Broke Millennial Takes on Investing Page 3

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  GETTING YOUR FINANCIAL LIFE together is step one on the journey to becoming an investor. You also need to shake the common misconception that investing is just for the wealthy.

  INVESTING ISN’T JUST FOR WEALTHY PEOPLE

  “[T]here’s this misconception that you need to be in a certain place before you can start investing,” explains Jennifer Barrett, chief education officer for Acorns, the saving and investing app. “That was true when I was in my twenties, too. I sort of had this idea that investing was for the wealthy or investing was for the financially successful, which meant I had to get my stuff together before I could really go in big. I think a lot of people feel that way because it’s intimidating and, at least in the past, you had to have $500 to $5,000 to open an account, so you really did need to have some money set aside outside of savings that could be used for investing.”

  Barrett touches on a real concern for most rookie investors: how much does it take to start? In some cases, you will be faced with a minimum amount to buy into a fund. For example, you may need as much as $3,000 to open an S&P 500 index fund with certain brokerages. Saving up $3,000 just to gain entry to investing can be a ludicrous scenario for some.

  Fortunately, technology really has changed the game, and now the average rookie and seasoned investor alike have more choices and can start with much lower thresholds than available to previous generations. The much-touted index fund wasn’t even created until 1976.1 That may sound like a long time ago to your average Millennial, but consider that the New York Stock Exchange has existed as a formal organization since the 1800s. Chapter 8 will take a deeper dive into how technology allows you to get into the game without hefty minimum initial investments.

  INVESTING ISN’T JUST FOR OLDER PEOPLE

  As you continue on your journey to learn more about investing, there will be one common mistake that gets mentioned time and time again. “I’d say the biggest mistake is not starting early,” explains Julie Virta, senior financial advisor with Vanguard Personal Advisor Services®. “The earlier you start, the better.”

  There are plenty of other mistakes you can make as a rookie investor, and we’ll address those throughout this book, but believing you’re too young to start is the simplest one to fix when you’re young. In theory.

  PUTTING ON YOUR FINANCIAL OXYGEN MASK

  In reality, it can take years to get your financial life together, and while it’s a mistake to wait too long to start investing, it’s also a big mistake to throw your money into the market before you’ve taken the time to put your financial oxygen mask on first.

  “You have to earn the right to invest,” says Douglas A. Boneparth, CFP®, New York City’s financial advisor for Millennials, and president of Bone Fide Wealth. “Investments are the sexiest part of personal finance, but it’s just one piece.” He adds, “There are a number of boxes you should be checking off before you find yourself putting risk on your money.”

  Ready to Start Investing Checklist

  ☐ Set financial goals:

  What do you want to achieve in the short, medium, and long term, and what will it take to get you there?

  Boneparth’s rule: “For goals that will take four years or less to achieve, you are not putting risk on that money. You are not investing that money. Investing equals risk.” We’ll discuss goal setting further in chapter 4.

  ☐ Master cash flow:

  How much money is coming in and how much is going out? (Another, often hated-on term for cash flow is budgeting.)

  Can you easily pay all your bills each month? If you’re still in the “scraping by” phase, then it’s not time to focus on investing yet.

  Boneparth explains that mastering cash flow allows you to figure out and be honest about what is a comfortable lifestyle, which is completely subjective, and enables you to become disciplined with your savings. But what’s practical isn’t always what’s the most enjoyable. “Fun scale quite low, importance scale super high. Mastering cash flow must be done before you even contemplate investing,” says Boneparth.

  ☐ Set aside cash reserves for your emergency fund and short-term goals:

  For an emergency fund: A fully funded emergency savings account is critical before you start investing. This money needs to be liquid, easily accessible, and “principal protected,” according to Boneparth. “Principal protected” means you are guaranteed a certain return (like the interest rate on your savings account). Money that’s invested isn’t guaranteed a return, and you could end up with less than what you initially put in.

  Three to six months’ worth of living expenses is the rule of thumb, but depending on your risk tolerance, you may want a little more cushion if you’re self-employed or have a volatile income. Having three to six months’ worth of money saved may sound like an insurmountable feat before you start investing. Before you panic, consider that this needs to only be your bare-bones budget. Not enough to keep you in your current lifestyle, assuming it’s a comfortable one, but enough to keep the lights on, cover rent or mortgage payments, and put food on the table and gas in the car or a MetroCard in your hand.

  It doesn’t hurt to tack on a buffer fund for pets. My pup has his own (much smaller) emergency fund.

  For planned upcoming short-term purchases: This ties back to the first step on your checklist: “Set financial goals.” Virta advises setting aside cash-flow needs for the upcoming six months before putting money in a long-term investment plan. This means not only your healthy emergency savings fund, but also any big purchases you may need to make or anticipated life changes (for example, moving).

