Simple money saving tips! Part 1

  • Saving money is a universal struggle
  • There is no painless trick to saving more money
    • Determine on an individual level what you can cut out
    • Saved money should be put away, not spent elsewhere
  • Some simple saving tricks
    • Unplug electronics not in use to save on passive energy drain
    • Learn housekeeping skills
    • Insulate your home
    • Lower water usage
  • Saved money should be invested, to work and grow for you

If you often find yourself unable to save much money, you’re not alone. Life is expensive; between rent and utilities, food and clothes, going out and enjoying yourself. Especially as a college student or a recent college graduate, your income isn’t very high and you really don’t want to be drinking Keystones again.

This is a hard truth. If you want to save money, you will have to be content living a less luxurious lifestyle, regardless of your income level. Living frugally is generally not fun. It takes discipline. It takes time. It doesn’t particularly get better. I’m sorry there isn’t a better way of phrasing it.

What this means for you is: you’ll have to eat out less. You cut back of treats for yourself. You’ll go to less events or cut out a service you don’t really need. To effectively save, you’re going to have to set limits individually, based on your situation. And even if you are very strict on your guidelines, you aren’t going to all of a sudden see your bank account explode. It’ll take months or even years to see any noticeable accumulation of wealth and even when you do, it’s not like you can go out and buy something with the savings. (Side note: if you’re saving to buy a house, all real estate purchases should be treated as investing, not simply buying) That’s a big reason why I like treating contributions to saving accounts as a monthly bill. The money has to be put away every month and there is nothing I can change about it.

For smaller scale savings, a few simple habits can save you some cash. Not a ton of money, but 5-10 dollars a month is better than nothing.

First, and super simple, unplug everything you’re not using. The passive energy drain of a flat screen TV is as much as a refrigerator.  Microwaves, internet routers, lamps, chargers. Anything that plugs into a wall, should be unplugged. Especially when you’re asleep or not home. It’s especially easy if you can plug everything into a power strip, because then it’s just one motion.

Personal example: I have my TV, PS4, sound system, internet modem and a lamp on one power strip. Every day when I get home from work, that one strip is plugged into the wall. And it is unplugged before I go to bed. That saves me around 16 hours of passive energy draw, significantly lowering my energy bill at the end of the month.

Things you can learn to do yourself will also save you from hiring someone to do it for you. Skills like cooking can become hobbies and allow to you eat both cheaper and healthier. Basic needlework, leather upkeep (for shoes and bag and the like), ironing, cleaning and home repair are all valuable skills to learn and once you’ve learned them, you will no longer have to pay someone to do it for you.

Additionally, things like cable or a landline might be redundant if you pay for things like Netflix or have a mobile plan.

Often, insulating your house can also save you money on heat and air conditioning. Putting old pillows or blankets in the crawl spaces of your home will increase insulation. Sealing holes and leaks in your walls or window frames can also help. An often overlook area is the wall plugs and ceiling light fixtures, which will also leak air. Those can be sealed with various supplies you can buy at home improvement stores. Talk to a friend-recommended contractor to see what other improvements you can make.

If you pay for water, washing your dishes by hand instead of a dishwasher will lower your water bill. If you joined a gym, showering there will also help. Putting a jug or a brick in your toilet tank will lower the amount of water you use to flush.

Again, cutting costs and saving money is a consistent and inconvenient struggle. It also doesn’t end up saving all that much, unless you take some extreme life-style changes. What we should keep in mind is that once you have saved the money and are consistently saving, safe investing outlined in this blog are how those saving grow and work for you.

In a part two, we will discuss some other saving tips as well as where to put the savings i.e. and emergency fund

Advertisements

Actionable: First Investments

Where Do I start?

  • Offer S&P 500 ETF or a Russell 2000 ETF as preferred initial investments
  • Explain why indexes are great investments
  • What you should consider for a second step

To New Readers; Welcome. To Old Readers; Welcome back. Here’s where the fun starts. Here’s where we make our first actual investment.

If you haven’t read the articles Defining a Traditional and Roth IRAs or Opening a Trading Account, please glance through those; you’ll need a trading account before moving on.

Transferring funds to your trading account is reasonably easy and quick. You’ll need the account and routing (electric) number as well as funds in your bank account.

Once the transfer has been confirmed, you’ll need to invest that money into a security. Otherwise it sits as just cash reserves with no interest or growth.

And so my first suggestion is to invest in Vanguard S&P 500 ETF (Ticker: VOO), and/or Vanguard Russell 2000 Small Cap ETF (VTWO). I’ve got sizable percentages of AUM in both. Alternatives include a DOW ETF, a S&P 500 Growth ETF, a Russell 3000 ETF.

