Previously, we talked about building an IPS (Investment Policy Statement). We’ve worked out how to get ahead from paying ourself first and thinking with a Rich mentality. We learned the Investing Order, finished our Emergency Fund, and took our employer retirement plan match.

Now, the world requires me to put a disclaimer: This is all educational information, not financial advice.

With that out of the way. The question next is what do I do with the money I’m saving? We’ll try to discuss two things the Emergency Fund and actual investments. Everyone will agree that an emergency fund cannot fulfill its function in any form unless it is held in cash, but that doesn’t mean bills in your hands. Generally we want to utilize a High Yield Savings Account (HYSA), which is an FDIC-insured bank account that has a high interest rate. Vanguard has a Cash Plus account which has over 3% interest. Robinhood Banking has a 4.25% interest rate with some stipulations (My referral link is in the Toolbox). There are several others online with solid reviews.

The key is this FDIC-insured. This means that if the bank fails you can get your money back from the Federal Government. Why is this important? Because Inflation is the term used to explain that goods and services increase in price over time, while the purchase power of a currency will decrease over time.

Basically, $1 is worth more now than $1 will be worth in 10 years. This matters in an Emergency Fund because investing is how you beat inflation, and your emergency fund needs to be safe, but also not idle. Even a lower end HYSA interest rate of 3% will make you $300 per year in interest. My Emergency Fund sits at $20,000. That would mean I’m gaining $600 a year interest. So it is simple, but vital to find a reliable and easy to use bank that offers a high interest rate on your cash in your emergency fund. Chime has a good one but it requires you to use their checking account with direct deposit to get the rate. Vanguard is the easiest to access or get started with, but pulling the money back to checking can take a few business days.

With the Emergency Fund tucked away and making interest, it’s time to move on to investments. Employer Sponsored Plans, like the 401k, or your Individual Retirement Account (IRA), or a Brokerage account there is one thing they have in common. They will all offer you broad based Index Funds. These are funds that allow you to own partial shares of the fund, which is split over dozens or hundreds of companies. The most famous would be the S&P 500. This lets you own weighted slices of the top 500 companies in the US.

That means major companies like Apple are bigger pieces of the pie, but if a company starts to decline it will get moved off the list. The biggest key to index funds, besides diversification, is that they are focused on minimizing the fees you have to pay for holding them.

There are many of them, but personally I like the Vanguard versions. VOO is the Vanguard S&P 500 fund as an ETF that can be bought at any brokerage out there. If you are inside of Vanguard you get VFIAX which has even lower fees (0.04% or $4 per $10,000 invested). The total US market Index is VTI (VTSAX in Vanguard) which is every publicly traded US company. VT is an index of all public companies in the world, and VXUS is every company outside of the US.

The average return of both VOO and VTI over the last 100 years (which included the Great Depression) is 10.0%-10.5%. The average inflation rate over those same 100 years is calculated at 3.1%. This is where the internet frequently quotes the 7% return math.

Historical averages are key for future planning, but you have to remember that 2008 had a -37% return, while 2019 was up 31.5%. Over a 20 year time span less than 10% of professional funds/investors can beat the total US market in returns. Warren Buffet has even said many times that for most investors the Index is unbeatable for investing.

Estimates from Fidelity, Morningstar and Dave Ramsey say that roughly 80% of US millionaires made their money using Index Funds. This is where the money actually builds. Buying and holding index shares for decades will compound into the money you need to reach your goals.

Live below your means, invest the rest, let it compound for many years. Boring is proven to be successful. Please remember, this is introductory information. There are many nuances even in Index Fund choices. Take the IPS you made last week, and split your investing money equally among the funds that match.

~~Miniwing~~
Investor, Stoic, Parent