“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations. You have to pay attention to money, but it shouldn’t be about the money.” –Tim O’Reilly
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I didn’t think I had anything to add beyond Scott Adams’ 9-point financial plan (which got me started on this path 10 years ago), but I did wonder whether others might benefit from keeping a yearly log of their financial decisions and plans, as I do on my blog. So I distilled Adams’ list down to what I thought were the 4 most important pieces of advice, and then added my own. Here it is:
I always expect, after recounting my financial chores from the past year, that the next will be simple and uninteresting. That all I will have to write in 12 months is, “I worked a lot and saved a little.” Instead, it seems, each year I confront new challenges, learn the details of increasingly complex financial acronyms, and continue to fine-tune my savings strategy. This, my tenth such dispatch, is no different. (You can read my first here.)
Just before my birthday I got an email that contained a retirement factoid I’d never heard before:
Fidelity suggests that by age 35, you should have at least one times (1X) your yearly income saved to meet your basic needs in retirement.
Nothing like a little extra retirement anxiety on my birthday. Thanks Fidelity!
Update: Don’t put too much stock in rules-of-thumb. A year later, Fidelity sent me an email that said:
Fidelity suggests that by age 35, you should have at least two times (2X) your yearly income saved to meet your basic needs in retirement.
But it did succeed in getting me thinking about how I measure up. If I combine both my Roth IRA and my 401(k), I’m a hair over 50% (or 0.5X) of my salary. If I also include my brokerage account (which isn’t strictly earmarked for retirement—it’s more medium-term savings), it bumps up to just over 60%. So by that yardstick, I’m coming up short. Their email obviously had the intended effect, because I increased my 401(k) contribution from 6% to 75% just in time for my final paycheck of 2014.
The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur.
It reminded me of my initial foray into investing, which I mistimed right before the housing bubble burst, perfectly captured in my blog post, What a crappy time to have started investing in the stock market. The post has a graph of an S&P index fund from October 2007, when I first started investing, through June 2008, when I wrote that post. At that point, the index was down 17%—and, unbeknownst to me, the bottom of that bear market was still 10 months (and 56%) away.
Compare that graph to now, 7 years on. The S&P 500 index is up 19% from where I started back in October 2007.
What follows is a meaty excerpt from Warren Buffett’s 2013 Shareholder Letter, extolling the virtues of index funds for non-professional investors.
For the first time in several years, I have the ability to contribute to a 401(k) plan through Sincerely’s new parent company, Provide Commerce. There were only two index funds available among the predictably limited mutual fund offerings: the Spartan 500 Index Fund (FXSIX) with a rock-bottom expense ratio of 0.05% and the Spartan International Index Fund (FSIVX) with a respectable ratio of 0.17%. The rest were all managed funds with expense ratios between 0.8% and 1.2%. Given that my existing investments at Schwab are all index funds with an asset allocation of 40% large cap, 40% international, and 20% bonds, I skipped the bonds and just went with 50% large cap (aka domestic) and 50% international for my 401(k).