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Advice for a Beginning Investor

Time to investI had the pleasure of discussing investing with one of my friends recently. She and her husband hadn’t really started saving for retirement. They also had a baby last year and wanted to look into options for college funds. I am certainly no expert, but I’ve learned a thing or two over the years, and I love to talk about money. It’s just hard to find anyone to talk with most of the time!

It turns out they had already met with a financial planner who gave some recommendations, but she was unsure about his advice. It turns out she had already done quite a bit of research and just needed to pull the trigger. I think lots of people are in the same boat and end up doing nothing because they are scared of making the wrong investment choices. There is never a better time than now to start investing, and you don’t necessarily need a financial planner to do so.

Financial Planners, Friend or Foe?

I have nothing against having a financial planner. I know there are some amazing ones. I just don’t think any of them live in my town. I met with one a few years ago who wanted to sell me annuities. I’ve also been given the whole life policy pitch. The one my friend used suggested some investments I’d never heard of, but I assume they are front loaded mutual funds.

With those type investments, the planner gets a percentage right away, often 5% or more on your investment. You don’t need to be a financial genius to know that can be a big part of your nest egg. I think asking for advice is smart, but be sure and double check that advice and know how your planner is getting paid. If he is getting paid to push a particular investment, that’s padding his bottom line, not yours.

Keeping an Emergency Fund

When I asked how much money my friend had to invest, I was pleasantly surprised to learn that they had about $30,000 sitting in a savings account. The first thing we talked about was keeping some for emergencies. She though that they would keep enough for their insurance deductible and for some home repairs that were coming up. She felt keeping $10,000 would make them sleep well at night. The amount that lets you rest easy is always the correct amount to keep in an emergency fund.

Traditional vs Roth IRA

After the emergency fund amount was determined, that left $20,000 to invest. We talked about IRA’s, and decided that it made the most sense to open up a Roth IRA for both she and her husband for 2013 and then contribute again in 2014. With a traditional IRA, they would have gotten a tax deduction if they itemized, but they are in a low tax bracket currently. She liked the idea of the money growing tax free, even if there was no immediate benefit. There really is not a right or wrong answer as long as you know why you are choosing one type of investment over the other.

Low Fee Index Funds

Next we talked about which funds to choose. We discussed fees and how that affects your bottom line. Everyone charges something to invest your money, but there is a range of management fees. Vanguard is my personal favorite because of their ease of use and low fees. She chose a Target Retirement Fund until she has time to study and learn more about their various offerings. Even if she never changes funds, that’s not a bad route to go. Putting money into a fund that costs 0.16% per year vs 1%-3% is a huge difference over a 30 year investment time line. Why give anyone else your money when you don’t have to?

What About College Savings?

Like most parents, my friend wants to do what is best for her child and wondered if she should use some of this money to set up a 529 college savings plan. Even though her daughter isn’t even one yet, it’s never too early to plan.

My advice was to go ahead and open an account and start putting whatever they thought was reasonable in per month without having to sacrifice their investment goals. I always fall back on the line about how their daughter will be much happier having to pay for college than having to pay for her parents in their old age because they have no retirement savings.

Anyone Can Be an Investor

In the end, my friend was way smarter than she gave herself credit for. She just needed a nudge and confirmation from a non-biased source. I have no doubt she and her husband will do great. They already know how to save money, now it’s time to put that money to work.

What if you don’t have $20,000 to invest?  Vanguard does require at least $1000 to start an IRA using one of their funds, however you can start an IRA with as little as $200 with Fidelity as long as you set up automatic contributions of at least $200 a month. You can also start saving in a bank account and invest with a brokerage when you reach $1000. Since anyone can make an extra $500 a month, you should be able to do this in no time.

It literally takes less than 30 minutes to set up a retirement account online if you know which brokerage and funds you want to use. If you have no clue, use one with low fees and pick a Target Date Fund. Also keep in mind that doing nothing will cost you lots more than choosing the wrong fund in the beginning.

