Things nobody taught me about money

When I was growing up, I was one of the first generations of students to have a strikingly different education from previous generations. I grew up under the Bush administration’s No Child Left Behind policies. Classes teaching important life skills like home economics and driver’s education were cut or moved to after-school classes to make way for classes like “movement and music” to meet new requirements.

Financial literacy is complicated. And nobody out there really wants you to be financially literate: if you can do your own taxes or manage your own money, you can’t be sold basic services. Banks can bamboozle you with bad deals.

A few months ago, I went to dinner with my partner, my cousin and her husband, and their friends. The topic of money came up, and my cousin’s friend mentioned how they were trying to save to buy a house, but how it felt too challenging. I asked how they were managing their money, and came to find that they were being sold some lackluster financial products (bonds? for a twenty-something? in 2022?) from their bank. The conversation turned to our parents and how they managed their money. One parent keeps their entire life savings in a checking account. Another parent wanted to invest in i-Bonds but isn’t technically literate enough to use the website.

Even folks who you might expect to have some knowledge about money lack an understanding of some basics. Chatting with former coworkers about Stripe’s tender offer, it was clear that many folks didn’t understand the equity that they had earned or the tax implications¹.

I wanted to write up a few things that I’ve learned over the years and some of the bullshit I’ve heard as well. I hope you find it useful!

Credit cards

Growing up, the advice for credit cards was not to get one. Credit cards were evil: one wrong move and you’d be buried in debt. A lack of self-control or budgeting would lead you to financial ruin. While credit card debt is indeed a problem, the assumption that credit cards are inherently bad is flat-out wrong.

Treat a credit card like it’s a debit card: assume it’s tied to your bank account, and don’t spend past the amount of money you can pay back that month.

Read the terms! When you get a card, it comes with a giant sheet of paper with all the details about the costs, fees, and benefits of the card. It’s a long, boring read, but well worth it. Some cards have unexpected perks, like travel concierge, rental cars, and more. You won’t know about them unless you read up.

Some cards may be much better than others. When choosing a card, calculate the benefits you’d get from spending on gas, restaurants, travel, and groceries. Understand the fine print: cash back is usually limited to some amount of money (meaning it’s a fixed amount of cash back; it’s not unlimited).

Use them to:

• Make everyday purchases. Some cards offer an extra warranty for purchases made with the card.

• Make “risky” purchases. If a business seems sketchy, it’s better to use a credit card than a debit card.

  • You can dispute debit card purchases, but until you do, fraudulent transactions use up the money from your bank account. With a credit card, the fraudulent transactions use up the card issuer’s money.

  • For the same reason, credit cards tend to be more responsive when filing disputes. I’ve filed disputes for fraud in under ten minutes with my card company and had them overnight me a new card. The same cannot be said for debit cards.

Don’t use them for:

• ATM withdrawals. These are called “cash advance”s and charge a very hefty fee.

• Paying off other credit cards.

Paying bills with a credit card is a big “maybe” from me. If there is no fee for using a credit card, use it. If there’s a fee, do the math to figure out whether the points or cash back that you earn is greater than the cost of the fee. It usually isn’t. I used to be able to pay my rent with a credit card, which would have been awesome for points. But if you read the fine print, I’d end up paying a fee with my rent payment that completely overshadowed the value of the points I’d get in return.

Don’t carry a balance on your credit card, if you can help it. If you need to carry a balance, you probably spent too much. The interest incurred (that is, the fee you pay for carrying a balance) is often not good.

A former coworker of mine (who almost certainly made gobs more money than I made) proudly claimed that he always carried a balance on his cards, because it helped to boost credit. This is the opposite of true. Why would a bank trust you more for owing them money? Yes, you’d be paying them interest. But credit is a measure of being able to pay your debts, not a measure of how much money you make for the bank. When you carry a balance, it makes you look worse at paying your debts.

Debit cards

Don’t use them unless you have a great reason! A debit card is just an easy way to get money out of your bank account. You rarely (if ever) earn anything from using them.

Use them to:

• Pay bills that do not charge a fee for debit cards but do charge a fee for credit cards.

• Make ATM withdrawals. Some banks offer fee-free withdrawals, but it’s usually limited to certain ATMs. Your bank will have a map of ATMs if they offer this.

