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Passive investing generates income that requires little or no effort to earn, maintain and grow that income. Passive investing examples include dividends from dividend stocks, 401(k), Roth IRA, interest from high yield savings account and dividends from REITs. Learn more about what are passive investments, different types of passive investments and how to get started.

How to Invest Money In Your 20s

02.01.2021 by admin // Leave a Comment

Wow, Gamestop ($GME) was on a wild ride the past month. Even seasoned stock investors had to start Googling “what is a naked short” and “how is it legal to short a stock over 100% of float” when this all started. We don’t yet know how this will end; however, it’s likely to end really well for some people and really badly for others. The good news is $GME has now generated excitement for first time investors to consider investing.

If you’re now interested in investing in your 20s, here are some ideas to consider before you buy your first stock. Don’t get caught up in all the hype. You have decades left to reap the benefits of investing in stocks and it’s important you make the right investing decisions for yourself. Here are 5 considerations to invest money in your 20s.

Invest Enough In Your 401k To Get The Full Employee Match At Minimum

A 401(k) plan is a retirement savings plan sponsored by employers. It allows employees to contribute to their retirement savings pre-tax in the United States. The 401(k) contribution limit for 2021 is $19,500, unchanged from 2020. Don’t know if you have a 401(k) plan or match? Ask your boss or look at the internal benefits webpage at your company. If you are eligible, your company will have information on how to sign up. The contribution amount you elect will be taken directly from your paycheck.

At minimum, you should always contribute enough to your 401(k) to get the full match. Consider how much you’ll save on taxes this year when you decide how much you’ll contribute to your 401(k). Also consider your money needs in the next 5-10 years. When you’re starting out in your 20s you’re paying down debt, saving for a car and saving for a house. It’s easier to put more money in retirement accounts when you’re no longer saving for a down payment.

Even though a 401(k) can be a set it and forget it account it’s best to check the performance of your 401(k) investments periodically. A 401(k) is a great investment vehicle; however, many companies limit what you can invest in. Even if you have a 401(k) you should also open a Roth IRA account for retirement savings and investments.

Open A Roth IRA To Lock In Gains Tax Free

A Roth IRA is a retirement account that offers you a tax benefit when you retire in the United States. Roth IRA contributions are not tax deductible. You also do not pay taxes when you withdraw money at age 59 ½ +. This is different from traditional IRAs and 401(k) plans.

Make sure you’re familiar with the benefits of a Roth IRA and the Roth IRA rules first. Important rules include you can only invest up to $6,000 in 2021 pending income eligibility and you can only withdraw certain money penalty free before 59 1/2. While you don’t pay taxes on gains, you also can’t write off losses on your taxes.

At the beginning of your career, your salary is lower, your taxes are lower and you have less money. It’s harder to contribute at all to your Roth IRA, let alone the maximum. At the same time, you have the opportunity for money you contribute to grow tax free for 40+ years. In a Roth IRA you also have the flexibility to invest in any stocks, ETFs and mutual funds you want.

How do you set up a Roth IRA? It’s very easy and can be done in minutes. Charles Schwab, Vanguard and Fidelity all offer Roth IRA accounts among others.

Use Company Benefits like ESPP and RSUs

Do you work for a publicly traded company? Your company may offer an Employee Stock Purchase Plan, or ESPP. This benefit enables you to buy company stock at a discount. ESPP is a way for you to make extra money without any extra effort. The only steps? Enrolling in ESPP and deciding when you want to sell the shares. Whether you keep the shares or sell the shares is based on your own investment and tax strategy.

Another possible benefit to take advantage of is equity compensation. Restricted Stock Units (RSUs) are a popular way of giving company equity to employees at tech startups and large public companies. RSUs are a great way to grow your wealth. If they aren’t part of your comp plan today, inquire if this is something your company offers. A company may offer RSUs to employees, but may not offer them to all employees. Sometimes employees have to perform at a certain level, or need to be at a certain level, or they are offered as part of an employment package. Whether you keep the shares or sell the shares is based on your own investment and tax strategy.

Buy Individual Stocks in the Stock Market If You Like Risk

You want to buy individual stocks to get rich quick, but how do you know which one to buy? When starting anything, I always ask myself about what I’m willing to pay to learn. Learning anything cost money. Even if you teach yourself, you always need to buy the basics. For example buying / renting gold clubs or technology to watch how to videos on YouTube. How much are you willing to spend learning something new?

