Money Principles

Investing Part 2

Lesson 11

Saving / Investing Rate

Many people like to track their savings/investing rate as a percentage of their income. People like Dave Ramsey say if you aren’t at 15% or more you will for sure have too little at retirement. But when you look at these investment spreadsheets you might want to focus more on getting enough income to live comfortably while investing the needed amount weekly.

For myself I have run several scenarios and I must invest $150-250 weekly if I want to be reasonably sure I can retire with a million or more. I plan on working hard so that that amount will eventually be far less than 15% of my income leaving me with room to invest more if I choose. 

I think the average USA savings rate is currently around 4%. So pat yourself on the back once you're saving over 4% and then move onto hitting your weekly investing goal.

Investment Asset Classes And Vehicles

So by now you should know where you can put your money (asset classes) to get a good return on average that is higher than inflation. Now you need to decide what vehicle you will use.

There are tax deferred (pay tax later) and tax sheltered (pay now and growth is not taxed) vehicles.

Tax Sheltered

Most common example: Roth IRA

General consensus is if you have 20-30 years until you retire then max out on this type of investment and keep it up until you retire. You will get a better return and pay a lot less in taxes than say a regular Roth or 401k.

There are a lot of restrictions here so at least research:

  • Your Yearly contribution limit
  • When you can stand pulling out money tax free
  • When you are no longer eligible (to old or to high income earner) to invest

Tax Deferred

With tax deferred you get to reduce your reported taxable income (might lower your tax bracket and might even keep you getting medicaid). And then your money grows and you pay taxes at whatever bracket you are at when you retire.

Most common examples: 401k, Government Pensions, SEP IRA

401k / Government Pensions

General consensus is always to go for the full employer match. Then once you have maxed out your contributions to the Roth IRA go back to the 401k for the rest of your passive investment allocation. Even if you still have some debt, do the employer match.

You also should research the mutual fund options you are given to find one with a very long successful track record. And many say you want to find out if the manager is still there that has been getting that return or if a new one just came in. I’ll show you how to see returns a little later.


If you own your own business or are self-employed and make over 80k per year, this might be the best way to reduce your taxable income and therefore lower your tax bracket / percent of taxes you have to pay. This isn’t a good option if you have employees that stick around for years. So do your research.

Having a Financial Plan

I have never been more inspired financially than when I listened to, “How to Become Wealthy Episode 252” by David Stein who runs the podcast Money For The Rest of Us.

In summary this is the simple advice on how to become wealthy:

  • Have a goal for retirement 
  • Get to a comfortable standard of living
  • Always have rich experiences (not always costly)
  • Increase income 
  • Increase savings 
  • Increase investment returns (Portfolio allocation and lower fees)
  • Reduce the taxes you pay (I added to the list)

This episode and when I met with David directly inspired me to add all 7 categories to what I call the 1-page financial plan. You can see about getting your free copy in my ultimate money resources list (2nd in the list).

In the episode he had compared studies that looked at the allocation of investment asset classes of the super wealthy versus the poor. Here is the breakdown he mentioned.

He also mentioned the average of the super wealthy increase their worth by 5% annually.

Allocating Your Passive Investments

There is an amazing tool that has benchmarks for asset classes over time. You can put in any scenario by asset class and see what your returns would have been. In this scenario I have allocated 10K broken down by 80% to the USA stock market and 20% to the bond market. This would be an aggressive portfolio.

Pick And Test Your Exact Picks On The Stock Markets

Once again, Portfolio Visualizer helps us out. You can put in a specific stock or bond and compare any time frame to see how it did. You can put in any scenario by asset class and see what your returns would have been. In this scenario I have allocated 10K broken down by 80% to the USA stock (VT) and 20% to the bond (TFLO). This would be an aggressive portfolio.

When comparing investments side by side you would also want to do the math to calculate annualized return factoring in inflation. Portfolio visualizer does this for you when it outputs CAGR.

I also hope you finally noticed the maximum drawdown stats. That means you have to be willing to lose that much in any given year as well as wait that long for a recovery. You need to invest for the long term and getting scared ruins investment returns. You can not time the market to get out completely or put in completely at the best time. All you can do is invest constantly for 30 or more years if you want to be successful on average. Even then the Great Depression took 10 years to recover. There is nothing you can do about the sequence of returns risk flaw but to do dollar cost averaging (invest lump sums over 6 months or less and just keep investing every month). Checkout, “Should You Pay Off Debt or Invest? Episode 188” (20:20 minutes in covers, “dollar cost averaging vs lump sum investing”).

If you want to cover the risk of living a long life then an income annuity based on an index might be a good option. Don’t forget long term care insurance as well. Checkout, Why All Retirees Should Consider an Income Annuity Episode 279.

David Stein would chastise me if I failed to mention he watches several indications of shifts in potential returns. Based on what he finds, he does adjust as much as monthly his allocation of asset class investments. And to his credit, he had reduced his stock allocation before the 2020 hit.

So recently I learned all major financial advisors basically use Modern Portfolio Theory as their basis for recommending their portfolio allocations.

Video: What Is Modern Portfolio Theory and What Is Wrong With It | MPT Explained


Comparing Methodologies For Investing Passively

ProftfolioCharts.com compares 15 portfolio allocation methodologies for investing up until the year 2015. It outlines the allocation of investments as well as a ton of insightful data.

David once again helps us see all of them side by side.

Here is the summary sheet for the Portfolio Charts portfolios discussed in Episode 111.

To me it is funny how many methods really do not return significantly more than others. Best just to ride the overall market because historically it is up on average. And anyone trying to charge ongoing fees for investment management, most likely is stealing part of your returns and underperforming the market as a whole.

Final Thoughts

None of the tools I have I introduced you to factor in fees. So that is why I want to introduce you to M1 Finance. I choose it as my passive investment app because it has no fees on top of those the ETFs it offers charges. It also allows for Roth IRAs for free which the others I looked at didn’t have.

You’ll also note I have not mentioned social security or pensions when considering retirement. That is because they are perks not guarantees to bank on. Same goes for your house. Your home should not be part of your portfolio since you would never want to sell it to just get bye.

I choose not to mention any auto investing app for you. I think you need to set your weekly investment goal and use whatever helps automate contributing to your asset allocation. 

I also wanted to mention some things I understand about investing.

Below you will find some solid education on specific investment types. Watch as your interests align.

Inflation Explained. Protecting (Investing (Treasury bonds) and low fixed rate mortgages, food & water storage)

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