MoneySmarts U: Investing

MoneySmarts U: Deciding when to invest

You’ve graduated. You’ve got a job. And an income. Is it time to invest? Maybe. Maybe not. Find out when (and how) you should start.

Podcast transcript

JASMIN: MoneySmarts U is brought to you by IU MoneySmarts.

PHIL: Arguably, the most important years of your financial life are your college years. The decisions you make in college can make or break your first few years in the workforce. This is exactly why you need to be money smart. Enter MoneySmarts, Indiana University’s financial literacy program for students. To begin, it’s free! Now that makes financial sense. At moneysmarts.iu.edu, you can learn how to budget, how to deal with your credit, living expenses, and student loans. You can learn how to leverage summer earnings to help you reduce your student loans. Indiana University MoneySmarts, creating a financially smart culture one student at a time. Visit us online at moneysmarts.iu.edu to learn great ways to maximize your money and wreck your debt.

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PETE: Sure we use this podcast to help people get through college, put their past behind them and look towards their future. But Alex today we focus on the future, not the present. I know that we’re getting people out of school. They’re going to have their first job and they’re excited to form their lifestyle, but today we skip over their lifestyle to talk about their lifestyle 40 years from now. Well that’s fun isn’t it?

ALEX: Yeah, always fun. And it’s a topic that honestly in the world of personal finance in a world that sometimes, no offense Pete, people can see it as a little boring sometimes. People don’t like to talk about it very much. This is kind of a hot topic that people actually kind of enjoy discussing and really like to get into. So I think it will be a good one.

PETE: There is a lot of studies you will read in the newspapers that everywhere that millennials don’t like to invest in all these sort of things. I have my own theories to why that is, I think that increase student loan debt has convinced people of a couple of things. Number one, you actually end up seeing students contributing less from a donation standpoint back to their alma maters. Either you know I’m an alumni I’m gonna give you 100 bucks. Well I’d just like to pay off my student loan is really the real thought there.

ALEX: Yeah and part of it could be because we’re mad at them for having student loans in the first place so of course we blame them. [CROSSTALK]

PETE: Well there are studies that show that. That student loans have caused people to contribute less to the universities. But the other factor here is, I think millennials often don’t put money forward for retirement, cuz they’re like, I just wanna get out of debt.

ALEX: Exactly.

PETE: So today we’re gonna focus on how in the world are you supposed to focus on your financial future, day one of being out in the job market when there’s so much work to do from being in college.

ALEX: Absolutely. So I’ve got a couple of first caveats.

PETE: Sure.

ALEX: Things to watch out for me why not and things why you should. So what do you think? Should we go through the why you should first? The caveats first?

PETE: Yeah, hit those, caveats.

ALEX: Caveats all right. Let’s go to the caveats. So first one, as we just mentioned, debt. That’s one of the reasons that I invest, I do invest right now, but very little. And the reason for that is because pretty much all of my extra money is going towards paying off my student loans.

PETE: Yeah and so there’s like a few functional things here. First of all, we need to define when you say very little, I know what you put towards your investments and it’s actually not very little.

ALEX: Here’s a funny thought, I didn’t even think about 401(k). I was thinking about other investments.

PETE: See.

ALEX: Here we go.

PETE: This is why I’m glad we’re having this conversation. Yeah. So let’s start with 401(k). You’re putting what 10%.

ALEX: So I am putting 10%, yes.

PETE: And your match is 4%. So 14% of your income is going towards the future.

ALEX: Yes, very true.

PETE: Which is a lot.

ALEX: So yes, it is. But that’s a good thing, because I’m not even thinking about that, being gone from my income, because I’ve already learned to live on less there, which is good.

PETE: Okay, and then, so then on a monthly basis, a non-retirement, I think you’re doing a couple of little investments here and there, right?

ALEX: I mess around on a couple of apps and stuff but I haven’t put money in there in a while, my main investment is I put around 50 bucks a month in a betterment account.

PETE: So a Betterment is a Robo-Advisor or not neither endorsing them or telling you to not invest in them. But there’s a breed of websites that allow you to invest online, and it does a lot of the work for you. If you’re gonna do that, read up on it. You’ve read up a lot on those, and so you’ve chosen Betterment at this point. Okay, so $50 a month. Now lets think about this for a second. If you’re gonna invest for the future, by the way, I draw a huge line between invest and save. Invest is when risk is involved.

ALEX: Right, right.

PETE: So there’s the intersection of risk and reward. Whereas if you’re saving money, you’re not trying to grow it. You’re just trying not to spend it.

ALEX: It’s like having an emergency fund. You don’t wanna risk it, you just need it there when you need it.

PETE: So if we enter interest into the conversation, or return, if you will. Then you would invest for the future because you think, on a regular basis, you can get a higher rate of return than the interest rate on your student loans is racking up.

ALEX: Right Yeah, you would be in the positive there.

