Over the past year I’ve thought a lot about personal finance. Here’s what I concluded:
a) Money is not the main driver in what I do.
b) If given the choice between being rich versus not being rich, I’d rather be rich.
c) If there are easy things I can do in the spirit of goal (b), I want to be doing them.
When I turned 18 I became eligible for many financial programs and, with the guidance of friend Ramit Sethi, I moved quickly to put into a place a personal finance infrastructure that suits my needs. Below are the details.
1. Short Term Cash Needs — I use a free Wells Fargo checking account that gives me ATM access anywhere in the Western U.S. I keep less than $1,000 in this account because it doesn’t earn any interest.
2. Medium Term Cash Needs — I park medium term money in ING Direct, a high interest savings account. ING gives me fantastic interest and links with my Wells account so I can transfer money online back and forth easily. So if I need to move money from my ING to Wells, it happens within 24 hours. ING doesn’t have ATMs in the U.S., but that’s OK. I just want my money to grow here. If you want to set up an ING account, email me, because I have a special referral code that will earn you free money.
3. Long Term Cash — This is cash I don’t plan on touching for 8-10 years. I want to regularly deposit money into this account. Since I have a long time horizon, I can invest this money more aggressively because in the long run the market should go up by 8-9%. So, I’m willing to endure ups and downs with this money in the short term.
I believe much of the money market industry is bullshit. The idea that mutual fund managers can pick the "right" stocks is baloney, since many mutual funds fail to beat the S&P 500 market average in the long run. Furthermore, if "experts" can’t pick the right stocks, I sure as hell can’t, and I have no intellectual interest in tracking the market on a weekly or monthly basis, nor do I want to spend the time researching specific stocks. So, I invest my long term cash in Vanguard index funds. Currently I own the Vanguard S&P 500 index fund and the Vanguard Total International index fund (it matches Europe, Asia, and developing markets index funds). I’m looking for the broadest, most diverse exposure. If you don’t know what index funds are, research them online.
Ramit is fond of saying, "Do you want to be sexy or do you want to be rich?" If you want to be rich — like him and me — avoid the hoopla over the daily market’s ups and downs, and consider index funds for long-term investing.
4. Retirement Money — I have a Roth 401k through Comcate (employer). Note that the Roth 401k is a new instrument and is different than a traditional 401k. The Roth is geared to younger investors in lower tax brackets. In a traditional 401k you make contributions from your paycheck taxfree but are taxed when you take it out at retirement. With the Roth, I pay taxes now but can take it out tax free (when I’ll be at a higher bracket). I try to put as much as possible into the 401k — after all, every dollar I put in now will be worth around $9 (adjusted for inflation) when I retire. How do I invest the Roth 401k? I bought Vanguard’s "Target 2050 Retirement" life-cycle fund, which is a 90/10 equities/bonds mix and it automatically adjusts that ratio to become less volatile as you age.
I also have a Roth IRA.
5. Credit Cards — I use two credit cards, and I use them a lot because it’s easier to track my expenses with a credit card. The first is Capital One Hassle Free card. It’s the only card you can use internationally without extra surcharge. I earn one "neutral" airline mile for each dollar spent (it can be applied to a variety of airlines). The upside to an airline specific card is you earn status points such as free upgrades or airport club access. The downside is you incur a significant lock-in effect with that airline. I know many dissatisfied United Airlines customers who still fly there because they have so many miles. The second card I use is a MasterCard Direct Rewards card. I use this for gas, groceries, or drug stores, since I get 2% cash back on these kinds of purchases. Many young investors use debit instead of credit — I think this is a mistake assuming you’re a responsible person. You want to establish credit and get rewards points.
How do you think about personal finance?
That’s a very well designed portfolio. Well, flawless almost.
Add some form of Insurance too. In case if you are adequately covered under any component of your existing portfolio, it’s ok. Otherwise, it’s better you have some Life Insurance policy so that even if you survive it’s term, it will act as a very good collateral for mortgage, education loans etc. ( since lenders shall have the first right to recover their dues from claims ).
Provide something for mid-career liquidity as well.
I suggested it because, somewhere around late 30s or early 40s, your interests will stabilise around something which you didn’t get a chance to attempt seriously till now. Then you may as well have a financial cushion to fall back on so that you can pursue your “passion” ( something that is punctuated by your “lack of conviction” – yet that which you want to pursue like hell – hat tip : Ben Casnocha’s earlier post dt.Jan 24 ) without a care in the world.
Glad you took my suggestion to shift the Roth 401k … it’s an option a lot of people are not aware of, and the *only* way people in higher brackets can invest in a Roth-style accounts (once your Adjusted Gross Income exceeds 105k, a single earner is no longer eligible to contribute toward a Roth IRA).
