Debunking the Four Biggest Myths

Making Smart Decisions with Josh Tirado

Josh Tirado: [00:00:00] Welcome to the making smart decisions podcast. I'm your host, Josh Tirado. And for this episode, we are going to launch into some myth-busting. In media currently, it seems as though there is a plethora of misinformation, and it seems that being [00:01:00] first or having your topic be popular is more important than being correct.

There are a lot of common myths out there surrounding finances, and I want to debunk several of them. My goal is to provide you with a little bit of background information on it. So you can make your own smart decision about whether it's a myth or whether it applies to you.

So the first one is some advice that I, when new clients come in, that they've received from the HR department or that they've heard and it's maxed out your 401k. I hear that day in, and day out to me that's a myth. I don't think that's a right fit for everyone. To maximize your 401k, the total amount you can put in ends up being a significant amount of money, or it could be a significant percentage.

My, this is a rule of thumb. My rule of thumb is to contribute enough to get the employer match. So maybe be very clear about this. Also, if there is no employer match or legally, there needs to be one, but it's minimal, not every year. You may have better options outside of a 401k,[00:02:00]. The main advantage of your 401k is to max out your employer match, not max out the 401k plan.

I say that because if you put in a dollar and your employer matches it with a dollar, you immediately have a hundred percent return on your money without taking any risk. And there are also tax advantages to it. However, if your employer only matches say up to the. 3% or $3 that you're putting in, and they don't match above that.

And you're putting in 9%, 12%, 15%, something really large. And they're only matching that first piece. The rest of it is still an address. But there may be other better options. Often the investment options inside your 401k plan are pretty limited as to what's in there. The fees can be high. They changed rules several years ago to make fee disclosure more prominent and make fee disclosure clearer.

However, in many cases, you still don't get the complete picture unless you really dig into the numbers with all the fees are so your 401k. [00:03:00] It Can be more expensive than it needs to be. Your options can be limited. And the rules concerning 401k versus other types of investments are different. So depending on your situation, it could be advantageous because you can take a loan.

It might not be advantageous because it's very locked up, and there might be. A vesting period before that money is all yours to take with you. So there's a lot of pros and cons here, but what I want to say is the maximum foreign case, not always the best option. You want to put it enough to get the employer match.

So you get an immediate return on your money. And then, above that, take a serious look at, should I do a different IRA on my own and have control over it? Should I do a Roth IRA? Should I do a brokerage account, so it's not necessarily tied up until I reach age 59 and a half, and I could use the money sooner for something else?

Maybe I have short and intermediate-term goals where this money doesn't have to go towards retirement, but instead, I have a goal that's coming up in the next two years, five years, ten years that I need to save for, to reach instead [00:04:00] than have it be tied up for. The tax advantages are significant, but they're tied to retirement.

So what I'm saying is that whole max out your 401k, not always the best solution. The second myth I want to go over is that all debt is bad debt, and don't get me wrong. I have several clients who, at one point in their life were in substantial debt. And they managed to get it all paid off, and they're pretty successful.

And sometimes, the debt is for education. Sometimes the debt was for launching a business. There are a million different reasons to have debt. It's not always credit card debt, or somebody made poor decisions. They might have a lot of debt. They worked very hard to get out of the debt, and now they're very debt-averse.

They don't want to go back into debt. And they make that conscious decision. When I say, okay, you could leverage someday. Versus paying it all off and long-term, here are the numbers that work out better for you. If you did not pay all cash and were to use some debt, they understand that, and they're willing to forgo that to sleep soundly at night, [00:05:00] they don't want to have any debt.

So they make that decision. Other people understand it and leverage debt. For instance, in a business, it's very hard in many cases to start a business without taking on some debt, or you start the business, but to grow and reach next. You need more money and often, rather than using your cash reserves, if you're lucky enough to have any borrowing some money, especially at very low-interest rates, is a much smarter decision where you keep your cash on hand for any needed.

Some people call it dry powder. You can borrow the money and leverage it. And then you can also, on top of it, get tax advantages or write-offs for that debt. So leveraging that debt and what other people would many people referred to as OPM other people's. Utilizing that debt is a really smart choice.

And in the end, we'll put you further ahead. There's, of course, bad debt. You don't want to run up credit cards at 20%, 25% interest, especially to buy consumer goods that you don't need. But all that's not bad. I recently got a new car used, but new to me on the used car, the [00:06:00] financing was right around 2% and made a lot more sense to me rather than buying the car to finance it at 2% interest and use my money for other things, invest it, grow the business.

Do what have you that provides a return, same thing for a mortgage. Some people are blessed to put down a large amount of money to buy their house, or you can buy. And this market is so crazy. Sometimes that's what you have to do to win the bid, to get the house. If you do that, I still have as you take a mortgage out afterward, because when you can get a mortgage that is around 2% or 3% with positive tax implications on it, that's amazing.

You can borrow the money at 2% or 3% and do something else with your cash, where it stays liquid. It remains available to you, and you can get a better return on it elsewhere. So paying off the house earlier, putting down a huge, down payment, long-term when you have your advisor run the next.

You may be behind by doing that rather than putting down less and using your other money for other purposes. [00:07:00] So when I say all debt is bad, all that is not bad, you can finance a car, you can finance a house. Those you can finance your business. Those options can work out well.

If you are one of those people, though, that needs. Be debt-free to be comfortable. Then we do that and work around it. Just know that in many cases, if you can deal with a bit of discomfort and go with some debt, it can benefit you. I have some older clients the house has paid off, but we'd looked at again.

Each house like house mountain, home, insert, whatever home you, you think of where you'd want to spend some time. They're able to refinance their house and use some of those proceeds to buy the second property. And that property gives them a lot of joy and helps them achieve their goals of where they want to be and where they want to spend their time.

That results in a mortgage. But they're trading off that mortgage, a very low-interest rate for an asset that will most likely appreciate, and they get to enjoy it for a lot of years. So it's a good trade-off. So all I'm going to [00:08:00] say is approach debt. All debt is not bad. There's another thing.

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