How To Manage Personal Finances Book: Chapter 13- A Dog Groomer’s Fortune and Mutual Fund Investing Options
Author’s Note:
I am posting a text version of this entire book on Substack, and video versions on YouTube. Email ken@stltest.net for details on my 5th book’s publishing date in late ’24 or early ’25.
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I think my dog groomer is making a fortune.
The building is less than 1,000 square feet, and it’s always busy. I’ve been taking dogs to this groomer for 20 years, and I’ve never seen a slow day.
I think I know why.
Customers know what they’re getting. The staff is very clear about what they can do and (more importantly) what they can’t do.
If you think your dog is going to compete in the Westminster Dog Show, you probably need to take Princess Caroline somewhere else.
Clarity. It’s something that investors don’t always have.
Did you hear these comments during tax season?
“You need to open a retirement account so you can take the deduction on your tax return.”
“Do you have a 1099-DIV for the dividend you were paid on the IBM stock?”
Completing your tax return is tough enough- then tax preparers and investment advisors throw in these other questions.
Mutual funds can be particularly confusing.
What investments are in my mutual fund? Do I have to pay taxes each year? If I sell the fund, what is the tax impact?
To clear up these issues, I’ll use the The Box, the Bag, and the Wrapper Analogy.
Your Amazon shipment
Ok, let’s assume that you get a box from Amazon. Inside the box are 10 bags, and each bag contains individually wrapped pieces of candy.
Got it?
The Box: The Type of Investment Account
The box is the type of brokerage account that you use the purchase the mutual fund. Generally speaking, there are two types:
Taxable account: The interest on bonds, dividends on stock, and capital gains or losses are reported on your tax return each year.
Retirement account: The most common retirement account is a 401(k) account through your employer, and you can set up other types of retirement accounts if you’re self-employed. The tax impact of interest, dividends, and capital gains and losses is deferred. There is no tax impact until you withdraw funds at retirement.
401(k) retirement accounts include contributions from your employer that are not taxed until retirement. Other retirement plans tax the contributions before you invest.
The Bag: The Mutual Fund
Inside the box (the account) may be one or more mutual fund investments. For example, Washington Mutual is a fund that invests in U.S. equities (common stock).
To diversity investment risk, your account may include different types of mutual funds, including stock funds, bond funds, and balanced funds (that invest in both stocks and bonds).
The Wrappers: The Fund Investments
A bag (mutual fund) may own dozens — or hundreds — of individual stocks and bonds (candy wrappers).
Washington Mutual owns dozens of stocks in a variety of industries. As of this writing, the fund owns shares in 188 different stocks.
Clearing up tax confusion
If your box is a taxable account, you can expect to receive tax documents that report interest income, dividend income, and possibly capital gains and losses each year. If the box is a retirement account, the tax impact is deferred until you sell the investment.
If your mutual fund buys and sells stocks in a taxable account, there will be a tax impact. Stock or bond sales in a retirement plan do not impact your taxes until you withdraw funds.
Keep this example in mind as you start to invest.