Financial Advisor Answers Money Questions From Twitter 💰| Tech Support | WIRED

Summary

In 'Money Support,' Kevin Matthews II addresses financial queries from Twitter, explaining the current recession indicators, credit score factors, and the importance of early retirement savings. He discusses wealth accumulation through business, stocks, and real estate, critiques the tax system's bias towards the rich, and advises on college ROI, treasury bonds, debt management, budgeting, and investment strategies. Matthews emphasizes the value of compound interest, the risks of high debt ratios, and the benefits of index funds and ETFs over mutual funds.

Takeaways

• 📉 A recession is technically defined by two consecutive quarters of negative GDP, and the U.S. has experienced this in 2022, although it is not officially declared by the National Bureau of Economic Research.
• 💳 Your credit score is influenced by payment history (35%), credit utilization (30%), credit length (15%), new credit (10%), and credit mix (10%).
• 💰 Start saving for retirement as early as possible to take advantage of compounding interest, which allows your money to grow exponentially over time.
• 🏆 Becoming a millionaire often involves business ownership, stock market investments, or real estate, and requires patience and the benefit of compounding interest.
• 💼 The U.S. tax system has loopholes that disproportionately benefit the wealthy, such as mortgage interest deductions and lower capital gains tax rates.
• 🎓 Despite a negative ROI in the first 10 years, the median lifetime return on investment for a college degree is 287%, making it a worthwhile investment over time.
• 🔒 A treasury bond is a loan to the U.S. government with a guaranteed return of principal and interest on a maturity date, considered a safe investment.
• 🚫 A debt-to-income ratio exceeding 43% is a red flag for lenders, indicating too much debt relative to income.
• 📊 A realistic budget follows the 50/30/20 rule, allocating 50% for necessities, 30% for discretionary spending, and 20% for savings and investments.
• 📈 Investment benchmarks like the S&P 500 are used to measure performance, and a buy-and-hold strategy with index funds and blue-chip stocks is recommended for long-term growth.
• 🤔 When investing in stocks, define clear goals to determine the type of stocks to buy and when to sell, and conduct thorough research on the company's performance and potential.
• 🚫 The phrase 'if you can't buy the dip, just survive it' suggests holding onto investments during downturns instead of selling, but it's important to understand the risks and set limits.

Q & A

What is the technical definition of a recession?

A recession is technically defined as two consecutive quarters of negative GDP (Gross Domestic Product), which reflects the total output of goods and services produced by a country.

Why hasn't the National Bureau of Economic Research officially declared a recession despite two negative quarters of GDP in 2022?

The National Bureau of Economic Research considers multiple factors beyond GDP, such as unemployment and consumer spending, before officially declaring a recession.

How is a credit score calculated?

A credit score is calculated based on five factors: payment history (35%), credit utilization (30%), credit length (15%), new credit (10%), and credit mix (10%).

Why is it important to start saving for retirement early?

Starting early allows you to take advantage of compounding interest, where the interest earned on your money also starts earning interest, significantly growing your savings over time.

What are the most common ways to become a millionaire?

The most common ways to become a millionaire include business ownership, investing in the stock market, and real estate. Patience and time are also crucial factors in building wealth.

Why is the tax system often perceived as rigged in favor of the wealthy?

The tax system is seen as rigged because there are tax breaks that disproportionately benefit the wealthy, such as the ability to write off mortgage interest and the lower capital gains tax rate compared to income tax rates.

What is the median return on investment for a college degree over a lifetime?

The median return on investment for a college degree over a lifetime is 287%, though the return can be negative (-41%) in the first 10 years.

How can you explain a treasury bond to a five-year-old?

A treasury bond is like lending money to the U.S. government, which promises to pay you back on a certain date with some extra money (interest) for letting them borrow it.

What is a realistic debt-to-income ratio to maintain?

A realistic debt-to-income ratio should ideally be below 36%, and hitting 43% or higher is considered a red flag that indicates too much debt relative to your income.

What is the 50/30/20 rule in budgeting?

The 50/30/20 rule is a budgeting guideline where 50% of your income goes to expenses, 30% to fun or discretionary spending, and 20% to savings and investing.

Outlines

00:00

💡 Understanding Recession and Credit Scores

Kevin Matthews II introduces himself and answers questions on topics such as the definition of a recession and its indicators. He explains that a recession is defined by two consecutive quarters of negative GDP, and though 2022 met this criteria, the National Bureau of Economic Research has not officially declared a recession yet. Kevin also explains how credit scores are calculated, breaking down the five factors that influence credit scores: payment history, credit utilization, credit length, new credit, and credit mix.

