Category: Investing

16Aug

Dividend Stocks – A Magic Money Machine

What if I told you there was a magical machine that could create money. Every year, on a specific day, this machine will spit out $1. Once you buy it, there is literally nothing you have to do. You stick it in a closet and forget about it and BOOM, once a year your dollar pops out. The machine doesn’t need any maintenance. You don’t have to plug it in. It doesn’t break. It just spits out dollars every year. 

It gets better. Every year, the machine gets just a little bit more efficient and actually INCREASES the amount of money it can create. So the first year you get $1.00 even, but the next year you get $1.03. The next you get $1.07 and by year four it’s up to $1.12! 

The machine allows you to either take your money and spend it, or automatically buy a little more of the machine so it can make even more money. Over time the machine grows and grows and spits out more and more money!  

If you ever get tired of having the machine, you are free to sell it. This only takes a few clicks of a computer mouse. There are millions of people out there who will bid on the chance to take the machine off your hands. 

The machine will go up and down in value over time, but the general trend is up. Hold onto the machine and keep buying more of it with the money it produces over a long period of time and you can have quite a contraption that can feed you in your retirement! 
 
Sounds like a dream right? A machine like this can’t exist or be this easy. The reality is that this thing is out there and you can buy one (or a million of them) today! 

Magic Money Machine!

Question: How much would you be willing to pay for a machine that could make $1 every year, grow in value and increase the amount of money it makes most years? 

Well, if you invest in stocks, mutual funds or ETF’s that pay a dividend, you are in essence buying such a machine. The MARKET determines how much the machine costs at any given time. Sometimes it’s a great value, sometimes not so much. The dividend is the money that is produced by the machine and paid out yearly (or quarterly, depending on the fund).  

What Is a Dividend? 

A dividend is a payment to shareholders of a stock, mutual fund or ETF that comes from a portion of the profits of a company. Dividends are not guaranteed and may be reduced or eliminated at any time by a company. There is also the option to either take the dividend in cash, or reinvest the dividend into additional shares  in the company (buying more of the machine). 

Generally speaking, ordinary dividends which are paid out by big companies and funds are taxed as ordinary income. So Uncle Sam will want a slice of the pie the same way he would tax your paycheck. Just make sure you are prepared for that at tax time. 

What Companies Pay Out Dividends? 

Lots of companies out there pay a dividend. Probably the best known dividend stocks are large, established companies that pride themselves on consistency and steady growth. Coca-Cola (KO), McDonalds (MCD), Proctor & Gamble (PG), General Electric (GE) and AT&T (T) all pay a dividend. They all are well known brands that produce products and services that millions of people use daily. 

Let’s use Coca-Cola as an example. A share of KO costs $57.23 as of today. It is projected to pay a $1.68 annual dividend this year, distributed quarterly. Basically, ever 3 months a share of KO will pay you $0.42. Over time, the company has a history of increasing its dividend (however this is NEVER guaranteed). 

Believe it or not, there is even a list of companies in the S&P 500 that has increased their dividend every single year for 25 years or more! These are called the “Dividend Aristocrats.” KO is one of the Dividend Aristocrats. It has increased its dividend ever year for the last 59 consecutive years!  

Increasing Dividends.. I’ll drink to that!

The Dividend Aristocrats give a lot of investors a warm and fuzzy feeling. They are often industry leaders with a proven track record. These companies may also tend to be less volatile than the broader market. 

The cool thing is you don’t need to buy individual stocks to get a dividend payout. Even index funds that contain dividend paying stocks will pay a dividend! 

For example, I am invested in the Vanguard S&P 500 Index (VFIAX). A share of VFIAX costs $413.04 as of today. Over the past 4 quarters it has paid dividends as follows: $1.31 on Sept 28, 2020, $1.38 on December 21, 2020, $1.26 on March 25, 2021 and $1.33 on June 28, 2021. Not bad! 

Since I am in the growth/accumulation phase on my journey to financial independence, I do not take any of the dividends I receive. Instead, I choose to reinvest them into buying more shares of the funds I own. This helps me continue to build wealth for when I will need an income stream in the future. 

