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Kevin Mahoney is the founder and CEO of Illumint, a virtual financial planning company for millennials. His company specializes in financial planning during one’s late twenties and thirties, as one plans to repay student loans, buy a house, save and invest. In this episode, Chris and Kevin had a great time talking about how to invest strategically and build wealth. Tune in and take away amazing insights from this wonderful episode.

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Chris Pratt: We have a really wonderful guest today. He is the founder and CEO of Illumint, a virtual financial planning company for millennials. He specializes in addressing the trade-offs that arise during one’s late twenties and thirties, as one plans to repay student loans, buy a house, save and invest. He’s also a contributor to Forbes magazine and has written for Yahoo Finance, Fatherly, and Kiplinger. He has an MBA in finance and is a certified financial planner. I’m really excited for this guest. Everyone, let’s welcome, Mr. Kevin Mahoney. Welcome to the show, Kevin.

Kevin Mahoney: Thanks for having me, Chris.

Chris Pratt: So we were just talking a little bit before the show about, uh, the stock market and cryptocurrency and all this crazy stuff going on. Before we get into that, I want to hear a little bit about your background. You’re based out of Washington, DC, you’re certified financial planner. You have an MBA in finance. Can you talk a little bit about what made you decide to get into personal finance? What made you decide to go for that MBA? And in that degree?

Kevin Mahoney: The company that I’ve built comes out of my own personal experience in many ways when my wife and I were preparing to have our first child, we started having all these conversations about finance that we didn’t previously have to have. And I found myself doing research and thinking through questions that I knew if someone like me with a background in finance was, was having to spend a lot of time on, that there was probably this large group of peers who were going through similar situations without the benefit of some of the experience and, um, education around these issues that I had had. And it just seems like an opportunity to offer a service that doesn’t exist, even, even at this point in large part compared to what financial planning is overall.

Chris Pratt: Okay. Yeah. And by the way, I’ll mention this, you might not want me to, but you got your undergraduate degree from Georgetown University and your MBA from Georgia Tech, correct?

Kevin Mahoney: Yes.

Chris Pratt: Yeah. So I imagine that that was a pretty challenging experience, right? A lot of our listeners are in college. Some are even planning to go to college or graduate school, and they’re wondering, you know, which degree should I get, which path should I take ? Finance is a pretty common one, just because of the job opportunity and job potential that can come from that and the different paths you can take. Do you have any advice before we get into the nitty-gritty of the personal finances, any advice for a young person who’s considering going to graduate school? Who’s thinking of going into finance or a finance related degree?

Kevin Mahoney: I think we’ve all seen at this point, the burden that student loan debt has placed on young adults, whether it’s right after undergrad or after grad school. And so I don’t think people need to, to feel confident that they have picked the one job or the one industry that they’re gonna work in for the rest of their adult lives. But I do think, especially in a situation where someone is considering taking on education debt, that you’re prepared to leave school with a certain skill set that will be desirable and easily marketed, no matter where you find yourself in life and no matter, you know, where your interests or your, your personal life kind of drifts over a period of years. And in some ways it’s, it’s an unfortunate reality, right? Because there are a lot of different subjects that people can get a degree in become specialists in, that are really valuable to the world in different ways, but not all of them do a great job at this point in helping people, you know, maintain a certain quality of life or ensure financial stability. So whether you’re specifically interested in financing,

Chris Pratt: A good wage is basically what you mean.

Kevin Mahoney: Yeah, exactly. You know, whether you’re interested in finance or a specific part of finance or even something else. I think the primary focus that I would encourage is just making sure that that skillset is really tangible and really strong, um, when you’re leaving school. So that even if you do have that debt, you’re able to, you know, continue supporting yourself.

Chris Pratt: Okay. We just got the numbers from, I don’t know when you went to Georgetown, but today for 2020 to 2021, a full-time semester tuition at Georgetown is $25,000, which seems very high for a university. Uh, and, and so that’s, that’s a great point. Like how do you weigh and make that decision at 18 years old for that cost, or even at 20, you know, 21, 22 going to graduate school, 23, even deciding to take on more money for a program, like an MBA. It’s, it’s a challenging decision, I think.

