ON A MILD summer day in Buffalo, New York, a simple conversation turned a risk-averse twenty-one-year-old woman into a bullish investor.
The year was 2010. America was just starting to pull out of one of the worst recessions since the Great Depression, but honestly, I couldn’t have told you much about it. I was heading into my senior year and living in the spectacularly insular bubble that college so often tends to create. There were rumblings about it being tough out there for employment prospects, but as a journalism/theatre double major, I already had fairly low expectations. No one spoke of the housing crisis. People’s parents were certainly being laid off, and yet that never trickled into dinners in the dining hall or late nights chatting in the dorms.
I was in the car with my dad. He drove while I sat shotgun. We were making small talk about the internship I’d worked that summer, which I’d accepted despite it initially being unpaid. To subsidize the cost of working for zero dollars, I saved up my resident assistant money, and I stocked up on pasta and Costco-size jars of peanut butter in preparation for scraping by. But a series of fortunate events transpired—namely, The New York Times published a piece questioning the legality of unpaid internships, and the company where I was interning announced on my first day that interns would now be getting paid $9 an hour for our forty-hour work weeks. Eight weeks later, I had much of my initial savings left, plus the money from the internship itself.
I’d started watching The Clark Howard Show during lunch and breaks. Even though I’d been money-motivated from a young age, and an avid saver, I’d never read about or researched how to build wealth. I figured I would just keep being a diligent saver (putting my money into a savings account) and keep working hard until I made a six-figure salary, and somehow the combination of those two things would mean I’d one day be wealthy.
Clark Howard mentioned in one of his episodes that it’s smart for college-age kids earning taxable income to open up something called a Roth IRA.
That fact bubbled up in my brain as I told my dad how much money I’d managed to accumulate since I didn’t have to raid all my savings to survive during the summer.
“A money show I watched mentioned it’s a good idea for college students to open a Roth IRA. Should I do that?” I asked.
“Sure, it’s never a bad idea to start investing early,” he told me.
“Wait, that’s investing?” I asked. “I thought it was a way to save for retirement or something.”
“It is a way to save for retirement, but it’s also investing,” he explained.
“Oh, I’m not sure I’m ready to invest yet,” I responded.
Then he told me a story about investing that still guides how I behave as an investor.
Before I share his story with you, it’s important that you know I am generally a risk-averse person. I never went through a serious rebellious phase and rarely broke a rule at home or school. You couldn’t even get me on a roller coaster until well into my teenage years. My brain, to this day, likes to quickly compute the consequences and figure out how to mitigate any fallout before I take a risk. Given this information, logic dictated that I’d be a cautious investor. And I probably would’ve been, if not for the following story from my father.
“Here’s what you need to understand about the stock market, Erin. It’s cyclical. It goes up and it goes down, but you need to hang on when it goes down and wait for when it goes back up. In 2008, the stock market went through a big crash and remained volatile for a while. When that happened, some people panicked and tried to pull out their money by selling their investments. On paper, your mom and I lost a lot of money during the months the market was down. I say ‘on paper,’ because we didn’t sell those investments. We held on to them. Instead of panicking, we actually put more money in the market. When it’s down, that’s usually a good time to buy, because the stocks are essentially on sale. Then you just wait for things to turn around. Today, we not only have back what we lost on paper when the market went down, but we have even more because we were able to buy more at a lower price.”
IT’S OKAY IF a lot of what my dad told me sounds like jargon to you. I felt the same way on that summer day in 2010. I did, however, get the overall point: the market goes up and the market goes down, so you need to have a long-term vision for your investments. And I got the distinct feeling that investing was what I needed to do in order to become wealthy. It became apparent that working hard and having the optimistic belief that I’d one day make a lot of money wasn’t an effective wealth-building strategy. After all, having a big salary doesn’t always translate into wealth. High income earners can live paycheck to paycheck, too.
The story from my dad deliberately oversimplified how the stock market works. It wasn’t until later that he explained how you need to be strategic and diversified in your investments so you can weather the ups and downs of the market. That it’s important to have an emergency fund, make a budget, and live below your means so that you don’t have to raid your investments when life sends you some curveballs. He later talked about the emotional reaction you’ll have when you see the angry red numbers on the screen telling you your investments have gone down and your net worth isn’t as high as it was yesterday. And it wasn’t until later that I asked how to even pick investments and where to actually go to put money into the market.
That’s what this book is for.
WELCOME TO THE true beginner’s guide on how to start investing and building wealth. I’m hoping you opened this book because you have at least a vague interest in investing, but like so many investors before you, including myself, you just have absolutely no clue how to start.
