Being rich is having money; being wealthy is having time.
—Margaret Bonnano, author
My friend Jessica vividly remembers the beautiful bracelet she got from her parents when she had her bat mitzvah at twelve. And she remembers clearly a couple of years later when, for her brother’s bar mitzvah gift, their dad opened an investment account for him and started teaching him how to invest so that he’d have enough to help support his own family one day.
Of course, neither she nor her parents ever imagined that twenty-seven years later, Jessica—who became a single mom at age thirty-nine—would be the one supporting a family herself. “I could have used that investment account,” she told me.
Women—much more than men—are rarely taught how to invest when growing up. As I mentioned earlier, surveys find parents are more likely to teach girls how to track their spending and budget and to teach their boys about building credit and investing. And while few Americans get much of a financial education in school, men are much more likely to take finance and business courses in college and tend to outperform women on financial literacy tests overall. So it shouldn’t be surprising that, as women, we tend to feel less knowledgeable, less confident, and less comfortable talking about investing.
I still remember a party I went to when I was in my twenties with some friends from the newspaper where I worked. When the men started comparing the performance of their stock market investments and trading tips, trying to one-up each other with their investing acumen, the women fell silent. Lost, and a little embarrassed, my female friends and I turned to one another to discuss our weekend plans instead. When we did talk about money, it was usually related to the amazing deal we got on a pair of shoes or how to split up a restaurant bill. At the time, I was hardly putting anything into my 401(k) retirement account, and I had little idea of how the money was being invested. I’d literally just ticked off the portfolio that had been recommended to me.
From the data, it seems like things haven’t changed much for women since. In a recent survey by Fidelity Investments, eight in ten women said they’ve refrained from talking about their finances with the people they’re close to, and less than half of the women surveyed said they’d even feel confident discussing money and investing with a financial professional on their own. While women are almost equally as confident as men when it comes to financial tasks like paying bills and budgeting, men continue to be much more confident about managing investments—with only about one in four women saying they’re comfortable with how much they know about investing. The result is that many of us end up waiting too long to put our money to work by investing it.
This is a critical mistake. And it is probably the single greatest reason why we lag so far behind men when it comes to building wealth and having enough money for retirement.
That’s because time is often the single greatest factor in our ability to grow our money. More important even than the amount of money we invest. The earlier you start investing, with any amount, the better off you’ll be. Wealth building, financial freedom, the ability to make the choices you want to make, the postwork life of your dreams—it all comes down to investing. Right now. Today. No matter what amount you start with, the most important thing you can do is to start. Because the moment you invest your money, it can start growing—faster than it would sitting in the bank, and certainly faster than sitting in your wallet.
Men have already figured out that investing money in the stock market can be one of the most efficient ways to build wealth. Yes, the market can go down. But over time, it has consistently recovered from every downturn and gone on to new highs. In the last fifty years, the stock market has grown more than sixfold. It’s hard to find that kind of growth anywhere else.
Yet many women are still making the same mistake I did—and waiting. Well, actually, my mistake was worse, because I started investing in a 401(k) retirement account in my midtwenties but then cashed it out when I switched jobs, erasing all the hard work I’d done and years of potential gains. (Had I left it alone, instead of emptying it to pay off a car loan, it would have easily tripled in value in the years since.) I learned my lesson and quickly began investing again—for retirement, at least—but by then I was nearly thirty, so I’d already missed out on almost a decade of growth.
I thought I was an exception. But it turns out that a lot more women than men tap their retirement funds early, even though it means paying a 10 percent penalty on top of taxes. A 2015 survey by Boston Research Technologies revealed that, among those with 401(k) balances below $5,000, women tend to cash out at significantly higher levels than their male counterparts. As balances grow, that gap starts to shrink. But if you’re cashing out early and then starting all over, as I did, it can leave you scrambling to make up for lost time.
And looking at the data, it seems like a lot of us are scrambling. Some of us start early and then tap our retirement savings, setting ourselves back. Many others don’t start saving at all for retirement until they’re already years into their careers. In a 2017 study by Financial Finesse, only a quarter of women said they felt they were on track for saving for retirement. (In fact, one in five women has nothing at all saved for retirement, according to a recent CNBC–SurveyMonkey poll!) And even when women contribute, we are less likely than men to put enough money into our employer-sponsored retirement plan to even capture a full match in contributions from employers that offer one, which means many of us are basically leaving money on the table.
Outside of retirement accounts, the investing gap is even wider, in part because women are much more likely to leave our money in savings instead of investing some of it. Yes, saving money is important, but once we’ve got enough money stashed away in a high-yield savings account for emergencies and short-term goals, continuing to funnel money into savings instead of investing it can actually hold us back. Yet many of us continue to do that.
In fact, the Fidelity survey found that more than half of women were not investing anything outside of their retirement accounts. Instead they were leaving nearly all their money in cash or in bank accounts—which, by the way, are paying out less than 0.05 percent annually in interest now, on average. (Yeah, that’s a nickel for every one hundred dollars you deposit.) Meanwhile, the Standard & Poor’s 500 Index, which tracks five hundred of the largest stocks and is used as a gauge for the overall stock market, has averaged annual returns of nearly 10 percent (or about 7 percent, adjusted for inflation). That’s nearly 200 times as much. That can be a difference of literally tens of thousands of dollars in potential earnings over time.
