Rebalance Chief Marketing Officer Lauren Simpson and Matt Jude, CFP®, share practical strategies for young investors, from building an emergency fund and maximizing employer retirement plans to choosing the right accounts and investments for long-term financial success.
Transcript
Lauren Simpson: Hi, and welcome to our webinar, Start Early, Save Smart. This is a Rebalance client-only event, and we are excited to welcome you here. We have a few people coming into the Zoom, so we will give everyone one or two minutes to get logged into the portal, and then we will get started.
While we wait, I have a poll because I am curious who is here. Because the topic today is getting started with investing and getting started with saving, I wanted to know the age demographic of who is in attendance. If you do not mind filling out the poll while we wait for people to join, that will help Matt and me tailor our advice a little bit today.
Okay, I am seeing results come in right now. It looks like a pretty even spread. Actually, we will give people one more minute to join.
And just a reminder for those of you who are joining: this is a Rebalance client event, and while it is a client event, our intended audience is those who are just getting started with saving or investing. So today’s conversation is going to be very fundamental, 101-level, and that really is not our typical client. The majority of people who registered are people who know a client: clients, children, grandchildren, friends, and family members.
So, welcome to all of you who are Rebalance client guests. And if you are a Rebalance client, it is very likely that your Advisor has already talked to you about these principles. But maybe you will still learn something today. Just know that the information we are giving is intended to be very basic and introductory.
Okay. We have given people a couple of minutes. I will go ahead and end the poll, and I can share the results back. So, it looks like 30% of people here are under 25, which is great. This is such a good time for you to be getting this information. Time is still on your side in terms of investing and compounding.
We also have 14% of people in the 25 to 34, 14% in the 35 to 44, 14% in the 45 to 54, and then another 30% in the 55 and up. So, we have a pretty even spread today. Matt?
Matt Jude: Yeah, it is great, and I totally agree with you, Lauren. Even for anyone who has heard this information already that we are going to go through, it is not bad to have a refresher. I think there is something for everyone who is here.
Lauren: Great. Well, let’s get started. So, first, we could tell you a little bit about your speakers. My name is Lauren Simpson. I am the Chief Marketing Officer here at Rebalance. I have spent a decade working in marketing, finance, and analytics, and I am passionate about using data to make smarter financial decisions.
And then on a more personal note, I am part of the FIRE movement. You might have heard of it. It stands for Financial Independence, Retire Early. My husband and I started a few years ago with student loan debt and a negative net worth in our early 20s, and through aggressive saving and investing and real estate, we have grown our net worth to over a million dollars, all before either of us have turned 30.
Along the way, we have also been featured in Business Insider for our approach to financial freedom. When we are not thinking about financial strategy, we are going to national parks. Our goal is to visit all of them. So, I am excited to be here, and I look forward to our discussion.
Matt: Lauren, would you say you are fired up about this?
Lauren: I love the pun, Matt. I am fired up about the discussion.
Matt: Sorry, I had to. Hi, everybody. I am Matt Jude. I am one of the financial Advisors at Rebalance, and some of you may know me already, and some of you do not.
Like Lauren said at the beginning, a lot of folks who we work with are a bit further along the way of saving and investing and may be familiar with some of the concepts we are going through. But I think there is some good actionable information in here for everyone, and I look forward to going through all of this with you.
Please send us questions. We want this to be an interactive event for you all, so please send questions as they come up.
Lauren: Yep, we have a Q&A box in the Zoom navigation. If you go down to the bottom, find the Q&A box. At any point, throw a question in there.
And now that you know a bit about Matt and me, I am going to do a quick overview of our firm. Since some of you are clients and some of you are client guests, you may not know. Rebalance has over a billion dollars in client investments or assets under management, and we are proud to call ourselves consumer advocates. I can almost guarantee you will not find a firm more passionate about helping investors.
In fact, our Managing Director, Scott Puritz, testified before the U.S. Senate on the subject, and we have also comprised our Investment Committee with some of the brightest names in the industry, people who we know have led the charge on pro-consumer initiatives and have the experience and knowledge our clients deserve.
So, on the next slide, you can see our Investment Committee. These individuals are a powerhouse of investing expertise. Starting on the left, you have Charley Ellis, who, along with Vanguard founder John Bogle, helped spearhead the index investing movement.
Second from the left is Burton Malkiel, who, along with Charley Ellis, co-authored the investment guidebook The Elements of Investing. Burton also wrote a must-read guidebook called A Random Walk Down Wall Street. He is a professor emeritus at Princeton University, and we had him on as a guest just last month for a different client event.
And then, third from the left, you will see Jay Vivian, who was previously responsible for managing the retirement investments for IBM. And last, but certainly not least, you have Christie Craig. She is the Chief Investment Officer at National Geographic Society, overseeing a $1.4 billion endowment.
These individuals embody the firm’s mission. We also have Scott Puritz and Mitch Tuchman pictured here, the Managing Directors, and we feel very fortunate to have all of them on the board, making decisions about our clients’ portfolios in a very hands-on way.
All right, as Matt said, there is a Q&A box open the entire time. We do want this to be interactive. We are going to do our best to cover some fundamentals that we think are a very good starting point for people who are just getting going with investing.
