On Finances

Everyone is in a different stage in life and thus their financial situation will be different. Different goals, allocations, and responsibilities.

Maybe you just started your first job or are finishing up school. Whichever stage, my experience and decisions may help you.

  1. Mindset: I think it is important to start here. Along with your stage in life, the culture in your part of the world will likely reflect in your spending. You may have heard the terms “lifestyle inflation” and I can say I have wrestled with this concept lately. Thus, the mindset to cultivate has two parts; you must fight the urge to let an increase in income become an increase in spending and you must think about future you rather than fall to immediate desires.

Thus; become content with what you have ie. frugality and cultivate a delayed gratification mindset.

Why do you want to save? The answer to this question is the difference between working till your 65 and living in debt forever and living a fulfilled life with the freedom to do what you want. Start with this question if you do nothing else.

  1. Systems: What follows are the systems or methods I have set up for myself. These systems are designed to be “out of sight, out of mind” meaning they operate in the background with little input from myself. Why? I can’t hijack my own plan. There is no resistance for me to overcome when the decision to deposit funds is already in place.
  • Start with retirement savings

I invest in my employer’s 401K plan. I contribute 6% of my net pay to this retirement account that way I can take advantage of my employers 50% match for the first 6%. This money is pre-tax so it comes out of the value that eventually becomes my paycheck. The employer match is a great incentive as it is essentially “free money”.

I also have an automatic deposit set up with my bank for $250 to be deposited into my ROTH IRA every month. This one I am still playing with, both the value and when it is deposited. I am incentivized to max out my ROTH IRA (contributions are capped at $6,000 as of 2019) due to my age and the compound interest that follows.

If you are unfamiliar with a 401K plan or retirement plans in general, do your research. There are many free resources online and, of course, paid resources to draw from.

In an abbreviated format, there are two retirement plans I currently fund: 401K and a ROTH IRA.

A 401K is a retirement account that is generally offered by employers. It is made up of pre-tax contributions so you pay no taxes on what you put into it. This consequently reduces your taxable income. I already mentioned the employer match being unique to the 401K. Because contributions are pre-tax, you must pay taxes when you withdraw from the account in the future. Traditional 401K accounts require you to begin withdrawing around the age of 70.

A ROTH IRA is a retirement account that is made up of post-tax contributions. Contrasting with a 401K, you can withdraw from this account after the age of 59, tax-free.

A lot of variables go into choosing a retirement fund. Of course you can do more research or even speak to a financial advisor. As mentioned before, these are the specific actions I take right now.

Compound interest? This financial term aligns with the mindset of delayed gratification as the earlier you begin contributing and the longer you let your account grow, the better. Here is a simple summary of what compound interest is and how to take advantage of it. I am fortunate because I learned about this concept while in undergraduate and began making contributions when I was 22. Even though my contributions were small, my account has grown tremendously.

  • Long term savings

Along with retirement savings, I have a separate account for long term savings. This account’s intention is rather fluid and in my mind is growing for a future house or capital for a real estate venture. At this time, I contribute the majority of my paycheck to this savings account; approximately 50% of each paycheck. I plan to continue to grow this account until I can purchase property to then ultimately grow my portfolio.

Just to share my intentions, I plan to purchase a house for my family rather than to both continue renting an apartment and purchase a rental property. Both renting and purchasing a property would stretch myself too thin and does not line up with my long term goals. My plan as of now is to find a multifamily property or a property with extra bedrooms for a “house hacking” opportunity. Look into “house hacking” if you have not heard of it. Seems like an effective means of building your net worth.

Keeping with the intention of this post, regarding systems, I mentioned I allocate 50% of my paycheck to this savings account. This allocation is a mechanism of the specific checking account that I use. I have automatic deposits set up, bi-monthly, once again so I do not have to exert any energy to overcome resistance to make these savings decision. There is no friction to fight when the system is already in place.

If you are interested, I bank with Capital One 360. I keep a checking account for my direct deposit, a savings account which serves as my emergency fund, and a money market account for my long term savings. Aside from the money market account which accrues a higher interest than my other Capital One accounts, what is remarkable about my checking and savings account is that they are entirely online and have no fees. A highlight for me compared to other banking accounts.

  1. Investments:

So with systems in place, I have achieved my goal of putting money aside for future me in a way that operates without any action on my part. I will speak more about what amount of money I set for monthly expenses in a future post to keep with the brevity and intention of what I am speaking about today.

What do I invest in? To give you a quick overview, I hold three investment accounts.

