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Chats on Saving and Investing…

by J. Money on Wednesday, January 23, 2013

scrabble money words

I had a great convo back and forth with a reader of this site on saving and investing – we’ll call him Elmo – and I thought you may get something out of it too. Maybe someone else is in this current situation? Or needs some re-motivating again? (Pretty clever title for today’s post btw, eh? ;))

Here’s our emails copied and pasted below… I don’t know why I want to call him Elmo, haha.

From Elmo:

I’m a year out of college and have a cool job I’m happy with. I had a much less cool job which I was much less happy doing, although the financial benefits were much better. I got 7 months into that job, said screw this, and got an awesome job I love instead of the financially rewarding corporate ladder climber I had before.

The problem is at my last job they set up a 401k, matched up to 6%, and all that fun stuff. I never saw a match but I did put a small chunk (maybe 3%?) into it.

My new job doesn’t do any kind of retirement stuff. I have my past job 401k still in the past companies 401k account. They said I could leave it there or move it. I was lazy (rather more not sure) of what to do so I left it there and about a grand sits there.

My main problems now are:

  1. My retirement is in a random 401k and I feel like I don’t know what it’s doing there
  2. I am not saving now because the job I have now didn’t make itreally easy
  3. I want to be saving!

Your blog is awesome, easy to read, and fun. Thanks for being a good blogger. Can you help!?

Hey Elmo, congrats on the sweet move!  It’s always tough moving over to a place w/ less money but MAN I bet you feel a ton better yeah?  I’d have done the same thing in your shoes, so well done :)  And thanks for reading my blog too!

To answer your questions:

1) My retirement is in a random 401k and I feel like I don’t know what it’s doing there — That’s cuz you don’t! Haha… I would spend the time moving it over to an account fully owned by YOU and then stay on top of it from this point going forward. I’m not an expert in this area, but most people recommend moving it to a Traditional IRA where you can then invest the $1,000 into whatever stuff you want: stocks, mutual funds, cds, etc. That’s what I did when I went to self-employment, and I’d just call up your financial institution (or Google for a good one that fits your style) and then just have them walk you through the process of getting it all over.  It’s super easy to do, just really annoying. Luckily you only have to move it once though :)  And then for the future you’ll always have 1 main account for additional 401k xfers or more retirement funds, etc etc.  It’s all YOURS to do as you wish.

2) I am not saving now because the job I have now didn’t make it really easy — I would set up either automatic xfers from your paycheck (if HR has that where you are now), OR set up auto xfers from your banking account a few days after your paycheck hits. If you’re one that likes everything being done for you so you don’t have to think or worry about it anymore, that’s your best best. You could always xfer the money into a retirement account (like that traditional IRA or even beter, a separate ROTH IRA), which will then make it harder for you to touch too since you know you’ll then get dinged/etc since it’s for retirement :)  I have to trick myself sometimes like that too…

3) I want to be saving! — Then start! :)  Do those auto. xfers I just mentioned, or pull money out every time you get your paycheck yourself and put it somewhere safe that you won’t touch.  Or think about picking up a side hustle and earning some extra money at nights or weekends, and then put 100% of THAT away and to considered savings.

There’s a lot of stuff you can do once you know what you WANT, so now the tricky part is acting on it :) But better to think about all this stuff NOW than later when you’re old and wrinkly!  And the fact you’re only 1 year out of college is even better – you’ve got plenty of time to let all these savings work for you over your lifetime.

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ROUND TWO:
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Elmo hollers back:

Just wanted to check in with you again and let you know that your advice has helped me continue to move along in my financial journey.

Since I last emailed you I’ve rolled my old mega-corporation 401(k) into a traditional IRA that I now control (per your advice). I kicked my current employer in the shin and found out they match up to 3%! I just need to get the paperwork lined up and I’m making free money, something I know you love.

Oh and I got engaged – super awesome but it adds a crazy amount of financial stuff into the picture. I’m addicted to planning and budgeting though, so that only makes it more interesting :).

My main question right now I’m actually stumped on is how the *heck* I pick the right stocks/mutual funds/etc for the $ that is just sitting in the IRA?? What I would like to do now, being that the account is small, is set up this account as my conservative account which will just play it safe. I will make other accounts later that will be more fun but for now I want to set up a nice little nest egg for when I’m old and wrinkly and hitting golf courses up and down the east coast ;).

How do you go about picking mutual funds?

Congrats on your engagement – soak it all in bud! It goes by super fast and then you have a most wonderful day of your life and then it’s all over, haha… not the fun or love or anything – that continues! – but just the excitement of the wedding and all that :) It’ll suck planning and your fiance will probably worry her sweet little tush off, but just make sure to keep reminding her to pause and breathe it all in too. It’s a fun time in your guys’ lives!