The next article will define an ETF and a later one will compare the various mutual funds that offer them, but for let ETF simply mean it tracks all the same stocks that are in the various indexes that it is titled after.

You’ll notice a theme in my suggestions, that we are looking at broad index funds. The reasons are varied; it provides liquidity, diversification, timeless advice, low management and fees, as well as growth that many actively managed funds find difficult to match or beat over a significant period of time. Let us address each of these advantages in terms of an S&P 500 ETF and/or the Russell 2000 Small Cap (from now on we’ll use the ticker symbols VOO and VTWO, respectively, as shorthand for the funds.)

Low Management and Fees: Index ETFs require little of your time to manage. As they capture an overview of the market.

Mutual Funds and ETFs both have management fees. However because VOO and VTWO are Vanguard funds and are index tracking, their management fees are extremely low. They don’t have to be actively managed and Vanguard is already well known for their low fees.

We’ll talk about this more later, but low management fees are extremely important and is why it is first on this list. Definitely make it one of your most important factors in deciding an ETF.

Liquidity: Being one of the largest ETFs for either of the indexes, you’ll have a fairly easy time adjusting your position in the fund. The ability to quickly increase or decrease your position in an investment is useful to building a nimble portfolio that can react quickly to whatever the market is doing. It’s important to note that VTWO has smaller trading activity than VOO and is therefore less liquid.

Diversification: 500 stocks in VOO and 2000 in VTWO makes the case for diversification pretty clear cut. Capturing a wide variety of stocks and industries means you’re less likely to see losses from eclectic shocks. The S&P 500 is meant to be a measure of the entire market while the Russell 2000 is simply so large, it has to be diversified.

(Quick side note; you’re diversified among US stocks. Neither of these indexes have stocks in foreign markets which is an important distinction.)

Timeless Advice: This article is aimed at your first investment for a Traditional/Roth retirement fund for 20 somethings. To this end, simply getting your foot into the metaphorical door is a good start. These index ETFs are perfect for just that. Regardless of your entry point, 4 decades of growth will clearly wash out whatever short-term concerns we might have about the market. Therefore, whenever you’re reading this article, my advice stands.

 

Sustained growth: Possibly the strongest argument for why this should be the first investment in your portfolio. Actively managed mutual funds or hedge funds have difficulty beating indexes over a long period of time. Because we’re long over a few decades, your best bet is the index funds.

In conclusion, it’s my firm belief that your first investment should be just a broad index ETF investment. As your first investment, it’s important to have well-rounded strengths, few weaknesses, and seek modest growth without incurring a lot of risk. A broad US equity ETF provides diversity, liquidity, and stability. Additionally, the ETFs I suggest have low management fees, and in the long term, beating the return of actively managed funds.

Outlining Goals

Highlights:

  • Define Goals as effectively saving/investing money to meet financial goals.
  • Defining the Means and Tools we will use to meet said goal
  • Outline Categories of Articles

 

Goal:

We want to effectively save, invest, and grow our money using minimum effort.

 

By effectively saving, we mean that we try to keep losses to a minimum. This includes losses due to broker fees, government taxes, loss of return, loss of principle, inflation, trading fees, our own consumption etc. etc. There are a lot of people who want to dip their hands into your nest egg,so defending your principle is just as important as growing it.

 

By steadily growing, we mean to with beta; with the same risk as the market as a whole. Because we are not nearly smart, active, or lucky enough to beat the market, instead we will be satisfied with minor risk and steady return.

 

By minimum effort, we mean that using almost exclusively the actions outlined by this blog, we will reach our goal. Further research can yield a deeper knowledge and insights that might not be covered here (I’ll provide some links and resources), but for safe and steady growth, this blog will be all-inclusive with easy to follow instructions.

 

To accomplish this goal of steady growth, we are arming ourselves with a deep and functional knowledge of the market(s), strategies and approaches to investing, as well as the trading platforms available to us.

 

This blog will be dedicated to providing you with actionable and timeless instructions  that will make navigating the financial markets a breeze.

 

The topics we will discover and learn about in this blog will generally drop into these following categories.

Definitions

Strategies

Market Knowledge

Each article will have an accompanying rating of difficulty, either beginner, intermediate or advanced.

With any luck, and much hard work, by the end of this journey we will have collected enough knowledge to properly save for our futures, provide for our families, or just buy that new Tesla Model 3 or BMW Series 5 that is just a really awesome looking vehicle and it totally makes sense that I should get one.


