personal finance – Abacus Fitness and Money

Needs, Save, Want Budget Format (revised)

Everyone likes a quick simplification of something that otherwise requires a lot of thinking. A “rule of thumb”.

When it comes to planning what to do with your money, odd are that you’ve likely heard some recommendations floating around in articles, podcasts, videos, and the occasional blog post. Some of these recommendations are:

Save at least 10% of your income
Invest 15% of your income for retirement
Pay yourself first
50/30/20 rule (Spend 50% on needs, spend 30% on wants, and save 20%)
Track your spending
Don’t buy fancy coffee
Automate your savings
Wait 7 days before buying anything
Follow a budget
Have an emergency fund
Don’t have an emergency fund, use credit cards or a HELOC
And plenty more

Photo by **Suzy Hazelwood** from **Pexels**

Turns out we need a rule of thumb to cut through the rules of thumb.

One of the more popular rules is the 50/30/20 budget. I want to destroy the rule. Here’s why.

Despite what I assume were good intentions when someone devised the 50/30/20 rule and the likely good intentions of everyone since then who have repeated it, I sincerely doubt it’s efficacy in the real world. In reality, saving 20% of your take home pay to cover everything from a rainy day or big purchase to retirement investments is not enough.

More importantly, justifying the expenditure of 30% of your pay on “wants” because it fits in an easily repeatable saying like 50/30/20 is in my opinion only serving to enable wasting money. Somehow many of the big voices in media only suggest investing 15% of our income. At that rate of saving, you would need to continue for 51 years before you could retire and have enough invested to cover your costs of living! 51 years! Reference this article by the infamous Mr. Money Moustache to see the math behind this claim:

Mr Money Mustache article

Even if you started diligently following that advice at age 20, that means you have a 51 year career ahead of you! Better not relax and take your foot off the gas! Plan a wonderful 71st birthday party because that’s how old you will be when you can finally retire! MADNESS. I don’t know what your hopes and dreams are around working and retirement, but even a foggy and ill-defined view into my future doesn’t show a 71 year old Brendan hard at work at the same full time job!

Even if you somehow had enough cash savings to allocate all of the recommended 20% of the 50/30/20 rule directly to investments, it would STILL take 37 years to replace your average spending with investment income! This is believed to be “not bad” considering most people start working in their early 20’s and the retirement age is people’s early 60’s. But why is retirement age all the way into our 60’s? Because the government sets those dates for penalty-free withdrawals from our tax-advantaged retirement accounts? Or because it’s impossible to do otherwise? To be honest I have no idea. It feels like surrender to just accept 4 decades of work to one day have hope of achieving “work optional” status. This is something we need to force to change at a grassroots level.

My baseline proposal is to flip the 50/30/20 rule around and recommend spending 50% of income on needs, 20% or less on wants, and 30+% to save and invest.

My baseline proposal is to flip the 50/30/20 rule around and recommend spending 50% of income on needs, 20% or less on wants, and 30+% to save and invest. To regularly save cash for future purchases or to replenish an emergency fund that’s been tapped, we have to create a margin. 5-10% of income going to cash savings is likely needed to save for that next car, that home renovation project, that vacation, or a similar expense. These kinds of things are foreseeable, predictable, and are therefore “save-for-able”. Having the cash to pay for these kinds of things keeps us out of debt and in the long run easily saves tens of thousands of dollars. The fact that a large purchase is always around the corner means that we should perpetually be saving cash for these kinds of events. You can either make payments to yourself interest free or you can make payments to a lender and get absolutely destroyed by interest. I choose the former.

The common practice of taking out a home equity line of credit or second mortgage to pay for a big project or other expense seems especially appealing in 2020 because interest rates for this kind of loan are at record low levels. I am with you in feeling this temptation. I even called our mortgage broker to discuss refinancing to take advantage of these incredibly low rates. But the response I got back was basically, “Your rate is already so low and your mortgage balance is also so low, that I won’t write the loan and the banks likely won’t be interested in it.” Translation: we can’t make enough money off of you so we’ll move on to someone else who WILL make us a lot of money. (No hard feelings on the broker, the guy has to eat.) This is somehow a compliment and a rejection at the same time. Because we took out a 15-year mortgage 4 years and 1 month ago, we’ve aggressively paid down the principle on the loan. That’s just the way a 15 year mortgage works. In the same 4 year period we would have paid off far less of the loan balance and far more toward interest (i.e. making the banks richer) had we opted for the far more common 30 year mortgage. Anyway, all that to say, the only way the banks would be interested in allowing us to refinance would be if we did a massive 6-figure cash-out refinance to do something like fund a home renovation project. As a result they would make many thousands of dollars on us, just because we wanted it now and would not wait and do the same work over a period of years.

The other extraordinarily common way to get what we want RIGHT NOW is just to put it on a credit card. It’s truly amazing how common this is and how common it is for people to carry a balance on their credit cards. The average American carries $5,700 in credit card debt. The average interest rate on credit cards in America is about 17%. If someone with this “average” situation pays $150 per month on their credit card, it would take them 55 months to pay off the balance! Almost 5 years! That would also mean they paid an extra $2,541 in interest! That’s 44.6% more than that stuff should have cost! Those $200 earbuds? They actually cost $289. That $1100 phone? It actually cost $1590! And this is all assuming the credit card spending stopped and no additional charges were made! Most of us keep using the cards for the next emergency or the next impulse buy! The amount of money that credit card companies profit from our lack of saving and impulse control is truly staggering and depressing. Let’s just say it’s in the hundreds of billions of dollars. (In 2016 it was about $163 billion and odds are that number has only risen).

Especially if someone is already in debt using some of these methods (which aren’t even the worst or most predatory kinds of debt available), allocating at least 5-10% of all income to save and/or use for debt repayment is crucial. In fact, as part of the new 50/30/20 rule I’m proposing here, I think if someone has high interest debt, which I would classify as anything above 6%, the vast majority of that 30% number allocated toward saving and investing should be spent on debt repayment. If you are losing money at a high rate, you won’t dig yourself out of the hole by investing and hoping to earn it back at an even higher rate. Paying off that credit card balance that’s costing/losing you 20% interest is triage. Stop the bleeding! Until then, postpone investing and get the wounds stopped.

