3 steps a 27-year-old millennial took to build a $250,000 investing portfolio

Shelby Farnsworth by a mountain lake
Shelby Farnsworth built a $250,000 investing portfolio in about a decade.

  • 27-year-old Shelby Farnsworth built a $250,000 investing portfolio using several strategies.
  • She automated her savings to put away more, and cut back on her housing expenses.
  • She also took advantage of her employer’s 401(k) program early on, and got a match.
  • This article is part of a series focused on millennial financial empowerment called Master Your Money.

Shelby Farnsworth, a 27-year-old global supply manager at Lyft, started saving and investing as soon as she could, and it’s helped her build a large investment portfolio at a young age.

Farnsworth used simple accounts almost anyone can open, and was able to save and invest her way to a $250,000 portfolio in about 10 years.

Here are the three main methods she used to reach this major milestone quickly.

She automated her investments

From her 401(k) to her individual investing account, she automates her finances to make it easier to save and invest.

“Living in California, it’s hard just because everything here is expensive and there’s always something going on. So for me, it’s having everything on automatic withdrawal,” she told Insider.

She sets up automatic deposits from her checking account to other saving and investing accounts.

“Between my 401(k), I never see that money. I’ve got money that’s set up to go to the Roth IRA, and then money set up to go to my personal management fund,” she said.

Automating her investments made it easier to save consistently and save more over time.

She tried to keep her housing expenses as low as possible

Living in San Francisco, Farnsworth’s largest expense has long been her rent. But over the years, she’s found ways to get creative to keep her costs down.

“A lot of it was making sure that my rent was controlled,” she said. “I lived in some pretty interesting living situations just to make sure that that huge chunk of change where people typically spend 50% or 60% of their money, mine was at 20% to 30%.”

As her income has risen, she’s been able to move into a one-bedroom apartment – no more roommates or “interesting” situations – but her housing costs are still 30% of her income.

She started investing as soon as she could, and took advantage of employer matches

Since she started working, Farnsworth has been taking advantage of 401(k) programs offered by her employers. By starting to invest as soon as she could, she’s been able to use the power of compound interest – where money grows based on money earned – to her advantage.

“Just having time on my side through college and my very early 20s, that small chunk of change has become larger and larger and larger as my salary has grown,” she said.

Her employer match has been another critical part of the equation – that match equates to free money her employer contributes towards her retirement savings, up to a percentage of her salary. Matches are an easy way to save more, without having to contribute more. It’s something that helped Farnsworth grow her portfolio and build her net worth.

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Workers are flooding their retirement accounts with record amounts of cash as confidence recovers following pandemic stress

old couple finance savings retirement planning
  • Retirement account balances rose to record highs in the second quarter of 2021, Fidelity said on Thursday.
  • The average IRA account balance increased to $134,900 and the average 401 (k) balance reached $129,300.
  • Younger workers and Baby Boomers alike are pushing more money into their accounts.
  • See more stories on Insider’s business page.

Baby boomers and younger workers alike have been shoveling more money into their retirement accounts, pushing balances to record highs in the second quarter and highlighting signs of ebbing stress about the pandemic, according to a report from Fidelity.

Balances of individual retirement accounts, or IRAs, rose to average of $134,900, up by 21% from the same quarter last year, the asset management firm said Thursday. The average 401(k) balance was $129,300, an increase of 24% from a year earlier. The second quarter marked the third straight quarter of record-high balances.

Younger workers have been stepping up their savings with the average 401(k) savings rate logging a record 9.3% in the second quarter. Fidelity said 54% of Gen Z workers and 43% of millennials have increased their savings rates over the last year.

Aiding overall balances was a rise in equities during the second quarter. The S&P 500 index gained 8.2% between April and June as it accumulated high records, contributing to the 17% advance year to date. Blowout corporate earnings reports and improvement in the labor market have helped the benchmark recover from the plunge it suffered during 2020 as the COVID-19 outbreak put the US economy on the path to recession.

“The pandemic is clearly fueling a shift in how Americans prioritize their work, health, personal lives and financial well-being, so it’s encouraging to see a continued improvement of retirement savings rates and individuals expressing more feelings of hope and fewer feelings of stress,” said Kevin Barry, president of Workplace Investing at Fidelity Investments, in the report.

The firm said positive sentiment among 401(k) savers is reflected in a few measures of investor behavior, including that less than one in five individuals, or 17.5%, had an outstanding loan from their 401(k) in the second quarter.

“While some workers may still have to tap their 401(k) to help address a financial challenge, the long-term trend of decreasing loan usage continued in Q2,” Fidelity said.

Meanwhile, with the youngest Baby Boomers this year reaching 57 years of age, a record 18.2% of that group made a “catch-up” contribution to their 401(k) in the second quarter. 58% put in the maximum catch-up contribution of $6,500 by the end of last year.

