How to Save and Invest Your Money Like a Boss in 2019
As the end of your Peace Corps service looms large, it’s easy to feel like you’ll have it made in the shade once you land a job and can pay your own rent.
Then student loan invoices start rolling in. You see your parents aging. And you can’t help but notice how many of your friends bought homes and cars while you were swatting at mosquitoes and farm fowl on multi-hour bus rides.
Just getting by each month doesn’t feel so satisfying anymore. You’d like to manage your money, save, and maybe even invest. But where to begin?
Here’s a simple step-by-step guide to building and managing your wealth!
In this article, we’ll walk you through these crucial steps to building wealth:
- Switch to a fee-free checking account
- Establish a money market savings account
- Build your safety net
- Pay off (most) debt
- Max out your Defined Contribution Plan every year
- Max out an Individual Retirement Account every year
- Save for big purchases
- Establish an Individual Taxable Account
We’ll also give you lots of context on tax regulations, tell you what to avoid, and make recommendations of awesome financial services to help you make all of it happen.
1. Switch to a fee-free checking account
First thing’s first: stop paying more than you have to. Find a checking account that has no minimum balance requirement, no international fees, and no ATM fees. We did some research on your behalf, and Schwab is a strong choice. You’ll get an investor account when you open the checking account, but it’s not required that you use it. Which is good, because there’s definitely better investment accounts out there (more on that later).
2. Establish a money market savings account.
Before we move on, let’s be clear about the purpose of your savings account (hint: it’s NOT where you keep your savings.)
- Money you expect to spend over the next 1-2 weeks, plus a cushion (let’s say $200) should live in your checking account.
- Money you expect to need for the rest of the month should live in your savings account. That’s it. No $10,000 savings account balances, people!!
So what to do with everything else you’ve saved? So glad you asked.
3. Build your safety net
Before you do anything else, make sure you have a backstop for when shit hits the fan. The here is that if you were suddenly unable to work, you’d have enough to continue living your same lifestyle for at least 6 months, and ideally a whole 12 months. The Safety Net can also be very useful for major unexpected expenses, like if you have a car accident or get really sick. Meg (our transitions coach) knows this awesome woman from their Peace Corps Paraguay days named Paula Perhach. Paula calls her Safety Net the Fuck Off Fund, because sometimes people just suck and it’s worth having a cash stash with which to fund your escape from a sleazy boss or a spouse turned scrub .
How to make it happen:
1. Count up all your expenditures for the past few months and divide it to get a monthly average. Don’t forget rent, gas, utilities, insurance, groceries, Venmo, mortgage payments, subscriptions, loan payments, cash from the ATM, credit card charges, and direct transfers from your bank account.
2. Are there any annual or semi-annual costs that aren’t included in this? (For example, service memberships, car maintenance, insurance premiums, travel). If so, be sure to include an appropriate portion of these in your monthly average.
3. Now multiple that by 6 (or 12 if you’re feeling motivated).
4. Open an account that accrues at bare minimum 2% annual interest. See the Pro Tip box below for our recommendation.
5. Only put Safety Net moolah in this account. Keeping it separate from the rest of your money is crucial to keeping track of exactly how much is in it.
OK, back to that Safety Net:
6. Put money in this account as fast as you can until you hit the 6- or 12-month estimate you calculated in #3.
7. Don’t touch it. If that fat stack is threatening to burn a hole in your pocket, write up a list of instances in which you have permission to tap into your fund, and stick to it. The “nice to have or need to have?” litmus test might also be super helpful to you. New car? Nice to have. Cast on your broken leg? Need to have. Vacation? Nice to have. Quitting your job because HR didn’t take your harassment complaint seriously, and now you’re stuck working with the sleaze bag? Need to have.
8. If you do use part of your Safety Net, fill it back up before you put money on anything else.
9. Whenever there’s a big change in your life, like a move or a big purchase, recalculate your monthly expense average and beef up your Safety Net if needed.
4. Pay off (most) debt
Debt is NOT a bad thing. It lets us make smart investments that earn a ton of money in the long run, like getting an education or starting a business. But poorly managed debt is outrageously expensive. And we are trying to be affluent here! So once you’ve gotten your Emergency Fund up to par, it’s time to turn your attention to dealing with debt.
1. Compile a list of all the debt you have. This includes student loans, car loans, credit card balances that you’re carrying from month to month, mortgages, and other bank loans.
2. For each one, figure out the annual percentage rate (APR) and write it next to the loan.
3. Put them in order from highest APR to lowest. Most likely, credit card debt will be at the top, followed by car and bank loans, student loans, and mortgages.
4. Read the fine print and make note of any that have pre-payment penalties (credit cards never do). If any of them do, figure out the cost of paying the penalty vs. the cost of paying interest on the loan for the full loan term.
