I made it. I'm finally not scraping by paycheck to paycheck. I order off the McDonald's dollar menu because I want to. Not because I have to. I see the numbers in my bank account go up. It's basically meaningless. I can afford everything I need. But the anxiety monster still rears its head.
"I don't know what I should be doing with my money."
I hear this a lot. Many people I know have hit this point in their lives as fast as I reversed into a truck at a McDonald's drive-through. Financial paralysis plagues millennials. Even us older millennials. No one taught us what to do. The last financial-related thing the education system deemed important enough to bless us with was how to write a check in elementary school. Spell out every. single. number.
Credit cards? Investing? Financial health? Go Google it. Good luck.
At this point, I've personally helped many people in my life, and now it feels unscalable. So here's a guide on what to do with your income and that pile of pennies you've worked so hard (or not) to build without thinking too much about it.
Please keep in mind that this is not a prescription. I fully expect everyone's situation to differ, but this is a framework you can reference to build your own financial stability.
There are two major dimensions to managing your income and growing bank account: keeping your money and putting your money to work.
Specifically, I'll be guiding you through ways to keep Uncle Sam's dirty paws off your money. I do say that facetiously because I personally pay every cent than I'm required to the government. I live in the land of the free. Home of the brave. My parents built a life here as first generation immigrants. I can contribute like an adult.
Whatever your political stance, the game - it's more fun if you think of it that way - is about taking advantage of all the different avenues available to you to save on taxes. They're giving you this opportunity. So take it and keep your money. It may come in the form of deferring taxes or even not owing it at all.
You’ll then want to put that money to work. If your money has no intent to work for you, then why are you working for it? Wait, that doesn't really make sense, but it sounds heady, right?
I can sum this up in three words: Invest and forget. That’s it.
Step 0. Pay Down Debt
Before you think about saving, zero out your high-interest loans or credit card debt. The banks are making an enormous amount from you, and they’re laughing all the way to their bank.
Consider that the average rate of return on the stock market is 10%. Any loans or credit cards above that should be paid off first. Maybe even anything above 7%, why not?
Step 1. High-yield Savings Account
If you don't have a high-yield savings account, drop everything. Go open one up right now. If your only bank account is your checking account, then you're losing to yearly inflation.
Let's use some arithmetic to get on the same page. If you invest $1000 with an interest rate of 2%, that's $20 of "free" money for the year (ignoring compound interest). You then get served an ad for a savings account at 3% interest rate. That's higher, right? It sure is. You'll be making $10 more a year! You're going to be filthy rich, you filthy genius.
Little do you know, the new institution was just using marketing dollars to lure you with that extra 1%. They cut your rate down to 1.5% after 6 months. F*ck! Wasting time opening up an account, transferring money, and missing out on interest while your money works your way through the financial system are not going to be worth it.
Stick with a solid institution, pat yourself on the back, move on.
Step 2. Emergency Fund
Now...what do you shove into that newly minted savings account?
Think your income is stable? You're never going to lose it, right? Wrong! Roughly calculate your monthly essential expenses:
+ Rent/Mortgage 🛏️ + Utilities 🔥🌊💡🌐📱 + Gas ⛽ + Groceries 🍍🍆🥔🌽🍞🧈🥫 + Medical 🏥💊 + Subscriptions (...but do you really need these?)
Be kind to your future self. Save aggressively to cover your expenses should you lose your job. Three to six months is advised by financial health experts. Once you've covered your potentially unemployed ass in the short-term, you'll be ready to start saving long-term for your old retired ass.
Step 3. Contribute to 401k w/ Employer Contribution
What’s a 401k? It’s a company sponsored retirement account and one of the more useful benefits an employer can offer. More useful than that ping pong table being used as a catering surface.
Some of you might have employers kind enough to incentivize contributions to your 401k with a match. Don't think your employer does 401k matching? Check your benefits paperwork. Check it again. Ask HR.
If there's no HR, ask Steve who can't stop complaining about how he ended up with the role in addition to all his other responsibilities. We get it, Steve. You're busy. You're wearing too many hats. You've even got that Kentucky derby one. You're a goddamn superhero. Now answer my question. Please.
If you definitely don't get a 401k match, skip to the next step.
As you tip that wheelbarrow of pennies into the vat labelled '401k', your employer will be right there with you, hand in hand, tipping their portion. If you don't contribute, your employer will happily sit on the sidelines. They'll be ecstatic. They expected to pay that out to you, but now they get to keep it because you couldn't be bothered.
Review how your employer matches. Contribute enough of your income to capitalize on the entire match. You deserve it.
Step 4. Individual Retirement Account (IRA)
Now open up an Individual Retirement Account (IRA). Just like a 401k or any other retirement account, your money grows tax free in an IRA. This means that the government won't touch any capital gains, interest, or dividends earned while growing in the account.
