How To Manage Your Money In The Accumulation Phase Ages 18 – 50

Troy Sharpe: How should you manage your money in the accumulation phase? This video may just change your life over the next 30 years. Where should you save? How much should you save? Which investment should you be investing in? Should you pay down debt and how do you do that? We’re going to get into all that in more in this very, very powerful financial planning video.

Troy Sharpe: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner Professional, host of The Retirement Income Show, and also a Certified Tax Specialist. This video is going to be broken down into three sections. The first one is going to be how much to save and how do you handle debt. The second section will be which investments should we be investing in in our accumulation years. Then third, which accounts should we be investing in? Should it be in the 401(k)? How much, the pretax, the Roth, non-qualified accounts, or outside of the 401(k)?

Lots of great information here, and if you follow these steps, you’ll be on the path for a much brighter financial future. Before I get into this, I just want to cover the three distinct phases of the financial life cycle. You have the accumulation years, which I define as soon as you become an adult and start working up until about 5 to 10 years before retirement. That timeframe is what we call the pre-retirement years, and then, of course, we have the retirement years, so three distinct phases and the investing style and strategy, savings, all of the different financial planning items that we need to be knowledgeable on and be implementing in our day-to-day lives have different approaches in those three different phases.

Okay. For this first section, how much should you be saving, and if you’re in debt, how do we tackle that problem? First thing I want you to do is make sure that you have three months of expenses in an emergency fund. If you lose your job or something happens, you have an air conditioner go out, you need a car part. I want you to have three months of expenses so you don’t have to use a credit card to go into more debt to cover that. That’s the number one thing that you’re going to do.

From there, we want to start to tackle this debt. Now, Dave Ramsey has made famous the debt snowball, and what this is, it’s a very effective method of paying off. You want to get all of your minimum payments set up auto pay on all of those credit cards that you have. Start paying off the smallest one first. Once that one is paid off, the theory goes, you’ll be excited, you’ll be motivated, and then you’ll use those dollars in as much as you can save to put towards that second credit card.

Now, once you pay off that first one, cancel it. You shouldn’t have a Target card with $100 credit limit. You shouldn’t have a Dillard’s card or any of these retail cards with these small limits, that hurts your credit. We’re going to have other videos to talk about how to improve your credit and get on a better path to have more financial security down the road, but once you pay those small ones off, take all those dollars, put it towards that next credit card and then cut those up. Get rid of those credit cards. You do not need those. Maybe have one credit card at most once you get this all situated for emergencies, maybe to build up some points, although points are not a good reason to have a credit card.

One thing I want to add to this is if you have a very large amount of debt on a very high-interest credit card, you may want to consider a personal loan or a debt consolidation technique maybe through a credit card where you can transfer that balance to either a 0% or a very low-interest rate loan. Now, you want to be very, very cautious and understand the terms and conditions. A lot of times, there’s a limited amount of time that you’ll have that very low rate before it bumps up to a much higher rate.

Now, the banks and the credit card companies are anticipating you not paying it off within that timeframe, but be aware of what you’re currently paying, and then understand what those terms and options are if you decide to do a balance transfer. Just understand it’s a math calculation. If one credit card is at 24% and you can transfer it over, even if it expires after, let’s say, a 12-month period, and it goes from 0% to 18%, that’s still better than 24%.
Be aware of those options there. You may want to talk to a certified financial planner professional to help you figure this out but understand those options.

Hey, just a quick interruption. If you like the content, make sure to subscribe to the channel and share this video with a friend or family member. We want them to be better connected to their money as well.
Now, I want you saving at least 15% of your pay, and I want you to set that up where it’s an automatic deposit into your investment account or your retirement account somewhere where as soon as it comes into your paycheck or in your bank account, it automatically goes into some type of savings vehicle. What will happen is, one, you’re building a good habit, but, two, you won’t notice that the money is missing and you’ll be able to build a lifestyle around the money that you do have in the bank account.

Now, there’s a general rule of thumb out there called the 50/30/20 rule, and this is fine. I’m not a huge fan of general rules, generally speaking, but it’s something that if you’re not saving and you have the ability to, it’s absolutely something to strive for. You can play with these percentages a little bit, but 50% goes towards your needs. This is of your take-home pay. 30% goes towards your wants, and then 20% goes towards your savings.
A lot of times we can reduce our needs. You don’t necessarily need a $200 cable bill. That’s more of a want. We can go to a lower-cost streaming option. We don’t necessarily need the new iPhone every 12 months when one comes out. Make sure you have a clear understanding of what’s a need and what’s a want, and you have to know these numbers. It’s very important to know your numbers.

