On the Money is a monthly advice column. If you want advice on spending, saving, or investing—or on the complicated emotions that can arise when preparing for big financial decisions—you can Send your question using this formHere we answer two questions from Vox readers that have been edited and shortened.
I’m doing all the usual things to save for retirement (Roth IRA, employer 401(k), match, ETFs, etc.), but it still feels like middle-class money (I’m just scraping by and won’t have any excess to pass on). I have excellent credit, so should I take out a low-interest personal loan and invest in ETFs to increase the gain? I want to be the first in my family to build generational wealth.
Taking out a low-interest personal loan and using the money to buy ETFs is not a good idea. First, even the best personal loans come with higher interest rates today than they did a few years ago, with an APR of about 8 percent for people with excellent credit. Second, the stock market is currently experiencing both record highs and typical volatility—and while you can try to time your purchases to coincide with one of the dips (also known as “buying the dip”), you may still end up getting in relatively high.
But even if the stock market were at a record low, going into debt to buy ETFs is still a bad move. I’m assuming you want to hold onto the ETFs for a while, which means you need a way to pay back the debt while the borrowed money is tied up in the market. If you have enough extra income to do that, why borrow money at all? Why not just put the extra income directly into the market?
If you plan on buying and selling ETFs quickly enough to use the proceeds to pay off debt and have a profit left over to reinvest and/or save, good luck with that, I guess. Lots of people have tried day trading, but few have made more money than they invested.
I’m not saying there aren’t cases where it’s smart to take on debt now to increase your wealth over the long term – and if you want to learn more about this process, including using debt to finance long-term investments in housing, education, and (in some cases) the market, I recommend reading Thomas J. Anderson’s The value of debt in building wealth. This book discusses how much debt you want to take on at different stages of your life, which might serve as a good benchmark. Anderson’s book also looks at how much you might want to save and how you might want to manage your assets over the course of your 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 financial situation. You want to have a little more in the bank each month and turn that excess money into wealth that you can pass on to the next generation.
The truth is, this may not be achievable. Our current economic system is designed for as many of us as possible to live paycheck to paycheck. Since you’re middle class, your paycheck to paycheck life is probably pretty comfortable all things considered (which is one of the reasons the system works), and even Anderson’s book on debt and wealth management acknowledges that for many of us, the goal is not so much wealth as 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 a surplus after retirement that can be turned into generational wealth. Many of these opportunities require serious frugality combined with serious entrepreneurship. (I combined these two tactics with a series of moves – first to a city with a lower cost of living and then, a few years later, back to the rural area where I grew up.)
But let’s say you like your job and where you live. Let’s even say you like the way you spend your money. What else can you pass on to the next generation to ensure they have a better chance of breaking out of the middle-class lifestyle of living paycheck to paycheck?
You already know the answer – and it’s the same as it always has been. Education. Socialization. The ability to make friends and influence people, combined with the skills needed to not only navigate an increasingly complex world but also contribute to it. That includes financial management skills that may not result in a literal inheritance but could help the next generation live their own lives paycheck to paycheck in a balanced and thoughtful way.
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My wife and I are 65. We have retirement money, half of which earns 5 percent interest, and the other half is invested in index funds and big-name non-tech stocks. Is there a way to protect that half from big market drops without buying an annuity or putting it all in cash?
If you really want to protect your money from big market crashes, consider investing it in cash as soon as you have enough money for retirement. If you happen to have exactly what you need while the market is at an all-time high, that’s the best case scenario.
Keep in mind that “selling your investments” doesn’t mean the same thing as “taking distributions from your retirement accounts.” You may be able to put your retirement money into a HYSA or CDs without taking distributions and earn a guaranteed rate of return that could keep pace with inflation. (It looks like you’re already doing something like this with some of your retirement savings, and I’m glad you’re getting 5 percent interest.) If you’re planning on converting a 401(k) to put your money into an IRA, which gives you access to one of these low-risk options, you may want to talk to a financial advisor who can help you avoid unexpected tax issues that sometimes arise when you move money from one type of retirement account to another.
However, some people prefer to keep their money in the market as long as possible, or “buy and hold,” and this strategy could still work for you as long as you have enough time to deal with market volatility. If you’re 65, you may have 30 to 40 years of investing left – that’s plenty of time for the market to rise, then fall, then rise again (and then rise and fall a few more times, to be safe).
It’s also worth considering whether your investments will ever achieve the value you need for your retirement. If you’re not making enough money from investments, you may need to think about other ways to fund your retirement.
Since I gave the last letter writer a book recommendation, I will give you one too: Morgan Housel’s The psychology of money. Housel writes honestly and carefully about the risks and rewards presented by the stock market, including the risk of major market declines. He explains what people can do to manage those risks and capture as many gains as possible. He also reminds us that the way we fund our retirement today was developed in the 1980s, and we’re still figuring out how to make this new system of 401(k)s and IRAs work for the majority of retirees.
If you want it to work for you, first assess how much money you’ll need for the rest of your retirement and how much time you have left to generate that money. Then ask yourself how much risk you’re willing to take.