Preeti, the Chicago doctor in her late thirties who is the main provider in her relationship, used to be among them. She says she’d always been diligent about saving some of her income, but it took her years to get comfortable putting it anywhere other than a bank account. “I’ve generally been pretty conservative when it comes to money,” she told me. “I would keep all of my money in my bank. I’m not sure why. Maybe because I felt like I could see it, and then I felt safe.”
But after talking to her older sister, who was participating in her company’s retirement plan, she started maxing out her own 403(b) plan (a retirement plan offered to employees of tax-exempt organizations and certain other workers). That was it, initially, since she felt uncomfortable investing on her own. But then she was talking about her finances with an older female colleague “who is excellent with money” and who encouraged her to invest in a regular brokerage account, too. Her guidance and prodding prompted Preeti to start looking at online brokerages. Had it not been for her colleague, though, Preeti’s not sure she would have considered moving some of her money from a high-yield savings account—that still pays less than 1 percent a year in interest (so, not even enough to beat inflation)—into an investment account, which has the potential to earn exponentially more than that.
Why are so many of us still leaving most of our money in the bank? Probably because that’s where we were told to put it! For decades, after all, men have been conditioned to look to the stock market as a means of supercharging their wealth-building efforts, while we have been encouraged to save our pennies. For a long time, that’s how the financial responsibilities broke down in heterosexual couples: The men invested, and the women saved. The assumption was that men would earn more, so they had more to invest, and they were encouraged to focus on long-term planning. Meanwhile, women were encouraged to save for short-term goals like new furniture or vacations.
Wall Street was (and still is) dominated by men, and investing in stocks was portrayed in popular culture as a testosterone-fueled endeavor with mobs of red-faced men in blue jackets waving papers and yelling over each other on the floor of the stock exchange. (The first female trader wasn’t allowed on the floor until 1967 and, more than fifty years later, women still make up just 9 percent of traders at the New York Stock Exchange. Even when I shot some episodes with Cheddar TV on the floor of the NYSE a few years ago, the female cohost and I were among only a handful of women on the floor.)
While all that is changing—the first female president of the New York Stock Exchange took office in 2018—there’s still a perception that investing in the stock market is a man’s game. And that men are more adept at investing (despite growing evidence that women actually have better results, but more on that in a minute). So, many women—even young women—still end up deferring to their male partners on investing and financial planning decisions. A recent UBS survey found this to be true for nearly 60 percent of women in their twenties and early thirties! Or they simply stash away their money in a bank.
We also tend to prioritize more immediate financial goals and needs over long-term ones. In a survey by insurance brokerage Willis Towers Watson, women ranked investing for retirement as their fifth most important financial priority, after managing daily living and housing costs, paying down debt obligations, and building up savings. For men, investing for retirement was number one. Sure, you can explain some of that because we earn less than men, on average, so we need to pay more attention to daily expenses, and we tend to owe more student and credit card debt. But we also aren’t brought up to believe we need to start investing for retirement—or for other goals in the decades before—right away.
“Investing is often just not as high a priority in the moment as whatever urgent situation is right in front of us that day,” said Bobbi Rebell, a certified financial planner and author of How to Be a Financial Grown-Up, when we were commiserating on how much money women miss out on by putting off investing. Why isn’t planning financially for our future on our “self-care” list, too, she wondered, along with—or even ahead of—a manicure or spa day? “There’s been a great movement recently, in large part because of marketing, to put ourselves first,” she said. “But it is often focused on something we need to buy: a candle, a solo trip, or even a membership to a networking group.”
Yet one of the best ways to care for ourselves is to take the time to make sure we’re investing enough to set ourselves up for the future we want.
What a lot of this comes down to is mindset, and many of us are still operating from a scarcity mindset. Think about this for a moment. While men are comfortable trading stock tips and trying to one-up each other with the returns on their investments, women are more comfortable comparing bargains and trying to one-up each other with the money we saved. Browse the bookstore aisles, and you’ll see plenty of books about bargain hunting, budgeting, and couponing with titles like Extreme Couponing and Never Pay Full Price! and Meal Planning on a Budget—all of them written by women. But wander over to the investing section, and the majority of books on investing and building wealth—from The Intelligent Investor and The Little Book of Investing Like the Pros to The Secrets of Getting Rich and I Will Teach You to Be Rich—are written by men.
“Women will have five times the emergency fund they need, sitting in the bank, not doing anything,” Cary Carbonaro, managing director of United Capital Financial Advisors of New York, lamented to NBC. “Women are afraid of losing money, while men seem to be afraid of losing out by not playing the market.”
But here’s the thing: By waiting, we do lose out.
Because the earlier you start investing, the more your money works for you—and the less time you’ll end up having to work for your money. Think of it this way: Every year you’re investing now could be a year less you have to work later. That’s thanks to the power of compounding, or when the returns you’ve earned on the money you invest start earning money, too.
Kameka Dempsey, an executive coach and founder of KD Leadership Strategies, learned this firsthand. The first in her family to go to college, she grew up without much money and had little firsthand knowledge of how to build wealth. But her parents did instill in her a voracious love of learning, she says. “They convinced me that education was the way out.”
