Step 3: I Have Money, Now What?

I have money, now what?

You’ve been following financial blogs for a little while now (including this one, of course) and now you’ve got a little stash.  You’re now thinking,”I have money, now what?”  I am not a licensed financial advisor, this is my opinion and it has been developed through years of studying and experience.  This is what has worked for me.  It will work for you too, but I don’t consider it a “my way or the highway” thing.  Give this a shot, then over time you can adjust it to suit your style and decide what will work for you over the long term.

Step One:  Save an emergency fund… but just enough for an emergency.

The typical emergency fund is defined as 6-12 months of living expenses saved in cash.  I’m suggesting your emergency fund be much less.  The minimum you feel is needed to keep you solvent to the next month is what I recommend.  That is, your tolerance for what may go wrong in the next 4 weeks, plus regular monthly expenses.  For example, my current tolerance is $5000.  It’s so high because I have a cashflow negative rental property that is old.  I expect some things to go wrong with it from time to time, so my emergency threshold is higher than if I did not have it.  Your threshold could be much lower.  Of course, it could also be much higher!  I feel safe having that amount liquid so I’m not forced to sell stock because of poor planning, especially during a market downturn.  If I go below my threshold I save cash each month until it has been replenished.  I just stop investing extra cash until I have my emergency fund replenished.

Step Two:  Grow some balls, put the leftovers in a money market.

Open a Vanguard brokerage account, if you haven’t already, and put whatever is over your emergency fund into that.  A money market is very safe, you shouldn’t worry about losing anything there.  The reason for putting your extra cash in this account is to avoid seeing a large number growing in your checking/savings account.  Humans have one weakness, among many, that when we start to see a small amount of money growing we feel like we have money to spend!  Put the extra cash out of sight and you’ll check your temptation to spend it.

Step Three:  Before you have too much, invest it.

When you’ve moved a sum about equal to your emergency fund into your money market account it’s time to start investing!  I recommend investing everything in VTSAX.  Don’t complicate things, put your money there and forget about it.  VTSAX is a mutual fund compiled of over 1000 companies, if one dies it is simply replaced by another and your account will barely feel it, this fund is about as safe a market experience as you will get.  After you’ve saved your first million you have my permission to begin your “diversification experimentation” and buy individual stocks at your leisure!

I do not recommend you stockpile a whole bunch of cash and “buy in” when the market “drops”.  If you wait too long and save too much you will be hesitant to invest under ANY conditions.  You will convince yourself you can “time the market” and in the meantime lose out on hundreds or thousands of gains in the same time.  Timing the market is a losing strategy and a “beginner” mistake (that we are all subject to at some time or another).  Follow that strategy and you will wonder for years how anyone ever makes money in the stock market.  “If the market drops a little bit I’ll go all in!”  No you won’t.  Avoid trying to time the market.  Start investing as early as you can, before you have too much and become skittish.  Put your money in and forget about it.  If you have AT LEAST five years until retirement then time on your side.  If the market drops, history shows, it will take no more than five years until your account has regained its original balance.  Meanwhile you’ve been maximizing contributions during the downturn and you’ll end up with much, much more when the market recovers.

Step Four:  Checking Zero -or- Auto Invest.

You have your emergency number.  At the end of the month, or whenever your last bill for the month has been paid, move everything over the balance of your emergency fund into your brokerage account.  That’s right, every month you will invest whatever number is left over, minus your emergency fund, into the stock market.  This method is very easy.  I have, in the past, tried to zero out my entire account each month.  That is not easy, especially when something comes up and you have to sell some stock to cover expenses.  Having a number above zero means you still have a safe number in your account.  It’s not be hard to set aside the rest for your future!

If zeroing out your account each month is too much work, or you’re not following through, then I strongly suggest setting up auto invest.  Your 401k is set up to auto invest pretax dollars and is easy since you never touch it.  The money your hand touches after tax can prove more difficult to let go.  Setting up auto invest is like paying an optional bill to yourself.  Set up a predetermined amount to invest each month and watch your savings grow!  Don’t let your account drop below your emergency fund, select a number to invest that you know can be covered each month.  If you end up with extra in your checking account over time you can choose to invest it or treat yourself to something nice… like more stock, but I’ll leave that up to you!

Step Five:  Unless you can take the heat, leave well enough alone!

I’ve watched my account lose thousands of dollars in just a few days.  I’ve also seen it grow thousands of dollars in the same span.  I think I’m a little sick in the head, I don’t really care if my balance is in an upswing or downswing.  I have plenty of time before I have to start withdrawing money (at least five years, like I suggested earlier), so maybe that helps a little.  Watching money make its own money is very interesting to me!  Maybe if my number was cut in half I would panic a little, but I like to think I would just invest more during the downturn!  The only sale I suggested buying into is when stocks are half off!

If watching numbers makes you nervous then set it and forget it.  It will drive you bonkers if you check your account everyday, losing hair because you think you lost a few dollars that day.  Remember, it is just a number if you get rid of the dollar sign in front of it.  You have not lost ANYTHING until you hit the panic button, i.e. “sell”.  Until you sell you have not realized any loss.  At the end of the day you still have the same number of shares and they will eventually be worth the same number (with the exception of reverse splits and such… no need to worry about that with a mutual fund).  It can be fun to watch your account, but if you find it stressful then find a different hobby, trust that your account will grow over time as history shows it will.

So there you are, your beginners guide to WTF to do with your money once your saving more than you spend!  Keep it up and your net monetary worth will grow very quickly.

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