July 2020

Today, we’re going to dive into what to do once your emergency fund is fully stocked – also known as, the world’s best problem to have.

Welcome to adulthood! You’ve made it. Your company-issued minivan and mortgage are in the mail; BYO-orthopedic shoes.

In my work with Matriarch clients (and, candidly, personal experience), a few themes emerge as big areas of opportunities. I’ve talked about some of them in the past:

Paying off debt the wrong way – i.e., paying down high-balance debt instead of high-interest rate debt
A complete lack of savings
Credit card overuse

Most of these themes stem from the relationship between spending and saving – between what you have coming in every month and what you have going out.

Then, on the other end of the spectrum, you have the super-saver thematic area of opportunity:

Saving (in the literal sense) way beyond what’s necessary and neglecting investment opportunities

See? A great problem to have.

Last week we dug into how to start building your emergency fund. If you passed up that article because yours is already stocked, this one is for you.

This post will be published in a few parts because it’s a fairly dense topic with a lot of variance, so today, we’ll focus more on the psychological side and set the foundation for the tactical in case you’re a little skeptical of diverting money away from your precious Marcus account. Next time, we’ll get into the nitty-gritty: the difference between Roth and traditional accounts and prioritizing investments.

What does “fully funded” look like?

The short answer is, it depends. The emergency fund of a single person with low expenses, no debt, and steady income from a W2 job (me) is going to look a lot different than the emergency fund of a parent with two children who does freelance work full-time and has a mortgage.

But if your financial situation resembles that of your average 25-year-old (give or take a few years), the number I mentioned last week was $15,000. For most of the people I work with, the emergency fund target (based on income, expenses and debt) ranges most often from $12,000 to $18,000, so I simply took the average. My emergency fund used to be a solid $15,000, but I decided to cap it at $12,000 and move the remaining $3,000 into a general investment account for more aggressive growth.

If you’re fully funded, it’s time to shift mental gears.

I remember the first time I invested in anything outside my company-sponsored 401(k).

Having just hit my first emergency fund goal, I felt like I was falling behind in shoveling more money into savings every month (a solid instinct, but what happened next was a little misguided).

Sitting in my cubicle one afternoon, I downloaded the Robinhood app (I know, get your “Robinhood trader” puns ready).

Ready to link a checking account? It prompted me. Hastily, I punched in the account and routing numbers, then stared at the transfer option.

How much should I transfer? How much can I afford to transfer? I wondered. Already logged into my bank portal because I used it to grab my account information, I stared at the number in checking. Once upon a time, someone had told me you should never invest money that you wouldn’t be comfortable losing (I know now that that’s probably an overly emphatic approach to risk), so I held my breath and transferred $1,500.

The green checkmark darted across the screen and I let out a deep exhale.

Cool. Now what?

I pulled up a text thread with my friend Haley with her recommendations. It looked like alphabet soup. VOO, VTI, VGT… it bears the question, WTF?

I learned later that these were ETFs, or exchange-traded funds. Upon further investigation (and I use “investigation” lightly), I had pulled the trigger on a couple shares of each. (I know. I cringe.)

I owned 6 shares of Vanguard ETFs. Nice!

Suddenly, something on the screen began to move. My money was moving! I had $1,501.87! Now $1,503.50!

“Investing is easy!” I declared to the older men on my row. “I just made $3.50!”

I have to believe they were entertained by my on-the-job day trading break.

“So, wait,” I asked, “If it goes up to $1,507, could I withdraw the $7 and use it to buy Chipotle for dinner?”

I swear, that was an actual question I asked. You have to start somewhere. They said, technically, yes.

But I didn’t. I closed the app and went back to work. The next day I was dismayed to see that my balance was $1,498.02. Maybe investing wasn’t easy. I was stressed.

Do as I say, not as I do – this experiment in trial and error luckily didn’t net any losses, but the strategies we’re going to talk about are more scientific (and a lot safer) than the Robinhood Roulette I was playing.

You’re shifting your mindset now: You’re no longer building an emergency wall of protection around you in defense, you’re playing offense. The goal is no longer preservation – the goal is growth.

