Money is a Tool & Sometimes You Need to Use It

One of the fundamental “rules” of the financial independence community if the idea of “buy & hold.” While this is a great way to build lasting wealth, maybe we should be more forgiving and allow a few exceptions along the way. Here we give a few examples of over the past year when I used money as a tool.

Find your way around:

Waiting Till FI

Selling stocks is often reserved to the time when you are post-FI (post-financial independence) meaning you have 25x your annual spending. The idea is that once you hit this number, say 1 Million dollars invested, that you could safely sell 4% of your shares per year to have $40,000 to live off a year without your portfolio collapsing (4% Guideline, established by Michael Kitces). This is based on the average returns of the stock market and having your assets in low-cost index funds. Meaning that you aren’t buying stocks in individual companies, but rather a fund that includes many companies.

Never Sell Your Principal

Of course there are people who prefer dividend producing assets and would even discourage selling when you reach this point. If you never sell your principal (the initial amount you invested), unless you are picking individual stocks, the odds of completely going to zero are minimal.

We choose to invest mainly in a Total Stock Market Index. It captures the top 3,500 companies on the stock market. However, if the whole stock market bottoms out, then get to your bunker because we should be ready for the Zombie Apocalypse. Make sure you have some Whiskey on hand for bartering, because money won’t mean anything anyways.

However, personal finance is personal.

VTSAX or FSXAX was our tool of choice to represent our main vehicle for investments, but that doesn’t mean it’s right for you. These funds do track the stock market. So when there are big swings either up or down, you will feel it. It’s not for the faint of heart, and you do need to be willing to hold and not sell on the downturns.

5 year performance for two Total Stock Market Index Funds. Averaging over 10% per year even including the 2019 dip!

Either way, whether you chose stocks, bonds, real estate, or commodities, if you sell only the gains so your initial investment will keep working for you.

Have an Emergency Fund

This is great advice, because when real life comes into play you will have the ability to whether the storm. Katie Donegan, Co-Founder of the Rebel Finance School, would say “It’s not binary.” Your journey is not guaranteed to be smooth. A typical recommendation is to have 6 months or more of living expenses in savings. This is so that you can draw on those funds rather than needing to sell investments immediately.

Sometimes your Emergency Fund will be fat and happy. Other times, when real emergencies hit, you will utilize this tool. Whether it’s a major car or home repair, unforeseen medical expense, or insert emergency here. Using your emergency fund for emergencies is a part of life. However, once you get your feet on solid ground again, it’s a good idea to start building it back up to where it was originally.

Time in the Market: The Best Tool You Can Have

If you are just getting started with investing, building up your emergency fund first is a great idea. The last thing that you want to do is to start investing and then a few months later, sell shares at a loss. This is why your time in the market matters. The longer that you are investing, the greater the odds are that your initial investment has grown. Time in the market is a tool that even works when you have experience a down year or two. With time an patience, your value will eventually recover.

For the first 5 years of my investment journey, I only invested. I never pulled out of both Retirement accounts and Brokerage accounts. Every time I invested a chunk of money I told myself “That money is gone”. So it wasn’t something that I ever thought I would access (at least in the near future).

Since then, the market has had strong returns and my investments have recovered from the 2019 dip because I didn’t sell when things were going down.

Although during these past few years, I have had a few instances in which I sold a small portion of my shares when they were worth more than the cost basis (the price I originally bought them for). I used my money as a tool to help family in need after they had done so much for me in the past. I also used it for a once in a lifetime trip with my parents and husband to Italy this Summer. Something that was worth every dime and lost compound interest to be able to make those memories!

Health Savings Account

A High Deductible Health Plan (HDHP), is a great tool that gives you the option to invest money for healthcare expenses. However, this often comes paired with higher bills when you do use your insurance.

I started my HSA in 2014, as a tax free way to pay my medical bills. The money came directly out of my paycheck and when I used it on medical qualified expenses, it wasn’t taxed. After I hit the minimum amount required before investing, the excess was invested in a Total Stock Market Index fund. This allowed my funds to grow overtime and further support my needs.

While some refer to this as the “Ultimate tax sheltered vehicle,” (Mad Fientist) just knowing that I had a way to cover my expenses provided a sense of security.

Contrary to prior beliefs, HSA’s are not just for “healthy” people. I am a cancer survivor/thriver, so regular specialist visits, scans, and life-saving medication were non-negotiable. I have expenses every year and I am utilizing my HSA in the best way I know.