But if at any point you have a more specific question or you want us to go deeper into something, please put it in the box. We will either address it when it comes in, or we will wait until the Q&A portion at the end. We have some designated time.
All right, something fun that we are doing today is a lottery for The Elements of Investing. That was the book that I just mentioned earlier, and to give you more information, I am going to put a link in the chat to where you can enter this lottery. Okay, there is the link.
But to give you a little bit more information about the book, two members of our Investment Committee, Burton Malkiel and Charley Ellis, wrote this really fantastic small book. It is a quick read, but it breaks down core investing principles into easy-to-manage, bite-sized chunks. It talks about keeping costs low, staying diversified, and the power of compounding, and it is going to help you get going on building wealth over time.
This webinar is a great first step. This book is a really good next step for you to read and learn a little bit more. So, if you are just getting started with investing and saving, it is going to provide you a solid foundation and help you avoid some of the common mistakes that trip up new investors.
So, fill out that link at the end. We will randomly draw three people, and we will mail you the book.
All right, let’s get into the content. I wanted to start with this example. We have Emma and Olivia, and they both want to invest, but they take two different approaches.
So, Emma attends the webinar today, and she decides immediately that she is going to start investing. She starts in the month of February 2025. She starts putting away $500 a month, and she is consistent in investing $500 a month for 35 years.
Lauren: And by the end of that period, her money has grown to over a million dollars, over $1.1 million.
Now, Olivia also wants to invest, but she waits. She is not sure where to start, so she puts it off for five years, and then finally she starts also investing $500 a month, but not until February of 2030. She follows the same strategy as Emma, but because she started later, her money grows to just $745,000 over the same period.
So, what is the difference? The difference here is really time. So, even though Olivia still invested for 35 years, those extra five years that Emma had in the market made a huge difference, a $400,000 difference, despite only investing $30,000 more of her own money.
So, that is the power of starting early. I think when you see it illustrated like this, it really motivates you to get going, so hopefully after today’s webinar, you feel motivated to get going.
Okay, this is the agenda for today. When I first graduated college and I was on the path to finally earning money instead of just spending it on student loans, I had a lot of initial questions. I wanted to know, how much do I put in my 401(k)? I did not even know what an IRA was in terms of investing. I knew very little.
I knew that most of the time, at least in my family, like with my dad, the traditional gender roles kind of came into play where the man manages the money. So, I put it on my husband. I said, “You need to figure out how to invest.”
And so, we spent a year getting individual stocks in a Robinhood account, which I completely would not recommend, before we finally learned more about what best practices are for investing.
So, I am assuming many of you on this call have had or currently have similar questions, and you might be further along than we were at the time. You have aggressive savings goals like retiring early. You might have other goals like travel, a house, or a wedding, but the principles are still the same, and that is what we are going to cover today.
So, we will start with budgeting, and then after that, we will move to saving and investing, and that is where Matt is going to come in.
So, the budgeting category. There is this rule of thumb called the 50/15/5 rule, and I would strongly suggest, if you do not already have a budgeting rule that you follow, that this would be a good place to start.
It is a framework. It says 50% of your income can go to essential expenses. This would be things like rent, groceries, and bills. 15% would go to retirement savings, 5% to short-term savings, like an emergency fund or saving for a big purchase, and the rest is yours to enjoy: travel, dining out, hobbies, etc.
So, in the next couple of slides, I will break down each of these categories.
Okay, the first is essential expenses. This should make up 50% of your income. Like I said earlier, it is things like housing, utilities, groceries, transportation, and minimum debt payments.
If you find, when you look at what you have spent over the last couple of months, that your essentials are taking up more than 50% of your income, it might be time to reevaluate and cut costs where you can. Maybe downsize your house, refinance your debt, or adjust your living expenses. But the goal here is to make sure that your needs are covered without leaving too little room for saving for other financial priorities.
Okay, next is retirement savings, which should make up at least 15% of your income. This includes contributions to your 401(k), your IRA, which is an individual retirement account, or other retirement accounts.
One of the best ways to hit this goal is through automation. If you are automating your contributions to your 401(k) plan, that means the money is being invested before you even see it hit your paycheck. It is like paying yourself first.
Many employers also offer an auto-increase feature for a 401(k), which means you can have them boost your contribution level by 1% every year without you needing to go in and adjust it, and it just generates more savings without feeling it.
Matt: I like to think of the savings as, I do not know if you have ever heard of the rock versus sand metaphor, but if you are filling a jar and you have some big rocks and you have sand and you need it all to fit in the jar, you have to put the big rocks in first and then pour in the sand, and the sand will fit in around it.
But if you put the sand in first and then the rocks, it is not all going to fit. And retirement savings is a lot like that. It is a big rock, so you need to put it in first, and then you can fill the gaps with your day-to-day spending, with your hobbies. It is all going to work out, but you are just not going to have room if you do not pay yourself first for retirement savings.
Lauren: That is a great metaphor, Matt, and it also goes to your very beginning example of not waiting the five years, right? If you set it up and set up that automation and the automatic increase as well, it is not like, “Oh, I will do this next year. I will worry about it in a couple of years.” You just get yourself set, and then you do not have to worry about it, right?
Yeah, just get going.
