Rich Girl Roundup: Shifting From Medium to Short Term Goals

Katie: Welcome back, Rich Girls and Boys, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, Katie Gatti Tassin, and every Monday morning we're gonna dig into an interesting money discussion. But before we do that, here's a quick message from the sponsors of this segment. 

Sponsored content: Here's a truth bomb that will make you rethink your skincare budget. 90% of it actually goes to waste, because it gets wiped or sweats off. Droplette is here to fix that, and to help you stop wasting money on skincare products that don't work. With their breakthrough patented Micro-Infusion and serum capsules, Droplette helps you get the absolute most out of your skincare ingredients, and gives you needle-free, clinical-grade results from the comfort of your home. Droplette’s breakthrough handheld device transforms serums into thousands of tiny, high-velocity micromist drops that absorb into the skin 20 times deeper than topicals. Plus, you can choose a variety of serums to address specific skin concerns, like blemishes, wrinkles, or uneven skin tone. For a limited time, listeners can get 50% off your Droplette device at droplette.io, and use code MoneywithKatie. That's droplette.io, code MoneywithKatie.

Katie: So it is a vacation week for us here at Team Money with Katie, but this week's upcoming main episode is a really solid 2023 investing lesson about buying, holding, and the idea that this time it's different. So I think we would all agree that the stock market has been bewilderingly irrational this year. So we're gonna use that as an opportunity to dig into the hashtag #data, but in a fun way. Okay, onto the Roundup. Henah, how you doing? 

Henah: I'm good. We're recording this now at the end of June, so by the time I hear this, I'll be settled in my new home in Atlanta, which is exciting. And you'll be winding down your time in Fort Collins. So how are you doing? 

Katie: I'm doing well. Friendly reminder that we should probably just start putting in the top of every show, which is that I am not a licensed financial professional. Please do not think about this as if it is financial advice. This is really just us musing through some of the financial dilemmas that we all face. So if you are in a really serious predicament with this question, please be sure to talk to a professional. 

I'm kinda loving this question this week from Gillian, because it's all about transitioning savings goals. So Gillian asks, “How do I transition from a medium-term savings goal to short-term? I started saving for a house seven years ago with a taxable brokerage account, and I now wanna be able to buy a house within a year or so. How do I shift and plan for this now short-term goal, especially if this brokerage account is invested 100% in the S&P 500?” 

Henah: Well, Gillian, you and I are in the same boat, so I also have this question. We're not buying a house in the next year, but that is something we're working on. So Katie, can we maybe first define what we would call medium versus short-term goals? 

Katie: Yeah, I think this is a slippery one, but if I were really pressed, I would say medium is like five years away and short term is like anything within 24 months. So anything within two years is starting to feel shorter-term, where you're gonna wanna start thinking about changing asset allocation theoretically over time. 

Henah: Oh, asset allocation. Sexy. Okay, that makes sense to me. This person, Gillian, is starting with an account that they had on a taxable brokerage account and now they wanna shift. So what would your next step be when you're considering this? 

Katie: Yeah, so I had coffee on Monday with my friend Shelby, who's a CFP, and she is a wealth manager. She's amazing and very, very good at her job. 

Henah: Shelby, do you need friends? 

Katie: Shout out Shelby. I know she listens to this show, so she's probably driving down the highway right now in her Bronco, laughing to herself. But she is really, really great. And so I asked her this question 'cause I said, “Hey, we're going through our rounds of listener questions and I have a hunch on how I would approach this, but I'm actually really curious from your professional perspective what you would say.” And she had kind of fortunately given me an answer that was very similar to what I was thinking, which is effectively thinking about it like you’re dollar cost averaging out the way that you dollar cost averaged in. So starting out by looking at the overall returns of the shares that you would be selling, and being like, okay, I'm gonna look at the ones with, let's say, as long as it's all long-term capital gains, which I would assume most of it is if you've been contributing for seven years, the bulk of that should be more than a year old. But looking at the, I think she said the highest cost basis assets first. So where are your gains? Where are you gonna pay the least amount of taxes on your earnings? Starting there, and dollar cost averaging by selling…you can even set this to automate. Okay, every two weeks or every four weeks, I'm gonna sell a chunk so that I'm slowly but surely taking this from something that is very risky to something that is very risk-averse.

