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Debt
First get out of bad debt. Investing is a topic only for people without bad debt.
Do you pay for your cars with cash, have zero debt that rolls over from month to month and pay off your credit card bill? Good; put that first. If someone has not already gotten there, there is no point in discussing investing. If you have a credit card charging 20% or – even worse – a payday loan, all of your energy needs to be dedicated to getting rid of debt. Revolving credit card debt and payday loans are almost always mistakes. If you are paying off high interest debt, consolidate it at a lower rate. Get your rate as low as possible then get your balance as low as possible before you do anything else.
2. Frugality
Cost savings have 100% probability of working and are taxed at 0%.
You don’t necessarily have that much control over how much money you earn in a given month, so that makes frugality one of the most important factors in your financial life. Hopefully you’ve already made the right decisions here, but just to prioritize: if you waste money or marry someone who does, this whole exercise is pointless. Decide what is important to you – such as travel – and then spend sparingly on everything else. If your spouse does not work, make a point of expressing gratitude for keeping a tightly budgeted household. It doesn’t always feel like an accomplishment to not spend money, but it has a huge impact over time. If you’re already frugal, then keep it up.
One thing I’ve found is that you can afford to buy really quite good groceries for less money than it costs to eat out at even mediocre restaurants. If either you or your spouse enjoys cooking, it makes a big impact on the budget over time. I look back on old bills from past years and am aware of how much meals at restaurants add up. Even just shifting one incremental meal per week from a restaurant to your home will add up quite a bit through the years.
As for financial services costs, many of the costs don’t really benefit you at all. Cost is one of the things that you really can control. That is something good about dividend reinvestment plans/DRIPS. It is also a good reason to trade sparingly. Every time you buy or sell a stock, the brokerage makes money but it does not necessarily benefit you. There are no natural advocates for passivity in this business. You need to be your own advocate for not doing something new.
3. Tax-Advantaged Account
Max out all tax-advantaged accounts. Not doing so is stealing from yourself.
It is excellent news if you are currently maxing out your Roth IRA and have been for years. That is the third most important priority. Roth IRAs are terrific vehicles and not maxing them out is simply stealing from yourself. 100% of wage earners should be doing the same. Besides the tax advantages, when you pay yourself by funding your Roth IRA, it is easier to be frugal because you lack convenient access to that money. As far as allocations within your Roth IRA, don’t change frequently. My first choice would be a passively managed index fund or ETF such as SPY. If you have a good annual income, you can go a long way to being a good steward of that money through tax advantaged accounts
Emergency Fund
Six months is okay. One year is better.
What are your family’s combined annual expenses? This may be difficult to calculate. Rely on hard data such as last year’s credit card bills instead of your intuition because a lot of people lie to themselves about spending. You should have six months (a year is better but six months is okay) of cash in an emergency account that is not used for anything ever other than funds in an emergency. This should be in a federally insured bank account. The interest rate does not matter much. What matters is that it is there if you need it. This priority comes ahead of any taxable investments. If you’ve already checked off dealing with debt, frugality, and tax-advantaged accounts, this could be the first hole in your planning.
What do I look for in an ideal emergency fund account? Principal protection from federal insurance, tax efficiency, and a high yield. I always keep such accounts within the $250k federal insurance or $500k for joint accounts. I also love to fully exploit sign up bonuses where available. My emergency fund is at save at b ecause it offers each of the above characteristics I look for – my principal is 100% protected, returns are taxed as long-term capital gains instead of income, and the variable APY is 2-3x alternatives.
5. Down Payment Account
If you want to own a home and you’ve already made it, don’t risk it again.
After you have funded your emergency fund, set up a federally insured bank account with at least enough money ready to fund a down payment on your retirement home. Look for the same characteristics that you look for in an emergency fund.
6. Taxable Investments
This should be active only if you enjoy it and are good at it. Most people don’t and aren’t.
Are you interested in investing? Do you like researching stocks? If not, stick with passive index funds or ETF such as SPY. If you do, keep only a modest amount in your brokerage account to fund this hobby. You can keep an amount of money in it to take advantages of investment ideas without putting undue pressure on your overall financial life. Spend at least four or five years investing in an account with about $25,000 in it to get a realistic view of your performance in various markets before putting more of your financial life at risk. This will offer some statistically significant data. But don’t worry about it or take any out if performance is poor. Instead just keep that same amount that you have now and get either 1) a profit or 2) a lesson.
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Health
Here is one area where you can be looser with the upfront dollars involved.
All of the time and money that you spend preparing for a marathon is all “free”… the shoes, the travel, and the hours. It will increase your life expectancy and your healthy earning years enough to pay for the whole activity. So if you like to run, then run a lot. It doesn’t even cost any time because if you go for a long run, then you have to be that much more disciplined about not wasting time the rest of the day. My current routine is CrossFit at 5 AM on weekdays and long trail runs on the weekend. Find something (or a few somethings) you love then stick to it with discipline.
Conclusion
You might as well get it right, but none of this matters that much.
You have the chance of an exciting career followed by a great retirement with plenty of travel. You have the chance to be an excellent provider for your family. However, none of that will depend upon your stock picks. It will be because you eschewed debt, lived frugally, took advantage of tax-advantaged accounts, and minimized complexity, taxation, and costs in your taxable accounts. That is about all your financial life can offer in terms of its role in supporting a happy, healthy life.
Consider specific stock ideas only if it is a topic that you authentically enjoy. It won’t do you any good otherwise. Whether you buy five hundred shares of this or sell five hundred shares of that won’t make the crucial difference between long-term success and failure. Under no circumstance let any particular stock give you any anxiety. If it gets the least bit frustrating or emotional, then quit. The second you stop enjoying the process, simply liquidate your brokerage account and put the whole thing into a mutual fund.
