Co-Founder, Financial Planner
A millennial himself, he's lived through many of the same experiences as his clients and understands first-hand their struggles and successes. Having worked with older generations and high net worth clients as well, he understands the impact financial planning can have the earlier you start.
Prior to launching Millennial Wealth, he started his career as a financial advisor at a bank-run wealth-management firm. Over the course of 3 years at the firm, he realized Millennials, for the most part, aren't able to access professional financial planning and investment management services.
He saw an enormous need to make these services available to the Millennial generation. Time is our greatest friend when it comes to building wealth. The earlier Millennials put a financial plan in place, monitor, and track towards goals, the greater the impact it can have.
Levi grew up in Eastern, Washington, and lived in Seattle since 2014. He’s always had an interest in personal finance, investing, and money. He’s a member of the Confederated Tribes of Grand Ronde and proud of his Native American heritage. In his free time, he enjoys playing golf, basketball, video games, and watching the latest binge-able Netflix shows with his girlfriend.
Millennial Wealth is an Investment Adviser registered with the State of Washington. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. We do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. The information provided is subject to change without notice.
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Financial Planning For Millennials
Capital gains tax applies to an investment's growth, not the interest. In your example, you mention contributing $1000 to a taxable account. Once the $1000 is invested in a security (stock, ETF, mutual fund, etc) then you establish a basis. The cost basis is what is used for tax purposes to show the price you bought your investment for. Assuming it grows to $2000 and you decided to sell your investments, you would then pay capital gains tax on the growth.
$2000 (current investment value) - $1000 (cost basis) = $1000 (Subject to capital gains tax)
On the contrary, interest applies to an investment such as bonds. Investments that pay interest are subject to ordinary income tax.
Depending on how long you hold the investment before selling, the capital gains can be taxed as ordinary income, or the preferable long-term capital gains tax. Short-term capital gains tax (ordinary income tax bracket) applies to investments held for less than 1 year, and long-term capital gains tax applies to investments held for longer than 1 year.
It depends on the interest rate you're paying on your student loans. If on the lower side say, 4-6% you should consider investing the money instead. Historically equities have earned greater than that, and you'd essentially be locking in a 4-6% rate of return by paying your student loans back faster.
In addition, are you currently contributing to a retirement accounts such as an IRA or Roth IRA? If not, you could maximize your contribution to a Roth IRA and buy diversified equity ETFs since you'll be investing for the long-term you can afford to weather the volatility of equities in exchange for historically greater returns.
Lastly, you'll want to ensure you keep some of the funds set side in a high yield savings account as an emergency fund. Typically 3-6 months worth of living expenses is an adequate amount. Especially since you own an investment property and you never know when potential repairs will need to be made.
You can buy ETF's through your brokerage firm. Wherever the Roth IRA is held at, should have brokerage services. In which case, you'll likely pay a commission for trading costs and then the ongoing expense ratio of the ETF"s you buy.
If you're interested in having a real estate allocation in your Roth, look into a REIT ETF. Real estate investment trusts (REITS) are actually recognized as their own sector now, and an easy way to gain exposure is through ETF's.
You should also look into holding a "core" fund, that provides broad diversification across asset classes or a particular asset class. Other types of funds you might look into are index funds. Vanguard and iShares have a variety of very low-cost index funds to choose from.
The key is to remain patient, invest for the long-term, and maintain perspective when your investments do experiences volatility. Of course, starting with a diversified allocation using ETF's or index funds is also a priority.
Best of luck,
You're saving a lot! Great job. You're going to be ahead of the curve.
Depending on what your average monthly expenses are, typically a good rule of thumb to have is to set aside enough cash for 3-6 months worth of living expenses. However, it's up to you what you're comfortable with. That money should be designated for expenses outside your ordinary expenses.
Emergency funds should typically remain in cash or a cash equivalent such as a money market fund. There are high yield savings accounts offering much higher interest rates than typical banks. Ally bank is one for example. Nerdwallet has a review for the best 2018 high yield savings accounts, I suggest checking that out.
Once you've reached the "emergency fund" threshold you're comfortable with, you may consider re-allocating that $1000 in cash flow towards mid-long term investments depending upon any goals you might have. Do you want to begin investing/saving for a home in the next 5-10 years? If so, you could consider investing the cash flow in automatic contributions every month to a taxable brokerage account. While it won't have any tax benefits like your retirement accounts, it will allow you to access the funds before retirement without penalty.
You may also consider maxing out your Roth IRA. There isn't a better time to put away funds in a Roth than when you're young and in a lower tax bracket than you will likely ever be throughout your career. Especially with the recent tax cuts!
All in all, you're in a great position to begin building wealth and have done an excellent job saving thus far. Prioritize your goals and determine what's important to you to save/invest for and that will help you determine where to allocate the $1000 in cash flow that will be free once your emergency fund is sufficiently funded.
All the best,
You are correct, a 529 plan would only allow for money to be used for qualified education expenses, otherwise, a 10% penalty is assessed on the withdrawal amount. One interesting note, however, is 529 withdrawals aren't assessed the penalty if the beneficiary receives a scholarship.
If you'd like your daughter to have the flexibility to spend the money on other things, not just for her education, you should consider a custodial account such as an UTMA/UGMA. A custodial account would allow you to retain control until the age of majority (depending on state 18 or 21 typically), at which time she will receive full control. This type of account would allow you to select investments such as a low-cost index fund. I would suggest looking at Vanguard, you can also open a custodial account directly through them.
I do advise you to understand that this account gives your daughter FULL control at the age of majority. Unfortunately, most individuals aren't financially savvy at that age since financial literacy isn't taught in school. Open communication regarding the intention of the account and responsibility is key.