What Companies Don’t Pay Out Dividends? 

Not all companies pay dividends. Does that mean you shouldn’t buy those companies? Not necessarily.  

A big reason why a company may not pay a dividend is because they prefer to reinvest the profits back into the company to fuel more growth. This is very common with the high growth stocks found in the tech industry. Companies like Amazon (AMZN), Google (GOOG), Facebook (FB), Netflix (NFLX) and Tesla (TSLA) do not pay a dividend. 

When you invest in non-dividend stocks like the tech stocks mentioned above, you are hoping to grow your wealth through the appreciation of the stock price as the company grows. For investors in the growth/accumulation phase of their FIRE journey, the potential for this growth can be very attractive. 

I invest less than 5% of my net worth into individual stocks. None of them are dividend stocks. I am currently holding Google, Facebook, Peloton (PTON) and Duolingo (DUOL). I don’t plan to go past 5% of my portfolio in individual stocks because of the risks. 

Why Invest in Dividend Producing Stocks? 

One of the biggest reasons you may want to invest in dividend stocks or funds is to get a steady stream of income. When you are retired and are not working anymore, having streams of income that are predictable and likely to rise over time with inflation are very valuable. Also, if you can live off the dividends of your portfolio only, it means you don’t need to sell stocks when you need income. This will likely result in an ever increasing portfolio over time. What better way to earn a living than to sit back and watch your magic money machine provide for you!

The biggest thing is you really need a lot of capital to generate enough dividends to live off of. For instance if I wanted to generate $50K a year in dividend income from VFIAX, I would need 9,470 shares! At $413.04 a share, that works out to a cool $3.9M!! Of course there are other funds that will produce higher dividends with less of an investment, but you get the point. 

Dividend stocks and funds can be a great supplement to other income streams in retirement. Dividends coupled with money from rental properties, sales of growth stocks, side hustles and in time Social Security payments can combine for a very comfortable and stable retirement. 

I would currently say that I am not a dividend investor. Right now, I am focused on growing my portfolio and net worth, saving money and planning for early retirement. However, I am learning all I can about dividends because they are a very attractive tool for producing income in retirement! I may be relying on a magic money machine of my own when I reach FIRE!

What are your thoughts? Do you invest in dividend stocks or mutual funds? Do you have recommendations on funds that pay a healthy dividend historically? 

13Aug

Index Funds – Set It and Forget It!

For most people (myself included) the path to financial independence is a journey that can take many years (or decades). Very few people achieve financial independence overnight. Sure these things do happen occasionally, but planning to win the lottery or get in on the ground floor of the next Tesla may not be the best way to hit your FIRE number. For me, one of the top tools for building wealth is index funds. 

I like easy. I remember when I was growing up there used to be these infomercials on TV all the time. One that I clearly recall is for a product called the Ronco Showtime Rotisserie & BBQ. Basically you would put in your meat, set a timer and walk away. Sometime later you would come back and a perfectly cooked chicken or beef roast would be waiting for you!

Ron Pompeil was the pitch man for these gadgets. Every time he would set the timer on the rotisserie in the commercial he (and the TV audience) would say, “Set It and Forget It!” Awesome tag line that everybody remembered. That phrase alone probably made Ron Pompeil a millionaire many times over. (Sadly, he recently passed away at the age of 86.)

People like easy. People like automated. People like something they don’t have to worry much about. For me, index funds are like the Ronco Showtime Rotisserie & BBQ of investing. You set it. You forget it. You (likely) come back a lot wealthier than you did when you started. The majority of my net worth is invested in low cost index funds. 

So how does this work? First off we need to define what an index fund is. 

What Is an Index Fund? 

An index fund is a portfolio of investments (stocks and/or bonds) that replicate (mimic) a specific market index. For instance, the S&P 500 is an index that is made up of the 500 largest publicly traded companies in the US. By purchasing an index fund that tracks the S&P 500, you are getting slivers of every single company that makes up the index!  