My point in telling you this is, investing feels different from saving.

I remember being nervous to transfer that $1,500, unsure whether or not it was going to disappear into the cyberspace of the fintech world forever. Now, after several years of prioritizing (smart, not sporadic) investing and watching my net worth quintuple in a few years’ time, I’m trying to find ways to move even more money out of savings and into investment accounts.

The first transfers will feel foreign, but you have to remind yourself that if you’re investing in low-cost index funds and properly diversifying your portfolio, the risk is fairly minimal. Sure, you might lose money sometimes, but if you leave your money in a savings account at the mercy of 2% to inflation every year, you will certainly lose money.

Consider this handy graph from Ellevest:

So how does one invest in low-cost, diversified index funds?

Unlike my lowly origin story, I wouldn’t recommend transferring your life savings into Robinhood and betting it all on TSLA (although, to Haley’s credit, her suggestions were actually rock solid – I was just lucky that my first financial peer influence actually knew what she was doing).

Instead, I recommend turning to a robo-advisor platform like Betterment or Ellevest.

At the risk of oversimplifying, a robo-advisor investment platform uses algorithms to invest your money for you. You divulge your age and risk tolerance and transfer the money as if it’s a savings account, and the computer invests the money and rebalances your portfolio if your allocations get out of whack.

In other words, you don’t have to know the perfect blend of large-, mid- and small-cap funds to choose or which bonds to select; it chooses them for you.

The pros

So easy a caveman could do it. You make virtually no decisions beyond how much to transfer and when.

The UX/UI is really clean and easy to understand; you can see your performance, holdings, and other key pieces of information in a way that’s much easier to comprehend than your typical brokerage site.

When Betterment was being developed, Jon Stein was pitching it to venture capitalists and angel investor Chris Sacca famously complained that it looked too simple. “So let me get this straight,” Jon said in response to Chris’s distrust of the interface, “You’d like it more if it were harder to use?”

The rest is history.

Here’s an example of the Betterment interface:

And here’s an example of a Vanguard account:

That’s not to say that Betterment is a better brokerage firm than Vanguard; Vanguard is a trusted (and trustworthy) institution with an impeccable track record. This is merely to say that, if you are unfamiliar with the financial services industry, that should not preclude you from participating – and Betterment’s platform makes it easier to start than Vanguard’s does.

The cons

Slightly higher fees: 0.25% annually with Betterment. This means, roughly, that a $10,000 balance would elicit a $25/year fee for the service. There is no “management fee” of this kind for a self-managed brokerage account elsewhere (like the account shown with Vanguard).

This is still significantly lower than you’d pay a real person to manage your money for you, where you could expect fees more in the 1-2% range (netting $100 or $200 per year on a $10,000 balance as opposed to $25).

That said, you should always be skeptical of any fees levied on your net worth in money management. Ultimately, this is something you could learn to do yourself. But in exchange for the ease and convenience Betterment offers, I made the call for myself that 0.25% annually was acceptable.

Candidly, when I began using robo-advisors, Betterment’s fees were lower than Ellevest’s (0.25% vs. 0.30%), which is why I chose Betterment. Ellevest has changed their pricing strategy; now, their basic plan is a flat rate of $1/mo. and they have a membership/subscription business model. I haven’t dug into it too much, but I know Betterment’s pricing still leverages the traditional assets under management fee of 0.25%.

I will also note that I’ve never withdrawn money from Betterment so I’m unable to comment on the ease of that process, but hopefully, the money that you’re investing in a General Investing account through the platform is not money that you’d need immediate access to for Chipotle that night (i.e., it may take a few days to sell your shares and transfer back out to a bank).

That’s enough for today. Next time…

We’ll talk about a few things:

First, a breakdown to get clear on Traditional vs. Roth
Then, how to prioritize your different investment accounts and how much to shoot for, percentage-wise

In the meantime, decide if Betterment or Ellevest is right for you. See you soon – same time next week!

What to Do Once Your Emergency Fund is Stocked, Pt. 1