PETE: Yeah, so that’s how you wanna evaluate an investment versus debt decision, generally. Let’s say you pay 3% on your student loans, but you think you could get 7% on your investments over time. If you could consistently do that it would make more sense to deal with the investments because you’re only paying 3% and you’re earning 7%.

ALEX: That’s interesting and I never thought about it that way. And from my perspective I had just been kinda throwing it in just cuz I wanna invest a little bit of interest me, things like that. But it’s more of a do I put more money toward student loans, or take some of that money away towards the investment if the rate of return is going to be higher. But for me, I’m so early in the game that I just have no idea what to expect.

PETE: Well it does tell us one thing that if you start saving money aggressively again, saving meaning no interest rate, just putting it in the bank. And your student loans are taking away at 3%, that’s a really bad idea because then you’re having money set aside that’s already nothing while you’re having these huge loans tick away at 3%. So you never want to aggressively save money while you’re trying to pay off your student loans, but it does make sense to moderately invest money, because you can actually switch that interest situation.

ALEX: That makes sense. Yeah, I’d not thought about it that way.

PETE: Wait a minute, are you learning stuff this morning?

ALEX: Yeah, so now I’m just rethinking. So here’s a question. I’m saving up for a car, or if there are other large savings in the future, and if you’re getting towards that number. A lot of people do this for a down payment on a house.

PETE: Sure.

ALEX: So if you’re in debt, I have a large chunk of money I’ve saved. Do I throw that in investments? And it’s kind of safe that I would not lose a ton of money, but there’s always that risk there, right? And I don’t have that much history in my personal account as to what my return is, so is that something that should be done?

PETE: Love that question, so then we get into one of my favorite ideas and concepts, it’s called time horizon. You never wanna invest money against your time horizon. So you get in a rig, a car, some wheels.

ALEX: They call it a whip now.

PETE: A whip?

ALEX: Yeah.

PETE: I don’t want to. That’s a couple months, right? A few months from now? Yeah, a couple months at most.

ALEX: So yeah, it’s real short.

PETE: So that means your time horizon is two months. You never, ever, ever, ever want to put money at risk. If you’re gonna need it within two or three years.

ALEX: Okay so that’s your base line minimum time horizon for investments, two or three years.

PETE: Yeah I mean I don’t know your housing situation. I can’t imagine you buying a house from a mortgage in the next-

ALEX: Not at all.

PETE: I can’t see you doing it within the next three years.

ALEX: Not for a long time yeah.

PETE: So if for some reason you were saving for a down payment for a house, I could conceivably see you putting that at risk to some degree. But, a car? No way, man. I would bury it in a coffee can in your backyard.

ALEX: Okay. And that makes sense. So this conversation helps lead to my next caveat. Which is, the type of investing you’re doing and what to watch out for. So, in the very beginning I kind of forgotten that my 401(k) is a type of investing for my future and retirement. But then there’s the other side of, there’s the Robo-Advisors, Betterment that are meant for a bunch of different things like those. And then there’s all the way down to mutual funds and stocks, and kids get interested in day trading and all stuff.

PETE: So, there’s two main periods you need to invest for and think about. Number one is retirement. Which again, this is why this is such a crazy topic. Because if we’re talking about people that are listening to this program, this podcast that aren’t even working yet. Yet I’m asking them to think about not working 40 years from now. So your 401(k) is for when you’re not working. Not now, 40 years from now. So that’s a tough ask, but by the way, it’s super important. I think if you peel off 10, 1-0, 10% of your income immediately, always, to your 401(k) you will not regret it. But Alex, the other period of time, people are gonna deal with this pre-retirement.

ALEX: Right. And here’s the big problem with that 401(k), real quick. This is one of my why-you-shoulds, and that’s the simple fact that your 401(k) is not going to be enough. For a comfortable time it, no matter what, we see people struggling to hit the match, up to later in their lives. And, I just did a quick calculation, here. The, what’s called maximum, you can put into a 401(k) pre, right now. Around 18,000, right?

PETE: 18,000, until the year 2015, that’s correct.

ALEX: Yeah. So, multiply that by 30 years. If you max that out, for 30 years, at most. Granted, little bit of hopeful gain on that investment, but no matter what, it’s only $540,000, unless my math is completely wrong.

PETE: Is that right? I’ve gotta grab my calculator.

ALEX: 18,000 times 30 is only a little over half a million dollars. Now some people may be thinking, half a million dollars, that’s a ton of money. That is nothing when you’re thinking about a 20, 30 year retirement, possibly.

PETE: Now of course there will be a compound in effect with interest and what not. But to your point, that’s exactly right. And that’s why when people come out and they just hit the match, when they just put 3 or 4% of their income. Let’s say you come out making $40,000 a year. And you put 3% of your income. You’ve just spent or paid taxes on $38,800 and you’ve set aside $1,200. Dude, not enough.

ALEX: Not even close, kids.

