Do you want to be a millionaire? You may be closer than you think.
I wrote this for my fellow filmmakers.
I have always been interested in investing, but I never learned how to properly invest until recent years. From multiple discussions with fellow filmmakers (25 - 35 years old) I discovered that there are three types of filmmakers when it comes to investing: People who know about investing, people who are not interested in investing, and people who are interested in investing but are not sure how and where to start.
This guidebook is specifically designed for this third group of people. My hope is that this guide can take you through your initial steps of investing (specifically in the stock market) and to try and answer all your questions.
This guide is not just for recent film school graduates. Investing is important for everyone- and it’s best to start NOW. The biggest advantage in investing is time; which we will discuss further below.
My name is Yuki Noguchi. I am a local 600 cinematographer (www.yukinoguchi.com) based in Los Angeles. Originally born and raised in Japan, I moved to California to pursue my dream of becoming a filmmaker, graduating from Chapman University.
As an immigrant, I didn’t have any family here to financially guide me after school. I started by purchasing camera equipment, thinking it would be wise to invest in my own career. However, I wanted to diversify my investments beyond my career, while lowering my risks.
I knew most people invested in the stock market, so I started reading and teaching myself. I started with a couple influential books: Rich Dad Poor Dad by Robert Kiyosaki and Money Master The Game by Tony Robbins. Today, I have a solid understanding of the basics of investing. My goal is to make my money work for me, while I continue to focus on my career in filmmaking.
I hope to shine a light, and inspire those who are interested in investing, to take their first step. Since I did not have the guidance, I understand how important it is to share this knowledge. I have also tried to write in a way that makes it easy to understand and more approachable. Ultimately, if we can learn from each other, we can all help each other to reach our higher financial goals for our future. By starting these conversations, we can build a community and have a deeper collective understanding about investing.
Just to be clear, I am not a financial adviser. You should do your own research and decide what's best for you.
There are so many entry points into the stock market, making it difficult to know where to start. A simple place to begin is to open a free Robinhood account and buy an Index ETF (more on that in the next paragraph). I suggest an ETF called “VOO”. This fund represents the S&P500, which you could more or less consider representing the US Economy.
Decide how much you can invest monthly. Then, invest a consistent amount every month - even through the ups and downs. The goal is to hold the investment as long as you can in the market.
You can find the Robinhood app here.
“VOO” is the stock symbol for an ETF / Index Fund created by Vanguard (An investment management company) called the “Vanguard S&P500 ETF”.
An ETF (Exchange-Traded Fund) is basically a group of stocks bundled together, and then divided up into smaller, cheaper "slices" that are easier and cheaper to purchase. This makes it possible for someone without a lot of money to invest in a collection of companies, without having to pay the full price of each individual stock.
An “Index Fund” is a type of ETF that follows certain rules to create a group of underlying stocks. VOO mimics the S&P500 (the US’s top 500 companies), so buying VOO means bidding on the US economy.
Vanguard is an investment management company famous for its low cost funds. For example, VOO’s fee (taken out by Vanguard) is 0.03%. If you want to see what else is out there, I recommend looking into a low cost ETF/ index funds.
You could say that VOO represents the US economy. Why should you invest in the US economy? The US economy has recovered from major recessions and continues to thrive again and again. Historically, the US economy has been making about a 10% gain each year on average since 1926. Most index funds are a market weight ETF, the pie is broken up into slices based on its market cap. VOO will rebalance your portfolio according to the size of companies - all without you having to lift a finger! This is extremely beneficial because it minimizes your time to manage your portfolio.
You can’t underestimate the importance of compound interest when you start to invest. Compound interest basically means you are making interest on your interest (Learn more about compound interest here) Let's illustrate this with an example:
1. Let’s say the market makes on average 10% a year and you invest $500 today.
2. $500 will become $3300 in 20 years
3. $8700 in 30 years
4. $22600 in 40 years!
The numbers increase exponentially. This is why it's so important to invest at an early age. Here is the online calculator, see for yourself.
In investing, small percentages count much more than you would think. Without understanding the magnitude of these numbers, you may overlook a significant amount of money in the long run. For example, the average fee for a professional financial advisor's services is about 1%. This may sound like a very little amount, but when investing over time, 1% can become very significant.
For example - let’s say you invest $100 every month for 30 years, with 10% return per year. Because of compound interest, that 10% per year will become $220,000 in 30 years.
However, if instead of 10%, you are only getting a 9% return per year, that same investment will instead return $180,000 over 30 years. That is close to a 20% drop. Thus, it’s important to pay attention to even a single percentage point when looking at long term investing.
