Jennifer Grucza

As I mentioned in an earlier post, I have been doing a fair bit of reading lately about personal finance. Growing up, I learned the value of living below your means and saving your money. But I never learned about the other half of the story–putting your money to work through investing. This is because you have to have a lot of money to invest, right? Wrong! Of course, it does make it easier, but it’s better to invest a little bit than to invest nothing at all.

Sure, I could save all my money in a nice savings account, earn a couple percent interest on it, and it would be safe and I’m sure I could build it up somewhat over time, just by regularly moving money into it from my checking account. This is the concept I grew up with. Even then though, I didn’t think of disciplined saving–paying your savings account as if it were one of your bills, but making sure to pay it before anything else. Ideally, you would want to save 10% of your income this way. It’s easy to do with a 401K plan at work–your employer automatically deducts the money from each of your paychecks. Not too hard to do on your own, either, especially if your bank has a nice website where you can set up recurring monthly transfers. You can do this even if you don’t make much money at all–just put away 10% of it before you do anything else with that money. Hopefully, you won’t even notice the difference. And it will pay off in the long run.

Now, a savings account doesn’t do much of any work for you. It’s barely keeping up with inflation (maybe it doesn’t even do that). You want to get a higher return on your money, don’t you? Put your money to work! Invest it.

Now, I’ve learned the hard way that investing money into a single stock is often not the best way to go. My previous employer had a stock-purchase plan where you could withhold money from your paycheck to go towards buying discounted company stock every six months. I started that job in September 1999, when tech stocks were skyrocketing. It was great to see the stock price rising 30 points in a day! Everything was great–it would be stupid not to get in on this, right? Well, of course then the bubble burst. I still have some stock left from that–I’m just waiting for it to get up to maybe $3, but I’ll probably be lucky to see it rise to $2. The only good thing about the low price is the tax advantage–by selling those shares at a loss, I’ll be able to offset any gains I might make in other investments.

So, if not individual stocks, what should we invest in? Mutual funds! Specifically, no-load (no sales charge), index mutual funds. An index fund is a fund that follows some stock index, like the S&P 500 or Wilshire 5000. Basically, the managers of the fund invest in all the different stocks tracked by the index. They don’t spend any time trying to figure out which stocks are good or bad. This is good because this way they avoid any taxes incurred by frequently buying and selling stocks within the fund (actively managed funds can have a lot of turnover, and therefore a lot of taxes). It is also good because people aren’t really all that good at predicting the future performance of stocks. It has actually been shown that choosing stocks by throwing darts at the financial section of a paper yields better returns than most actively managed funds! Why would you want to pay a hefty sales charge for this?

Lately, I haven’t been doing so well at paying myself (remember, pay yourself 10% of your paycheck before spending that money on anything else). At my previous job, I had a 401K that I regularly contributed to, in addition to my employee stock purchase plan. But I haven’t taken advantage of the 401K plan at my new job. Part of the reason is because I had never heard of the company managing the 401K before, and many people here thought it was better to just invest on your own. Knowing what I do now, I should take a second look at the offerings to see if there are any nice index funds being offered.

So I haven’t been investing in a 401K. At least I did open a Roth IRA, though–barely managed to get it in for the 2003 tax year (I’m such a procrastinator). IRAs and 401Ks are great for tax reasons, but of course you can’t get to that money until you’re 65, at least without paying hefty penalties. That’s good too, because then you won’t be tempted to dip into that money, which will give it a better chance of growing into a nice large sum. But you want to be able to spend some money before you’re 65! So, my next step is to set up a non-retirement brokerage account. I’ve got the account opened, now I just have to decide what I want to invest in.

Of course, I want to use no-load index funds, but there are several out there. Right off the bat, I’m narrowing down my choices to those offered by Vanguard, since they are supposed to have the lowest costs (even though there’s no sales charge, there are some operation costs). The only downside to Vanguard seems to be the $3000 minimum. So, I am going to invest in just one fund to begin with. Right now, I’m thinking I’ll go with the Total Stock Market Index Fund (tracking the Wilshire 5000). The 500 Index Fund (tracking the S&P 500) is also a possibility. If I were to choose a second fund to invest in, I might go with the Mid-Cap Index fund or the Total International Stock Index fund, to diversify a little more.

I know this is a very long post, and probably boring to some (either because they don’t care, or already know all of this), but I went for so long without knowing the slightest thing about this topic, that I thought I’d share for those who are in the same position as me.

This entry was posted on Wednesday, April 28th, 2004 at 7:22 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.