Natalie and I have the unique perspective of understanding how thousands of households invest and manage their money. During our first quantitative meeting with new clients, we review their net worth (assets-liabilities = net worth). After we reveal their figure, our clients typically say, “I don’t know what to compare this to -- is this good or bad for our age?”
No one knows what to compare this to because no one shares their entire financial situation with other people. Think about it, you may know your friend’s income, but you have no idea how much they spend or save. An influencer may talk about their Ethereum holding, but you have no idea what that means for their financial wellbeing. In our position as financial planners, we actually know the ins and outs of many households’ finances. We realized that our clients don’t know nearly as much about our financial situation as we do about theirs. Therefore, because one of our goals is to create greater transparency in financial planning, we are going to share with you how we invest our money.
Have you read Natalie’s blog, How to Structure Bank Accounts to Make Budgeting Easier? It provides the framework for calculating our target emergency fund balance. We recommend having a balance between 3 - 6 months of living expenses (not gross income) set aside in a separate bank savings account. Not only do we recommend this, but the CFP board does as well.
At the time of this blog, Natalie and I have 6 months of living expenses saved in our personal savings account. We lean toward the greater 6 months as opposed to 3 months worth because our income comes from the same source (Fyooz Financial Planning, of course!) and quite frankly, it helps us fall asleep at night. It’s important to ask yourself what’s your “sleep at night number”?
As of now, we have several different investment vehicles established. The accounts include a joint taxable investment account, a Traditional IRA, Roth IRAs, HSAs, and cryptocurrency accounts (keep reading).
Our Traditional IRA and Roth IRAs were consolidated to our investment custodian after we left our previous employers. The consolidation allowed us to have direct oversight of the funds as well as having greater investment selections. There are pros and cons to consolidating your retirement accounts, and you can read more on this here.
Our joint taxable investment account actually started off as Natalie’s individual account. We converted it to joint ownership for greater transparency and estate planning purposes. We then had to have a conversation on how to invest these dollars jointly. Natalie had one idea, I had another. Through discussions and compromise (neither of us can predict the future, so it was hard to say who is right/wrong in that type of conversation) we created a portfolio that matched our goals for this account.
The cryptocurrency accounts represent less than 1% of our net worth with holdings of Bitcoin and Ethereum. These accounts were established with excess monthly cash flow that we viewed as “fun money”. The dollars that funded this account were initially deposited to help us learn more about cryptocurrency. The funds invested in cryptocurrency have not been identified or earmarked toward any of our future financial goals. Probably something we should discuss at some point…financial planners need accountability, too.
Our current asset allocation percentage breakdown looks like this:
Our overall allocation is 98% equities and 2% cash/fixed income. Our target allocation is 100% equities. This is based on our long-term investment horizon, knowing that we will not use these funds for 10+ years. Our retirement accounts are earmarked for our retirement living expenses or dollars that will be used to draw down on our portfolio over our lifetime. Our taxable investment account is earmarked for future goals such as property purchases or my 40th birthday present (Sprinter Van -- yes, it’s actually in our financial plan).
Our current sub-asset allocation percentage breakdown looks like this:
Asset allocation is susceptible to change when various market conditions change. It’s important to note that your percentages will change as asset classes outperform and underperform.
We currently invest our dollars in Environmental, Social, and Governance (ESG) index funds. We believe that companies that have strong ESG characteristics will benefit in the long term. Companies that do not adhere to ESG standards are likely to face greater risks. Our ESG portfolio is first established from a long-term perspective and from there it is set up for minor tilts to accommodate short-term changing factors. According to Morningstar, in 2020 sustainable funds in the U.S. saw record flows bringing in $51.1 billion in net flows, which is over two times the net flows of $21.4 billion in 2019 and nearly ten times the net flows of $5.4 billion in 2018.
Tax allocation refers to the breakdown of our investment assets in terms of the categories of tax-free (Roth IRA, Roth 401k, HSA, 529), tax-deferred (pre-tax 401k, Traditional IRA), and taxable (brokerage).
Our current tax allocation percentage breakdown looks like this:
Our taxable account is meant to bridge our retirement age and age 59 ½ (you receive a 10% penalty if you distribute funds early from pre-tax accounts). If Natalie and I retire at age 50 (#goals), then we need a bucket of funds to withdraw from that will not incur a penalty and will have lower tax implications. Taxable accounts are subject to capital gains tax when funds are sold (at a gain), whereas pre-tax retirement accounts are subject to ordinary income tax rates when money is distributed. Ordinary income tax rates are typically higher than what you would pay for capital gains.
You may be wondering why our tax allocation is heavily skewed toward tax-free assets. The reason is that when we first started our business, our income decreased to the point where it made sense to complete a Roth IRA conversion. My former employer's 401k was in pre-tax dollars. We created an analysis to see if it was financially better to pay tax on the pre-tax dollars now by converting it to Roth dollars or if we should wait to pay tax on the pre-tax dollars in retirement. By paying tax on the money now, we were able to lock in low tax rates and allow the earnings to grow tax-free for the next 30+ years! We can run the same analysis for you, schedule a visit to learn more.
There you have it. As you can tell, our risk tolerance and investment time horizon dictate our allocations and our investment selections. Unfortunately, our society is enamored with “get rich quick” stories and that’s what we tend to peg our wealth to. The secret to building wealth is keeping your expenses modest and your savings rate high. By creating different investment vehicles for various purposes you give yourself more flexibility in the long run. Isn’t that what we all want?
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
