My Best Financial Decisions
I recently published an article explaining my four biggest financial mistakes.
Thankfully, I’ve made more good decisions than bad, and I am sharing those today. Here they are in no particular order.
1) I Started Early
I don’t think I can overstate how important an early start on saving and investing is.
The single greatest friend any of us have in building wealth is compounding interest. I was introduced to this concept in college, but the first time I realized that I could put it to use for myself was reading Dave Ramsey’s Total Money Makeover.
In that book, Dave illustrated how someone who invested $2,000 for 8 years could out-save another person who saved $2,000 for 38 years.
How is this possible? The first saver started earlier.
Did you know that $1 saved and invested today could be worth $7.60 in 20 years, $20.94 in 30 years, and $159.04 in 50 years!?!?
These multiples are incredible, but it’s only possible if you start early.
My wife and I started investing when we got married in 2006, and now that we’ve been saving for almost 20 years things are getting pretty exciting.
In 2019, our investments actually made more than we did in earned income from our day jobs.
Granted, it was a stellar year for the stock market, but we hope it’s only the first of many years like that as compounding interest continues to work its magic.
Don’t drag your feet. There is no substitute for time.
2) Say No to Debt
As I just mentioned above and in the post about our biggest money mistakes, we followed Dave Ramsey for the first few years of our careers so debt wasn’t something we accumulated much of (aside from a small student loan and our first house).
Thankfully, we were convinced that consumer debt wasn’t a good way to get ahead financially so we’ve always paid cash for our cars and never carried credit card debt.
Normally, people aren’t bothered when I mention the pitfalls of credit card debt, but for some reason borrowing money for automobiles seems to be more controversial.
I’m not judging anyone for their financial choices, but I think avoiding car debt might be one of the most important financial decisions my wife and I have ever made.
In a video we made recently for our YouTube channel, we showed how paying cash for cars could save you over $1 Million over the course of 30 years.
That may be a bit shocking, but if you consider the depreciation, interest, and opportunity costs of car debt, it adds up fast.
My recommendation is to not ever borrow money for a depreciating asset, but if you must, be sure your combined housing and transportation budget stays below 30% if possible so you have something left to save and invest.
3) The Beauty of Roth
I like to think that I’m a good American.
I certainly enjoy freedom, baseball is among my favorite sports, and I fully expect to hear Lee Greenwood’s voice at least a few times on the 4th of July.
With that said, I don’t share the same level of patriotic fervor for the IRS.
I know they have a job to do, and I understand that it’s very important. And, truthfully, I want to do my part.
I just don’t want to do any more than my part.
So, when I first heard about Roth IRAs and learned that I could excuse the government from at least some portion of my assets for the remainder of my life, I was intrigued.
If you think about most tax-deferred accounts, they work a bit like a silent partnership in business.
There is a general member (you) who is responsible for operating the enterprise on behalf of the silent partner(s) (Uncle Sam). A silent partner does not control the day-to-day activities of the general partner, he or she does not vote on decisions and does not typically have an active role.
However, when the partnership’s profits are realized, the silent partner is there with hands wide open, ready for their cut.
For years, you will contribute to and operate your own little financial empire without much outside influence or help. Then, when the time comes to enjoy the fruits of your labor, you get to share them with our favorite silent partner.
That is, of course, unless you invest through a Roth account.
In that case, you would have bought the IRS (your partner) out of his share when you began investing by paying taxes on your contributions.
Personally, this has been worth it to me more often than not.
For one, I have enjoyed life in lower income tax brackets for some time, making Roth contributions more tax-efficient than tax-deferred.
But I also experience a bit of paranoia when I consider the growing financial obligations of the federal government against what are historically low-income tax rates.
I suppose I have a nagging feeling that tax rates will increase one day, making Roth assets even more valuable.
Somehow, we’ve managed to get almost 55% of our personal portfolio in Roth accounts, meaning over half of our investments will be able to grow for years to come, completely tax-free.
4) I Did It Myself
About 8 years ago, my wife and I bought a fixer-upper.
I’m happy to share that today we live in a renovated version of an older home but when we bought it, it was in desperate need of a foundation-to-roof overhaul.
Initially, I wanted to do most of the renovations myself. I think I’m a handy guy and I like taking on projects anyway, but I’m not sure slow progress on nights and weekends would have worked for my wife.
Actually, I do know this because she told me.
After a few months, we hired a contractor to do most of the heavy work for us. It wasn’t cheap, but it was completed in just a few months and we’ve been living happily ever since.
But there were several projects in “non-living” spaces like the attic and basement that I decided to do myself.
We wrote a post about it on our website where we estimate that we saved over $75,000 in just a few years by completing these projects ourselves.
If you’re at a loss for how to fix or update something yourself, at least try to find a YouTube video about it before you call a pro. You may be shocked to see just how easy it is to do some basic plumbing, drywall, or automotive work yourself.
Those savings add up and lead to significant sums when the opportunity cost of investing your savings is considered.
With all of that said it pays to know yourself. Don’t take on anything that could be unsafe or just beyond your skill to manage.
5) Equities Baby!
If you ask nearly any financial adviser about asset allocation, they’ll generally suggest that you own a mix of stocks and bonds at a ratio of anywhere from 50/50 to 80/20 depending on your age and risk tolerance.
I’m not saying they’re wrong, but we chose early on to drop bonds and pursue the potential growth benefits of a portfolio heavily leaning toward stocks. In fact, for much of our investing lives, we’ve had 100% of our invested assets in stock mutual funds and ETFs.
The reason we did this is because we’re young (or at least we were when we started out) and have plenty of time to recover from an unexpected downturn in the stock market.
There is certainly a time and place for holding bonds or other non-correlated assets, but the justification is primarily centered around the need to limit sequence of returns risk. If you’re young, sequence of returns risk is low to non-existent for retirement savings because you’re not going to need the money for a long time.
And the results have been pleasant. The years we’ve been 100% invested in equities have outperformed the target date funds we formerly owned on the order of 2%-3% annually. Over several decades, this could translate into thousands or even hundreds of thousands of dollars.
I do want to clarify that we are not endorsing the ownership of individual stocks as an investment strategy. The “stocks” we owned were in mutual funds and ETFs which provided broad stock market exposure while also providing diversification to avoid concentration risk.
For more about how we have approached the use of bonds in our personal portfolio, please check out this post about bond ownership.
Wrap Up
Now that you’ve read this, please note that none of this is meant as a suggestion on how you should arrange your own investment portfolio. History is not necessarily an accurate indicator of future results.
For more information about investing please visit our YouTube channel or check out our investing page.