Here’s your first step. Quiet the inner voice that’s telling you some version of these excuses:
“You’re too young to worry about investing. That’s a grown-up thing. Like married with a house and a yard and a dog and a kid kinda grown-up.”
“You’re not smart enough to figure this out.”
“You’re too broke to be able to invest in the first place.”
You are grown up enough. You are smart enough. And we’ll get to whether it’s the right financial move for you to start investing now.
The fastest way to silence that inner critic is to clap back with why you need to be investing.
The simplest reason is this: it’s an efficient way to build wealth.
Seasoned investors, personal finance writers, financial advisors, and pretty much anyone doling out money advice will wax poetic on the advantages of starting young and being consistent as an investor. The reason for this isn’t wishful thinking about what could’ve been if they’d only started sooner or been a little more aggressive with their contributions to the stock market. It’s simple math.
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it,” Albert Einstein, allegedly, once remarked.
Regardless of which wise man (or woman) made the statement, truer words were never spoken. Compound interest and the principle of compounding are essential reasons why investing early and consistently are touted as the means of wealth creation.
In short, compound interest is earning interest on interest. In extremely simple terms, it works something like this:
On January 1, 2019, you invest $1,000 in an index fund. (We’ll get to what that is shortly.) By December 31, 2019, you’ve earned an 8 percent rate of return, so a total of $1,080 is now in your account. Starting in 2020, you begin earning interest on the $1,080 in your account, not just on the initial $1,000 investment. In 2020, you earn a 6 percent return on your $1,080, so you now have $1,144.80 in your index fund. Year after year, your money compounds, and you earn interest on your interest.
An increase of $144.80 in two years might sound like chump change, but imagine how quickly you can take advantage of compounding if you’re contributing to your investments monthly or even annually? In the scenario just described, you didn’t put in another penny after the initial $1,000 investment and you still earned $144.80 in two years.
Or try this example:
Instead of starting with $1,000, you begin investing $100 per month in an index fund. Over the course of twenty years, with the fund receiving an average 7 percent return, you will have earned $49,194.59. It only would’ve amounted to about $24,000 if you’d put the same $100 in a basic savings account each month instead of investing it.
Investing allows you to take advantage of compound interest in a way that socking your money away in a savings account doesn’t.
“The idea is, you will not outperform inflation without investing,” says Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation, and senior vice president at Charles Schwab & Co., Inc. “What I mean by inflation is the natural rise of prices for goods.”
A hundred dollars can’t buy you as much today as it could’ve in 1989 or 1999 or even last year. Before you feel like contradicting me, let me say that obviously this isn’t always true for every good on the market. Thanks to competition in certain sectors and advancements in both manufacturing and technology, there are items once inaccessible to the general masses that are affordable today. But when we’re talking about inflation, we’re really referring to purchasing power. It’s why your grandparents could take a family of four out to a nice dinner for $5 in the 1950s, but today you can’t buy a value meal at McDonald’s for one person for $5. Having $100 in your bank account in 1989 would be equivalent to having $203.591 today, according to the Consumer Price Index Inflation Calculator from the United States Department of Labor.
Money nerds make a big deal about inflation because your money will essentially lose value over time if it isn’t at least keeping pace with inflation. From January 2008 to January 2017, 2 percent represented a decent rule of thumb for what to expect inflation to be.2
Your money needs to keep up with inflation, especially when you’re saving for long-term goals like retirement. Just putting that money in a savings account will erode your purchasing power because savings accounts don’t offer great interest rates. Or, as it’s more commonly called, annual percentage yield (APY). In 2019, many bank accounts only offer you a measly 0.01 percent APY. That means if you have $1,000 in savings, you’ll get a whopping $0.10 in interest by the end of the year. Some banks offer higher rates, like 1.75 percent APY, which would net you $17.50 in interest, but that’s still a pretty measly rate if that’s where you’re putting your entire life savings because you aren’t investing.
Investing helps protect your money against inflation. Sure, there will be years of low returns, but the average annualized return of the stock market will (most likely, because I can’t make promises about market performance) outperform inflation. We know this because we have decades and decades of data, and even factoring in terrible years, it still averages out to beat inflation. However, this argument does make the assumption that your investments are diversified over a variety of sectors and companies and are not all in a single stock. We’ll get into what those terms mean in chapter 2.
The earlier you start, the longer you have to let compound interest do its job for you, and the better you can weather the ups and downs of the market. And best of all, the less money you have to invest each year to meet your goal. Think that sounds suspicious?
Meet Jake and Stacey, twenty-six-year-olds who would like to retire at age sixty-two. They’ve just started new jobs, and neither one has ever invested or saved for retirement before. They each earn $50,000 a year, and their employer offers a 4 percent match on their 401(k)s.
