Where to Invest $5,466 a Month

Posted On February 5, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning /

Why should you invest $5,466 a month? Why that very odd number? Well, at an 8% hypothetical return, investing $5,466 a month will get you to $1 million in 10 years. That’s what we are going to explore today and it is very possible for many professional couples to save this much.

Last week, we looked at where to invest $1,000 a month. That’s a reasonable goal for many people, a 10% savings rate for a couple making $120,000 or 15% for an individual making $80,000. And while saving $1,000 a month may be okay, it will take decades to amass enough for retirement. If you want to accelerate the process or aim for a higher goal, you have to save more.

Saving $5,466 a month is $65,592 a year. For a couple making $200,000, that represents saving 33% of your income. That’s challenging, but not impossible. After all, there are many families who get by with making less than $134,000.

There are many different ways you could invest $5,466 a month, but I’m going to focus on adding tax benefits both in the present and future. Let’s get right to it!

Retirement Accounts

Maximize 401(k), $1,625 a month each. That will get you to the 401(k) annual contribution limit of $19,500. It is surprising to me how many people don’t do this. For a couple, that is $3,250, more than half our goal to invest $5,466 a month.
Company match, $416 a month each. Many companies match 5% of your salary to your 401(k). For an employee making $100,000 a year, that equals $416 a month. I am assuming this couple each makes $100,000. For two, that’s $832 a month. Added to your 401(k) contributions and we are now at $4,082 a month.
Backdoor Roth, $500 a month each. At $200,000 for a couple, you make too much to contribute to a Roth IRA. However, you may still be able to make Backdoor Contributions to a Roth IRA, for $6,000 a year or $500 a month each. Added to 1 and 2 above and your monthly total is $5,082. We only need to find another $384 to invest a month to reach the goal of $5,466.

Additional Places to Invest

Health Savings Account (HSA), $600 a month. If you’re a participant in an eligible family plan, you can contribute $7,200 a year to an HSA. That could be up to $600 a month, and that is a pre-tax contribution!
529 Plan, $1,250 a month. If you are saving for a child’s future college expenses, you could contribute to a 529 College Savings Plan. A 529 Plan grows tax-free for qualified higher education expenses. Most parents choose to stay under the gift-tax exclusion of $15,000 a year per child, which is $1,250/month.
Taxable Account, $ unlimited. You can also contribute to a taxable account. And while you will have to pay taxes on capital gains, dividends, and interest, we can make these accounts relatively tax efficient.

Other Notes

Tax Savings. While trying to invest $5,466 a month is a lot, you will be helped by the tax savings. A couple making $200,000 a year (gross) will have just entered the 24% Federal tax bracket after the Standard Deduction of $25,100 (2021). Some of your tax deductible contributions will be at 24%, but most will be at 22%. Using just 22%, your joint $39,000 in 401(k) contributions will save you $8,580 in taxes. That is $715 a month back in your pocket. Add in $7,200 to an HSA and save another $1,584 in taxes ($132 a month).
Catch-up Contributions. If you are over age 50, you can contribute more to your 401(k) and Roth IRA accounts. There are also catch-up contributions for an HSA if age 55 or older.

I wish more people had the goal of becoming a Millionaire in 10 Years. We cannot control the market, but we can do our part and do the savings. At an 8% hypothetical return, starting to invest $5,466 a month can put you on track to $1 million in a decade. And if you already have $1 million, saving $5,466 for another 10 years would get you to $3.2 million.

For couples making over $200,000, can you afford to invest $5,466 a month? Can you afford not to? Planning is the process of establishing goals and then creating the roadmap to get you there. If you’re ready to create your own roadmap, give me a call.

How to Save More Money

Posted On August 29, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /

Growing your net worth is the product of saving and investing. Sometimes, we assume this means we have to slash our spending to be able to save more. Sure, you want to have awareness and planning regarding your spending. But it’s not much fun to give up coffee or never take a vacation. There has to be a balance between sensible spending and your saving goals.

Luckily, there is another way to increase your savings rate: earn more. Especially for younger investors, as your income grows you will find that you can easily save more. This may take a number of years. But, as your career takes off, your income may increase at a double digit rate during your twenties and thirties.

So, don’t despair if you cannot save as much as you would like today! Focus on growing your career and increasing your income. Saving will get easier.