Paying off that credit card balance that’s costing/losing you 20% interest is triage.

After paying off that high interest debt, let’s say you’re saving that 30% total, with 5-10% of that going into a high yield savings account or CD ladder. You’re preparing for future expenses both expected and unexpected! Bazinga! You will avoid the debt woes mentioned above and will have ample cash saved. I agree with recommendations to have about 6 months of living expenses in cash, more if you have greater volatility in income levels or spending levels. I.e. you are paid on commission alone and have variable medical expenses etc… Or even if you just want to be prepared for anything and not have to think about going back into debt, having a larger cash emergency fund available is great.

The traditional 50/30/20 budget is oriented much more toward immediate satisfaction than my proposed swap. Planning to spend 80% of your money makes sense in the moment because there are SO many things to buy and so little money to buy them. I think it also serves to make people feel better about “only” saving and/or investing 20% when they could actually do considerably more if they set their mind to it. For higher earners or people with simpler lifestyles, it’s a relatively low bar. In my suggested 50/20/30 budget, spending 70% (or less) and saving or investing the other 30+% positions a persons finances with a hugely increased level of security and future hope.

The remaining 20-25% of that 30% total left after saving in cash should be allocated to investing. The reality is that many people are forced into involuntary retirement through job changes or medical challenges. Perhaps your company closes and you aren’t able to find a similar job in another company. Maybe you’re injured and can’t perform the physical duties your job called for. There are any number of ways this happens. Sometimes it’s not even something that happens to you specifically, but a choice you feel is right. Taking care of someone close to you make become a higher priority than work. Being financially secure could allow you to stop working or cut down the amount of work greatly to care for them. Only investing a small amount now does not allow those transitions to happen with any degree of smoothness.

But the fact is that over 47% of Americans aren’t investing at all, let alone to the degree recommended above. And less than 20% of Americans are saving for retirement specifically in 401k or IRA accounts. Since the 401k and IRA are tax-advantaged accounts and are the most popular ways to save for retirement, we can postulate that the vast majority of people simply aren’t prioritizing their retirement.

But the fact is that over 47% of Americans aren’t investing at all, let alone to the degree recommended above.

Looking at this issue objectively, I completely understand why this is the case. The realities of today and the next month are pressing. Retirement happening someday feels like an eternity away. It is both distant and vague. We know what we need this week to pay bills, buy a new fun thing, or eat at our favorite restaurant. We don’t know exactly what we need or even when we will need it in terms of retirement savings. Human nature is to focus more on the immediate payoff, so we do. And this is one of the main reasons (in my opinion) why we are in dire circumstances when it comes to most people’s personal finance situation and especially in the case of retirement savings.

Part of my motivation to both do this and encourage other people to do this is the potential for something to happen between now and “retirement age” that knocks us off our feet. I’ve known people personally and read numerous stories online about otherwise healthy, active, relatively young people being struck down with cancer, covid, accidents, or other unexpected events. These are catastrophic financially because not only is that person not working, but their partner is likely working less or not at all to take care of them and to top it all off, they are racking up obscene medical bills along the way! This is not a commentary on the American healthcare system, but we all know how crazy expensive these bills can be. No one has died, and in fact the expectation is for a slow but full recovery. Let’s look at a hypothetical example:

Let’s say you’ve been working on this flipped 50/20/30 plan for 10 years. You started at age 35 and now you’re 45. You have paid off your debt with the exception of your mortgage and have 7 months of living expenses saved in cash as an emergency fund. You also have $5,500 saved for a home repair you expect to happen in the next year. Solid work! Not only that, but you’ve been investing 25% of your income every year for the last 10 years and the occasional small pay raise at work has helped create quite a nice nest egg between your tax advantaged retirement accounts and a taxable brokerage account you opened on the side. The retirement accounts have about $125,000 in them total and the taxable brokerage account has about $20,000. Out of nowhere, you feel a tightness in your chest on the way to work. You make it there but walk inside only to feel worse. You call 911 and are taken to the hospital when you find out you’ve had a very mild heart attack. The doctors recommend spending 3 nights in the hospital for monitoring and tests then taking at least a month off work. During the second night, you have more chest pain and have yet another heart attack! The doctors rush you to surgery and implant a stint. You end up spending a total of 4 nights in the hospital.

After that you’ll likely need regular checkups and daily medication to mitigate future problems. As a result you end up missing over a month of work, have $11,300 in medical bills, and now pay $267 per month for the prescription medication. Your old financial self would have been crushed by this. Missing over a month of income alone would have pushed you to visit the dealer of debt known as “credit card”, let alone the huge medical bills and increased living expense of the medications. You would have been paying off the balance of the new debts for years. Instead, you dip into your emergency fund to pay bills while you are away from work. It’s annoying but not a stress-inducing exercise. Then you negotiate a bit with the medical billing people and find out that not only can they reduce the cost of the bills by $1100 down to $10,200, but they can also break up the cost into an interest free 6 month payment plan for you. Nice. You use the cash in your emergency fund and the $5,500 earmarked for home repairs to fairly easily pay off the entire balance in the 6 months. You end up with 2.5 months of living expenses remaining in cash in your high yield savings account and begin to quickly replenish it now that the bills are paid. Your credit card remains at a $0 balance since it wasn’t needed. Before long, you’ve gotten the cash savings back up to the previous levels and didn’t even need to touch the money you had invested, but knew if you needed to you could pull the $20k out of the taxable account at a moments notice. The biggest difference throughout the whole scenario was your lack of stress brought on by the financial burden of this. You had a plan and were not very burdened at all. This left you with more mental and emotional bandwidth to focus on your physical health and recovery. Quite the win-win!

