Do This After You Get Paid (Paycheck Routine)

00:00:00.000 | You just got paid, but now what do you do? Do you move money to savings, invest, pay down debt,

00:00:05.640 | or just let it sit there and hope for the best? Most people kind of wing it. And even if you're

00:00:10.020 | earning good money, that leads to second guessing, missed opportunities, and financial stress that

00:00:15.240 | doesn't need to be there. So in this video, I'm going to walk you through the exact 10-step

00:00:19.700 | framework I use every time I get paid so you can stop guessing, start optimizing, and make your

00:00:25.960 | money work smarter. And this isn't just about paying off debt or building an emergency fund.

00:00:30.700 | I'm also going to cover advanced tactics that are sometimes contrarian for investing,

00:00:35.320 | managing liquidity, and creating real financial flexibility. So let's get into it.

00:00:40.020 | So the first step in how I allocate money is what I'll call operating cash, which involves making

00:00:45.240 | sure you have one to two months of your regular expenses sitting in cash, right in your checking

00:00:50.500 | account. Or for those of you who listen to episode 177 on the best bank account setup,

00:00:55.140 | I actually think the best accounts are ones that you can earn interest on. And in most cases,

00:01:00.700 | those are actually savings or cash management accounts that function like a checking account.

00:01:04.860 | So go check out that episode if you want my recommendations for where to put this money.

00:01:08.600 | But this is not an emergency fund. This is not a giant amount of money to solve all these problems.

00:01:14.220 | It's your cash flow buffer for each month to smooth over the gap between the fact that sometimes

00:01:19.400 | you have bills that are due before your income hits, and you want to make sure you're not having to go

00:01:24.320 | borrow money, transfer money when that happens. It also means because it's one to two months that

00:01:29.620 | there is a small buffer for some urgent thing like a high health insurance deductible, a sudden car

00:01:35.380 | repair. You want to be able to cover those things without having to dip into your savings or borrow

00:01:40.260 | money. So this is your pay your bills. Don't get caught off guard fund. It's simple. It's boring,

00:01:45.240 | but it's probably the most practical and essential piece of your framework for how you allocate your

00:01:50.700 | money. So if you don't currently have one to two months in an account, this is where I would

00:01:54.860 | prioritize putting those funds. And just to be clear, if you're not doing this exactly like me,

00:01:59.720 | that's okay. If you already have money in other places, I'm not saying go ahead quickly and sell off your

00:02:05.400 | stocks or withdraw the money from your retirement fund to follow this order. But I do think that as you have

00:02:10.860 | incremental savings, this is the order in which I would prioritize putting my own money in different

00:02:15.820 | places before I start saving and investing. Okay. After that cash buffer is in place, the next

00:02:21.880 | absolute priority, in my opinion, is the employer match. If your company is matching your retirement

00:02:26.980 | contributions, whether that's in a 401k, a 403b, or any type of account, even if they're only matching

00:02:32.840 | some amount of investment and not the entire amount, right? Sometimes they might match the first

00:02:37.680 | thousand dollars of your 401k contributions. If you're getting a hundred percent match, meaning you put

00:02:42.180 | in a thousand and the employer puts in a thousand, that's a guaranteed 100% return on your investment.

00:02:47.300 | And it's immediate. You don't have to wait a period of time. There is no debt payoff, no investment,

00:02:52.520 | no savings account that can compete with doubling your money instantly. This is also true if they

00:02:57.840 | match your HSA contribution or your FSA contributions or anything like that. And really the only time I'd

00:03:04.040 | skip this employer match is if you have really crushing high interest debt, like 15, 20, 25, 30%,

00:03:11.340 | and your match is really small that it's not worth focusing on until you can get that debt paid off.

00:03:16.960 | Otherwise, skipping an employer match is like saying no thanks to free money, which if you've

00:03:21.940 | listened long enough, you know I would never want to say. All right, once you've got your match set up,

00:03:26.180 | if you have it, right? I work for myself. I don't have an employer match, so I skip number two.

00:03:30.720 | But then I like to allocate money towards what I'll call urgent debt payoff,

00:03:34.940 | which is generally paying down any high interest debt, typically above around 8%.

00:03:40.440 | Now, why do I pick 8%? Well, that's roughly the long-term after-tax return of the stock market.

00:03:46.700 | You might decide that this number for you is 7% or 9%. You can tweak it as you see fit,

00:03:51.780 | and it may fluctuate a little bit with interest rates or your current situation.

00:03:55.560 | But if you're carrying credit card balances, have personal loans, medical loans,

00:03:59.800 | or some older student loans that are in really high interest rates,

00:04:03.000 | paying them off is like getting a market-level return, except you don't have the risk of the

00:04:08.260 | market. So instead of accumulating, let's say on average 8% in the stock market, you're actually

00:04:13.280 | going to not pay 8% interest. But in the stock market, that money might not make 8%. It might go

00:04:19.000 | down this year. This is guaranteed because you're paying that debt off, and you're stopping the

00:04:23.060 | interest payments immediately. Now, if you're juggling multiple debts that are at this amount,

00:04:27.340 | there are a few different ways to decide the order to pay them off. I care much less about which one

00:04:32.260 | and more that you pick one, stay with it, and then move on to the next one. I personally like what I

00:04:38.180 | think is called the avalanche method, which is you start with the highest interest first. It's going

00:04:42.480 | to reduce the amount of interest you pay the fastest. But there's an alternative method called the

00:04:47.080 | snowball method, where you start with the smallest balance first. I know that's more motivating for

00:04:51.500 | some people. But like I said, whatever works for you is great. But I'd much prefer to be paying off

00:04:56.720 | high interest debt than investing my money, because I'm going to get a better ROI with more certainty.

00:05:01.200 | Now that the urgent stuff is handled, it's time to build your safety net. I know this is often called

00:05:06.020 | an emergency fund. I've called it that in the past. But I think it's for a lot more things than just

00:05:10.120 | emergencies. So that's why I like to call it a safety net and think of it as a broader thing.

00:05:14.880 | No matter what you call it, it is usually an extra three to nine months of your monthly expenses.

00:05:19.840 | It could be more. And I want to put those somewhere that earns in today's interest rates at least four

00:05:25.600 | percent with very little risk. It could be high yield savings. It could be a brokerage account in

00:05:30.220 | treasuries, something similar, but somewhere where there's no risk and you're earning interest.

00:05:36.100 | Now, this is your cushion for any big life disruptions. Could be a layoff, could be a health

00:05:42.180 | crisis, could be a major home repair or car repair. I don't know what it is in your circumstance, but

00:05:48.020 | you want to make sure you have something to cover it. Now, how much you need depends on a few key

00:05:51.780 | things. First, do you have any dependents? If so, I like to increase my safety net. Job stability.

