Broke Millennial Takes on Investing

Home > Other > Broke Millennial Takes on Investing > Page 10
Broke Millennial Takes on Investing Page 10

by Erin Lowry


  Being self-employed with unpredictable income can make it difficult to balance financial priorities. But even though you’re dealing with student loan debt, it is still wise to invest for retirement. You want the advantage of compound interest working for you for the extra decade of your life, especially if it’s going to take you ten to twenty years to pay off your student loans.

  I Can’t Afford to Put Much into Retirement, Yet

  Sure, the Erica example is simplistic and rather cut-and-dried. She’s making a decent salary, and her student loan payments seem manageable. I get that it’s certainly not the typical situation for many Millennials who don’t feel as if they’ve gotten their financial lives together and put that financial oxygen mask on. You may feel as if every single penny is spoken for in your paycheck and that putting enough away to get your employer match is simply not doable.

  “So, they say you should target 12 to 15 percent of your income toward retirement,” says Maria Bruno, CFP®, a senior investment analyst for Vanguard Investment Strategy Group. “Well, if I have that conversation with someone who’s in their twenties, they look at me like I’m crazy. I lose all credibility. So what I would suggest would be to save at least up to the company match, if you have that opportunity, and then do a 1 percent increase every year. And maybe you’re saving 5 percent plus a 3 percent company match. You’re at 8 percent out of the gate. You do a 1 percent automatic increase every year. If you’re twenty-five when you start, by the year you hit thirty, you’re pretty much within that ballpark in a very comfortable way.”

  Bruno’s strategy of increasing in small increments over time is also a way to work up to getting your employer match in the first place. Start by putting just 1 percent in your 401(k). After six months, kick it up half a percent or all the way to 2 percent. Then keep increasing it every six months until you’ve worked up to getting the employer match. When it’s just 1 percent at a time, you honestly barely notice the difference in your paycheck—especially if you’re lowering your taxable income.

  If Nothing Else, Consider the Tax Benefits

  Math-heavy arguments showing why compound interest is your best friend and why you should invest early and often in order to take advantage of it, even with student loans, really might not get you going the way they do for me. That’s okay. Here’s another argument for why you should at least contribute to your retirement account even while carrying student loans: taxes.

  “I think you want to make retirement investing a priority because there’s tax benefits to doing so, even if you don’t get a company match, for instance. Or if you don’t participate in a 401(k) through your employer, there’s individual retirement accounts or other vehicles that you can use that have tax benefits,” says Bruno. “And that starts the tax-free or the tax-deferred clock ticking right away. So you want to make that a priority. But it’s okay to do that and balance debt as well.”

  Contributing to a tax-deferred account such as a traditional 401(k) or IRA means you lower your taxable income today. When you take the money out in retirement, you’ll have to pay taxes on it. A Roth account means you don’t get the tax perk today, but you will in retirement. You put money into a Roth account after paying taxes, but you get to take the money out in retirement tax free.

  That said, there is one completely valid reason you may want to hit Pause on making retirement contributions: your debt tolerance.

  WHAT’S YOUR DEBT TOLERANCE?

  “I really regret paying my debt off quickly,” said no one ever, because debt sucks with a capital S-U-C-K-S.

  I can give you all the mathematical reasons as to why you need to be investing. I can make impassioned pleas about compound interest and the value of having time on your side and how it’s incredibly difficult to make up ground ten years later, even if you double down on your contributions. But for all my eloquent arguments, your gut might just say, “No, I’m completely uncomfortable with debt and it needs to be gone at any cost.”

  That’s okay. You may have a massive case of debt aversion. I’m one of you, too. The idea of hanging on to debt for a decade, even when it mathematically makes sense to do so, gives me a low-grade case of nausea. It’s something I’ve been working on getting over while dealing with my husband’s loans. We’re attacking his debt with a three-pronged approach of moderately aggressive repayment, prioritizing retirement savings, and mixing in some investing.

  Ultimately, you do have to decide what the right decision is for you emotionally and not just financially. Just do the future you a favor and consider the financial side a little bit. At least put some money into retirement savings, please. Okay, I’ll get off my soapbox now.

  “You’re the circus unicyclist spinning plates with a kazoo in your mouth,” jokes Schlesinger. “That’s what your financial life is when you’re in your twenties and thirties. And you’ve got to balance a lot of different needs. So just be reasonable and know yourself. If that debt is keeping you up at night, even if it’s just 2 percent, then pay the frickin’ thing off!”

  CHECKLIST FOR INVESTING WHILE YOU HAVE STUDENT LOAN DEBT

  ☐ Get the employer match!

  If it hasn’t been made abundantly clear by now, you shouldn’t aggressively pay off debt in lieu of putting money away for retirement, especially when an employer match is involved.

