Category: investment

A Year Without My Grandfather

A Year Without My Grandfather

One year ago today, my grandfather died. It took me completely off guard, and I did not think it would. He was 87 years old but I was still completely unprepared for him to go. Since that day, I have spent hours daily thinking about him, our relationship, and the things he cared about. In many ways, this blog is an exploration of our relationship, as my love of numbers came from him. The cover to my blog is the flag and the shells from his funeral. 

Growing up, I saw my grandpa almost every single day. He babysat me when I was a little kid. He drove me to and from swim practice in the summer and helped my mom out with taking me and my friends to and from sports and school activities. I rode my bike to my grandparents’ house because they lived in our same neighborhood. He was at my high school graduation. He taught me how to calculate square roots by hand, along with many other algorithms I have long forgotten. The more I showed prowess in my ever advancing math education, the more other family members lauded me as being like him. I never particularly desired to be like him, it just turned out that way.

After his death, I found myself doing two of his daily routines without really being aware of it: checking the weather and checking on the stock market. If I spent the morning at my grandparents’ house, I had to watch the channels my grandpa wanted until about 10:30 or 11 am. He flipped between Bloomberg and the weather channel. I never understood what they were saying on Bloomberg so I just waited til he flipped back to the weather. About 6 weeks after he died, I was visiting with my grandma and she told me how she’d been watching the stocks because that’s what he always did. She told me how he’d always tell her if they were losing or making money. Now she had to interpret it for herself.

Another time when she and I were visiting at my parents house, she saw my composition notebook where I budget and make all of my financial plans and asked to look at it. “Oh, Santo used to keep a ledger like this. You’re a lot like him, aren’t you?” she laughed. Now, I’ll never stop keeping a handwritten ledger. I had no idea I was doing anything like him. I just grabbed a notebook when I was in college to keep track of my scholarships and tuition bills, and I continued the habit as I added other sources of income.

When it comes to money, my grandpa knew what so many people miss: money is just a tool to provide security and to build a comfortable life. He avoided greed and gluttony. He built wealth through compound interest so that his family would be taken care of. Now that he is gone, his widow need not worry about food or clothes or shelter. My grandparents lived with his parents for the first years of their marriage, and they never moved out of their first house. There were small upgrades here and there, but they did not let their lifestyle inflate as they gained more income and wealth. I really started to internalize this over the past year. Money is a vehicle for one’s life. The more you save up, the safer and more comfortable you feel. After saving, then you spend on necessity, then you spend, modestly, to enjoy life.

My grandparents are like the OG frugalists. They were born the year of the start of the Great Depression. If you ever want to know how to truly be frugal, look no further than your own grandparents. In her basement, my grandma has shelves of supplies stocked up from spaghetti sauce to laundry detergent. Everything must be bought on sale, and only on sale, which means you don’t buy when you need it but when it’s available at buyable price. They live by the mantra “it’s not about how much you make, but about how much you save.” My grandfather saved/invested so much money and planned so well for retirement that when he reached the age of required minimum distributions (70 ½) from his IRA, he just withdrew the money and put it into his local bank. He didn’t even need that money he saved up. They tried not to spoil their kids or grandkids so that we would learn how to live on less and work for everything in our life. But at the same time, they built up a nest egg that eventually will pass on. They provided in knowledge and wealth at the same time.

My grandpa was one of those people who believes you should pay less in taxes throughout the year and owe money rather than to receive a refund. He implored “don’t give an interest free loan to the government!” While I’d like to honor his ideal, I am not quite there yet. One day, I hope I can adjust to this mindset and way of operating. Until then, I am trying to pay exactly the right amount, with perhaps just a little bit too much going in.

Every bit more I learn about investing and personal finance, I feel a little closer to my grandpa. He didn’t talk about this much with me, but it was a great interest of his. He wasn’t raised to talk openly about money but he was raised to be a breadwinner and to take care of his family. Times are different now and talking about money is becoming less of a taboo each year. And it isn’t just for men to make money anymore. My grandpa never stated that girls should just grow up and get married. He liked that his granddaughters went to college and can provide for themselves. Two of us became math teachers, one is following in his footsteps in military service, one is a doctor of physical therapy, and one is a social worker. My brother, the only grandson, also served in the military and is taking care of his own family.

A year later, I think about how much I have grown because of him. I miss him immensely. I miss him quizzing us on topics we had no clue about during holiday dinners. To stay close to him, I learn about baseball stats, investment strategies, and keep watching the weather. I wear his sweaters my grandma gave me and read his old novels. I carry him with me.

Why you needed to open a Roth IRA yesterday

Why you needed to open a Roth IRA yesterday

I just finally opened my Roth IRA (individual retirement account) last week and set up the investment allocations over the weekend. This is years overdue. I want to help you avoid the same mistake I did. When I was in college, probably after my freshmen year, my manager at Cold Stone randomly told me to open a Roth IRA. He said if I contributed $2000 for the four years I was in college, I would have $2 million by the time I retired. I thought about it, and told my mom what he said. I had no idea what a Roth IRA was. I looked it up on Wikipedia and found a lot of confusing tax language, but I saw one thing I understood: the word “retirement.” What did I need to fund a retirement account for? I thought. I didn’t even have my college degree yet. I also thought that there was no way that this $2 million fairytale could be anywhere close to true. I forgot about this conversation and research until last year, when I started actively learning about investments. I told my students when we did the stock project not to be foolish as I was and actually open this account whenever they turned 18. But I know that they, like me, do not believe this million dollar promise.