And the next piece of that rule, the 50/15/5, is the short-term savings, or the 5% of your income. This would include an emergency fund. It might also include if you are saving up for some big upcoming expense, like a down payment or a vacation.
But an emergency fund is very important. And if you go to the next slide, we talk a bit more about an emergency fund. You should aim for at least three to six months of essential expenses, and the way I would recommend you find this number is to look back over the last couple of months, see what you have spent, and try to say, “What is essential? If there was an emergency, if I lost my job or had a medical bill, I would cut everything but this chunk out. How much is that chunk?”
And try to have three months’ worth of that. So, three to six months built up. This was something that came in handy with my husband and me last year when our son ended up having a really big NICU stay bill that was huge. It was nice to be able to have this without having to dip into credit cards or retirement accounts.
Okay, and in terms of building up this emergency fund, we talked about the rock and sand analogy. An emergency fund is one of those big rocks.
So, a couple of ways that you can build it effectively is to auto-save. Just like with retirement savings, you can set up something to automatically transfer within your bank account. Most banks have the feature where you can auto-transfer to a savings account. A lot of employers also offer that your direct deposit of your paycheck can get split between two different accounts. So, you could even do it that way.
But the more you can automate it, the more likely it is that you are actually going to save the money, and then fund it before other goals.
And Matt is going to talk a bit more about this, but keeping it in a high-yield savings account, you do not want your emergency fund tied up in stocks. You need it more accessible.
All right, now that we have covered essentials, retirement, and short-term savings, the rest is yours to enjoy. This is your discretionary spending, money for dining out, travel, and hobbies.
I would say the key here is balance. You do not have to sacrifice enjoying your life today to save for the future, but you want to make sure that your spending aligns with what is actually important to you. So, I think the 50/15/5 rule will help create a good balance.
I had a friend come and stay over with me over the weekend, and she told me that her dad has been encouraging her to save more toward retirement. And she said, “Dad, I am making all my minimum debt payments. I feel like that is enough, and the rest of my money is for me to live my one life,” is what she said.
And so, I have thought about that a little bit over the last couple of days, and I would say that this is something I personally have fought with a little bit as trying to work toward retiring early. But I have had to find that balance because if I am not happy along the way, then what is the point?
So, for me, that meant being intentional about those, cutting back on things that do not really add value to my life, but still spending on things that matter.
So, I would encourage you to think of it like this: future you is still you, and you would not take all of your money right now when you get your paycheck on payday and blow it in one night, right? You would spread it out over the course of the next month so that you can make it to your next paycheck.
And I would say that saving is just like that, except it is spreading your money out over your lifetime so that you have enough to enjoy now and later, and the key is to automate your saving so that can happen.
So, instead of thinking about it as missing out now, I would think of it as buying yourself choices and freedom in the future.
Matt: Very nicely put.
Lauren: Thank you. I do not know if it will work on my friend, but we will have to send her the recording of this webinar.
Matt: Yeah.
Lauren: The purpose of this slide is just to let you know that while the 50/15/5 rule is a good place to start, it does not mean it is best for everyone. So, you can adjust this depending on what is right for your life.
On the next slide, we have some resources for you. So, Fidelity has a checkup where you can put in your spending, and it will tell you how you are doing on the 50/15/5 rule, and there are some other resources here. They are all linked.
We are going to send out the recording and the deck after this webinar, so you can go to these. There are some free tools for budgeting. There are some paid options like Monarch and You Need a Budget, YNAB. So, feel free to take a look at those after.
And Matt, I will turn it over to you for saving.
Matt: Excellent. Thanks, Lauren.
So, saving. We are talking about the 15% and 5% buckets that Lauren just went through. So, our long-term reserve for retirement, and then our short-term for emergency fund and near-term expenses, like maybe you want to buy a new car in a couple of years.
Take a look at this map or landscape here, and you will see some different account types, some of which you may have heard of, like Roth IRA, 401(k). Maybe you have one of these accounts. Most of you probably have checking or savings, so these are some of the different types of accounts you can use for your savings, and we are going to get into them and the different rules and purposes for each of these.
When we think about saving, there are two worlds: banking and investing. Again, most of you probably have some sort of banking institution that you work with for your checking and savings account.
And if you do not have an investment institution that you are working with, Charles Schwab and Fidelity are a couple that we at Rebalance use. Think about getting something set up with them for your investments because you need to have both of these.
Schwab and Fidelity are where you will be able to open an IRA or a taxable brokerage investment account. We will get into those. For the 5% bucket, the short-term savings and the emergency fund, you want to get some interest on that.
Okay, if you are just keeping your emergency fund in your checking account, it is paying next to zero. So, this chart here shows a few different types of vehicles you can use. On the y-axis we have the yield, the interest rate that it is paying, and on the x-axis we have liquidity, which is another way of saying, how easy is it to get your money out of this account?
And basically, the easier it is to get your money, the less it is going to pay you in interest.
So, checking account, you can add and take money out of there every day, with no restrictions really, but it pays basically nothing.
On the other side of the spectrum, you have CDs, which have early withdrawal penalties if you take money out before the end of the term of the CD. They can be 3-, 6-, 9-, or 12-month CDs, even farther out than that.
