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:
- 40% – Equity in Primary Residence
- 40% – Non-401K “retirement fund” from previous employer (Tax Qualified)
- 20% – Cash Value in Variable Whole Life Insurance Policy
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!