In that article, I made a rogue prediction for the bottom: the S&P 500 at 3,200 points. The math of how I arrived at this figure is unimportant, but it was the result of my attempt to “undo” quantitative easing’s effects on markets, since all the smartest Twits on FinTwit were confident that until we flushed the excess cash out, things were going to be overvalued. At the time the piece was published, the S&P 500 was at 3,966—which would’ve meant it had a pretty far way to fall for my premonition to come true.

It’s important to note at this point that my wheels-off efforts at cosplaying a human fortune cookie were solely for shiggles: I was dollar-cost averaging into the inferno the entire time, and trying to make the thrashing a little more entertaining.

Fortunately, I was wrong (and a bit too pessimistic). The real bottom happened on October 12, at 3,491. So while I didn’t accurately predict the bottom, it turns out our guest that week on The Money with Katie Show did.

A guest on The Money with Katie Show may have accurately called the bottom

On October 19, we released an episode with Liz Young, the head of investment strategy at SoFi. I was reading her interview this morning because I seemed to recall her delightfully common-sense (and oddly prescient!) explanation for the situation we’re in now, in 2023: The S&P 500 is up 16% YTD, as of today, July 3. Unemployment is still at an all-time low. Interest rates are in line with historical averages. Inflation peaked a year ago and continues to come down. As Jack Raines asked a couple weeks ago, did the Fed pull off the soft landing?

Nothing about the 2023 forecasts suggested we’d be riding high right now, and yet…here we are.

So what gives? Let’s ask Liz, from her October 2022 interview:

“The market is a forecasting mechanism. It’s forward-looking; it tries to predict what the economy will be 6–12 months from now. The market bottoms first, earnings bottom second, and the economy last.”

This reality—that the stock market and the economy are operating on different “timelines,” so to speak—triggers a flaw in human judgment that creates issues for regular-shmegular investors. I can’t tell you how many messages I received throughout the second half of 2022 that said something to the effect of, “Things are looking like they’re going to get worse. Is now a good time to hold off on investing more?” 

Of course, that’s the exact opposite of what those types of tumultuous times call for, but the collective amnesia that sweeps through brokerage accounts is enough to make even the most seasoned investor second-guess their plan. 

But Liz had some words of wisdom in that episode that now stick out to me as perhaps the best advice we’ve ever shared on the show:

“I have a feeling that we’re going to look back on this period and wish we had bought more.”

Had our listeners heeded her advice that day, they’d be up roughly 21% right now. 

I was afraid to air the comment

I distinctly remember the post-production process for this episode, because we had a conversation about whether or not to cut that line—could it be construed as financial advice? “I don’t know, man,” I remember thinking, “Shit is so bad right now. Is it irresponsible for us to release this in the event things just keep crashing? What if this time it’s different?”

After all, remember that the months leading up to the interview looked like this:

In the end, we decided to keep it, because we knew Liz was a professional and her sentiment was expressly about “feelings” as opposed to a hard-and-fast recommendation or directive.

But it gives you a sense for the vibes of the period.

The last 12 months have been a crash course in trusting the data instead of the vibes. As that annoying saying goes, “Facts don’t care about your feelings.”

That’s why this week’s episode of The Money with Katie Show is all about the classic investor folly that’s statistically most likely to cut your returns in half (and that’s no hyperbole). Give it a listen—because who knows? It just might prevent you from selling off at the most inopportune time.

Financial goals, sacrifice, and taking the steepest path up the mountain

If you take home $5,000 per month and your goal is to save $2,500 (a 50% save rate, for those keeping score) because a 50% save rate makes intuitive sense on your journey to financial independence, you’ll likely find yourself in situations where you’re forgoing small luxuries or experiences to stay under your self-imposed budget.

This is the point where I, as the self-proclaimed millennial money guru, tell you that a 50% is unquestionably a good thing. Discipline! Sacrifice! Focus!

But it begs the question: What’s the point of reaching financial independence? Is it to never work again and tap-dance out of the boardroom, middle fingers extended? Maybe—but you’re likely trying to achieve something else. Happiness.

Our biggest challenge is striking the balance of “sacrifice in the short term” and “happiness in the long term.” And when taken to its logical extreme with the best of intentions, it’s easy to assume this relationship is linear: The more I sacrifice now, the happier I’ll be in the future. 

But that’s not how the sacrifice/happiness lever works.

“It’s not the destination, it’s the journey!”

Research suggests humans overestimate how much incremental happiness they’ll feel from large changes, because we often return to our baselines after big, circumstance-altering shifts. That’s fancy scientific talk for the idea that your baseline level of happiness may not change as much as you think once you summit your personal financial mountaintop. 

So let’s run a thought experiment: Say I estimate that my life will get roughly 20% better when I hit financial independence. It won’t change everything, but it’ll change enough of the things that actively annoy me on a daily basis and give me a lot of time back. On a scale of 1–10, if I’m a baseline 7 every day now, I don’t think it’s outrageous to assume I’d be closer to a baseline 9 if all pressure to generate my income evaporated. 

So today, I want to measure just how much small sacrifices materially change the time it takes to reach a financial goal (in this case, financial independence).

You’re going to have to suspend disbelief with me for a moment and pretend that we could also assign a value to your Happiness Quotient (HQ) on any given day. For example, let’s pretend the mornings when you buy a fancy coffee and a scone from the shop down the street and start work a little later give you a 10% boost in HQ.

If we’re measuring happiness on the same set scale of 1–10, maybe this ritual takes you roughly from a 7 to an 8. 

Normally, I’d be the voice of reason in this scenario and remind you that purchasing pleasure is a slippery slope and it requires constant swiping to be satisfied and blah, blah, blah—but not today. Instead, we’re acknowledging that these little dopamine bumps are capable of making you just a little bit happier in your day-to-day life. 

So how much does a little #light hedonism slow us down?

I should clarify two things right now: Spending more will absolutely result in you having less money, or, at the very least, the same amount of money, but later. And that’s okay, because the point isn’t to accumulate as much money as possible (or even to be financially independent as quickly as possible), but to achieve the most total cumulative happiness.

Rather than taking the steepest, hardest path up the mountain, we’d want to find the most enjoyable one: the path where we get the most marginal utility for our sacrifice, but stop short of diminishing returns.

The framework and numbers

All right, #RichGirl. Let’s get hypothetical, shall we?

Using our earlier $5,000/mo. income and 50% savings rate, that means we’re allowing ourselves to spend $2,500 so we can invest $2,500 per month.

At that rate, our hypothetical rich girl would need $750,000 to be financially independent (ignoring inflation, raises, etc. to keep this point illustrative).

If she saves $2,500/mo., she’ll reach financial independence after about 15 years (assuming an average 8% real rate of return). That’s 15 years of sacrifice, assuming staying under her $2,500/mo. budget requires sacrifice to maintain.

How much extra money would she have to spend each month for some happiness units?

I’m going to use my own life as an example here and rack up some happiness charges that will make her life better.

• $100 every two weeks for cleaning services (~$200/mo.)

• $5 per day for a fun coffee, tea, or other #littletreat (~$150/mo.)

• $30 for one nice lunch out during the work week, every week (~$120/mo.)

Maybe her weekly lunches, daily special coffees, and cleaning services buy her an additional 10% of happiness. Nothing crazy, right? We’re not trying to change our entire lives, just give a 10% bump to our HQ.

In total, that’s $470 more per month for convenience and a little joy. Our hypothetical Rich Girl is spending roughly 19% more each month to enjoy these little luxuries, and therefore saving 19% less ($470 out of $2,500), because her save rate was 50% before. Now, her new save rate is 40%, because she’s only saving $2,030 per month instead of $2,500.

She needs 19% more, and she’s saving 19% less. So how much is her timeline thrown off?

Her goal number is directly impacted by how much she’s spending, of course. Now that she’s spending an extra $470 per month, her goal number goes up: Instead of $750,000, she now needs $891,000.

Now, she’d be financially independent after 18 years, instead of 15.

Would you rather have a “7” level of happiness for 15 years and then jump up to a “9”, or an “8” for 18 years before hitting “9”?

Here are a few questions to ask yourself:

• How much do I make each month now?

• How much do I spend? Do I honestly feel like I’m making sacrifices right now to spend less?

• When am I on track to hit FI right now? (You need to know your current invested assets, the amount you’re adding to them each month, and how much you spend per month * 300)

• What types of things would I want to intentionally add back into my day to bring more joy, and how much would they cost? Conversely, are there things that you’re spending money on regularly that aren’t raising your HQ? Can you redirect existing funds?

• How much more per month would I have to spend to achieve a 10% boost in happiness?

• How would that spending increase impact my timeline?

Try this out for yourself and see what it would cost to increase your happiness on the journey. You might find you’re taking a steeper path to reach a destination faster that isn’t all it’s cracked up to be…or you may realize your weekly pedicure doesn’t actually move your HQ, and you’d rather invest that money in reaching financial independence (or another, more meaningful goal; I’m looking at you, after-market Eras Tour tickets) just a little more quickly.

So let’s start with the best part:

Unless you’re retired and drawing down on your retirement accounts, you don’t have to worry about your 401(k)s and IRAs during tax season.

