Month: February 2017

I’m not a huge fan of fairs. Lots of overpriced and unhealthy food, lots
of oversold and unhealthy people, and not much peace and quiet. But I am a fan of people watching!

Last fall I went to the Texas State Fair with my homie Mars. We did a lot of walking around and exploring. Eventually we got tired and wanted to rest for bit. Fortunately there was a tent set up by a well-known mattress chain, with plenty of very comfortable looking furniture to test drive.

I sat in a modern-styled reclining chair with a footstool, and man it was comfy! It could’ve been that I’d been on my feet for the last 4 hours, but still. I melted into it.

Mars and I were talking about how much we thought that the chair would cost, and out of curiosity I asked the sales rep dude. He said “I think 2 or 3 thousand, lemme check,” then talked to another dude who knew, and said, “They’re $3,200”

$3,200 for a chair. What.

I wish that was the worst part of the story. Despite me emphasizing that I had asked simply out of curiosity and had no interest whatsoever in taking one home with me, the sales guy started hounding me pretty hard to buy one. He brought over his clipboard and put it right in front of my face.

Out of semi-politeness, I told him I didn’t have that kind of money and I’m a broke college kid. Partially true, but not fully because I could pay cash for a few of those silly chairs if I wanted to. But “I can’t afford it” is a lot more polite than “Get outta my face!” right?

Now, I know it’s his job, and everybody has to pay the bills. But after I told him that I was not able to afford a $3,000 chair, he tried to convince me to finance it. So basically telling me, “Hey poor college student, I know that you don’t have money now, so how about you pay it off little by little over a long period of time, paying more than you would have paid up front, and making sure you don’t have money for the next few years!”

His actual words were “It’s $20 a week, that’s less than your cell phone bill!”

Jokes on you bro, my phone bill is $19.51 a month $12.18 a month (as of April 2017).

Here’s what we learned:

1.   Someone out there is spending 3 grand on a comfy chair. Otherwise they wouldn’t be selling them. Don’t be that person.

2.   If somebody tries to sell you something, and they want you to finance it, pay for it over a period of time, “take advantage of a layaway option”, please say no and stop talking to them. If you’re financing something, you will pay a lot more for it. Looking back, I should’ve asked them what the interest rate on that financing was, so I could calculate how much more it would cost “with special financing”. But I just wanted to get out of there afer he started badgering me.

3.   One of the most powerful words in the English language is “no”. If you are not comfortable telling people no, get comfortable with it.
There will be people out there who are trained to make you part with your money, and they do a great job of masking the fact that it’s for their gain, not yours.

 

(Pictured: My cat using a significantly less expensive chair. Mora, MN December 2016)

One of my friends recently asked me what should come first, paying off student loans or investing. It really depends on your situation.

First of all, if you are paying interest on your debt, and that interest is higher than what you expect to make investing (over 7%) then pay it off as soon as you can. Eat rice and beans until that crap is gone. Seriously.

But if you have debt that you aren’t paying interest on yet, or the interest is very low (less than 2-3%), take a look at how much debt you have, and how comfortable you are with it. Take for example someone who is getting done with 8 years of higher education which they’ve funded by taking on a lot (read: a crushing mountain) of debt, and will not be paying it all off in a short period of time. In their situation, I would recommend focusing all financial efforts towards getting that debt paid off, and freeing yourself. Once the debt is gone, then the savings and investments will start piling up.

On the other hand, if someone has a smaller, more manageable amount of debt that they expect to pay off quickly (within a year or two) upon graduating, then starting an investment strategy may be a good option. When contributing to your Roth IRA, you can only deposit $5,500 each year. So if you had the opportunity to contribute the maximum amount one year ago, but didn’t do it, you’ll never have that opportunity back. In other words, if you have 40 years until you withdraw that money, you will have given up $82,000 in tax-free money in retirement ( 5,500*(1.07)^40= 82,359.51 ).

Especially if you are not currently paying interest on that small amount of debt that you plan on paying off quickly before graduating, then contributing to a Roth IRA makes a lot of sense.

That being said, you should still consider your situation and how you feel about debt. If having any debt at all stresses you out, then you might be happier getting rid of it right away (I would be in this category). If you are ok with having some debt, and are confident you will be able to pay it off as soon as interest payments are due, then feel free to get started on your investments. But after maxing out your IRA for the year, paying down your debt should be the next priority if you’re in this situation.

P.S. I am a big believer in the power of just getting started. Even if you open up a Roth IRA today, and put a hundred bucks in it, then don’t touch it for the next four years because you’re paying down debt, that’s an awesome start. Simply knowing that you have an account there waiting for you to put more money in can motivate you, and it will be easy to transition from debt payments to IRA deposits once your debt is gone.

***Also, if you are working full-time, and your employer offers to match your contribution into a retirement account like a 401k, always contribute enough to get that match. Even if you’re in debt. That’s free money, please don’t throw away free money!

 

(Pictured: Me getting a workout in at Enchanted Rock, Llano, TX March, 2016)

The Vanguard Total Stock Market Index Fund is a collection of stocks that represent the entire market. A stock is a piece of ownership of a company, and stocks can be bought in one share or multiple shares. For example, you can buy a share of Apple, and you will own a small chunk of the company. That means that if the company makes money, you will get a little bit of those earnings.

But owning only one company is dangerous. Even billion dollar companies can lose lots of money, or even go out of business (#tbt to Enron).  So it’s best to diversify, and buy many different successful businesses to reduce your risk.

