How To Invest Like A Pro (For The Average Joe)

In Can You Reduce Your Spending? we talked about cleaning up your budget and paying down your debt.  Now that your budget is cleaned up and you have excess cash, how do you invest?  

I know what you’re thinking.  When you see the word, “investing” you may hear these words in your head: 

Confusing?!  Complicated!!!  Scary?!  Recession!!!

If this is you, I have good news.  By the time you’re done reading this post, you will have all of the information that you need to become a successful investor.  I promise it really is easy, and anyone can do it.  

Is your current investment tool a piggy bank?

Where To Invest?

First you need to select an investment company, and in my opinion there is only one to go with - Vanguard.  I recommend Vanguard because of their unique ownership structure.  Most investment companies are owned by outside shareholders, and in order to pay the “outsiders” the investment company has to charge their investors (you and me) fees.  Vanguard is owned by the funds that it offers which are owned by the investors (you and me).  There is no outside ownership.  Read more about the unique way Vanguard is structured here.

What Type Of Account Do I Open?

If you decide to go with Vanguard (good choice!), you now need to open your account.  For most people pursuing early retirement this is going to be a taxable account (when you eventually start to pull your 4% per year in early retirement, you will be taxed on the dividends and long term capital gains from this account).  Don’t sweat the tax implications because if you are a couple filing jointly, your first $77,200 of income is taxed at a zero rate.  Most people living in early retirement live on much less.

Open your taxable Vanguard account here.  

What Fund(s) To Invest In?

This is the easiest part! 

Before I begin, let’s talk about what we are not.  We are not day traders, and we are not short term investors.  We are buyers and long term investors.  When the stock market is up, we buy.  When the stock market is down, we buy.  We know that if (or when) another 2008 happens, we would buy as much as possible while others panic and sell (because the market will go back up).

What funds should you invest in with Vanguard?  The good news is there are only two, and depending on your risk tolerance we could lower it to just one (like us).  

Fund 1: VTSAX – Vanguard Total Stock Market Index Fund

This fund covers every single company that is in the US Stock Market.

Fund 2: VBTLX – Vanguard Total Bond Market Index Fund

This fund covers every type of Bond in the US Bond Market.

Next decide how you want to allocate your funds.  If you are okay with some volatility in your account, you could just stay 100% in VTSAX.  If you want to smooth the ride out a little bit you could do 75% in VTSAX and 25% in VBTLX.  

As an example, we are currently sitting in 100% VTSAX.  Once we retire I am considering changing to 90% in VTSAX and 10% in VBTLX (but would never go lower than a 75% / 25% split regardless of age).  

For more on this investment strategy, I’m going to point you to one of the posts in Jim Collins Stock Series again.  If you haven’t read the series yet, I highly recommend you do it as soon as possible. 

What About Fees?

Not only is Vanguard’s company structure designed to benefit the investor, but they also consistently offer the lowest fees.  The amount of fees you pay is very important and can save you thousands over the long run.  

An example:

If you have $100,000 invested in VTSAX with Vanguard you are going to pay an expense ratio of $.04 % (these are the fees they will deduct every year).  $40 per year for every $100,000 invested ($100,000 X .0004 (move the decimal over 2 places) = $40.)

Even if other companies offer similar fees for a similar investment (most do not), they still can’t touch the unique ownership structure of Vanguard that we discussed above.  Other investment companies are set up to make money off of you, and Vanguard is set up to make money for you while charging the lowest possible fees. 

What About My 401k / IRA?

If you are fortunate enough to work for a company that offers a 401k Plan you should be maxing this account out.  I’m not talking about maxing it out to the company match.  I’m talking about putting in $18,500 if you are under 50, or $24,500 for those that are over 50.  Don’t worry about early withdrawal penalties for those reaching FI (financial independence) before the age of 59 ½, there are ways around that (For more information on this let me introduce you to the Mad Fientist.  This guy is a genius!).

If your 401k is with Vanguard, congrats you are one of the lucky ones and can invest in VTSAX and VBTLX.  If you are with a company like Fidelity, search out a low cost Total Stock Market Fund and a Total Bond Market Fund to invest in.  For example, my 401k is with Fidelity, and there is a S&P 500 Index fund with rates comparable to Vanguard that I invest in. 

If you have an IRA, I suggest rolling over to Vanguard (if you aren't already there!) and investing as mentioned above in VTSAX and VBTLX.  

That’s It!

To sum it up.  Vanguard, VTSAX, VBTLX.  Got it?

So what do you think?  Where do you currently invest?  What do you think about this strategy?  Any questions?

-Erik

What Are You Going To Do?

But … what are you going to do?

Once we reach FI (financial independence), we won’t have to work.  So now what?  

What would you do?  Would you keep working?