Then a high school classmate encouraged her to apply to a program called INROADS, which targets talented minority students, through which she was able to take courses on business etiquette, acumen, writing, presentations, and even dress codes—“all of these things that are so important in how you show up in corporate America,” she says. It also helped her to start working in paid internships just after she graduated from high school and throughout her time at Yale (which she also helped pay for through scholarships and a work-study program).
The program also gave her the opportunity to take a financial literacy course, and she paid close attention. “I wanted to make sure that once I started making money, it was not here today and gone tomorrow,” she told me. “First, it was about getting paid the most I could get at that point in time. And then investing it.”
She started investing in a 401(k) as soon as she had access to one. “I remember when I was presented with my first 401(k), and someone said, ‘The company will match your contributions one hundred percent. You have to contribute the max you can!’” she recalled. “So I did.”
More than twenty years later, she looked recently at the projections for her combined 401(k) accounts and realized she’ll be a millionaire in retirement even if she doesn’t invest anything more. “It’s not that I’m going to be rolling in dough, but it’s comforting to know that I will have enough money to live on even if I didn’t invest another dollar,” she told me. “I bought myself that flexibility, unknowingly, by investing early.”
The breadwinner mindset is a growth mindset. It’s thinking about how you can put as much of the money you earn to work for you so that you are not stuck working for your money for the rest of your life. A million dollars in retirement may seem like a faraway goal. But the more your money works to earn money, the less you’ll have to work for it. And the earlier you start, the harder those dollars will work—they can grow exponentially over time. “A lot of times women wait because they think they’ve got time . . . but then you miss out on all those earlier years and compounding returns,” certified financial planner Stacy Francis, the CEO of Francis Financial and founder of the nonprofit Savvy Ladies, which provides financial education to women, told me. “Had you started earlier, those dollars would have been the hardest-working dollars you invested.”
What you earn is important, but what you do with each paycheck is even more important. One thing I noticed among all the breadwinner-minded women I interviewed is that they diligently put a double-digit percentage of every paycheck straight into savings and investing.
Some of that should go toward retirement—enough, eventually, to max out any employer-sponsored retirement plan, but at least enough right away to capture any employer match money. (If you don’t have access to one, you can use an individual retirement account, which we’ll get into later in this chapter.) Some money should also go toward saving for short-term goals—like an upcoming vacation or summer camp for kids, if you have them—and building up an emergency savings fund. You’ll want enough, eventually, in a high-yield savings account to cover at least three months of basic expenses. (Basically, enough savings to cover your expenses in case you lose a job while you look for new income.) And once you’ve got enough savings to feel comfortable, you can put money into a regular investment account, too, for other mid- or long-term goals. By investing, you stand to reach them much faster because your money will be earning more money, too.
More so than any other area of personal finance, investing is plagued by myths that tend to hold us back though. So let’s get some of the big ones out of the way.
Given how many books, podcasts, shows, and “pros” there are when it comes to investing, it’s easy to understand why it’s gotten a reputation for being something complex that requires a lot of expertise. But nothing could be further from the truth. Investing successfully is not hard. You don’t need to day-trade (in fact, you probably shouldn’t). You don’t even need to pay that much attention to your investments on a day-to-day or even a month-to-month basis. I learned this when I started investing, and I’ll share the simple, successful approach I took with you later in this chapter.
I grew up believing that investing in stocks was risky—their value could go up, sure, but it could also go down, or maybe even disappear altogether. (Remember Enron and Lehman Brothers?) But the reality is that just a small fraction of the thousands of companies that trade publicly have filed for chapter 7 bankruptcy (the kind that can wipe out any stock value). So if you invest in a broad and diverse mix of stocks, you can substantially lower your risk of losing money and increase your chances of picking winners.
I’d gotten it all wrong: The truth is, you usually don’t get wealthy until you invest. Which is why it costs us so much when we don’t do it. Sallie Krawcheck, founder of the investing platform Ellevest, estimates the gender investing gap can leave women with about $300,000 to $1 million less than men at retirement after a thirty-five-year career. That difference can make it much harder to fund the post-work lives we want and ensure we have enough to cover healthcare and other expenses.
Nope. Wall Street has done its best to perpetuate this myth. Financial advisors, who are still predominantly older white guys, act as if investing is so complicated that it’s best left to the professionals—that you wouldn’t understand. Of course: Their business depends on that. But as I’ve learned from personal experience, the truth is that investing is not hard. And while you may choose to work with a financial advisor, you don’t need someone to do it for you.
In a 2017 survey in which Fidelity asked men and women who they believed made better investors, just 9 percent of women thought they’d outperform men. But here’s the twist: A growing body of evidence, including an analysis of more than 8 million Fidelity clients, shows that women actually do tend to outperform men in the returns they generate on their investments. That’s partly because men tend to be, shall we say, overconfident? And that results in a lot of churning (e.g., buying and selling and buying again) of stocks. So they end up paying more in trading fees. And they are more likely to buy when prices are high and sell when they are low. If you’re a woman who was raised to be risk-averse, you can use that to your advantage in investing.
