Forget Black Friday, Stocks Are On Sale Today

Happy Black Friday! While I’m a frugal person by nature, even I am struggling to avoid the siren call of the Black Friday deals.

At moments like this, I try to keep in mind that the greatest gift you can give yourself is financial stability—today and for the future. Just remember, buying stuff you don’t need does not count as saving money.

In that spirit, instead of purchasing some modestly underpriced goods online, we’d humbly suggest that you consider investing the money. In a certain sense, stocks are at least 68% off today.

Stocks Are on Sale Today?

To be fair, the comment about stocks being on sale is something of a metaphor, but bear with me.

Here’s a basic rule of investing: The sooner you get started, the better. The rule works because the stock market always rises over the long term—always. The longer you have money in the market, the more you benefit from compounding returns.

But we can’t predict the future, you say! That’s true, but two of your least favorite subjects—history and math—can help us make educated guesses. Historical stock market returns tell us how the market may perform in the future. That’s how we know that on average, the stock market doubles in value every seven years.

Let’s take the returns of one of Forbes Advisor’s top picks for the best total stock market index funds—Fidelity’s Total Market Fund (FSKAX)—as a proxy for estimating how much of a discount you can get buying stocks today.

If you had invested $10,000 in FSKAX on November 29, 2013, it would be worth $31,751 on Black Friday in 2023. Assuming that trend continues, FSKAX could be 68% off today when compared to its hypothetical value 10 years in the future. But wait, there’s more!

Buy One, Get One Free

If your employer has a 401(k) plan, they might even offer a buy one, get one free deal. This option could make your Black Friday stock discount even more valuable!

Okay, okay, it’s not actually a buy one, get one free offer, but it’s pretty close. Many employers make matching contributions to their workers’ 401(k) accounts. For each dollar an employee contributes, the company fully or partially matches the amount, up to a certain limit.

A very common approach is for an employer to match 50 cents for each dollar an employee contributes to their own 401(k) account, up to a total that equals 5% of the employee’s salary. This not only provides a valuable job benefit, but it also incentivizes workers to save for retirement.

Stack Coupons for Stocks

Did you know that you can stack coupons for stocks? Fine, we’re not talking about coupons in the traditional sense, but you can take advantage of tax savings to stretch your investing dollar.

There are two ways to stack your coupons and multiply your investment savings: pre-tax retirement savings and post-tax retirement contributions.

Pre-Tax Retirement Contributions

Saving money in so-called “traditional” retirement plans like an individual retirement account, 401(k) or health savings account (HSA) lowers your adjusted gross income and can save you big on taxes. Just keep in mind that there are rules and limits.

Let’s assume that you’re single with a salary of $60,710 per year. You don’t itemize your deductions, so you take the $12,950 standard deduction.

After reading this article, you decide to max out your employer’s match by opting for a $3,036 contribution for the year to a traditional 401(k), which amounts to 5% of your annual salary. Before you started investing for retirement, the IRS would have taxed that $3,036 at a 22% marginal rate, not to mention possible state and municipal taxes.

So in addition to the discount on stocks, plus the buy one, get one free deal, you’re getting another 22% off thanks to this unbeatable tax savings coupon.

Post-Tax Retirement Contributions

Post-tax contributions don’t save you as much money today, but they help ensure your money is more accessible in an emergency and can save you a ton of money when you need to make withdrawals.

When you save money that’s already been taxed in a Roth 401(k) or Roth IRA, you’ll never owe taxes on the contributions or the investment gains ever again (with a few caveats).

Let’s compare post-tax Roth accounts to investing in a taxable brokerage account.

Continuing our example above, say you contribute 5% of your annual salary—$3,036 per year—for the next 10 years. The account owns FSKAX, which continues to grow at the 12% rate it’s seen for the last 10 years. Remember, past returns don’t guarantee future results. We’re just using them for illustrative purposes.

In a taxable brokerage account, you’d end up with a balance of $54,534 after 10 years. In a post-tax retirement account, you’d have $62,707 after 10 years. That’s a difference of $8,173 for doing nothing other than taking less than an hour to open a retirement account.