The Million Dollar Promise

Any investment vehicle can offer you great growth if you have a long enough time line. Remember that compound interest turns on “time” being the exponent. So the larger you can make that number in the exponent, the bigger you can make your account balance. At 19 or 20 years old, my manager telling me I could have $2 million after saving only $8000 seemed truly farfetched. But I saw his claim spelled out in a Dave Ramsey article when I started teaching. The key item is that the 19 year old who started the investment account has to earn 12% interest, which is a wildly high estimation. Most experts use 8% when doing any sort of projections for retirement account values. If you use this more realistic growth rate of 8% and did the 4 years of $2000 contributions, you’d have over $266,000 at age 65. This is still way more than you put in and is a pretty fantastic value! If you were to “max out” the Roth IRA, meaning, you put in the limit of $5500 each year while you were in college, you could have almost half a million by retirement at age 60 or over a million at age 70. So as you can see, it is a great value.

My Mistakes

I did not open the Roth IRA while in college, nor did I after college. Every penny I earned while in college went toward paying for college. It was my dream and there was no way I could take money away from that cost for a retirement account I didn’t understand. So now I’ve lost out on a lot of potential growth. When I started working as a teacher, I could have opened the Roth IRA, but this time I went with the advice I got. And it was bad advice. A financial advisor visited my school and essentially said that there is no point in opening a Roth IRA now that I am in a “higher” tax bracket. Again, it took me a long while to understand why this was a mistake. I am only in the second tax bracket (15% this year, 12% next year). I did the math back in September that told me there is still a great advantage to opening a Roth at my age but waited until this past week to do it. This was decision fatigue and some serious debate about where to best allocate my funds. I was caught between saving more for my house downpayment and funding my retirement. Now that I am living in my house, I don’t have that debate to deal with anymore.

Don’t be like me. Don’t wait to open your Roth IRA. Don’t make excuses about your student loans or your car or anything. Research shows that we prefer to build our assets to paying down debt. We get happy when we see our savings go up more than we do when we see debt go down. Investing will certainly grow your assets. And no matter our political leanings, there is a small part of all of us that wants to avoid taxes. Open your Roth IRA so you can avoid paying taxes on your growing funds! As with all savings/investments, anything is better than nothing. The more you contribute now, the less you have to worry in retirement.

Tax Advantages 

A Roth IRA has a unique tax advantage compared to all the other retirement accounts out there. A traditional IRA, 401(k), 403(b), and a 457(b) are all tax-deferred accounts. This means that whatever you save, does not get taxed until you retire and start using that money. It has the advantage in present day of lowering your taxable income. You pay less in taxes now and avoid paying the rest until later. Pretty nice, right? But… you still have to pay taxes on that money. If you open a Roth IRA, you use after tax dollars. You pay taxes now and you don’t have to pay taxes when you retire. I prefer to have the latter.

Let’s think this out. If I contribute $3000 this year of after-tax dollars, that is really the same as $3490 of pay before taxes. I calculated this by considering that my effective tax rate this past year was 14.45%. As long as I have more than $3490 by the time I go to spend the money, I have won. Since an 8% rate of return would turn this $3000 into $35,028 at age 60, I’d rather pay taxes today than in retirement.

The other main consideration with tax advantages is what tax bracket are you in now vs. what tax bracket you will be in when you retire. I am in the 15% slash 12% tax bracket (this is the final year for the 15% bracket to exist, then I move into the 12% bracket under the new Republican tax law). I anticipate being in the same or a higher tax bracket when I retire. I do not believe I will ever get my spending to be low enough for me to enter the 10% tax bracket. The traditional wisdom goes that if you are going to be in a lower tax bracket when you retire, use a traditional IRA (or 401(k), 403(b), or 457(b)) in order to save for retirement. If you are going to be in a higher bracket, use the Roth IRA so you avoid that higher tax rate. If you’re going to be in the same tax bracket, it could go either way. But as I demonstrated above, I think being in the same tax bracket warrants a Roth IRA for a millennial.

The last reason I love the Roth IRA for tax reasons is that when I reach age 45 or 50, when I plan to stop traditional work, I can use the Roth IRA for a Roth conversion ladder. It’s a tool to help get money from those tax deferred accounts into the tax free Roth account. It’s a sweet, legal maneuver to help you pay even less in taxes. I won’t be explaining that today. Visit the Mad Fientist for the explanation.

Back Up Emergency Fund

If you are anything like me, you have been thinking through this whole article, “what if I need this money now? or soon?” Right? I know. That was me in college. I couldn’t invest because I had that money earmarked for my tuition. But now you’re more in a situation where you don’t have a specific reason in mind to spend money, but you’re worried you might need to. Still contribute to the Roth. While a Roth is a retirement account which is designed to be used after age 59.5, you can get your money out if you want to do so. Anything you contribute is yours to take back. It’s the growth that will be penalized if you try to take it out. Just about all retirement accounts have a 10% penalty if you take the money out early. However, a Roth IRA allows you take out any money you have put in, since you’ve already paid tax on it. It’s just the increase in value that you must wait until 59.5 to access or else pay a penalty.

Let’s say my $3000 I contribute this year I want back 10 years from now. Based on 8% growth over 10 years, this money should be worth $6476. I can take my $3000 out if I need it to cover some emergency. I cannot take the growth of $3476 without penalty. There are some exceptions to the penalty rule, like becoming disabled or using the funds to pay for your first home.

The fact that I can get my money back makes me much more comfortable contributing to a Roth IRA, especially being a new homeowner. I don’t have a true emergency fund of 6 months worth of expenses in a savings account, but my savings accounts plus my Roth will actually come close. Withdrawing from the Roth is an absolute last resort, but that’s what an emergency should be: spending money because I need to and I have no other option to deal with the problem.

