail back here. So for you guys I just want to let you know we're going to put this together for you today and then I am right back to the hospital.
78 - 87 Brad Barrett So it's Tuesday morning the baby was born Sunday and yeah you're you're at your house recording the podcast while your wife and baby at the hospital is that right.
87 - 94 Jonathan Mendonsa If I didn't love this freaking show so much there's probably zero chance I'd be on it right now. But yeah yeah that's that's exactly right.
94 - 103 Brad Barrett That's awesome. That's really awesome. All right. Well congrats again obviously. And yeah you know this now second generation fire becomes a little more real for you right.
103 - 107 Jonathan Mendonsa The fire spreading brother the fires spreading.
107 - 111 Brad Barrett I love your little taglines that so great. Those are my two favorite.
111 - 113 Jonathan Mendonsa Write that down right. Yes.
113 - 129 Brad Barrett But in all seriousness you know like you said second generation fire has become real for you. You know there's no reason you can start thinking about you know 529 accounts opening up you know Vanguard accounts for your son you know. That's good. That's got to go into the thinking right.
2ndgenfi, 529
129 - 214 Jonathan Mendonsa That's what I love about our podcast from day one. We have said we want this content to build like I don't want to start you in some random area and then give you nothing to lead you into that. We want it to be actionable tips and I know it's it should be actionable for you because it's actionable for me. That's the way that we're designing this it's like how can you build your own curriculum that guarantees your path to wealth. If you just follow these simple steps one at a time that's all we're all about. And so yeah I'm going to be taking these and share them with you guys. And of course I'm going to share them with my son and I'm going to try to game it for him. So it's just this fun thing that we do together and I'm steering him into this fastlane for success. And how cool would it be if by the time he got to 20 he doesn't need whatever you leave behind. So this argument about whether or not you're going to leave the inheritance or not leave him is that going to ruin the child. What if just by you living this mindset out living this philosophy out building this framework in front him and giving him the tools and teaching and the rules from such an early age what if that is just completely irrelevant. By the time that he's 20 because he's already got a path that he's chosen chosen and you know it just becomes optional for him. We talk about the power of time and the power of just knowing the rules ahead of time and making these little steps one at a time. And if you start early enough. I mean how many people do we have that are in their 60s that wish they just learned about this 10 years earlier. How many people that are 50s are in their 40s and starting from scratch with this stuff. How cool would that be.
mindset, podcaster
214 - 228 Brad Barrett Yeah. No it's incredibly powerful and like Go-Curry cracker said on episode 18 he had his son do modeling right. And was able to put some of that money into a Roth IRA while he's 0 or 1 years old. There's no reason.
ira, roth
228 - 232 Jonathan Mendonsa yeah If only if only I had a blog that I could allow my son to model on wouldn't that be cool.
232 - 239 Brad Barrett I wonder I have two cute daughters as well.
239 - 283 Jonathan Mendonsa Haha there we go, Absolutely. Very cool. Well you know in the next thing that we're going to be getting into is coming up soon and I hate to take you all away but that's just how my brain thinks. There are all these opportunities for people that decide to start a business. All these little tax optimization strategies and how cool would it be if we had someone just come in and coach us and then you guys through us on all these little kind of secrets that you can that you can do once you know the rules. And it's not a legal You just didn't know about it. And this is this is what the game looks like once you really dig in and you start to learn the rules. That's what I'm excited about. And that's kind of maybe where this will go. All these really fun different directions that build on these initial principles that we've talked about. But one of those initial principles has to be index investing that is a pillar of FI right Brad.
indexfunds, tax
283 - 365 Brad Barrett Yeah. I mean that is that is one of the main pillars of fire. Without question and yeah we actually just just recorded an episode that should be coming out here in a couple of weeks on the pillars of FI. You know what we consider like the absolute essential topics for living a financially independent lives. So that featured very very prominently and of course like you mentioned earlier this this all comes back to Jim Collins for me certainly I know for you and you know that's not to say that but Jim Collins obviously didn't invent the index fund or anything like that but man did he did he crystallize it so perfectly in that stock series and you know I know I've mentioned this before in the podcast but but that just really changed the entire trajectory of my investing life from someone who was you know really uncertain and constantly worried about am I doing it right. And you know just doing all the typical stupid things that people do you know asking the guy next to you at your job you know. How are you investing. And just kind of mimicking that or you know not understanding anything about expense ratios and fees and the impact of that on your long term return. So Jim's stock series without question has been a huge benefit to my life and I suspect it will amount to potentially millions of dollars by the time I turn 100 or whatever and whatever we're talking about down the road. I mean literally millions of dollars and that is as powerful as it can be.
indexfunds, stocks
365 - 385 Jonathan Mendonsa So what we all should do is just take a few minutes to go through the episode and really pick up on the on the high notes from that. And I know Brad that you always make a concerted effort to actually when you're writing your show it's not just write the show notes but also just take a few minutes and make a few notes about the things that really hit you hard hit you where you live. Do you want to maybe talk about a few of those right now.
