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Day 5: What to Do With The Money You've Saved!

Welcome to the last day of the Challenge.

Up till now, we’ve talked about your expenses and creating this little bit of space in your financial life. What next?

Do I keep it in my checking account? Do I put it in a savings account with a tiny little interest rate? What do I actually do?

The short answer is, invest it!

For many of us in the FI community, we use the ideas laid out by our friend JL Collins in his book The Simple Path to Wealth, which, in a nutshell, is to put our money into low cost index funds that cover the entire US stock and bond market.

JL’s book helped me understand that over my investing lifetime of 50+ years that there was almost no way I was going to outperform the market.

So what I do now is invest in broad-based low cost index funds. Now these index funds just try to match the market, and they’re not trying to hit home runs.

And they do it for the lowest cost possible because those costs can really, really add up to something significant over again, 30, 50, 70 years.

We’ll link to some articles below if you’re interested in just how insidious these fees – also known as expense ratios – are, and how much financial advisor fees can really hurt you, as well.

Now that we’ve discussed WHAT to invest, lets talk about HOW to invest.

Today's Action Step #1: If you have a W2 job, claim your free money!

If you have a W2 job, your 401k (or 403b or 457 if you’re a public employee) at your company is most likely the lowest hanging fruit of your investing possibilities. In most cases, your company actually has what’s known as a “match.” So this really is free money.

This is part of your salary and if you aren’t contributing to your 401k to the point of that match, you are literally throwing away free money that is part of your salary!

An Example:

Your company matches 50% of the first 6% of your salary that you contribute.

Let’s say you make $100,000 and you put 6% into your 401k, that’s $6,000.

In this hypothetical, your employer matches 50% of that $6,000. So, they’re going to give you $3,000 free into your 401k.

If you are not getting that full match, I would look into it and try to raise your contributions to your 401k to at the very least get the entirety of that match.

Today's Action Step #2: Lower your taxes by maxing out retirement accounts

After getting the full company match, you can now look at your budget and say, “wow, what would it look like to max out my 401k?”

401k contributions are tax deductions in this current year. So it’s actually lowering your income that shows up on your tax return. 

So not only are you saving for retirement and ultimately FI, but probably more importantly here, but you’re getting a tax deduction and you’re lowering the amount of tax liability you have to pay this year. So this is huge.

Today's Action Step #3: Still have money to invest? Open a regular taxable account

If you have other money to save and invest, consider opening up a regular investment brokerage account.

We are not your financial advisor, so we’re not advocating any particular companies. But many in our community use companies like Vanguard, Fidelity, and Charles Schwab.

They all offer the broad-based low cost index funds that we love, like Vanguard’s Total Stock Market Index Fund (VTSAX) and the Vanguard Total Bond Market Index Fund (VBMFX). Fidelity and Charles Schwab have their own versions of these low-cost, broad-based index funds as well.

The one drawback of mutual funds like VTSAX and VTBFX is that they usually have investing minimum, which might make it challenging for the new investor.

Luckily, these funds have more accessible versions called Exchange Traded Funds – Vanguard’s ETF versions of VTSAX and VTBFX are VTI and BND respectively. These ETFs allow you to start investing with a much lower minimum and in smaller increments – often in the low hundreds. 

Another company is M1 Finance, which my co-host and co-founder of ChooseFI, Jonathan, loves for how it helps him automate his investing with a “set-it-and-forget-it” feature. M1 Finance makes it especially to start, and automatically keep, investing in VTI and BND.

Here is a full review of M1 Finance, or, if you are ready to open an account, click here

Whichever platform you pick, consider matching and maxing your 401k by investing in low broad-based, low-cost index funds.

Well, there you have it. Thank you for being here, and thank you for taking action to earn you financial independence.

We hope this 5-Day FI Challenge has made a difference for you.

Thank you, and thank you for letting us accompany you on your path to FI!

Resources To Dive Deeper:

I always want to be transparent with you, so please note that ChooseFI may get a referral fee, at no cost to you, if you use some of the services mentioned.