So, you really need to have, maybe if you have a designated expense, again, like a new car, you want to get a new car in a year, you could use a CD. But if you want to have a little bit more flexibility and still earn some interest, a money market mutual fund is a great fit that a lot of our clients use.
When you want to set up a money market mutual fund, just understand it is not something you do with a bank. It is an investment, and it is a very specific category of investment, but you need to have an account with Schwab or Fidelity.
Typically, it is going to be just like an individual account or a joint account that you could own with a spouse or partner, and you need to actually go into that account and purchase the security mutual fund.
An example of one that we use or see people use, if you just want to get some more information on what it is all about, is with Schwab. There is a ticker, SWVXX, which is the symbol for the mutual fund. So, if you just Google that, SWVXX, you will see a fund page, and it will give you some more information.
A savings account or CD, you can get those through your bank. CDs can also be purchased within an investment account.
Lauren: And I would say, Matt, this is where I keep my emergency savings money because it is not the money I am going to use at the end of the month to pay off the credit card. It is money that I need accessible, but I have an account that takes two to three days to transfer, which is enough time where, if there was an emergency, it is still accessible, but it is not right there in my checking account, and it gets a better rate than it would if it was sitting in my savings account at my bank.
Matt: Exactly. The mutual funds, money market funds, are paying somewhere around four and a half percent right now. It is a floating rate; it will adjust with market conditions. But compare that to maybe 0.1% in a checking account. It really makes a big difference, and I think your example of a hospital bill is a perfect example where you are going to have enough time where you do not need to withdraw it immediately, like same day.
So, it is okay that you have to wait a couple of business days to get money out of this type. So, this is a great. I love this illustration here. It helps to visualize how most people would typically prioritize their savings.
Okay, which bucket? This is your, the water is your money, and which bucket should you be funding first?
For most people, achieving a 401(k) match, which, if you are not familiar, is basically what your, if your employer offers a 401(k), you can contribute your money to that, and often the employer will have a match arrangement on there where they will put some percentage of what you put into your 401(k).
So, if you do 3% of your salary, maybe they will match 100% of that, and they will do 3%. Now you are getting 6% savings into your 401(k). If you have this available and you are not using it, you are leaving money on the table. It is basically free money from your employer, so the 401(k) match is really important.
High-interest debt, like consumer debt, credit cards, maybe car loans, these can really spiral and really kind of take a toll on your finances. Credit card debt is somewhere around 20-plus percent is what I have seen from a lot of people lately, and so we encourage aggressively paying that down if you have it.
HSAs, we will talk a little bit more about these. You may have heard of it. It has the coveted triple tax benefit. It is very rare, and this type of account is used for qualified medical expenses.
You get a tax deduction when you contribute to it. You can invest within an HSA, and those investments have tax-deferred earnings. So, as your investments increase in value and as you earn dividends, you are not paying taxes on that.
And then, if you take the money out for qualified medical expenses, that is a tax-free withdrawal. So, it is really great.
And then, if you do not use the account for medical expenses, when you turn 65, it kind of operates like an IRA, where you can use it for just funding your retirement.
Now, if you take money out for any reason other than medical expenses before age 65, you are going to have a big 20% penalty. So, you need to be careful with it. But it is a really powerful tool.
401(k) contribution beyond the match is a great vehicle, and then maybe you do not have a 401(k), and so you could just set up an IRA or a Roth IRA for yourself.
And then lower here on the priority list, once you start filling these up, is a taxable brokerage account, which is a very flexible way of investing. It does not have the same rules as these other ones that we just covered, and you can add money to it as you see fit and take money out of there.
So, that is very important to have if you have the capital for it.
And then low-interest debt, like a mortgage, especially if you refinanced around 2020 to 2021, you might have maybe a 2% to 3% interest rate. That is kind of the lowest priority, and might not even make sense to pay that off. It is kind of different for each person and situation.
I talked about HSAs and the triple tax benefit. Another type of tax-advantaged account for healthcare is an FSA, a flexible spending account.
So, we have health savings account and flexible spending account. There is a bit of overlap between these two in that they are used for qualified medical expenses and have some tax advantages for that. But there are some really important differences.
One is that an FSA has to be offered through an employer.
Matt: So, if your employer does not offer this, you cannot go get one on your own. Whereas an HSA, you can get it through your employer or you can get it on your own, but it is tied to the type of health insurance plan you have.
You have to have a high-deductible health insurance plan. That is the requirement. Once you have that, you can again add to either of these. They have different contribution limits.
I think the FSA is about $3,300 in 2025 for an individual, and HSA is $4,300 is the limit that you can add to that.
But maybe the most important difference between these two is that an FSA is kind of use it or lose it. So, if you make the maximum contribution to an FSA and you only use $1,000 for qualified medical expenses, you would have $2,300 left over in the account, and when you hit the next calendar year, you are going to forfeit all or most of that.
Sometimes there is a rollover feature where you get to keep like 500 bucks, but you need to be really careful if you are adding to an FSA to make sure that you are not adding more than what you are going to use in that calendar year.
An HSA is totally different. It is your account; you keep it forever, so really important to be aware of those differences.
Lauren: And a fun fact that I like to tell people, Matt, is if you can afford to pay an emergency medical expense out of your emergency fund, and you do not have to go into your HSA, you can keep those receipts. Just make sure you are storing them in a place that you are not going to forget them.