What I do is I put everything onto either one credit card and one bank account. I don’t have tons of different accounts everywhere. Then once a quarter, what I do is I go through, I print off the statements and I start to categorize everything in the softwares that I use. I just break it down into what are my basic necessities? What am I spending money on? What is fun? What is leisure, restaurants, et cetera? Then I always want to know how much I’m saving. Of course, I have my savings hooked up first. As soon as money comes into my account, I never see it. It automatically transfers over to either a retirement account or what we call a non-qualified investment account. It automatically transfers and what’s left in the account is what I divvy up between these two.

Which investments should you be investing in in your accumulation years? There are a couple of concepts we want to understand first and foremost. There was a study done of 401(k) participants. People who have a 401(k) and can choose their own investments. They were given five funds to choose from. Four of them were stock funds and one was a bond fund.
The investors at 90% of that choice or 90% of the sample put 20%, 20%, 20, 20, 20, they split their money evenly across all five of those funds, which effectively meant 80% were in the stock mutual funds, 20% were in the bond mutual funds.

That same study then gave a different set of participants five mutual funds but four of them were bond funds and one of them were stock funds. Same thing about 90% of those people put 20, 20, 20, 20. The expected return over the course of their accumulation years by effect of making those investment choices drastically different.
You have to understand which investments you should be choosing inside your 401(k). A big part of that has to do with understanding this equity premium, the fact that we are being compensated for taking additional risk above and beyond lower risk and risk-free assets.

To determine your risk willingness or how much you should have in equities, there are two primary components here. One, what is your time horizon? If you’re 30, your time horizon is 29.5 years minimally. Why? Because your 401(k), your retirement accounts, you cannot touch that money until you’re 59.5 without a 10% penalty plus income taxes.
Your retirement account money, it’s not for short-term loans, it’s not for withdrawals, it’s not for emergencies, it’s for your retirement. Any money you put in there, make sure that mentally you’ve accounted for that money not being available. It is for the future.

If you’re 40, your time horizon is 19.5 years minimally. Now, if you’re 50 or 55, you probably have a shorter timeframe. You’re entering the pre-retirement phase. We need to be doing some strategic planning at that point.
The second thing is your ability to withstand the ups and downs in the market. We all know that stocks go up and down. If you have a long enough time horizon, if we can mentally prepare and understand, it doesn’t matter what’s going on right now, we have a long time horizon. We should be better able to withstand or tolerate the ups and downs in the stock market.

To show you the difference of having lower returns versus higher returns over a long period of time, I have this time value of money calculator. If your account starts out with $10,000, you put 10,000 a year in it for 30 years and earn 4% interest, your future value in 30 years because of compound interest is about $593,000. 4%, that would be something we would expect in some type of balanced portfolio, stock, bond, maybe 50/50, 60/40, or maybe you went heavier bonds. It’s a conservative interest rate given historical performance in the markets.

The reason someone would earn 4% is because they made, most likely, a poor asset allocation, meaning you chose more lower risk investments as opposed to more higher earning potential like stock investments. If we change this to 8, compute the future value, it jumps up about $700,000.

We started with 10, we put in 10 for 30 years, instead of earning 4, we’re earning 8%. Our future value is 1.233 million. Let’s say we go 100% stock and the markets do really well, and on average, you make 10% a year. It jumps up to $1.81 million.

Understanding the risk premium, the equity premium, what we’re compensated above and beyond for taking some risk and being able to withstand that volatility, historically, has paid off quite handsomely. Don’t be the person who just puts 20%, 20%, 20%, 20%, 20% of your money across those 5 mutual funds, understand what those funds are, and we’re going to show you how to understand right now.

Okay, I’ve pulled up retirement mutual fund offerings from Voya, your 401(k) maybe with a different provider, I just picked this as an example. You have target date funds to choose from. As a basic premise, the later the target date, the more allocated to equities, or the more risk and the more potential return you should expect.

I, personally, am not a big fan of target-dated funds, but they’re better than going 20%, 20%, et cetera. When you see fixed income, this is bonds, this is lower risk, lower expected return. Anything that says income typically or yield bond specifically is going to be lower risk, lower return.

Equity. Equity mean stock, so whenever we see these, these are going to be equity or larger risk, larger potential return mutual funds. Now, we get over here where we see asset allocation target risk. Typically, these are going to be some type of balanced type portfolio, where some of your money is in lower risk, some of your money is in higher risk, and you actually have to get in and look to see which ones are more tilted towards equity, which ones are more tilted towards bonds.

Now, me, personally, I have an income, I have a long time before retirement, I love what I do, I’m a 100% stock inside my retirement account. I don’t own any bonds, because I don’t care what happens if the market goes down. As a matter of fact, that’s a prime opportunity for me to put as much money into my accounts as possible because when prices are down, and I’m buying at that time, I have what’s called the largest marginal return on invested capital. All that means is those dollars that are invested at lower prices, their expected returns over time are much greater than if I’m buying high when everything is doing really well, so do not stop investing in your retirement accounts when the market is down. If anything, try to accelerate when the market is down.