Your 401(k) and IRA are great tax-advantaged investment vehicles. You aren’t taxed on the growth in those accounts every year the same way you’re taxed on the growth in your taxable accounts. After all, that’s kinda the point.

So what does this mean? You can buy and sell and rack up dividends and interest inside these accounts without worrying about paying taxes annually on any of the gains. It’s all tax-sheltered.  

The TL;DR: If you do all of your investing inside retirement accounts, nothing I’m about to share really applies to your situation. We really only need to concern ourselves with investment taxes during our accumulation phase inside taxable brokerage accounts.

(And a note: The term “taxable” gets its name from the fact that it refers to pretty much everything that isn’t a tax-advantaged retirement account.)

So if you have brokerage accounts, what do you need to know about the taxes?

If you contributed to a brokerage account over the last 12 months, it’s likely that you experienced some gain or loss. For example, if you invested $1,000 in March 2024 and today you have $1,200, that $200 difference is your capital gain. It’s the gain that your capital of $1,000 earned. 

For most index fund investors, growth will be composed of two things:

• Capital gains, where the asset went up in value; in other words, it’s worth more now than when you bought it

• Dividends, which you can think about like a token of appreciation from a company; the company is essentially distributing its profits to shareholders directly, and some companies offer higher “dividend yields” than others

• For example, if you buy a $20 share of a company that offers a dividend yield of 5%, you’d earn $1/share.

Capital gains and dividends are taxed differently than earned income—and if you’re just dollar-cost averaging into an account and not selling anything, you won’t pay any taxes on the capital gains.

You only pay taxes on capital gains when you “realize” them, which essentially means when you sell at a gain for any reason. You may be wondering: If I’m selling something within my brokerage account but then using the money to buy something else and not withdrawing anything, do I still have to pay taxes on the gains? The answer is yes. 

Even if all the money stays within the confines of the brokerage account, those “realized gains and losses” from buying and selling still trigger a tax event.

So let’s talk about how capital gains are taxed, when you finally sell.

Your capital gains are taxed based on how long you held and your total income from all sources—your salary, your side hustle, your investment income—add it all together and imagine stacking the capital gains on the very tippy top. 

If you sell after…

• Fewer than 365 days: You’ll pay your marginal tax rate on the gain. This is definitely suboptimal and should be avoided if possible.

• For example, if we had sold our $20 share at $25 after, say, six months, and we’re in the 24% tax bracket, we’d pay $1.20 in taxes on the gain of $5. Gross. Of course, it’s still better than nothing—you still have $3.80 you didn’t have before—but you’re less ahead than you could have been if you had waited or sold older shares first.

• Greater than 365 days: You’ll pay the capital gains tax rate on the gains. The capital gains and qualified dividends tax brackets are a lot easier to navigate than the progressive tax system and can be way more forgiving.

• If you (as a single person in 2025) have $48,350 or less in total declared income, you won’t pay any taxes on your long-term capital gains. For married filing jointly, the 0% bracket covers up to $96,700 in total income.

• If you have between $48,351 and $533,400 in income in 2025 (yep, that’s not a typo), you’ll pay 15%. For married filing jointly, it’s $96,701 to $600,050.

• And if you have $533,401+ in income, you’ll pay 20%. If you’re married, it’s a total income above $600,051.

Because of how broad it is, most people fall into the 15% category. 

So remember our $1.20 in taxes on our $5 short-term capital gain before? If they were long-term capital gains, we’d pay 75 cents. And even if you’re bringing in $400,000 per year as a single person and would be in the 35% marginal tax bracket, your investment income (the capital gains) are only taxed at 15%.

But what if you’ve been dollar-cost averaging into various holdings over time? If you’ve been adding little by little, how does the brokerage firm know what to sell? The shares I bought last week, or the shares I bought three years ago? My gain will be different depending on my cost basis (the amount I paid for it), so how do I know?

Brokerage firms typically use FIFO—first in, first out—automatically, though it’s definitely worth a Google for your brokerage firm. This means they’ll sell your oldest shares first to satisfy a sell order. If you bought something three years ago that has a $5 gain and more of it last year that has a $2 gain, it’ll sell the older shares with a lower cost basis first.

Firms like Betterment make this pretty easy, too; they’ll warn you of the tax impact of selling before you press any scary buttons, and confirm you still want to make the move.

And don’t forget about state capital gains taxes, which vary depending on where you live and how much you earn. Here’s a list from SmartAsset; Command-F to your heart’s content to find your state’s rates (now I know why everyone retires to Florida).

But let’s circle back to those dividends, because they’re taxed a little bit differently

Your dividends will be taxed annually whether you reinvest them or not (that is, whether you keep them in the account and set them to “reinvest,” or withdraw them). You pay taxes regardless, because they’re always considered “income” in the year you earn them.

There are two types of dividends:

• Ordinary dividends are taxed like ordinary income; in other words, you’ll pay your regular tax rate on these bad boys.

• Qualified dividends that meet certain requirements are taxed similarly to capital gains using the more forgiving brackets described before.

Your 1099-DIV that you receive from the brokerage firm will clearly outline both your qualified and ordinary dividend amounts. 

Now, it’s important to note: If you’ve set your dividends to reinvest (which is generally the advisable thing to do), you’re technically being taxed on income that you never withdrew as cash—which is different from the way you’re taxed on the income you receive on your paycheck, because you’ll essentially need money from another source to pay a tax bill associated with your dividends. This won’t be much in the beginning, but if you have a huge brokerage account worth hundreds of thousands or millions of dollars, you could theoretically generate a dividend income tax bill in the thousands.

You may not need to sell any holdings because you need cash, but you may find yourself in a position where you need to sell in order to rebalance your portfolio.

Rebalancing is effectively saying, “Okay, my goal was to own 90% stocks and 10% bonds across my portfolio, but 5 years have passed, and my stocks grew way faster than my bonds did, so now, my actual allocation is 95% stocks and 5% bonds,” which might be too risky for your liking. 

In order to get back to your goal allocation of 90/10, you have two options:

• You can sell stocks and use the money to buy bonds.

• Or, if you’re still contributing and growing your accounts, you can contribute your new cash in such a way that it buys more bonds than stocks for a little while until your bond allocation is larger.

Keep in mind, though: It’s helpful to think about your portfolio holistically, as the sum of its individual parts, because it’s a lot easier to buy and sell within tax-advantaged accounts—so it’s possible you could handle the majority of your rebalancing within those accounts, depending on how much you’ve squirreled away across them.

In a scenario where your money is primarily allocated to tax-advantaged accounts, you may decide to venture over to a 401(k) that’s beefy and offload some of your longest-held stocks to reinvest in bonds and leave the brokerage account alone.

If you find yourself rebalancing, you have a few considerations:

1. The first is to try to rebalance within tax-advantaged accounts where you won’t get dinged with capital gains taxes.

2. The second is to be mindful of the upper capital gains tax bracket where you’d creep into 20% territory. If you’re a high earner and/or selling a lot at once to rebalance, you want to ensure you don’t accidentally breach the upper limit of the 15% bracket and begin paying 20% on some of your gains.

Ideally, this is something that can be done little by little over time, rather than all at once.

So far, we’ve mostly talked about how taxes affect your investments if your holdings are up—but what if your stocks are down? 

If you invested money that’s at a loss (for example, how most of our portfolios looked at the end of 2022!), tax loss harvesting is effectively what happens when you say, “Hey, I invested $100 and now I only have $80. I want to take a tax deduction on the $20 I lost to help ease the pain of failure.” Just kidding. You’re not a failure. You’re an investor along for the ride!

Here’s how it works: You sell a holding that’s decreased in value so you can recognize a capital loss (your 1099-DIV should also list your capital losses), which can then be used to offset gains from other investments. 

The important part, however, is not that you’re just cashing out and walking out of the stock market casino. You’re reinvesting your $80 in something similar, but not “substantially identical.” You could sell a position in the S&P 500, lock in your loss for the year, then immediately turn around and invest that same cash into a Total Stock Market fund, which has such similar holdings that it’s effectively giving you exposure to almost the same thing—cap-weighted US stocks—but you’re also benefiting from the loss you experienced. 

Unfortunately, you have to sell by the last day of the year, so it’s too late to do this for 2024 securities—but keep it in your back pocket in the future. If you use a robo adviser like Betterment, this happens automatically if you have the feature turned on. 

This is only a benefit in taxable accounts—there’s no such thing as tax loss harvesting in an account where you aren’t subjected to capital gains taxes, like a 401(k). 

This is a bit of a tricky maneuver: For one thing, you want to be careful of avoiding what’s known as a wash sale. 

This is when you sell an investment at a loss, but buy a “substantially identical stock” within 30 days before or after that sale. Note that the wash sale rule also applies to any substantially identical stocks or securities purchased by your spouse or a company you own, so if you were thinking of getting crafty by assigning bae some Robinhood homework, think again. 

This can be complicated if you have a lot of multiple accounts that are dollar-cost averaging into similar holdings. To extend our earlier example, if I sold my S&P 500 holdings at a loss to repurchase the Total Stock Market in my brokerage account, but my 401(k) plan purchased the S&P 500 two weeks later as part of its standard operating procedure, I’m pretty sure this would trigger a wash sale and invalidate the whole thing. 

