Intro to personal finance
Effai.me presents
About Me
My Name is Leon. @OSPortfolio on Twitter
I've been at Twitter > 3 years.
I'm the author of effai.me/blog (go/effai)
Assumptions
- We are here to maximize wealth.
- We are interested in having as much money as possible at retirement.
- Opinions are biased but rooted in reason. I will skip the justifications.
Out of scope
- Becoming a billionaire
- Early retirement*
*If interested in early retirement read go/effai
The Plan
- Saving (the why)
- Taxes (the where)
- Investing (the how)
Saving
the why
Compound interest
Classic example
Lattes
Classic example
- $5 a day
- Over 20 years
5 * 365 * 20 ~ $36,000
But we forgot about compound interest
It's double
Classic example
- $15 a day - lunch
- Over 20 years
It's almost $250,000
Classic example
- $30 a day - lunch for you and your spouse
- Over 20 years
It's half way to a mil
Classic example
The point is that small early amounts add up
How much should I save?
$400 / month
$1000 / month
10% of my salary
How much should I save?
Start with 50% of your salary and work from there.
Taxes
the where
Avoid at some costs
Taxes
Remember the half a million dollars you can have by skipping lunch?
That wasn't the full story.
You earn $100,000 / year
You pay $20,000 in taxes
You save $40,000
To save $40,000 you need to earn $100,000
That half a million you saved was worth ~600,000 in salary
Taxes
Taxes are likely to be your #1 or #2 cost
It's worth while to minimize them.
Taxes
3 steps of taxation
- Earned income
- Taxable activities
- Cashing out
Taxes
Earned Income
Before buying a house, you have to earn money through work. The difference between your salary and your take home pay is income taxes.
Taxes
Taxable activities
If you have an asset, you pay property taxes.
Or taxes on dividends
Taxes
Cashing out
If you sell an investment property, you owe taxes on any gains in that property.
Or capital gains taxes if the shares went up in value
Taxes
Taxes on earnings
Taxes on activities
Taxes on
cashing out
And then there's tax acronyms:
- 401k
- IRA
- HSA
- ESPP
- Roth
- Traditional
Taxes
IRA vs 401k
IRA - Individual retirement account.
The money you set aside independent of your employer.
401lk - A section in the tax code
The money you set aside as part of a program sponsored by your employer.
Note: After a certain salary it doesn't make sense to participate in both
Taxes
| Traditional | Roth | ESPP | HSA | Post tax | Regular | |
|---|---|---|---|---|---|---|
| Earnings | ✓ | 𐄂 | 𐄂 | ✓ | 𐄂 | 𐄂 |
| Activities | ✓ | ✓ | 𐄂 | ✓ | ✓ | 𐄂 |
| Cashing out | 𐄂 | ✓ | 𐄂 | ? | 𐄂 | 𐄂 |
| Limits | $19,000 | $19,000 | $25,000 | $3,500 |
$19,000 | ∞ |
| Incentives | $3,000 | $3,000 | $3,750 | $500 |
𐄂 | 𐄂 |
Traditional
HSA
ESPP
Post tax
Regular
Investing
the how
No free lunch
Investing
3 rules to investing
- The higher the reward, the higher the risk.
- Always diversify. Never concentrate risk.
- Never ever trade. Buy and hold.
Investing
The higher the reward, the higher the risk.
Investing
The higher the reward, the higher the risk.
If someone is promising a higher reward with no/low risk, the risk is still there. You just can't see it.
Investing
Always diversify. Never concentrate risk.
Example:
- Netflix
- Tesla
- Amazon
- Lyft
Investing
Always diversify. Never concentrate risk.
S&P 500 is a good start.
Broad market index funds covering many industries in many countries.
Many other index funds and ETF's to choose from.
Investing
Never ever trade. Buy and hold.
Software engineers are too smart for their own good. Always trying to beat the average.
Has been shown since the 60's time and time again that it's extremely unlikely to ever happen.
Would you ever try and beat Tiger Woods in golf?
Investing
What should we do?
- Buy diversified funds. Look for funds that have hundreds of companies in many industries. We have limited choices in Twitter but they are decent.
- Choose funds with the lowest MER. Must be less than 0.25%. Anything higher is day light robbery.
- Never sell. A recession is just a sale. When steak is on sale we buy more; not less.
- Reinvest everything you earn. All dividends go contribute back to your portfolio; not your shopping habits.
Investing
What should we do?
Investing
What should we do?
Investing
What should we do?
You've maxed out all the tax shelters we discussed. What now?
Traditional
HSA
ESPP
Post tax
Regular
Investing
What should we do?
I recommend betterment.com
- It's a robo advisor. There are many on the market.
- Buy an efficient set of funds.
- Auto invest dividends.
- Automatic tax loss harvesting.
- Very hands off for a relatively low price.
go/invest-better
Thank you
go/invest-better
go/effai
Effai.me presents intro to personal finance
By Leon Tager