Whatever your end goal is, I truly hope that you learn something from this and we both are better for the journey

Definition: Traditional and Roth IRA

The Roth IRA.

Defining the following terms: IRA, Traditional IRA, Roth IRA.

Discussing high level differences, advantages and disadvantages

IRA, individual retirement arrangement, is a tax deferred financial vehicle, or a fund where money can saved, invested, and sheltered from taxes for retirement. It is offered by most brokerages, mutual funds, banks, credit unions and other financial institutions. IRAs are subdivided into two categories: traditional and Roth IRAs.The difference between traditional and Roth IRA’s is how money is taxed, explained below. Money put into the IRA (contributions) can  be invested in securities. Generally, your contribution limit is $5,500 a year, COMBINED for your Roth and Traditional IRA ($6,500 a year if you’re over 60). Example: if you put $3,000 in your Roth and $2,500 in your Traditional, you have reached your cap for the year. Additional contributions will be taxed.

 

IRA’s are NOT federally insured. There is a risk of losing principle through investing.

 

Contributions and investment returns generally are withdrawn upon reaching age 59½.  Policies on withdrawing vary depending on the situation and the type of IRA, explained more below.

A Traditional IRA is the first type. Contributions can be fully taxed deducible, if you do not have a retirement plan offer through your work. They are partially deductible if you ARE in a retirement plan through work. Click here for a chart of guidelines.

You will be penalized for withdrawing money from a Traditional IRA prior to reaching age 59½. Money taken out after 59½ is subject to your current income tax level. Once you reach age 70½ you are required to take out a minimum distribution or pay a heavy fee.

A Roth IRA is the second type. It differs in that the money is taxed going in, but not taxed going out. Contributions are capped depending on your income level. Generally, if you’re making more than $100,000 a year, you can contribute less than the $5,500. Click here for guidelines on contribution limits. Any money in a Roth IRA can be withdrawn, tax free, at age 59 1/2. You can also withdraw any contributions you’ve made without penalty as long as they have been in the account for 5 years. There is no maximum age that you have to be to withdraw from this account.

As a generalization, the Roth IRA is the more flexible account. For younger people (30 and below) this is always going to be your best bet. It is likely that your income level at 59 1/2 will be higher than your current income level. Additionally, the growth you gain over 30 or 40 years will not be taxed, which is the most important aspect.

 

Example: If you are 25, your income and your tax bracket will be likely higher when you are 30, 40, 50, 60. Therefore, putting the money in a Roth, and getting taxed at your rate at age 25, will be less than putting the money in a Traditional and having the withdrawals be taxed at age 60.

Those who are older than 30 should look at their own retirement goals. If you’ve like to stop working at 60, you should probably use a Traditional IRA. If you don’t, the Roth is the way to go.

Your income level maxes at around 40. At that point, you should exclusively use a Traditional IRA. Your income level after 40 is not going to increase that much, and your withdrawals will not push you into a higher income bracket.

If you’re more of an active trader with a separate brokerage account, it’s useful to know that IRAs do not have report capital gains. If you have a really good play, it might be better to use your IRA to avoid capital gains, and use your separate brokerage account for less risky and smaller gains.

Investing Strategies: The Case For Investing

The case for investing

  •         Why Should you invest?
  •         Inflation and Purchasing Power
  •         Historical Growth and becoming Wealthy
  •         Compound Interest and Time

So if you’ve been alive in 2008, you have an idea of what happened. The Great Recession, the Financial Crisis, Subprime mortgages, etc, etc. A lot of jargon that you might not understand, but clearly does not convey a lot of confidence in the market. There are plenty of horror stories of losing all of your savings in an instance. Maybe some of you have heard of Ponzi’s Schemes or Bill Madeoff, the king of Ponzi schemes.

So why even bother taking that risk? Shouldn’t we cram all our money under our mattress? At least I’m not going to lose it right?

I’ll try to lay out an intuitive and, later in the article, a fundamental argument to why you should always invest your money, even with the risks of stock market collapse.

At the bare minimum, investments offer a safe guard against the worst of inflation. Trying to save for retirement without fighting inflation is the equivalent of building a boat without sealing the holes. Your boat might be huge, but it’s probably not going to sail very far.

Inflation is just the gradual loss of purchasing power. This means your dollar, in terms of goods in can buy, is worth less than before. Right now, inflation is about 2%, meaning every year you essentially lose 2% of your nest egg, in terms of what you can actually buy with your money. Inflation will be a future article itself, but this is the root of the joke that older people remember a time you could buy, like, a bag of groceries for a nickel back in the day. Decades ago, that nickel was worth a lot more, but inflation took away the ability to purchase goods.