There are tons of different index funds out there. Some track a specific sector like technology, healthcare, or finance. Others track bond or real estate indexes. Still others are total stock market indexes where you can literally buy exposure to every publicly traded stock!  

Index funds are generally purchased as part of a mutual fund or an ETF (Electronically Traded Fund).  

On this site, when we talk about index funds, we are generally talking about funds that track the market, such as the S&P 500 or Total Stock Market indexes. 

Some of the index funds that I am currently invest in are: 

  • VTI – Vanguard Total Stock Market ETF 
  • VFIAX – Vanguard 500 Index Fund (S&P 500 Index) 
  • VGSLX – Vanguard Real Estate Index Fund 

Ok, so what is so great about these funds? Here are my reasons for investing such a large portion of my net worth in index funds. 

Easy to Manage 

Index funds are super easy. You buy the fund and get all the stocks or bonds that make up the fund. When there are changes that are needed in the allocation within the fund, you don’t have to do anything.  

Even easier are when you set up for automatic investing into these types of funds through your brokerage account or IRA, or when the money is automatically deducted from your paycheck for your 401K.  

All you have to worry about is regularly buying funds and then holding them for the long term. History has shown us that the trend of the stock market is always in the upward direction over time! Buy, hold and forget about it! 

Low Fees 

Index funds generally have lower fees than actively managed mutual funds that are not tracking an index. This is because with actively managed funds, there is a highly compensated fund manager who is buying and selling stocks within the fund trying to boost the its performance. All of this costs money, which is generally passed down to the investors in the form of fees. 

VTI has an expense ratio of .03%. That means that if you have invested $100K in that fund, you will be charged $30 per year in fees by Vanguard. In contrast, there are actively managed funds that charge 10-20X that (or more) in fees. These fees eat away at the growth of the fund. 

The crazy thing is that most actively managed funds don’t beat the index funds over the long term! 

Diversified Investments 

You have heard the term don’t put all your eggs in one basket right? Well, the same is true with investing. There may be some success stories out there of people who have personally picked five or ten successful stocks and have done quite well. However, more common are people who do poorly by not being more diversified.  

The beauty of index funds is you are investing in the market. With a total stock market index, you get all the companies! Big companies, small companies, medium sized companies. Tech, healthcare, finance, entertainment, travel, automotive, communications, commerce. Wildly successful companies. Some failures. But you get everything. The advantage here is you spread your risk across a wide variety of sectors, industries and companies. The net result will be a trend up with the markets. 

It is possible to create a well diversified portfolio on your own. This would take a lot of research and work on your part and you would have to take care of re-balancing all on your own. With an index fund, this is all done for you and you don’t have to think about it. Simplicity at its best! 

Self-Cleansing 

Ok, so what happens if you have some real dogs in your index funds. I am talking about companies that are losing money, heading for bankruptcy or just plain going out of business. How are these handled? Well, over time, companies that fail or go out of business will be dropped out of the index and replaced by new companies that are growing and profitable. Again, this is all managed within the fund and you don’t have to worry about it.  

For instance, last year when Tesla (TSLA) was added to the S&P 500, a company called the Apartment Investment & Management Company (AIV) got dropped out of the index. That means if you owned an S&P 500 index fund like VFIAX, you just dumped AIV and got TSLA! Ever heard of the Apartment Investment & Management Company? Me neither. But I’ll bet you have heard of Tesla. Maybe you feel like you missed out because you didn’t buy Tesla at the bottom and become an overnight millionaire when it rocketed to the top. Never fear, you can still be part of the action (and shed some of the risk) by owning it in an index fund. 

The lesson is that in the entire market, there will be winners and losers. The winners will find ways to keep growing. The losers will die off and be replaced by new companies who are incentivized to become one of the winners. This is why the market keeps going up over the long haul. 

Solid Historical Returns 

The S&P 500 index has been around since 1926. Between 1926 and 2018, the index has averaged 10-11% per year in returns before inflation. This does NOT mean that ever year is a guaranteed 10-11% return. That is the average. There have been some very good years and there have been some very bad years. But over the long run, the index has consistently gone up with nearly 100 years of past history to give you confidence about the future. 

