AnnetteLouisan wrote: ↑Wed Jan 26, 2022 11:01 am
Thanks Snowbog.
You note that you invest “when you have money to invest.”
How do you determine this? Do you keep a certain amount in cash, spend some and invest the rest?
Are you referring to when your paycheck comes in (assuming you are a employee) or other income if a business owner or trust beneficiary (nothing wrong in my opinion with any of those options).
Part of my issue comes from having had a way bigger income for 30 years already than what I need or am used to. It’s sort of paralyzing. My family feels the same way. We are in a poverty mind set but we are not in poverty (anymore, well, we were for US standards poverty adjacent - or even if we weren’t, it felt like it). It’s surreal at times. We want to do the right thing but are just learning what that is.
We know that saving and going to discount stores are good. All this other stuff is like a cyclone of unfamiliar habits. It’s hard to get on the Carousel.
But, feeling much more confident based on everything I’ve learned here!!
I think clip651 already answered genericly, but since you asked directly, I'll explain how I do it now.
First some context. Prior to finding BH, our savings was what was done through paycheck (401k, ESPP, etc.) or employer actions (RSU). Anything beyond that ended up in a bank account, and at one point we had a rather large bank account...
I fully admit I was financially illiterate during this time. I had no clue that we could - or should - be doing things like invest in IRA's, HSAs, 529s, taxable, etc. Those were problems for other people... As another example, our exclusive bank was a credit union we'd used our entire lives, which I think was paying something like 0.05% in savings and 0.01% in checking. This was when you could easily find options paying > 1%. And before I even understood inflation and that even at 1% I'd still have been losing money... I had a six figure pile of cash from years of hard work and living below our means that was actually costing us even more money, and would continue to do so forever...
Around 2018 or so (prompted by changes at work that made me realize I could find myself without a job unexpectedly) I started on my way to learning more about finances, and eventually finding the pot of wisdom that is BH. At some point I realized that we had enough cash to pay off the remainder of our mortgage (which we had been aggressively paying off), which was a > 3% guaranteed return comparing our mortgage rate to our interest rate. (On later finding BH, I learned we probably would have been better off investing that money. But no regrets, we can't change the past, we love being debt free, and the excess cash flow enabled us to eventually accelerate other investments.)
On finding BH, learned a ton. Learned that while we'd done a ton wrong, we did the basics right like max out 401k early, live below our means, etc. And we realized that we were better prepared and closer to FI than we thought.
Also learned a ton about finances, investing, retirement planning, etc. Figured out what an AA is and why it's important, what bonds are, why I should probably own some (Ignoring my cash, all my investments were basically 100/0 at that point)... Ended up also hiring PlanVision for a no nonsense recommendation (and I love them, no BS, advocates simplicity, very reasonably priced like < $10/month, still pay them although I rarely use them just knowing they'd tell me to quit meddling is enough). Initially landed on an AA of 80/20, and a goal of the "three fund" model. Once the plan was set, I exchanged my funds in my 401k to get to an overall 80/20. Once my decision was made and my funds selected,
I did this in a single day.
Then I started to realize everything else I had neglected. We were earning really good money at the time, paying a boatload in taxes. Yet we'd never even touched my spouses 403b plan, so we set that up and started to max it out (lowering taxes while increasing investments). I had no clue we could do Backdoor Roths, so I setup 2x and started those (no initial tax savings, but definitely long term savings, and again speeding up investments). I had no clue why someone would do an "after tax 401k contribution", only to find out that this was the Mega Backdoor Roth - another great way to speed up investments and lower long term taxes. I continued this journey until all of tax-advantaged accounts were being utilized as well as all of employer benefits were maximized.
Then I switched to our cash... Initially I struggled with things like do we need an emergency fund, is that part of our portfolio or separate, etc. I went through a lot of gyrations, but ultimately landed on cash would be included in our portfolio as part of our AA, but in doing so our AA was more accurately reflected as 75/25. The next was "how much cash" do we need. For us, this was extra hard as my income can be highly variable with some paid as "advances" (meaning if end of year measures aren't met, I owe the money back) and thus hard to predict taxes. So for a long time I maintained a high cash reserve, enough to cover several months expenses + payback any advances + pay any extra taxes. After going through some intermediary changes, including building up a cushion of I Bonds, what we now do for cash is:
- Maintain 1 months expenses in checking (for simplicity of auto pay, not stressing with moving money around last minute, etc.)
