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Tech Tree
Finance
Thomas Ebenezer
Osaigbovo
CONTENT
1) First Dollar: ............................................................................................................................................................... 3
2) Saving s or “War Chest”: ....................................................................................................................................... 3
3) Income: ..................................................................................................................................................................... 3
4) Deet: .......................................................................................................................................................................... 3
5) Budgeting: ................................................................................................................................................................ 4
6) Net-Positive Income (Income Independence):................................................................................................. 5
7) Installment Lons: .................................................................................................................................................... 5
8) What-If analysis:..................................................................................................................................................... 6
9) Financial planning: ................................................................................................................................................. 6
10) Active Budgeting: .................................................................................................................................................. 6
11) Pay Yourself first: .................................................................................................................................................. 6
12) 500€ Emergency Fund ......................................................................................................................................... 7
13) Full-time job (w/retirement plan) ..................................................................................................................... 7
14) 1-month cash buffer ............................................................................................................................................ 7
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15) Large purchase savings (cash or checking/savings) ...................................................................................... 8
16) Credit Cards ........................................................................................................................................................... 8
17) shaort-term savings vehicles ............................................................................................................................. 8
18) Deadbeat Creadit .................................................................................................................................................. 8
19) high-intrest dedt epimination (>10%) ............................................................................................................... 9
20) 3-month cash buffer ........................................................................................................................................... 9
21) Credit score basics ............................................................................................................................................... 9
22) Medium-intrest Dedt elimination (5-10%) .....................................................................................................10
23) investing ................................................................................................................................................................10
24) First Home purchase .......................................................................................................................................... 11
25) point hacking & benefits Maxing ...................................................................................................................... 11
26) Total debt elimination (debt freedom)........................................................................................................... 12
27) 401(K) or other empoyer sponsord retiremnet plan .................................................................................... 12
28) IRAS (Traditional and/or Roth) ......................................................................................................................... 13
29) Taxable investing ................................................................................................................................................. 13
30) Life insurance ......................................................................................................................................................14
31) Match limit Maxing ..............................................................................................................................................14
32) Contribution Limits ............................................................................................................................................. 15
33) asset Classes........................................................................................................................................................ 15
34) Stocks ....................................................................................................................................................................16
35) Bonds .....................................................................................................................................................................16
36) Mutual funds & etfs ............................................................................................................................................16
37) real estate ............................................................................................................................................................. 17
38) High-Risk Investments ....................................................................................................................................... 17
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1) FIRST DOLLAR:
2) SAVING S OR “WAR CHEST”:
Since this tech tree is inspired by Civilization, let’s think in video game terms. In a game like Civ,
your “war chest” is your pool of resources you can use to expand your civilization AND to deal
with threats, like enemy attacks. (The game doesn’t use the term “war chest” for this, but I like
it so, I’m using it).
In real life, your savings represents your war chest. It allows you to do two things:
-
Take advantage of opportunities - AKA do things that make your life better. Get a better
apartment, invest in your education, buy a plane ticket to a conference that might help
you build new relationships.
-
Take a punch. Life throws unexpected punches at us - flat tires, sicknesses, broken
garbage disposals full of rotten food (don’t ask). It’s not “if”, it’s “when”.
Your savings/war chest allows you to take these opportunities AND to take punches and stand
back up again.
Establish Savings by putting at least $1 into some sort of savings account or vehicle. You may
pass this checkpoint without any regular income if you’re gifted money or savings bonds by
relatives.
3) INCOME:
Regular income that comes in on a repeat basis. If you had an allowance as a kid, you’ve met
this check Point.
4) DEET:
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Debt is money you owe to someone else. Many people think debt is evil, but in fact debt is what
makes the world go around. Debt is an incredibly useful concept.
Money is a store of value. Some people have more money (stored value) than they can currently
use. Other people have potentially valuable things they want to do or create but need resources
to do them.
Debt allows people who have money to give it to those who need it for useful purposes, and to
be compensated for doing so via interest - extra money paid back along with the original amount
(the principal).
Ideally, those useful purposes generate enough value that the borrower is easily able to pay
back the debt and the interest, and still have extra value left over.