How to invest the Roth IRA funds

At this point you should be ready to research more about opening a Roth IRA. You are probably wondering how you’ll actually make your money grow into these big numbers I keep mentioning. As we explored in the Invest Like a  Professional series, you want to choose low cost index funds. This helps you maximize your growth because you pay very little in expenses. Warren Buffet recommends a 90/10 split between stocks and bonds. While I did choose this split for my 457(b) account I just opened, I decided I wanted to be just a little more conservative and go 85/15. This is still an aggressive portfolio profile. What you choose will depend on your own risk tolerance. What can you handle? The 8% I’ve mentioned is an average. Some years, like lately, there might be 16% growth in your chosen fund. Then there will be some years with negative growth. You’ll “lose” money. But you only lose it if you sell rather than wait for the portfolio to rebound. Figure out your own risk tolerance by taking a Risk Profile Questionnaire. I am comfortable being very aggressive right now considering that I am only 27. As I near the point of wanting to use these funds, I will dial it back to 60/40 or maybe even 50/50. We’ll see when I get there, but that is still at least 19 years from now.

My Roth IRA

I of course used Charles Schwab to open my account. They have the lowest expense ratio for the two most popular index funds: the S&P 500 and the Total Stock Market index. Their expense ratios stand at 0.03% and both of these made it into my portfolio.  I opened with the one time minimum of $1000. Your other option is to open with automatic payments of $100 a month and you don’t have to use the minimum of $1000. When I get my tax refund, I will be immediately adding that amount into my Roth IRA and I plan to incorporate regular contributions as soon as my finances smooth out.

Expense Ratio
My Allocation
SWPPX S&P 500 0.03% 15% Stock
SWTSX Total Stock Market Index 0.03% 50% Stock
SWSSX Small Cap Index 0.05% 10% Stock
SWISX International Index 0.06% 10% Stock
SWRSX Treasury Inflation Protected Securities Index Fund 0.05% 10% Bond
SWAGX U.S. Aggregate Bond Index Fund 0.04% 5% Bond


Invest Like a Professional part 02: The Math

Invest Like a Professional part 02: The Math

This is a continuation of the post “Invest like a professional: the basics.” So you’re on board with all of the terms on concepts of investing in the stock market. You understand what an index fund is, what bonds are, and you agree investing is a solid endeavor you can deal with. It seems legitimate, but now you’re wondering, how does this really work? Can a regular person really build wealth in the stock market?

How does this really work?

Remember that compound interest formula that makes an enemy of your credit card? Just like it works against you when you spend money, it works for you when you invest money. Being a millennial, being young, is the biggest asset you have when it comes to investing. The biggest mistake people make is thinking “I am only in my 20’s; I don’t need to think about retirement now.” But mathematically speaking, thinking about retirement now and then not thinking about it in your your 40’s is the smarter move. You could literally save for ten years now and be way better off than if you saved more money for 20 years starting when you turn 40.  I want you to understand exactly what your money can do over the next few decades so you can make an informed choice for yourself. You have to weigh all of the options and all of the risks. Don’t just trust some random blogger anymore than you would trust some random financial planner who showed up at your office. Do the work yourself.

Here is our compound interest formula…

And the most important thing to note is that “time” is in the exponent, which means the more time you have, the bigger and bigger the numbers will grow. To make things easier to understand, I am going to assume n=1, or that all of the compounding happens one time per year, say January 1, just so it simplifies the calculations. We want to look at a model that offers an easy comparison. It will be a little more complex in real life, but just one compounding per year, for thirty years, will show you what the payoff could look like for you. So our formula turns into:     

So now our main variables are the principle, or how much we invest at the beginning, the interest rate, and the time. Remember in the Christmas Cash article we talked about IRAs or Individual Retirement Accounts? Anyone can open one of those as long as they have earned income (they’ll get a W2 come January). The maximum one can put in that account is $5500 in a year. So for our example, we are going to assume that you save or invest $5500 all at once. And we want to find out how much this money could be worth 30 years from now. We now have P=5500 and t=30. 

Now, we have a lot of saving and investing options to choose from. We just have to choose our “r” or the interest rate.

Let’s calculate how much money we’d have in a variety of vehicles: a high yield savings account, a CD, and 3 different brokerage accounts. For the sake of this example, it doesn’t matter if it’s an individual or a retirement account; we just want to remember we are analyzing an input of $5500. All of these account types are listed in the first column of the table below. The second column gives the assumed interest rates. Remember that for the stock market, these are not guaranteed in any way. Only for the first two rows would those numbers be guaranteed. The third column shows the math so that you can check it yourself (knowledge is power). The final column shows how much money you would have after letting that $5500 grow for 30 years. There would be no additional investment, just waiting.

As you can see, the higher the interest rate, the higher the ending balance. With an 8% rate of return, your money was multiplied by 10! The 8% rate of return is the common rate used to make predictions about retirement account values, so focus on that number. To get the bigger pay off from the 10% or 12% accounts, you, of course, have to take bigger risks. Historically speaking, the total stock market has grown an average of 12% per year over the last 40 years. We know nothing is guaranteed but if you invest in a total stock market index, you are investing in the American economy as a whole.

Don’t forget about taxes

One thing to remember is that taxes do play into it. While these numbers are just based on the interest rate, the type of account will matter how much, if any, taxes you pay. If you use a regular savings account, that would be money you already paid taxes on, and you will also have to pay taxes on the interest paid to you. If you use a 401(k) or traditional IRA, you will not have to pay any taxes on the money until you’re ready to use it in retirement. If you use a Roth IRA, you pay taxes on the money when it comes through your check, but that potential $100,000 in your account 30 years from now is tax free baby!