And when I asked her what her perspective was on the asset allocation you should move to, she was like, “Hey, I would just go money market funds. You're getting 5% in a money market fund right now, in that brokerage account. So if you wanna just start cashing out and moving into a money market, that's probably the easiest way to do it if you're gonna be using this money within 12 months from now.” 

Henah: And can you help us define what would we call a money market fund? 

Katie: Money market funds, they're basically a type of mutual fund that's gonna invest in lower-risk securities, whether that's cash, cash equivalents, maybe T-bills. But they do offer a lot of liquidity, which is really nice because you can very quickly convert that to cash. So a few examples of money market funds that are offered by Vanguard. You've got, just as an example, this one: It has a 5.05% yield and a 0.1% expense ratio. It's short-term US government securities. The ticker is VMRXX, the Vanguard Cash Reserves Federal Money Market Fund. They have another one that's doing 5.03% with a 0.11%, which is the VMFXX Vanguard Federal Money Market Fund. So I think you have options, but that was just something that she threw at me. 

And I think you could also probably, if you wanted to go into like a high-yield savings account that's yielding 5%, just getting out of the really aggressive asset and moving into something that is safer but still has a decent yield. But we both were kind of into the idea of dollar cost averaging out the way that you got in, especially if things are down, because that way you're not locking in everything all at once. If you're really up on some of your holdings—that's not really a very sophisticated way to say that, but let's say you're looking at something and it's up 15%. Sure, you could be like, “Ooh, it might go up even more. Let me wait.” Or you could be like, “You know what? I'm thrilled to be up that much. I'm just gonna sell everything now and lock in that gain.” I think that's another consideration, but… 

Henah: Like a bulk sale, basically. 

Katie: Yeah. But I do think theoretically, if you have been investing for seven years regularly into that account, chances are your returns on certain shares are gonna look really different than other shares. It really depends on where you're at. If you have enough, if you're good to take all your chips off the table, so to speak, all at once, or if you want to dollar cost average out.

Henah: I have a couple follow-up questions. So, one, you kind of addressed this with the high-yield savings account. Just to confirm, I guess if you're planning to take it out in the next year, does it matter if those things live in a CD or a money market fund or a high-yield savings account, as long as that timeline falls within what you are hoping for? 

Katie: I wouldn't say it necessarily really matters. I would just look at yields and I would also think about the strategy you're using. For example, if you are just making automated sales every two weeks, it's probably easier to keep it in a money market fund 'cause it's all gonna just stay in the brokerage account, versus having to transfer money from a brokerage account to a savings account every two weeks. So it might be easier and lower friction from that way, but I think if you're going the, “I'm happy with these returns, I'm gonna sell everything all at once and just put it somewhere safe so it's ready,” then I think you'd have a lot more flexibility as far as just moving one lump sum into either a money market fund, a high-yield savings account, or a CD. 

Henah: That leads me to my follow-up question, which is, you talked about dollar cost averaging out and trying to avoid the capital gains tax. So to confirm, a lot of these are FIFO, first and first out, right? So the longest shares that have been there should theoretically have passed that time. But should someone like Gillian, who is transitioning a lot of this stuff out, prepare for a tax bill in some way throughout the year while also doing this?

Katie: Yes, there would be a tax bill. So there's really no totally evading capital gains tax. We might try to minimize in the sense that we wanna, to your point about first and first out, we might wanna try to just make sure we're only selling long-term capital gains, but theoretically most of them probably should be by now anyway, so that's probably not as much of a concern. But yes, you're gonna have a tax bill on those realized gains kind of no matter what. It's a great call-out: Something that you'll wanna prepare for come April is just that you're probably gonna be paying about 15% of those earnings in April or whenever you pay your taxes.

