How I Manage My Money Step-by-Step

A couple of years ago I wrote a post about How to Start Investing Today.

Since then, my basic investment philosophy has not changed, but some of my specific recommendations have evolved.

In this post, I reintroduce my investing philosophy and share my updated and specific steps for how I manage my money.

Who is this for?

This post is for you IF:

• You want to build wealth slowly.
• You have a medium to long term time horizon for at least some of your money (i.e. you don’t anticipate needing to sell at least some of your investments in the next 10 years).
• You don’t want to spend a lot of time managing your money.
• You have any level of income.

This post is not for you IF:

• You want to get rich quick or try to “beat the market.”
• You have a short term investment horizon for all of your assets (i.e. you want all of your income to be in cash or other safe places)
• You want to play a very active role in managing your money.
• You have no income.

Core Philosophy

Two years ago, I had this to say:

For people who have little/no experience investing, it can seem daunting, exciting, scary, and all of the above. I know that’s how I felt when I began.

When I first started investing in college, I just picked stocks that seemed cool and then lost thousands of dollars. Talk about learning my lesson the hard way. I was just gambling. Might as well have been in Vegas.

I knew there had to be a better way. And as I began researching and reading, I learned the big secret that the finance industry doesn’t want you know:

You can beat the returns of most professional money managers without lot of time, research, or knowledge of individual stocks.

I still stand by this statement, and I feel even more strongly about it now than I did back then.

Many people, (including probably your money manager if you have one) try hard to “beat the market” by picking individual stocks, buying and selling often, and constantly chasing the “next big thing.”

This strategy generally does not work.

At best people beat the market by a little bit, and at worst (and much more frequently) they actually underperform the market (especially once you factor in fees), meaning the return of all of that time and energy was actually negative.

The reason this is so depressing is because anyone, including you, can guarantee market-level returns with extremely minimal effort by simply investing in funds that track global stock markets.

This has been shown to be an effective strategy time and again.

One illustrative anecdote: In 2007, Warren Buffet, a believer of this strategy, bet a hedge fund manager that the stock market would outperform top hedge funds over the next 10 years. Barring a dramatic stock market crash this year, Buffet will win the bet on December 31st, 2017.

I don’t know about you, but I feel pretty good about betting on the Buffet approach.

How I manage my money, step-by-step

This diagram represents my exact, step-by-step process for how I manage my money:

It’s pretty simple. All of my income goes into my checking account, and then I set up recurring transfers that automatically move my income each month from my checking account to my credit card payments, cash savings account, retirement account, brokerage accounts, and charitable giving account.

It’s all automatic and I only need to spend a couple hours a year managing this flow.

There are three keys to making this system work well:

1. Set up recurring and automatic transfers for everything so you can set it and forget it.
2. The numbers correspond to priority. Only once you have “maxed out” step one should you move to step two, and so forth. I will get more specific about this below.
3. Think long term, trust the system, and don’t panic during downturns.

That’s the high level overview. Now let’s get super specific with exact accounts I use, and the specific recommendations I have.

Here’s the same chart with more detail, including the exact accounts I use, and the percentages that I target.

Let’s break it down:

Checking Account

I use Charles Schwab Investor Checking. I like Schwab for a number of reasons including the fact that they reimburse all ATM fees, have great customer service, and are on the same platform as my brokerage account.

But chances are you already have a checking account, and so I wouldn’t worry too much about optimizing this step.

Recommended Actions: If you’re happy with your checking, just keep it. If not, I recommend Charles Schwab Investor Checking or if you want something more simple — Capitol One 360.

Credit Card Accounts

If you have overdue credit card debt, that’s priority #1. Pay that off 100% before you continue to any of the following steps.

If you don’t have credit card debt, the next step is to make sure all of your credit cards are set to auto pay, so your balance is paid in full every month.

After you set up autopay, still plan to check in on your credit card accounts every couple months to keep an eye on your spending, and scan for any fraudulent activity.

In terms of what credit cards to use, I mostly use a Chase Sapphire Preferred because I like the travel rewards.

Recommended Actions: Set up all of your credit card accounts to auto pay in full.

The most important steps in the flowchart are steps 1 through 3.

1. Savings Account

Your savings account is your near-zero-risk account where you keep cash that you want easy access to for emergencies, planned big purchases (like a down payment on a house), and unexpected bills.

There is no “right amount” to keep in your savings account — it depends on your personal circumstances and preferences. I personally aim to keep a baseline of 6 months of living expenses in my savings account, and then I have a recurring monthly transfer of around 3% of my income from my checking to my savings.

I would generally recommend trying to save 6 months of living expenses in your savings account before you move on to the next steps, but again, this is a goal that is personal to you and your and circumstance.

Logistically, I use Schwab for my primary personal savings account. But like with checking, if you already have a savings account you like, that’s great — don’t worry about opening up a new one.

If you would like to easily manage multiple savings accounts, I highly recommend Capital One 360, (which I also use).

Recommended Actions: Setup a recurring monthly transfer from checking to savings for as much as you can possibly manage until you hit 6 months of living expenses or whatever your cash savings goal might be, then lower the recurring transfer to 2 to 5% of income, and re-divert your other income to the following steps.

2. Retirement Accounts

If you don’t have a Roth IRA, I recommend you open one right now with an automated investment service (also known as “robo advisors”). I use Wealthfront and highly recommend it. I also know people who have a good experience with Betterment.

(Note: I use referral links. For more about what that means, scroll to the bottom of this post.)