Stacey enrolls right away, putting 4 percent of her salary ($2,000) in her 401(k) in order to get her full employer match (an additional $2,000). For simplicity’s sake, let’s say Stacey stays at the exact same salary for the next thirty-six years, and that she receives an average 7 percent return on her investments.
In thirty-six years, when Stacey is sixty-two, she’ll have just shy of $600,000 in her 401(k).
Jake decides to wait until he’s thirty-six to begin investing in his 401(k). That means ten years of employer matches left behind, which, before compound interest, is $20,000! Again, for simplicity’s sake, we’ll say Jake also stays at a stagnant $50,000 salary per year his whole career.
Jake tries to play catch-up and puts 10 percent of his $50,000 salary toward his 401(k). That’s $5,000 a year from Jake + the $2,000 employer match he receives. He, too, receives an average 7 percent return on his investments.
In twenty-six years, when Jake is sixty-two and wants to retire, he’ll have almost $481,000* in his 401(k).
Jake contributed $3,000 more per year to his 401(k) than Stacey did, yet he accrued approximately $119,000 less than Stacey because she started earlier.
The Jake and Stacey example highlights why time matters. The earlier you start, the less you have to invest each month or year in order to reach your goals. Trying to play catch-up later is much harder than most people think.
“What you forget when you’re a young person is that you don’t have a mortgage yet, you don’t have a family yet. Your financial commitments are less, and you have flexibility, and making decisions may feel tough then, but it’s easier to make [them] then than when you have a mortgage and a family,” explains Julie Virta, senior financial advisor with Vanguard Personal Advisor Services®.
Even if you earn a lot more later in life, it doesn’t always mean you’ll have hundreds to thousands of spare dollars a month to try to catch up on the investing you should’ve done a decade ago.
But don’t take it from me. The stock market itself is happy to explain.
Dear Millennial Investor,
While reading The Wall Street Journal, I came across an article3 I found quite distressing. Apparently, your generation is flocking to my bastard cousin, real estate, in the hopes of securing its financial future. You’re flippantly tossing around hurtful statements about how I “spook” you or how putting your money in my grasp is nothing more than gambling. I’m not some two-bit slot machine you pump full of quarters in Vegas. I’m the Stock Market, and I believe it’s time the two of us have a little heart-to-heart.
Yes, there have been times I caused panic and destruction. Your history books teach you about Black Tuesday, and your parents may have lost some money when I took a dive in 1987. Most of you are probably frightened by me because of what happened in 2008. I know I caused some of you to lose jobs, while others graduated from college to face crushing unemployment rates. It makes sense why you view me as a wicked witch trying to lure you into a gingerbread house only to throw you into a stew. However, this exaggeration makes it clear that you’ve probably spent more time debating whether to binge-watch the latest Netflix series all in one weekend than learning about me from reliable sources. Yes, there will be days I get volatile and cause your portfolio some pain, but if you have the patience and commitment to tame me, then we can grow together.
My dearest Millennial, you are in the unique position of having what every investor craves: time. Time is exactly what will make you the next Warren Buffett. (Well, that’s a lie. Time can help, but few people can make me their bitch quite like Buffett.) Time is important because it helps you grow your wealth while surviving future drops in the market. Time alleviates the pressure to quickly amass money in the later years of your life so you can retire. In fact, you can retire earlier if you learn how to master investing in your twenties instead of your late thirties or, heaven forbid, your forties.
For those of you interested in keeping all your surplus money as cash in a savings account, I beg of you to think about the low interest rates. If you won’t need that little nest egg for five or ten years, then why are you stuffing it under the proverbial mattress by putting it in a low-yield savings account? Your money is pitifully wasting away when it can be used to make more money!
While we’re on the subject of diversifying, go ahead and invest in real estate, but keep some funds with me, too. The real estate market can burn you just as badly as the stock market. And even if real estate is doing well, it doesn’t liquidate into cash particularly quickly when you’re in a bind.
If you’re willing to commit to this relationship and become a long-term investor, then we can do well together. You need to be able to handle your emotions and remember to buy low and sell high. When I take a dip, don’t run away screaming. Instead, consider pumping more money into my waiting arms. While everyone else panics and sells, you can scoop up some cheap buys and watch as they begin to rise until you can sell high. Because the secret is: I’m a cyclical beast.
Your teachers probably told you that we should learn from history. Well, if your young brains are as open-minded as your generation claims they are, then learn from the history of investing. Those willing to establish a committed relationship with me through good times and bad, in sickness and in health, are handsomely rewarded. Those who run at the first sign of trouble will never amass the wealth I can make them.
