Post-Tax Investing with M1 Finance

September 23, 2019 By Deanna 1 Comment

I always recommend investing in your tax-advantaged accounts before doing any after-tax investing. The reason is if you can reduce your taxable income now, great. Chances are when the time comes to withdraw that money in retirement, you’ll be in a lower tax bracket.

Once you are maxing out your tax-advantaged accounts and are looking to invest more, you might be interested in opening an individual investing M1 account. This post is to give you my review of M1 Finance which is where I invest my post-tax monies. However, you can do tax-advantaged investing with M1 as well!

Tend to Your Financial Garden

October 8, 2018 By Deanna 4 Comments

Today, I’m using the analogy of gardening to talk about taking care of your financial life. Both gardening and finances require preparation and tending. If you do the work, both will produce a harvest of fruit. Furthermore, when you harvest in your gains, I recommend you store up some for later.

Prepare the ground in gardening and finances

Once you’ve chosen a plot of land for gardening, the first step is to till up the ground. Next, you’ll potentially need to improve the soil. This involves boosting and testing it until it’s optimal for growing.

When you decide to take control of your financial life, the first step is to lay the groundwork. You must know what type of ground you’re on by testing it. I propose you write out all of your debts, their balances, and their interest rates.

Now that you’ve shed some light on your financial situation you can choose a method to pay off your debt and improve the soil. The two methods I’m most familiar with are the debt snowball or the debt avalanche. Choose a method that works for you and/or a combo of both. Whatever you do, stick with it and see it to completion.

When you’re debts are clear, you’ve got good some ground for planting investments.

Pick your plants/choose your financial investment vehicles

Now that you’ve prepared the soil, you get to choose what plants you’d like to grow. Flowers or vegetables? Either way, you’ll want to choose the plants that are best suited for your climate, soil and the amount of sunlight your garden receives.

Are you do it yourself kind of person? Yeah, me too but be prepared to get your hands dirty. You can google different plants and/or go to your local garden store and read the labels. Additionally, there are usually pros working at the store who will dispense advice for free since you are a buying customer.

I’d argue the same amount of prep work in choosing the right investment vehicles is prudent.

First and foremost, I recommend having an emergency fund of 3 – 6 months of expenses saved. I have an emergency fund of 6 months in an easily accessible online savings account.

Do it Yourself Finances

Are you still a DIYer when it comes to finances? Yep, me too. There are plenty of resources out there and people who will share their experiences with you. I personally recommend the book, The Simple Path to Wealth by JL Collins. It answered all of my investment questions.

Furthermore, I’ve written a post on the basics of investing here.

In regards to choosing investment vehicles, I’d recommend you find out the answers to these questions:

What type of retirement account do you have access to through your employer?
Is there an employer match? If yes, how much?
What is the annual contribution limit for the current year?

In my opinion, maxing out your employer-sponsored retirement accounts should be done first. The reason being is that you can reduce your taxable income. Who doesn’t like to pay fewer taxes? Hands are going up everywhere!

Yeah, you’ll have to pay taxes on it when you take distributions later, but you may be in a lower tax bracket then.

The second set of questions to ask yourself are:

Do you have enough cushion to also max out a Roth IRA?
How about an HSA account – are you qualified to open an HSA?
Furthermore, do you have leftover money which you can invest in an after-tax brokerage account?

Not a DIYer?

Not comfortable in navigating the waters by yourself? Do you want to hire a pro? No problem. I advise you to understand a bit about what type of advisor you’ll be hiring.

If you decide to go this route, I’d recommend hiring a fiduciary. A fiduciary is legally bound to acting in your best interest.

Furthermore, hiring an advisor does not mean you give them your money to invest and walk away. It means sitting down with them and explaining your risk tolerance and your goals.

Additionally, it means choosing investment vehicles together. It should be a collaborative effort where the advisor acts as the teacher and you are the student with control of your decisions.

My friend, Fred, who writes over at Money with a Purpose is a fee-based planner and has been in the financial planning industry for years. He recently wrote a good article about choosing a competent advisor. I think this a good starting point in thinking about how you will choose one.

Put the plants in the ground and money in the accounts

So when putting plants (or seeds) in the ground, you’ll need to know the best time of year to do that. It will depend on the type of plant and your climate.

Similarly, depending on what type of investment vehicle you are parking your money in, you’ll want to be strategic about what time of year it is. Tax-advantaged accounts come with annual contribution limits. These limits are adjusted for inflation annually.

Furthermore, you have until the time you fill your taxes to max out the previous year’s bucket. It’s a way to reduce your tax liability. Simultaneously you can be contributing to your current year’s bucket.