There are two types of retirement accounts. Roth and Traditional. Each year, you can contribute a maximum amount to your IRAs regardless of type. Just Google '[year] ira contribution limit' because the limit changes every year.
Roth = pay Uncle Sam now:
Good for those that expect their income to increase in the future
Withdrawals at retirement are not taxed
Contribution is not tax deductible
Allowed contribution decreases and is eliminated over a certain income limit (Google '[year] roth ira contribution income limit')
Traditional = pay Uncle Sam later:
Good for those that expect their income to decrease in the future; pay taxes later
Withdrawals at retirement are taxed
Contribution is tax deductible
Allowed tax deduction decreases and is eliminated over a certain income limit (Google '[year] traditional ira deduction income limit')
As you may notice, the situation is a little more complicated for those fortunate enough to have high income. If you can't enjoy all the benefits of IRAs due to income limits, there's something called a Backdoor Roth IRA. I won't get into the details here. Basically, it's a way for rich people to still enjoy all the benefits of a Roth IRA by shirking income limits. A sorely needed win for the disenfranchised rich.
For those under the Roth IRA income limit, I suggest contributing the maximum amount into a Roth. Put it all in at the beginning of the year if you can. Otherwise, contribute an even amount every paycheck to reach the maximum by the end of the year.
Step 5. Health Savings Account (HSA)
If you're healthy and don't even know your doctor's name, then consider a high-deductible health insurance plan (HDHP). The insurance premiums are cheaper, and you're covering yourself for big emergencies rather than consistent care. The main thing to understand is that you have a high deductible, which is the amount you have to pay out of pocket before your insurance starts paying.
If you're not in a position to afford an HDHP, then skip this step.
The other advantage of an HDHP is the ability to contribute to a Health Savings Account (HSA). Some employers offer HSAs along with health insurance, so check with Steve. If your employer doesn't, check out Lively. You can contribute to your own HSA as long as you have an HDHP.
Why have an HSA? Because it's triple-tax advantaged:
Your contributions are tax-free.
You can invest the money in your HSA and let it grow tax-free.
You can withdraw money from the HSA tax-free, as long as the money is used for qualified medical expenses. You save money since your medical care costs will be effectively discounted at your tax rate.
Note: If your employer doesn't support an HSA and you choose to make the wise decision to contribute to your own, then you won't be able to enjoy the first tax-free advantage.
The last major benefit of an HSA is that it can also be treated as another retirement account. Once you saunter into your surprise 65th birthday party that nearly gives you a heart attack, you can start withdrawing whatever balance is left. It essentially acts like a traditional retirement account in that respect, so you'll be taxed on your withdrawals.
Again, if you're healthy and don't know whether or not your doctor suffers from halitosis, then seriously consider an HSA from your employer or Lively.
Step 6. Max Out 401k
Wow, you still have more money than you know what to do with? I've got a GoFundMe just for you. It supports my debilitating need for more money. I even have a Kickstarter, but it got shut down.
Didn’t fall for that? Then, max out your 401k next. Log into your 401k dashboard and adjust your contribution percentage so that you’ll stash away the maximum allowable which usually increases every year.
Step 7. Taxable Brokerage Account
You have even more money? No idea where you’re going to shove those last pennies you're squeezing out of your employer like water out of a rock?
Put that money into a taxable account at the brokerage you opened for your IRA. Invest it. There are no tax advantages here. You used most of them up without calling a greasy tax accountant to find you loopholes. Don't be sad. You're still putting your money to work.
Now that all your pennies are in their rightful place, how do you put them to work?
Here's an extremely easy plan called the three-fund lazy portfolio. Emphasis on ‘lazy’. In this case, lazy wins. Each of the three brokerages I mentioned above has similar funds. Essentially, you'll want to diversify across the global economy in stocks (risky) and bonds (less risky):
Total US Stock Market
Total International Stock Market
Total US Bond Market
Choose a percentage of your total amount invested for each of the funds. Conventional wisdom says to use your age for your bond allocation. I’m riskier, so I subtract 10%+ from that. Then maybe take the rest and do 75:25 for US:International stock. It’s your choice here.
Set it and forget it. Do the same for all your newly minted accounts.
If you think you're a genius and want to play roulette, set aside 10% of your money. Invest in Bitcoin. Invest in weed stocks. Invest in options. The important thing here is to expect that all of it will disappear. There are much smarter and richer people out there waiting to take your hard earned pennies. But you'll have fun on the roller-coaster. Just don't get addicted. If you don't trust yourself, stick with the lazy portfolio.
Good luck, Scrooge McDuck.