Pay Out of Pocket

Every year that I was enrolled in a HDHP, I invested the max. Then I’d pay for as much of my medical expenses as possible before utilizing it. Determining your pain threshold for out of pocket payments is up to you. I usually make it to a thousand or two before I tap it. I always look at the performance before I do so, and I always try to make withdraws when my account is up.

HSA investment graph, selling only when the value is higher than the cost basis.

Keeping your withdrawals to a minimum is best, but with an HDHP can come higher expenses. If you use the HSA, don’t think about it as robbing your future self. Rather it’s an investment in your health now!

From Jan 2020 to today, my remaining investments are up 13.23% from where they started!

Even if you pull out, you are still getting an advantage. Your money wasn’t taxed going in and isn’t taxed coming out. Every step in the graph above is when I sold shares. You can see that I allowed my account to recover in between every transaction and didn’t sell when my account value fell below my cost basis in 2020.

Keep Your Receipts

Every time you pay for a medical expense out of pocket, keep your receipts. I keep a folder on my computer with all my medical receipts. The great thing is that you can use this as a tool to reimburse yourself at anytime in the future, months or even years later! If something comes up and you need a little more cash, you can submit one or more receipts to get the cost of those medical expenses returned to you.

Be Forgiving

I haven’t been able to contribute to my HSA since I started graduate school in Fall of 2019. Instead my goal is to use it when needed and know that if I graduate with a $0 balance, that is okay!!! It served it’s purpose and I was able to take care of my health when I was in a lower income bracket.

However, paying out of pocket when I can has allowed my investments to keep my account afloat. Pending a large market crash, I still have a remaining balance that will cover my max out of pocket for the next two years and then some.

Alignment with Your Values

If you do have an instance in which you are choosing to sell shares, make sure it’s in alignment with your values. I value family, so when I sold shares to help them out, I didn’t even think twice about it. Money is a tool and I was happy to be able to use it.

It’s the same thing with travel! I don’t want to wait till I’m 65 to see other cultures, so we started traveling a few years ago. We have been to 5 countries in a total of 7 years! The first 4 trips I saved in advance. But the last trip to Italy wouldn’t have happened on my student salary. Instead of missing out, I used my Brokerage account to help cover some of the costs.

Photos from: Italy (2022), Mexico (2021), Canada (2018), Peru (2017), Ireland (2016)

My ROTH account is a tool that I have used to invest money for building a home when I graduate since it will have matured. It will be 5 years since I opened it, meaning I can withdraw the principal and returns penalty free (Rules of a ROTH, Investopedia). We have been long-term renters, and every year that I invested up to the $6000 max I was working towards this goal. However, if I end up with a higher paying job after I graduate, I can choose to leave this money there and pay out of pocket.

Accessible Funds vs Long Term Investments

A new category that I added to my financial spreadsheet last year was “Liquid” or Accessible funds vs Long-Term investments. I wanted to see how much money I had available in the instance that I lost my job, or just decided to up and move to Chiang Mai, Thailand (where the cost of living is much lower that the US).

The “Liquid” funds include my HSA, Brokerage account, ROTH, and ROTH 457. These are all accounts that DO NOT have a penalty if you withdraw from them before traditional retirement age. I consider this my “Young person money.” While I can allow it to grow over time, I am also not locked in and can use it for expenses that align with my values.

On the other hand, my Long-Term investments are my 401K and self directed IRAs. This category would also include 403b’s, from tax-exempt organizations such as a University. This money is not to be withdrawn until traditional retirement. This is my “Old person money” and while I can continue to contribute, it guarantees that I will have something other than Social Security when I get there.

Now there are some exceptions that allow early withdraws on a 401k like a first time home purchase. However, I would like this money to have the benefit of time in the market and use my accessible funds instead.

Extending Your Timeline

Of course, selling investments at anytime will impact your time to Financial Independence. However, you’d be surprised to see how taking an annual vacation may only add 6 months to a year onto your timeline, but allow you to enjoy the journey. I’d rather have amazing experiences while working than, rush to get there and miss out while I’m in my prime.

Giving You Flexibility

I hope that this article has shown you that finances “It’s not binary.” That you don’t have to wait till you never have to work again to sell shares. But that you can use money as a tool when you do it in a thoughtful, methodical way, that aligns with your values. Knowing that this will push back your retirement date, but will help you to be able to weather the storms along the way. I am happy to know that I have options and a fall back if I need it, and that I’ll get to financial independence when I get there.