Personal Finance Thoughts

Eric Johnson
03-12-2019

There are lots of acronyms and rules and opinions about saving for retirement/what to do with your money when you get a job. I put a lot of thought into this when I started work after school and had a lot of stress over making the right choices. I’m writing this post to force myself to summarize and clarify my thoughts on the subject, and tangentially to help anyone who reads it and is in a similar situation. The more open I am about my financial decisions, the more of a chance I find something dumb I was doing, or someone tells me how I can improve.

My Background

I graduated from college about eight months ago, without student loans (thanks to my parents and the John McMullen Dean’s Award from Cornell Engineering). I am thankful for this opportunity and I understand how much of an advantage this puts me at. I work in NYC and spend a bit under 25% of my pre-tax yearly salary on rent/utilities.

Overview of types of accounts

Below is my understanding of the different types of accounts available/relevant for myself and probably other young urban professionals. The list isn’t exhaustive but should cover most accounts you may want to know about for financial planning.

401k

Employer managed retirement fund
Some employers match contributions to your 401k
Contributions usually come right from your paycheck
Two options: pre-tax and ROTH
- Pre-tax is money that doesn’t get taxed until you withdraw from the account
- Pre-tax is also usually where money from employer contribution matches goes
- Money you contribute pre-tax lowers your taxable income which can lower your taxes
- ROTH is taxed before going in, and is tax free when you withdraw
You have to wait until you are ~60 to withdraw without penalty from your 401k, some 401k’s have rules that require you to start withdrawing at a certain age
The max amount you can contribute (for the entire 401k) is $19,000 for 2019
Fidelity, Vanguard are typical places where you open the account, but because it is employer managed, your employer chooses this for you
Taxes:
- Depends on the type of account
Typical strategy:
- Contribute as much as possible each year and hold until you retire, at the bare minimum, contribute enough to get your employer match (free money)

IRA

Individual retirement account
Two options: pre-tax and ROTH (like 401k)
- Pre-tax is taxed when you take money out
- ROTH is taxed before going in
This is similar to 401k but it’s individually managed and has lower amounts you can put in per year
Cool feature is that you can contribute towards last year’s limit up until April 15 of the current year if you are doing a ROTH
The max contribution is $6,000 for 2019, $5,500 for 2018
Fidelity, Vanguard, Betterment are typical managers for this
If you make above a certain amount of money (~$120,000) you can’t contribute to IRA
Taxes:
- Depends on the type of account
Typical strategy:
- Contribute as much as you can while you still can (based on your income), then hold until you retire

High Yield Savings

Savings account that gets better interest rates than normal checking or savings accounts, but subject to special rules
You can usually get ~2% interest rate in a high yield savings account vs ~0.05% for normal savings or checking account
Typical rules for these accounts:
- Usually <=6 withdrawals allowed per month
- Sometimes there are fees if you don’t have enough money in your account (depending on the bank)
Interest rates usually subject to change throughout the life of the account
Taxes:
- Have to pay taxes on money earned as interest
Popular high yield savings accounts are Marcus, Ally, Synchrony, most banks have some version of these accounts
Typical strategy:
- use as an emergency fund or use to strategically limit spending out of a checking account

Personal Brokerage

An account for personal investing
Buy stocks, bonds, ETFs through this type of account
Taxes:
- Have to pay capital gains tax when you sell
Fidelity, Vanguard, Extrade, Robinhood, Charles Schwab, many others
Typical strategy:
- Buy securities that you think will increase in price
- Buy stocks that pay high dividends
- Use this account like gambling at a casino
Another strategy is dollar cost averaging:
- This is when you buy shares of something with the same amount of money at a set frequency, e.g. you buy $500 worth of shares in the S&P 500 index fund on the 20th of every month
- Because you buy the same amount (dollar wise) every time, when the price is higher you will buy less shares and when the price is lower you will buy more shares of whatever you choose to buy
- In the long run, the average price you bought at will be closer to the cheaper shares than the more expensive shares, and you should be able to sell for a profit
- Read more here
- Works great when you don’t have a large chunk of money to invest at once, but instead just want to invest little bits of money over a long period of time (like a specific amount out of every paycheck you get)
- This calculator shows how much you can make using this strategy

Checking

Typically the main source of money for all other accounts described here
Usually have a debit card and checks linked to this account
Usually have paycheck direct deposited to your account
Money spent with debit card is taken out of checking account immediately

Credit Card

For spending on purchases and building credit
Buying on “credit”: money spent with credit card is paid by the bank upfront, then you pay the bank back when you pay off your credit card bill
People get into trouble because it’s easy to buy things with money you don’t have and then not be able to pay your credit card bill in the future
There are a lot of bad decisions people make with credit cards, read about them if you want online
Taxes:
- If you get enough cash back through a rewards program, may have to pay taxes on this
Typical strategy:
- Get a card with some type of rewards (cash back or points) that you can accumulate and use for other things like cheap airfare on travel
- Spend money on this card to get accumulate rewards
- Pay off your credit card bill often to build good credit and improve credit score

