Investing: How to Build Your Portfolio From the Ground Up

Episode Summary

This week, we’re revisiting our most popular episode of all time, where Allegra offers a window inside Session 1 of the Wealth Circle. In this snippet, Allegra talks about what it means to build your financial future from the ground up.

Episode Notes

This week, we’re revisiting our most popular episode of all time, where Allegra offers a window inside Session 1 of the Wealth Circle. In this snippet, Allegra talks about what it means to build your financial future from the ground up.

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Transcript

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  Hey guys, it's Caro Factora’s podcast editor. This week we're releasing our top episode of All Time, which offers a sneak peek inside session one of the wealth circle, where we talk about what it means to build your financial future from the ground up. The next wealth circle doesn't technically start until September. But with all of the volatility going on in the market right now, we want to encourage you to set up your future self for success by investing in your financial literacy and confidence now. So if you sign up for the wealth circle before Friday, June 24, you get $150 off the course. And you also get to take the intro course six figure savings for free. I'll share the details in the show notes. But if you're interested in joining us this fall, this is your best chance to do so at the lowest possible price. Now, on to the episode.

  This is Allegra Moet Brantley and you're listening to the coffee and coin podcast where women talk wealth. I'm the founder and CEO of Factora have company on a mission to lead 1 million women to 1 million in net worth. Because when women have more money, we'll have more power to be the change we want to see in the world. If you're ready to hear real women share their real numbers and investment journeys and have a sneaky feeling you should be doing a little more with your money, you are in the right place. Just sit back, relax and turn me

  up. All opinions expressed by Team Factora and podcast guests are solely their own and do not necessarily reflect the opinions of Factora Incorporated. This podcast is for informational purposes only and should not be used as the basis for investment decisions. Team Factora. And podcast guests may maintain positions in the securities or investments discussed in this podcast.

  By assets and putting your money to work is what gives you access to passive income opportunities and in turn can allow for exponential growth. So this is why investing is our wealth building engine, not our paychecks, most of us have been working very hard to save our active income over the years. And while that is a great start, it's gonna give you very gradual linear growth as depicted by the pink line in this graph, it's just not possible to achieve financial freedom this way. So strategically investing and creating passive income streams is what we want to do because this has no ceiling, and our potential is uncapped. Here's a visual to show you how investment returns work and lead to exponential growth. So in this example, it's showing an investor contributing a $10,000 lump sum to an investment account and then adding $1,000 a month to it for the next 30 years. So using an annual rate of return of 8%, which is pretty typical for long time horizons in the stock market. In year 15. The money she earned from the returns alone would have exceeded the total amount she had contributed to this account in cash. This is money earned because of where she put her money in income generating assets, not because she traded her time and skill for a paycheck. So after 30 years, the amount contributed also known as the principal would have been $370,000, while her investment returns would be 1.1 5 million, that's over 3x, the amount she contributed and gives her a total of one and a half million starting with just a lump sum of 10k and a commitment to keep investing $1,000 a month, month in and month out. buying assets that generate passive income that pay for their expenses is the biggest trait that sets millionaires apart. Those that fall in a lower socio economic bracket use income from their jobs to pay for their expenses. Remember that cash in cash out approach we discussed, that approach is depicted on the left, people get a job and exchange their time. And then they take that income and they pay for their expenses. Those in the middle socio economic bracket will use their income to buy liabilities, oftentimes thinking that their assets but remember, if you are still paying a lender for them, they are technically a liability until they are paid off or sold. So that biggest difference of the wealthy is that they are buying income generating assets, which in turn provide them with more income. So instead of needing a job to pay for their expenses, millionaires use their assets to cover those costs for them. pretty brilliant. And that's not all they have in common. A woman studied 600 millionaires and found that true wealth depends on these six traits. is planning frugality, confidence, responsibility, focus and social indifference. Notice, none of these traits are unique or extraordinary. You can all cultivate each of these without having anything to do with your current financial situation. So let's go through them. Millionaires plan their goals, they know exactly what they're investing for. They run the numbers, they don't just throw money at something on a whim. They are also intentionally frugal despite not having to worry about money, they continue to track their expenses and say no to purchases that don't fit their values. But you all will be able to do soon after this week's assignments. They have confidence in their investing strategies because they continuously learn and educate themselves. So if a topic intimidates them, they lean in rather than turn their heads the other way and give up or ignore it. Not to mention, they gain so much confidence via their experience of actually doing it.

