Do More With Your Money Podcast

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T.J. van Gerven

"I have money going to my savings account each paycheck that I don't know what I should be doing with; what should I be doing with it?"

Let's start with the ever-important caveat that personal finance is personal, and as always, "it depends."

With that out of the way, let's talk about some ideas, habits, and strategies you should be thinking about if you feel like you're sitting on too much cash.

It may seem trivial at this point but having a sizable cash reserve is crucial for many reasons, some of which provide a "hidden return" like having the flexibility to search for better job opportunities or be more selective with investment opportunities.

At a minimum, you should have at least three months worth of living expenses in cash at all times. This should range as far as eighteen months of cash reserve depending on a variety of factors such as if you're self-employed, how economically sensitive your job is, or how many income sources you have in your household.

Personally, I strive to have twelve months' worth of living expenses in cash as it provides me the peace of mind to run my business and invest (in personal investment accounts) long term with confidence.

If you're still working towards building towards your ideal cash reserve, don't feel bad about not investing additional cash flow. The opportunity cost of building a sizable cash reserve is well worth the peace of mind.

When you're determining your ideal cash reserve, you can base it on your baseline spending needs or what you're currently spending. The lower your baseline spending needs, the lower your cash reserve can be, and in turn, the more cash flow you can use to grow your net worth on an ongoing basis.

If you've determined you're "sitting on too much cash" relative to your cash reserve requirements, here are some things to consider:

Are there any major short-term expenses or purchases you anticipate to have in the next 6-18 months? Generally speaking, you want to avoid investing in the stock market for any money that will be needed within the next three years (ideally five years +). However, if you have a sizable cash reserve, stable income, and a high tolerance for risk, there is some flexibility.

If you don't anticipate having any major short-term purchases and are looking to maximize the value of your hard-earned money to grow your net worth, here are some ideas:

Are you maxing out your 401(k) at work? You can contribute up to $19,500 (under age 50) in employee contributions for 2020 and 2021. Why would you want to contribute more to your 401(k) than is necessary to receive your employer match? Because contributions to a Traditional 401(k) reduce your taxable income and can be invested to grow tax-deferred until you need to pull them out after age 59 1/2. If your employer offers Roth 401(k) contributions, you should strongly consider taking advantage of these "after-tax" contributions (no income tax deduction) to increase your tax-free investment assets.

In addition to maxing out your 401(k) at work, you should also be taking advantage of an individual retirement account (IRA). You can contribute up to $6,000 (under age 50) for 2020 and 2021 and receive the same tax-deferred benefits as investing in your 401(k). However, if your income (MAGI) exceeds ~$124,000 (2020), you'll want to consider a backdoor Roth IRA.

If you're taking advantage of all your tax preferential accounts and still have additional cash flow, you should consider investing in a taxable brokerage account. The specific investment selection should align with your overall investment strategy. Meaning, you should invest in a taxable account that factors in your investment holdings across your various retirement accounts.

A taxable account is more flexible in that you always have access to the money penalty-free. However, unlike a retirement account, you'll be subject to taxes. Consider holding most of your equity allocation in your taxable account (as it grows in proportion to your other accounts) as stocks will have more tax flexibility with capital gains and/or tax-loss harvesting.

If you're sitting on too much cash, the most important thing is that you have a plan for how to maximize the use of additional cash on hand. Getting in the habit of investing regularly is the most important factor for achieving long-term financial success as it puts the odds in your favor.

Although cash is safe in the short-term, it becomes risky long-term as the purchasing power is eroded from inflation. Make sure you're doing all you can to preserve (and hopefully grow) your hard-earned wealth.

Am I sitting on too much cash?

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One of the biggest (if not the biggest) investments you can make is choosing a lifelong partner. You and your partner must be aware of each other’s values, goals, and desires as it relates to your money. There is no perfect strategy when it comes to managing finances as a combined unit. However, you both must have at least a general understanding of each other’s finances and long-term financial goals.

That way, you can avoid any unneeded stress or disagreement because you weren’t on the same page. We can all benefit from having a professional, objective third-party who has our best interests at heart to bounce off ideas and provide us with guidance.

Here are four financial tips for newly married couples:

1) Your income is now taxed as a joint singular entity, so make sure to maximize it.

Before you’re married, you pay taxes separately. Depending on your respective income level, filing jointly may benefit you or cause you to pay additional taxes.

If one person in the household is the primary earner, then filing jointly will most likely provide you a tax benefit due to the larger bands in the marginal tax bracket.

Regardless, it would be best if you worked together to maximize the efficiency of your combined income. If you view your income as combined, you should work together to make sure both of you max out your retirement accounts or additional tax preferential accounts.

If one spouse’s income is substantially lower, it may not be easy to maximize a tax-deferred account like a 401(k) without the higher-earning spouse supplementing their spending needs. These strategies depend on your specific needs and how much cash flow you have to dedicate to discretionary investment contributions.

