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In case I get hit by a beer truck, here’s everything important that I’ve learned about Personal Finance over my lifetime.

Make sure you read the ABOUT and DISCLAIMER pages before taking action.

For Feds who are Veterans, make sure you read all the stuff about Military Service Credit Deposits so you can make the most of your FERS Annuity.

Note that I use the terms TSP and 401k interchangeably, as they are treated the same under IRS rules for a ‘Qualified Retirement Plan’.

 

Early Career Savings and Short-Term Savings

Save at least 10 percent of your gross salary per year.

When you get promoted, try and put as much of the ‘new’ money into savings as well.  Use this money as ‘dry powder’ for retirement, furthering your education, a down payment on a house, or money you may need to hold you over if you decide to switch careers later.

Save as much as you can in tax-deferred retirement accounts (401k/TSP) and never leave ‘free money’ (employer matching contributions) on the table.  You cannot earn a better rate of return than money handed to you for free.

Where to park short term money (0-3 years)

Note that an average ‘bear market’ is a drop of 30% in the S&P 500’s value/index price for 30 months.

If you’re looking for short-term places to stash monies, Buy a short term TIPS fund, individual bank CD’s (preferrably brokered CDs through Schwab/Vanguard/Fidelity), or individual short-term Treasury bonds/notes (via TreasuryDirect or also for free through Schwab/Vanguard/Fidelity).

If the series I savings bond is offering a ‘fixed’ rate of 1.0 percent or better (and you can handle deciphering the byzantine rules around purchasing and redeeming Series I Savings Bonds), consider using Series I savings bonds (via exclusively through TreasuryDirect.gov) for rainy day money.

Medium Term Savings (3-5 yrs.)

This nut is harder to crack.  It’s easy to say that 3 years is too short a time horizon for stock market investing, and that you should be in short-term bonds or CD’s.

Some say you should have some stock market exposure for a 5 year savings horizon but I disagree.   Go look at Dow or S&P 500 returns for 2000 – 2010.

Medium-Term money is best kept in either medium-term treasuries or CD’s with maturities between 3-5 years.   The TSP ‘F’ Fund or the AGG ETF are ok, but I prefer fixed investments with maturity dates that match your ‘need date’.  That is, if you need the money in exactly 5 years, buy a 5-year CD or a Treasury that matures in exactly 5 years.     In this scenario you are guaranteed the money you put in- plus the promised interest rate- in 5 years.

If your only purchasing choice (ie within TSP or 401k) is a bond fund, make sure the ‘Duration’ of the fund does not go beyond the time horizon when you will need the money.    You may have to do some research to find the ‘Duration’ of the bond fund in the Fund Prospectus pages or on its Fund Summary Page.   Don’t buy a fund with a 10-year Duration if you need the money in 5 years.    This is just like buying a 10-year CD for money that you need in 5 years.  This is known as a ‘Duration-Liability mismatch’, and can get you in to huge trouble if rates drop.

Duration-liability mismatch is what torpedo’ed Silicon Valley Bank in 2023.  You don’t want to end up like Silicon Valley Bank.

 

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Saving for Retirement/Long-Term Savings

As far as retirement fund choices go- You’re not going to beat the TSP, so just stop it.

You cannot beat the low expenses of TSP  and the stable-value fund (G Fund) product offering in the TSP.

Think about it.  Congress writes the rules for their own Defined-Contribution retirement plan (the TSP), so it behooves them to create plan rules to their own benefit.  Re-read this last sentence and Think about It again.

Don’t stare at your retirement account balances daily.

I’m paraphrasing former Barron’s editor Alan Abelson who said ‘Investing is like hiking up a mountain with a yo-yo.  The yo-yo represents the daily moves in the stock market.  If you stare at the motion of the yo-yo, you’ll never recognize the fact that you’re steadily climbing up the Mountain.’

The stock market (like the S&P 500 or the TSP ‘C’ Fund) is a solid long term bet for holding periods greater than 5 years.

If you need some facts to back this up, the companies that compose the S&P 500 have never encountered a negative year of earnings since the creation of the index.  The growth RATE of  S&P earnings has occasionally gone negative, and there have been negative individual QUARTERS of S&P earnings, and the perceived VALUE (ie the market index price) has dropped in a year (and sometimes longer), but there has not been a YEAR of negative earnings for the S&P 500 since its creation.

Stated another way, if the S&P 500 were one single giant company called ‘USA, Inc.’, ‘USA Inc’ would have made a profit EVERY YEAR since its creation:

S&P 500 Earnings – 90 Year Historical Chart | MacroTrends

Earnings per Share (Orange Line) and the Value of S&P 500 (Blue) over 90 years.  Note the Orange Line (Earnings) has never been negative.

Think about this before you send your hard-earned money towards actively-managed investment products, derivatives, options, market-timing strategies, Alternative Investments, Private Placements, Master Limited Partnerships, Non-Traded REITs, etc.

If you’ve done all the above for your Savings and still have cash left over at the end of the year (congratulations!), put the maximum amount you are allowed per the annual IRS limits in a Roth IRA.

 

Real Estate

The Real Estate Game can be hard to win because you typically pay an extra 10 percent in fees and expenses when you buy, then you pay 10 percent in fees and expenses when you sell.

That being said, Real Estate is typically a winner over the long term, as Housing Prices tend to follow local WAGE INFLATION (Not Consumer Price Inflation) over the long run.   This makes sense, as people can’t/won’t pay more than they can afford for rents or mortgages.  In the long run this is not sustainable.

If you’re going to be in a location more than 3 years and you like the schools and your neighbors, go ahead and buy a house you like in that neighborhood if you can afford it.