00:05:56.860 | Depending on how stable your income is or how volatile the industry you work in is, you might want to

00:06:01.980 | increase or decrease your safety net accordingly. I know some people that have jobs where they feel

00:06:07.120 | like they are certain forever. They have very little risk that they'd ever lose them. Maybe you're a

00:06:11.780 | tenured professor and so they feel a lot more comfortable. Other people might work at a startup

00:06:16.040 | or work in an industry that's getting quickly disrupted. In that case, I'd want a much bigger

00:06:20.680 | safety net. Similarly, when it comes to income replacement, you want to consider how hard it might

00:06:25.740 | be to replace your income. If you're in a highly specialized field or you're in a really senior or

00:06:30.880 | executive role, even though that industry might be working and it's not necessarily a volatile industry,

00:06:37.440 | it might take you a longer time to find a new job because you want to find the right place. You want

00:06:41.980 | to find the right fit. You might have to move. You might have to talk to lots of companies. You might

00:06:46.420 | have to wait for those roles to open up. And so I'd like to have more of a safety net in those

00:06:51.060 | circumstances. Next is how many sources of income you have in your household. If you're a single income

00:06:56.560 | household, I'd skew on the higher end of a safety net. If you have two or three or more sources of

00:07:01.840 | income for your house, your family, you could probably go a lot lower. And then last is your

00:07:06.400 | risk tolerance. That matters because if you sleep better at night knowing that you have a bigger safety

00:07:11.220 | net, that's a totally valid reason to increase it. So in summary, if you had no dependents, a very

00:07:16.440 | stable job that would be easy to replace, and in your household there's two or three different sources

00:07:21.180 | of income, and you have a lot of risk tolerance, maybe three months is fine. Maybe you don't need a big

00:07:25.700 | safety net. But if you have all those things, dependents, unstable job, volatile industry, hard to replace

00:07:32.840 | your income, and only one source of income in your household, and maybe you're risk averse, I would be

00:07:37.980 | skewing towards nine, 12, or maybe even more months of expenses as a safety net. And if you're the kind of

00:07:43.900 | person that would really like a formula to figure out the exact number, Brian Feraldi, one of my past guests,

00:07:49.160 | actually has a framework for this that has a series of questions to help you arrive at a number,

00:07:53.140 | I'll put a link to that in the show notes. For someone like us, we've got two kids, both of us

00:07:59.460 | are self-employed at the same company. I'm probably skewing a little bit more towards nine or 12 months

00:08:04.100 | with our safety net right now. And keep in mind, and if after hearing this, you realize you don't have

00:08:08.060 | the safety net you want, you don't necessarily need to get there overnight. Sure, if you already have

00:08:12.880 | these funds set aside, that would be great. But I wouldn't say go sell retirement accounts and pay

00:08:17.660 | penalties to do it. If you're actively saving, this can be a goal that you save for over time.

00:08:22.480 | And if you're thinking, wow, so you want me to do all of this before investing any of my money into

00:08:27.960 | my 401k or brokerage account. That is correct. I know that seems crazy to some, but my rationale here

00:08:33.140 | is that if you're going to need these funds in case you lose your job, you don't want to have to sell

00:08:37.720 | your investments or pay penalties to withdraw them to do it. Especially if the market's down when that

00:08:43.080 | happens, which unfortunately often happens around the same time as many companies do layoffs.

00:08:48.120 | So yes, I am saying that I like to set up this safety net before I'm in a situation where I'm

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00:10:12.440 | terms and conditions and find the link in the description. This episode is brought to you by

00:10:16.980 | Gelt. Now, when it comes to building wealth, taxes are such a big part of the strategy. And as tax time

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00:11:19.980 | Gelt. Or find the link in the description to stop overpaying on taxes. Okay, next up is a short-term

00:11:25.960 | goals fund. Now, this is different from your emergency fund because it's for expected expenses. But like

00:11:31.040 | your emergency fund, I keep it in the same type of liquid and low-risk investments. And I say investments,

00:11:37.340 | but more often than not, it's a high-yield savings account where it's in a brokerage account but stored

00:11:41.860 | in something like a treasury money market fund or actually buying treasuries or a treasury ETF or just

00:11:47.900 | something low-fee, easy liquidity, but still earning four or more percent right now in today's market.

00:11:54.520 | I'm recording this at the end of June. Who knows what happens in the future? Now, why did I say five

00:11:58.920 | years? You could invest this money in the stock market. That'd be totally fine. The long-term expected

00:12:03.320 | returns are going to be greater than you're going to get from a high-yield savings account.

00:12:06.500 | However, the market drops. That's just something that happens. And you don't want to be in a situation

00:12:11.680 | where you're saving up for a down payment. And the point in time you want to buy your home,

00:12:15.540 | the market's down 20% or 30%. And that's the time you need to take your money out.

00:12:19.560 | So I like to keep this money in a place that is separate from my long-term investing.

00:12:23.920 | That said, if my goals were 10, 20 years from now, you want a down payment someday,

00:12:28.520 | day, but it hasn't really entered in that next five-year window. Absolutely. I'd be investing

00:12:33.040 | that in a different way. But for short-term goals, this is what I'm doing. Also, you want to consider

00:12:38.340 | the cost of not having this cash, right? So let's say you're trying to make a down payment and you

00:12:42.600 | don't have this accessible. You might be paying PMI, which is a type of insurance that you have to pay

00:12:48.280 | if your down payment is too small, or you might have to borrow at really high interest rates.

00:12:53.440 | Sometimes the best way you can earn on your money is actually avoiding debt in the future,

00:12:57.940 | which is why I like to make sure I have all my short-term goals funded and saved in cash

00:13:03.120 | before they happen. Okay. After your goals are covered, I think it's time to do what I'll call

00:13:08.340 | a debt review. And the target right now for what I typically would think about paying off is in that

00:13:13.060 | six to 8% range. And it's a little tricky because the rates are a little borderline. They're higher

00:13:18.960 | than what you typically are on your cash, probably close to what you'd earn on investing, maybe a

00:13:23.520 | little less. And there's some other factors that might apply. So here's my rule of thumb.

00:13:26.740 | If the debt isn't tax deductible, right? So there are certain types of debt like mortgages or maybe

00:13:32.540 | investment interest, maybe even related to student loans, where you're actually going to get a tax

00:13:37.020 | savings for the interest you pay on that debt. So I think you should look at the interest rates on,

00:13:42.280 | I'll call it like a tax adjusted basis, right? If you have a 6% mortgage,

00:13:46.460 | mortgage, but that mortgage interest is tax deductible, and you live in a high tax state,

00:13:50.880 | and you make a lot of money, it might really be more like 3% or 4%. You have to do your own math

00:13:55.420 | related to your own tax brackets. But if you have a loan, and it's at, let's call it 7.5%,

00:14:00.740 | we'll call it a used car loan. I would lean towards paying that off at this point. Now,

00:14:05.760 | when you look at paying off this debt, and you compare it to some of the short term goals I talked

00:14:09.880 | about in the previous step, I think you could make a case depending on the timeframe of how soon they are,

00:14:15.940 | that it might make sense to pay off the debt first, you're obviously going to be earning

00:14:19.860 | more by paying off 7.5% debt than by putting money aside earning 4%. But depending on the type of loan

00:14:28.280 | that you have, it might be very difficult for you to be able to get that money again, if you need it.

00:14:33.480 | So for example, let's say you had a 7.5% student loan, and you're trying to make a down payment,

00:14:38.900 | and you want to set aside some money. Well, yes, you could pay that student loan off,

00:14:42.660 | and you'd effectively be getting a 7.5% return. Let's assume there's no deductibility on the interest.

00:14:48.340 | But now that you've paid it off, let's say you actually need that money for some other purpose,

00:14:52.140 | one of those short term goals. Well, you might not be able to borrow at 7.5% now.

00:14:56.300 | Maybe you have to go take out a personal loan, or maybe you have to put it on a credit card with a

00:14:59.700 | 20% interest rate. And so you want to weigh how soon that goal is and what alternative ways you

00:15:05.200 | have to fund it or delay it if you pay that debt off first. Now, just to be clear, I'm not anti-debt.

00:15:10.340 | I don't think you should pay off all debt, but I am anti-debt when the math doesn't work out over

00:15:15.100 | other types of investments. Okay, now let's talk about investing. We've got the high interest debt

00:15:19.680 | covered, we've got our safety net and short-term goals funded, and it's time to start building real

00:15:24.440 | long-term wealth. And the thing I like to start with here is tax-advantaged investing.

