The following is a collection of viewpoints on my personal approach to investing and managing money. Your situation likely looks a bit different, and your risk tolerance may vary from mine, but you might find bits and pieces helpful and worth applying to your own investing. [While it’s not the #1 most important thing in life] the goal here, when it comes to finances, is to make sure every month your net worth is going up.
Max out a Roth IRA when young and eligible
Currently the cap on income for Roth IRA contributions sits at 140k/208k (single/married) so if you’re young and under the income threshold max out that Roth IRA each year. A little known fact, contributions can be withdrawn anytime without penalty. While I wouldn’t recommend withdrawing funds set aside for retirement, it might make you feel good knowing your money isn’t quite as tied up (until 59-1/2) as you might think.
If you can max out your contribution on the 1st of the year and get that money working for you right away great, otherwise spreading the contributions out over the year are great. And remember, you have until tax day the following year to make contributions for the prior year.
Brokerage account, buy VUG use funds as needed, pay LTCG
I prefer to keep my cash invested in the market. While having 3-6 months worth of expenses in cash is a popular approach (and nothing wrong with this if it helps you sleep at night) I’m just as comfortable having a small amount of cash sitting there doing nothing, and a bigger chunk of those funds invested. If a large purchase comes up or some kind of emergency I can simply withdraw the funds, pay long term capital gains tax and I still come out much further ahead and if I left the money sitting in a savings account doing nothing.
Now I wouldn’t rush out and dump every penny into a brokerage account leaving you no cash on hand, but if you start investing the funds (I use one simple growth fund Vanguard’s VUG) get past that 1 year mark so you’re locked into the LTCG then you’ll be home free.
Futures trading account
For day trading futures I have money in a separate account from my other investments. Mentally this helps me focus on the goal of that account and it also provides a barrier if something catastrophic would occur, protecting my other funds.
Should I keep lots of money in my futures account?
No, I don’t keep a lot of extra cash in my futures account. I keep enough to trade the number of contracts I want, plus cover my biggest drawdown. The opportunity cost of having cash sitting there doing nothing is too great not to invest it someplace else.
Swing trading account
If you are going to swing trade, the simplest way to set it up is to use that brokerage account I mentioned above. Having access to a bigger chunk of cash with margin allows you to control swing positions while still keeping the funds invested and growing while you’re not in any swing trading positions.
You could have one brokerage account with Thinkorswim (that’s what I use) and both day trade and swing trade in that account or you might opt to use a futures specific platform like Tradovate that has lower intraday margins and then do all your stock/options trading with Thinkorswim. Either way, I like to keep it separate from my long term accounts.
You really don’t need a huge pile of cash for emergencies if you have funds accessible in the above accounts, but if it makes you feel more comfortable to have some cash set aside go ahead. I use Discover Bank and just park some extra money in it. I’ve found that the more time goes on and the more my income grows I can pretty much cashflow most purchases or unexpected expenses.
Health savings account
I’m pretty healthy and rarely go to the doctor. My wife and daughter are also (thankfully) in the same boat. For our family, I have a high deductible ($5000) insurance plan via Cigna with allows for a Health Savings Account. The HSA allows you to set aside money into an account for health expenses and the best part is, you can invest that money.
I use that same fund VUG and keep $5000 in the cash account (the amount of my deductible) and the rest is invested. I could probably keep less in cash, but there are a broad range of uses for those funds such as dental etc.
Pre-tax vs. after tax account, which is better?
If you’re employed this is probably something you’re dealing with. With pre-tax dollars, such as money you contribute to your 401(k) you are contributing more money because that money is not taxed. If you paid taxes on that money, then made a contribution to your IRA, you would be contributing less money, but the gains would not be taxed.
At the end of the day, it ends up being a bit of a wash. More money contributed (pre-tax) means more growth, but those earnings are taxed. While after tax dollars means less money contributed and less growth, but those earnings are not taxed.
Should I trade within my IRA?
In most cases I say no, but if you are young and don’t need the money for a while taking some speculative plays in your IRA can be a good way to shelter the tax burden, especially if you expect some large returns from (think buying TSLA, AMZN, CMG 15 years ago). At the end of the day though, investing more money into a growth fund (like VUG) versus small amounts into speculative plays usually benefits the former.
For speculative plays, you want to invest enough to where, if it works out it can have a big impact, but if it doesn’t work out, the money won’t be missed.