Sometimes it isn’t quite clear what the mutual fund offerings that you have. They may have some funky name that you can’t make sense out of it. I want to introduce you to a very, very important concept that directly correlates to potential risk, and therefore, I should say, potential return. It’s a concept called standard deviation. This is a bond fund I pulled up from the sheet I showed you before. I clicked on a couple of those.
This is a bond fund. This is a stock fun. If we come down under the risk characteristics or performance, typically, we see these statistics, and most of you probably just scroll over because you have no idea what these mean. The most important one I want you to understand for this video is the standard deviation. This 3-year standard deviation is 6% for the bond fund. For the large-cap growth stock fund, it’s 21, so the higher the standard deviation, typically, the more risk is in that fund.

Now, remember, risk isn’t necessarily a bad thing if you have the appetite for it and the time horizon, because, with risk, we have greater expected returns, generally speaking.
Now, I’m going to keep this fairly simple, but I do want you to understand the statistical importance of standard deviation because it can help you have a much greater understanding of that fund or that investment potential. Statistically speaking, 68% of the time, a mutual fund will be within either positive or negative 1 standard deviation of its average return. 95% of the time, it will be within 2 standard deviations of its average return.
What does that mean? If the 5-year return– you want to look at that funds either 5 year or 10 year, please don’t do 3 because that’s too short of a time, a lot of funds haven’t been around for 10 years, though, and you’ll have to use the 5 but maybe look at both of them.

If the 5-year return average is 10%, and you have a standard deviation of 20, 1 standard deviation means you would add 20 to this, but then also subtract 20 from that, so your range would be negative 10 to plus 30%. That means that there is a 68% probability that in 1 year, the annual return for that mutual fund, you should expect to be between negative 10 and plus 30.

2 Standard deviations, there is a 95% probability that the return for that fund you’ll either lose 30% or, in between, up to 50%. When we see a higher standard deviation, and we understand this math, we can say, “Okay, this is the range of expectation I should have if I allocate my money to this.” Primarily, it just lets you know that, hey, you have some risk, but you also have a great potential for return. If that fits within your risk tolerance or your willingness to withstand the ups and downs over time, maybe that’s something you want to put your money in.

Finally, where should you be saving that money? Inside your retirement account, the pre-tax, the Roth, should you be building up a non-qualified investment account? What about saving for retirement over paying down debt? That’s a question I receive a lot. The reason why we want you to pay down debt first is because it’s a math equation. If your credit card interest rate is at 15% or 18%, that is a higher expected return than what the stock market has historically offered and, quite frankly, it’s a much higher return than we expect over the next few years in the market.

If you want to balance your credit card going down essentially creating a negative wealth at 18% a year and your investments are earning 8% or 9% a year, well, that is a negative arbitrage, you’re losing money. That’s why we want to see those credit cards get paid off first before we’re saving significant dollars for retirement.

Now, with that said, there is an argument to be made, you would want to put money into your 401(k) if you’re getting a company match because that is 100% return fully guaranteed, no risk. In that instance, depending on how much discretionary income you have and how much your credit card debt is, this is where a professional can really help you.

You may want to put, let’s say you’re getting– I wrote here always get the company match first, but specifically, when we’re deciding do we pay down high-interest debt or save in the retirement account, generally speaking, I want you doing that debt snowball. If let’s say your company offers you 100% match on the first 6% of your contribution. Let’s say your salary’s $100,000 for simplicity sakes, that means if you put 6% in, $6,000, they are going to match you $6,000. That is a 100% return.

That percentage is greater than that you’re paying on the credit card. Now, I haven’t really heard many people talk about this choice that you may have before, so I’m not even sure if it’s controversial in the retirement industry. Me, personally, I would do this, but I do have an understanding of finance. I would take the 100%, but for many of you out there, it’s probably far more important that you get that credit card paid down and cut it up as opposed to worrying about this match. Because if you’re young enough, you have plenty of time to catch up on that retirement savings.

We want to see you always get your company matched first. Whether you have $500 to save or $50,000 annually to save, this is the first place where you save money because it’s free money. Number two, determine your short-term needs. Now, I said we wanted to have a three-month expense fund, and that’s true, it’s an emergency fund in case you lose your job or in case your car breaks down.

When we’re planning for the future, whether it’s two to three years or in retirement, it’s really helpful to have money in an investment account outside of your 401(k). The reason is you can’t touch that money in the retirement accounts until you’re 59.5. If you want to get married, if you want to make a down payment on a home, if you want to go on vacations. Also, that’s the accumulation years. Once you get to retirement, it’s very helpful to have money outside of the retirement account and investing tools like stocks, et cetera, because the taxation is completely different.

