Transcript: A Quick Start Guide to Investing for Self-Employed Creatives, with Eowyn Levene

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Show Notes for this Episode

Eowyn Levene 0:00
Welcome to Creative Do Money. Each week we explore the topics of everyday money management, solo business ownership, and how we’re fueling our creative futures. I’m your host Eowyn Levene, money coach, longtime self employed massage therapist and watermelon enthusiast, and I’m on a mission to help you build the lasting financial stability that frees you up to do your creative work without hustling anxiously for the next dollar.

Eowyn Levene 0:29
This episode is sponsored by my Plum Tree Community, the online home and membership for creatives who are seeking financial stability for themselves, to build savings to get out of debt and to build wealth. In the community, you’ll find weekly live money, co working sessions, video classes, articles, challenges, accountability, and more. Oh, and it’s free right now, to join us head to www.plumtreemoney.com, and click Community in the header menu.

Eowyn Levene 1:00
This quickstart guide to investing for the self employed is for those who have felt overwhelmed by the idea of starting to invest or saving for retirement, have no idea where to start, have no idea even what to Google. And it’s a result of the clarity and understanding I’ve developed over the past five years. And it’s everything I would have wanted to know when I got started investing, similar to Episode 12, which is a collection of all of the things I would have wanted to know when I got started with paying off debt. So this is a real Beginner’s Guide, and it’s a basic guide. You’re already maxing out your Roth IRA contributions at $6000 a year, this episode isn’t really for you. If you wonder what a Roth IRA is, and why you would want one, this episode is for you.

Eowyn Levene 1:52
I also want to make it clear that I’m talking about retirement savings and investing specifically in the USA. And just don’t make it 120% clear. I’m not a financial advisor, financial planner. And I definitely recommend that you do your own research and get advice for yourself about how to take the next steps. If that feels right to you. That could be your CPA or looking for a financial advisor. Ideally, you’re looking for someone who’s a fiduciary who is legally obliged to give advice that’s in your best interest.

Eowyn Levene 2:30
Okay, disclaimers aside, we’re going to touch on the terminology, how to understand what you’re looking for, and how to know when to get started, how much you need to get started. And we’re going to address the concern of losing money in the stock market. My goal for today is that after listening to this episode, you’ll feel empowered to do the research that you need to do. And to really get going right away with investing if it’s the right thing for where you’re at right now.

Eowyn Levene 3:04
One thing that kept me from investing for a really long time was some ambivalence around the capitalist system and the behavior of large corporations in general. And I really struggled with the idea of contributing money to companies that influence our political life in unhealthy ways. That are the reason factory farms exist, or are contributing to climate change, I really struggled with those. And on a certain level, those ethical concerns are still present for me. We touched on this a bit in Episode 13, with Clare Marie Edgemon, as well, because recently, she has made some investing choices that have allowed her to divest, to remove any contribution on her part, to divest from companies that are involved in for profit, prison management and ownership, because she refused to contribute to that in any way. And I really resonated with that and understand that. And it was that kind of ethical concern that prevented me from investing in the stock market for quite a long time. There were a lot of layers to why I chose not to invest. Some of it was simply not feeling like I had the money and I had other financial priorities, but also ethical concerns and then also just general confusion and not really knowing where to start or how to start. And I had to do some deep thinking to decide whether or not I was going to engage in this way in the general financial markets. The understanding I came to led me to thinking about it similar to car ownership. I don’t own a car right now because we live in New York City and we don’t need one. But I have several times in the past. I own those cars because they were necessary to get To my job and to buy food for myself and to visit the doctor like all the different things involved in leading a human life. And while I wasn’t excited about the fuel emissions, or some of the lives led by those who mined the metals and other raw materials that led to the fact that I could have a car, so I thought about those things. But nonetheless, I had a car, it was a compromise that I made in order to live my life. In an imperfect world. There are other areas in my life that I don’t compromise so much. But as I’ve grown older, I’ve gotten better with compromise. And eventually investing in the market became one of those things to where my need to do so overcame my ethical concerns. And that need grew out of a few different things. One of which is planning for my eventual old age and possible need to not work until I keel over and die. I’m not going to inherit any wealth or any property or anything of that nature. And I’m 43 now and have some significant questions about what the state of social security benefits will be like when I choose to retire. And having always been self employed, like there’s no pension plan, or other employee facilitated retirement that I have ever benefited from in my life. So I feel some urgency as I’ve aged around preparing for retirement. And so that urgency started to overwhelm the ethical concerns that I had about investing in the stock market. And, and I’ve come to the position of saying, I will work on what I can in my everyday life to make the world a better place, I will do what I can within the context of the retirement version of needing a call of needing to put some plans in place for myself, and grow the money that I do have available to put aside in a way that will take care of me when I might not be as capable and energetic as I am now. And I know a lot of my listeners are thoughtful, intelligent, progressive folks, as well. And so I wanted to address what felt a bit like the elephant in the room before I get into the nitty gritty of how to get started with investing in the market.

