The summer recently slipped away from my appreciative hands. I experienced a wealth of change that lead to the pause in writing.
Got engaged to a bomb-ass lady in May. Then enjoyed job growth over the summer that led to a promotion in August. Traveled to Prague in September. Attend the adult summer camp that is the Austin City Limits festival in early October (thank you Lizzo, Billie Eilish, and Childish Gambino for the fun!). And quite a bit more in between kept me busy.
I lagged in listening to my financial podcasts, reading financial literature, and researching how to better invest. But with the beginning of fall I caught up and now feel back on my financial track and comfortable writing again.
Even with my summer activities, I continued to spend less than what I earned, stocked money away in my 401K and Roth IRA, and kept building up an emergency fund. I never stopped balancing my financial goals with my living goals.
What fun would life be right now if I saved everything and did nothing or in the future if did everything and saved nothing?
I have five key vehicles of saving with a sixth coming soon: (1) Traditional 401K, (2) Roth IRA, (3) Health savings account, (4) High interest savings account, (5) Low interest savings account for the short term, and soon (6) Investment account.
Vehicle One: Traditional IRA
My traditional 401K has money pulled from my paycheck prior to income taxes being taken out (thus lowering my current taxable amount and saving me money) and being placed into four index funds: (1) US large cap stocks, (2) US mid-cap stocks, (3) US small cap stocks, and (4) foreign stocks.
Note: Large, mid and small cap reference the size of the company if someone decided to buy all the stocks available for the current stock price. For instance, Amazon would be a large cap costing $880 billion and Etsy would be a small to mid-cap at almost $7 billion.
Each year I can put up to $19 thousand into my traditional 401K. This process of putting money into the 401K account each paycheck and buying the same index funds is called dollar cost averaging. The simple idea is that if I place the same amount of money in the account each month then I will buy more of the index fund when the index fund’s price is lower, and less of the index fund when the price is higher. Exactly what you want to do in the market. This constitutes my investment and savings foundation… automatic and emotionless with a great consistent growth potential.
Vehicle Two: Roth IRA
My Roth IRA enters the investment picture by allowing me to store up to $6 thousand of after-tax money that can grow tax free and be taken out of the account in retirement tax free. There are some qualifications to this account like your level of income and what age you begin taking out money, but I will pull any levers I can to save money, even if miniscule.
My Roth IRA will be my stock picking account. Semiannually on December 1st and May 1st, I will research and choose my favorite stocks, holding them for a minimum of 6 years (unless there is a drastic change in the business model or within the company that impacts my investment thesis or challenges my value system) and grade them against the returns of the S&P 500. Stay tuned for my first set of 10 must-have stocks on December 1, 2019. Then on May 1, 2020 I will review the December 1st stocks and pick my new 10 must-have stocks. This constitutes my investment and savings driver, risky but thoroughly researched with a potential for market beating returns.
Helpful News Flash: The recent elimination of transaction fees for the purchase of a share of stock have opened a whole new world of investing for me. In the past I would not be able to purchase 10 stocks without incurring almost $100 in fees. Or if I wanted to buy stocks in tranches (purchasing 10 stocks one month and 10 stocks the next month), then those transaction costs would rise dramatically and eat into my potential for growth. The elimination of transactions fees has been an amazing recent development. Time to take advantage.
Vehicle Three: Health savings account
Due to my $5 thousand medical deductible, I am allowed a Health Savings Account where I can put in pre-tax money (up to $3.6 thousand) and use it for medical expenses. I have used this pre-tax money to pay for an eye infection, stitches in my hand, contact lenses, and other medical supplies that qualify. What money I don’t use can also be invested in index funds. My plan is to grow this account over time so that my medical expenses are covered in retirement, thus saving the 22% I would have used on taxes.
Vehicle Four: High interest savings account
For my Emergency Fund, I have chosen to open a high interest savings account that currently offers me 2% interest, thus offsetting inflation (the year to year increase in the price of goods and services). My goal is to initially build up a 6-month emergency fund over the next year and then a 1-year emergency fund over the coming years (hopefully never having to use it). My fiancé and I have also transferred our wedding funds to this type of savings account to accrue interest until we pay the vendors. This account will also be useful for larger purchases that will take time to accumulate like a car or a house down payment. In the meantime, those funds can accrue some interest until they are needed.
Highlight: Do no invest short term money in the stock market. I consider things short term if they are needed in the next 3 years. The market has a funny tendency of swinging wildly in the short term. In most of the stock market drops since 1950, the market recovers in a year, but recently we have had two drops, one in 2000 and one in 2008, where it took the stock market 8 and 6 years respectively to recover.
Vehicle Five: Low interest savings account
And finally, I have a low interest savings account for small needs. I use this account to save for my next vacation, to offset a quick car repair, or to cover a month when I had a few more activities than normal.
Vehicle Six (Coming Soon): Investment account
As the major wedding expenses dwindle and my salary grows over time, I will add a sixth form of saving with an investment account. This account is not sheltered from taxes, but it will allow me to invest in more companies. And I can minimize my tax expenses if I hold the stocks for greater than one year, since I will only be taxed 15% (my taxable income is between $39,375 and $434,550) on the profits of the stock. For instance, if I bought a stock at $10 and sold it a year and a day later at $30, then I would only be taxed $3, pocketing $17 of profit and recouping my initial $10 investment (Taxes = [$30 – $10] * 15% or $3). Not too shabby.
Having each of these accounts helps me enjoy the process of saving more and more because I can put my money to work in a variety of ways. Recently on a Motley Fool podcast mailbag episode, one of the comments had a quote that said something like “There are only three ways to make money. You can make money with (1) your hands, (2) your mind, and (3) your money.” I want to make sure I am accomplishing all three each day. Make that your goal too!
Upcoming: On December 1st I will publish my first set of 10 Must-Have Stocks, along with the ground rules for how to I will purchase and grade them versus the S&P 500. In the mean time I have a few articles in the works to bridge the gap.