It’s pretty common that friends and family will reach out to me with financial questions. They’ve started a new job or have some extra money and want to know what they should do with it.

They can probably Google their question, but they trust me and it can be hard to discern good information on the internet. I don’t mind taking an hour of my time (usually while walking the dog) to give them good, solid, foundational financial planning advice. There usually aren’t details regarding their specific situation.

“I really don’t mind helping you for free. But if I need to do math or figure out solutions you can’t answer via Google, then you should probably be hiring an advisor.”

This is what I tell them.

Save More

In my podcast with Trishul Patel, we agreed that the single most important piece of financial advice is to save more. If you can do this one thing and start as early as possible, then so many other things work out later on down the road. This comes from a dual benefit of having more assets later, but it also means you have managed your spending effectively. By definition, if you are saving more, you are spending less [assuming you are paying off your credit cards every month]. These lower regular lifestyle expenses provide more flexibility in the future, including potentially working less or retiring earlier.

There are many articles online and a famous Albert Einstein quote about compound interest. The earlier you start saving, the more time to reap the exponential benefits of compound growth. It’s not just the money you have saved that earns a rate of return, it’s also the growth you have had in the past that also earns more money.

Your money is making money

Invest in stocks

(Stocks = equities)

The corollary of Saving More is to invest in stocks. A nice broad diversified index will likely help most people grow their net worth more effectively than a savings account because the rate of return on stocks is likely to be greater than the interest on a savings account over the next couple decades. This also comes with increased volatility (a.k.a risk). A savings account will not lose money. A stock portfolio can lose money. In fact, these ups and downs in the stock market are so common, I feel comfortable saying that some year in the next decade, you will lose money. But over a long enough time frame, say a decade or longer, the stock market is more likely to have greater growth than a savings account.

How much to save

The farther I go down in this article correlates with the possibility that this advice may not apply to you.

Retirement – Max out your 401k

Try to save 12-15% for retirement specifically.

Maxing out your 401k every year is ideal.

In 2024, employees can contribute up to $23,000 (pre-tax or Roth) and if they are age 50 or over, they can contribute an additional $7,500 catch-up contribution, for a total of $30,500.

If you make under $150k/yr, maxing out your 401k is saving more than 15% for retirement. Great! Try to stretch there if you can.

If you make more than $230k/yr, maxing out your 401k is saving less than 10% for retirement. Not as good. You will likely need to save and invest more outside of your 401k just for retirement specifically. But even at higher incomes, maxing out your 401k is such a good habit, it is still my default advice for as many people as possible.

I love recommending that my clients contribute to their 401k. There are multiple benefits all working together.

It’s easy. The money comes out of their paycheck before their take-home pay hits their checking account. No extra work required.
It’s automatic. It happens every pay period without any extra mental energy by the client.
- Side note: I love ‘set-it-and-forget-it’ strategies. If you implement a strategy and forget to check it for a few years and you are better off because of it, this is a good strategy.
Tax benefits. This is intentionally third on this list. Systematic savings and investing is more important than the tax benefits you get from a 401k, but whether you are making pre-tax or Roth contributions, the tax deferral and/or tax-free growth are better than only using a taxable investment account (a.k.a brokerage account).

401k

Pre-tax or Roth?

(Short answer: Roth)

If your tax rate is the same while you are working and adding to your 401k as it is when you are retired and withdrawing from your 401k, the math will say that pre-tax vs Roth doesn’t matter. If you put money in pre-tax, let it grow, then pay the taxes as you take the money out, you will have the same after-tax amount as if you put paid the taxes first on the Roth contributions, let that lesser amount grow at the same rate, then took the money out tax-free.

$100 pre-tax, gets a 100% return [doubles] over some time frame, grows to $200, then you pay 25% in taxes and net $150.
$100 gets taxed at 25%, you put $75 in Roth, get the same 100% return, and you have $150 tax-free.

However, when we start to factor in contribution limits, which we do have to account for with 401k’s and IRA’s, your Roth contributions will end up being more. If you put $23k in pre-tax this year vs $23k in Roth, let it grow for some time, the account balances will be the same. But in the future, you will have to pay taxes on the regular pre-tax 401k and the Roth will be tax-free. You will have more money after taxes if you max out your Roth 401k than if you maxed out your regular pre-tax 401k.