Eowyn Levene 7:22
Okay, enough with all the preamble, let’s talk about investing in the market. First of all, what do we even mean by that, we’re talking about taking our money and buying shares in different kinds of financial products, in the hopes that over the years and decades, we will benefit from interest paid on that money that we put into the market. It helps me to use an analogy to think about the whole structure. And I will credit Paula Pant of Afford Anything for helping me use mugs to understanding this big spaghetti mess that is investing.

Eowyn Levene 8:04
So if we want to put money in the market, in the hopes that that money will grow over time, and we will benefit from that growth, we do that through a certain kind of account. And you can think about that account like a mug. And there are a bunch of different kinds of mugs that you would then drink from some of those mugs are tax advantaged, you will have heard of some of the names of these mugs. So a 401k would be a kind of mug, an individual retirement account, or IRA or IRA is another kind or a straight forward brokerage account is also a kind of mug.

Eowyn Levene 8:40
Then the investments that we choose to make investing being putting money in the market in return for part ownership of the financial products. those investments are the drinks that go inside the mugs. So it’s not just about getting a mug, if you want to drink, you also need to fill the mug with a beverage. So it’s something that comes up with regularity that folks will open an IRA account, but not realize that they need to then do something with the money that’s in the IRA accounts, they will get any upfront tax benefits of putting money into that account. But they won’t actually be investing the money until they’ve made some subsequent choices. And that’s the equivalent of filling that mug with a beverage of some kind. Then a single stock or a bond is like a single variable of black tea or apple juice where it’s just one thing in that mug. And then there are more complex drinks, where you blend a variety of black teas and maybe some spices and some sweetener and some milk and you have Chai, so you have a lot of different things in that drink. And there’s a diversity of different kinds of entities. So that’s the equivalent of a mutual fund where there are a variety of different Products bundled together. And you can purchase a part of that mutual fund when you invest, and the benefit of having a blend, aka the greater flavor that comes with your child as a black tea, that diversity provides some protection against loss. So there’s always a risk when you invest in financial products. Ultimately, there are companies and governments on the other end of those financial products, and how those companies and governments and ultimately individuals in our society, how they are all doing impacts how much your investment will grow. And sometimes your investment doesn’t grow, sometimes there is a loss. And so having a bundle of products protects you against the potential trouble that one of those investments within the fund might come up against. So your mutual funds are like your Chai tea, or maybe it’s a cran-apple juice, with a lot of white grape juice and maybe some vodka in it. So it’s a bundle of different things. And there isn’t only one kind of a mutual fund, there isn’t only one kind of a drink blend, there’s a bunch of different kinds. And you can invest in multiple funds and really spread out any potential risk over a wide variety of different products with different emphases. And the younger you are, the more risk you can choose to take. As you get older and closer to wanting to withdraw your money from the market, you can reduce the amount of risk you’re taking. And that’s determined by what kind of drink you put in your mug.

Eowyn Levene 10:07
The last part of this mug metaphor that I want to add is to account for the brokerages. So those are the companies that help you invest in the markets. they facilitate the different accounts that you might be using. So these brokerages the names that you might have heard of Vanguard or Fidelity, Charles Schwab, TD Ameritrade or these companies are brokerages that facilitate your presence in the market. And I like to imagine them as cupboard or counter space in some kind of communal kitchen that you are renting so that you can keep your mug somewhere and put drinks in your box. So the brokerages are the kitchen that provides that counter or cupboard space for you to house your mug in which to put your drinks. So there you have it, that is the mug analogy that I returned to over and over again when I’m just trying to keep my head straight about inflammation again, as I research and learn more about the world of investing.

Eowyn Levene 12:35
Now the next question that comes up is how do I know when to get started with investing? This is a complex question. And I’m actually gonna go more into it in a future episode when I talk about how to set your financial priorities, how to know when to pay off debt, when to focus on saving when to start investing, when to pause investing and so on. It’s not an easy question. I do think though, there are some parameters, which makes sense to hold in mind when deciding when to open up an investment account. In my experience, you want some savings stability before you start investing, you want your checking account buffers built up, you want to be saving in advance for larger purchases that are coming up in the next one to five years. And you want at least three months personal expenses in an emergency savings account. And at least I would say one month in a business savings account. So that creates a platform from which you can start to invest, which yes does involve some risk. You also want to bear in mind any debt that you have and the interest rate on that debt. You can expect your investments to grow at between seven and 10%. Over years and the decades, there will be some ups and there will be downs in the market. But generally speaking, investments trend up at approximately that rate. So if you have debt, interest rates of you know, 10%, 14%, 19%, it makes a lot more sense to focus all the available money that you have on paying off that debt before you think about investing.