I will take a picture and put it on my Google Drive so that I know I have it, and then you can submit those receipts at any point in the future. You do not have to submit them that year that you spend to continue to grow tax-free, and then when you actually need the money, you could submit the receipt and get it out then.
Matt: Yeah, excellent point, and definitely make sure to keep your receipts because for an HSA it is actually pretty easy to spend that money from an HSA, but you do not have to prove it as you go that it is a qualified medical expense.
But you need to make sure you keep that record in case you ever get audited.
So, here are a few really common types of accounts. We have two IRAs, a traditional and a Roth, and then we have two 401(k)s, traditional and Roth.
All of these accounts have tax benefits one way or another, and they all have some restrictions. One thing that applies to all these: there are early withdrawal penalties if you take money out before age 59 and a half. In most cases, there are a few exceptions. You are going to pay a 10% penalty for early withdrawal.
Another thing beyond that, it is probably best to think about just traditional versus Roth because the traditional IRA and 401(k) operate somewhat similarly, in that you are getting a tax deduction when you contribute to those accounts. So, your earnings are tax-deferred until you take money out of the account later on in retirement.
Whereas with a Roth IRA or Roth 401(k), your earnings are taxed when you make the contribution to the account. All of it grows tax-deferred in all four of these accounts. Your investment earnings grow tax-deferred.
But with the Roth, when you take a withdrawal in retirement, it is totally tax-free.
So, between traditional and Roth, you are kind of just deciding: do I take the tax hit now or do I take the tax hit later?
And usually, it is best to think about, okay, well, how are you paying a lot in taxes right now? If you are very early in your career and you expect your earnings to grow, then you are probably in a lower income tax bracket now than you will be in the future, and therefore you probably benefit from just doing Roth, just pay the taxes.
If you are earning a ton of money, you are doing very well, you are in a high income tax bracket, maybe get the tax deferral and do traditional. So, that is the high-level comparison to think about.
Lauren: Okay, Matt, you mentioned 401(k) employer match when you were looking at the buckets. That was the very first step, and this is one that gets me super excited because it is free money. I love free money.
I will talk to my siblings, especially, when they get a new job. I will ask them, “Do you have a 401(k)? And have you set it up yet?” And it stresses me out so much if they say no.
So, just a little example to talk everyone through, so that you can more conceptualize what this free money looks like and what it could mean for you.
So, this morning I Googled it. It said the average starting salary for an undergraduate degree is $60,000. So, I said, okay, let’s say you just graduated. You are starting your job. You have $60,000, and your company offers a 401(k) with a 4% match.
4% of $60,000 means you are getting $2,400 a year in free money. So, if you put off setting up that 401(k) for a year, you just gave up $2,400.
If you divide $2,400 per month, that is $200 a month. So, if you just procrastinate, you just started your job, you have been there for three months, you have put it off, you are losing $200 a month every month that you put it off.
So, I would say, if you have a job and they offer a 401(k), if you have not set up your 401(k), please do so. Usually, an HR person can help you set it up if you do not know how.
We also have a QR code at the end where you can set up a 15-minute call with one of us for office hours. Set up a call with us. We will help you get this.
I really do not want to hear about anybody losing out on money from their employer match.
And if we go to the example that we had at the beginning of this with Emma and Olivia, it was that idea of contributing $500 a month toward retirement, and over 35 years they made over a million dollars.
If we take that same principle and we apply it here, a tax bracket for somebody making $60,000 per year is 22.5%, which means if you decide that you do not want to put $300 a month into your 401(k), and I am choosing $300 because if you put $300 a month in and you get that 4% match, that is $200 from your employer. That adds up to the $500, so you really only need to save $300 a month.
But let’s say you think $300 is too much. I do not want to do that. I want it to hit my direct deposit, and I want to be able to spend it.
Well, that $300 is going to get taxed, and by the time it gets to your bank account, it is really only $230. So, save $230, and that would end up going into your 401(k) pre-tax at $300 plus the employer match, and now you are saving $500 a month just for sacrificing $230.
I know that was a lot of math, so hopefully you followed that. But the point is, it can actually be pretty simple to save $500 a month, especially if you take advantage of things like this and you do not leave free money on the table.
Matt: So, when we are talking about setting that money aside, then you might have to figure out, okay, what do I do with it? What do I do with it once it is in the IRA or in my brokerage account?
So, here we are going to quickly go through a bit about investing at a high level.
Most of the time when we are investing, clients and anyone who is doing it on their own, you are pretty much looking at buying stocks and bonds. That is the main form of investment we do.
And stocks are actual ownership. Buying a stock is purchasing an ownership share in a company, in a publicly traded company, or in a group of companies. And by doing that, you are putting your money on the line, hoping that that company will do well, and in return, you are going to hopefully get some earnings in the form of dividend payments.
So, as corporate earnings are great, they will often pay out dividends to investors, maybe quarterly, and ideally, if a company does well, the share will also appreciate in value, and so that is how you get a return from stocks.
Bonds, you are actually making a loan of your money to a company. Bonds still have some risk, but they are lower risk than stocks. Bondholders, if a company goes defunct, are typically going to be paid out before stock shareholders.