Why? How does this math work?

We are no longer making the same comparison as the example above. If we were trying to make an accurate comparison (with a 25% tax rate), we would compare putting $23k in pre-tax to making Roth contributions of $17,250. ($23k – 25%) Now the after-tax amounts would balance out.

Going the other way, if we put $23k in a Roth 401k, this is equivalent to putting $30,667 in a regular pre-tax 401k. But the IRS doesn’t allow us to put this much in a pre-tax 401k.

The difference is because we are paying the taxes on the Roth contributions with outside money. We are effectively forcing ourselves to save more money by making Roth contributions.

Roth 401k is tricking ourselves into saving more money.

How to invest?

100% equities for anyone under 50

60% US (VTSAX)

40% International (VTIAX)

Again, I’m oversimplifying with generic advice that probably applies to most people. Because stocks are volatile, if you are taking withdrawals from your portfolio or you plan on taking withdrawals in a few years, you will want to balance out the stocks with some bonds in your portfolio. With 401k’s, you likely won’t be taking withdrawals until age 59.5, so if you under 50, you still have a decade to go and an all stock portfolio makes sense.

I use Vanguard Total Stock Market Index Fund (VTSAX) as an example of a good, diversified, low cost investment that includes US Large Cap, Mid Cap, and Small Cap stocks. Vanguard Total International Stock Index Fund (VTIAX) does the same thing with stocks outside the US.

Even if your 401k doesn’t have these Vanguard funds, there are likely a couple passive index fund choices available to you. If it’s says “index” or “500” it’s probably a good, low cost option.

Not everyone has a 401k, but a 403b, 457, Thrift Savings Plan (TSP), or even a taxable investment account will work and all the advice above remains consistent.

3-5% into cash

I admit my sample size isn’t big enough and this is probably more anecdotal, but every client I have with a healthy cash position feels less stress and is more comfortable with life in general. This is one area where my advice has evolved over the last decade. A younger me with a freshly printed CFP certification would talk about the math and the cash drag on your net worth. Yeah, you need some in a cash reserve, but anything extra should be invested. Now? If you want a couple year’s worth of income or six-digits in a cash reserve to feel more comfortable? Go ahead. We can plan around that.

Pick a nice round number that you think will help you feel comfortable. How much do you need to sleep a little easier at night? This will probably be an arbitrary guess and that’s ok. You don’t need to stay committed to this number. After you reach that number, wait a few months and see how you feel.

“You know what? I think I’d like just a little more.”

“I see that much cash just sitting there and I’d rather it was working for me.”

A couple years ago, I would have said that I don’t care what the interest rate is. Is your time worth the extra 0.5%?

On $100k an extra 0.5% = $500 over a year

On $20k an extra 0.5% = $100 over a year

Is this worth your time and effort?

Now, with interest rates higher, I care a little. Some banks have kept their savings accounts under 1% and you can do better than that. I care more about the difference between 4% and 1% than I do trying to shop around for the difference between 4.75% and 5%.

(As I type that out, I realize how obvious it sounds. I hope you understand my sentiment.)

Is your bank, savings account, or money market offering a competitive interest rate?

Good enough.

Is your bank, savings account, or money market offering THE BEST interest rate?

I don’t care.

1) Max out your 401k, 100% equities.

2) 3-5% in cash, pick a round number that feels good.

When it comes to saving and investing, one of the key questions I help clients answer, usually related to company stock, is “What is the money for?” If you already know what the money is for, how much you need, when you need it, etc. this makes choosing the appropriate asset allocation easier. After Retirement/Financial Independence and Cash, here are a few other examples of what people usually save for.

Down payment on a house

When determining whether you can afford a home you are looking at, you need to be aware of two main items.

20% down payment (plus extra for fees related to the purchase)
PITI (Principal, Interest, Taxes, Insurance) payment

You need to have 20% of the purchase saved up in cash ready to transfer to the seller via a title company and escrow.

Once you have purchased the property, you need to fit the PITI payment in your monthly cash flow. An online mortgage calculator can help with this calculation based on current interest rates. Once you can estimate your PITI payment, you should be saving the difference between that estimated PITI payment and your current rent every month.