Kevin Mahoney: Yeah. And let me give an example. I’m from Georgia Tech, where I got my MBA, you know, I was living in DC at the time before I went to school. So I had been interested in some of the schools up in the Northeast because they were relatively close to where I was living a lot of, you know, very schools in this area. But the debt that I was going to have to take on to go to those schools was pretty significant, but Georgia Tech, because it has a history as an engineering school, you know, that’s, that’s long been its primary focus. They have this co-op program where you go to school there and you can work for an employer in the city while you’re in school. And that employer will either pay for, or subsidize your tuition. And so one of the reasons I ended up going down there was this ability to get a strong education, get some good work experience while I was in school, I actually worked for the federal reserve bank in Atlanta, and then they, they significantly reduced my tuition so that when I graduated compared to what it might’ve looked like if I had gone to an Ivy league school up in the Northeast, I was in a much better place financially, still with a really strong degree and a good skill set.

Chris Pratt: Yeah. Okay. So we’re talking about student loans. We say Georgetown university has a ridiculous tuition costs, $25,000. Let’s just say have $50,000 in student loans. I think the average student loan debt is in the 20 to $30,000 range, but let’s just say I have $50,000 in student loans and I just graduated college just generally. And, and, you know, I’m making a, an average salary, like 40, $50,000 a year. What would your advice be for managing that student loan? And I know there are a bunch of different options. You can, if you’re a teacher, you might be able to get forgiveness, but just assuming I can’t get forgiveness, my income is not low enough, really for an income driven repayment plan. I just want to either, you know, maybe make the minimum payment on my loan, or I want to try to pay it off as quickly as possible. What should I do?

Kevin Mahoney: So I don’t want to totally eliminate the income driven repayment plan from this conversation, because I think we find ourselves at an interesting time and in economic history, so to speak, to have this conversation because interest rates are so low that I think what someone might be inclined to do or what they might think or hear from the headlines is I’m going to refinance. I’m going to, you know, whatever loans I have, I’m going to exchange those essentially for loans that have a much lower rate and I’m going to be in the best case scenario I can be in. And in some situations that is indeed true. But one thing that new graduates in particular may overlook is the really strong protections and overall benefits that federal student loans offer that private loans, the loans that you refinance into do not and income driven repayment options are certainly one of those where as life changes for you as the economy changes as there’s a pandemic, for example, and your income is fluctuating. Those protections that the federal government offers specifically the income driven repayment gives you flexibility. So that as your financial situation may be variable, your loan repayment is kind of following suit. Whereas if you refinance into those private loans in most cases, and we’ve seen some exceptions with this in the pandemic, especially early on, but in most cases they just want their payment. It’s much more black and white. You’ve refinanced into, you know, this particular type of loan with this interest rate. You just need to make your payments until that’s paid off. You know, even with low interest rates, that becomes a very challenging situation for some people when they’ve experienced some change in life, either related to a medical emergency or a job loss, what have you. And so having the flexibility that the federal government allows as part of their loans is a value that is often overlooked, um, especially right out of school.

Chris Pratt: Yeah. And so just to clarify, you know, to refinance your loan from a federal loan to a private loan just means that you basically take out a loan with a company, a private company, and you use that loan to pay off the federal student loan. And the reason you would do that is because you’ll get a lower interest rate. So in the long run, assuming everything goes perfectly, you end up paying less interest. But what you’re saying is that there are many pretty common scenarios where you might lose your job, uh, where your pay might get cut or, or you have a medical emergency. What have you, that you won’t be able to pay back that private loan and federal student loans offer more protections for you in those situations. And they can have more advantages. One thing I want to get a little bit more clarity on is, can private student loans. So if I take out a loan from my bank for college, is that still considered a federal loan? Can it be considered a federal loan if it’s done through the FAFSA? I think people get confused about what private loans mean, what federal loans mean.

Kevin Mahoney: Typically when you go through that FAFSA process, the information that you received back after you submitted the FAFSA will be for a variety depending on your specific circumstances. And whether we’re talking about undergrad or later on, if you’re trying to get student loans for grad school, the loans like the Stafford loans and the Grad plus, those are the federal loans. The private loans for many people will come into the picture when you’re trying to fill some gap, or perhaps you’re not eligible for certain types of federal loans, the private loan is typically a separate beast that you’re kind of doing on your own to make sure that you have the funds to pay for schooling or any of the costs associated with that.