I think the most important and efficient thing to do is set up automation. If you have an employer-sponsored retirement account, decide on an amount you are contributing to for the year (I max mine out) and have payroll automatically deduct it for the year.

You can set up automatic deductions for your other vehicles as well.

Water Your Garden

Here is where the analogy breaks down a bit but in a good way. With a garden, be it flower or vegetable, you need to water it frequently.

However, with a financial garden, you can basically set automation and forget it. Having an annual review should suffice for re-evaluating things like:

Changes in annual contribution limits
Do you need to adjust things based on evolving goals?
Have there been unforeseen changes in your life?
Has your risk tolerance changed?
Have you moved from wealth accumulation to preservation?

So one might argue that tending a financial garden is easier!

Pull Out The Weeds

With a garden, it will be necessary to pull out any weeds that pop up. You won’t want weeds impeding the growth of your flowers or vegetables.

The weeds to keep out of your financial garden are debt. When you own your entire paycheck you can embrace a high savings/investing rate.

During your investing life, you may have a mortgage but I would advise you keep any other debt out.

If you use credit cards within your budget, pay them off and on time every month!

Spend within your means.

Harvest the fruit/reinvest the gains

Harvest time is what’s all about.

With a vegetable garden, you’ll likely harvest more than you can eat. I know many people who blanch and freeze a lot of the harvest.

With investment accounts, I recommend reinvesting the dividends. Let the magic of compound interest work for you!

After all, you’re investing in your future so store up those gains for a later date.

It’s a way to hedge off a future famine.

Closing Thoughts

Bearing fruit requires putting in the work up front. You work hard for your money and deserve to enjoy financial peace. Take the time to tend to your financial garden and experience fruit for years to come.

The Magic of Health Savings Accounts

September 17, 2018 By Deanna 20 Comments

Health Savings Accounts (HSAs) can be a great tool for trifecta tax efficiency. Yep, I said trifecta! Additionally, they can be used as an investment vehicle.

Who doesn’t love to legally avoid paying taxes?? I do!

I wanted to invest in an HSA account. However, formerly my employer-sponsored health plan did not allow for that.

I did some research and was able to convince my boss into providing an HSA qualified option for me. Which leads me to the next point…

How Do You Qualify to Contribute to An HSA Account?

Firstly, to be able to contribute to an HSA account, you need to be on an HSA qualified medical plan. Because HSA accounts provide a tax break, the Internal Revenue Service (IRS) sets limits on the type of health plans that qualify.

I included a graphic taken from the Society for Human Resource Management (SHRM) on the limits for 2018 comparative to 2019:

HSA qualified plans are high deductible health plans in which everything is subject to the deductible. The only exception is zero dollar cost preventative care. Preventative care is included in all Affordable Care Act (ACA) compliant health plans.

As you can see from the chart above, the minimum deductible is $1,350 (single)/ $2,700 (family). There has been no change in deductible minimums from 2018 to 2019.

Of course, a qualified plan can have a higher deductible. However, the highest the maximum out of pocket can be is $6,750 (single) / $13,500 (family) for 2019. The maximums have gone up slightly from 2018 to 2019.

Obviously, with the IRS being able to change limits each year, you’ll want to investigate this in the year you are considering an HSA qualified plan.

Things to Consider

Your employer may offer several options in health care plans. There are several things to consider before choosing an HSA qualified option.

Step 1 – Open Enrollment

Ask your employer when is the open enrollment period for the healthcare plan. Additionally, find out what type of health care plan options your employer offers.

Each year your employer-sponsored health plan has an open enrollment period. During open enrollment, you can change from one plan to the next and/or come on if you formerly waived coverage.

Ask to see the Summary of Benefits and Coverage (SBCs) of the offered plans. Yeah, health insurance is like alphabet soup!

Anyway, the SBC will tell you almost everything you need to know about your health plan options. Furthermore, you’ll want to find out your share of the premium for all of the plans offered. This is also called your payroll contribution.

If your employer set up a cafeteria (or section 125) plan, your payroll contributions will be taken out pre-tax.

High deductible HSA qualified plans are typically cheaper in premium than the traditional type of plans with copays up front. That is because you must meet a deductible before the plan pays (except for preventative care).

Step 2 – Know The Deductibles

Deductibles typically run calendar year and re-set annually. There are some employers who have deductibles which run plan year and re-set when your plan renews. You should ask your Human Resource department about yours.

If you’re insuring your family as well as yourself, you’ll want to know if you plan has an embedded or aggregate deductible.

An embedded deductible is better as it protects single members inside of the family. It means that if one member of the family hits their single deductible, they are then covered. At least two members need to make up the family deductible before the entire family is covered.