Initially we thought about moving to a state where the kids (heck, all of us!) could enjoy the seasons and outdoors (Houston is great and all (for many reasons that I won't go into right now), but it feels like the surface of the sun from about May through September.  And that is putting it nicely.)  We were thinking … maybe Colorado?  Or even Bend, Oregon?  Those may still be on the table … 

2018 Snow Trip to CO

But our next thought was … why not travel?  Why not travel while the kids are young?  Max is in his third year of Dual Language (English / Spanish), and Sadie is starting her first year of Dual so why not Spain?  I’ve loved our Dual program (shout out to their teachers!) … so maybe we should build upon that?  Our current idea (nothing set in stone) is to maybe take flight to Spain for a school year (yes, enrolling them in public school - hope their Spanish holds up well!) once we reach FI.  We like the idea of being able to immerse them in the Spanish language / culture.  But ... time will tell.

Where would our next flight take us?  That’s the scary / exciting part.  Would we want to spend a longer time in Spain?  Would we want to spend a year somewhere else outside of the US?  Would we want to settle back in the US - Colorado or Bend, OR (or another place?) and take time to travel in the summer time when the kids aren't in school?

Our main goals right now are … 

• Giving the kids an opportunity to be immersed in the Spanish language / culture.
• Learn about life with the kids through travel (whether that is full-time travel or on school breaks).
• Spending more time with family (my sister is in NYC, and we would have the flexibility to be able to visit more or for a longer period of time).

Another idea is to live in one big (expensive!) city once a year (a month or more) and show how it is possible to live off a smaller annual budget.  First stop, NYC (well, we will be visiting there regardless).  Paris anyone?  London?  San Fran?  DC?  Tokyo?  (With Airbnb it is all possible!).

And what about just the opportunity to … 

Explore?  Nap?  Find art and make art?  (Still) Teach art?  Sell art?  Write art or other educational curriculum (which I may be making for my kids anyways)?  Read?  Write?  Volunteer?  Netflix Binge?  (Drink wine?  Eat tapas?)

How about you?  What do you plan to do when you retire?

-Tara

Can You Reduce Your Spending?

Reducing Spending?  Let the kids play for free in the backyard / park in the mud!

If you are considering FI (financial independence), “where do I start” may be the first (and sometimes overwhelming) question.  I asked myself this question in 2013, and the answer is reducing your debt and cutting spending.  This part is not the most exciting (and certainly isn’t easy), but it is absolutely necessary to reach your FI goals.  You can’t save for FI if you haven’t paid off your debt.  Let me say that again ... You can't save for FI if you haven't paid off your debt.

Where to begin?  

• Get out a pen and paper, or open up a spreadsheet.  Do what works for you.
• Write down your total take home monthly income at the top.
• Below that subtract out all of your monthly expenses.  Not sure?  Look at your bank account, or completely track your spending this month (Need help?  Try using Personal Capital or Mint).

Reality check, right?  The number staring back at you may be a little depressing to look at, but we are going to work on that.  It will get better (if you want it to).

Let’s come up with a hypothetical situation to put this into perspective.  We will assume this is a dual income household with two kids.  Then we will take a look at how the numbers improve by making some key changes.  

The first budget is where many people are right now.  They are looking at a lot of debt.  But look - there is still close to $1,000 left over each month.  The best thing to do with the $1,000 is to start paying down debt as much as possible.  Start with the highest interest accounts first (probably credit cards).  If you start applying any extra money to paying down debt, you are well on your way to FI.  

But we aren’t done yet!  Let’s clean up this budget a little bit by making some lifestyle changes.  In this second budget, we have made some changes to help pay down debt as quickly as possible.  Decide what is important to you, and what you can adjust.  

In this example … 

Goodbye Cable! (We said goodbye to ours in 2013, and we don’t miss it.)  Goodbye Gym Membership! (Exercise is great, and you should do it.  But are there cheaper (or free) ways to exercise especially if you are paying down debt?).  Lower Grocery Spending.  Drive less.  Lower your Electric Bill (Either by researching for a better rate or turning up the temperature a few degrees.  It makes a difference.)  Lower Entertainment Spending.  Cheaper Cell Phone Plans (Republic Wireless anyone?)

Check it out!  You now have an extra $1,000 per month to allocate to paying down your debt.  Just by making some rather small changes we have gone from paying down $12,000 per year in debt to $24,000 per year.  

I used a two year time frame to pay down the debt as an example.  Everyone’s situation is a different, so just keep paying it down as quickly as possible until your debt is gone.  Now our third budget … 

In the third budget, after two years of aggressively paying down debt, it is all paid off in our example scenario.  Now we can start saving / investing for early retirement at $4,000 per month which is $48,000 per year!

All this being said, none of this is easy.  It’s always hard to make lifestyle changes, especially when there are multiple people involved.  But in our experience, every lifestyle change we made has led to improved quality of life and happiness.  And you are literally buying yourself an extra 20 - 25 years of freedom (depending on your age of course)!

So can you give up that extra Starbucks coffee?  What can you cut out or lower spending on?

-Erik