Money Archives

“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

The Roth Awakening

Ten years ago I embarked on my retirement savings journey by opening a Roth IRA. The research I did at the time gave me the conviction to make post-tax contributions in the present—to avoid paying taxes on the projected earnings 35-40 years in the future (while also hedging against the risk of higher taxes). It seemed like a no-brainer. Later, when I had access to a Roth 401(k) at work, I followed suit and contributed even more, rolling that balance over to my Roth IRA between jobs.

But it turns out that I fundamentally misunderstood how our progressive tax system works. In short I’ve been paying the full marginal tax rate on my contributions (25-28% Federal + 9.3% CA), but if I had put that money in a Traditional 401(k) instead, I could have avoided paying those taxes, and I would very likely have paid little to no effective tax on any future distributions (depending on my cost of living in retirement).

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Index Card Financial Advice

The New York Times recently published an article entitled, How Should You Manage Your Money? And Keep It Short by Ron Lieber. In it, he asked several personal finance experts to summarize their “best ideas” in the space of an index card (inspired by one such internet-famous card and the book it spawned). I enjoy these sorts of pithy financial recommendations, but what really caught my eye was this call to action alongside the article:

What Would Your Card Look Like? Please make your own card with a few simple tips (or just one, or a sketch) and upload a photo of it here. We’ll display some of our favorites in the coming days.

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:

Justin Watt's index card financial advice: Pay off your credit cards [every month]; Save 6 months worth of expenses as an emergency fund; Fund your 401(k) and/or IRA [to the max] and invest in index funds with expense ratios below 0.1%; Get term life insurance---if you have a family to support; Once a year (early January) write a letter to yourself describing the financial decisions you made in the past year and the financial plans you have for the coming year---before writing, read each of your previous letters
My index card financial advice

Learning how to save, nine years later

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.)

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Learning how to save, eight years later

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.


It looks like they’re sticking with “2X by age 35”. Fidelity just produced a video with the following benchmarks:

Fidelity 10x road sign benchmarks screengrab

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.

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Warren Buffett’s advice to individual investors in his 2013 Berkshire Hathaway Shareholder Letter

One sentence in his 2013 Berkshire Hathaway Shareholder Letter resonated with me. He says that:

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.

Graph of the S&P 500 index from October 2007 through February 2014
S&P 500 index from October 2007 through February 2014

What follows is a meaty excerpt from Warren Buffett’s 2013 Shareholder Letter, extolling the virtues of index funds for non-professional investors.

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