Example: Median total career earnings for bachelor’s degree holders is $1.28 million, while for
high school degree holders it is $630,000):
-
https://www.brookings.edu/blog/up-front/2020/10/08/major decisions-whatgraduates-earn-over-their-lifetimes/
This increase in value should justify the cost of student loans. (These are median numbers - the
question “are student loans worth it” is worthy of much more discussion, as there are many
more factors such as major choice, school choice, personal drive/autodidactism).
Debt becomes a problem when:
-
Lenders act in a predatory nature
-
Borrowers take on too much debt, or take on “bad” debt - AKA debt for consumption,
rather than value-generating purposes
One good rule of thumb for managing debt is to understand Debt-to-Income Ratio. This is your
monthly debt payments divided by your gross monthly income.
In this calculation, you should include rent payments. The reason is that if you owned a home,
you would include your mortgage payment. When you’re renting, you are essentially paying
someone else’s mortgage - and more importantly, it’s a monthly obligation you have to meet.
Note that mortgage lenders don’t include your rent in DTI - instead they include the total housing
cost for the property you’re trying to buy - including mortgage, property taxes, HOA, etc.
Including
rent is just useful as a financial health metric.
Example:
-
Rent ($2000) + Student Loan ($350) + Car Loan ($250) = $2600/mo
-
Gross monthly income = $7500/mo
-
DTI = 2600/7500 = 34.7%
Ideally, you should keep your DTI under 35%. DTI ratios between 36% and 50% may be stressful,
though may be a necessary evil these days because housing is bonkers expensive, and wages
haven’t kept up. Thanks, [insert politician you hate here but blame lobbyists].
DTI ratios over this 50% are likely to become difficult to handle - and this is how people get into
trouble with debt.
5) BUDGETING:
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Budgeting is the process of making sure you know your income (how much is coming in) and
your expenses (how much is going out). It also involves planning out what to do with that income.
At
its
simplest
level,
creating
a
budget
means
looking
at
your
income
and
understanding/deciding:
-
How much goes to necessary expenses - rent, food, utilities, debts
-
How much you’ll save - put into savings accounts or investments
-
How much is left over - aka “discretionary income” aka “beer money” aka “money I will
spend on more of those logic puzzles at Barnes and Noble even though I still can’t even
do a Rubix Cube”
A few useful terms to understand to set up your budget:
-
Gross income: The amount of money you make before taxes
-
Net Income/Take-Home Pay: How much money you receive each month
-
Fixed/necessary expenses: The expenses you must pay each month. Rent, utilities, food,
debt, gas. You can split this into “fixed” (e.g. rent) and “variable” (e.g. groceries), which
may be helpful if you’re on a tight budget. I prefer to get an average figure for necessary
“variable” expenses and include them in an overall necessary expenses category.
-
Savings: Money you plan to save for the future, either in Short-Term Savings Vehicles
or Investments. Or in the form of canned beans and ammo if you’re a prepper.
Money left over after necessary expenses and savings goals are met is discretionary income,
which you can use on whatever you want - however, you should keep some of it to form a Cash
Buffer in your checking account. (See Cash Buffer on the Savings track)
6) NET-POSITIVE INCOME (INCOME INDEPENDENCE):
Once you have a job or indie work that pays for all your expenses + $1, and you understand basic
Budgeting, you’ve passed this checkpoint. Now you should have Net-Positive Income.
This will allow you to independently start building up a Savings.
7) INSTALLMENT LONS:
Instalment credit is one of the two main types of credit (the other being Revolving, i.e. credit
cards). Most instalment credit comes in the form of loans.
Instalment loans have set terms - there’s a set amount you’re borrowing, a payoff period, and
an
interest rate (though this can sometimes be variable - there are fixed interest rates and variable
interest rates. Aim for fixed whenever possible). There will also be a set monthly payment.
Instalment loans include home mortgages, student loans, car loans, personal loans from a bank,
and that scary guy giving Bradley Cooper a bag of money in Limitless.
Example of an instalment loan: A $10,000 car loan at 5% with a 5-year (60-month) term. Your
monthly payment on this loan will be $189.
Instalment loans are typically amortized, which means more of your early payments go to
interest than to principle. As time goes on, more of each payment goes to the principal, and less
goes to interest. This allows you to have the same monthly payment throughout the life of the
loan.
Most instalment loans will require credit history and proof of income to get. However, this
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check is very early in the tree because Federal student loans can be acquired without income
or
a co-signer.