The challenge is that we’ve been fed these myths for years. So it shouldn’t be surprising that a whole lot of us are afraid to even get started. And that leaves us lagging later in life. Women today have retirement balances that are about half the size of men’s on average, according to the Vanguard Center for Investor Research. That’s a big reason why women are 80 percent more likely than men to end their lives in poverty. I know, that’s a pretty scary stat. But we have the power to change those odds. And doing so doesn’t require a lot of effort, know-how, time, or money.
Whether you’re making $30,000 or $300,000 a year, all you need to do is get started and follow some basic guidelines. Take it from my grandmother.
My maternal grandmother, born in 1912 in Perth Amboy, New Jersey, didn’t fit anyone’s stereotype of a wealthy person. She worked as a secretary, with the modest salary that accompanied it. In her thirties, she married my grandfather, had two daughters, and stopped working. Then, when she was in her forties, my grandfather returned from a business trip and told her he was leaving her for a woman he’d met in Florida, and she suddenly found herself a single mom of two adolescent girls. At the time, she had been out of the workforce for more than a decade.
My grandmother, or Nana, as I called her, had no paycheck and very little savings. And now she was responsible for a twelve and a fourteen year old and herself—possibly for the rest of her life. (In fact, she never did remarry.) At the time, there weren’t 401(k) retirement plans or individual retirement accounts. And the lawyers’ office where Nana went back to work as a secretary, like many private employers, didn’t offer a pension. If she was going to save enough money to support her family and herself in old age, she realized, she was going to have to figure out how to do it largely on her own. So Nana hired a broker to make trades on her behalf and opened an investment account. She spent most of her lunch hours at her broker’s office, staring at the ticker tape that showed the ever-changing stock prices and asking him questions. She continued putting some of each paycheck into her investment account. And she left that money alone to grow until she needed it.
In other words, she thought like a breadwinner. She wanted to have enough money in retirement that she wouldn’t burden her daughters with having to take care of her. She wanted to have enough to help them cover the costs of college. And she wanted to remain independent and to live on her own terms. And she did. Her financial habits were guided by her values, and she used those values to incentivize herself to save and spend wisely. Even in her seventies, she was living the dream she’d imagined for herself. She lived on her own, played jazz standards on her piano, drove a bright-red sports car, and regularly broke swimming records in competitions for her age group. And by the time she passed away in her early eighties, she had amassed an investment portfolio that was worth nearly half a million dollars. On a secretary’s salary.
What was her secret? Her strategy was simple, and it reinforces the fact that you don’t need to do a lot of research, or trading, to earn a lot in the stock market. Nana invested in every company she either wrote a check to or whose products she bought on a regular basis. That included a wide range of publicly traded companies—from her electric and phone companies to her favorite department store chains to Coca-Cola (my aunt’s favorite drink). Without even realizing it, Nana ended up following four basic principles for successfully investing in the stock market.
Rather than bet on a few stocks, spreading your money across a diverse mix—large and small companies across different sectors—can help you lower the risk of losing money on one bad bet. It also increases the chances that you’ll find some winners and that if stocks in some sectors are down, others will be up. Back in Nana’s day, that required multiple buy orders as you snapped up shares of different companies. Now you can simply buy shares in one or more funds that invest in a range of stocks to get the same kind of exposure (more about that below).
You don’t need to be familiar with all the intricacies of a company you’re interested in investing in, but it helps to have a basic understanding of the business (or to understand what types of companies are in a fund if that’s the route you want to go). Nana’s approach was to invest in the companies she wrote checks to, whose products she bought, or that operated stores where she shopped. She didn’t invest in currencies or pork-belly futures or precious metals. She invested in companies she understood. Her approach allowed her to be not just a customer but an investor in the companies she supported. A bonus was that if her electric utility rates went up, for example, she would pay more as a customer, but she would gain as an investor because the stock’s value could increase as a result.
This sounds like a complex term, but all it means is that you’re investing regularly—like a small portion out of every paycheck—instead of waiting to invest a large sum once or twice a year, for example. By doing so, you’ll buy more shares when stock prices are down and fewer when they’re up, and you can lower the average price per share you pay over time. You can also invest earlier than if you’d waited until you had more money to invest, so your money can start growing sooner.
Stock prices fluctuate every day, and there are periods when the value of many stocks goes down—sometimes by a lot (as in March 2020). But every stock market downturn in history has ended in an upturn. And the market has gone on to hit new highs. Buying and holding is usually a better strategy than trying to time the market, because timing the market’s ups and downs is nearly impossible. But over time, the stock market’s value has grown exponentially.
“Investing is not trading, or buying the hot stock and selling it at just the right time. If you’re watching one of those business channels, you may think that’s what investing is and wonder: How will I choose the right stock among thousands? How will I choose the right day to buy or to sell?” financial advisor Stacy Francis told me. “But that’s not really what it’s about. Investing can be really boring, but that’s not a bad thing. You pick a broad basket of stocks in a fund, and you stay with it. The better investors are the ones not watching it on a daily basis. The better investors have a life and look at their portfolios once a month or a quarter.”
And by the way, while it’s never too early to start investing—time (and the compounding returns it allows for) is a powerful tool in growing wealth—it’s also never too late. Nana was forty-six when she started investing.