Chris Pratt: So even if you take a private student loan, it’s not a refinance, you’re just taking it out to, to fund your college in the first place. It still doesn’t have the same protections as a federal student loan.

Kevin Mahoney: Right. And one other aspect that I think is important to mention here about the federal versus private is with the federal loans. You know, most people may have heard about the concept of loan forgiveness, and that is often in the context of the public service loan forgiveness program, where if you work in certain industries or certain occupations that generally are providing some, some service to the community or the country, your loans may be eligible for forgiveness after doing that work for 10 years. But there’s also a different type of forgiveness where under these income-driven repayment plans, if you make consistent payments for a certain period of time, and it’s typically 20 or 25 years, depending on the repayment plan that you’re in, those loans are also forgiven. And I want to bring this up because in the context of refinancing to a private loan, even if you’re getting that better interest rate, there are many people whose loan balances are high enough that compared to the income they make, it’s going to be a really long time until they can pay off that full loan balance. And in some cases, even with the benefits of the lower rate for a private refinancing, you’d be better off staying in one of those federal income driven repayment plans and planning for the government to forgive whatever balance is remaining after that 20 or 25 year period, just because your income doesn’t really allow you to pay off the loan any sooner than that.

Chris Pratt: Yeah. Another great example is right now because of COVID all federal student loans have had no interest rate, I think, through the end of the year.

Kevin Mahoney: Yep.

Chris Pratt: And that does not apply to private student loans and especially does not apply to refinance private student loans. We were actually looking at SoFi and Splash Financial, uh, and they actually have warnings saying, Hey, if you refinance a federal student loan, you’re going to have to start paying interest a lot sooner than you would if you didn’t. So they’re basically saying don’t refinance us, which I thought was really cool to do as a company, even though they have no real financial interest in doing that. I want to switch gears a little bit from student loan financing. So let’s just assume that alright I figured it out, I’m on my income driven repayment plan or, you know, I make a lot of money. So I was able to pay off my student loans in two or three years, or I just never had student loans to begin with. So I’m debt free. I was smart. I didn’t get credit cards. Or if I did, I paid them all off immediately, no car loans, whatever I’m debt-free. And I want to start investing. If someone came into your office and said, Hey, I want to start investing. Where would you start? What will be the first thing you’d ask them about ?

Kevin Mahoney: The first question I usually ask is about what retirement plan options they have available to them through their employer.

Chris Pratt: You’ll start with retirement?

Kevin Mahoney: So I would typically start with retirement for, for two reasons. One is that a lot of companies, not all, but a lot offer some type of employer match, which means if you contribute a certain amount to the retirement plan provided through your employer, then your employer will match that amount up to a certain point. And so this, in some ways is part of your overall compensation. It’s a benefit to you, that if you don’t take advantage of, because you don’t put in that initial contribution to

Chris Pratt: So you’re leaving free money?

Kevin Mahoney: Yeah. You’re kind of leaving free money on the table, right?

Chris Pratt: Yeah.

Kevin Mahoney: And so, so that’s certainly a, a good reason in and of itself to focus on, you know, this investment account first, but there are also the strongest in many cases, the strongest tax advantages and federal protections in terms of, you know, bankruptcy or creditor access by using these accounts compared to some alternatives. So it’s just a good, solid place to start. There’s certainly maybe reasons, depending on individual circumstances, why other accounts may come into play sooner rather than later. But if nothing else getting that match in your 401k or whatever your retirement plan may be is typically a very good way to start.

Chris Pratt: Yeah. And we’ve talked about 401ks, IRAs, different retirement accounts, why you should invest for retirement on this show. And if you’re not familiar with what those things mean, I highly encourage you. Uh, I don’t care if you’re 20 years old, if you’re 30 years old, 40 years old learn about retirement accounts, what they mean, the tax advantages that they offer and why you should get one. I want to focus a little bit more today on what you actually invest in inside of those retirement accounts or in an individual taxable account, whatever. So for a retirement account, what kind of, uh, uh, investments would you recommend they make actually, before that, I want to mention one thing you are a fee only advisor, correct?

Kevin Mahoney: Yes.

Chris Pratt: So that means that first of all, you act in a fiduciary interest and you also do not make money by selling, investing portfolios or investments in certain products. So you don’t make money by recommending what to invest in.

