Stock Account As Savings Account

COLLIN HARNESS

Retirement accounts are wonderful. You put money into the account and then it grow tax free. You can withdraw the money when you are ready to retire at a lower tax rate than you may currently be paying. The goal should be to max out those tax advantages accounts. Like 401k, Traditional IRA, HSA.

But…

There is a problem with retirement accounts. You may want or need to use that money before you are 59 1/2. Unfortunately, the government says no. If you want to use that money there will be a penalty. That money is only supposed to be used when you are getting olde

Those accounts encourage people to save for retirement. You should have as many of those accounts as you can. Because they provide layers of security in the worst case senario that you need to use that money.

“Do not save up sex for old age.” – Warren Buffett

This is one of my favorite quotes. You must live for today, because that is all we have. It is a balance. You want to have fun today, but also plan for your future. You will be older one day and may want to retire. If you do not plan for it now, you won’t be able to do it.

This leads me to the good old stock brokerage account.

A stock brokerage account is one of the most important tools on the path to financial independence. The stock brokerage account is like Candyland. There is a universe of investments you can choose from. REITs, Commodities, Options, Technology.

The easiest way to get returns and manage your money is Total Stock Market Index Fund. Or you can choose a targeted index fund that you think might give you better returns like Technology or Biotech.

Or for better returns you can choose individual stocks: GOOG, AAPL, GM. You get to build a portfolio that fits your goals.

Treat your stock portfolio as your savings account.

Putting your money in the market is riskier than putting your money in a bank account. The market will go up and down. So why would someone put their money into the market rather than a bank account?

Mental separation

When you Pay Yourself First you mentally separate yourself from your money. It forces you to act like the money is not there for you to spend.

When you put money into the stock market, you are putting a barrier between you and your money.

In order to use the money to buy stuff, you will have to sell some equities and move the money back into your bank account. You will have to do a tiny bit of work to get access to that money. This barrier will make you question if you really want or need that purchase. How badly do you want that item? Enough to do the tiny bit of work required get access to that money?

Most Americans do not save money. They spend it on lifestyle instead. And that is understandable, most people are not taught how to manage their money or how to invest their earnings into the market. Instead they are taught to save money and then social media and marketing are telling you that you should be living a certain lifestyle that you need to pay for.

This knowledge will keep you on the hamster wheel. You will stay on a cycle of working, savings, spending till you die. But this is 2020 and nothing is guaranteed. Not that job or your health or your lifestyle. You have to be prepared for the worst.

More people need to reach financial independence. If you are starting at $0, the best way to reach financial independence is to invest in assets. That could be stocks, real estate, business, books, etc.

If you are using index funds to reach financial independence, you need to invest as much as possible into the market. In good times and in bad times.

Investing is a habit. Shopping is a habit. If you get into the habit of investing your extra money into the market you will be less tempted to get into the habit of spending that extra money. A little bit of extra money goes a long way toward increasing your investment gains.

Stocks can quickly and easily be sold, but what about the risk?

There is a risk of having money invested in an index fund or the stock market. The market goes up and down, which means your investment will up and down.

But your investment will go up more than it goes down over time. The longer you are invested into the market the more your money will increase. If you continually add money into your investment account you are increasing the amount in the account and increasing your compounding ability.

What if the market drops 50% or more?

If there is a massive market drop in the market do not panic and sell all of your equities. This is the worst thing a long term investor can do. Because you are converting paper losses into physical losses and you money does not have the chance to recover. When the market does drop try to sell as little as possible. Instead you should look at the drop as a chance to buy into the market. When the market recovers, then feel free to sell more and use the money as needed.

Do not forget about taxes. This adds another layer of separation between you and your money. When you invest in the stock market you have to pay taxes on any gains that you make when you sell the stock. There are short term gains and long term gains. When you sell stock which you have held for less than one year and the stock has increased in value, you will have to pay tax on the gains as if it were ordinary income.

Long term capital gains are taxed at a lower rate than ordinary income.

This is another incentive to keep your money invested rather than spending it. If you can keep the money invested in the market it will be taxed lower than if you spend it within the first year. The longer amount of time you can hang on to money, the greater your emergency cushion will be.

Seeing your account value increase is more motivating to reach financial independence over buying new stuff. New stuff is fun in the moment. A new car. New clothes. These things will give a temporary boost, but you have to keep buying to keep getting the same amount of pleasure. And that drains your bank account so you need to keep refilling that. It is a cycle.

More pleasure and appreciation can be found from seeing your account value increase. You can reach a point where you can buy all the stuff that you. You will also have more than enough and can give your money to people and organizations that will use your money for good rather than to purchase new products.

This savings strategy may not be for everyone. Some people may get more comfort having their money in cash sitting in the bank. It should be a consideration for anyone serious about increasing their wealth.

Published by Collin Harness

Obsessed with creating value and helping people achieve financial independence.

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