I recently wrote an
article for Seeking Alpha suggesting a specific ETF-based portfolio for millennials to consider as their New Year's resolution going into 2017.
In the comments section, I received the following question from a 25-year old reader.
If this has already been answered, I apologize, but why would someone
invest in this portfolio rather than increase their IRA contributions or
save up to contribute to their Roth? The reason I am asking is that I
have been thinking about investing outside of my IRA, but to me, it does
not make sense to use that extra money in a taxable account, where I
could use it in a nontaxable instead . . .
I ended up writing a fairly long response to this young man. As I reviewed it afterward, it occurred to me that this might form a nice article in and of itself.
So, here it is:
Noah,
I'm quite a bit older than you are, but perhaps I can address your question by describing how I run my financial affairs.
First,
pretty much all my life I have lived by the mantra "as little debt as
possible." As just one example; after buying my first house, I decided I
would save FIRST and pay for any upgrades with cash, as opposed to
taking a second mortgage, running up a home equity line or the like.
Now, that meant I had to be patient. I didn't have the nicest looking
house on the block right away. But neither was I ever in deep debt.
Cars?
Haven't had a loan on a car since I was in my early-30s. Well, that's
not technically true. I bought a Subaru Outback in 2013 and they gave me
interest-free 48-month financing. I had plenty of cash in savings to
write a check for the car. But, at zero interest, I decided to keep that
money in savings and at least get my lousy 1%. So, let's modify that to
"haven't had a loan on a car on which I paid any interest since I was
in my early-30s."
As far as 401(k), my policy has
been to be sure I took full advantage of the employer match. It's free
money, right? Typically, this has meant I have contributed 6% of my
salary. The key is that I started early enough that I haven't had to do
anything dramatic in later life in a desperate attempt to catch up.
But,
at 25, there's another component to your life. All the years between
now and when you can get to that retirement money. For me, I break it
down into 2 basic categories: 1) SAVINGS - I have online savings
accounts at Ally Bank and Synchrony Bank and have enough stashed away to
cover any and all "emergency fund" needs, pull some out once in a while
for a nice vacation to Italy (see the beautiful picture on my Twitter
account and personal blog), and other such. 2) INVESTMENTS - Over and
above that, I invest in ETFs (and a couple of individual stocks) just
like I recommend in my articles. While my goal is to rarely if ever
touch this money, I could if I wanted to. So, for example, if an
incredible opportunity to purchase a piece of real estate popped up, I
could go here for the funds.
In summary, I guess I
would say that life has two parts. Sure, the retirement component is
important. But you've also got a lot of years to live before then. Make
sure you handle your finances holistically, with all segments of your
life in mind.
Oh yeah, and be sure to have a
little fun along the way. The sad reality is that any of us can have the
most perfectly-laid plans negatively impacted by some unforeseen event.
A now-deceased uncle of mine, who lived through the Depression, once
told me to live life from two perspectives: 1) Make sure to put
something away for the future but, 2) Also never to forget to have at
least a few great experiences while you are young (and healthy) enough
to enjoy them!
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