This is the kind of real life in-between scenario that I expect to happen to many if not most of us. The point of saving and investing far more than is common isn’t to “get rich” or even to have a plush retirement. Despite current popularity in early retirement, I would argue it’s not even about that! (Though the potential of work becoming optional before all of my hair turns grey does sound pretty awesome.) It’s about the peace of mind all along the way. Getting away from the regular stress of debt and cash shortages along with a total lack of preparation for the future is priceless. It frees us up to spend more of our limited time and attention on the people around us. It prevents big nasty financial catastrophes when unexpected costly events unfold. It prepares the generation after us to change the “norm” to something much better. Our kids watch us, including what stresses us out and what causes fights. Let’s pave a new road toward financial security and health for ourselves and for them!

Opportunity cost of buying that cool new thing

Recently had a buddy recommend I get a Nintendo Switch to be able to play games with him online. Harmless invitation. Friendly. But this is the rationale/dialogue that went through my head:

Hmmm what’s a switch cost?
$200?
I’d rather invest that.
Actually I bet it’s a lot more than $200.
What could that amount to after 20 years!? I bet its a ton.
Yeah I’ll invest the money instead.

Fact checking: Nintendo Switch $299 from Nintendo’s website or this snazzy bundle from Amazon with the docking station, Mario Kart, Animal Crossing (The Essentials! duh!) etc… is almost $600 at time of writing!

https://amzn.to/332FWVX

Yowza!

What IS the real opportunity cost of $600 invested? I would likely play the switch for the next 5 years, then it would be forgotten in a drawer somewhere.

If we invested $600 in well diversified stocks through an index fund and got a return of 7%, it would be worth $841. That would be nice to have in 5 years instead of an old video game system….

Investing the $600 instead of spending it (5 Years)

	start principal	start balance	interest	end balance	end principal
1	$600.00	$600.00	$42.00	$642.00	$600.00
2	$600.00	$642.00	$44.93	$686.94	$600.00
3	$600.00	$686.94	$48.09	$735.03	$600.00
4	$600.00	$735.03	$51.45	$786.48	$600.00
5	$600.00	$786.48	$55.05	$841.53	$600.00

5 years @ 7% interest growth

But that’s not the whole story. Because after 5 years the Switch would probably be worth some money, but not a lot. Lets say $150. So the net difference is $841-150= $691. Even so, I doubt we would actually sell it. Most things in life we buy and keep until they have very little value remaining or keep them until they stop functioning. Let’s calculate that more realistic scenario.

“Keeping the Switch forever” Scenario

Purchase price $600

Value after 20 years: $0-$50

Net difference: ($600)

Yes the Switch added a little entertainment benefit to our lives, but realistically we already are saturated with possible sources of entertainment. Just Youtube, Netflix, Amazon Prime Video, HBO Max, and Hulu provide so much content that keeping up with your favorite 2-3 shows on each platform is basically a part time job! We are in no way lacking in forms or amount of available entertainment methods.

What would happen if we invested that same $600 for the same 20 year period? Even without opening the calculator.net Investment Calculator, I can tell you 2 things.

We would have more time available to do other things. Buying new toys automatically invites a Time Vampire into your home. It is a hungry vampire and it even has the strength of sunk costs to empower it. We think that because we just bought this new thing that we “should use it”. And we do. That time can never be returned.
We would have more money if we invested than if we spent it. This one is obvious and you can see the trend here, but it’s still worth acknowledging out loud. Do you/do we want another thing taking up space in our lives and in our drawers? Or do we want to employ our dollars to go to work for us?

Ok now it’s time for the Investement Calculator. This one is simple and I find myself coming back to it. https://www.calculator.net/investment-calculator.html

Investing the $600 instead of spending it (20 years)

	start principal	start balance	interest	end balance	end principal
1	$600.00	$600.00	$42.00	$642.00	$600.00
2	$600.00	$642.00	$44.93	$686.94	$600.00
3	$600.00	$686.94	$48.09	$735.03	$600.00
4	$600.00	$735.03	$51.45	$786.48	$600.00
5	$600.00	$786.48	$55.05	$841.53	$600.00
6	$600.00	$841.53	$58.91	$900.44	$600.00
7	$600.00	$900.44	$63.06	$963.47	$600.00
8	$600.00	$963.47	$67.45	$1,030.91	$600.00
9	$600.00	$1,030.91	$72.17	$1,103.08	$600.00
10	$600.00	$1,103.08	$77.22	$1,180.29	$600.00
11	$600.00	$1,180.29	$82.61	$1,262.91	$600.00
12	$600.00	$1,262.91	$88.39	$1,351.31	$600.00
13	$600.00	$1,351.31	$94.58	$1,445.91	$600.00
14	$600.00	$1,445.91	$101.21	$1,547.12	$600.00
15	$600.00	$1,547.12	$108.32	$1,655.42	$600.00
16	$600.00	$1,655.42	$115.88	$1,771.30	$600.00
17	$600.00	$1,771.30	$124.01	$1,895.29	$600.00
18	$600.00	$1,895.29	$132.67	$2,027.96	$600.00
19	$600.00	$2,027.96	$141.96	$2,169.92	$600.00
20	$600.00	$2,169.92	$151.90	$2,321.81	$600.00

20 years, no additional money invested, 7% return

Well lookie here! We are at $2,321! Ok, ok that’s not a ton of money. I agree. We won’t be impulse buying a Maserati with it. But let’s compare the net difference again.

Purchase price: $600

Value after 20 years: $2,321

Net Difference: +$1,721

In other words, we were paid over $1700 just to not spend money on a toy we don’t need. I’m not an advocate for minimalism or abstaining from good and fun things that cost money. Almost the opposite actually. But this kind of long-term thinking helps me actually calculate the cost of our decisions.

Spending $600 isn’t as simple as: “Do I want this object enough to spend $600 on it.” It’s more like: “Is this object so wonderful that I am happy to give up $2,321 to play with it for a few years?”

This doesn’t even factor in the potential implications for early retirement. We aren’t focused on retiring as early as possible, but I AM intrigued by the possibility. In 20 years, having another $2300 invested means we could count on having an additional $92 per year or $7.67 per month for the rest of all time! That’s not a ton of money but it would pay for a couple nice coffees every month during our retirement. If we abstained from 3 more random $600 purchases and had something like $30 per month, we could have a fancy coffee every week for the rest of all time for “free”!