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Bitcoin is scarce, valuable, and should be part of your 401(k), Anthony Scaramucci says

anthony scaramucci
SkyBridge Capital’s Anthony Scaramucci.

  • Bitcoin stands to be the best-performing asset in the next 10 years and should have a spot in retirement portfolios, Anthony Scaramucci tells 401K Specialist magazine.
  • Scaramucci said purchases of the volatile cryptocurrency should be made in “bite-size” chunks.
  • Bitcoin is “the technology that people are going to use for a large swath of commerce” over the next 100 years, said SkyBridge Capital’s founder.
  • See more stories on Insider’s business page.

Bitcoin should be a part of people’s retirement accounts as the cryptocurrency’s rewards outweigh its risks, Anthony Scaramucci, the founder of investment firm SkyBridge Capital, said in an interview with 401K Specialist, a magazine that covers defined contribution plans.

Bitcoin purchases should be “in bite-size, digestible chunks,” so that clients, including plan participants, will be comfortable holding the volatile asset, he told 401K Specialist magazine in an article published online Wednesday.

Bitcoin has been on a turbulent and mostly downward ride in May, rocked by worries ranging from China’s threats to restrict mining and trading activities surrounding the largest cryptocurrency to Tesla‘s decision to halt taking bitcoin as payment for its electric vehicles because of environmental concerns.

Bitcoin, which is prone to big price swings, has dropped about 32% so far in May to trade below $40,000.

But bitcoin’s volatility is one reason the digital currency should be part of a retirement portfolio, he said.

“People can trade within their 401k without tax consequences,” Scaramucci said. “If we’re right about Bitcoin and I was your financial advisor, I would tell you that over the next 100 years, this is the technology that people are going to use for a large swath of commerce on the planet.”

Bitcoins “are scarce, and they’re going to be valuable. For that reason, I do think it’s appropriate to own a few in a retirement account,” he said.

Scaramucci earlier this month defended the slide in bitcoin’s price in a Bloomberg interview, saying bitcoin has been able to “maintain its supremacy as the apex predator in digital currency.”

401K Specialist said Scaramucci recommends that non-professional investors have bitcoin exposure of no more than 5% of their retirement portfolios. SkyBridge’s bitcoin exposure has grown to more than $500 million, the magazine reported and noted that the money manager projects bitcoin will hit $100,000 this year.

Bitcoin “was the best performing asset over the last 10 years, and I predict it will be the best performing asset over the next 10 years,” said Scaramucci.

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Borrowing from your 401(k) plan can be a fast, advantageous way to meet serious financial needs – here’s everything you need to know about 401(k) loans

401k loan
If you need funds quickly, a 401(k) loan offers several advantages over other loans or 401(k) plan withdrawals – but there are many rules to follow.

  • Borrowing from a 401(k) means withdrawing funds from your plan that you later repay with interest.
  • A 401(k) loan avoids the taxes and penalties that come with outright withdrawals.
  • Borrowing from a 401(k) has drawbacks, like the suspension of contributions and overall loss of account growth.
  • Visit Business Insider’s Investing Reference library for more stories.

Any financial expert will tell you it’s best to keep your retirement savings tucked away until, well, retirement. That certainly holds true for one of the most common ways to save for those post-career years: employer-sponsored 401(k) plans

But life can get in the way of the best investment plans. And if you have an immediate need for cash, borrowing from your 401(k) may make the most financial sense. Especially when you compare that option to other loan alternatives – or withdrawing money entirely from the plan.

However, there are many rules, both from the IRS and individual employer plans, that apply to 401(k) loans. If those are not followed, you may end up paying taxes and penalties that can seriously hamper your finances. 

Understanding exactly what’s entailed in borrowing from a 401(k) is key to determining if the strategy will suit you. Let’s take a closer look.

What is a 401(k) loan?

In a 401(k) retirement plan, you make regular pre-tax contributions and the money grows tax-free. In return for those tax advantages, you must follow several IRS rules, chief among them, no withdrawals without penalties until age 59½. If you do withdraw early, you’ll be subject to a mandatory 20% federal tax withholding and in most cases a 10% tax penalty.

A 401(k) loan is basically a way you can take money from your own account without paying these taxes or penalties. You don’t get charged, because this is only a temporary withdrawal: You will be putting the money back, eventually. And you won’t be depleting your retirement savings permanently.

You will pay interest on the sum you take out, but this money goes back into the plan account. So, in effect, you are both the borrower and lender of a 401(k) loan.

IRS regulations govern 401(k) plans overall, but there is also some flexibility for employers to impose their own rules and restrictions. Most employers that provide 401(k)s plans allow 401(k) loans, says Gregg Levinson, senior consultant at Willis Towers Watson. He estimates that about a third of 401(k)(k) participants borrow from their accounts at some point (not counting the COVID-19 pandemic year of 2020).

Will my employer know if I take a 401(k) loan?