• If there is no fee, prefer debit cards to ACH. Debit card transactions are fairly easily disputed, and getting a new debit card is straightforward. If your bank account number is stolen, you won’t have a great time.

Don’t use them for:

• Everyday purchases

• Paying bills that do not have a fee for using a credit card. Get the points with your credit card instead of earning nothing with a debit card.

Savings accounts

Regular plain-old non-HYSA savings accounts that your bank gives you when you get your checking account, for all intents and purposes, are unnecessary garbage. Almost across the board, the interest you can earn on your savings in a savings account is next to nothing. And if you can earn an interest rate that’s meaningful (e.g., close to the current inflation rate), you can get that same rate on a checking account.

As far as I can tell, there is no practical upside to a savings account compared to a checking account. They can both be FDIC-insured, your money is easily accessible (even more so with a checking account), and they both earn some amount of interest.

When my father passed, I went over my mom’s finances with her. She had a savings account that was earning 0.05%. I told her she should close it, but she wanted it “in case of emergencies.” Frankly, there’s no reason for this:

• There’s almost no emergency that requires you to have a sizable sum of money that day. Getting money out of a different investment vehicle can take a few days, and that’s probably good enough.

• If you’re making less than 1% interest on your money, it’s not keeping up with inflation. You’re not saving, you’re actively losing money².

  • The point of a savings account is to accumulate wealth. If you’re not accumulating wealth because the interest rate is crap, and the account has fewer features than a checking account, just put your money in the checking account.

That said, there are other kinds of savings accounts. High Yield Savings Accounts (HYSAs) usually offer a generous high interest rate. You’ll need to put down a minimum amount to get started. And you might have somewhat limited access to your funds, so getting emergency access to that money might be limited. Unlike a checking account, though, you’ll have very little in the way of fees for HYSAs.

The trick here is that you trade convenience for yield. The more you let the bank control your money or the more concessions you accept (e.g., not having immediate access to it, having to provide a minimum amount, not being FDIC insured, etc.), the more money you can (potentially) expect in return. At the same time, be smart and research the risks involved in where you’re putting your money.

Retail investing

In the last few years, lot of folks started investing with Robinhood. Instagram is loaded with grifters showing off flashy lifestyles that they credit to forex trading. There’s lot of ways you can invest your money with services like this (both non-commission services like Robinhood or glitzier services that you pay for), but they all mostly (with a few exceptions) boil down to one thing: gambling.

If you’re buying stocks in a company, you’re gambling. You don’t know whether that stock price is going to go up or down. Lots of folks bought Gamestop stock and got burned badly. Lots of folks bought Gamestop stock and made money.

I made no money on Gamestop or AMC. Why? Because I don’t care to end up being the fool left holding the bag, and didn’t try to jump on that bandwagon. I made money on two stocks. The first was Tesla, but that could have been a bad bet, and I was quite lucky. The second was Lululemon, which I’d invested in because I love their clothes and couldn’t believe nobody else was getting in on it. Turns out I was right. At the same time, I’ve also lots lots of money on stocks like Under Armour (thanks, Motley Fool), TSMC, and Moderna.

Here’s what I’d say you should know:

• If you’re making a trade because you think you’re going to miss out, it’s a bad trade.

• Buying stocks for individual companies is gambling.

• Buying shares of index funds (which is like buying a little bit of lots of different companies) is much less risky, but you’re maybe better off using a service that invests for you. You’re probably not going to do a better job than someone who does this full time.

• If you think you want to buy puts (“shorting” a stock), you had better do your research. There’s some potential upside but also a lot (even unlimited amounts!) of potential downside. You probably don’t want to do this.

• Unless you’re trading securities full time, don’t let “forex trading” cross your lips/fingertips.

• Don’t take investment advice from people on Instagram.

Interest and inflation

Money at rest is normally pretty unproductive. It mostly just sits there. Sometimes, your bank will offer you interest on your checking account, so “sitting there” actually means “getting slightly bigger over time.” Which is cool! But is it enough?

No, because of inflation. Inflation is a hand-wavy measure of how powerful your money is. Said another way, it’s almost like a formalized way of measuring how much stuff your money can buy. There’s lots of different reasons that this happens (like a supply chain issue caused by a global pandemic, or government monetary policy creating demand), but $1 today can buy less than $1 in ten years, often by a significant margin.