So, bonds, you kind of know what you are going to get from them in the form of the interest rate when you purchase a bond, and the returns over time are a little bit lower than stocks. So, slightly lower return, slightly lower risk, and we will talk about how much to buy of each of those categories as well.
If you are familiar with Rebalance, you have definitely heard of index funds. If you work with us, if you do not, an index fund tracks a specific part of the investable market.
So, a very common example is the S&P 500. When you watch the news in the morning, you will see the Chyrons at the bottom with S&P 500, Dow Jones Industrial Average, and buying an index fund is a way of putting your money not in one company but in a bunch of different companies.
It provides very broad market exposure, diversification, which is a way of lowering your risk, and it is a really simple and low-cost way to put your money to work for you.
Index funds can come in the form of an ETF, an exchange-traded fund, or a mutual fund. These are very similar. They are different vehicles that investment companies use to allow investors to purchase, like an S&P 500 fund.
But ETFs just tend to be a little bit easier to use. They trade throughout the day, so you can buy them kind of like you would buy a stock, just at any time during the day. Whereas mutual funds all settle at the end of the day and take kind of like an extra day to get your money out of.
ETFs tend to have lower expenses, and that is what we use here at Rebalance. They also avoid things like sales loads or minimums that mutual funds can have built in.
These can have kind of a lot of differences. They are not all built equally. Some are good, some are really bad. ETFs tend to be a bit more consistent.
Asset allocation is all about the mix of stocks and bonds, and generally, the younger you are, the more you can afford to just have in stocks, the higher-risk investment, because you have time on your side.
So, if the market has a huge correction, we have some economic turmoil or recession, stocks are going to take a hit. But if you have 25, 30 years ahead of you before you retire, you can ride that out and not really have to worry about it as much.
This is a lot in this slide here, but it illustrates what I was just talking about. And what we have here is, okay, the orange is a stock portfolio, the green is a bond portfolio, and blue is a 60/40 mix, so 60% stocks, 40% bonds.
Matt: And what we are doing is looking at different periods along these 73 years from 1950 to 2023. And if we take any one-year period during that time, these three portfolios have a huge disparity in their returns.
The best one-year period for each of these three portfolios is a very high return: 47% return for stocks, 43% for bonds, which is insane, and 34% return for a 60/40 portfolio in the best one year.
The worst one year, look at the downside: stocks down 39%, bonds down 13%. That was probably 2022, and the 60/40 portfolio down 20%. But just by going from 100% stocks to 60% stocks, the difference in downside is basically cut in half.
So, that hopefully illustrates to you how risky stocks can be in a very short period of time. But as the time horizon expands to any five-year rolling period, again, in this 70-plus-year time frame, the downside is much more limited.
And any 10 years, we are within a couple of percent here between these three portfolios of all stocks, all bonds, and the 60/40.
And then 20 years, there is not any rolling 20-year period during this time that had a negative return for stocks. The worst 10-year period was down 1% for stocks.
So, again, this is the more time you have, the more you can afford to take on some risk and invest more in stocks.
Lauren: And I think that perfectly illustrates why your emergency fund is not in stocks, because your emergency fund is a one-year time period.
Matt: Exactly. So, if you are looking for someone to help you, a lot of you might be DIY right now. If you want someone to help you, this is the magic word right here: fiduciary.
That is a legal standard. It is the type of relationship that Rebalance has with all of our clients. It is a fiduciary relationship, and it means that our advice is in your best interest as a client, and that is what you want to look for.
If you see someone who is a broker, their advice has to be in your best interest. It is not the same standard. I am sorry, I do not know if I misspoke there. Their advice has to be suitable, not best interest. So, it is a totally different legal standard, and they can often have commissions and sales and high fees.
So, fiduciary is what you want to look for. RIA, a pure RIA, not a hybrid RIA broker-dealer, is going to be a fiduciary, compensated by client fees, not by commissions based on products that they are selling.
And so, we promised some actionable items for you, and this is in our next steps. We have some things that you can do because this is a lot of content, and we know that. And so, we want you to have a quick summary here of what do you do next?
Lauren: Right. And then we will get to the Q&A portion after this. We have had a few good questions come in. If you have been thinking of questions during this presentation, go ahead and drop them in the Q&A.
So, the first next step we have for you. This is the 50/15/5 rule tool that Fidelity provides that I mentioned earlier. If you scan this QR code, it will take you right to their tool, and you can go ahead and see what your status is right now on this budgeting rule of thumb.
Matt: Yeah, sorry, I will hang out there for another second.
Lauren: Yeah, give people a chance to scan it, and we will send out the deck.
Also, if you attended this webinar and you think it is useful for somebody else, everyone who attended will get the recording and the deck, so you can forward it on to whoever you think would benefit from watching it.
Matt: Yep. Okay, I am going to go to the next.
Lauren: Okay.
Matt: So, if you are thinking about something like Lauren said, if you have a 401(k) and you are not enrolled in it yet, at that point you said, “Okay, I need to do that,” please just write it down because whatever your goal may be, once you write it down, it is real and you have something to kind of keep yourself accountable to.
So, if it is you want to buy a home, you want to enroll in your 401(k), make a note for yourself, make it real.
