Learn to Invest

Personal Finance Club is a community which helps educate individual investors on personal finance and investing without any ulterior motives.

The world of money and investing is confusing. Almost everybody in the industry has an incentive to make money at your expense. Personal Finance Club teaches how to handle money and invest without any misaligned incentives.

Below you'll find the habits, steps, and rules to become a multi-millionaire. This is the simple, tried-and-true method to live below your means, invest well and become wealthy over time.

The Habits

These three life long habits are the bedrock on which you can build and stay wealthy.

1. Know the “why”
  • Maximize Happiness: The goal of building wealth should be to maximize your happiness across your life, not to die with the most zeroes in your bank account.
  • Seek Contentment: Realize that there will always be someone with more stuff, bigger stuff, better stuff. No person can ever be rich until he decides he has more than he wants.
  • Spending Is Not Wealth: When you see someone driving a new BMW, living in a fancy house, buying rounds at the club or wearing the fanciest clothes, more often than not that person is broke, living paycheck to paycheck and up to their eyeballs in debt. Most millionaires are driving used cars, living modestly and putting their money to work to build wealth rather than burning it on overpriced stuff today.
  • Happier With A Plan: For those of you who want to YOLO and live for today. You will be HAPPIER today if you have a plan and know you are set up for later. It will mean not going into debt up to your eyeballs and spending every penny that comes into your hand, but your happiness will increase both later in life when you're not working at a diner and eating catfood as well as today when you have more peace and security.
2. Live below your means
  • You can't fill a leaking bucket: If you spend every dollar you earn you will always be broke. The math is simple. One minus one equals zero. Living below your means is an absolute requirement to build wealth.
  • $1 saved is $1.XX earned: Spending less is a more powerful wealth building tool than earning more money. Your income is taxed. So if you want to spend a dollar you have to EARN $1.XX where the XX is your total income tax rate. Federal income tax, social security tax, medicare tax, state income taxes, etc. That all comes out of your earnings. What you have LEFT you can spend. If you DON'T SPEND a dollar you already have you get to KEEP (or invest and grow!) that entire dollar.
3. Earn more money
  • Not a silver bullet: This is the least important of the three habits. Having a high income and high spending does not equal wealth. (See habits one and two!). But it's undeniable that for some low income earners there is no option but to increase earnings in order to make more than the bare necessities cost. For everyone, earning more (and not spend it) will accelerate your path to great wealth!
  • You can't outearn bad spending habits: If you haven't committed to habits one and two, this one won't save you. Many people make six figures and beyond and still live paycheck to paycheck.
  • You can't squeeze water from a rock: If you are a very low income earner, there's only so much you can squeeze from your income.

The Plan

These are the step-by-step instructions to become a multi-millionaire. Do these in order. Don’t move to the next one until you finish the previous.

1. Save one month worth of expenses
2. Contribute to your 401k/403b up to match
  • Employer sponsored: Some employers offer a 401k or 403b retirement investment account. Not all do. If your employer doesn't offer one, skip this step.
  • Some match: Some employers who offer a 401k or 403b will contribute money to YOUR account on your behaf ONLY IF you also contribute. If your employer doesn't match, skip this step.
  • Free money: This match represents an instant 100% return on your money. Not making this contribution is essentially throwing away money.
3. Aggressively pay off all debt (except mortgage)
  • Seriously: Yes, seriously. Pay off ALL of your debt except your mortgage. And never use consumer debt again.
  • No payments: When you have no payments on stuff you bought in the past, you can use the full power of your income to invest and build wealth.
  • Down escalator: Trying to invest and build wealth while still in debt is like running up the down escalator. Get rid of the debt first, then put your full focus on building wealth.
4. Save full emergency fund (3-6 months expenses)
  • Do not invest: Put this money in a savings or money market account separate from your checking account where you pay your bills.
  • Forget about it: Forget about it and move to the next step. When you have an actual emergency you'll know you need it.
  • Not-poor insurance: Your emergency fund does the important job of acting as "not poor insurance". When you have an emergency, you don't want to fall back to the gauntlet of being poor (overdraft fees, credit card interest, payday loans, etc.) By leaving your emergency fund in cash it's helping to build your future wealth by not letting yourself fall back into the trap of being poor.
5. Invest in tax advantaged accounts
  • Government deal: The US government has decided they don't want a bunch of broke old people. So they made these special accounts you can invest inside of with greatly reduced tax implications. Over time the tax savings can be in the millions.
  • Use it or lose it: These accounts are "use it or lose it" so if you don't contribute money, the benefit disappears each year. Figure out which ones you are eligible for and contribute.
  • Roth IRA first: For most, the first best place to contribute for retirement is a Roth IRA. In 2019 the max contribution is $6,000 per year.
  • 401(k) or 403(b) next: If you have one, you started contributing up in step two. Now it's time to fill up the rest. Up to $19,000 per year in 2019.
  • Invest inside It's important to understand that Roth IRA, 401k, etc are just names of accounts inside of which has stuff (like stocks, bonds, cash, mutual funds, etc). Once you contribute cash, you need to invest that money in order for it to grow exponentially. See the rules of investing below to learn how to invest smart.
  • Multi-millionaire status: If you do nothing else but stay out of debt and max out your Roth IRA and 401(k), that will be $25,000 per year invested. If you do that over a 30 year career and earn 10% on your investments along the way you'll have over $4.6 million at retirement. And over $31 million 20 years after retirement, even when you're spending instead of working.
  • Advanced options: Depending on your situation, you may be eligible for a SEP IRA, Solo 401(k) or backdoor or mega backdoor Roth IRA. Hire a capable CPA to help navigate these options.
  • 6. Invest more
  • The fun part: If you're on step six, you've done awesome! You're well on your way to multi-millonaire status. Now you get some choices in how you invest:
  • Pay off your mortgage: This is a guaranteed win. Save your X% per year on the mortgage rates. When you own your home free and clear, think of what you can do with the power of those payments you use used to make to the bank
  • Taxable brokerage account: Just as the above tax-advantaged accounts, you can invest further in equities in a regular/taxable brokerage account. It's nice to do it in a tax-advantaged account, but as they say, you only get taxed on it if you make it, so it's a good problem to have.
  • Investment real estate: A huge opportunity to build wealth, whether it's buying a single family home to turn into a rental, flipping homes or something larger. Find a local who is successful and ask them to lunch to pick their brains. Read a book and get started!
  • The Rules