Regardless, when executed correctly, you can typically deduct up to $3,000 of losses per year, and if you have losses in excess of $3,000, you can carry them forward into the future to offset Future You’s gains.

Phew, okay. So, should all this talk about taxes scare you away from investing?

Well, would you turn down a raise because it means you’re going to have to pay taxes on that incremental money? No, probably not.

But this post makes a decent support case for maximizing your 401(k) and IRA contributions first, since the ongoing tax situation on those bad boys is pretty simple.

For everything else, there are ways to help minimize the pain. First and foremost: Try your best not to sell assets that you’ve had for less than a year. That’s one great way to help minimize your tax liability on growth, since once you cross the one-year mark, you’ll be dropped down into those sweet, sweet capital gains tax brackets.

What can you expect at tax time?

Most firms will send you something called a 1099-DIV (or maybe a 1099 Composite) by mid-February. This will list your capital gains, ordinary dividends, qualified dividends, etc., and you’ll upload the form to your tax software of choice or give to your CPA.

Even if this feels like a lot to manage yourself, you have options:

• If you invest with a roboadvisor, it’s likely they’ll have automatic rebalancing and tax loss harvesting features you can turn on so you don’t have to worry about doing it manually.

• Plus, your 1099-DIV forms will spell out the results of each account for you, so get familiar with them! It’s relatively easy to plug the numbers into tax software, but there’s no shame in hiring a CPA to handle it for you—they can answer questions and make suggestions that may lessen your tax burden.

And remember the best news of all. If you’re making enough income from your investments to be taxed on it, you’re in #RichGirl territory. Embrace it.

So your company is offering you discounted access to company stock. What do you do?

(Pssst…for our full deep dive on all things stock-based compensation, check out this week’s episode of The Money with Katie Show!)

We only sprinkled a little bit of podcast fairy dust on ye ole’ Employee Stock Purchase Program (ESPPs) on the show this week, so I wanted to talk about my take on ESPPs in more #depth here.

ESPPs are generally treated as part of your paycheck elections (that is, you can opt to buy discounted stock with your income instead of taking it as income).

Some employers will pay you with stock as part of your compensation package (and this becomes increasingly popular as you move up in a company), but we’re not talking about receiving stock as compensation here—we’re talking about the option to buy it at a discount.

It’s important to consider the potential pitfalls of any investment decision, especially when it comes in the form of HR paperwork and well-intentioned Janice from payroll encouraging you to “get that 10% discount on the stock!”

According to Human Capital, 85.5% of information technology companies and 68.3% of healthcare companies in the S&P 500 offer ESPPs to their employees. In the Russell 3000, 67.7% of IT companies and 60.2% of healthcare companies provide ESPPs. In other words, if you work for a large public company, the chances are good you’ll have some version of this option available to you—but there are many different ways to structure such a perk.

There are effectively two ways to use your ESPP: One is like walking through the front door, and the other is like using the revolving door in the back.

First, let’s break down the risks of “walking through the front door”—using the ESPP as a buy-and-hold strategy.

The main risk? Compromising diversification of your investment portfolio

You know how I’m always harping about how one of the best ways to protect yourself in down markets is to be properly diversified?

When you participate in an employee stock purchase program, you’re trading diversification for cheaper access to a particular asset. Usually, the discount is somewhere between 5%–15%.

As we’re all probably well aware by now, as a general rule, I don’t believe in buying any individual stocks as a major component of my investing strategy. 

A 2021 JP Morgan study examining the loss probability of individual stocks found that 42% of stocks in the Russell 3000 had negative absolute returns between 1980 and 2020 and 66% trailed the index as a whole (which is a fancy way of saying, 6 in 10 individual stocks that made up the index actually underperformed the average of the 10 overall). All that to say: You have worse than a coin flip’s chance in working for a company with a stock that beats the index over the long run.

And while it’s certainly possible, it’s—statistically speaking—not overly likely in the long term.

Now, I always used to caveat this speech by saying, “That is, unless you work for, like, Facebook!”

…except for the fact that—this year—the stock’s meteoric gains were almost totally wiped out after the company placed a huge bet on the metaverse, and was down 65% by the end of the year. 

The other issue at hand? If you work for one of the biggest tech companies and own a bunch of S&P 500 or Total Stock Market index funds, you already own a disproportionate amount of your own company’s stock. Apple alone comprises 6.3% of the S&P 500 index fund.

And while you can make the case that Apple and Google are going to continue their climb to world domination, if history is any indication, most big companies are eventually usurped. Owning too much of any one company—no matter how dominant it seems today—isn’t the safest plan if your investing strategy is intended to carry you through the next few decades.

One counterargument I’ve often heard is, “But if I’m working for this company and have an impact every single day on its success, isn’t that worth betting on?”

…and I think that point stands if you work in a four-person startup.

If you’re working for a company that’s already large enough to be publicly traded, it’s unlikely that your contributions as one individual are going to have any real bearing on what the stock price does or the long-term success or failure of the company (unless you’re the CEO or another exec; in which case, would you like to sponsor Money with Katie?).

There’s one other risk associated with holding too much of your company stock:

The secondary risk: Your income and investments are tied up in one company’s success

While this doesn’t really apply if your company stock accounts for a tiny fraction of your total portfolio (which may be a bet you’re willing to make), if you’re primarily investing in company stock and taking your paycheck from that same company, you’re relying on the same hen for all your financial eggs. (How’s that for a twist on the “eggs in one basket” analogy?)

The same point goes for the big tech employees—your company is already disproportionately represented in your index funds, so you’re placing an even bigger bet when you load up on more.

After all, “diversification” means owning assets that aren’t perfectly correlated—and it doesn’t get much more correlated than big tech and the S&P 500.

If something happens to your company, not only do you lose your paycheck, but that portion of your portfolio suffers, too. (Enron employees have entered the chat.)

Regardless of who you work for or how great they seem, that risk may not be worth taking.

Of course, most people who use an employee stock purchase program aren’t only investing in their own company stock—but I’ve definitely seen young new hires sign up for the program in an attempt to be a well-intentioned Budding Adult and not bother to invest anywhere else.

In that way, their entire financial future is tied up in the success or failure of one company. It’s too risky.

But what about using the revolving side door? That’s another story.

How to hack your ESPP for a guaranteed return

All of that proselytizing out of the way: Depending on how your ESPP is structured, it might be a way to get some guaranteed returns on your money. 

Let’s take a walk down benefits planning lane, shall we? If your plan…

• Provides a discount on the stock

• Accumulates your cash contributions over a defined “accumulation period” or “offering period” (call it 6–12 months) and then buys the discounted shares of your company stock on the purchase date

• AND allows you to sell immediately (with reasonable trading costs) without restrictions or blackout dates, with bonus points if your ESPP allows you to automate the sale…

…then you may be in a good position to take advantage of this revolving side door. 

By allocating a portion of your income to a plan like this, you’ll “guarantee” a 15% return on your investment (minus ordinary income tax). Some companies will even honor the lowest price of the stock over the offering period on the purchase date, so it’s possible you’ll capture even more upside—it’s worthwhile to dig into the details of how your plan is set up.

For example, if your company stock costs $10 per share and you get a 15% discount, your company would accumulate your cash contributions during each pay period over the length of the offering period, then buy shares for $8.50/each on the purchase date. If you were to place a sell order immediately, you’d earn $1.50 profit per share, on which you’d pay ordinary income tax come tax season.

That’s a 17% return on investment ($1.50 earned on $8.50 invested), with a marginal tax rate-sized #chonk taken out for your ordinary income taxes. If you’re in the 24% bracket, for example, you’d earn $1.14 in net profit on each $8.50 invested—a 13% real return on investment, on up to $25,000 worth of pre-discounted stock per calendar year. 

Of course, you have to weigh this priority with your other financial priorities (for example, contributing to a 401(k), an HSA, a Roth IRA, etc.), but if you’re in a position where you’ve checked those boxes and you’re looking for other #optimizations to make, it might be worth exploring whether or not your employer stock purchase program is structured in a way that would make this possible.

It sounds like a lot of back and forth, but if your company allows you to automate your contributions and sales, it may be well worthwhile (and an automatic savings device, like your 401(k), which is valuable in and of itself because it takes indecision and forgetfulness out of the equation).

Before making any big moves,

Consult a tax professional. Per the disclaimer on this website, I am not a licensed financial professional—just a gal who loves to invest, learn about the tax code, and share what I find.

Is it the S&P 500’s performance over time? 

Close! It represents searches for the term “S&P 500” over time. 

Why am I looking at this? Well, mostly because I don’t have other empirical ways to get a pulse check on public awareness of a phenomenon beyond Google Trends data. I’m using increasing search volume as a proxy for public interest in the S&P 500 (the index that measures the performance of the 500-odd largest American companies by market capitalization).

Now, we could explain away this increase a few different ways:

• The Google search trends data (and the methodology that Emperor Google uses to measure search trends) have changed over time, calling into question the accuracy of such a graph.

• Personal finance education has become more popular in the last decade, in part due to the internet and social media.

In short, we could explain the increasing interest in the S&P 500 over the last few years with other stories. Or we could compare searches with actual performance:

Note the delineation for 2004, where the search trend data above begins. 