Kevin Mahoney: Correct. Or insurance or any other type of financial product. Right.

Chris Pratt: Okay, great. So now can you explain… knowing that.. it’s important, right? It’s knowing that..

Kevin Mahoney: Yeah. Let me tell you about this new startup I found that everyone should invest in, right?

Chris Pratt:: Yeah, exactly. So knowing that, can you explain, you know, your rationale for investing what you would recommend young people invest in for retirement? You know, people in their twenties or thirties.

Kevin Mahoney: Yeah. And I, I want to approach this from two different angles. The first is for employer retirement accounts. And then the second is for investments that you would kind of do on your own because both questions come up and the most common decision that I see people make differs for each one. So I want to make sure that we address both of those. In the employer, sponsored retirement accounts. What will typically happen is, you know, when you’re doing the HR stuff or open enrollment time comes around, you will have, it may be in paper form, but you’ll also get online access to this portal where you’ll have to set the amount that you want to contribute. And then you’ll have to pick the, the funds that you want that money to go into. And almost without exception, people have no place, no idea about where they should start. And I don’t, I don’t blame them at all.

A lot of the, the names, the fund names that they see are confusing. They’re typically very few details that go along with them. And so the reason that people pick what they do initially usually does not have a whole lot of information behind it. So one of the most important things to focus on out of the gate is how much you’re paying, what the cost to you is of putting your money in these different funds, because each fund has a different cost associated with it. Essentially all of them have some type of costs, it’s essentially what you’re kind of paying the financial institution behind the fund to kind of put it together and maintain it, but they differ wildly in how much you actually incur in expenses.

Chris Pratt: And when you say fund, do you mean like, like a, like a mutual fund? What is it?

Kevin Mahoney: So a fund is, is the most straightforward example. I’ll use an S&P 500 fund, which is 500 US companies, large companies that a financial institution like Vanguard puts together in a basket to create a mutual fund that is comprised of those companies. So rather than having your money in just Apple or just Amazon, your money is now spread among this basket of companies. So that as one company does poorly your not totally out of money, but at the same time, you, you also don’t just benefit if only one, one or a handful of companies are doing particularly well, you kind of help offset the risk that you’re facing by putting money into these companies to begin with.

Chris Pratt: I’m wondering, okay. So if I’m investing for retirement in a retirement account, an employer retirement account, like a 401k, I have limited options. And so I want to find the lowest expense ratio. I want to invest in like a total market fund or an S&P 500 fund that has a lot of companies in it. That is very well-diversified. And then I can go from there in terms of, you know, if I want to add international markets or, or, or whatever else that might be available. I’m wondering now about if I just want to invest in an individual taxable account, we were talking a little bit before the show about a lot of millennials and Gen Z’ers getting their stimulus checks and investing them in single stocks in Robinhood. And, you know, now Bitcoin is on the climb again. Can you explain a little bit about that risk of investing in individual stocks outside of retirement, and how you should manage that in terms of investing just outside of enticement, outside of retirement? Like, I just want to make, you know, I have a thousand bucks, I want to turn that into 10,000 bucks in the next year. You know, what would you say to me if I, if I said that to you?

Kevin Mahoney: Yeah. So there’s a lot to unpack there. Let me hone in on one thing you said about…

Chris Pratt: It’s a loaded question, right?

Kevin Mahoney: Yeah. Well, there are so many things I want to talk about, um, when, when you mentioned, you know, alright for the employer provided account, you know, total stock market, something like that, that’s hitting on a really key point in this conversation. I think because there are ways to make your investment portfolio, whether it’s retirement or non-retirement more complicated and have more pieces to it. And at some points in life and at, at a certain place where you have more knowledge or more comfort with all of this, that can make sense. But I imagine for a lot of people who are listening to this, the key is not to get bogged down in different parts of the economy or the US versus the world.

And it’s about having one, two or three investments that capture, that puts some, some of your money in as many different companies and types of companies and parts of the economy as possible. And so before we completely jumped to the, you know, kind of investing on your own thing, another example of this in the employer provided accounts is the target date funds. And these are similar. They’re pretty common across 401k’s at this point where it’ll have this list of what they call target date funds. And there will be different years at the end of them. And those years are related to when you would be expected to retire based on a typical retirement age of let’s say 65. And that’s a good way, you know, similar to just investing in a fund that’s, that’s called total stock market or something that really encompasses a large part of the global economy.

