Looks like an ad for Vanguard and ETrade. You should never pay $10 per trade. Included in this cost is the privilege of placing a market order at no penalty. Use Interactive Brokers instead and place limit orders at nearly no cost. For someone who espouses "1% can make you a millionaire" and then advocates spending $10 on a $1,000 order is just stupid. By their own definition, this alone will make you a millionaire.
Another thing I hate, the 10% return on average of the stock market. Since the inception of S&P 500 in the 50's, it's almost 8%. In fact, the average rate of return over any 40 years (the typical investing age) is something around 6.5% [0].
The single greatest thing you can do to save for retirement - negotiate for a 2% salary raise when you start your career. This will literally beat every piece of advice in this entire document combined.
Even the 6.5% is high, practically speaking. People tend to put more in the market when times are good (and the market is high), and less when times are bad (because they have less money), which mutes performance. Dollar-cost-averaging helps counteract this, but not all the way. So personal performance in the S&P will be less than the S&P market average.
I ran an XIRR analysis on my complete lifetime retirement contribution history, pretending that on the dates I had those sums of money, I put the money in the S&P and held. The results were not pretty, and were way below these "average rate of return" stats the articles like bandying about. (This takes dividend history into account.)
On top of that, the above link also shows how performance goes down if you want some degree of confidence. Over a 40-year period, a 90% confidence gives you 4.9%.
Finally, people are usually advised not to put all their money in the S&P anyway. Some kind of allocation model is preferred instead, which further mutes performance.
Our lack of personal-information education in this country is due in large part to misinformation, not just ignorance. I agree with the above conclusion; your chief weapons are raising income and cutting expenses, not chasing returns.
> People tend to put more in the market when times are good (and the market is high), and less when times are bad (because they have less money), which mutes performance.
Just in case it wasn't clear to others, my argument wasn't that it isn't worth doing, it's that you cannot expect the level of returns that almost all articles, publications, and blog posts claim.
To expand, the reason one shouldn't rely on those is because people will bust out the spreadsheet, and put their 7-10% expected returns in there, and then figure out an amount of monthly savings that is "enough" for their goals. And then years will pass and they'll fall short.
Yes, invest - it'll most likely beat inflation. But don't get the false sense of security. (And you'll like need more than a million anyway.)
There's no reason for the average investor to trade ETFs at all when no load mutual funds exist. You can use vanguard directly or etrade (or a billion other companies) for that.
For non-Vanguard funds, ETFs are generally more tax efficient than mutual funds because they can avoid capital gains distributions in ETFs, but not in mutual funds. Vanguard has a patent on the mutual fund method.
There are minimums investment amounts on many mutual funds include the Vanguard ones which are most popular with personal finance investors. ETFs don't have minimums allowing for more home investor participation, especially from those new to investing or personal finance.
These guides tend to assume the reader makes a consistent paycheck more than their expenses every month. There are two big assumptions in there: one, that the paycheck is consistent; two, that the amount is sufficient to cover the expenses of the previous month.
All too often, for many people, these two assumptions are false. What good is advice like "pay your credit card in full every month" when you have no money left after paying rent? Or if you have just enough money to pay it off, but you're not sure how much you will have next month? How do you choose whether to save cash or pay debt?
The article strikes a tone that seems naive and slightly patronizing, by failing to consider a situation that many people face on a monthly basis.
If you have no money left after paying your bills then what sort of personal finance advice would be useful? This article is about using your capital to make more of it. Obviously that doesn't apply to everyone, and to say it's "naive and slightly patronizing" is ridiculous.
Should we also avoid writing new car reviews? What if I can't afford it? Can I talk about my new phone? It may make some people feel bad, right?
I don't get why every article on budgeting garners this reaction. Nobody is going to bother reading about budgeting if they don't make enough money to make it a priority. And it's still hard for people that do make that much money. And there are always young people who literally have never heard about budgeting before who still need the advice.
If you consistently run a deficit, then such guides are not for you. I would think it a given that such a guide assumes outflow not exceeding income. So perhaps for a person such as yourself, Step 1: get expenses under control. One can offer all sorts of excuses as to why that's not possible, but the fact remains that it's not sustainable.
Too right. The expenses listed were very similar to my own, with two glaring exceptions: My rent is not $600, it is $1250. And my income is not $5000. Without going into detail, it's less than that, pre-tax.
