Transcript:

Hello there, my name is Edwin Romero, and this is the Out of Office Chat, where I talk about life outside the office. Today, I want to chat about nest eggs, index funds, and T-bills (Oh my!). Thank you so much for joining me. I really appreciate it. 

In this episode, I want to cover my recent investment activities.

I also had a little more time on my hands. A couple of projects wound down, and I felt that I should take on some long-overdue personal finance tasks. 

So, a little bit of context: 

Going independent, inflation, and how I started to explore investment options

About two years ago, I went independent. I know, I know, I don’t really talk about work on this podcast, but I think it’s important. And as I left my full-time job, I paused contributions to any retirement account, specifically my 401k.

The reason being, I wasn’t really sure how client work was going to go; I wasn’t sure how often I was going to get paid. I mean, there are really no guarantees when you’re out on your own. 

So, that being said, I was in survival mode. I wanted to make sure that the cash and the money were accessible, as accessible as possible. I didn’t feel too comfortable with it being placed somewhere else.

I wanted to make sure that the cash was very accessible and liquid at a national bank. Now, this is the first red flag. 

That was my biggest issue: 

I didn’t do anything with that money. 

Just to give you an idea of where these national banks sit in terms of interest rates for their savings accounts, both Bank of America and Chase have interest rates that hover around 0.01%.

To put that in perspective, let’s compare that against the inflation rate. 

The inflation rate is a rate that measures how expensive goods have gotten over a specific period of time. 

For example, in 2022 versus 2021, the inflation rate was up to 8.8%. Meaning the goods in 2022 cost 8.8% more than what was found in 2021. 2023 vs 2022, inflation was at 4.1%. 2024 vs 2023 inflation was at 3.1%. 

Inflation in the US from 2020 to 2023. Source: worldbank.org

Inflation is leveling out but if you are at a national bank, then your money is really devaluating.

I hadn’t paid much mind, until I began to do a little more research. So, what I ended up doing was, I began to look around to see if there are other banks that offered a better interest rate.

4 Banks with high yield rates

There are several banks that offer high yield savings accounts. For example: 

• American Express, a pretty reputable bank, has a savings account for 4.25%.
• SoFi Savings, which is an online bank, has an interest rate of 4.6%
• Barclays, an established bank, for 4.35%
• BMO Alto, which is a relatively new bank, has an interest rate on its savings account at 5.1%

So, really nice alternatives to the traditional big retail, or big national banks.

Now, the downside to that is that there aren’t any brick and mortar locations, but so far I haven’t had any issues, and I heard that customer service for a lot of these is pretty darn nice.

My experience with American Express

What I would go with, I would go with American Express, just because of its reputation and its customer service.

Opening a bank account was relatively painless and it got me out of my comfort zone. I had to look at my bank statements just to get all the required information, all in all it probably took 5 to 10 minutes to set up, and it also gave me an idea about what the level of effort would be, as I synched up the banks.

It also made me start to think how straightforward other investment opportunities might be. 

This is why you need a budget

So, it had me thinking:

I wanted to take stock of my finances, so it required me to look at my current spending: what was I buying, how much… and, honestly, it was eye-opening.

One of the first things I noticed, which was nuts, was how much I spend on coffee. It’s an insane amount! I spent an insane amount over the last year on coffee. And it was decaf! I don’t have caffeine in my life! I only drink decaf coffee, so I would, either go to a Starbucks, Dunkin’ Donuts, or a local coffee shop, and just ask for decaf.

Me, if I had regular coffee

That’s besides the point.

The point is I’ve been spending so much money on coffee, I decided to cut it out.

Additionally, I enjoy Excel a ton. So what I ended up doing was, I downloaded a spreadsheet from my bank and I began to go through it line by line, by line… over the last year.

Then, I added all those into a pivot table, and it was really eye-opening to see how much I actually spent on things like coffee, going out, or various subscriptions that I really didn’t need!

You don’t have to do Excel, but I thought it was a really good exercise.

Use your credit cards responsibly 

Another opportunity was to look at my credit cards. 