You are not going to become rich quickly by investing in index funds. They are best utilized when they are bought and held over long periods of time, perhaps even decades. But the growth can be amazing when compounded. This is the key to building wealth even if you don’t have a lot of money to invest.  

Less Temptation to Time Market 

Ok, so the key to the Ronco Showtime Rotisserie & BBQ was that you set it and then forget it. That was what made it so amazing. You didn’t need to come back and keep checking or adjusting the food. You didn’t need to baste it, fiddle with the temperature gauge or anything like that. Trying to do anything before the cooking process was done actually would MESS UP the end product. You just had to walk away and not do anything to get the best result. 

Walk away until we’re done!

It’s the same with index funds. They are not trying to beat the market. They are trying to keep up with the market. The idea is that if you are satisfied with the consistent returns of the index fund you will be less likely to do something crazy like sell when the market is down. This could seriously eat into your wealth building ability over time. The best approach if you are pursuing FIRE is to hold your investments and play the long game. 

So that’s my thoughts on index funds! I invest most of my net worth in them because they are easy, low cost and I can truly set it and forget it! Do you invest in mutual funds? Why or why not?

08Aug

Invest a Windfall to Accelerate Financial Independence

A “windfall” is generally a chunk of money that lands in your lap unexpectedly. Perhaps you win a prize/contest. Maybe you receive an inheritance. Your company does very well and gives out unplanned bonuses. You pick a stock that goes to the moon. All these count as a windfall. 

A windfall can be relatively small, perhaps a few hundred dollars or it can be a life changing amount that sets you up for financial independence immediately. Either way, a sum of money that shows up in your life out of the blue is a great opportunity to build wealth. It’s a chance to accelerate your FIRE journey and get to the destination a bit sooner. 

What should you do if you are fortunate enough to land a windfall? Let’s start with a story about my favorite example of someone who had money raining from the sky. 

Bobby Bonilla Day 

Bobby Bonilla was a professional baseball player from the mid-80’s until the early 2000’s. He was pretty good, going to the All Star Game six times in his career. I remember him well because he played for some really good Pittsburgh Pirates clubs (my home town team).  

In 2000, Bonilla played for the New York Mets and was owed $5.9 million. For some reason, the Mets and Bonilla worked out a deal where they would defer paying him that money. Instead, from 2011-2035 the Mets would pay him $1.19 million a year. Bonilla gets this money every July 1. Fans jokingly refer to the date as “Bobby Bonilla Day.” 

“Yes! Its July 1!!!!”

Talk about the mother of all windfalls! I would imagine that very few (if any of us) are getting a deal like that! Let me tell you though how I have my own mini version of Bobby Bonilla Day. 

My Personal Bobby Bonilla Day 

I worked for 9 years for a small, privately held company. This company did not offer a 401K plan. Instead they offered an ESOP (Employee Stock Ownership Plan) along with a profit sharing plan. Basically the way that this worked was they would put some shares of the company stock into a tax qualified account for each employee every year. In addition, each employee had a second account where the company would add some of the company profits every year. The profits account was invested in a bunch of stocks that the company pooled on behalf of the employees. 

The plan sucked. The shares were not publicly traded and so every year some accounting firm would appraise the company and set a stock price. You had no control over the investment choices in the profit plan and it was way too conservative for a younger person. There was no website to look at the real time value of your account. And in the end, it was not portable at all. 

I quit that company in 2015 and by that time, the account had grown to a non-trivial amount. It represented about 50% of my net worth at the time. However, instead of the company allowing me to immediately roll that money over to a traditional IRA when I quit, they had some pretty ridiculous rules. I had to wait 4 years to become eligible to roll over the money, and then when I did, I found out they had the option to spread the payments over 5 years1! The day of my yearly payouts? August 1.

