Top 10 reasons for having an emergency fund – debunked (Part 2)

This is a follow up from our post last week when we couldn’t fit debunking all the arguments for emergency funds into one post. This is also good place the point out some of the great work other bloggers have done on this topic:

Here are our reasons 6-10. Enjoy!Read More »

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Top 10 reasons for having an emergency fund – debunked (Part 1)

In a past blog post, we pointed out that a $0.00 emergency fund is most useful for us. Lots of visitor traffic came from both Physician of FIRE and Rockstar Finance (thanks for featuring us!!!) and most comments were very supportive. Good to know that others follow a similar approach. To make the case more complete we should also look at some of the standard arguments people normally use in favor of keeping a large stash of cash for emergencies.

That’s because in addition to some of the complaints we got in the comments section, someone we quoted in our post, Scott Alan Turner, is a blogger and podcaster and he dedicated almost an entire 28 minute podcast (transcript included if you don’t want to spend 28 minutes) to our theory and why he thinks we’re wrong. We respectfully disagree!

For full disclosure: I really like Scott’s blog and podcasts in general. I mean no disrespect and like to invite everybody to check out his material. I agree with most of what he has to say, just not the advice on emergency funds! Enjoy!

So, let’s look at some of the arguments in favor of an emergency fund and debunk them. It took us a while to put this together, but better late than never!Read More »

Gold vs. Paper Money: a rant

Have you ever seen these TV commercials:

“Governments are trillions of dollars in debt and are printing paper money at record pace. So, don’t invest your retirement in paper money. Transfer your IRA to a Gold IRA at XYZ Capital. Call now for your free IRA transfer kit.”

I have to cringe every time I see or hear that. What deceptive marketing! Our financial assets (equity ETFs and Mutual Funds mostly) are not invested in paper money, they are merely denominated in paper money. In fact, if people are so troubled by measuring their equity portfolio in USD paper money, they are free to measure it any way they want: ounces of gold, metric tons of copper, bushels of wheat, gummy bears, the choices are endless. And by the way, don’t forget that gold is denominated in paper money USD as well!Read More »

The ultimate retirement account comparison in one single Google Sheet

Some people argue that there is a rule of thumb for which account is more attractive when saving for retirement (both early retirement and “normal” retirement). Jeremy over at Go Curry Cracker likes the 401(k) and is skeptical about Roth IRAs, while someone on Kiplinger recently recommended the Roth and trash-talked the regular 401(k) in light of higher projected future tax rates. Who is right? Nobody. There are likely no universally true answers to the following (and many other) questions:

  1. Taxable account vs. Roth IRA?
  2. Roth 401(k) vs. regular 401(k)?
  3. After-tax 401(k) contributions or a taxable account?
  4. Should I invest in a high-fee 401(k) at work or a low fee taxable account?
  5. What is the drag in after-tax returns from having to pay taxes on dividends throughout the accumulation phase?
  6. If you have a lot of money to invest and already max out the regular 401(k), should you shift more money into a Roth 401(k), to get more “bang for the buck?”
  7. Should I roll over an IRA to a Roth IRA?
  8. Should I use a deferred variable annuity to boost tax-deferrals?
  9. Pay down credit card debt first before saving for retirement?

It all depends on the individual situation, tax rates, expected return assumptions, account fees/expense ratios, etc. The only way to tell which account is more attractive is to get out the spreadsheet, punch in your particular parameters and compare. But how do you do that? Others did it before but sometimes we have the feeling they compare apples and oranges. A Roth 401(k) is best because you can withdraw tax-free? Not necessarily because you have to take into account the taxes you pay upfront when contributing to the Roth IRA.

We came up with an easy way to make sure you compare apples to apples to gauge the relative attractiveness of different accounts. Read More »

How to invest a house downpayment fund

Our previous post on emergency funds got a lot of traffic and we received mostly praise for the post (see here and here). One issue mentioned by some that got us thinking is how to save for a house down payment or some other large expense in the future. Should we apply our same rule as for the emergency fund, i.e., invest it all in risky assets to get greater expected returns and avoid opportunity cost? Or is this a different animal from an emergency fund?

Since we still can’t time the stock market we would lean towards keeping money in stocks until it’s time to withdraw. So we first make a case in favor of equities. But we concede that there can be situations where you want to take less risk, say, where you could lose your dream house if you are short even a single dollar in your down payment fund, so we present some options for that scenario as well.Read More »

Early Retirement Math 101

Here are some simple calculations to show the benefit of compounding and the power of turbo-charging your savings. If you don’t believe you too can get rich in 10-15 years keep reading!

The power of compounding

For the average retirement saver this effect is huge. Compounding your investments over 40 or so years works wonders with your savings. If we assume a real index return of 5% (net of inflation, dividends reinvested), the first dollar invested grows to $7.04 in real terms. Investing one dollar every month, adjusted by inflation and compounded with 5% annual return gives you almost $1,500 after 40 years.

For the turbo retiree who wants to retire after, say, 150 months (12.5 years), compounding has a lot less opportunity to unfold. That first dollar grows to only $1.84 in real, inflation-adjusted terms. Investing one dollar monthly (inflation adjusted) and getting 5% real return yields only around $206 after 150 months.

What we lose due to less compounding we have to make up with frugality!

The power of frugality

During the accumulation phase, every dollar we don’t spend every month accelerates the retirement date in two ways:Read More »