I said this a few times in my replies to comments on different posts. I’d like to put it in a separate topic for everyone.
What I observed is a tendency among some people to over-optimize, in other words trying to wring out every last drop. It’s not necessary. It can even be counterproductive in some cases. It’s better to leave some money on the table.
I wrote 3 Good Money Habits Going Obsolete In a Low Interest Rate World a few years ago. Those habits are still obsolete today. There simply isn’t much point in paying bills as close to the due date as possible, transferring back and forth between checking and savings, and refusing to give Uncle Sam an interest-free loan.
When I said transfer $1,005 to a prepaid card before putting $1,000 into the linked savings account, someone asked why $1,005 instead of exactly $1,000. When I said transfer in $2 every two months to keep the account active, someone worried that those $2 every two months would pile up in the account.
On doing the backdoor Roth, some insist that the money should go into a money market fund and be converted the very next day, or even on the same day, in order not to have any earnings and pay taxes on the earnings. I simply invest the money normally and convert at a later time. I’m happy to pay taxes on a small amount of earnings.
On doing the mega backdoor Roth, some say you should do a split. Rollover the after-tax contributions to a Roth IRA, the earnings to a traditional IRA, and then possibly roll the traditional IRA back to the plan. I simply roll both the contributions and the earnings to Roth. Again I’m happy to pay taxes on a small amount of earnings.
On using an HSA, some people say don’t take any withdrawals and let 100% of the money grow. I withdraw every year to cover the current expenses and only grow what’s left. I give up some tax-free compounding.
In each of these cases, what I do isn’t necessarily the most optimal. I deliberately leave some money on the table. The battles are won by having the high-yield savings accounts, doing the backdoor Roth, doing the mega backdoor Roth, and contributing to the HSA. It’s not necessary to stretch for the kill by holding back another $5 here, $2 there, or avoiding paying taxes on $100 in earnings.
Leaving some money on the table when you win the big battles minimizes the chances that something goes wrong. I see it as small prices to pay for the big wins.
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Agree 100%. Plus, there’s a time cost to micromanaging the various activities to maximize optimization.
Agree 100%. We want to be Pound Wise and Penny foolish 🙂
Harry @ RSG says
Or as they say, don’t sweat the small stuff. Only thing I disagree with is the HSA 🙂 But I don’t think I’m going to change your mind on that so won’t argue for it.
Sam Seattle says
Thanks, Harry, for reminding us to be wise.
Money for Something says
This reminds me of what William Bernstein argues so often in his books about asset allocation — that it’s far, far more important to simply stick with the allocation you’ve chosen, than to have chosen the optimal allocation in the first place. Even still, it’s so common to see people fretting endlessly over optimal allocation selection, and frequently switching allocations.
(BTW, totally separate topic, kudos on the eleven40 theme you chose for this site! That’s the one I ended up going with on my personal site as well…)
I can be guilty of this at times, but thankfully less often now that I have significant investments and can see the plan working and a healthy paycheck even after saving over 50% of my gross. New to the site, enjoying the depth of your articles. You mention a 5% savings account. Have you talked about this in a post? Curious about that.
I don’t currently have a NetSpend prepaid card + 5% savings account, but I’d like to get one. Is there a way around the direct deposit requirements with NetSpend? Will a standard ACH transfer be sufficient for that requirement?
Harry Sit says
Short answer is yes. See the linked article for detailed step-by-step.