💸 5 Ways to Optimize Your Money

I’ve been interested in personal finance for as long as I can remember and back in 2016 I took that passion to launch a financial planning company (Grove) that didn’t work out as well as I had hoped. Fortunately, we found a home at Wealthfront, where I continued to work on building products to help make it easier to save and invest for the future. Then in 2021 I launched the podcast with a goal to have ~1/3 of the content be focused on money, investing and personal finance. Well, today I want to share five ways to optimize your personal finances.

Here’s what we’ll talk about:

• Emergency savings
• Options for High Yield Cash
• Putting finances on autopilot
• Paying down your mortgage or investing
• Finding professionals to help with money

💰 Right-size Your Emergency Savings

I’ve long believed that everyone needs to have some type of emergency savings, but a few events in the past year have evolved my perspective even more and made me rethink my stance on emergency funds.

But first, I want to emphasize how important I think it is to have an emergency fund. It helps you deal with unexpected life events, bills, or costs without worrying how you will pay for them. It makes life less stressful when you have a cushion of savings and don’t have to borrow at a high interest rate when things don’t go according to plan.

A good rule of thumb is to aim to build an emergency fund that covers 6 months of your monthly spending, including housing costs, but that number may vary depending on a lot of factors. For example, I love Brian Feroldi’s (🎧Ep 38) formula for sizing your emergency savings:

As for what caused this recent change in my opinion on emergency funds… well, the first event was when interest rates started rising. Previously, we didn’t have much emergency savings, because low interest rates made it easy to rely on Wealthfront’s PLOC, which lets you borrow against your portfolio (but limiting those loans to 30% of the portfolio value, so it’s very unlikely you’d ever face a margin call and need to immediately repay the loan). However, those borrowing rates are now 7.65% – 8.90%, which makes it a much less appealing option for emergencies (though it’s still comforting to know it’s a backup option).

Then, a few months later, our primary bank (Silicon Valley Bank) collapsed over the course of a couple of days, leaving us unable to access our money. It was definitely a stressful weekend, and even though the FDIC ultimately quickly helped the bank open up withdrawals, I learned that you might want to keep some emergency funds at a separate financial institution from your primary bank.

Next, in the past six months, my wife Amy and I both transitioned from being employees to being self-employed. As employees, we had a predictable paycheck and a lot more job security than we do now, where our income varies drastically from month to month. Given that fluctuation, we’re keeping a lot more in our emergency fund than we used to. All that said, we’re both so happy to have burned the boats.

Finally, it was only a few years ago that cash was only earning 1% or less, which made it tough to have a proper-sized emergency fund, because it felt like you were missing out on so much earning potential. However, with rates on most cash savings at ~5%, it feels so much easier to leave money in cash.

🏃 Tap into High-Yield Cash Opportunities

So where do we put all our cash? Finally, we get to talk about the upside of these high interest rates, which is being able to earn meaningful interest on your cash. But where do you put all that cash? And does it make sense to hold any money in cash outside of your emergency savings?

My rule of thumb is this:

So where do I keep my cash? Right now, I think there are a few good options, which I discussed in much more detail in yesterday’s podcast episode (Ep 131):

High Yield Savings

This option is probably the easiest, because it’s easy to transfer money in and out, and if you use an account like the Wealthfront Cash account, you can even earn interest from an account with all the standard checking functionality like direct deposit, bill pay, etc. All of my High Yield Savings cash is in my Wealthfront Cash account earning 5.3%, which is 0.5% higher than advertised, because I used a referral link (← this link randomly cycles through our Member referral links, so in addition to getting an extra 0.5% yourself, you'll also be helping fellow subscribers earn more interest too). Aside from Wealthfront, this Doctor of Credit article has a massive list of the top-earning High Yield Savings accounts.

US Treasury Bills

It seems like everyone is talking about investing in US Treasury Bills, which makes sense when today’s rates are from 5.29% - 5.54% for a 4 to 52 week investment. Not to mention they’re state-tax free, which means that in a state like NY or CA, the effective rate could be greater than 6%. You can buy them directly from the US Government at TreasuryDirect, you can buy them on the secondary market from your brokerage firm or you can invest in them through a short-term treasury ETF like SGOV.