What things have kept you from investing? What advice would you have given my friend?

Image: Freedigitalphotos.net/Miles

 

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

44 comments

  1. I was having those same introductory how to get started with investing conversations with family members also during Thanksgiving weekend. The main thing I think everyone needs to keep in mind is this: The average investor will never beat an index fund over time. Once you give up on the illusion of making 12, 15, or 20% returns every year, the notion of hiring a financial planner will drift away because you’ll discover that you could make those same kinds of returns using Vanguard or Fidelity.

    • Absolutely. That’s why I never really sought out financial advice after the first couple of times. It’s easy to do on your own.

  2. Index funds in my Roth are my planned vehicle (after we finish paying off the mortgage). I’m glad to see that you’ve taken up another side-hustle, Kim. Financial planning!

  3. This all sounds like really solid advice. I like to keep it simple, so I agree with your suggestion of target date funds. I plan on opening up an IRA this year since I currently only have a 401k and want to put a little more in retirement savings. It’s crazy how easy it is to get set up with an account once you decide to go forward with investing.

    • If you already have one account, you can open an IRA with the same company in less than 5 minutes, and it doesn’t take much longer to start from scratch.

  4. I am constantly saying the same thing to people who either do not invest, or are thinking about it: it takes 30 minutes to get started, and you can choose funds that take the thinking part (at least for them) out of it. Still I get push back. Good for your friends in making the jump and growing a pair in terms of talking to someone about it.

    Roth IRAs are the best retirement vehicle available, very good that they went that path.

  5. Sounds like solid advice! The only thing I was wondering is if your friend is eligible for 401(k) contributions through her employer and if she is contributing up to the point of the match. Hopefully she is!

    We had a financial planner for a while, but after some experiences with him that really left us wondering if he was more interested in our well being or his own, we parted ways with him. These days the hubs and I read a LOT about financial planning, and we are trying to become our own financial planners.

    • Great point. She does have a plan and contributes up to the match. Her husband is self employed and does not have anything set up for himself. That was another option we talked about, upping the work contribution and living off the savings for a while, but she decided she liked the Roth better.

  6. Sounds to me like you gave her the perfect advice. We too, are mostly just afraid of pulling the trigger, but we’re getting less and less nervous about it. Our plan is to start with a really small amount, like $500 – $1000, and then see how that sits for awhile before adding more.

    • I can understand your push to pay down the high interest debt first. I would do that as well. If you lost some money that could have paid off a credit card, that would be disappointing.

  7. You gave great suggestions. I think keeping it simple with Vanguard is the way to go. Slow and steady wins the race to retirement in my opinion.

    • Life can be hard enough without trying to make investing harder. I have always though Vanguard made it simple, so that’s why I use them as much as possible.

  8. “I met with one a few years ago who wanted to sell me annuities. I’ve also been given the whole life policy pitch. The one my friend used suggested some investments I’d never heard of, but I assume they are front loaded mutual funds.”

    This is exactly why Greg’s sales job didn’t work out. He felt so sleazy trying to sell people stuff that they don’t need and doesn’t really benefit them =/

    • I have so much more respect for Greg for quitting that job. That’s why I’m not a richer optometrist. I just can’t pitch all that crap that people don’t need.

  9. “The amount that lets you rest easy is always the correct amount to keep in an emergency fund.” So true! I do use a financial planer but it’s someone my money savvy dad kind of set me up with. Even still, I’m not as involved as I should be. I guess my fear is not understanding everything and feeling stupid. Poor excuse I know.

  10. Solid advice Kim. There are many things that hold people back from starting to invest, but the amount they have to invest and being overwhelmed are generally near the top. Many, though not all, advisors will take advantage of this and end up in the person having their money eaten away by fees. That is a huge part of the reason why going the low cost index fee route is such a good option for many.

    • I think lots of people don’t think 1% here and there makes a difference, but if you look at 30 years time, that’s thousands of dollars!