Let’s look at it a little differently

I have another visual for you in the graph below. Remember, “time” is our variable that matters most. The more time you give yourself to invest, the more you will have in the end. In this graph you see all the lines begin at $5500 for the account value. The further you move along the x-axis, the wider the gaps get between each of the lines. That means, that the further we move in time, the larger the differences among all of the  accounts become. The green line is the 8% return and the blue line is the 3% return. Notice that if you give it another 10 years, they are even further apart at x=40. The green line reaches an account value of $119,484.87 and the blue line reaches an account value of $17941.21. You will wait the same amount of time, 40 years, but you could have 6.6 times the money just by choosing to invest rather than save.


Remember, this model just looks at a one time investment of $5500. You can invest that much every year until you retire. If you have an employer sponsored fund, you can invest $18,500 every year. Most likely, you’ll save somewhere in the middle. Something is better than nothing. If you save $450 every month, during your working career, you will have over $1 million by the time you retire 35 years from now. This is not counting pensions or social security. All you need to do is make careful diversified investments in index and bond funds. The math is very clear: invest in some way in the American economy to invest in your own future. It is worth it, literally. The more time you give yourself to invest, the more money you’ll have whenever you are ready to retire, whether it’s at 55, 60, or 67.

Invest Like a Professional part 01: The Basics

Invest Like a Professional part 01: The Basics

It has been almost a year since I started investing in the stock market. That means it has been almost a year since my entire outlook on my finances and future has radically transformed. I had once set a goal to be able to invest in the stock market by the time I turned 35. I used to think that investing was difficult to get into, required thousands of dollars up front, and was extremely risky. Luckily, I discovered how to invest with little risk and little money. My hope for you is that if you have not invested in the market that you do so in 2018. Or if you already are invested, that you learn more about it so you can make better, more informed choices for yourself.

This article is called “invest like a professional” and you need to fill in the blank that comes next. I invest like a professional teacher, because that is my profession. If you are a nurse, you are going to invest like a professional nurse. If you are a network engineer, you are going to invest like a professional network engineer. You are not going to become Bobby Axelrod. You might get a little rush when you watch Billions and think you want to do that, too. It would be cool. But you aren’t going to short a bunch of stocks and become rich. That’s Bobby’s profession. And it’s a TV show. Regular people invest their money, meaning they buy and hold equities for the long term. This is distinct from trading equities (like Bobby), which for a regular person is akin to gambling. If you want to be a day trader, set a small limit for yourself that you’d be willing to lose all of and head over to Robinhood, a free trading platform that is about to add in options trading. If you’re on a phone, use my link to sign up and we’ll both get a free share of stock.

Investing for the long term is what Warren Buffet recommends to his family and friends, and it’s what we’re going to concentrate on. And Buffet recommends two types of investment: government bonds and the S&P 500 index fund, which is a special type of mutual fund. So let’s break it down and find out what he is talking about so we can grow our wealth.


Why invest at all?

What I tell my students who sometimes struggle to grasp a future needing a retirement fund, is that the market is going to do what the market is going to do, so you might as well be a part of it and make some money. This is true. The economy has its cycles of expansion and recession, but overall, it grows bigger over time. Hopefully, you have the sense to understand that you are going to want more than the potential social security benefit when you are 67 years old (the age they’ll probably push retirement to by the time we get there). We don’t know if social security is going to be there. I don’t know if the teacher pension will have a different formula by that time. I want wealth built up in my own name that I can count on. In the second half in this series, I explain the mathematics of investing which for me is convincing enough. It goes something like this: invest just enough when you are young enough, and you could end up with hundreds of thousands or even a million dollars. And it’s all due to patience and letting the market do its thing.

What do I invest in?

Well, Warren Buffett tells us: government bonds and an index fund. Let’s spell out some terms associated with the market so we understand it just right. A stock is a fraction of ownership in a company. If you own 100 shares of Facebook, that means you own 100/10,260,000th of Facebook. Not a lot, but you’ll make some money as Facebook grows. A bond is a fraction of the debt of a company or government agency. When organizations need money they can borrow it in the form of a bond. Bonds do not yield as much money as stocks might, but they tend to be more secure, especially of they are government bonds. The US government always pays its debts. Bonds are less risky to invest in than stocks, but stocks can yield much more reward.

I used to think that when I finally was ready to invest in the stock market, that I’d have to pick some favorite companies and hope they continued to do well so I would share in the profits. But that’s where a mutual fund comes in to play.

What is a mutual fund?

A mutual fund is basically a group of people buying many different stocks and sharing the cost and profit. There is a person in charge, called the fund manager, who buys hundreds of different stocks or bonds or both even. And other people with less knowledge all give their money to the manager to buy a piece of the fund so that the manager can buy all those different stocks. Mutual funds can have different themes or foci. I have a small amount in my Charles Schwab account invested in a technology mutual fund. The fund is invested in many different technology stocks like Alphabet (Google’s parent company), Facebook, Microsoft, Cisco, etc. So rather than me buying all of those companies’ stocks on my own, I just invest once in this fund and the fund buys all of them. When those companies do well, the mutual fund does well, and I see the profits.

A mutual fund helps decrease risk of buying individual stocks. If you just own Facebook, you count on the performance of Facebook. If Facebook does well, you are happy. But if Facebook performs poorly, you are losing money and you are sad. But stocks are volatile so Facebook is going to do poorly sometime. A mutual fund is made up of many stocks so one stock doing well can offset another stock doing poorly. The idea is that over the long term, all together, the stocks will increase in value.