Correlation does not equal causation, but there’s a simple explanation I’d like to offer here: Recency bias.

Line goes up. People take notice. New investors are attracted. Narrative is formed. (Also known as: Fund flows tend to follow—that is, chase—returns. When something is performing well, it attracts a ton of new cash (Cathie Wood’s ARKK being the most recent, microcosmic example.)

Because the S&P 500 has performed exceptionally well in the last decade (and we’ll get into that shortly), it’s a fan favorite for investors everywhere.

Over time, a very cozy narrative has developed around the S&P 500 and its annualized 9% returns, lulling investors into a dangerous “expectation trap.”

When money is cheap, growth stocks generally pop off

There’s a general consensus in the investing world that there’s a correlation between the Federal Reserve’s monetary policy (specifically, interest rates) and stock market performance. For example, this analysis from BlackRock demonstrates how S&P 500 P/E ratios map to interest rates over the last 12 years; when rates are negative, P/E ratios tend to be higher, and vice versa.

When the cost of borrowing money is cheap, the thinking goes, we expect future earnings—and returns on stocks, the securitized devices that represent a company and its earnings—to be higher. 

When the cost of borrowing money rises, we expect future earnings and stock returns to be lower.

There’s a loosely inverse relationship. 

And what do we know about the last 10 years? A picture’s worth a thousand words! Below, you’ll see the Federal Funds Effective Rate—a bunch of fancy words that basically mean, “How expensive is it to borrow money?”

The higher the line on the graph, the more expensive money is. Check out the line post-2008, especially relative to the previous 60 years:

Things have been awfully ZIRP-y. 

(ZIRP is the acronym for “Zero Interest Rate Policy,” an approach to monetary policy that tries to jumpstart economic activity by making borrowing money really cheap. In other words, the interest rate is at, near, or sometimes even below zero.)

It’s true that this correlation (between high returns and low rates) exists, but it’s also true that—at other points in history—reality flouted this expectation. Between 1940 and 1969, rates rose and the S&P 500 had positive real returns.

In that sense, it’s not quite as simple as “one goes up, the other goes down,” though this intuitive narrative is very powerful.

I don’t want to get into the ~economic theory~ or effectiveness of ZIRP, or how it played out for us. That would be fun (really!), but what I’m more interested in is exploring how a new era of higher interest rates is likely to shift the narrative sentiment (and therefore, investor behavior) around things like the S&P 500. 

Is narrative sentiment more powerful than data?

Do ~vibes~ and public opinion matter more than reality itself? Do vibes create our reality?! (I feel like I’m at Burning Man.)

To dig a little deeper into our earlier note about positive real returns amidst rising rates, LPL Financial released some data in March 2022 that showed the average annualized S&P 500 return during Fed rate hike cycles was 4% (in other words, lower than the historical average, but still positive) since the 1940s. 

In fairness, the data doesn’t appear to be inflation-adjusted, and you probably don’t really give a shit if your stocks are up on a nominal basis if they can buy less bacon at the store than they could last year.

For example, a quick review of S&P 500 returns at this site (where you can easily adjust time periods and include or exclude inflation) paints a very different picture of the period between 1977 and 1980 than the LPL data does:

Regardless, it almost doesn’t matter if rate hikes don’t actually meaningfully impact S&P 500 returns, if everyone investing in the stock market thinks (and behaves!) as though they do.

Data is often no match for the narrative that forms around the data. A compelling, intuitive story is often more powerful than fact.

The end of an era: The “safe bet” of the S&P 500 might be over, for now

When rates are continuously ripping and J-Pow refuses to step away from the “CHAOS & VIOLENCE” button that adds another 50 basis points to the Fed funds rate every few months, we’re going to see a gradual narrative shift in investing circles that moves away from presenting the S&P 500 as a “safe” option. 

This is probably a good thing. While you’re historically likely to see real returns over any given 20-year period you’re invested in the S&P 500, we humans have a tendency to take a look at recent history and extrapolate it forward.

Writer and investor Nick Maggiulli points out why this is a dangerous inclination in his recent piece, “How Much Growth Can You Expect?”:

“I wanted to share these results because there are many personal finance gurus who will advertise expected growth numbers far in excess of [real returns] and it can be quite misleading. Most of the expected growth numbers I see tend to be inflated for a few key reasons:

They don’t examine people investing over time (i.e. DCA)

They don’t include bonds in the portfolios (it’s 100% stocks which is unrealistic)

They don’t include Global stocks (they focus solely on U.S. stocks)

They don’t usually adjust for inflation.”

To quote myself five minutes ago, you’re probably more interested in a realistic estimate for future returns that’ll accurately reflect the type of life they’ll enable you to live than some pie-in-the-sky, relatively unlikely outcome.

Am I going to save as aggressively if I think I’ll get 11% annualized returns? No, probably not. 

What if I plan as though I’m only going to realistically 2x my savings over 20 years (around 4.5% real annualized returns)? Well, I’d probably save a little differently. 

Again, this is a good thing.

“Save like a pessimist and invest like an optimist,”

wrote Morgan Housel, the connoisseur of “human behavior really jacks up our finances, huh?” hot takes.

While I’m sure we all enjoyed the era of S&P 500 dominance (also correlated with the Alabama dynasty of Saban’s joyless murderball, I might add!), realistic expectations for the future matter, because they influence how we behave, plan, and save.

And diversification beyond a single asset class really matters, because the S&P 500 alone is not a surefire bet, even over relatively long periods of time (despite what our recency bias-tainted amygdalas may tell us)—go back just one more decade and we can learn that lesson clearly:

This is real S&P 500 performance from 2000 to the end of 2011, though as Nicky Numbers pointed out above, this represents one lump sum of cash invested at the beginning, rather than a more realistic dollar-cost averaging approach.

Accurate or not, it’s high time for a narrative shift so this new generation of investors can benefit twofold

A more realistic set of expectations for future S&P 500 returns—and, by extension, a more realistic appreciation for diversification beyond it—is good for improving saving behavior, whether the narrative driving this behavior is data-driven or not. 

Moreover, deep downturns provide buying opportunities for younger generations (in both the stock market and housing markets) that aren’t possible when ZIRP pushes things to new, outlandish all-time highs every six weeks—anyone sitting on dry powder in 2008 went on an asset shopping spree that likely propped up the rest of their financial lives. 

Without these economic blowups and subsequent recessions, the rich stay rich and the young (and broke) get farther and farther behind.

So no, the S&P 500 isn’t “safe”—but if you save aggressively and diversify beyond it, you’d be hard-pressed to find a better way to build wealth. 

Our brains are hardwired to perceive negativity as more truthful, more intelligent, and as a result, fear-mongering tends to run rampant when things seem like they are Going Very Badly. 

The alarmists are harmonizing the refrains of their favorite Sunday hymnal, This Time It’s Different, explaining (some with earnestly positive intentions, to be fair) that investing in the stock market right now would be a no good, very bad idea. This is usually followed by something about “fiat, bitcoin fixes this, whole life insurance or bust” on a droning loop. They shoot down messages of optimism as uninformed or unsophisticated. 

Oh, how quickly we devolved from “Software is eating the world!” to “The only safe assets are physical bars of gold and Costco cans of Bush’s Baked Beans.”  

When the vibes are off, it can feel safer to heed our gut instincts that something dire is afoot, pause our contributions to our brokerage accounts, and wait it out on the sidelines. 

There’s only one problem: Our perception of danger in the markets is highly uncorrelated with how dangerous the market actually is at any given time. 

But…is it a “no good, very bad” outlook?

A few weeks ago, I saw a comment entitled “Hard Lessons Will Be Learned” from an Anonymous Internet Opiner. They declared with certainty: “The next 40 years will not look like the last 40 years because of where we are in the big debt cycle.”

Ray Dalio has entered the chat. 

“This lacks an understanding of macroeconomic trends.”

As soon as the tide turned from headlines of jpgs of rocks selling for $3 million to monkey-themed fan clubs to “the world is definitely ending” in nine months flat, it seemed internet comment sections were suddenly glutted with classically trained macro economists. 

r/WallStreetBets called; it wants its analysts back. 

But uh, do you know when we weren’t constantly wading through accusations of economic incompetence? When frequent conversations across the web didn’t co-opt Dalio’s talking points? When people weren’t beating the end-times drums? 

In 2020 and 2021, when—as my friend Jack pointed out in this brilliant piece—risk was technically much higher than it is today.

That’s the problem with our perception of danger. We think it’s a lead indicator—a warning sign that something bad is going to happen, and we should act (or stop acting). 

Unfortunately, fear is an emotion that functions on a lag. By the time we retail investors perceive the risk, it’s usually too late to do anything about it.

Back then, it was, “Have fun staying poor.” Today, it’s, “Macro trends tell us we’re headed for a flat decade.” 

The critical, pessimistic sentiment online tends to be late to the party. It probably would’ve been a lot more helpful to spread a word of caution in 2021, when the S&P 500’s PE ratio was pushing 40, just about as high as it gets, rather than now, when we’re already down 25% YTD and the S&P 500 is roughly half as expensive as it was last year, with a PE ratio of around 18. 