05:02

📈 Saving for Retirement and Becoming a Millionaire

Kevin advises on the importance of starting to save for retirement as early as possible, emphasizing the power of compounding interest. He explains that wealth accumulation, such as becoming a millionaire, is often achieved through patience, business ownership, investments in the stock market, and real estate. The process is largely dependent on time and strategic planning.

10:03

🧐 Tax Loopholes, College ROI, and Treasury Bonds Explained

Kevin addresses concerns about the tax system favoring the wealthy, highlighting loopholes such as mortgage interest deductions and capital gains tax rates. He discusses the return on investment (ROI) of a college education, noting that while the first 10 years may show a negative ROI, the median lifetime ROI is positive. Kevin also explains treasury bonds in simple terms, likening them to loans made to the government that are low-risk but offer lower returns compared to other investments.

Keywords

💡Recession

A recession is defined as two consecutive quarters of negative Gross Domestic Product (GDP) growth, indicating a decline in economic activity. In the video, the speaker mentions that although Q1 and Q2 of 2022 were negative, the National Bureau of Economic Research has not yet declared an official recession. The term is crucial to understanding the economic context discussed.

💡Gross Domestic Product (GDP)

Gross Domestic Product (GDP) measures the total value of goods and services produced within a country over a specific period. It serves as a key indicator of economic health. The video uses GDP to explain the criteria for determining a recession, emphasizing its importance in understanding national economic performance.

💡Credit Score

A credit score is a numerical representation of an individual's creditworthiness, based on factors like payment history, credit utilization, and credit length. In the video, the speaker explains the five main factors that affect credit scores, highlighting its significance in managing personal finances and obtaining credit.

💡Compounding Interest

Compounding interest refers to the process where the interest earned on an initial investment also earns interest over time, leading to exponential growth. The speaker emphasizes the importance of starting to save for retirement early to benefit from compounding interest, which is portrayed as a powerful tool for wealth accumulation.

💡Debt-to-Income Ratio

The debt-to-income ratio is a financial metric that compares an individual's monthly debt payments to their gross monthly income. It is used to assess a person's ability to manage debt. The video mentions that a ratio above 43% is considered a red flag when applying for loans, underlining its importance in financial health.

💡Treasury Bond

A Treasury bond is a long-term debt security issued by the U.S. government with a promise to pay back the principal amount with interest. The speaker explains it in simple terms, describing it as a safe but low-return investment. The video uses Treasury bonds to illustrate the concept of low-risk, low-reward financial instruments.

💡Index Funds

Index funds are investment funds designed to track the performance of a specific market index, such as the S&P 500. In the video, index funds are highlighted as a common and efficient way to achieve a diversified investment portfolio with lower fees, making them a central concept in the discussion of long-term investing.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. The speaker discusses the impact of inflation on food prices and its connection to monetary policy, particularly how the Federal Reserve combats inflation by adjusting interest rates, showing its broad economic implications.

💡Asset Allocation

Asset allocation refers to the strategy of dividing an investment portfolio among different asset categories, such as stocks, bonds, and real estate, based on an investor's risk tolerance and time horizon. The video emphasizes the importance of adjusting asset allocation as one nears retirement to protect against market volatility.

💡Cryptocurrency

Cryptocurrency is a digital or virtual currency that uses cryptography for security and operates independently of a central authority. In the video, the speaker addresses the volatile nature of cryptocurrencies and advises caution, recommending that they constitute a small percentage of one's investment portfolio due to their high risk.

Highlights

Definition of a recession: Two consecutive quarters of negative GDP growth.

In 2022, both Q1 and Q2 had negative GDP, technically putting the US in a recession.

Explanation of credit score calculation: 35% payment history, 30% credit utilization, 15% credit length, 10% new credit, and 10% credit mix.

Advice on credit utilization: Keep it below 20-30% of your credit limit.

Importance of starting retirement savings early due to the power of compounding interest.

Explanation of how to become a millionaire: Focus on business ownership, stock market, and real estate.

Discussion on the US tax system being rigged for the rich, with examples like mortgage interest deductions and capital gains tax.

The median return on investment for a college degree over a lifetime is 287%, despite a negative 41% ROI in the first 10 years.