This is where VTI comes in. It owns over 3,600 different U.S. stocks, basically getting as much diversification as possible. With every approximately $115 share that you buy of VTI you are owning a chunk of profits from thousands of companies. That way if one company goes bad, it won’t hurt much at all, and most companies will continue to be successful!

That doesn’t mean that VTI will never lose money. It will go up and down just like the individual stocks do. It might go down 10% one year, and then up 20% the next, but over the long term it will go up about 7% every year just like I mentioned before.

Now, some people are able to make better than 7% on a consistent basis. Those people are rare, and have billions of dollars like Warren Buffett. I am no Warren Buffett, and you are no Warren Buffett. I used to think I was, and spent a couple years thinking I could do better than VTI. I couldn’t. And neither can 86% of Professional Money Managers.

VTI is where it’s at fam. Super easy.

WARNING: This post might be long and boring, but I will put a picture of a cute puppy hugging/attacking a cute kitten at the end, and after you’re done reading and implementing this post you can take a nap 🙂 

You’ve worked hard, earned money, saved it, and you’d like to invest it (excellent, and congrats on getting this far! You have a promising financial life ahead of you!).

First you’re going to set up an investment account, which is similar to a savings account. There are plenty of different types of investment accounts out there, but for young adults just starting to make money and focusing on long term goals, a great option is a Roth IRA. IRA stands for Individual Retirement Account.

A Roth IRA encourages you to save early on, because as your money grows and when you take it out, you don’t have to pay taxes on the earnings. (You do have to pay income tax on the money before it goes into the account though. In contrast, with a traditional IRA, your money is taken out of your paycheck before income taxes, it grows tax-free, but then you have to pay taxes when it is withdrawn)

The catch is that with a Roth IRA you will be penalized if you take your money out of it before you get to retirement age, which is 59 1/2 years old. If you want to keep your funds in a more accessible investment, then you would want to open up a brokerage account. A brokerage account would let you invest and do everything you could do in a Roth IRA, but your earnings will be taxed every year.

 

What accounts do I use? Great question!

I have both a Roth IRA, and a brokerage account. This is because I am starting to put money away for long-term, retirement purposes (Roth IRA) but I also want to have access to some money if I need it. I would suggest starting with a Roth IRA and focusing on long-term planning.

It’s super easy to open a Roth IRA account, and you can open one online today if you would like! I would recommend opening an account with Vanguard. They provide simple and cost-effective investment tools, and I personally use their services for both my Roth IRA and my brokerage account.

Here’s the link to open a Vanguard Roth IRA. (I don’t make any money when you open an account with them, I’m just recommending them because I’ve tried other companies and they’re the best out there)

 

Ok, I have my account. Now what?

Once you have your account open, you are going to need to purchase shares of a fund. I personally use Vanguard’s Total Stock Market ETF which goes by the ticker symbol VTI.  This fund gives young investors like us as much exposure to the stock market as possible, and as much diversification as possible as well.

If what you are looking for is simplicity in your investments, just keep putting your savings into VTI, and forget about it. You can set up an automatic deposit with Vanguard so you can set it and forget it. Do that regularly, and in 30 or 40 years you will have plenty of money to do whatever you’d like!

So hypothetically, let’s say you put $1,000 into your Roth IRA from age 25-30, while you’re getting your career started. Then from age 30-60 you are able to put in the maximum contribution of $5,500 every year. How much would you have at 60 years old? You will have put $170,000 of your own money into the account, and it would have earned you $443,418.71, so your total would be $613,418.71. You made $400k and never had to pay a cent in taxes on it. That’s the power of a Roth IRA and investing #MoneyGoals

As promised, here is your puppy and kitten. If you have any questions about investing or setting up an account, I’d love to help answer them! You can either comment on this post, or send me an email at hashtagmoneygoals@gmail.com

(Pictured: A sunset on (I think) Knife Lake, MN August 2016)

You’ve made your money. You’ve saved it, and resisted the marketing departments of billion-dollar companies. Now what? How does your savings make you more money?

You invest it. Investments can range from gold to real estate to beanie babies. But for our purposes, we will be investing in the stock market.

The stock market can be scary. As young adults, our generation witnessed the Great Recession, when the markets crashed around the world and we heard of people losing lots of money. And it’s true, the stock market can go down, and you can lose money. But over the long run, history shows that the stock market will always go up. Need proof? Here’s a chart of the Dow Jones Industrial Average, a measure of how the market as a whole is doing, over the last 110 years. (The Dow Jones is made up of 30 of the biggest companies in the stock market such as Apple, Exxon Mobil, and Nike)

See that little downturn at 2009? That was the Great Recession. Since then the market has recovered and is higher than it ever has been.  See that big downturn at 1929? That was the Great Depression, the worst financial disaster the United States has ever seen. Yet the market continues to go up in the
years following.

The stock market will go up and down, and there is no way to predict what it will do tomorrow, next month, or next year. But over the long term, it averages out to gain about 7% per year.

I’ll be using a 7% return to calculate any future value of money as I’ve already done a couple times, and that 7% will be compounded. Compound interest is when the interest you earn is added to your total, and then interest is earned on that interest. For example, if you had $100 and earned 10% interest, after the first year you would have $110. Then you’d earn 10% interest on that $110, and after year 2 you’d have $121. Year three you’d have $133, and so on.

The effect of compound interest is amazing over time, and Albert Einstein was even quoted saying, “The most powerful force in the universe is compound interest” (actual fact despite my meme).

Compound interest will turn a $1,000 investment every year for the next 40 years into  $228,584.03.

If you want to try other amounts or years, play around with this online calculator and plug in any value you want, then put 7% for your interest rate!

 

(Pictured: Me at Gooseberry Falls State Park, MN June 2015)