5. Start paying off the one at the top of the list first. Don’t be tempted to pay off the smallest loans to get it out of the way. Knock out the highest APR first, always.
6. For pre-payment penalty loans: If you determine that it’s cheaper to pay interest than pay the pre-payment penalty, keep paying the maximum amount you can each month on that loan without incurring a penalty. It’s important to know the difference between the minimum amount due (many loans will only bill you for the premium each month) and the maximum you can pay without being penalized. Put any remaining money you have that month toward the next loan on the list. And never again sign for a loan with a pre-payment penalty.
7. Once you get down to the end of the list, take note of any loans that have 0-2% interest. Set up automatic minimum monthly payments on these.
5. Max out your work-sponsored Defined Contribution Plan every year
Once you’ve established your Safety Net and paid off your debt, it’s time to start putting your spare income to work. Most employers offer a Defined Benefits Plan and/or a Defined Contribution Plan.
Here’s what to do about your DCP:
1. Double check that the investment plan is one of the four listed above, and not simply an opportunity to purchase stock in your own company. Having all your eggs in one basket is a red flag in the investment world.
2. Decide whether to make pre-tax or post-tax (roth) contributions. Basically this boils down to whether you’ll have a higher taxable income (=owe more taxes) now or in retirement.
3. Find out if the company matches your contributions, and if so, how much.
4. Opt into the investment plan (talk to HR) and select your investments. Here’s some hints to help you pick:
- Look for mutual funds—they are extremely diverse and thus relatively stable
- Look for funds with longstanding companies like Vanguard. The Vanguard 500 is one of the best performing in history.
- Look for funds labelled as lower-than-average risk and higher-than-average returns (you might have to Google the fund name).
- Look at the historical performance compared to the overall stock market chart. If the fund stays close or slightly above the stock market, and doesn’t drop as severely as the stock market, it’s probably a great option.
- Spread your contribution out over lots of different funds. Diversity is strength.
5. Contribute as much as you can. Do this even if you’re already contributing to a DBP. At the very least put in the maximum amount your company will match, because it’s free money. Aim for the legal maximum of $18,500/year.
6. If your organization offers both a 403(b) and a 457(b), split your contributions between the two, and aim to maximize both.
6. When you leave the organization, roll your DCP into your Betterment account rather than into your next organization’s investment plan. You’ll pay far lower fees, and it’ll be way easier to manage your money effectively. It will show up in your Betterment account as a Traditional IRA or Roth IRA (more on that below). And don’t worry, they’ll keep track of whether you’ve already paid taxes on it or not.
6. Max out an IRA every year
So you’ve got a Safety Net, you’ve paid your debt off, and you’re maxing out your Defined Contribution Plan (or your company doesn’t have one). Well done! Now it’s time for IRAs.
Investment retirement accounts (IRAs) are like personal investment accounts for retirement. There’s more limitations on them than company-sponsored investment plans, but they still give you tax advantages and a great way to save. They exist because not every employer offers a DCP. Nevertheless, even people who have a DCP can use them. The legal annual contribution limit is $6,000 (or $7,000 if you’re age 50 or older).
The same pre- and post- tax concepts that apply to company investments plans also apply to IRAs. Pre-tax lowers your taxable income now and increases your taxable income in retirement. Post-tax gets taxed now, and decreases your taxable income in retirement.
In the IRA world, pre-tax is referred to as Traditional, and post-tax is called Roth.
The tax break on Traditional IRAs works a little bit differently than for company-sponsored retirement plans, but the effect is more or less the same. Instead of the investment being made before your income is taxed, you get to claim your Traditional IRA contributions as a tax deduction. So your earnings get taxed, come to you, go to a Traditional IRA, and then come back to you in the form of a tax return.
You are eligible for a Traditional IRA tax deduction if:
- If you don’t have a DCP at work.
- You have a DCP at work, and you earn less than $74,000 annually.
If you don’t qualify for a Traditional IRA tax deduction, then there’s zero reasons to have a Traditional IRA account. Instead, go for a Roth IRA. Just like a post-tax DCP, it won’t reduce your taxable income now, and the money will be tax-free when you withdraw it in retirement.
- Decide whether a Traditional or Roth account is right for you. As with company-sponsored programs, you can also choose to split the maximum legal amount between a Traditional and a Roth account.
- Open an IRA account. Once again, Betterment is the best place to do this. Start a new account and choose “Retirement”. They’ll guide you through the rest.
- Put as much as you can in this account each year. Aim for the legal maximum.
7. Save for big purchases
Maxed out your annual IRA contribution and still have dough left over? Hot damn! It’s time to reward yourself with the fun stuff: saving up for your next big purchase!