Some loans may also accept collateral instead of credit history or proof of income. Pawn shop
loans (try to avoid these at all costs) are an example: You leave something of value, which will
be
taken if you fail to pay back the loan.
See more on collateral in Credit Score Basics
8) WHAT-IF ANALYSIS:
This knowledge check builds upon Basic Budgeting to include future -forward "WhatIf" analysis. Rather than simply tracking your current and historical income and
expenses, you can now look forward at the impact of potential changes to income,
expenses, and savings.
This can be made easier with a budget modeler tool, like the one I built for myself and
share for free: https://thomasjfrank.com/free-budgeting-spreadsheet-template
9) FINANCIAL PLANNING:
Similar to What-If Analysis, Financial Planning is a future-looking knowledge check. This involves
considering your future goals - home-buying aspirations, family goals, potential dependents
(older and younger than you), target retirement age and lifestyle, etc. One tool that can help is
Personal Capital:
https://www.personalcapital.com/
10) ACTIVE BUDGETING:
Active budgeting means manually tracking your individual purchases as they happen. You can
do
this in a note on your phone, in a spreadsheet, or with a tool like YNAB:
https://www.youneedabudget.com/
Active budgeting can be useful if you spend more money than you should. By manually tracking
each expense, you:
-
Get a true feeling for how much you’re spending and what your spending habits are
-
Feel the “pain” of each purchase more viscerally, which may encourage you to spend
less and save more
I do not actively budget, and I don’t believe most people need to do so long-term once their
Financier Habits are set.
11) PAY YOURSELF FIRST:
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“Pay Yourself First” is a hyper-useful budgeting concept. Paired with a One-Month Cash Buffer,
it will allow you to manage your money without any stress or need for Active Budgeting.
Paying yourself first means using your income to meet your savings and investing goals first.
When money comes in, part of it immediately goes into Short Term Savings Vehicles or
Investments.
Then, what’s left over is used to pay necessary expenses and fund whatever else you want to
buy that month.
You do still need to ensure you’re maintaining your buffer, however. If you’re using a credit card,
ensure you’ll be able to pay off the full balance while also maintaining your buffer.
12) 500€ EMERGENCY FUND
An emergency fund is an account separate from your checking account (e.g. a savings account)
with enough money to allow you to take a punch and get back up on your feet.
A “punch” is any unforeseen event that you have to deal with financially - e.g. a blown tire on
your car.
People who don’t have an emergency fund are in danger of putting unforeseen expenses on a
credit card, which can trap them in a debt spiral.
Establishing an emergency fund should be your #1 personal finance priority.
I chose $500 because it was a sensible number for me when I was starting out on my own - 18,
single, living with roommates in the U.S. Midwest where cost of living was quite low.
If your circumstances are different, you may want to adjust this number.
(However, this is just checkpoint #1 - you’ll be continuing to save past this point.
13) FULL-TIME JOB (W/RETIREMENT PLAN)
This achievement provides a shortcut to one vein of Investing - 401(k)s and other
employer sponsored retirement plans.
This path exists because it is typically advantageous to contribute to a 401(k) even when you
have debt to get employer matching.
If your employer provides a 50% match (this will usually be up to a certain % of your salary, such
as 6%), then every dollar contributed up to the matching limit immediately provides a 50%
return.
So, if contributing to this matching limit doesn't squeeze your budget and still allows you to pay
down high interest debt, it can be advantageous to do so. After hitting the limit, pay down high
and medium-interest debt before investing more.
14) 1-MONTH CASH BUFFER
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A 1-month cash buffer means having enough money in your checking account to cover 1
additional month’s expenses.
E.g., if your monthly expenses are $800 (food, rent, utilities, debt minimums), then you should
have $1,600 before paying those off this month.
The folks at YNAB (You Need a Budget) call this “living on last month’s income”.
Once you hit this level, you are no longer living “paycheck to paycheck”, and have some measure
of financial security.
15) LARGE PURCHASE SAVINGS (CASH OR
CHECKING/SAVINGS)
Once you’ve established an emergency fund, you may also want (or need) to start saving up for
large, foreseeable purchases in the future. Examples include:
-
Textbooks and student fees for next semester (if you’re in college)
-
New car tires
-
Holiday gifts
-
A house down payment
-
A giant robot with rocket boosters so you can finally leave this world and stop dealing
with everyone’s crap all the time
Think ahead and ask yourself what you’ll likely need to buy in the future, then start planning out
how much you need to save each month (or paycheck period if you prefer) to meet those goals.