RE: Stocks/funds/etc - First off, congrats on now having full control AND working on that free 401(k) match – that’s the best thing I’ve heard all night :)  As far as what I pick myself, I’ve never been too good at it I’m afraid. I do have my ‘fun fund‘ as you know, but really for the bulk of my investments I always just call up the institution it’s at (in my case, USAA) and tell them what I’m going for and ask what they suggest.

For people young in their 20′s and 30′s the “pros” usually recommend a more aggressive fund (or funds) because we have 20, 30, 40 years to take advantage of all the growth, as well as recoup from any crazy losses. And even the “aggressive” funds aren’t hardcore like one or two tech stocks or anything. These mutual funds are still 50-100+ filled with stocks, and then a chunk for cash too – so I wouldn’t get too scared, unless you’re SUPER conservative and that’s fine too.

In that case just ask what they recommend then for your situation and they’d happily advise there. The only thing I know that people like a lot is to invest in “index funds” which basically follow the stock market. When it goes up, your funds go up. When it goes down, yours goes down/etc. But it follows it and the theory is over time it’s always more beneficial…

But yeah, I’m no expert in that area so I’d def. search around more…I’ve heard The Fool is a good place to check out, as well as the Boglehead community, but outside of them I haven’t heard of killer sites on stocks and funds… I feel like if someone was brilliant at it they’d be billionaires by now! ;)

Maybe someone else here knows of a great investing site/blog that they enjoy? Or any other advice/thoughts for Elmo and others in similar situations? All I know is that saving and investing *something* on a consistent basis is key for long term success… it’s just a matter of figuring out how to do so without wanting to punch yourself in the face ;)

Happy Wednesday!

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[Clever photo by StockMonkeys.com]


{ 32 comments… read them below or add one }

1 Lance @ Money Life and More January 23, 2013 at 7:18 am

I personally invest with Vanguard because of their low fees (a key to getting the most out of your retirement money). In terms of what type of investment to go with generally the younger you are the more aggressive you should be with retirement money because you won’t need to touch it for 40 years and have time to recover any losses. However, it will likely lead to more growth too! I personally went with a target retirement date fund because they take care of all of the technical stuff like rebalancing for you and it goes from aggressive now to more conservative toward retirement automatically. Of course every fund is different so you need to understand what the particular fund you invest in does… and I have to mention the normal disclaimer that i’m not an investment professional so make sure you talk to a financial advisor or investment advisor to help you with your decision.

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2 J. Money January 23, 2013 at 9:51 am

I like Vanguard too. I have two funds with them I believe that are index funds as well. So far so good!

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3 Jane Savers @ The Money Puzzle January 23, 2013 at 11:14 pm

Vanguard is fairly new to Canada and I am considering investing. They have quite a long list of funds to chose from.

Why did you select the Vanguard fund you have your money in?

I will stay away from the funds that start with the word “emerging”.

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4 J. Money January 25, 2013 at 9:46 am

I started investing in them because every other person I know loves and trusts them, so I figured it was as safe as a bet as any others :) And I was looking for an index fund to get some of my money more conservative, so figured why not them over others who have pretty similar index funds?

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5 Mortgage Mutilator @ Mutilate The Mortgage January 29, 2013 at 3:28 am

We’re just about to take the plunge and start investing with Vanguard too. They have very cheap management fees and the way the company is structured is very unique and important.

A great blog I read on this stuff is over at http://jlcollinsnh.wordpress.com He’s an already retired and very experienced investor.

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6 J. Money January 29, 2013 at 10:27 am

Oh, very cool. I’ll have to check that out, thx man :)

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7 Glen @ Monster Piggy Bank January 23, 2013 at 7:45 am

This is a really great post and I am glad that things are working out so well for Elmo :)

I invest my money myself into both long and short term stocks (although after the GFC it has become very much in favor of short term trading). If you aren’t comfortable doing the whole stock market thing yourself then there are plenty of fund managers willing to invest your money for you, but be aware – some are far better than others at delivering returns.

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8 J. Money January 25, 2013 at 9:46 am

Yup! And you never know who the best will be until after time proves so ;)

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9 Sense January 23, 2013 at 8:04 am

After 5 years of reading about choosing mutual funds, I still get very confused and am *still* learning. Investment paralysis: it’s a real thing! The best thing to do when in that state of mind (after the due diligence that caused it), is to just pick something and go with it. Just take action! The money can’t do you any good just sitting there in limbo. Obviously I’m not an expert, so all I can offer as advice is what I personally did. 1) as J$ mentioned, I only was interested in index funds, because they offer the lowest management fees (and most times, best return as there’s less taking away from your profits). 2) I learned I needed to select no-load funds (ditto). 3) I identified my preferred risk (mine is very aggressive). 4) From these criteria, I jumped online and looked through the options available at my broker, Vanguard. They have some great quizzes to narrow down your options.

