Aggressive Investment Strategy Noobie Question

[slimwhoisdirtay]

Hello Mustaschians,

I'm finishing up the get out of debt part of my life and in the next few months I will begin the stashing phase.  I plan on buying Vanguard index funds eventually but right now I'm using Betterment since it allows me to put in and take out smaller amounts of money within a couple days. 

I had this idea from the motto of Robert Kiyosaki's Rich Dad about "pay yourself first" and thought, what if I put 100% of my income into my Betterment account and only withdraw money when I have a bill or expense that needs to be paid.  This would maximize my income growth potential while also having a nice mental effect where I will always seem broke so I shouldn't buy any non essential item.  Any thoughts about this strategy?  Will I end up paying more in taxes on my withdrawals to the point where it isn't a good idea?  Any advice would be greatly appreciated.

[matchewed]

Is this Betterment account a taxable account? If so and you are selling funds in order to pay your bills you're being taxed on income to put money into that account and being taxed on short term capital gains selling those funds in order to withdraw.

Rather than look at a cute little quote take some time and understand the mechanisms you are using for wealth generation.

The best rule of thumb IMO for your situation would be to figure out how much you spend on regular living, optimize that, and the rest goes to savings. The "pay yourself first" quote is just reversing what I said, in that you save first and spend the rest on living. Not save all and then sell stocks/etfs for living.

[Bracken_Joy]

Hello Mustaschians,

I'm finishing up the get out of debt part of my life and in the next few months I will begin the stashing phase.  I plan on buying Vanguard index funds eventually but right now I'm using Betterment since it allows me to put in and take out smaller amounts of money within a couple days. 

I had this idea from the motto of Robert Kiyosaki's Rich Dad about "pay yourself first" and thought, what if I put 100% of my income into my Betterment account and only withdraw money when I have a bill or expense that needs to be paid.  This would maximize my income growth potential while also having a nice mental effect where I will always seem broke so I shouldn't buy any non essential item.  Any thoughts about this strategy?  Will I end up paying more in taxes on my withdrawals to the point where it isn't a good idea?  Any advice would be greatly appreciated.

What does the math say? You know more about your taxes, earnings, etc, than we do. =)

[thedayisbrave]

I like the "pay yourself first" idea in theory but it can get complicated/inconvenient quickly if you're not careful.  What might be better is if you tally up your bare bones expenses and just do a 1x transfer every month from your Betterment account (where your funds are) to whichever account your bills/spending money comes from.  That way you are still "paying yourself first" but just in equal +/- installments, reducing the effort needed to make a transfer every time you need to pay a bill.

You won't pay taxes unless you have actually bought stocks/funds with the money and then sell them - which I would highly suggest NOT doing.  What you could do is leave 3-6 months of expenses in cash in the account to float you in case of emergency (yes it'll be in a very low yielding fund like money market, but better to be safe than sorry), have your monthly expenses come out, and then invest the extra money that you have beyond the current month's expenses + 6 mos. emergency.  Also keep in mind, any upcoming purchases within 3-5 years such as a car should be saved up for (thus adding to your cash) rather than invested, as dipping into stocks after only a few years is dangerous as you don't know what the market will be doing and you may be selling at a very inopportune time.

[Wolf359]

Use your bank account for day-to-day needs.  Use a brokerage for your investment needs.

Betterment is essentially a brokerage with a user-friendly overlay.  Once you transfer the money in, they will automatically invest it based on your goals and risk settings.  But underneath, they're buying and selling stocks and bonds.  If you use that account for day-to-day expenses, you will make your accounting very complicated.  You may be selling stocks at the wrong time, which means your taxes increase or you may be selling at a loss.

Keep your investment transactions to a minimum.  On your Betterment account, this includes adjusting your risk allocations.  Once you have money invested, changing that slider can increase your taxes and/or cause losses.  Don't do it lightly.