00:15:29.680 | Now, many of these things will be very dependent on your employer and what types of accounts you

00:15:34.100 | have access to, your current income tax bracket, and even your health insurance plan in the case

00:15:39.380 | of an HSA. So I can't give a one-size-fits-all answer. However, when I think about tax-advantaged

00:15:45.240 | accounts, I'm thinking mostly about IRAs, 401Ks, 403Bs, but my favorite is probably the Roth IRA and

00:15:53.020 | the HSA. And that's because they offer a ton of flexibility, really low fees, because you can house them,

00:15:59.660 | usually at a brokerage account of your choosing, and some of the best investment options. And on

00:16:04.000 | the HSA side, you've got the triple tax deduction of being able to put money in tax-free, being able to

00:16:08.880 | put it in tax-free, being able to take it out tax-free, and being able to have it grow tax-free.

00:16:13.680 | So it's an amazing account. And on the Roth IRA side, I know many people don't think that they

00:16:17.820 | might be eligible because of their income or their workplace retirement plans. I'd encourage you to go

00:16:22.980 | look into a backdoor Roth IRA contribution, which is something that is kind of a workaround that the

00:16:28.440 | IRS has finally signed off on, if you will. And it's something I do every year. And so take a look at

00:16:33.400 | that as a way to be able to contribute to a Roth IRA, even if you're not directly eligible. After the

00:16:38.580 | Roth IRA and the HSA, I'm looking at 401ks, 403bs, solo 401ks, maybe a SEP IRA, anything that you have

00:16:47.080 | access to with low fees, good investment options is a really great place to start saving in a tax

00:16:54.520 | advantaged way. If you don't have good investment options, or you have a 401k at work with really high

00:17:00.300 | fees, I'd probably make the argument that the tax savings aren't worth it. And after you've used an

00:17:05.820 | employer match, if you have one, it might be better to just put your money in a taxable brokerage account

00:17:10.080 | where you have a lot more control. And if you're a high earner, and you're saving a lot of money each

00:17:14.200 | year, definitely look at your 401k plan if you have one, and see if you have the ability to make after

00:17:19.880 | tax contributions and roll them out into a Roth IRA. It's called a mega backdoor Roth contribution,

00:17:25.620 | and actually has a limit each year of up to $70,000. So you could put a lot more money than you might be

00:17:31.460 | thinking into your tax advantaged retirement accounts. If you want to go really deep on tax

00:17:37.400 | advantaged accounts, this is not it. I did a really deep dive episode number 144. Go check that out.

00:17:43.900 | The reason I give the numbers is because you can either scroll through till you find the number or

00:17:47.800 | just go to allthehacks.com slash 144. And it'll redirect you to the page, which has links to the

00:17:53.680 | episode in different podcast players, and it should jump right to that episode.

00:17:58.720 | Now, the obvious downside of putting your money in these tax advantaged accounts is that you're kind

00:18:03.880 | of locking your money up until retirement. And to take it out early often comes with taxes and fees

00:18:09.600 | or penalties. But the tax advantage really can add up over decades. So it's important to make sure that

00:18:15.900 | you do have your money set aside for short term goals before putting your money here, because you

00:18:20.940 | don't want to have to pay those penalties and fees for a wedding down payment or any other major expenses,

00:18:25.640 | because it will completely negate all the tax advantage of putting money in. That said, even if

00:18:30.700 | you knew you were going to have to take all your retirement money out, and your employer was offering

00:18:34.420 | a match, I would still take advantage of that match, putting no regard to whether you're going to leave

00:18:38.460 | that money in forever, because it's still going to make up for any fees you'll pay taking the money

00:18:42.460 | out. All right, the next step is brokerage investing. And that's where most people are going to spend the

00:18:47.500 | longest amount of time in this framework. Once your tax advantaged accounts are full,

00:18:52.480 | your emergency fund solid, all your debts behind you, that your taxable brokerage accounts are going

00:18:57.180 | to be the default destination for every new dollar you save and invest. They're incredibly

00:19:01.240 | flexible. There's no contribution limits. You're not forced to pick a specific brokerage with specific

00:19:06.620 | investment options or fees. There's no penalties to withdraw it. You get long term capital gains if you

00:19:12.580 | hold your money long enough. And the right investments, there's no early withdrawal penalties,

00:19:17.660 | income phase outs, or really anything. You can use the money for anything also. You can use it for early

00:19:21.960 | retirement, travel, sabbatical, whatever you want. Although I would say if those things are in the next

00:19:27.420 | five years, it's probably not the best idea to invest them given that the market can go down. As for how to

00:19:32.080 | invest the money in your taxable brokerage account, I don't think it has to be fancy. You can build really

00:19:37.200 | serious wealth by just investing passively in low cost index funds or ETFs. I'm not trying to beat the

00:19:43.560 | market. I'm not trying to time the market. The majority of my money is in index funds just trying

00:19:49.360 | to match the market performance. I do personally like to be diversified across sectors and geographies.

00:19:55.340 | So some of those are international. Some of those are US based. The majority is US based because that's

00:20:01.380 | where I live. But I do have a bit of diversification in a couple different index funds. I also like to align

00:20:06.900 | the portfolio I have and I would recommend everyone think about their own level of risk tolerance and how much

00:20:11.700 | they're willing to stomach a drop if the market changes because that's an important thing that

00:20:16.660 | if you haven't experienced it before, it can be a little bit tough to experience. And then I would

00:20:21.680 | just really avoid over trading unnecessary complexity. I don't like to spend a lot of time in my brokerage

00:20:27.320 | account thinking about it at all. In fact, most of mine is automated and it's not something I check on

00:20:32.840 | a daily basis. I actually went really deep on everything when it comes to building a portfolio

00:20:37.420 | with my old co-founder from the financial planning firm I ran. It's in episode 168. But

00:20:42.260 | beyond that, taxable brokerage accounts are really powerful for long-term investing when it comes to

00:20:47.280 | tax efficiency. So a few reasons. One, you get access to long-term capital gains rate, right? The tax rate

00:20:53.380 | you pay at the federal level on long-term investments that are held for more than a year where you have

00:20:58.480 | gains is lower than the income tax rate for a similar level of income. So you're getting preferable tax

00:21:04.820 | treatment on long-term investments, which is fantastic. And you can take advantage of tax

00:21:09.820 | loss harvesting. Meaning if you have an investment that is down below the price you paid, you can sell

00:21:15.600 | that investment and capture those losses and use them to offset other gains, whether it's long or

00:21:21.180 | short-term gains, or you can offset up to $3,000 of income a year. Now, when you do that, when you sell

00:21:26.920 | that asset, you're not still holding it. So if your intent is to keep that investment, then you can rebuy that

00:21:33.640 | investment. However, either you need to wait 30 days to avoid what the IRS calls a wash sale, where you

00:21:39.660 | actually aren't able to capture those losses, or you can buy something very similar. So if you're

00:21:44.580 | holding an S&P 500 fund, you could maybe buy a U.S. total stock market fund, and that would not be the

00:21:51.200 | exact same investment. So you could sell the S&P 500 fund when it's down, buy the total stock market fund at

00:21:57.640 | that same level. And then as the market rises, you would have a lower cost basis, meaning someday in

00:22:04.080 | the future when you sell, you will likely owe more taxes. Though if those investments do happen to end

00:22:09.980 | up being donated to charity, which I'll talk to about in a second, or if those investments are passed down

00:22:15.060 | to your children, there might be a step up and they won't actually have taxes due. But in general, if you

00:22:20.160 | were to sell them and use those proceeds yourself, you would have taxes owed, but they would come at that

00:22:24.800 | long-term capital gains rate. So if you're able to use those captured tax losses now to offset your

00:22:30.680 | tax today, especially if it's your actual short-term cap gains or income tax rates, it can be pretty

00:22:37.380 | advantageous. It's a lot to think about. And so I personally like to use an investment platform that

00:22:42.300 | does this for me. Full disclosure, I worked at Wealthfront. I'm a shareholder of Wealthfront.

