I was intimidated by investing, but here’s how I got started

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:

  • Driving downtown

  • Moving across the country

  • Parallel parking

  • Investing

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:

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.

Of course, I also looked through Get Rich Slowly's massive investing archive, and I found that index funds were the way to go. From our intro article on index funds:

“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.

Understanding taxes

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:

  • IRAs

  • 401(k)s

  • 529 college savings

  • HSAs

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:

  1. Find my abandoned 401(k).

  2. Learn about the different types of IRAs and open one.

  3. Roll over my 401(k).

  4. Learn what index funds are.

  5. Figure out how to diversify my investments.

  6. Pick some index funds to invest in, based on that diversification.

  7. Find other ways to invest aside from standard IRAs.

  8. 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.

More about...Investing, Planning, Psychology, Retirement

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Alix
Alix
6 years ago

It still seems hard to me!

Lonelle
Lonelle
6 years ago
Reply to  Alix

I agree. I keep trying to wrap my brain around it but there is so much to learn!!!

nicoleandmaggie
nicoleandmaggie
6 years ago
Reply to  Lonelle

If that is keeping you from investing, then just get a Target-date fund from Vanguard. Set and forget.

There’s still some complications for 401K, IRA vs. IRA Roth etc. but the drawbacks of making a “wrong” choice are minimal compared to the drawbacks of not starting. It’s better to satisfice than to put off starting because of perfectionism.

Phil Dub
Phil Dub
6 years ago

Good article, it’s always interesting to see how everyone found their way to investing. I never had an interest till I had a job and some money, now it’s completely interesting to me! You spoke briefly about also investing in index funds for your non-retirement savings, do you mind expanding on what savings goals you find appropriate for index funds outside of retirement? My longest term goal outside retirement is a housing down payment, but even that is less than 5 years away so I have it in a high-yield savings account, not mutual funds. I don’t want to risk… Read more »

Dianecy
Dianecy
6 years ago
Reply to  Phil Dub

Hi Phil, one key reason to invest outside of retirement accounts is so that you have something to live on should you chose to retire early. (Yay!) If you retire before 59.5, you’ll get hit with penalties, so you need money to live on until you hit the magic number when your pension kicks in/the penalty age limit for your Roth/401k/403b, etc. is exceeded/Social Security kicks in. The stock market is generally not the place to park money you are saving for a down payment. Kristin may have additional plans. I’m not answering for her specifically, I’m just giving you… Read more »

Phil Dub
Phil Dub
6 years ago
Reply to  Dianecy

Thanks Dianecy! I’m not at the point where I can save for early retirement outside of tax-advantaged accounts so I guess I’ve never considered that need. But it’s good to hear of someone using a taxed account for a goal with a long time horizon. I sometimes here about people investing for nearer goals and I don’t believe that’s appropriate. I agree a down payment doesn’t belong in any mutual funds so that’s why I’ve kept mine out!

Kristin Wong
Kristin Wong
6 years ago
Reply to  Phil Dub

From what I’ve read and written about on the matter, it’s generally not recommended to use index funds for goals of less than five years. But I’m comfortable investing some of my non-retirement savings because I don’t see myself buying a home in less than 4-5 years (unless I move cities) 🙁 That’s really the only costly milestone I see in my future–homeownership or children. I really don’t know, so I figure I’d park it in a medium/long-term account. If I had a tangible goal with a set date in the near future, I might’ve done a CD. But, looking… Read more »

Millionaires Giving Money
Millionaires Giving Money
6 years ago

Interesting story and I can really relate because I too was afraid of investing and put it off for far too long especially when the market was booming. Like you I educated myself and now I am much more confident. Great to hear a story similar to mine, thanks for sharing.

sarah
sarah
6 years ago

Good article!

I’ve only gotten as far as rolling over a 401k, spending the full amount, about 30k for a first-home down payment (I don’t regret that, either), and then starting up my own traditional IRA with Fidelity a couple years ago.

My company doesn’t do a 401k match but contributes a set percentage of my salary each year to a retirement plan. I believe it’s currently 4%. It’s nice because I really don’t think about it at all but it’s there, growing a little each year. My previous company only matched 1% so this is an improvement.