An aggregate deductible means that the entire family deductible must be met before even one member is covered.

Example:

Let’s say you’re on a plan with a $1,350 (single) / $2,700 (family) deductible, 0% coinsurance & $1,350 (single) / $2,700 (family) Maximum Out Of Pocket (MOOP). I’ll explain coinsurance in a bit.

If it’s an embedded plan and one member of the family meets $1,350 in claims, that member is then covered 100%. Now if other members incur claims, combined they will have to meet another $1,350 before the entire family is covered 100%.

Now let’s say you have the same deductible, coinsurance and MOOP parameters but it’s an aggregate deductible plan. If one member incurs a lot of claims on an aggregate deductible plan, they will have to meet the family deductible of $2,700 before being covered 100%.

Step 3 – Know The Coinsurance

Coinsurance is a percentage that you split with the insurance company after the deductible has been met. If you have 0% coinsurance, the insurance company pays 100% after deductible.

Many plans have an 80%/20% split where after the deductible has been met, the insurance plan pays 80% and you, 20%. Know what this is! Your coinsurance share will continue until you hit your MOOP.

Step 4 – Know The Co-Payments

Some HSA qualified plans have co-payments after the deductible for certain episodes of care. The co-payments are typically for office visits, prescriptions drugs, urgent care, and emergency room. Remember if it’s an HSA qualified plan, the copayments kick in after you first meet your deductible.

These will continue until you hit your MOOP.

Step 5 – Know The Maximum Out Of Pocket (or MOOP ‘cus we are tired of typing out the same words) 🙂

All plans have a MOOP and this is the most you’ll pay in one calendar year for your health care expenses (not including premium).

Once again know what this is!

I recommend knowing these things when considering between healthcare plan options:

Premium
Deductible
Annual maximum out of pocket

If you know how often you typical seek care, you can estimate how much you’ll spend in a year. Additionally, make sure you can afford the deductible & MOOP.

Many people choose traditional plans with co-payments that kick in before deductibles are met. Reason being is that they know what they’ll pay each time they visit the doctor.

However, doctor visits are not really expensive. It’s the major tests, in-patient stays, surgeries, emergency room visits, and high-cost prescriptions that you need to watch.

If you can afford to cover your deductible then you should consider the HSA qualified options because you can tap into the magic of HSAs…

It’s Mostly About the Tax Break

Once you’re on an HSA qualified plan, you can contribute up to certain amounts set by the IRS each year into a tax-advantaged HSA account. Go back up and look at the graphic taken from SHRM.

The 2019 contribution limits are $3,500 and $7,000. They’re going up slightly from 2018. If you are currently maxing out your HSA for 2018 (me included), you’ll want to make sure you let payroll to increase it in January to the new limits for 2019.

HSA accounts are so magical because you can contribute pre-tax dollars to them. Furthermore, if you use the money for qualified medical, dental, and vision expenses, you will not have to pay taxes on the backend. Score!

It’s Also About the Investment Opportunity

Most HSA accounts allow you the opportunity to invest your contributions into mutual funds. This means you can have tax-free contributions, tax-free growth, and potentially tax-free distributions. Winner, winner chicken dinner!! It’s a trifecta!

I cannot write an article about HSAs without linking to this stellar article by the Mad Fientist. He nails it.

The way you can get the tax-free distributions is to use it for qualified medical, dental, and vision expenses. You can do this one of two ways:

Use the HSA account as a debit account to pay for your qualified expenses.
Invest the HSA monies, pay for your qualified expenses with post-tax dollars, save your qualified expense receipts, and reimburse yourself later.

The second option can be useful for the person looking to retire early and wanting access to investments.

Edit: Seonwoo reminded me of the absence of a time limit in reimbursing yourself. As long as you save your receipts for qualified medical, dental, and vision care, you can reimburse yourself years later after lots of growth occurs. Truly Amazing!

HSA Banks

Unfortunately, Vanguard does not offer HSA accounts. Actually, your employer may have a specific bank they recommend for your HSA account needs. However, you can also open your own HSA account at any bank who offers them.

I currently use Health Savings Administrators and am very happy with their investment options. Through Health Savings Administrators I have access to Vanguard Total Stock Market Index Fund, Admiral Shares (VTSAX).

I’m not really quite sure how as I don’t have the $10K minimum which is typically required for admiral shares. When I saw it was an option, I didn’t ask, I just signed up for it!

Anyway, one can also do a combo of the above two options which is what I’m currently doing.

