Dear Dollars

The world's easiest way to money

How much do mutual funds cost?

Mutual funds have a sneaky way to charge you with what they call an expense ratio. You never see a bill, they just take the money out of your account, like a boat with a leak in it. A 1% expense ratio will take 30% of your returns over 30 years (assuming a 6% annual return). You’d lose $142,154.88 over 30 years if you initially invested $100k. With a low-cost fund at 0.1%, you’d only lose $16,034.83 over 30 years.

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Should I take my money out of the stock market when it drops?

No, you shouldn’t touch your money until you had originally planned to use it. And if it’s in the stock market, that should be a minimum of 5 years out. This is basically trying to time the market, which will burn you 99% of the time because you not only have to time it right when you take your money out, you have to time it right when you put your money back in. The biggest stock market climbs happen after the biggest falls, leaving you on the sideline.

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What is a bond?

A bond is a loan to either a government or a company. They usually pay a fixed interest rate. Bonds are graded based on how trustworthy the company or government is to pay back its debts.

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Why should I invest in index funds?

Index funds greatly reduce your investing risk. Rather than going all-in on a single bet, you can buy thousands of stocks and bonds in an index fund. You own each underlying stock or bond based on how much it’s worth, not on based on some “expert’s” guess. This lets you easily bet on the entire world economy, which is almost guaranteed to go up in the long run. 

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Should my teen have a credit card?

No. Instead, add them as an authorized user to one of your cards, but don’t give them a physical card. This will let them build a strong credit history by piggybacking off of yours. When they get to college, they should get their own credit card and they’ll be off to a great start.

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Should I buy a new or used car?

You should buy a used car that is two or three years old. You’ll still get the benefit of new technology, safety, and low maintenance but you don’t have to pay the hit of the initial drop in value when that new car was driven off the lot. This is even a bigger money saver when you are considering more expensive luxury cars.

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What is a credit score?

It’s a way banks and other companies that lend money judge how trustworthy you are to pay them back. If you’re not that trustworthy, they’ll still lend you money but they’ll charge you a ton. If you borrowed money before and haven’t been good at paying money back – late or not at all – you’ll have a bad credit score.

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How can I make sure I don’t lose money in the stock market?

You’re less likely to lose money in the stock market if you own more stocks and you hold them for a long period of time. If you owned an S&P 500 mutual fund that holds the 500 largest company stocks in the U.S., you would have never lost money if you held it for at least 15 years – whether you bought it in 1973, 1983, 1993, or 2003 or any year in between!

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What is asset allocation?

It’s your mix of stocks, bonds, and cash that controls your risk. If you’re heavy in stocks you’ll have higher risk – you’ll potentially make more money but potentially lose more too. As you add bonds and cash to your mix, you can reduce your risk.

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What is interest?

It’s the percentage that you either earn on your savings or pay on your debt. You can earn interest in a savings account, although right now you’re lucky to get 0.5%. On the other extreme, credit cards kill you with their interest rate which average 15.9% in 2021.

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What is diversification?

It’s a way to reduce your risk when investing. Rather than going all-in on a single bet, you can buy thousands of stocks and bonds in a mutual fund. This lets you easily bet on the entire world economy, which is almost guaranteed to go up in the long run. Until the Apocalypse.

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How does income tax work?

The government collects taxes based on how much money you make but in steps. You pay the least amount at the lowest step, and with each step your income increases, you pay higher taxes for that next chunk of income.

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What is rebalancing?

Rebalancing is how you can get your investment portfolio mix back in order. Over time, your mix of stocks, bonds, and cash can drift as each performs differently. Once a year, you’ll want to reset them back to your target mix. A target-date mutual fund does this automatically for you.

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What is an emergency fund?

Sh!t happens. Cars break down. Water heaters leak. You lose your job. You need an emergency fund of available cash that you can tap to cover these emergencies. You should shoot to cover six months of living expenses.

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