MYM #019: A Guide to Saving and Investing – Part 2

By: Ryan Greiser, CFP®

Read Time: 5 minutes

Welcome to Part 2 of our series, "A Guide to Saving and Investing."

You're going to learn how to kickstart your investing journey, without being a financial guru, by exploring:

1. What to Invest In
2. Where to Hold Your Investment
3. The Power of Starting Early and Investing Often 

Now, here's a little reality check: Most people struggle when it comes to investing. But we're here to change that. Our mission is to make investing simple and accessible.

We're about to make your financial journey a whole lot easier. Let's dive in.

What to Invest In

The easiest way to get started on your investing journey is to explore Mutual Funds (MF) or Exchange Traded Funds (ETF). 

Mutual funds and Exchange-Traded Funds are like baskets of investments. They make it easy for you to invest in a variety of assets without having to pick each one individually.

How Do They Work?

• These funds are managed by institutions with expertise in investing.
• Each fund has a specific objective, such as investing in large US companies, a mix of cash/bonds/stocks that are allocated conservatively or aggressively, or targeting a particular retirement date.

Let's take a look at a few examples of different types of funds. For simplicity we’re going to take a look a few funds from Vanguard. As always, do your own research and contact a financial advisor for personal advice. This is not an endorsement for Vanguard.

Asset Class ETF: Vanguard S&P 500 ETF

• This fund is like a collection of shares in the 500 biggest U.S. companies.
• Its goal is to do as well as the whole U.S. stock market, which is measured by the S&P 500 Index.
• It tries to copy how the index performs, so if the stock market goes up, this fund goes up too. If the stock market goes down, this fund goes down too.

 Here are the Top 10 of 510 total holdings of the ETF as of 08/31/2023:

Allocation Fund: Vanguard LifeStrategy Growth Fund

• This fund is a mix of different investments in one place.
• It aims to give you a complete investment package in a single fund.
• In this example, Vanguard is investing in 4 of their mutual funds within a mutual fund.
• You can choose a strategy that matches how much risk and growth you're comfortable with (Conservative, Moderate, Aggressive)

Here is how Vanguard builds a portfolio of mutual funds within one mutual fund:

Target Date Fund: Vanguard Target Retirement 2050 Fund

• This fund is like a helpful guide for your retirement savings.
• It starts with more stocks when you have a long time until retirement.
• As you get closer to retiring in 2050, in this example, it shifts your money into safer bonds and cash.
• It's like a built-in plan that adjusts as you get older, so you don't have to worry about changing your investments.

This is how Vanguard will automatically adjust the investments in the portfolio based on target year you select:

Why Are Mutual Funds and Exchange-Traded Funds a Good Way to Get Started?

• They offer instant diversification, spreading your money across different investments.
• You don't need to be a financial expert; professionals at institutions manage these funds for you.

Where to Hold Your Investment

When it comes to investing, you have several main options on what account to put your investments in. Let's break them down:

IRA/401(k)

• Contributions: You can contribute a set amount each year. For 401(k)s, it's typically through your employer, while IRAs are individual accounts. You contribute pre-tax dollars, which can lower your current tax bill.
• Withdrawals: Withdrawals usually start at age 59½. Withdrawals are considered taxable income. Early withdrawals may incur penalties.
• Purpose: These accounts are designed for tax-advantaged retirement savings. You do not owe taxes on the money while it is growing in the account. 

Roth IRA/Roth 401(k)

• Contributions: Like traditional IRAs and 401(k)s, you contribute annually. The key difference is that you contribute after-tax dollars.
• Withdrawals: The magic happens during retirement. Qualified withdrawals are entirely tax-free.
• Purpose: Roth accounts are all about tax-free withdrawals in retirement. They're ideal if you expect to be in a higher tax bracket when you retire.

Taxable Brokerage Accounts

• Contributions: No contribution limits here. You can invest as much as you want, but there are no tax advantages.
• Withdrawals: You can withdraw your money at any time, but gains, dividends, and interest may be subject to taxes.
• Purpose: These accounts offer flexibility. They aren't specifically for retirement, so you can use them for various goals, including buying a home or funding education.

Now, let's emphasize the importance of employer-sponsored plans like the 401(k):

The Power of Employer-Sponsored Plans

Your employer's 401(k) is a valuable resource. Here's why:

• Contributions: You can contribute a portion of your salary directly, often with pre-tax dollars.
• Employer Match: Some employers offer a match, which is like free money. They'll contribute to your 401(k) based on your contributions.
• Purpose: The primary purpose is retirement savings, but the match makes it even more compelling.

What's a Match?

A match is when your employer contributes a certain amount to your 401(k) based on your contributions. For example, they might match 50% of your contributions up to a certain percentage of your salary.

Why It's Important

A match is essentially a bonus on top of your salary. It's free money that can significantly boost your retirement savings. Here are the basic steps:

1. Contribute to Your Plan: Don't miss out on tax-advantaged growth. The more you contribute, the more your employer might match.
2. Meet the Full Match: Don't leave money on the table. Aim to contribute enough to get the maximum match your employer offers.

By taking full advantage of your employer's match, you're supercharging your retirement savings. It's a smart move to secure your financial future.

Other Types of Accounts

While we've covered the basics of where to invest, there are other types of accounts worth exploring. We'll delve into these in more detail another day.

The Power of Starting Early and Investing Often

Investing early is like planting a money tree. The sooner you start, the more it can grow. Here's why it matters:

Compound Interest

When you invest, your money earns interest or grows over time. But here's the magic: The interest you earn can also earn interest. It's like a snowball effect that gets bigger and bigger.

Let's take a look at a powerful example why investing as early as possible is so important: 

If you start investing at 15, you only need to invest $60 per month to reach $1,000,000 by age 65.

But if you wait until 25, you have to invest $160 each month to catch up.

Waiting until 35, 45, or 55 means you need even bigger monthly investments to hit that $1,000,000 million mark.

Systematic Investing

The key is to invest regularly, month after month, regardless of market ups and downs. This is called systematic investing, and it's a smart way to make your money work for you.

And here's the best part: Many ETFs or funds through a workplace plan don't require a big initial investment. You can start with the cost of just one share, making it accessible for most budgets.

So, whether you're 15, 25, 35, or beyond, don't wait. 

Start early, invest regularly, and let the power of compound interest build your financial future.

Conclusion:

To kickstart your financial journey, consider Mutual Funds (MF) or Exchange Traded Funds (ETF). They're easy to grasp and offer diversification with expert management. For long-term success, prioritize tax-advantaged accounts like IRAs and 401(k)s. Don't overlook employer matches; they're free money.

Most importantly, start investing early. Compound interest works wonders, and systematic investing is the key. Whether you're 15 or 55, the sooner you begin, the better. So, get going and let your money grow.

Actionable Tip:

1. Begin your investment journey with MFs or ETFs for diversification and expert management.
2. Explore tax-advantaged retirement accounts like IRAs and 401(k)s for long-term savings, and maximize employer matches if available. Start early to benefit from compound interest.