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Basics of the 401(k)

As of 2019 the maximum contribution you can make to your 401(k) is $19,000, $25,000 if you are over 50. That amount will increase to $19,500, $25,500 if you are over 50 in 2020. If you are planning on leaving your current job or already have and your 401(k) is still sitting there you have a few options. You could move it into your new employer’s plan or leave it where it is and pay higher fees. You could also withdraw the funds but then you would be subject to an early withdrawal penalty if you are under 59.5 plus tax. What I recommend is to roll that 401(k) into an IRA account. By doing this you can not only reduce the amount of fees you are paying buy you also vastly increase the investment options available to you. Most employer plans only have about 20-30 investment options and those typically are target fund accounts and company stock. By rolling into an IRA you can now invest in everything from mutual funds, ETF’s, index funds and individual stocks like Apple and Amazon.

There are many different 401(k) products available to you today that all the information out there may seem a little confusing. There is the Solo 401(k), SIMPLE 401(k), Small Business 401(k) but the most common and the one we are going to be discussing today is your everyday employer or company sponsored 401(k). In 1978 Congress passed the Revenue Act of 1978 which included a provision that was added to the Internal Revenue Code – Section 401(k)- that allowed employees to avoid being taxed on deferred compensation. New rules and regulations have since been put into place, but the basic principles remain the same today. The biggest hurdle for most people is just getting started. It may be that you are just putting it off for another day or you feel you can afford to make contributions right now, but the truth is only 44% of eligible participants are contributing to a 401(k) plan and those are the ones who will be fighting an uphill battle down the road and will not be able to build real wealth.

When setting up your 401(k) with your employer there are several questions you should ask yourself before starting. First and the most straightforward is, does your employer offer a company match? If the answer to that question is yes, then make sure to contribute at least the minimum amount needed to take advantage of the full match. If you are not doing this then it is like saying no to free money. That extra 1 or 2 percent out of your pay is not going to make or break your break you, but an extra 1 or 2 percent over 20 or 30 years with compound interest can equal hundreds of thousands of dollars. The average match today is 4.2% and 25% of 401(k0 participants do not take advantage of their full employer match. Here is a quick example of this. Let’s assume you earn $50,000 per year and your employer will match 3% of your pay dollar for dollar. That’s $3000 a year and at an 8% average annual return you would have $372,589.86. Using this same example but you only put away 2% and earned the matching 2% for a total of 4% your total value would be $248,383.31. That’s a difference of $124,206 for only 1% more each pay. If you are paid biweekly that is only $19.23. That is the beauty of compound interest and the difference even 1% can make. Imagine if you increase your contributions by 2% or even 3%, what kind of a difference it could make.

The next step will be to determine if you will make your contributions pretax or after tax, which would be a Roth 401(k) contribution. The difference between to the two is in the traditional 401(k) your contributions are made pretax, thus reducing the amount of taxes you would owe in that year. The Roth option makes contributions after tax but all the interest you earn grows tax free and when it comes time to withdraw those funds you would not be subject to any taxes on you gains no matter how big they are. There are a lot of factors to consider when determining if the Roth 401(k) option is best for you, such as do you plan on working during retirement, how likely is your income to increase between now and retirement. While we can not predict the future if you believe your income will be higher in the future or at retirement then the Roth choice may be best for you to avoid having to pay a higher tax. When you are first starting with your career chances are you may not be realizing you biggest earning potential yet, and this is a great time to make contributions to a Roth 401(k). If you are already in the 10% or 12% tax bracket the advantage to saving tax now may not outweigh the savings down the road when your income has increased, and you are in the 24% or 32% tax bracket.

Lastly, you will need to pick what your contributions will be invested in. As I stated early most employers offer a small group of investment options, typically being target date funds. A target-date fund is a fund offered by an investment company that seeks to grow assets over a specific period of time for a targeted goal, which would be retirement in this case. The best way to determine which target date is best for you is to estimate what you will retire and choose the fund that most closely matches that year. The longer the target date is in the future the more tolerance there is for risk. As the years go by and the date gets closer the mix of assets becomes more and more conservative to preserve that which was earned in previous years. Occasionally your employer will offer some other investment options or the opportunity to purchase company stock with your contributions. Make sure to understand what you are investing in and to keep an eye on the fees you are charged as well to preserves as much wealth as you can.

Joe Pietrzak is the writer of this article. Feel free to email me at joepietrzakproperties@gmail.com with any questions or comments.

Disclaimer: I’m not a lawyer or accountant, and this is not legal or accounting advice. This information is based solely on my own personal opinions.

