Investing

I have to admit, I’m pretty clueless when it comes to investing. It was something that my mother never taught me about as a kid. Hell, we rarely talked about money at all. Several years ago I read a very basic personal finance book which introduced me to investing – something I had never imagined myself doing. Here’s what I remember from that book: money market funds are a safe place to keep an emergency fund because they are extremely low risk, but also low reward; bonds are slightly higher risk and slightly higher reward; stocks offer greater rewards but at the expense of being extremely risky and difficult to understand. Admittedly, after three years I’m sure my memory of this book has become foggy, but this is what I took away from it. Consequently, what money I did sock away was all stuck into a money market fund for safe keeping. I always planned to learn more about investing and diversify at some later point when I had a better understanding of what I was doing – that point just never came.

My trusty money market fund has done its job. My savings were kept safe and earned at least a small amount of interest, and it did help me out in an emergency. Last year when the hand-me-down car I’d been driving since I first got my license finally decided to die, my money market fund provided me with enough money to make a sizeable down payment on a used car – without totally wiping me out.

However, the time has come for me to finally do what I promised myself I would do years ago and start learning more about investing. To that end, I’ve begun reading Charles Schwab’s New Guide to Financial Independence. I picked it up at the used book store a couple years back but never got around to reading it. I’m now on page 62 and so far, so good. It starts off very simple and explains investing in a non-intimidating way that even the novice (aka – me) can understand. I was worried it would be somewhat dry, but it’s held my interest so far and I’m zipping right through it. By the time I finish reading this book, I plan to (dun-dun-DUN) diversify my investments.

Retirement: Ya Gotta Do It Someday…

Yesterday I did something I probably should have done awhile ago: I opened a Roth IRA. It’s something I had thought about doing before, but I was paralyzed by fear… I didn’t know the 'right' way to start a retirement investment, so I did nothing. Yesterday I finally decided that it would be smarter to start saving for retirement now without having a perfect strategy, than to sit around waiting for answers that I wasn’t finding. What spurred me to finally make the plunge was an article on the U.S. News and World Report website: Financial Tips for 20-Somethings. The article interviews Ramit Sethi, creator of the I Will Teach You to Be Rich blog. In it, Sethi is quoted as saying :

There's a funny idea in our culture that more information is always good. But as Barry Schwartz noted in The Paradox of Choice, the more choices we have, the less likely we are to do anything. In a study about 401(k) participation, he wrote, "For every 10 funds added to the array of [401(k)] options, the rate of participation drops 2 percent."

So if the average 20-something sees 20 fund choices at work for his 401(k), TV commercials about annuities, blog posts about Roth IRAs, and newspaper columns about not spending so much on lattes every day, what do you think he'll do? Chances are: nothing. Over half of 20-somethings don't contribute to retirement accounts. Forty percent don't even deposit money regularly in a savings account.

He goes on to say:

Getting started is more important than being the smartest person in the room. If I had a choice between being 100 IQ points smarter or starting to invest earlier, I'd choose starting earlier. I encourage young people to read enough to get started but not to worry about knowing every investing instrument under the sun.

This made perfect sense to me. To get started, I moved $3,000 out of a money market investment and into a retirement account. It was the minimum investment, but I wanted to have something left in the money market as it’s my emergency fund. So now there’s $2,500 in the money market and $1,600 in my basic savings account, making my total amount in savings a whopping $7,100. It could be worse. In fact, the majority of my friends have absolutely NO savings.

I actually started saving several years ago, but as I’ve been living hand-to-mouth for the last two years while I was in grad school, I wasn’t in a place to be able to regularly contribute to my savings accounts. Now I’m out of school and finally earning some money, but I also have the added expenses of student loan payments and am finally contributing a full 50% to our living expenses, which was impossible for me to do before.