Strategies to Manage your Money and Grow your Nest Egg

This article will provide strategies on budgeting fundamentals and prioritized approach to manage your money and grow your nest egg.

As you open the various accounts and begin investing, read the article How to Invest: Stock Market Strategies. This will provide you strategies to invest in stocks, ETFs, mutual funds and Target Date-Funds. In addition, this article will provide you with portfolio strategies and traps to avoid to maximize your gains over the long-term.

Prior to building your nest eggs, read the following fundamental advice to get started.

Fundamental Advice

Analyze Monthly Cash Flow and Establish Budget 

Step 1: Create an income and expenditure spreadsheet

For income, put in your after-tax amount deposited in your bank account. For expenditure, put your big cost categories like housing, health, entertainment, insurance, auto/transportation, food, clothing, church/charity, vacations, loans and other categories.

Step 2: Denote how much you are currently saving for retirement for both after-tax and pre-tax contributions.

Step 3: Track your actual income and expenditure over the last 3-months or longer span. This may be tedious as it will require you to consolidate items from your credit cards and bank account. However, this is a necessary step to determine your actual expenses.  

Step 4: Set budget targets for each expenditure category. Make it realistic however know that these categories can flex up and down.

After these steps, you will know if you are net positive or net negative cash flow.  If its negative, you will have visibility of your problem areas to work on for future months.  If its positive, great news!  You will be able to use these extra funds for the below phases.

Live within your means

As you plan for your next big purchase like a new home, use your budget spreadsheet to determine how much you can afford.  Be conservative and do not overextend yourself. Take into the following considerations:

Are you going to have kids?  

As detailed in Future Dad Advice: 5 Things to know before you have kids, kids are expensive.  You can expect to pay $233k average to raise a kid up to age 17. This equates to nearly $14k per kid per year. The jaw dropper for me was getting the year-end daycare statement for 2 kids totaling $38,000!  This was equivalent to having 2 house payments for that year.

Will you or your spouse leave work either permanently or temporarily in future?  

This should be discussed before making that major purchase.  Ultimately, it could potentially bring your dual income down to single income in the future.

Bigger is not always better

Naturally, a bigger home equates to a higher total cost of ownership.  Your mortgage payment, property tax, utility bills, and maintenance will be higher.  This should all be part of your budget spreadsheet.

Don’t lose hope that you will never being able to get your dream home.  As you get raises and advance in your career, you can always upgrade when your budget allows.

Pre-Nest Egg (Phase 1)

Pay off High Interest Debt, Build Emergency Fund, 401k Company Match

Phase 1 helps you prioritize how to manage your money.  This phase will be helpful for those people starting their working careers or having a major life event like starting a family.  

Pay off High Interest Debt 

Focus on paying off your high interest debt such as credit card balances.  As some credit card rates are as high as 25% APR, there are nearly no investments that can achieve those gains reliably.  For example, the stock market has averaged gains around 10% annually. However, this can be a bumpy ride with its ups and downs at any given time.

Build Emergency Fund

Save 3-6 months of salary for your emergency fund.  This is to protect against rough times like being laid off or if you run into health issues.  The emergency fund allows you time to get back on your feet without the need to make drastic changes to your lifestyle.

If you are supporting a family and single income, be conservative and aim for 6 months of salary for the emergency fund.  Considering using a High-Yield Saving account for your funds.

High-Yield Saving Account

According to money.com, these accounts can offer up to 25 times higher interest rates than the standard savings account.

In addition, these accounts offer similar protection (FDIC-insured), few to no administrative fees, and funds are easily accessible making these an no-brainer account for your emergency fund.

Check out money.com’s Best High-Yield Savings Account article for the top picks.

401k Company Match

Although you may be cash-strapped in this phase, at a minimum invest in your 401k up to your company’s match.  This is essentially bonus money your company is gifting you so take advantage of this benefit.

Build and Grow Nest Egg (Phase 2)

Roth IRA, 401k, Roth 401k, Employee Stock Purchase Plan

This second phase helps build and grow your nest egg.  According to Fidelity, the rule of thumb for retirement is to save at least 1x your salary by age 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.  At the time of retirement, your nest eggs should be generating enough interest to cover your living costs.

Power of Saving Early

One of the key principles is to start saving early.  This allows you to take advantage of the magic of compound interest over time.  Here are two scenarios that illustrate this concept.

Scenario 1 – Contribute $5k Annually, Assume 10% Annual Gain, Retire at Age 65.

Start Investing at Age	25	35	45
Annual Contributions	$5,000	$5,000	$5,000
Total Contributions at Age 65	$200k	$150k	$100k
Total Savings at Age 65	$2.4mil	$904k	$315k

Look at the massive difference in potential nest egg ($2.4 mil vs only $315k)!

Scenario 2 – Annual Contribution needed to reach $2.4 mil, Assume 10% Annual Gain, Retire at Age 65.

Start Investing at Age	25	35	45
Annual Contributions	$5,000	$13,500	$38,500
Total Contributions at Age 65	$200k	$405k	$770k
Total Savings at Age 65	$2.4mil	$2.4mil	$2.4mil

Although we end up at the same total nest egg ($2.4 mil), there is significantly more annual contributions needed for those starting later in life ($38k vs $5k).

Now what accounts should I consider?

Roth IRA Account

Benefit: This is an after-tax annual contribution.  All investment gains are not taxed in the future.  This means if you hit the next Microsoft or Amazon stock and your $10,000 contribution grows to $1,000,000, then great news!  All of these gains are tax-free in future.  Also, the Roth IRA allows you flexibility to withdraw funds up to your original contribution under certain circumstances.