What you should have learned in school but probably didn’t

There are many subjects taught to us while growing up and in school. Unfortunately, personal finance and proper money management are not one of them. I have worked in the financial services industry for many years now and it still astounds me at the lack of general regarding even a simple savings account. More and more people are not saving or planning for retirement because they lack fundamental budgeting skills or the understanding of how money works, so they push it off until usually it’s too late. Here are some of the necessary skills that I wish were taught is schools today.

  1. How to balance a checkbook and maintain a budget. A lot of people especially younger people have done away with the traditional checkbook these days, but that doesn’t mean that the same principals and system can’t still work today. Maintaining your checkbook and budgeting go hand in hand today. You need to understand your income and expenses and what is flowing in and out of your account so that you can properly adjust and don’t have an unexpected surprise in the form of an overdraft fee or return item fee. This can also help you understand where you may be spending unnecessary funds that could have otherwise been invested or used to pay down other debts.
  2. Compound interest and the massive effect it can have on your finances and ability to build wealth. Putting even small amounts into a retirement or investment account early on can lead to huge gains later down the road. If you started at 18 putting just $100 per month into an account that averaged an 8% return, you would have $687,324.19 at 67. That same $100 earning the same 8% if invested just 10 years later at 28 would yield a return of $309,667.82 at 67. That is a difference of $377,656.37 or more then double by waiting to invest by 10 years. The point is start early and often. It doesn’t have to be $100 every month. Maybe you start out with just $25 and as you grow in your career you steadily increase the amount but remember the earlier the better.
  3. How to build credit. So many aspects of your life will depend on your credit score and your credit worthiness and so many people don’t know how to build or even begin to establish credit. Everything from the interest you pay on your car and house to even possibly a job opportunity will depend on your credit worthiness. One of the easiest ways to establish and build credit is to utilize a secured credit card. This works just like a debit card, but you prepay the credit card company and in exchange you get to use the card like any credit card with the limit set at your prepayment amount. The benefit is that the credit card company will report this to the credit bureaus thus building your credit score. With good credit so many doors will open for you, but with bad credit it can be very difficult to wedge the door open enough to accomplish any financial goals you have.
  4. Finally, how credit cards, interest and debt work. Most people who are in credit card debt don’t realize just how hard it can be to get out from under that credit card or how easy it is to lose control of your credit cards and debt. It is always smarter to avoid debt if possible but in cases where it can’t be avoided having some general knowledge can come in handy. Have the knowledge to understand how repayment works or how a few percentage points more of interest can drastically affect your ability to pay that debt off as quick as possible. The flip side to this is also understanding that not all debt is bad and that when leveraged properly it can lift you to new heights. Utilizing credit available to you in order to start or grow a business is a great example of this. If you can borrow $10,000 today to increase your monthly revenue by $900 per month then with 1 year you would be able to repay that debt and then continue to bring that extra $900 in per month, thus allowing you to continue to grow the business. Another great example of this is leverage real estate and mortgages to increase you cash flow. Why buy a house for $100,000 and cash flow $1000 per month when you could but gown $25,000 on 4 houses and finance the rest and cash flow $1500 per month.

It is time we start educating people on what is really important and set them up for success instead of forced dependability.

Last minute ways to reduce your Tax bill

This time of year, with all the holiday festivities going on it is easy to see why your taxes might not be top of mind, but a few easy solutions can help you potential save thousands when you file your taxes next year. Make sure all your deductions will add up to more than the standard deduction and you itemize your tax return, otherwise you will not see the benefit of any of the suggestions below. For 2019 the standard deduction is $12200 for individuals and $24400 if you are married and file jointly. Here are a few ways to easily and, in some cases, dramatically reduce your tax liability.

Sell a loosing investment to offset other capital gains, or you can reduce your taxable income by as much as $3000. This is extremely useful if you are right up against the next tax threshold and want to avoid moving up into a higher tax bracket.

Max out an IRA or 401k. You can contribute to a tax deferred retirement plan to reduce the amount of taxes you own in the year of contribution. Keep in mind that depending on what retirement product you are in this may just be a deferral but can certainly reduce the tax you owe now if you will think you will be in a lower tax bracket in retirement. You can contribute up to $6000 in an IRA ($7000 if you are over 50) and $19000 to your 401k ($25000 if over 50).

Contribute to an HSA account. This is a great way to offset tax liability especially if you have kids. Individuals can contribute up to $3500 and families up to $7000. The funds can be spent on healthcare and other related items such as deductibles and prescriptions with now penalties or increase to your income. The funds are usually also able to be invested typically when the value is above $1000.