In today’s low interest rate environment, keeping your money in a savings account is barely giving you a return, making your more vulnerable to inflation.

So where do we turn to outpace inflation, if not in a savings account? Securities come in many shapes and forms. Safer securities, such as sovereign debt, high quality corporate bonds, or certificates of deposit have higher return than saving accounts, but still relatively low. More risky investments, like real estate, equities, or derivatives offer higher rates with a possibility of losses. Whatever your medium of investing, it’s incredibly important to have an investment strategy. Being safer will allow you to avoid inflation. Taking smart risks can begin the process of wealth building.

The average year-over-year of growth of the S&P 500 is 7%. At that level of return, over decades of time, one sees a sizable return on investment. Rather than just outpacing inflation, instead you are building wealth. This is how most fortunes are maintained. In an understandable example, high-profile athletes who manage their fortunes, often see  their net worth grow in retirement.

Now while you might not be making 27 million a year (*cough*A-Rod*cough*) the magic of time and compound interest will see that you have more money when you retire than if you just stuff your mattress.

Given that most people reading this are in there 20s, and given the general trend towards later retirement, many of us won’t retire until late 60s or 70s. This gives us FIFTY years of time. A $1,000 put in the S&P 500 today, seeing 7% return for 50 years, gives us nearly $30,000. 30x return. Tax-free if that’s a Roth IRA. That’s jaw-dropping. If that doesn’t make you want to throw your money into fund right now, I can’t help you.

The key factor here is time. Given 50 years, if you have that savings, you’re always going to see a lot of money when you retire. You’re going to become wealthy. It’s a guarantee, founded in discipline and patience. I hope I’ve laid out an intuitive reasoning to investing today. In an accompanying article, I’ll add some number crunching, for those who like a more data driven argument. If I’ve convinced you of anything, please read Opening an IRA and First Investments. It might change your life.

Opening an IRA

Opening an IRA

Actionable Items

Beginner

 

  • Steps to opening an account
  • Comparison of some of the largest names

 

In  this article, we’ll look a little at the different brokerages you can open an IRA account from. If you haven’t already read Defining an IRA, I highly suggest you start there.

 

Back? Good, let’s move on. Once we’ve decided that we want to save for retirement and use the either a Roth IRA (or a Traditional if you’re older) we need to actually open an account. Scroll to the bottom for a chart comparing some of the major brokerages. Simply follow the links to open a account.

 

Once you’ve decided on a firm, opening an account is easy. Go to their website, search for IRA or Roth IRA accounts and click open. The chart below also includes links to the sites.  You’ll be ask to provide some basic information, such as social security number, employment, address and email, plus a bank account.

 

Once your account is opened, you can transfer money from a bank account into the IRA. Congratulations! This is your first contribution to your IRA. Remember that you have a maximum of $5,500 you can contribute to a IRA before the tax man double dips ($6,500 if you’re older than 50). Click here if you make more than 100K a year or are married (filing jointly)!

 

I currently use Merrill Lynch because they are the only licensed broker for Bank of America employees. Prior to that I used Fidelity. In my experiences, both of these brokers have been fantastic. However feel free to pick your favorite. It’s not a significant difference between them for our purposes; if you are taking trading advice mainly from this blog. Below is a chart listing the various fees/requirements/services provided by the brokerages in my order of importance.

 

Account Fees

Account Requirements/Minimums

Trading Fees

Products provided

Transfer Fees

Bonuses

The following is a table of sampling of brokerages. Please look on their website for further details

Brokerage Account fees Account requirements Trading fees Products provided Transfer fees Bonus Full Details
TD Ameritrade None None $9.99 per trade for Equities and ETFs Range of Equities, Bonds, Mutual fund, Options, Other $75 for Account transfer Various bonuses for Deposits of $2,000 and up. Details Details
Fidelity None Minimum Investments Required 7.95 per trade for Equities and ETFs Range of Equities, Bonds, Mutual fund, Options, Other $50 fee for transfers Check Site Details
Roth
Traditional
E*Trade None None 9.99 per trade for Equities and ETFs Range of Equities, Bonds, Mutual fund, Options, Other Bonus cash for accounts 25K plus Details
Merrill Edge None None 7.00 per trade for Equities and ETFs Range of Equities, Bonds, Mutual fund, Options, Other $50 Various benefits, inc. free trades for 25k funds Details
Scottrade None None 6.95 per trade for Equities and ETFs Range of Equities, Bonds, Mutual fund, Options, Other $75 Details