From there, it gets trickier. Most funds at Vanguard have a $3K minimum buy-in, so you may or may not be able to buy any funds until you add some more money to the pot. I also suggest considering your emergency fund as your ‘conservative’ investment in your overall portfolio, and going riskier with IRA and 401K funds, due to the tax advantages. I highly recommend perusing the Motley Fool’s forums–I’ve always found that someone else has been in my exact situation and asked questions about it before. Good luck, Elmo! :)

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10 J. Money January 23, 2013 at 9:53 am

I like that you talked about your 5 years and always learning – that’s important with this stuff! Even the professionals are continually learning and adjusting ;)

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11 Tony@YouOnlyDoThisOnce January 23, 2013 at 8:19 am

Loving Vanguard Total Stock Index Fund….Not getting rich on it, but it’s steady with low fees. Real winner..

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12 Paul January 23, 2013 at 8:52 am

Like J, I have accounts at USAA. They’re great and the financial advisers are not paid on commission, so they won’t try to sell you anything you don’t want to buy. And USAA has changed its rules. I’m pretty sure you don’t have to have a military affiliation to use its banking/investing products. I think you only need a military background if you want to get insurance from them. USAA has a lot of good funds that you can only get through them, but does not limit you to their products. If you get a brokerage account with them, you can use pretty much any mutual fund you want.

When I retired from the Air Force, I had a Thrift Savings Plan (TSP), which I rolled into an IRA with USAA. I talked to one of their financial advisers to determine my risk tolerance, and ended up distributing the balance among 8 USAA funds.

It’s good to see that your company does have a 401k and matches up to 3%. I would recommend you invest 3% in your 401k and 7% in a Roth IRA. If you max out your Roth IRA, invest more in the 401k. I hope you have a lot of options with your 401k. Make sure the allocation of your 401k matches your risk tolerance. Since you are relatively young and have a long time horizon, I would suggest something a bit risky, but only if you are comfortable with it. You don’t want to be constantly worrying about your investments. For right now, investing 10% of your income might seem like a lot, but you’ll thank yourself for doing it in 20-30 years. As you get older and start making more money, you can increase the percentage invested without affecting your quality of life in any noticeable way. You might eventually want to increase to 15 or 20%, depending on your goals. Like if you want to retire early, you might have to go to 20% or maybe even more. I hope this info helps.

Paul

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13 J. Money January 23, 2013 at 9:54 am

Thanks for chiming in! And you’re right about USAA – their banking products are now open to non-military folks too – it’s pretty cool. I call them up at *least* every two weeks to ask them about something, and they’re always super friendly and helpful. And I swear this isn’t an ad for them! Haha…

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14 Brian January 23, 2013 at 9:12 am

The Booglehead community is pretty solid and offers good advice.

The very least you should do is put enough to get the company match in your 401k. You can put more in, but I would look at the funds and make sure they are decent (ie. lower expense ratios good management). Otherwise I wouldn’t put another dime in there!

ROTH vs Traditional IRA is a debate that rages on. If you think you are going to be in a higher tax bracket when you retire the ROTH makes more sense (mathematically), otherwise you should do a traditional. If you can max this out great do it. From there I differ from most people and prefer to put my money into a taxable account vs my 401k since the choices in my 401k are kind of “meh.”

In the end, the important part is that you are saving and taking an active roll in it. As Paul said above, you can start out small and increase it every year (I find just putting your raise into savings helps and you will never miss it).

Cheers!

Brian

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15 J. Money January 23, 2013 at 9:56 am

YES!!!! If you can get into the habit of investing all your raises/bonuses/etc, your lifestyle expenses won’t go up along with it! Which does MIRACLES to your money over time – it’s awesome. And you really don’t miss it much either.

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16 Grayson @ Debt Roundup January 23, 2013 at 10:00 am

I have both my 401k and my Roth invested aggressively. I am about to turn 30, so I have some time to build it up if it falls. I am working on building up some funds to move to Vanguard because I like their fee structure. This was a good read J.

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17 Joe @ Retire By 40 January 23, 2013 at 11:42 am

Good job rolling over your 401k. My suggestion is to invest it in a low cost Vanguard index fund/ETF like the SP500 fund. Just keep adding to it and when you learn more about the stock market, you can move it somewhere else. At this point, consistently adding more money is the most important thing for you.

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18 J. Money January 25, 2013 at 9:47 am

I like that approach a lot.

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19 Johnny @ Our Freaking Budget January 23, 2013 at 11:56 am

I’ve heard really good things about these companies around the Internet: Enron, Lehman, and Blockbuster Video. :)

I think you hit the nail on the head by saying that the most important thing is that he’s consistently saving and putting the money to work. You can definitely still mess things up with some bad investments, but generally, if you’re diversified like every financial advisor has preached since Moses, your gains/losses should be minimal.

