On The Agenda

1. Getting sick of the word “unprecedented” yet?

2. How to invest in market indexes ^LUMINARY

3. Don’t get trampled by student loans

4. Self-employment unlocks a world of retirement options ^LUMINARY

Unprecedented Times

From Jon Scott, Lead Author 

If the 1920s was the “Roaring Twenties” then the 2020s should be the Unprecedented Times” decade. We are, for the first time ever, without a speaker in the US House of Representatives.

To make a long, long story short let’s recap:

• Kevin McCarthy became the Speaker of the House after 15 different ballot attempts. This was the most attempts to elect a speaker since before the Civil War. McCarthy had to make concessions to a faction of Republicans, led by Matt Gaetz of Florida, who believe in limited government spending. The rules package also reduced the number of votes needed for a no confidence vote against the speaker.

• In June 2023, Democrats claimed McCarthy reneged on a budget deal with the White House; and instead pushed for less government spending. Democrats were not happy–this part is very important.

• McCarthy squeezed out a debt ceiling deal, gaining concessions from the White House even after he allegedly reneged on his original deal, and kept the fiscally conservative faction of Republicans placated enough not to trigger a no confidence vote. Matt Gaetz was still upset–this is also important.

• The nation faced the prospect of a shutdown on Oct 1, 2023. A shutdown basically closes many government run entities such as National Parks and prevents payment for many federal workers until a new deal is agreed upon by Congress. McCarthy surprisingly brought a stopgap spending agreement to the floor to avoid a shutdown that was largely supported by Democrats. The fiscally conservative faction of Republicans were not happy.

• Matt Gaetz triggered a vote of no confidence against McCarthy, and received the necessary votes to proceed with the vote. In the end, McCarthy was ousted as Speaker since all Democrats (remember those ticked off Democrats from earlier?) and 8 Republicans voted against McCarthy as Speaker. Even if only 8 members of the 200+ Republicans did not support McCarthy, those 8 along with the entirety of the Democrats in Congress were enough to end his short reign as Speaker.

What’s next?

That stopgap spending bill that cost McCarthy his Speakership only lasts until November 17th. So there is a possibility that we will face this problem all over again. Additionally, the House will not elect a new Speaker until at least Tuesday of next week, meaning the House is effectively paralyzed until a new Speaker is voted-in, only reducing the amount of time available for a new funding bill.

What does this mean for the economy?

Shutdowns are no small matter, “Shutdowns can be disruptive, leading to delays in processing applications for passports, small business loans, or government benefits; shuttered visitor centers and bathrooms at national parks; fewer food-safety inspections; and various inconveniences.” However, the spending in a shutdown constitutes about 25% of spending allocated by Congress, yet it still matters for many federal workers and a delayed shutdown could cause a small decrease in GDP.

What are Market Indexes and how do you invest in them? ^{LUMINARY SECTION}

For most long-term investors, a market index is going to be the most straightforward stock market investment. For example, if you invested $10,000 in the S&P 500 on the first day of trading of January 2001, that same $10,000 would be worth $50,900 by the end of 2021. Over a 20-year period, that’s a pretty hard number for anyone to beat.

The reason why indexes performed so consistently over the long-term relative to individual equities is because of diversification. Investing in an index is much different from buying shares in an individual company or even shares of a couple dozen companies because you’re typically getting a piece of hundreds, if not thousands, of companies with exposure to virtually every major industry out there.

But this can be a double-edged sword. If you happen to be a stock picking genius–or just get lucky–the individual stocks you select may do far better than the index, especially over the short-term. However, according to most experts, a non-professional has a very small probability of beating the market (which is defined as the S&P 500’s returns) over the long term. Even professional equity traders have a hard time beating the S&P. Still, if you have a good hunch about a stock or a couple of stocks (and you obtained that information legally), investing in individual stocks can possibly bring in larger returns than the indexes.

How to invest in a Mutual Fund Market Index

Method 1: Do it yourself

1. Log on to the mutual fund providers site, in the case of the Vanguard 500 Index Fund Admiral Shares (VFIAX), the site is located here.