00:22:46.560 | I use Wealthfront. I do pay fees at Wealthfront because I'm no longer an employee. And so I use them to

00:22:51.760 | automate all my investing, tax loss harvesting, rebalancing. I think that the benefit of tax

00:22:56.840 | loss harvesting far outweighs the 0.25% fee I pay to have it managed. So there are other solutions.

00:23:03.900 | If you're not interested, you can do tax loss harvesting yourself. It can just be a little bit

00:23:08.180 | more complicated and you want to keep track of things in a better way than if you outsource it

00:23:12.640 | to software that is doing all that for you. You can also donate appreciated assets to charity.

00:23:18.520 | So I like to say, if you're donating any amount of money ever, any year to charity, I would encourage

00:23:24.560 | you to, instead of donating cash, donate any appreciated securities and ideally the most

00:23:30.500 | appreciated securities, the ones that have the highest baked in gains. Because when you donate

00:23:34.820 | those securities to charity, the charity gets the full amount of the donation, but you don't have to pay

00:23:40.400 | any income taxes for selling those securities or capital gains taxes or any taxes, but you get the

00:23:45.420 | full tax deduction as if you gave the total amount, which you did. And then you could take whatever

00:23:49.820 | money you were otherwise going to use to donate to charity. And then you could just rebuy that same

00:23:53.940 | investment. The watch sale rule doesn't apply here because you didn't actually sell the security,

00:23:58.640 | you donated it. So anytime anyone's donated to charity, I like to say, always donate your securities,

00:24:05.020 | the most appreciated ones. However, I will make one exception, which is if you do what I do and what a lot of

00:24:11.520 | other people do is set up a donor advised fund, then you can separate these decisions and make it a little

00:24:17.260 | simpler. Because if you wanted to make $100 donation to a charity, having to coordinate transferring

00:24:22.080 | stocks to their accounts, it's too much work. But if you set up a donor advised fund, what you can do is

00:24:27.400 | you can donate all those securities to one fund that you manage. And you can get the tax deduction when

00:24:32.600 | you donate the securities or cash or crypto to that fund. And then later, could be a day later,

00:24:38.640 | it could be a month, a year, a decade, you can donate that money at different amounts to any

00:24:43.580 | charity you want. And that charity will get the full contribution, but they usually get that in

00:24:48.220 | the form of a check. So they don't have to deal with managing those securities like you did when

00:24:52.680 | you transfer them into your donor advised fund. Now, another full disclosure, I've used Daffy long

00:24:59.120 | before they became a partner of the show, but they are a sponsor and a partner of the show. So I just want

00:25:03.020 | to give that disclosure out there. They're who I use for my donor advised fund. If you want to check

00:25:07.240 | them out all the hacks.com slash Daffy D A F F Y. And I think right now you'll still get a $25

00:25:12.920 | contribution to your fund and the charity of your choice when you sign up as a new user. So I think

00:25:18.100 | that's a great option to automate all of your charitable giving. If you want to really focus on

00:25:22.920 | optimizing for the most tax advantaged way to do it. If you want a few more strategies for tax optimized

00:25:27.860 | investing, I'll give you a couple things to go do a little bit of research on one is called direct

00:25:31.900 | indexing, which instead of buying, let's say the S&P 500 as an index fund, you could buy all 500 stocks

00:25:39.580 | in the S&P 500. Now that a lot of brokerages offer fractional shares, that makes it a little easier to

00:25:45.360 | do. But I would absolutely not try to do this yourself. I would find some brokerage firm that

00:25:51.420 | supports direct indexing to manage it for you. And understand that if you were to ever leave that

00:25:57.260 | brokerage firm, you know, you would be stuck with 500 individual stocks, if you were trying to match

00:26:01.740 | the S&P 500. The advantage of doing this is you can tax loss harvest at the security level instead of

00:26:08.280 | the fund level. So on any given day, it's not that likely that the S&P 500 is down, because typically it

00:26:14.900 | goes up over time. But any individual security, I would go out and say that almost any day, one of the

00:26:20.540 | shares of the S&P 500, one of the securities there has gone down. And so it gives you the advantage of

00:26:25.360 | more tax loss harvesting opportunities. Another thing you can look at is asset location, which

00:26:30.980 | would be to take really tax efficient investments and put them in your taxable brokerage account,

00:26:34.960 | put really tax inefficient investments in your tax advantage retirement accounts, and view your

00:26:40.160 | portfolio across all of your different accounts. I find that this is really hard to manage and there

00:26:45.120 | aren't any automated solutions I'm aware of to do it. So I found that the juice isn't worth the squeeze.

00:26:50.580 | So to summarize, brokerage investing gives you both growth and flexibility. You're not constrained by

00:26:57.280 | any limits or penalties. And over time, I think it's going to be the biggest part of your financial

00:27:01.340 | life. And it's something you can keep adding to constantly as your income grows. In many ways,

00:27:05.540 | your taxable brokerage account kind of becomes your future freedom fund. It quietly compounds in the

00:27:10.920 | background, you continue contributing to it, and it will give you options in the future that you might not

00:27:15.400 | even know you need right now. Next, before we get to the final step, I want to talk about education

00:27:20.040 | investing and specifically where I think 529 plans fit into this framework to save for the cost of

00:27:25.680 | college for your children or maybe yourself. Here's my general philosophy. You shouldn't put your child's

00:27:31.740 | education ahead of your own financial future. You can borrow for college, often at reasonable rates,

00:27:37.680 | but you can't easily borrow for your own retirement. So that's why I put education investing

00:27:42.160 | after your own investing in a taxable brokerage account. Now, 529s do offer tax-free growth for

00:27:49.520 | qualified education expenses, and they can be a really great tool if you know you are going to

00:27:54.200 | save to pay for college. However, I like to think about those as secondary to saving for myself, but

00:27:59.880 | there are a few exceptions. If you are in a high-income household and you're already on track to fund your

00:28:04.680 | future and you know you're going to get there, you could absolutely make the case to move some of

00:28:09.000 | your 529 contributions up earlier in this framework. Or if you live in a state that offers really generous

00:28:15.080 | state income tax deductions or credits for 529s, which California sadly doesn't, then it could make

00:28:20.500 | sense to prioritize this a little earlier as well. Finally, we come to our last step, number 10, which

00:28:25.080 | is to look at your optional debt. These are things that are below 6%. Like for us, we have a 30-year

00:28:30.540 | mortgage we got in 2020. We probably won't ever make another payment here other than what's required.

00:28:35.680 | But for some people, these decisions aren't necessarily about optimizing their returns and

00:28:40.480 | it's more about a psychological win. If the thought of being debt-free really gives you the peace of

00:28:44.660 | mind you need to sleep well, the flexibility you need for your life, go for it. If you'd rather invest

00:28:50.340 | that money because the returns are better, that is fine too. You've earned the right to choose based

00:28:54.900 | on what matters to you, not just what's optimal on paper. And I know some really smart people who have

00:29:00.620 | the means and are aware of the financial trade-offs and still choose to pay down their debt, pay down

00:29:06.020 | their mortgage, even if the interest rates are low because it makes them sleep better at night.