Starting August 1 2019 and ending on August 1, 2023, I receive a windfall from my former company every year. Ok, it’s probably not technically a windfall since they are just giving me MY MONEY, but it is money that is coming into my life that I am not actively working for. I like to think of it as my own Bobby Bonilla Day. 

What should you do if you get a windfall, or some type of regular, deferred payment? 

Resist the Urge to Cash Out 

The money I get is tax-qualified. This means that I have not paid income taxes on it yet. I will have to pay Uncle Sam when I withdraw the money, and only after age 59 ½. Thus, the money is tax deferred. I have the option of taking my payment in cash or rolling it over into another tax-qualified account like a traditional IRA. By rolling it over, the money retains its tax-deferred status. 

If I would have chosen to take the cash, I would have gotten crushed with taxes and penalties. I would have had to pay income taxes at my current tax rate (24%) as well as a 10% penalty for accessing the money before at 59 ½. Over a third of my money gone! Not a good deal for me.  

To resist the urge to cash out, I actually instructed my former employer to just send my yearly chunks right to my brokerage. I get a photo copy of the check, but it’s never in my hands and simply gets rolled over. I never have the chance to spend it! 

Treat Yourself (Reasonably) 

On the other hand, maybe you are getting money that is NOT tax qualified, perhaps in the form of a prize or inheritance. It can be tempting just to spend the money on yourself. I think this is especially tempting if the money is significant, but not earth shattering. I think for me that number would be around $10K. 

Instead of blowing it all at once, perhaps leave it alone for 30 days and really think about the possibilities you have for the money. This may help to cool down any immediate desire to spend the money. 

It might also be good to treat yourself with a small portion of the money, perhaps up to 5%. This gives you a treat but also preserves the majority of the cash so it can work for you. 

Pay Off Debt 

If you have debt, especially the high interest variety that is common with credit cards or certain types of loans, by all means, consider paying this off with your windfall. Paying down debt is a fantastic use of a windfall as it helps you shed something that is eating away at your income, so you can start building for financial independence. 

Currently, I have no credit card debt and $4,500 left on a car loan (5.9%). The car will be paid off by the end of the year. My mortgage is currently financed at 3% and so personally I am not in a hurry to pay down this loan since I can get much better bang for my buck in the stock market. 

Invest For Financial Independence 

By investing your windfall for the long term, you will get a gift that keeps on giving. If your dream is to retire early or accomplish some other dream with financial independence, investing your windfall can help get you there sooner. 

I invest my “Bobby Bonilla Day” money in a traditional IRA, in low cost index funds. Currently, my account is invested in VFIAX and VGSLX. I don’t plan to touch this money for at least 18 years. Due to a bull market, my payments so far since 2019 have gone up nearly 60% in value! 

Help Someone Else 

Perhaps the greatest thing we can do if we get an unexpected chunk of money is to use it (or part of it) to help someone in need. Maybe you have a friend or family member who really could use a little bit of help. Or, perhaps there is a charity that aligns with your values who would put that money to good use. Either way, if you are in a position to help someone out when you get a windfall, you are likely to feel great happiness and fulfillment by giving. 

Bottom Line 

If you get a windfall or deferred payment of some sort, congratulations! Many people never get that experience. Understand that it’s an opportunity and think carefully before taking any action. Either way, continue to work hard, save money, build wealth on your journey to FIRE! 

28Jul

Convert Earnings to Wealth for Financial Independence

Ever see the movie “Rush Hour 2?” There is a part where Chris Tucker and Jackie Chan go to see Don Cheadle to see if the bad guy in the movie had spent any counterfeit money in his restaurant. Don Cheadle says yeah, and then Jackie asks if he still has the bills. Don Cheadle’s response is classic.  

“Still got my lunch money from the 3rd grade.” 

I love that line. The character respected money, saved and obviously had something to show for his work, going back all the way to the 3rd grade. He had successfully converted past earnings into actual wealth. 