    These are the rules of smart investing, borrowed and simplifed from the Boglehead investment philosophy.

    Rule #1: Develop a workable plan
  • See above: The Plan above is a great framework to start from.
  • Be specific: Include how much to invest in each account, and what you'll invest in.
  • Rule #2: Never bear too much or too little risk
  • Diversify: In a word, diversify. That means spread your investments across lots of different things in different asset clases. For example, US Stocks, international stocks and bonds are three different major asset classes to diversify between.
  • Too much risk is bad: Putting 100% of your money in bitcoin has resulted in losing 80%+ in the past. Putting 100% in a single tech stock could go to zero if that company folds. Putting 100% in a single asset class exposes you to risk and volatility without additional benefit.
  • Too little risk is bad: Being afraid of the market and keeping all your money in cash and bonds prevents you from taking advantage of the massive upside potential and guarantees your money slowly erodes to inflation.
  • Rule #3: Never try to time the market and don’t chase past performance
  • This is how you lose: The stock market goes up by about 10% per year over long periods of time, but most investors earn signficantly less due to these bad behaviors.
  • Don't time the market: Timing the market is getting in and out based on what you think it will do in the future. Or changing your asset allocation based on news or projections. Timing the market is hard and almost guarantees losing to the market with very little potential to exceed the market by much.
  • Don't chase past performance: When looking at investment options, it's natural to look at how they have performed in the past. But jumping into the options that did great in recent history is a sure way to underperform the market. Investing in what just went up is "buying high".
  • Rule #4: Keep costs low and use index funds when possible
  • Fees Destroy Returns: Money invested for 40 years at 9% will grow to only 2/3 of the same money invested at 10%. That one tiny little percent in fees can cost you a THIRD of your nest egg at retirement.
  • Invest in index funds: On average, low cost index funds are guaranteed to beat actively managed funds after fees.
  • Rule #5: Minimize taxes
  • Use tax-advantaged accounts: Like a Roth IRA, 401k, 403b, SEP IRA, etc.the plan above.
  • Invest in index funds: They're cheaper and more tax efficient than actively managed mutual funds.
  • Rule #6: Keep it simple
  • Don't give yourself too much rope: Don't own 10 funds when 3 will do. (Hint, 10 funds aren't necessarily more diversified. Those 3 funds my own every stock on the planet inside of them). More funds mean more opportunities to break all of the above rules and make bad emotional decisions.
  • Use a target date index fund if possible: Putting 100% of your long term investment funds in a target date index fund follows every rule on this list and is ultimately simple.
  • Enjoy life: A simpler portfolio is likely to perform better and make your life easier. Why not kill two birds with one stone and go have a beer.
  • Rule #7: Stay the course
  • Buy and hold: Plan to never sell and collect growth and dividends forever.
  • Set it and forget it: It's not just a great line from an infomercial, it's also a great investment strategy. Tinkering with your portfolio is likely to cause you to lose to the market.
  • Don't panic: The market has always had volatility. But you don't lose money until you sell. Remember you have a long term horizon and when the market drops it's an opportunity to buy more at a discount. Even in retirement you'll just sell a small bit at a time so the majority of your portfolio will have years to recover and grow.
  • The TLDR (too long didn't read)

    If you don't want to go through everything above, here's the nuts and bolts of it. Follow these TWO steps to achieve millionaire status:

    Step 1: Get and stay out of debt
    Step 2: Invest early and often in a target retirement date index fund