These target date funds are another way of, in a very simple step, making sure that your money is spread widely around and is invested in such a way that it aligns with your timeline, that you’re not going to use this money in five years, you’re going to use this money in 30 years, most likely.

Chris Pratt: Right.

Kevin Mahoney: And so I think Chris, unless you want to jump in here, I think that’s a good segway to the individual investing conversation too, where if you’re talking about individual stocks compared to something like a total stock market index fund, or even a target date fund, you’re doing the opposite of what I just described and making sure that your money is spread so widely that on the whole over time, you’re going to benefit. The opposite of that is true in the majority of cases with the individual stocks, where you’re putting so much faith in one company’s products or services, and the people running that company, that sure, in some, in some rare examples, and, you know, unfortunately these are the types of examples that often generate the most headlines. You could make a lot of money very quickly, but the odds of that happening are pretty slim. It’s not that different from, from going to Vegas and playing the casinos or betting on a couple of NFL games over the weekend. Like you could get lucky and you could make some good money, but if you’re truly trying to maximize your wealth over the long term and make sure that you’re set up for whatever goals you may have, you know, now, or in the years ahead. And then for later in life, that’s not the game you want to play with this particular type of money.

Chris Pratt: So I’m glad you said that. So it’s essentially like gambling, but here’s the thing that I think catches a lot of people up. They feel like it’s not gambling because they feel like they’re smarter than everyone else. And they’ve done their research on this company and they think they have an edge on other people and they just are getting in really cheap. And so they think that they’re going to win big because they’re smart. Whereas, you know, if you play slots in Vegas, you know, there’s no skill to that, right? If you play some poker, there’s, there’s some skill to it. Blackjack is, is set up for you to lose. But I think where people get caught up is they think that they can outsmart every other investor that’s investing in those stocks, get a good deal and make a ton of money that way. What do you think about that?

Kevin Mahoney: The closest comparison to that thinking, going back to the Vegas and the sports betting examples is, you know, probably like you said, poker, and even just odds makers in Vegas for sporting events, where these are people, if you think of professional poker players or are those odds makers whose jobs it is who spend all of their professional time and maybe some personal time as well, researching these things, talking to people in these industries, they have the technology to support this research and they often don’t get it right. And so if you compare yourself to those people and you know, the other demands on your time, you probably have a job in a different field than this. It’s just, it’s very difficult to imagine a scenario where consistently and a big part of this is consistency, because anyone can get lucky once or anyone can, you know, make a decision based on some research that they did.

And think that the reason they got it right, is because of the work that they did while discounting the fact that other factors including luck may have been at play. So the big thing to emphasize here is, can you do that consistently? And when you’re at such a disadvantage, whether with technology or time or access to resources, compared to the people who do this for a living and even they struggle to get it right, then it really starts to, you know, the argument really starts to fall apart that I know I can do this well, or I can do this better than these other people who are also trying to do it.

Chris Pratt: Okay. Yeah. That’s great. We’re out of time, the last couple things I’ll say with respect to cryptocurrency that you can’t do research on cryptocurrency. Bitcoin, especially, is entirely speculative. It’s basically just gambling. If you want to gamble, just do it with a very small inconsequential amount of money. And you’ll probably learn why you shouldn’t do it with a large amount of money by doing it with a small amount. And then the last thing I’ll say, uh, that I think kind of adds on to what you just mentioned is that index funds outperformed, so these total market funds, S&P 500 funds, index funds, outperform individual professional investors who do this for a living full time. I think it’s anywhere from 80 to 90% of the time. And an index fund is very simple. You just invest in it once and forget about it. You can set up recurring investments and it’s going to outperform a professional individual investor, the vast majority of the time.

So the odds of it outperforming you are very, very high. So I encourage you to invest in index funds. Thank you so much for the time, Kevin. I highly encourage you guys to check him out, check out his website, uh, schedule some time with him, his website is Illumintfc.com. That’s I L L U M I N T F C .com. You can also find him on Instagram @illumint I L L U M I N T. There you go. I got it. Right. Thanks again for coming on, Kevin. Have a great day.

Kevin Mahoney: I appreciate it, you too.

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