Investing 102: Leaving the Nest

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In my previous post below I briefly outlined some of the tips and knowledge I had picked up since graduating from college. It has slowly begun to dawn on me that I will be entering adulthood and moving out of my parents’ house which I have lived for the past 22 years of my life. This means that I am am currently in the process of strategically laying out my short term future and establishing my foundation as an independent human being.

Finding my own Apartment

My journey for finding a place to work has been strenuous especially since I graduated in early May. Fortunately I utilized my own personal network and I was able to land an amazing job as a financial analyst for a mid sized company in Alpharetta. Finding a suitable apartment to live in Atlanta has been interesting because I want to live a nice location but also be relatively close to work and have access to the city and Buckhead areas. Alpharetta is about 30 minutes outside of Atlanta given traffic, and I have budgeted around $1000 per month for rent and other living expenses.

Getting my own Credit Card

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I have had two credit cards since my freshman year of college. These two cards are the Chase Freedom and Discover IT cards. I would definitely recommend these cards for anyone looking for their first credit cards to get since they both require no monthly fees. However, because I am moving out, I want to be fully independent from my family and thus it’s essential that I get my own credit card. Because I am moving to Atlanta and Bank of America has the largest presence in Atlanta, I will be getting the BoA Cash Rewards Card. This card offers many great perks like $200 cash back after I spend $500 within the first 3 months and 3% back on gas, 2% back on restaurants, and 1% on everything else. In addition, they offer 10% back on any cash back redeemed into a BoA checking or savings account. I would recommend limiting the number of credit cards you have to a max of 3.

Familiarizing myself with my company’s retirement packages

My company offers both 401k and Roth IRA retirement accounts. They do offer a matching up to the average 6% of my salary which is good. My eye is on the Roth 401k account which has a max of $19,000 + $5,000 catch-up annual contribution. Additionally, they have a free financial advising service which I plan to utilize asap and I would encourage you to contact your company as well!

Savings Account

I have been recently researching other possible sources of income and I realized that my savings account could be more efficient. I like Ally Bank because they currently as of June 20, 2019 2.20% interest for their savings account with 0 fees! This is amazing considering the current 10 year treasury yield is a 2.013%.

Where do I Invest?

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Three words: Exchange-Traded Funds (ETF). What is an ETF you ask? An ETF is a fund or investment instrument which can be traded and holds a set of assets (typically companies). The most common type of ETF is one which tracks the S&P 500. Essentially these funds hold shares of the top 500 largest US companies by market capitalization or size. This means the fund will hold more of Apple than another smaller firm. Because the market has become so efficient recently with the readily available investment information and high speed technical and algorithmic trading, it is incredibly hard for even the best fund managers to beat the market returns over a long period of time.

This has meant that these ETFs have been the investment instrument of choice for many of the world’s wealthiest people. Someone just graduating from college, like myself, has the unique advantage of time to grow this investment. Personally, I would recommend Vanguard’s funds which offer the lowest expense ratios on the market. For example, VOO one of Vanguard’s ETF funds offers just a 0.02% management fee which means more money in my pocket. In addition to checking for the lowest management fee you can find, it’s important to look at the total managed assets which gives you an idea about the liquidity of the fund. In rare cases where you need to pull your money out, liquidity is very important. The more total assets managed, the more liquid the fund and the better your chances are for getting your money out.

Investing 101: Right out of College

1. Why should you invest NOW?

Amount required to invest annually to have $1 Million by age 65

Amount required to invest annually to have $1 Million by age 65

If you start investing with just $3,100 per year at age 22, assuming an 8% average annual return, you'll have $1 million at age 65. But if you wait until age 32 (just 10 years later), you'll have to save $6,900 per year to reach that same goal of $1 million at age 65. This is over double the annual investment required. Think about it this way, if you wait 10 years to start investing, it’s going to cost you $3,800 more per year! This is the power of compounding.

2. Understand your financial situation

Where are you living? Are you in a high tax state like New York or are you living in Texas and Florida where there’s no state income tax? What’s the cost of living for you? Understand your current and expected cash flow and always reserve a little cash for unexpected expenses. Budgeting is key. What are you spending everything month, now compare that with what you’re making every month. Investing will NOT solve your spending problems or debt problems. If you have to payoff student loans that’s an expense you must consider.

3. 401ks, IRAs and Roth IRAs

Accept your employer’s generosity! Most employers offer a 401k or 403b retirement plan. These are company sponsored plans, which typically means whatever you contribute up to the maximum $19,000 (under age 50) or up to a certain percentage of the employee’s income (typically 4%). The major benefit of these savings accounts besides the free money is the tax benefits (You don’t pay annual taxes on your retirement accounts).

Let’s discuss traditional IRA vs Roth IRA

Traditional IRA accounts use pre-tax money to save for retirement (you get the tax deduction today). Roth IRAs use after-tax money. In retirement, you'll pay taxes on your traditional IRA withdrawals, but you can withdraw from the Roth IRA tax free. This is why many financial planners love a Roth IRA. In 2018, the maximum contribution limit for IRAs is $5,500. You should focus on contributing the maximum every year.