  Millionaires take responsibility for their financial decisions, no blaming the market or any outside factors, they understand that risk is involved. And so they strive to make calculated decisions. They stay focused on their goals through accountability systems, it is easy to get distracted and are very on demand consumer focused world, but millionaires work on cutting out the noise by setting up an environment that keeps them focused. And lastly, the hardest one, they practice social indifference, meaning not giving into peer pressure, not buying something because it's the newest trendiest thing, they're not worried about looking cool. They are dedicated to their wealth building and wealth keeping mission. So let's go ahead and dig into how and why you need to increase your investing rate. The two biggest factors that will grow your wealth are compounding returns, which do require time and your investing rate, which requires discipline. So throughout the wealth circle, and afterwards, if you decide to become a part of Factora is ongoing, well, society, you will be calculating your investing rate on a regular basis, because the goal is to a bi always be increasing it so that more of your dollars can get put to work, your investing rate is the percentage of money you invest monthly, and it's how we're gonna grow our net worth very quickly. So you calculate your investing rate by taking the amount of money you invest monthly, and divide it into your total income per month, multiply that by 100, and you have a percentage. So for example, if you make $1,000 a month and you invest $2,000 of it, you would divide two into eight, multiply by 100. And you have a 25% Investing rate. So now, your investing rate, you should know is not the same as your savings rate, your savings rate falls within the choice section of your financial picture. So this is the percentage of cash that you keep in store each month, but it's not going to generate you returns. And there's really only two reasons to save your money in cash, it's either to fill up your emergency account, or to pay for near term goals in which you don't want your capital at risk invested. Otherwise, we want the rest of our money invested in assets. So your investing rate falls within the opportunity section of your financial picture. This is a percentage of your monthly income not spent on things not saved in cash, but rather invested the working money. So that's the biggest difference between investing rate and savings rate, both of which you'll be calculating during your assignments. So this is the number we care most about the investing rate. And it doesn't matter if your monthly income is low or high. What truly matters is how much of your income you prioritize towards investments. Hence why we use a rate and also why I said it requires discipline. So like I said, You'll be calculating both during your assignments.

