Continuing on with the last lesson, this lesson is another standalone example of how to get started investing. The last lesson was for someone just getting started with the bare minimum needed to open an investment account. This lesson will be for someone a little farther into their journey, but still with a ways to go.
The emphasis in this lesson is more about optimizing your accounts if you’ve already started investing. Often people already have existing investments, and now that they know a little more about how diversification and fees work, they want to make a few changes to bring their investment style in line with their knowledge. That’s where we’ll start for this one.
Starting Point for Our Under $100,000 Plan
Who?
This lesson will follow our made up investor Robert. Robert is 34 years old and working as a software developer. He makes $115,000 a year, or $100,000 a year after taxes, and has been putting some money into his 401(k) for a few years. His 401(k) offers a “100% match up to 3%”. He initially just picked whatever fund did the best the year he started investing and has been adding more money to that. His entire household spending is $60,000 a year, leaving him with about $40,000 left to invest each year. Robert wants to start investing for retirement.
Debts?
Robert has actively paid off almost all of his debt already. He has no credit card debt outside of his monthly spending which he pays off in full each month. He has no student loans, but doesn’t have a 5year auto loan of $20,000 and a 30year mortgage of $250,000 at 4.5% and with 25 years left on it. He eventually wants to remodel his office to be able to be more productive when working from home, a ~$5,000 expense.
Assets?
With Robert’s income and spending level, it’s no surprise he’s amassed some assets. His biggest asset is his house, which has risen in value and is now worth around $350,000. He’s spent a lot in recent years fixing up his house, so he hasn’t put all of his excess money into the stock market. He has invested in his 401(k) up to the company match since he started and it now has a balance of $45,000. Beyond that, he’s been stocking up money in a savings account – which is now up to $40,000 that he’s not sure what to do with. He has $20,000 in a traditional IRA that was rolled over from a previous jobs 401(k) after he left. He’s worried that it’s not a good time to invest and is reluctant to pull the trigger on putting that into the stock market at this time.
Our Problem: What does Robert do with his current 401(k), his IRA, his $45,000 in savings, and his $40,000 a year that’s not earmarked for current expenses? How do we make a plan for him to invest?
Making A Plan for Robert
Like Stacy in the last lesson, Robert is in a really good position. He has a mortgage and a car loan, but no highinterest debt. He also has the potential to save 40% of his income – which would allow him to reach financial independence in somewhere around 22 years. If he plays his cards right he could retire at 55 – or younger!
Once we have all the data on someone’s finances, their future expenses, and their goal, we can see if they’re a good fit for investing. In Robert’s case, he has enough for an emergency fund and he’s paid off his highinterest debt, so that’s an easy yes. We’ll go through the same investment process we went through with Stacy on Roberts finances:
 Determine which accounts to use
 Determine how much to add to each account
 Determine what investments to use, and in which accounts
 Make a plan for how this will change in the future.
We’ll start in the same way – with this familiar graphic:
Let’s take these one by one.
Emergency Fund.
Robert spends $60,000 a year, or $5,000 a month. To fill his emergency fund, he’ll need somewhere between $15,000 and $30,000. Since he has $40,000 saved up, he’s overdoing it. If he was a consultant with varied and inconsistent income, I’d lean towards the higher end on the fund. If he’s in a stable job, and could easily find work if he left his job, then the lower end might be safer.
Recommendations: Given his situation, 6 months is overkill. We can lower that to $20,000, which should give him room to have an emergency fund and also spend some of that money on home repairs that come up. If any huge home repairs come up (I was always scared of needing a new roof when I was a homeowner), then he may need to use this entire fund. For most things (broken A/C, plumbing, electrical, etc) he’ll be able to pay out of his emergency fund and then refill it from his income.
Of the $20,000 in his emergency fund, he could put most of it into a highinterest savings account at his same bank. If he puts $15,000 into the highinterest side and $5,000 into checking, he could get back a little money in interest each year.
Company 401(k) up to the company match
Since Robert jobs offers a 401(k) with a company match, that’s a good next step. It offers a “100% match up to 3%” – which honestly isn’t that great, but it’s still better than nothing.
Robert’s company pays him $115,000 a year. 3% of that would be $3,450 a year, or $287.50 a month. If he invests $3,450 a year, his company will match that at 100%, putting in another $3,450 a year. That means he’s actually saving $6,900 each year from just that!
He can invest more than that into his 401(k) – up to $19,000 a year – but his company would only match the first $3,450 he puts in. If he were to max out his 401(k), that would mean he invested $19,000 and his company invested an additional $3,450 on top of that for a total of $22,450. The $19k limit is for how much Robert puts in – not for how much Robert and his company put in.