  ☐ Pay off consumer debt:

  Any form of high-interest debt like credit cards, payday loans, title loans, and the like need to be paid off before you start investing.

  Mortgages and low-interest-rate auto loans are more akin to student loans. You must be current on your debt, but you don’t necessarily need to have paid these off in order to start investing.

  ☐ Ensure student loans are current, if not paid off:

  Chapter 5 is dedicated to the “student loan debt and investing” conversation, so that should give you a sense that it’s probably okay to start investing while you have student loans. There is nuance as to whether it makes sense, of course, but for the sake of your checklist, you need to be current on all your student loans before you’ve “earned the right,” as Boneparth says, to start investing.

  ☐ Educate yourself about the stock market:

  Well, you’re reading this book! That’s a great place to start. Hopefully you can come back to this page and put a big checkmark here when you’ve finished reading it.

  ☐ Start saving for retirement:

  Saving for retirement is a bit of a misnomer, in my opinion. You should be investing for retirement. Putting money into a 401(k) or IRA means you are investing, assuming you don’t have that money sitting as cash. We just don’t tend to think of ourselves as investors when all we have are retirement accounts. But putting money into an employer-matched retirement plan or into IRAs should be your first foray into investing, which we’ll discuss further in chapter 4.

  Yes, even if you have debt, you should be contributing to your employer-matched retirement plan. “The one exception to ‘earning the right to investing’ is getting free matching money. Obviously, go get that. If putting in 3 percent gets you 3 percent and you’re going to stick around for a year or two, go get that free money,” says Boneparth.

  To keep driving home the saving-for-retirement mantra . . . “Investing in a 401(k) should be a no-brainer, something you definitely do. So, if you work for an employer that has a 401(k) plan, you definitely want
to invest in it, especially if that employer is doing a match. So, for example, if they’re matching 3 or 4 percent, you should do at least that, minimum, to start. Those are dollars that are going to come out of your paycheck right away, before you even see them, so it’s a great vehicle to start the saving. You don’t necessarily see those dollars come into your pocket and then have to make the decision as to what to do with them. Getting your savings up to 15 percent of your income is ideal, especially if you plan for a higher lifestyle in the future or an earlier retirement,” says Julie Virta.

  Once You’re Ready to Start . . .

  “Starting early and staying disciplined are the two primary focuses for a young person,” says Virta.

  One way to stay disciplined is to automate! Decide on a sum of money you can comfortably invest each month. Then set up your brokerage to automatically pull it out of your checking account and put it in the stock market.

  AM I TOO MUCH OF A BROKE MILLENNIAL TO START INVESTING?

  You picked up this book excited to learn more about investing so you could get started, but after reading the checklist, you have a few unmarked boxes. Does that mean you can’t invest yet?

  Unfortunately, outside of contributing to retirement accounts, it does. It’s important to lay the foundation first before you begin putting money in the market. Without the proper foundation, you can put yourself at greater risk in what is already a somewhat risky situation. Investing is a critical part of building wealth, but as Boneparth says, you must earn the right to start.

  When You’re Not Ready to Start Investing

  ☐ You haven’t set financial goals:

  Thinking “I want to be debt free” doesn’t count as a financial goal. A financial goal needs to be both specific and actionable, such as “I want to pay off my $35,000 of student loan debt in the next five years.”

  ☐ You still have credit card debt:

  Student loans (potentially) get a pass (we’ll discuss this more in chapter 5), but credit card debt needs to be paid off before you start investing.

  ☐ You don’t have emergency savings:

  Three months’ worth, at minimum, of your essential monthly expenses needs to be in a savings account. Don’t tie money up in the market until you have this buffer.

  ☐ You haven’t taken the time to learn about how the stock market works:

  You’re fixing that one right now!

  ☐ You haven’t started contributing to an employer-matched retirement plan, if it’s available:

  Your first focus should be getting that employer-match. It’s essentially a guaranteed return on your investment. If you don’t have access to an employer-sponsored plan with a match, then you should still consider a retirement account as your first investment before planning to invest elsewhere. We’ll discuss this more in chapter 4.

  If any of these boxes get a checkmark, then you need to press Pause on investing. Take the time to put your financial oxygen mask on first. At the risk of being too self-serving, I suggest you start by reading Broke Millennial: Stop Scraping By and Get Your Financial Life Together. It will help you lay that necessary foundation in order to start investing. That’s why this is the second book in the series!

  That being said, I’m not telling you to stop reading this book. You can learn about investing before you’ve built your emergency fund, paid off your credit cards, or set all your financial goals.