I’ll be honest:

My wife had been pushing me to leverage credit cards responsibly, and of course I didn’t listen. I just didn’t want to be taking on debt unnecessarily.

And then, when I opened up my business, my practice, one of the things I did was I got a credit card to help me purchase tickets to conferences, you know, online tickets… things that I knew I was going to need. 

And it really made me change how I view credit cards.

So there’s the reward system, the cashback, the points… things that can add up over time, things that apply to your business, or to your personal credit score.

Now, with the cashback and points and stuff that you can use, particularly for heavy purchases or big purchases, you can take in and then ultimately reapply it to the bill or it goes back to your account.

Now, I’m not saying leverage credit cards all willy-nilly, you still have to have a lot of responsibility. You don’t want to buy things just because you want it, and just because you have a high credit limit, right?

Please, don’t use your credit card like this

So, with that, it really made me shift my mindset on when and how to use my credit card.

There’s no snow bowling. I look at the banks from prior and think what better interest rates I can find, I look at my spending and my credit card… and THE BIG ONE:

I think that the biggest thing I’m most proud of is finally looking at my 401K.

Don’t forget about your 401K

Now, when I was at a full-time job… all my full-time jobs had offered 401Ks, and I think for the most part I did leverage it, but after I left my last job, I just kinda let it sit there.

I was at Fidelity, and out of shame, I haven’t invested anything into my retirement account. I was just avoiding it… but my finance guy (and yeah! I have a finance guy), he’s like:

You should really know what’s in there. So, I got around to it. I looked at it and I’m like: Oh! Wow! It grew.

My finance guy

And that’s the cool thing about the 401K as well as where you place it. It follows the market, right? It goes with how the economy is going: it goes up, it goes down… For the most part these brokerage firms… 

And if you don’t know what a brokerage firm is, it’s basically an institution that facilitates market transactions, like buying stocks, bonds…

So, a lot of brokerage accounts, what they do is, they follow the market, and they invest the money accordingly. So, I think, you don’t have to touch much, and because I’m not in a full time job, I can’t actively contribute to a 401K, but there are options out there. This is another rabbit hole:

What can I do as an independent consultant, as someone that works for himself to help save up for retirement?

IRAs a great alternative for independent consultants

Knowing where I am, knowing where my cash is, knowing how I’m saving now, I wanna know a little bit more about IRAs.

An IRA is an Individual Retirement Account. The cool thing about an IRA is that you don’t need to be employed by anyone to open one up.

Now, there’s a couple of options for an IRA:

There’s a Roth IRA, and a traditional IRA.

Roth IRAs

With a Roth IRA you get to contribute income after you have already paid taxes, and after the age of 59 and a half, you can do tax and penalty free withdrawals.

Traditional IRAs

With a traditional IRA you can contribute either pre or after tax dollars, but the withdrawals are taxed after the age of 59 and a half.

Source: firstexchangebank.com

My IRA choice

On my end, I decided to go with a Roth IRA, the reason being I rather pay taxes now than later.

One of the reasons I like my Roth IRA is that I get to reinvest funds from that account in purchasing other investments like stocks and such.

So again, I already had Fidelity with my previous 401Ks, I said open up another account for my Roth. 

And since I was in there, I was just like: let me explore just a little bit, see what this dashboard is all about.

Getting used to a new tool, a dashboard you’re not familiar with… it can be overwhelming, so I used the opportunity to explore, and see how Fidelity worked.

But something keep creeping up on the back of my head:

Index Funds

I began doing a little more research on what index funds were, and they sounded pretty interesting.

Index Funds are pooled investments that are meant to mimic the market.

So, for example, there is the Fidelity 500 index which takes portions of the stocks from the top 500 companies in the United States; there’s an international market fund, which aims to look at top companies globally.

The goal is to diversify risk, minimize it, but also be able to follow the market, and honestly, increase value over time.

So I had them open up an account for my index funds. Again:

Low risk, low cost.

And yes, some of these investments, some of these things you find online, they come at a specific cost. Fidelity I think is pretty low cost, so something to consider when you’re looking for a brokerage account.