Your employer has to be informed if you plan to borrow from your 401(k) loan – the withdrawal and repayment process is set up through them. This is not to say that the whole company or your immediate boss will necessarily know. Only, perhaps, the payroll department. 

How to borrow from a 401(k) 

Your first step when considering borrowing from your 401(k) is to contact your employer benefits department or your 401(k) plan provider to get details on how your plan’s loans work (assuming, of course, they’re offered in the first place). 

Here’s what to look for in 401(k) loan rules:

  • Borrowing limits. The IRS mandates that you may borrow no more than 50% of your account value or $50,000, whichever is less. Some employers and plans will also impose a minimum loan amount, say, no less than $1,000.
  • Interest. Your interest rate is determined by your employer but must be “reasonable” and similar to the rate you’d find at a financial institution, according to IRS rules. In most cases employers charge prime plus one percentage point.
  • Repayment.  IRS rules call for full repayment of your 401(k) loan, with interest, within five years in equal payments that include principal and interest paid at least every quarter. Your own plan may follow those terms, or impose more stringent ones. Many employers use payroll deductions for repayments. Your employer may also allow for longer repayment limits, as recommended by the IRS, if you use the loan for a primary home purchase – sometimes as long as 25 years. 
  • Number of loans allowed. How many loans can you take from your 401(k) plan? Again, that depends on your employer. Most of them only allow for one at a time; you have to fully repay one sum before they’ll allow you to borrow again. So weigh carefully how much you’ll need. The IRS itself permits simultaneous loans, as long as the combined amount doesn’t exceed the general limits. 

As long as you adhere to the mandates, all should go well. But if you don’t, your loan could be considered a withdrawal, and tax payments and penalties will follow.

Is it smart to borrow from a 401(k) plan?

Compared to other financing methods, borrowing from a 401(k) plan has its advantages. On the plus side, a 401(k) loan offers:

  • No need for approval. It’s your money, so you’re getting it is automatic. No loan applications or credit checks. And borrowed 401(k) funds  do not show up on your credit report as a debt.
  • Quick access to funds. Often, you can get the money within two weeks.
  • Interest rates that are often lower than those charged by credit cards and many personal loans offered by banks
  • Benefits from the interest. You’re paying yourself to borrow, instead of a lender. Because it goes into the account, the interest is sort of a boon, not just an expense. 
  • No prepayment penalty. Unlike some consumer loans, most plans don’t charge a fee for loans repaid in full early. 

What are the downsides of borrowing from a 401(k)?

401(k)s loans have their drawbacks, too.  Downsides include:

  • Loss of tax-deferred earnings. Taking money out of your account shrinks it, obviously, and also its earning potential – especially if you take the full five years to repay the loan. The overall effect on your retirement savings will depend on how much you borrow, how long you take to pay it back, and the state of the stock market. Some plans don’t allow you to make new 401(k) contributions until the loan is repaid, further hampering the compounding ability of retirement savings.
  • Double taxation. Loan repayments and interest are made with after-tax dollars, in contrast to the dollars used for contributions. But they’re not distinguished within the account; everything goes back into the same pre-tax pot. So, when you eventually start taking regular distributions from your plan, you’ll pay income tax on that money; in effect, you’re being double-taxed on the interest. 
  • Sudden repayment. In most cases, if you leave your employer for any reason you will need to fully repay the loan usually within one to six months, depending on the plan rules and the date of your last payment. If you don’t, your former employer and the IRS will consider the loan a distribution. You’ll then owe income taxes on the amount and, if you are under age 59½, a 10% penalty. (For Roth 401(k)s, you likely won’t owe taxes but you will be on the hook for the 10% penalty.)

“People often underestimate how long they will be with an employer and find themselves in the position of having to come up with the full amount outstanding on the loan or face a large tax bill and penalties,” says Levinson.

The financial takeaway

Most financial experts agree taking a 401(k) loan should be a last resort. Employees of a certain age, who are beyond the penalty-incurring years, might find that taking a distribution might actually work better for them.

Still, borrowing from your 401(k) plan can be an option if you need funds quickly. It’s certainly a better course than an outright withdrawal, especially if you’re under 59½, which incurs penalties as well as taxes.  

Before you jump to borrow from your 401(k), it’s important to consider the pros and cons. Understanding how 401(k) loans work, the consequences of leaving your employer or losing your job before repayment and the opportunity risks involved in tapping your retirement savings early are all key considerations. 

Related coverage in Investing:

The difference between a Roth 401(k) and a traditional 401(k), and how to decide which retirement plan is right for you

The worst thing you can do with your 401(k) when you leave a job, according to a financial expert and bestselling author

A 401(k) can be the most lucrative way to save for retirement, so take advantage if you can

If you work for a nonprofit, church, or public school, a 403(b) plan is a great way to save for retirement

How to withdraw from your traditional 401(k) account early – the strategies to avoid penalties and fees

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