So, my Millennial, I ask that you please reconsider your relationship with me. I can offer you both the danger of being with a bad boy and the power of being with one of the biggest players in the financial world. Plus, when you catch me on a good day, I’m really not too hard on the eyes.
My most sincere love and gratitude,
The Stock Market
Okay, I’ve made my opening argument in the case of Your Future Financial Health v. Your Reluctance to Invest. The defense for the Stock Market is going to take a brief rest, and I’m going to make another case: why you should listen to me in the first place.
You might’ve noticed early in my narration that I tactfully threw in a nugget about being a journalism/theatre double major in college. Notice what’s not bundled in with those super-practical majors? Finance. Business. Accounting. Really, anything that might sort of make sense for the author of a book about investing to have studied.
You know what else I don’t have? A storied (or even mediocre) career working on Wall Street. Any sort of advanced certification, like Series 7, 63, or 79, or any other exam an investment advisor may need.
Basically, I’m probably a lot like you. I got a liberal arts degree. I’ve worked in a few different jobs and changed my career path more than once. I started off making very little money ($23,000 my first year living in New York City) and gradually worked my way into a position where I felt it was time to level up my financial life. The first experience I had with investing was through an employer-matched 401(k), and now I’m self-employed and only have myself to rely on.
Now that I might’ve completely disqualified myself in your eyes, let me explain some of what does qualify me to write this book.
I’ve been writing about money professionally and not professionally (*cough* wrote a blog *cough*) since 2013. I’ve also worked for a financial technology (“fintech”) start-up that compared financial products for consumers. There, I developed a strong bullshit detector for when a bank or financial professional was peddling a less-than-desirable product. Then I wrote my first book, Broke Millennial: Stop Scraping By and Get Your Financial Life Together.
Before and since authoring that book, I’ve been able to gain access to, speak with, and learn from a lot of people with far more experience than I. Plus, I’ve been DIY investing since 2012. That’s not a long track record by any means, but it does mean I’ve been where you are right now.
My goal with this book is to work as a translator. I’ve spent time in the trenches, done the research, spoken to professionals, and now I’m synthesizing all that information into an accessible, digestible book. I’m not promising you huge returns or that you’ll be a millionaire in just a few years, and anyone who makes such claims is worthy of some suspicion.
What I’m promising is that this book will help lay the foundation for you to start to take control of your finances and begin building wealth. I also promise that you’ll have a better understanding of how investing works, from both a technical and an emotional perspective.
There are lots of voices in this book other than mine because I’m not playing the role of expert here. I interviewed CEOs of investment firms, creators of robo-advisors and micro-investing apps, certified financial planners, wealth management advisors, and executives at brokerage firms.
It’s also important to me that you know one more thing about me.
As mentioned previously, I am self-employed. Speaking engagements and writing are the primary ways in which I make my income. In addition, I’ve also done brand partnerships and/or worked as a spokesperson or influencer. At the time of this book’s publication, I will have been working in this field for more than six years, which means I’ve worked with a lot of clients. Some of my clients for writing projects, speaking engagements, and spokesperson work are financial institutions. It would be really simple to go back through my social media feeds and do some digging on Google to link me to a variety of banks, apps, and investment companies. Instead, I’ll be up front with you.
Some of the companies I’ve worked with are included in this book. The relationships I’ve cultivated with financial services companies made it easier for me to get access to high-level people and persuade them to go on record and talk about investing advice for this book. However, I am in no way endorsing or promoting any of the brands you’ll read about here. I have received no compensation in any capacity from the people or companies interviewed for or mentioned in this book in exchange for their being included.
(And because lawyers advise that it’s a good idea!)
This book is a guide to help you learn how investing works. The experts featured in it and I are not giving you prescriptive investing advice. In fact, I’ve mostly made up names of investment products in order to be clear that I’m not suggesting you go put money into a particular stock, bond, or mutual fund. There will be times I name specific funds or indices. When I do, I am not (or a quoted expert is not) giving you direct advice to go invest in that fund or index.
As I’ve mentioned a few times by this point, the stock market goes up and down. Choosing to invest does mean you will, at times, see your funds go down. The quoted experts and I offer no guarantees about the market’s performance; nor do they or I assume liability if you choose to invest.
Now that all the legal jargon and disclaimers are out of the way . . .
Good! But before you get overzealous and start shoving all your spare cash into investments, let’s take some time to assess your overall financial situation. Investing is a critical part of building wealth, but first you must make sure that you have the proper foundation. As flight attendants always remind us, “You must put your oxygen mask on yourself first before assisting others.” Do you have your financial oxygen mask on? We’ll find out in chapter 1.