Matt’s Unsolicited Financial Advice, Part 1
A handful of people have asked me for various sorts of financial advice so I wanted to try and break down what I’ve learned and what might be worth emulating (or not) about what I do with my finances. A lot of this I’ve learned from my coworker Isaac, so shoutout to him, and the rest I’ve learned from a few other sources.
It’ll mostly be some information about different financial instruments/ tools and my positives/ negatives with them.
Hopefully you find this helpful!
I explain in depth below but I’ll just do a bulleted list of tl;drs so you don’t have to reach much farther.
Too Long, Didn’t Read
- Get a good credit card (good rewards) and pay it off every month fully
- Max out your tax advantaged accounts (401K and Roth IRA) and make sure the money is invested as the next bullet says
- Invest in indexed funds and bonds, feel free to play with a small amount of money elsewhere
- If you can afford it and you’re going to be somewhere for a while, buy a house/apartment. If things break you can pay people to fix them (that’s what the people who rent to you do anyway).
- Reduce the amount of doodads you buy. I’m especially against buying new cars or brand new tech just because, do it for a reason.
- Conversely, don’t cheap out on things you use every day (i.e. it’s worth it to pay more up front for a semi decent car or decent tech if it has a lower maintenance cost/ longer usage time). But also consider the depreciation of things that you buy brand new.
- Don’t cheap out on traveling. Either travel well or don’t travel.
Credit Cards
Credit cards are unfortunately very necessary to things like renting/ buying homes, because companies use a credit score to decide if you should be eligible for certain services.
The Best
- Credit cards give you money back for purchasing things. This is the main reason to have a credit card
The Good
- Credit cards can make purchasing things easy/ convenient
- Most retail outlets don’t charge fees for using credit cards (basically everyone pays them with an increased cost of goods)
- Credit cards can come with extra incentives, like travel cards that offer free checked bags
The Bad
- Credit card debt. If you carry a balance on your credit card and are paying late fees/ interest fees, you probably should not have a credit card. Pay your credit card off completely every month or don’t have one; the money back will not be worth it in the long run. (Though also consider you can’t really build a credit score without a credit card.)
- Some places charge fees when you use a credit card (i.e. they are pushing the 3% fee credit card companies use onto you). Either don’t use them at that location (use cash/debit instead) or do the math if your cash back offsets it (it usually won’t).
- A lot of credit cards have annual fees. Make sure the benefits outweigh the costs when considering a card (i.e. how much cash back/points you accumulate)
Tax Advantaged Accounts
A tax advantaged account is basically a place to put your money that the government either won’t tax going IN (401K, regular IRA) or won’t tax coming out (Roth IRA). The whole point of these is that you pay less to the government in the short term (and in the long term if you pull your money out a proper fashion).
401K/ Regular IRA
The Best
- Lower your taxable income NOW. This means the federal government and state governments take less of your money to spend it on… whatever they want.
The Good
- Companies generally offer some flexibility in how you invest your money for these accounts
- Companies will match to a certain percentage (you should invest AT LEAST THAT MUCH into your 401K per paycheck)
- For Regular IRAs, you have a lot of flexibility as to where you put the money (will get into this more in the “investing” section)
- The limit is pretty high, $20,500 for 50 and under as of 2022.
- If you’re older than 50, the catchup is $6,500 more in 2022, i.e. you can contribute up to $27,000.
The Bad
- 401Ks and IRAs are usually matched to Stocks and Bonds, which have to do with how Wall Street and the government respectively are doing. 401Ks are great from their tax advantage perspective but as far as investing, it’s a bit more murky.
- There are penalties when you pull out from these accounts “early”, which is before 59 1/2. They are significant, so if you want the money and don’t want a penalty, then don’t use a 401k.
Roth IRA
The Best
- These accounts are not taxed when you withdraw from them (assuming you do so after 59 1/2 years old). So mixing this with 401k withdrawals can really reduce how much Uncle Sam takes per year at 60+
The Good
- Same flexibility as a regular IRA, i.e. you can pick where you put your money
- Separate limits from a 401k
The Bad
- The limits are lower for Roth IRAs, around $6000 per person
- There are limits based on income (i.e. that $6000 gets even lower if you make a good amount of money), but you can use a backdoor IRA to get around it
Investing
I am not an investing expert, so I’ll say what I think is universally understood:
You can’t beat the market.
Warren Buffet says he can’t beat the market. So don’t try, he has a lot more money than you probably do. Invest in indexed funds with your retirement accounts and/or personal accounts.