Greg
Greg
6 years ago

Great article, as always, Kristen.

Take notes, William Cowie, this is what most people were looking for from your article last week.

Aldo@MDN
6 years ago

I was also too afraid of investing because I just didn’t know what I was supposed to do. I thought only business people knew what to look for when investing, but I educated myself and found out that there’s really not much to it. There’s definitely a risk, but there are ways to minimize that risk.

I’m not investing heavily, but I’m investing nonetheless. I’m trying to build up my portfolio slowly.

SavvyFinancialLatina
SavvyFinancialLatina
6 years ago

I love investing and seeing the returns grow. It’s so awesome. I’m a bit addicted to it. It always feels good to go online and buy some more Vanguard fund shares.

Beth
Beth
6 years ago

Thank you! The logistics are a little different for us international readers, but this is a good approach many of us can use.

Most of my investing so far is in my RRSP or TFSA, but the tax implications are important to understand.

Chris
Chris
6 years ago
Reply to  Beth

The account types seem to transfer over pretty well. As far as I’m concerned when reading these articles I replace Roth with TFSA and traditional with RRSP.

sarah
sarah
6 years ago

I’m curious about the idea of being in a higher tax bracket during retirement. It’s hard for me to imagine that occurring… is it common? My husband and I make about $110k combined before any taxes. I think our taxable income is usually around $50-60k.

When we retire we won’t be paying a mortgage, raising kids, saving for retirement, saving for college, etc… it’s hard to imagine needing to withdraw more than $50k a year. Am I missing something?

Beth
Beth
6 years ago
Reply to  sarah

I wonder if that part applies to people starting out? Once TFSAs were introduced in Canada, some experts started advising that people who were new to their careers and had low salaries use the TFSA instead of an RRSP for retirement savings. The idea being that the tax-free income stream in the future outweighs the tax break you get now. (Assuming you have no pension and no employer matching.) When your earnings are low, chances are you’ll be paying the same amount of tax if not more in retirement. When you’re earning more income and paying more tax, you’ll get… Read more »

Chris
Chris
6 years ago
Reply to  Beth

This idea gets even more interesting when you are lucky enough to be in a defined benefit pension plan. If all goes well and you hold out at with current employer for the next 30 years then the retirement income should be pretty high. Meaning that that drawing from an RRSP will incur pretty steep clawbacks. If you plan on earning more in retirement that you do currently then I would max out the TFSA and then think about contributing to an RRSP. But that’s just my 2-cents.

Jill
Jill
6 years ago
Reply to  sarah

There are several things to consider
(1) inflation. I’m not sure how many years away from retirement you are but you could be withdrawing more if things (such as healthcare and food) continue to steadily increase in price over the next 20 years
(2) This one is the biggest- tax rates. Tax rates are at historical lows right now. The way the government is spending money the tax rate could easily be 50% ten years from now instead of 25%.

Ramblin' Ma'am
Ramblin' Ma'am
6 years ago
Reply to  Jill

I was just going to say this. Even if your income is lower in retirement, your tax bracket may well end up being higher.

Beard Better
Beard Better
6 years ago

My fear of investing came from the feeling of being completely and utterly overloaded with information. I didn’t understand that, for the majority of people, sticking to simple investments is really the way to go. Every once in a while I would start clicking around Yahoo Finance or Morningstar, but was so overwhelmed with numbers and terms I didn’t understand that I would walk away convinced that only people who did this for a living could possibly integrate all of that information in a coherent way (and, for more complicated investments like futures and derivatives, I feel like I was… Read more »

Mysticaltyger
Mysticaltyger
6 years ago

I really don’t think investing is that hard from an IQ standpoint. It’s more hard from a psychological and emotional standpoint. I personally like numbers and financial jargon so I have a hard time understanding why other people don’t find this interesting. It sort of drives me crazy. But the short end of the story is if you just participate in your 401K, put it in either a balanced mutual fund or a target date retirement fund….and keep adding money. Save until it hurts. Of course, you’ll need to save in plain vanilla savings accounts outside the 401K as well…but… Read more »