385 - 480 Brad Barrett Yeah sure. Now that sounds good and yeah a lot of it focuses on Jim's philosophy and you know basically he said something to the effect of you know there are certain gurus out there who have these magic formulas and and claim that we should follow them and you know as he said quote There are no such people. They just don't exist. Right. And this is it's one of these kind of truth to life like there are in my estimation are very few if any people on earth that can outperform the market. When you factor in fees over a long term period of time and you know the likelihood that you or I or any person in the audience is just going to by sheer chance happen upon these people is so incredibly slim that you know if you're just talking from a betting perspective you know it's a it's a terrible terrible bet. Right. I mean it's a one in a thousand and one in ten thousand maybe maybe even worse than that but and that's just not something I'm willing to take. Right. Like if you can it's one of those odd paradoxical things in life where you know if you just go the simple the simpleton route. Right. Like the no brainer route of investing in the market you are going to outperform the people who think they're brilliant who think they're gurus and that they've figured out some secret. It's just so incredibly unlikely that that person exists period or that be you're going to find them. So don't even bother. Just follow the index follow the lowest fee fund you can possibly find and just be very confident that that's going to work out for you over the long term.
480 - 557 Jonathan Mendonsa Yeah you're essentially your pride you know that you can beat the system gets in the way of your overall success. Some great life lessons there as well you know if you're just humble enough to say I can't do this you know I just cannot do enough research to do this. Conversly if you don't care about any of that and it's just a time perspective. The lazy man wins if they're following this general advice. Just put it in there and forget about it and you're going to wake up very very wealthy. One of the things that really struck me was just all the noise on TV he talks about you know what we're talking about with index investing. That's the beer. But everything that you see on TV all the chaos all the advice it seems counterintuitive and in fact they say one thing the next day and then they say the exact opposite thing the very next day. All of that is just foam it's noise. But what we're talking about is just index investing that's the beer and you're just cruising down this simple path to wealth and you can just put it in there and then you can forget about it. And we're going to go through his series he has 30 articles now and I haven't exactly figured out how many episodes that is going to be with Jim. It's hard to say because he's a consummate storyteller. He is the ultimate travel guide. And frankly I don't want to cut him short. I want to hear the story that he wants to tell. And I want to see where it goes. I love listening to Jeb talk about index investing. It was pure joy for me to be able to sit there and just listen to him talk about it.
557 - 612 Brad Barrett Yeah I agree. I mean Laura and I were just sitting there last night listening to the episode and just smiling. Honestly like you could just almost like you could hear the enthusiasm in Jim's voice and just knowing that he's going to go off and spin this tale on whatever it is and at the heart of it I mean this is pretty boring stuff. I mean not for people like us obviously but in general. But you know we're sitting there just enthralled by the story that Jim's telling and and yeah I mean if Jim is willing to come back as many times as as he said he was this is going to be a fantastic series over the next year or two we've been I mean who knows how long it's going to take us to tell this. But like Jonathan said we're going to do do the best job we can and just wanted to kind of mention a couple of things. I thought it was funny how he said he quoted that Fidelity study of the classes of investors who did the best and the two best were dead people and those who forgot they had their accounts. Right I mean how fantastic is that Jonathan.
612 - 678 Jonathan Mendonsa It was So cool and then the other thing that he said that that crystallized a concept for me because you know we always talk about are we in a bubble right now. Do we need to be concerned about that and there are two things he said that were really powerful. One is you know if you're young enough the best thing that could happen would be for you to invest now and then the bubble the crash and then you have 40 years to 20 years or 30 years to invest through the bubble right. But the other thing the other thing that was super powerful for me was this idea of you know one company fades away but other companies you know replaced that new blood. And so for that one single company. Yes you could lose you know the downside is you could lose 100 percent. And that sounds bad. But the upshot is with the new companies that fill that in they can gain 100 percent 200 percent 10000 percent there's no upper limit on you know how much profit those companies can make. And so there's infinitely more upside than there is downside to an index investing. And that crystallized a concept for me because you're trying to pick winners and losers when you do day trading and all these other things. And that is so risky and is so risky but with index investing. The math works for you. And it's that upshot that makes this so powerful.
678 - 809 Brad Barrett Yeah. I never contemplated that thought honestly that the index is self cleansing in that regard. As Jim said and like you said it can only lose 100 percent. But the upside for the real winners is incalculable really. I mean there's no end to it obviously. And I think this really ties into what you were just saying with you know the people who are essentially gambling right the day traders those people aren't investing. That's just a simple gamble on this piece of paper or is this you know bid on the computer going to go up in a few minutes or a day or whatever it is. And if so can I sell it really quickly and make a couple of bucks. That is not what we're doing here. We're investing as we talked about on the podcast we're investing in thousands of American companies and tens of millions of American workers who are all working their tails off to essentially make us richer. Right. How cool is that when you actually think about it that you are albeit a very tiny owner but an owner in 3000 plus American companies when you buy VTSAX like that it's just such a crucial crucial concept. And this touches on one other little thing that he mentioned which was you know he talked about the stock picking contest in schools and that just hit home for me because even though it's such a minor thing we are teaching the kids the exact wrong things. It's looking for stocks that are going to go up in the next two to three months while they're doing this stock picking contest. And as Jim said it's worse than not teaching them anything. Wow. And what's funny is I don't know how I remember this. I have like a terrible terrible memory when it comes to like my own life. But for some reason I remember doing a stock picking contest in the fifth grade and the one stock that stuck out to me even all these years later even though I knew nothing about it was the stock ticker Birk ha. And it was actually Berkshire Berkshire Hathaway Warren Buffett's Warren Buffett's company. And at that time the only reason that I knew about it was because it was the only stock that went up in like the hundreds of dollars per day. Because you know it's worth tens of thousands of dollars and now hundreds of thousands. But it's funny that literally the one stock that I remember from the time when I was you know 10 years old is the one individual stock essentially that I own today. Isn't that amazing.
indexfunds, stocks
809 - 810 Jonathan Mendonsa Awesome.
