General Questions on Personal Finance and Investing

DROPS THE MICROPHONE AND WALKS AWAY FROM THE STAGE LIKE A ROCKSTAR GOD!

Credit card use it is then...

Here are some recommendations for banks and brokers I have from my recent experiences:

Bank: Ally (ally.com)
They are an online bank with great service (most of the time 0 minute phone wait time) and that pay some of the highest interst rates on savings accounts (1%) with no minimums or fees for the most part. I've setup many different bucket accounts with them (e.g. I have a savings account with them for each credit card so I can do things like syncronize the balance instead of paying off the card agressively and earn the month or two of interest from leaving autopayments on this way).

Broker (non IRA): Robinhood
This is an iPhone app (no website yet) but offers legitimate free trades and happens to have the simplest and cleanest design of any broker app. The free trades are gamechanging. I play and learn with tiny amounts as a result.

Broker (for IRA): Vanguard
Between them and Fidelity it seems like they are the victor by a narrow margin. The lowest fees around and great funds and ETFs. I expect most of my IRA deposits to be with them. One downside is a pretty awful website (they also made a 5k+ mistake with my signup, charging my bank 5k+ when I did not specify a deposit on signup, so my recommendation is purely financial, not technical).

And here are some recommendations to avoid, or rather that I don't strongly recommend (they aren't bad, just didn't impress as any good either):

Broker: Merrill Edge
I was interested because of the promotion where if you have 25k in balance you get free trades (free trades are very important to me in my early learning phase because it allows me to learn with amounts of money that would not possibly be profitable if I had to pay for each trade). Also because I already have a BOA account and for the connection (faster transfers and a link to autologin to each other are the only advantages there really) Only after I opened an IRA with them and deposited my yearly limit did they highlight the fine print that I had missed: you have to leave that 25k balance in cash, and they pay low interest rates (at least in their bank savings accounts). I'd have to trade at volume to beat the loss of interest.

I don't think they are terrible but they are not a great deal and if you are in it for the free trade option that is actually a losing deal unless you trade a lot.

Broker: E-Trade
Their website is not good (but honestly none of them are great, they are just particularly bad with their navigation of accounts) and there are no significant benefits to them (e.g. the free trading ETFs they give you access to are all inferior to Vanguard's with higher expense ratios etc).

Oh forgot this recommendation: https://www.personalcapital.com

It's a free site like Mint, for tracking your cash flow and holdings across all your different accounts, but much better. I strongly recommend them, and they are like command central for personal finance for me.

Concerning personal finance, here is what I tell my grown or mostly grown kids:

Money: I have four tiers of money.

1) A checking account where I keep enough money to pay monthly bills including a little extra to handle normal fluctuations.
2) A savings account where I keep zero money. When I was right out of college, advisors would tell you to keep six months worth of salary in an emergency savings account. The reality these days is that that savings account doesn't pay any interest. I keep an emergency credit card with enough of a balance that I can handle almost any emergency. If I have to float a month or two of interest while I move money around, I can do that if I have to.
3) A intermediate term investment account where I save money towards the next car, major family purchase. When I was younger I would pay myself a car payment every month so that when it came time to buy the car I would be ready. Not everyone can do that but it should be the goal. I invest this money in investment grade preferred stocks or REIT's that pay 6-7% return and have very little market sensitivity. If I have to sell one, I might have a small loss or gain but the dividends are what I'm after here.
4) A diversified retirement fund consisting of low cost index funds for all the rest that is rebalanced quarterly.

Insurance

If you can't afford to take a loss, you have to have insurance. If you can, you probably shouldn't (unless required by law). To understand this statement, you have to realize that insurance companies make money - from you.
- If you buy a TV and they sell you an "extended warranty", what you have just done is buy an insurance policy. That policy costs more than what your expected repair costs are because the company is going to make money. If you can afford to repair your TV in the rare case it has a problem outside the manufacturer's warranty, you shouldn't buy additional insurance. I have never seen an extended warranty for any product I think is worthwhile.
- Car and House Insurance is another matter. You likely cannot afford an extra $20K to replace a car so paying some every month to cover an accident makes sense. It makes more sense to pay for liability coverage since if you hurt someone it could ruin you. Not likely but you can't afford the risk. A house is even more expensive so the same rules apply to a greater extent. Even if you rent you should have renter's insurance to get you liability coverage.
- Life insurance is the most tricky. It costs your survivors a lot when you die. Your income stops, your bills do not, you have to get buried and your survivors need time to recover. People make mistakes on both sides of this equation. Some people have too little or none leaving their families at significant risk, others feel like they need a million dollar policy and end up paying monster premiums that limit their ability to save. The insurance industry will tell you 5-7x your salary. If you are a two income couple with no kids, $50k is plenty. If you have a stay at home spouse, then 3x your salary makes sense. If you have a bunch of kids who are counting on you to get to college, you need more. If you have a lot in the bank, you need less because that money will work. My approach is to have a small life policy to cover basic death expenses and use term insurance to cover me when the kids are younger. A good insurance agent can help you here, but anyone trying to sell you a high six figure or seven figure policy is just padding commissions.