Treasury bills (T-Bills)

So now, I opened up a Roth, I’m investing in index funds… cool, cool, cool, cool, cool, cool!

But the last thing is I still wanna do something a little more stable and, you know… experience growth.

I read on Reddit, a user recommended something like treasure bills, and I wasn’t entirely sure.

I was a finance major and it sounded vaguely familiar so I began doing a little bit more research, and I discovered that treasury bills are basically short term debt obligations from the US treasury department, that they agree to pay back at a later time.

The neat thing about these financial vehicles or securities is that they have different maturity dates. So, whereas a CD may mature in a few months, 6 months, 12 months, 13 months… the treasury bills, they mature at different frames:

There are 4 weeks, 8 weeks, 26 weeks, 52 weeks.

Now if you want to do a longer term… well, what I wanted to do is:

I wanted to see what I could do to make sure my cash was liquid, but also obtain a higher interest rate. What I found was that the interest rates for treasury bills were hovering around 4.5% to 5.5% or so, depending on the time frame.

One of the reasoning I gravitated toward this investment was because of:

• Their low risk
• Pretty decent interest rates

Certificate of Deposit (CDs)

I also looked into CDs. So I went ahead and opted for a couple of CDs. Nothing fancy, you know? Just something to make sure that my cash continues to grow, trying to catch up to that darn inflation rate, if I’m being honest.

I just want to be able to make sure I beat that, and continue to have some sort of liquid value.

CD ladder

In that same vein, an idea I played with, if I’m being honest, it’s not really working out, but I thought I’d share. It’s called a CD ladder.

So, a CD ladder is investing in multiple CDs with different maturity dates,and basically having each one contributing something to a pool of investment.

For example: you might have a CD that matures in 4 weeks, another in 8 weeks, another in 26 weeks, and another in 52 weeks. What I’ve seen is that the 52 weeks might not have as high an interest rate as the 4 or 8 weeks, just because the market might change, and the treasury department wants to make sure that they are not biting more than they can chew.

So the 4 and 8, and sometimes the 26 weeks have a higher rate, so it’s not uncommon for users to invest something into a 4 weeks ladder or CD, and once it matures, reinvest it into another 4 weeks, then reinvest it into another 4 weeks. And they do the same with the 8 weeks, the 26 weeks, and the 52 weeks. So, you’re having CDs with different maturity dates.

I tried it. I wasn’t really a fan of what it would entail, plus, I’m kind of testing it out. I have a 4 week CD now, it’s liquid, and Ijust want to see how it goes. That’s all I want to say.

“I haven’t engaged in any financial planning in a while, and I do feel bad about it, but it’s better late than never”.

Start doing financial planning

Whooo!

Well, y’all. That is a lot, right?

That is a lot to go through.

I don’t know if any of the listeners have engaged in any kind of retirement planning or investment ideas, and I feel like I’m just scratching the surface. I’ll be honest: it’s a massive learning curve.

I haven’t engaged in any financial planning in a while, and I do feel bad about it, but it’s better late than never. Just make sure you’re planning accordingly.

And to that end, I do recommend using Excel. You don’t have to do any fancy equations; you just have to learn the basics, and a lot of that is just getting your thoughts about facts, and figures, and putting them somewhere. 

The spreadsheet, for me, worked. Maybe, it is pen and paper for you, maybe a Word doc, whatever. Just have something that can help you plan.

I don’t anticipate having a windfall of cash at the end of the year, if I’m being honest. I heard all of this is incremental growth, it’s a waiting game. But, the goal is to get into good habits and make sure you begin to invest small. It doesn’t have to be massive. You don’t have to be a millionaire to invest.

 With the low costs of brokerage firms like Fidelity, as well as their openness to accepting varying types of deposits and amounts, it makes it very easy to begin investing. Plus, if the rate of return is at least more than the inflation rate, at least your money is retaining its worth.

With that, I hope you’ve enjoyed this episode. I know it’s a ton to take in, but if you haven’t gotten started on either retirement planning or investments, give it a shot. It’s actually a lot easier than I thought it was going to be.

I appreciate y’all dropping in, and if anything, I’ll catch you on the next one. Take care.