I'm not a fan of this "dump a whole crap ton of semi-relevant information at once with no context" style. Personal finance should have discrete steps that complete newbies can master and you shouldn't move onto the next step until you've mastered the previous step(s) and shouldn't assume you have any prior knowledge. This article deal with specifics of trading ETFs yet doesn't contain the words "debt" and "emergency fund."
This is my personal opinion coming from a background where my personal finance knowledge started out as "I have a bank account" and is now more advanced than most people. I also came from a poor family.
IMO the very basic first steps anyone needs to take when getting the foundation of personal finance down are:
1) Either increase income or reduce spending so the money coming in is greater than the money going out. This can come with serious lifestyle changes, maybe you have to sell or downgrade a car, for example.
2) Aggressively pay off any high interest debt (credit card, subprime auto loans, etc.).
3) Build emergency fund. Use only for emergencies, not planned expenses.
4) From here, do everything in your power to not end up with high interest debt.
After you get the foundation then there's a lot of flexibility based on your goals and life situations and this is where the "personal" comes in.
Many people haven't mastered foundational steps, and mastering those steps are more important than meandering around about CDs, charitable giving being tax exempt, micromanaging credit scores, and tax loss harvesting. Not to mention it doesn't have the important caveat that you have to itemize to take advantage of the specific tax deductions mentioned.
I actually know a guy who is trading individual stocks while also paying 20%+ interest on thousands of dollars in credit cards.
I wrote a little series a few months ago detailing how my own system works and my reasoning for my decisions. My aim was to help people starting out set up a reasonably automated hands off system.
I just want to say thank you for your posts on ledger and CLI accounting. I've been trying to port my personal book-keeping from Mint recently and your blog posts have been extremely helpful (even if I have chosen beancount over ledger/hledger because I was struggling with the Haskell ecosystem).
I find it useful on blog posts in general. Eg to know
whether I've seen it before,
whether I've fallen behind your latest content,
at what point in time you're writing,
whether new comments are likely in the next few days,
whether it's worth commenting myself,
etc.
I end up looking for it carefully top and bottom, in both reader format and original format, and miss it, every time I visit your blog.
I'm curious if there is anywhere in the US that cheap that you can actually make more than $35-40k/year (locally, remote work is obviously different).
The median income for a man with a Bachelor's degree in the US is ~$51k [0] - which means a full half of reasonably well educated men make less than that (the numbers for college educated women are much more grim). I'm assuming there is substantial overlap between less expensive places to live and people making below median income.
Given a time frame of 5 years from today, what's the best type of account to store funds for a down payment on a house? 5 years seems like a long enough time frame to place in the market, albeit not at a 90/10 split favoring stocks. Yields are low right now, but so is inflation so on net am I losing anything by using as HYSA?
0-5 years, high yield savings or CD (optionally, CD ladder).
Even bonds are too risky and low yield over this kind of timeframe.
If you had 5-10 years, longer duration bonds (cash is essentially a zero-duration bond). If you had >10 years, maybe stocks. Stocks can lose value over periods of 20 years, though, so you probably wouldn't go 90:10 even for a 10 year period.
HYSA means you’re treading water. 5 years is dicey, depends on how badly you need the house. If you have a couple kids and NEED to be settled down, then keep it in HYSA. If you’re comfortable with some volatility and can afford to wait 6, 7, 8 years in worst case scenarios, then go all in on a total stock market fund in my opinions. I always bet on the government bailing out equity owners and devaluing the dollar, as long as US has military might.
As you get closer to buying a house you can allocate more and more to HYSA.
When I was saving for a down payment I wasn't comfortable keeping it anywhere else but FDIC insured savings or checking account. I don't think five years is long enough for the market.
I did make that money work for me in a low interest environment by using it to churn bank account bonuses.
If you are in the USA look into Series I savings bonds. They both earn interest and are protected from inflation. Minimum term ownership: 1 year. No early redemption penalty after 5 years. Earnings exempt from state and local taxes but subject to fed tax. The only drawback is you can only buy $10k of them per year per SSN. Much of my E-fund is I-bonds.
Not a bad idea if you are worried about runaway inflation, but otherwise yields aren't great. There aren't any i-bonds issued in the past decade that are currently earning over 2%, which is less than a savings account or money market currently yields.
Yea, I don’t keep I-bonds for the yield, I keep them for the inflation protection and tax advantage. High yield CDs are fine too but the interest is taxed.
The basic budgeting formula given does not allow for debt repayments, my suggestion is to split the leftovers after your bills are paid, including credit card monthly minimums on the bills column, three ways. Save a third, pay off debt with a third, and spend the last third.
