It’s Tuesday, 4.26pm here in New York and it’s raining outside. I was supposed to send out my weekly newsletter
this morning last week, but guess what, I didn’t have anything to send…
The truth is I still run way too many things and at times my days feel quite disorganized and crazy, regardless of all my efforts to be more efficient and productive. I have to constantly juggle fulltime and side projects, not to mention personal and family matters that also compete for my time.
Some people asked about the state of my new fintech project and why I don’t write about it as much, so I’ll try to summarize it with a one-liner:
“It’s complicated”. 🙂
The project is still going, but not as fast as I was hoping for. No complaining though (not yet), as a lot of the slowness comes from my side as well. Actually, it kind of brings me to the topic I wanted to discuss with you today.
See, sometimes it makes sense to wait and do things the proper way instead of rushing in and paying for it later on. Especially so when it comes to legal matters and partnerships structuring. Here is the catch though, if you wait too long trying to make everything perfect or can’t make any decision at all, you may lose the whole deal. Another balancing act right there. I’ll try to get back to this topic in my future posts, but let’s just get going for now.
A little over a year ago I wrote a post “Have money sitting in the bank account? You are doing it wrong!” suggesting that you should try to invest every single dollar.
Bright and sound ideas for sure, but thanks to the crypto craze last year I had a chance to implement and test my own strategy. In short, it didn’t play out as expected.
Just like many other people out there, I invested a substantial amount of my savings into cryptocurrencies (including mining infrastructure).
Seeing crazy returns on some of my coins, I seriously considered borrowing more money against my house and investing every last available dollar into the crypto space. At the time it felt like the right thing to do and the market growth would continue forever.
Then boom, in a matter of weeks the entire marked turned around and dipped into the red.
Sure, I still had my coins (aka investments), but our bank account with real money suffered dramatically to a point that only a few thousands of dollars were left.
I remember riding in the LIRR train from work and feeling the stress of exposing myself and my family to any unforeseen event (like losing a job, something I never had to worry about before) and it wasn’t a good feeling.
It was clear that I had to reconsider my “invest everything” strategy, so I set out to find my answers. After about a year of research and geeking out on the random financial topics I think I finally uncovered a solid investment approach worth sharing with you today.
On the high level there are only three main components to it:
1. Figure out your monthly spendings (you should open a separate bank account just for that).
If you “think” you spend 5K a month, then you should transfer 5K to this account and see if it’s enough for you to live on. If it wasn’t enough, then you transfer more money until you get a feel of your REAL spendings. The other side benefit of having just enough money every month is that it prevents you from making random impulse purchases you didn’t really need (it’s easy to throw away money when you see there is plenty there).
With some practice, you should get a good grip on your monthly budget and figure out the absolute minimum you could survive on in case of emergency. We will need this number later on to calculate how much money we need to store for emergencies.
2. Once you know your monthly spendings you need to build out liquid reserves (again you would need a separate bank account for your reserves; savings account would work fine)
Again, let me re-emphasize the importance of the liquidity. In the past, I used to think HELOC (home equity line of credit) or any similar credit line for that matter was pretty liquid, but after talking to some smart people in the financial space I reconsidered. Turns out the bank can freeze your credit line for numerous reasons, which has a tendency to happen at the worst possible time when you need it the most. That’s why it’s not a reliable reserve option (use at your own risk).
How much money do you need to save? Up to you, but I prefer 6 to 12 month of savings. Yes, that could mean having 50K or more sitting still in your reserves doing nothing but maintaining your peace of mind! Here is the beauty – in rare cases you can use your reserves to take advantage of rare opportunities that come your way (a sudden partnership deal, market dip etc).
It’s ok to use a portion of your savings from time to time, just make sure to replenish the funds before continuing with your regular investment strategy (the next and last phase).
3. Invest every dollar above your reserves – once your reserves are fully funded and you don’t have any bad debt like credit cards or car loans (should be paid off first), you are ready for investment phase.
Now all you have to do is re-evaluate your monthly spendings and adjust your reserves accordingly (even once a year should be good at the beginning).
Yep, it’s that simple! (once you get it of course). Again, don’t stress about “unused” cash sitting around – it’s actually a good and healthy thing!
Sure, I’m not the professional financial advisor and you should do your own homework, but let me re-state the obvious – any investment is a risk, no matter how not risky it might seem at the moment. I personally saw thousands of my own dollars evaporate in a matter of weeks while investing in “proven/risk-free” opportunities, so I know the feeling. Trust me, it’s much easier to invest with money you can afford to lose.
The other great thing about having an investment strategy is that you don’t have to constantly ponder whether you should invest something and how much is good enough. Any amount that goes above our savings ( item #2. on our list ) should be invested. Period.
Ok, now that we have the foundation in place, I’d like to mention a few more super important financial instruments that you should be aware of:
- HSA – health savings account. Super powerful especially if you and your family are in a good health. Even better if your employer provides you with a match or lower premiums to entice you to participate. At my previous company there were only two people who chose the HSA plan once it was offered – the CFO and me. 🙂 It helped me to build significant health savings over time. For the record, my current insurance plan also has the HSA component.
Sure, you have to take a high deductible health insurance plan in order to be eligible for HSA, but run the numbers before discarding. It may seem more complex at first, but it can save you a lot of money in the long run.
- 401K – no-brainer, start contributing as early as you can (I wish someone explained it to me at the beginning of my career), especially if there is a match by your employer.
If you max out but have a small business on the side (let say freelancing), you can save up even more with your own “company” match (which means more savings and deductions).
- IRA – you can make additional pre-tax contributions.
Roth 401K and Roth IRA – you have to finance those plans with post-tax money but investments grow tax-free. Mind blown, research for more info.
Here is the kicker – you can self-manage your HSA, 401K and IRA accounts and invest in whatever you know best (crypto, gold, real-estate, startups), not only stocks that are traditionally available. Yep, that’s right! There is a book by Mat Sorensen called “Self-Directed IRA” that will explain it better than I possibly could.
Ok, here is the deal, a lot of people I speak with on the daily basis (mostly tech guys) don’t pay too much attention to the financial stuff thinking they would rather focus on something they know and understand (coding). Don’t be like that, especially if you want to be financially independent one day. Find some time to geek out on the money management strategies and I promise it will pay off in the near future.
Also published on Medium.