Great portfolio infrastructure. I was wondering about insurance and the mid-career “cushion”, but it seems like krishna took care of that.
I really like the International index fund, it seems like a very wise choice in this ever-changing world economy. I’ll have to look into that for myself.
Good choice also not to get caught up in the whole money market and stock-picking thing. Let your money work for itself so you can go to sleep relaxed at night, wake up in the morning, and focus on the important things you’re doing in life.
Ben …
Only thing I would change on all your financial planning is the credit cards … I am a strong believer no matter how strong willed you are at some stage credit cards will get you into debt I know to many people who have been caught in the trap where they went overseas or at home and needed something or wanted something and said screw I will buy this life is short and then later on it becomes a habit and before they know it they owe $10k …if I were you see if you can get visa/mastercard debit cards they offer the same freedom and credit cards exactly the same but don’t have the credit facility linked to it ..
Credit cards are designed to make it easy to get into debt … that’s my 2cents worth …
–Gareth
I’m not judging your choice to have credit cards — but just sharing my thoughts on them and the whole airline miles debacle that goes with them.
I think I heard this on a Dave Ramsey lecture — Nobody ever got rich by points back or with airline miles. Rich people can afford to just buy the tickets. Most rich people — or should I clarify, successfully rich people with no credit card debt, know that credit cards are a trap. My husband and I are working to pay our two cards off and once they are, they are gonna be closed forever. Cash is king, baby. 🙂
Using a credit card carries risk, but if you’re responsible, you don’t have to incur credit card debt. The key is to spend within your means.
It’s about knowing yourself. If you feel like you might have a self-control issue using a credit card, then use a debit.
Here’s a great article on the chase for Alpha – http://www.businessweek.com/magazine/content/07_04/b4018069.htm?chan=search. Unless your first name happens to be Warren, index funds are the way to go! However…I’m surprised you don’t have a time share strategy. 😉
I have a couple questions for you:
1) why not use a bank like Citi or HSBC that gives high interest (HSBC is at 6% until April) but also has ATMs? You’d earn the extra interest on the $1000 or so (not much but still), and wouldn’t need to move money around.
2) How much does Comcate contribute to the 401k? As an employee you can contribute up to $15,000 a year, but your employer can contribute a fair amount as well. I believe the employer limit is something like $25,000 (I’d have to check). If Comcate makes enough to contribute that amount (essentially $40,000 a year) do you or would you take advantage of that?
Successful Personal Finance
More questions:
1) Why ING Direct? There are like 30 banks now with significantly better rates. (This question may be rhetorical; I know your answer will be simplicity, convenience, trust, history, etc.)
2) Investing in the Vanguard 500 funds seems illogical to me, no offense. This is because VTMSX, Vanguard’s total stock market fund exists. It seems really odd to concentrate risk in a lower-return asset class (large caps) instead of just putting the money in a total US stock market fund.
3) Also, it seems really strange to me that you have a lower risk, lower return portfolio in your Roth 401k. This is the part of your portfolio that has the LONGEST horizon and grows TAX-FREE!
4) Don’t listen to the credit card haters. Rewards are not the only benefit; your credit score is significantly improved.
5 “In the long run the market should go up by 8-9%” and “every dollar I put in now will be worth around $9 (adjusted for inflation) when I retire.” You seem cocky. Honestly, there’s nothing saying the stock market “should” go up. All we really have to go on are decades and decades of historical returns. Because there’s no convincing reason to think the fundamental forces behind the stock market have changed, I agree the market will probably go up in the future. However, it’s imprudent to assume future returns will be as strong as past returns. Stock returns can be boiled down to the risk-free rate of return + dividend growth + appreciation + rise in price. Part of the historical gains are not true gains in value, but price. This means future returns will probably be lower.
6) All in all, you have a great plan and you’re doing very well.
Credits cards do carry risk, but so far I’ve been able to use them for many “small” purchases (i.e., i-Tunes, used books, clothing, etc) that I can pay fine myself and still build a good credit rating.
My Dad worried but my Mom was adamant that good credit — both in terms of FICO scores and spending habits — must begin early. They’re convenient as hell and I never like carrying that much cash anyway.
As for the rest, I’m not making enough $$$ to have anything other than a basic savings account… but hopefully that will change soon.
Brenden’s questions:
1. Wells has more ATMs in the West than most other banks, certainly more than Citi. ATM access is important to me. So I want that plus a high interest savings. Last time I checked ING was comparable to all the others and offers great service.
2. Some employers match your contribution. Mine doesn’t. I try to max at $15k when possible.
Anonymous questions:
1. I doubt there are 30 banks with significantly higher rates. Again, I think ING is comparable. Plus, they have great service.