Henah: Yeah, I just didn't want anybody to be like, “Cool, I moved all my money here and now look at all this,” because you're still gonna have some money on the hook. And then my final question, how far out do you wanna start making that shift? Is it as soon as you know, whether that's two years or one year, or is it something that you kind of recommend keeping an eye on and then determining, okay, well, I actually foresee this as being a thing in the next six months and now I'm gonna actually ramp this up? 

Katie: Yeah, man, it's a good question. I think, and I've talked to Shelby about this too, she was like, is this a firm date or is there a potential that it could move around? And my guess is that you're probably planning ahead for a general timeframe, but if it's six months from now, you're gonna be having to move more quickly than if it's like, ah, yeah, anytime in the next one to two years. So I think ideally, if you're trying to do something like this, you are looking at about a year's worth of time to make these types of changes. But I do think that in this case, it depends on what the money is for and how flexible you are, and frankly what the market is doing. 

I think last year if you decided, “Hey, I'm gonna DCA out of the market starting in January 2022,” ehh, you're kind of losing every single time. It's getting worse and worse and worse and worse. So I think that there is like a market timing element here that we're almost trying to avoid. We're really just trying to get the money out in a way where we're going on a prescribed cadence, but there is some risk involved when you start to draw down over a short period of time, that you might time it incorrectly, where you should have just taken it all out all at once. Oh, if you had taken it all out a month before. But that's why ideally, like if you're saving for a medium-term goal that's five years away, 100% S&P 500 is not the asset allocation that you probably wanna be in anyway. 'Cause that's way too risky for needing that money in five years. 10 years, 20 years, 30 years? Now we're talking. All that to say, I think 100% S&P 500 for something that's five or fewer years away is still a bit of a gamble.

Henah: Right. Well, I think that that brings up the topic of, is this an unexpected expense, which it's not, in Gillian's perspective, like she's planning ahead, but for people that it is an unexpected expense and you didn't really have the time to plan for it, do you have any recommendations on someone who knows, I have this much in taxable brokerage accounts, most of it is this, I may need to tap it at some point, but I don't wanna remove it yet. Is that where we're saying diversify? 

Katie: That's where I'm saying you need an emergency fund. 

Henah: Gotcha. 

Katie: Like your taxable brokerage account. I don't think you should be thinking about it like an emergency fund. Ideally in a perfect world, and I know things happen and so this is not always gonna be the case, sometimes things really will, a completely unplanned for expense will happen. Hopefully insurance can limit your downside insofar as you're not gonna be faced with a $300,000 accident. But I do think that you need an emergency fund that is large enough such that you are not having to cash out a 100% S&P 500 brokerage fund with a week's notice. And so I do think that it comes down to just having enough cash on hand to weather storms. And at that point, if you need access to a taxable account on that short of notice, there's really no hack. It's kind of like, well, you're selling at whatever price you're selling at. To my knowledge, there is no secret or workaround for making that easier. It's just having enough cash to protect the wealth that you're growing for the long-term from those types of emergencies. And if you don't have that yet, maybe don't be investing for the long-term yet. 

Henah: Yeah, that all makes sense. I'm sure you've all picked up on this, but I really have the best job in the world, which is that I get to ask questions or we hear questions that I also have, so I get to learn alongside with you. 

Katie: Oh, well, I had to call in the big guns for this one. I was like, “Shelby, what am I missing? I don't know if I'm not seeing something here, but help me think through this one.” 

Henah: Well, I have the inside scoop. 

Katie: That is all for this week's episode of Rich Girl Roundup. I hope it was adequately illuminating for you, or has given you something to think about, and we will see you on Wednesday. Bye.