A Brief Primer on Saving and Investing

Disclaimer

This post represents my personal opinions. I am not a financial, accounting, or tax professional. This is not investment or tax advice. You should consult your financial or tax professional for specific advice.

It Doesn’t Have to be This Hard

Over the years, I’ve had a number of conversations with friends and family about saving and investing. I’ve found most people hate dealing with saving and investing, but personally, I really enjoy it. I may as well embrace my personal quirks and share this in the event others might find it useful!

For whatever reason, it’s taboo in our society (or at least the culture I grew up in) to discuss personal finances, and frankly, I think that leaves us all worse off. While my family was responsible with money, we typically did not discuss things like salary, mortgage payments, 401(k)s, etc. Many of these would be much less intimidating if everyone discussed them openly. Instead, we each struggle through them on our own, often making completely avoidable mistakes.

One Easy Trick

While it’s easy to get overwhelmed trying to pick the right strategy or investments, the important thing to remember is this:

At the end of the day, the most important step is to actually save money.

Most people don’t even do that. They spend every dollar they earn (or more).

Steps to Follow

Assuming you have money left over in your budget to save, I would suggest the following:

1. Pay off all non-mortgage debt, starting with the highest interest rate balances first.
2. Once debt is eliminated, build up an emergency fund. A common recommendation is somewhere between 3-12 months of living expenses.
3. Determine your risk tolerance (there are various quizzes online to help with this, e.g. Vanguard.
4. Develop some familiarity with asset allocation and modern portfolio theory.
5. Choose an investment strategy and target asset allocation you are comfortable with.
6. Minimize the fees and expense ratios on the investments you purchase.
7. Infrequently (annually, or possibly quarterly) check your investments and re-balance back your target asset allocation.

Regarding #6, you can’t predict the markets, but you can control your costs. A 7% return with 0.15% expenses is better than an 8% return with 2% expenses.

Regarding #7, if your target asset allocation is 70% stocks and 30% bonds and upon checking your investments, stocks are up to 80% and bonds are down to 20%, you sell stocks and buy bonds to get back to 70% and 30%.

Accounts to Use

Personally, I prioritize my investment dollars like this:

1. Employer-sponsored retirement plan up to any employer match
2. Roth IRA
3. Traditional 401(k) until maxed out
4. Other savings vehicles/investments (e.g. taxable brokerage accounts, paying off a mortgage early, rental real estate, etc.)

Always Take the Match!

Whatever you choose to do, put at least enough into any account where your employer provides matching contributions in order to get the full match available, if your employer has one. It’s free money! Or put another way, it’s a guaranteed 25%, 50%, or even 100% return, depending on the matching percentage.

Don’t Panic

Now the less-fun part. We’ve seen two 40+% drops in the stock market in the last 20 years. It can be very difficult to continue investing when your portfolio is plummeting. This is actually the reason most people are unsuccessful investors. They panic and sell when the market drops and buy when it it is doing well, which means they sell low and buy high instead of buying low and selling high. This is also the reason I would suggest checking a portfolio infrequently. It takes a tremendous amount of discipline to not make impulsive decisions if you are checking every day.

How Much to Save

If you’re not sure how much to save, I recommend the following article discussing savings rates vs. time to financial independence, i.e. the crossover point where your investments generate more returns than your ongoing expenses: MMM on ER math.

WARNING: The linked blog is written by an engineer who retired from his software engineering job at 31 to spend more time with his family. His perspective is heavily weighted towards early retirement, and his writing style rubs some people the wrong way. Nevertheless, the math is sound, and he presents the data much more succinctly than I could.

Ask Me Anything

I enjoy discussing all things personal finance/saving/investing related, so feel free to shoot me a message if you have any comments or questions. You’ll probably make my day!