Recommendation: Robert is already doing this step, so he’s good there. We’ll revisit this though to see if there’s room to invest more or to change what he’s investing in.
Debt
Robert only has an auto loan and a mortgage – no highinterest debt. The auto loan is fine to keep paying the minimum on, but what about the mortgage? Is there anything that could be done there?
There might be. For one, mortgage rates are at an alltime low right now. If he plans to stay in his house longterm, and can refinance and lower his rate by at least 0.75%, then doing that is a good first step.
He also has a 30year mortgage, which is the default mortgage most people go with. With Robert’s income level, he could choose to refinance into a 15year mortgage at a lower interest rate. This might save somewhere around $50,000 in interest over the course of the loan while also paying it off sooner.
If Robert already has a great interest rate, another option would be adding more to the mortgage each month. With mortgage rates where they are today, I wouldn’t recommend this. As of April 29, 2020, when I write this, 15year mortgage rates are around 2.9%. That’s insanely low! If you have a choice of paying off this 2.9% loan of investing in the stock market that returns 7%+, stocks are an easy choice.
There are still reasons for paying off a mortgage early. If rates were higher (like 5%), then putting money into his mortgage can be the equivalent of investing in bonds. You’re getting a guaranteed rate of return – but in this case, it’s in the form of a discount for being charged a 5% fee later.
When I was a homeowner, I ran a bunch of simulations on this to figure out if I should pay off my mortgage early. The takeaway for my situation was that if my mortgage rate was above 4.5% and I planned to stay in my house longterm then making additional payments to bring down my 30year mortgage to about 12years made sense. Beyond that point, I would need to contribute significantly more each month that could instead go to the stock market.
I’d encourage Robert or anyone in this situation to run the numbers for themselves. In any case, you shouldn’t put ALL of your money towards your home in this step. My rule of thumb is that for every $1 over my mortgage I put towards my home, I should be putting at least $4 into investments elsewhere.
Recommendation: If Robert plans to stay in his house longterm, now would be a good time to refinance down to a 15year mortgage. He’ll pay a lot less interest and will pay it off much sooner. If he is planning on moving within the next 5 years, then he could refinance into a 30year mortgage while rates are low and pay a little less each month – but only if the amount saved would more than cover the refinance costs.
Roth IRA / Traditional IRA.
Robert has $20,000 in a traditional IRA that was rolled over from a 401(k) from a previous employer. Since Robert makes $115,000 a year, he’s above the income limit for being able to contribute to a Traditional IRA and deduct it from his taxes.
Luckily though, he can open a Roth IRA and contribute to that up to $6,000 each year!
Recommendation: Robert has $20,000 in cash in his savings account. I’d recommend Robert open up a Vanguard Roth IRA and fund it with a full $6,000. If he’s reading this between January 1 and April 15th of a year, he could even make a $6,000 contribution for the current year AND $6,000 for the previous year. During that time window, you can do both (I know, it’s a little weird). In future years he can use his income to invest in this Roth IRA on his own outside of his employer.
Company 401(k) Up to the max.
Robert is in a great position to fully max out his 401(k). He has enough excess income to increase his 401(k) contribution all the way up to the max – $19,000 a year.
Recommendation: Max out that 401(k) every year! Even if he only gets a match on the first 3% the rest of it is still a nice pretax contribution that’s lowering his taxes today and allowing it to grow taxfree.
Savings/Investments
Of the $40,000/yr Robert had to invest, about $19,000 of it will go into his 401(k) and $6,000 into his Roth IRA. That still leaves another $15,000 a year. He also has more in his savings account that he can put into his Roth IRA right now. The last stop for this money is an aftertax investment account.
You can open an investment account at about a million places online. Like with every previous example, I’m going to recommend you do it at Vanguard. This will allow you to invest in the same things across all of your accounts, which means less time researching a companyspecific version of a fund (ex Vanguard Total Stock Market vs Fidelity’s equivalent).
Recommendation: Robert can transfer some of his savings into this brokerage account to fund it initially with about $14,000 and set up automatic transactions to invest about $1,000/month.
Recap
Ok, let’s look at where I recommend Robert’s money should go.
 Savings Account: Reduce his $40,000 in savings down to $20,000. Use $6,000 to open a Roth IRA at Vanguard and $14,000 to open a brokerage account at Vanguard.
 401(k): Max it out! Set it to $19,000 a year. With the company match, this will mean $22,450 a year invested.
 Roth IRA: For the first year Robert will fund this in one single swoop from his savings. In future years he can either fund it in a lump sum or put a little in each month.
 Debt: Let’s assume Robert refinanced his mortgage from a 30year down to a 15year. He’ll pay about $300/month more ($3,600/yr), but in exchange, his home will be paid off sooner and with less money going to interest.