A mutual fund also helps people invest in companies at a lower cost. If you were to buy your own shares of a company, you would need hundreds or even a thousand dollars. For just one share. On the day of this posting, Apple opened at $172.54 and Amazon opened at $1205.05! If you were starting to invest today, you’d need almost $1380 plus the cost of the trade. But to buy into a mutual fund through Charles Schwab, you need just $100. You can start low and start out with diverse investments.

If you have a 401(k), you are probably already invested in several mutual funds. Look into it.

What is an index fund?

An index fund is a special type of mutual fund. Unlike my technology fund, an index fund has certain companies that must be in them, so the manager doesn’t get to pick. An index is a group that an outside source tracks, to have a general sense of how the American economy is doing at any one time. You might have heard of the Dow Jones – it’s an index of 30 fabulous companies. A hundred years ago it was the gold standard for measuring the economy. But now there are other indices out there that can give a better sense of how the economy is doing. The S&P 500 is a group of about 500 large companies. There is also the Russell 2000 and the Russell 3000. The Russell 3000 covers almost all of the publicly traded companies in the American Market and the Russell 2000 are the 2000 smaller companies (called “small cap” – we can get into that terminology later). The last main index that people talk about is the total stock market index. Vanguard and Charles Schwab both offer a fund that covers the entire stock market.

The S&P 500 is the index that Warren Buffett likes but that doesn’t mean investing in another index is wrong. To be honest, they will perform very similarly in most cases. The S&P 500, or just “the S&P,” is the benchmark for market performance. In Billions, there are several scenes in which they discuss beating the S&P.  Beating the S&P means that your investments are doing better than the market as a whole. But, after you read the next section about expenses, you might think twice about what it means to “beat the market.”

The S&P 500 was the first investment I ever made on my own. And I started with just $100 and then I watched for a while. I checked my account and read the stock news for like a month before feeling less anxious. You can read all of this information and understand the math, understand the theory, but when it comes to your own money, the thought of losing it is terrifying. It can take some time to really internalize the ideas. I know how my anxiety can impact my choices, so I knew I would need this adjustment period, and if you need it, give it to yourself. Just take $100 and invest it and then watch what happens. Know that, yes, it could crash to $50 tomorrow, and be OK with that. You’ve spent $100 on something stupid before in your life. What you’ll find is that your money will go up just a little bit, then it’ll drop again. It’ll take about a year for it to change too much. Hopefully, you’ll become more comfortable and add another $100 investment the next month, and again the next month. Whatever you need to do to get comfortable with investing, do, but don’t wait another 5 or 10 years to get involved.

What is this going to cost me?

There are two main costs you want to think about when investing: the expense ratio and taxes. Nothing is free, but there are ways to minimize these costs or avoid them all together.

EXPENSE RATIO. When you are doing research and reading an overview, or the document call the “prospectus,” of any mutual fund, there will be an item called the “expense ratio.” This is how much it will cost you to invest in the fund. And when spending money, you of course want a lower number. An expense ratio of 1.24% seems low to a lot of people, but it’s not. That’s 1.24% of your money that will be taken out each year and given to the fund manager and other operating expense. The expense ratio can be subtracted off of your expected interest rate or rate of return. I use that number, 1.24%, because that’s the expense for the plan I am on in my 403(b). I am not happy about it, but when it comes to employer retirement funds, you don’t always get the best options. If I ever change jobs, I will move that money. In the meantime I have to accept that of my $1800 I invested last year, they’ll take about $22 from me. But, in my S&P 500 index fund over at Charles Schwab, I won’t have to pay so much. Index funds are great mutual funds because they represent the market and they don’t cost very much. Remember that an index fund doesn’t require active management so you don’t have to pay for someone to remove a losing company and pick a new one to replace it. At Charles Schwab, the expense ratio for the S&P is 0.03%. Yes, three one-hundredths of a percent. Yes, a tiny, tiny amount. If my 1800 were invested in that Schwab fund, the cost would be $0.54 which I much prefer. While $22 is not a lot of money, half a buck is way less of a not a lot of money. So look for the expense ratio when deciding where you want your money to go and grow. It grows more when it costs less.

TAXES. One of two certainties in life. When and how much tax you pay depends on the account you choose and when you spend the money. If you choose a tax-deferred account, which would be most retirement plans, you don’t have to pay any taxes on the money or the growth until you draw the money out in retirement. So imagine you take out $40,000 in your first year of retirement. If it’s just you and you take only the standard deduction, you’ll be in the 12% tax bracket. You’ll pay the federal and state taxes on this money just like you would if it was money for your job.

If you choose a Roth IRA, that means you pay tax when the money comes through your paycheck and then you invest the money. The money grows and grows and grows. Forty years go by and now you want to take it out. No taxes for you. Enjoy your $40,000 in your first year of retirement. Even if your portfolio grows to $1,000,000 you don’t have to pay any tax.

If you set up an account like I have at Charles Schwab, often called a taxable account, you pay taxes on money when it comes through your check before you invest it. Then, you pay taxes again when you earn money on the investment. This is one reason why saving for retirement is such a great idea! You avoid taxes. But saving for retirement isn’t the only financial task you have. Some people use the stock market for other ventures like saving for a house or a business. The amount you pay in taxes for a taxable account depends on how long you hold the investment. If you hold an investment for less than one year, you pay the same tax rate you do for your income. So, say I sold my S&P 500 index shares. My statement says I made about $30 in 2017. It hasn’t yet been 365 days, so if I sell, that $30 would basically just be added to my regular income and all together I’d be taxed in the 12% bracket. But say I wait until the end of February so that I hold the shares for over 365 days. Now my investment is long term and I have to pay capital gains tax instead of ordinary income tax. Since my taxable income is less than $38,600, I would pay 0% capital gains tax. If I get to a point when my taxable income goes over $38,600 I would pay 15% capital gains tax on my long term investments. I have no expectation that I would ever be in the 20% rate for capital gains; I’d need to have a taxable income over $425,800! Clearly, my advantage would be to hold my investments for longer than a year.