(For reference this math is based on the 4% rule. For more info just Google 4% rule or Trinity Study)

Choose wisely. Move forward! Save lots. Invest often!

If you like personal finance/investing/financial independence and podcasts, here’s mine! : https://anchor.fm/brendan886

Or if you prefer video, here’s my YouTube channel! :https://www.youtube.com/channel/UCVaO3-9dDkesDFAFrvqvcFg/

Introducing: Brendan Fitness and Money Podcast!

Robinhood's Credit Card Just Got Even Better (Somehow) – Brendan Evan

In someways, I hate to say it, but this is the best credit card I've ever used and it just got better. The only problem is the card is hard to get because you have to be on the waitlist for so long. Info on the card here: https://robinhood.com/creditcard/ Sign up for Robinhood with my link and we'll both pick our own gift stock 🎁 https://join.robinhood.com/brendab533

Photo by **Tommy Lopez** from **Pexels**

Here it is! The long awaited, much anticipated debut of my podcast!! Woo hooo! Ok, no one was waiting or anticipating anything. Ha! Podcasting is such a handy way to ingest information that I felt like it was worth making some content here as well. Listening while driving, running, doing housework, showering, etc… is such an easy way to hack everyday life and increase your productivity. It seems simple to make a podcast, but to do it well takes real effort and craft skills. I don’t have those yet! But I will continue to practice and get better over time!

Topics: This podcast will be about the same general topics that I write about here on this blog and talk about on my Youtube channel: sustainable and healthy ways to improve your fitness and personal finances. These areas of life both require slow, disciplined, sustained action over the course of years to really be successful. I think the nature of that progress being so slow and taking so long is what makes it so difficult. Plus, these are both relatively personal endeavors. We can easily feel ashamed at our lack of progress, extra love handles, or personal loan debt. Instead of stopping there I want us all to be able to learn ways to turn that habit train around and start moving in the right direction. My biggest hope is to help you along that journey!

My Youtube channel:
https://www.youtube.com/channel/UCVaO3-9dDkesDFAFrvqvcFg?view_as=subscriber?sub_confirmation=1

Instagram:
https://www.instagram.com/brendan_fitnessandmoney/

Debt is destroying you. But it can be yours to wield.

How long do you think a company would stay afloat if it spent more than it made? Months? Years? Ok, that’s a little unfair since many companies have outside investors who are willing to send millions of dollars it’s way to continue operating. Do you have anyone sending you millions of dollars to continue your lifestyle?

Didn’t think so.

Me neither!

But a lot of people live a lifestyle and spend their money as if they did have some outside source of financing footing the bill for their latest impulse. Since we don’t have a Sugar Daddy investor, instead we often turn to other entities willing to help us buy that new Jeep and iPad Pro. There are so many lenders these days under so many names that make themselves SO available to us that it’s hard to even categorize them. Banks, credit card companies, and numerous others continue to successfully market to consumers and convince us that they are the way we should get that stuff we just can’t live without.

In fact, the average American in 2018 had $38,000 in debt, not including home mortgages! And credit card debt is 25% of that amount on average. That’s almost $10,000 in credit card debt alone. With an average interest rate of 18.61%, we are getting absolutely DESTROYED by credit cards.

If you’re in this average situation, it will take over 2 decades to pay off this debt! And that only assumes you stop racking up more and more charges today. (Math is: $10k in debt at 18.61%, paying $300/mo which may be more than many people actually pay.) During your payoff of the $10k in debt, you actually paid over $20,000 total. (So anything you bought was functionally twice as expensive as you thought it was when all was said and done.)

What if you were on the other side of the equation and instead of paying 18.61% interest on top of the money you borrowed, you were EARNING 18.61% interest? If you were the credit card company you’d have made a little over $10k on someone borrowing that money from you and slowly paying it off. But the amount is getting paid off over time and thus the chunk that they can charge interest on is always shrinking. Sounds nice, but we aren’t really getting the feel for how enormous that 18.61% is and how powerful it really is.

What if you could invest that $10k and watch it grow and compound on itself at that same $18.61% rate? Let’s pretend you found a magical stock market index fund that guarantees that rate of growth every year. (This is guaranteed growth is both impossible and doesn’t exist so don’t believe anyone who promises you such firm and distinct gains) The money is growing and growing at this massive rate for the same 21 years it took to payoff that debt at ever-increasing amounts. The first year you get paid a lovely, but relatively modest $1,860. Pretty nice but we are just getting started. By year 5 your interest earnings alone are $3,684. By the end of the first decade the total interest you’ve earned is a cushy $45,122. The second decade is where things really get interesting though. The 11th year’s interest alone nets you more than the whole initial investment at a whopping $10,260. Are you starting to feel the POWAH? (Power) Just wait. Year 15’s interest earnings alone are over $20k and year 19’s are over $40k! At the end of the 21 year period, your $10k turned into a massive beast of $360,000! Sign me up!

Just for fun let’s pretend like this investment was real and you left that $360k for another 19 years for a total of 40 years. You started with that same $10k, earning the same 18.61% you are willing to fork over to any credit card with nice enough rewards and app design. After 40 years, the account would have an insane total of $9.2 MILLION DOLLARS! $9,217,000 actually. This is absurd. That interest rate is absurd. Everyone in the world would be scrambling to invest in that magical fund you found if these returns were possible. (The stock market has averaged around 10% overall, so 18%+ is far better)

The big question is this: Does your desire for a temporary and small lifestyle boost justifyTHAT level of pain? I was assuming before writing this post that a lot of people don’t really feel how insane the rates are that they gladly sign up for via credit cards (and other debt). If you were one of those people I hope you feel it more now. It’s downright absurd. We should laugh in the face of companies who send us “Special Offers” that we are “Pre-Approved!” for their little plastic rectangular thievery devices. We should scoff at them for thinking we are so foolish and gullible.