810 - 864 Brad Barrett Yeah I just thought that was a funny story. But yeah you know Jim Jim's thought of the market always goes up and and you know he kind of alluded to that being a very controversial topic and I think I think it's only controversial in the sense that people aren't thinking on the scale that he's thinking. You know he's thinking on the scale of look at that stock chart for the S&P 500 or the Dow or whatever over 50 or 100 years. And it is essentially a straight line up like it's it does always go up and there are blips. Obviously there are crashes. And as Jim said there are always going to be market crashes over a 50 year period. There are always going to be corrections are always going to be bear markets. We have to deal with that. But as he said you know quote you only you lose money by trying to dance in and out of the market by trying to predict when those drops were going to happen and nobody can do it. Warren Buffett can't do it. I can't do it. The people on TV can't do it.
864 - 877 Jonathan Mendonsa And he has even more strongly phrased that he was saying look at the chart just look at it. How do you lose money when a chart just goes straight up like that. How is that even possible. And you know like you said the explanation unless you're dancing in and out.
877 - 898 Brad Barrett Yeah. No doubt about it. And yeah that's really important. It's stay the course and it's not easy. As Jim set up that scenario right like where was it March of 2009 the market had already dropped 50 percent. Every smart person he knew was saying the market was going to go down another two thirds. And what would you do in that scenario. And you know I think a lot of people would sell I mean like that's just the way.
898 - 942 Jonathan Mendonsa I think a lot of our audience will actually have to look at themselves and say I did sell you know there was a recent reality. And how amazing would it have been if you had heard this same reassuring information before than. Now we can't go back in time we don't have a time machine. I'm sure all of us wish we did sometimes but you have it going forward. And how does having this knowledge now how does that put steel in your spine for the next 10 20 years. There is an incalculable value to having steel in your and your investing spine and having something that you truly believe in and in order to truly believe in it you need to have a why. Right. You have something to go behind that belief and that's what Jim's episode did I believe and that's what his stock series did. But this was another way to really relay that stock series and bring it to life for maybe a different audience although I'm sure there's plenty of overlap.
942 - 960 Brad Barrett Yeah agreed. And I just love the fact also that Warren Buffett who's one of my heroes really backs up every single thing that Jim says about these low cost index funds where literally the instructions that he has for his estate is to buy 90 percent of the money to use to buy the S&P 500 index fund from Vanguard.
960 - 1028 Jonathan Mendonsa Well and and you know what. He's almost He's almost coming behind Jim. And so it has been saying this for five years Warren has more and more over the last two years been just he's been pushing this thing. You know it's it's almost like he believes that more and more each additional sequential year. So that's that's kind of cool as well. One other thing that I thought was really interesting is when Jim picked took a second just to pick on the Dow Jones and he basically said look guys the Dow Jones is not the market it is just a single index that tracks 30 companies. And the crazy thing about it is nothing that is in there now was in there when it started. It's completely switched over. So if you were trying to do this yourself or pick these individual winners and losers you can't. The safest bets in the 50s they're all gone. They've been replaced by big corporations like Facebook and Google and other lookalikes. Times are constantly changing and it doesn't matter how safe a particular company seems right now. You will not be able to pick it. You can't you can't with any reliability. Things are far beyond your control. And the great thing is with that advice that Jim has given you and that we're trying to persuade you on as well you don't have to so I hope you have peace from that.
1028 - 1040 Brad Barrett Yeah I know I sure do. So yeah hopefully everyone out there in the audience has taken this in and you know that might be an episode to listen to again. So as we said it's a choose FI dot com forward slash 0 1 9.
1040 - 1053 Jonathan Mendonsa And I know I've read his book more than once. I know I read his stock series more than once. I mean absolutely you don't you don't get everything in one sitting and that's something you need to believe that in your core because the more you believe it the wealthier you will be 20 or 30 years from now.
1053 - 1101 Brad Barrett And guys on the topic of the simple path to wealth Jim's book we really want to give away as many copies of this book as possible and like me mentioned on the Monday podcast we are doing the thing where if you leave a review on iTunes or stitcher I just take a quick screenshot or a quick picture and send it to us at feedback. at Choose F-I dotcom. And for every 10 reviews that we receive we're going to take those 10 names put them in a hat pick it out and you know they want a copy of the simple path to wealth. So I mean in a perfect world center here we give away as many of these as humanly possible so you know it's helping us with reviews. And you know we want to help you get this book in your hands so. Yeah. You know again if you know please send us send us itunes reviews that would be phenomenal.