Where to trade futures?
- Since futures are taxed at 60/40 (60% LTCG, 40% STCG – coming out to approx. 23%) a non-retirement account is adequate.
Where to trade stock options?
- Index options are taxed the same way as futures 60/40, whereas stock options are taxed at your short term capital gains rate. This means if you have some massive returns on option positions you will be left with a hefty tax liability.
- For this reason, trading options in your retirement account can be advantageous, so long as you don’t need the money until you reach 59-1/2.
Buy real-estate and investment properties for additional tax savings
Trading is fantastic, but when it comes to taxes, real estate is where the real savings are at. Owning property, be it your own home or a rental will allow for additional tax savings, especially when you start getting into the investment property game.
Where should I invest short-term money?
If you’re saving up for a down payment on a home that you expect to buy in the next 6 months, my preference is to just keep that money in a savings account as the downside risk is not worth the upside potential.
For medium term goals, saving up to buy something 3-5 years down the road, a brokerage account is a great vehicle. Piling up cash in a simple growth fund (again that VUG fund I mentioned) allows you to gain a market return and you can pull money as needed.
I only cash out money from my brokerage account for other investments, such as buying a rental property. I would not buy toys, cars, or go on a vacation with that money.
The goal is to leverage your capital and invest in things that give you a greater return, NOT buying things that go down in value.
Should I pay off my house ASAP?
Rather than pay the mortgage down as fast as possible, with a low interest rate (and being 33 at the time of this writing) my approach is somewhere in the middle. I started with a 15-year mortgage and in 2020 did a refinance with the same term left and have a 2.25% interest rate and a little over 50% equity (although with the recent home appreciation it’s probably much higher). Investing aggressively into the stock market allows me to build liquid assets which are more useful than home equity, in my opinion.
The most important thing you can do is pay off any consumer debt. If you are a shopaholic or spending freak you need to change your habits if you want to change your bank account balance. (If you’re already sitting on a couple million you can ignore this advice and probably this entire article, but thanks for reading this far if you are already a multi-millionaire).
As I said earlier, I don’t see a huge need for a massive cash balance. If you have a modest cash pile, a credit card and investments, you always have access to real money. 10k in cash pretty much covers most home repair, car repair, or medical bill. This of course, is why we have insurance. High deductible, cheap premiums, just for emergencies that I cannot self insure for.
Worse case scenario you can always do a cash out refinance on your house. Again, not suggesting this as a first solution, just trying to show that options do exist, and it’s not as scary as it might seem.
Invest a lump sum vs. dollar cost averaging
Adding money to your account each week and then investing what you just added is not true dollar cost averaging (DCA). Essentially, you are investing all the money you have to invest at that point in time.
True DCA would be sitting on $10,000 and investing $2500 4x over the next 4 months. In this example, you would be averaging into a position versus investing all $10,000 on day 1.
Neither is right or wrong. In most cases, statistically, investing the lump sum is the better option as it gives you more time to be exposed to market growth, but if you’re entering after a long bull run and unsure if it’s likely to continue, DCA can be a manageable way to enter a position and help you sleep at night.
Motivation over time
The last topic I’d like to touch on is motivation, particularly a loss of drive as success increases. If you look at many pro athletes, after many years of winning and being on top or reaching the pinnacle event of their careers, there is often less desire to train and push quite as hard as newcomers enter the scene.
If you think back to your first job out of college or the first time going out on your own, you probably had some serious drive to make it and a work ethic to back that up. As you pay off debt and build wealth, there can be less motivation to keep your foot on the gas and more of a desire to simply enjoy life. This is totally normal and it’s okay to feel this way. Just make sure that your long term goals stay front and center so you don’t end up goin backwards or falling back into debt.
Thank you Tim for wharing this very important information with me. Your article gives me a lot of good thoughts on how to manage the cash and the trading accounts. But I do not quite understand why in most case you say no to trading with the Roth IRA account since we can save a lot of tax money by using it? Would you like to share some ideas on the disadvantages of trading futures with Roth IRA account?
For the Roth IRA trading, I would make sure that you have tested and traded your strategy live in a non-retirement account first. Since you can only add a limited amount of funds to retirement accounts, if you lose it trading, you won’t be able to reap the long term gains. So for that reason, test and build your strategy first and get some real live trade data on a non-retirement account first before trading in your IRA.
Thanks Tim for your reply.