What are the risks?

There is always going to be risk involved when you invest in the stock market. Investing in a new company is extremely risky. You have no idea how it will actually do in the coming years. You can’t predict the future. It’s less risky to invest in a mutual fund. It’s not risky at all to save your money. Savings accounts are perfectly secure. They are FDIC insured up to $250,000. But it will not grow very much, and it won’t grow enough to beat the rate of inflation we experience. An investment account does not have insurance. You are owning fractions of a company which has to figure out how to operate successfully. You’ll share in the success, hopefully. But you’ll also share in the failures. Mutual funds help you avoid risk because one company can do poorly but be offset by another company doing well. Usually, poor performance of one company is offset by the success of several other companies in the fund. Investing in an index is like investing in the American economy which is why you should do it. The economy has been growing for the last 9 years.

Yes, the economy has been growing, but be ready for it to stop. When it dips and crashes, so will your account. Just assume it is going to happen. But don’t sell your shares. Don’t freak out. After the crash, the economy will begin to expand again. Just hold on, use your cash reserves to make it through the tough times. Your account will eventually rebound to a higher level than before the crash. We can dive into this more later, but know that every investor is exposed to the same risk so you are not alone. You just have to be smart and remember that the economy cycles just like the seasons. Expect the downs as much as you expect the ups.

Read part 2 of this post if want to understand the mathematics of investing. If you are on the fence about investing, I highly recommend reading this post. Seeing what your future holds will convince you to invest.


8 Lasting Ways to Use Your Christmas Cash

8 Lasting Ways to Use Your Christmas Cash

“It’s not about how much you make. It’s about how much you save.” – my grandma

My grandma always says this to me. It’s a great guiding principal, especially right now. It’s the end of the year. Perhaps you received some cash gifts for Christmas or earned a holiday bonus. You are contemplating what to do with that money. This money can be a great way to set yourself up for a strong financial new year. Go ahead and buy your drone that Santa forgot to leave you, but save 50 – 90% of the money you’ve just been given. But where should you put it?

When I was a kid, my parents had opened a savings account for me and also put money in CDs (certificates of deposit). And as far as I knew, that was how one saved money and there was nothing else to know. I learned the compound interest formula just fine through  these accounts because as a minor, I was offered better interest rates than my parents. At one point, my CD had a 5% rate and I could use that number for some interesting calculations with the Dollar Dog Savings Club worksheet I was sent quarterly. My regular share savings account had a decent rate of around 1% or 2% as well. I thought saving was just the coolest thing. The credit union gave me money just for saving, which I was going to do anyways. I loved going with my mom to cash her check and to deposit my birthday money in my account. I saved the majority of my gift money and eventual wage earnings for my college education. I loved watching those numbers go up and up. As I got older, I started predicting what those numbers might be if I saved certain amounts from working.

As an adult, though, my savings incentive is much smaller. I will never see a 1% interest rate on a regular savings account. When I cover banking with my students, I have groups research all different local banks. In winter and fall 2016, I didn’t see one bank offering higher than 0.1% interest unless it was a Money Market Account, which requires large balances (10k or 25k). After working several months and having already bought my car, I was searching for ways to make my money grow while it was sitting around waiting to be used. I thought about opening a CD, but the rates weren’t great. In fact, they were terrible unless I opened a 5 or 10 year CD.

Over the past two years, I have learned a myriad of ways to save and to grow my money. I am actually amazed when I think about how much I didn’t know for most of my life. I have 5 of the account types outlined below and am opening the 6th very, very soon. When you come into a windfall of money, choose a way to make that money appreciate, rather than depreciate in some gizmo. You can save the money (store it for future use) or invest it (put it away hoping it grows over time) in any of the following places:

1. Regular Savings Account

This one is pretty straight forward. Everyone should have one of these paired with your checking account. You won’t earn very much on the money housed here, but you can access it immediately if you need. It’s basically cash on hand. I keep around $2000 in my regular savings. Generally, you can only make 6 transactions per month on this account but should you run into an emergency, it should be simple to transfer money from your savings into your checking account and spend it. Any money kept here is FDIC insured, meaning you will always be able to take out the full amount in the account up to $250,000. Think back to learning about the Great Depression in school: banks don’t actually have everyone’s full account values present in their vaults, but should everyone want to take out their cash, they can.

2. High Yield Savings Account

This is my favorite new toy in personal finance. It functions almost exactly like a regular savings account, but, as the name implies, it has a high yield. The one I have is currently earning 1.20%. The catch is that this account is offered at select banks. I’ve noticed online banking institutions can offer these (“Can” is a loose term. Most banks can offer these but they choose not to because it’d cut into their profit margin. I digress…). An online bank doesn’t have the cost and upkeep of a brick and mortar institution so they can offer a higher rate. I use Barclays for my high yield savings account. It requires you to link an external account in order for you to transfer money in and out. I have my checking account at my credit union linked, which is also where the majority of my paycheck goes. When I get paid on Fridays, I can also transfer money into the Barclays account. It shows up on Monday. It takes about 2 days for money to transfer back, so this money can’t be used in a true emergency. I used this account to save up the down-payment on my house. This account is pretty low now but I will be using it to save up my 6 month of expenses emergency fund.