Some people will suggest that paying off debt with two thirds is more advantageous due to the interest rate difference. However psychological effects of watching a savings balance grow are more powerful than the tiny monetary amount you recoup by paying off 20% interest debt twice as fast.
You want your finances to be as much 'set and forget' as you can possibly get. I've switched to fixed payment amounts over paying off the balance every month on my regular card. So the spendy months are offset by the lean months. And my head can wrap itself better around the fixed $1400 I have going out rather than having to constantly check balances, not that that really stops me, lol.
Occasionally you need cash, such as if you're saving for a down payment or want to quit your job. In this case you can drop all your monthly payments down to the minimum, let your credit and cash balances pile up. If your credit is good, then once the dust settles and you're back to normal you can get a fixed interest loan to cut down on the interest-rate pain. $6k in credit card debt costs about $200/month. Cutting that interest rate in half saves you a hundred bucks.
You can't plan everything, and you can't always tame the little inner demon wanting you to spend more money. Some years are just spendy. Distinguish between capital spending, recurring spending, and incidental spending. It's the incidental stuff that will kill you if you don't rein it in.
Don't worry too hard about capital purchases like buying furniture, buy good stuff so you don't have to replace it every few years and just pay it off.
Don't worry about running up a few hundred bucks coming out of your account every month for Patreon donations or cloud services. Just run through your bank statements every six months or so and cancel stuff you don't use anymore.
It's those incidentals that will kill you. I probably have $3k in debt for frivolous purchases over the last few years that I really should have been better about. Key here is to recognize the psychological need they're filling. I used to go to the bar a lot because I'd get bored. Nowadays I spend a lot less money comparatively on cheap tech toys and hobbies. Retail therapy can be cheap or it can wreck your long term goals. Start paying attention before it goes so far you're paying $500+/mo just to finance your previous life.
I like to tell people that the only people who should be investing in the stock market are those for whom single-digit differences in yield are meaningful. Practically speaking, this means at dollar values of $1MM and up. If you don't have that kind of capital then you need either leverage or time. The only two financial investments ordinary mortals should be making are a retirement portfolio and buying a house.
The house makes sense because it's an accessible form of leverage and the retirement portfolio makes sense because of the time scale involved makes the return on investment vs just putting it under the mattress meaningful.
Otherwise it's just not worth your time. Obviously you can do active trading on the market and make more money with less capital but that's not investment.
Similarly, you can use the same logic to determine that paying 20% interest on small amounts of money, i.e. under $10k, just isn't worth worrying about in the grand scheme of things. It's like $300/month. I'm not going to waste sleep over that. I mean, I'll happily take it if someone's giving it for free, otherwise it's just another bill.
And I've already got lots of other bills in the range of $1-300 a month. I'd rather have the things I bought with the $10k right now than to save up for them, just to save a few hundred per month.
The problem comes in when you're spending that money on stuff that's not providing meaningful quality of life benefits. That's a leak in your bucket. Whereas $10k in debt in a life that's working is more like poking holes in an airship. You'd need a whole lot of them to bring it down.
Just pay them. If you are wealthy enough to worry about and have to time to game the tax system, you should just pay them. Don't over-itemize to save yourself a few hundred dollars.
The attitude of avoiding taxes baffles me. We are the government. We all use roads and rely on the infrastructure, the idea that is it normal to not pay your fair share angers me to no end.
I understand using a 401K, getting exemptions for some things are built into the system. I am not talking about those. If you are truly struggling, I understand why you would need to game the system a bit.
I am talking about wealthy and middle class people who deliberately abuse the tax code. Be a good citizen, pay your goddamn taxes.
Justice Learned Hand wrote “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes."
And, “Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”
Ok, so like why should I be a good citizen and pay my share of taxes when loads of giant companies, corporations, and wealthy individuals get out of paying millions in taxes every year by abusing the tax code?
Doesn’t make any sense to me to say “pay your taxes” to someone who is paying their taxes. Minimizing the amount one pays does not change the fact that they paid, what they owed.
The government on the federal level doesn’t need more money. They need to spend less. If they were using the money on the social safety net or infrastructure. I might agree.
Another thing I hate, the 10% return on average of the stock market. Since the inception of S&P 500 in the 50's, it's almost 8%. In fact, the average rate of return over any 40 years (the typical investing age) is something around 6.5% [0].
The single greatest thing you can do to save for retirement - negotiate for a 2% salary raise when you start your career. This will literally beat every piece of advice in this entire document combined.
[0] https://dqydj.com/sp-500-historical-return-calculator/