Right now, stocks are within one standard deviation of the historical average and are considered fairly valued by most measures. If anything, now would be the time to fire up the chorus of have fun staying poor, since the last two decades have proven that investing in something is just about the only chance regular people have of escaping chronic wage stagnation and declining purchasing power.

Of course, that’s not to say the market won’t go lower. That’s not to say there isn’t some macroeconomic trouble on the horizon. That’s not even to say this time it won’t be different, or that we aren’t headed for a flat decade—just that, all things considered, most of these doomsday Paul Reveres are about a year late. And ultimately? Nobody actually knows. 

Even if bad things are ahead (like catastrophic events of the past that preceded recessions from which the stock market eventually recovered—a Great Depression, a housing market implosion, a massive terrorist attack, a Gulf War, an oil embargo, or…well, I think you get the picture), we have a relatively solid idea of what typically happens when shit goes awry at scale, thanks to the last 100 years.

Stock market returns through recessions are less predictable than you’d probably expect

As much as I wish past performance was indicative of future returns…it’s not. That said, history is just about the only (hazy) crystal ball we’ve got for understanding a probable range of outcomes.

Moreover, the stock market is forward-looking—it’s not reacting to what’s already happened in the same way that our flighty amygdalas are. It’s anticipating what’ll happen six or 12 months down the road, which means it usually goes down before a recession actually starts (and usually improves before a recession ends). 

And one of the key recession indicators—high unemployment—isn’t really happening yet. (The technical language for this phenomenon is the “recession isn’t recessioning,” and J-Pow & the Fed Boiz are probably going to keep hiking rates until it does.)

This is why a strong jobs report actually made the stock market react negatively, because a strong-ish economy probably means more rate hikes. The market—comprising a bunch of smart, greedy people—is pricing in something it’s expecting to happen in the next few months. (You’ll never convince me the stock market isn’t just a mood ring in the short term.)

The chart below shows us that the range of drawdowns during recessionary periods in the last 72 years was between -14% and -57% (woof). But it also shows us the returns on cash invested at or around the low point two years after each “bottom,” ranging from 5% to 99%. (This means a dollar invested during the market’s lowest point in a recessionary plunge returned anywhere from 5% to 99% in the two years that followed.)

These ranges are about as wide as they come. The median drawdown, however, is -24%, which is approximately where we are right now. 

The point isn’t to estimate how bad it’s going to get—there are far too many variables for that—but to exemplify the fact that it’s almost impossible to know. There’s no discernible pattern to extrapolate forward. 

Is this the bottom? Who knows? The macro buffs would tell you we have much farther to fall (because of money printing, because of war, because of inflation, because of Jerome…or because negative press is what gets clicks), but nobody actually knows.

The one thing that is clear from this data is that the money you invested through every recessionary bottom in history always looks all right two years later, and the only way to guarantee you invest at the bottom is to invest through all of it.

Might as well bet on 100 years of historical precedent if you’re going to bet on anything. As Jack Raines wrote: “Risk is highest when we forget it exists, and lowest when it’s all we can think about.”

Maybe the Bear Bros will rejoice from their alternative asset classes that they were right and the dumb, optimistic masses were wrong—but if you’re coming to that conclusion in October 2022, you’re probably too late to do anything about it anyway.

But that stuff is boring and you may already know it, so let’s jump to what investing actually is

“Investing” in the broadest sense just means using your money (read: cash) to buy assets that you think will go up in value. You can invest in real estate, the stock market, and a lot of other things.

Today, we’re going to talk about stock market investing in particular (as distinct from day trading and other arbitrage attempts), as I believe that has the lowest barrier to entry. I can’t start a rental property empire right now with $20 and an internet connection, but I can use those two things to start investing in the stock market in the next 20 minutes.

What’s the stock market?

The stock market is just a big collection of companies that have decided they want money from the public in return for the promise that they’ll produce profits they’ll share with the public.

In order to be offered on this thing called the stock market, a company has to “go public”—which means revealing a lot of intimate details about how it’s spending and earning, how much it’s paying its executives, and more. Companies want to look good to the public so more people will say, “Yep, I’ll give that company my money in exchange for a small piece of it, because I think it’s going to do well and I’ll get a good return on my investment.”

Going public is a big deal, and it happens in something called an “IPO,” or “Initial Public Offering.” It’s the company saying, “All right, world—you are now able to exchange your dollars for a small piece of me, and you should exchange your dollars for a small piece of me because I’m going to produce profits that’ll make the piece of me that you own more valuable over time.” Like NFTs, but you know, actually profitable.

IPOs aside, that’s why the value of a stock goes up—because that stock (or rather, your “share” of the stock) represents a small piece of a company that’s theoretically creating real value in the world and generating real income.

But just like people, companies die

Even good companies may eventually die, because the world changes, the public’s needs change, and hopefully, innovation keeps pushing us forward.

Back in 1896, this dude named Charles Dow selected a group of 12 leading stocks from American industries to create his index. You’ve probably heard of it: the Dow Jones Industrial Average.

Today, there are 30 stocks in the Dow Jones Industrial Average, or DJIA.

Do you know how many of the original 12 are still in it? None. Most of the stocks in it today didn’t even exist when he started. Things change.

But that’s the cool thing about indexes (or indices): They adapt, too. Since they’re prescribed to include only stocks that meet certain requirements (like size, or growth, etc.), the holdings in an index change as the companies do.

For example, if I created an index that was supposed to measure the 10 biggest companies in the US based on profits, as soon as the tenth company was usurped by another one, it would be replaced on my index.

You’re saying “index” a lot, Katie—is this where index funds come in?

An index fund is a collection of stocks designed to track one of these indices. The index fund allows you to invest in a certain index, like the DJIA.

The benefit of using something like an index fund is that you’re saying, “I don’t care what the top 10 biggest companies are, I just want shares of the top 10 biggest companies at any given time.” Just like above, as those companies change on the index, so too does what you own.

Compare that to deciding, for example, that you think one particular company is going to do well. You might be right, but you also might be wrong. If you invest in a company that ends up not producing the profits they say they will, you’d be disappointed in the return on the dollars you handed to the company.

You can probably connect the dots now about why index funds are so popular. They eliminate a lot of guesswork. Popularized in the 1970s by the founder of Vanguard, John Bogle, the index fund is a dope invention and John Bogle is considered a genius.

Without getting too deep into the weeds today, it’s probably useful to mention that—in general—only about 10% of investors who try to actively beat the performance of major indexes like the S&P 500 actually do so over any 15-year period.

(The S&P 500, or “Standard & Poor’s 500,” is an index that tracks the 500 biggest companies in the United States. It’s a popular one, especially in the last decade, as it’s done very well.)

And while I’m not telling you that you shouldn’t invest in individual stocks if you want to, I am telling you that almost 90% of professionals who do it for a living (to try to outperform the total stock market) fail. Do with that information what you will.

Why does the stock market tend to go up over time?

A stock is just a small piece of a company.

It’s not just a piece of paper or numbers on a screen. A stock represents a real company producing real value and generating real income.

It’d be like if I started Money with Katie and asked you, dear reader, to invest the first $100 used to pay for the website. Let’s say we split ownership of the company, 50/50, so you owned half of Money with Katie. There are two shares of stock, valued at $50 each.

In Money with Katie’s first year of business, it made about $10,000.

You put in $50 to own 50% of Money with Katie, and it generated $10,000 in revenue, meaning you’re entitled to $5,000.

Not bad, huh?

As long as Money with Katie makes money, so do you.

But if it lost money—if it never made a dime—your $50 is worthless.

That’s why (rather than investing all $50 in Money with Katie’s stock) you’d probably be wise to spread that $50 around over, say, 50 different personal finance blogs, giving them each $1.

Of the 50, at least a couple are bound to do well, so your “shares” in the successful ones will do well.

Actionable advice to start investing today

Some people try to day trade individual stocks to earn a profit on a sort of arbitrage—I’m not advocating for that, and I wouldn’t call that “investing.” Instead, set that shit on easy mode. Buy and hold low-cost index funds for the next 30 years. 

I know it’s incredibly annoying to have someone tell you, “Okay! Cool. Now go buy some index funds,” and then walk away without another word.

People go to school and spend their entire careers figuring out which funds to invest in, so I realize that’s not super useful.

That’s why I always recommend people consider investing with a brokerage firm or roboadvisors (Betterment, Wealthfront, M1 Finance, etc.), where your only “job” is to deposit cash, and an algorithm determines how to invest it based on your goals. It couldn’t be easier—and you get a low-cost, diversified portfolio of exchange-traded funds (ETFs) that represent the US stock market, international market, fixed income, emerging markets, and more.

This provides exposure to other categories that outperform the S&P 500 sometimes (yes, really) and it’s likely to your benefit to diversify beyond large, US companies—check out the Callan Periodic Table of Investment Returns if you’re skeptical, where you’ll see that in the last 20 years, the S&P 500 was only the top performer 15% of the time.

What’s an appropriate amount to invest?

Remember how we noted those ducks we wanted in a row prior to starting? If you’ve already eliminated all high-interest debt and your emergency fund is straight chillin’ on the sidelines, it’s wise to focus your future “saving” efforts (and excess cash flow) on investing so you can build wealth. 

