On the Money is a monthly advice column. If you’re looking for advice on spending, saving or investing — or any complicated emotions that may come up when you’re getting ready to make a big financial decision — you canSubmit your question in this form. Here, we answer two questions asked by Vox readers, which have been edited and condensed.
I’m doing all the normal things to save for retirement (Roth IRA, employer 401(k), match, ETFs, etc.) but it still feels like middle class money (I’m just getting by and won’t have one to pass down surplus). I have excellent credit, so should I take out a low-interest personal loan and invest in ETFs to maximize profits? I want to be the first to build generational wealth in my family.
Dear Middle Class,
Taking out a low-interest personal loan and using the money to buy ETFs is a terrible idea. First, even the best personal loan interest rates are higher than they were a few years ago. With an APR of around 8 percent for people with excellent credit. Second, the stock market is currently experiencing both record highs and general volatility — and although you can try to time your purchases during a tumble (otherwise known as “buying a dip”), you can still end up buying a relatively high position.
But even when the stock market is at record lows, going into debt to buy ETFs is still a bad move. I’m assuming you’ll want to hold the ETF for a while, which means you’ll need a way to repay the loan while your borrowed money is stuck in the market. Why borrow money in the first place if you have enough extra income to pay it off? Why not just put the extra income directly into the market?
If you’re planning to buy and sell ETFs quickly enough to pay off the debt with the returns and have the profits left over to reinvest and/or save, then well – good luck with that, I guess. Lots of people have tried day trading, but very few have made more money than they deposited.
I’m not saying that going into debt right now is a smart move to increase your net worth over the long term — and if you want to learn more about that process, including using debt for long-term investments in housing, education, and (in some cases) the market, I suggest reading Thomas J. Anderson’s writing. give Value of debt in wealth creation. This book discusses how much debt you want to take on at different stages of your life, which can serve as a good metric. Anderson’s book also shows how much you can save and how you want to manage your assets as you move through life — which brings me to the second, more important part of your question.
You want to know how to get out of your middle class money situation. You want to end each month with a little extra in the bank, and you want to turn that surplus cash into an asset that can pass down to the next generation.
The truth is that it may not be achievable. Our current economic system is designed so that we live as close to paycheck-to-paycheck as possible. Since you’re middle class, your paycheck-to-paycheck life is probably fairly comfortable, all things considered (which is one of the reasons the system works), and even Anderson’s book on debt and wealth management admits that for many of us, the goal isn’t wealth as much as it is. Balance, which he defines as the ability to meet your financial needs, manage your debt and save enough money for retirement.
There are ways for people in your situation to accumulate surplus, post-retirement cash that can turn into generational wealth, many of which involve serious frugality combined with serious entrepreneurship. (I combined these two strategies with a series of moves—first to a low-cost city and then, a few years later, to the rural area where I grew up.)
But let’s say you like your job and like where you live. Let’s also say that you like the way you spend your money. What else can you pass on to the next generation that can ensure they have a better shot at making it out of the middle class paycheck-to-paycheck lifestyle?
You already know the answer — and it always is. Education. Socialization. The ability to make friends and influence people combined with the skills needed not only to navigate but to contribute to an increasingly complex world. These include financial management skills, which may not extend to literal inheritance but can help the next generation move through their own paycheck-to-paycheck lives in a balanced, thoughtful way.
Read more from On the Money
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How to deal with inflation and lifestyle
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Do you have personal finance questions? Submit them here.
My wife and I are 65 years old. We have retirement money with half earning 5 percent interest and the other half in index funds and big name non-tech stocks. Is there a way to protect against this half-major market decline without buying an annuity or putting all of the cash in?
Dear Retirement Money,
If you really want to protect your money from major market downturns, consider putting it all in cash as you get what you need for retirement. If you’ve got what you need right now, when the market is at an all-time high, you’re in a great situation.
Remember that “selling your investments” is not the same as “withdrawing from your retirement accounts.” You can keep your retirement money in a HYSA or CD without taking distributions and earn a guaranteed return that keeps pace with inflation. (It sounds like you’re already doing something with a portion of your retirement savings, and I’m glad to see you’re getting 5 percent interest.) If you plan to roll over a 401(k), put your money in an IRA that gives you this low- Given access to one of the risk options, you may want to talk to a financial advisor who can help you avoid any unexpected tax issues that can sometimes arise when you Transfer money from one type of retirement account to another.
That said, some people prefer to keep their money in the market as long as possible, aka “buy and hold,” and that strategy can still work for you as long as you have enough time to weather the market’s volatility. If you’re 65, you may have another 30 to 40 years of investing ahead of you — that’s plenty of time for the market to rise, then fall, then rise again (and then rise and drop a few more times for good measure).
It’s also worth calculating whether your investments will ever provide the value you need to support you in retirement. If you can’t make enough money through investments, you may need to start thinking about other ways to finance your golden years.
Since I gave a book recommendation to the last letter-writer, I’ll give you one too: by Morgan Housel. The psychology of money. Housel writes honestly and carefully about the risks and rewards offered by the stock market, including the risk of large market declines. He explains that people can manage those risks and reap the rewards as much as possible. He reminds us that the way we finance retirement today was created in the 1980s, and we’re still figuring out how to make this new system of 401(k)s and IRAs work for most retirees.
If you want it to work for you, start by assessing how much money you might need for the rest of your retirement and how long it will take you to build that cash — and then ask yourself how much risk you’re willing to take.