If all of your money is in that tax-infested retirement account and you get to be 60, 65, 70-years-old, every dollar you pull out, you have to pay income taxes on. It’s beneficial in the retirement years to have multiple accounts where we can withdraw from to support your lifestyle. That way we can manage how much tax you’re paying annually, as well as many other strategies we can implement.

Determine the needs within the next two to three years and start saving money outside. After you’ve received your match and you’ve put money into that account, your 401(k), start determining your short-term needs and maybe open up a non-IRA investment account. It will help you not just in the short-term, but later in life as well.

The HSA, the health savings account, this is my favorite account in the entire world. I don’t go to the doctor that often, but I max out my health savings account. Now, you do have to have a high deductible healthcare plan, meaning you have a higher deductible than the lowest deductible option. This may be the best thing for you if you don’t go to the doctor often or if you’re young and healthy.

With the Affordable Care Act, out-of-pocket costs have been capped. Even if you have a high deductible plan, you still have a limit on your out-of-pocket maximum costs. Make sure to compare these, but understand if you have some discretionary cash flow, meaning you’re not living paycheck to paycheck, having an HSA, a health savings account, you get to put all that money in that plan, never pay tax on that contribution, so that’s a tax-deductible contribution. It grows with the investments you choose over time and then when you take it out, you never pay any taxes on the money you put in or the growth.
It’s the only account in the world where you get a tax deduction for making the contribution, it grows tax-deferred, and then it comes out tax-free, principal and interest, assuming you use that money for qualified health expenses. This is a very valuable account that you can build up for you and your family.

The 401(k), most of you have a pre-tax option and a Roth option. Similar to the HSA, with the pre-tax option, you put money in, it gets a tax deduction today. That means you actually can increase your take-home pay because income taxes are not calculated and deducted or paid at tax time on any dollars you contribute into the pre-tax portion. This can actually increase your take-home pay when compared to the Roth.
The Roth, we do not get a tax deduction today, all the money we put in grows tax-free, and then you can take out all principal and interest later in life tax-free. This account, we get a tax deduction today, but when we take it out, we have to pay income taxes later.

With that said, which one should you put money into? Should you put some in the pre-tax part or should you put some into the Roth? Well, this is a personal decision, it’s based on your personal income situation. Is it general rule of thumb if we are living paycheck to paycheck and we want to increase the discretionary income? I would put it in the pre-tax at least something. You got to put something in there to get that match.
If we’re in that 22% to 24% tax bracket range, it’s really a close call. I would probably put it into the Roth personally, but that’s just a personal preference. Once you get up to the 32% to 37% taxable income range, I would definitely put it into the pre-tax because I could plan on taking it out later and paying less than 32% to 37%, hopefully, through a strategic distribution strategy by taking some from IRA later in life, some from non-IRA.
Understand your situation, what your taxable income is, what’s your marginal tax bracket, meaning if I earn one more dollar, am I paying 12% on that? Am I paying 22, 24, 32, 37, or anything in between? To identify your taxable income, if you look at your last year’s tax return, your 1040, and go down to line 15. Line 15 is going to show you your taxable income number.

Then you just simply do a Google search for tax brackets, married filing jointly, or single, and then find out which tier you fall into and do a little bit of research, and you’ll find this. I have a lot of videos on the channel about that as well. It depends on your personal situation, but taxes are lower now than they have been in a very long time. I believe in my entire life, and for most of you watching, it’s the same.
Taxes are going up in 2025 or after 2025, and if you believe in 10, 15, 20, 30 years, taxes have the potential to be much higher because of the 33 trillion and massively growing national debt that we have, then you may want to consider some money at least going into that Roth and going ahead and paying the tax ban today.

Same thing for your IRA. The IRA is a retirement account. You have a pre-tax or traditional IRA, but then you also have Roth IRA option. This is a retirement planning account that you have in the individual marketplace. If you don’t have a 401(k) at work, you probably would save in an IRA. Same rules apply for the most part. 401(k)s are just offered through your employer and IRAs are available to anyone who wants to open one up.
There are some limitations on how much you can put in, and also how much income you can earn to be able to qualify to put money in pre-tax or into the Roth, so make sure to check those out as well.
We covered a ton of information here, but if you follow these steps and you follow this guidance, even seek out a local certified financial planner professional in your area, you will be on a much better path to retirement, or I should say, you have the potential to be on a much better path to retirement. Make sure to subscribe to the channel, hit that thumbs-up button if you like this, put comments down below, and, again, share this video with a friend or family member, please.