53. How I Invest (Part 1)

This is the final piece of the "Investing" series.  I haven't blogged much in the past 3 years or so, and when I did blog regularly, I mostly focused on the principles that I believe and the "why" side of the subject.  This would be the "how" side, and although I want to keep talking about "why" most people will find this "how" more interesting.  Everyone has different agendas and no matter what the motives are, we all want to make more money, protect our money, and be wise with money, etc. I have no credentials on this subject, and it's up to the readers whether they find this informative or not.  But I have spent significant time trying to learn better ways, and I'm here to help.

 

First of all, I first began investing (after our family had become debt-free) in March of 2017, so it's been about 2 and 1/2 years.  I learned a great lesson and found hope by reading Dave Ramsey's "Total Money Makeover" and listening to his radio shows, but for technical advice, I needed more than his books.  Here is the list of books I read within the last 2 years in order to become a better steward of money:

 

1) "Think and Grow Rich" by Napoleon Hill

2) "Warren Buffett's 3 Favorite Books" by Preston George Pysh

3) "Money: Master the Game" by Tony Robbins

4) "Principles" by Ray Dalio

5) "The Richest Man in Babylon" by George Clason

6) "A Random Walk Down Wall Street" by Burton Markiel

 

For anyone who hasn't given much attention to personal finance until now, I would recommend starting with #5, George Clason's book, a rather short book but rich with financial wisdom.  And for those who want to learn more about how to go about personal investing, #3 will be an awesome read.  But that one is at least 3 times longer than the average book.  #6 is what you need the most if you just got interested in individual stock investing (to get you out of it).  

 

I wrote about IRAs in the last two posts.  There are 401(k), IRA, 529, ESA, HSA, etc.  These are the common types of tax-saving accounts, and I refer to them as "baskets."  The government (IRS) made these specific rules, and they're giving us a special tax break when we invest within these "baskets."  Without these tax-saving accounts, we would just be investing in normal brokerage accounts, and we would be doubled-taxed for any returns from the investment.  We earn money from working, pay taxes on income, invest with those "after-tax" dollars, and for whatever we earn from the investment (returns), we have to pay tax again.  So, in this typical scenario, the government is there to catch a portion of any money we earn.  But for example, with the tax-deferred account such as 401(k), we get some help from the special rule that IRS came up with.  401(k)s are invested with "pre-tax" (or before-tax) money, so you don't have to pay income taxes in the year that you earn for the portion you set aside in the 401(k) plan.  Although you will eventually get taxed on it when you withdraw, the real advantage is that you get to use some of the government's money to grow your investment.  Let's say you earned $2,000 and put $100 toward your 401(k).  In the current year, your income tax will be on $1,900 instead of $2,000, but that's not the main point.  If that $100 that you set aside was taxed (e.g. 20%), all you have in your hand to invest is $80.  And let's pretend the return was 10% in 1 year.  The earnings would be $10 vs. $8.  And that 20% difference is huge when it gets accumulated.  The $20 which would've been given to IRS is still in my hand earning that extra $2.  I should cut it short on explaining these tax-saving accounts for now.  I haven't got to the real how-to part of the message.  

 

 

I have 3 full pages of apps for Finances

 

Ok, here we go.  If someone asks me what they should do first, and I really don't have time to go deep into the details, I would say "First open a savings account where you can get at least 2% interest.  Btw, I use Ally Bank and I like it.  And visit vanguard.com to open an IRA account and a regular brokerage account.  Put a grand or two in the savings account first, and then start putting money into both IRA and brokerage accounts.  And within those IRA and brokerage account, pick low-fee index funds, such as the Total Stock Market Index or S&P 500 Index, and I will talk to you again once that's all set up."

 

I have our family's savings in 4 different categories. 

1) Bank savings account: Ally Bank

2) IRA accounts: Vanguard, Fidelity, American Funds

3) ESA accounts: TD Ameritrade

4) Brokerage accounts: Vanguard, Fidelity, Robinhood

 

The proportion in which I allocate our investment among these 4 categories is based on our family's short-term and long-term plans.  When I started saving 2 1/2 years ago, the short-term goal included purchasing a used minivan.  If I had saved everything in IRA or ESA, I wouldn't have any money to buy the minivan because IRAs and ESAs are not available for withdrawal (unless with penalty) until we retire and kids go to college, respectively.  And if I had put everything in the savings account, I would've missed the opportunity to participate in the growth of the market during the 2 1/2 year period.  So, I divided our investment based on personal discretion.  When it was time to buy the minivan, I took out all of the money from the savings account and took out a big portion of the brokerage accounts.  Our minivan was $11,500, and I would say about $1,000 of those were earned from investing in brokerage accounts.  

 

I first started with Fidelity.  (I also have some experience with T.Rowe Price too.) But after reading Tony Robbins' "Money: Master the Game" I decided to stick with Vanguard.  Vanguard is my favorite at the moment, but Fidelity and T.Rowe Price are pretty similar.  But American Funds is different in terms of the availability of index funds, so I don't put any more money into it, but just keep whatever was already in there.  Robinhood is for fun.  It's so easy and simple.  I do experiments with individual stocks on Robinhood but on a very small scale. I also recommend Robinhood for its ease of use.  

 

I thought I would get to the actual funds that I like, but the post got longer than I expected (as usual), so even this will have to be divided into 2 sub-parts. 

 

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