Reddit reviews The Truth About Money 4th Edition

Hi there. These were 2 books that got me started with getting serious about saving, investing:

The Millionaire Next Door

The Truth About Money by Ric Edelman

I like them both because they are easy to read and understand. Written in a conversational style and accessible to the public.

>Man, this subreddit always makes me feel like garbage.

Don't sweat it. Just by reading this and caring you're ahead of most people. The subreddit will self-select for people who have the time and money to invest.

> 401k up to employer match
> Max out Roth IRA
>* Max out 401k

Even if you only get partially through the second step, you're still doing well. The money you invest now will be worth much much more after growing for a couple decades. The habits you develop now on good saving will be even more valuable. :-)

>That's it. I don't really know the difference between stocks and bonds and I have no idea what any of these acronyms are, but I guess that's why I'm here: to learn.

Here are some good books to learn from-- go check your local library for them or even an earlier version:

http://www.amazon.com/gp/product/0062006487/
http://www.amazon.com/dp/0470067365/

0. Read The Truth About Money by Ric Edelman, it covers all the basics

https://www.amazon.com/Truth-About-Money-4th/dp/0062006487/ref=sr_1_1?ie=UTF8&qid=1522467370&sr=8-1&keywords=the+truth+about+money


1. Have Zero debt


2. Live as cheaply as possible but maintain a healthy balance between frugality and enjoying life. Save 50% or more of your net income

$72,000 gross annual income - 22% federal tax - 9% California state tax - $16,800 annual expenses = $32,880

If you save all of that $32,880 every year, you might be able to achieve financial independence in 10 years (with some caveats, do read the fine print and do all your research about FI):

https://networthify.com/calculator/earlyretirement?income=49680&initialBalance=0&expenses=16800&annualPct=5&withdrawalRate=4

Also see https://www.reddit.com/r/financialindependence/

3. Three to 12 months living expenses ($4,200 to $16,800) in a liquid account (bank checking/savings or Vanguard Prime Money Market VMMX).

Liquid means you have instant access (or max 3 days) to your money. This is money you CANNOT put in the stock market, it MUST be liquid and low-risk. Bank CDs are not liquid enough.

Three months because it ideally takes you that long to find your next job. 12 months and you have plenty of cushion. Ideally you'd take 2-3 months to take off and chill in between jobs.

With your remaining money, you can take a long-term outlook, meaning put it in the stock market as per below but you can't touch it for at least 20 years because that's how long you'd expect the market to even out the lows and the highs.

4. Maximum IRS annual contribution to Traditional 401k plan ($18,500 as of 2018).

That's $18,500 you're shielding from income taxes. Where do you invest the money? Stock index funds with the cheapest expense ratio you can find (0.06% or cheaper) and annual returns of 6% or better like VFIAX, VTSAX, or VBIAX.

Beyond those funds, if you want to fine tune your ratio of risk to return, you'll need to understand the difference between small-cap, medium-cap, large-cap, and their permutations (small-cap growth, small-cap value, mid-cap growth, mid-cap value, large-cap growth, large-cap value), and ideally you'd buy only index funds of these permutations, as index funds have lower expense ratios than managed funds. Don't forget international stock index funds.

Given that you're age 29, if you want to retire at age 59.5, let your money ride the stock market and grow for most of the next 30.5 years.

As you get closer to age 59.5, adjust your allocation, i.e., shield your money from the volatility of stock index funds by moving your money toward the safety of bond index funds according to a formula, on which opinions vary:

https://www.financialsamurai.com/the-proper-asset-allocation-of-stocks-and-bonds-by-age/

https://www.investopedia.com/articles/investing/062714/100-minus-your-age-outdated.asp

http://money.cnn.com/retirement/guide/investing_basics.moneymag/index7.htm

5. Maximum IRS annual contribution to personal IRA ($5,500 as of 2018).

Personal meaning over and above your employer's 401k plan. Unfortunately that's $5,500 after income taxes. You might as well put this money in a Roth IRA (versus a Traditional IRA). Where do you invest the money? I'd take the same approach in #4.

However, the advantage of a Traditional IRA (versus Roth) is you can rollover your Traditional 401k money into this Traditional IRA as you move from employer to employer without worrying about conversion calculations. I suppose you could also rollover your Traditional 401k money into a Roth IRA but I don't know how complicated that is.

6. Brokerage account with Schwab (or your preferred broker).

With the remaining money (not counting money you need for short-term financial goals like buying a car, etc), open a trading account with Schwab and buy more stock index funds with the same long-term outlook as #4 and #5 (more money toward retirement).

Keep in mind each trade (buy or sell) will cost you $5+ no matter how many shares you buy/sell.

You must be ok with not touching this money for the next 20+ years, although you can sell in an emergency without the early withdrawal penalty of your retirement accounts.

Ideally you'd only sell after minimum 1 year so you pay the long-term capital gains tax rate of 15% and not your standard income tax rate which is currently 22%.