Podcast transcript
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PETE: You’re listening to How Not to Move Back in With Your Parents here on the IU MoneySmarts radio network. I’m Pete the planner. This is Alex.
ALEX: It’s time to make some money.
PETE: It always occurred to me if I ever said to start the show, this is Alex, you could totally hang me out to dry.
ALEX: Just not.
PETE: Just not say anything. [LAUGH] But you don’t. Hey, this episode we’re talking saving and investing. There’s a difference. Did you know there’s a difference? We’re learning. I’m taking you to school today, buddy. Saving and investing. First of all. Alex, what do you think the difference between saving and investing is? Let’s see what you think.
ALEX: So, from I guess just personal experience thus far. Not having really done investing at all. Saving is where you’re putting money away. Not with the end goal to grow it specifically, but just putting money away in savings to hold it whether its for emergency fund expenses, or saving up for later. Whereas an investment when you are putting it into an investment, your whole entire goal is to grow that fund.
PETE: That’s pretty darn good.
ALEX: Nice.
PETE: That’s really good.
ALEX: Nice.
PETE: So I was thinking of savings as a couple of things. Number one, it preserves your money. So meaning, capital preservation is one of the technical term is, and it means to make sure your money doesn’t go backwards. So it is to truly protect it. It’s also to prevent you from having economic hardship if an emergency comes. So an emergency fund like you said.
ALEX: Yep.
PETE: And I also think it allows you to break your dependency on your income. So I talk about this a lot in what I do for a living. But, Alex, consider this. If you, and I’m making up stuff here, let’s say you’re making $2,000 a month take home pay, and you save 20% of that into a savings account. Which I’m not saying you should, but just go with it. It’s 400 bucks, did you live on 1,600 bucks. So what do you know about that $400 every month. What do you know about it, because you're living on 1,600.
ALEX: You know that it’s in the bank, that you have it. That it’s there.
PETE: You know that you don’t need it to live. So that’s the bigger point, right. The idea is the more you save the less you need to live, and the challenges specially early in a career, if you live on it will be tighter by the way early in your career, cuz you’re gonna have a probably little less income. If you live on every dime you make, then you are fully dependent on that, and that’s scary because it creates challenges when life happens, right?
ALEX: Right.
PETE: So, savings is about preservation. It is about preventing emergencies from hurting you. It’s also about breaking your dependence on your income. Now, investing, and by the way, whatever money is saved and I’m giving you advice here that is not technical, it is practical and it is counterintuitive. I don’t care at all what rate of return, what interest you get on savings.
ALEX: Well, it’s basically nothing anyway, right?
PETE: Yeah, well it is now.
ALEX: At 0.4%.
PETE: It used to be different. It used to be bigger, right? So I would say, I wanna do some math here. 1997 or so, I was a teenager.
ALEX: I was 4.
PETE: Stop it. I was investing. Okay, like 16, how old was I, I don’t know, no one knows. Listen, you could get 4% on a money market account which is basically a fancy savings, like 4%.
ALEX: Right, today that’s like wow.
PETE: Yeah, like 4% amazing. Right now, you get point .5% or .05%, I mean you get nothing.
ALEX: I think mine is at .4
PETE: Okay so it’s, to me, when you save money, you don’t care about earning interest, despite what a bank will say or what technical. It’s not the point. It’s for what we already said. Now, the start out right out of school, maybe have 1,000 bucks off to the side just to have your back, and then hammer away at student loans, that’s savings. Which people always wanna know, should I be saving when I'm paying down debt? Right? That’s a heck of a question.
ALEX: Yeah.
PETE: The answer is you should not be saving when you’re paying down debt, once you have about 1,000 bucks, but you should always, always be investing when you have that, okay? Because there’s a big difference.
ALEX: So now we can segue into what does investing actually mean. What types of investments are you talking about.
PETE: So investing is where you’re leveraging money. And by the way, you need to have a habit of saving to be a good investor, right? So beating a good investor kind of beings knowing what to invest in, but really it means consistently putting money towards investments. You have to be a good saver in my opinion to that habit, in order to be a good investor. So I would say this that investment is leveraging saved money, and using it to get a rate of return, right? So now you have to think, how do different investments pay off? I mean people have real estate investments, I mean like a rental property and so rent itself and the overage, the profit on rent versus the expenses, that's the return. When the stock market returns, it’s a couple of things. It can be a dividend. Which is a payment a company makes to its shareholders. Or it can be when you buy a stock low and sell it high, so that capital gain is a rate of return. If you're gonna do mutual fund investments, or exchange traded funds, which are called ETFs, or anything within your 401K. Those are managed funds or funds that create returns for you, so the goal is your first job you want to be as aggressive as you can in putting money towards investments, and towards your retirement fund.