You may also like these posts:

• Why You Probably Have Too Much in Your Emergency Fund

• Why Index Funds & ETFs are a Better Bet for Successful Investing

• Setting Up My Perfect Financial System: Money Mapping

• How Your Investments are Taxed

This Twitter user (whom I don’t know, but their tweet was suggested to me) makes a good point: We’re throwing around the word “recession” a lot for an economic reality that doesn’t seem to mirror typical recessionary conditions. 

And to quote one exchange in the replies: “What’s the difference? If things are more expensive for households, why shouldn’t people consider this a recession?”

The answer? “The members of the households in question haven’t lost their jobs.”

In all our concern about our dollar not going as far, we forget: The Federal Reserve has created this environment by design. They want you to buy less. Their hope is that you, the consumer, will be able to afford less—and therefore buy less—to lessen demand and give supply a chance to catch up. (Which will, yes, lower inflation.)

Of course, it doesn’t feel good, in the same way that committing to a New Year’s resolution to “eat better” after three straight weeks of chugging spiked eggnog and devouring Christmas cookies by the tubful doesn’t feel good. The party’s gotta end at some point, right? And if the aforementioned “party” was mostly just due to printing trillions of dollars and—now—things are slowing down because we’ve stopped printing? That’s (probably) a good thing. 

Oh yeah, and about all that printing…

In a way, the stock prices we saw last year were fake—much like the “growth” was kind of fake. Maybe that’s why now it feels like we’re reverting to a less fun “normal,” to price-to-earnings ratios that exist in a realm of reality that’s sustainable.

Why do price-to-earnings (P/E) ratios matter? Well, they’re not the only thing that matters, to be sure, but they’re a decent way to determine how undervalued, fairly valued, or overvalued the stock market is at any given moment—the P/E ratio answers the question, “How much do I need to spend in order to earn a certain amount?” 

Since the prevailing theory (that I’ve come across, at least) is that modern monetary theory and its subsequent quantitative easing got us into this mess, then it stands to reason that looking at the price-to-earnings ratios pre-money printing would represent “normal”—the undistorted price signal. Once we get back to those P/E ratios, then we’d be back to “normal.” 

So what would that look like? Quantitative easing kicked off in March 2009. As soon as the banks started writing off the bad mortgage-backed securities debt in 2009, the P/E ratio skyrocketed (because earnings were low or negative), jumping from a median of around 15 to a staggering 123 in May 2009. But to figure out what was “normal,” we can probably use the P/E of around 15—the average before the Great Financial Crisis and the subsequent Fed triage. 

And now? Our current P/E ratio is about 19. This isn’t a huge difference compared to historical highs (hello, low-40s in the peak of the dotcom bubble), but it’s still far off enough that I’m prepared to make…

My unhinged thought experiment about the bottom that shouldn’t be taken seriously

In order to reach the “equilibrium” of the pre-QE world (assuming that really was equilibrium), S&P 500 would have to come down from 3,825 points to about 3,200 points, assuming earnings per share stay consistent at the current 12-month average of $207. If earnings go down, it would have to drop below 3,200 points. But—and here’s the bull case—if earnings per share go up, the drop back towards “normal” may not have to be as precipitous. 

How much would earnings per share have to go up in order for prices to remain at 3,800 points and hit a P/E ratio of 15? From $207 per share to about $250 per share, or an increase of about 21%.

Earnings have never been anywhere close to that high—in fact, somewhere around $207 is the highest they’ve ever been—but if the S&P 500 increases profits (perhaps by finding new customers in other countries, identifying efficiencies, or simply doing more with less), a further drop could be mitigated. 

But the wealth destruction is already underway, and if your theory is that “QE broke the markets,” we have a decent guess of how much further we have to fall to un-break it (the S&P 500 at roughly 3,200 points). We could always start by eliminating excess like this, documented in a “day in the life at LinkedIn!” TikTok that got absolutely incinerated on Twitter.

To put it in perspective, a fall to 3,200 points would be an approximate 16% drop from where we are now. At the time of this writing, we’re already down 20% from the start of the year; all in all, it’d be a 33% drop from where we started the year; coincidentally more or less in line with the average drawdown of 33.5%. Once we reach a P/E ratio of 15, we’d be back at the “equilibrium state” of the pre-QE world (or rather, what we could consider “undervalued” to “fair value”—but these terms are starting to feel like the same thing).

The actual issue? Wage stagnation

“Oh, great, Katie’s fetishized socialism and liberal woke politics have entered the chat!” Not so, my friends. These circumstances are connected, and it’s all in the name of (a) improving quality of life for workers and (b) boosting profits and growth. Stick with me!

Here’s the thing: The recession label bugs me because it distracts from the actual reason people are struggling: wage stagnation and worsening wealth inequality. 

If the price of your gas increasing by 53% from the start of the year is enough to force you into living paycheck-to-paycheck (or worse, into debt), you were already way too close to the edge and probably underpaid. For many, this is not an issue of irresponsible spending or poor money management—the “bottom 50%” of Americans have an average annual pre-tax salary of $19,000. Yeah. 

Roughly half the country being unable to afford living (and working) in it much longer simply isn’t sustainable, and we have to find a way to balance shareholder interest with the broader employable workforce’s interests. Sure, we want corporate profits to increase in the name of the almighty shareholder—but if the price is great at the expense of a fair wage for the employees? We’re robbing Peter to pay Paul.

The solution to both of these problems is the same thing

How do we do it? Hear me out: We treat employees better, not just hope that those same underpaid employees hold stock. Need an example of what happens when you put employees first, compensate them fairly, and provide job security?

Look no further than Southwest Airlines. Southwest Airlines is one of the only domestic airlines that’s never gone bankrupt and—up until the global Pamela Anderson—had 47 years of consecutive profitability, a feat that’s unheard of in the airline industry. They’re the quintessential MBA business case study.

How does Southwest do it? Well, for starters, they committed early to a disruptive, scrappy business model, and their late founder, Herb Kelleher, was creative. One of his main beliefs in business was that your employees need to come first. They’ve never furloughed employees. The pay is fair. They treat people well. They have a 9.3% dollar-for-dollar 401(k) match and other excellent benefits, including great health insurance, free flights, and profit-sharing. Maybe that’s why they were ranked in Glassdoor’s “Top 10 Best Places to Work” for 10 years in a row. (Can confirm these things; I worked there for five years.)

Southwest is in a league of its own when it comes to impressive, sustained growth and profitability and being known for treating employees excellently, if not a little irritating during Group C boarding (IYKYK). Their employees are known for consistently going above and beyond, flying in the face (pun intended) of the stereotypical “rude and overworked airline employee” trope (though, not without the occasional disappointing mess, to be fair).

A workforce that’s paid well and happy must not be very productive, right? All those benefits must come at significant expense to the company, huh? Well, it’s a long-term game, and Southwest is winning. LUV (Southwest’s ticker symbol) has been one of the best-performing stocks in the S&P 500 over its 40+ year history. 

When you treat employees well and pay them fairly, they’re loyal to you. They work hard for you—kinda like the four employees responsible for ingeniously hedging fuel prices to save the company $1.2 billion this year alone. 

Contrast this with Amazon’s current hiring dilemma: They’re running out of people to hire because their turnover rates are so high. It’s projected that—if they continue business as usual—they’ll run out of new employees by 2024.

Amazon is a hot growth stock, but it’s not sustainable. White-hot growth doesn’t last forever when you treat your employees like garbage.

The economic growth we need will not come from a workforce that’s overworked, underpaid, and considered expendable. For our classic American innovation and ingenuity to get us out of this one, we must do as Kelleher said, and make an “audacious commitment” to “put employees first, customers second, and shareholders third.” Turns out it’s pretty good for sustained profitability.

The good news? While the stock market and supply chains will likely continue correcting, the job market is still strong—and by fixing the way we treat (and compensate) workers, we’ll likely see these other economic growth factors improve, too. A win-win. Maybe things have to get worse before they can get better; the metaphoric Amazon has to run out of workers (or rather, realize that’s where they’re headed) before their labor practices will turn the corner. 

Either way, there’s reason to believe we’re in the worst of it now—and avoiding a true recession is entirely possible, if not probable. 

Timelines for saving up for big purchases: Saving vs. investing

I hear people ask fairly frequently: “I want to buy a house in X years. Should I invest that money?”

Then I ask: “Well, is your timeline flexible?”

If you’re signing a blood oath with your lender in seven months and you need that down payment ready to rock—or else—it’s probably not wise to put it in the stock market and risk losing some of it, like many of us are experiencing in this bear market.

But if you’re like, “Meh, I wanna buy a house…eventually…probably in like, three to five years. But who’s counting? I don’t know,” then I wouldn’t let that down payment wither away in a savings account.

Suggestion #1: If you need the money in 12-18 months and your timeline is not flexible, don’t bother with investing. Just save it instead.

Aside from the risk of losing money you’ll need, the bigger issue with this approach is the fact that investing for a few months won’t really do much. Sure, you may make a few hundred bucks, but really, investing is a long-term game. It’s not intended to be something you do for a few months then call it a day.

Investing builds wealth over years of compounding. If you don’t have years (and you’re not willing to wait), just keep it in cash.

