I think I’ve said this before, but I want to try and put out a little more content than just my monthly updates. I started this blog with the hope that it would be a blow-by-blow of my finances as I made my way through debt repayment and wealth growth, and I think it is accomplishing that. But I do find that some of the same questions come up again and again on Twitter or on my semiannual Reddit posts, and I think it would be worthwhile to expand on some things that may otherwise be glazed over or taken for granted in my regular updates.
To that end I’m going to talk about our various saving and investment accounts, and how they contributed to the growth of our wealth by $280,000 in 2020 alone. For the record, I’ll be talking about the specific companies that we use, but I don’t have any sort of affiliate/kickback relationship with any of them.
All of our liquid cash is in Ally Financial checking and savings accounts. We moved our money here a few years ago from Bank of America, in part because of BoA’s consistently poor customer service, but primarily for Ally’s high-yield savings option. At that time, you could get a little over 2% nominal return; this has since fallen to 0.5% as rates have plummeted across the board. Considering that this is still higher than the rate on the majority of our student loans (currently 0.21%), it remains the best option for parking risk-free money.
I don’t have a fixed amount that I try to keep in our checking account, but I generally feel comfortable with a floor of $5,000. This is high enough that I don’t have to think about when credit card and utility bills will auto-debit, but little enough that it doesn’t feel like a drag on our gains.
One thing I like about Ally is their ‘buckets’ feature, which allows you to earmark your savings into categories within a single account. I hear a lot about people opening a separate savings account for every goal, which seems insane to me. Ally’s is an elegant solution. Right now the only buckets I use are for emergency fund and house downpayment, but they also have options for vacations, car expenses, and others.
I keep $25,000 (about three months expenses) as an emergency fund, and the rest is saving up for a house downpayment. I’m currently directing $2,000 a month toward this goal.
Our retirement investments are comprised of my 403b through work, our two Roth IRAs, and a taxable brokerage account. Across all of these investments, I try to maintain an overall asset allocation of 60% US stocks, 20% international stocks, 10% US bonds, and 10% real estate investment trusts (REITs). This is growth-focused allocation that maintains a reasonable amount of diversification across countries and asset classes. All of these investments are in low-cost broad-based index funds, no individual stocks.
My 403b is at Wells Fargo, and this is where I keep all of the bond allocation. The 403b is all pre-tax, and so I figure I may as well have my slowest-growing assets in there and pay Uncle Sam the smallest amount on the backend. The rest of it is a portion of my US stock allocation. I don’t have access to VTSAX or an equivalent in my plan, so I have this equity portion split 80-20 between a large cap equity fund and a medium/small cap equity fund, as this closely approximates the US total market.
I do have access to a 457b at work, but it is non-governmental (complicating rollovers if I were to leave my current position) and more importantly it has very poor distribution options. Upon separation from my institution, I would be required to liquidate the account as a lump-sum distribution and pay the resulting tax bomb. It does not have options to spread this out over five or ten years, like many other 457b plans. This all unfortunately means that I don’t feel it’s in my best interest to utilize this account at the moment.
Our Roth IRAs are at Vanguard. Due to our high income, we aren’t eligible for direct contributions, so we make ‘backdoor’ contributions (non-deductible contributions to a traditional IRA, immediately followed by Roth conversation). This is where I keep our international and REIT investments, along with additional VTSAX. These accounts will ultimately be the smallest pool of our retirement investments due to tiny annual contribution limits, but they will be among our most valuable accounts due to never having to be taxed again.
In October 2020 I also opened up a taxable account at Vanguard, and I have been making regular contributions. This is 100% VTSAX due to the tax-efficiency of this fund, as the vast majority of the dividends spun off are qualified dividends. I expect this account to represent the bulk of our new investments in 2021 and beyond, and I have set up automatic recurring contributions of $4,000 per month starting in February (this will hopefully increase).
It’s no news to anyone reading this that the cost of school in the US has grown astronomically, far outpacing inflation and just about everything else except for healthcare. I was extremely fortunate to have my undergraduate education paid for by my parents, and I am hoping to do the same for our children. But where my tuition was about $6,000 per year at my public state school, a year at that same institution in 2021 costs $18,000 (not including room and board). Many new grads have paid much more than that, and all signs point to continued out-of-control tuition inflation (especially – in my opinion – if any of the larger proposed debt forgiveness proposals become reality).
For this savings goal we’ve opened up 529 accounts for each of our children. We can get a nice state tax deduction per parent per child, so we’re using that to guide the size of our annual contributions. This amounts to a total of $8,000 per child per year, invested in a total US stock market fund. This should hopefully get us to somewhere around $200,000 saved per child by the time they turn 18. I am not overly stressed about hitting any particular amount exactly. If we save too much, we can always use it for graduate school or gift it to another family member. Too little, and we will cash flow the difference or draw from other savings.
Finally, in 2020 we opened custodial Roth IRAs for our children at Fidelity. My wife has her own photography business and the boys featured heavily in the advertising. We paid them a conservative hourly modeling wage and put the entirety in custodial Roth IRA accounts. We chose Fidelity because of the ease of opening the accounts (didn’t even require a phone call) and their low-cost index funds that are very similar to Vanguard’s. We have the entirety of these accounts in Fidelity’s zero-cost VTSAX equivalent, FZROX. I don’t know if we will be able to contribute to these accounts every year, but whatever we put in should be able to grow untouched and untaxed for ~60 years, providing a nice cushion for their future.
That about sums it up. I don’t have any direct or syndicated real estate holdings, and no individual stocks or crypto. We do have a few small physical gold and silver holdings that are more heirlooms than anything; they probably amount to a few thousand dollars and I don’t include them in any net worth calculations.
I hope that this is helpful, and I’d be interested to know if any of you are doing anything very different that has worked out well for you!