CDs (Certificates of Deposit)

If you’re confident you won’t need access to your funds for a specific period of time, it could be worth looking into CDs, which you’ll get through your financial institution. When I checked recently, it looked like for terms of 1 to 5 years, the rates for CDs were sometimes more attractive than US Government securities, but rates change daily so definitely do your research first. Also, make sure you really don’t need the funds for the duration of the CD, because you might face fees, penalties or lost interest if you need to withdraw your funds early.

Rate Chasing

As much as it might seem exciting to jump between High Yield savings accounts to try and get the best rates, it might not work out in your favor. Typically interest is paid daily in cash, savings, and money market accounts. So, when your money is in transit from one account to the next, you don’t accrue the interest during the transfer time, which means you’re reducing your overall yield.

Plus, transferring your funds for a higher interest rate only works in your favor if the new bank continues to offer that higher rate. If it goes down, not only did you get a lower rate, but you also got 0% interest during the time of transfer.

So my advice is to find an institution that has a history of competitive high rates and not worry about chasing higher rates. And if you want a deeper dive on the topic, definitely check out this article.

💸 Pay Off Mortgage or Invest?

In so many of the personal finances, real estate, and Q&A podcasts, a common question resurfaces:

There are a lot of emotions at play in this question and the benefit of being “debt-free” might outweigh any financial math, but personally, I’ve never made an extra mortgage payment.

Firstly, mortgage interest is tax-deductible in the U.S. for mortgages up to $750,000 when itemizing taxes. Depending on the state and tax bracket, this deduction can lower effective interest rates by as much as 30% to 50%. So a 5% mortgage could have an effective cost of as little as 2.5%. And if you really want to go down the rabbit hole here, I previously wrote about a trick to deduct interest even if your mortgage is greater than $750,000.

In contrast, average long-term equity portfolio returns range from 6% to 10%, which for me is where I’d prefer to put my long-term savings to work. Not to mention that no matter how much of your mortgage you pay down, you still get 100% of the appreciation of your home (or depreciation if the value goes down). So paying down your mortgage won’t offer you any financial upside, except for saving on interest.

That said, I’d prefer to pay down debt with interest rates over 5% before investing. So with some mortgage rates over 7% right now, if you weren’t able to get any tax-deductibility on that mortgage, it might make a lot more sense to pay down your balance before investing.

Finally, let me add a deeper, more contrarian take on the topic of mortgages and interest. I love interest-only mortgages (I recently discussed it in the Ultimate Home Buying Guide newsletter). While I didn’t get one for my recent home, the reason why I love them is the same as why I wouldn’t pay down my mortgage faster. I’d instead save or invest my money somewhere that’ll generate a return rather than lower the loan because I benefit from the appreciation of my house whether I pay down the mortgage more or not. And with interest-only, you typically pay a lower payment in the first 5-10 years (and a higher one later on), which means I’m investing the difference in the early years and planning to make principal payments and/or refinance in the later years.

🤖 Put Finances on Autopilot

Back in February, we released the 100th episode of the podcast, where I reflected on a few topics with Brad Barrett. One was this funny little paradox that the people who care (and talk) most about finances often spend little time actively managing their money.

It’s often overlooked, but putting your finances on autopilot is one of my key operating principles for optimizing your finances (and once implemented, you’d be surprised how little time you really need to spend managing your money). The key is to optimize for stress reduction, enabling financial processes to occur seamlessly, with minimal active management.

It’s a strategy supported by decision rules, automation, and consolidation.

Here is an example of our decision rules:

• Ensure we always have $10k in Checking (Chase)
• Maintain 6-months of expenses in our Emergency Fund (Wealthfront Cash)
• Max out retirement account contributions (Ocho Solo 401k and Wealthfront Roth IRA)
• Contribute to our kids’ college savings accounts (Wealthfront 529s)
• Invest the rest (Wealthfront Investment)

I’m actually such a big fan of rules-based automation for your money that when I was working at Wealthfront I helped build a service called Autopilot that would automate this entire process for users. Here’s what the rules above look like within Autopilot (though sadly there’s no way to support 401k contributions):

On top of decision rules, we also have all our bills (credit cards, cell phones, utilities, etc.) set to autopay on a credit card (usually the Capital One Venture X Rewards Credit Card) or from our checking account. Instead of reviewing each bill before it gets paid, we just review every transaction in Copilot, where we can get a clear picture of how we spend all our money. And after using almost every app for tracking spending, I feel confident saying Copilot is the best (if you’re an iOS/Mac user).