Limit: $6,000 in 2020 and contributions are subject to income limits.  There are ways to contribute annually to a Roth IRA even if you are beyond the income limits.  Research opening a backdoor Roth IRA (contribute to IRA account which can then be rolled into the Roth IRA).

Strategy: Consider Roth IRA as your first savings vehicle especially if you have many years before retirement to allow this account to grow.

401k Account

Benefit: This is a before-tax annual contribution.  Every dollar you contribute to the 401k will bring your taxable income down by that amount.

Limit: $19,000 in 2019. Assuming you have a 25-30% tax rate, this could potentially save you $4k-$5k in taxes.

Strategy: Consider maxing out the 401k to gain the full tax savings.  At a bare minimum contribute up to your company’s match as this is free money given to you.

Roth 401k Account

Benefit: This is a newer account that is gaining popularity with many companies.  Think of the Roth 401k similar to the Roth IRA.  The benefit allows all gains to be tax-free. You will also be able to contribute more than the $6k Roth IRA limit and is not subject to income limits.

Limit: $19,000 for 2019.

Strategy: Similar to the Roth IRA, consider the Roth 401k if you have many years before retirement.

How do I decide between 401k, Roth IRA or Roth 401k?

This will depend on factors such as how close you are to retirement, your current tax rate, and if you need flexibility for withdrawals.  Consider talking to a financial advisor who will help you decide what may be best for your situation.  

Employee Stock Purchase Plan Account

The Employee Stock Purchase Plan is one of my favorite investment vehicles.  Past programs I have been involved allowed investing up to 10-15% of my income.  Then every 6 months, this money is used to purchase company stock.

Benefit: The best part is a potential gain of at least 15% every 6 months.  Company stock is purchased at the first day or last day of the cycle less 15%.  The best case scenario is if the stock appreciates during this period, you get all those gains in addition to the 15% purchase price discount.  The worst case is if the stock falls you will still net the 15% gain from that cycle.

Strategy: Since there is a potential gain of at least 15%, consider maxing out the ESPP.  Plan for ESPP contributions as part of your monthly budget.  To lock in the gains, you can immediately sell your ESPP as soon as the shares are purchased.

Invest More (Phase 3)

Health Savings Account, 529 College Savings Plan, Dependent Day Care FSA

Once you are solid on Phase 2, consider investing more. In this section, look at these additional tax-advantaged funds as potential investments.

Health Savings Account

Benefit: This is an awesome tax-advantaged account as it provides a triple benefit: 1) Like the 401k, it allows you to contribute pre-tax money 2) Like the Roth IRA, the gains will grow tax-free.   3) When you make health qualified withdrawals, this money is not taxed.  On top of this triple benefit, your company may chip in money annually to help you fund the HSA account.  Sound too good to be true?  Well sorta …

Here are the negatives: You must be enrolled in a high-deductible program.  This means that with any non-routine visit to the doctor office you will be footing most of the bill.  As an example, when my kids get sick, the doctor’s bill is typically around $250 which I have to pay about $180.  The health expenses can add up quick especially during your kid’s preschool years.

Strategy: Due to the “triple benefit”, I max out the HSA ($7,100 limit in 2020) and use out of pocket money for doctor’s visits.  The idea is to let the HSA become another nest egg in retirement.  The HSA also provides nice flexibility.  As long as you keep your health receipts, you can always claim them in the future.

529 College Savings Plan

Benefit: This is an after-tax contribution. A 529 College Saving Plan allows for tax-free growth. This could help minimize your kid’s future college debt. It is not out of the realm to expect overall private college costs to total over $400k and public college costs over $200k when they go to college.

Strategy: Read Beginner’s Guide to College Savings Plan for details about how much you may need to save and potential strategies to help you accomplish this.

Dependent Day Care FSA

Benefit: This is a pre-tax contribution.  The Dependent Day Care FSA allows you to pay for eligible services such as preschool, summer camps, before and after school programs.

Limit: The annual limit is $5k for working married couples.

Strategy: Until your kids are age 13, you can leverage the Dependent Day Care FSA to help save on taxes.

Accelerate to Retirement (Phase 4)

Other Investments, Pay Down Long-term Debts

If you’ve made it to Phase 4 and still have more money to invest, give yourself a big pat on the back.

There are many other investments to consider such as rental properties, stock market, etc.  Instead of investing more, you can also consider paying down any long-term debts such as your mortgage and car payments.  You should analyze whether you can potentially make more by investing vs paying off debt. Since investments can lose money, your risk tolerance will also play a big part.

By saving more and reducing your overall debt, this will allow you to accelerate to retirement.

Summary

You have learned strategies on budgeting fundamentals and prioritized approach to manage your money and grow your nest egg.

Keep the fundamental advice of budgeting top of mind and then work through the phases sequentially. This will give you ideas to manage your money and grow your nest egg.

Disclaimer: Dad MBA is not a financial advisor or tax consultant.  Do your independent research and rely on your tax accountant and financial advisor for professional advice.  This article’s purpose is to provide general education and awareness of ways to manage your money.  Your company may or may not offer certain accounts and/or provide benefits as mentioned in this article.  With any investment, you may lose money.

About DadMBA: Through his schooling (he does have a MBA) & more importantly being a Dad, he has provided practical advice to family & friends on finances & other life topics.  He loves helping others thus the creation of DadMBA.