Let’s talk about how to set up your first investment accounts for you guys who are
absolutely new to the stock market. Even if you aren’t brand new to the stock market, the information in this article can help you plan for your financial future.
Here are some of the tips and strategies that I've used over the past couple of years to become financially free.
Here are the topics that we’re going to talk about today.
What account types and brokerages to choose from.
What stocks and etfs to invest in.
How much money to deposit every single month or every single year.
How you can become financially free.
First let’s talk about different account types.
A lot of you guys want to get started investing but the first step is usually the hardest. It's like “oh my gosh what account types should or what account should i open up first?”
I know there are a lot of different accounts but I want to talk about my two favorite ones, especially for beginners which include:
Individual Cash Account.
The Roth IRA
If you are completely new, we usually recommend opening up a Roth IRA first.
The Roth IRA can be super powerful if you know what you are doing… With a Roth IRA, it's kinda like a checking or savings account you can put money into. But the difference is that you can actually invest your contributions into investments that will help your savings grow. This means you can actually buy stocks or ETFs or other investments right inside a Roth IRA.
So when you contribute to your Roth IRA it's all tax-free at the very end of it all. So when you guys take out your money when you're 59 ½ years old, all the money that you take out, (hopefully over a million dollars) will be tax free.
How to open a Roth IRA
Now how is it that you can open up a Roth IRA? Well there are a couple of rules. First you need to make sure that you have a job and you have some sort of earned income.
In order to contribute to a Roth IRA you need to make sure that you don't make too much money.As of 2021, you can only make less than $139,000 as a single adult. So if you make less than this number, this account can work for you.
If you are more than 50 years old, you can deposit up to $7,000 per year. If you are less than 50 years old, you can deposit up to $6,000 in a year. And there is no requirement to how you want to contribute your $6,000 every year. You can do it all in one month, divide it up into $500 per month, or contribute everything at the end of the year.
Now, you're probably wondering why there is a cap?- The cap is enforced so people don’t cheat and take advantage of the tax-advantages of the Roth IRA. Many people may try to deposit thousands of dollars every single month or millions of dollars every single year so it will be tax-free when they take it out. So the government put a cap on it.
Here's the thing: IRAs (individual retirement accounts) don't want you to take out the money right away. They want you to leave your money in there so it can compound and you can grow your contributions over time. So they do have a little penalty if you try to take out your money. There are exceptions which we won’t get into today. But if you are good at saving and want to contribute more than $6,000 per year towards your retirement, then you can open an Individual Cash Account.
The Individual Cash Account
Now, at Call to Leap we usually have people open up both a Roth IRA and an Individual Cash Account at the same time.
Yes, you can open up multiple brokerage accounts. With these Individual Cash Accounts you won’t have to worry about the $6,000 per year limit. You can put as much money as you want into this account. So, you can put in eight thousand dollars, ten thousand dollars, or a million dollars into this account every single year. But unlike the Roth IRA, the Individual Cash Account is taxable.
So if you make money trading or if you invest in a stock and then you sell the stock for a gain, Uncle Sam will take a percentage of it from you.
So your Individual Cash Account will be a taxable account but it is penalty free if you take out your money. A lot of people use an individual cash account to generate income in the stock market.
Account Types and Brokerages
There are many many brokerages out there. Brokerages can be similar to many different companies. Kinda like a Target or Walmart or like Walgreens and CVS. A lot of these companies are very similar but of course there are some differences too!
When you open up your brokerage account, the first place that you can open it up is actually your bank. So, if you bank with Chase, Wells Fargo, or Bank of America, they usually have some sort of brokerage or a retirement account that you can open up. All you need to do is just go online. You can google - “chase brokerage account” like individual ira or something like that and then it'll be you know it'll be like right there. You can just open it up. All you have to do is answer a couple of questions like your name, your address, how much money you make every year, and your social security number.
Then boom! In 15 minutes you should be able to open up our individual retirement account in your bank. Okay now if you don't want to go with your bank it's okay because some people don’t want to open up an IRA or Individual Cash Account with their bank because they may be very limited with what they can do. So we usually recommend opening an account with a reliable brokerage firm like:
Any of these brokerage firms are very good companies. So how do you open one up? All you have to do if you want to open up a Roth IRA for example is just go to Google and type in “Roth IRA” along with the company name like “TD Ameritrade.”
These companies are great because of their customer service. When you have problems with your account or any questions, reliable customer service can go a long way. You can always give them a call and then they usually will pick up. With most of these brokerages you can even call them in the middle of the night!
They also have very good research and tools for those of you who like to chart things or read news articles about certain companies. They all have it there so it's it has good research it has good tools but the thing is and it's not i don't think it's that big of a deal in the long run they do charge some fees so if you guys are options traders or you guys are thinking of becoming options traders or you know um uh yeah where you guys want to open up contract or close a contract or something like that there's going to be some fees like maybe some brokerages might have you pay like 65 cents per contract or a dollar per contract something like that so again you can.
If you want to go for something simple you can use Robinhood, Webull, or Wealthfront. Any of these will do fine and they have really nice interfaces on their mobile apps. Currently, Webull and Robinhood allow you to open up an individual cash account but do not offer Roth IRAs.
*Steve’s personal preference is TD Ameritrade, Charles Schwab, Fidelity, or Etrade. *
Getting a Million Dollars in your Account
So let's talk about how to get a million dollars into your account.
Alright so here's the thing - if you are investing right we usually tell people that when you're investing you're not doing it for the short term. You're not doing it for the next couple of weeks or the next couple of months or even just a year. You're doing it because you want to build long-term wealth.