The thing about stocks is that there is a chance it could go to $0. That chance depends on which stock you pick. For example, Gamestop is a very volatile stock. If you buy a share and it comes crashing down you could lose most of your money when you decide to sell. This is why it’s good to know how much you’re willing to spend to learn something new.

If you’re willing to spend $100 to learn something new, buy $100 worth of a stock or several stocks. Say the stock goes up in value, great! If it goes to $1, you were willing to spend $100 to learn something new. Now, you’re left with $1 and knowledge about how to set up an investing account, how to buy a stock, how stock prices fluctuate, where to learn more about your investments, how to sell a stock, how to write off stock losses on your taxes and more.

When you buy your first stock consider buying a share of a company that excites you. That way, you’ll want to learn more about the company. You’ll want to listen to quarterly earnings, learn about market valuations and more. If you’re not excited about your first investment you’re less likely to spend extra time learning about investing in the stock market. Generally, stocks fall into two categories: growth stocks and value stocks.

Growth Stocks

Growth stocks are stocks that are considered to have the potential to outperform the overall market based on their future potential. These stocks usually don’t pay dividends and tend to be more volatile. Examples of growth stocks include Tesla, Roku, Square and Amazon.

Value Stocks

Value stocks are stocks that are currently trading below what they are really worth and the thought is they have the opportunity to provide a better return. Some value stocks also offer dividends so you don’t have to wait to sell a stock to get some cash. Value stocks are usually larger, more established companies. Examples of value stocks include companies like Verizon and 3M.

Both growth and value stocks have the possibility to go up in value and go down in value. There is no guarantee the stock will go up. And, if you think a stock is overvalued there is also no guarantee that stock will go down.

See Also: Smart Money Moves In Your 20s

Buy ETFs If You Don’t Want To Actively Manage Your Stock Portfolio

ETFs stand for electronically traded funds, also know as index funds. When you buy an index fund you are buying a basket of individual stocks. If you buy a S&P 500 ETF, you’re investing in all 500 companies that are in the S&P 500. The more diversified your portfolio, the less volatile your portfolio is. The goal of index funds is to match the performance of a specific benchmark.

There are fees for ETFs; however, they tend to be lower than mutual funds. Before you buy an ETF make sure you know what fees the ETF charges per year. The average fee for index funds is 0.15% according to Morningstar data from April 2019.

How To Invest Money In Your 20s Summary

No matter how you decide to invest money in your 20s it’s important you choose a strategy that works for you. Before you start investing, make sure you know the options that may give you free money to start investing. This includes things like a 401k employee match and RSUs. Other important considerations? When you’ll need the money, your risk tolerance and how much time you want to spend.

Investing money in your 20s is hard when you don’t have as much money and it’s new. Like everything, you’ll learn from your mistakes and get better over time. Even if you buy a bad stock, or sell a good stock early it’s better to learn these lessons when you have less money at stake.

Different strategies work for different people. Investing when you may need the money for a big purchase in the next 5 years is different than investing money when you don’t need money for 20 years. Different people also have different risk tolerances. If you’re going to lose sleep worrying about losing money in the stock market a lower risk, set it and forget it strategy may be more aligned to your goals.

The Ultimate Guide To RSU Compensation

08.24.2020 by admin // 1 Comment

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Restricted Stock Unit compensation (RSUs) is a popular way of giving company equity to employees at tech startups and large public companies. When you hear about how much money people at tech companies make it’s often because they have equity as part of their compensation package. When looking at your compensation package don’t just look at the salary. Also understand what your benefits are worth including your RSU package. Often we look at benefits like health insurance and retirement options like the 401(k) company match. But, what about equity compensation? Equity compensation is a perk companies use to give you an ownership stake in the company. This includes RSUs, ESPP and employee stock options.

If you don’t have RSU compensation today, you are missing out. If your company offers RSU packages as one of their benefits, negotiate for RSU compensation during your next merit raise cycle or during your next promotion. Or, apply to companies that offer Restricted Stock Units as part of their compensation package. Learn below what RSUs are, what RSUs are worth to you, when you get RSUs, RSU tax considerations and the drawbacks of RSUs.

What Are RSUs or Restricted Stock Units?