 Brokerage: With all taxadvantaged accounts used, Robert’s last option is to invest in a brokerage account. He kicks it off with $14,000 and sets up an automatic transaction to invest $1,000 each month.
Of his initial $40,000 extra, here’s where it’s all going:
 $19,000 is going to his 401(k)
 $3,600 is going to his mortgage after refinancing it
 $6,000 will go towards his Roth IRA
 ~$12,000+ will go towards his brokerage account
At the end of just the first year doing this, Robert will have put $40,450 into the stock market!
Investments
Ok, last step – what should he invest in? Since he’s in his 30s with about 20 years of investing left before he retires, we’ll use an asset allocation with slightly more bonds than Stacy:
 50% US Equity Index Fund ($VTSAX)
 30% International Equities Index Fund ($VTIAX)
 20% Bond Index Fund ($VBTLX)
After the first year, his accounts would have these values:
 401(k): $65,000
 Traditional IRA: $20,000
 Roth IRA: $6,000
 Brokerage Account: $12,000
For a total of $103,000. Since we have 3 funds we want to use and we have 4 accounts, we can see immediately that at least one fund will be in multiple accounts.
Let’s go from the least taxoptimized fund to mosttax optimized: Bonds, then international than US. We can split them from the most taxefficient account to least taxefficient account: 401k/Traditional IRA, Roth then brokerage.
The 401(k) and the Traditional IRA behave exactly the same when investing – you’ll pay the same taxes on them when you withdraw.
Bonds first. We want 20% bonds, or about $20,600, since we want 20% bonds, we could fill our entire Traditional IRA with bonds first. This works out since a Vanguard IRA would likely have a $3,000 minimum purchase there. If we wanted to be exact we could purchase $600 of bonds in our 401(k). I’d recommend against that though – it’s overcomplicating things for now. We’re close enough. When we rebalance in a year we might want to consider that though.
International funds next. We want 30% International funds, or about $31,000. That’s an easy one – we’ll put all $31,000 into our 401(k) to start.
US funds are last. This is where it’ll get tricky. We’ll fill all remaining buckets with US funds. That means $34,000 in our 401(k), $6,000 in our Roth IRA, and $12,000 in our Brokerage account for a total of $52,000.
The end result looks like this:

401(k): $65,000
 $31,000 International Equities Index Fund ($VTIAX)
 $34,000 US Equity Index Fund ($VTSAX)

Traditional IRA: $20,000
 20% Bond Index Fund ($VBTLX)

Roth IRA: $6,000
 $6,000 US Equity Index Fund ($VTSAX)

Brokerage Account: $12,000
 $12,000 US Equity Index Fund ($VTSAX)
We’ll also want to set what our 401(k) and our brokerage account invests in from each paycheck. Our brokerage account is simple – it’ll just put $1,000 into $VTSAX.
Our 401(k) is more difficult to calculate. Since this will be the only place to invest new bonds and international funds, we can calculate that out easily:
 $40,000 invested * 30% = $12,000 International
 $12,000 invested * 20% = $8,000 Bonds
Since we’re getting a company match, we could add a little for US Funds as well, making our 401(k) contribution going forward looking like this:
 5% US Funds
 57% International Funds
 38% Bond Funds
With all of that setup, Robert’s actual asset allocation should be roughly in line with his target allocation!
Next steps
At the end of the first year, Robert will want to change how he invests in his Roth IRA. He can choose to invest a little each month, or in a lump sum.
Since markets usually go up, I prefer investing all $6,000 into my Roth IRA as close to January 1st of the year as possible. In the months before that, I’ll keep transferring money into my Vanguard Brokerage account (the aftertax one) but leave it in a money market account there. Once January 1st rolls around, I’ll transfer $6,000 from my brokerage account to my Roth IRA for a quick contribution.
In a few years, Robert may make too much income to invest in his Roth IRA. At that time he could shift to contributing more to his brokerage account instead.
Robert is in an amazing position. He can keep it up asis, he’s on pace to be financially independent before age 55. It’ll probably be sooner too! There are a few ways he could get there quicker:
 After paying off his mortgage, he could save more.
 If he saves his future raises rather than spending them, then he’ll increase his savings rate.
 If he lowers his expenses he’ll have more money to save and need less money each year.
I’ve met a lot of Roberts in my career. Often they are in amazing financial positions, but they haven’t taken the leap into investing. I know, it can be scary! You can lose money and there’s a lot to learn. The rewards of understanding your finances can be euphoric – you’ll have more control over your life and your future outside of a job.
Robert is on a great path towards financial independence – and now he has a plan to get there!