How to Set Up Your Financial Life | Investing for Beginners | EP 276

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Disclosures.

What You’ll Get Out Of Today’s Show

  • Continuing the conversation discussing financial basics, today’s episode covers how to get started investing, banking, and setting up your financial life.
  • As a recent college graduate, Brad had the motivation to get his financial life together but didn’t really know how to go about doing it. During his first job, he wanted to open up a Roth IRA after learning about the power of compound interest.
  • Unfortunately, the investment advisor who helped get him set up invested in a fund with a 5% upfront load. That means 5% of his investment automatically went to pay the advisor’s commission. Brad’s investment was treated like a quick payday for the advisor.
  • Not all financial advisors are bad, but you can learn how to get set up with a low-fee or no-fee investment without feeling confused or overwhelmed by the process.
  • It’s important to understand all of the possible fees that can impact the return on your investment. In addition to load fees, there are other fees to watch for, such as assets under management fees where you pay a percentage for the advisor to manage your account, or expense ratios which pay the team who actively manage the activity of buying and selling within the fund account, and with a surrender charge, you may pay fees to get your money out of the investment.
  • If Jonathan was giving a family member financial advice on how to get started, it would begin with banking. Do they have a banking system set up and understand the differences between checking and savings accounts? What other variables should be considered?
  • Getting a checking account set up is first and becomes the repository for income coming in and money going out, such as paying bills. Brad uses autopay to have many bills automatically draft from his checking account.
  • Brad likes simplicity. Because he knows which days money will be coming in, he sets up his bill autopay dates around that. He also ensures he has a couple extra thousand dollars in his checking account to cover anything unexpected with him having to track the balance every day.
  • Jonathan does something similar in that he uses the pay from last month to pay this month’s bills, which means there is always around a month’s worth of pay in his account giving him plenty of margin.
  • Try to minimize fees in every aspect of your life. Select a bank account option that requires the lowest minimum account balance to avoid a monthly fee. Avoid overdraft fees by asking the bank to remove that option or connect to a credit card. Don’t pay ATM fees by trying not to use cash or plan ahead and withdraw cash from your own bank fee-free. Some online banks will reimburse ATM fees.
  • Brad doesn’t keep all of his financial assets in a checking account. He used to use a saving account at the same bank that was connected to his checking account. However, it earned very little in interest. Online savings accounts, like those at CIT Bank, frequently offer a much higher interest rate on their savings accounts and still allow access to the money within 2-3 business days.
  • Your investing goals are determined by two items: your cashflow and what sort of safety net you need. Money that might be needed in the short-term and accessible within days, such as for emergencies, should be kept in cash in a savings account. Money that isn’t needed for 10 years or more, should be invested because money can lose value over time due to inflation. Instead, that money can be making money and beating inflation. To maintain value, your money needs to make 1-3% per year just to keep pace with inflation.
  • Knowing how much to keep in savings and when to move to investing depends on your risk tolerance.
  • Make sure your bank is FDIC insured, which means it’s backed by the United States Government and covers depositors in the event of bank failure.
  • Once you have a checking account set up and you are putting away something each month into savings, getting started investing would be the next step.
  • Brad says the best place to get started is with your company’s 401K. Find out what the 401K match is and invest at least up to the match. The match is free money from your employer and technically part of your overall benefits package.
  • It may be something like a 100% match on the first 3% of your salary you invest. If you make $100,000, 3% equals $3,000, it means you invest $3,000 of your salary and your company also puts in $3,000. It’s a guaranteed return.
  • If there’s an option to check a box and automatically increase your contribution by 1% each year, do it.
  • Instead of a 401K, teachers may have a 403b or 457 which are essentially the same type of investment vehicle.
  • The maximum amount an employee may contribute in 2020 is $19,500. The total limit for employee and employer contributions combined in 2020 is $57,000.
  • Each person needs to figure out what works best for them in terms of funding an emergency fund, paying off debt, investing in their 401K, or Roth IRA. Since contributions may be withdrawn from a Roth IRA tax and penalty-free, it could be used like an emergency fund.
  • A 401K is funded with pre-tax dollars, meaning it was invested before that portion of your income was taxed. When it is withdrawn at the age of 59 1/2 or later, it gets taxed at your marginal tax bracket.
  • When picking a fund within a 401K, Jonathan’s strategy has been to look for index funds or anything with the index beside it.
  • Brad notes that the list of funds may also show the funds’ expense ratios. Look for the ones with the lowest expense ratios which will be the most similar to total stock market or S&P index funds. Go to Google and type in the ticker symbol to find out more about the specific fund.
  • Actively managed funds are run by teams of well-compensated people whose goal is to beat the market. Their fees are incorporated into the expense ratios. Index funds do not try to beat the market, they try to track their market index. Their expense ratios are dramatically smaller since they are managed by a computer algorithm not a team of managers.
  • ChooseFI is anti-debt, but not anti-credit card. Credit cards a financial tool when used responsibly and paid off on-time and in-full each and every month.
  • Brad tries to use his credit card as much as possible for the safety and security credit card purchases provide, as well as for the travel rewards points that allow his family to travel the world for free or almost free.

Resources Mentioned In Today’s Conversation

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Disclosures.
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