PETE: Not even close. I mean think about that if. And we always tell ourselves, we’ll do it later. There’s nothing like doing a term paper late.

ALEX: Except for you can’t pull an all-nighter to save for retirement.

PETE: The money you save when you’re 22 or 23 for retirement, I should say invest, not save, is so much more powerful and important than any money you save at any other time because of time.

ALEX: Yeah and that’s the second why you should is the time value of money, and how important that is to keep that growing over time. So I guess the different types of investments there works, it makes with that as well because we’re definitely not saying that people should be day trading and going in to stocks, because there’s, my third caveat is the knowledge barrier that goes into investing and it takes a lot of know how, a lot, lot of know how. People get huge exam certifications to be good at investing in the stock market and a lot of times there, they aren’t. So there’s a huge knowledge barrier. And I guess, what would you recommend as the first couple types of investments to prioritize?

PETE: Your retirement plan through your employer is super important. I like Robo-Advisors for people in this situation because they’re slick, from a user interface standpoint they make things super understandable. By the way, I know the CEOs of these companies, and they were designed for this purpose. For people with a pretty low knowledge base to be able to get them to effectively prepare for their future. Alex, this is, I’m gonna hit the old guy train. When I was a senior in college, I actually took my stockbroker’s exam, cuz that was gonna be my career path. So my last semester of school, I was studying and, what I quickly realized is, had I not been studying for my stockbrokers exam, and had I not passed it. The knowledge gap was huge.

ALEX: Really?

PETE: My gosh, and I took finance classes in college. But it’s unbelievable how little you really know. So, a, start with your retirement plan at work, because it’s a pretty simple way to start, and it’s an important way to start. But if you’re gonna invest outside of work, frankly you don’t have the amount of money it takes to earn the attention of a financial advisor. So using a website, a Robo-Advisor, again, as they’re called, is a good way to go. And again, that’s for money that you’re not gonna use for awhile because that means your time horizon’s kinda long.

ALEX: Yeah, and if someone didn’t wanna use it for Robo-Advisor, what are the most common alternatives? Is that finding a mutual funds and ETF things like that?

PETE: Yeah that’s usually where people start, that’s where I started with mutual funds. So mutual fund’s just a group of stocks. So a company picks and manages stocks or bonds for you. So instead of owning, let’s say you had 100 bucks to invest, you’d buy a share of a mutual fund for 100 bucks. And that actually buys you shares of probably 3 to 400 different stocks, cuz they’re partial shares. So that’s a good way to diversify, or sometimes people just buy stocks and all that. But, again, the newer solution that people have or is this sort of Robo-Advisor component where a lot of that work’s done for you with ETFs, which are called exchange-traded funds, which are mutual funds that trades like stocks. But now, Alex, we’re getting into the weeds.

ALEX: Yeah. Exactly. This is where all the jargon gets into things like that where you’re trying to overdo it. So I guess the last part here for me and if I was a, I am a beginning investor, right? So for someone who may not know all the jargon, things like that, what is a good place that you could go to educate yourself, maybe an unbiased website, anything like that, that might have some information on kind of getting into it?

PETE: Yeah, again, if you are looking to invest in your company-sponsored retirement plan, when you get a job they will give you all the packets and materials, and frankly, just reading those, and they’re not horrible.

ALEX: They’re probably not a Hollywood movie script, but they’re [LAUGH].

PETE: No. No, it’s not, what’s that movie? Pacific Rim, where there’s this giant monster. [SOUND]

ALEX: Yeah, that’s like Transformers meets Gundam Wing meets Godzilla it’s amazing.

PETE: That’s a solid movie. It’s not that, but it’s somewhat interesting. And beyond that, again, I think, we’re not telling you to invest in Robo-Advisor. But I would say, you can learn a lot from their websites, cuz you get to see how mechanically, things work. So, going to a betterment.com, and-

ALEX: Wealth Front’s another one.

PETE: Wealth Front, Robin Hood is one, WiseBanyan is one. And just learning how, Loyal3, loyal and then the number three.

ALEX: Yeah, they’re partial share investing.

PETE: Yeah, I mean, my daughter is six, and she’s got shares of Disney because of loyal3.com. So just like learning about that sort of stuff.

ALEX: Definitely.

PETE: All right, man. That’s it. So, I think we just changed the world. [CROSSTALK] It is. I’ll just lay around and watch it, this is, I could see this happening.

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ALEX: The acting, and the dialogue, is horrible, but you’re not watching it for the acting the dialogue, so. If you guys want to learn more head up moneysmarts.iu.edu. It’s a fascinating conversation in investing when you may be 18, 19, 20 years old. Thinking about your retirement and the fact that your 401(k) might not be enough. So educate yourself, put your money to good use, and if you want to be on the IU, MoneySmarts U podcast. You can go ahead and reach to us. Head to the MoneySmarts U website, fill out the application. Come on and we will help fix some of your financial problems. Until next time, this has been Alex and Pete. See you later.

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