Now, if I were Ruler of the Universe, everyone would invest in their twenties before doing anything major like buying a house—everyone would have a few hundred thousand by the time they needed to make this decision, so it wouldn’t be an issue. But since I realize that’s not always how people operate, I think it’s important to state a timeline explicitly here.

That said, if you’re still in the process of building something as big as a down payment (meaning you don’t have the full amount yet) and you do have a few years ahead of you, investing can supercharge that experience. (And while I have your attention about housing, this post helps you determine whether you’re better off renting or buying.)

Maybe you don’t want a down payment—maybe you want a Soul bike (again, guilty) or a $4,000 pure-bred doodle shmoodle dog from a breeder named Anastasia (though, may I humbly suggest adopt a shelter animal like Sam Cat?). These purchases aren’t worth tens of thousands of dollars, yet they still need to be budgeted for separately from regular spending—and if you’ve got several years to accumulate the funds, investing in something flexible (like a brokerage account) probably makes sense.

“But Katie, what about the taxes in a brokerage account? Shouldn’t I avoid taxes by just saving my money instead?”

I understand the fear around paying capital gains taxes, but the interest you earn in a high-yield savings account is also taxable. In fact, it’s taxed at a higher rate than long-term capital gains and the same rate as short-term capital gains.

That means if you’re afraid to invest for something that’s still a couple years away for fear of paying long-term capital gains taxes on the gains, you should also avoid high-yield savings accounts—because you have to pay tax on that growth, too.

That’s why your HYSA provider sends you a 1099-INT for tax season. The interest is taxed like ordinary income, meaning it’s taxed at your marginal tax rate.

Check out this Instagram post where I broke this down with an example that demonstrates why the HYSA may be costing you more than you think if you’ve got a flexible timeline of more than a couple years.

TL;DR: Taxes should be the least of your worries when it comes to make the saving vs. investing decision. At the end of the day, if you’re paying capital gains taxes on your earnings (usually 15%), it means you made money.

The most important thing is time horizon.

Suggestion #2: If you’re saving up for a discretionary purchase that costs less than $10,000 but more than what your monthly budget allows for, designate a few categories in your budget that can be put “toward” that saving goal each month.

When saving up for my bike, the thing that I tried to avoid was dipping into money that I would have otherwise been saving and investing to pay for it. Instead, I wanted to defer existing spending into the future where possible.

Another high-level example:

Let’s say I spend $3,000 per month and invest $2,000 (so my total income = $5,000). If I’m saving up for my [insert expensive thing here], I’d ideally be shaving some money off that $3,000 spending chunk each month vs. dipping into the $2,000 per month I’m investing. 

Maybe I have $300 earmarked for travel and $300 earmarked for shopping. I’d try to file that $600 chunk that would’ve been spent in those two categories for my future expense and not spend it, waiting for the $600 chunks each month to accrue to the point that it’s enough for [thing I’m trying to buy] while still meeting the same investing goal every month.

Remember, money is about priorities. You can buy expensive stuff and still meet your investing goals—you simply have to plan for it. And maybe you’re not earning quite enough yet to where you can defer the entire amount from present-day spending, but the bulk of the savings for the discretionary item should ideally come from money you were planning to spend anyway. 

Too often, the chunk of money we’ve earmarked to invest is the first place we go when we need cash. Instead of investing it, we set it aside and blow it on something called a Cloud Couch from Restoration Hardware (which I’ve been told is all the rage with the Zillennial YouTubers), investing goals be damned.

It pains me so: The power of compounding is on your side to grow that investing chunk to Cloud Couch-levels over time instead of spending now.

Using your savings: An order of operations for spending

Maybe you’ve got plenty of money lying around and you’re ready to make a big purchase. The good news is, if you’ve followed the first two suggestions in the “save up” period, this shouldn’t really be a question: You’ve likely got the cash (or investments) earmarked somewhere already. 

But let’s say you’ve found this post on the other side of saving. You’ve saved in an emergency fund. You’ve saved in a brokerage account. You’ve got a Roth IRA. You’ve got funds to draw from everywhere. Where do you pull from to make your big purchase?

Here’s how I think about this decision, based on the “value” of the money in each of these accounts from worst to best:

• The worst place to pull from: Your Roth IRA

  • While your Roth IRA can technically function as a back-up emergency fund because you can access your contributions at any time, I wouldn’t recommend it. Your Roth dollars are the most valuable ones you have because they’ll never be taxed again. They’re a veritable wealth snowball, and you don’t want to do anything that’ll make that snowball smaller unless you absolutely have to. If you do pull out (your limited!) Roth contributions, you can’t retroactively go back in and re-contribute those same funds for the original contribution year (if I put in $6,000 in 2020 and took it out in 2021, I can’t then go back and put $6,000 of 2020’s contributions back in because 2020 is already over). 

• The second-worst place to pull from: Your Emergency Fund

  • While needing an at-home stationary bike that connects you to a portal of beautiful, sweaty people can often feel like the closest thing to an emergency you’ve experienced since the Kardashians announced their new show on Hulu, it’s something we should plan to buy, not buy in a frantic haze. The emergency fund is the backbone of your financial life, because it’s what enables you to invest comfortably. Without a fully stocked emergency fund (read: a cushion of cash you could pull from if shit hits the fan), you expose yourself to unnecessary risk. The amount you need in your emergency fund definitely varies depending on your lifestyle, but in general, I wouldn’t recommend using this for a purchase you can plan for.
    The worst thing you can do, in terms of opening yourself up to a lot of financial risk, is use your entire savings to put a down payment toward a house. When you buy a home, you’re also buying a 30-year headache. Shit breaks, and it costs money. Buying a home is a situation that necessitates an emergency fund—if you have to use yours to get a house, it’s not yet time for home ownership.

  • Here’s where I keep my emergency fund.

• The slightly fine place to pull from: Your taxable brokerage account

  • Notice how I said slightly fine. I’m not outright condoning dipping into your taxable brokerage account, but if you gotta pull from somewhere, it’s a good option. Because the dividend income and bond yield in this account is being taxed every year and you’ll be taxed on your gains when you eventually sell, it’s less valuable than the money in a Roth IRA. It’s also not as serious a line of defense as your emergency fund is. If money is in your taxable brokerage account, that money is usually excess.

  • After all, someone that invests aggressively for years will probably amass a pretty big sum in their brokerage account and may not keep much in cash. If you’ve got $150,000 in a brokerage account and you want to pull $1,000 out to buy a MacBook, have at it. What I’m trying to dissuade is someone who just started investing and has $3,000 in a brokerage account from pulling out $2,500 to buy a used Peloton on the black market (at least get the Soul bike; it’s sturdier). Just kidding.

• The technically optimal place to pull from: Your actual checking or savings account

  • If you’re like, “Thanks, Captain Obvious. WTF?” Cash is your least valuable asset. It’s a melting ice cube, losing money to inflation every year. This is why Suggestion #2 above (planning intentionally for your purchases) matters so much. It allows you to shuffle a few hundred bucks every month into a nearby cash account that you can use without having to sell any assets in a brokerage account (or, worse, the Roth IRA).

  • This is where we tie everything into a nice little bow and circle back to our original “saving up” piece. Ideally, you’d use money that’s “leftover” in checking from spending every month. What happens when you under-spend for a few months in a row? You ultimately end up with a nice little pool of extra cash from your cash flow just hanging out, unspent. That sum is the ideal chunk to spend on whatever it is you’ve got your eye on. You aren’t disadvantaging your investing goals, you’re not putting yourself in a dicey position with your emergency fund, and ultimately, it’s money that would’ve or should’ve been spent anyway.

  • I realize this won’t work for something as big as a down payment. You don’t just accidentally underspend enough to buy a house; that’s an act of intentional wealth accumulation. Here’s how I personally think about it: I put thousands of dollars every month into a brokerage account. Whether I use that brokerage account as a source of income in early retirement or use some of the money later to buy a house is irrelevant at this point: What’s important is that the money is building wealth more quickly than if it were just chillin’ in a savings account.

With my panini bike purchase, I had been consistently several hundred dollars under-budget for the previous six months or so. I know this was the case because I track my income, spending, and investing every month, so I could see the portion allocated for spending, and I knew it was hanging out in checking, waiting to be spent. I didn’t know I was going to end up spending that money on a bike, but I knew at some point something would come along.

Being able to get that bike was the product of months (if not years) of making decent financial decisions most of the time. It didn’t require perfection, just attention (and tracking; lots of tracking.).

Conclusions

I reiterate: Your saving and investing plan doesn’t have to be perfect!

But it’s the difference between having some semblance of a plan and tripping through life, Discover card in outstretched hand, swiping indiscriminately and squinting through the pain of opening the bill PDF.

Every layer of this whole “financial wellness” game layers on top of each other. First comes the budget. Then comes the different types of accounts. Then comes an article like this one, that builds on those two fundamentals as a way of determining the most optimal way to live a real life within the parameters of the financial structure you’ve created for yourself.

…Until it starts to feel like you are living through something special and novel, and, oh, by the way, everyone who seems intelligent enough to have a worthwhile opinion on the matter seems to think so, too. 

