There is one topic here on Making Sense of Cents that I hardly ever talk about. That topic is investing.
Investing is something I have never really gotten too deep into in my personal life. I know, personal finance blogger fail right here.
It’s an area in my life that I have been too embarrassed to really talk about. We’ve always had some money in a retirement fund, but nothing to be proud of. My main excuses in the past were always that I was paying off my student loans, saving for something, or preoccupied with things going on in my life.
We do have other money saved as well, but I’ve made a huge mistake of letting it sit in accounts that earn hardly anything in interest.
However, I plan on changing that now.
To make a long story short, I took a leap and bought a few hundred shares of Vanguard Total Stock Market Index Fund Admiral Shares and put it into my SEP IRA. Yes, I’ve finally joined the Vanguard bandwagon thanks to Holly at ClubThrifty and J. Money at BudgetsAreSexy (among several other bloggers!). It is cheap to invest in VTSAX, and their diversified holdings definitely had my interest.
Anyway, I thought this would be a great chance to track and talk about our investing strategies, what exactly we are doing, and our retirement progress. I’m sure there are others out there who need that extra little push as well, so be ready for some investing-related posts in the future.
Today, we will start it off with a basic investing 101 and beginner’s guide to investing article. We will talk about the basics of learning how to invest and saving for retirement.
What is an investment?
To start this off, we will quickly talk about what an investment is. An investment is something you buy that you think will bring you future income. There are many types of investments out there. You can invest in a business, invest in real estate, invest in stocks, and more.
Side note: I highly recommend that you check out Personal Capital if you are interested in gaining control of your financial situation. Personal Capital is very similar to Mint.com, but 100 times better. Personal Capital allows you to aggregate your financial accounts so that you can easily see your financial situation. You can connect accounts such as your mortgage, bank accounts, credit card accounts, investment accounts, retirement accounts, and more, and it is FREE.
Why is investing important?
Investing is important because it means that you are making your money work for you. If you weren’t investing, then your money would just be sitting there and not earning a thing.
$100 today will not buy you the same $100 later in the future if you just let it sit under your mattress or in a basic bank checking account. However, if you invest, then you can actually turn your $100 into something more (more on that below). When you invest, your money is working for you and hopefully making you an income.
Investing is important because it will hopefully allow you to retire one day. Unless you invest in some form, it would be very hard to ever retire because of inflation.
But I have no money to invest…
Many people put off investing because they do not think they have enough money. Well, a little bit of money can go a long way when it comes to investing.
Compound interest can make a little bit of money grow and equal something much more attractive in the future. Compound interest is when interest is added to the principal of a deposit, the interest then grows from that interest as well into the future. Basically, you’re making money off of your money because of compounding.
If you put $1,000 into a retirement account that has an annual 8% return, 40 years later that would turn into $21,724. If you started with that same $1,000 and put an extra $1,000 in it for the next 40 years at an annual 8% return, that would then turn into $301,505. If you started with $10,000 and put an extra $10,000 in it for the next 40 years at an annual 8% return, that would then turn into $3,015,055.
Yes, that’s compounding for you. It is pretty amazing.
What if I lose all of the money in my investments?
Yes, investing your money in stocks and funds does come with risk. That’s just like any investment though.
Some say that they stay away from the stocks and funds, and would rather prefer to invest in other things (such as an expensive comic book or classic cars), but there is risk in that too. What if someone stole it or it got damaged? Also, realistically a down economy can affect material goods as well.
A post I recently read that is related to this subject is I Just Lost $2,000 in Three Weeks and I Don’t Care by Matt at MomandDadMoney. The stock market goes up and down all the time, and it’s normal. As long as you are investing long-term, short-term changes shouldn’t mean much to you.
Are you saving for retirement? When do you want to retire? What beginning investing tips do you have to share?
P.S. Please keep in mind that I am definitely not an investing professional and this post is just meant for informational and entertainment purposes. Always do your own research and seek out help if you need it.
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I really need top take saving for retirement more seriously.
Yes, you should! What’s stopping you? 🙂
its never to early to start saving for retirement
I agree!
Tips wise, start investing as soon as you can. You’ve nailed it with the compound interest explanation. People don’t realise what a different a little bit often can make in a few years or decades. I wish I considered compound interest ten years ago, would be in a much better position today.
As for retirement accounts, I’m not a fan. We have compulsory superannuation (sth like the 401k) here in Australia where employers pay a 9.5% on top the employees annual income for retirement, however you cannot access this until you turn 65. At 31, I’d rather put my money in the stock market or property directly because it’s accessible should I need it earlier, plus hopefully it will allow me to create a passive income that I can use to live off in the next 7-10 years.
Yes, investing early is very important. We started investing young, but we put it on the backburner and we didn’t prioritize it as much as we should have.