00:29:10.340 | Okay, so that wraps up the core framework. Those are the 10 steps I use to decide exactly where every

00:29:15.400 | new dollar I save goes. And before I talk about a couple advanced strategies, hopefully you can see

00:29:20.400 | how this sequence will build from stability to flexibility and finally to long-term growth.

00:29:26.280 | You don't need to follow it perfectly, but I think it's really helpful to have some kind of structure

00:29:30.460 | to help cut through the noise and eliminate some decision fatigue, especially when you've got

00:29:35.380 | competing priorities like saving, investing, debt, and really big life goals. So feel free to adapt it

00:29:41.440 | to your own and turn it into whatever you need to make your life a little bit more simple. But I also

00:29:46.500 | want to talk about two different perspectives or kind of advanced strategies that might be worth

00:29:50.200 | considering that I did include above. So the first is an increased focus on liquidity. Now, I feel like we are

00:29:57.400 | always being told to max out our retirement accounts. But what if you need that money before retirement and it

00:30:03.040 | wasn't something you planned three to five years in advance like I talked about? Could be wanting to take a

00:30:07.880 | sabbatical, start a business, buy a home, retire early. Locking everything into their retirement accounts

00:30:14.580 | could backfire on you because you've got to pay penalties and fees, right? The case for prioritizing

00:30:20.740 | liquidity, meaning putting money in your taxable brokerage account before your retirement accounts

00:30:25.700 | would avoid those 10% penalties, ordinary income tax on those retirement contributions. Now, one argument

00:30:32.720 | I often get is, well, you can take a loan from your 401k and that's true. While the interest payments do

00:30:37.720 | accrue to you, the money is no longer invested. And if you lose your job, a lot of time those loans

00:30:42.320 | need to get paid back pretty quickly. Taxable brokerage accounts, on the other hand, you can

00:30:45.960 | access any time, long-term capital gains tax rates, tax loss harvesting, step-up basis if you end up

00:30:52.040 | leaving that money to heirs. And so yes, you may miss out on some tax savings if you focus first on your

00:30:58.300 | taxable brokerage account investing, but you gain a lot of flexibility. And sometimes that's worth more

00:31:04.580 | than the returns or tax efficiency you get for your retirement accounts. So one way you might approach this

00:31:09.800 | is to say, I think I want a little bit more flexibility. Let's just equally invest. You could

00:31:14.940 | say, let's prioritize half of our savings goes to brokerage investing, half goes to tax-advantaged

00:31:21.140 | accounts in our retirement accounts. You can choose how you want to do this, but I just want to flag that

00:31:25.680 | there is a benefit to liquidity. For every person, it's really hard to quantify. And so sometimes you

00:31:31.940 | might think, oh, it's easier to just put it all in my pre-tax account. That's more efficient in the long run.

00:31:36.000 | But if you ever do need access to the money, and I would say the most recurring theme I hear from

00:31:40.600 | people that think about money and have been around for a while is you never know you need the money

00:31:45.240 | until you need the money. And so making sure you have enough money to cover whatever goals you have

00:31:50.520 | in the next three to five years, that short-term savings fund, that's important, but sometimes it's

00:31:54.920 | unexpected. And so prioritizing a little bit more brokerage investing if you have the ability before

00:32:00.340 | your retirement accounts can totally make sense if you want a little bit more liquidity.

00:32:03.780 | This episode is brought to you by Copilot. If you're looking to get your finances organized this year,

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00:33:09.180 | that's chrishutchins.com slash copilot and the code HACKS2 for a free two-month trial of my favorite

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00:34:24.160 | and get hydrated. Another contrarian take I often have here is that if you have a strong credit score

00:34:30.500 | or a large investment portfolio, you might be able to reduce the amount of cash savings you have.

00:34:36.280 | And that could be cash savings for a safety net or that could be cash savings for short-term goals.

00:34:41.520 | And this is especially true during low interest rate environments where putting money in cash doesn't

00:34:47.600 | earn the four or more percent it does right now. I remember a handful of years ago when your savings

00:34:52.500 | account was earning one percent or less, it felt really painful for me to keep money in cash knowing

00:34:58.640 | it was earning so little. Also knowing that because interest rates were little, borrowing money was

00:35:04.260 | actually a lot more accessible in terms of the interest rate you would pay to do it. So here are

00:35:08.580 | a few strategies to potentially pair with keeping less cash for your safety net or your short-term goals.

00:35:15.300 | So one is zero percent APR credit cards. Some credit cards offer 12 to 18 months of no interest

00:35:21.660 | on purchases, sometimes on balance transfers. Usually you're going to make a minimum payment,

00:35:25.900 | but you're not going to have to make the full payment. And so this could be a great backup

00:35:29.440 | emergency buffer for circumstances where you all of a sudden need some cash and you don't want to have

00:35:36.200 | to sell your investment accounts. You could take advantage of zero percent APR credit cards. Now,

00:35:41.380 | there's no guarantee that they will be around when you need them. There's no guarantee you will get

00:35:45.420 | approved for them. And so obviously these strategies are advanced because they come with some risk,

00:35:50.020 | but it is something that I know people have been able to take advantage of in those circumstances

00:35:54.360 | where they wanted to avoid selling from their taxable brokerage account. The next one could

00:35:58.720 | be a home equity line of credit or a HELOC. And so for homeowners, if you have equity in your home

00:36:03.540 | beyond your down payment amount, usually, you can access that equity by borrowing against your home

00:36:09.220 | with a HELOC. Now, typically the rates here are lower than a lot of personal loans or credit cards.

00:36:15.040 | So that can make it advantageous. Also in a low interest rate environment, the HELOC rates are also low.

00:36:20.740 | So if you have home equity and you need access to funds, you can effectively borrow from the bank

00:36:26.300 | with your home as collateral. And that allows you to have access to low cost borrowing that in certain

00:36:32.860 | interest rate environments might be really compelling as an alternative to keeping money in cash.

00:36:37.700 | So you could take that money that you would have kept in cash and put it in the stock market.

00:36:41.040 | Similarly, you could do what's called a PLOC, which is a portfolio line of credit, or I think

00:36:47.100 | there's some other version of it that's a security line of credit or a security backed loan.

00:36:51.460 | And that lets you borrow against your taxable investments without having to sell them.

00:36:55.660 | So obviously the pros here are, you can access your taxable investments without triggering capital gains.

00:37:01.360 | Depending on the platform, you can get them in as little as a day, maybe even same day sometimes.

00:37:06.820 | And they're pretty flexible on how long you need to repay them.

00:37:10.260 | But they do come with some risks and cons.

00:37:12.820 | So one, the rates on those loans are typically variable.

00:37:16.040 | And so in a low interest rate environment, they can be really compelling.

00:37:18.980 | So much so that you might think, well, this makes a lot more sense than keeping money in cash,

00:37:23.680 | earning nothing.

00:37:24.340 | But the biggest challenge here is that if your portfolio drops in value,

00:37:28.960 | you may face what's called a margin call.

00:37:30.920 | Now, I'm not going to do a deep dive here on the nuance of how this would happen and what happens.

00:37:35.940 | But the high level here is your brokerage firm is going to be able to loan you money

00:37:38.980 | as a percentage of your balance of the eligible securities.

00:37:42.640 | So let's say you had $100,000, they might be willing to loan you half of that.

00:37:47.200 | So $50,000.