Eowyn Levene 14:08
And I think you want to have a general sense that you have a handle on your everyday money management. If you’re getting hit with a lot of late fees or overdraft fees. There’s some work to be done in how you manage your money and you want to learn how to navigate the variable income implicit to working for yourself especially in a creative field. So it’s worth putting some time and energy into learning some skills there before you put too much money in investing.

Eowyn Levene 14:33
When you feel ready to take that step, the first thing you’re going to be looking at is a brokerage, so picking one of those institutions mentioned before. Vanguard is known for being low fee and the place to go for investing in mutual funds. TD Ameritrade is also known as being a great place to get started because the fees are relatively low. So there’s a wide range of fees that folks investing can pay for different services and different kinds of investments. So you want to pay some attention to the expected fees that you’ll be paying wherever you choose to invest. I made the choice by talking to my CPA and went with Vanguard. I like the fact that they’re actually they’re like the co op equivalent. So a cooperative entity equivalent of an investing brokerage. Vanguard is effectively owned by those who invest through it. And I like the idea of that. I also love the idea of keeping fees really low. So that’s where I chose to go. And it’s a common choice. It’s one of the top three or four investment brokerages. But this is one of those moments where I tell you to do some googling, and possibly to talk to a professional to find out what’s best for you.

Eowyn Levene 15:45
I will also say it was helpful to me that it only takes $1,000 to get started with opening up and investing through an individual retirement account, or IRA with Vanguard, which was appealing to me, because when I got going, I didn’t feel like I had much more than $1,000 to get this process started. So that was a factor in my decision making as well.

Eowyn Levene 16:08
Once you’ve chosen your brokerage, the next question is what kind of account do you want to invest through? Roughly speaking, there are general investing accounts through which you can purchase financial products and invest. And there are the tax advantaged retirement vehicles, different kinds of retirement accounts that you can put money into and invest through.

Eowyn Levene 16:30
The first potential tax advantage is that any amount in a given year that you put into that retirement account is deducted from your taxable income. So it effectively lowers your tax bill to invest in certain retirement accounts.

Eowyn Levene 16:45
The next potential benefit is that the money inside that account grows tax free. And we’ll look at that in a little more detail in the context of the account that most people who are self employed start with.

Eowyn Levene 16:56
The third potential tax advantage is when you withdraw the money as you reach retirement age, it’s possible that you will not be taxed on any money that you withdraw.

Eowyn Levene 17:07
And then as a special bonus advantage in some cases, which is that you’re not required to withdraw money from that account, once you reach retirement age, and it can continue to grow, should you not choose to withdraw money from that account. So that’s the three and a half potential tax advantages.

Eowyn Levene 17:26
The next thing to understand when you’re self employed in the States is that you can invest in tax advantaged accounts as an individual and then also have tax advantaged investing accounts as a company or a sole proprietorship. So as an individual, we’re talking about those individual retirement accounts that were mentioned previously. And then as a company, or as a business entity, you can open and invest through a SEP IRA, which stands for Simplified Employee Pension-Individual Retirement Account. So much fun, all the acronyms. So as a business entity, you can open a SEP-IRA, or a solo 401k. And we’re not going to talk too much more about that though, I’ll briefly reference when you want to start thinking about them.

Eowyn Levene 18:15
So when it comes to choosing your first tax advantage retirement accounts, the place that most people start, which is true for myself, too, is with the Individual Retirement Account. Simply speaking, there are two major categories of the IRA. One is what’s known as a traditional IRA, and two is what’s known as a Roth IRA. The traditional IRA gives you that benefit of lowering your taxable income in the year that you contribute, that first kind of tax advantage. But on the other hand, you do pay taxes when you withdraw the money, although the money does grow tax free.

Eowyn Levene 18:50
If you choose to go with working through a Roth IRA, any yearly contributions do not lower your taxable income for that year. However, the money does grow tax free, and you pay no taxes when you withdraw the money. And in the case of the Roth IRA, you’re not required to withdraw the money once you reach retirement age at specific intervals. This means if you don’t need to withdraw money from your Roth IRA, once you reach retirement age, you can continue to invest it and grow that money if you want.

