I'm proposing some updates to the Prioritizing investments page. No one change is major but in total they are enough to warrant forum feedback.
Current page: Prioritizing investments
Proposed page: User:Fyre4ce/Prioritizing investments
Editorial:
Current page: Prioritizing investments
Proposed page: User:Fyre4ce/Prioritizing investments
Editorial:
- General clean-up. Made to look more like Retirement draw-down priority. The current version looks clumsy, with a list in text in the side of the image, and also similar partly-redundant text below in a table. Theoretically this is to separate the description of the priority with the reasoning for why it’s in that particular order, but it makes more sense to keep these together so readers don’t have to flip back and forth. It’s much cleaner and easier to read to have a single list in table form with a descriptive title, and one or a few short paragraphs adding detail. The picture in Figure 1 contains a sufficient description of each priority.
- I added detail and links in some areas. As this is a prime page on the wiki, it should be accessible to novice readers. This means it should be both compact, but also provide explanation that would help the reader understand basic concepts. These two goals are in conflict, so I tried to strike the right balance. I’ll let reviewers comment on how well it turned out.
- I tried to keep the list as compact as possible while still covering options that will apply to a significant number of readers. So, I clumped together similar investment options, even when there is a clear priority to them. Liquidity and starter EF. 401k match and ESPP. All retirement accounts are lumped together – 401k/IRA are not separated (though I think this is correct because one is not usually better than the other), mega-backdoor Roth and 457b are included too when they should clearly come after regular contributions. But I don’t want the list to be 20 items long.
- Header text is expanded to provide more context, and a description on how to use the list. Though it may seem obvious, to be accessible to beginners I think it’s helpful. The current page also talks about minimizing taxes, which can be misleading (one of the common misconceptions about traditional versus Roth is that you should try to minimize taxes), so I expanded this to correctly state that the list tries to balance several goals, some of which have nothing to do with taxes.
- The current list has #1 as “Establish an emergency fund to your satisfaction” with the (good) caveat that you can start small and grow it over time. But it does not say where growing it should come in down the list. I separated this item into two. I changed the top priority item to “Liquidity and starter emergency fund”, similar to both Dave Ramsey’s baby step 1 and MDM’s “priority zero” over at Mr. Money Moustache. Again, these could be separated but I don’t want the list to be too long. Second, “Robust Emergency Fund” is further down the list, lower than retirement accounts and medium-interest debt but higher than a 529, taxable investing, and paying down a mortgage. For those who don’t max out their retirement accounts, I mention that keeping an EF in a Roth IRA makes sense. I do think it makes sense to pay off medium-interest debt before piling up cash, and this is consistent with Dave Ramsey. Paying off those debts also provides a kind of financial security. Student loans are mostly in that category and they are not dischargeable in bankruptcy.
- Added a mention of an ESPP, although not as its own item. ESPP’s are not common, but not too rare to deserve a mention. MDM thinks ESPP’s should be lower priority, but I don’t agree. I have a friend who has access to an ESPP, and the terms are great. Each 6-month period, he can contribute some percentage of his salary each paycheck. At the end of the period, the money he put in is used to buy shares of company stock at a 15% discount from the lower of the prices at the beginning and end of the period, and they can immediately be sold on the open market. So he is guaranteed at least a ~17.6% return, and with the money being invested for an average of 3 months, that’s like ~70% annualized before taxes, and higher if the price went up during the period. That’s an incredibly good deal, and it gets repeated every 6 months. The only downside is that you take a cash flow hit for the first period while you “prime” the pipeline. After that, you get a steady stream of income coming out that’s more than what you’re putting in, which if you’re short on cash could go a long way to funding other high priorities. Even accounting for taxes this ESPP should outperform a 30% APR credit card debt, and that’s why I put it above.
- Added descriptions of what’s meant by high, medium, and low interest. I defined high-interest as above the expected return of stocks, low-interest as at or below the expected return of bonds, and medium-interest as between the two. This does take up space, but I hope it helps novice readers to understand the concept of comparing interest rates and rates of return to decide the best investment. I also updated the expected rates of return to match the current interest rate environment.
- Added the recommendation to save 15-20% of gross income in retirement accounts, with the goal of maxing them out. Without this caveat, someone who couldn’t max (which even with one earner and a just a 401k and IRA, age <50, saving 20%, would need to earn at least ($23k+7k)/20% = $150k, a 91st percentile income, to do) would never save any emergency fund, pay down any medium-interest debts, or save in a 529, and I don’t think that’s right. And again, if someone has unused space in a Roth IRA, I think the default should be to put the emergency fund in there.
- Added a discussion of a 457b, including the differences between governmental and non-governmental. This does take up valuable space, but given the issues with non-governmental 457b’s I think it’s worth it as a warning to the small percentage of readers who have access to one.
- Added saving for college, between build a robust emergency fund and investing in a taxable account. That placement seems about right for most people. This is a similar position in the order to Dave Ramsey’s baby steps.
- Separated taxable investing into high-return and low-return assets, with high-return coming before low-interest debt and low-return coming after. This gets tricky because it becomes a function of asset allocation, but I think it’s a net improvement for readers. I don’t think it’s controversial to say that if someone has (for whatever reason) a 100% stock AA, then they should invest in taxable before paying off a reasonable-rate mortgage. I also don’t think it’s controversial to say it someone has (for whatever reason) a 100% bond AA, they should pay off a market-rate mortgage before investing in bonds in taxable. It gets more complicated where someone has a mixed AA. This page says to treat the two asset class investments separately and treat the mortgage as a negative bond. For example, if someone has $10,000 to invest in taxable and has a 75/25 AA, they first invest $7,500 in stocks, then put $2,500 toward the mortgage, unless the after-tax return of risk-free bonds is higher than the after-tax interest rate of the mortgage. With loans treated as negative bonds, this will get them to their target AA slower than first dumping all money against the loan, but I don’t think that’s the right move for most people. There may be some different opinions about this, but if so we can discuss further.
- Mentioned that non-deductible IRAs and variable annuities may be appropriate for fixed income investments, rather than a taxable account.
Statistics: Posted by fyre4ce — Fri Aug 16, 2024 12:04 am — Replies 0 — Views 190