Obviously I’m not claiming all debt is terrible and must be avoided at all costs. We would have very little chance of ever owning a home if that was the case. Plus mortgage rates are incredibly low, so they are a different situation than optional spending with extremely high credit card rates. We personally borrowed over $180,000 to buy our house a few years ago. That is a ton of money. It puts us well above the average debt level for someone in our age category. The average debt for someone under 35 is $67,400. Doubling that to account for my wife and I puts the average at $134,800. Yowza. We are far behind the curve there. Since the purchase we have paid the mortgage down to about $127,000 which puts us just a little ahead of the average. However, we have ZERO consumer debt. So our entire debt load is being charged at a low rate of 2.875%. Having the payment at all is annoying and our cash-flow situation would be much improved by it disappearing.

While you can’t earn the kind of massive interest on your investments that credit card companies earn on you, you can choose to stop making them richer and start making yourself richer. Paying off any high interest debt (Higher than 5%) as soon as you can and investing as much as possible once that is done will drastically reverse the “Normal” trends that plague Americans. Most of us willfully opt into the kind of limiting and damaging debt that we then have to work so hard to free ourselves from. In a similar, but more time consuming way, we need to opt out of the beliefs that more stuff will make us happier and the only way to make that happen is through consumer debt.

Part 2: $2000 Passive Income Experiment: The Investments

But, Mousie, thou art no thy lane [you aren’t alone]
In proving foresight may be vain:
The best laid schemes o’ mice an’ men
Gang aft a-gley, [often go awry]
An’ lea’e us nought but grief an’ pain,
For promised joy.

-Robert Burns’ poem, To A Mouse, 1786

When starting this experiment I hadn’t even considered the possibility of a stock market correction on the scale of 35%+. Honestly it was a mix of foolish optimism and a lack of experience. For my entire investing lifetime it’s been a bull market. Before 2009 I didn’t have money to invest anyway. Everything was immediately spent! Now that I’m allegedly older and wiser, a significant portion of our combined income goes to investments but I have to admit that this downturn has been an emotional workout!

Enough gloom and doom! Let’s get back to the real content of the experiment at hand!

In this post I’ll outline the specific stocks and funds I chose, why I chose them, and what I anticipate the outcome to be overall.

First: Dividend-paying indexes

Our first group contender is the $1000 invested with Webull into dividend-paying indexes. If you’re not familiar with the concept of an index, here’s a very short explanation. An index is just a group of stocks chosen based on whatever parameters people want, all grouped together into one basket. You buy a portion of the entire basket, getting the benefits of diversifying with all those stocks inside it.

Still feel a little confused? Me too….let’s think about it in terms of pizza!

Photographer Victor Protasio, Food Stylist Rishon Hanners, Prop Stylist Sarah Elizabeth Cleveland

The ingredients of the pizza represent stocks. Flour, water, salt, pepperoni, sausage, tomato, oregano, cheese, olives, onion, etc…. Choosing individual stocks is like just buying the cheese or the salt or a little piece of sausage. If they are really awesome (i.e. increase in value/pay regular dividends) then maybe you’d be happy with just eating them alone. But if you want all of them combined, you would have to go out and buy specific amounts of each to aggregate yourself. That’s a lot of work to find what you want, how much of it you want, and buying it all in pieces.

In contrast, an index is just buying the whole pizza. Its assembled for you with all the right ingredients based on what you ordered. Ah you like the pizza based on the S&P 500? Here you go. Only want the dividends and don’t care about growth, there’s a pizza (index) for you. Whatever your flavor, there’s an index already hot and ready and waiting.

The benefits are that an index is simple, automatically diverse, and readily available. It’s a powerful tool that you can take advantage of now and don’t even need to hire a fancy high-powered financial guru to manage.

“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
(Warren Buffet, 1993)

I chose a small handful of indexes that are made to follow dividend paying companies. This way I get to take advantage of all of them simultaneously! Here they are:

VIG: Vanguard Dividend Appreciation ETF
VYM: Vanguard High Dividend Yield ETF
JDIV: JPMorgan U.S. Dividend ETF

VIG: Vanguard Dividend Appreciation ETF

Vanguard has always been a go-to investment group for people looking for low fees and great returns. They LITERALLY invented the index fund for this purpose. VIG is a fund that is designed to track another index called the NASDAQ US Dividend Achievers Select Index. That index chooses investments with at least ten consecutive years of increasing annual regular dividend payments. Sounds good to me! On top of that, the expense ratio is a teeny tiny 0.06%! That’s about as close to totally free investing as we are going to get! It holds 186 different stocks and most of them are big names you’ve definitely heard of. Like these:

Month-end 10 largest holdings
(35.50% of total net assets) as of 02/29/2020

1	Microsoft Corp.
2	Visa Inc.
3	Procter & Gamble Co.
4	Walmart Inc.
5	Johnson & Johnson
6	Comcast Corp.
7	McDonald’s Corp.
8	Abbott Laboratories
9	Medtronic plc
10	Costco Wholesale Corp.

Sector
Basic Materials	3.6%
Consumer Goods	10.6%
Consumer Services	20%
Financials	11.5%
Health Care	11.9%
Industrials	26.2%
Technology	9.9%
Utilities	6.3%

JDIV: JP Morgan U.S. Dividend ETF

I only chose this ETF because I needed to round out the $1000 total and the price was just about right to do that! I did almost no research to choose it besides noticing the famous name (JP Morgan) and the fact that it held over 200 companies. It turns out that it’s a very small ETF with only about $34 million in holdings. Thankfully, it’s well-diversified over a number of sectors and companies! It is also inexpensive to own with a net expense ratio of 0.12%! That means they only charge you $1.20 for every $1000 invested.