RSUs, or Restricted Stock Units, are a form of compensation offered by employers to employees. They are company shares that are restricted, meaning that you can’t sell them right away. Instead, you will be given shares that vest over time. When you accept RSUs, they will come with a vesting schedule. Often, you’ll see vesting schedules that span 3+ years. This schedule will show how many shares will vest on which dates. Typically, there will be one day per year and each of those days will be a year apart. On that date you are given those shares at the price of the stock that day. They have no tangible value until the vesting date. If you leave the company before the vesting date that means you walk away from this future compensation.

What Is RSU Compensation Worth to You?

The value of your RSU package depend on a few things: the number of shares offered, how well the stock is projected to do and the vesting schedule.

How Much Are Your RSUs Are Worth When Granted?

To understand the current dollar amount of your restricted stock options multiply the number of RSUs by the stock price the day it is granted. When considering a job offer with RSUs, they may provide a dollar amount for RSUs. If you are provided a dollar amount, that means your RSU package will originally be worth that amount no matter what the stock price is. The day the RSU package is granted, you’ll know how many shares equate to that dollar amount.

How Well Do You Think The Stock Will Perform?

Consider how well you think the stock will perform during your vesting schedule. Is it a growth stock or value stock? Here, I’ll compare a growth stock (Amazon) to a value stock (Cisco). On January 1, 2019 Amazon stock was worth $1718.73. In comparison, Cisco was trading at $47.29. On August 21, 2020 Amazon traded at $3,284.72 a share and Cisco traded at $42.25 a share. That is a huge difference! If you had accepted a job offer at Amazon your RSUs are worth almost double! If you accepted the job offer at Cisco your RSUs actually decreased in value. Even with the quarterly dividend of $0.35 a share, your RSUs are still worth less. Note, this is one example of past results, and this doesn’t mean either of these stocks will perform similarly in the future.

When comparing compensation packages at two companies, don’t only look at what the RSU package is worth at that moment in time. Consider how you think the stock will perform over the next few years. The lower RSU package may end up being worth more money.

Amount of Time For All Of Your RSUs to Vest

Know how long it will take for your RSUs to fully vest. How long do you have to stay with the company to get the full RSU package? Do you intend to stay with the company for that amount of time?

When Do You Get Restricted Stock Units?

Typically companies offer RSUs at time of employment. Other opportunities to get RSUs include promotions. Similar to annual merit increases, some companies have annual equity awards. Once a year they give RSUs out to select employees. If you’re unsure if your company offers RSUs, go to your internal benefits page and see if it’s one of the benefits listed. You can also ask your manager or HR business partner. When you’re talking to them, ask them the criteria for getting RSUs. It can never hurt to ask.

Do I get RSU Money Right Away?

Usually you don’t get RSU money right away. RSUs typically have a vesting period. A vesting period is a period of time before the shares are owned by the employee. If you leave the company before the end of the vesting period you’ll walk away from those shares.

Cliff Vesting – after a certain amount of time has passed you will receive 100% of the shares all at once. For example, say you are granted 30 shares. 3 years later you get 30 shares all at once. The date you get all of your shares depends on what is in your RSU agreement.

Graded Vesting – you will receive smaller chunks of your RSUs more frequently. For example, say you are granted 30 shares in January 2021. In graded vesting you could get 10 shares in January 2022, 10 shares in January 2023 and 10 shares in January 2024. The dates you receive the small chunks of RSUs depend on what is in your RSU agreement.

Hybrid of Cliff and Graded Vesting – You receive a certain amount at once, and then smaller amounts at regular intervals following that. The dates you receive a certain amount all at once and the dates following depend on what is in your RSU agreement.

How are RSUs Taxed?

RSUs will not be taxed when you first receive them. But, they will be taxed upon vesting. This is because you were given RSUs at $0 and they converted to the value of the company stock when they vest. Even if the stock goes down the very next day, you will be taxed at the total fair market value of your stock grant on the grant date.

When you sell your RSUs your taxes will be calculated based on the strike price. The strike price is the price of the shares when they become vested. Upon vesting, this is when you get to decide if you want to keep the shares or sell them. Whether you decide to keep or sell the shares, you will get taxed upon the shares vesting.

To avoid getting hit with a huge tax bill your company may have an option to sell RSUs at time of vesting to cover taxes. Additional tax withholding options include same day, net shares settlement, sell to cover and cash.

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What Happens if my RSUs go Down in Price After They Vest?