Credit

The cost of credit often ends up costing as much as the purchase, but the reality is that people starting out will probably need some credit to get started.
- Everyone should have a credit card since they are pretty much required to today's world. No one should keep a balance on one unless you have to due to an emergency. Credit cards are the worst form of credit not counting pay day lenders. (If you are on the hook to a pay day lender, so everything in your power to pay that off and never get back on.)
- Unless you are taking advantage of an employer matching fund, in just about every situation, you should pay off credit debt before investing in either tier three or four money areas. I sure there are people who disagree but remember that interest you pay is paid after tax. If you are paying 6% on your car loan and you are in a 15% tax bracket you need to earn over seven percent on your investment to cover the payment. A guaranteed six percent after tax return will usually beat just about every investment option you have. If you are looking at 18% on a credit card, this is a no brainer. Pay down your debt today, invest harder tomorrow. But what about your 0% car loan? Well, the car dealership included the interest in the price of the car and you've already paid it, so just keep making the minimum payment and put your money on other debts or into investments. Note that this requires some discipline. If you have a $300 car payment at 6% interest and $100 extra to invest, put $400 on your car until it is paid off then start putting all four hundred into tier three or four. Just because you paid off the car early doesn't mean that you can have some extra mad money.

Spending

If you are trying to lose weight, you can exercise more, but to really make a difference you have to eat less calories. Wealth growth is the exact same. What you invest in is not nearly as important for the first twenty years or so as how much you spend. Everyone is trying to nickel and dime you. That eats up what is available to pad your nest egg. Drink soda vs water? $20/month. Like the best cell company vs the cheapest? $30/month. Feel like eating out twice a week instead of once? $50/month. Like that fancy cable plan with the 100 channels of which you watch two for one hour a week? Another $50/month. To put that in perspective, to earn $100 a month from your investments, you need $20,000 in investments yielding 6% interest, more if you talk about taxes. Make that car last an extra year, grill out instead of eating out, get the 42" TV instead of the 55", drink water instead of tea at restaurants and it adds up to a lot, leaving you more money to grow your nest egg. In your forties, your nest egg will be big enough that it starts to take on a life of its own and you can start splurging on yourself. Remember that $50 per month invested at 6% interest will grow to $23k in twenty years.

You know I was literally thinking about this just 5 minutes ago. I have my short term emergency savings in an ally account at 1% interest and was thinking I should move all that to Robinhood and or vanguard and put into other securities. I think this convinces me that I'll do that.

I keep other accounts (savings though, mainly not checking) that I use to pay all the bills. I actually have a savings account at 1% interest for each card and instead of paying my cards as the spending came in as I used to I switched this year to transferring to those savings accounts and earning the interest while waiting for autopay.

One question I have is how you would use your credit cards in an emergency? Cash advance for things that can't be swiped? I've never done one of those and should look into how they work, as I have a lot of credit headroom.



I like this approach a lot and one thing I do that helps is use banks that let you create many accounts and name them what you like. If I want to save for something I can just make an account for it vs tracking it in spreadsheets.



The advice I have followed seemed pretty straightforward. Go with cheap term insurance when you are younger and when you are older your savings should mitigate more of any impact. Does that make sense as a strategy to you?



My research agrees with this, but with the stipulation that the emergency fund is nearly as high a priority. I'm interested in your thoughts on this. It seems that most people get in trouble with credit either due to a lack of financial discipline or due to a lack of an emergency fund.



This is such a good point and you have some great examples to back it up that made me want to reconsider some of my spending.

I learned this basic (I'd say the most fundamental) rule too late, from the book The Richest Man in Babylon. Read it in a sitting while waiting for a plane and it was that book that opened my eyes to personal finance (previously I'd been a "just work harder and earn more" in my thinking about finance). It stated that some of your money should be yours to keep (i.e. working for you in investment) vs giving it to others. And it made me realize that indulging in savings can be as exciting spending it and giving it to others.