- Maintain at least enough in "cash" in saving for us to sleep well at night (this is now down to $30k for us, several months of expenses, used to be much higher... But we now know that between I Bonds, muni bonds, and the rest of our assets, we can get to money as needed...)
- Grow cash reserves throughout the year so that we have enough to front load 2x IRA, HSA, 529, I & EE bonds, etc. in January (this does double duty, most years it will do as stated, but if we end up owing "advances" back and/or have unexpectedly higher taxes, we can use this instead and just invest as cash flow allows)
After deciding we had "too much cash", like you I tried dipping my toe in... Let's do $5k at 5% less than current price and see how it goes... I was exceedingly worried about "buying at all time market highs". Took a lot of reading on here... But the thing that "made it click" for me personally was "Bob, the world's worst market timer" video I've previously shared combined with the realization that looking at the stock market over say a 50 year period, the trend is quite noticeably "up".
Took a few months... I realized that it was time my money was "working for me", and actually helping me not only beat inflation, but help me get to my retirement goals. And I realized that by continuing to wait, I was only making the problem worse. When the lightbulb went on, I invested 100% of my excess cash the next day and haven't looked back. It felt like one of the scariest things I did. The next time I had excess cash to invest, didn't even make me the least nervous. The right thing to do is the right thing to do...
After we got to our AA,
what this means in daily use, we have a specific $ target for cash (which increases every month and resets in January). If we have more than that amount, I know it's "excess cash" that should be invested. . For example, my spreadsheet shows I have $10k "cash" I should invest, to keep my AA that's actually going to I Bonds which is scheduled for the end of the month.
In reality, because we front load tax-advantaged accounts, we go through most of the year with no extra income to invest in taxable through our regular pay check. The exceptions being annual bonuses or quarterly RSUs, ESPPs, or "advances". We sell the RSUs and ESPPs as soon as possible (admittedly, I sell them at a "limit" price of whatever they landed as any "loss" would be a wash sale). Some of that intermittent money is already factored into the growth of our cash (setting aside enough to front load next year's investments), the rest gets
immediately invested based on AA.. As an example, by end of March I'll have another RSU and ESPP hit, that will push my "cash" amount out of balance, and anything in excess will be invested the first market day possible (
regardless of the current price, market conditions, etc.).
To add some more context, after better than expected income and amazing returns juiced by the extra investments we started making on our journey above, and perhaps the shock to the markets in early 2020, we adjusted our AA to 60/40. We are likely within a few years of being Financially Independent (aka the numbers work, assuming our assumptions are right, where we'd no longer "have" to work), but still plan on working a few years beyond that (get child into college at least which reduces some of the assumptions). So our "need" for risk was no longer as high, neither was our "willingness" to take risk. We had gotten to the point we had far more to lose than we needed to gain.
Once we decided on the new AA, realized that we couldn't get there in our tax-advantaged accounts (or not while retaining the ability to rebalance there). This resulted in adding municipal bonds to the mix through new money and selling stocks in taxable.
Now everything is basically on autopilot. My spreadsheet keeps track of current AA and projected AA based on planned contributions. At the beginning of the year, I adjust where new money is going. For example, my AA was closer to 64/36 at the start of the year, so 401k contributions were changed to basically 100% bonds, taxable to basically 100% I & EE & muni bonds (Roths left 100% stock).
If things get out of balance (my threshold is 5% of AA or 20% target value), my spreadsheet shows what's off and how much I need to change. (To my earlier example, my cash for January was off by more than 20% of target value, so it showed me how much I should invest.) During the March 2020 crash, several times it showed our AA was out of balance (initially stocks had dropped too much, during recovery they had risen too much). I remember thinking I was an idiot exchanging "safe" bonds for stocks that were plummeting in an economy that was being shut down by COVID. But I steeled my nerves and did it anyway... Oddly, it was harder to sell the stocks and buy more bonds, knowing stocks could go up much more. But I remembered that my AA is based on my need, willingness, and ability for risk. What the markets were, might, could, should do was irrelevant. So I rebalanced.
It was definitely a journey, with more than one false step, and lots of scary steps. And I continue to learn. I continue to appreciate and aspire for simplicity. Until then, I just sit back, update my spreadsheet every so often (mainly just my cash balances, or any changes to # of shares, as the pricing pulls in live updates), and tweak as needed.
I didn't get there over night... But I took one step, then another, then another, and they get easier and easier as I go.
If any of this resonates with you... As mentioned, some of us have been through a similar journey!