If you do not have any type of investment account yet, a great place to start is by opening an IRA or a Roth IRA. And you can look at that chart where we had comparisons between them.
If you have a 401(k) and/or you are a high earner, there are some rules about making IRA or Roth IRA contributions. If you have a very high level of income or you are a participant in a 401(k), so if you have those, just check the rules first.
If you do not have anything, you do not have a 401(k), and you are not making a couple hundred thousand dollars a year, open an IRA or a Roth.
You can use Schwab, Fidelity, or any other institution that you might be familiar with. But those two we work with, and we really like them. There is no, we have nothing to do with it, but we just like those institutions.
And you can buy a diversified ETF, which is what we were just talking about. A very common one and popular fund is VTI. It is a Vanguard Total Market Index, and that is basically investing in U.S. companies, small, medium, and large U.S. companies.
Again, the symbol is VTI. And then there is another fund from Vanguard. The ticker is just VT, and that is Vanguard Total World Market, and so you have exposure in that fund to not just U.S. companies but also international.
And just take a look at those. Pull up the fund pages on Vanguard’s website and get familiar with them. And that can be a great place to start.
Lauren: And I would say, too, calling attention to the tickers, the reason Matt is doing that is because when you open an IRA and you deposit money into it, it is not automatically invested. In fact, it just sits in a cash account, and now cash is doing a little better, but it is just not making money, and you might think it is invested.
So, you need to make sure that you actually click the transfer button and that you purchase a ticker, which means you are now in an index fund and it can actually be invested in the market.
Matt: Yeah.
Lauren: Okay, so we are offering office hours. This is not something that we publicly put on our website. It is really just pro bono for people who are just getting started, who are friends or family of clients.
So, because this is a client-only event, the only people on this call are those who are either current clients or know current clients. So, this is just a complimentary offer we have, where we are opening up office hours between myself and Dan, another financial Advisor here at our firm.
And if you have any questions about how do I get started, maybe you are not sure how much to contribute to your 401(k), or if you want us to just sit on the call while you open the IRA and make sure that you do it right, we can do that for you.
If you have a question that is more specific to your situation, this is just a call where you can have 15 minutes with somebody who can hopefully help answer your question.
And then on the next slide, if you happen to be on this call and you are further along than just getting started, we tend to say that the level of complexity of over a million dollars is where it necessitates a financial Advisor. If you are under a million, you do not necessarily need that at that point.
So, if you are over a million, feel free to schedule time with us. Send me an email. We would be happy to talk to you and potentially bring you on as a client and help you in that capacity. But again, we do not recommend it if you are under a million.
Okay, great. So, those are all the action items we have, and now we can get to some of your questions.
So, let me go ahead and pull up the Q&A box. And again, if you have a question, feel free to put it in there. There is no shame. They are all anonymous, so do not feel like any question is not a good question.
Matt: Yeah, no bad questions here.
Lauren: No bad questions here.
Matt: Meaning, no question is a bad question.
Lauren: Well, the first one that I have, Matt, I think might be best for you to answer. So, this person asked, “I have an HSA account and I have contributed to it. How do I make sure the money is invested?”
Matt: Great question. You should be able to get a statement from the institution. See if you can log in if you have online access and look at balances or positions or documents, and either find a snapshot, a live snapshot of what is in there, or download a recent statement, and that will definitely have some more detailed information for you.
And if you are still not sure, send it to us or schedule one of those 15-minute meetings, and we can take a look and confirm for you.
Lauren: Yeah, and I would say something that is confusing about an HSA account is you actually have two accounts. You have the HSA savings account, and you have the HSA investing account, and those two just come together by nature of having an HSA account.
And most HSAs require that you have at least $1,000 in the savings, and then everything over $1,000 can go to the investing account. So, if you have under $1,000 in your HSA, you likely cannot invest. But once you reach over that amount, then it can go into the investing side.
Okay. The next question, Matt, is what percentage of my paycheck should I be contributing to my 401(k)?
Matt: Great question. So, the magic number that we had was 15%, but really it depends on your personal situation. But that is the target that we generally want to see people get to, is your overall long-term bucket being at 15% of your current earnings.
Lauren: And I would remind people that if you have an employer match of 4%, that 4% counts as part of the 15%, so then you really just need to do 11%.
Matt: Yes, thank you. Great point.
And then beyond that is the more personalized answer, which is, when do you want to retire and how much can you afford to defer right now?
Because if you want to, if you are like Lauren and you are FIRE and you are on the FIRE movement, then 15% will not be enough to retire.
Lauren: So, trying to retire at 35, you are going to have to have around 75% of your income being…
Matt: 75% is the magic number, which you cannot probably put 75% in the 401(k). No, you would max it out.
So, yeah, 15% is the good rule of thumb, and that is kind of the starting point. And then you can tinker it depending on your personal needs.
Lauren: Yeah, and the other thing, too, is for the group of people who said you are in the 18 to 20, whatever that group was, you are probably people who have had a lower standard of living in college. Maybe you are not used to eating really great home-cooked meals. Maybe you do not go out to eat as much.
When you are moving from that into suddenly making $60,000 a year, if you got your first job after college, it is a big lifestyle jump. It is easier now for you to put some of that money aside than to get used to living off $60,000 and now have to save it.