Normally, people retire in their 60s. So when people say to invest, it means that they are assuming this money will be used after you retire. However, if you invest earlier (in your 20s), you will have a great advantage. For instance, $100 invested for 30 years becomes $1750, but if you invest the same amount of money for 40 years, it will turn into $4500!
Historically, it’s proven that NOBODY can time the market consistently. There is no way you will outsmart the professional investors with multi-million dollar computer algorithms, and even then, they can’t time the market. Besides, the difference over 20 years between a very active person in the market, versus a less active person in the market, is minimal. Shwab has a great case study on timing markets. Your strategy should be to stay in the game the longest - that’s how you win.
You simply can’t know the best time of the year to invest. If you happen to invest only once, and it ends up being the worst time of the year, it would be a disaster to your investment portfolio.
So when should you invest? Actually, there is a way to know one market price mathematically - the average cost of the market. It’s called “dollar cost averaging”. This basically means: invest consistently throughout the year.
By diversifying your investment timing, you can enter the market with an average cost (the one number that we can traditionally rely on).
For instance: instead of investing only once a year, diversify that investment into every month. This way, you buy the stock on the average cost of the year. It's important to think long-term and maintain a consistent investment pattern, even through recessions. Also, by doing this systematically, you don’t have to spend any time researching or worrying about the market timing.
Don’t buy high and don’t sell low. The worst thing you can do is stray from your financial strategy. Buy and hold is a very good strategy. Don’t look at stock investments as a “get rich quick” scheme, you are in this for the long haul. It’s hard not to be irrational or emotional about your decisions when you see the market fluctuate, but over time, the market always grows. The stock market is meant to go through bull (up) and bear (down) cycles. Every 10 years, there will be a big recession. If you invest for 30 years, your stocks will go through at least 3 recessions, but in every single recession the US has had, we’ve recovered and even gone higher. When the market is low, just leave your money. If you want to do something when the market is low, think of it as a black friday sale (cheap stocks!) and put more money into the market. Besides, big up-swings in the market usually happen right after the big down-swings. You don’t want to miss those. Tony Robbins notes that the average return in the S&P500 over the last 20 years was 8.6 percent. But if you were out of the market for just 10 of the best trading days during the period, your returns would have been only 2.5 percent.
You should always have a few months of emergency money in your saving’s account. It is generally recommended to have at least 3 months of emergency funds. Also, you should not invest money if you know that you will need it in the near future. The market may go down temporarily, and you could lose that money in the short term if you have to pull it out too quickly. There is no such thing as easy, instant money. But in the long run, stock investments reward patient people.
I highly doubt you have no money you can invest. You could have one less drink at the bar, or cook a meal at home instead of eating out at least once a month. Let's say that drink you didn't have was $10 and instead you invested it. That $10 in the market will become $175 in 30 years. If you find $10 each month to save for 30 years, that becomes $20,000. Think of where that compound interest could get you before you drink that next beer. Small savings today may seem to be insignificant, but once you start looking at the future value, you will clearly see that it is not. Baby steps. As Bill Murry says, “No step will take you nowhere.”
You can.
Today, some individual stocks are making way more money than ETFs, but how much do you know about those individual stock’s business? The book Intelligent Investor says: “If you don’t know their business, you are not an investor, but a speculator”.
Did you know that Amazon didn’t make that much money until recently and Apple almost went bankrupt in the 1990s? Think about the bigger picture. A company doing well today will face some downturns, and in the worst of cases, that business can go under. That is the natural process in our economy. Today, only 60 companies of the original S&P500 remain.
Warren Buffet famously instructed his wife to invest 90% of his money into the S&P500 index funds when he dies. Investing is not gambling. If you don’t know what you are doing - stick to low cost ETF/ index funds.
Sadly, most investment firms with actively-managed funds do not make as much money as someone simply investing into the market (like S&P500) and doing nothing.
Famouly, in 2007, Warren Buffett bet a million dollars that an index fund would outperform a collection of hedge funds over the course of 10 years. He won that bet.
Managed funds take a percentage of your investment. As you’ve learned, small % over time becomes a substantial gain. So, the reason those firms can afford nice suits and ties is because you gave them that money. Additionally, in 2008 (the last recession), most firms lost more money in their investments than if they simply left it in the market. So they don’t make you more money and they also don’t protect you. They feed off of your lack of education.
By now, you learned how small percentages matter in long term investing. Winning just one more percent gives you a huge advantage compounding in a 30 year investment. Thus, it is impossible to talk about investing without talking about the elephant in the room - tax.
So how much in tax do we pay? It's a whopping 30% (simplifying for the sake of this article). Basically, you have to pay 30% of every dollar you earn - so beyond anything you can invest in, it's important to understand tax and minimize this number. You should not do anything illegal, but there are a lot of legal ways to pay less in taxes. Understanding tax is very important when you make investment decisions.