If RSUs go down in price after they vest they will be treated like any other stock that is currently showing a loss. Nothing will actually happen until you sell and the price can continue to go up or down. If you sell at a price that’s below the RSU stock price it will be considered either a short term or long term loss on your taxes pending when you sell.

Do I Have to do Anything When I Get Confirmation I was Awarded RSUs?

Sometimes you do have to do take an action when you get confirmation that you were awarded RSUs. Just because you’ve been told you are getting RSUs doesn’t mean there are no actions on your part. Sometimes you need to accept the RSUs by a certain date or you actually won’t get them! The written confirmation that you get awarding you RSUs should detail out any instructions or next steps you have to take. Make sure you read this written confirmation thoroughly. When you accept the RSUs make sure you know what you are signing, it’s not only about making sure you click accept. Sometimes what you are signing contains a non-compete.

What Are The Drawbacks of RSU Compensation Packages?

Non-Compete Clauses

When you are accepting your Restricted Stock Unit grant, do you know what you are signing? You may be signing a non-compete. If you’ve already signed a non-compete for your employer this agreement may be nothing new. Be aware of what you are signing before you sign. After you sign print a copy for your records in case it’s hard to find after the fact.

Leaving the Company

Restricted Stock Units are designed to incentivize employees to stay at a company. Of course, you can still give your notice that you’re leaving at any time when you have unvested RSUs. However, you’re now putting in notice knowing that you’re leaving money on the table. With vesting, you won’t get the full amount of your award until the vesting schedule is complete (usually 3-4 years). If you get RSU awards every year, that can quickly grow to a sizable amount you’re walking away from. If you leave the company you will forfeit your unvested shares. Any shares that have vested that you haven’t yet sold you will continue to keep.

If you are looking to leave your company, don’t forget to negotiate the amount of unvested RSUs you’d be leaving on the table as part of your negotiation for your new compensation package.

High Risk, High Reward at Startups

Early stage or start-up companies (pre-funding or even after series A) tend to have the valuation of shares as quite low. The opportunity for appreciation is the highest, but there is also a chance your RSUs end up being worth $0.

Ability to Sell RSU Shares Once They Vest

If you work for a publicly traded company you should be able to sell your shares upon the RSUs vesting. If your company is private though, they may have restrictions on when you can sell the equity you’ve been awarded at the company. When you are awarded RSUs, read the terms and what the terms outline for selling vested shares to avoid any surprises.

For quick answers to all Frequently Asked Questions about Restricted Stock Units Fidelity has a FAQ guide that is pretty helpful.

10 Passive Income Ideas in 2021

05.17.2020 by admin // 2 Comments

Ways to make passive income, passive income ideas 2020, passive income 2020, top 10 passive income investments

The pandemic has changed many of our income plans. While some people are able to work from home they may have reduced pay or uncertainty about their pay / hours. Others find themselves laid off or furloughed. With all this uncertainty, it’s important to have several income streams. This helps reduce the risk of no income should you get laid off or furloughed from your day job. Even though there is uncertainty of when businesses can return to normal there are plenty of ways to earn more money from the comfort of your home. Learn how to generate passive income and then get started with these passive income ideas below. These passive income ideas range from very easy – all you need to do is swipe the right credit card – to passive income investing – such as dividend stocks – which should be researched before the investment is purchased.

Use A Cash Back or Rewards Credit Card

One very easy way to start a passive income stream is to get a cash back or rewards credit card. This doesn’t mean spending additional money. What it does mean is to generate dollars, or rewards points, from the money you are spending anyways. This approach won’t put actual cash in your pocket. Instead, it’ll either help reduce your spending because you can now use points to buy things or it’ll help reduce your credit card bill with cash back. Instead of spending more money, save the money you would have spent.

Put Your Emergency Fund and Savings In A High Yield Savings Account

Every dollar you save, whether for investing or for an emergency fund, should be generating additional income for you. Any money you have saved for an emergency fund or for investing later should be held in a high yield savings account. Most of the online only banks tend to have higher interest rates (such as Marcus by Goldman Sachs and Ally Bank). Right now the highest interest rates are around 0.6% APY (annual percent yield). Unfortunately these rates decreased significantly over 2020 and aren’t as appealing as they used to be. Not sure where to put your money? Nerd Wallet shares the top 10 best high yield savings accounts.

Rates are falling with the Fed lowering rates. But, you’ll always need an emergency fund at minimum so you might as well get something.

