Welcome to the final blog segment of Money Hacks for Metalheads and Old Millennials. Here’s where we pull back the curtain on what The Rich are really doing to get ahead of the rest of us….
Well, we’ll kinda pull back the curtain — I’m an elementary school librarian, not a financial advisor. (This is a great time to state again that I’M AN ELEMENTARY SCHOOL LIBRARIAN, NOT A FINANCIAL ADVISOR.) But hopefully I can shed some light on a topic that can be complicated and intimidating: investing.
First of all, what is “investing”? In general, the term means to put money towards something with the expectation of profit in the future. People invest in lots of things: Bitcoin (what is that?) real estate, gold, even fine wines. For purposes of this column, we’ll focus on stocks and bonds. Think of them as imaginary widgets. When you buy a stock widget, you are supposedly buying a share in a company’s ownership. Bond widgets are loans to the government or different companies. You trade your actual money for these widgets, and at some later date you sell the widgets — ideally getting back more cash than you put in. The key thing to remember is that you do not gain or lose money until you sell the widgets.
“That’s great, Jessie, but where do I get these widgets?”
The good news is that if you have a retirement account, you probably already have lots of widgets of all kinds! Let’s go over a couple different kinds of retirement accounts:
- 401(k), 403(b), or 457 plans are typically offered by employers. The type of plan you’ll have depends on whether you work for a government agency, a nonprofit, or a for-profit company. Short version: a percentage of your pretax paycheck goes in… Hopefully grows and grows and grows…. And then you pay taxes on the money when you withdraw it during retirement.
- IRAs are individual retirement accounts. A person can just start one of these on their own, or roll an employer-sponsored account into one after leaving a job. In a traditional IRA, you deduct the contributions from your income at tax time, but then get taxed when you withdraw the contributions. In a Roth IRA, you contribute post tax dollars (i.e. you don’t deduct them) but then you are not taxed on the withdrawals in retirement. You also have more flexibility to withdraw the contributions before retirement. People who are self-employed and/or have freelance income (I’m looking at you, musicians and industry folks) can contribute to a SEP IRA, which has higher contribution limits than a traditional or Roth IRA.
Step One: If you don’t have one of these plans, get one. Don’t waste years worrying about the fact that you haven’t started one already. To get on your employer-sponsored plan, send an email to Benefits. Do it now. To start an IRA, google Fidelity, Charles Schwab, Vanguard, or lots of other financial institutions; search up “IRA”; choose the search result that’s closest to “Open An IRA”; and you’re off to the races!
Step Two: Once you have The Plan, choose which Widgets to purchase with the money you put into The Plan. The Plan itself is not your investments; it is a vehicle through which you can purchase investments. One simple way to invest your retirement savings is to choose a target date fund. Pick the year you expect to retire, and the fund does the rest. It will automatically (at least in the sense that you don’t have to do anything) become more conservative as you get closer to retirement.
More on 1: Same goes with a Roth IRA, Traditional IRA, SEP IRA, etc. These are just accounts!! They just happen to be fancy, tax-advantaged accounts where you can buy investments. Think of these like your garage (or your pink/teal Caboodles) where you just store shit
— DUMPSTER DOGGY (@dumpsterdoggy) February 21, 2020
Step Three: How much money should you be putting into The Plan anyways? The gurus say 10-15% of your gross income should be saved for retirement. If you’re investing 0% right now, that will sound like a lot. If you work somewhere that matches 401(k) contributions, start off with at least that much — otherwise, you’re leaving free money on the table.
There is A LOT more I could say about retirement investing, but for the purposes of a thousand-word article, I’m going to leave off here.
“Jessie, having money when I’m old is boring. I want to have money now.”
That makes two of us! If you’ve already paid off high-interest debt, you’ve built an emergency fund that will cover three months of expenses, and you’re investing 10% or so in your retirement accounts, think about opening a brokerage account. This is how you can buy and sell those widgets, but get the money before you’re old. Since money in brokerage accounts is taxed coming and going, you can sell your widgets and get your money any time you feel like it! Just remember what we talked about in the beginning of the article: you do not gain or lose money until you sell the widgets.
If you’re new to investing, the conventional wisdom is to start with mutual funds and ETFs (exchanged traded funds) rather than individual stocks and bonds. These funds are like baskets that hold hundreds — or even thousands — of widgets. Instead of having to decide which individual companies to purchase stock in, you just pick funds according to your risk tolerance. Perhaps your stock investments will even pay you dividends, which is when the companies you invest in give you free (taxable) money — these dividends can be reinvested directly back into your funds, so the funds grow in value without you adding more money. (You probably still wanna add more money though.)
