Savings & Investing

The whole purpose of this plan is to let you retire as early as possible.  If you don’t follow a plan like this, you’ll be working extra years.

Step 1:  Pay off debt

It’s okay to have debt in the form of a home mortgage and/or car loan, and in some cases, student loans.  Those are low-interest, and necessary for your life.  But you shouldn’t have other kinds of debt (like credit card debt), because it’s usually high-interest, and unnecessary.

If you have any credit card debt, you have to pay it off before you can go to the next step.  If you can’t afford to pay off your credit cards in full, pay as much as you can, according to your budget, until they’re paid off.  Use the 20% from DRESI to make the payments.  You need to pay at least double the minimum payment in order to make progress on paying them off.  If you make only the minimum payment, it’ll take decades to pay them off.  Use the full 20% from your DRESI, which should be much more than double the minimum payment.

Once you’re out of credit card debt, never get into credit card debt again.  Always pay the credit card in full each month.

For student loans, the general rule is, don’t worry about them until and unless you’re working full time.  Once you’re working full time, make at least 1.5x the minimum payment each month.  Student loan rates are higher than mortgage and auto rates, but lower than credit card rates, so this debt doesn't hurt you as much as credit card debt, so you can afford to pay it off slower.

If you have both credit card debt and student loans, use your 20% DRESI to make the minimum payment on your student loans, and put the rest towards your credit cards.  Once the credit cards are paid off, then pay off your student loans.

Step 2:  Build Emergency Savings

Once you're debt-free (besides mortgage/car), then save according to your budget, to build your emergency savings.

• The emergency fund is to pay your living expenses if you lose your job or can't work, or if you have some big unexpected expense.  Decide how many months' worth of living expenses you want to save (minimum 3 months, maximum 12).
• Make a separate bank account for your emergency savings, and don't use that account for anything else.
• Don't withdraw any money from that account unless it's for an emergency.
• If you want to have savings for some other purpose (wedding, college education for a kid, house, travel), make a separate savings account.  You don’t have to go to a new bank or credit union, banks/CUs let you have multiple savings accounts.

Step 3:  Invest

What to do

1. Once you've filled up your emergency fund, then stop saving and buy investments instead, according to your budget.  I’ll cover investments below.
2. The whole point of investing is to have money for the big things in life:
• College education for kids (I know you're not planning, but maybe you'll get stepkids.  I know from experience that stepkids are awesome.)
• Buying a house (which might not be a good idea, see my Rent vs. Buy Calculator)
• Retirement
  
3. So, don't spend your investments for any reason except for the above reasons.  If you want to be able to do other things, like travel, start a separate savings account for it, and fund it from your 30% WANTS (not your 20% DRESI).
4. At least once a year, check your investment balance to make sure you’re on track.  You don’t want to find out in ten years that you’re far behind and won’t be able to catch up.  See your spreadsheet for how much your investment balance should be at the end of each year, and compare that to how much you actually have (your own self-managed investments plus your 401k).  I'm happy to review this with you any time you like, and to run new numbers about any ideas you may have.

It’s important to start early

Saving 10-20% of your income sooner is more powerful than saving 20-30% later.  Starting earlier gets you the power of compound interest (interest on the interest).  I can’t stress this enough:  You have to start investing early to have any hope of retiring early, or comfortably.

Rate of Return

• The percentage your investments grow in a year is called the “rate of return”, or just “the return”.
• You need a return of at least 7-8% to make enough money for retirement.
• Returns of 3% or less just keep up with inflation, and don't actually grow your wealth.  If you make 3% on your money in a year, but then everything costs 3% more, you’re not growing your money.
• Safe investments have poor rates of return.  Bank savings accounts typically pay 3% per year or less.
• Riskier investments can offer higher rates of return.  Risk means you could lose money.  But you have to take some risk to get the 7-8% you need for retirement.  For example, here are the returns for the stock market for the last few years:
• 2024:  25%
• 2023:  26%
• 2021:  -18% (negative)
• You can't average the yearly returns to figure your average return, because the return in one year affects the total in another year.  As an extreme example, let's say the first-year return was -100% and the second-year return was 300%.  The total after two years is 200%, so the average is 100%, but you didn't get a 100% return.  The first year you lost all your money, so there was nothing to grow for the next year.
  
  Likewise, looking at the 2021-24, if you averaged, you’d think that (25% + 16% - 18%) ÷ 3 = 11%.  So if you invested $1000, you'd think that after three years you'd have $1000 x 1.11³ = $1368.  What you actually got was:
• Year 1:  1000 x 0.82 = $820.
• Year 2:  $820 x 1.26 = $1033.
• Year 3:  $1033 x 1.25 = $1291.
  
  There's a complicated formula to figure the true annualized return which you don't need to know.  All you need to know is that you can't average the return for each year to figure the average return.

Investment calculator

Now that you know that the most important factors for investing are how early you start and your rate of return, let’s see how that actually plays out.  Notice especially how delaying your investing until age 35 torpedoes your results.In this calculator, the results are adjusted for inflation.  That means if the final figure is $2M, that's $2M in today’s dollars.  Also, if you withdraw any money for things like kids, college, or home down payment, that will reduce the amount you'll get at the end.

Turn your phone sideways, baby.

I want to point out that I set up the calculator to show the results of two different scenarios side-by side.  You will probably never see another calculator on the Interet that does that.  Instead, they'll show you a single result which you'll have to either remember or write down to compare to the results you get when you change the input.  Further, each scenario actually shows four different scenarios, so you get eight different results at once.  Here again, almost every other calculator would show just one.  Finally, you can see sample results before you even change any of the assumptions.  Most other calculators would make you do a lot of input before showing any results.  This kind of insanely useful data organization is one my special skills, remember me for this.

