Since I became active in WSO several weeks ago, I've noticed a few threads on "I have this much money, what should I do with it?" And the amounts have ranged from $2,000 to $20mm, and to put it bluntly I'm tired of people giving stock tips to strangers when they have no business doing so. Now, astute investors like @heister will definitely give you some great ideas and share experiences on how he's invested his money, but if you ask for stock tips before you've gotten basic personal finance right, you've got it backwards. In this thread, I'll attempt to answer that question on a 30,000 foot level and entertain questions in the comments.
So you know my background, in late 20s, partner in a practice (one of the big 3 wirehouses: MS/ML/UBS) in the southeast with around 500mm AUM, responsibilities are marketing, AM, and general financial planning. I am client facing. I say this because there are several people I know who are help desk people at Vanguard in places like Charlotte who say they're financial advisors just because they have their Series 7 and answer questions about what a 12b-1 fee is. Not to knock that job, but I think it's important you know what I do, for whatever that's worth.
No matter how much money you have, you need to learn basic personal finance habits. Whether we're talking $5k you got as a graduation present, $100k you got as your Associate bonus, or $20mm you got because your friend's startup of which you were a shareholder went public and became the next Angie's List, you need to do some basic things first (in this order):
1. Rainy Day Fund:
This is a pile of cash (not literally, use a bank/brokerage account) that exists solely for emergencies and unexpected expenses over and above what you can take care of from your paycheck. Things like hospital bills, insurance deductibles, major car repairs, speeding tickets, etc. Ideally this should be at least 6 months' salary (not just living expenses, salary), but you'll occasionally hear 3-6 months of expenses. The reason I say salary is because most quality jobs take a while to find (especially if you have to move), so if you can essentially be "paid" for 6 months if you found yourself in Morgan Stanley's commodity business that got sold, you don't have to settle for a lesser job just because your savings account has run dry. Also, if you got laid off and have to go through interviews, you're going to want a new suit, make sure you have the cash to clean up your wardrobe
I could write an entire thread on how to get good credit, what to look for in mortgages, credit cards, etc., but honestly a lot of the incremental benefits you get from one provider to the other are moot. If you don't mind debt, pay down/off your higher interest rate stuff if you have the extra money. Otherwise, keep the minimum payments going. I personally recommend not carrying a balance on credit cards, which may not always be the optimal money decision, but it's a great habit to get into (use it like a charge card, not a loan). If you hate debt, pay it down/off as much as will help you sleep at night.
3. Retirement Savings:
Max it out, period. If you have the salary, max this out even if your company doesn't match. Again, while you may be able to get better returns if you trade pork butt futures, the fact that 401k plans are automatic, passive savings plans (you don't have to make the decision to save each paycheck) make them effective vehicles for the average person. I'm a fan of Roth personally, but it depends on the person. I won't get into the weeds of that here, though. This also includes any on the side savings that's specifically for your retirement, be it revocable trusts, IRAs, etc. Won't get into the weeds of finding out how much you need to save, because this number varies from person to person, but if you truly save the most you possibly can and invest along the way, you'll be fine.
4. Other goal savings:
this includes vacation, weddings, college, etc. The reason I say take care of retirement first is I'm a big believer in taking care of #1 first. You can elope in a courthouse, you can skip vacation, you can borrow for college, you cannot borrow for retirement. After your retirement savings are taken care of, it's time for other things, and the priorities will vary from one person to the other. When you're in your 20s, it may be wedding, then vacation. When in your 60s, it may be vacation, then college/wedding for grandkids. Whatever the case may be, determine where these goals rank in priority, how far away they are, what the dollar amounts will be, and how much you're willing to dedicate to this goal.
5. Non-financial stuff:
This includes things like POA (power of attorney), HCPOA (health care POA), Living Will, will, trust, life insurance, disability insurance, IRA beneficiaries, etc. It's a good exercise to review all of this stuff every 1-2 years or every time there's a death/divorce/marriage in your immediate family. The last thing you want is to die with all of your money going to an ex and have your kids/new spouse be screwed. When you get HCPOA/living will, carry a little card with you in your wallet or in your car that indicates who those people are (wherever you keep your health insurance card) so if something does happen, the hospital can take instructions from somebody. Some firms will even give you an electronic version of this so the hospital can view it right there. Point being, get all of this stuff set up however it works best for your personal situation, and review it on a regular basis (again, every 2 years is fine less a major event in your family).
Notice I didn't talk about investing here? That was on purpose, too many people lose the forest through the trees here. The thing is, although I'm decidedly a value guy and firmly believe that over long periods of time value stocks outperform, picking all of the best stocks will not help you pay for groceries if you get laid off (especially deep value!). Once you have the above right, you're ready to get into the weeds and either interview people to help you out or embark on your own and become educated about what to do with your investments. I imagine I'll get specific investing questions in the comments, so I'd rather not write a dissertation on that here.
Also, I always think rules of thumb are helpful, and even though these are not going to work for everyone and nor will everyone agree with them, here are a few I enjoy (some are overly conservative, FYI)
5 Rules of Thumb
1. Save 10-20% of what you make, put half of that savings towards cash (assuming #1 above is taken care of) and half towards investments. Once your cash hoard exceeds your "other goals" and emergency fund needs, invest that money
2. Never buy a house that's more than 2x your annual household gross income (your income + spouse, gross of taxes, multiplied by 2. So if you're both analysts making 100k, don't buy anything more expensive than a 400k house)
3. Never have non-mortgage debt be over 20% of your budget (cars, student loans, furniture loans, etc.)
4. Take your annual spending, divide by 4%, that's the amount of money you need to retire with your current lifestyle, in today's dollars. Obviously that will change if your lifestyle changes and it doesn't take inflation into account, but still a good exercise
5. And my personal least favorite: your allocation to stocks should be 100-minus your age. I personally do not like this as this greatly depends upon risk tolerance and overall level of wealth, but it will help prevent you from blowing yourself up in the stock market even though it will lower your long term return. I hesitated adding this but I felt it was worth mention.
If you have any questions, feel free to ask here or PM me.
Mod Note (Andy): #TBT Throwback Thursday - this was originally posted on 5/16/14. To see all of our top content from the past, click here.