- I'm Kevin Matthews II, author and financial educator.
Today I'll be answering your questions from Twitter.
This is "Money Support."
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@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."