That is one way or you can pay put things you normally pay in cash (power bills, phone bills, etc) on your card or just pay the minimum on your card freeing up cash for the emergency. Also, most expenses during an emergency can be paid with a card. House repair, travel, hospital, etc all will take a card. For cash advances, usually the credit card company will give you drafts you can use like checks if you need a cash advance. Typically cash advances start accruing interest immediately and have no grace period.


Yes, but you might want to look at a small, long term policy. When you die, everything locks up. The banks freeze your accounts, your paycheck stops, etc. It takes a few weeks to break that log jam. Having a $50K policy to tidy up the ends works well and it's pretty cheap. Then just add term as your life conditions change. I know you are a newlywed with no kids, so if your wife works, you really don't need a lot. If she counts on your income, either because she doesn't work or because there is a significant income disparity, you should get something for the next 20 years. It will take a while for your nest egg to grow.


If you have the credit headroom to handle an emergency, that can be your emergency fund. I wouldn't put $10K+ in a low to zero interest savings account when I can borrow that much in an emergency. That is over $600/year in lost interest.

Thanks, it all makes sense. In my personal case my income varies widely (as goes the business) so I think I need a bit more of a personal buffer than people with predictable income. But other than a one-month buffer in cash I think I'm going to take your advice and count on my emergency funds being credit cards as well and invest the rest with a mix of vanguard (for bonds and mutual funds etc) and robinhood (for stocks).

1. Do you own any annuities?

2. Your approach , as a beginner, seems to me to be too complicated. I suggest, you stick with one company ( like Vanguard) for stocks, mutual funds, even annuities, until you get the real insight into what investing is all about.

3. Vanguard's fees are pretty reasonable. At the $500,000 level you pay $2 for a trade either online or by phone. At even higher levels, your trades will be free.

4. Credit cards having zero interest can be useful for many thing, including college tuition. If you have such a credit card, it's important to pay off the balance in time, to avoid high interest rates ( 25% or higher).

5. Have you any interest in Ameriprise? I personally think that $60/trade for a phone trade is too much. If their web is blocked, Vanguard will do the trade, via phone, for free...

6. Some of the folks working at Vanguard & Ameriprise aren't the brightest bulbs on the tree. So....be careful!

7. Some colleges offer courses in Financial Planning, which can be very useful to those who want to save and invest, but who don't really know much about what they're doing.

8.One other thing...Buy some real estate. At your stage in life, why not buy a 2 bedroom condo? Sell it later, or rent it out when you no longer want to live in it.

9. When you invest...please remember to diversify.

Don't know why you are asking me these questions but I'll humor you...



No.



I'm doing fine, and beating the market. I am intentionally trading more than ideal to gain experience but I do it with small amounts of money and keep the bulk of my money with a few companies (Vanguard is already one of them).

I am getting more insight into investing this way, and I am going out of my way to use more brokers and banks to find what I like.



I'm a big fan of Vanguard and would recommend it as pretty much the be-all-end-all of investing to anyone who wants to invest without the level of curiosity about it that I have.



One thing I've started recently (and too late) is getting more of my spending on credit cards with cash back. I spent too long with my first credit cards and not shopping them more.



No.



I am not relying on any financial advisor or advice from any of the financial institutions I use.



I'm not in the US, and in any case prefer to learn online as it is much more efficient for me.



I already own property and currently rent it out.



Um, ok but it's obvious that I already do. That is the one free lunch of investing.

Robert, You're doing just fine. The fact that you're putting any effort into saving for the future speaks volumes.

Here's the average savings by age:
TransAmerica’s 2015 Annual Retirement Survey (based on 4500 online interviews) found that the median total household savings by age were as follows:
Age Amount Saved
20s $16,000
30s $45,000
40s $63,000
50s $117,000
60s $172,000

We started saving early in our marriage from 15 to 20% of our income, so our savings at our age is more than four times the 60s median.

The home we purchased in Sunnyvale for $52,000 is now worth about $1.5 million. Of coarse we've done a complete makeover/renovation of the home that was built in 1955.
We also have our investments with Vanguard (mostly index funds). It has almost doubled in the past ten years even though we withdraw money from it every year.
You're on the right track.

I sold our income property when I retired in 1998, because I didn't want to manage anything in my retirement.