Simple explanation of treasury bonds as loans to the US government with guaranteed interest, considered a safe investment.

The debt-to-income ratio red flag is at 43%; lenders consider it too high.

A realistic budget follows the 50/30/20 rule: 50% for expenses, 30% for enjoyment, 20% for savings/investing.

Investment philosophy: Buy and hold strategy, focusing on index funds and blue-chip stocks.

Key to buying stocks: Define your goal, as it dictates what to buy, sell, and when.

On surviving market dips: Don't sell when you're down; understand the asset's risk and potential for recovery.

ETFs vs. mutual funds: ETFs typically have lower fees and no minimum investment, making them more accessible.

Transcripts

- I'm Kevin Matthews II, author and financial educator.

Today I'll be answering your questions from Twitter.

This is "Money Support."

[dynamic music]

@acirellis asks, are we going into a recession?

And what does recession mean again?

That's a great question.

A recession, by definition,

is two consecutive quarters of negative GDP,

that is gross domestic product.

Is essentially the amount of stuff we produce as a country.

Q1 of 2022 was negative.

And then Q2 of 2022 was also negative.

So technically, yes, we are in a recession.

One thing that's stopping us from officially calling this

a recession is the National Bureau of Economic Research.

They take in a number of factors, including GDP,

unemployment, consumer spending, and other factors.

And so far, they have not yet declared

the official recession.

@ImAnAdultish asks, seriously,

who is trusting me with a credit card?

And how on earth is my credit score calculated?

I don't know who's trusting you with a credit card.

However, I can tell you how your credit score is calculated.

So there are five main factors.

35% of it is based on your payment history.

Are you paying that credit card on time?

30% of it is going to be your credit utilization.

This is the amount of the credit limit that you are using.

Generally, you wanna stay below 20 to 30%.

15% is credit length.

How long have you held this particular credit line,

or credit card open?

This is why if you have had a credit card

for several years, and you close one,

that's gonna bring down the average credit length.

10% is new credit.

So this is when you apply for a new credit card.

You wanna be very careful,

your score does tend to dip during those times.

And then the last one is credit mix.

This is the mix between credit cards, mortgages,

student loans, and other things.

They wanna make sure

that you can pay different types of debt

and you have a diversified credit portfolio.

@financially_bot asks,

how soon do I need to start saving for retirement?

Yesterday.

You wanna make sure that you are taking advantage

of time because time is your biggest asset.

So the longer you invest

the more you're going to have compounding interest.

Compounding interest is when your money makes money.

So for example, let's say I make $100,

and I receive 10% interest on that.

I have made $10.

The next time that I take that money, and invest it,

and get 10% again, that $10 also makes 10%.

So the money makes more money.

So one of the pushbacks I get when people ask this is,

well yeah, you gotta wait 20 years,

or 30 years for that to pay off.

It does.

However, the time is going to pass anyway.

I'd rather start now.

And 10 years from now,

you're gonna wish you started 10 years ago.

@StansaidAirport, how do you become a millionaire?

So becoming a millionaire is essentially

having at least $1 million in net worth.

There are 7.5 million Americans

who have reached millionaire status.

That's about 2.5% of the entire US population.

Now how you do this, there are multiple ways.

Business ownership, the stock market, and real estate

are the most common ways to become a millionaire.

The other thing is be patient.

Wealth is going to depend on time.

And the more time you take, the easier it's going to be,

and the more you can take advantage of compounding interest.

Robert Reich asks, is our tax system rigged for the rich?

18 billionaires exploited tax loopholes

to get federal stimulus checks

at the height of the pandemic.

What do you think?

The answer is yes.

There are plenty of tax breaks that disproportionately

impact and help those who are wealthier.

One of the most famous examples is the fact

that you can write off a portion of your mortgage interest.

Well guess what?

90% of millionaires do own a home.

Those who do not have the money to buy homes

do not get this particular advantage.

Another one that tends to get a lot of news coverage

is the capital gains tax rate.

So if I make money from buying and selling stocks,

the highest tax bracket that I would pay is 20%.

However, if I took that same income

and worked a regular nine to five job,

the highest income rate there is 37%.

If you are a multimillionaire,

or a billionaire in many cases,

a lot of your wealth is usually tied up into a stock.

If you were to sell that stock

that means that you would pay taxes on it.

However, what some people do is loan themselves

the money based on the value of that stock.

Because when you are receiving a loan

you're not paying any taxes on it

'cause it doesn't count as income.

