Saturday Discussion Points
Today is just some informal musings, so please excuse the lack of reviewing and editing. I'd love to hear your thoughts on this as well
I've been working out of town for a week, and spent a bit of time this Saturday to catch up on a website that I've been visiting for a very, very long time (p-t.com). Two topics were brought up that I thought were interesting, given the direction of the website.
The first topic was "Is a recession imminent"?
Well yes, a recession is always imminent. When is the million dollar question.
Firstly, let's think about what a recession is in practical terms. It's the reduction of output from our economy, which does have a direct impact in our daily lives. Recessions and Depressions are the bottom points of market valuation (the bad type of volatility) over periods of time. Research from Daniel (The Money Guy Show - FYI by FTE) highlights that every 1-2 years the market drops 10%, every 4 years a 20% drop (bear market, big decline), and 30% declines about every 10 years. The problems arises from timing, in that NOBODY knows when this will all happen, and it isn't regularly space. The bad news - when the market drops 20%, at least 20% in your neighborhood are about to loose their job. The good news, is the markets pretty much always come back stronger than ever after the declines.
The topic that made me chip in was someone mentioning millennials having degrees in underwater basket weaving, and the inability to purchase a home with a useless degree. Unfortunately there's no agreed upon age bracket for millennials that's recognized, but it's safe to assume I'm an old millennial by now.
Thankfully I don't have that one of those doctorate weaving degrees, just Intelligence studies and Technology (AS), and Environmental Earth Sciences (BA) with no student loans, car payment, or revolving debt. I graduated at 31 and 34 respectively, and the number of 22-23 year olds going for graduate degrees to delay paying student loans was sickening.
USAjobs.gov has GS7 jobs available right now, but they also require a freaking master's degree for a job paying 38-50K/year, and I've been rejected on every GS11+ job because my resume doesn't list the hours and days worked for each job (full time vs part time is not sufficient). The discrepancy between employment requirement of a degree level, and the wage offered, is pretty bad, and most of the labor-heavy jobs around me don't pay much more than McDonalds with minimum benefits (if any). I have no debt, so I have more freedom in job selection, but at the end of the day the housing and utility costs still have to get paid, and if you're single, it's a rough go for most.
Unfortunately the reality is single earners need to earn 30% extra to maintain the same quality of life as dual income, but don't have discretionary spending (IE - single wage, 65k/year vs dual income of 100K/year (combined couple)). At 65K the single person can have the approximately the same housing/utility/etc. as the couple (each making 50k/year), but they fall short by 35k to put aside for savings, retirement, and investments (or 17.5k on an individual vs. individual basis). That doesn't even touch the number of divorces and people that get drug through the coals while they're trying to start a new chapter in their life, which has it's own financial costs involved. The divorce rate is high and the number of people out there trying to snag a life support is ridiculous. I've asked women directly on a date what they're after in a relationship, and the answer 7/10 times is "someone to make me laugh"; that's wanting a caretaker, not a partner in my opinion.
The biggest societal problem with the economy from my perspective is so many people are groomed into a earn/spend ratio of 1:1, and keeping up with the Jonse's is viewed as the bare minimum to life - so you better get some leverage to be the Jonse's instead of trying to keep up with them. Basic fiscal literacy isn't taught in schools any more, and the current generation of parents are generally pretty bad at this as well, and our culture tends to view income as wealth. Nobody is telling folks it's alright to struggle for a bit right now so you're setup to be well of 10,20,40 years in the future, or how to do it. I think the root problem isn't the banking system, fiat currency, capitalism vs. other setups globally, worker wages, or education - I think the root problem is our culture here in the US tends to believe that long term means the time to the next pay check. If we can't get a grasp on that, and stop trying to make subjective things objective (IE no child left behind = test grades for money, which means teaching the test not the material), then we're on a slide that's just going to get more greased by sweat from fear as time goes by.
The second topic was asking for advice about financial strategies/investments versus preparedness. The conversation included debt, child's college funds, quality of life, and flat old living life instead of hyper-focus on one thing or the other. Check out Triage : The Preppers Plight for deeper thoughts on preparedness.
I am NOT a tax accountant or financial professional (yet), and this is simply things I have learned over the last 2 years from my personal experiences and diving way deeper into this field than I would have ever expected. Contact a CFA/CPA that is a fee-based fiduciary to get specific advice for your situation, awareness of actions that can trigger taxable events, along with getting a handle on estate planning and possible wealth transfer early.