16) CREDIT CARDS
If no regular income, secured card or co-signer will be required. Secured is the best option as
most credit card providers no longer allow for co-signers.
A secured card requires a deposit, which becomes your credit limit. It’s a great way to build
credit if you don’t have any credit history yet.
Example secured card: https://www.capitalone.com/credit-cards/quicksilver-secured
17) SHAORT-TERM SAVINGS VEHICLES
Use money market accounts (or funds), CD's, or certain bond funds to park cash for large, shortterm (<3 year) purchases.
18) DEADBEAT CREADIT
Credit “deadbeats” are credit card users who pay their full balance each month. This means
they never pay any interest.
I am a credit deadbeat and always have been. You should be on too.
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19) HIGH-INTREST DEDT EPIMINATION (>10%)
High interest debt can keep you trapped for years, so paying it all off should be top priority after
you've established an emergency fund and 1-month cash buffer.
This can be done instantly in many cases through consolidation and refinancing - e.g. taking out
a new loan at a lower interest rate to pay off the higher-interest debt all in one lump sum.
Local credit unions can provide personal loans for this purpose. Balance-transfer credit cards
can also be used. It could also be worth looking into services like Lending Club:
https://www.lendingclub.com/
and
Sofi:
https://www.sofi.com/personal-loans/credit-
card consolidation-loans/
However, be aware that a good credit score is often needed to get an interest rate that’s
significantly better than what you already have.
Ultimately, do what you can to accelerate payments against high-interest debt. Live like a
Spartan and kill that debt.
20) 3-MONTH CASH BUFFER
Depending on your life circumstances and risk tolerance, you might choose to start investing
before establishing a full 3-month cash buffer.
However, be aware an event that could cause you to lose your job could be the same event that
causes your investment portfolio to lose a lot of value! (See: S&P 500 during Feb-March of 2020
and the number of job layoffs that happened during that time).
If you happen to lose a job and don't have a decent cash buffer, you could be forced to sell your
investments at a huge loss to cover expenses.
It may also cause you to scramble and take a sub-par job opportunity because you need the
money now.
People with a multi-month cash buffer can handle a sudden income loss much more gracefully.
21) CREDIT SCORE BASICS
Your credit score is a number between 300-850 that influences a TON of factors in your life:
-
Whether you’ll be approved for a home mortgage
-
Whether you’ll be able to use a conventional mortgage, or if you’ll have to use an FHA
loan.
-
Your interest rates on all types of loans (higher score = lower interest rate)
-
Whether you’ll be approved by landlords as a renter (I’ve seen some properties requiring
a 700 credit score)
There are other factors as well. Bottom line: Prioritize building a great credit score.
FICO is the main company that creates your credit score. There are others (mainly
VantageScore), but most lenders use FICO scores.
There are 5 factors that go into your score:
1.
On-time payments (35% of your score) - how often you pay your loans and credit card
bill on time.
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2.
Amounts owed (30%) - this includes how much overall debt you have, but also your
credit utilization, which is your current revolving credit balance (revolving credit = credit
cards and other lines of credit) divided by your revolving credit limit. E.g. $2000 credit
card balance / $5000 credit limit = 40% utilization. The lower the utilization, the better.
Aim to keep yours under 30%.
3.
Length of credit history (15%) - includes how long you’ve used credit in general, but also
the average age of your open accounts. For this reason, it’s a good idea to keep old
credit cards open (put Spotify on them and auto-pay) as long as they don’t have high
fees.
4.
Credit mix (10%) - your mix of different credit types. This includes credit cards,
mortgages, car loans, student loans, etc. Lenders like to see that you can handle multiple
different types of loans responsibly.
5.
New credit (10%) - if you’ve opened a lot of new accounts recently (credit cards, loans),
this can slightly hurt your score.
Bottom line: You can build a good score simply by getting a credit card, keeping its utilization
under 30%, and paying it in full every month.
Your score will also go up if you add other loans into the mix. Typically, you’ll have “thin credit
history” if you have less than four accounts on your credit report, and this can hurt your score.