Hold Your Spending Steady

As you get promotions and raises, avoid the temptation to keep up with the Joneses. You will see friends and classmates who are buying fancy cars and huge houses. Good for them! But what you might not see is how much debt they have, how little they save, or their net worth. You won’t know how stressed they are about their finances. They may be two paychecks away from being broke.

Hopefully, your current lifestyle is enjoyable and you find happiness in your relationships and the things you do. Getting more expensive things is not likely to create lasting satisfaction. The temporary, but fleeting, pleasure from consumption is known as The Hedonic Treadmill. If your priority is becoming financially independent, using a raise or bonus to save more is a better choice than spending it.

Put Your Savings On Autopilot

As your income grows, save your raises. Establish recurring deposits to your retirement plans and other accounts, and increase them annually. If take this step when you receive a raise, you will not miss the extra money. Skip increasing your monthly savings, and you probably aren’t going to have extra money leftover at the end of the year. If it’s in your checking account, you will spend it!

For couples, a joint income is a tremendous opportunity. If you can live off of one salary and save the second salary, you will grow your wealth at an amazing rate. In some cases, this could literally be saving one of your paychecks. Or, it may make more sense to participate in both of your 401(k) plans, and save the equivalent of one salary.

Multiple Sources of Income

Given the economic fallout from Coronavirus, many people aren’t getting a raise this year. A lot of us are seeing that our 2020 income will be lower than 2019. Hopefully, this will be temporary, but there are lessons to be learned. It is a risk to have all your eggs in one basket with one job. If you lose that job, you’re really in trouble.

As an entrepreneur, I have always had multiple sources of income. My financial planning business is diversified across a number of clients. I also sell insurance. I make music in a couple of orchestras and teach a few lessons on the side. Some of it is small, but having multiple sources of income gives me flexibility and safety.

Have you considered finding a side hustle, second income, part-time business, or online gig? Find something you enjoy and make it into a business. Find something people need and provide that service. You never know where that part-time work might take you. Maybe someday it will allow you to retire early or be your own boss! In the mean time, use your additional income to save more and build up your investment portfolio. Don’t give up your time just for the sake of buying more things.

How and Where to Save More

How much should you save? If you are saving 15% of your income, you’re doing way better than most people in America. Start at a young age, and a 15% savings rate will likely put you in a very comfortable position by retirement age. For those who are more ambitious, or just impatient like me, aim to save more than 15%. You could be putting $19,500 into your 401(k) each year ($26,000 if over age 50).

And you might be eligible for an IRA, too, depending on your income. Or, consider a taxable account, Health Savings Account (HSA), or 529 College Savings Plan. There are lots of places you could be saving! Put your savings on autopilot with recurring deposits to your retirement plans and other accounts. If take this step when you receive a raise, you will not miss the extra money, but you will be growing your wealth faster.

Do you need a reason to save more? The sooner you save, the faster you can achieve financial freedom. Even if you enjoy your work, it’s great to have the means to not have to worry about your job.

You can save more by spending less. That’s true, but you can only eliminate an expense once. Most people will have some tolerance for cutting costs, but austerity is no fun. Focus on increasing your income, hold your expenses steady, and increase your monthly savings. Put your energy into building your career, and aim for a high income. Couples have a great ability to save, if they can aim to live off one income. Look for creating a second or third income stream. A lot of the wealthy people I know have an entrepreneurial mindset. They have multiple income streams.

As your earnings grow, you will be able to save more and invest more. Most of my newsletters deal with investing, tax, or planning questions. But those benefits only accrue after you’ve done the first step of saving that money. It’s not how much you make that matters, but how much you keep!

Become A Wealth Builder

Posted On June 15, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /

Is this a terrible time to become a wealth builder? With market uncertainty from the Coronavirus, and the very real destruction of jobs and income, it’s easy to dispair. But you shouldn’t and here’s why.

There remains a unique opportunity in America to become financially independent. Building wealth is a slow process that requires patience, discipline, and smart decisions. But once that process has begun, it is simple. And by simple, I mean not complex. That’s not to say it is easy! Like running a marathon, it’s a long haul, but it is also just one step at a time.

You can begin those steps today. We offer two programs at Good Life Wealth Management. Our Premier Wealth Management program provides holistic financial planning and tactical asset management for investors with assets over $250,000. The Wealth Builder Program is designed for investors who are starting out and have less than $250,000 to invest. In fact, many of my clients in the program start with zero dollars to invest with me.

You can read more about the Wealth Builder Program here. Today, I want to share three reasons why now is a great time to start the process.