CDs

Certificates of deposits
I think of these like bonds or a loan, where you are the person who loaned the money
You buy these from the bank (give the bank $x) and they give you that money plus interest after a certain (defined) period of time
Can buy these through almost any bank
Taxes:
- On interest earned
Typical strategy is to “ladder” CDs:
- Buy a one year, two year, and three year CD, all with the same amount of money (say $1000)
- The one year rate will be less than the two year rate, which will be less than the three year rate (probably)
- When the one year CD expires, take the interest as payment, then use the principle ($1000) and buy a three year CD
- When the two year CD expires, take the interest as payment, then use the principle ($1000) and buy another three year CD
- Now once a year, your oldest three year CD will expire, you will get a check for your interest payment, and then you can buy another three year CD
- This “ladder” makes it feel like you have a bunch of one year CDs, but they pay the interest of three year CDs
- Another explanation

My allocations, accounts, and plans

401k

My employer has me use Fidelity, and contributes $0.50 for every dollar I contribute up to $10,000 (so they match $5,000 of the first $10,000 I put in)
I allocate 10% of every paycheck to the pre-tax 401k
I allocate 6% of every paycheck to the ROTH 401k
In general I think it’s a good idea to get as much employer match (free money) as you can no matter what
I am investing in Vanguard target retirement 2060 fund (because the other options I have aren’t very good or are too expensive based on the expense ratio)
If my contributions don’t get me to the maximum contribution ($19,000) by the end of the year, then I will use my bonus (if I get one) to try and top off my contributions
Because I am in target retirement fund, I don’t deal with rebalancing my holdings, but if I had the option, I would do this once per year
Given any choice, I would pick a variation of the three fund portfolio, with a mix of US stocks, US bonds, and international stocks

IRA

I only do a ROTH IRA, this seems to be standard for people who have the option to use pre-tax 401k
I want to max out my ROTH every year ($6,000 in 2019, $5,500 in 2018)
Eventually I want to have invested 1/3 of my money in VTSAX (Vanguard Total Stock Market Index Fund), 1/3 VTIAX (Vanguard Total International Stock Index Fund), 1/3 VBTLX (Vanguard Total Bond Market Fund)
- Because of minimum purchases for admiral shares (the funds I want to buy into) I only own VTSAX right now
I plan on rebalancing the ratios of money in the three funds once a year
Rebalance = move money around so amount in each fund is back at 1/3,1/3,1/3
I use Vanguard for this
I set the account up so any dividends I get paid are re-invested into my funds
Hopefully I eventually make too much money to be able to contribute to this fund, when that happens, my contributions will stop and I will just leave the money in the fund until I am old enough to withdraw it

High Yield Savings

I set up automatic contributions to take $500 per month from my checking account into this account
Trying to follow the “pay yourself first” philosophy
This is my emergency fund, I want to have living expenses for about half a year to be accessible here in case of emergency
I’m going to keep doing the $500 automatic contributions until I have ~$10,000 in this account, then I’ll turn down the auto-contributions to $100 per month (this depends on my financial situation a couple years down the road and is subject to change)
Also, if I want to save for a vacation or a large purchase, I can set up other auto-transfers of money from checking into this account and strictly enforce my savings goals
I use Marcus and get a 2.25% APY as of 3/12/2019

Personal Brokerage

I cannot buy stocks due to my current job, so I’m going to use this account for dollar cost averaging into index funds
- Side note: even though I can’t buy stocks, I don’t think I have the time or the skill such that it would be worth my time to try and beat the market by picking stocks on the side, and no matter where you work, you probably don’t either
- Smart money usually does most of their betting on stocks with Other People’s Money
For now, I want to hold money in this account for 15-20 years, and only take out what I need if I do withdraw/sell some of my shares
- E.g. if in 20 years I want to buy some real estate, I could sell some of my holdings in this account to get the capital to make the investments
- Other big purchases that this account could fund are vacations, house, car, potential kid’s college tuition, small business investment, speculative real estate investment
- There are capital gains taxes that I would incur if I’m taking money out of this account, if the amount is big enough, I could see value in working with a CPA or the like to try and make sure I’m making the right decisions wrt potential tax consequences
I am using Vanguard and I invest $500 into the S&P 500 (VFIAX) once a month (using automatic withdrawals) and I re-invest dividends
Once I have enough money in my savings for a “life emergency”, I’m going to focus on putting more $ into the stock market (increase my monthly contribution) and continue to do this while I am younger and can tolerate higher risk. As I get older, I will scale back and probably diversify my contributions into bonds.
I also view this account as my main hedge against lifestyle inflation. If (hopefully when) I get a raise at my job, I will divide the amount of my raise by 12 (to get my raise amount per month) and then increase my monthly automatic contribution amount by about 75% of my raise per month (delay 3/4 of my gratification and account for potential income tax increase in overly simplistic fashion). If I can continue like this for any raise I get, I can live as comfortably as I am now and will be continually storing away money that I can use for things later on.
If I want to save for a short term semi-big purchase (e.g. going on vacation in 6 months) I could use this account to fund it in a few ways:
- pause the auto-contributions for a few months and then have a few thousand dollars (without changing anything else about lifestyle)
- sell some shares from the account and withdraw the money (but taxes…)
- (if I have a lot of money invested) don’t reinvest the dividends I get from the S&P 500 investment and instead use those to fund the purchase

Checking

I direct deposit my paycheck here
All other accounts use this account as their source for money (except 401k which comes right out of my paycheck)
I have a debit card linked to this account but I try not to use it
I pay my bills from here, unless they allow using a credit card
My checking account is through M&T Bank

Credit Card

I try to do all spending with this card so I can gain cash back and improve my credit score
I have auto-payments set for the end of every month, but also manually pay off the bill multiple times to month to keep credit utilization in check
I use Capital One Quiksilver card (1.5% cash back, no international fee)
I value simplicity of getting cash back on my purchases and the fact that there are no international fees for the Quiksilver
If I get another card it will be a “points card” with the goal of accumulating points to use for traveling, but I don’t want to invest the time into researching these cards right now
If you want to open a Quiksilver hit me up so I can refer you, then we can split the referal bonus

CDs

I don’t own any CDs
If I did, I would ladder CDs as far into the future as I could afford (like I described above)
Upside for this strategy is the potential to get a decent interest payment every year (as if you bought year long CDs at the 5yr long interest rate)
Downside is potential fees you have to pay if you have to take money out a CD before it expires

Tracking: It’s possible but hard and inefficient to track all of your accounts in separate places, or to do it on your own. With this in mind, I use Personal Capital to track all of my accounts in one place. It’s free and a lot of people online recommended it so I gave it a shot, I have no problems with it so far. There are probably other options or you could build your own too.

Goal (or thesis): I would like to make a lot of money during the course of my career, in such a way that the saving and investing plans above end up not having been necessary. My savings and personal finance plans are not expected to be my primary income or source of sustenance in the future. However, I am committed to saving according to my plan so that I have a safety net/insurance policy against taking risks in my career. I want to have money to fall back on if necessary and money that I can draw on to take risks (like starting my own business, making speculative real estate investments, etc.).

Random Closing Thoughts

The idea behind most of my accounts is to automate away the possibility I succumb to spending everything I make and therefore fall prey to lifestyle inflation. If you can’t easily access money, it’s unlikely that you spend it unless it’s necessary. As I described above, if my salary increases I can just increase automatic contributions to each account, then continue to live life as I do - delayed gratification.

A more specific thought I have is that I see no use for a savings account that isn’t high yield. It comes down to planning. If I need money that I don’t have in my checking account, I should know about this advance and use one of my 6 transfers/month (in the high yield account) to bring the money into the checking account so I can spend it. If an emergency comes up (e.g. I lose my job) I use the high yield account as my “paycheck” (add money to checking account twice per month) while trying to find another source of income as quickly as possible.

It’s hard to make plans and throw around $$ amounts especially right out of school, starting jobs, moving to new cities, etc. I think the most important aspect to all of these accounts is inertia. Once you open an account, the effort to contribute to that account is very low, especially with everything now being online and even accessible from an app on your phone. However, until accounts (the “infrastructure” of your personal financial situation) are setup, it’s impossible to make any progress towards financial goals. So advice I have and would give my past self would be: as you are signing the lease for your new place in the new city before starting your first job, force yourself to sit down and do all the paper-work/get everything in place and open all the accounts you want to have (maybe the accounts I describe above, maybe others). Because you will already be in that “mindset” (filling out paper-work for the new job, signing leases, etc.) opening accounts will be less annoying/burdensome than it will be when you keep putting it off and every Sunday afternoon you remember it’s just another thing on your to-do list that you are pushing off to next weekend. More so, most accounts don’t require a lot of money to be put into the account when it’s first opened! Even if you are broke from paying 1st months rent and a security deposit, just open the accounts with nothing in them. You can worry about actually contributing after a couple paychecks, but you want the inertia of having the account ready when you are. Don’t worry about overanalyzing and making the perfect/most optimal decision about your money. Doing something (anything) productive with it as soon as possible is going to be more effective than waiting and waiting and planning and thinking before putting anything to work. Also, it’s very easy and always possible to change things around after you have accounts set up. Good luck.

Other ideas or areas for exploration

Idea from a friend at work:

If you have stock options or something similar at your company, declare unvested stock as income and pay taxes on it now, before it goes up (if you think it’s going up).
Drawback is if you leave before stock vests you paid taxes on money you can’t access.
This is a common strategy for people who have stock options at startups who are taking the bet that the startup will be successful and options will be worth a lot more in the future.

Hacks for saving more money:

Acorns app or any other auto saving software
Make custom stuff with code and your banks API (if you really want to get into it)
Create IFTTT rules to move your money around or use Qapital
It would be really cool if you could set up a separate venmo account where you Venmo money you want to save, and the money that gets sent there automatically gets put into high yield account, etc. This is the lowest friction for saving money online that I can think of, especially with how much Venmo is used among yuppies.