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Kindle Notes & Highlights
by
J.L. Collins
Read between
April 1 - April 8, 2020
Try saving and investing 50% of your income. With no debt, this is perfectly doable.
When you can live on 4% of your investments per year, you are financially independent.
James Clavell’s novel Noble House,
“F-You Money.”
Our unwavering 50% savings rate. Avoiding debt. We’ve never even had a car payment. Finally embracing the indexing lessons Jack Bogle—the founder of The Vanguard Group and the inventor of index funds—perfected 40 years ago.
50% savings rate is the goal
As it happens, from January 1975 - January 2015, using the parameters I chose above, the market returned an average of 11.9% per year. As you’ll learn reading this book, the actual returns for any given year were all over the place. But when the dust settled, over that 40-year period, the average was 11.9%.
While the mantra here is “avoid debt at all costs,” if you already have it, it is worth considering if paying it off ahead of schedule is the best use of your capital. In today’s environment, here’s my rough guideline: If your interest rate is... Less than 3%, pay it off slowly and route the money to your investments instead. Between 3-5%, do whatever feels most comfortable: Either put the money to debt payment or investments. More than 5%, pay it off ASAP.
important. There are many things money can buy, but the most valuable of all is freedom. Freedom to do what you want and to work for whom you respect. Those who live paycheck
Spend less than you earn—invest the surplus—avoid debt
hard. Stop thinking about what your money can buy. Start thinking about what your money can earn. And then think about what the money it earns can earn.
“Opportunity cost” is simply what you give up when you commit your money to one thing (like a car) over another (like an investment), and it’s easy to quantify.
Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing.
It took a year or so for me to regain my nerve and get back in. By then it had passed its pre-Black Monday high. I had managed to lock in my losses and pay a premium for a seat back at the table. It was expensive. It was stupid. It was an embarrassing failure of nerve. I just wasn’t tough enough.
1,540 actively managed equity funds that existed at the time. Over the next 15 years only 55% of these funds survived and only 18% managed to both survive and outperform the index. 82% failed to outperform the unmanaged index. But 100% of them charged their clients high fees to try.
They are not alone. Brad Barber of UC Davis and Terrance Odean of UC Berkeley found that only about 1% of active traders outperform the market and that the more frequently they trade, the worse they do.
Ironically, a crash at the beginning of your investing life is a gift. In fact, any pullback in stock prices is a gift while you are in the process of accumulating your wealth. It allows you to buy more shares for your dollars, on sale if you will.
1. Stocks: VTSAX (Vanguard Total Stock Market Index Fund). Stocks provide the best returns over time and serve as our inflation hedge. This is our core wealth-building tool. (See Chapter 17 for variants of this same fund.) 2. Bonds: VBTLX (Vanguard Total Bond Market Index Fund). Bonds provide income, tend to smooth out the rough ride of stocks and serve as our deflation hedge. 3. Cash. Cash is good to have around to cover routine expenses and to meet emergencies. Cash is also king during times of deflation. The more prices drop, the more your cash
can buy. But when prices rise (inflation), its value steadily erodes. In these days of low interest rates, idle cash doesn’t have much earning potential. I suggest you keep as little as possible on hand, consistent with your needs and comfort level.
As a point of reference, the average mutual fund ER (expense ratio: the fee funds charge investors) is ~1.25%. The ER for VTSAX is .05%. As Bogle says, performance comes and goes but expenses are always there, year after year. After year. Compounded over time the amount lost is breathtaking.
Bonds are in our portfolio to provide a deflation hedge. Deflation is one of the two big macro risks to your money. Inflation is the other and we hedge against that with our stocks. You’ll recall from earlier that deflation occurs when the price of goods spirals downward and inflation occurs when they soar. Yin and yang.
In the simplest terms: When you buy stock you are buying a part ownership in a company. When you buy bonds you are loaning money to a company or government agency.
When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. In either case, if you hold a bond to the end of its term you will, barring default, get exactly what you paid for it. Stage 6 As you’ve likely guessed,
Here’s the basket: VTSAX. No surprise here if you’ve been paying attention so far. This is the Total Stock Market Index Fund that holds virtually every publicly traded company in the U.S. That means you’ll be owning a part of about 3,700 businesses across the country, making it a very big and diverse basket. The fact that it is a low-cost index fund keeps more of your money working for you.
VBTLX.
VTSAX.
For the smoothest transition, you might start slowly shifting into your bond allocation 5 or 10 years before you are fully retired. Especially if you have a fixed date firmly in mind. But if you are flexible as to your retirement date and more risk tolerant, you might stay fully in stocks right up until you make the change. In doing so the stronger potential of stocks could get you there sooner. But if the market moves against you, you’ll have to be willing to push your retirement date back a bit.
Some people say the funds get too conservative too soon. Others complain that they are too aggressive for too long. For my money, I think Vanguard gets it pretty close to spot on. Maybe a bit conservative for me personally, but then I’m on the aggressive side. This is easy to adjust for. If you want a more conservative (greater percentage of bonds) approach, choose a date before your actual retirement. The earlier the date the more conservative the asset allocation. If you want more aggressive (greater percentage of stocks), just pick a later date.
401(k)/403(b)/TSP = Immediate tax benefits and tax-free growth. No income limit means the tax deduction for high income earners can be especially attractive. But taxes are due when the money is withdrawn. Roth 401(k) = No immediate tax benefit, tax-free growth and no taxes due on withdrawal.
Fund 401(k)-type plans to the full employer match, if any. Fully fund a Roth if your income is low enough that you are paying little or no income tax. Once your income tax rate rises, fully fund a deductible IRA rather than the Roth.
Think about this for 2021
Keep the Roth you started and just let it grow. Finish funding the 401(k)-type plan to the max. Consider funding a non-deductible IRA if your income is such that you cannot contribute to a deductible IRA or Roth IRA. Fund your taxable account with any money left.
Like an IRA, you can fund this account with pre-tax money. Or, put another way, your contribution is tax-deductible.
If you use a payroll deduction plan through your employer, your contribution is also free of Social Security and Medicare taxes.
Once you reach the age of 65, you can withdraw your HSA for any purpose penalty free, although you will owe taxes on the withdrawal unless you use it for medical expenses.
Like a traditional IRA.
In effect, we’d have a Roth IRA in the sense that withdrawals are tax-free and a regular IRA in the sense that we get to deduct our contributions to it. The best of both worlds. If we ever needed the money for medical expenses, it would still be there. But if not, it would grow tax-free to a potentially much larger amount. When we were ready, we would pull out our receipts and reimburse ourselves tax-free from our HSA, leaving any balance for future use. Should we be fortunate enough to remain healthy, after age 65 we would be able to take it out to spend as we please, just as with our IRA and
...more
The bottom line is that anyone using a high-deductible insurance plan should fund an HSA. The benefits are simply too good to ignore.
here: http://ssa.gov/myaccount/.
Vanguard Charitable Endowment Program.
You can open your own foundation with as little as $25,000.
You get the tax deduction in the year you fund your foundation. So I got to take the tax benefits when they mattered most to me.
www.charitynavigator.org
Save and invest at least 50% of your income. Put this in VTSAX or one of the other options we’ve discussed in this book.
Fund your Roth IRA when your earnings and the income taxes on them are low. Fund your Traditional IRA once your earnings and the income taxes on them begin to rise.
Once 4% of your assets can cover your expenses, consider yourself financially independent.
Put another way, financial independence = 25x your annual expenses.