ALEX: So with that explanation, I am willing to bet a lot of college kids. Right now we're just like?
PETE: Really?
ALEX: Yeah, everyone knows the words. But I guess the place to go from here, everyone knows the words of what kinds of investments are. But honestly still, even as seniors, the minority are the people who actually know what's going on with those. So I guess the place to go from here, for us, would be where do you start? Specifically what should you be doing?
PETE: All right, so here's what I think. And I’m gonna give you aggressive comments. Now these will not get you in trouble. These will not get you in a jam. Ideally, your first job, I put as much as much as, of your first paycheck, I would defer 10% into your retirement plan at work, because you have to understand, despite the fact that maybe you're 22 and you've got a 40 year work career. The retirement isn’t what it was for your parents or what it will be for your parents, or of your grandparents or great-grandparents. All you know about retirement and a financial life and investing is from them. But unfortunately everything has changed. There used to be something called a pension, and that's when you’d stop working, and your company would keep paying you. [LAUGH]. Until you die.
ALEX: Which looking back is absurd.
PETE: Right? I agree. Have we talked about this?
ALEX: We have had this discussion off here before. Though it’s like yeah, you put in lots of user service and all that stuff, but it’s like they’re paying you to do nothing.
PETE: Yeah, I mean it’s part of the compensation structure. But that’s the way it seems, right? And so, those really don’t exist too much anymore. So, your chance to stop working at any point in your life. Is to have enough money that you can self fund your retirement. And it’s start with putting money, investing right away. Now, what to invest in? Is the million dollar question, literally. A lot of times, with technology and start ups have created some interesting solution for novice and amateur investors. Here’s a couple sites that do a really good job of helping people understand these things. I happen to like a site called betterment.com. That’s B-E-T-T-E-R-M-E-N-T, betterment.com. And what you do there is it’s pretty slick. You put in how long until you need your money that you’re going to invest. Maybe it’s for a down payment of a house in ten years, once you get out of student loans or whatever. And then you put what your risk tolerance is. It asks you a few questions and then it just picks investments for you, and it’s pretty cheap and it’s pretty slick.
ALEX: So I mean, but your money is growing when it’s going in there. Like, has it been successful? I don’t know if that’s a personal question. Has it been successful so far?
PETE: I mean, it’s just what the markets do, right. So if the S&P 500 is going up or the Dow Jones, which are some stock market indexes. If they are going up then your money is ideally going up, but it's a really efficient way, for instance, I have an account in one of those types of services. The other day, I had some extra money that I was not use for anything. I timed it cuz I was being dramatic as you might know. Seven seconds to log in, make a deposit and it was done. And by the way, in that seven seconds that deposit went into, I think 17 different types of investments. Within that seven second deposit like dude, five years ago there’s nothing like that existence.
ALEX: So easy.
PETE: So, bettermen.com the entering choice loyalthree.com is interesting.
ALEX: I use little three a little bit, very, I haven’t used it very actively. Which I should get back into. But you can buy partial shares on Loyal3, of companies that sign up and work with Loyal3. So it allows you to buy, I bought some stock in, this is totally me, Buffalo Wild Wings. [LAUGH]
ALEX: Cuz why not, right? And then I had some in Amazon. [CROSSTALK]
PETE: Cuz BuffaLouie’s or whatever, was it?
ALEX: BuffaLouie’s is local.
PETE: Right, that’s why because they don’t have-
ALEX: Incredible.
PETE: Yeah.
ALEX: Delicious.
ALEX: So I love wings, as we all know. So that was funny. Their whole thing, though, I think, on Loyal3, is to more own what you love is kind of their tagline. As you can participate in the brand and have that brand ownership, I don’t know if that’s as much about making money on your investments.
PETE: But it’s just learning how investments work.
ALEX: Right, it helps you figure it out you can experience, I’ve experienced loss because the share price has gone down on my stocks and I’m like crap. I just lost $10 and to me in college that’s a meal, so that’s huge for me that’s devastating loss.