JDIV Top 10 Holdings

As of 03/25/2020

Symbol	Name	Security Identifier	% of Net Assets	Market Value
CLX	CLOROX CO/THE COMMON	189054109	0.84%	216,351.96
GILD	GILEAD SCIENCES INC	375558103	0.82%	211,836.06
DLR	DIGITAL REALTY TRUST INC	253868103	0.82%	210,802.48
CY	CYPRESS SEMICONDUCTOR	232806109	0.80%	206,885.00
LLY	ELI LILLY & CO COMMON	532457108	0.80%	205,346.96
AMGN	AMGEN INC COMMON STOCK	031162100	0.79%	202,410.72
INTC	INTEL CORP COMMON STOCK	458140100	0.78%	201,861.88
VZ	VERIZON COMMUNICATIONS	92343V104	0.78%	200,209.46
JNJ	JOHNSON & COMMON	478160104	0.77%	199,278.60
GIS	GENERAL MILLS INC COMMON	370334104	0.77%	197,271.00

Sector Exposure

As of 03/25/2020

Sector	FUND
Basic Materials	9.5%
Consumer Goods	15.1%
Consumer Services	7.9%
Financials	16.4%
Health Care	7.6%
Industrials	9.5%
Oil & Gas	5.5%
Other	0.0%
Technology	6.4%
Telecommunications	3.7%
Utilities	18.9%

VYM: Vanguard High Dividend Yield ETF

VYM is yet another index that’s made to track some other index. It is designed to track the FTSE High Dividend Yield Index. Unlike the FTSE index it is made up of domestic stocks, but holds a very similar ethos of only holding dividend-paying companies. Like the others, it’s made up of many different companies so all of your eggs aren’t trusting the same proverbial basket. For example, at the end of February the top holding was a tie between JPMorgan Chase & Co and Johnson & Johnson at 3.80%. So even if Chase absolutely plummeted, it’s less than 4% of the whole. The 10 largest holdings in the index make up less than 27% of the total, which gives you an idea of how small each piece of the pie really is. I view this as a good thing. Yes, it’s less likely to have a rocket ship company make me a millionaire overnight, but that also means it’s likely to handle the market downturns better as well.

If you care to compare, there’s the break-down of the different sectors of companies in this index fund:

Portfolio composition

Equity sector diversification

Sector	High Dividend Yield ETF as of 02/29/2020	FTSE High Dividend Yield Index (Benchmark) as of 02/29/2020
Basic Materials	3.30%	3.30%
Consumer Goods	14.40%	14.40%
Consumer Services	9.20%	9.10%
Financials	18.30%	18.30%
Healthcare	14.10%	14.10%
Industrials	8.30%	8.30%
Oil & Gas	7.10%	7.20%
Technology	10.60%	10.50%
Telecommunications	5.20%	5.20%
Utilities	9.50%	9.60%

Whew! Lots of numbers. Just a few more: About 98% of this part of the investments are in the 2 Vanguard funds, with a tiny bit of that oddball JDIV bringing up the last 2%. The point of this exercise is to test how easy it is to just pick 1-2 (or in my case 3 just to round out an even $1k) indexes and “set it and forget it”.

Second: Picking specific companies that pay dividends.

Photo by Andrea Piacquadio on Pexels.com

This is what it feels like to me when anyone picks an individual company. Or even a handful of individual companies. I’m FAR from a financial analysis guru, but even people who make a successful career from analyzing companies financial standing can’t accurately and reliably pick winners. The fact that the pro’s lose to “the market” as a whole over 95% of the time makes me realize how small of a chance I actually have to do that kind of thing.

For the purposes of this experiment I picked dividend paying companies that the Interwebs claim are worth considering. Once you type things like “dividend stocks” and “passive dividend investing” into Google, you get a lot of very direct advise (and a lot of people wanting to sell you their opinion) on where to invest your hard earned money.

A lot of people claim the “Dividend Aristocrats” are a sure-fire way to succeed. So I considered those. Others have hot picks based on the current state of the market, of consumer sentiment, of perceived demand, or any other number of factors. Knowing that the pros don’t generally taste success with a TON of smart analysis made me feel like I was partially off the hook when it came to pouring over prospectus statements and P/E ratios and all the other paperwork available. I went with what made sense at the time and didn’t look back.

SO, who did I choose. These lovely companies:

F: Ford
ABBV: AbbVie
AOS: A.O. Smith
MMM: 3M
PBCT: People’s United Bank
WBA: Walgreens
XOM: Exxon Mobile
T: AT&T
PSEC: Prospect Capital

The only company that I didn’t choose strictly on the recommendations of logic and anonymous internet brethren was Ford. I like their vehicles. I’ve also wanted to invest in them since 2010, and have regretted not since at the time the stock was only $2.00/share. It’s risen a lot since then and has paid dividends along the way.

You’ve likely heard of a handful of these companies and have an idea of what they do. I’d never heard of PBCT or PSEC. People’s United Bank is a bank and financial holding company doing….bank sounding stuff. (Insert shrug emoji here!) And Prospect Capital is a business development company that basically lends money to companies or invests in them directly. Anyway, enough about them.

In next week’s post I’ll share how the results have fared thus far. Fair warning: it is NOT pretty.

Saving is the best and worst thing you can do with money.

Save first. But don’t stop there.
— Me.

“Pay yourself first”

“Save 10% of your income”

“50/30/20 budget”

SO many little quips revolve around saving money. I feel like the implication is that they somehow summarize everything you need to know to handle your money well.

But that’s bogus! Money is complicated. Or at least our lives are complicated so the way we choose to deploy our money is also complicated. That’s why I think we need to think with a little more nuance about what saving our money is for and what it can never accomplish.

FIRST: Why saving money is great essential! And a little childish…

Spending everything we make (or more) is a losing proposition. We can never catch up, pay off debt, create a secure financial footing, build wealth, or hope to have the option of retiring from full time work. If that’s the place you’re currently in: no shame and no blame. Not from me, not from yourself, not from anyone else on the internet. Yes it’s an objectively bad habit to be in but shame/blame/built aren’t going to help change things.

So we are left with the next logical step which is to save some portion of our income. I.E. intentionally spending less than we make so we can set it aside. Wisdom. Delayed gratification. All that jazz. But hearing things like “pay yourself first” honestly has only served to cloud my mind in years past. What the heck is that supposed to mean!? (I finally learned that it is just a cryptic way of saying you should save some money before you start spending it on non-essential items)

I used to save money in a wooden and plexiglass kids bank shaped like a dog. His belly was see-through since it was made of plexiglass and you could see the little coins and bills piling up over time. To access them you had to literally disassemble the thing with 9 tiny screws. But that’s what I did countless times! I couldn’t wait to let the money pile up. Having to count it over and over I’d grab a tiny screwdriver and take it apart to get my new total. Then it would get carefully reassembled and put back on the shelf.