3. Certificate of Deposit – CD

This savings instrument was highly popular in the 70s and 80s when banks offered very high rates on them, like 14%. You can get a fraction of that today. The rate on the CD is locked in and guaranteed for the term of the CD, unlike the previous two savings account which have fluctuating rates. You can get a CD with a term as short as 3 months or as long as 10 years. This means that is how long you agree to not touch your money (and let the bank use it for other things). If you take money out before the term is up, you have to pay a penalty. There is usually a minimum balance required. Right now, my credit union is offering a 59 month CD with a 2.32% interest rate. The minimum deposit is $500. If I wanted guaranteed growth and could stand to be apart from my money for 5 years, I would totally open this CD. I personally want more flexibility with my money and am working on other ways to grow wealth so a CD is not part of my current plan. My grandma is a big fan of CDs.

4. Individual Brokerage Account

I used to think that only rich people had money invested in the stock market. When I was 25, I set a goal for myself to build up enough wealth by the time I was 35 that I could invest in the stock market. But in today’s world, there are so many ways for people to access the market with lower account values. Last year the New York Times reported in their year-in-review that the best way to invest in the market was through low-cost, passive index funds. I didn’t know anything about that so I did a lot of research and found that it was, in fact, an inexpensive way of investing. Investing, though risky, has a far better pay off than mere savings.

As someone who was only ever used to guaranteed growth, no matter how small, the thought of losing money in the stock market was terrifying. Opening an account of just $100 and seeing what happened provided me a psychological safety net. I originally planned to invest $100 every month and let the account build up. I would learn as I watched my money cycle up and down. In just a month’s time of watching the market and watching my account value, I eased into the idea of investing in the stock market. I read the articles that the stock app on my iPhone generated about the S&P500 and became more comfortable about what to expect from the market. When my grandfather died in February, I added an additional $1000 to the account and invested in the S&P and in May I invested $100 into a different mutual fund I had been researching. I also own 10 shares of a single stock. Then I decided not to invest anymore until I developed a goal for the money. My account fluctuates around the $1400 range this month. Anyone looking to start investing in a low risk way, I highly recommend opening an account with Charles Schwab because they have the lowest expense ratios for index fund investments. Vanguard is often lauded as the best of the best on index fund investing, but Schwab is currently beating their cost.

5. 401(k) or 403(b) Retirement Account

This is your employer sponsored retirement account and I hope you already have one! 401(k) accounts are for people working in the private sector and 403(b) accounts or for people working in the non-prof world. They have all the same rules: $18,500 contribution limit for 2018, savings are pre-tax meaning it lowers your income that is taxed now and you pay the tax on it when you use it in retirement. You can’t access the money until you are 59.5 years old, unless you pay a penalty. Your employer may potentially match your contributions, so you can basically get free money as long as you are contributing. My employer does not make any contributions to our 403(b)s because they contribute to STRS at a 14% match. If you have a pension fund at your job, I really encourage you to still have some other kind of retirement account that is solely in your name and you can make investment changes to.

While you can’t take your Christmas cash and add it to this account, you can totally up your contribution amount for the coming year and use the cash on hand for your day-to-day purchases. Contributions to these retirement accounts are payroll deducted so you set it up through HR and make changes to it through HR. By my last check this year, I will have contributed $1800 to my 403(b) which I set up in the spring. I will be adjusting my contributions downward to $25 per check temporarily while I make some adjustments to my plan.

6. 457(b) Deferred Compensation 

This is a government employee retirement account option and is the greatest thing on earth. I am not kidding. I found out about this account type in November of this year and opened one as soon as I discovered it was available to me. I will be contributing $100 per check to my 457. A 457(b) is a unique account that is referred to as “Deferred Compensation.” It has the same contribution and tax rules as a 401(k) and 403(b). But. And this is a big but… But you can access the money as soon as you “separate from service.” Meaning, if you quit or are fired from the job through which you opened the account, you can now access the money in there. There is no waiting until you are 59.5 or paying penalties. The money is yours for the taking.

I love this account because it can be thought of as a unique emergency fund. In my mind, the biggest emergency I could encounter is losing my job, since I have good health insurance and my car can only cost me so much. Losing my job and needing to pay the bills for a few months would be a most stressful experience and if I have this account that suddenly becomes available to me the minute I don’t have that job anymore, I am good to go. I also love this account because the S&P500 index is available to me at an even lower expense ratio than at Charles Schwab. If you are a teacher or a government employee, make opening a 457 account a top priority this January.

7. Traditional IRA (individual retirement account)

If you don’t have access to a 401(k) at work, you can still save for retirement through an IRA. Unfortunately, you can only save $5500 a year instead of $18,500. You can actually have both if you want. This account also lowers your taxable income just like the 401(k). You can take your extra Christmas cash and put it in an IRA if you wanted to. For someone who freelances or hasn’t settled into a career yet, an IRA could be a great investment option. An IRA might also be appealing if your employer sponsored retirement account doesn’t have many low cost options. That is, if there are many fees involved in the 401(k) account, you might want to contribute the maximum $5500 to your IRA first then save more in the work account. It all depends on your situation.