4. Invest in yourself!

You are your biggest asset. You can increase your own earning potential drastically by going to college, getting a certification, or attending career development events. In investing just like in life, it’s important to diversify. This means diversifying your income. If all the money you make is from your job, then you will be at risk if you lose it. By having multiple streams of income helps you spread out this risk and help you live stress free.

5. Ignore social media as much as possible

Take what you see on social media with a grain of salt. All of those stories of people going on trips and buying extravagant cars are very short term and over the long run, if you save properly, you can go to that trip to Europe or buy that Ferrari (experiential purchases in general are often better than cars which are not great investments because they’re depreciating assets- it’s smarter to go with a secondhand car but make sure you do your research)

6. Bucket your goals into short term and long term:

Once you have an idea for your short term goals are (buying a car or a vacation) and long term goals (buying a house), you need to find a good place to save that money. Good places to put your short term goals: bank CDs, savings accounts, and money market funds. There are many alternative options to a traditional savings account or checking account which can give you +2% returns annually! Each offer their own advantages and drawbacks so make sure you do your research. If you would like me to go into them more like this post and/or send me a direct message on LinkedIn or Instagram!

I hope this helps many of you who maybe are in a similar stage in life as I am. Graduating from college and entering the real world can be scary, investing shouldn’t be. Feel free to message me on LinkedIn or Instagram if you want to know more.

The US Dollar and Debt Crisis

Image depicts a bald eagle frantically holding up the American flag above the chaos below symbolizes not only the immense power the US has but also how the vast numbers of enemies there are below.

Image depicts a bald eagle frantically holding up the American flag above the chaos below symbolizes not only the immense power the US has but also how the vast numbers of enemies there are below.

Our national debt stands at a whopping $21 Trillion. With the majority incurred during the most recent administrations. Mark Twain once said: “History doesn’t repeat itself, but it often rhymes." We have seen in the past when the government tries to control money, wages and the economy as a whole, it results in disaster. In addition to this, the current geopolitical position the United States is in is very precarious. I foresee a dramatic shift incoming which will take the world by storm.

Firstly, let’s examine how and why the US has positioned itself in the way it has currently. The US like any other nation has an obligation to lookout for its own self interests. In the president’s oath it is stated: “to the best of my ability, preserve, protect and defend the Constitution of the United States.” This obligation to “preserve”, “protect” and “defend” has often resulted in a more active and hands on approach to its currency and the world economy by any means necessary. Often times meddling in areas where our arrogance and generalizations have led to the splitting of the Korean peninsula, the of South America and the debacle in the Middle East all in the name of “Freedom”. This is why I believe that the US dollar’s status and strength are the end all be all for the US. The US will do everything and anything to maintain the dollar, even declare war when Iraq tried to sell oil in Euros. The world has begun to take notice.

We have seen from history that the fall of empires such as the Roman Empire are linked to problems with the financials of that nation. The Roman Empire’s decline could be attributed to the excessive war spending, currency debasement, public works spending, and excessive taxation. The beginning of the US’s influence and overstep of power was during the Nixon Administration when the US went away from the Bretton Woods gold standard. It has always been understood that the US Dollar would the world’s reserve currency since it could be exchanged at a fixed rate with something valuable with a fixed supply like gold. Julius Paulus once said about currency: “this device being officially promulgated, circulates and maintains its purchasing power not so much from its substance, as from its quantity”.  What we saw immediately after the US went away from Bretton Woods, was ridiculous amounts of inflation and a fragile economy. Nixon attempted to fix prices on consumer goods and wages to remedy the problem. However, the US was clever. They knew that if they were printing a lie, it had to be a good one. The way to achieve that was to create as liquid of a lie as possible. The US knew that to maintain its power over the world would be to control the world’s economy. However, they knew that just simply printing money would devalue the dollar, so to combat that they needed power over something worth just as much as gold: black gold or oil. In order to accomplish this, they utilized their massive military force, strategic alliance with Saudi Arabia, and control over the currency used to trade oil.

Currently, a few countries have realized the crux of the US’s strength is the dollar. With the current trade wars, US and China relations are very weak. China sees how the US’s power over oil trade is correlated to their power across the globe and has actively taken steps to create another market to trade oil with other currencies. Russia’s Putin said in an interview that he intends to move to independence from the dollar because of sanctions against them which limits Russia in trade. Japan and India are also considering moving away from the US dollar. With the economy slowing down, this might be the perfect catalyst to sway more counties to move away from the US dollar and sell US bonds. China has already sold $3 billion of sovereign dollar bonds. China still holds over $1 Trillion worth of US bonds making them the largest foreign holder of US debt. I do not see these conflicts globally resolving themselves anytime soon. Humans are procrastinators and lazy. It often takes a catastrophic event to wake people up from their naps.

Some questions I have you are: US bonds were recently reduced from their AAA rating to AA+, yet US bonds are considered a “risk free” asset, how is it possible for a “risk free” asset be downgraded? Do you think that the US debt is a problem? If so, how high must it go before decisive action will be taken to reduce it?