Time for another week of money talk! This brief series is intended to provide the foundation for a sustainable career for those in creative pursuits.
If you missed my newsletter last week, check out the post here. I’m writing this three-part series ahead of a seminar I’ll be leading on July 10th titled Finance Basics for Creatives, which you can register for here.
This discussion will focus on investing. I’d mentioned in my previous post that the two types of jobs available to creatives are salaried and freelance. They both have their pros and cons in terms of pay, freedom, and more, however, the means by which a creative professional may invest are the same in both regards.
First, why should you invest?
The unfortunate truth is that money loses value each year! That’s right, the federal reserve estimates that the US dollar loses 2-3% of its value due to inflation annually.
This means that if you leave all of your money sitting in a bank, whether in a checking or savings, you are losing some of that money. Alternatively, investing allows you to park that money somewhere that earns you more of it.
A tweet from my friend Jesse, who runs the ridiculously informative Best Interest blog, perfectly encapsulates what you stand to miss out on if you fail to invest (thanks to the wondrous magic that is compound interest)!
To quickly sum up the rest of the post before diving into specifics, the three types of basic accounts you should have are:
A checking account for quick access to money (keep about 6 months of expenses stowed here for emergencies)
A retirement account that lets you invest for the future in a way that is tax-efficient, meaning you pay the least amount of taxes on those investments. For those living in the U.S., my choices are (and I recommend having at least one, but all three if possible):
At least 1-2 Credit Cards (avoid store-branded cards): these are great for earning points on purchases, versus a debit card. Credit card points are actually what enables me to travel for free each year.
WARNING: Never go into credit card debt. These are a fantastic tool, but only if paid in full after each purchase.
If you can check off the above three, I can show you how to build a sustainable investment strategy that will have you covered upon retirement, or even sooner! To learn more, I would recommend turning to one of the darker corners of the internet, Reddit, where there’s a pretty helpful channel called Financial Independence. There’s loads of information on the sidebar as well as threads to help educate yourselves.
Now, to get a bit more technical….
For folks like us, investing can be broken into non-taxable and taxable opportunities. The basic principle will apply no matter where you live: invest as much as you can in non-taxable opportunities before moving on to the taxable investments.
Let’s break down the different accounts you can have in the United States, keeping in mind to look for similar such accounts globally depending on your options. Generally speaking, I’d recommend Fidelity Investments and Vanguard for companies to use as they are the two largest financial firms and also have great customer service.
Non-Taxable: accounts to store investments where the gains are not taxed. These typically account for retirement.
Note, I said the gains from the investments are not taxed, but the money you initially put into the account might be taxed. This creates a further sub-category within non-taxable accounts:
`Post-tax accounts: if you are salaried, then your employer may automatically take taxes out of your paycheck. The remaining money is what you put into these investments. See how you’re still paying taxes? Well, the reason you should still invest in these non-taxable accounts, even after your paycheck was taxed, is because the money you invest will not be taxed. Examples are:
Roth IRA: a retirement account with a major advantage in that you can take out the money you initially invested (not the gains on that money until you turn 59 unless you want to pay a 10% penalty), though you are limited to investing $6000 per year unless you are over a certain age.
Roth 401k: a retirement account, often offered by an employer for salaried employees, where you can contribute up to $19.5k to a smaller number of investments. Employers may also offer a salary match benefit, where if you put something like 2-5% of your paycheck into this account, they will match it for you.
Pre-tax accounts: if you are salaried, you might be able to set up automatic withdrawals from your paycheck before the government even draws taxes. These accounts don’t pay tax on the salary or the gains that the investments make.
Traditional IRA: same as the Roth IRA, only you have not paid taxes on the money you invest, so you must pay whatever the taxes are at the time of taking out the money.
Traditional 401k (company or self-employed options available): while the Roth IRA is more common than the Traditional IRA, the opposite is true for this account. A traditional 401k is basically when you or your employer withdraw money that has not been taxed into your 401k investment accounts. The same applies in that there may be a potential company match that is offered too.
Health Savings Accounts (HSA): an account where, should you have a high-deductible health plan, automatic withdrawals can be taken out of your paycheck and placed into this investment account used for health-related expenses only. Note that all the money in this account becomes available when you turn 65, so it can serve as an extra non-taxable retirement savings account should you not need to draw from it.
Now, for taxable investment accounts, where you pay taxes on the initial income and the investments, many opportunities do exist. The best form of this is simply buying stocks and putting them in a brokerage rather than a retirement account. If you want a safer bet, you can buy bonds, though I’m not the biggest fan of them due to their low returns.
Again, I would lean towards using Vanguard and Fidelity, though lately I’ve been impressed with SoFi due to how easy they make investing/checking accounts (I use them for my taxable investing account as well as my checking account).
Another recommendation is to invest in index funds. This is the easiest way to invest, with desirable and safe returns, since buying into these funds is essentially the same as buying a basket of diversified stocks. There’s a fantastic article here on the subject.
Of course, beyond stocks, there are also riskier investments such as cryptocurrency, and more conservative investments, like real estate.
I won’t into specifics on crypto, but I will say that I invest in real estate (as someone who lives in their own home and rents out rooms). This has been a really convenient way for me to invest, only because it lowers my cost of living and gives me some freedom that renting doesn’t.
Note, however, that this is an investment that requires work! I only own condos, where all the owners band together to share a small part of the risk, but it can still take some effort. The TRUE benefit of real estate is that you can make money both off of the cash flow from renting, while also knowing the investment gains in value (generally) the longer you own it.
Finally, the last thing I will say is that you should diversify. The way I wouldn’t park all my money in a checking or savings account, I also wouldn’t put it into just real estate. A mix of real estate and stocks enables me to sleep easy in uncertain times.
Now, I hope you took something away from this! There is so much to say about investing and this one post can’t possibly cover it all, so I encourage you to use this as a jumping-off point.
You don’t need a financial advisor, the internet has all the information you need!