I’ve opted to go the target retirement date options for the time being. They’ll handle all that aggressive/conservative stuff automatically and tend to my flock of cash. But I’d love to do a “fun fund” down the road so that I can prove to myself that I’m terrible at picking winners and losers. MiniDiscs? Yeah, I totally bought in to that thinking it would be the next big thing. <—- Loser

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20 J. Money January 25, 2013 at 9:49 am

haha nice! that’s what everyone told me when I invested in Sirius radio back when it was all new and fresh. but it def. turned out much better! :) only I had a pittance of money back then so me tripling my $100 wasn’t all that impressive, haha… but it was cool to buy a stock for like 25 cents or whatever when you were first learning.

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21 Cordelia January 23, 2013 at 2:07 pm

Did the “Elmo” reference come from your new-found TV habits as a dad? :)

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22 J. Money January 25, 2013 at 9:49 am

Haha, no – we’re not at the cartoon stage yet. I’m currently getting him hooked on HGTV since all he does is try and eat all his toys when it’s on anyways ;)

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23 John S @ Frugal Rules January 23, 2013 at 2:14 pm

Love this post! I love the suggestion to do auto transfers. That is generally the easiest way to go and after a time it is painless. Rolling that 401k into an IRA is an awesome move as well, I was just talking to my younger brother last night about his need to do this as he is leaving for a new job in the next month and has no clue what to do. I directed him to roll it over and look at some solid, low-fee index funds. I too have USAA (which I LOVE), but yet to start a brokerage account with them…maybe I should. :)

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24 J. Money January 25, 2013 at 9:50 am

Maybe you should, indeed :) Your brother’s lucky he has you to help watch over and lead him too – you only need to learn this stuff once and then it’s always in your head!

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25 Aloysa @ My Broken Coin January 23, 2013 at 5:06 pm

You know, personally, I want to start investing. But since my saving habits are bad, I probably should improve them first. I am not comfortable investing, until I have a good cushion. Just in case, things don’t go well. :)

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26 J. Money January 25, 2013 at 9:51 am

No shame in that, friend! You can keep “investing” your money into your savings account for however long you want :) Piles a money anywhere is still piles of money.

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27 Cat January 23, 2013 at 8:59 pm

I think it’s awesome that Elmo’s job let him have a 401K right off the bat. I’ve worked at ones that don’t let you for a year and then if you hate your job and leave early, similar to what Elmo did, then you don’t quite get those perks.

@aloysa, I agree – I want to start investing too but I haven’t quite saved enough. And if you’re doing a mutual fund of some sort, they have restrictions on minimum investing (At least through ING) and I can’t ever seem to get that 1,000 set up for “investing” because I am too busy saying, I need that 1,000 in my emergency fund in case I leave my job for my sanity and can’t find another one or in case my car breaks down! Hopefully we will both be investing soon. We’ve taken the first step of thinking about it and putting a goal out there!

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28 J. Money January 25, 2013 at 9:53 am

GOOD JOB keeping that emergency fund safe and secure! That’s a wonderful feeling isn’t it? Knowing you always have it just in case? I never advise anyone to start investing until they’ve got most of their debt away and a nice savings cushion for emergencies/etc… You gotta have a solid foundation first before venturing into other more complicated worlds :)

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29 Jane Savers @ The Money Puzzle January 23, 2013 at 11:18 pm

Dear Elmo,

Elope. Huge cash savings. You can use the money saved to put towards a downpayment of your first house.

Best wishes for your future,

Jane Savers

ps

Don’t rush the elopement. Enjoy a long engagement. You are very young.

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30 J. Money January 25, 2013 at 9:53 am

haha… “don’t rush the elopement” – haven’t heard that one before ;)

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31 William @ Drop Dead Money January 24, 2013 at 7:26 am

Note to Elmo: Spend some time getting to know individual companies and/or industries. Here’s why: human beings are wired in a certain way. The more time we spend around something, the more we know about it and the more interested we become in it. My wife knows a lot about football simply because she sees and hears a lot about it being around me and her coworkers, even though she never would have been interested in it on her own.

Once you know more about an industry or company, you’ll know a lot more about its investment potential, and you’ll know whether it’s a good idea to invest in it. That’s when you become more like Warren Buffett, and that’s when investing becomes a lifelong interest. When that happens, you almost can’t help but make money.

It’s your future. Nobody’s going to give it to you, you need to make it yourself. Definitely worth the time…

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32 J. Money January 25, 2013 at 9:55 am

Love that football analogy, William!! My wife was the EXACT same way – hated to watch cuz she never understood it and didn’t know what the big fuss was about… Then I helped explained things to her over time, and we had a team to root for (the Redskins, what what!), and now she enjoys it immensely :) It took a few seasons, but the more you’re immersed in it as you said, the better (and more comfortable) you’ll get over time! Great point, indeed.

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