00:37:48.120 | But if your portfolio drops from $100,000 because the market crashes to $80,000,

00:37:53.000 | they might only be willing to loan you $40,000.

00:37:56.140 | And you might need to make a margin call or a deposit to close that gap.

00:38:00.860 | So this is not for people who are really risk averse.

00:38:05.740 | Unless you do what I've done in the past, which is just keep that amount small.

00:38:10.480 | So the amount that might trigger a margin call might be 60% or 70% of the loan to the portfolio value.

00:38:18.460 | So if you were to borrow only 10% of your portfolio,

00:38:22.040 | the risk that your portfolio drops so much that 10% you borrowed now becomes 70%

00:38:28.780 | is really a catastrophic situation where the market's crashed by more than 50%.

00:38:34.220 | And so some programs, I know at Wealthfront,

00:38:36.880 | we did this where you couldn't borrow more than 30% of your portfolio.

00:38:40.420 | And the primary reason is that we really didn't want to let people get into a situation

00:38:44.080 | where they were having to make these margin calls.

00:38:46.040 | So if you manage this appropriately and you borrow a smaller percentage of your portfolio

00:38:51.480 | such that even a 50% crash in the market is not going to require you to make immediate payments.

00:38:57.160 | Because by the way, in that 50% crash scenario is probably the last time

00:39:01.400 | you want to be able to make payments because maybe you lost your job.

00:39:04.240 | Maybe there's all kinds of stuff happening.

00:39:06.000 | And so if you can manage it appropriately,

00:39:08.380 | I think it could be a really interesting alternative to keeping money in cash.

00:39:12.500 | So let's say you decide your safety net should be $100,000 and you have a million dollars in your taxable brokerage account.

00:39:18.700 | Well, in the worst case that you need to borrow that $100,000,

00:39:21.900 | you're going to be able to borrow it and it's only going to be 10% of your portfolio.

00:39:25.940 | So I feel like that is a very low risk circumstance.

00:39:29.160 | Whereas if you only had $100,000 in your taxable brokerage account and you needed to borrow $80,000 or $100,000 for a safety net,

00:39:36.520 | it would not be a scenario I'd want to rely on.

00:39:38.860 | And this might also vary depending on the interest rates.

00:39:41.660 | Right now with high interest rates, both to borrow and to earn on cash,

00:39:45.080 | you might just be willing to keep your money in cash to make things simpler.

00:39:48.440 | But if things change, it might make sense to invest that money and rely on being able to borrow from your portfolio.

00:39:53.700 | So that setup would let you keep your money working in the markets, but give you access to liquidity when you need it.

00:40:00.240 | But obviously it comes with some risks.

00:40:02.160 | So please go do some research before you take advantage of it.

00:40:05.180 | So that's the full picture from the foundational steps to some more advanced moves that I've been thinking about and using for years.

00:40:11.060 | So whether you're just starting out or you're fine tuning a little bit more of a complex financial life,

00:40:16.260 | I really hope this helps you feel more confident about what you do with your money.

00:40:19.460 | And now that we've gone through it, I want to switch gears and answer a few questions I got from listeners

00:40:24.020 | because hearing how this applies in real life is where sometimes it really starts to click.

00:40:27.920 | So first question is from Matthew, just moved to a new state for a new job and is selling his house

00:40:33.420 | and is going to bank a few hundred thousand dollars.

00:40:35.560 | And they decided they're going to rent for a year while they figure out the market

00:40:38.740 | and wants to know what to do with that money that's come in.

00:40:41.640 | And he said, do I pay off debt?

00:40:43.540 | I've got some student loans.

00:40:44.880 | I have a car loan at 5.24%.

00:40:47.760 | Do I put it in high yield savings?

00:40:49.620 | Right now, he said he has emergency funds of about $10,000 for three kids

00:40:54.560 | and wants to know what he should start doing.

00:40:57.340 | And so first off, congrats on the new job.

00:40:59.640 | You're in a great position.

00:41:00.720 | You're debt conscious.

00:41:02.080 | And you've got this windfall coming, which is awesome.

00:41:04.400 | As for what to do with this windfall, obviously, you could just follow the steps I mentioned.

00:41:09.080 | But I'm going to walk through my thoughts.

00:41:10.420 | So you said you've got about a $10,000 emergency fund right now.

00:41:13.740 | With three kids and a new job, I personally would want a bit more of a safety net.

00:41:19.100 | I don't know how much you spend each month.

00:41:21.180 | But I'm guessing $10,000 isn't going to cover three to six months of monthly expenses.

00:41:26.040 | So that would be the first place I prioritize with the money from selling your house.

00:41:30.140 | Obviously, before that, I would prioritize setting aside any money you're going to owe for taxes.

00:41:34.920 | But assuming that you lived in the house for long enough,

00:41:38.440 | that first $250,000 if you're not married, $500,000 if you're married,

00:41:43.220 | should be tax-free on gains from a primary resident.

00:41:46.300 | So hopefully, you don't have any taxes to set aside money for.

00:41:49.320 | But anytime anyone is thinking about a windfall,

00:41:51.380 | I would make sure that if you're going to owe taxes on that windfall, you set that aside first.

00:41:54.980 | Next, I'd go through that debt review process.

00:41:58.080 | You mentioned you have $50,000 of student loans.

00:42:00.560 | But you said right now, 40,000 of them are on hold without any interest owed.

00:42:04.960 | And so I don't know the percent on that other $10,000.

00:42:08.080 | And you mentioned a car loan at 5.24%.

00:42:11.200 | So the loans you don't owe interest on, I wouldn't pay them off.

00:42:14.600 | That doesn't make any sense.

00:42:15.760 | The car loan at 5.24%, that's pretty close to the break-even point, right?

00:42:19.920 | It's going to probably not be as much as you earn on cash.

00:42:22.240 | But it'd be pretty hard to borrow at 5.24% right now.

00:42:25.940 | You're probably going to do better in the market in the long run based on historical averages.

00:42:30.360 | So if it feels like a mental burden, you could pay it off.

00:42:33.280 | I probably wouldn't personally pay it off right now.

00:42:35.720 | After debt, I'd be thinking about your short-term goals.

00:42:38.120 | And you mentioned you're going to rent for a year.

00:42:39.920 | If you're thinking of buying a home after that,

00:42:41.840 | I'd want to set aside money in cash, something safe and liquid for that down payment.

00:42:46.800 | And if that down payment is going to take the full amount of money you're having,

00:42:51.320 | then that's what I would do.

00:42:52.080 | That's where I would stop.

00:42:52.860 | But if that amount of money you're getting from your home sale is actually way more than

00:42:56.300 | you'd need for a down payment than any excess,

00:42:58.580 | I would probably put in either a tax-advantaged or taxable brokerage account,

00:43:02.220 | depending on how you want to think about liquidity

00:43:03.860 | and what types of retirement accounts you have access to.

00:43:07.040 | And as I'm saying that, I realized I didn't mention the employer match.

00:43:09.980 | Obviously, if your employer has a match, I would do that first.

00:43:12.500 | I would max that out and then come back to everything I just said.

00:43:15.100 | And if you aren't thinking of a down payment,

00:43:17.000 | because you're not thinking of buying a home and you decide you want to rent forever

00:43:19.620 | and you have no short-term goals, then great.

00:43:22.680 | I would invest all the money once you've maxed out your safety net.

00:43:25.680 | And so that's what I would be thinking about.

00:43:26.980 | So hopefully that's helpful.

00:43:28.360 | You don't have to make every decision now.