2. You will need to create an account to invest. Once this is completed you will need a minimum of $3,000 as a minimum purchase (for this specific broker and index).

Method 2: Go through an investment advisor

1. If you do not have one already, find an investment advisor (many financial planners also serve as investment advisors) who can invest your money into a mutual fund.

How to invest in an ETF Market Index

1. Open an account with a broker that allows stock trading.

   1. For example: Webull, Robinhood, Charles Schwab, E-Trade.

2. Do your research to find a market index ETF that’s best suited for your investment goals.

   1. The best place to research is the ETF’s investment manager’s site. A good choice is the Vanguard S&P 500 ETF, ticker VOO.

3. Log into your brokerage account and find the trading ticker and search for it.

4. You should see the ETF appear, and the next step will be to buy the number of shares or dollar amount you wish to purchase.

Don’t get trampled by student loans

From Nate Hoskin, Founder & Lead Advisor

It’s October and if you don’t want to get trampled by your student loans these are 3 things you need to know:

1. Pay by loan instead of making one payment. If you don’t, they will put your payment towards the one with the lowest interest rate. I have been able to prove this by looking at the paydown history for several clients who had loans before the pandemic.

If you make a payment above what you are required to pay, the overage will go towards the loan with the lowest interest rate. They do this because it will maximize the interest you pay and maximize the amount of time you spend in debt. Good for them, not good for you.

2. An “on-ramp” period will start today and end on September 30, 2024. During this period the Education Department will not report missed payments to the credit bureaus and they won’t put your loans in default. It’s still essential to pay them if you can though, because interest will still accrue.

If you miss a payment or can’t figure out your loans before the payment deadline, don’t fret, you have a cushion to get everything working properly.

3. If you can’t pay, don’t just let the payments be late, look into the SAVE plan. This payment plan caps your payments at 5% of your income and keeps your loan from getting bigger because of unpaid interest. For anyone unemployed or earning less than $33,000, it may reduce your payments to $0.

Even if you plan on paying more, the SAVE plan could give you leeway to pay down aggressively and not miss a payment if you find you can’t pay as much in one month.

I’m cutting my hourly rate in half for anyone who wants to spend an hour figuring out their loans. I’m a CERTIFIED FINANCIAL PLANNER practitioner. I also graduated college during the pandemic so student loans have become a specialty of mine.

Retirement when you’re self-employed ^{LUMINARY SECTION}

The moment you make 1099 or self-employment income you unlock a whole new level of retirement planning.

One of the best retirement accounts available is the Solo 401(k). You can use this if you are the only person in your business or if it’s just you and your spouse. You can contribute up to $22,500 and your business as the employer can contribute 20-25% of your net self-employment income. If your income is high enough you can contribute $66,000 this year. All of this money can be pre-tax, which could save you tens of thousands of dollars.

Another option is a SEP IRA. This one doesn’t allow you to contribute, but your business can contribute up to 20-25% of your net SEI. This one may be a better fit if someone has a small number of employees or also has a 401(k) through another job. Because it’s the employer contributing and not you, you can do a 401(k), a SEP IRA, and a Roth conversion all in the same year. If your self-employed business is making more than $264,000 a year, you could save $95,000 a year in tax-deferred and tax-free accounts.

"Net self-employment income" is your business profit minus half of your self-employment tax, minus the plan contribution for yourself.

If you have a Single-Member LLC or are a Sole Proprietor, the business can contribute 20% of the net SE income from the business (revenue - expenses - ½ self-employment taxes - your contribution to the 401k).

If you have an S-Corp, you can contribute 25% of the salary you are paid. For example, if you pay yourself a salary of $50,000, the business can contribute $12,500. If you also contribute $22,500 to the 401(k), the business can contribute $6,875 (($50k - $22.5k) * 25%).

*Businesses can only have one retirement account, one business cannot have both a SEP and a Solo 401(k).