If you’re a homeowner or better yet you own investment property make sure you are taking advantage of every possible deduction and credit you are entitled to, especially depreciating the rental property. Do you work from home or have a home office? The home office is a great tool to use to deduct tax liability because you will get a deduction based on the square footage of the home but also things like internet, heating and cooling repairs and maintenance may also be able to be deducted as an expanse to reduce your tax liability. This is the perfect time to make improvements to your rental or home office and take the tax deduction.  

Lastly a very common and easy way to reduce you tax liability is to make a charitable contribution. You can take a tax deduction for donating cash or items of value. It is important to document your donations and not exaggerate the values because without that documentation now one will believe that a bag of sweaters and some shoes are worth $5000, or that the old car that was towed away is really worth $10000.

As with anything you do regarding your taxes or financial wellbeing, consult with an expert and make sure that whatever plan you put in place that it is the right plan for you.

NORMAL sucks! It’s time to get WEIRD

What is considered normal today sucks! Normal is 55% of credit card users have debt. Normal is in March 2019 the amount of credit card debt was at 1.057 TRILLION dollars. Normal is 78% of Americans live paycheck to paycheck. Normal is the average student loan debt is $35,359. Normal is 85.4% of all vehicles purchased are financed and Americans have over 1.1 TRILLION in auto debt. Normal is work your entire life and hope that the government can or will support you because you didn’t save and invest properly before retiring. Normal is the number 1 cause of divorce relates to conflicts and arguments about money. Normal is ignoring money problems and bankruptcy. Normal is a new iPhone every year and minimums payments on your debt. You get the point. What is normal behavior and accepted by most people today sucks. Why would you want to be normal if this is what it looks like?

Visa stock is up 32.08% in the last year. Mastercard is up 44.82%. American Express is up 35.89%. The reason all these credit card companies are earning billions of dollars every year is because people continue to overextend themselves and make purchases with money they don’t have. One of the best gifts you could give yourself and your family this holiday season is to get out of and stay out of debt. Think of how much more you would be able to invest if you were not making monthly payments to the credit card companies. A great way to start is to use the debt snowball or debt avalanche methods. I go into more detail about these here.  Consider being weird and being in the minority of not having credit card debt and experience how freeing it is.

Another normal for most people today is a substantial car payment. Why on earth do you need to drive a brand new BMW and pay over $1000 a month, when a very reasonable used vehicle can get you to the exact same places in the same amount of time for thousands less. Overextending yourself when buying a car kills most peoples ability to save for retirement and build wealth. That is why paying cash for your vehicles is always the best option and is the only true way to know your exact cost of a vehicle purchase. Now, I get it, you may not be able to purchase a car without some kind of financing, at least initially, but that does not mean you have the green to splurge and buy a top of the line fully tricked out car. Be sensible and purchase a sensible car on the shortest-term loan possible and pay that wealth killer off as soon as possible. Don’t be fooled by super low monthly payments on a 72 or even 84-month loan. There is a reason the dealerships push these loans. That’s because it makes them more money and keeps you in a perpetual state of normal. I personally believe that that you should not finance a vehicle longer than 48 months, and if you can pay if off early then do so. Consider being weird and drive that paid for car another year or two or pay for your next vehicle with cash and forget the lease and loan payments.

If you didn’t receive a paycheck this week would you be able to pay your mortgage or rent? Would you be able to make your car payment? Would you be able to put food on the table without turning to a credit card? If you answer no to any of these then you are normal in todays society. 78% of people today are living paycheck to paycheck and would not be able to pay their bills if this happened to them. Why do you want to be normal? Being normal is keeping you from financial freedom. Normal is keeping you from being able to retire comfortably when you want. Normal has caused so many problems in your life and you don’t even realize it because its normal. Get weird with your money and stop being normal. Stop trying to impress those around you who you have no business trying to impress. If you truly want to impress someone then impress yourself and stand out because you chose to be weird and build wealth. To many people get wrapped up with how they look or how they can impress their next door neighbor and fall victim to normal. Weird is wearing the same pair of jeans year after year bexcause there is nothing wrong with them. Weird is driving a 10 year old car with 200,000 miles on it that is paid for. 80% of millionaires today are first generation millionaires meaning they did not inherit wealth but they worked their asses off and saved and decided that being welathy and weird was better than being poor and normal.

Stop paying someone else’s mortgage

More and more people are turning to renting instead of owning their own home in 2019. There are some that decide to rent vs purchasing for any number of reasons. I have heard everything from they don’t want to deal the day to day maintenance and upkeep of owning a house or they want to live in the newest trendiest building downtown. While I do not agree with this premise, I understand the thought process. The other side of the coin here is, though that there are plenty of people out there that would love to own their own home but they either think that they can’t afford to do so or just continue on renting because they don’t know where to start. As an active Real Estate Investor in the Philadelphia and surrounding areas I have come across all sorts of situations and stories, and I can tell you from personal experience you can pay less for your mortgage then you can pay to me for rent.