For reference, my history (I’m 30) includes five credit cards, four student loans, three car loans,
two mortgages, and a partridge in a pear tree.
You can always get something like a car loan and then pay it off quickly to minimize interest
while still building your credit history (be wary of loans with early payoff fees).
22) MEDIUM-INTREST DEDT ELIMINATION (5-10%)
Debt with interest rates between 5-10% is an interesting category, because an S&P 500 index
fund has historically returned around 7% on average (and quite a bit higher than that in the last
10 years).
So, you have a good chance of coming out ahead by just paying the minimums on this type of
debt and investing what’s left.
However, many people feel uncomfortable with debt - especially debt over 5%. It’s also worth
noting that the 7% average return in the stock market is just that - an average. Some years, the
market will lose money - and your debt payments will still come due.
So, it’s up to you - choose to either accelerate payments on this debt or start investing with the
surplus after hitting your minimums.
23) INVESTING
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Investing means putting your money into vehicles that grow in value or produce income.
By investing, you’re making your money work for you.
Philosophically, this is a hugely important thing to do. It acts as a force-multiplier for your own
effort. And if you do it intelligently and for long enough, it can ensure that you have income even
if you want (or have) to stop working.
24) FIRST HOME PURCHASE
It used to be common wisdom that you should save up a 20% down payment - i.e. 20% of the
home’s purchase price - before applying for a mortgage.
This allows you to avoid paying private mortgage insurance (PMI), which is an extra monthly fee
that compensates that bank for taking the extra risk lending to someone paying less than 20%
down.
I do not believe this is a good strategy in today’s market.
Home prices go up so much each year that it’s probably worth paying a smaller down payment
% to get a home faster.
You can then accelerate mortgage payments to race to that 20% equity number, and have the
PMI removed.
(There are details and caveats around this. FHA loans make it way harder to remove PMI. As with
most things, having a good credit score helps a LOT with getting a house).
25) POINT HACKING & BENEFITS MAXING
Once you've gotten your first credit card and understand the principles of deadbeat credit, you
can maximize the benefits you get from your credit card(s) in several ways. These include point
hacking and card upgrades, among others.
-
Optimum benefits: Credit cards can provide cash-back rewards or points that can be
redeemed for air travel, hotel stays, etc. Some cards provide more rewards for certain
types
of
purchases.
For
example,
Amazon's
credit
card
(https://www.amazon.com/Amazon-Rewards Visa-Signature-Card/dp/B007URFTYI)
gives you 5% cash back on Amazon purchases, 2% on restaurants and gas stations, and
1% back on everything else. Analyze your spending behavior and goals to determine the
best card and associated rewards. I don't travel enough to care about airline-mile cards,
so I do most of my purchasing on SoFi's credit card. It gets me 2% cash back, if I use
those rewards to fund a SoFi checking account or to invest on SoFi's trading platform.
Since SoFi doesn't charge trade commissions, I use my rewards to buy stocks on SoFi.
The next best simple cash-back card is Capital One's Quicksilver Rewards card, which
gets me 1.5% cash back. As a result, SoFi's card essentially gets me an additional 0.5%
back on every dollar, and essentially forces me to use those rewards to invest, rather
than spending them frivolously.
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-
Point hacking: The practice of signing up for many cards to take advantage of sign-up
bonuses. Also in this category is the practice of figuring out the effective dollar-value of
airline miles and other point schemes. Start learning more here: The Points Guy
(https://thepointsguy.com/)
-
Card upgrades: Many cards aimed at people with no/little credit history or recovering
credit will have fewer benefits or will have annual fees (APRs should not matter to us
since we are deadbeats!). Since average age of your open credit accounts factors into
credit score, it is often advantageous to have these existing cards upgraded when your
credit score improves, rather than closing them (to eliminate the annual fee) and
opening a new card. Example: Capital One's QuicksilverOne card has a $39 annual fee,
while the better Quicksilver card has no fee. They both offer 1.5% cash back on all
purchases (making it nearly the best simple cash-back card for personal use). I called
Capital One customer service and had my card upgraded to Quicksilver to eliminate the
annual fee while keeping my average credit age as old as possible.