It is—in a word—disorienting, and it can create feelings of uncertainty and fear about whether or not continuing to invest or “staying the course” is the right move, or if we should go against our better judgment and start deviating from the plan. 

The bears (and those who simply insist this time is different) have compelling logic to suggest the underlying conditions we’re facing now have changed, and therefore we should expect different outcomes in the future than in the past. 

Fair enough, right?

What’s supposedly different this time?

I wanted to identify a few key metrics I see frequently pointed to in the media as proof things are different now. I ended up with three primary symptoms we point to as evidence of problematic “now” times:

1. Overvalued markets (i.e., stocks being at all-time highs), as measured by the Shiller PE (or “CAPE”) ratio (though at this time of writing, we’ve come down quite a bit from previous all-time highs)

2. Low interest rate environment as measured by treasury bond yields (this one matters because it’s usually the culprit people point to when they accuse the 4% rule of being invalid in lower interest rate environments)

3. High inflation as measured by the consumer price index

The optimist in me wants to point to all three and say, Look, we just came out of an unprecedented global Pamela Anderson—as a result, there are going to be some oddities which will take a little while to revert back to the mean.

But at the same time, I want to know if there were any sort of historical precedent for these things (and more specifically, these things happening simultaneously). 

So to be very clear: I’m not trying to predict the future—I’m only trying to explore if what’s happening (in these three key metrics that keep appearing in financial media) is reminiscent of anything that’s happened in the past.

Let’s start with overvalued markets (as measured by the Shiller PE ratio).

High valuations matter because they basically indicate how much money you’re going to spend on a security in order to make a certain expected return. 

To use a more tangible example, imagine you buy a rental property for $100,000 to earn $1,000/mo. in rent. Your return on that $100,000 is going to be greater than if you had to spend $200,000 to earn the $1,000/mo. That’s why people worry when stuff is overvalued—because you don’t get as much bang for your buck. 

One of the main calculations used to assess if the market is fairly valued? The Shiller P/E ratio (stands for “price to earnings”), which basically does a 10-year lookback of prices divided by earnings. 

While some have called into question the validity of this measure as it looks backward, not forward, it’s generally accepted as one of the strongest metrics we have to analyze valuations. I’m going to use the S&P 500 since it’s the most popular benchmark.

Moreover, since we’re less concerned with the validity overall of the Shiller P/E ratio as a means of judging valuations and more concerned with how current P/E ratios compare to those of the past, it should still be a good relative benchmark for whether or not we’re in ~precedented~ times.

Check this out (I pulled this data from here and then ported it into a spreadsheet so I could look at it over time against our other factors):

At the time of this writing (June 2022), the Shiller P/E ratio for the S&P 500 is 29.17. In May when I pulled it, it was 32.46. The average Shiller PE ratio over the time period illustrated above is 16.94, so it’s probably safe to assume that “overvalued” is a fair characterization, though this source notes the long-term historic trend considered “fairly valued” is 20.1. We’re approximately one standard deviation above “fairly valued” right now, despite being 22% off all-time highs.

(Again, it bears repeating: We’re not trying to question the work of Nobel Prize-winning Yale economist Robert Shiller here. We’re just trying to understand how “now” compares to “before.”)

From looking at the chart, it’s certainly higher than the average but reminiscent of 2018 values. It’s quite a bit lower than the peak around the Dotcom Bubble (which appears to have hit 42.91). 

My major takeaway: Yes, valuations are high when compared to the 20th century, but—and this is my subjective assessment—not unprecedented in the truest sense of the word. 

I didn’t look at this chart and think, “Oh my God, I’m getting out of the S&P 500 right away!” but I did think, All right, this is…potentially another indicator that diversification outside of Large Cap Growth is sensible. 

If domestic Large Cap Growth is technically overpriced from a historical perspective using this measure, then I’m thinking: OK, it’s not “cheap” right now. Let me make sure I’ve got exposure to indices that track other stuff, too. (This is my approach always, but perhaps even more so when valuations on the Big Boiz are overpriced.)

The hard part about shaping your decision-making around single metrics like the Shiller PE ratio alone, though, is that it’s not a crystal ball. While it’s true we typically see high PE ratios associated with bubbles (and subsequent corrections), it is cyclical, and the data indicates it’s better for investors to hold on through the market cycle instead of attempting to time entry and exit. 

As Two Centuries Investments puts it, “CAPE cycles are mean-reverting. However, this mean reversion does not only occur as a result of crashing market prices, it can also result from periods of modest market returns where earnings growth catches up and restores the valuation multiple. This second outcome is one of the reasons why selling stocks altogether leads to missed compounding. The other reason is that valuation ratios get you in and out too early.” 

To put it bluntly: History may not repeat itself, but it certainly rhymes. 

Cool—so there’s that. S&P 500 overvalued? Yep. Anything you can or should do about this one? Unclear. So what’s next?

Low interest rate environments (as measured by treasury bond returns).

As a reminder, people in the financial independence world worry about low interest rate environments because it impacts bond yields, which are the #SturdyGurl lynchpin of the 4% rule. While I’ve done an episode about the 4% rule in the past and addressed these concerns specifically, they’re still helpful for this analysis. pushes glasses back up nose

Since most of the data we use to support things like the 4% guideline for safe withdrawals goes back to the 1920s, it seemed important to look back that far—it was hard to find stuff on major websites much older than the 1960s, but fear not, dear Freaks in the Sheets, I prevailed. I found this sketchy back-alley website (OK, that’s not fair—it was the NYU Stern School of Business site that just looks like it’s from the 1920s), downloaded the data set, and found this: A funky, sharp bell curve of 10-year T-bond returns. 

Right now, it appears that we’re at the end of a downward trend that is lower than it’s ever been before. The average t-bond return in this data set is 4.8%; right now, we’re sitting at around 1.51% (as of 2021). 

So confirmation of our second bias appears to be clear: We’re in a lower interest rate environment for 10-year treasury bonds than we’ve been in before, though it’s interesting to see this chart plotted all the way back to the 20s when one considers that we often see the chart “start” in the 70s and appear to be a perilous drop downward.

The last decade appears to be a rough mirror image of, say, rates in the 1940s.

Here’s the thing, though: If we’re to believe the Fed, then these should begin going up. It’s not like it’s been multiple decades since we’ve seen higher yields. As recently as 2006, the rate was 4.7%.

It’s worth asking: Do we need to treat bonds differently in a 2022 portfolio than in a 1992 portfolio? Are our “old faithful” #SturdyGurl bonds not as deserving of a spot in our portfolio? It’s been argued that the Fed’s actions have forced people into alternative assets (like real estate) and driven housing inequality, and when you see bond yields hitting historic lows, it’s compelling.

Cool—so we’ve confirmed t-bond yields are unprecedentedly low in recent years. 

What’s left?

High inflation as measured by the consumer price index.

Ah, yes. Good ole’ inflaish. Everyone’s favorite dinner party topic of conversation!

I’ll let this one speak for itself:

Hm. So we’re in a recent inflation high, but if someone showed me this chart without any other context, I’d think whatever it was measuring had been going down, for the most part. 

This highlights a limitation of all of this “let’s examine the historical context” stuff—it’s not predictive. It doesn’t tell us where we’re heading, just where we’ve been. And while it’s good for making us understand whether or not what we’re experiencing now has ever happened before, it’s not good for indicating what’s going to happen next.

So what happens when we map all three of these factors onto the same chart?

Let’s get naughty and commit some chaotic chart crime by indiscriminately layering these lines on top of each other despite the fact they’re measured with different metrics and enraging sophisticated data scientists everywhere:

THE HORROR!

Please excuse my egregious plotting things measured by different metrics on the same graph. Forgive me, data gods, for I have sinned.

But I wanted to be able to look at all three of these things (relative to their histories) and see if we’ve had relatively high inflation, overall low bond returns, and relatively high CAPE ratios simultaneously before. 

The periods that most closely resemble the period we’re in now? 

Well, the ‘40s, for one thing: High relative inflation and low-ish bond yields, but technically undervalued CAPE ratios. And the late ‘90s: When we had similar CAPE ratios, but slightly higher bond yields and lower inflation. 

So my experiment nets an interesting outcome…

We’ve never been in a period exactly like this one if you consider current inflation, bond yields, and CAPE ratios occurring at the same time…

…but each variable on its own is not unprecedented, with the exception of the bond yields, which have been at historical lows in 2020 and 2021.

(Though, I’d take this time to remind us all: Rates were low for a reason. Our global panorama created a lot of unexpected economic strain on our system that didn’t stem from businesses making bad decisions or consumers’ changing preferences, for what it’s worth.)

My general takeaway after spending an embarrassing amount of time tinkering in my little data set with rogue chart creation was that, Yeah, things are a little haywire right now, but this doesn’t look drastically more concerning than other turbulent times in the past (or periods with much higher inflation and low valuations from crashes). 

It’s clear that the economy and markets can’t continue on this way, but I don’t see any reason why we can’t return to more realistic valuations, raise rates (and by extension, bond yields) slowly, and ride out the (still historically low) inflation while the kinks in the post-pandemic world get worked out. 

Maybe I’m just a dumb optimist, but I don’t know that I’d classify the severity of our current situation as any “worse” or “different” from the past. Because: History rhymes.