That's another way that very wealthy people

tend to manipulate the tax code and kind of

get around things so that they can lower their tax burden.

@warrenmyers asks, why do so many people go to college

when the return on investment is so poor?

Says who?

When you look at the median return on investment

for a lifetime for those who went to college,

the median return is 287%.

However, it is negative 41% in the first 10 years.

So over time, most college degrees do pay off.

When we talk about return investment,

especially for a college degree,

this is a relationship between how much you make

from having that degree and how much you paid.

Either lower the cost by going to an in-state state school,

sometimes it's going to a community college,

and you're lowering the cost for that degree.

Or you can make significantly more money

for paying the exact same cost.

This is why you see some engineering majors,

those who went to school for engineering,

they have a higher return on investment

because their degree pays more.

However, across the board, I think we can all agree

that college is also too expensive

and should be made more affordable across the board.

@Oluwanonso-Esq asks, can someone explain

what a treasury bond is to me like I am a five year old?

So I have a four year old at home.

So I'm gonna do my best dad impression

on how I can explain a treasury bond to a five year old.

A treasury bond is a loan that you make

to the US government, and the US government

is going to promise to pay you back on a certain date.

We call this the maturity date.

And also, during this time,

they're going to guarantee you interest

on that principle on the amount that you loan.

Now treasury bonds are considered to be

among the safest investments in the world

because as long as the US government is collecting taxes

you are going to get some portion of your investment back.

When we're talking about treasury bonds

your returns are typically pretty low.

Right now, for a 10 year treasury bond,

you're looking at close to 3%.

So you could invest $100 and just get back three.

That's not necessarily motivating

because inflation is above 8%.

So for most investors, especially those on the younger end,

you usually wanna take on more risk.

Maybe that's a stock,

maybe that's an index bond, to gain higher returns.

And are more likely to build wealth,

because a treasury bond isn't necessarily

the best way to grow your money.

But it is one of the best ways to protect your money.

@maxsebastii asks, how much debt is too much debt?

That is a great question.

And there is a metric for this.

This is called the debt to income ratio.

Once you hit 43%, that is a red flag.

If you are bringing in $10,000 per month

and $4,500 of that is going to debt payments,

then that is far too much.

Because that is gonna leave you

at 45% on your debt to income ratio.

When you do that and you are applying for a loan,

then they're going to look at this debt to income ratio,

because they wanna make sure they're gonna

get their money back for their loan.

So they do pay a lot of attention

to that debt to income ratio.

You hit above 43%, that's gonna raise a red flag.

Honestly, when you look at 36%,

they're also going to raise an eyebrow at that as well.

@keepmoneymore asks, what does a realistic budget look like?

For me, a realistic budget is 50/30/20.

It's called the 50/30/20 rule

because you wanna have 50% of your income for your expenses,

you wanna have 30% for fun, money you can enjoy,

and then 20% for savings and investing.

Regardless if it's 30% or lower,

you should have room in your budget to enjoy.

That's going to help you to stick to your budget.

When you max out everything,

and everything is going to savings,

and everything is going to bills,

and you don't have time to enjoy,

or you don't have money to enjoy the things that you want,

you're not gonna stick to that budget.

That can lead you into debt

and put you in a situation that is not conducive

to your financial health.

@CoveredInWords asks, what investment benchmarks do you use?

What is your investment philosophy?

So I love this question.

When we talk about benchmarks, it is basically,

how am I measuring my success?

Am I investing well?

Or am I behind the curve?

In most cases I use the S&P 500, the largest 500 companies.

This is a very standard benchmark.

I would say, this is like the basics that you should use

as your investment benchmark.

What is my investment philosophy?

Personally, I'm a buy and hold investor.

I primarily hold index funds

and what we call blue chip stocks.

Stocks we all know and have heard of before.

And when you are a buy and hold investor,

again, you're buying, you're holding.

It's boring, but it is quite effective.

@Tavva2 asks, where do you start

with buying/trading stocks?

What do you buy, what to sell?

And how do you know WTF you are doing?

That is a great question.

The first thing is you have to define a goal

when you are looking to buy stocks,

or if you're looking to trade.

The reason why I say that is because,

your goals are going to determine what account type you use,

it's going to determine what stock you buy,

and then when you sell.

So for example, if I'm looking to make $10,

that's gonna tell me when to get out of a stock.

If I'm looking to build wealth over time,

that's gonna tell me to buy something that's more stable,

and something that I may hold for quite a while.