  11. Great advice. I’m glad I started investing right after I graduated from college. I know many people who put it off and are afraid of it, but it doesn’t have to be complicated. Low cost index funds are an excellent choice. I also opened up a 529 plan now that we had a little one…also get a tax deduction from our state for contributing.

  12. I think your point about low fee index funds is huge. It is amazing how much people pay in fees/expense ratios and they don’t even know it. Great advice!

    • My husband’s 401k fees are not good at all and he doesn’t get a match. We stopped the contributions to that and went with Roth’s instead.

  13. This is great advice Kim. As far as financial planners, you have to look at someone who is fee based or fee only. No commissions on the investment side whatsoever. There are plenty of good ones, but you have to understand the industry compensation models. And 529 plans can be good, but they are also rather restrictive and off fairly low rates of return. I’m not so sure a taxable account wouldn’t be better for someone in a low tax bracket.

    • Colorado doesn’t even give tax credits for 529’s. We have one for our daughter and put a little money in it, but the bulk of what we’ve done for her is in a Roth IRA. I’m hoping she can use it when she’s older as a great nest egg.

  14. At the moment, we have a Roth IRA and my company 401k, and an old rollover IRA.
    We are hoping to setup a vanguard investment account as our “in case I lose my job one day” savings account in 2014.

  15. Vanguard is great, huh? So easy to set up an account and the low or no fees makes it a no brainer. Great investment advice Kim.

  16. So many people are terrified of making an investment mistake and second guess themselves to the point where they cannot make a decision. For most people, their financial lives are not that complicated and their investments don’t need to be either. For some reason so many people believe investing must be complicated and thus make it so. Simplicity is often the best. A financial advisor can certainly be beneficial – yes, I am biased since I am one 🙂 – but you also need to do your due diligence on the advisor and remember that you’re hiring them. So interview them, ask them how they get paid, make sure they treat you respectfully, etc.

    • I was thinking of you when I mentioned the good advisors. I honestly think most of the ones in our area are just good at sales and not necessarily finances.

  17. I think the target funds at vanguard are a great place for most people to start. The important thing is not to let imperfection serve as an excuse for not getting started!

    • Sadly, I know that happens a lot of the time. People think they will start next month or the next enrollment period and never do.

  18. Good advice Kim. I didn’t invest for some time outside of my 401k because I wanted to pay down debt. Then I started investing when I was close to being done. Now, I have a 401k, brokerage account, Roth, and a 529, which I setup the day after my son was born. You just have to start somewhere.

    • That’s awesome. I can certainly see paying down high interest debt before putting the bulk of your money in retirement. It’s very nerdy, but I like to log in and look at all the accounts and how they’ve grown with time.

  19. Wonderful advice! You’re right, anyone can be an investor with great information like this that is so easily accessible. It can be hard to make that leap all by yourself, but it’s important to start as soon as you can so you give yourself as much time as possible in the market where your money can compound and work for you.

  20. I like how you talked her through that. The best advice is to keep it simple. Most investors don’t have need of a financial planner. Perhaps if someone came into a large lump sum of money and had no prior investing experience it might be wise to search one out. Anyone can learn to invest on their own if they just take the time and are patient.

    • That was kind of my thought. If you don’t know what you’re doing, start off slow and easy. The most important thing is to start.

  21. If your friend’s husband is self employed he can open a self IRA with Vanguard to shelter more of his income. What are your fees in your husband’s 401K? Anything under 1% is reasonable.

  22. I think the problem for most people, not your friend obviously, is that they feel they don’t have enough to invest. I think the important thing to remember is that you just need to get started. I started with $3,000 and watching that money grow has inspired me to invest as much as possible.

  23. What a fun conversation! I love having those types of talks with friends and family and it usually happens around the holidays. It sounds like your friend just needed someone to tell her she’s on the right track.

  24. You can start investing at Schwab with just $100. That’s for retirement or non-retirement accounts.

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