If you contribute for even longer, say 30 years—only adding $3,036 per year—your taxable account would have $487,129 while your tax-advantaged account would hold $823,644.

Sure, you’re probably not spending $3,036 on Black Friday. But you might spend that much or more shopping online in one year. Maybe it’s better to put the money to work in the market instead of accumulating more stuff?

Bonus Round: Retirement Accounts Provide Extra Financial Security

The investment accounts discussed above are tax-advantaged retirement accounts. In many cases, the IRS charges penalties for withdrawing money early from retirement accounts. But there are enough workarounds to make them viable sources of money for emergencies.

No financial advisor in the world would ever recommend tapping your retirement savings like a piggy bank. But if you find yourself in dire straits, facing eviction or needing to leave an abusive household, please don’t hesitate to tap your retirement savings.

In my years of helping people achieve financial security, I’ve found that encouraging them to abandon the mental block of “you can’t touch retirement money” is a good way to get them to start investing.

Here are the ways you can access your retirement savings when financial emergencies strike:

• Make Roth contributions. Money that you contribute to a Roth IRA can be withdrawn at any time penalty free. Note that this is different from Roth IRA rollover money, which can only be withdrawn after five years.
• Consider a 401(k) loan. If you intend to stay at your employer and you desperately need money, you can take out a loan from your 401(k) for up to half of the balance, and all interest is paid back to your own retirement account via payroll deductions. There are rules as well as pros and cons you should consider before taking this option.
• Utilize HSA reimbursements. It’s best to leave money invested in a health savings account and save your receipts for reimbursement as long as possible. This allows your money to grow tax free until you need it. If you do need it, you can always reimburse yourself for qualified health-related expenses without penalties.
• Make hardship withdrawals. If a loan isn’t an option, a 401(k) hardship withdrawal might be workable if you meet the IRS rules for one.

If none of the above options work, you can simply withdraw funds from your retirement account and pay taxes and a penalty. This is called a non-qualified distribution.

Any money you take out will be taxed at your normal income tax rate, plus a 10% penalty. If you contributed to your 401(k) while working, your top marginal tax rate was 32% and you’re currently unemployed earning $0, you could take out up to $95,350 and still break even after the penalties since your top tax rate would be 22%, plus a 10% penalty.

How to Start Investing Today

Getting started with investing is easier than you think. The only surefire bad choice is to delay the decision. Here’s what people in different situations need to know.

Do you have a job with benefits?

People with job benefits have the best options. Contact human resources to discuss your 401(k) options and see if you’re eligible for an HSA.

If you don’t have HR, do some research. Ask the money nerd at your office about the company’s benefits. Absent a self-appointed staff expert, study your onboarding materials. Start by searching your work email for terms like “benefits,” “retirement” and “enrollment.”

Note that you can still choose to open an IRA to supplement your workplace retirement account.

Does your job lack benefits?

If you’re at a job with no benefits, you have fewer options. Talk with management about offering a 401(k) plan. There are low-cost options, and offering a retirement plan can help them attract and retain workers.

Do not hesitate to open an IRA. Decide whether you want a traditional or Roth IRA based on your current income and tax rate, and your future anticipated income and tax rate.

Check out our list of the best IRA accounts, and consider setting up automated monthly contributions. It’ll take a few days for the money to clear your account before you can start investing.

Are you self-employed?

If you’re self-employed, consider opening a SEP IRA or a Solo 401(k), depending on the way your business is structured. Figure out which you’re eligible for, then open an account at the brokerage of your choice.

Are you a non-working spouse?

If you’re a non-working spouse, you can invest in a spousal IRA. It’s important to have your own money set aside for retirement and emergencies. Protect yourself and your family by having your own money, especially in an account where the money works for all of you.

To open a spousal IRA, you’ll need to decide between a Roth IRA or a traditional IRA, pick a brokerage to open the account with, set up contributions and invest the money you’re contributing.