I’m maxing out my HSA for 2018 and I have my contributions split:

25% going into a cash account tied to a debit card
75% going into VTSAX

This way, I don’t need to budget for medical expenses and can use my debit card to pay for them. At the end of 2018, I’ll see how much money I have left in the cash account (if any) and adjust my 2019 percentages accordingly.

Accessing The Money If You Have No Health Expenses

If you have no qualified health, dental or vision expenses, wow! You are truly blessed! However, you may be wondering how you can access these monies.

You will be able to access these monies at the age of 65 without incurring a penalty. It’s kinda like a Traditional IRA (with a later distribution age) in the sense that you can:

Contribute pre-tax dollars
Your contributions grow tax-free
You’ll pay income tax on distributions after age 65

The way to get the tax break trifecta is to withdraw the money for qualified medical expenses.

Closing Thoughts

I’ve discovered now that I’m not living paycheck to paycheck, I can manage a high deductible health plan. Moreover, it’s giving me access to another tax-advantaged vehicle to max out.

Take the time to do a little homework with your employer-sponsored options. See if an HSA qualified plan will work for you. Then you can tap into this magical vehicle and get the trifecta win!

Lay The Groundwork First, Then Wield Your Superpowers

August 20, 2018 By Deanna 9 Comments

Would you like to have superpowers? Yeah, me too. Having your finances in order will allow you to harness such powers. It feels great to be the master over your money rather than the other way around. I believe we all can and should be saving something.

If you have obstacles in the way, like debt, take the time to lay the groundwork…and then get ready to show off your superpowers!!!

It’s Never Too Late To Start

I don’t care who you are or where you’re at in life, it’s never too late to start saving. On the flip-side, it’s never too early either. There are basically three things you can do with your money:

Give
Save/Invest
Spend

Even if you have to focus on some of the other groundwork laid out in this article, you should be saving something. It’s a good habit to build.

The key to saving is to not touch that money. Put it away and forget it.

Of course, there are different ways to save money and those are either in investment or savings accounts. The former being where the magic of compound interest comes in. You’ll want to take advantage of that as soon as you can.

Investment accounts are for long-term financial goals. If you have an employer-sponsored 401k or something of the like, start contributing, at least up to the employer match. At some point, you can hopefully ratchet that up to higher percent.

Savings accounts are great for short-term financial goals. You won’t get a lot of interest-bearing growth here but you won’t get risk either and the money is easily accessible. I’m of the belief that everyone should have an emergency fund of somewhere between 3 – 6 months of expenses saved. Also, a savings account is where you can save for a future car or down payment on a house.

Lay The Groundwork

If you owe other people money, that diminishes the amount which can go towards a high savings rate. It also means someone else owns you.

“The rich rule over the poor and the borrower is slave to the lender.” – Proverbs 22:7

I found debt to be a shackle and so I focused hard on paying mine off. That simple fact allows me to now put 60%+ of my monthly income towards investing and saving.

The only debt I’d consider now is a mortgage. I currently rent but am saving a down payment for a house. Mortgage debt is fine if you are living within your means and can still afford a high savings rate. However, I’ve also heard of a great many people hunkering down and paying off their mortgage. I imagine living in a paid for house feels boss.

Anyway, if you have any other debt (car note, credit cards, student loans), I think it wise to pay them off quickly. Refinancing for a lower interest rate is certainly a lever to be pulled. However, the real attack will come by paying off big chunks as quick as possible.

And if you owe money to the IRS, focus on this first!!! The U.S. Government is kinda powerful.

The intensity is worth it! I still saved while I was paying off my debt but my main focus was plowing as much of my income towards my debt as possible. Three and a half years later, I own my entire paycheck.

Get To Possessing Your Superpowers

The groundwork is necessary but once you’ve got it laid, you get to be superhuman…

Superpower #1 – Give Like a Rockstar

Whatever your personal philosophy is on giving, I believe we all need to do it. I’ve found it’s better to give than to receive. So I say give like a rockstar!

Giving comes in many forms. How about donating some time to a worthy cause or a person who needs help? It doesn’t have to be a lot of time either to have compound effects. I guarantee if you spend one hour per week pouring into someone’s life, the fruit will come. Of course, if/once you FIRE (financial independence, retire early), you can get extravagantly generous with your time.

I’m a Christian and so I believe in tithing. I try not to be religious about it, but I’ve found that giving 10% off the top of my income helps keep me focused and disciplined. Additionally, I budget money for a random giving fund each month. If I come across a cause or a person that I believe I’m called to help, I utilize this fund. It makes me feel good.

How about stealthy giving?

How about giving compliments and positive feedback to people you meet?

Get creative!

