Fabricating Double Duty Money
I love when something you have can pull double duty. Like a Swiss army knife that is not only a super useful blade but a toothpick and tweezers. Yeah, that is awesome! Now, what if you could get your money to pull double duty in the same way and get a year ahead at the same time. Let me explain.
I’ve got a little tiny problem festering in our financial life. Our lifestyle, (think expenses) has grown over the last 5 years but our emergency fund has not. I have the same stash of money, sitting in an online saving account that I had 5 years ago.
I keep telling myself I need to contribute some money to the e-fund but other financial needs seem to steal my attention like a noisy kid in a quiet classroom.
I have been buying shares of VTI(Vanguard Total Stock Market Index) and paying extra on my mortgage, but never sending more money to that boring emergency fund. Why? Because with a 2% return on investment, it qualifies as my most boring account.
There is a direct correlation between return on investment and risk. With nearly zero risk, a savings account is always going to have a lower yield than you might find in a riskier investment like stocks or real estate.
However, I have hatched a plan to make my pedestrian money pull double duty.
As a nurse, winters are my busy season. A bad flu season translates into nearly limitless hours of overtime-although my employer caps nurses at 108 hours per pay period for safety concerns.
Every winter I use this bolus of overtime money for paying down debt or acquiring assets. In other words, building my net-worth.
While many of my colleagues are using their overtime money for increased consumption of material goods, I am diligently engineering a future that includes less work and more freedom for meaningful passions.
These are some of my past accomplishments:
- In 2016 I used overtime to pay off our car.
- In 2017 I purchased nearly 100 shares of Apple stock.
- In 2018 I used my overtime to max out my 403(b) by June.
In 2019 I am going to max out my IRA early.
With my 2019 IRA maxed out, I will take the $500 per month that was going to my IRA contribution and divert that money to my online savings account.
This serves 3 functions.
mathematically speaking investing a lump sum wins over dollar cost averaging.
If I had $6,000 dollars sitting in an account to invest, mathematically speaking, it is better to invest all of that money today versus spreading out the investments over a period of time. What happens though, emotion gets in the way of the math, I am certainly guilty of this.
Fear that the market will go down prevents you from investing in one lump sum. Over time the stock market gradually increases and the money you invest each month gradually buys less. That is not a win for you or your money.
Real world proof. This past January, a friend sent me a text asking for help with maxing out their Roth IRA for 2019.
You read that right. My friend wanted to max out their IRA in January. I was thoroughly impressed. After 10 minutes of helping my friend navigate the Vanguard website, they had deposited all $6,000 dollars required to cap off their 2019 Roth IRA.
I remember warning my friend that the market was volatile in January and after a precipitous market decline, I even warned my friend, they should think about waiting a couple of weeks to let the markets settle down.
Despite my erroneous suggestion, my friend forged ahead and the market rallied for the next three months gaining nearly 13%.
The moral of the story is, no one can predict what the stock market is going to do today, tomorrow, or next month. What is known though, over the last 100 years the stock market has gone up and I bet dollars to doughnuts that the market will continue to do so for the next 100 years.
I will be expanding my online savings account.
By maxing out my IRA early and then diverting my increased cash flow to an online savings account where my e-fund lives, I will be adding a much-needed boost to my online emergency fund.
I aim for an emergency fund equal to 3 months of our family’s expenses. In a low unemployment environment, I feel comfortable with 3 months of expenses. In the event the 3 months of available e-fund were exhausted, I could liquidate some taxable investments (stocks).
In the past, I have thought about increasing my e-fund to 6 months or 1 year, but I would rather have my money invested. Until recently high yield online savings accounts were paying a measly 1%.
I plan to get an IRA year ahead.
Why have I never done this before? Honestly, I’ve had the idea of maxing out my IRA early. What stopped me dead in my tracks was the realization that once I was no longer allocating money to an IRA, the money would be lost to lifestyle inflation.
I have a real-life case study to prove it. Last year I maxed out my 403(b) in June. You can read about my race to the max in 2018 in the link below.
For the last 6 months of 2018, our financial life was artificially made easier. We had extra money for eating out and grocery expenses seemed less cumbersome, among other things. Despite my best efforts to skim money off of our checking account after each payday, money was lost to lifestyle inflation like sand through your fingers. Have I ever mentioned I struggle with budgeting?
Lifestyle Inflation Solution
I had a lightbulb moment recently when Josh Overmeyer suggested on Instagram that I should max out my IRA today and save my monthly contribution into a high yield savings account.
Mistakes are human, learning from them is infallible. In 2019, with my IRA maxed out, I will set up $500 automatic contributions to my high yield online savings account.
With this mental hack, I will not be losing any money to lifestyle inflation, while also creating a pile of cash. Come January 1st, I can max out my 2020 IRA and be a year ahead of schedule.
How does my tale of having a new idea for funding my IRA help you? Here are the takeaways.
- If you don’t have an emergency fund, start one asap.
- If you don’t have an IRA, start one asap.
- make your savings automatic for an easy path to a million dollar net worth.
Any old savings account will work for starting an emergency fund but what you are really looking for is a high yield (interest) savings account. Some of the best accounts are found with online banks that currently have interest rates as high as 2.5%.
These 3 online banks offer no minimums for opening an account and pay top tier interest rates on any balance.
Capital one 360 is currently offering a $200-$500 bonus through May 19th, depending on balance transfer amounts.
So if you have your e-fund sitting in a brick and mortar bank earning a measly 0.25% yield, you need to find something better because you could be missing out on hundreds of dollars in interest per year.
If you don’t have an IRA or a Roth IRA you are missing out on one of the best retirement vehicles available to Americans. Your IRA is not linked in any way to your employer so switching jobs does not affect your IRA in the same way as a 401(k) would.
You can read my article 4 Reasons Why You Need A Roth IRA
My top 2 favorite places to open your IRA are Vanguard and Charles Schwab.
Incremental improvements in life are my jam. Every day I am trying to find a better way to live a more meaningful, intentional and fulfilling life. Something as little as finding a new more efficient way to fund my Roth IRA sparks joy in my life that spills over into all aspects of life.
Thank you for reading this article. Please leave a comment and tell me what you think about my “new” plan.