Make your money do work
Note: This is a departure from blogging about tech and programming for a bit. This is a topic I am becoming obsessed with and wanted to share a few things. Enjoy!
The biggest lesson I missed when I was younger was how to make more money. I don’t mean that in the sense of jumping jobs every two years or anything like that. I mean in an investment sense. Unfortuantely, I was never really told what an IRA was, just that I needed one. 401k, REIT, Financial Independence and so much more was never talked about. Not in schools, home, or anywhere else I could access. Sure I could have gone online but back then it was more about getting online to get music off Napster or something. Thanks in part to Reddit (ya, Ive heard its a shithole, but if you contain it, its not terrible) I stumbled on to the personal finance subreddit, and like dominos I was in both the financial independence and learn financial independence/retire early section and have just had an awaken. Hopefully this knowledge helps others now.
The best time to start investing was 20 years ago, the second best time is today.
This post will be an exploration into a few things I’ve learned. They are:
- Different types of investment/retirement accounts
- Ways outside of stocks to make your money work for you
- Tools to help you manage all of this.
The biggest lesson though is this: make your money work for you. Just about everyone here in America has a checking account and a savings account. Both are great! You probably get your check from work directly deposited into your bank account on a schedule (every other Friday or the 15th and last day of the month) and its kind of like Christmas when you see your accounts rise. If you do nothing with this money besides let it sit there, you may gain anywhere from 0.01% interest to 1% interest average savings rates for 2018 here. So if our savings account has $50,000 and you do nothing, you will earn an additional $500 if you have an interest rate at 1%. Not bad, but can it be better? Absolutely. We can go to somewhere like Betterment ref link which using some nifty mathematics and invests your money for you. I love Betterment, I have been using it for years now and have zero complaints. Betterment has routinely turned out anywhere from 4% to 20% return based on the market. Even 2% more gets you more return for your money then your savings account.
A savings account is great when you need some rainy day funds to make you feel comfortable, but lesson one: move your money to an investment account. A Roth IRA, Traditional IRA, basic Investment account more. Let your money reinvest on itself with your dividend earnings. Betterment will pick out a portfolio for you based on your sense of risk. You stand to make more money with a higher risk profile, but you also stand to lose more. Its gambling, plain and simple. But if you are young (under 40), you can be risky for a while for the idea of more money. I have now have 3 different Betterment funds going: my retirement set up, which includes a Roth IRA, Traditional IRA, and Individual Taxable Account which are all set at a high risk portfolio. I also have an emergency fund account now. I will talk more about this in a minute but I think this has been a great idea. I just opened an account this morning for purchases. Will it be a house, car, bike, or travel? Who knows! But I have an auto deposit set up just to throw extra money in there and let it make me more money while I decide. In 5 years, the target of the account, I will see where I am and adjust. Maybe I will get that guitar I’ve always wanted… the Black Beauty that Jimmy Page played and had stolen. Black with gold hardware and a Bigsby. That thing sounds beautiful.
You might wonder though, is having my emergency fund in stocks risky? Absolutely. Thats why I keep some money in my savings account just ready to go if something were to happen to me. Fortunatey, I had pretty great benefits at work, so this will be more for if something happens to my car. The emergency fund I have in Betterment and am actively and aggressively growing is for if shit hits the fan somehow. My goal for the Betterment emergency fund is grow it to have enough money to live with little change for 6 months. This is all happening as Im aggressively paying down debt too. Another thing we will explore. But back to the emergency fund idea, our jobs in tech are not permanent. What seems like a good thing today can go bust tomorrow. Thats the harsh reality. There are things you can do to be ahead of it (keep an updated resume ready to go, network as often as you can, freelance a little, build a side project that makes a little bit of money), but at some point something will change and you need to be ready. How ready is up to you, I draw my numbers based on a) my budget and my lifestyle (super lavish let me tell you) and b) experiences I and others have had. I have a great friend who was my former boss at a start up. Said start up when bust and we all scrambled. Fortuantely, I got picked up quick but he was not so lucky. It took him 5 months to find something. Fortunately his wife was working and they had saved up money in order to get through, but this is what gives me my motivation. It causes stress, it causes frustration. No one is entitled to a job so might as well be prepared. Once I hit the 6 month mark of having money ready to go, I will turn around and aim for a year, 2 years even. Its nice to have what is often to referred to as “fuck you money”. The reason its called that is it gives you the confidence to leave a job when it goes south and not have to worry. But why stop there? If its in an investment account, it sits and just makes more money. Every $100 I send to Betterment for this account is gonna get me between $4 and $10 dollars. So if I put an initial $1000 in, Im looking at $40 to $100 back. Not great, but not bad. Im not planning on getting fired or quitting, so I can just let it ride and enjoy my time working.
IRA, REIT, WTF
According to Rothira.com, there are a few differences between a Roth IRA and Traditional IRA. One big one is that with a traditional IRA, you are required to take the money at 70.5 years of age, regardless if you need it. Roth IRAs are not required to be disbursed. I didn’t know that, but it makes sense. Some quick math: if I max out the Traditional IRA at $6,500, in just 20 years when Im 50 (thats weird to say), my IRA without doing any adjustments for the market or what stocks/bonds I own will be worth around $130,000. If this money just sat in my savings account, I look at something significantly less. The math is winning, and I hate math. The Roth IRA has the same rules on how much you can contribute ($5,500; $6,500, if age 50 or older) but also has some rules about being able to withdraw for first time home buyers. Another thing to look into investing with is REIT, or Real Estate Investment Trusts. These “… are companies that own or finance income-producing real estate in a range of property sectors.” Its a lot easier to invest in this form of property investings rather then owning multiple houses. Is it the same in terms of return on investment? Im not totally sure. I view it like this though, if I want to own multiple houses, I have to maintain multiple houses. And in my currentl situation I have grown to have a serious moral and ethical dilemma with regards to non-resident short term rentals (ask me about it sometime). With REITs, I am just putting money in a trust and letting people who want to mow grasses, trim hedges, maintain houses and more do it. It seems perfect for me, but it may not be for you! Some people love farming, I prefer living in a city. It is what makes us all great. I just have zero desire to buy a lawn mower. A band saw maybe but not a lawn mower.
Tools to use
As someone on the web all day, it makes sense to have tools that I can easily access and see how I am doing. Mint.com is great for a quick overview. Just plug in your accounts and passwords and Mint is a one stop shop when it comes to looking at your financial health. Another tool I enjoy using is Personal Capital which focuses more on your investment health. These two tools together can give you a lot of knowledge. But if you want to budget, what is right for that? We didn’t talk budgeting much, but one tool I love is You Need A Budget. It follows the principle of envelope budgeting, where you would take all your money and put it in envelopes designed to curb spending and make you think you have already allocated and spent the money. Its worth the $50 I spend a year on it. I think there is a whole post I can write about budgeting and financial deep diving but even just establishing a simple budget will let you find money you had no idea was there or curb some spending. Like I said earlier, Betterment is my choice of investment platform. Ive tried Scottrade and TDAmeritrade, but I just love Betterment. It is simple, clear to the point and no frills. I use Robinhood but thats just play money, I dont expect anything to happen with those stocks it is just for me to put some money in companies I believe in and hope it works out.
I hope this may have cleared up a few things that you may not have known are out there for ways to make your money work for you. In the coming weeks, I wanna deep dive a few things surrounding this. If you have ideas, just leave a comment!
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