Stashing some money in cash or even in a savings account is really not much different than my childish activities 25+ years ago. We know it’s the right thing to do and put some money off to the side. It has no real intent or purpose, but its there and we are doing what we’ve been told is the “right thing”. The problem is that we don’t have much of a grasp on what’s happening overall, which doesn’t allow for intention to be baked into that savings, which limits its power to help us.

We need a general game plan. I’d summarize that as: have an accurate budget, have a plan for debt repayment, and have a plan to grow your wealth. Saving money needs to have a direction into 1 of these 3 buckets or it will be stuck in that aimless, child-like state like my doggy-bank dollars.

Photo by Rodolfo Quiru00f3s on Pexels.com

SECOND: Saving is a foundation. But only a foundation

Assuming we have a budget, a plan for debt, and a solid vision for a wealth-building future do we just save as hard as possible? Yes and No.

Saving is the first step in the process of wealth building. We have to hang onto money and not let it fly out the door to subscriptions and restaurants and nasty bills. It is the only way we can stop the cycle of living paycheck to paycheck.

We all need a small chunk of money that is a basic buffer while money flows in and out of our accounts so as to avoid bouncing a payment. This can be as little as a few hundred dollars or as much as a few thousand depending on your comfort level, when bills are paid, and how big those bills are. If you want a good buffer, have everything set on autopsy for the 1st of the month and spend a lot on recurring bills you may need $3000-$6000 as a buffer. But if you’re ok with a tighter budget, have bills spread out across the month, and don’t have many large expenses you could probably get away with $500-1000 quite comfortably.

After a buffer, everyone needs an emergency fund. Actually your buffer is the start of your emergency fund because it’s the bare minimum in whatever account(s) you use. In a real emergency it’s likely the money that gets spent first. But over and above this an emergency fund should be set aside in it’s own account, distinctly earmarked for emergencies only. “Emergency” means unpredictable, accidental, or otherwise out of your control. If it IS in your control or can be foreseen that falls into the next category of “sinking funds” but more on that in a minute.

An emergency fund is directly proportional to 2 elements. 1: What comfort level are we after? 2: What are our average monthly expenses? For number 1, this is literally a matter of preference. Part of that preference has to do with how regular income is for the household. The more variable the income, the larger the emergency fund should be. However, most people outside of commision-only jobs are paid fairly regularly. Number 2 is important because the amount of emergency funds we need to set aside depends on how fast it will be used. If you’re a high income/high spending household that’s much different than a single student living at home.

Rules of thumb for emergency funds: Always have at least 1 month of living expenses. Set a baseline goal after that of 3 months worth of living expenses. If your income is wildly variable, bump that baseline goal to 6 months or equal to the average span of your sales/paychecks. Any more than these amounts and you’re probably giving up a lot of wealth-producing potential! Unless you’re saving for a specific upcoming need: a sinking fund.

Third: Saving for a “sinking fund” (aka rainy day)

This area of saving stands to lift the most people out of the evil clutches of consumer debt and I to the glorious paradise of freedom: saving for big purchases. Wait! Stay with me! Don’t turn away because you just threw up in your mouth a little bit like I did thinking about this particular topic! I know it’s repulsive or at least horrifically boring to slowly and methodically save for a premeditated purchase months or years in advance. I get it. But we have to do something new to get a new result.

We have to do something new to get a new result.
-Me…again

If you bought a house and expect the air conditioner to kick the bucket in the near-ish future but don’t save for it, that’s just silly. (This is what my wife and I did by the way, we bought that house. 3 years in and the old thing is still somehow functioning!) Or if the current vehicle is steadily creating more and more bills from the mechanic shop we have to acknowledge that reality with a plan. And plans often take time to come to fruition.

We are responsible for our financial futures so it’s our responsibility to forecast the big expenditures. Making a quick list in a phone app or notepad with the impending biggies for the next 1-3 years can add huge amounts of perspective. With it, we are better able to act in the present. “Can we afford to go on that 2 week cruise” becomes easier to answer if Christmas is around the corner along with a new washing machine.

Keep your list handy and update it often. It’s easy math to figure out how long it will take to save for an upcoming purchase. (The math is easy. The saving is harder!) Let’s say an expense is coming up in about 5 months. It is going to cost around $900. $900/5= $180, so every month from now until the big purchase we need to set aside $180 and not touch it! That can be the hardest part, seeing the funds accumulate and leaving them alone, destined to fulfill their true purpose.

Saving for these bigger expenses can take a lot of the sting out of them plus it saves huge amounts of interest in the long run. If you charged that same $900 on a credit card with a 19% interest rate and only paid $50/month, it would take you almost 2 years to pay it off! (22 months of torture, knowing that giant company is taking your hard earned money just because you didn’t save for it in advance). Worse than that, instead of it costing you exactly $900, it costs over $1067!

Fourth: DON’T. STOP. THERE!

So far we’ve established significant security by way of cash savings. (By cash that of course includes and presupposes using a bank and a high interest savings account…not literal paper currency.) But stopping here is why “saving” can be terrible. Stopping at saving and choosing not to invest our money grossly limits our wealth building potential.

CALLING ALL MILLENNIALS: Do not stop here!

Lets review a few stats:

Yes, 58% of millennials have less than $5,000 in savings. That’s not an insignificant sum. But its not massive either. The problem is that saving money is where many of us stop. We think that is the proverbial finish line. To have a lot of cash piled up like Scrooge McDuck means we are secure.

60% of millennials and Gen-Zer’s define financial success as being debt free. Again, in concert with a pile of cash this “feels” like an indicator of success or completion. We want to have zero debt and the foundation of cash at our fingertips. This is not a big enough or accurate enough goal. We need to think bigger!

Millennials have an average net worth of $8000. Here, we start to see a little more into the depths of the problem. Having that cash-heavy plan that is focused on accumulating more in the savings account and paying off all those debts leaves our growth at a snails pace. A net worth of $8000 means we are barely above ZERO. And without investing we are doomed to stay near there. Your wealth accumulation is limited to your earning power if you refuse to invest. (Sources: https://www.businessinsider.com/average-millennial-net-worth-compared-to-other-generations-2019-5)

21% of all millennials on average have invested less than $500. Ever.