I got my pants caught down in 2020. Bad. Here's a few things I've learned:
1) You must absolutely have a budget. Budgets should be realistic and focused on your personal goals. They are not punitive, rather they exist to put guardrails in place and be more conscience about our spending habits. By knowing what the actual cost of eating out one meal a day for the month is, compared to packing my lunch, I can decide how often I want to do it, if at all - because I'll know how it impacts my other goals. Resources are limited, so if I spend $150 a week eating out, that's $150 I can't put towards anything else. I can feed myself for $55 a week, meaning I can put $95 towards savings, retirement, ammunition, etc.. You have to know your current situation in order to implement change that will steer towards where you want to be, otherwise you have no map or compass.
2) Pay yourself first - you'll wind up using debt to try to live, and it will accumulate faster than anybody wants to admit in the dark times of life. Even if it's $10 a paycheck, start somewhere. Put it in a high yield savings account that's FDIC insured that is separate from your normal bank. This keeps you from getting entangled with tech companies fronting as a bank, such as "One Finance."
Cash is king in emergencies, and liquidity second to that (paying off a mortgage early makes it very hard to access that money again). I put 10% of my paycheck into an emergency savings account, period, regardless of what's happening. I've had to dip into it when I walked away from my company, and it took about a month to find a new place. That's fine-that's what the emergency savings is for. Try to get enough liquid cash on hand to cover the biggest insurance deductible/out of pocket expenses that you have in full, so if one of the worst days finds you, you aren't taking on even more stress trying to find out how to pay for it. After that, getting 3-6 months of actual living expenses is a good goal to gradually get to, which will keep things in the house flowing while another income stream is found. My employer allows me to upload different bank accounts and allot different % to each, so that part is on auto-pilot for me. 10% is could be too aggressive for many and may not be what you can do right now with a family, but even 1% is more than 0%.
Not going to lie, for me being a single guy, that's almost $20,000. I don't have that - but I can work towards it. You have to put aside $100 before you can get to $500, before $1k, before $5k, etc - but try to get to at least $1k rapidly to build some breathing room. I have a high deductible health plan that is HSA eligible, (HSA rolls over every year, it is NOT a FSA) and allows for same year tax deduction (ala 401k), tax free growth (ala Roth IRA - you can invest in a HSA), penalty free withdraw for qualifying medical expenses (keep your receipts), and allows for penalty free withdraw at retirement age (must still pay income tax). If you have the ability to pay for the medical expenses without touching this account, you'll be able to deduct the medical expenses in addition to keeping the compounding growth in the HSA with it's own tax benefits. I use this account predominantly for building up my maximum out-of-pocket for medical care, allowing my money and market forces to work together. A family can put $7,300 into this account each year, individuals $3650
3) High interest debt must go, and you must know you and yours habit's about it intimately. I know that if I don't check my credit card balance daily, to keep that number in my face, I will swipe the card more often with the potential of "I'll pay it back later" type of attitude creeping in. I manage this by implementing a spending cap in my budget that has wiggle room to play defensively and limit how much the card gets used. I also pay the balance in full every pay day. To give an idea of how bad this is - the US stock market has returned 8-10% on average for the last century, even counting the volatility with it. Most credit card that get pitched charge 19-25% interest these days. You will never get ahead if you are leasing your life style to Mr. Visa by spending tomorrow's dollars (plus interest) today. Credit cards are not for everybody, but if you use them strictly as a tool for the benefits they provide (fraud protection, extended warranties on electronics, 2% cash back (my cash back feeds my Roth IRA)) and keep the rotating balance at $0, you're doing alright. I'd consider anything over 5% to be high interest - how you attack them should be methodical, reasonable, and not make your standard of life miserable. That's a great way to invite depression and emotions into parts of your financial life you don't want.
4) Get term life insurance if others are relying on you, I've heard 10x annual salary is a decent number. You can get additional term policies if life gets more complicated to build a stair step effect for coverage, allowing them to expire as needed or renew them.
5) You and yours must be on the same page for what the end goal is, and more importantly, WHY that is even a goal. Not doing this is an exercise in frustration that can result in stagnation and worsening of the relationship, and fiscal parts of life over time.