26) TOTAL DEBT ELIMINATION (DEBT FREEDOM)
Hitting and remaining at this milestone is more philosophical. In many instances, you can come
out ahead by paying the minimums on debt <5% and investing in higher-paying securities, rather
than paying off this low-cost debt as quickly as possible.
Additionally, buying a house will almost certainly involve taking on a large amount of debt at this
level.
Personally, I believe mortgage rates are currently low enough that accelerating payments on a
mortgage makes little sense. I don’t make any extra payments on my mortgage, opting instead
to invest that extra money.
27) 401(K) OR OTHER EMPOYER SPONSORD RETIREMNET
PLAN
A 401(k) is the most common retirement account that is handled by your employer. It allows you
to make contributions each year that are invested, and you can start taking withdrawals from
the account once you hit retirement age (currently 59.5).
Most 401(k) accounts operate like Traditional IRAs, in that your contributions are “pre-tax”,
meaning they lower your taxable income.
E.g. If you made $50,000 this year, but contributed $5,000 to your 401(k), then you’d only be
taxed on $45,000.
The contributions are “tax-deferred” because you pay normal income taxes on your withdrawals
in retirement. You’re not avoiding the taxes - just paying them way later.
401(k)s have higher contribution limits than IRAs. My free budgeting spreadsheet contains the
current limits (they change each year) and will tell you if your projected savings will go over
them: https://thomasjfrank.com/free-budgeting-spreadsheet-template/
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28) IRAS (TRADITIONAL AND/OR ROTH)
IRAs are tax-deferred/tax-advantaged retirement accounts that you open and manage yourself
(as opposed to a 401(k), which is managed by your employer).
IRAs have the same age requirement as 401(k)s for withdrawals - 59.5.
There are two main types of IRAs, and they’re quite different.
Traditional IRAs function similarly to 401(k) accounts - the money you invest in them is taxexempt, so your contribution lowers your taxable income in the year you make it. This means
you save money on taxes during your working years, and it may mean you can afford to invest
more. However, when you take withdrawals in retirement, they’re taxed as regular income.
Roth IRAs are the opposite. Your contribution is “post-tax”, meaning they don’t lower your
taxable income number. However, when you take withdrawals in retirement, they’re tax-free!
Both types of IRAs have contribution limits, and Roth IRAs also have income limits - your
income
can be high enough that you can’t contribute to one (unless you use an advanced technique
called a Backdoor Roth IRA - consult a financial advisor on that).
My free budgeting spreadsheet will show you these limits (which change each year) and if they
affect you based on projected income: https://thomasjfrank.com/free-budgetingspreadsheet template/
Lastly, I’ll mention that IRAs can be used to pay for a house if you’re a first-time home buyer. I
typically recommend saving for a home outside of an IRA, but it’s worth knowing. Details here:
https://www.investopedia.com/articles/personal-finance/110415/can-you-use-your-irabuy house.asp
29) TAXABLE INVESTING
Pass this check by opening a taxable brokerage account, and by understanding the differences
between taxable and tax-advantaged investing:
Investments held outside of tax-advantaged retirement accounts (401(k)s, IRAs, etc) are
considered "taxable".
Funds used to purchase taxable investments do not reduce your taxable income, and
withdrawals from taxable investments will be taxed as well.
In addition, taxable investments are not protected from taxation as they grow. Dividends and
capital gains are taxed, even if they are set to be automatically reinvested.
For this reason, funds in taxable investments suffer from tax drag, which is the reduction of
potential gains due to taxes. Funds in tax-advantaged retirement accounts have more earning
potential, especially over a long-time horizon.
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Unless you have specific reasons to do otherwise, it's a good idea to hit contribution limits on
your 401(k) and/or IRA before investing in taxable accounts for the long-term. Even contributions
to a non-deductible IRA have an advantage since their dividends and gains aren't taxed before
being reinvested.
Example from A Random Walk Down Wall Street by Burton G. Malkiel, pg. 298, which compares
two hypothetical accounts - one tax-advantaged, one taxable:
-
$5,500 invested annually over 45 years, earning 7% annually after expenses.
-
Tax-Deferred account final balance: $1,687,135
-
Taxable account: $$938,601
Don't underestimate the effect of tax drag!
More: https://www.investopedia.com/terms/t/tax-drag.asp
30) LIFE INSURANCE
I am placing life insurance into the Investing tree because, philosophically, buying life insurance
fulfils one of the same functions that investing does - ensuring that there is an income producing
asset for your family if you are no longer around.