Interest is measured in a percentage, which is convenient: we measure returns (interest) on our money as a percentage. If your money gets 5% interest and the inflation rate is 5%, the number on your bank account goes up by 5% at the end of the year, but you can still only buy the same amount of stuff (give or take).

The goal, then, is to do whatever you have to do to at least meet the inflation rate. If inflation is 7%, what do you have to do to make up that 7% in returns?

This is where investments come in. Depending on how much money you have and whether you’ll need access to it in an emergency (or how quickly you’d need access to it) there are options.

Certificates of deposit, HYSAs, money market accounts, bonds, and other kinds of popular investment vehicles can be good ways to invest your money. If you go to your bank in person and ask them about your options, they’ll probably have more than a few. How do you choose? Without trying to oversimplify: pick one that firstly meets your needs, where the expected returns (or “yield”) is well above the inflation rate. Even better, pick a few different kinds of investment vehicles and spread your money across them.

If you have money somewhere, check how much money your money is making. If it’s not making money, it’s not where it should be.

401Ks, and how they can sometimes be kind of shit

401Ks, frankly, are pretty garbage. America swore off pensions and adopted retirement funds. Except they’re nowhere near as advantageous as a pension. Why did we do this? Because it’s cheaper for businesses, who can put that money towards executive bonuses and giving the money back to investors.

The idea with retirement accounts is that you get to put money away for retirement. There are various tax benefits to this, depending on the type of retirement account. Some accounts collect tax on that money up-front, some collect tax on it when you pull the money out. Depending on your situation, when you pay the tax could change how much money you make. Often, though, folks my age just have whatever account their employer sponsors and that’s the one you use.

With a 401K, you put some chunk of your paycheck aside to go into the 401K. You don’t pay tax on that money, and it gets invested and grows over time. When you retire, you can pull that money out, and the money is taxed at the tax rate at the time you pull out the money. Which is advantageous if you’re not making a lot of money in retirement: your tax rate is low, so you pay less tax later than you would if you paid the tax when you earn the money as you put it into the account.

When you get a 401K, there’s often a fairly set-it-and-forget-it enrollment process. Your money gets invested in some fund and then you don’t look at it until it becomes a problem (e.g., you get a new job). The enrollment process is often swift, but the details—if you cared to read them—are long and boring.

Now, a 401K sounds great in theory. You pay a relatively small amount of tax later on money that’s been growing for many years. Sometimes your employer will match the money you put into the account, which could be quite a bit. But there are two important drawbacks:

• Most folks don’t actually check on how their money is being invested, or don’t have a lot of great options for how their money is being invested. You might be making less than the inflation rate on your retirement fund. If your retirement investment falls behind inflation, it’s shrinking instead of growing.

• You can’t touch that money³ until you retire. If you’re putting money in and it’s being invested poorly, you’re not doing yourself any favors.

Here is my advice:

1. When you enroll (or check up on!) your 401K, the funds you have the option to invest with will tell you what their returns have been historically. These should inform your choice. Don’t invest in a garbage fund.

2. If none of the funds are even coming close to the inflation rate, don’t put your money into the account. Just take it as part of your paycheck (paying the income tax) and invest it however you’re investing savings.

If you start an account and save $500/mo, after ten years you’ll have $60,000. If you’re earning 2% on that money, you’ll have $66,359 (coming out $6,359 ahead). But if the inflation rate is 5%, that money is only worth about $40,739. It gets worse over time. If your interest rate is below the inflation rate, there’s essentially nothing you can do to come out ahead.

Even if the rate of return in this ten-year scenario is 5% and the inflation rate is 5%, they don’t cancel out: the inflation-adjusted end amount is about $47,000 (with an “actual” $77,641 in the bank).

Here’s a calculator you can play with.

Right now, the inflation rate in the US is about 5%. You’d need a rate of return of around 9% just to break even after adjusting for inflation. Now, it’s not expected that inflation will remain this high, it’ll almost certainly drop. But here’s what I know: I’m not making anywhere even remotely close to 9% on my 401K(s). Even if the inflation rate dropped to 3%, you still wouldn’t be breaking even with 5% returns (you’d need almost 6%).

Unlike other ways of saving money, be cognizant that retirement accounts are full of money that you have relatively little ability to do more with. If you’re getting shafted on returns, you’ll probably continue to get shafted on returns for a long while. And if you get shafted for long enough, you’ll eventually find yourself with a very disappointing amount of money.