1101 - 1153 Jonathan Mendonsa And right right now just so you guys know we had four that came through yesterday and just want to give a shout out to Hawaii FI see you mama bear of two and rancher's daughter. Thank you so much for putting those reviews and we appreciate you guys. Thank you very much. So the stock series I put part one because I know there's no way we're not coming back to this. We're going to do this right. I don't know exactly. Probably five parts or ten parts but from from the time that we sat down we were pretty much sure this is going to be a multi-part series which is why I put part one at the end of that picture just so you know what would be coming if we did this would be going over your tax advantaged bucket so the 401k the 403B the TSP the IRA and the Roth buckets whether or not to use your company's 401k international funds and bonds and also portfolios exactly how to build that portfolio and wealth allocation model so a bunch of really cool stuff just digging deep into all of this content and just having a fun conversation about it.
401k, 403b, ira, roth, tax
1153 - 1202 Brad Barrett So kind of tied into the Jim Collins episode I actually saw an article on The New York Times this past weekend and sent it over to Jonathan via text just saying like wow. And it was entitled. Vanguard is growing faster than everybody else combined. And this is the one paragraph I want to read in the last three calendar years investors sank eat 123 billion dollars into Vanguard funds. The scale of that inflow becomes clear when it is compared with the rest of the mutual fund industry. More than 4000 firms in total all of them combined took in just a net of $97 million during that period compared to vanguards 823 Vanguard. In other words scooped up about eight point five times as much money as all of its 4000 competitors combined. Wow. And that is just astounding right.
1202 - 1220 Jonathan Mendonsa Well you know what's probably happening as well. I bet you like these hedge fund brokers like they may be taking everybody else's money and making like ridiculous sums of fees off of it. But I bet you with the money that they're making. I bet you they're just plowing it into Vanguard. I mean I can just the hypocrisy there is really thick. But I bet you that's what happens on the backside.
1220 - 1222 Brad Barrett I don't know anything about that.
1222 - 1226 Jonathan Mendonsa But my conspiracy laden.
1226 - 1229 Brad Barrett Yeah I'll steer very clear of that.
1229 - 1276 Jonathan Mendonsa But I think I think what it means ultimately is that is that people are hearing our story. People are hearing Mr. Money Mustache's story they're. You know hearing the thousands of blogs that are that are reading Jim's stock stories and reading things by Warren Buffett and reading Jack Bogle and saying like wow this makes sense and I mean the proof is in the pudding here. I mean this is stunning. This is where all the money is going. And you know Vanguard and like like Jim said Jack Bogle is an investing and financial saint and he has probably done more than any other single person to enrich the lives of Americans. And you know right now I think Vanguard has something crazy like four trillion dollars under management which you know it's just an astounding astounding company. I mean astounding sum of money.
1276 - 1346 Jonathan Mendonsa So yeah that was one cool little side tangent I wanted to mention. Very very cool guys. Brad and I realized that we had this massive oversight. Apparently you can do reviews on stitcher and a couple of people did. And we have just been neglecting you guys and we're sorry frankly I didn't even know you could do reviews on stitcher. I tried to figure it out. Back in the day and I couldn't do it myself. But I saw two of them on there. And these are a little bit delayed but I just wanted to give a shout out to you guys because we we really do appreciate you guys taking the time to leave us a stitcher review. It's awesome. It is a really cool surprise to see that the title House says My husband and I are 28 and are loving the show. We had already toyed around with the idea of early retirement but hadn't honestly considered it a reality until listening to choose FI. We find these guys easy to listen to and certainly helpful in the way they package the material. We've applied at least one action stuff from each episode. So if you're serious about moving forward with the fire plan check these guys out and that was that was very cool. And then also what Derrick said Brad and Jonathan I want to start with saying thank you guys for all of your work on the show. the Content has been excellent and I look forward to the episodes each week. The material is very accessible and applicable. I've been trying to share the Fi movement to friends and family and this podcast has been instrumental in that process. Keep up the great work guys here knocking it out of the park.
families, testimonial
1346 - 1415 Brad Barrett Yeah that's really cool and you know as Derek mentioned about sharing it with friends and family I have to say this is the first time that I've really felt so strongly about like an online project that I've done that I personally am sharing it with family and friends and you know I'm not like embarrassed about it which I know sounds silly but like I'm not like a self-promoter by nature by any means but I just feel like this information is so valuable and useful for people that I like. I'm stepping outside of my own comfort zone and sending it to 10 to 15 different friends and you know kind of family members and people are actually listening to it and like Normally that's just not something I would do. But you know I think I think people really relate to what we're doing here. And I think what people like is like we mentioned before like this is just a conversation. This is not two experts just trying to lecture to you. This is us chatting through issues and kind of getting as we always talk about the audience's input. So again I know we say this every time but this is just the coolest thing that John and I have ever done. We just talk every single day about how excited we are and what we can do to make this better for you. And we appreciate you guys being there for and with us on this journey.
