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Investing setup for software engineers

Hozefa
Engineering Manager @Wealthfront | prev @PayPal
・3 min read

Before we get started here, I want to call out that this post applies mostly to software engineers. But the basic principles can be used by anyone earning a salary greater than $75k per year.

As software engineers, we are very adept at writing code. This helps folks earn a good living. In order to secure our family's future, it's important to make sure we invest the excess cash we have. The idea here is a "Set up once and forget".

Below I have outlined some steps that have worked well for me.

  1. Emergency Fund: You should have about 6-9 months of your expenses, which would include your house payment or rent, property tax(if applicable), kids schooling, food, car payments/expenses, etc. The disadvantage with holding liquid cash is that it's a depreciating asset against inflation. You can use a high yielding saving account or any other safe and liquid investment vehicle to balance against inflation.

  2. 401k: 401k is an employer-sponsored retirement plan. If your employer offers one, you should contribute to it. If your employer matches a certain percentage of the amount (typically companies do a dollar to dollar match up to a certain % of contributions), you should maximize and take full advantage of the match amount. IRS sets the maximum limit that you can invest every year, try to max it out.

  3. Backdoor Roth IRA: A Roth IRA is a retirement account where you pay taxes on money going into your account, and then all future withdrawals are tax-free. If your employer offers a 401k and depending upon your income, you might NOT be eligible to invest in an IRA. In that case, a backdoor Roth IRA is a great investment vehicle.

  4. 529 Plan: If you have kids, opening a 529 account for your kid(s) is definitely something I would recommend.

    • Post-tax money is put into the account, however, the withdrawals are tax-free provided they are used for educational purposes.
    • Set up regular recurring contributions like bi-weekly or monthly. This also helps to balance out any big changes in the market
  5. Brokerage Account: My advice is not to invest in individual stocks. I have tried it and it's not worth the time and energy. Keep investing in low-cost index funds.

    • Delegate this to robo advisors like Wealthfront or Betterment to invest for you. They offer portfolio rebalancing, tax-loss harvesting, diversified portfolio at a very reasonable fee(0.25%). Invest in recurring cadence. Don't try to time the market.
    • If you want to get your hands dirty with individual stocks trades, limit yourself to not doing so beyond 10% of your worth.
  6. HSA: HSA is a Health Saving Account offered when you take a high deductible plan for your health insurance. If you are young, in good health, and don't foresee any big medical expenses in near future my recommendation is to take on an HSA.

    • You can contribute pre-tax dollars to your HSA account.
    • HSA is portable, which means that if an employee changes jobs, they can still keep their HSA. In addition, an HSA plan can be transferred to a surviving spouse tax-free upon the death of the account holder
    • Medical expenses can be paid using the HSA account.

This is a high-level overview of the saving/investment side of things. There is another aspect of spending which I will cover in another post.

I am not a Certified Investment Advisor
This is information based on personal research and experience.
Please do your own independent research and / or consult a Financial Advisor as you see fit.
This is focused on US retirement account structures & taxes. 
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