  HOW THIS BOOK IS ORGANIZED

  The introduction has explained why it’s important to invest your money and not just stash it in savings, and now you’ve figured out whether now is the right time to actually begin investing. In the words of Douglas Boneparth, you’ve “earned the right to invest.” Or you’ve realized it isn’t time for you to be putting money into the stock market (outside of retirement plans), but you still want to learn.

  Akin to the style of the first book in the Broke Millennial series, this book does not have to be read cover to cover. Each chapter stands on its own, but I do advise you to read chapter 2 before progressing so we’re speaking the same language.

  However, just because you can skip around doesn’t mean you should. I’ve created three categories of potential readers and recommended chapters based on your level.

  The True Rookie

  You’ve never dabbled in investing but are eager to learn more. Well, maybe not so much eager, but you’ve been told it’s important, and this book seems like a way to ease in. You probably don’t contribute to an employer-matched retirement plan yet or an IRA, and it’s also totally okay if you don’t know what either of those terms mean.

  For the true rookie investor, it would be best to read this book in chronological order, chapters 2 through 9. (I’m assuming you’ve already read the introduction and this chapter, but if you randomly opened up to this page, go back and start at the beginning!) After that, you’ll have a solid foundation and can begin to jump around based on your personal interests or where you are in your investing journey.

  Chapter 2: Let’s Establish a Common Language

  Chapter 3: Grabbing the Bull by the Horns When You’re Risk Averse

  Chapter 4: I Have a 401(k)—Do I Need to Do More Investing?

  Chapter 5: Should I Invest When I Have Student Loans?

  Chapter 6: I Want to Put Money in the Market—How Do I Start?

  Chapter 7: I Like Gambling—Isn’t That Like Individual Stock Picking?

  Chapter 8: Investing—Of Course There’s an App for That

  Chapter 9: Robo-Advisor or Human Advisor—Which Is Better?

  Got Some Game, but Looking to Level Up

  You’ve started contributing to your employer-matched retirement plan (or you contribute to an IRA), and maybe you’ve downloaded an app or two that’re helping you dabble in investing. But you know you can do more and want to level up your current investing strategy. For you, I recommend:

  Chapter 4: I Have a 401(k)—Do I Need to Do More Investing?

  Chapter 8: Investing—Of Course There’s an App for That

  Chapter 11: Riding Out the Panic of a Market Crash

  Chapter 12: Sniffing Out a Scam

  Chapter 14: Tactics the Wealthy Use to Make and Preserve Money

  Chapter 15: Where Can I Get More Investing Advice (Because I’ve Been on Reddit . . .)?

  Want to Keep Learning (and Maybe Feel a Little Smug About Being Ahead of the Curve)

  As mentioned in the preface, this book is designed for beginners. I won’t be taking you on a deep dive into cryptocurrency or providing a blueprint for individual stock picking (granted, the concept is addressed in chapter 7). Also, I won’t make it easier for you to understand “hedgies” (the colloquial term for people who work at hedge funds) or any other term you may overhear at happy hour. There are well-written books available for you to learn about all those things.

  Have you already opened your own brokerage account and contribute to your 401(k) and dabble a bit in investing apps and are thinking about hiring a financial advisor? Don’t worry, there is still some value for you in this book.

  Chapters that will interest you include:

  Chapter 9: Robo-Advisor or Human Advisor—Which Is Better?

  Chapter 10: Impact Investing—Making Money Without Compromising Your Ethics or Religious Beliefs

  Chapter 12: Sniffing Out a Scam

  Chapter 14: Tactics the Wealthy Use to Make and Preserve Money

  Buckle up, it’s time to move on to deciphering investing jargon. I promise to make this as painless as possible.

  Chapter 2

  Let’s Establish a Common Language

  SITTING IN MR. FUGAMI’S eighth-grade Algebra class, I propped my head up by resting my chin on my hand, my eyes furtively darting to
the clock above the door. In an effort to exercise some self-control, I played a game with myself to see how long I could go without checking the time. Three whole minutes later, I glanced over to see I still had another twenty-five minutes of class to get through before I’d be released to scurry over to Global History class. At least there I understood what was going on.

  It was only a few weeks into the new school year, and it’d become clear that algebra would essentially require that I learn a foreign language. Hell, learning Kanji in my Japanese class had felt more doable than trying to remember that an expression is a group of terms and the terms are separated by an operator and that the pesky x or y symbol is really called a variable and that the number in front of the variable is actually called a coefficient.

  Would I seriously ever need to know this in real life?

  No, I’ve never needed to solve an algebraic equation for any of my jobs or in day-to-day life. But I did develop an appreciation for why I needed to understand those terms. Algebra needed a self-contained language in order to establish a common way to communicate. Plus, algebra became a whole lot easier once I could understand the necessary vocabulary.