I 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?