When you invest your money, you need to pay a tax on your capital gain. The government will take every piece of your pie whenever possible. When you invest for less than 1 year, it is categorized as short term capital gains and it has the same tax rate as your ordinary income (let's say 30% to simplify). However, if you invest for longer than 1 year, it becomes a long-term capital gain - and your taxes fall to around 15% (again, simplified). Therefore, it’s always recommended that you want to invest at least 1 year in the same stock / ETF.
By now you should understand that one of the biggest factors you need to deal with (in regards to your investments) is paying taxes on every dollar you make. What if there was a way to avoid paying taxes on your capital gains? Well, there is - through a retirement account.
Essentially, there are only two kinds of retirement accounts: pre-taxed and post-taxed. Both act like bank accounts that you can invest the money through. However, you can’t take any money out until retirement - 60 years old (most accounts do allow you to withdraw money, but with penalties).
1. Pre-taxed - known as a Traditional 401K or SEP401K. In a nutshell, a pre-taxed account means that you are taking the tax advantage today. For example, if you make $50,000 today and you put $10,000 of that in a Traditional 401k, that $10,000 contribution becomes tax deductible. You will only get income taxed on reminding $40,000. However, keep in mind that you will eventually owe that income tax for the $10,000, plus the capital gains in the future when you retire. If you do this, you should hope that you are in a lower tax bracket when you retire, because you may be making less money.
2. Post-taxed retirement contributions - my prefered way - typically known as Roth 401K or anything with the term “Roth”. Essentially, you pay tax on that money today as income. Then, your (already taxed) income money is ready to be invested in the market through Roth accounts. When you retire, you will not need to pay any taxes on any amount when you take it out, not even on the capital gains. For instance, let's say you invest $10,000 in a Roth today for 30 years. The money will roughly become $175,000 in future and you will not need to pay a single dime when you take it out. If you don’t invest in a Roth, you will have to pay for long term capital gain tax (15%) on it. That is $25,000 to the government just for taxes! But by investing in a Roth account, you bypass the tax. The Roth does have some limitations. Normally you can only contribute up to $6000 a year, but there are some ways to work around these limitations.
You should ask your accountants what’s best for you, but normally they recommend a mixture of both types. Look up Roth 401K, backdoor Roth, individual 401K online to see what fits. I have an individual 401K set up as Roth through my s-corp. As a freelancer, you can apply for retirement accounts very easily through Vanguard, it took me only 10min to open one.
As a freelancer, having an s-corp is one of your biggest tax advantages. It's quite complicated, so I won’t go into too much detail, but here are my brief takeaways:
First - net income tax versus gross income tax: Individuals get taxed on gross income, but s-corps are taxed on net income (after tax deductions). Additionally, s-corps have a lower tax rate after a certain threshold.
As a company owner, you take a portion of your income as dividend. It’s called K-1 income, and it has a lower tax rate of about 15%. Although you are not allowed to take all the income as K-1, my accountant suggests 60% can be K-1 income and the rest must be paid through payroll - which I had to set up myself.
Running a company isn't free. Preparing your tax returns will cost more (mine is around $1500 for personal and corporate combined). Additionally, you will need to pay for payroll service to put yourself under payroll, which gets double taxed as both employee and employer. I do mine through square payroll.
This system doesn’t make sense until you reach a certain income level. If you make more than $75K a year, you should ask your accountant if you are a candidate for an s-corp. This topic is very complicated, but if you do a search on YouTube you will find many great resources explaining how s-corp works.
In 2020, I believe most freelancers are required to get paid by W2. When I started freelancing, most of my jobs were W9 / 1099. I wasn’t sure of the differences between the two, I just knew that W2’s seemed more intimidating because of all the legal forms. Here are the basic differences between W9 and W2.
- W9 means you are an independent contractor and you are not part of the production company. Your taxes will be charged when you file your tax return. However, you are expected to file estimated tax throughout the year. At the end of the job, you send your invoice and W9 to productions, and at the end of the year, you get a tax form called 1099 for filing your tax return.
- W2 means you are an employee of the production (or payroll) company. The advantage of W2 is that you get workers comp and work incidents are covered by the production insurance. This is why production companies require you to go W2. W2 pays you through payrolls, and tax will be taken out when you get your paycheck.
- If you have s-corp, your payroll processing is called a ‘loan out’. Your company has to submit a W9. You can still get paid through the payroll companies and additionally you do not need workers comp as loan out. Loan out companies must be single owner companies. Depends on productions, you may invoice or fill time cards.
