The lessons I have learned over the years, as much from doing wrong as reading, boil down to a few key points. Remember this is all my opinion. I am not a financial advisor. My purpose is to give you ideas to think about and consider, then you should decide when and if you should see a financial advisor. You just don’t want to go into a conversation with one cold. You will get more out of conversations with an advisor if you have done some homework first.I must add that Motley Fool agrees with me for the most part.
- Pay down your debt. Ideally become debt free except perhaps car or home loans
- Make an emergency fund
- Save for retirement. Don’t skip out on company matches if yours offers it
- Save for intermediate term expenses like cars or car repairs, furnature, home repair, etc
Each of those things I can go further into detail about, but I will add one more important point. Find a lot of good blogs, and get some ideas. I will also recommend this book as it is the best short primer on investing I have yet to come across.
Paying down your debt is important. All of the reading I have come across says that you should do that first. The warning is that you still need an emergency fund, so try to balance the two. It makes sense to pay down that debt, as long as you are talking about high interest debt; credit card. Home mortgages get special credit on your tax returns, the 2018 tax law hurts us in the expensive areas of the US, but most of the deduction for most people nation wide keep it or most of it. Mortgage rates are fluctuating, so watch it closely. If you have a low mortgage rate, it may not make sense to pay off your mortgage early, even while it does make sense to pay off your other debt early. The thing you have to decide here is what’s worse, having the debt or investing the money you would pay down the debt with. Not everyone agrees with me on this one, so please consider this carefully.
Let me give you a scenario, you have a mortgage loan at 3%. The market is earning say 6-8%, and with a low cost index fund, you’ll keep most of that; 5.8% to 7.8%. That’s a 2.8-4.8% gain you are missing out if you pay down that mortgage early. In any given year, the stock market can gain or lose 50% or more, but over time the market tends to grow. The rule of thumb is if you need the money in 5 to 7 years, don’t put it in the market. Most people hedge their bets by putting some in the stock market, increasing risk and potential for greater returns.
Ok, so while you are focusing on paying down that credit card debt, I suggest that you start building an emergency fund. Well, how big should that fund be, and where should you put it. Depending on your situation, the advice I have read suggests anywhere from 3 months to 12 months expenses. My rent plus insurance and car payments and food, and so on all adds up to X. When I was single amd young, I kept only 3 months. Now, with a wife, a home, and a young son, we feel comfortable with 12 months in cash or cash like items. Use your judgement.
Cash loses value due to inflation. Few cash like investments are indexed to inflation. US government series I bonds are, but you can only $10,000 of them per year. You can put an additional $5,000 from your tax return in them if you wish. (I just learned that, and plan on doing it this year.) So some of our funds are in those bonds since the government adjusts the rates on them twice a year to make them at or above the inflation rate.
We also have some 4 week t-bills. Generally they are a little above the best online savings account rates. I know they sound complicated, but its just another option on the US Treasury department’s website. Its the same place you buy I bonds. Now whereas you can cash out of your bonds at any time, t-bills are locked in for the duration. We put a quarter of the amount of cash we set for that location in to t-bills each week for 4 weeks, so that each week we can get up to a quarter of the money out. They allow you to let it roll over each month for 2 years, so you don’t have to mess with it. Lastly, we have a chunk of out emergency funds in high yield savings accounts in case we need it.
Now I have neglected to say how much of each option is in each location for a good reason. We have never sat down and thought about it carefully. In writing this, I realize we need to. I will update this when we have done it.
Once the high interest debt and emergency funds are squared away, its time to consider retirement amd medium term savings. If your company offers a 401k or 403b match, then you really need to consider funding that while you pay down your debt and build that emergency fund. Again, you have to choose the right way for you. For me, I did all 3 at once. My wife was smarter and never got into debt.
Once you have any match covered, for the company I work for, it’s 4%, then you have to decide the hard stuff. At this point a financial advisor really is a good idea. I will lay out your options, and tell you what we did.
There are a lot of tax considerations as to which option is optimized for your specific case. IRAs are better than 401ks in that you have total control. 401ks have higher contribution limits. I found a good summary on Charles Schwab’s website. What my wife and I did was to contribute to the one or both that made the most sense at the time of our investment, and adjusted that over time. So we both have traditional and Roth IRA amd 401k accounts; literally all 4.
You might be thinking, “just tell me something”. When I was younger I liked Roth accounts for the earnings are not taxed. As I aged, I preferred the traditional accounts for the tax benefits now. My income has gone up considerably from my military days earning $20,000 a year, and that is another reason the traditional accounts tax savings matter.
In my learning links area, I have more suggestions of what to read to get better at this, but again, a financial advisor is an expert in this stuff for a reason.
This is where I got until a few years ago when I got the idea about FIRE. I think having a kid was a factor in that. I want to spend more time with him.
Now the idea is how to save more, to retire sooner, and still do the things we want to do. This is the tricky part.
A GenXer's Journey to FIRE 