However, if done correctly, you can substantially increase the efficiency of your after-tax joint income.

2) Have a joint checking account and joint credit card for joint expenses.

There’s no “correct” way to approach spending as a couple. The most important thing is that it works for you, and no one is resentful about how expenses are paid. A strategy I’ve seen work for various couples is maintaining a “his and hers” spending approach with a joint checking and credit card for joint expenses. In certain cases, it may make sense to consider a “pro-rata” approach where the higher-earning spouse pays a higher proportion of the fixed expenses.

Again, the most important thing is that you and your partner agree on the approach you’d like to take. As long as both spouses are comfortable with the level of ongoing saving (preferably investing), no one should be concerned with the other partners spending.

3) Discuss your individual and joint financial goals.

You may be surprised to learn how different your partner’s individual financial goals are. How important is achieving financial independence to you vs. your partner? Do you want to fund your child’s education savings fully, or do you want them to have “skin in the game”? Our personal experiences with money have a massive impact on how we view the world. Your partner may have had a substantially different experience with money growing up, which will influence their individual goals and preferences.

Again, communication (ideally with an objective, third-party professional) is essential for getting on the same page about what financial and lifestyle goals you’d like to work towards together.

4) Have a combined investment strategy that factors in each other’s tolerance for risk.

Like your income, your investments should be viewed as one unit for all intents and purposes. It’s important that you both have a general understanding of your investments, what you own, and why you own it. Your long term financial plan should influence how your investments are structured. Ideally, you’ll factor in your combined tolerance to accept the risk needed to achieve your financial goals. If one partner substantially deviates from the investment strategy, it can have a large negative impact on your combined finances.

Again, communication (ideally with an objective, third-party professional) is essential for getting on the same page about the appropriate investment strategy to achieve your desired financial outcomes.

Four Financial Tips For Newly Married Couples

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One of the most common windfalls of wealth can come from employee equity compensation. Often, this happens when you’ve worked at a private company that experiences an Initial Public Offering (IPO), and the share price appreciates dramatically once it enters the publically traded market. However, you can also experience a windfall with a publically traded stock that experiences a dramatic rise causing your stock options (or equity position) to represent a large portion of your investment assets.

You can analyze many factors in whether or not to diversify your stock position. I’ll be primarily discussing incentive stock options (ISOs), but many factors for determining diversifying can apply to any concentrated stock position.

The overall message you should remind yourself is that “concentration builds wealth and diversification maintains wealth.” The decision to diversify should be based on your long term financial plan. Let’s discuss it!

Seven Factors For Determining How To Diversify Concentrated Employee Stock Options

YouTube Video UCxejrzu3vF5dc9V3tb9uOoQ_iD65lbryBuc

One of the most common windfalls of wealth can come from employee equity compensation. Often, this happens when you've worked at a private company that experiences an Initial Public Offering (IPO), and the share price appreciates dramatically once it enters the publically traded market. However, you can also experience a windfall with a publically traded stock that experiences a dramatic rise causing your stock options (or equity position) to represent a large portion of your investment assets.

You can analyze many factors in whether or not to diversify your stock position. I'll be primarily discussing incentive stock options (ISOs), but many factors for determining diversifying can apply to any concentrated stock position.

The overall message you should remind yourself is that "concentration builds wealth and diversification maintains wealth." The decision to diversify should be based on your long term financial plan. Let's discuss it!

Seven Factors For Determining How To Diversify Concentrated Employee Stock Options

YouTube Video UCxejrzu3vF5dc9V3tb9uOoQ_vyNFPdYq1kY

You have limited energy. You have limited time. If you want to achieve progression in anything, you have to give it your best effort.

However, giving your best effort isn't always enough. You need to focus your limited energy on high leverage tasks and avoid shiny objects.

In this podcast episode, I discuss examples of focusing on tasks that amplify outcomes and propel progression.

Whether it's your personal finances, career progression, or taking back your time, these principles can be applied to your situation.

High Leverage Tasks And Avoiding Shiny Objects

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Are you self-employed or a small business owner looking to reduce taxes and invest in your financial future? In this podcast episode, I break down the different types of investment accounts you should be thinking about establishing.

The primary accounts discussed are the SEP-IRA, Solo 401(k), and Traditional 401(k).

Depending on if you have employees (and how many) is a significant factor when deciding which account to use.

The SEP-IRA is the easiest and most cost-effective (from an administrative standpoint) to establish. However, if you have more than a few employees, the matching requirement can quickly become expensive.

In which case, considering the 401(k) could make more sense. The great thing about the current small business 401(k) landscape is that there are more low-cost third-party solutions than ever before.

If you're not currently deferring taxes and investing for your financial success outside of your self-employment or business, you'll want to give this episode a listen!

The Best Investment Accounts For Self-Employed Individuals And Small Business Owners

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