  Let's go back to Factoras financial framework, because you gotta get your bases covered before you're in a position to start increasing your investing rate. First step on the bottom left, eliminating high interest debt. This is the biggest factor stealing from your wealth. What do I mean by high interest debt? Well, definitely anything you're charging to a credit card and are not paying off at the end of each month. But go ahead and consider anything that's costing you above a 7% APR. You want to pay off this kind of debt as soon as possible, because then you can repurpose that money for those debt payments to your savings and investing. After creating a plan to prioritize your high interest debt. The next thing you want to focus on is aligning your spending with your values and these are actually counterparts at the bottom of the pyramid because having a values based spending system will support your ability to build wealth by helping you avoid purchases and signing on to liabilities that don't fit your life. The next level up is your emergency fund, emergency funds are going to protect your wealth when life throws you financial unknowns. I don't know like a pandemic, getting laid off unexpected pet issues. Rather than charging the additional costs to a credit card and taking on more debt, or having to sell off and vestments at an inopportune time, you'll have the cash savings bucket readily available to pull from instead. That's why we call it an emergency fund for the unexpected lemons life might throw your way. And it always does. You just don't recognize them sometimes. So how much did you have in your emergency fund? Well, all of my six figure savings grads will know the answer to this. And it's really personal. So there is a formula to help you figure it out, you're going to first add up your total monthly expenses, the things you have to pay for mortgages, debts, other fixed items, and that's the number you have to cover, then you'll estimate how long it would take you to replace your income. If you were to lose your job tomorrow. For some of us, that might be a few weeks. For others that might be a few months, and then you're gonna determine your risk tolerance. So some people feel more comfortable with a 12 month runway, others have total peace of mind just covering three. So this is personal preference. It's based on your comfort level and the amount of insurance you have covering your bases. You know yourself well and your financial situation the best. So you can use our emergency fund calculator to go ahead and determine this exact number which will be in the Additional Resources section. Basically, if your emergency fund is underfunded, it's when you're exposed to financial risk if anything happens. If it's overfunded, it actually means you're missing out on compounding returns by not having that extra cash invested. So that's why we need to all know our emergency fund numbers. And if it's been a while since you've calculated yours, go ahead and do it again. And just know that this number is going to change as you move through different life stages. So it's always nice to come back to and reevaluate. your emergency fund should always always always be kept in a high yield savings account. high yield savings account is exactly that an account that will earn you a higher yield than you would get saving at a traditional bank. Even though rates are historically low right now, don't worry about that too much. They go up and down based on the Fed rates, a high yield savings account, it's going to stack up way better than any other savings account option. Savings Account at retail banks that we all know of because they spend a lot of money on TV ads and retail stores like Bank of America and Wells Fargo, they're going to have the lowest API I'm talking like point zero 1%, which stands for annual percentage yield, which is the rate of money the bank is paying you for keeping your money there. And you should know when you keep your money in a bank, they are allowed to go and do other things with it, where they are making way more than that amount that they're paying you. So first perspective, if you have $10,000 in a savings account that's earning you point zero 1% API, you're getting $1 a year, not very much for storing your money, their savings accounts across all national banks will have a little higher API at point oh 4%. But a high yield savings account is going to pay you 10 times that. So your $10,000 will at least earn you $40 per year. And remember, you're losing purchasing power due to inflation. So we want to be making something the level of effort it is to open and keep your money at a traditional retail bank versus a high yield savings account is the exact same, it might even be easier because most high yield savings accounts are primarily online banks. So we obviously want to opt for the one that's going to pay us the higher interest. And this is also an example of passive income on a very micro level. If you don't have a high yield savings setup yet, this will be additional homework for you. And if you've had the same checking or savings account since you were a teen, or got it at a college fair, it's probably time to reevaluate those accounts anyways to determine if they're still serving your needs for this phase of life. To help you decide whether to spend on a purchase, save for your emergency fund or invest in your retirement accounts. You need to understand your values. This way you can employ a values based spending system, having defined values is going to help you with all of your financial decision making. So if buying a daily $6 latte brings you insurmountable joy then please buy that friggin latte. But understand, you might need to cut back somewhere else because we can have anything but not everything. Not all at once. So this is values based spending approach will act as your natural trade off system. For example, these are three of my personal values that I always consider when making a financial move, bold, intentional leverage. They might not mean anything to you, but they certainly mean a lot to me. And so if a purchase aligns with my values, I can spend on it guilt free. If a purchase does not align with my values, then it's going to help me decide to save and invest that money instead, if you don't know your values yet, you will, because we'll be determining them as your first assignment in session one. And you're going to run through your spending behavior and your second assignment of session one, once you have this value lens, so that you can truly determine if you're spending in the right places that work for you. Having a values based spending system will help you stay out of debt and get the power of compounding working for you rather than against you. Let's take a look at an example of what happens when you charge $10,000 on a credit card with a 20% annual percentage rate. So Annual Percentage Rate or APR is the amount your credit card company is charging you to borrow money from them, right. So we learned AP why this is APR. The minimum monthly payments in this example are $193, which means after 10 years, you would have paid $23,000 for $10,000 worth of charges. And now you'll have an account balance of zero, it took you 10 years to get back to zero if you're paying those minimums. Now, if you didn't have that high interest credit card debt, and you could instead put that $193 into an investment account each month, earning an average 8% annual rate of return at the end of 10 years, you would have paid yourself 23,000 and accrued 12 and a half 1000 More in investment returns, giving you an account balance of $35.5 thousand. So this is what I'm talking about opportunity costs, right. And it's why the sooner we can get the power of compounding working for us, rather than against us, the better off we are. Notice that the credit card company is charging you 20% Which is almost impossible to go and find an investment that's going to earn you that amount you keep hearing me say this 8%. And that's because that's the average rate of return from the stock market over a long time horizon. So we don't want to easily give away our money to credit card companies. With this APR, we want to make sure that we are putting our money in places where we can invest and get a return close to at least half of that. But it is really important to build credit, I don't want you to swear off credit cards, we just need to use them strategically because having a good credit card utilization is going to raise your credit