My Personal Finance Infrastructure

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?

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