1415 - 1559 Jonathan Mendonsa Yeah. And just to reiterate these are not Brad and my ideas. I mean some of them are that even the ones that are our ideas purely our ideas. We got them by researching other people's stuff like. And those people got it by research and other people's stuff. All this is though this is a new framework. This is by the fire community for the fire community so like our guests are not pure Yes they are co-host. This is like a place a place that we've built for people that have figured out these ideas to bring it to a new audience and really show them how they can use it in their specific life in a way that tells a story and that you can go and take action with it. And so this was the feedback that we got in email and I think it encapsulates that idea perfectly. And this is from Steve and Amy and he says Hi Jonathan and Brad we are writing to say what a huge impact your podcasts and articles have had on our financial future. We are 42 and 46 we've always saved. We have no debt and we own our current home. However we had no idea how much we had to learn about FI since listening to our first podcast the interview with Mrs. frugal woods which by the way is competing with our Dave Ramsey episode for most downloaded episode. And yeah that frugal Woods episode was awesome but they said since listening to that first podcast we have done the following they move their Roths and their taxable accounts from a high cost investment firm to Vanguard VTSAX that's several hundred thousand dollars in funds and they originally had a point six nine all the way up to a 1.9 seven and annual expenses. And so we asked them the question is your financial adviser were $600000 and their answer was a definite no. Now since then they've increased their contributions. to their 401Ks from 25 to 30 percent in an effort to max out the 18000 per person this is going to reduce their taxable income to below the 25 percent bracket. They never realized that by not having by not maxing out their 401Ks was causing them to land in a higher tax bracket. Steve also says I've increased my contributions to an HSA to max that out as well. We are making our first attempt to travel Hacking on airfare for cruise to Alaska next year. Your podcasts and articles are a fantastic resource for those of us who want to live like no other. As Dave Ramsey says he taught us the basics of saving. Now you're teaching us how to keep all the money we have saved. We hope to both be retired in the next few years when we feel your podcasts and articles will help us get there much faster. We're just settling in to listen to your new interview with Jim and really looking forward to it even after reading the simple path to wealth. It was actually your blog that changed our financial future. Thanks for all the great info Steven and Amy that's like chills down my spine level of awesome right there.
401k, indexfunds, ramsey, travelrewards
1559 - 1613 Brad Barrett Yeah. That is that is mind blowing. It's really just wonderful and empowering for us too to know that people are listening to this and taking action. That's what we want and we talk about it all the time like you should get actionable tips out of every single episode or we're wasting our time and wasting your time. It's all about taking action. And just like we are talk about little things it doesn't have to be big huge things like you know they're going to save potentially hundreds of thousands of dollars with VTSAX it could just be you know making an extra meal a week at home and saving 20 or 30 dollars. Like it can be small things and just take action. And all of these things are going to add up over time to creating this life of abundance for you in every way shape or form and that's that's where we want to do with the financial tools that we're giving you and the life hacks. It's all part and parcel of the same thing.
indexfunds, lifeoptimization, mealplan, savings
1613 - 1753 Jonathan Mendonsa And the other cool thing is that this story constantly builds Brad and my idea was that no episode is pointless like you literally should start with Episode 1 and then listen to every single one up through now you will not regret it because each episode has unique content that's being presented and it always builds we relay the content to you as we get it. And so we start with this baseline. We get a guest on that has this idea that they have essentially packaged in a way that it should crystallize it for you. They can they can talk about it describe it and describe how to implement it in your life and then you get to go do something with that. But then you know what that is going to inspire another member of our audience or maybe they came up with another way to tweak that and optimize it even further and then they will bring that idea to us and then we can share that with you as well. So this is Neal Lancefield and Neal Lancefield has a Web site and he just sent this to me on Twitter that he had. It's Neal Lancefield dot com. And he specifically said to me Hey once you finish listening to Episode 13 of the Choose F-I podcast which is the unfair FI advantage of teachers and specifically focused on the tax advantages that teachers firefighters and police officers has. Go check out this article that he has. We're going to put a link to it in the show notes. And it's a bill called H.R. 2 1 4 6 and specifically it it even optimizes that further for police officers and firefighters as well. And so if you're a police officer and you're pursuing FI and you're listening to this this will make it even easier you'll be able to retire 50 and access your 401k without the 10 percent penalty and he will walk you through how to do that. So it's a these really cool laws that are only applicable to certain people once you have a baseline the tools that we're laying out for you then someone else can show you how to go even farther at that. So we'll put a link to that in the show notes. If you are a police officer or firefighter go check this one out. If I find out anything that I can give to you that will get you to fire faster. I'm going I'm going to tell you. And so that's why I'm giving you all like 30 seconds on the show just to make sure I get you that information. Go check out that link and speed up your path to FI and let me just mention that if you want to access the show notes for this episode of particular you can just go to choose FI dot com slash 0 1 9. So next we're going to go ahead take a question from the audience and specifically we're going to be doing a travel hacking question first and someone decided to use our voicemail feature so we got our first live audience question. Hold on just a second.
401k, firefighter, police, tax, teacher, travelrewards
1753 - 1797 Speaker Hey guys. My wife and I love listening to your podcasts while we walk and share a set of airpods. I'm actually a pharmacist and it's great hearing from my fellow legal drug dealer about fire I'm currently active duty military government fully paid of those loans and we are relocating to Cambridge England for three years. I have lots of reading to do about travel hacking. However I wanted to know which company would you start with if you are in my situation. American Express waves all fees for me and my spouse. We currently can fly Rine Air for some $75 round trip all over europe and plan to use our points for hotels. Would you still recommend I start with the Chase Guantlet or start with American Express and their partners. Any recommendations on which hotels have the best bang for buck in terms of rewards. points value. Best Anthony and Abby.
military, travelrewards
1797 - 1803 Jonathan Mendonsa That is so freaking cool I love it by fire for fire it's crowdsourced guys. Lots of fun.