Working for money is really hard. My first job was at Burger King when I was 16 years old. My day basically went like this. I got up at 6:00 AM, went to school, came home around 3:00 PM, did my homework, ate something and then went and worked from 5:00 PM – 10:00 PM slinging burgers, cooking fries, waiting on customers and cleaning bathrooms. It was hard work and I came home exhausted and smelling of fryer oil. All for $5.15 an hour.  

When you work that hard for so little, you build an appreciation for money. You think to yourself if a purchase was worth it before parting with your precious money. If a trip to the movies and popcorn cost $15, you think if it really is worth trading 3 hours in the back of a miserable, hot fast food restaurant to earn the privilege of watching that movie in a theater versus watching TV at home for free. Whatever it is you do with that money, you want to have something to show for it, otherwise it’s a big fat waste. 

Working in the corporate world is hard too. Sure you make more, but the hours can be long, the work can be stressful and there may be politics and drama you have to deal with. Again, if you are going to trade such a significant portion of your life for money, you better have something to show for it. I had a moment like that in 2015 when I checked my net worth for the first time and realized that I had worked for 13 years and had little to show for it. 

The key is to actively convert what you trade your time/energy for (earnings) into something lasting (wealth) that can help you accomplish your goals (in my case financial independence). This takes saving, shrewd investing and some luck along the way. But how do you know how efficiently you are converting your earnings into actual wealth? 

The trick comes from figuring out your net worth as a percentage of your total earnings. For example, if you have earned $500K in your career, and your net worth is $50K, you have converted 10% of your earnings into wealth. And if you look at it in terms of the TIME it took to create that wealth, you would realize that 90% of your time was spent earning money that is 100% gone forever and can’t help you in the future. Sobering fact. 

Back in 2015, my ratio was 13.8%. It made me sad that 86.2% of all the money I had made up to that point in my life was gone forever. But it also helped to motivate me to change my actions. I am happy to say that 6 years later I have increased that number to 40.5%!! That feels a lot better and makes me feel like my hard work has actually started to BUILD SOMETHING that will LAST. My goal is to one day see that ratio go over 100% which would mean I had saved MORE that the total of everything I had ever earned.

So how can you figure out how much of your earnings have been converted into wealth? It’s probably easier than you think! 

Step 1 – Calculate Your Net Worth 

Hopefully you are tracking your net worth on a regular cadence already, but if not, it’s pretty straightforward! First calculate the sum all of your assets (bank accounts, investments, real estate equity, cash, etc.). Next, calculate the sum of all your liabilities (credit card balance, mortgage balance, car loan balance, etc.). Finally, subtract your total liabilities from your total assets to get your net worth. 

Step 2 – Calculate Your Lifetime Earnings 

Ok, so how are you supposed to do this? Do you need to have saved every pay stub from years and years of working at various places? Fortunately, there is a much easier way! The United States Social Security website actually give you your lifetime earnings all the way back to your very first job! Here is how to get it. 

  1. Access the Social Security site and create an account. You will need some basic information to sign up including your social security number, date of birth and address. 
  2. Once you have access, you will land on the My Social Security dashboard. Click “Review your full earnings record now” 
  3. You will see a chart with your reported earnings for your entire working career! Add up the “Taxed Medicare Earnings” column. This is your total lifetime earnings. 

Step 3 – Calculate Your Earnings to Net Worth Ratio 

Here is the easy part. Take your net worth from Step 1 and divide it by your lifetime earnings from Step 2 and multiply by 100. This is the percentage of your earnings that you have converted to wealth! 

When you first see this number, you may be a bit disappointed. But don’t worry, you can totally take action to make it way better! Track this metric along with your net worth monthly and feel the satisfaction of small victories on the road to financial independence! 

Additional Reading: 

There are a ton of amazing articles on the value of the earnings to wealth conversion ratio out there. Some of my favorites are Your lifetime wealth ratio (and how to calculate it) from JD Roth at Get Rich Slowly and How Much Should My Net Worth or Savings Be Based On Income? from Financial Samurai. Check them out! 

