So Pat scours the internet, absorbing as much as she can about investing, retirement accounts, tax-efficient investing strategies, vegan crypto currencies, solar-powered metaverse real estate, edible NFTs, and so much more. We’ll keep it extremely goodanuff and simple here and summarize 85% of what Pat took away from this extensive deep dive into the world of investing. Note: If you are not familiar at all with investing, the information below may be too surface level for you – watch a quick video about the stock market and investing to get your footing. In short, investing is going to a website (Vanguard, Fidelity, Schwab, etc.), making an account, and regularly/automatically buying an index fund with money from your checkings account. An index fund is made up of many companies. When you buy one of these funds, you own a little piece of every one of these companies. For example, The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of the 500 largest companies listed on stock exchanges in the United States. You invest to grow money faster than you ever could simply saving (see “compound interest”) and to have your invested dollar work 24/7 so you can sleep and do other life shit.
GOAL: Make as much money as you happily, healthfully, ethically can. Reduce your taxable income as much as possible while investing as much as you enjoyably can and as your budget allows. Invest passively and regularly in low-cost index funds. Generally, invest in the accounts below in the order they are listed.
1. 401k: Max this bitch out (if possible, as your budget allows). The max you can contribute is set by the IRS annually. Contributions automatically come out of your pay-check (pre-tax) and, in turn, your taxable income is reduced. Most employers will match your contributions up to a certain limit (3% of your salary for example). Choose low-fee index funds to invest in (the S&P 500 or Vanguard Total Stock Market index fund for example).
2. HSA: If you are healthy and it makes sense for your life situation, get a Health Savings Account (HSA), which comes with a high-deductible health insurance plan. Contribute the max to the HSA. Contributions automatically come out of your pay-check (pre-tax) and, in turn, your taxable income is reduced. Choose low-fee index funds to invest in (the S&P 500 or Vanguard Total Stock Market index fund for example). Save all your medical receipts.
3. IRA: Read up on the rules for an Individual Retirement Account (IRA) to see if you are able to deduct your contributions to one. Max this bitch out (if possible, as your budget allows). The max you can contribute is set by the IRS annually. Your contributions can be tax deductible and, in turn, your taxable income is reduced. Choose low-fee index funds to invest in (the S&P 500 or Vanguard Total Stock Market index fund for example).
4. Roth IRA: Read up on the rules for a Roth Individual Retirement Account (Roth IRA) to see if you are able to contribute to one. Max this bitch out instead of the traditional IRA if you cannot deduct your traditional IRA contributions. The max you can contribute is set by the IRS annually and traditional IRA contributions count towards the overall max. You cannot deduct contributions, but your investments will grow tax-free.
5. Taxable/Normal Investing Account: Should you choose (AND AS YOUR BUDGET ALLOWS), invest whatever you have leftover in a normal brokerage account.
Other Notes: Out of all of your accounts (401k, HSA, IRA, Roth IRA, Taxable), your overall portfolio should be balanced with 90% to 40% stocks & 10% to 60% bonds. The higher the ratio of stocks:bonds, the more aggressive, volatile, and risky your investing strategy is and, in other words, the more time you have to ride the waves of the market’s patient long-term climb. On the flip side, the less stocks and more bonds, the less aggressive and volatile your investment strategy is and, perhaps, you cannot afford to or do not have the time to ride the ebbs and flows of the market and you need a more reliable income with less aggressive growth. A very simple, goodanuff investing strategy could be investing in a US total stock market or S&P 500 index fund and balancing it accordingly with a US total bond index fund (sprinkle in some international, single company, and/or fun investments as you desire). Keep income-producing investments (bonds, real estate investment trusts, high-dividend funds, etc.) out of a normal, taxable investment account to avoid being taxed on interest/dividend distributions.
When it comes to withdrawing funds, all of these investing accounts have rules, fees, and penalties that may apply. The point is not to withdraw from these accounts unless you are retired or rely on withdrawals as part of your financial independence income. If you need to withdraw from these accounts, read the rules before doing so. As Pat has done on her journey so far, you should not be investing until you have solidified a regular income/cashflow for life expenses, built an emergency fund, and you have eliminated all debt (aside from a mortgage). Thankfully, Pat is a smart cookie and has never accumulated credit card or loan debt, so she hasn’t had to worry about this debt elimination step. However, with the best weapon of all (a budget and a plan), unwavering grit, and patience, debt stands no chance for anyone. Something else to think about: If you have a mortgage on the home you live in – After maxing out your 401k or utilizing some tax-reducing investing strategies, maybe tackle the shit out of that mortgage debt, especially if you can pay it off in 5-10 years. It feels good as hell to own your home and not having a mortgage payment will significantly boost your cashflow. Also, chances are these things won’t happen (winky face), but the stock market may crash, the housing market may crash, you may lose your job or income source, but the bank always gets their money. While you have a certain income source, maybe it makes sense to get rid of that mortgage to ensure your shelter is yours and yours alone. Please note, especially if your mortgage interest rate is low or below the average return of the market, many others will feverishly argue that paying off your mortgage instead of investing for higher returns is silly. The beauty of free will is you get to choose! God bless America!