1803 - 2033 Brad Barrett Yeah that's great stuff. So Anthony's question is a very good one so he is going to be in England. He's going to have access to Ryanair which basically means that most traditional frequent flyer redemptions are not going to make sense. So just because Ryanair is just so unbelievably inexpensive you know $75 might even be high. Honestly like I remember we flew from Dublin to Brussels for I think it was I think it was £1. So it was like a couple of bucks and then maybe like 20 dollars in taxes or something like that so you know you can get even even better deals than that which is amazing. So my recommendation for that type of travel would be to go for what I call the fixed value credit currents which are like the Capital One venture and the Barclaycard arrival Plus those are the two most prominent personal versions Capital One has some business versions as well there's one called the Capital One Spark miles for business card. So let's just talk about let's say the arrival plus. So the way that that works is it has a Currently when we're recording this it has a 50000 mile bonus after you reach the $3000 spending requirement. So you would get after all said and done you'd have 56000 of these arrival Miles. OK. Now why their fixed value is there's no huge upside to them. They're just worth one cent per point so that's worth $560. But you know that's not as fantastic as some of these other currencies like the sapphire preferred you know with transferable points where you can potentially like we talked about with Jeremey and from go cracker cracker where he got a 20 cent per point redemption. You know that's that's incredible. But you're not going to touch that on a on a fixed value card. It's just simply one cent per point. But that said it allows you to offset any quote travel expense. So Anthony and Abby can buy Ryanair tickets with their credit card you know in this case the arrival plus. And Ryanair doesn't know they have miles. They don't care it's not relevant they're just buying the flight with this credit card and after the fact they log into their credit card account they'll go to their travel you know whatever it is. Travel eraser I know that's what Capital One calls it. But essentially you go to the area where you redeem your miles. You'll see that travel expense and you just literally wiped it out with your miles and that expense then ceases to exist on your credit card balance. So for Ryanair if you're getting $50 flights well you can get 11 of them for a $560 bonus from one credit card. So that is a really powerful way to go about saving just on travel where you can't use traditional frequent flyer miles. I would say another strategy just by sheer virtue of where they're going to be near London is using British Airways obvious points. We've talked about British Airways points previously where there are more charges based on distance and the way that works so Europe while there are a lot of this going to sound silly and elementary where there are a lot of countries in Europe but it's not that vast of a geography. So if you can get flights that are one way and distance that are 650 miles in distance or less each of those one way flights only costs 4500 obvious points. And yeah which is incredible. So for one British Airways credit card bonus which you could get a 50000 mile bonus or one Chase Sapphire preferred card that has 50000 ultimate rewards points well those transferred to British Airways. So you can get what 11 of those also 11 of those. One way flights albeit on British Airways using those obvious point is something.
2033 - 2047 Jonathan Mendonsa And just to put that in perspective I just remember when I use the ultimate portal to redeem some points basically a rental car was 4000 ultimate rewards points or 7000 ultimate rewards points today so you're getting a flight for the price of a rental car for the day. That's incredible.
2047 - 2213 Brad Barrett Yeah it's it's very valuable especially when you live near a huge British Airways hub. So that's something to consider for sure. You know Anthony said that he is an active duty military and Amex. They do waive the annual fees on all of their credit cards for active duty military. So the best option in my estimation would be then to go for high annual fee cards like the American Express Platinum which is a phenomenal card. The bonus again add publication of this in the end of April. The bonus is 60000 of the American Express membership rewards points which also do transfer to British Airways albeit not at a one to one. I think it's five to four. So it's 80 percent essentially of one point if you will. So not a terrible transfer ratio but the cool thing about the Amex Pratham there are add on bonuses. There's I think now they just changed the offer I think you get 200 dollars in annual Uber credits. So that would be completely free for Anthony which is nice. They also have some reimbursement annual reimbursement on airline incidentals. So on like that could be valuable for checking bags or buying flights. I'm not 100 percent sure just by memory on all of the specifics if it includes check baggage but definitely includes like in-flight beverages and things like that. So that's just free money really. And a very nice thing that Amex does for active duty military. So you know that's kind of enough said on on the flights. But as far as hotels go we talked in-depth about this last week and I went into great detail about my favorite hotels which are high at hotels and Starwood and you know I'm not going to take another 10 minutes and talk through it now. But I did want to give Anthony and the audience one other a little tip there is a Web site called award mapper dot com that allows you to see all the hotels that exist in a particular location for a bunch of different chains. You know Starwood Mariya and IHG Hyatt Hilton club Carlsson. So essentially the whole list of reward hotels are available here. So you know if they're going to Prague you can just type in Prague and literally check off. You know I have Hyatt points I have Starwood points and you can see what's available. So that's a really valuable Web site certainly to check for hotel options and they tell you how many points it cost per night and and all that stuff. So I would tell Anthony to check that out for sure and then check out last week's podcast. I would try to maximize Starwood points which you can get through the Amex Starwood card and Hyatt points which you can earn most easily through Chase Sapphire preferred and the other Chase ultimate rewards cards. So yeah I think that pretty much answers Anthony queestion.
