Plan for Success

Plan for Success

The goal is to keep as much of your money in your accounts in one form or another. Set up automatic contributions for all these accounts, as it makes sure that you save. You are less likely to spend if there is no money in the bank because it has all been allocated to saving vehicles.


If your employee matches your contributions, make sure you contribute to at least that level

  • Free money basically

You fund this account with your pre-tax money (before you get your paycheck) so the more money in this account the less taxable income you have

  • Taxable income  -> income  – pre-tax expenses (401K, healthcare)

 This means that you get some tax relief for contributing to this account

  1. Example(A) – No Retirement Contributions
    • Scenario
      1. 25 % Tax Rate
      2. 100K income
      3. No Contributions
    • Tax  = $100K * 25% = 25K
    • Paycheck  = 75K
    • Total money you keep  = 75K
  2. Example(B) – With Retirement Contributions
    • Scenario
      1. 25 % Tax Rate
      2. 100K income
      3. 10K contribution
    • Tax  = ($100K – 10K) *.25% = 22.5K
    • (Savings of 2.5K in Taxes)
    • Paycheck = 67.5K                                                     
    • (Smaller Paycheck because of contribution)
    • Total money you keep 77.5K = 67.5K + 10K     
    • (Overall you keep more money)

Roth IRA

  • You can only contribute 5,500 to this account every year and can’t go back in time
  • The great thing about this account is that you use post-tax money (your paycheck) and you won’t get taxed on the gains so this account is very important to fund
  • You can use the money in this account to pay for your first home or certain emergencies

401K/403B revisited

  • Like the Roth, the 401K has a contribution limit of 18,000 so the next goal is to maximize this contribution as well
  • You lower your taxable income so this account has an immediate impact come tax time

Brokerage account

  • Now that you have a 401K and Roth fully funded, I would recommend opening a brokerage account to grow your after tax money (paycheck)
  • At this point it is a personal preference what to invest in but I still use the mentality of long term goals to pick my investments

Health Savings Account (HSA) – Optional

  • An account similar to a Roth IRA that grows tax free and is mainly supposed to be used for medical expenses. At a certain age though you can pull the money out for general use
  • This is a personal choice, I chose to do this and got really sick and it ended up being a detriment. I have since decided not to use this account.
  • This account as along as you are healthy and don’t have any accidents acts as a second Roth IRA which is what attracted me to it.

Emergency Fund

The most useless account of all time

Most people recommend starting with an emergency fund that at least covers 8 months or so of your expenses. They recommend keeping this in a nice safe savings account for a rainy day.

This seemed like a lot of money. If you have a total of 3K in expenses a month you are expected to have 24K in a savings account earning next to no money.

My approach to a emergency fund is at follows

  1. Calculate how much of your expenses you can’t pay with a credit card
  2. Calculate how much of your expenses you can pay with a credit card you would still have during an emergency
  3. Plan to downsize during the emergency (Bare bones living)
  4. Use 0% interest credit cards for the expenses that can be paid with a credit card and either balance transfer the card when the 0% interest period ends or pay it off if things get better before the promotional 0% interest period ends.
    • Usually 0% interest for 12-18 months
    • Make sure your credit limit can cover 8 months of your expenses
    • Chances are that you would need about 8K credit limit
    • You can ask for an increase if you get approved for less but chances are most people get larger credit limit


 Let’s say you have 2K/month in expenses that can’t be paid with a credit card (mortgage, electricity, gas and water) and 1K/month in expenses that can be paid with a credit card

Regular Savings Approach (8 months of savings)

  • Savings Target A -24K
  • (2K + 1k)/month * 8 months  = 24K
  • Typically this money is put in a savings account with a low interest rate

My Method – Invested Savings

  • Saving Target B  – 16K
  • 2K/month * 8 months  = 16K
  • You only cover the expenses that can’t be paid with a credit card as you will have a 0% promotion to cover those expenses and will only be paying the minimum
  • I would invest in the stock market on a broad market ETF but you do run the risk of apart when I actually need the money

This plan also gives you the advantage that you probably won’t have an emergency every year so your money can grow with the stock market and inflation.

If your savings account earns 1% and the stock market earns 5% on average after 5 years you would have something close to the following in the account

Starting funding Interest After 5 years After 10 years
Regular Savings (A) 24K 1% 25.22 26.51
Invested Savings (B) 16k 5% 20.42 26.06

Emergency Summary

As a summary, instead of having to save 24K for 8 months of emergency funding at a expense rate of 3K/month in a low yield savings account you can save 16K in a brokerage account on a low risk investment vehicle like a SNP500 ETF and have a 0% credit card for other expenses during your emergency.

 Overtime you may also find that this type of emergency fund will grow and you might actually be able to pull money out.


Checking and Savings

Checking account

  • I usually keep about 2x of my monthly expenses in my checking account. That means at some point in the month my bank account is about 2x my expenses and at the lowest (when all bills are paid) it reaches 1x of my expenses

Savings Account

  • I don’t have any, I would rather have my money in the previous investing vehicles and increasing the amounts I automatically invest
  • If I had to have a savings account, I would have a money market account or a CD but I would never have a regular savings account
  • Savings accounts give you next to nothing in interest so they really are not worth it. You might as well get a interest checking account


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