2. Fair point
3. I think you misread my post. The 401k money is invested in 90% stocks, 10% bonds, across a range of index funds. This is the most “risky” since it is the longest time horizon. What I said was that that ratio shifts more to bonds and less to stocks as I get closer to retirement.
5. I agree with all your points here, that’s the comprehensive way of describing it.
For category #2, you should also look at treasury bill money market funds (Vanguard as usual is best because they have the lowest costs thus highest returns). Although t-bill funds offer slightly lower rates than commercial paper funds, they are NOT TAXED at the state level, and most people pay state tax at a similar rate regardless of bracket (and when you’re in CA this is a big deal!) – at Colorado state tax rates it ends up being even with commercial paper rates, but lower risk. There is nothing with less overall risk than a t-bill money market fund, since it’s U.S. govt (if they default, pretty much everyone will be defaulting), it’s all short-term, and unlike the actual t-bills you have complete liquidity. Oh, and you can usually set up easy no-fee transfer mechanisms. Worth looking at.
3. I didn’t misread it. The target retirement 50 fund will probably and theoretically have a lower return than a mix of total domestic and international stock (like your long term cash).
This is so weird — we have the same exact “financial infrastructure” — everything: Wells, ING, the Vanguard index funds, right down to the 2 credit cards for the exact same reasons. I kid you not. The only difference is that I’m one of those dissatisfied United Airline card holders…
I came upon your blog by following a link from The Happiness Project blog (http://www.happiness-project.com/happiness_project/2007/01/a_quotation_fro_1.html) where she mentioned you. I only hope my 2 boys grow up with the same financial savvy. When they get old enough to read, I’ll be sure to refer them to your blog :).
Hey Ben,
Thanks for a tremendously useful post on a realm that I know nothing about (I had another committment when you brought in a friend/speaker to talk about finance last year). Do either you or your friend Ramit know baseline savings or income at which it’s practical to diversify money like this (e.g. index funds, retirement accounts, etc.)?
Thanks,
Dario
Dario,
It’s good to hear from you.
If you are barely getting by and have no money to save, then you can’t set up index funds, put money into retirement, etc. However, if you have a little money to set aside, and you can do so regularly (say, $5 each month), you should definitely set up a high interest savings account (such as ING). Most index funds require a minimum of at least $3,000 to get going….some $10,000. ING and its ilk require no minimum.
Let me know if you have any other questions.
Ben, I love your personal financial infrastructure. It is very similar to my own, although I do a little more hands on investing as I’ve been an active investor in stocks since I was 14 and I enjoy it. I do leave the majority of my long term investments in the hands of professionals, however.
I agree completely with you on credit card spending. In addition to the rewards points, credit building and easy tracking benefits already mentioned here, it is also is a great way to save money. When coupled with an online savings account like ING as you have, or HSBC as I have, there’s an opportunity to earn a little more interest on the credit card company’s dime. By doing as much spending as you can afford to pay back on your card each month, you can get up to an additional 45 days of interest earned on that money depending on pay period and billing period for your card by putting more cash in your savings account (before having to pay off the card). It may not be more than a few dollars each month, but over time it could definitely add up.
Ben –
I think you have an excellent portfolio for conservative growth.
Have you considered investing a small portion in earlier stage, higher risk areas?
These early stage ventures can be very exciting investments and if placed and managed properly can also be very financially rewarding.
These do not have to be ‘two guys in a garage’ operations, but more conservatively you could look toward companies on smaller exchanges seeking capital to expand their business.
I have been successful pooling money with small groups and making a series of diverse investments in such enterprises.
Possibly, this is too early a stage for you to make early stage / high risk investments. You may want to consider waiting until a later stage of your investment timeline to enter this area of investment.
In any case, I think you are building a solid financial foundation.
Best of luck!
Cheers,
Jonathan
Very interesting and helpful thoughts as I have been pondering the same questions for myself.
The Capital One Credit Cards looked pretty good at first glance. Until I found out that they refuse to report the card limits to the agencies.
As a result those estimate the limits by the maximum balance carried, which can result in numbers unfavorable to one’s credit score.
Surely not essential (especially if one is willing to max the card out once), but somewhat strange.
See here:
http://articles.moneycentral.msn.com/Banking/YourCreditRating/WeirdStuffThatHurtsYourCredit.aspx
Best regards,
Bjorn
The correct link should read (without line break):
http://articles.moneycentral.msn.com/Banking/
YourCreditRating/WeirdStuffThatHurtsYourCredit.aspx
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Ben,
I have been digging around on your site since I discovered it recently…I loved reading this entry, not least of all because the parts of it I knew about in 2007, I agreed with too…I wonder how your game plan has changed in these last three years.
Good work with it all – I check in often and always learn a little something !