Finance

Lost in a sea of money sacks?

During my senior year of college, I read two financial books, and when the stock market crashed during the 2020 Covid pandemic, I seized the opportunity to open my first investment accounts with E*Trade and Vanguard. Since then, I’ve consistently invested and have seen 20% returns. After years of trial and error, I’ve developed an automated strategy, and now I want to share what I’ve learned on the path to financial freedom.

1. Savings: I store the majority of my cash in a Vangaurd Money Market Account (VFMXX) pulling 5.3% APY

2. Retirement: Before recieving a paycheck I recommend 10-15% is allocated to your 401(K) and ~1% to your HSA

   1. Fidelity holds my Roth 401(K) and Roth IRA. For the first time investor, use target date funds which usually carry slightly higher expense ratios. I diversify for more gains which also brings on more risk. Here are the percent allocations:

      1. Target date 2060 (35%), S&P 500 index (35%), International index (25%), Russell 2000 (5%)

   2. I recommend maxing out your HSA to reduce your taxable income. S&P 500 index funds are great or you can diversify like my 401(K)

3. Spending: 75% of my net paycheck is allocated to an account at Wells Fargo for rent and credit cards. I keep less than $10,000 in this checking, enough to automatically pay bills without needing any attention

   1. Rent is paid using BILT Mastercard (1%). Daily use cards are split between Amex Gold (4%), Chase Saphire (1.5%), Amazon (5% Amazon only), and United Explorer (Travel)

   2. Pro tip - Federal law requires each of the three nationwide consumer credit reporting companies - Equifax, Experian and TransUnion - to give you a free credit report every 12 months. Use Free Annual Credit Report to ensure your in a high-accurate credit position

4. Investing: 24% of my net goes to Chase bank connected to investments acounts at Vanguard and E*Trade

   1. 90% of the money is typically invested in Vangaurd ETFs. Examples below:

      1. 75% Total stock market ETFs: VOO (US stock market), VT (Total stock market), VXUS (International)

      2. 25% Sector ETFs: VFH (Financials), VDE (Energy), VWO (Emerging) 

   2. E*trade is where I invest in stocks I either have knowledge on or believe in

      1. Examples: Microsoft (MSFT), Palantir (PLTR), United (UAL), Walmart (WMT), Apple (AAPL)

      2. I do not recommend individual stocks for the average investor. Stick with index funds, however, reading analyst projections can give you a better understanding of the market outlook

5. Cash: 1% of my net goes into my savings account at Sofi pulling 4.5% to keep the account active

6. Risk: I have a few funds that include crypto currency and aggresive new stocks. You may think of other categories like real estate

   1. I recommend investing in crypto funds like FBTC or FETH because it's tethered to an institution for more stability

These are the primary categories, and once they’re in place, you’ll have a solid financial foundation. First, focus on building an emergency fund, paying off credit card debt, and investing in a retirement account. From there, invest in ETFs and watch your wealth grow. The key is to automate the process as much as possible. Then either increase your income or keep your spending (burn rate) low. My current breakdown is 45% retirement, 30% cash, 15% ETFs, and 10% stocks, though I’m actively working to increase my allocation in ETFs.

Emergency savings

• • It's a good idea to have at least 3 months of your living expenses in cash (or similar). For example, a good number could be around $15,000 to target

  • Consider using a high yield savings account or money market fund for your emergency savings. My advice is to use whichever account has an opening promotion and high APY that's FDIC insured. Here are a few options to research:

    • Sofi (Hight Interest Savings Account FDIC insured. Use that link for an additional sign-up bonus)

    • Bankrate (High Interest Saving Accounts Review. FDIC insured)

    • Vanguard (Money Market Funds. Not FDIC insured)

    • Charles Schwab (Money Market Funds. Not FDIC insured)

  • I suggest that you start by picking a monthly savings target (maybe 5-15% of your take home pay) and try to automate that money going into savings/investing each month. Whatever is leftover is what you should use to budget for needs and wants.