                The average rent for a 2-bedroom house or apartment in Philadelphia is $2,039 per month plus utilities as of the writing of this article. While the average house price in Philadelphia is still just $154,000. There are programs out there such as FHA, VA and Home Ready that can get you into a house with little or no money down. FHA requires just 3.5% down and the Home Ready program just 3% down plus closing costs. That means that at $154,000 you could purchase that house with just $4,620 down, or about 2 months rent. While lenders have tightened up their lending practices after the collapse of the real estate market back in 2008 and 2009, it is still not as hard as you might think to qualify. Those applying for FHA can do so and still put just 3.5% down with a credit score as low as 580, while the Home Ready program has a minimum score requirement of just 620. With rates back down to yearly lows (well under 4%) now is a great time to speak with a loan officer to get qualified.

                Now I understand that we are dealing with averages here and the area you want to buy in may have an average sales price much higher than $154,000. That’s ok, I can help with that to. It’s called House Hacking! House Hacking means you live in one of the multiple units of your investment property, a duplex, triplex or quadplex as your primary residence and have renters from the other units pay your mortgage and expenses. You have the ability to offset your mortgage and living expenses by living in 1 unit and renting out the others. This process can even allow you to qualify for a house you may not have normally been able to afford by using the rental income to offset your monthly mortgage payment. The best news is you can still qualify for a traditonal mortgage if the proeprty has 4 or less units.

To break it down let’s look at a real-life example of a property that is for sale right no in my market. This property is a duplex that is listed for $270,000. Unit 1 is a 4 bed 1 bath and we will consider this as the owner unit. The second unit is a 1 bed 1 bath and it is the rental unit. Assuming that you used the Home Ready program to purchase this house (3% down) that would mean you put down $8,100 and now have a mortgage amount of $261,900. After factoring the taxes and insurance for this property your monthly mortgage payment comes out to about $1,863. The average rent for a comparable 1 bed 1 bath unit in the area is $1,200. That means that you can own your own home and your monthly housing costs would only be $663 per month.

Lastly, I want to talk about the tax benefits of owning your own house. Most people don’t know that some, or all your interest and any points you paid to get your loan may be tax deductible, meaning you can apply what you have paid towards reducing your tax owed come tax time to the IRS. The other major advantage is that when it eventually comes time to sell your house your capital gain on the property, or the amount you sold the house for over what you paid in tax free up to $250,000 for individuals and $500,000 for married couples. To qualify for this exclusion, homeowners must have lived in and used the home as their primary residence for at least two years out of the five years before the sale date. There are not many other investments you can make and earn $500,000 tax free.

As always, remember that building wealth is a choice and there is not easier way to build wealth then through real estate. Whether you own 1 property to call your home or have a portfolio of hundreds of units it is always better to pay your own mortgage then to pay someone else’s.

Joe Pietrzak is the writer of this article. Feel free to email me at joepietrzakproperties@gmail.com with any questions or comments.

Disclaimer: I’m not a lawyer or accountant, and this is not legal or accounting advice. This information is based off my own opinions.

Why your credit card debt is killing your ability to build wealth, and 5 ways to pay it off.

The average American household has a roughly $9,333 in credit card with an average interest rate of 19.24%. Yikes! If you were to pay $170 a month every month it would take you 134 month or just over 11 YEARS to pay off that debt. Households with a negative net worth or net worth of 0 have an average of over $10,300 in credit card debt. What I am trying to tell you here is that credit card debt is a drain and a killer for anyone looking to build wealth. So, what can you do about it? Today we are going to talk about 5 ways to help you eliminate your credit card debt and to keep from adding to it. It is not very helpful to keep paying your credit card bill every month to just keep using it during that same time, you will get nowhere and most likely get discouraged very easily because instead of seeing your balances go down every month they stay the same, or worse get higher. Here are 5 ways to help you eliminate your credit card debt.