Overall, 54% of millennials have invested less than $5,000.

So that’s a total of 75% of “us” that have only parted with between $0-$5000. We are not setting ourselves up for the kind of future we want. (This isn’t the time to discuss income inequality for younger generations as compared to previous generations, but of course that plays a large role. Regardless, the stats show that most younger people are very conservative with their financial planning, detrimentally so). (Source: https://finance.yahoo.com/news/43-millennials-aren-t-investing-090000387.html)

Your wealth accumulation is limited to your earning power if you refuse to invest.
-I’ve got to find someone else to quote. Me again.

Instead, if you take a tiny step into the world of responsible investing through an employer sponsored 401k, a personal Roth IRA, or similar tax advantaged account, your wealth accumulation powers are compounded and multiplied far beyond the amounts you are paid every month. Many of us are too conservative in the wake of 2008-2011. We saw people who were “investors” lose a lot of money and feel determined to be wiser than they were. But think about how vague that is: who are these investors? What were they invested in? How diversified were their investments? How much is a “lot of money”? Did they make that money back over the last decade?

It’s like your first breakup. It hurts, its terrible, its debilitating…for a time. But if we resolve never to be hurt again and thus rule out all relationships with human beings then we also miss out on the beautiful intimacy, joy, growth, and love they very often bring.

Our investments will hurt us a little from time to time but over the long haul they will do so much more good than harm. We need to do a little research, approach things carefully, then break up with “Savings” and marry our newfound love “Investment”, never looking back. Yes this analogy got weird fast, especially because we need to continue to save along the way but you get the point.

One more quick example:

Jill and Betsy are twins. They mirrored each-other’s educational and career paths. Both were hired for identical jobs, have the same costs of living, and the same income. Jill is a traditional millennial and saves $500/month after paying bills, making debt payments and saving for some larger purchases. The money goes directly into her savings account at the bank where she’s had an account for most of her life. “Investing is risky” she tells herself. She can’t afford to risk the hard earned money she makes so she keeps it “safe” in cash. After 30 years, Jill has contributed $180,000 to her savings! Nice work! However, the bank has not appreciated her diligence and the trivial interest rate of 0.1% they offer has only gained her an additional $2,718.

In contrast, Betsy is a non-traditional millennial and reads a few books, listens to some investing podcasts and checks out an interesting new blog called “Abacus Personal Finance”, all finally convincing her that investing is the way to go. She opens a Roth IRA at a brokerage with zero fees and shovels the same $500/mo into an index fund tracking the whole stock market. After 30 years, Betsy has contributed the same $180,000 her sister Jill did. But the results of her investing are astonishing. She has a balance of $1.09 MILLION! What a massive difference! The companies she invested in through her index fund have rewarded her with a cumulative $910,000 in interest!

We cannot afford to stay stuck in our “savings-only” mentality. If we do it will be the worst limiting factor for our financial futures despite an otherwise solid game-plan.

Stick around for more posts in the future on investing and just how easy it can be to get started!

If you want a 1-stop app/website to track all of your accounts including banks, debt, mortgage, investments, and anything else in your financial life, I recommend Personal Capital. It’s 100% free and I’ve been using it since September 2017 and love it. By far the easiest way to track your net worth and all accounts in 1 place. Full transparency: if you start using it with my link below we both get $20. If you don’t use my link neither of us gets $20. Also, it really is free but they will “offer” you their own services or investment recommendations every now and then. They probably have good things to say and overall trustworthy recommendations, but I want to keep it free so I’ve not used any paid services or investments they advertise. Link: https://share.personalcapital.com/x/sLcqkA

My Personal Capital Link (We both get $20 if you use it!): https://share.personalcapital.com/x/sLcqkA

Who am I?

A quick intro:

Stats:

30-something American male
Son, Brother, Husband, Father
Lover of spreadsheets
Fan of low-fee investing
Amateur trail runner with a dream of one day completing an ultra-marathon
Driving enthusiast (though, with no current outlets for this)
Rock climber, adventure seeker, fun lover
Passionate about helping people better understand personal finance and investing basics

So why are we here, online together? Conversations kept happening in person about personal finances, investing, budgeting, and general financial planning. Family, friends, and coworkers all were so eager just to talk openly about money for once. We had awesome conversations about saving money, how to invest, teaching kids about money, retirement planning, real estate, and more. It was so refreshing to experience this and it just kept happening!

The wheels in my head started turning….if we are having these productive and enlightening conversations where we all benefit in person, I wonder if people elsewhere would also like to talk. I wonder if they are experiencing a distinct avoidance around money with their friends and family. Maybe they, like us, have questions and don’t really know who to believe for the answers.

So I started a Youtube Channel and Instagram account: Abacus Fitness and Money. The goal was and is to talk about the basics of exercise and money in a way that is non-threatening, simple, and helpful to everyone. But making video content is a ton of work and was taking a lot of time away from the very personal relationships that spurred on the creation of the accounts to start with. In the meantime I kept writing. And writing. Notes about books, helpful tips from podcasts, articles to reference in later conversations, questions I had, ponderings about estate planning, and more! But you can’t post a bunch of words to Youtube or Instagram. Hence, the blog!

This is a place where I hope to add the most value to someone like myself who is prone to reading and writing and wants to engage in real conversations about the topics they are most interested in around personal finances. Being a millennial, much of my writing will be from that perspective but a lot can apply to anyone. Plus if you’re in a unique or different situation we can talk about that too.

This is a safe place to question what we have heard and look to learn more. I do not have all the answers. I want to learn along with you. In the meantime I will share my experience, the good sources of information I’ve found, and anything else that can add value to your life and your pursuit of financial wellness.

Let’s learn together!

Youtube Channel: https://www.youtube.com/channel/UCVaO3-9dDkesDFAFrvqvcFg
Instagram: https://www.instagram.com/abacusfitnessandmoney/