  ☐ Crunch the numbers on your interest rates.

  Are the interest rates on your student loans above 5 percent? Then it probably makes sense to prioritize the debt payoff over investing outside of retirement accounts.

  ☐ Know your risk tolerance.

  Can you emotionally handle investing while in debt or will a dip in your portfolio trigger you to sell when the market is low?

  ☐ Embrace your emotional relationship to debt.

  If you legitimately can’t sleep at night because of your debt, then it’s okay to make paying it off a priority. But please, please, please, at least get an employer match or put some money away in a retirement account if you’re self-employed!

  Chapter 6

  I Want to Put Money in the Market—How Do I Start?

  THERE I WAS, two years out of college, earning a whopping $37,500 a year at my job and bringing in a few extra grand a year in small writing jobs and babysitting. Despite living in one of the most expensive cities in the United States, I officially had my financial oxygen mask on. A fully funded emergency savings and no debt made me feel empowered to start investing outside the 401(k) I had at work. Except I had no clue what to do, and in retrospect, I wouldn’t have done what I did next.

  I made the entirely un-Millennial move of calling up my bank.

  Now, I will say that I loved, and still love, this particular bank. It has great customer service, which was what inspired my phone call. I didn’t know what I was doing, so speaking to a real person helped reduce my anxiety about screwing up. I hadn’t done any research about fees or set goals or determined my time horizon or risk tolerance.

  Carol answered my call and assured me she could help me set up my first investment. To do this, she asked some basic questions to determine how I should be investing.

  She asked me when I thought I’d want the money. “Uh, I don’t know. Maybe for a house in ten years?”

  She asked how much money I had to invest. “I’ve saved up $2,000 to invest.”

  She inquired about my risk tolerance. “Hmm, I don’t mind taking some risk, I guess.”

  As you can sense, my responses were not particularly well thought out. But thirty minutes or so later, I had my first taxable account set up: a mutual fund that, unbeknownst to me at the time, came with rather high fees.

  I basked in the self-important glow of being twenty-four years old with a 401(k) and a mutual fund.

  Silly, Erin. You still sort of screwed up. />
  While I guess it’s good that I took a step toward investing, albeit an uninformed one, and while I felt a smidgen of dignity in trying to be a grown-up and not calling my dad this time for advice (even though I probably should’ve), this is not the method you should use.

  OKAY, BUT SERIOUSLY, THEN—HOW DO I GET STARTED?

  “I want to invest, but how do I start?” is probably the most common investing question I receive. It’s completely justified because it isn’t a straightforward process. We aren’t taught how to do it in school, googling the question yields an overwhelming amount of options that rarely actually show you how to open an account, and your parents may have never invested, either. Our go-to resources have failed!

  This chapter will give you an overview of how to open a brokerage account and some of the options available to you. This will be focused more on investing in mutual, index, or exchange-traded funds. There is some overlap with what you need if you plan to do individual stock picking, too, but that topic is addressed in chapter 7.

  Because this book is in print, which means I can’t update it like I could a blog post, there will be certain points at which I’m a bit vague. I don’t want to put a detail or direction in print that will be irrelevant in a few years or maybe even by the time this book is in your hands! In these moments of vagueness, I’ll do my best to direct you to places where you can find up-to-date information.

  WHAT YOU NEED TO OPEN A BROKERAGE ACCOUNT

  Before you even walk into a brokerage firm or, more realistically, go to its website, here are the pieces of information you’ll need for a smooth process:

  Personal information: You’ll be asked for your name, address, email address, telephone number, date of birth, employment status, and occupation. The brokerage will also want to know if you’re employed by a brokerage firm.1

  Social Security number or other tax identification number: The money you earn investing is subject to taxation, so the brokerage firm has to be able to report that income to the IRS. This number is also used to verify your identity.

  Government-issued identification: Your driver’s license, passport, or similar identification cards will be required. The brokerage firm needs this to comply with the USA PATRIOT Act of 2001 and to further verify your identity.2

  Financial information: You will be asked about your annual income, net worth, and investment objectives. Brokerages and advisors need this information in order to comply with state and US laws as well as rules from regulatory bodies like the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Your broker may also use this information to determine suitable investment recommendations.

  Bank information: You need the routing and account number for the checking account you’ll use to fund your new brokerage account.

  WHAT YOU SHOULD DECIDE BEFORE YOU BEGIN

  You’ve collected all your personal information and now you’re ready to set up your brokerage account. But first you need to know a couple of things:

  What Kind of Account You Want to Open

  Are you investing for retirement, education (e.g., your child’s college education), or for other financial goals? The type of account you open will depend on the reason you’re investing in the first place. In this case, let’s assume you are investing for a medium- to long-term goal.