score, which is literally our adult GPA, but it actually counts for something. So it's what lenders will assess to determine whether to approve you for a loan in the future. And I know all of us want to own homes and drive in cars. So we're going to need that the key is paying off your credit card each month and having the ability to save and invest which requires us to live below our means doing so it's going to give us optionality. A question we get asked a lot is how do I prioritize investing while paying off debt? Here are a few things to consider. First, what's the interest rate that you're paying to borrow that money? What's that APR. Second, how funded is your emergency fund currently, and third, your general state of financial wellbeing, there is no hard and fast rule here. But here's a general recommendation via our debt quadrant. So the y axis depicts how full your emergency fund is today. And the x axis is your debts APR. Starting in the pink section. If you have high interest debt over around seven to 10%, like consumer debt on credit cards, and no emergency fund, this is a danger zone, we definitely recommend you getting your emergency fund up to 50% before aggressively paying down debt beyond the minimums. That's because if you don't have cash on hand, you're risking going further into debt if an emergency arises. Looking above that, at the brown section, if you have high interest debt and at least half of your emergency fund filled, then you have the option to get more aggressive with paying off your debt. Because you have a little cash there in case something happens but ultimately the choice is yours and you need to find the mix that supports your financial situation. And while being then over in the green section. If you have low interest debt, you may want to continue paying your minimums while you go ahead and build your emergency fund all the way up to 100%. And once you have that emergency fund filled, it's really your choice whether you want to keep paying the minimums and start investing or pay off the debt aggressively. It's up to you. You have to Pick what suits your financial life best, and we're all different. Not all debt is bad debt, we just have to have a plan for and understand what debt we have. So once you've taken stock of and built a plan for these bottom layers of the framework, you're ready to start increasing your savings and investing rates. Remember, savings is going to add to our money supply, but investing is what will compound it. So your savings and investing strategies will revolve around your goals and their timelines. To build an investment plan, we have to know what we're working towards. And when we want to achieve it, is it a near term goal midterm or long term, because that's what will help us determine where to put that money. This is one of the biggest things you're gonna get out of the wealth circle building a plan of action based on your specific financial goals. So how do you know whether you should save or invest your money? Well, here's something to consider. If you don't need access to that money for five years, why not invest it? Because remember, we want to get as much money working for us as soon as possible, while still having enough liquid cash to cover emergencies and near term goals. This is not a rule, it's just a guideline, I have built up high personal risk tolerance. Because the more investing I do, the more comfortable I get doing it, which means I personally choose to invest as much money as I do not foresee myself needing in the next two years, because I want all that capital growing and accelerating my wealth. But once you understand your own risk profile is when you can determine the right fit for you. Generally, your goals are going to fall into one of three buckets. Short term is anything you want to accomplish from now, and in the next three years. So money for these goals are what should be kept in high yield savings account. So they're easily accessible mid term is anything you want to accomplish in the next three to seven years. So most of this money can be invested to take advantage of the power of compounding. But depending on the goal and the timeline, some of it may need to remain liquid. This is where you've got to make a choice. And long term is anything you want to accomplish beyond seven years, and that money should obviously be invested. And here's the best news of all, you already know what you want to accomplish in life. That's why you're so good at being you. So you probably just don't have these desires outlined and built out as financial goals that you can put a system behind. But that's what we're here to do. So once you know your goals is when we can start using the three asset classes to our advantage. The first one being paper assets, things like stocks, bonds, mutual funds, ETFs investments that you can't see or touch so the ownership is documented on paper. Well, now technically screens but you get the point, session two and three, we're going to deep dive paper assets and we'll talk about the mechanics of the stock market all the way to selecting and managing your portfolio. The second asset class is real estate, which is a hard asset. It is an investment that you can see you can touch it, you can even live in it. Session Four is all about creative ways to earn an income from property. And the third asset class is business investing, which is two pronged either investing in your own business aka entrepreneurship or investing in someone else's business, like becoming an angel investor or venture capitalists. Session Five will focus on the business asset class from both of these perspectives. If you are feeling closed off to one of the asset classes I just briefly described, I would like to encourage you to show up for that particular session with an open mind. There have been a number of faculty members who started off very disinterested in a certain asset class, only to find themselves using that asset class as their top wealth building tool. Remember, the more investments we have the better so don't limit yourself before we gain knowledge around each one. I want to squash a common myth that you need to be making a lot of money in order to start investing. Your income does not equal wealth. Making Money does not equal having money. If someone is making $60,000 and investing just 5% of it. They are way better off than someone making $260,000 and spending it in its entirety. The old me prided myself on a high salary even though I basically had zero in savings and investments and I had a negative net worth. The new me is strategically taking a low salary to build this company and investing in assets that are continually growing my net worth in the background. So rather than focus on the dollar amount you make focus on the dollar amount you keep and get working. The reason your investing rate is so critical is because it's the part of your financial plan you actually have the most control over. There are a lot of outside factors that determine investment returns, market fluctuations, property values, whether business will succeed or fail, but you are in control of the portion of your income that you invest each month.

  Here's a scenario where a woman makes $80,000 annual income and invests it making that 8% average annual rate of return with a 5% Investing rate, meaning about $80,000 She's putting 4000 towards the investment account annually. She'll have under half $1,000,000.30 years later. But look at what happens if she managed to get her investing rate all the way up from 5% to 50%. She didn't close to $5 million in just 30 years. I know that sounds like a huge jump, but look at the impact of just increasing your investing rate 5% Higher, it's the difference of becoming a millionaire or not. So increasing your income over time and keeping your living expenses the same is really the magic formula to growing your investing rate and it's what hundreds of Factora women have gotten really good at. I saw all of you on Slack talking about all of these new salary increases you've made that is awesome. Let's get that money invested. If you enjoyed this episode, come join us in a well circle. It's our live online 12 week course and community where we teach you how to create a personalized financial plan alongside hundreds of other women building wealth. It will change your life and your money for good. You can apply at factorawealth.com forward slash wealth circle. That's factorawealth.com forward slash wealth circle. See you in the next episode.