Long-term Expected Returns

Investing should be a 30+ year process, but people are so focused on the month to month volatility. Don’t! It’s noise that will distract from your goals. The Vanguard Capital Markets Model, projects the following expected annualized returns for the next 10 years (as of June 3, 2020):

US Large Cap 5.4% to 7.4%
US Small Cap 6.2% to 8.2%
International Equity 8.5% to 10.5%

That’s not bad. Will Vanguard be right? No one knows. But I do know that leaving your money in a bank account earning 0% won’t grow. If you have more than 10 years until retirement, history suggests you are likely to be wise to invest. And if the market does drop, that is often a great buying opportunity for investors in Index Funds. Stick with diversified funds, and Dollar Cost Average with monthly automatic contributions.

Consider Inflation

Right now, there is no inflation and the concern in the near months is deflation. However, globally, governments are expanding the supply of money and taking on new debt at an unbelievable pace. How will economies be able to repay all this debt?

There are a couple of possible scenarios. Some smaller countries will default and not repay their debt. Some will introduce austerity measures, slash spending, and raise taxes. This will be very unpopular. I think the preferred way for many developed economies will be to try to gradually inflate out of debt. That is to say, it is easier to repay a fixed dollar amount of debt as the GDP and taxes of a country grows. So, some inflation will be good and very welcome.

Inflation does not help consumers, as the cost of living increases. We also have very low interest rates today, which penalizes savers. But if the eventual scenario is modest inflation, it will benefit borrowers like the government. People who hold cash – nominal dollars – will see their purchasing power decline with inflation. Wealth Builders investing in stocks and real assets are more likely to see their net worth grow in times of inflation.

Positive Wealth Building Habits

Over the past 16 years as a Financial Advisor, I’ve met many people who are financially independent and observed their personal characteristics. Successful investors are not necessarily smarter than everyone else, but they usually are optimistically committed to good savings habits.

We’ve certainly had bad times in the past 20 years. It hasn’t been an easy road. We had the Tech bubble, followed by 9/11, and struggled with an unprecedented three down years in a row. The Death of Equities? No. We had the housing bubble and crash in 2008-2009. Was that the end of investing? No.

There are times when you have big drops and it’s ugly. Today, people may be thinking that the world is going to hell in a handbasket and that investing now would be pointless. But that is exactly what investors over the past 20 years faced, and it turned out fine. That’s why I think it’s important to educate yourself on history and think positive. Create wealth building habits now without worrying about what is going to happen in the rest of 2020.

Make automatic contributions to your accounts like a 401(k) or IRA. Dollar Cost Average and keep investing.
Diversify. Consider Index Funds as core holdings. Evidence shows that a majority of active funds underperform their benchmark over 5 or more years.
Don’t get greedy. Chasing performance can hurt returns. Avoid speculating on individual stocks, sectors, or countries.
You cannot control what the market does. Your goal should be to be a participant in the market, not to try to get in and out of the market.
Focus on what you can control: your mix of investments (asset allocation), and keeping taxes and expenses low. Rebalance.
Live beneath your means. Keep your housing and car expenses down and create the room in your budget to save. Increase your savings rate over the years, not your lifestyle expenses.

Conclusion

In spite of today’s uncertainty, there are reasons why young people need a plan to become a wealth builder. Long-term equity expected returns are still attractive, especially relative to cash and 10-year bonds. If you anticipate inflation picking up over the next several decades. you want to be invested for growth. Good savings and investing habits can create wealth over time. The more years you have, the earlier you start, the more chance to compound your returns. Eventually, your money will work for you.

In our Wealth Builder Program, we begin with a Balance Sheet to quantify all your assets and liabilities. For many young professionals, this often starts as a negative number. We will track your net worth and create a plan to save, invest, and grow your wealth. We will address risks to you and your family and develop a plan that’s unique to your situation.

Yes, you can always wait for tomorrow. A decade ago, we had just come out of a crash. As of May 31, 2020 the 10-year annualized return of an S&P 500 fund (SPY) is 13%. Were people wildly optimistic 10 years ago about the opportunity to invest? No. There’s never that degree of confidence and certainty. You just have to get started and commit to making it work. Ready to become a wealth builder? Email me for information.

Past performance is no guarantee of future results. Investing involves risk of loss of capital. Dollar cost averaging cannot guarantee against a loss.

Your Goals for 2019

Posted On January 13, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /