The slow lane approach to wealth and other financial tips
How to get to wealthy at a very old age? the answer is, you leverage time, by following the slow lane equation: Job+ market investments. Let's see how you can build an infrastructure that does the job.
Things to keep in mind:
- You don’t have to be a financial expert.
- you can start the journey to a excessively rich life(at 80, lol!) with as little as 100$/month.
- You should start managing money now.
- Define what being rich means to you and why you want to become rich. Be specific.
- rich rather than sexy( going into the minutiae; employing expert terminology, and buying/selling frequently..)
- Pay off all your debts first thing.
- Checking credit history is key: a) Credit report: includes all accounts you’ve opened/closed and payments history. View it at annualcreditreport.com, ideally once a year . b) Credit score: a score between 300-850, represents risk of lending you money, the higher the better( 35% paying on time, 30% credit utilisation rate_(amount you owe/available credit) x100, 15% represents the length of history, 10% for the type of credit; varied is better). Websites to check your score: myfico.com. For more accuracy(with small fee), use credit karma.
Accounts and cards:
Choosing accounts : rule of thumb: owning 2-3 accounts is ideal. Go to bankrate.com to compare accounts and choose what suits you. The author recommends Shwab investor checking account for checking, Vanguard for investing, capital one for savings, alliant for cashback, chase Saphhire reserve for a travel card. He warns against banking with Bank of america and wells fargo. Never get retail store credit cards. Ignore card ads in the mail.
Maximizing card perks and rewards: For eating out and online bookings ,use travel card; for everything else use cashback/credit card. Negotiate any charges/ fees on card before the end of year ( I’d like to have a fee waived instead of can you waive). If you have god credit, ask for credit increase which increases your credit utilization rate, call credit card company every year to learn of card perks you might be eligible for.
credit cards perks you’re not aware of: consumer protection like apple iPhone 1-year extension of warranty, insurance against trip cancellation, fees with third part sellers, car insurance
Beware of these things: Paying minimum monthly pay is bad because you incur increasing interest rate. Don’t do Cards churning( closing and opening accounts to get rewards). Don’t incur overdraft fees; always keep a money cushion in your account; call bank to make sure you don’t get charged when your balance is not enough.
The conscious spending plan
The plan is not to be frugal but spend extravagantly on the things you love and cut out mercilessly on the things you don’t. Ideally, 10-15% of your money should go to retirement accounts, 50-60% of gross income(take home pay) would go to necessary expenses, fixed assets( rent, utilities) 10-15% savings for short term goals( travel, wedding, car..), 10% guilt-free spending. You get the point.
Investing your money
The 85% solution: taking action now. Optimal path: having a diversified portfolio of low-cost funds running in the background, thanks to an automatic money transfer infrastructure.
But How do I start?
Most common types of investing:
- Mutual funds: A fund manager aka financial expert pick stocks(active management) that he thinks will go up and pool them into a fund.
Verdict: not recommended because of high fees aka expense ratio(1-2% for managers, which compounded over time accounts to 30% loss in returns. This is how Wall Street get rich, not you. You don’t need any kind of expert to manage your money. the records show that they’re good as you at beating the market. your best bet is to focus on time in the market, not beating the market.
2. Index funds: A way to measure part of the stock market. the index(passive) matches part of the stock market, e.g, the index fund of the 500 largest market-cap companies matches the SnP 500. there are other indexes like the Dow Jones( 30 big-cap companies), Nasdaq, international, small-cap companies. There are additionally funds that match the stock market in its enitrety. A computer picks socks for you which reduces fees to 0.14%, give or take.
Verdict: recommended because of low fees but portfolio needs rebalancing every year or so to maintain target asset allocation goal.
3. Target date funds: Fund of funds that takes into account the date you wanna to retire on. A target date fund might include stocks from the SnP, the Dow jones, international stocks… The perfect diversified fund for people who are lazy and want sit and watch money grow.
Verdict: Highly recommended because of low fees, automatic rebalancing of portfolio, and tax efficiency.
4. Bonds: IOU from governments and corporations set for a particular period (1-year bonds, 2-year bonds, 10-year bonds). Rate of return is low, secure, and super low risk but there is a penalty if money is withdrawn before the target date. Verdict: ideal for old people and the extremely wealthy( they don't need to take risks anymore)
5. Cash: Save money in savings account. verdict: Not recommended as an investment because of inflation.
6. Real estate: Owning homes incur fees which includes but not limited to mortgage,closing costs,moving costs,real estate contractor fees(~6%), fees when you sell,property taxes, high maintenance fees. And when sold, the money usually goes to buying larger houses. Returns were 0.6% between 1915-2015. not to mention opportunity cost( money could have been invested in the stock market)
7. Art: Pretty speculative. Even expert art collectors fail at prediciting winning piece.
So, what does the winning portfolio look like?
The best portfolio would be diversified across all categories (stocks,bonds,domestic,international…), automatic, composed of low cost funds( expense ratio<0.2(check investment tools)), no frequent tradings involved as this would incur fees and capital gains taxes(25-30%)_ after the 1 year-mark, the tax would be lower and the investment would be considered long-term( the longer you keep the money the more it compounds). The wise doesn’t leave the market, even when everyone seems to be leaving. Also, you need an asset allocation plan first so start with the swensen model: 30% domestic equities; 15% developed world international equities, 5% emerging market equities, 20% real estate securities REITS; 15% government bonds, 15% treasury inflation protected securities.
How to actually start investing?
You first need to take advantages of retirement accounts available out there:
- 401k retirement account. Perks: a) 401k matches(free money), which means the company matches the money in your account when it reaches a certain amount contributed b) you contribute pre-tax money and you defer taxes until 59 which means more money compounded over time. Tax-fee money growth. You can withraw before retirement only in specific cases: medical expenses, funeral..
- The ROTH IRA retirement account: Perks: You contribute taxed money but when you withdraw at retirement age you keep all the gains, zero taxes. you can always withdraw principal money(money initially invested) from your Roth ira penalty-free but that would affect money’s ability to compound.
- The third type of retirement account is a health concentrated account called Health savings account aka HSA. Perks: contribute pre-tax money, and keep all gains, you pay zero taxes. The tax-free money withdrawn before age 65 can only be spent on medical expenses. After 65, you can use the money for anything but the gains would be taxable.
529 account: Tax-advantaged account for children’s education.
You know what accounts to take advantage of. How to take concrete action?
Start by linking all your accounts(checking,saving,invest,credit). Set up an auto monthly transfer to your 401k and vanguard Roth Ira account, and then once the money is enough to buy a fund( minimum is usually 1000$;can sometimes be waived thru auto investments), Start investing by Buying your first vanguard target fund/target retirement 2040/ life cycle fund( ticker symbol VFINX) and keep contributing to it monthly. Meanwhile, save money to buy the second fund and repeat the process until you have bought couple of funds. Once you have a portfolio with sufficient funds. Use asset allocation plan to organise money distribution to funds, e.g international means 30% of the 500$ invest/month goes to international. The average return on investment in the stock market is 8% after inflation.
If you still have money after you’ve allocated your assets, you can make high-risk investments in individual companies or sectors. You can also angel invest in early-stage companies.
Some investing tricks:
- 72 rule: 72 divided by return rate= nb of years it takes to double money. E.g: it will take 7 years to double money on a 10% average return.
- Investing in lump sum beats dollar cost averaging over the long term
The cross-over point aka financial independence:
This is the point where your returns cover your expenses and the lifestyle you have chosen for yourself: it can be one of those three:
- the lean life: living the minimalist life
- The fat fire: living luxuriously
or just FIRE: Retiring Early
Tips for buying a car
- factors to consider: how long will you keep it, reliability, emotional value, resale value(kbb.com). e.g Toyota n Honda usually retain value, fuel efficiency, down payment
- buy a car that will lasts you 10 years
- don't lease a car
- don't sell early
- buy a new car and drive it for the longest time
- buy at the end of the year
- visit fightingchance.com to compare prices
- Keep a record of major maintenance checkpoints: scheduel maintenance according to manufacturer’s instructions.
After buying a car: maintain maintenance: average car is driven 15000 miles a year: set maintenance schedule by referring to the manufacturer's instructions. perform regular oil changes and keep an eye on tires . keep detailed maintenance records.
- buy a house only if you can afford paying 20% of its price in cash
- buy a house only if you gonna live in it for at least 10 years
- buy a house only if the total monthly payment(mortgage, maintenance) <30% of your income
How to negotiate a salary:
-Have a second job offer ready
-point out how you will help the company
-don't reveal current salary
-Don't make first offer
-don't ask yes/no questions
-don't reveal the job offer you got from a mediocre company
Source: The book "I will teach you to be rich"