Alea
Alea
6 years ago

The real trick to investing is to know how to invest in the taxable account. If you don’t know what you are doing you can get a major tax bill. 1.) Invest in an index fund as they are very tax efficient unlike a mutual fund. Why? Because mutual funds churn their portfolio, selling left and right, while an index barely makes any moves, thus no taxes at the end of the year. 2.) Invest in index growth funds, as they pay no dividends and no taxes at the end of the year. 3) Do not invest in value funds… Read more »

Brian @ Debt Discipline
Brian @ Debt Discipline
6 years ago

I believe getting started with investing is easier today then it’s ever been. A lot of information available for individuals to research themselves. Just need to get over the fear of taking the plunge. 🙂

Chris
Chris
6 years ago

So how do people diversify their portfolios when they are part of a defined benefit pension plan?

Can one consider the DB plan to be a bond and thus have a higher percentage of stocks than would normally be advisable in their other accounts of choice?

nicoleandmaggie
nicoleandmaggie
6 years ago
Reply to  Chris

You should consider it in the same way that you consider social security or an annuity, so better than a bond because it insures against outliving your assets. There’s still some risk because if the company goes under or defaults you could end up having taking less than you are owed.

Dianecy
Dianecy
6 years ago

This is the best GRS article on this topic ever! Way to go Kristin!!! Now, here’s some hope for anyone who despairs of figuring it all out: In my twenties, I TWICE left jobs not long before some percentage of vesting would have occurred. In my thirties, I fully participated in my employer’s 401k plan and left it there when I became self-employed. In my forties, I started a SEP IRA and did exactly what Kristin did, but for much longer… So, THREE big strikes for Diancecy. Don’t get me wrong, I knew how to save a buck, but had… Read more »

CJ
CJ
6 years ago

“I’d be a writer (technically)”
I heart you, Kristin Wong.

Marie
Marie
6 years ago

Ah, memories of BSing your way through an interview full of CAD drawings and unidentifiable parts…The best part is that when you work with patented/proprietary technology, EVERY interview starts that way, no matter how long you’ve been in the field. What made you turn to freelancing instead, if I may be overly curious?

Kristin Wong
Kristin Wong
6 years ago
Reply to  Marie

Haha, it was fun at times! I do miss the people I worked with. Are you an engineer?

I switched careers because I’ve always wanted to write in a more creative/ journalistic capacity. Houston didn’t have many opportunities for that, but they sure had a lot of oil and gas jobs!

Marie
Marie
5 years ago
Reply to  Kristin Wong

I’m actually a technical writer, which is why I was so tickled by your description! I work with high-speed manufacturing products.

Thanks for the personal response, I know how busy you are.

Lance
Lance
6 years ago

I think the unknown is always scary. I didn’t invest early because my parents didn’t do it and never talked about it. They saved and paid things off and avoided debt, but never took that step. I finally did and once I did I only had regrets I didn’t do it earlier. Consistent investing over the long term in low cost mutual funds is the only way to go!

sam@compoundinterest.rocks
5 years ago

Can’t really go wrong with Vanguard Index funds. Although not always exactly optimal, for the novice that doesn’t have the time to do a bunch of studying in allocations, risk, etc., putting their money in a target year retirement fund (2040 fund means you want to retire at that time) is as good a strategy as any to get started. After you’ve figured out more (which can be just as dangerous as knowing nothing), be really sure you know what you are doing before moving money elsewhere. I’ve made plenty of investment mistakes, but one thing I’ve always found to… Read more »

Ardie Johnson
Ardie Johnson
5 years ago

Thx for all the great information!!! I too have Financial paralysis! I have moneys to invest—much is just sitting in money market funds at this time–have found CFP that I trust & am finally seriously thinking of having his firm [BBB A rated] manage my money – see how they do in 1-2 years…in the meantime…Watch & Learn what they are doing! Your thoughts on this?? Where I’m at now–I’m not even keeping up with the 3% inflation rate!! BTW: I am a woman also…Thanks for all your help!

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