  Don’t be like me and just randomly pick something with little to no forethought. But the one right move I made was talking to someone when I felt I needed help. I advise that you give your investment strategy more thought than I did, but picking up the phone and talking to an advisor at your potential brokerage firm is smart.

  How to Fund the Account and How Much to Invest

  You could write a check (if you even have a checkbook!) or make a transfer from your bank account. Have your routing and account numbers ready.

  You should also have decided how much you want or need to invest. Some funds have a minimum initial investment.

  If your investing is retirement related, you might be doing a rollover from a former employer’s 401(k). Or you could transfer a brokerage account you already have at another financial institution to fund your new endeavor.

  OTHER QUESTIONS YOU MAY BE ASKED WHILE SETTING UP YOUR ACCOUNT

  Here are three other questions you may need to answer when setting up your account:

  Would You Like a Cash Account or a Margin Loan Account?

  As a rookie, it’s best to go with a cash account. A cash account means you’ll be paying for the investments you purchase in full. A margin loan means the broker can lend you funds to make the purchase, so you’re buying “on margin.” Money already in your account works as collateral for the loan. It’s simpler not to complicate the process, so choose a cash account.

  What Do You Want to Do with Your Dividends?

  You will be asked, at some point, what you want to do with the dividends your investment earns (assuming it earns dividends). You could take them in cash each year or you could just reinvest them, using a dividend reinvestment plan, or DRIP).

  This isn’t a black-and-white situation in which one is completely superior. It comes back to your goals. Why are you investing this money? Are you trying to get some passive income right now or do you want to maximize as much growth as possible for the future, when you plan to sell the stock? Reinvesting is going to be beneficial for long-term growth.

  Who Is Your Beneficiary?

  The beneficiary is the person who will receive the money in your account upon your death. Please take the few minutes it requires to set up a beneficiary. You usually need the person’s full legal name, birth date, address, and Social Security number. Designating a beneficiary helps reduce confusion and tension for your loved ones after your death. Plus, it could help your loved ones avoid probate, in which a court supervises the distribution of your estate.

  WHICH BROKERAGE SHOULD I USE?

  Okay, you’ve pulled all the information together that you need to open the account. Now the big question: where should you take your business?

  You have many options when it comes to picking a brokerage firm. This may be a disappointment, but I’m not going to tell you which one to pick. I can’t! I don’t know what best suits your needs. Instead, I’m going to provide you with a way to vet brokerage firms to find one that’s the right fit.

  “Vet them like a dating partner,” says Kelly Lannan at Fidelity Investments. “Is this someone who has my best interest at heart? This is someone whom I might spend the rest of my life working with. As a result, those are pretty high standards.”

  What Kind of Service Do You Want or Need?

  Do you plan to do lots of trading, or will you be a buy-and-hold investor? Do you want to be more hands-on and DIY in your approach, or would you feel more confident if you connected with a human or had an algorithm maximizing your portfolio? These are the factors you need to take into consideration when determining whether a brokerage firm is right for you.

  What Are the Minimums for Opening an Account?

  Many, but not all, brokerage firms will have minimum initial investments in order to open an account at all or to invest in certain funds. These minimums vary, and therefore can have a huge impact on which institution you pick. Let’s say you have $1,500 to get started on your investing journey and you’ve picked an index fund in which you want to invest. Well, that’s going to rule out any brokerage with a minimum investment greater than $1,500 for that fund.

  If you’re dead set on a certain brokerage firm, but its minimum is too high, then you have a few options:

  Search and see if another comparable fund at the same brokerage has a lower initial investment requirement.

  Start investing at a different brokerage and transfer your funds after you’ve met the investment minimum at the brokerage you want.

  Keep saving up until
you hit the minimum.

  See if the exchange-traded fund (ETF) version is cheaper than the mutual fund version. Sometimes it is!

  How Reputable and Well Liked Is the Brokerage?

  Honestly, my favorite strategy here is word of mouth. Do any of your friends, cousins, parents, aunts, uncles, or parents of friends invest? If so, ask them which brokerage firm they use, why, and how they like it. Try to crowdsource from more than just one or two people.

  Then, take to the internet.

  Type in the name of the brokerage firm and “reviews” to get a sense of what people outside your immediate circle think. Be sure to also read about the negative experiences customers shared.

  You can also see what Morningstar has to say about specific funds in which you want to invest. This investment research company ranks funds out of five stars, so it’s easy to see how your potential investment stacks up.

  How Is Its Customer Service?

  You don’t have to be a current client to take the firm’s customer service out for a test drive. Give the brokerage a call. Use the opportunity to see how long you’re kept on hold and how you’re treated by the customer service representative. You should also check whether email and live chat are options for connecting with customer service. You want to be doing business with an institution that treats you and other customers well.

 

‹ Prev