00:43:30.120 | You can let the money sit and think about it,

00:43:32.440 | but let it sit somewhere where it's earning interest

00:43:34.360 | and try not to let it look at you and convince you to spend it

00:43:37.500 | and turn into lifestyle inflation.

00:43:38.940 | I'd encourage you to be intentional with every dollar

00:43:41.720 | and you'll keep winning like it seems like you have.

00:43:43.880 | Next is a question from Chris.

00:43:45.120 | He says he's currently using SoFi as a brokerage account

00:43:47.900 | and they offer 1% back with all of his investment contributions.

00:43:51.060 | And then he's converting that 1% into cash and reinvesting it.

00:43:53.940 | And he mentioned that I've talked about tax loss harvesting.

00:43:56.700 | I've talked about Wealthfront.

00:43:57.780 | Curious if that's better than the 1% cash back

00:44:00.860 | he's getting on all his investments.

00:44:02.720 | And also curious if he should be donating securities

00:44:05.980 | with the highest capital gains to a donor-advised fund like Daffy

00:44:09.000 | to try and further optimize.

00:44:11.360 | And so first off, I love that you're already thinking about automation.

00:44:14.320 | This is great.

00:44:14.940 | Now, if you compare these, SoFi right now,

00:44:17.520 | according to what he said,

00:44:18.700 | is giving him a 1% guaranteed return on every contribution.

00:44:22.040 | It's clean.

00:44:22.820 | It's simple.

00:44:23.400 | It's pretty rare.

00:44:24.300 | And then Wealthfront's got tax loss harvesting,

00:44:27.240 | which research often shows over time can add half to 1% in after-tax return.

00:44:33.180 | So if you're just comparing apples to apples right there,

00:44:35.760 | I'd take the 1% on every contribution every day.

00:44:38.800 | Now, I don't know how long you have to leave that money in there,

00:44:41.860 | but if you had, let's say, $50,000 saved

00:44:45.580 | and you're only adding $100 a month,

00:44:47.320 | you're only getting that 1% on the contribution

00:44:49.660 | versus on the tax loss harvesting side,

00:44:52.540 | whatever amount you prescribe,

00:44:54.180 | whether that's half a percent or 1%,

00:44:56.100 | is going to apply to the whole portfolio value.

00:44:58.080 | That said, over time, as the market increases in value,

00:45:02.640 | the real opportunities for tax loss harvesting

00:45:05.340 | are going to be the new contributions that have lower cost bases.

00:45:08.340 | So in theory, I think the tax loss harvesting could outperform SoFi.

00:45:13.320 | But right now, if the bulk of your investments

00:45:16.300 | are coming from regular contributions

00:45:18.200 | and you're not sitting on a really large pool of investments,

00:45:20.820 | I would keep doing that.

00:45:21.780 | If SoFi gets rid of that,

00:45:23.340 | then I could make an argument that tax loss harvesting

00:45:25.840 | could outperform not tax loss harvesting,

00:45:28.240 | but you could also do that on your own in your brokerage account.

00:45:31.080 | You don't have to automate it

00:45:32.400 | and you don't have to necessarily do it on a daily basis

00:45:35.140 | or even weekly basis.

00:45:36.220 | I think that in the last few years,

00:45:39.140 | 90% of the benefit of tax loss harvesting for me

00:45:42.360 | happened right after the pandemic.

00:45:43.960 | But you do have to have the ability

00:45:46.780 | and the mental capacity to act when things are down,

00:45:50.840 | which can be super stressful,

00:45:51.920 | which is why I like to automate it.

00:45:53.540 | On to the question about appreciated assets.

00:45:55.120 | Absolutely.

00:45:55.780 | If you're donating to charity,

00:45:57.060 | donate appreciated assets.

00:45:58.620 | If you don't want to donate the appreciated assets

00:46:00.960 | directly to charity,

00:46:01.840 | donate it to a donor advised fund.

00:46:03.420 | The only exception I'll say here is

00:46:04.920 | in his question, Chris mentioned,

00:46:06.120 | should I move to Wealthfront and do that?

00:46:07.700 | And I will say no,

00:46:09.400 | because Wealthfront,

00:46:10.540 | at least as of the last time I asked,

00:46:12.440 | does not let you partially transfer out securities.

00:46:15.320 | You have to transfer the entire account.

00:46:17.200 | So if you had an account with $100,000 of securities

00:46:19.300 | and you wanted to donate $1,000 to a charity

00:46:22.840 | in the form of one of those securities,

00:46:24.840 | you would actually have to transfer

00:46:26.680 | all your brokerage account to another brokerage account,

00:46:29.300 | transfer the securities that you want to a charity

00:46:32.260 | or to your donor advised fund,

00:46:33.420 | and then move all of those securities back to Wealthfront.

00:46:36.480 | So I would say if your goal is to regularly donate appreciated assets

00:46:40.180 | from your brokerage account,

00:46:41.120 | Wealthfront is not a great option.

00:46:42.800 | However, if you're managing individual stock positions,

00:46:45.940 | maybe at one brokerage account,

00:46:47.560 | and you're managing your diversified,

00:46:49.560 | low-cost index funds at Wealthfront,

00:46:51.140 | then you could use that other brokerage account

00:46:53.660 | as the place you make a lot of your contributions

00:46:55.780 | to your donor advised fund.

00:46:56.820 | That's what I do.

00:46:57.640 | My brokerage account for my individual stocks is separate.

00:47:00.420 | And then my brokerage account at Wealthfront

00:47:02.060 | is long-term investing where I'm not making contributions

00:47:06.180 | from that account to my donor advised fund.

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00:48:21.040 | All right, two more.

00:48:22.320 | Next one's a great question.

00:48:23.560 | I'm 38.

00:48:24.060 | I have a wife and a couple young kids, seven and four.

00:48:26.760 | And my portfolio has been long time managed by my father's friend,

00:48:30.820 | who's a financial advisor at Morgan Stanley.

00:48:32.720 | And a few years back, we learned we're paying 1.25% in fees,

00:48:36.560 | which we negotiated down to 0.75.

00:48:39.240 | But when I'm looking at the returns and the investment options,

00:48:42.320 | my net returns are not great.

00:48:44.280 | However, I'm in a lot of individual stocks.

00:48:47.620 | And I know that if I transition to the portfolio I want,

00:48:50.620 | I'm going to be paying a lot of taxes

00:48:52.380 | because I'm going to have to sell all those stocks and buy index funds.

00:48:56.680 | This is a loaded question and I really appreciate you sending it in.

00:49:00.040 | It's a lot more common than you think that people have just inherited

00:49:02.840 | their parents' financial advisor and haven't really thought about it for too long.

00:49:06.080 | So high fee management can really eat away at your portfolio.

00:49:09.480 | A 0.75% fee over 15 years is a really big deal,

00:49:13.660 | especially if the funds that you're being invested in

00:49:16.880 | are also high fee themselves or not exactly what you want.

00:49:20.860 | In this person's case, they said they're an individual stock.

00:49:23.180 | So there's probably not a lot of fees there.

00:49:24.920 | But another thing I often see is that you've got high management fees

00:49:29.000 | plus proprietary funds with their own high fees.

00:49:32.000 | And that can really eat at the value of the portfolio.

00:49:34.040 | So the good news is you don't have to sell everything all at once.

00:49:38.180 | So if this were me,

00:49:39.460 | I would pretty quickly move all of those investments

00:49:42.200 | into a brokerage account that is self-directed

00:49:44.420 | and not managed by a financial advisor.

00:49:45.980 | And that'll eliminate the 0.75% fee.

00:49:49.060 | And then I would over time

00:49:51.160 | start to transition out this portfolio.