Saving vs. investing

• • In general, if you have planned expenses within 2-3 years it might still make sense to use a savings account or money market fund (see above). Before you decide to invest too much of your savings it would be a good idea to fine tune your budget. Still, it doesn't hurt to move more of that into the money market fund since it earns more interest than your checking accounts.

  • Any longer term goal could potentially be invested, but the mix of stocks, bonds, cash will depend on your risk tolerance and the time until you need the money. 

    • This Vanguard resource helps to show the risk/reward of different allocations of stocks / bonds. 

    • Resources from Vanguard and Fidelity that will help you build a "model portfolio". Just keep in mind that these are only examples of funds that you might consider, but either option keep things relatively straightforward and low cost.

    • Alternatively, if you want more assistance with the ongoing management of your investments then a robo-advisor could be worth considering...just keep in mind that typically there is an added cost.

    • Vangaurd provides market perspectives so you can guage 10-year outlooks on areas you want to invest in 

Investing

• • • Simple investment principles. Remember, you are not looking for the perfect investment, but rather one that aligns with your intentions and objectives. Purpose determines placement so start with a behavioral finance framework. As you begin to invest keep in mind what your objective is with those funds and your time horizon for accomplishing that. Look for companies that you use, are familiar with and feel good about. If you do that, you are less susceptible to emotional investing (getting in and out of the market and second guessing your decisions). You can also research any of the ETF's on Yahoo Finance. You can use the Chart Function on the left side menu and then the comparison tool if you want to compare some of the positions you are considering. Buying positions or funds that invest in companies that you know, use and trust will serve you well.

  • If your target retirement and index funds are both low cost, the main decision for you to consider is how much control do you want over the asset allocation. For example, the most aggressive allocation for most target retirement funds is around 90% stocks. If you were comfortable with more risk, then you could create your own custom portfolio using a higher stock percentage (or less stock if you didn't want as much risk as a target retirement fund)

  • This resource from Vanguard does a good job of showing the relative risk vs. reward for various allocations of stocks/bonds

Taxes

• There are various types of taxes: federal, state, FICA (Social Security and Medicare), and local taxes.

  • Federal taxes are based on where your taxable income falls within the tax bracket associated with your filing status (ie: "single" vs. "head of household")

  • FICA Taxes is comprised of social security and medicare. FICA has a flat tax rate of 7.65% of your ordinary income.

    • Your income is subject to social security taxes for earnings in 2024 up to $168,600 - any earnings in the calendar year above this amount will not be subject to social security taxes. 

    • Employers must withhold an additional .09% for Medicare taxes on any earned income above $200k (amount specific to 2024)

• Capital gains taxes and strategies like tax-loss harvesting.

  • Capital gains taxes is associated with selling investments at a gain.

    • The difference between your cost-basis (what you paid for the investment) and the sale price (what you later sold the investment for) is known as capital gain or capital loss.

    • If you've held your investment for over one year from the date of purchase, the gain is subject to favorable long-term capital gain rates... generally ~15% for those earning less than ~$500k a year.

    • If you hold then sell your investments for less than a year (365 days or less) the gain is subject to short-term capital gains taxes - which is the same rate applied to your ordinary income.

    • If you sell an investment at a loss, no tax liability will be due. 

    • You are able to reduce your capital gains with capital losses in a given year. And reduce your ordinary income by up to $3k from capital gain losses. If you have more than $3k in capital losses after reducing your ordinary income, you can carry the remaining losses to reduce your income into future tax years.

• Real estate investing and associated tax benefits/considerations

  • Rental properties are not taxed in the same way your earned income is.

  • Generally, you pay taxes on the net income of the rental property.

  • If you are an "active participant" in managing the property, rental losses may reduce W2 earned income.

  • You may also be able to depreciate the property, offering more tax savings. But you'd want to work with a CPA to ensure your plan properly to avoid owing taxes in the future if you decide to sell the property