Over the long term, inflation drives the ‘real’ cost of your monthly interest payment to the bank to near zero.   Buying a house on a fixed-rate mortgate and holding it long-term is one of the only ways you will ever ‘win’ against inflation.

Use a VA loan (if you are eligible) to take advantage of the free refinance benefit if/when interest rates drop.

Another added benefit of the VA loan is that the loan is ‘assumable’ if the homebuyer is also a veteran.  DO NOT UNDERESTIMATE THIS BENEFIT. ‘Assumable’ means the house buyer can take over your mortgage under your original mortgage rate and remaining mortgage term.

This can make your house more attractive to a buyer if today’s mortgage rates are much higher than your existing VA loan rate.

If you have to move out of the above house for PCS/career move and you can rent out the home at a monthly rent  better than 1 percent of the TOTAL value of the house when you bought it, consider renting the house out to somebody rather than selling it.  Example, if you bought the house you live in for $350,000 4 years ago, you still have the original mortgage against the $350,000 value, and can rent it out for $3500 per month today, then consider renting it out rather than selling it when you move.  Research and find a good professional property manager and gladly pay them 10 percent of the monthly rents to take care of everything for you.

If this discussion about rental properties makes your head hurt then just sell the house and move on- You won’t like the drama of being a landlord.

Note that equity in your home or investment property is NOT LIQUID. DO NOT assume you can get your hands on this equity tomorrow (or even 1 year from now) if you need it. I learned this the hard way and had to stay in the workforce for an additional 2 years.

Said another way, if you cannot click a mouse button and convert an asset to cash, it’s not liquid.

 

Traditional vs Roth IRA/401k.

This has been a hotly debated topic ever since the creation of the Roth accounts in the late 1990’s.  In general, Roth accounts work best if you are in a low tax bracket when you make your contributions (ie your early working years) and make your withdrawals when you are in a high tax bracket.

However, to know the right answer you need a crystal ball that predicts not only your tax rates for every year in the workforce, but also every year of your retirement.  Since I don’t pretend to know this answer for myself (or you) I try to keep about HALF of my tax-deferred retirement investments in Roth accounts and half in Traditional accounts.

That way I can make tactical decisions in each year of retirement based on my annual tax situation to pull what I need from Traditional, Roth, a combination of both, or neither.

Should I roll my 401k in to an IRA when I leave an employer?

While most pundits (and brokerage houses) advise you to do this so that you can have ‘more control’, keep in mind that most 401k plans have a provision that permits you to start making withdrawals without penalty if you leave your employer at age 55 (web search ‘401k Rule of 55’).

Unless you meet one of the rare conditions that allow early IRA withdrawals, IRA’s force you to wait to age 59.5 to make penalty-free withdrawals.

Is forcing you to wait an additional 4.5 years to withdraw retirement savings the definition of  ‘more control’?

Also, if you live in a sue-happy state (like the Democratic People’s Republic of California), a judge chooses how much of your IRA you get to keep if you get sued.

Don’t like that level of uncertainty in your retirement plan?  Then know that Pensions (like FERS and your retired Military Pension) and Qualified Retirement Plans (like the 401k, 457b, and TSP) are largely shielded from creditors and lawsuits. Example: A certain infamous retired NFL player got to keep his NFL pension payouts, even after he was found liable for two ‘wrongful deaths’.

TL;DR Version: TSP is the best version of 401k on the Planet.   If you have left an employer and their 401k provider has high expenses and fees (greater than 1 percent on the funds or account value expenses), then it might make sense to move it to an IRA with a low-cost provider.  Otherwise, keep your money in the 401k/TSP to take advantage of the Rule-of-55 and as a free ‘lawsuit insurance’ policy for your retirement savings.

If you like your new employer’s 401k, it’s ok to perform a trustee-to-trustee transfer of your old 401k in to your new employer’s 401k.  Think twice about ditching the TSP.

 

Cars

You can’t win the personal finance game with cars- Cars are just a necessary expense for most people and you’ll have to do your best to reduce the damage to your wallet.

Note: Temporary market anomalies or supply chain disruptions can alter the new-vs-used car math below.

Buy a used car that is off-lease (36 months old) that you like and drive it until the wheels fall off.

Avoid new car/used car dealer lots except for Carmax.

It is usually best to avoid leasing a car since the dealer/manufacturer is holding all the ‘cards’ and the transaction financials are not transparent to the buyer (you).  At the end of the lease, you own NOTHING and may actually owe MORE money if you are returning the car with mileage or damage that do not meet the terms of the lease contract. If you have a business that lets you write-off a car lease then the lease MAY work in your favor.

If you keep cars 10-12 years you can consider buying new via a new car buying service (ie Costco).

Again, avoid walking on to a new car lot ‘off the street’.   I’ve not once had a positive (or even neutral) experience purchasing a car by walking on to a new- or used-car lot ‘off the street’.

As for the make and model of car, research reliability on Consumer Reports, AND find a car that is manufactured at least 75,000 times per year.  Anything less than this annual volume means the manufacturer does not have sufficient data to determine the reliability of its components and manufacturing processes.  As an added bonus, this volume is also a sweet spot for finding reasonably-priced repair parts down the road.

Avoid buying a car model made in the introductory year of its life cycle/generation/body style.   Let other buyers be the guinea pigs and find all the faults in year 1 of a new body style.

Don’t forget to research the cost of insurance ahead of the purchase.  There can be a huge difference in insurance costs between different engine options and 2-door vs 4-door choices.

For service, create a relationship with a local independent mechanic who regularly repairs your make of car.  Dealers typically charge more for repairs and place a middleman called a ‘service writer’ between you and the mechanic who repairs your car.