The point of life insurance is to provide for your dependents in the event of your death. This
means that you only need it if you have people in your life who depend on your income for their
life or standard of living. Additionally, you only need it if your estate couldn’t provide the same
benefit.
This means you probably don’t need it if you’re single, and you also probably don’t need it if
you’re married, in your 60’s, with grown kids and a multi-million-dollar retirement fund.
There are likely only going to be certain times in your life when you’ll need life insurance typically
if you’re married and your spouse doesn’t earn much, and (more importantly) if you have kids.
For this reason, you almost always want to buy term life insurance, which only covers a certain
number of years. It is WAY less expensive than its counterpart, whole life insurance, which is
worth it for almost no one.
This page contains more good info: https://www.reddit.com/r/personalfinance/wiki/insurance
It also may be worth considering disability insurance depending on your tolerance for risk, career
field, and dependent situation. This functions similarly to life insurance, but pays out if you’re
disabled and can’t work.
31) MATCH LIMIT MAXING
Many employers that offer 401(k)s and other retirement plans will match contributions up to a
certain amount. A typical matching scheme is 50% up to 6% of your salary, meaning that for
every dollar you contribute, they'll contribute 50 cents (up to 6% of your salary).
This means two things:
1.
Every dollar contributed up to the matching limit gets an immediate 50% ROI (return on
investment). Of course, it then keeps growing as long as you keep it invested.
2.
If you hit the matching limit, you've effectively given yourself a 3% raise.
Example:
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If you make $50,000 a year, your matching limit (6%) is $3,000. If you contribute the full $3k,
then your employer will match that with $1,500 (50%). Effectively, your salary for that year is
$51,500.
However, since 401(k) contributions are tax deductible, your adjusted gross income (which is
used to determine your taxes) is reduced by $3,000!
For these reasons, contributing up to the matching limit is EXTREMELY advantageous. It is one
of the best financial decisions you can make, if your budget allows you to do it comfortably.
32) CONTRIBUTION LIMITS
Knowledge check:
Know the contribution limits for 401(k)s and IRAs. In 2021, the limits are $19,500 for 401(k)
contributions, and $6,000 for IRAs.
It is also useful to know the following:
-
Roth IRAs have income limitations; if you make more than these limits, you cannot
contribute to a Roth directly. (It is possible to contribute using a Backdoor Roth
strategy).
-
Traditional IRA contributions may not be tax-deductible if you (or a spouse) are covered
by a 401(k) or other employer-sponsored retirement account. There are income limits to
determine whether this is the case.
These limits can be founding and used for what-if analysis in my budget modeler tool:
https://thomasjfrank.com/free-budgeting-spreadsheet-template/
Backdoor
Roth:
https://www.investopedia.com/terms/b/backdoor-roth-ira.asp (this
is
an
advanced strategy for high-income earners)
33) ASSET CLASSES
There are many types of asset classes in which you can invest your hard-earned cash – including
other types of cash! (i.e. currencies).
Asset classes include stocks, bonds, real estate, mutual funds, ETFs, currencies, commodities,
precious metals, cryptocurrencies, options and futures, and more.
Pass this knowledge check by understanding these two fundamentals:
-
Risk and Return - all investing involves risk! However, different asset classes come with
differing levels of risks and potential returns. These two qualities can vary a lot within
an asset class as well (e.g. one stock may be riskier than another). Typically, fixedincome investments like bonds are less risky than stocks. As a result, they'll experience
lower volatility, but tend to produce smaller returns as well.
-
Diversification - You can reduce risk as an investor by not keeping all of your eggs in
one basket. Smart investors diversify their investments in several ways - across multiple
companies, sectors/industries, countries, and (at the highest level), asset classes. This
is why you'll often see portfolios constructed with a combination of stocks and bonds.
Learn more about investing in my Investing Basics article: [In Progress]
What follows is a non-exhaustive sample of certain asset classes you may be interested in.
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34) STOCKS
35) BONDS
36) MUTUAL FUNDS & ETFS
Mutual funds are investment vehicles that get you access to automatic diversification. Mutual
fund is essentially a bundle of assets - usually stocks or bonds, but it could be anything. The
fund’s value is equal to the total value of the assets it owns, and you buy shares in the fund
that grow with it.