The first place to invest is in a tax-advantaged retirement account, then consider a regular brokerage account for medium-term goals (after building up some savings). It’s a pretty simple process.
Usually, this is either a 401(k) or a 403(b) plan.
Eventually, you want to contribute the max allowed under law—$19,500 plus another $6,500 if you’re fifty or older, in 2021. But in the meantime, make sure you are at least contributing enough to get any employer match money (do not leave free money on the table!) and try to stretch yourself to contribute more. You can always adjust your contribution rate back down, but behavioral science says you probably won’t—and future you will thank you for that.
If you don’t have access to an employer-sponsored plan, open up an individual retirement account (IRA) and try to max it out. Even if you do have an employer-sponsored plan, you might consider opening an IRA, too—if you’re in the enviable situation of already maxing out the plan—so that you can save more for retirement or even some earlier goals. (More on IRAs below.)
Those could include buying a home down the road or starting a business or a family. Prioritize your retirement accounts. They’ve got tax advantages, and you don’t want to miss out on any employer matches or end up short when you’re ready for retirement. But investing even a little at a time in a regular investment account, too, can help you grow that money to reach goals you’ve got in the decades before retirement (more on what to look for in a brokerage below).
If you’re just starting to invest on your own outside of picking a plan for your employer-sponsored retirement account, you don’t need to do a lot of research. It’s a remarkably straightforward process:
Open a brokerage account. Look for one that offers zero commissions, meaning you won’t be charged for your trades (e.g., when you buy stocks, bonds, or shares of funds). Those include Ally Invest, E*Trade, TD Ameritrade, Merrill Edge, Vanguard, Charles Schwab, Fidelity, SoFi, and Acorns (where I work).
Connect it with your bank account and transfer money to get started. I’d also recommend setting up an automatic monthly or biweekly transfer so that you get in the habit of investing regularly. (I do it the day after my paycheck is deposited.) But don’t forget that when you transfer money, it is typically not automatically invested. So you need to then go in and invest the money you deposited. (Some, like Acorns, will invest it for you in a preselected portfolio.)
Invest the money in one or more exchange-traded funds. Look for funds that provide exposure to dozens or hundreds of stocks, like those that track the S&P 500 Index, and that have low expense ratios (more on both below). You can also balance those with funds that invest in bonds.
In Nana’s time, having a diverse mix of stocks or bonds meant buying shares in, or bonds issued by, a lot of different companies. But today, you can accomplish the same thing just by buying shares in a fund that does that for you, and it’s as easy as buying a stock. Exchange-traded funds (ETFs) trade just like stocks. But they save you time, and money if you’re paying any trading fees, because you can just buy shares in that fund, rather than buying shares in (or bonds from) every company it’s investing in.
Of course, you can invest in individual stocks and bonds, too. But generally, I keep most of my money in funds, so I know I’ve got a broad and diverse mix, and I’m not too concerned about (or dependent on) how one particular company does.
I started years ago by investing in an index fund that mirrors the S&P 500. That’s the Standard and Poor’s index that tracks five hundred of the largest stocks, representing roughly 80 percent of the stock market’s total value, and is often used as a gauge for how the overall market is doing. When you hear that the “stock market” has returned about 10 percent annually on average (or about 7 to 7.5 percent adjusted for inflation), reporters and analysts are usually talking about how much the S&P 500 Index has grown each year, on average. You can’t invest in the index directly, but you can invest in an S&P 500 Index fund that tries to match, or even beat, its performance.
I’ve found it to be one of the best ways to capture much of the stock market’s growth over time. There are several different S&P 500 Index funds from which to choose, including:
Vanguard S&P 500 ETF (VOO is the ticker)
iShares Core S&P 500 ETF (IVV)
Schwab S&P 500 Index Fund (SWPPX)
SPDR S&P 500 ETF Trust (SPY)
iShares S&P 500 Growth ETF (IVW)
Each of the funds tracks the S&P 500 Index and seeks to mirror or beat its gains. But when you’re investigating any funds, it’s smart to check something called the “expense ratio”—basically the cost of holding the fund. A fund’s expense ratio is another term for the percent of assets that a fund takes to cover costs like management fees and other expenses associated with operating the fund. These come right out of your returns, so you may not even realize it’s being taken out. Simply put, a bigger expense ratio means you get to keep less of your earnings.
A big plus of index funds is that they don’t require a whole lot of management, so the fees are generally pretty low. Among the S&P 500 Index funds above, SWPPX and VOO had the smallest expense ratios in late 2020: 0.02 percent and 0.03 percent, respectively. That means that for every $1,000 you invest, you’re paying just twenty or thirty cents! That’s a very good deal. The IVW fund had an expense ratio of 0.18 percent. That means you pay $1.80 for every $1,000 you invest. On the other hand, this fund seeks to match the performance of the S&P 500 Growth index, which focuses on the “growth” stocks within the S&P 500, so its returns can be higher.
You can check out a fund’s expense ratio on sites like Morningstar or Yahoo Finance, or just look up the fund itself online. Generally, you want to stick with funds that have below-average expense ratios. In 2019, the average expense ratio of an actively managed stock mutual fund was about 0.74 percent, while the average index fund had an expense ratio of just 0.07 percent, according to the Investment Company Institute.