26Jul

Our Investments For Financial Independence

As I shared in our intro post, I really started to get a handle on my finances and actively start working towards financial independence about six years ago. When I sat down and actually took inventory of my net worth, not only was I disappointed with the total, but I learned that how my money was invested was not yet optimized for maximum growth. The breakdown of my net worth was as follows: 

Ok, so cash value in a primary residence… that’s good, right? What made the rest of my “portfolio” not so great for financial independence? 

Well first, the “retirement fund” from my previous employer was not a 401K and not very portable. First off, the investments were tied up in the stock of the company (not publicly traded and so the stock price was determined by yearly company audits by an external firm) and an investment portfolio managed by the company that was intentionally conservative. The company had a policy where it took YEARS to extract that money from them when you quit and so at the time, I had literally no control over this money. In the years since, I have gotten paid out about 75% of this cash (which I have rolled into a traditional IRA) so far with my final payment coming in 2023. For a job I quit in 2015. Yeah.  

Second, the variable whole life insurance policy. With this plan, I got life insurance and an “investment” that was packaged together and sold as a single product. When I really dug into it, this plan was riddled with of fees that were killing the growth of the cash value. Like multiple percentage points each year of precious growth were tied up in a bunch of charges I didn’t understand which came from actively managed mutual funds, that weren’t even matching the performance of the market. Yikes. 

I knew I had to take action. For the sluggish retirement fund, there was not much I could do but live by the payout terms, but when I did start to see that money I rolled it into a traditional IRA and invested in low cost index funds. For the whole life insurance policy, I called my insurance guy and told him I was terminating the contract. Of course he tried to keep me from doing this (he got a healthy commission each year that I kept the policy), but eventually he relented and I took the cash value from that policy and paid off a ton of consumer debt that was bogging me down. I replaced that insurance with much lower cost term coverage that would protect my family. I then took the balance of my monthly savings from not paying for the variable whole life insurance and invested it. 

So how am I invested today? Most of my net worth is invested in low cost index funds. These are spread out across several accounts both taxable (Brokerage) and tax-qualified (401K, IRA and HSA). All my funds come from Vanguard, Schwab or Fidelity. 

Total Stock Market Index Funds – 26% 

By investing in the total stock market index funds, I am getting exposure to every single publicly traded company in the US. The costs are low and I am guaranteed to at least keep up with the performance of the market. I am invested here in FSKAX, SCHB and VTI. 

S&P 500 Index Funds – 36% 

By investing in the S&P 500, I am getting exposure to the 500 biggest companies in the US and especially getting a healthy chunk of growth stocks as the index is tech heavy at the top. Again, I am guaranteed here to at least keep up with the S&P 500 with very low fee funds. I am invested here in VFIAX and SWPPX. 

REIT Index Funds – 8% 

REITS (Real Estate Investment Trusts) are mutual funds that invest in real estate. The nice thing here is you can get a broad exposure to a ton of different types of real estate investments (homes, apartments, offices, healthcare, retirement homes, etc.) without having to invest (or manage) actual property. I am invested here in SCHH and VGSLX. 

Individual Stocks – 5% 

I keep a modest amount of net worth in a few big tech growth stocks. These give me some opportunity for major breakout growth, but I keep the overall allocation low to reduce risk. 

Equity In Primary Residence – 21% 

Still a major chunk of my net worth, but not nearly as large of a proportion as it used to be. Not only does the house provide a reasonable yearly uptick in value (especially in the last year or so as home values have risen dramatically) but it provides me and my family with shelter, comfort and a place to be happy. In the last year, we have sheltered in place here, worked, gone to school and pretty much done everything in it. 

My mortgage is not paid off and I am paying the minimum payment on it because I am financed at a very low rate (3%) and I find greater opportunity for grown in my other investments.  

Cash – 4% 

I keep some cash on hand for emergencies, including an emergency fund of roughly six months’ worth of living expenses. While there is probably some opportunity cost being in so much cash, it helps me to sleep better at night and I like the fact that I wouldn’t have to immediately sell assets if I lost my job. 

So there you have it! Where I am invested, and why. Steady investing and saving money on the path to financial independence. Feel free to leave comments on your thoughts!