(PITI – rent = monthly savings)

This should be going towards the down payment specifically. This is separate from financial independence or cash reserve. This has a dual benefit of building up your down payment AND confirming you can fit the future housing cost in your cash flow without sacrificing the other savings you need for the future. Not everyone builds up their down payment solely through monthly savings. There may be tax refunds, equity compensation, bonuses, help from parents, etc. The key is that even if you get the down payment sooner than you expect, you want to make sure the mortgage fits in your cash flow.

At the beginning, it doesn’t really matter if the cash you are building up is for cash reserve or down payment. As long as you are establishing a good savings habit, you can separate what you are saving for later.

When saving for a down payment, it also matters when you think you might be ready to buy a house. When will you be ready to make that commitment to location? Saving into cash (CDs, money market, etc.) is fine if you plan on buying a house in a couple years. If you think you are further from buying a house, maybe add some bonds. The longer your time frame, the more stocks you add to the portfolio.

Less than 2 years All cash

2-7 years More bonds than stocks

7-10 years More stocks than bonds

10+ years All stocks

If you are following along, trying to fit the current recommendations into your existing cash flow and doing the math, yes this can start to seem dauting. I admit that. 15% for retirement, 5% to cash, and another 10-20% for a down payment? Yes, keep pushing to save more. Realistically, I see people start with what they can save now, then as their incomes grow, they increase their systematic savings over time. If you have already purchased a house and you are still saving 15-20%, you’re probably doing pretty well.

College

If you have kids and you want to start saving for their college, a 529 plan probably makes the most sense. Do a quick Google search to see if your state provides any tax benefits when using that state’s 529 plan.

There are no federal tax deductions on 529 contributions, but some states will allow you to deduct some amount of a 529 contribution if you use that state’s plan. I live in California, which does not provide any such benefit, so it doesn’t matter which 529 plan I use.

UCLA has a sticker price of about $37k, including room and board. If you want to fully fund four years at UCLA for a child born this year [with a variety of assumptions] you would need to save $500 per month for college specifically.

The easiest strategy is to open a 529 plan, choose an Age-Based investment, and begin contributing $500 per month.

This is taking advantage of a ‘set-it-and-forget’ strategy where if you forget to look at it for a decade, you’re probably fine.

An Age-Based portfolio will start off with mostly stocks, then as the child gets older and you get closer to needing the money, the portfolio automatically gradually adjusts to increase how much you have in bonds. It’s the same theory I mentioned above about how time frame impacts how you should be investing, but this does it for you automatically.

If you are willing to pay a little more attention and be more aggressive, an all equity portfolio could make a little more sense if they are under 10. This means you will need to manually make an adjustment to sell some stocks and add bonds at some point in the future.

The other nuanced approach to saving for college is that you don’t necessarily need to use a 529 plan for the entire amount. Depending on how many kids you have, how much you want to provide, the possibility of getting scholarships, parenting values, etc. it may make sense to split the savings between a 529 plan, which would be for college specifically, and a taxable investment account, which has the flexibility to be used for any purpose you want.

Planning together as a couple

This not a referendum on family values. This is an observation that has played out consistently enough that it’s worth recommending. If both parties of a couple are working, try as much as possible to keep your combined expenses under one income.

Dual-income household? Live off one salary.

This would mean that you are saving the entire other salary. This could be towards a down payment or financial independence. But it’s not just how much you are saving. This strategy gives you so much flexibility in the future for designing your ideal life. You can be intentional about where you want to live, which house you want to buy, what family dynamic you would like with kids. This is not a recommendation that one parent should stay home with kids. This is emphasizing that saving aggressively and managing expenses early gives you so many more choices.

One minute of free financial advice

If you have a good systematic savings (15-20% of income + down payment), you are invested aggressively enough, and have a solid cash reserve, then most of the rest of the advice becomes optimizing on the margins. Saving in a retirement account vs a taxable investment account can help, but now we need to figure out what the money is for. (One of those questions we can’t answer via Google.)

If you have any questions, please feel free to email me at aaron.agte@graystoneadvisor.com or schedule a meeting.

Aaron Agte, CFP®, founder of Graystone Advisor, is a fee-only Financial Planner located in Foster City, CA, serving clients virtually in the Bay Area and across the country. He specializes in helping families with stock options, RSUs, and other equity compensation.

@AaronAgteCFP