Yes, you can probably do something to improve your 401K, but you should also consider what you could do with that money if you invested it yourself. Sit down and read up on the 401K’s funds, and adjust where you’re directing your paycheck accordingly. Remember to factor in that money that you invest yourself is taxed, so you have less to invest.

When is it smart to pay off debt?

For a long time I had the idea that debt was bad. Owing people money was bad. And that’s maybe philosophically true, but it’s not true in a practical sense. Some debt is bad. Credit card debt, for instance, is almost always bad. Pay off your credit card. But then you have things like mortgages, where the answer is complicated.

Debt comes with an interest rate, which is the fee the lender charges in exchange for lending you the money. Taking on debt means paying back more (hopefully not much more) than you owe. This is a great reason to not take on debt, or to pay debt off fast (so that you minimize the amount of interest that you pay).

However, there’s a complexity to this: if the interest rate is lower than the amount of money that you can make if you didn’t pay off the debt, it’s smarter to not pay off the debt. It’s easier to understand this with an example.

Let’s say you take out a mortgage for $100,000 with a 2% interest rate (in today’s economy, that’s awesome!)⁴ paid over 10 years. That 2% is calculated per year, so it’s not $2,000 in interest, the interest on the amount of money you owe each year added up (compounding interest on the part you haven’t paid off yet). The total you’ll owe is $110,416. You’ll end up paying $920/mo, which is like $90/mo more than if you just pay $100,000 divided by ten years divided by twelve months.

Now let’s say you have $100,000 sitting in your bank account. You could pay off the principal of the loan and save yourself the $10,416. But consider this: you’re paying just over $11,000 each year for this mortgage. What if you invested the rest of the money?

Let’s say you can put your money into a Wealthfront investment account (as an example⁵) and get a hypothetical 5% return on it each year. You put $88,000 into Wealthfront so you have ~$11,000 remaining to pay for your mortgage in your checking account. That 5% return on $88,000 will net you $4,400 in earnings after the first year. You take $11,000 out of your Wealthfront account for your second year of mortgage payments (leaving $81,400 and ignoring capital gains). You’ll earn $4,070 on your Wealthfront in your second year. Take out another $11,000 your third year (leaving $74,470) and you’ll earn $3,723. Now you’ve earned a total of $12,193, which is almost $2,000 more than the total interest you’ll have paid for the lifetime of your mortgage. If you keep it up for the remainder of the mortgage, you’ll end up with more money than if you’d paid off your mortgage and waited ten years.

It’s simple math: the bank makes 2% interest, and you make 5%. The bank loaned you your $100,000 thinking that 2% was a good rate for them, but market conditions now mean that the bank could have asked for more interest, but they can’t really change that after the fact.

This feels greasy when you first consider it. Holding on to debt to make more money? Wild! This is the sort of weird shit rich people do to get rich(er)! The people you borrowed money from would do this (and do do this!) to make more money. There’s no additional dignity in not owing money to a financial institution who looks at you as nothing more than a number.

Now, this isn’t always going to work out. If you got a mortgage at 6% (like right now) and the economy cools off and you can only make 3-4% on your investments, you’re losing money by not paying off your mortgage. In this case, paying off more of the mortgage is maybe worth considering. Run the numbers and see whether you’d save money on interest by doing this!

Do research!

If there’s one thing I’ve learned, it’s not to make assumptions about money. Don’t do things because that’s what your parents did or it’s what you were told to do. Hell, Wells Fargo told me they were opening two checking accounts and two savings accounts for me in 2012 so that I “would be able to use one for ATM withdrawals and protect [myself] from fraud.” Yeah, that turned out great.

Don’t be the parent stashing away money in a checking account for decades! Don’t be the person making almost nothing on garbage certificates of deposit! Understand the numbers you’re being given and calculate out how much money that actually ends up making you.

1. If y’all have equity and don’t understand what it does for you and it’s been too long that you’re embarrassed to ask, let me know in a DM and I’ll write something up! 😂

2. By way of the money being worth less because prices have gone up.

3. You can borrow against it, but you probably shouldn’t unless you really need to.

4. For simplicity, we’ll say there’s no down payment, or that it’s $100,000 after you’ve paid the down payment. The principal of the loan (the amount of money you own minus the interest) is $100,000.

5. Hit me up if you want a referral code, I guess?