military, travelrewards
2213 - 2324 Jonathan Mendonsa And also one other little tool you mentioned award mapper but also we use award wallet to track a lot of our award points because you're going to end up with six or seven potentially especially once you move outside the Chase gauntlet. You could end up with other reward programs and it's very convenient to be able to track all your points their expiry date. You know all your log ins and one particular place so we do use award wallet and we use award mapper for those two specific different reasons and someone had asked me how we track our points going down long term and so that that's the answer to that when we use award wallet. And we'll have a link to both those in the shownotes if you want to check those two particular tools out. And if you have any other tools or you have any other particular sweet spot redemptions that you've put in we love your ideas. Please send those to feedback. at Choose FI dot com if you have questions about the show or ideas for future shows again feedback at choose F-I dot com and we had a question from Alyssa. Alyssa says I just turned 24. I've been listening to your podcast and love everything you are teaching. I've been pretty good at putting the principals in a place when it comes to frugal living and savings. I've actually always been pretty good at saving but that's pretty much where my path to FI ends. So right now I work for a nonprofit that doesn't have any kind of 401k or anything close to matching. So I've started looking at retirement accounts but I feel so lost. There are so many options out there from IRAs Roth IRAs index funds stocks bonds and the list goes on. So my question is how do I go about choosing a retirement account. Better yet how do I begin to choose step one. What are the most important things other than fees to compare. Are certain accounts better than others when considering the road to FI. Ends Well before the normal retirement age. Does it ever make sense to do a traditional IRA. I'm saving money but beyond that I have no idea what I'm doing. Can you please provide some advice to the younger listeners who may not already have retirement accounts or spare 10000 to put in a VTSAX for that matter. Thanks and please keep up the great work educating all of us. Best Alyssa.
indexfunds, ira, roth, savings, stocks, traditional
2324 - 2551 Brad Barrett Yeah that is a very powerful question and you know I certainly apologize if we haven't touched on this at all in the past but your questions like this are extremely helpful for us to help you really hone in the message for our entire audience so please Alyssa know that we certainly we're not intending to exclude our the younger members of the audience so this is extraordinarily helpful. There is a lot to talk about here. I guess the very first thing that I would say is when Alyssa said there are so many options out there from IRAs Roth IRA index funds stocks bonds etc. and I think I think we need to just make this as simple as possible so no index funds stocks bonds etc. those are those are investments that go into a like an umbrella. Essentially this is how I think of the different options like the traditional IRA the Roth IRA the 401 k. Those are distinct things. One are those types like the Roth the 401K the traditional IRA. Those are just umbrella accounts that you know in most cases the government has set up as vehicles to help us save for retirement in and of themselves there are no investments in particular within any of those umbrellas. Now some people out there will say but that's not true about 401Ks because some company for on case only give you certain investing options but still you know when you put your money into that in most cases you're just putting it into that umbrella as cash. And then you are investing from there. So let's you know we'll just talk about what I would recommend it in general for people as as Alysa said for people considering the roads to FI and not normal retirement age or normal advice for the general public kind of like how the mad Fientist just really got on. As he mentioned in episode 17 how he started on his path to researching all these tax optimization hacks is realizing that that we are a different animal. So this is not just the standard advice you hear is put your money in a Roth IRA. All right that's that's the standard advice. But for people on the path of FI I think you should put as much money as possible in the pretax buckets in the tax deferred buckets like the 401k and the traditional IRA. So in this case she does not have a 401k. So I would suggest maxing out the traditional IRA which is a tax deferred account. OK. So that means she is putting in let's say fifty five hundred dollars into that account in 2017 and that fifty five hundred dollars is a tax deduction on her current year tax return which means she is paying $0 in tax for tax year 2017. Now theoretically when she pulls this money out sometime down the road it will be taxable. So that's where people in the general public say oh but a Roth IRA. You're paying tax now. But all that money you're compounding and earning will come out tax free down the road. Well for people in the community we hope that the traditional IRA and the 401 K contributions will be tax free now and it's tax free forever even when you pull it out years or decades from now. And that's a lot of the strategies that we've heard from the millionaire educator from MAD Fientist from go Curry cracker. This is what the Roth IRA contribution ladder is all about. So there are these advanced techniques and we've talked about that at length and definitely Alyssa and the audience go back and listen to some of those episodes. But that's my. Like very high level. You I'm going to throw it over to Jonathan because I know he's itching to get in here.
401k, indexfunds, ira, roth, tax, traditional
2551 - 2688 Jonathan Mendonsa Yeah. You know I think probably there's going two pieces to this one is just kind of where Brad nice general and he used the word umbrella. I'm going to steer him towards the word buckets going forward. I think that's probably a general term that we'll be using more and more tax advantage. Bucket's it's going to be consistent with what we talked about with millionaire educator and also Jim Collins and that the whole idea is you have these carve outs. And so we try to work within those carve outs as they provide us these advantages these tax advantages typically. And then you have to work within the specific set of rules in the scenario for your life and with the FI community our thought process is that we are going to be retired significantly before the age of 60. And so the rules for us are slightly different than for the people that are retiring after 60 which is the people for which a lot of these accounts were initially created. So that kind of shifts though the rotation and how you actually view these different vehicles for our specific fi community. But but in general most of the F-I community agrees pretax is better than post-tax just because we have plans for getting all this stuff out tax free anyways and for more information so that we've covered that ad nauseum on the Roth conversion ladder and also on capital gains harvesting which was episode 17 and also the roundup for episode 17 which was 17 R and then go to check out the capital gains harvesting go to episode 18 and then the round up for that episode episode 18 R for specifics on how that would actually work. But in general kind of Brad and I think number one if you have a 401k you would definitely do that up to the match. We haven't really gotten into this but that HSA is another powerful tool that we'll talk about later. And then from there that's where the traditional IRAs come into place and they're very helpful after that. And then we start to consider the brokerage accounts. And then you would consider the Roth maybe and then you know there's a few other things from there but we always prefer a over tax. Now there's exceptions to every single one of those rules that we'll go into later. But just in general we like pretax overtaxed. Now those are the buckets that we have to work with. But now you actually take a look at the specific investment vehicles that you're going to use inside those buckets. And now that you're looking the investment vehicles inside those buckets that's what we're talking about index funds. So your options might be individual stocks or individual bonds. Index funds encompass a lot of that depending on which index you're following. And so we would try to get a index fund inside for you inside of a traditional IRA up to the fifty five hundred dollar limit. Brad any thoughts on that.