- Start a Big Purchase account in Betterment. If it’s for Education, pick that option. One of our clients uses the Big Purchase account to save money to care for his parents in their golden years. In this case, a retirement plan would not be appropriate, since it’s not for YOUR retirement. (Most retirement plans restrict access to the funds until the account holder is of retirement age.)
- Decide how much you need and by when.
- Divide by the amount of time between now and then, and set up automatic recurring transfers from your checking account.
- Watch your nest egg grow!
8. Start a Individual Taxable Investment Account
If you don’t have a Big Purchase in mind, or you have some extra cash you want to put to work, then it’s time for our personal favorite: general investing!
Taxable investments technically aren’t as cool as company-sponsored or IRA investments because they aren’t protected from taxes as much. Taxes are taken out of your income before it’s handed to you, you invest it, and then when you withdraw it, any gains are also taxed. That said, you can access the money at any time without penalty, until retirement accounts. And it sure is fun to see your money spontaneously multiplying from one day to the next.
One really smart thing to do at this point is to start moving your wealth out of US Dollars. This is a great way to bring even more diversity into your wealth-building, and is a good cushion for times of recession. Real estate is the top choice for most; it’s a relatively stable and reliably growing market. It used to be that purchasing property was the only way to get into real estate. That comes with it’s own set of issues: saving for years, going into debt, keeping up with mortgage payments, and, of course, having your success hinging on just one or a handful of properties. Our favorite generation (Millenials, of course!) solved this issue with the rise of easily accessible online shared equity platforms.
Here again, we did plenty of research on the reputation, fees, and diversity of all the providers out there, and Fundrise comes out on top for us.
Other options for moving out of US Dollars are cryptocurrencies and foreign currencies, such as the Euro. Unlike many other countries, there are virtually no reasonable services available in the USA for holding foreign currency. Revolut is aiming to come to the USA soon, and will change all of that. Robinhood offers free purchasing of some cryptocurrencies.
If you want to stay in the stock market for now, Betterment far and away offers the best service for taxable investment accounts in that regard. Open a General Investing account. If you’ve input all your info into the RetireGuide, Betterment will set up the risk level for you. Research shows that there’s very little or no gain across the long term between medium- and high-risk investments, so we suggest sticking with medium.
In both cases, you’ll have the option to reinvest dividends. Choose this if you want all the gains from the account to stay in the account. If you choose not to reinvest dividends, you’ll get a little bit of income from it every month. This could be a good thing if you’re needing some extra passive income, but definitely not a good thing if you are already earning enough; it will increase your taxable income unnecessarily.
Congrats! You’re poised to build wealth.
If you’ve established your Safety Net and paid off your debt, you have a strong financial future ahead of you. If you’re maxing out your DCP, you’ll be ready for retirement in no time. Getting through all these steps every year? You’re well on your way to an early retirement!
A few things NOT to do
1. Don’t use Smart Saver.
Betterment isn’t perfect; the one service we don’t see much value in is their Smart Saver account. It offers about 2% interest on your savings every year. However, this amount is not guaranteed, since the 2% interest comes from stock and bond investments, and, like all investment accounts, your money is not guaranteed by the FDIC. This isn’t such a big issue for long-term investing like the accounts described in the previous steps above. But it’s not a great place for money you expect to need this month. Money market accounts guarantee the percentage interest, and they are FDIC insured. It’s a clear win in the savings account category.
2. Don’t withdrawal from DCP and IRA accounts.
You’ll get hit with some pretty harsh fees (there are some exceptions that reduce the loss, but it’s still a very last-resort option). This means that, while you should put as much as you can into retirement accounts, put it in knowing that you won’t use it again until you’re about 60 years of age.
3. Don’t fiddle with your taxable investment accounts more than necessary.
Every time you adjust the risk level or make a withdrawal, stocks get sold. Every time stocks are sold, you’ll owe taxes on any gains they made. Gains from stocks that you’ve owned for less than 6 months get extra heavily taxed. If you do need to make a change, rest assured knowing that Betterment’s complex algorithms go a long way to reducing taxes owed through some cool reallocation functions that leverage that 6-month rule.
4. Don’t get TOO crazy with individual stock/ currency purchases.
By owning portions of dozens of mutual funds which each have dozens of stocks in them, you probably already own a little bit of most companies on the stock market. That said, the more you get into finances, the more likely it is that you’ll eventually want to invest in more in a particular company. Some people eventually decide to diversify into cryptocurrencies. In this case, we suggest:
- Limiting yourself: don’t stop investing in your other accounts, and set an amount in advance
- Use an app that offers free trades, like Robinhood or M1
- Stick with stocks/currencies that are stable and have a long growth outlook
5. Don’t hesitate to reach out.
Got more questions about juggling your finances? Every Peace Corps affiliate gets a free coaching session. No spam, promise. We just love helping Peace Corps folks.