Bottom line: If you don’t want to spend a lot of time managing your portfolio, investing your money in an exchange-traded fund that tracks the S&P 500 Index is one of the simplest, most cost-effective ways to spread your money out over a diverse mix of stocks. If you’d invested $500 in a fund that tracks the performance of the S&P 500 Index back in December 2009, it would have been worth more than $1,700 by December 2019. That works out to a total return of more than 240 percent over a decade. Obviously, the share prices of companies in the S&P 500 can go down, too, as we saw in the spring of 2020. But over time, the S&P 500 has grown significantly.
You can also open an account with a brokerage firm that offers and recommends preselected portfolios based on your goals, timeline, and tolerance for risk. (Acorns, where I’m the chief education officer, is an example of that.)
Dividends are sums of money that some companies and funds regularly pay to their shareholders—no joke!—to incentivize you to start or continue to invest in them. Not all companies or funds offer dividends. Those that do tend to be more established, so they’re in a position to offer a sliver of their revenues or reserves back to investors, usually on a quarterly basis. Generally, they figure that providing a dividend can make their stock or fund more desirable, driving up demand (and therefore the price) of shares. So ultimately, it benefits them, too.
How do dividends work? Say you own ten shares of a stock at $50, or $500 worth of the stock. If the stock goes up to $55 per share after a year, your investment value rises to $550 in total ($5 times the ten shares you own). If you earn an additional 2 percent dividend on top of that, you’d earn up to another $20, or $570 altogether (though the exact amount could vary depending on what the share price was when the quarterly dividends were paid out). That may not seem like much, but these dividends can really add up when you have more money invested. If you have enough invested by the time you stop working, you could earn a decent income from dividends and earnings alone. In the meantime, reinvesting dividends can help you grow the amount you’ll have waiting for you later.
How much? My mom inherited 700 shares of Middlesex Water Company from Nana in 1992. They were worth around $17,000 at the time. By not touching them and reinvesting the regular dividends into additional shares of stock, her investment had grown to 1,400 shares by 2020, worth about $110,000. She hadn’t put in another cent herself, and her investment grew by more than sixfold in less than three decades just by reinvesting the dividends. That’s the kind of exponential growth you might experience with reinvested dividends plus compounding returns. (Middlesex Water also had some stock splits, which increased the number of her shares.)
Even small dividends can dramatically improve your investment performance over time. And if the market goes down, you typically still get dividends. So it’s worth checking if a company stock or fund you’re interested in offers them, or even Googling “dividend-paying companies” or “dividend-paying funds” and researching ones that look like they may be worth investing in as part of your portfolio—meaning they’ve got a good track record, solid financials, and low expense ratios if they’re funds.
Your brokerage firm will typically offer you the option to reinvest those dividends. (Some automatically reinvest them for you.) And that’s a smart thing to do. Because when you reinvest dividends, you are putting someone else’s money to work for you. You’re buying additional shares with the dividend rather than using your own money. That allows you to own more shares for less money, which earns you even more over time.
Financial advisors generally recommend putting most of your money into stocks when you’re young and then shifting more money into bonds as you grow older. That’s because the stock market can have very good years—and it can also have some not-so-good years. And you don’t want to be in a position where you need to access your money at a time when the market is down. On the other hand, stocks tend to have significantly better returns than bonds over time. So that’s why you want a mix.
One general rule of thumb: Subtract your age from 110 and the result is the percentage of your retirement portfolio that should be in stocks. So if you’re thirty-five, you’d put about 75 percent of your portfolio (another term for the money you’ve got invested) in stocks. The other 25 percent could go into bonds. If you’re investing for a goal you want to reach sooner, like in less than ten years, you may want to put more of your invested money into bonds, just in case stocks start sliding as you near your goal. Bonds generally yield less, but they provide pretty reliable returns.
Buying shares of stock means you’re buying a little piece of that company or fund, but buying a bond is a little different. Basically it’s an IOU, or a loan that you give to the issuer. When you buy bonds, you do so with the expectation that you will get that money paid back to you—and with interest—in a certain amount of time. Yeah, it’s kind of boring, at least compared with watching a stock you invested in shoot up 10 percent in a day. But it’s also pretty predictable, which can be comforting when your stocks have a down day.
Companies issue corporate bonds. The U.S. government issues Treasuries. States and municipalities (which are cities or towns with a local government) issue municipal bonds, nicknamed “munis.” They each differ in the level of risk and returns.
Generally, we consider Uncle Sam a pretty trustworthy lender. (The federal government can print its own money, after all.) So the risks of buying Treasuries are pretty small. But so are the returns. In mid-2020, the yield on the ten-year Treasury bond was just 0.75 percent. That means the bond would pay $7.50 each year for every $1,000 in face value you own until you get your $1,000 back a decade later—for a grand total of just $75.
Corporate bonds typically offer greater returns, though they also come with greater risk. You can keep that risk low, though, by investing in highly rated companies. Generally, if you invest in corporate bonds, you want to look for those that are “investment grade.” That means they got relatively high ratings from the credit ratings agencies—a Baa3 or better by Moody’s Investors Service, or a BBB or better by S&P Global Ratings and Fitch Ratings. In mid-2020, investment-grade bond funds, which allow you to buy into several companies’ bonds by buying shares in the fund, were up year to date by about 3 to 5 percent. Some big ones include the Fidelity Investment Grade Bond Fund, which trades as FBNDX; Goldman Sachs Access Investment Grade Corporate Bond ETF, which trades as GIGB; and iShares Intermediate-Term Corporate Bond ETF, with the ticker IGIB.