If you come across some crazy investment opportunity in a new company (or Telsa?) etc. feel free to take the risk, but I wouldn’t bet against Warren Buffet.
When it comes to apps like Betterment etc. I don’t use those so I have no advice there. I just use Charles Schwab and Vanguard for my investment/retirement portfolios. People that work at those companies are super nice and willing to talk to you about how to invest your money, so use them well.
Cryptocurrency and other things? They are highly speculative (gambling?); feel free to invest a small amount of your money but understand that it can (and will) go up in smoke.
Also if the markets are not doing well/inflation is high, consider investing in bonds. A lot of 401Ks/ investment funds will buy both bonds and index/mutual funds.
Home Ownership/ Renting
Should you own a home/apartment or rent? There’s really only a few reasons to rent, so I’ll just frame it this way.
Why should you rent?
- You can’t afford a home downpayment (this is probably the number one thing in your way)
- You don’t want to, won’t live in the same place for more than 3 years (this is about the time it becomes worth it to own a house, given closing costs etc.)
Why should you buy?
- Your rent money is not going to someone else’s mortgage/bottom line, but instead is going towards YOUR OWN PROPERTY. And homes appreciate, unlike cars (see below).
- You can control the space (at the very least the inside if you’re part of a condo). You can improve things or make things your own.
How should I go about buying a place?
For the home downpayment, family is the best thing you should lean on if you can. The difference in a monthly payment between a 5% cash down loan and a 20% cash down loan is significant, something called PMI.
If you need to scrape on your own, consider some sort of “Christmas Club Account”, i.e. an account you put money into that you never pull out from. This will be the nest egg you use to put towards your downpayment. I’d even consider lowering my 401K contribution/ Roth IRA contribution to fund this nest egg.
Most people won’t be able to ask their parents etc. for money, so you’ll usually have to take a larger loan and start with a smaller downpayment. There’s lots to say about different loan types, but the main difference between them is the amount down, and the percentage you’ll have to pay in interest. The higher interest matters a lot less if you don’t stay in the house for the loan term (i.e. you only live there for 5–10 years).
But what about maintenance?
Maintenance is unavoidable. I have had terrible experiences getting a landlord to come fix something. If I’m on the phone with people to come fix an issue, usually I can get things done more quickly. Don’t expect you’ll be able to fix most of the issues that come up with a house (you might even make things worse!)
But maintenance is not something to fear, it’s just part of ownership. And remember the costs will always be pushed onto you somehow if things break in a rental (part of why rents are so high).
Doodads/ Spending Money
I don’t think this advice is as concrete as the above, so I’ll just give a few snippets that have worked for me.
Food
Eating out or getting coffee out is expensive; I think doing it for social experiences is great, but otherwise, cooking for yourself is a great way to avoid spending money.
Technology
Everyone wants the latest technology, but remember that technology depreciates super rapidly, both in value and in quality. That being said, buying something that is higher quality but will last longer saves you money in the long term.
Consider buying new gadgets because you NEED them (i.e. your old phone is basically broken), not because you WANT them. Just waiting 4 years to buy the latest iPhone instead of 2 could save you $500–1000.
As an example, I bought a new computer recently for $1500. I hadn’t bought a new computer in 8 years (because I had a really decent one and kept upgrading its parts/ patching it). If I’d bought a new one every 2 years, I’d have spent around 4 times as much.
Cars
I personally dislike cars. I think they represent a lot of bad things (sitting in traffic, unhealthy lifestyle, lots and lots of bills etc.) so I am very biased.
That said, they are also a terrible investment (losing 25% or more of their value off the lot). My main advice on cars is: spend as little money as you can while balancing how much time you spend going to the shop/ maintaining them. Also cars/ car purchasing has been crazy during COVID, so they’re even more overvalued these days.
So buy a “good enough” car, and don’t buy them new. Also certain brands (Toyotas) hold their value much better than ones that deteriorate more quickly.
Travel
This is my highest spending category but I’ll say this: spend the right amount of money on traveling. I have never regretted paying to travel somewhere or paying for a nice hotel, only have I regretted going to a crappy hotel while traveling. I’ve heard horror stories of people finding really good deals on hotels, only to realize they are crack dens.
Travel well or don’t travel at all. Also crazy people take the bus (I have taken the bus and the train between NYC and DC about the same number of times, and something always happens on the bus).
In closing
Hopefully this unsolicited advice is useful. If not, let me know what you do differently!
If you want any more unsolicited advice, check out part two!