PETE: I think its interesting that people totally when they begin investing they’re okay with gains, but in order to get those gains, and those big gains that they want, they don’t realize the risks that go along with it. That’s a tough thing to gather. It’s like, yeah I want 20% return, but to get 20% returns, you’ve gotta swing the bat so hard that you’re more likely to strike out. And you’re more likely to have 20% loses if you’re swinging for 20% gain. So that’s a tough thing to deal with.
ALEX: Yeah. And especially when we’re young, and you just don’t really know what's going on, it’s very easy to make a mistake. So I guess my next question for you as someone who will be going through this is, so you have set up your 401k contribution.
PETE: Right.
ALEX: 10% is.
PETE: I like it.
ALEX: If you like 10%.
PETE: It’s aggressive but I think you won’t regret it.
ALEX: Right.
PETE: You will only regret going on putting in 3%. No one who puts in 10% goes, that was the dumbest thing. No one has ever said that. They'll be like I’m glad I did that.
ALEX: Yeah. Right. And but at very minimum. Try and do up to the match of your employer, right? Would that be the minimum? After accomplishing.
PETE: Yeah. Which is about usually about 3% if your employer matches. But again, be better than that.
ALEX: If you can. And then sites like Betterment and loyal3 can now help you start in low risk way, to get [UNKNOWN]
PETE: Not low risk.
ALEX: Sorry.
PETE: Not low risk, the low agitation, because you don’t have to know a lot.
ALEX: Yeah.
PETE: Right, cuz the barrier to entering to investing can’t be knowledge.
ALEX: Right.
PETE: Because you got 1,000, you’re 22, you have 5 million things to think about. Becoming an expert investor can’t be at the top of the list.
ALEX: Right. And I’m at risk tolerance, you can say you’re risk tolerance when you do it. So beyond that, say if you wanted into more traditional ways of investing what would be the next step?
PETE: You could go to an E-trade, or a TD Ameritrade, or Schwab, or something where you’re buying stocks and bonds, and generally stocks online. And those sorts of things but again, risks happen that way because you don’t know what you’re doing, and that's not to be weird or rude it’s just you don’t. To be very truthful, some of the best investment advisers in the world lose money all the time, and they know everything. You know nothing.
ALEX: Cuz you can’t predict what business are gonna [INAUDIBLE].
PETE: Right, so you could look at that two ways. You can say well, if they know everything and sometimes they’re wrong, I can know nothing and be right. And that’s actually true.
ALEX: I mean it’s true but I don't know if that’s the best way to.
PETE: Yeah.
ALEX: You don’t wanna pretend to be cocky [LAUGH] when you don’t know.
PETE: You don’t.
PETE: Does that make sense, as they do? Any take aways you got from this episode?
ALEX: I think it’s good steps. The most important thing with investing I think is the 401K contribution.
PETE: I think so.
ALEX: At the start.
PETE: It gets that habit going. And again, I would be aggressive, and if you want to back it down, back it down, but I just don’t think you gonna back it down, and I don’t think you are gonna regret. And by the way, when I say be aggressive, I don’t mean aggressive, invest aggressively, into aggressive investments, I mean, put a lot of money. Money. Be agressive with your proportion that you put it at.
ALEX: Yeah, and with your budgeting for it
PETE: I believe you need about 1,000 bucks in savings to get started because you are paying down debt, but then you are gonna wanna build savings up to three months worth of your expenses. So if your expenses end up at $2,000 a month you want about $6,000 in savings. Then you can focus more on investing going forward.
ALEX: Right, so make sure you have the emergency fund before you invest. Make sure you know the difference between saving and investing. It’s preservation saving, not as much growth, and yeah, try out those sites if you want to when you’re started. But 401K is the place to start, and then go from there.
PETE: Perfect. All right, for more information we encourage you to, and if you’re gonna check out Betterment and Loyal3 and the things we talked about, TDM, anything we talked about. Read all their stuff. We talk about it, we use it, we’re not endorsing it, but just check it out.
ALEX: Be informed.
PETE: There you go, that’s an easier way to say that. You should have a podcast.
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PETE: Go to moneysmarts.iu.edu as well. This has been How Not to Move Back in With Your Parents, on the IU MoneySmarts Radio Network.
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