Now, the second half of the question is,

how do I know what I am doing?

What I tend to do is browse the company website.

We all know how much X company is making per year.

We can all see who the CEO is

and whether or not their products are working or not.

And you can use that to start to understand

whether or not that makes sense for you to own.

@NFTignition asks, if you can't buy the dip,

just survive it.

What does that mean?

Basically, don't sell if you are down.

Let's break this down.

So the first thing is buying the dip.

This is a term that started off in the stock market.

And it essentially means that if you believe

that a stock is going up,

and it comes down temporarily in price, that is a dip,

because you believe it is going to continue to rise.

Not every dip is a discount

and not every dip is worth buying.

A stock is different than a cryptocurrency.

All of them dip,

but not all of them have the same track record for recovery.

For example, the stock market as a whole,

since 2000, has been negative

only five times from 2000 to 2021.

Buying the dip for the stock market definitely makes sense.

Is that the same thing for crypto?

Is it the same thing for NFTs?

That question is still up in the air.

Now, another question is, what if that dip keeps dipping?

What if it is not a dip, but a cliff, and just falls off.

You have to understand what you are investing in,

understand the risk, and set limits for yourself.

So in some points you have what is called a stop loss

where you can say, look, if this asset falls

for a certain price, I'm gonna get out of it.

I'm gonna take my lumps,

and go take my ball and play somewhere else.

@Dancing_Cookie asks, Dollar Tree is now $1.25.

What's next for inflation, Arizona Iced Tea?

So first off, Arizona Iced Tea is far too expensive.

It used to be .99.

Food prices are much higher than what they were last year,

or even two or three years ago.

But if you look back at some of the old magazines

and things of that nature,

you could've got a Coke for .05,

you could've got burger for .10.

Now these things are costing five, 10, $15 for both.

Inflation slowly over time does increase prices for us all.

The problem, however, is when it happens

in what feels like overnight.

From 2021 to 2022, for example,

we just got an inflation report that said

food prices are up 10% from what they were last year.

Inflation is what happens when we have

too much money chasing too few goods.

Now the solution to this

is to either increase supply or reduce demand.

The way that we reduce demand

is by increasing interest rates.

And that's what you are seeing

from the Federal Reserve right now.

@giaxnicole asks, can someone tell me

how and where I should be investing my money?

This is probably the most common question

I get all the time.

For most of us, you wanna have what we call

a long term diversified portfolio.

For most people, this comprises of just stocks and bonds.

You have others that include real estate

and even business ownership.

So when I'm looking to move forward, to be more aggressive,

I'm gonna have more stocks.

And then when I'm looking to slow down and survive bumps,

then I want to have bonds.

The older you get, the more this mix is going to change.

This is a term called asset allocation.

The closer you are to retirement

the more bonds you'll have.

The younger you are,

typically the more you wanna have in stocks.

@givezerofx, so is it too late

to get in on this crypto thing?

Laughing emoji.

Depends on what you are looking for.

So crypto is known to be very volatile.

There are violent jumps,

both up and down in the crypto space.

Something like Bitcoin, if you go back

even over the last five to eight years,

there are times where that asset is down 90%.

There are other years where it's up 400%.

If you are someone looking to get rich tomorrow

you might have missed that boat.

If you are looking to invest in crypto long term

there is a case to be made where it does make sense.

However, the general recommendation here is to have 5%

or less of your overall portfolio invested in crypto.

If you wanna be more aggressive,

you are more than welcome to.

But remember, these assets are risky,

many of them are unproven, and they are very,

again, volatile for your portfolio.

@indexandETFs asks, what is the main advantage

of index funds and ETFs over mutual funds?

You could have an index ETF that tracks the S&P 500

and you can also have an index mutual fund

that tracks, again, the S&P 500,

the 500 largest companies in the US.

They do the same things,

but the mechanics behind them are a little bit different.

ETFs usually, when it comes to fees,

are significantly less expensive,

and there are no minimums in most cases.

An index ETF is going to allow me to do that

at almost any dollar amount,

compared to an index mutual fund,

which may have a $2,000 minimum, or $1,000 minimum.

So when you're comparing an ETF to a mutual fund,

an index ETF to an index mutual fund,

it comes down to fees and minimums.

And those are the biggest advantages

for ETFs over mutual funds.

So those are all the questions that we have today.

Thank you for spending your time with me.

And thanks for watching "Money Support."