Welcome to the 5th installment of 12 Months to Get Good with Money, where I give you a small goal each month of the year to create change slowly in your financial habits. If you’re new here, you can still catch up (like I said, these are small goals). Here’s what we’ve covered so far:
- In January, we made a budget.
- In February, we chose 1 exciting and 1 not-so-exciting savings goal.
- In March, we separated our savings accounts and decided if automation was right for us.
- In April, we talked all things taxes and covered what to do, whether your ended up owing money or getting a refund.
Today, we’re going to be covering the general information about investing. Your goal is to read this post and/or watch the video above and seek to understand the general concepts about investing, and then do your own research on your specific investing options.
You don’t need to open any accounts this month– in fact, that will be your goal for June. So let go of any of that pressure and make a commitment to use this month to just get educated. We’re doing this in extremely bite-sized pieces, because I don’t want you to be scared away by a call to a specific action right after you watch this video. In fact, you have the rest of the month to deepen your knowledge of investing.
It feels scary to start this, and risky. I completely honor that response. But I encourage you to keep your mind open as you take in this information. Investing information changed my financial future forever, and it has the capacity to do the same thing for you today.
As always, please remember that I am not a financial adviser, and so you won’t hear me tell you to go and buy specific stock, but instead I’ll give you the general information about investing based on the historical data we have of the stock market.
Let’s start by talking about the importance of investing. What’s the big deal?
- It’s actually more risky to not invest. Investing is something that feels intimidating and inaccessible to so many, but it isn’t actually that complicated. More importantly, investing is crucial to building wealth. Simply saving money in a typical savings account won’t actually keep up with inflation, which means that saving actually loses you money in the long run. How do we know this? Inflation averages about 3% per year, while even the best savings accounts earn less than 2% currently. On the other hand, the stock market grows 8% per year on average (yes, this includes all of big crashes we’ve experienced). That’s why, while investing feels risky, it’s actually a much bigger risk NOT to invest.
- We should all aim to build wealth. There’s also a noticeable stigma about the idea of building wealth in the teaching profession, which probably comes from the fact that it’s not a job anyone chooses for the money. This is deeply harmful, because building wealth isn’t a selfish or greedy thing. It’s time to acknowledge that you need to be able to support yourself in retirement, and that building wealth is crucial to that. If you don’t invest for your retirement, you’ll likely place that burden on loved ones.
- And if you have children or plan to have children, investing allows you to be able to leave money to them. If you want your kids and their kids to be secure and have more opportunities than you did, investing is absolutely crucial. There’s nothing immoral about building generational wealth, ESPECIALLY if you come from a family that didn’t have those opportunities or was even impoverished.
Now, let’s clear up some misconceptions about investing.
- You have to trade individual stocks. The biggest misconception about investing (that even I had when I started) was that investing meant trading individual stocks. I believed this because, sadly, it was the only context in which I had heard of investing. This is NOT true: trading individual stocks in the stock market is actually very risky, time-consuming, and not what the typical investor chooses to do. Instead, the average investor uses vehicles such as 401(k)s/403(b)s, IRAs, etc., to grow their money over time without having such a hands-on approach.
- Investing is too risky. The stock market, over time, predictably trends upward, even when it fluctuates in the short term. There’s an excellent instagram post by @personalfinanceclub that illustrates the stock market as yo-yoing while walking up the stairs. This shows that even when the market goes up and down consistently, it ultimately trends upward. So, in addition to the fact that we’ve covered why it’s actually more risky not to invest, we must also have an understanding of how the historical data on the stock market tells a different story.
- Your pension will be enough. If you have a state pension, it’s pretty nice because the money is automatically taken from each paycheck (you don’t need to think about it). You don’t decide how much to contribute; rather, it’s a set amount based on your salary. But the important thing to note is that pensions are notoriously unreliable, as they are underfunded in most states to varying degrees. Here’s some data from PEW about this.
Let’s talk about investing options through employers.
For teachers, these are most commonly called 403(b)s & 457(b)s. Most others have a similar option called a 401(k). For these plans, YOU decide how much per paycheck you want to contribute, and which account you want to contribute it towards.
The beauty of these accounts is that the money comes out of your paycheck before taxes, meaning that it’s a smart move tax-wise. It’s also automatic, so you can set-it-and-forget-it.The main difference between the 403(b) and 457(b) is WHEN you can take out the money without penalty:
“While [the 403(b) does] not allow distributions until you are 59½ years old, your 457(b) benefits become available when you no longer work for the employer providing the 457(b) plan.” -Investopedia
In other words, if you retire or change employers before 59.5 years old, you can withdraw money from your 457(b) without penalty, whereas you will pay some hefty fees if you withdraw from your 403(b) before retirement age.
A big thing to note is that while many typical employers offer a contribution match, the vast majority of public school systems DO NOT. It’s extremely rare– but if your district does offer a match, make sure to take advantage of it (this is, quite literally, free money).
But there are also individual options– to invest in on top of your employer options, or focus on if you do not have employer options.
You can invest up to $6,000/year into Roth & Traditional IRAs (and more if you’re over 50 years old). This is great to invest extra money on top of your automated amounts in your 457b/403b, and to use for different tax advantages.
Roth IRAs are an excellent idea for early/long-term investing, because the tax structure is different. Since you are investing after-tax dollars, the growth that the account makes is not taxed. This means that there is no tax on the money when you withdraw it. In general, this is advantageous for accounts that will see a lot of growth (such as accounts that are maxed out and left to grow for a long time).
I’m not going to talk about specific accounts in this video, but instead I’ll leave you to learn more about investing in general. Next video, we’ll chat about different types of accounts and my recommendations. Then, you’ll create a real investing plan based on your situation.
I want you to spend some more time this month researching investing, using Investopedia, buying a personal finance book (I recommend I Will Teach You To Be Rich), or browsing YouTube, other blogs, or podcasts. It’s important to note that you will get a lot of conflicting advice– the key is to weigh it all against each other and consider what you think is best for your situation instead of letting the contradictions derail you.
Don’t forget to pick up my free budget template
And if you need more guidance with goal setting, mindset shifting, and budget brainstorming, you can purchase my Money Map Workbook for just $9 –> Get Your Money Map Workbook