Open post

What is a Target Date Fund

My sister recently graduated from graduate school and for the first time in her life has had a full-time job with a steady paycheck and benefits. Last weekend, she asked for my help because she gets a 401k but she didn’t have any idea of how to invest it. After setting up her account and reviewing what her investment options were, I thought that the best option was to sign her up for a target date fund. Specifically, Vanguard’s Target Date 2060 Fund.

What is a target date index fund?

A target date index fund is an index fund that invests in a mix of stocks and bonds (domestic and international) that is designed with specific date in mind of when you will need your money. The weighting of how much is invested in each asset class is meant to grow with the stock markets when you are far away from your target date, and get more conservative as you get closer to retirement. My sister, for example, won’t hit 65 until around the year 2060, so her target date fund is heavily weighted towards stocks, with only a small percentage invested in stocks. As she gets older, the fund will gradually move to be invested more heavily in bonds to preserve capital and reduce the risk of her losing a big portion of her savings right when she needs it. read more

Evaluate your Finances Like a Financial Analyst

As you travel along your journey to financial independence, it is enticing to only focus on your net worth and reaching some goal you’ve set for yourself in the future. However, to really assess the health of your finances and ensuring the best odds of hitting your financial goals, there are other metrics as well that you should at least be monitoring. To get an idea of what metrics to look at, we head to the headquarters of assessing the financial health of organizations: Wall Street.

Financial Analysts make livings on finding the companies that are going to increase their value (also known as Net Worth) in the shortest, most stable way possible. I’m not arguing that Wall Street is any good what they do (see: Index Funds: The Gold Standard of Stock Market Investing), but we can still find the things about Wall Street that do work well and use them to our advantage. One body of research we can use is around metric. There are several basic metrics that the Financial Analysis use to assess the health and future potential of a company. By adopting those metrics slightly, we can apply them to our own finances and paint a picture of how we’re going. read more

What Risk and Return Should I Expect From My S&P 500 Index Fund

“The stock market, on average, returns 8% per year”. You’ve heard that statement probably a thousand times before. If you’ve been reading this blog, you’ve heard it here as well. But there is a lot of data and questions buried by that 8% figure. Should I expect that return every year? What is the worst I can expect? Does investing for longer periods of time increase my changes of earning 8% on my investments? I want to do some statistical analysis to show you the relationship between time, reduced risk, and reasonable expectations of your investment returns.

In the below graph, I show historically how the stock market has performed over a 1-30 year period going back to January, 1950 (the earliest data I had available). By that I mean, from January 1, 1950 to January 1, 1951, what was the return. Then what was the return from February 1, 1950 to February 1, 1951, etc. up through August 2017. Then I looked at the 2-year returns (January 1, 1950 to January 1, 1952) and so on until the 30 year horizon. Plotting the maximum return, the minimum return and the average return presents some very interesting information to show you what you can expect while investing and why investing for long periods of time is so important for mitigating risk. read more

Open post

Managing Our Finances with Mint

A guide to using Mint – Our Approach

Knowing how much you make and what you spend your money on is Personal Finance 101. This is the fundamental building blocks of wealth building. If you income is greater than your spending, your net worth will go up. If income is less than spending, your net worth will go down. It is that simple.

Before you dive into new and exciting ways to grow your income, reduce your spending, and find ways to grow your savings, it is important to know where you’re starting from. Only one you know where you are can you know the best way to get to where you want to go (in our case, financial independence and early retirement!). read more

Open post

Is it Better to be a Rockstar Saver or a Rockstar Investor

I want to present you with a simple question. If you could cut your spending in half and have no impact on your life and happiness, or if you could find a way to double your investment returns for the next 20 years, which option would you choose? Which option would get you to financial independence and early retirement faster?

Sally the Saver and Ivan the Investor read more

Open post

The Power of Small Wins and Financial Independence

A couple of weeks ago, I was talking with a coworker of mine who is training for the Marine Corps Marathon that happens in Washington, DC every year. Our conversation went a little something like this:

Me: “How do you stay focused for so long? The reason I don’t run long distances is because I find training really boring. I would never be able to build up to that kind of distance.” read more

Open post

Index Funds: The Gold Standard of Stock Market Investing

In 2008, Warren Buffet, the most successful investor in history, made a bet with Protégé Partners LLC, a hedge fund, that pitted the world of active and passive investing against each other. It was a simple bet; both parties would invest and whoever had the most money after 10 years, net of fees, won. (The winner got to choose the charity that the combined $1M+ would go to.) Protégé Partners LLC invested the money in their own hedge fund. Contrary to what most people thought Buffet would do, he didn’t invest in his own Berkshire Hathaway. Instead, he invested in an Index Fund, specifically Vanguard’s S&P 500 Admiral fund (VFIAX).

What is an Index Fund? read more

Open post

The 4% Rule: What Is It and Why It Matters

A popular rule of thumb for financial planners and bloggers is the 4% rule. This rule states that a diversified portfolio of stocks and bonds will allow investors to withdraw 4% of their portfolio every year without any risk of running out of money. For people trying to find out what their target retirement number is, this can be a very simple, valuable tool. Simply take the amount of income you would need annually to retire (before taxes), and divide it by 4% (or multiply by 25, they equal the same thing).

Spending in Year 1 of Retirement / 4% = My Portfolio Retirement Number read more

Open post

Your Savings Rate and Your Net Worth

Your savings rate, or how much of your income goes into savings and investing, is an incredibly powerful barometer for how well you are doing at growing your net worth and achieving your early retirement goals. In The Basic Equation that Governs Your Financial Life, I wrote out the formula I use to assess how I am doing on my journey towards financial independence and early retirement. In this article, I am going to look at the savings portion of the formula, and evaluate my own performance.

The first part of the equation is known as your savings rate, and it can have a HUGE impact on your journey towards financial independence. To find your savings rate, subtract your taxes and expenses from your income, and divide that by your pre-tax income. read more

Open post

The Basic Equation that Governs Your Financial Life

Building your net worth has a lot of moving parts. Savings, earning, investing, taxes. Sometimes it’s hard to know where to start and how all the pieces work together. To help, I developed a simplified equation to provide a framework for thinking about your personal finances. Thinking about your finances in this way can provide a powerful starting point for jumpstarting your journey to financial independence and early retirement.

Net Worth Equation: read more

Posts navigation

1 2 3
Scroll to top