00:49:53.460 | You could start to look at it.

00:49:54.920 | Some of the things you're invested in

00:49:56.560 | might not have a lot of baked in capital gains.

00:49:59.300 | Those will be easier to sell now.

00:50:01.060 | Each year, you can kind of sell up to the top

00:50:04.200 | of your current capital gains bracket is one option.

00:50:06.800 | You kind of decide at what level you're willing to

00:50:10.300 | realize those gains today

00:50:12.140 | to be able to get into a portfolio you really want.

00:50:15.060 | I don't envy this situation.

00:50:16.440 | I was actually in a similar situation for a different reason.

00:50:20.260 | And so one of the great things about tax loss harvesting

00:50:23.340 | was that during the pandemic a few years ago,

00:50:25.640 | we harvested a lot of tax losses.

00:50:27.700 | And then I used those to be able to get out of this situation.

00:50:30.700 | Obviously, I'm not hoping that the market crashes

00:50:33.320 | so you can capture a lot of losses.

00:50:35.080 | But in a circumstance where the market did crash

00:50:37.840 | and you could capture losses,

00:50:39.040 | this is a great opportunity to use them

00:50:41.220 | and remove the psychological barrier

00:50:43.420 | of trying to sell your positions you're not happy about

00:50:46.660 | knowing you're going to have to realize capital gains.

00:50:49.060 | Now, another couple of things to keep in mind.

00:50:51.480 | One, if you have dividend reinvesting on,

00:50:53.900 | immediately you can turn that off

00:50:55.380 | so you're not rebuying these positions.

00:50:57.600 | Sometimes that's part of your portfolio

00:50:59.420 | and the way it's set up.

00:51:00.360 | One other thing,

00:51:01.060 | depending on what kinds of stocks you have,

00:51:03.360 | you might be able to incorporate them into a portfolio.

00:51:06.720 | So I actually had a handful of individual stocks,

00:51:10.080 | mostly Apple and Facebook and Google.

00:51:12.480 | And I wanted to start doing more index fund investing.

00:51:16.160 | And so I set up direct indexing at Wealthfront.

00:51:18.620 | And I actually transferred in those stocks

00:51:21.420 | and Wealthfront incorporated them

00:51:23.420 | into the direct indexing portfolio.

00:51:25.060 | So if you look at the S&P 500

00:51:27.000 | or you look at the total US stock market,

00:51:29.260 | no individual stock is more than 6% or 7%.

00:51:34.020 | And that's the high end, right?

00:51:35.620 | That's the Microsofts, the NVIDIAs.

00:51:37.180 | But let's say you had $100,000

00:51:39.440 | and in that $100,000,

00:51:41.680 | 5,000 was Google or Facebook or Apple

00:51:44.820 | or Microsoft or NVIDIA.

00:51:46.060 | And you wanted to do a direct indexing strategy

00:51:48.800 | with someone like Wealthfront

00:51:50.040 | or someone else that offers that.

00:51:51.480 | You might be able to transfer those positions in

00:51:54.100 | and have the strategy built around it.

00:51:55.920 | I know there's a company called Freck

00:51:57.560 | that does direct indexing.

00:51:59.380 | I got to know the founder.

00:52:00.600 | I think it's a really cool product.

00:52:02.000 | They might actually be able to incorporate these as well.

00:52:05.560 | And so taking a look at incorporating

00:52:07.680 | your existing positions into something

00:52:10.180 | you don't have to manage at a much lower fee

00:52:12.240 | could make a lot of sense.

00:52:13.680 | Now, obviously, I don't know your portfolio.

00:52:15.160 | I don't know what those stocks are.

00:52:16.720 | I don't know what the Morgan Stanley advisor picked.

00:52:18.580 | So I can't really speak to that in much detail.

00:52:20.860 | As we mentioned before on charitable giving,

00:52:22.620 | if you're regularly donating money to charity,

00:52:25.220 | then I think you could use your appreciated stocks

00:52:28.200 | to donate to charity,

00:52:29.100 | take the money you otherwise would have donated to charity

00:52:31.660 | and buy the investments you actually want.

00:52:33.540 | And so that's another great strategy.

00:52:34.760 | So I know that's a lot.

00:52:36.140 | You don't have to do it all at once.

00:52:37.380 | Come up with a plan and a transition timeline

00:52:39.920 | and slowly chip away at it over time.

00:52:42.300 | I think you'll get there soon enough

00:52:44.060 | and it'll feel really good to not be paying

00:52:45.880 | those advisory fees.

00:52:47.740 | So last question was a quick one,

00:52:49.340 | which was, what are your thoughts on financial advisors?

00:52:51.260 | Great question.

00:52:52.200 | Let me be clear.

00:52:52.780 | I don't think financial advisors are bad.

00:52:54.400 | I was one in a previous life.

00:52:55.940 | I ran a firm for them in a previous life.

00:52:57.760 | I do think the industry needs to evolve.

00:52:59.620 | Many advisors are charging a high percentage

00:53:02.360 | of your portfolio just to manage a few investments

00:53:05.320 | that software can do a great job of.

00:53:07.300 | So I'm not a fan of paying 1%, half a percent,

00:53:10.340 | 0.75% for someone to manage my portfolio.

00:53:13.400 | I'd much rather do that on an automated basis with software.

00:53:16.120 | However, if your financial advisor is doing financial planning,

00:53:20.040 | tax planning, estate strategy,

00:53:22.160 | helping you with complicated decisions in your family

00:53:25.160 | or with the equity you have in a company you work at,

00:53:27.860 | those are great reasons to be getting help

00:53:31.440 | for your financial life.

00:53:32.520 | And those are things that you should pay a professional for.

00:53:34.980 | Personally, I prefer to pay a flat fee

00:53:37.700 | on an hourly, monthly, annual basis for advice

00:53:42.240 | and then pay for my investments

00:53:44.180 | either as part of that fee

00:53:46.000 | or as a percentage that is much, much lower.

00:53:48.200 | And there are a lot of financial planners out there

00:53:50.660 | you can take a look at

00:53:51.700 | that are fiduciary only, fee-based

00:53:54.720 | and not focused on a percentage of assets.

00:53:57.020 | So that is something I would like to do.

00:53:58.680 | So I think advisors still matter.

00:54:00.100 | I still think they're helpful,

00:54:01.280 | but I want to make sure you're getting real value

00:54:03.600 | relative to how much you're paying for them.

00:54:05.320 | So I really hope it was helpful

00:54:06.340 | for you guys to hear those four questions

00:54:08.380 | and how I think about them

00:54:09.720 | and walk through my entire money allocation framework.

00:54:12.020 | The goal was for this to be a helpful way

00:54:13.640 | for you guys to think about money

00:54:14.900 | and how to allocate money

00:54:16.020 | and hear my perspective on how I think about it

00:54:17.820 | as someone who's probably spent decades

00:54:20.120 | thinking about this exact topic

00:54:21.720 | and helping other clients do it.

00:54:23.160 | If you have other questions similar to this

00:54:26.220 | or on any topic,

00:54:27.120 | I always love to hear them

00:54:28.600 | and I'm trying to find ways

00:54:29.700 | to incorporate them in future episodes.

00:54:31.560 | And in many ways,

00:54:32.680 | the questions you guys have

00:54:34.040 | that aren't necessarily answered

00:54:35.440 | in any episode you've heard so far

00:54:37.480 | are great ways that I think about future content.

00:54:40.520 | So please send them over

00:54:41.440 | podcast at allthehacks.com.

00:54:43.080 | I definitely read everything that comes in.

00:54:44.900 | That is it for this week.

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