Open Up A New Bank Account And Get A Signup Bonus

Sometimes banks run promotions where you can make $100 by signing up for a checking account or savings account! Usually there are conditions like a minimum deposit amount, setting up direct deposit or holding the money in the account for a set amount of time. Money Crasher’s has a list of 31 bonuses banks are running now, with bonuses up to $300!

Open Up A Certificate of Deposit

A CD (certificate of deposit) locks up your money for a set period of time but guarantees a return. If you’re just starting out and have fully funded your emergency fund a 12 or 18 month CD is a good place to start (assuming the rates are higher than a high yield savings account). It’s good investment to start with as you get to learn about illiquid investments but you know when you’ll be able to take the money out and it won’t be held for long. Don’t have a preferred bank? Here are the best rates for CDs right now.

Invest in the Stock Market

Stocks are a way to build wealth passively. Stocks are a type of investment that represents ownership in a company. Investors buy stocks that they think will go up in value over time. Investors don’t make (or lose) money until they sell the stocks they buy. There is no guarantee that the stocks investors buy will go up in value. This is true in any market, although it is more often talked about when there is a lot of market volatility. Don’t worry if you only have a little amount of money to invest. You can open up a trading account on Robinhood with $0 and can buy fractional shares of a company. Starting June 9th you can buy fractional shares of top companies on Charles Schwab with as little as $5. If you’ve never invested in the stock market before learn how to start investing.

Invest in Dividend Stocks

Dividend stocks are stocks that offer a discretionary distribution of profits. When researching stocks you’ll know if a stock is a dividend stock if you see a yield greater than 0. Dividends are paid out on a monthly, quarterly or yearly basis. Investors need to own the stock on the ex-dividend date in order to receive the dividend payment. Stocks that pay dividends typically provide stability to a stock portfolio but do not outperform high quality growth stocks according to Investopedia.

Invest in Real Estate Investment Trusts (REITS)

Think of a REIT like a mutual fund for real estate. REITs is a type of company that allows investors to pool their money to invest in real estate. In order to be considered a REIT, the company is required to pay out at least 90% of their taxable income back to their investors. That is what usually makes REITs a great investment to generate passive income. It’s important to be aware that in these tough times tenants may not be able to pay rent so before you invest in a REIT know who their top tenants are and what risks they may have in their portfolio. Already several retailers have announced bankruptcies such as J.Crew and Neiman Marcus. Investors should understand if the REIT they are investing in has exposure to these businesses or other retailers that may be at the brink of bankruptcy. Learn more about investing in REITs here.

Participate In An Employee Stock Purchase Plan (ESPP)

ESPP is a benefit offered by some publicly traded companies to their employees. ESPP is the ability to purchase company stock through payroll deductions at a discounted rate.

The effort required is minimal and requires enrolling in ESPP and selling the shares to realize gains (or losses). You have a guaranteed return if you sell the day you receive the shares. If you decide to hold the shares for longer, and the shares increase in value, it will help you accumulate wealth. Companies can offer a maximum discount of 15% on company shares. With current savings accounts interest rates at best at 1.3% APY, and average stock returns at 5-7% a year, but not guaranteed, this is a great deal.

Participate In A 401(k) Company Match

A 401(k) company match isn’t money you’ll be able to touch until you retire, but it’s another way to generate income without extra effort. 401(k) plans are retirement savings plans sponsored by employers that allows employees to contribute to their retirement savings pre-tax. Many employers also offer to match or partially match employee contributions. Learn more about 401(k) plans including tax benefits, employee company match and accelerating funding your retirement.

Invest in Startups

According to Fortune, while the number of U.S companies continues to grow, the number of U.S. companies that are traded on stock exchanges has plunged 45% since peaking 20 years ago. Additionally, new companies have been completely disrupting traditional business models but many of these companies aren’t yet public. If you only invest in public companies, you are limiting your investment options more so than previous generations.

Additional Ways to Increase Your Income

Often you’ll see blogging, investing in real estate and flipping items on eBay referred to passive income streams. Yes, these are all ways to make more money. However, all of these options require a lot more time and effort to see the payoff. Becoming a landlord isn’t just buying the real estate, getting a tenant and collecting a check. A passive income stream is truly a set it and forget it. If you’re willing to put in more effort, learn about how to make money fast with a side hustle.

What are ways you’ve found to generate passive income streams?