The first time I felt the intimidating pressure of adult responsibility, I was three months out of college. It was my very first job interview, and I was wearing an old sweater and a pair of ill-fitted slacks, sweating. My would-be boss, the man sitting across from me, was only five or six years older than I was, which made me even more nervous. I'd never met someone in my age group who was that confident and self-assured. It was distressing.
He led me through a series of noisy workshops filled with strange smells and industrial machinery. He managed a small engineering firm, and I was applying to be their technical writer, which I was excited about because, if I got the job, I'd be a writer (technically).The interview was going pretty well; but at the end, he asked me one final, bottom-line question:
"Are you confident you could write a thorough instruction manual for this piston?" He pointed across the workshop to a piece of equipment that looked like a prop from a Ridley Scott movie.
"Yes," I lied. "Definitely."
Surprisingly, I got the job, and, even more surprisingly, a few months later, I did write a thorough instruction manual for that thingamajig. (I was more formal in the manual).
As with most intimidating things, I've found that, after you attempt them, they're not nearly as terrifying as they seem. Here are some things that terrified me at first but turned out to be pretty simple, actually:
Moving across the country
Investing intimidated me for a few of reasons. First, it seemed like a really, really boring topic. Two, some well-meaning people told me it was like gambling. Three, there was just so much jargon (see Reason #1).But I treated it like I did the technical writing. I didn't understand it, but I broke it down into a series of small bites to digest and that seemed to help in terms of how overwhelming it was. There's still a lot of stuff about it I don't understand, but I'm much further along with it now than I was even a year ago. Here's how I started, step by step.
Searching for my lost 401k
Two years after I quit my job and moved, I decided to look into my old 401(k). On the plus side, I was at least smart enough to take advantage of my company's match. But for two years, I had no idea what to do with it or even how to access it. In that time, I undoubtedly incurred high fees and missed out on better returns.
When I started getting my finances in shape, I realized I needed to do something with that old 401(k), which was my money, parked in some mystery location. I emailed my old employer, got the necessary info and decided I should continue saving for retirement. That meant rolling it over into an IRA.
Now I just had to find out what an IRA was.
Opening a retirement account
At this point, I needed to know a couple of things:
What kind of retirement account should I open?
I learned that there were two main types of IRAs: traditional and Roth. We've written about this topic at length, but if you're unsure of the difference, start here. To sum it up:
"The biggest difference between a Roth IRA and a traditional IRA is the tax treatment of contributions and withdrawals. With the Roth, contributions aren't tax-deductible, but withdrawals are tax-free (as long as you follow the rules). For the traditional IRA, contributions might be deductible; investments grow tax-deferred, but withdrawals are taxed as ordinary income -- the highest rate possible.
"The conventional wisdom is that a traditional IRA is better if your tax bracket today is higher than what it will be in retirement."
I decided to roll my 401(k) over into a traditional IRA with Vanguard. It just seemed easier, and I felt like it was more important than anything just to start saving. Vanguard talked me through the process. I learned that I had to specifically initiate a rollover. I couldn't just take the money out and then open an IRA separately; that would mean all kinds of crazy taxes and fees.
(Lately, I've been thinking about switching to a Roth, or opening one up separately because I appreciate the idea of tax-free growth.)
But -- yea! I opened an account, and it was time to start investing and saving.
Learning about index funds
About two months after I rolled over my 401(k) and saved a little bit in my new retirement account, I decided to look at the earnings. "What's going on here?" I thought. "Nothing has changed." There were no earnings, no real action whatsoever. I called Vanguard.
"Your funds are in a money market account," they told me.
"Oh! Okay." I said. "Now, what exactly is that?"
I learned that a money market account is basically a glorified savings account. My money was parked there, not really doing anything for me -- not exactly the way investments are meant to work. It was time to pick my actual investments. This was much easier when I had a company-sponsored 401(k). They gave me a menu; I pointed to what I wanted.
But now I actually had to find out what made up these menu items and build my own portfolio. So I did what anyone does when they need to understand something that's way over their head: I Googled it.
"With active investing, an investor tries to pick stocks that will outperform other stocks. With passive investing (also known as index investing or 'investing in index funds') an investor simply uses mutual funds to buy all of the stocks in the market. The basic idea is that with greater diversification and lower costs, a passive investor will generally do better than someone who buys actively-managed mutual funds."
That sounded good … I guess? I had no idea what half of those words meant, and I spent a lot of time looking up definitions while reading that article. It took me at least an hour to get a grasp on even the basic definition of an index fund.
But in that hour, I digested a bit of information that would benefit my finances enormously. I also learned that there were different types of asset classes in which to invest, namely stocks and bonds -- and there were index funds for those too. Since I already had Vanguard, I decided to go with their funds.
Figuring out how to diversify
After learning that diversification meant investing in different assets, I needed to find out how to do it.
There are a lot of different resources and calculators you can use to figure out how to diversify your investments. I started with a basic allocation of 80 percent stocks and 20 percent bonds, but I've tweaked it a bit since then. Honestly, it's something I'm still learning. I've found that Personal Capital's investment checkup tool is pretty helpful. It actually tells you how your current portfolio is invested and how they suggest you invest based on the information you give them.
A lot of people would scoff at that oversimplified 80/20 allocation, but the bigger point was that it started me in the right direction.
Investing beyond the standard IRA
As a self-employed writer, I no longer had the luxury of 401(k). And IRAs have contribution limits. I was determined to save more than that, so I started learning about retirement options for self-employed people. I read "The Money Book for Freelancers," per El Nerdo's suggestion. They listed all kinds of options and, after doing more research, I decided to go with a SEP-IRA.
After a while, the earnings in my retirement accounts were so good that I wanted to invest my non-retirement savings too. I wanted to make big returns on my regular savings, without having it locked up in retirement. So I opened up a taxable brokerage account and I started to invest in index funds within that account as well.
Finally, I learned that there are those investing accounts that are taxable and those that are tax-advantaged. Ideally, you want to invest in tax-advantaged accounts first, to take advantage of those, uh, "advantages." Common tax-advantaged accounts include:
529 college savings
But if you have a savings goal, maybe you want to put it in a regular taxable account, like I did. Either way, it's important to understand how taxes work when you invest. I learned that when you sell your investments, if you earned money on them, that money is called a capital gain and it's taxable.
Separately, stocks earn dividends and bonds earn interest. Those are taxable too.
Sure, there are a few things I could have done differently. After opening my taxable brokerage/savings account, I learned that you can withdraw your contributions from a Roth IRA, penalty free. (Only contributions, though). So I guess I could have opened a Roth IRA and used it as a place to park my savings.
To recap, the steps I took to get started with investing:
Find my abandoned 401(k).
Learn about the different types of IRAs and open one.
Roll over my 401(k).
Learn what index funds are.
Figure out how to diversify my investments.
Pick some index funds to invest in, based on that diversification.
Find other ways to invest aside from standard IRAs.
Understand how taxes work in regards to my investments.
Of course, this is a very basic overview, and I'm still learning -- but that's kind of the point. Investing is something I never thought I'd understand or even care to understand. But now, by jumping in and taking small steps, I've found it's actually not that hard. I actually understand what people are saying when they talk about their portfolios and stuff. And, more important than that, my finances are the better for it.