About 30% of your income will go to the government as income tax. This means that if you can purchase something that you can write off as a tax deduction, you are actually paying 70% of its cost. For example, if you want to buy a new camera for $1000, the true cost of the camera is actually $700, because if you did not buy the camera, you would've given $300 (30%) to the government as income tax for that $1000 you kept. Equipment owners should use this idea to determine whether or not something is worth investing in. (The rules for tax write-offs are changing. In 2020, since you can’t be a 1099 employee any more in the film industry, it may be difficult to write things off as a freelancer without an s-corp. Ask your accountant).
In Los Angeles, if you are buying anything that is related to production use, ask if they take teleproduction tax. Teleproduction tax replaces sales tax and it cuts rate in about half (5%). You need to ask the vendor, but you will be surprised how many vendors can offer teleproduction tax. The store will ask you to fill a short form. You are required to use the items purchased in this way for productions based in California.
Every year, cash loses its value by 2.5%. This is called inflation, and the FED is doing it on purpose. People say this is the hidden tax. Keeping your savings in cash may not be the same risk to your money, but it also does not preserve it’s value either.
For example: you may have heard that our gas costs more today than it did 20 years ago. It’s planned that way. If you have $1000 saved 4 years ago, that money’s actual buying power is closer to $900 in today’s market (this is a simplification, inflation is in reality a type of compounding interest, not just a simple interest percentage).
By now, you know how much these small percentages impact your investment. Some people think investment returns should account for this inflation. So 10% a year gain can really be looked at as a 7.5% gain.
No. But I think it is easy to become rich someday - through a few simple steps.
Don’t try to play the market, I did that for years, and you can easily lose money this way in the stock market. Your emotions will tell you to sell when prices are dropping and buy when prices are going up. This is not a good long term strategy to grow your wealth.
The best strategy is surprisingly simple - buy consistently and hold as long as possible. That is the best thing you can do to make money. It is not easy hearing that you have to wait 30 or 40 years to see the results of your investments. But with discipline, you will see your money grow steadily and immensely.
Most bank savings accounts offer a very low interest rate of less than 0.1%. When inflation is 2.5% a year, that doesn't sound like a smart place to put your money. There are other options however: certain banks offer several high-yield savings accounts. You have zero risk of losing money in these accounts, so if you have money sitting in your bank account right now, open one of these high yield accounts and keep your money there instead. I have used American Express savings accounts, Goldman Saches Marcus, Wealthfront savings account, and Robinhood cash management accounts. One downside to these accounts is that it can take several days to access your money because you have to transfer it to a brick and mortar bank, which can take up to 3-5 days. Some of these banks also limit monthly withdrawals. The interest rates will fluctuate depending on the Feds rates, and currently, it's a pretty depressing rate. However, in 2019, the rate was up to almost 3% per year. This means, if you put $1,000 every month for 30 years, you will end up putting $360000 of your own money, but your profit from your compound interest will be $210000 (Total $570000).
Get a credit card that pays you the interest. I have Citi Double Cash that pays 2% cash back. That means, any money I make is essentially 2% more as long as I can pay through this card. Combining this with a savings account can leverage what you have up to 5% more (when a savings account pays 3%) without having any risk of losing it. This adds up significantly.
When I first started learning about investments, I did not have any idea about ‘the numbers’. Today, those ‘numbers’ are the fundamentals that I use to measure all other investments in my life. The numbers are 2% (inflation, credit card rewards, saving’s account interest), 10% (general investment return in the market), and 30% (tax rates). So when you want to expand your investments to other things, you can use these numbers as the basis for your decisions. For instance, if your new investment makes less than 10% a year, it’s probably easier to just put that money in the S&P500 market.
These are the books that I like.
- MONEY Master the Game by Tony Robbins
- Rich Dad Poor Dad by Robert Kiyosaki
- The Little Book of Common Sense Investing by John C. Bogle
Here are YouTube channels that I like.
Truth is, the biggest investment you can do is probably invest in yourself. Buy books. Read them. They cost $10 - $20 each. If reading books isn't your thing, try audiobooks to listen on the go. Learning is the best investment and the return will be priceless (literally and figuratively).
I want to hear your opinions. There are many different ways to invest. I would love to know your way! Let's start a discussion and I can add it to this article. Here is the link to the Google Doc Version. Feel free to leave any comments or feedback.
Simply put, if you invest $500 every month on the market for the next 30 years, your contribution will be $180,000 in the end, and your profit will be $815,000. You will come out as a millionaire. So, by doing nothing but by putting $500 a month into your investments you will become a millionaire in just a third of your lifetime. Not too shabby, is it?