8. Roth IRA (individual retirement account)

Man, I wish I had opened one of these when I was 18 like someone told me to. A Roth IRA has a different tax advantage than all the other retirement accounts discussed so far. Instead of lowering how much you owe in taxes now, you use money you’ve already paid tax on to fill this account. But you don’t have to pay any taxes on the growth years and years from now when you actually retire. If you are in the 10% or the (new) 12% bracket now, a Roth IRA is ideal for you because you have the potential to be in the 22% or 24% tax bracket when you retire. You are essentially avoiding an additional 10% of taxes on this money by paying the taxes today. Even if you think you might never get into the 22% tax bracket, a Roth IRA is a great account to have in your line up of personal finance tools. Definitely use your Christmas Cash to fund a Roth IRA. I’ll be opening mine in the next two months. I took some bad advice by not opening a Roth two years ago, thinking there was no advantage to having it at this point. But I am still in a low tax bracket and I still have 30 – 40 years to let money grow completely tax free. After 5 years of opening a Roth IRA, you are allowed to take out any contributions you’ve made without penalty. It can be a back up emergency fund if you need it to be. You just can’t touch the growth until you are 59.5.


No matter what you do with your extra earnings this year, I hope you expand your opportunities by making that money work for you. Do what works for your life and your comfort level. Money is the tool you use to build safety and comfort for yourself, so don’t do anything that will make you uncomfortable. Reference the graphic below if you need a quick way to remember the difference between all of these tools. 


The Latte Leak Effect

The Latte Leak Effect

I am not a frugal person. Sometimes I wish I were more frugal, but I am happy with how things have been going. My grandmother is frugal: she buys everything on sale and can make $200 cash last 6 months. I spend all of the money allotted in my budget for flexible spending every two weeks. And maybe one day, I’ll get better with that kind of spending. But one thing I don’t do, is making a habit of spending money on something I don’t really need. When I was a kid, my parents taught me to quantify everything in a larger time frame. As I alluded in my last blog post, of course I can spend $5 or $10 bucks on something! However, if I do that regularly, I am making a habit of it and am probably wasting money.

Beware of little expenses; a small leak will sink a large ship. -Benjamin Franklin

For the millennial generation, Starbucks coffee (or something like it) is our Achilles tendon. We grew up with it, we love it, and we need it every day. It’s delicious and the cups sometimes have inspirational quotes on them, and it’s just so charming how the barista never spells our name correctly. It’ not very expensive if you think about it — just $4 for a delicious pick-me-up. It’s so true that $4 is not that much money. But $4 three times a week brings us to spending $12 on coffee. I can buy Folger’s or Maxwell big can of coffee for $8 at Giant Eagle and brew it at home. That big can will last me 4 – 6 weeks. So in a month, we could spend $48 on coffee drinks, and in a year $576. And this is all being very conservative. You or someone you know buys coffee at a coffee shop every day of the week! Many drinks, especially in the bigger cities, cost more than $4.

Save Save Save

If you want to save more money, start with the simplest stuff first and cut out the things you don’t need. Remember, you want Starbucks coffee, you don’t need it. You can brew coffee at home for 10% of the cost. So let’s assume you take action and stop your coffee buying habit. Over ten years, that money diverted away from coffee could be worth $9011 if you invested it into your 401(k) or your own brokerage account. This model assumes an 8% growth rate. My next few posts will be about savings accounts and investments. The bottom line here is: would you rather have your expensive coffee habit with nothing to show for it or the nine grand 10 years from now that could be put toward buying a house, or a pre-owned car, a vacation, or opening your own business. Think of all you could do with $9000 and you need to decide if your coffee habit is worth sacrificing that opportunity. If it were $5 drinks 5 days a week, you’d be cutting out $100 a month of spending, which means you’re investing $1200 a year. In ten years, your investment will be worth $18,774.

Now, obviously not everyone drinks coffee. For some people, this is craft beer bought out at the brewery, or it’s Subway sandwiches, or it’s video games and their consoles. Whatever it is that you have a habit of spending on it, ask your self if it’s worth it. You should definitely enjoy your life, but make sure you’re spending on what adds value to your life. And always quantify everything on the larger scale. Think “it costs $X now, but it costs $5X for the work week, meaning it costs $52X for the year. Is there something I’d rather buy with that $260X?” If you are currently not saving any money or saving very little, you need to cut down your spending habits immediately. Remember, you should be using 20% of your take home pay for financial goals, which includes saving for an emergency fund. Don’t let a latte sink your financial ship before you even get going on it. You probably have a good 50  – 60 years left to live your life. How do you want to do it?

Easier said than done

I know. If you’ve built up a habit over 5 years, it is all but impossible to break it. This is why I have started doing targeted spending diets. I stole the idea from a friend who does different (literal) diets to work on her health and wellness. My vice is pizza. I didn’t buy much pizza for the few years after I graduated college. But this awesome pizza shop opened right down the street from me. $6.95 for a smaller 8-slice pie. It’s larger than a personal pizza but it’s not quite a medium. It takes 3 minutes to cook. One of my student’s families owns it so I justified my spending as supporting their family. Midway through November, I looked at my debit card statement and just thought “oh my goodness, how much money am I spending on pizza while I have good food in my fridge?!” So December’s diet became no spending money on any pizza. I’ve heard of people doing a no-spend month, during which they only  buy the essentials. I tried that and it was too difficult to just stop my entire current life. The pizza diet has been working out great because I am focused on avoiding just one thing, and it happens to be the thing I was more frequently spending money on. So in addition to not spending money 4-6 times in a month on pizza, I am eating out less because pizza was my go-to for about 4 months.

Just commit for one month to cutting out one thing, even if it is very small. Send that money back in to your savings account or send it to an investment account.You’ll thank yourself one day.

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“The price of anything is the amount of life you exchange for it.”

-Henry David Thoreau

“It’s not about how much you make; it’s about how much you save”

-millionaire grandma