You’re going to want to be in the stock market for at least 10 - 40 years. The stock market is such a powerful tool to grow your money. So how do you reach financial freedom with it?
To be honest it's really basic. It really just comes down to these three simple steps.
Save more money
Be more conscious of how much you spend on a daily basis on a monthly basis. Do you really need your subscription services? Do you really need to go out to eat? Are there things that you can cut out from your monthly bills?
Make more money
Don’t just save more money...the next layer is to make more money so you want to have like another side hustle. Do something that you're passionate about maybe you can tutor maybe you can do some sort of of ghost writing or you can be a virtual assistant or you can even do like uber rides like uber eats or lyft right so make more money when you have both of these that means your cash flow is going to be increasing over time right and when you have more money that means you can invest more money.
Invest More Money
The more money that you can invest right now when you're younger, the faster your money is going to grow. Because you can take advantage of compound interest. That's where your money doesn't grow just in a straight line it actually grows in a curved line so this is like a straight line sort of but then when you invest your money your money actually grows in a curved line. This is also known as exponential growth.
This is a very powerful concept. Especially for those of you guys who have been investing for at least five to ten years. You're going to see some sort of exponential growth like this. Of course if you invest in you know like say fundamentally strong stocks or ETFs. So here is the game plan on how to make over a million dollars or two million dollars…
So with the roth ira let's say that you start today you're like okay i'm going to be disciplined in saving money making more money and investing money every single month you can you know you can first you know your principal right your ps4 principal you can first not even put in any money but you can just say you know what every month the md stands for monthly deposits every month you want to deposit 500 and you make this a recurring payment basically you just go to your brokerage account you just go to the options and you go hey i want to
deposit $500 into my brokerage accounts every single month. You do that for me automatically usually when people do it automatically it sets in a good habit it's kind of like a set it and forget it kind of deal where like you don't have to like worry about oh shoot did i deposit money into it or oh shoot i forgot to pay the bills right it just automatically does it right like with my bills with my netflix bill with my phone bill with my internet bill. I just have it all set to automatic payments every single month. So I don't have to worry about it. You’re going to want to do the same thing here. You want to make it automatic so that you pay yourself automatically every single month.
*Note* Remember that the current maximum contribution for your Roth IRA every year is $6,000. ($6,000/ 12 months = $500 per month contributions.)
Now if you deposit $500 into your account every single month and let's say that you invest in something like something safe right like an ETF that tracks the S&P 500 like you know like SPY or like VTI or like VOO or you know QQQ or a DIA something that tracks like some big broad index like that and you get like around 10% if you just do this consistently for the next 30 years this is how much money you'll have you will have roughly 1 million dollars.
1 million dollars - that's crazy! If you don't invest and you just leave your money in the bank doing the same thing and deposit $500 into your savings accounts, you will only have $180,000 after 30 years.
Yes, that is $180,000 vs $1,000,000…
So the benefits of contributing your retirement funds to a reliable ETF is pretty obvious when you put it that way.
The reason your savings grows is because your savings compound every time that you invest. The more money you contribute, the more your money grows. And it will grow in a percentage.
Here is a little example: if you have $10,000 with a 10% annual growth, how much money is that that's going to be? - A $1,000 growth. So your $10,000 is going to become $11,000 the next year.
But wait there’s more!
The next year rises over and you make another 10%. When you make this next 10% it doesn't mean that you're going to make another $10,000. Instead, you're going to make 10% out of the $11,000 which means that you're now going to make $1100 for that year…
You see every single year that you invest and let that money grow by a percentage every consecutive year, that amount that you grow with is going to increase in value. So it's not like you're getting a fixed amount of $1,000 every year. It's gonna be $1,000, then $1,100, then $1,200, then $1,300, $1,400 and so on...This is the beautiful power of compound interest!
Now, some of you guys are pretty good with saving. So if you can deposit more than five hundred dollars every single month, great! If you have extra money you can contribute to your Individual Cash Account.
With the Individual Cash Account, you have the ability to grow another $1,000,000 and more!
Let's say that you initially deposit $10,000. And then you also contribute $500 every month for 30 years. How much money are you going to have in the end? Well if you invested all of this right here you're going to have 1.1 million dollars that's crazy just because you deposited that $10,000 that extra ten thousand dollars do you see how that you have an x-ray one hundred thousand dollars at the end of thirty years
That's pretty crazy right? So you see if you invest here in your Roth IRA, any events you invest here in individual cash accounts you'll have $1,000,000 here AND $1,100,000 here - so you'll have $2,100,000
dollars that's crazy right?
Compare that to if you just left your savings in the bank which would be $190,000. which is very very you know it's not that it's not that much right because of course you know that in time inflation is going to rise and the amount of money that you have isn't going to be really 190 000 your buying power is going to decrease you're not going to be able to buy like a you know a burger right now that's two dollars.
So that's how you reach financial freedom. You have to make sure that you invest little by little. And every single month you want to have these good habits.
We would like to wrap things up with this little quote: “small habits create big results”
Okay right here when you guys look at this you're probably like, “$500 per month?? No I can't do that no no no no.”
Here’s a tip for you: If you want to be successful in anything, it all comes down to making positive small habits. You can take a small step every day towards your goals. Maybe one day you can learn about Theta decay. And then another day you can learn about Delta.
This lesson goes for any discipline. If you want to learn Muay Thai kickboxing, you would focus on your right kick for one month. Then your left kick the next month. Then move onto your right cross. Left jab and so on…
So compound growth doesn’t only apply to stocks. It can also apply to your habits and all areas of your life.
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