Side note: capital gains (money made from dividends and the sale of investments) are taxed at a lower rate than regular income. This means that The Rich — who don’t work and just sit around collecting money from investments passed down through generations — pay a lower tax rate than you and me. And let’s not even get started on Amazon effectively paying a 1.2% tax rate in 2019….
But enough about The Rich. Whether you’re investing for retirement or in a brokerage account , there is a lot of debate in the personal finance community about whether to work with a broker or choose investments yourself through various online platforms. That’s a time to consider your investing experience. If this article is your first introduction to the idea of a retirement or brokerage account, you may want the help of a human, even if it costs more — because remember those widgets? Welp, there are thousands of widgets and then thousands of baskets you can put them in. Are you really going to compare the performance of ten different midcap stock funds? Are you going to keep track of how each of your funds is doing compared to other options? Or research the holdings of a particular mutual fund to make sure you’re not investing in private prisons and opioid manufacturers? Maybe you will! Or maybe you’d rather let the experts handle it.
Here’s a real-life story about passively managed vs. actively managed accounts — and this is also where I’ll reveal my two biggest investing blunders. Back when I was 22 or so, I stopped working at Starbucks with about $500 in my 401(k) and rolled it into a Roth IRA. Okay, great. But remember, the IRA is just a vehicle for the widgets….. So when it was time to choose what to invest in, I checked off CASH. As we talked about in a previous column, cash is not an investment. Cash LOSES money. So with forty-plus years to go before retirement, I decided to “invest” my IRA in cash. Nobody from Fidelity suggested otherwise. I never asked my parents which box I should check off, or looked up any books or articles about it. I just thought that the stock market could crash at any moment and I would lose my five hundred dollars, and so I had better check off CASH just to be safe.
#jesuschrist
Fast forward at least a decade. I had sporadically sent contributions to the IRA over the years. It finally dawned on me that my IRA shouldn’t be invested in CASHJESUSCHRIST, so I called Fidelity. The guy on the phone hooked me up with a target date fund. Okay, cool. Now we’re rolling, right? Wrong. I incorrectly assumed that any additional contributions would be automatically invested in this target date fund. NOPE. It took another year or two for me to realize that these subsequent contributions were being held in something called a core account as cash, waiting for me to choose how to invest it. I had no idea that a “core account” was even a thing.
The moral of the story was that if I had been working with a human, the human would have said, “Let’s invest this in an aggressive blah blah blah,” rather than me randomly picking something and taking ten years to figure out I was wrong. Then the human would have said, “I see you sent some more money over here, let’s talk about what to invest it in.” Instead, because I had a passively managed account and no knowledge of what I was doing, I invested in nothing for over a decade.
Thankfully I have a retirement plan through my job, so it could have been a lot worse, but I’m bummed to have missed out on ten years of potential investment gains. Even though I’ve learned more about personal finance recently, I still feel like I’m getting a better deal working with a human. Maybe after some more research and observing how the experts invest, I’ll be ready to go off on my own.
(For some internet suggestions on where to open a brokerage account, click here. You can probably also open a brokerage account through the same company that manages your retirement account.)
Now that we’re 800 words over my intended wordcount, I’ll shoehorn in a final thought: don’t let the news about coronavirus scare you away from the idea of investing. If you’re an old Millenial, you’ve still got plenty of time to ride the wave. There are two stock market maxims that apply to the recent dip….
It’s a long game.
Buy low, sell high.
Anyhow, I hope you’ve enjoyed these columns and learned something you can use to make your budget more balanced or your life more comfortable. Money is a touchy subject and appearances can be deceiving, so don’t go crazy comparing your situation to what you perceive of others’. Just start where you are right now.
…And stay tuned for the Money Hacks for Metalheads and Old Millennials ebook with expanded sections and additional topics, coming later this year!
Further Reading
Lowry, Erin. Broke Millennial Takes on Investing: A Beginner’s Guide to Leveling Up Your Money. 2019.
Snow, Ted. Investing QuickStart Guide: The Simplified Beginner’s Guide to Successfully Navigating the Stock Market, Growing Your Wealth & Creating a Secure Financial Future. 2018.
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