Investment Strategy

Most of what we do in life is “trading“, which means I give you this if you give me that. We do this with our time, money, emotions, and actions.

In the Personal Finance space, investing can come in different forms. For example, we can invest in assets such as a home, 401k retirement account, markets, gold, or in ourselves in the form of education and self-improvement.

But the reality is that a large number of people do not focus on investments and become mostly consumers instead of owners. and this is the most important decision to make financially.  If I have an iPhone, I am already a consumer, but if I buy Apple stock, then I am also an owner.

Before you can invest, you need to put yourself in a situation where you can allocate money from each paycheck to different goals, but if you are living paycheck to paycheck you need to make it a priority to get out of that situation ASAP.

This might mean making difficult sacrifices such as lowering your lifestyle quality in exchange to be in a position where you can pursue goals and financial freedom.

But this step is where most people fail because it is more important to live in a way that people expected they should live with specific standards such as a certain home size, location, and look and feel. Same thing for the cars we drive, the clothes we buy, and what we do in our spare time. Most people associate their self worth to their lifestyle and link their identities to the their job as well. This means that most financial decisions are made emotionally instead of rationally.

The best way I can think about investing is to create a system that works as often as you get paid to build different goals through buckets of focus. And you can have as many as you want while also being creative!

Let’s look at some bucket examples:

Security Bucket.

These are safe investments.

You need to have savings that equal your monthly essential expenses from six months to a year. This should be in a secured account such as high interest savings, money market, or CD. You can get 10 times more interest on Internet Banks such as Capital One or Discover compared to the traditional banks. Do your research and make sure the bank has FDIC insurance on the accounts (most do).

Growth Bucket.

These are investments where you can afford some risk for long-term growth.

Retirement and non-retirement investment accounts qualify.

For retirement, it is recommended you put aside at least 10% of your income. If your employer offers a 401k with a match, contribute the maximum percentage that can be matched.

If the percentage being match is less than 10%, then allocate the remaining percentage to a Roth IRA if you want to accomplish the 10% retirement allocation goal out of your income.

A Roth IRA has different tax benefits than a 401k and will give you tax diversification and more flexibility with your retirement investments because you will have more control over your investment selections compared to a 401k where the funds offered in the plan are limited.

These retirement accounts are long-term and dedicated to your retirement. There are penalties and tax consequences if you withdraw money from them before retirement age. A 401k account has more strict consequences while the Roth IRA gives you some flexibility. Do your research.

For non-retirement investment accounts, you have more flexibility, you can invest long-term or short-term, you can sell whenever you want and pay taxes on the gains without the limitations found in retirement accounts.

There are really great solutions that will make it easier for you to get started.

If you want to buy individual stocks, bonds, crypto currencies, or ETF (exchange traded funds) without paying commissions there is a great service that allows you to do just that: Robinhood.

If you want a balanced portfolio of broad market low-cost index funds with exposure to domestic, foreign, and emerging markets with allocations to dividend funds, bonds, and commodities, then I recommend Wealthfront.

Wealthfront automates all the allocations and re-balances for you. It will give you a brief questionnaire to determine your risk situation based on age among other factors and recommend an allocation percentage in the different classes of investments which you can set manually as well. All you have to do is deposit your contribution each time you receive your paycheck (or as often as you prefer). They offer retirement and non retirement accounts as well.

Dream Bucket.

This bucket is dedicated to expensive fun experiences you want to create. Vacations is a good example.

You don’t want to just invest money without allocating anything to doing some great and fun every so often.

Conclusion.

This strategy could be described as a savings and investment budget in a way, but for me is more of a system. When you figure out what is the percentage that you can save in each paycheck, then you can allocate different percentages to each of these buckets. For example:

If you create the ability to save 25% of your income, you might decide to allocate 10% to retirement, 5% to non-retirement investments, 5% to your emergency fund, and 5% to your dreams.

The most important thing is to pay yourself first. That means that as soon as you get paid, you follow this type of savings structure (customized to your specific needs) and only after you are done with this, you can start paying your regular expenses.

This simple behavior will create a habit that with repetition, will become automatic, but also will prevent you from expending the money on other things that non essential and we justify in our head with emotion.

I hope this was useful to some degree and was beneficial to you.

See also related blog post: Personal Finance Strategy