Superpower #2 – Make Your Money Work For You

Now that you own your entire paycheck, you can put your money to work for you. I suggest investing in low-cost index funds, single stocks (if you have the time to research them), a business venture, and/or real estate. Investing is all about maximizing your rate of return and taking advantage of the glory of compound interest. Currently, I’m investing in low-cost index funds. But here are the areas I’m considering/working towards:

Entrepreneurship
The real estate market
Single stocks. I haven’t done this yet but I am really intrigued so perhaps I’ll block off a small amount of time each week to dig deeper.

The higher the percentage you can put towards investments, the more your money begins to work for you. These investments are what will allow you to retire.

With a big chunk of your money going towards savings/investing, you get to tell the rest of it where to go. I personally find joy & satisfaction in budgeting. It becomes a game to drive my expenses down each month and see how much more I can save. Yep, good times for a redeemed money nerd. 😉

However, I know many people who set their savings goals and live off the rest without budgeting per se. That is fine too and I say pick what works for your personality but remember the ultimate goal is to drive that savings rate up!

Superpower #3 – Embrace a Growth Mindset

Now that I’m not in a constant state of stress over my finances, I have more capacity for growth mindednesses. Being growth-minded means seeing a problem as something to be solved. Additionally, it means if I discover something I’m not good at, I can become a student of that thing. It also means giving myself grace. If you want to learn more about growth mindsets, I highly recommend reading, Growth Mindset by Carol Dweck.

BTW, I am a member of the Amazon Affiliate program. If you click on a product I link to and purchase it, I get paid a commission.

Prior to getting sober, I lived below the line in so many ways. I was in constant survival mode with my emotional, physical, spiritual, and financial state. Aah, I am glad to be on the other side of that!! Even after getting sober, it was still another 4 years before I was able to focus on cleaning up my finances. My mental freedom has come in layers:

Fog lifting after putting down the drink and drug
Self-awareness as I dug into why/how
Replacing lies I told myself for years with some solid truth
Becoming the owner of my entire paycheck

I see things differently now that my mental capacity is not spent on stress and worry. In turn, this allows me to possess a growth mindset.

Superpower #4 – Practice Mindful Spending

Typically our biggest expenses are housing and transportation. Find a way to drive these down and you’ll be golden.

I’ve chosen to live in a small apartment within a 1-mile radius of my job. My rent is less than 24% of my take-home pay. Keep in mind my take-home pay is after my pre-tax deductions are taken out for my retirement accounts.

Additionally, this choice is helping me keep my transportation costs low. I drive minimally during the work week so I don’t spend a lot on gas and I’m able to squeeze more life out of my 2008 Saturn.

What do you value in life? Relationships? Yep, me too. How do you foster those relationships? If it’s the time with your loved ones that you value, you don’t really have to spend a lot of money. There are a ton of free or low-cost things to do with your family and friends. For example, I just went on a free guided walking tour of downtown Cleveland with a friend.

I’ve found that I enjoy cooking for and/or with friends more than going out to eat. It’s healthier, it’s more economical, it’s more comfortable, and it’s conducive to playing board games after dinner.

When I was paying off debt intensely, I made some sacrifices. What I discovered in this so-called period of “deprivation” was that I was no less happy. As a matter of fact, I was FIRE’d up while working towards my goals. I loved seeing the balance on my student loans drop each month.

However, it is a little more fun to watch the balance on my savings increase.

I had the realization that my happiness did not stem from stuff or spending money. In turn, this allowed me to see clearly that my happiness is directly correlated to my relationships, experiences, spirituality and living on purpose.

With my new take on what I truly value in life and being above the line, I set out to make very intentional decisions with my life and finances. I developed the habit of mindful spending.

This is something Cait Flanders discovered in her year-long shopping ban. I am about halfway through her book, The Year of Less. I can relate to so much of what she writes about and I just love this line:

“During what was supposed to be a simpler year where I pursued less, everything I loved and relied on was taken from me, and I was forced to start from scratch and make a new life for myself.”

– Cait Flanders

It’s very easy to pacify ourselves with stuff. Take away the stuff and then you get to the insecurity. Get to the insecurity and replace it with truth, and then you can learn to find true happiness.

Closing Thoughts

For years I could not imagine thinking about my finances with a growth mindset. Fortunately, a few people poured into my life and showed me a way out. I took action and became the boss of my money. That perspective shift has changed everything.

While I’m not yet financially independent or retired early, I’m finding ways to give and my most favorite is pouring into other’s lives. Watching the light bulbs turn on and seeing people gain victories is a superpower that I’d like to duplicate many times over.

So what’s holding you back? What superpowers do you practice?