Okay, so yes, I have an accounting degree, but let me be completely honest with you – I suck at investing! My husband and I committed the cardinal sin in the financial world and cashed out my old 401(k)! 😱I know, I know, you should probably stop reading this post right now, because clearly, I’m not qualified to give the best advice. But as my Daddy used to say when he was teaching me to drive, “I’m teaching you what NOT to do!” 😂
Anyway, at the age of 27, I cashed out my 401(k) from my previous corporate job, and I didn’t start back with saving for retirement until the year 2017 at the age of 31. My old 401(k) was just over $10,000 and when I started learning about investing in 2017, I had set a goal for myself that by 2020, I was going to have saved up at least the amount of money that I originally took. And as of this writing, I have saved up $10,341.20.
I’ll be honest with you. I’m super proud of myself for this accomplishment because I wasn’t even sure it would happen. But here we are, five months away from 2020, and I’ve already met my goal! But this took me a long time to do – it didn’t happen overnight. And so, to help you fast-track what took me months of researching, reading, and struggling with to learn, I’m going to break it all down for you here. So here’s what you need to know about investing (especially if you’re brand new to this whole thing!).
If you’re brand new to saving for retirement:
Okay, if you are brand new to saving for retirement and have no idea what you should/should not be doing, read this section first. I’m going to go over some basic stuff to help you better understand some of the jargon and the dos and don’ts.
Terms You Need to Know:
401(k): This is a plan that lets you set aside money from your paycheck into a 401(k) account and invest it in the market. Usually, you’ll pick an asset allocation (more below on that), and the company that houses the 401(k) will invest the money accordingly. The idea behind the 401(k) is that the value of the stocks and bonds you invest in go up over the years you spend working, leaving you with a fluffy cushion of cash when you retire. To sign up for your company’s 401(k) plan, contact your HR department and find out how to get started.
Employer Matching: Some employers will “match” their employee’s contributions to their 401(k)s up to a certain percentage. For example, when my husband was still working in his old corporate job, they had an employer match of 6%. This meant that the employer would match up to 6% of my husband’s income if we contributed 6% of his income into that 401(k). It’s free money y’all, and I highly encourage you to take advantage of this if your employer offers it!
Asset Allocation: This is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals and risk tolerance. An example of asset allocation (that pie chart thingy you find with all your 401(k) paperwork) would be something like 70% Stocks; 20% bonds; 10% cash. And within this asset allocation, the money that you contributed would be divided up accordingly. Now please note, this is an example, and I’m not saying you should have your asset allocation look like this.
Risk Tolerance: This is where you get the “aggressive”; “moderate”; “conservative” typing from. Typically, your asset allocation will take into account your risk tolerance, and so your asset allocation will be divvied up according to your risk tolerance level. Example: let’s say you have a low-risk tolerance and decide to invest conservatively. If so, your asset allocation may look something like 57% bonds; 22% cash; 21% stocks.
Stocks: Okay, so I’m going to reference an “official” definition on this one from Business Insider: “A share of a company held by an individual or group. Corporations raise capital by issuing stocks and entitle the stock owners (shareholders) to partial ownership of the corporation. Stocks are bought and sold on what is called an exchange.” When you buy stocks, you buy partial ownership in the company whose shares you’re buying. Example, if you bought Apple stock, you’d have partial ownership of Apple.
Bonds: These are issued by governments and can be either US bonds or international bonds. These are considered less risky than stocks, but they return a lower return on your investment.
Mutual Funds: These have long since been a favorite way to invest among the world’s wealthiest folks, including Warren Buffet himself. And these are what I personally hold. Mutual Funds diversify your money among individual stocks. Each mutual fund will invest in different types of companies. For example, if you purchased the Vanguard Energy ETF (known as VDE in the stock market), you’d be investing in various energy companies like Exxon Moblie and Valero. You can also buy mutual funds for bonds.
IRA: This is an individual retirement account that you cannot get through an employer. There are two different types of IRA accounts, Traditional and Roth. Traditional is a tax-deferred plan just like a 401(k) which means you will not pay taxes on the money you’ve contributed or gained until you pull the money out of the account. With a Roth IRA, your contributions are taxed since they cannot be deducted from your taxes. The great part about the Roth is that when you pull your money out at retirement, you only have to pay taxes on the money you earned – not what you contributed because you already paid taxes on that money back when you were still working. This helps lower your tax burden in retirement years. There are contribution limits for an IRA, and as of this writing, the max contributions for the year are $6,000.
Okay so I know that was a lot to take in, but if you’ve never heard of those terms before, you would be lost in the rest of this post.
When should I start saving for retirement?
Now. Yep, right now. If you haven’t started yet, call your HR department and find out if they offer a 401(k) package and if so, enroll. Or, if you already have a 401(k) at work, check to see if your employer offers an employer match. If so, take advantage of that as soon as you can! If you don’t have the option to open up a 401(K), head to either eTrade or Vanguard to set up an IRA. The minimum to invest a Mutual Fund with eTrade is $500, and with Vanguard it is $3,000.
But I’m terrified of the stock market crashing!
I feel you on this darlin’, but don’t believe all the fear-mongering out there! The market always comes back – it ebbs and flows just like a river. And don’t take my word on this – Google it if you don’t believe me! The market always comes back – sure sometimes slower than others, but it always comes back. Don’t be afraid of the market crashing even though I know that it’s no fun watching your portfolio fall, just hold on tight and ride out the wave. If you’ve made smart investments, you’ll be fine.
Okay, but I still need help understanding this whole investing thing!
Like I said at the beginning of this post, I’m far from being an expert when it comes to investing. Budgeting? I gotcha! Paying off debt? That’s my claim to fame! Saving for a raining day? Totally gotcha! Investing? Eh, not so much as I’m still a newbie at myself. But I have gone through several resources on investing and below are the three that have helped me the most so far!
- Unshakable by Tony Robbins – This book opened my eyes to things I never even thought of when it came to investing! But I will be honest that this book is not the most easiest-to-read book out there and it’s written in true Tony fashion where he’s trying to promote a friend’s service. However, I still think it’s a great resource to read and will help get you excited to start saving for retirement!
- Investing Made Simple by MomAndDadMoney.com – This is the BEST resource I have found to-date for understanding investing! It is written for the complete newbie and is in workbook fashion, so you’re going to take action immediately (which is the best kind, in my opinion). It is a .pdf download so you’ll need to print it off, but it is worth it!
- The Millionaire Next Door – This classic book is a must-read for anyone trying to get their finances in order as it will motivate you like no other to start saving that nest egg!
- Acorns – This is an investing program that works similarly to how those “round up the change” savings accounts at some banks work. Acorns will round up your purchases to the dollar and then invest your change in the market. You get to choose your portfolio allocation and how long you want to invest for. Now, I do NOT suggest making this account your primary retirement saving account, but it is a great place to build your confidence in investing in the stock market and has proven to be an excellent additional savings vehicle in addition to our main retirement accounts. Below is a screenshot of how much we’ve built since 2018 (all from our “spare change”!).
Okay, so I hope this post has helped to guide you a little bit further down this towards saving for your retirement! If you’re on track to retire a millionaire, I’d LOVE to hear what your best piece of advice is below!
And here’s the video explanation:
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