After being a HUGE Copilot fan for years, I was able to partner with them to offer you a 2 month free trial when you download Copilot here and use the code HACKS2.

Now it hasn’t always been this easy. I used to open a lot of bank and investment accounts to test them out, but unfortunately that meant that our money was spread across so many places that it felt chaotic and unnecessarily stressful. Over the last year, we’ve really focused on consolidating to just 1 checking account, 1 high-yield savings account, 2 investment accounts and 4 retirement accounts.

I can’t tell you how much peace of mind this simplicity has brought.

🔎 Hiring a Professional

Finally, I know that many people really love having some support when it comes to their finances and investments. So when it comes to getting help with your money, I think there are two types of professionals to focus on:

Financial Planner

If you’re looking for someone to help review your entire financial situation and help create a comprehensive financial plan to align your goals, savings and investments, then a financial planner is exactly what you want. But there’s one important question to ask when evaluating any financial planner (or investment advisor if that’s what you’re looking for).

This matters because a fiduciary is a person (or organization) that is legally required to put clients’ interests ahead of their own, with a duty to preserve good faith and trust. If the answer to that question is a yes, great. However if you get anything other than a direct “yes” (e.g., “I always look out for my customers”), you should be concerned. My recommendation is to focus on looking for a Certified Financial Planner (CFP), not only because they’re all held to the fiduciary standard, but also because they’ve also gone through rigorous educational and ethical qualifications.

If you didn’t already know, I actually started a financial planning firm called Grove back in 2016, which is part of the reason I’m so passionate about the industry and helping people get good financial advice. Unfortunately we ended up shutting the company down in 2019, but when we had to decide where to direct all our clients, we ended up partnering with another online financial planning firm Facet, because they held themselves and all their financial planners to the same fiduciary standard and similarly built out a lot of technology to make their service much more accessible and affordable.

That said, if you’d prefer to find a local advisor you can meet with in person, I’d recommend checking out Wealthramp or the XY Planning Network.

Accountant

As soon as your financial life starts to get complicated, a good tax professional can add a lot of value to your life and be a great partner to your financial planning/investing strategies. This is even more true if you have your own business, have complicated company stock/option grants, have dual-citizenship or any other complicated financial situations. I had previously worked with a larger accounting firm, but switched after a new accounting firm (Gelt) found a mistake they made that almost cost me >$10,000. Thankfully they helped me re-file and get back the full amount. So if you have your own business income or other complicated tax situation, I definitely recommend you check them out here (they still have a waiting list, but have promised to give priority to anyone that signs up with that link).

🎙️ Podcast: Maximize Earnings on Cash, CD Ladders, Bank Bonuses, Bulk Buying, and Automating Returns

Yesterday, I released another mailbag episode where I discussed the best places to earn interest on cash, including high yield savings, US Treasuries, CDs and bank bonuses. I also covered lots of listener questions and tips, like when to sell your I Bonds, saving money on meat, protecting your identity online, automating returns and a lot more.

🎧 Recent Podcast Appearances

I've been fortunate to be a guest on a few great podcasts recently, so I wanted to share those episodes in case you're interested:

• ​Millennial Investing (Being a VC, building and selling companies, and my favorite personal finance tools)
• ​Side Hustle Nation (Why I chose podcasting, how I grew the audience and becoming a full-time creator)
• ​Inside Out Money (Top financial tipcs and the importance of automation and simplifying your finances)
• ​Danny Miranda Show (Building a world-class network and finding work that you actually love)
• ​Where it Happens (The best reasons to start a podcast and how to grow it way beyond sponsorship revenue)​
• ​Mile High Fi (Favorite tips and tricks, life optimization, and key takeaways/changes from “Die with Zero”)
• ​The Fort Podcast (My filter for finding tips and tricks, credit card points, travel tips and the business of podcasting)