Robo-advisors are investing platforms that offer automated, algorithm-driven financial planning services with very little human supervision. Rather than picking individual stocks, these algorithms will automatically invest your money in low-fee index funds that track various global markets. You simply set your risk tolerance, and they do the rest.

By definition you won’t beat the market with these services (since they track the market) but you will beat approximately 90% of human-managed portfolios after you account for the money you are saving on fees.

If you already have a Roth IRA, I highly recommend that you open up a new automated account and then transfer your Roth over (the new account will make it easy to transfer).

Once your account is open, setup a recurring $458 per month transfer from your checking to your Roth if you can afford it (that adds up to $5500 per year, which is the legal maximum).

If that’s too much, then set up as much as you can. But set up something. You can always dial it up or down later.

Beyond maxing out your Roth, the question of whether or not you should save further for retirement using traditional IRAs or employee sponsored plans is a personal choice based on your goals. I won’t speak to that in this post, except to say that 401Ks are often high-fee accounts. If your employee allows you to manage it yourself, then I would strongly consider this (Wealthfront also supports 401Ks).

Recommended Actions: Open or transfer a Roth IRA with a robo-investing service (i.e. Wealthfront — which I use and recommend) and set up a recurring monthly transfer of whatever you can reasonably afford, up to $458. Once you setup the automatic transfer, you don’t have to do anything else. The robo-advisor will automatically invest your money for you in a low-fee, diversified portfolio of index funds.

3. Automated Investment Account

After you’ve dialed in your savings account and retirement contributions, the next step is to set up your personal investment (brokerage) account. This is where the majority of your investment gains will come from over your life.

Just as with your retirement account, I highly recommend you use an automated investment service like Wealthfront. If you already have a personal brokerage account, you can easily transfer it over.

Unless you like to actively manage your own portfolio and you’re good at it, these services will save you a ton of time and headache and probably make you more money.

After you open your account, the #1 most important step is to setup a recurring transfer from your checking account to your automated investment account.

Even if you’re not sure exactly how much you’re comfortable transferring, setup something! Even if it’s a really small amount.

Then at least the system is working for you, and all you have to do in the future is turn the dial to change your transfer amount.

Ideally try to get to a point where you can transfer 20% (or more!) of your pre-tax income to this account. Especially if you don’t have kids yet.

If this seems unattainable right now, don’t worry about it. Decide what seems doable — 3%, 5%, 10% and setup your automatic transfer!

Since you will be using a robo advisor, that’s all you have to do. The platform will take care of all of the buying and selling.

Recommended Action: Open or transfer a personal brokerage account with a robo-investing service (i.e. Wealthfront — which I use and recommend) and set up a recurring monthly transfer of whatever you can reasonably afford with a stretch goal of 20% of your pre-tax income. Once you setup the automatic transfer, you don’t have to do anything else. The robo-advisor will automatically invest your money for you in a low-fee, diversified portfolio of index funds.

4 & 5. Charitable Giving, Active Stock Picking, and Other Activities.

These are topics for another post. The only things I’ll say here are:

1. Try to begin thinking about your giving strategically, starting with what percent of your income you’d like to give away.
2. Avoid active, individual stock picking unless A) you know what you’re doing and B) you enjoy the process and the ride. Otherwise, I believe that the time:reward ratio of short term betting on individual stocks is on average too low and at the margin too uncertain to justify.

Final Notes

I have seen too many people make financial mistakes that could have been easily mitigated had they followed this more simple and less glamorous wealth-building strategy of automation and indexing.

A system like this takes patience. In order for it to work, you have to have a long term outlook and you can’t panic during downturns when you lose money — instead you have to stick with the plan.

But the beauty of a system like this is that after you set it up, it works for you. It’s low maintenance and you don’t need to spend a lot of time on it. You will build your wealth slowly and automatically, without stress or having to worry about whether you’re “doing it right.”

The next time someone lets you in a “stock pick” you can ignore them, and feel good knowing that you’re already getting market-level returns and that trying to beat the market is a fool’s errand.

Disclaimers, Referral Links, Shout Outs, and Questions

General Disclaimer

This system may not be suitable for everyone! I am not a professional financial advisor, and just because it works well for me, does not mean it will work well for you. And just because it has worked well in the past is not guarantee that it will continue to work well in the future.

Other smart finance people might disagree with me about parts or all of this strategy, and I would highly encourage you to do your own research as well.

While I am fully aware that I could be wrong about anything (or everything), I do believe in this approach, and I think that a lot of stuff in the world would have to change very dramatically in order for this strategy to lose you money in the long run.

Referral Links

I use referral links throughout this post. That means if you sign up with my link, we both benefit. For example — if you use my my Wealthfront referral link you will get an extra $5000 managed for free, and so will I. If you would prefer to just sign up normally without the referral benefit, then of course you can do so at wealthfront.com!

Shout Outs

The two financial management pillars of automation and indexing that I share in this post are not original ideas and I take ZERO credit for them. I have learned and adapted my strategy based on my learnings from hundreds of sources over the past 10 years. Some of my key financial influencers include: My parents, Ramit Sethi, Tim Ferriss, Warren Buffett, lots of smart people on Quora.

Questions

My goal is to help you spend less time and energy on your personal finances so that you can spend more time and energy on the things you actually care about.

To that end, if you have any questions about this post, or want more help, you can email me at pmkoehler **at** gmail **dot** com.

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Originally published at petermk.com.