Congrats on qualifying for the “Admiral Shares”. Bigger dividends, lower expenses … that’s a club you’ll want to be in. Another little unknown secret about Vanguard – eventually when your assets reach certain threshold limits, your account upgrades to more and more elite status. I believe at some point they assign a personal financial adviser to you. I imagine it being like the end of the movie “Up in the Air” with George Clooney where you have your own phone number and concierge. 🙂
Wow I had no idea! I can’t wait until I reach their different threshold limits 🙂
Believe this is what you have in store 🙂
https://personal.vanguard.com/us/whatweoffer/advice/financialplanningservices
Basically it is free once you have $500k in assets. Hopefully you get there soon :)!!
It is also reduced fee once you got $50k. As this is loosely a competitor to what I am working on any feedback on vanguard planning services is always welcome!
Thanks!
I was raised on the idea that investing was bad and banks would steal all your money, which means I started late. Still the quote (by Warren Buffett I think?) is true, yesterday was the best time to start investing and the second best time is today.
You’re quite right about not needing a lot of money, that was another myth that had to be debunked for me. My bank actually offers an automated investment plan starting from 30 euros and that is my minimal monthly contribution next to my pension funds. I think such initiatives are great because they will get more people to consider it.
Good job on changing your investing beliefs! Yes, that best time to invest is now!
That’s really a good move, realizing that investment is now an option you gotta take. I got my first investment 3 years ago, it was really a risky move so I failed but that didn’t stop me. I felt I needed to learn more about investment until I finally knew some tricks and reading those numbers going ups and down. Now, I can say I have increased saving bec. of investment. Good luck!
What type of investment did you have before?
A nice and simple explanation of investing in an almost ‘for dummies’ style there. I think a lot of us do forget that whilst we save our money, we think we’re onto a good thing, but actually its depreciating in value all the time. A good reminder for me on that, so thanks.
Thanks Jack!
Yay for investing!!! Congrats on getting on board! We are complete newbies, too, but we do have a few accounts. My husband has an IRA from his former job (he’s self-employed now), I have a Roth IRA from 10 years ago but I opened it with such a small amount and never contributed, so it’s still small ($2500 to start and now it’s $4000). Just this past weekend, we opened a mutual fund through USAA which I’m excited about, and we moved the bulk of our savings into a high-yield savings account through Synchrony. Next up is a SEP IRA! Good luck to you!! I’m excited to read all your posts on investing!
Thanks Sarah! Yeah, we’ve always had retirement and investment accounts but were always lazy with them. Didn’t put as much towards them as we should have, and didn’t do enough research back then either.
Good job on getting started! Don’t feel bad about starting now, you are still ahead of many americans:
http://www.bankrate.com/finance/consumer-index/survey-36-percent-not-saving-for-retirement.aspx
The stat that gets me in that article is that 25% (!!!!) of 50-65 year old have no retirement savings. That’s terrifying!
I’m glad you are on this journey and I look forward to your future investment posts!
Thanks! We aren’t just getting started (we’ve had retirement accounts for years), but we are just now getting serious about it.
Yes, that stat about 25% of that age group is very alarming! Sad too.
Good on you for making the move into the investing world! It’s pretty powerful to know that you are contributing bit by bit to a secure financial future!
I’m saving for an early “retirement” although I’ve never really considered investing as savings.. I’d say it’s about achieving the goals that I want to longer term in my life :)..
I’d say dollar cost averaging is a reasonably powerful way and forces you to invest regular amounts! Although again I am not an investment expert
Thanks Jef!
Thanks for sharing your story; I think it’s powerful when people admit to something they wished they had been doing differently. The great part is, is now you are! Here’s an article I wrote for the Huffington Post on Millennials and Retirement, that’s pretty poignant: http://www.huffingtonpost.com/gina-horkey/how-are-millennials-going_b_5757902.html
Thanks Gina!
Great job, Michelle! I’ve been investing for about 3.5 years now and I’ve already seen some significant progress from my initial purchases. Usually I set up automatic bi-weekly contributions to be withdrawn from my regular account and it’s a good way to keep it simple and continue investing. I don’t check the investment balance too regularly (because the mark does go up and down) but certainly enough to keep me engaged.
Thanks Charlotte! We’ve been investing for a few years now, but weren’t serious about it before. We also had too much cash just sitting in our bank account. Huge mistakes!
Yay! Good for you. All of our stuff is in various Vanguard funds. Makes life easy and makes a lot of sense on paper too.
Yes, it makes life so much easier!
We just moved our investments from Scottrade to Vanguard, and my husband loves Vanguard more and more each day! 🙂 My understanding is that since Vanguard is actually owned by its shareholders (us!) it passes on its profits to us by way of lower fees, etc. Sounds like a great model when they have their shareholders best in mind. Also, we’re more into mutual funds/ETFs (which Vanguard seems to excel at) than stock trading (which Scottrade seemed to be better for).
Good choice Deb! I’m loving Vanguard and I’m glad I recently made the switch.
I am not maxing out my retirement investments because I’m paying off my student loans. That said, I’m still contributing. I contribute $400/month to a Roth 401k. This way, I’m still investing some, but not so much that it takes away from my main priority of getting out of student loan debt.
Good job Natalie! This was a mistake I did. When I was paying off my student loans, retirement fell behind.