6) Take advantage of any employer matched retirement funds that are available to you. My company matches 50%, up to 6% of my salary. What this means is for every $100 I contribute, I get $150 in the account - that's a 50% gain right out of the gate. Anything beyond the match, you may want to look at putting in an IRA, probably a Roth IRA if your taxes can be done with a professional in one sitting.
7) Investing does not have to be difficult, and generally speaking people are actually speculating instead of investing these days. For a Roth IRA, look at index target date funds (for me, FHAPX) and aggressive growth index funds with low cost (etf or mutual fund). VOO, IVV, VT, and similar track the S&P500 giving great diversification and regular rebalancing for a fee of about $3 per $1000 invested in the security (practically free). These grow tax free and are penalty free at retirement with no required minimum distributions, so you'll want to get the largest total return possible here. For tax deferred (like 401k), look at more stable securities such as bonds and other fixed income. The annual yield will be lower here, but remember that employeer match you get is an automatic 50-100% gain right out of the gate. For standard taxable brokerage accounts, look at securities that are treated with tax benefits, such as qualified dividends, MUNI bonds, etc.. I treat my HSA similar to my Roth, but put alternative income and bonds in place of index target date funds, as the HSA is where I'll be leaning if I can't afford my medical expenses out of pocket)
What this does is create an account you can access any time (traditional brokerage) to act as a bridge between when you retire and when you can access your retirement funds. It also allows for a "oh crap" liquidity bail out if a major life changing event happens, and while it is treated as income for tax purposes, it's treated at about half the % for long term capital gains and qualified dividends, with state-of-residence MUNI bonds having 0 federal or state income tax. The HSA is there as you need it, but can be used for health reasons as needed, so growth and stability are both important. The 401k is the more stable retirement account that you'll owe some big taxes on when you withdraw, and taxes are pretty much always higher later in life. By touching this one first, you're getting the tax burden out of the way when you're a bit younger, allowing the Roth IRA to continue to grow tax free - and then you can tap into that Roth as needed as you get even older.
8) You can open custodial account or Roth account for a child, which will give massive benefits from compound interest and ease the transition into adulthood. The Roth IRA for kids is great when they have income (cutting grass, babysitting, working a restaurant, etc.), putting some of their skin in the game. Reinvest all dividends and capital gain distributions, even if it's for yourself.
9) Brokers have a HUGE educational push available to clients for free, starting with personal finance. I have never once been offered anything like that at a bank. I have found TD Ameritrade's to be the best for my learning style, and is where I keep my taxable brokerage account. I mostly invest in state-of-residence MUNI bond mutual funds through this account that have a hefty penalty for selling before 6months passes per transaction, so there's a big stick keeping me from trying to be an active trader (don't bother, you won't beat the market though skill long term).
10) Fractional share purchasing is a HUGE benefit I did not know about when I first started. IVV is an ETF that tracks the S&P500, and is currently trading for $445 per share with an expense ratio of 0.03% (the management fee). I can't afford to buy a share of something that expensive. But with fractional share purchasing, I can purchase $20 of that on pay day, and another $20 next pay day, etc., and capture the gains and losses (dollar cost averaging) as I can afford it. TD Ameritrade doesn't offer it yet (they should within a few years, as Charles Schwab bought them). Fidelity offers fractional share purchasing, as does Charles Schwab. I prefer Fidelity, but that's a personal preference as 2% of my purchases go to feed my Roth and HSA through them (meaning I can't spend the money).
11) I put ammo into my budget, at a low % of my paycheck. I don't worry about precious metals. Cash is simply something we have decided to place an agreed value upon, regardless fiat or physically backed. If society no longer accepts cash, then the gold and silver bars are worth about the same amount as the cash since I can't do anything productive with them (food, production, or defense). If we hit that point, then everything we've previously done has been in vein anyway, so I'll prepare for the most likely events (loss of income) in a triage order of importance for me and my life.
I am NOT a tax accountant or financial professional (yet), and this is simply things I have learned over the last 2 years from my personal experiences and diving way deeper into this field than I would have ever expected. Contact a CFA/CPA that is a fee-based fiduciary to get specific advice for your situation, awareness of actions that can trigger taxable events, along with getting a handle on estate planning and possible wealth transfer early.