Eowyn Levene 19:21
There are some specific rules, though, to IRAs in general and the Roth IRA in particular. So the general rule for both a traditional and a Roth IRA is if you’re under the age of 50. As of 2020, you can only place a total of $6,000 into an IRA. And actually that can be split between a traditional and a Roth IRA. You don’t have to choose between the two. But if you have both, you may only invest up to $6,000 between the two accounts in a given tax year. Another important note is that there are income requirements when making contributions to a Roth IRA. You have to have earned income, which means making money from some kind of work, whether working for others or for yourself. So examples of non earned income would be interest income, or rental income. So you have to have generated some kind of earned income at the minimum, and there are maximum income rules as well, as a single individual, you have to earn $139,000 or less in order to be eligible to use the Roth IRA. If you’re married, it’s $206,000 a year. Otherwise, you’re stuck with a traditional IRA.

Eowyn Levene 20:37
OK, I want to return to that second tax advantage, the tax free growth of the investments through a Roth IRA. So even though when you put money in a given year into your Roth IRA, it doesn’t lower your taxable income, it has huge benefits because of this tax free growth. Okay, what does this really look like.

Eowyn Levene 20:58
If you’re investing the maximum amount of 6000 a year, let’s say for the next 30 years – just that, no other kinds of retirement investing. If we assume a 7% rate of growth, you’ll have over $600,000, that you will be able to withdraw tax free. So we’re talking about 30 years, you’ve initially invested $6000 a year, $ 6000 multiplied by 30 is $180,000. So you’ll have paid taxes on that $180,000. But if at the end of 30 years, you’ve made $600,000, you’re still looking at $400,000 that your money has made that you will not pay any tax on, which is a major advantage. If you don’t have 10s of 1000s of dollars every year to throw it investing, that $6,000 a year is a fantastic place to start. And if you think about it, that’s 500 a month, of course, you don’t have to contribute every month at exactly that level. But just to give you an idea, it’s already a decent chunk of money in the context of the kind of income that a lot of self employed creators are making.

Eowyn Levene 21:57
The other thing that I will note, which I think is important to know about using Roth IRAs through which to invest, and that’s that, in the case of an emergency, you can withdraw any contributions that you’ve made to your Roth IRA. So that’s the money you’ve deposited into the account yourself. And you can withdraw those contributions without paying any penalties, which is different than other retirement accounts. If you need to withdraw the earnings on that money that have accrued over the years then you would pay a penalty on. And you would also pay taxes on that money when you withdraw it. But anything that you contributed over the years to your Roth IRA, in case of real need, you can withdraw that money without penalty. I will say though, that if you recover from that emergency and want to return some money to your Roth IRA, and or continue contributing for that year, you’re still limited by that upper $6,000 number. So let’s say it’s May of a given year, and you have to withdraw $20,000 worth of Roth IRA contributions to handle an emergency. So those are contributions made over multiple years. So you’ve withdrawn that $20k in May of that year, and you’ve already contributed $1600 to a Roth IRA in that year, when it comes to returning some money to your Roth IRA, after whatever that emergency is, is over, and you’ve recovered, you can only put $4400 into the Roth IRA account for that same tax year. So that additional $4400 plus the $1600 you have contributed already that year brings you up to that $6000 limit. So there’s definitely an opportunity cost, which is why you’d only use this option of taking funds out of your Roth IRA, if you really don’t have any other emergency funds, and you’re really stuck. So it’s not ideal to have your Roth IRA function as an emergency fund. But life throws us curveballs and you never know.

Eowyn Levene 23:51
And some of the anxiety that comes up around taking risk with investing can be helped by knowing that you can withdraw those contributions should you really need to. So there you have it. That’s the outline of the benefits of the Roth IRA and why it’s the place that most self employed folks start when they want to get going when they want to get going with investing.

Eowyn Levene 24:13
The last thing that I’ll add is if you don’t qualify for the Roth IRA, because your income is too high, just skip the rest of this episode and find yourself a fiduciary to work with as a financial advisor and follow their advice.

Eowyn Levene 24:30
If you find yourself regularly maxing out your Roth IRA contribution in a given year, then it’s time to look at the decision of whether to open a SEP IRA or a solo 401k. And this is another point where you really want to do your research and or speak to a professional. So there’s a few factors that play in one is your income level two is whether you ever intend to have employees and your business life. Then there’s some other factors as well. Not least the cost of administering the account. So definitely do your research before you make that next decision of what follows after the Roth IRA.