Pay yourself first means to automatically transfer your investment allotment out of your day-to-day checking account so you don't see it anymore.  When you reach a low balance, you stop spending. 

Even if there were no tax and investment impacts, using the brokerage account for regular banking would be a bad idea.  You'd see the big investment balance and assume all of it is available to spend.  That negates the psychological advantage of pay yourself first.

Therefore, keep two separate accounts.  One is for the future, one is for today.  Automatically transfer set savings for the future, then conduct daily expenses out of the today money.

[innerscorecard]

Use your bank account for day-to-day needs.  Use a brokerage for your investment needs.

Betterment is essentially a brokerage with a user-friendly overlay.  Once you transfer the money in, they will automatically invest it based on your goals and risk settings.  But underneath, they're buying and selling stocks and bonds.  If you use that account for day-to-day expenses, you will make your accounting very complicated.  You may be selling stocks at the wrong time, which means your taxes increase or you may be selling at a loss.

Keep your investment transactions to a minimum.  On your Betterment account, this includes adjusting your risk allocations.  Once you have money invested, changing that slider can increase your taxes and/or cause losses.  Don't do it lightly.

Pay yourself first means to automatically transfer your investment allotment out of your day-to-day checking account so you don't see it anymore.  When you reach a low balance, you stop spending. 

Even if there were no tax and investment impacts, using the brokerage account for regular banking would be a bad idea.  You'd see the big investment balance and assume all of it is available to spend.  That negates the psychological advantage of pay yourself first.

Therefore, keep two separate accounts.  One is for the future, one is for today.  Automatically transfer set savings for the future, then conduct daily expenses out of the today money.

I totally agree. The alternative is making your life a lot more complicated for literally maybe a few pennies of extra gain.

[SuperSecretName]

Robert Kiyosaki's Rich Dad

please don't listen to anything in this book.  just throw it away.

http://www.johntreed.com/Kiyosaki.html

[theoverlook]

Robert Kiyosaki's Rich Dad

please don't listen to anything in this book.  just throw it away.

http://www.johntreed.com/Kiyosaki.html

I agree with therivler1.  Not just because of John T Reed's info which is damning in and of itself, but also because of the methods to getting rich that Kiyosaki advocates.

[slimwhoisdirtay]

This is really great advice, thank you everyone who contributed.

[Financial.Velociraptor]

I stay more or less "fully invested" with no "emergency fund" e.g. I am 'cash light'.  I am at Interactive Brokers which has a margin loan rate running about 1.6% right now.  So when I need a little extra over my budget for emergencies like when the a/c failed last year, I put it on my Chase 1.5% cash back credit card and then immediately pay off the card using a withdrawal/margin loan from IB.  If it takes a year to pay back, my interest rate comes out to a net 0.1%.  If I can recuperate the funds in 6 months, I actually come ahead on net interest.

But to answer the question, no don't put 100% of your take home in equities and then sell a portion every time you need to buy a loaf of bread.  Keep enough cash on hand to meet your normal monthly spend, and no more.

[Doulos]

I agree with the emergency fund & 2 accounts side.

We (Wife and I) actually have 3 accounts;
1) local walking distance credit union
We keep enough cash in checking (debit cards) to never worry if any payment will bounce.  So roughly 2 months expenses.
- Our paychecks are deposited here.
We keep 6 months in savings (low %, you can probably get 1%) for an emergency fund.
2) online banking.
We have some variable expenses in Capital One 360.  (1% returns)
- I travel for work and pay the expenses then get reimbursed.  My expense checks go to this account.
- My wife is in school, She needs to pay for classes, books, etc.  Her scholarship checks are transferred here.
3) Investments (which are in multiple accounts; HSA, 401k, etc)
Bulk of money. 
- Automatic pretax savings "Pay yourself first" stuff goes here; HSA, & 401k
- Automatic post tax withdraws go here (from checking under #1); Roth & Taxable

#1&2 totals to roughly $20k for us.
#3 is ~$200k right now.