Or if you are in some of the older age groups, anytime you get a raise, I would recommend saving a chunk, maybe half of it, and so you are just adjusting your lifestyle by 50% of the raise instead of the full raise.
Matt: Absolutely. It is huge. Yeah, because lifestyle creep is real. As your income increases, it tends to be easier to just pay for things that you maybe would not have before, so it is absolutely a great way to compromise, is to increase your contributions right when your income increases.
Lauren: And I would offer up to people, I have had friends and family ask me questions about how do I increase my savings rate. Sometimes it can feel like there is no room, especially with there has been a lot of inflation. Food is going up. My grocery bill is going up. I have seen it, too.
So, if you have any questions about that, you could schedule time on the office hours. I would be happy to try to look at your budget and help you find the savings.
And I also think some people, you might hear, “Oh, I am not doing FIRE. I do not need to save that aggressively.” But we have attendees here who are in the 55 and up age group. If you are trying to retire by 65, you have that same 10-year window that I had.
You know, if I want to retire by 35 and I am starting at 25, I have got 10 years. You have the same 10-year window, so everything I am doing is pretty applicable to you.
The difference, of course, being that mine is going to have to last a lot longer, which means more aggressively saving, but the principles are the same.
Matt: Yeah. And one more thing I will add is, especially, I guess I should not discriminate here, but because at any age it can be hard to figure out what your expenses are and to cut down if you need to.
If you are trying to increase your savings rate, there are only so many levers you can shift, right? You either need to earn more money or spend less to be able to increase what you are saving, for the most part.
And it can be really challenging to figure out how much you are spending and where can you cut. So, I encourage anyone who is thinking about that and trying to wrap their heads around it, look at the slide again when we send them out with the resources for expense tracking.
And I think that is a really important piece of the puzzle for people who are at any point in this saving and investing timeline.
Lauren: Yeah, I agree.
All right, I think we probably have time for one or two more questions. So, Matt, I will pose this one to you. The question is, when I am opening my 401(k), how do I decide if I do the Roth or if I do the traditional?
Matt: Yeah. Again, I think the first thing to think about is how old are you, and where are you at in your earnings trajectory?
So, if you are very young and you expect you are early in your career, you kind of know where you are headed, and you expect to be earning much more in 5, 10, 15 years, Roth is usually the best move.
Now, if you are maybe later on in your career, you are earning quite a bit, or even if you are young and you are in like the 37% federal tax bracket, then you want to defer. You want to do traditional.
So, one way to look at it is, you can actually go online and just Google federal tax brackets, and depending on the state that you live in, you might have state taxes, too.
So, you could Google that, like California has state income tax, and look at your earnings for the year, and look at that tax bracket and figure out where you are, your marginal tax bracket. Like, what are you paying on your last dollar earned?
And if you think you are going to be earning more to jump into another bracket in a few years, that can help you hone in on the decision of pre-tax versus Roth.
Lauren: Okay, and I am going to finish up with this question because it reminds me a lot of how it was when I was in the office. It is different now that I work for an RIA firm and we are virtual. But this came up a lot when I was in the office.
The question is, my coworkers talk a lot about stocks they are purchasing, Tesla, Nvidia, etc. Which one of these would you recommend?
Matt: Yeah, we at Rebalance really believe, and I believe this personally, and have before joining Rebalance, in the power of diversification and not putting all of your eggs in one basket, not making bets on any particular stock.
Because the people at the office probably are not stock analysts or experts, and even the people who are experts do not always get it right. And there is a bunch of research to back that up.
If you are curious, you can look up SPIVA, which is S&P Indices Versus Active, and it looks at professional active fund managers who pick stocks like Nvidia.
Nvidia has done great. If you owned it, I mean, awesome, but the point is, it is really difficult to get that stuff right consistently, and the vast majority of professional managers do not.
And so, that is why we believe in index investing and diversification and just buying a broad fund with a bunch of companies in it.
Lauren: Right, and the way I have explained it to people in the past is, I mean, let’s say you buy a little bit of Tesla and you buy a little bit of Nvidia. You own two companies.
Whereas if you spent that same money and you put it in the S&P 500, you own 500 companies. So, if something happens to one of those 500, it is a lot less risky.
And if you want to participate in the office fun of saying what stock you have and how it is doing, I would say put a tiny bit of money in a separate account and look at that as your fun money and truly view it as money you are okay with losing, because it is in a much riskier position than if you were to put your retirement account or any money that you actually need in the future in that.
Matt: Right.
Lauren: Okay. Well, thank you so much, everybody, for your questions. We appreciate it.
I am going to put the link one more time in here for entering the lottery, and after this event ends, we will go through and we will randomly select three people. We will send you the book.
Again, this is a great guidebook if you are just getting started, and it is the kind of thing, too, where you can read it in a couple of days and then pass it along to someone.
I gave my copy to my dad and told him to read it. So, it is just a good guidebook to have, and we will also send out this deck.
So, if you did not get the QR code for the office hours and you want to set up time and ask a question, then you can feel free to.
And we really appreciate just everyone coming today.
Matt: Yeah, thanks, everybody.
Lauren: All right. Have a great afternoon. Bye, Matt.
Matt: Bye.
