Build a Taxable Brokerage Account and not just usual Retirement plans
Retirement plans such as 401ks or IRAs are great but you should also start a taxable brokerage portfolio. Maybe you can even name it your "fuck you money" FUM portfolio.
Also if you do buy mutual funds, make sure you know what it is made of. Do not buy a fund of funds. Which is a mutual fund that is a collection of other mutual funds. Because your fees add up fast. You are essentially paying multiple managers for just holding that one fund.
Why?
Because if you only put away money in retirement plans then how can you have more freedom to:
1. Switch jobs if your current one sucks.
2. Have passive income from your investments in your FUM portfolio, on top of your active income (from your job) My previous article about dividend investing talks about this.
3. retirement plans in general are only fully accessible after age 59.5 years and let's face it. A lot of you these days do not want to work for somebody or stay an employee past the age of 50 or 55.
4. Shit happens, plans change. and it's nice to have that extra income.
5. It's nice to know that you are making money in your sleep.
Where to start:
You can easily sign up for a taxable brokerage account at Fidelity, Vanguard, or Schwab. These 3 are the most reputable platforms to use. I do not recommend Robinhood, because of what happened during the GameStop craze where they blocked their retail investor customers from trading because they want to make sure the hedge funds win. More about that here.
If you already have experience trading stocks or stock picking but in your retirement account, then you can do that in your FUM portfolio in order to build passive income that you can access now (if you want or save it for later).
Otherwise, for the lot of you, it maybe best to stick with just buying ETFs (which are a collection of stocks or bonds that are more liquid than mutual funds and can be traded).
Either way, diversify your portfolio by buying the index. Some people prefer mutual funds, that's ok. a good one is the S&P 500 index. Here are a few of them:
-FXAIX from Fidelity
-VOO from Vanguard
-IVV from iShares
-SWPPX from Schwab
When buying shares of a mutual fund or an exchange traded fund (ETF), make sure to check the expense ratio. I personally stick with Fidelity, Vanguard, or Schwab because they offer the cheapest expense ratios.
VOO's expense ratio is only 0.03%!
Check the turnover rate. I don't like funds with a high turnover rate, because every turnover cost you money.
Currently, the market is very expensive. It's pretty difficult to find bargains, but if you must, you can always dollar-cost-average your investments. This helps you become more consistent in feeding your FUM portfolio. contribute a certain amount per month and maybe contribute a smaller amount while the market is smoking hot, vice versa when sh*t hits the fan, like during COVID.
Buy the dip and sell the rally is easier said than done. Because a lot of people tie their emotions to their money. It's very difficult of people to see their investments lose value during the crash in 2020, and some who couldn't handle it sold. The ones who held on and bought more ended up winning, because that was the DIP. That's what the market does. It goes up then it crashes, rinse and repeat.
How to balloon your portfolio?
Sometimes it's easier to increase your investments from exponential growth that to increase your salary the same way. It sure is the case for me and probably for a lot of you reading this. One thing that helped me a ton was to really make sure my expenses never exceed my income. Make sure to only spend 30-50% of your total monthly income. Invest and save everything else.
Before you even start this portfolio, make sure you have an emergency fund. That amount is specific to your lifestyle. I'm married with three dogs and have a house. Houses have one-off expenses that could be expensive such as roof repairs, dry rots, etc. For us, I am comfortable having $100,000 in liquidity. In case my husband want's to switch jobs or I want to take more time off to keep studying.
That emergency fund should be in a high yield savings account.
According to Bankrate, here's the top 3 that pay around 5%
Don't waste the time-value of money by letting it get stale in a low yielding checking or savings account.
Okay, back to investing.
Make lowering your cost of living a fun game you want to win.
I'm going to make up some numbers and stories....
Instead of traveling 3x a year, maybe just travel once a year until you hit $50,000 in your FUM portfolio.
Instead of travel why not go camping with the kids? that's way cheaper. Even glamping is cheaper than taking your kids of anything Disney-related getaway.
Private school, why? Pick a good public school for your kids. There are good public schools.
Private schools come with rich kids, who will influence your kids to want shiny objects that will cost you more money. Kids like to keep up with the Jones'. Save yourself the headache and send them to public schools.
Teach your kids the value of money. Make them earn what they want.
Utilize social media groups like "Own Nothing" where people literally just switch hands with children's clothing, toys, car seats, strollers, etc.
I'm mentioning a lot of kid-related expenses here, because 99% of my readers have a full family.
Essentially that's what I've been doing even before I got married. We only got married a year or so ago, so all that hard work was mostly me.
And since I've been living like this for a while, it is easy for me to say no to almost anything that will derail my financial plans.
My husband on the other hand is just learning how to live like me, and sometimes say to me that "you make decisions as if we don't have money." But that's only because I have other plans for that money.
I really love spending money on assets and I really hate spending money on liabilities.
I always look at something before buying it and think, "Is my money better spent, there?" Most of the time, the answer is hell no.
You can also look at it this way. How many hour (minus taxes) do you have to work to buy that new shiny object? When you look at it that way and you remember how much you hate waking up at 4 am so you can commute to work without traffic, then it makes the decision much easier.
It also helps to be a minimalist.
Having functional furnishings in the house is all I need. I don't need pillows on the couch, throw pillows, a million decorative pillows on the bed, excess decorations that you have to dust, etc.
I keep it simple, which means I spend less on dust collectors and my dogs have more running space.
I hope this helps you get started.
Don't get analysis paralysis and just do it.
That is all for now.
See you on the next one!
-Pam
As a reminder, I created this blog to share information and to increase everyone's financial literacy. This serves as my notebook that I willingly share publicly to help others increase their curiosity and knowledge in wealth building and money management. I am not an official financial advisor, lawyer, or accountant. You will not find legal advice in this blog. Read the full terms and conditions here.