401k, brokeragechoice, gainharvesting, hsa, indexfunds, ira, roth, rothladder, traditional
2688 - 2801 Brad Barrett Yeah so Alyssa's comment about. For those of us don't have a spare 10 k to put into VTSA X for that matter. You know that definitely get home to me and I think that that is a crucial point and I've kind of touched on that before where you know it's difficult. I mean a it's difficult even if you have the money to dump it all in at one time. But certainly if you're just trying to build up a position you can feel like that's an insurmountable goal and that's that's not what we're trying to get across here at all. You know one suggestion that I would have is actually look at the Vanguard Total Stock Market ETF Exchange Traded Fund which is a stock ticker v. t. I. i think as of this minute when I'm looking at it it's $120 per share. Now this tracks the exact same index that VTSAX does and I am on Vanguard site right now and the expense ratio is point zero five. So this is really a phenomenal option. I mean that might be the answer honestly especially if we're not talking about investing huge amounts. You can buy in increments now of $120. So that's something to consider. Certainly there is an investor Shares version of the VTSaX which is symbol v t s m x which has a $3000 minimum investment. The expense ratio is higher in that it's point 1 6. But you know eventually when you do build up to $10000. Vanguard allows you to either they automatically transfer it I thought they always automatically change it into the VTSAX but I just logged into my account and I actually had one smaller account that had just reached $10000 and I had to actually click one button and it was literally five seconds and it changed it all to VTSAX.
indexfunds, stocks
2801 - 2806 Jonathan Mendonsa Oh that's cool. So you're saying I can just roll over from VTI directly into the VTSAX. Is that what I'm understanding.
2806 - 2912 Brad Barrett No. So yeah VTI and sorry if there was any confusion there because I was mentioning VTI and VTSMX so VTI is an exchange traded fund. This is more akin to a stock. So you know that does not transfer to the VTSaX. You would actually have to sell your shares of VTI like let's say if she eventually build up built up a portfolio of over ten thousand dollars she would have to sell sell those shares of VTI to then buy VTSAX. I personally would question whether that makes any sense. I personally would just leave it in VTI. But since we have you know all long talked about VTSA X and also there are benefits potentially of buying mutual funds where you can buy fractional shares and you know invest specific amounts of money. And like I said buy those fractional shares on a regular basis so there is a case to be made to move it over to the VTSAX at that point she would have to sell her shares in VTI. Now as we talked about on the go Curry cracker episode with tax gain harvesting if Alyssa or whoever out there was in the 10 or 15 percent marginal bracket the capital gains would would be zero. Really. So zero percent. So theres a very high likelihood that you know many people because you know the taxable income limitations are pretty high and then especially if youre a single person the taxable income bracket for the 15 percent rate goes all the way up to thirty seven thousand nine fifty. You know thats after all the standard deduction and personal exemption things like that. So theres a reasonable chance that that people are under there. You know so she could make that determination to just sell it pay $0 in capital gains and then by the VTSAX at that point.
gainharvesting, indexfunds
2912 - 3002 Jonathan Mendonsa And that could be literally within a five minute period. Yeah that can happen and you go and all of us withinside the Vanguard framework I mean just on Vanguard dot and you're selling then rebuying and then you're keeping track of it for your taxes. But going back to our capital gains episode because you're essentially inside that 10 15 percent marginal tax rate you're saying hey federal government you can tax me they're saying no thanks bro you're good about it. And you're all set. I think that's what the play would probably be here for you. You know if you're living in a pretty frugal lifestyle and you want to get all the stuff into a traditional IRA you can do that Vanguard and you could start by purchasing VTI you have to purchase it in $120 increments which would meet your requirement if you don't have three grand or five or 10 grand once you get up to three grand You could then have access to VTSMX or if you wanted the prize that we're always talking about VTSAX you could just keep going until you get until you have 10 grand saved up and then from there you can go ahead and literally do this within a five minute window. You could sell. And then just rebuy. So sell VTI rebuy VTSAX. And as long as you're within that 10 or 15 percent marginal tax bracket for a single person you know after you've got all your deductions in place you're not going to pay any capital gains on that and you could just rebuy VTSAX and then hey you're there. So you did great. So anyway Brad you did a great job laying that out and I hope that helps Alyssa. I love it when you send us your questions by e-mail and I love it when you leave them on our voicemail you know and definitely keep using that feature. This is for you this is by the fire community for the fire community crowd sourcing personal finance.
indexfunds, ira, tax, traditional

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