Sunday shopping at the local Trader Joe’s early in the morning—trying to beat the oncoming rush of humanity preparing for Superbowl parties—I heard it again as I have from so many young people.
“I have some money. But how do I get started?”
It was a young clerk in her 20s, with years of investing and prime earning years ahead of her.
First and foremost, to this young lady and for millions of others of her generation, I begin with a commendation: You’re asking the right questions. No matter your political orientation—and in New York City it is generally somewhere around the social democratic left—your question implies that you want to learn to amass assets for yourself and your loved ones.
Bright Young People
The implication of the latter is that maybe, just maybe, one shouldn’t depend on pols to provide for us over the years as we accumulate gray hairs from outrageous tax bills; that individual assets are better than all the government welfare programs in creation. So let’s get started. Here are some of the steps for people who are striving for financial independence. And the sooner we start, the better. So, for the time being, I’ll shut down on shooting spitballs at our masters in lower Manhattan, Albany and the Potomac Poloniuses, all of whom can spend our money faster than Imelda Marcos can go through shoe stores.
Set up automatic savings and investing vehicles. Leave them in place for as long as you can. The sooner you do it, the more years you can accumulate assets. And, despite in most cases having very little in assets at the start, you have an advantage that GregoryBresiger.com—now on a death watch— doesn’t have: You have lots of years. So don’t waste them.
Get started yesterday. O.K., I’ll accept today. But, for example, if you haven’t signed up your employer’s matching retirement plan—most commonly a 401(k) plan with stock, bond and money market options—do so. The younger you are—the more years you have before you want to achieve financial independence—the higher your stock investment component can be. Say you’re 25, with possibly 40 years to go, an 80 percent stock and 20 per cent bond allocation is reasonable. When you’re 55, and have accumulated a fair amount of assets that you want to protect, then a 30 percent stock and 70 bond allocation would be more reasonable. By then, with substantial assets, you probably should have an adviser to discuss investment allocations.
Looking for Help? You Can Find It.
Be sure you always contribute at least to the limit of the match. If your employer will match the first six percent, then you put in at least six percent. Your employer will double your contribution but only if you contribute up to the limit. And remember, especially for young people starting out and who don’t make a lot of money, a tax break comes with your contribution. So, in this case, Uncle Whiskers and his horde of money mad publicans is actually giving you a tax break (Sorry, I promised above not to bring up that dirty taxing subject).
Help, Part II
Don’t stop with your work retirement investments. If you can, start an IRA. Fully fund it with a $5,500 contribution each year. I know. I know. Where the hell are you getting $5,500? I understand. Despite what most people think who have seen the bio picture of GregoryBresiger.com and think that I was advising Cal Coolidge, I remember what it was like back in my 20s to make very little money. But remember one good thing about the IRA: When you have a low income almost all of it is deductible. So about a third of your contribution will come to you in the form of a tax break. That can help you find that $5,500
Investments Outside and Inside Your Retirement Accounts
I believe in index funds, especially for the long term investments, are usually the best deal around for the average investor. Indeed, no less than Warren Buffett has said that, for those who aren’t ready to do extensive stock analysis, index funds are often the best deal. As a general principle I would recommend Vanguard funds, both for your retirement accounts and regular accounts outside of the retirement accounts. A fund that tracks the broad market, such as an S&P 500 fund, would be good. But there are other fund companies that are also offering good index funds. Remember the cost advantage of these investment vehicles. Most domestic stock funds charge an expense ratio of about 1.3 percent a year (And that usually doesn’t even cover all trading costs, which can drive up the butcher’s bill handed to the benighted investor). A good index fund’s average expense ratio is about 0.1 percent. That means you are paying about 1.2 percent less per year than the investor who buys the high priced spread.
Why Now? Why Can’t I Wait Until Next Year When I’ll Be Making More?
In a word: Compounding. The longer it goes on, the better you will do. That’s why it is vitally important to start as soon as possible. In the long run, delay will cost you. The only way you can counter this argument is to prove that you will, without doubt, die by 30 or 35. And even this argument won’t do: “Oh, I love my job and my plan for financial retirement is to work forever.”
Sure, you’re happy now. But what if your boss changes or your company gets sold or you just reach a point where you are sick of getting up and being jammed into an E-train each morning on the wretched government run New York City subways? My last 15 years of a full-time job in Manhattan I worked for a small publishing company. The first ten were great. The last five were horrific. I was able to quit because my investments had compounded to a point that my wife and I—the former is the ever comely Suzanne Hall—had achieved financial independence even though neither of us has, or probably ever, will make mucho dinero.
How Will It Be Done?
The sooner it starts, the longer it goes on, the better you do. Let’s say you put $300 a month into a fund that returns nine percent a year. After 20 years you have some $207,000. But how about someone else who does the same but for ten more years? What a difference! The second person has $553,000.
Now let’s go back to the young clerk I spoke to while stocking up on Sunday. She’s in her 20s and might be able to invest for 40 years. What does she end up with the same numbers—-$300 a month, with a nine percent rate of return—if she adds that extra ten years? She has $1.414 million.
Get started now.