Risk and Diversity

1. You have to take some risks in order to hit your 7-8% annual goal.  Safe investments like bank savings accounts will never get you there.
2. The main way to reduce your risk is to diversify.  That means to invest in more than one thing, rather than having all your eggs in one basket.  If you have only one kind of investment, and it loses money, then you’ve lost money overall.  By spreading your investments around, you lower your risk.
3. The first kind of diversity is by type.  For example rather than investing only in stocks, you could invest in stocks, bonds, real estate, and crypto.
4. The second kind of diversity is within a type.  For example, with stocks, rather than buying stock in just one company, you would split your money among several different companies.  With Crypto, rather than buying just Ethereum, you'd buy Ethereum, Solana, XRP, etc.
5. The third kind of diversity is by the company that holds your funds.  If you have all your stocks on Robin Hood, and your Robin Hood account gets hacked, then you've lost all your stocks.  If you have all your crypto in Coinbase, and Coinbase gets hacked (or goes out of business, as many crypto companies have), then ditto.  Have each kind of investment (e.g., stocks, crypto) in an account in at least two different companies.

Stocks

• Corporations are owned by the shareholders.  A “shareholder” is anyone who owns stock.
• Corporations are either public or private.  The stock of public companies is sold on the stock market and anyone can buy it.  The stock of private companies is sold only to whomever the company wants to sell or give to, if anybody.  Often, all the stock in a private company is owned by the company’s founder.  I am the sole stockholder of Michael Bluejay Incorporated.
• The top 10% of Americans own 93% of the stocks.  The top 1% owns 50%.  Videos on wealth inequality:
• Humphrey Yang (13 minutes).  How unequal it is, and how it’s gotten worse over time.
• Robert Reich (12 minutes).  How it became unequal, and why it's a problem.
• Your owning part of the company doesn’t mean anything, in practical terms.  The only power of a shareholder is to vote to elect the Board of Directors, which chooses the CEO.  But most of the stock is owned by big companies or wealthy individuals, so they’re the ones choosing the Board/CEO they want.
• When a company enters the stock market, that's called "going public".  The initial sale of stock when they go public is called an "IPO", for Initial Public Offering.  In the IPO, the company gets all the money from the people who buy the stock.  After that, the company gets none of the money from stock trades.  When you buy stock in an established company, you're buying from another shareholder.
• What determines the price of a stock is how much buyers are willing to pay, and how much sellers are willing to sell for.  Think of it like eBay:  When buyers really want something they’ll bid up the price, and conversely, if sellers have a hard time selling, they’ll lower the price.
• Dividends.  Many companies pay out part of the profit to shareholders each year, which are called dividends.  If you get dividends, you should immediately reinvest them into more stock; the historical 7-8% return in stocks assumes that dividends are immediately reinvested.  Don't spend the dividends.  Use them to buy more stock.
• The main way to diversify with stocks is to buy an index fund.  That's a basket of lots of different stocks.  The most famous is the S&P500, which is a basket of the 500 largest companies on the biggest stock exchange.  That's a lot of diversity.
• You can also invest in individual stocks.  If you're doing this, you should buy at least 10, preferably 25 different companies, for diversification.  Also, to diversify, you wouldn't buy companies all in the same industry (e.g., tech, healthcare, financial), you’d want stocks that cover a few different industries.  For help picking stocks, you can subscribe to The Motley Fool for $99 and they tell you what stocks to buy.  Historically, the returns from their picks have been way higher than the S&P 500.

Other investments

• REITs.  This is a real estate investment, where you own part of an apartment building, or shopping mall, etc.  You’re paid a share of the profits.  It's not an amazing investment but like stocks, it's a good balance of risk and return.  To diversify within REIT, you'd buy an REIT fund, which is a basket of different REITs.
• Bonds.  When the government or companies want to borrow money, sometimes they don't get bank loans, but instead they borrow money from the public, by selling bonds.  When you buy a bond, you've loaned money to the government or a company, and they pay you interest.  To diversify within bonds, you've buy a bond fund, a basket of lots of different bonds.  Corporate bonds have similar returns to the stock market.  Government bonds pay less, but they're a good option for people who are retired or nearing retirement, who need to take less risk because they have fewer years to recover if they lose money.
• Cryptocurrency.  As you've seen, the bigger the risk, the bigger the potential rewards.  Crypto is super risky but the returns have been insane.  If I'd held onto some of the crypto I had in 2016 we'd have many million dollars now.  Here's the return for Ethereum for the last few years:
• 2024:  46%
• 2023:  91%
• 2022:  -68%
• 2021:  399%
• 2020:  473%
• Gold.  Gold has performed about as good as stocks from 2005-2025.  You don’t have to buy physical gold, you can buy shares in a fund, such as SPDR Gold Shares (GLD) on Robinhood.

Portfolio

• 30% Stocks
• 25% Bonds (one or more bond funds)
• 20% REITs (one or more REIT funds)
• 15% Cryptocurrency
• 10% Gold
• 100% Total

Within stocks, 65% in S&P500, 35% in the Motley Fool's picks.

Within crypto, equal amounts of ETH, SOL, XRP, BNB, DOGE (or TRON).

Updates to this article

• 10/7/25:  Added Gold, and rejiggered the sample portfolio % numbers.

• 9/15/25:  Initial