Eowyn Levene 25:08
All right, we’ve reached the point where we’re actually going to talk about the investing bits. So you’ve picked your accounts. And the next question is, after you’ve contributed money to that account, what do you do with that money? Where are you going to invest in it? So we’ve mentioned risk already. Some investments are super risky, and you have no idea what the returns will be other investments are pretty much guaranteed to give you a specific return, that might be investing in a certificate of deposit. So some of this process is checking in with yourself if even briefly and asking how much risk can I bear? Most brokerages will take you through a questionnaire if you’re that will help you determine how much risk makes sense for you.

Eowyn Levene 25:47
I want to just make a couple of notes about the question of risk and losing money in general. One is that you’re not special if you lose money in stock market. It’s normal and expected that the market goes up and down, and that you lose at certain points. And those who’ve been really successful investing share that the secret to being successful in investing is to stay invested, despite volatility, and not to buy and sell based on what you think you’re seeing in the market. Also, I’ll say, if you work for yourself, if you’re a human being, you already have a decent amount of risk tolerance, just going about your everyday life, it’s just about expanding that sense of risk tolerance to include money that you’ve worked hard for. There are really never any guarantees in life, we do our best. And we control what we can, and then we see what will be.

Eowyn Levene 26:37
On the other hand, the world of finance has created these bundles that I mentioned those Chai tea blends that mitigate risk, and spread your money out over a variety of different products. So if one product is doing really great, you benefit from that. And if another is doing really poorly, yes, you lose money there, but the two are really balancing each other out. And you don’t have to make individual choices, either of different stocks or bonds or products, you can choose the fund as a whole, you can look at the track record of the fund, you can see how well it’s done over the decades. So you can make a pretty risk managed decision when you decide to invest in those funds in mutual funds. It’s kind of like putting your eggs in a lot of different baskets. Let’s put it that way. So again, this is a moment where you’re going to do some research for yourself. You’re going to Google’s simple investment strategies for retirement, and you’re going to look at a few different recommendations. And you’re going to think through what makes sense to you.

Eowyn Levene 27:31
I really do think it’s important to develop your own knowledge around investing, which can feel super overwhelming. But it’s like anything, you start with the building blocks and you grow from there. So if you’re, you’re serious, learn at least a certain amount and do that research for yourself.

Eowyn Levene 27:48
As I mentioned, at the start of the episode, though, one of my goals is to really have you get going with investing, if that’s something that’s right for you. And there’s ways you can do that without needing to learn too much. So one is to focus on mutual funds. And then the next question is, what funds or funds to invest in. And once again, the financial world at large knew we were coming and that we might have this desire to not get super into our investments, but nonetheless to have them be appropriate to how old we are and how much risk we want to take. And that’s where the target date fund comes in. These funds are a mix of different assets, and the risk level is calibrated to how far the fund is from maturity. The funds are named by that target date, so it makes it super easy to choose one. Let’s say you have a rough idea that you want to start withdrawing money for retirement in 30 years, you can pick a fund whose target date is 30 years from today. So there are those who will say that you’re missing out on a lot of earnings by using target date funds, they’re not the cheapest funds to invest in either. However, they are a way of knowing that you’ve set yourself up in the direction more or less that you want to go without needing to learn too much without investing in a financial advisor. And for many, they’re really the way to get going.

Eowyn Levene 29:09
So once you’ve picked your investing direction, so to say, then work is to contribute as much as appropriate for your business and life each year and grow from there.

Eowyn Levene 29:19
As a brief summary, the easiest and most stable place for many to start investing is in mutual funds, whether a mix of individual funds you choose or target date funds. And for many self employed folks, myself included, the best kind of tax advantaged retirement fund through which to invest is the Roth IRA, with the benefits of the money growing tax free and also paying no taxes when withdrawing the money in retirement as you need to. And then once you are making regular contributions and maxing out that Roth IRA, it’s then time to look elsewhere. And the two places generally recommended to look are either the SEP IRA or The solo 401k. And ideally, you get the help of a professional to decide between the two of those. And from there you contribute as much as you can and grow your wealth according to your goals and your values and the way the winds blow.

Eowyn Levene 30:17
So I wish you well, the investing I’d love to know how this episode was helpful for you if it was. And also, if you have any follow up questions, I would like to talk more about investing. It’s an area I’m still learning about. And I want to bring guests on to talk more about it as well, especially that area of ethical investing and socially responsible investing, which is something I’m just starting to learn more about. And I want to understand how that changes the potential benefits of the investments and a lot more.

Eowyn Levene 30:50
Special thanks to Michael P. Atkinson, for help with producing this episode and for composing it’s beautiful music. If you enjoyed listening today, I hope you’ll return and tell your creative friends and colleagues about it. And also to take a moment to leave a review wherever it is that you listen. positive reviews make a huge difference in getting the word out about creatives do money. And in the meantime, wishing you all money, business and life success, whatever that means to you.