  • Individual Brokerage (Fidelity)
  • ROTH IRA (Fidelity)
  • 401K (Charles Schwab)

The funds I choose to invest in relate closely to the philosophy of the financial independence movement. That is low cost total stock market index funds. The rationale behind choosing these funds over pursuing shiny blue chip funds is that the smart mentality is thinking long term and investing in a way that allows you to ride the wave of short term fluctuations in price changes, etc.

Proponents of this advice and the financial independence movement support their rationale with charts and statistics with the main idea being that if you invest your money in funds that contain pieces of every company, ie the index fund, you will benefit from the average performance of all individual stocks.

As I mentioned before, I started investing while in undergraduate, therefore, I have a variety of different funds in my portfolio. Some of these funds were from my early ventures but thankfully uninformed me made similar decisions when I was first starting out.

I hold two ETF index funds: ITOT and VTI. These are two ETF index funds with relatively low expense ratios, important when you contrast with how much actively managed mutual funds charge.

I also hold FSKAX and FNCMX both index funds offered through fidelity.

These funds are between my individual and ROTH accounts. The fund I contribute to in my 401K is also a Vanguard index fund.

Another blue box? Here is a list of resources to complement the advice you are reading on this blog.

  1. Credit:

I mention credit here because it has proved a useful tool when used responsibly. Unfortunately one of the main contributors to the debt crisis in this day and age is due to irresponsible spending and compounding interest on unpaid credit cards. I was taught early to avoid credit card debt and thus I pay off my credit cards in full each month and I also track my spending to ensure that I do not use credit that I can not replace with money in my bank account. Responsible use for me means using a credit card like a debit card ie I wouldn’t use a credit card for an expenditure unless I knew I could pay it off with money I already had in the bank. Of course not all people have this freedom but if you are considering using a credit card, proceed with caution.

That being said, there are benefits to using a credit card and developing credit history. This information is used in regards to applying for loans either for a house or a car, a necessary step unless you are able to pay outright. Currently I am on my second credit card, one I was only approved for because I developed a solid credit history with responsible use through my first credit card.

If you are new to credit cards, start small but start now. I started with Bank of America’s Travel Rewards when I was a student in graduate school. I used it responsibly and paid off my bill in full every month. These good marks contributed to a growing credit score and ultimately allowed me to receive my most recent credit card; Chase Sapphire Preferred.

Another incentive to pursuing credit cards is Travel Rewards. Briefly, travel rewards is using points accrued through your credit cards via qualified expenditures towards travel. Most recently I was able to utilize Southwest’s Companion Pass for the year of 2019 and paid hardly anything for flights.

One way to compound this travel reward incentive is through bonus points. You collect these bonus points by achieving a pre-determined spending amount with the specific credit card within a certain time frame. Be wary of the argument that attempting to achieve a spending amount in return for points will cause you to spend more. I just allocate things I would normally spend money on and exclusively use my credit card to pay for these things (rent, groceries, insurance).

  1. Student Loan Debt:

I mentioned financial freedom at the beginning of this post and anyone on that path will know that debt in any amount is the biggest roadblock to achieving this dream. Therefore, some of my previous actions/allocations may seem quite controversial in light of the large amount of student loan debt I have accrued during my time in graduate school. Thankfully my profession is well established and relatively high earning so I have good potential to pay back my debt, however, until this debt is gone, financial freedom will be out of reach.

I have aspirations to pay off my student loans quickly despite the conservative allocations I have indicated above. The way I have decided to accomplish this is to sign up for a specific Student Loan Repayment option; Revised Pay As You Earn Repayment Plan (REPAYE). I encourage you to do your research regarding the pros and cons of each of the offered plans. This plan calculates my payment based on my Annual Gross Income for the year. Ideally this will require me to pay a smaller amount each month compared to other repayment plans and if I am able to I can then pay more towards my loans, in line with my aggressive aspirations.

I think the important thing here is that I am not tied into a higher payment each month and thus if something happens and I am strapped for cash, I will not be penalized for not paying a higher payment.

Thinking long term, the REPAYE option is attractive because after a certain time period filled with qualified payments (25 years or so), the remainder of the loans is “forgiven”, though it comes with a hefty tax bill (the remainder is taxed as income). So in the event that I have to ditch my own aggressive payment plan five years from now, my back up is already in place.

Read more about Student Loan Repayment Plans here:

I hope this content was helpful. I have benefited from the numerous resources I have stumbled upon in the past and I hope this “case study” approach serves you in some small way. Of course this is not an exhaustive list and perhaps not the best advice, but as always pick some things, try them out, see how they work in your own life.

While writing this I continued to think of more bullet points but for the sake of brevity, that is content for a future post.

Feel free to share with me your own “case studies” or comments about my own approach via the Contact section of the website.

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