Munis fall somewhere in the middle on the risk-and-return scale. A big benefit of municipal bonds, though, is that the interest on them is typically exempt from federal income tax and may also be exempt from state and local taxes if you reside in the state where the bond is issued. Moody’s, S&P Global Ratings, and Fitch also rate munis, so look for those with high ratings if you choose to invest in these. As with corporate bonds, there are muni bond funds, too, that you can invest in. Some exchange-traded funds (which you can buy on the stock exchange) that invest in a broad mix of municipal bonds include IQ MacKay Municipal Insured ETF (MMIN), an actively managed fund that invests in investment-grade munis; the Vanguard Tax-Exempt Bond ETF (VTEB), which tracks the performance of a benchmark index of investment-grade munis; and iShares National Muni Bond ETF (MUB), a large ETF with holdings in more than 1,200 securities.
How you divvy up your money among bonds is up to you. But as with stocks, it’s smart to spread your money among a mix of bonds (though be careful with any high-yield bonds that have low ratings). One efficient way to do that is to invest in bond funds that have purchased several bonds.
Of course, there are investment options beyond stocks and bonds, too. But if you do nothing but put at least 10 percent of your paychecks into a mix of stocks and bonds—prioritizing your retirement accounts, with their tax benefits, and investing largely in funds with high ratings, decent returns, and low fees—you can set yourself up pretty nicely to afford the future you want.
A transformative moment for me came when I met a woman named Alia through a close friend. A self-taught real estate investor living in San Diego, Alia had used some of her initial earnings from investing to co-create a fund that invested in storage units. By pooling money with other investors, she’d been able to invest in over a dozen self-storage complexes. The properties generated a steady cash flow from the monthly rental fees. And, eventually, the team would refinance or sell the storage properties that had significantly increased their occupancy rates and overall value to help pay back the investors’ principal contribution plus remaining interest earned.
As a real estate investor, Alia eventually made enough money to leave her full-time job as a director of nonprofit programs. She spent far fewer hours managing her investments and had more flexibility, which allowed her to spend more time with her family. That was particularly important because she was expecting twins when we talked and already had two kids. She could also work on the causes she was passionate about, like teaching financial literacy. Although I had no burning desire to invest in storage units at the time, meeting Alia was a game changer for me in the way I thought about investing and income.
For a long time, I’d looked at investing as something you do to make sure you’ve got enough money to retire. And maybe you put a little extra money into a brokerage account to save for goals that are at least a few years out, like saving to buy a home in my case. But I hadn’t thought about creating enough income through investing to supplement—or possibly even one day replace—my paycheck. I hadn’t really thought about earning passive income: money you make that requires little to no effort outside of your paycheck. Alia was making enough money from passive income that she didn’t have to take on any work outside of managing those investments.
I looked at her lifestyle and the control she had over her daily schedule and I thought, I want that! And before I’m old enough to retire.
Of course, it takes time to get to the point where you might make enough passive income from investments to cover your bills. Alia spent years building up her knowledge and her savings, and it took time to find the right partners, properties, and investors to build a system that would generate steady income and profits. Not everyone has access to enough money or people with money with whom they can pool funds to invest in properties either. I didn’t have any plans to invest in storage units. But talking with Alia did get me thinking about how investing my money smartly might provide me with enough income down the road that I could depend on some of it to cover expenses. Then I’d be less reliant on my paychecks and could have more freedom to choose the work I took on and the hours I worked. That is the real joy of investing.
Ultimately, we want to use some of each paycheck to invest so that we can become less and less dependent on each check over time. That is how you find true financial freedom. Sure, you can continue to collect a paycheck. But having enough income to cover the basics from investments means you only have to take the work you really want. It also gives you the freedom to cut back on work if you need to care for a loved one, or if you want to start building your own business, and know that you’ll be okay financially.
Interest from bonds—and even dividends from stocks and funds—are examples of passive income. They’re regular payments that can be used as income above and beyond a paycheck. And they require very little effort to get. Once you’ve purchased shares in the dividend-yielding company or fund, or bought a bond, you can basically sit back and make that money in your sleep. When you’re younger, reinvesting dividends is a smart growth strategy. But retirees often look at interest and dividends as one source of steady income to live off once they’ve stopped working, allowing them to leave their principal (the amount they’ve invested) alone, so they know their money won’t run out.
There are plenty of other potential sources of passive income, too.
One friend in California who was preparing to get her startup off the ground decided to rent out her second bedroom and bathroom through Airbnb, and to rent her parking spot to a neighbor. She earned enough from the two to cover most of her mortgage, which meant she had more money from her paycheck to put toward bills and toward the business she was starting to build on the side. It required some effort on her part to set it up, and to prepare for new guests, but not a lot.