  1. Plan and stick to a budget

I know this first step does not necessarily help pay off your credit card debt, but it is by far the best way to keep you from adding to that debt and making it that much harder to get out of. Determine what your fixed costs are every month. That’s things like your mortgage or rent, car insurance, credit and loan payments etc. You might not spend the same amount each month on things like groceries and gas, but you should be able to do a good enough job of estimating these costs based on your spending habits. Once you have your fixed costs, subtract that from your monthly income. This is the amount of discretionary funds you have remaining. Things like fancy dinners, that new pair of $200 jeans or whatever you buy on Amazon should all be budgeted so that you can pay off this debt. Maybe that means going out to dinner once per month instead of every week or holding off on that wardrobe update a little while longer. These are sacrifices that need to be made now to get out of credit card debt and to begin to start building real wealth. Using your budget correctly will allow you to free up money that would have otherwise been spent frivolously and apply it to paying down your debt. Which leads me to #2 on this list.

2. Pay more than the minimum payment

If you take the same scenario from above and pay just $50 more per month, you can have that debt paid off in 72 months vs 134 months. That’s more than 5 years sooner and will save you $6,914 in interest alone. Maybe you can’t pay an extra $50 per month, pay an extra $40, $30 or $25. The bottom line is put what extra you can towards the payments and be consistent with it. Once you start paying off your credit cards start applying the payments you were making to the now paid off cards to a card that still has a balance to really jump start your credit card debt elimination plan. Dave Ramsey has been a proponent of the debt snowball, which involves paying the minimum amount on all your credit cards and starting with the smallest balance. Pay off the smallest balance card first as quickly as possible, then apply what you were paying towards that card and apply it to the next lowest card and repeat until all your credit card debt is paid off. The debt avalanche is similar to the snowball concept but involves paying the highest interest rate card first rather then the one with the smallest balance. You can find an explanation of the differences between the two here. I am fond of the avalanche method myself and we will explore that next.

3. Pay off the highest interest rate cards first

Let’s say you have 2 credit cards, one with a $2,500 balance at 10.99% and another with a $4,000 balance with a rate of 23.99%. Both have a minimum payment amount of $100 each or $200 total a month, but you have $300 available to pay this debt down faster. The question is which one do you apply the extra money to, or do you just divide it up evenly? It’s simple really, add the extra to the highest interest cards first even though it has a higher balance. Here’s why. Paying the $100 extra to card A with $2,500 and an interest rate of 10.99% would lead to paying the card off in 14 months while paying $167 in interest vs paying off in 29 months with $359 going towards interest. Card B would be paid in 26 months with $1,159 going to interest with that extra $100 vs 82 months and $4,123 in interest. By paying the extra $100 per month to the card with the higher interest rate, even though the balance is higher realized an interest savings of $2,772. Obviously you will have to do your own numbers and determine which course of action is best for you, but as long as you commit to paying off your credit card debt whether you choose to pay the highest interest cards off first or pay off the smaller balances fast to snowball your savings you are heading in the right direction.

4. Be disciplined and use your tax refund to pay down your debt

The average federal tax return in 2018 $3,169. Most people went out and purchased a new sofa or car. Not those who have chosen to build their wealth. You don’t necessarily have to use your entire refund either. You can still indulge and pay yourself first (This is another strategy we will discuss at another time) but make sure you are disciplined enough to take a sizable chunk out of your debt. Don’t limit this to just your tax returns either. If you receive a nice bonus at work, earn a larger then expected commission, get a raise or even if  Uncle Joe decides to be extra generous around the holidays be disciplined enough to understand it is not about the know and what can you do with the extra cash you have. It is about making a choice to become debt free and stop worrying about your credit cards and other debts that are seriously hindering your ability to grow wealth.  

5. Consolidate, Consolidate, Consolidate

Using a personal loan, HELOC (Home Equity Line of credit) or HELOAN (Home Equity Loan) to consolidate your credit card debt can be a great tool if used correctly. You can bunch all your cards into one easy payment at an interest rate typically lower than 10%. The other advantage to this method is that you now have a finite period that you know when your debt will be paid off, such as 12 or 24 months. Where people get into trouble with method is once they transfer all that debt to the personal loan or home equity loan they are now sitting with sometimes as many as 10 or more credit cards with a zero balance. This can be tempting for some people and eventually end up in the same situation as before except now they have the added expense of a personal loan to pay as well as the credit card. Once those cards are at 0 get rid of them. Don’t temp yourself or think that you will just keep this around for an emergency, because guess what, all of a sudden everything will seem like an emergency to you and you will convince yourself that it is ok to use a credit card again because it was an “emergency”.

There you have it. Five easy yet powerful tips for eliminating your credit card debt. Now it’s up to you to make the choice to eliminate your credit card debt and to start building real wealth.

Joe Pietrzak is the writer of this article. Feel free to email me at joepietrzakproperties@gmail.com with any questions or comments.

Disclaimer: I’m not a lawyer or accountant, and this is not legal or accounting advice. This information is based solely on my own personal opinions.

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