By buying into a mutual fund or ETF, you’re getting a small piece of each of those assets. To get
the same diversification yourself, you’d have to buy dozens or hundreds of different stocks,
bonds, etc.
ETFs are exchange-traded funds and are extremely like mutual funds. The main differences:
They most often follow indexes (basically a standardized tool to track the performance of a
certain group of assets - like the S&P 500, the U.S.’ 500 largest companies), and shares of them
are traded on the open market just like a stock (mutual fund shares aren’t).
A great example of an ETF is VOO - the Vanguard S&P 500 ETF. Most of my monthly investments
go into VOO. It tracks the S&P 500, so it essentially lets me invest in the growth of a proxy for
the entire U.S. economy - https://investor.vanguard.com/etf/profile/VOO
You
can
see
the
exact
portfolio
of
ETFs
I
invest
in
each
month
here:
https://thomasjfrank.com/m1-tjf-portfolio/ (full disclosure: this is an affiliate link for M1 Finance,
my investment platform of choice)
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Most ETFs have an equivalent mutual fund, though the reverse is not true - there are lots of
unique mutual funds that don’t track and index. Rather, the fund manager picks the assets they
want in the fund.
I typically recommend ETFs over normal mutual funds for two reasons:
-
Most fund managers can’t beat the S&P 500. So, it’s best to stick to the index funds,
whether through an ETF like VOO or a similar mutual fund.
-
Outside of IRAs and 401(k)s, ETFs are slightly more tax-efficient - meaning you’ll lose
less to taxes on them each year. This is since they’re traded on the open market like
stocks. Mutual funds aren’t, so fund managers often must sell the assets in their funds
to pay investors who are selling their fund shares. This triggers capital gains taxes for
everyone invested in the fund. However, if you’re investing within a retirement account
like a 401(k) or IRA, this doesn’t matter at all, as funds in those types of accounts aren’t
subject to capital gains taxes!
37) REAL ESTATE
Real Estate investing can be another great way to diversify your investments and add regular
income. In general, RE investing requires a lot more capital to get started than stocks, bonds, or
mutual funds/ETFs.
There are two main real estate investing strategies most people use:
-
Rental properties - Buy properties and rent them out to generate monthly income.
-
Flipping - Buy properties, improve them, sell them at a profit.
Flipping is a far less “passive” strategy, so most people tend to want to build a rental property
portfolio.
This is easier said than done - RE investing is very competitive, and everyone and their brother
wants to do it since the process is well-documented. However, I still have friends who have
done it successfully.
The basic stratgy is to find properties in markets where you’re likely to be able to charge a rent
that’s high enough to cover the mortgage, expenses, and expected maintenance/repair costs –
plus leave a bit of profit as well. (Even if you break even, it can be worth it as you build equity
in the property each month).
My friend Andrew Fiebert (who co-hosted the Listen Money Matters podcast with me) developed
a course on this strategy: https://thomasjfrank.com/rentalpropertiescourse/ (affiliate link)
Personally, I have no plans to get into RE investing, as I feel my time is better invested in growing
my business. However, a lot of people love this strategy.
38) HIGH-RISK INVESTMENTS
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Cryptocurrencies, options and futures, commodities trading, forex, and the like are all high-risk
investments. You're getting into uncharted waters here - this chart can't provide any real
guidance on these.
I will say this: Consider any money invested into these types of vehicles to be play money - the
same type of money you'd take on a weekend Vegas trip. It's got to be money you're 100% ready
to lose because you very well might lose it all. In fact, 10 hours of quality study and practice into
Texas Hold'em poker would probably get you a BETTER return at Vegas $1/2 tables than you'll
likely get with these.
Additionally, be VERY sceptical of anyone offering courses or paid guidance on these types of
investments. They'll usually position themselves as super-rich, take pictures in cars, give you
the rags-to-riches backstory ("I was just like you") - the whole Fake Guru 9 yards. They'll also
promise wild returns.
Think about the incentives here. If these gurus were so good at trading, that's what they'd be
doing instead of trying to sell you a course. Most of them either got lucky once or twice, or are
straight-up lying about their returns. It's insanely difficult to keep up good returns in investments
like these over the long run, so many people opt to make money off naive people who buy their
products and courses.
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