As her business grew, she also decided to convert a section of her living area into a small office nook with a couple of employees, rather than paying rent for office space. While she wasn’t bringing in income, she was saving money. Basically, she told me, “I looked at every dead asset I had—anything I wasn’t really using and that wasn’t making me money—and I tried to figure out how to monetize it.”
There are other creative ways to make money from your unused stuff or space beyond renting out your home to vacationers or your parking spot to neighbors. These days you can make money renting out everything from your car (through sites like Turo and Getaround) to camera equipment (through sites like ShareGrid and KitSplit) to space in your home or yard for commercial video or photo shoots or events (through sites like Peerspace, Splacer, or Thisopenspace). Of course you want to balance that with the time and effort required (and any other concerns, as arose during the pandemic). But it is possible to bring in regular income by thinking creatively about what you already have.
I didn’t have a car or high-end camera equipment, and we were usually in our space, since my husband worked from home and I started working remotely in the spring of 2020 (and sharing our space in a pandemic didn’t seem prudent). But I did start to think about how to set myself up so that I could earn more money outside my regular paycheck. One of those strategies is something you may already be doing.
This is not a strategy to pursue unless you are able to pay off your bill in full every month. If you do, rewards credit cards can provide easy income, thanks to perks like cash-back bonuses.
Once I got wise to credit, as I mentioned earlier, I started spending strategically on my credit cards (while paying them off each month) so that I could earn as much rewards money as possible from each. It wasn’t a huge amount, but it added up to hundreds of dollars in extra income outside my paycheck that required very little effort on my part. It was passive income. And that was the goal.
Rental properties can be another way to get regular passive income (rent) while also building wealth (equity)—the goal being to get enough to cover more than the mortgage payment. Over time, the hope is that the property also increases in value, so you can sell it later for a profit.
So before you purchase any rental property, make sure that you can cover all the costs—which typically include insurance, taxes, and maintenance, on top of the mortgage payment—and still turn a profit on top of that. You want a property that will have both continued interest from renters and a strong potential to grow in value.
Eventually, as my money grew, I expanded my investments, too. I divided my portfolio among stocks and bonds that would generate regular returns, but I also put money into investments that might take longer to pay off. I invested in a friend’s startup after doing a good amount of due diligence, and I bought vested options in my own company’s stock with the hope that we will be acquired or go public one day in the not-so-distant future and those shares will be worth a whole lot more than I paid for them. Those are longer-term plays—it could be years before I have a chance to cash in—and riskier than investing in an S&P 500 fund, but they also offer the chance for higher returns.
My point is, there are a lot of different ways to bring in income outside of your paycheck and any side gigs. You can often leverage stuff you already have to earn more income. And you can find the investments that feel right for you, based on the money you have, the time you have to invest, and your tolerance for risk. But you don’t have to do all these things to build your wealth. I hit $1 million in net worth within a decade primarily by investing in stocks (mostly) and bonds, and through buying our home, which has nearly doubled in value.
Yes, increased earnings played a part in it, as that allowed me to invest more each year. And timing played a part in it, too. I was fortunate that I invested a lot of money in the stock market right at the onset of the Great Recession, when I got my severance package from the struggling magazine and advances on two books I coauthored. Of course, I didn’t feel fortunate at first as I watched the value of my stock portfolio drop by nearly half, but I left my money alone (and even invested more), and the market has grown exponentially since then. A decade later, my initial investments had more than tripled in value. We also purchased our home in 2010, when the housing market was still recovering and housing values in New York City had dropped. But we bought it in a neighborhood that had great schools and a huge park and public transportation nearby, and also had building restrictions in place—meaning there was a limit to the amount and height of new housing that could be built—so we felt confident that our home was likely to increase in value. I never imagined it would nearly double in value in a decade, but I was pretty sure we’d be able to sell it for more than we paid for it when the time came.
You may not experience the same growth in the same amount of time that I did. But ultimately, if you do nothing else but invest in stocks and bonds and buy a home that you plan to stay in for a while before selling, you can generally build more than enough wealth to support your postwork life. (When that life starts, of course, depends on when and how much you invest.)
At its essence, thinking like a breadwinner comes down to looking at each paycheck as an opportunity to grow your wealth. That’s what changed for me. I realized that the end goal isn’t increasing my paycheck. The end goal is to become less dependent on each paycheck entirely by building enough wealth to sustain me one day. Once that clicked, I was incentivized to put as much of each check as I could to work for my future and my family’s. And I would try to stretch that percentage a little bit more each year.
The more I invested and the more I spoke with other women who were building their wealth, the more I realized how smartly investing my money—rather than working harder just to earn a bigger paycheck—could help me get to a place where I could work less, have more time for my family, and be able to focus on the kind of work that really lit me up. One day I might actually be able to cover the basics with the income from my investments. Think of the freedom that would allow! I could take whatever work I wanted, whenever I wanted, rather than feeling so reliant on my paychecks. It wasn’t even about retiring early (though that would be nice) but about having enough money invested that I could have more control over the work I did or didn’t do. And have more time to enjoy this life I was creating!
Until I started thinking like a breadwinner, I’d never experienced the comfort and sense of possibility that came with having money that was invested and growing. It changed the way I looked at money—and the possibilities for my life—entirely. And it can do the same for you. Now let’s look at how to maximize your earning potential so that you have even more to invest for your future.