Start an IRA Today (If Not Sooner)


Clingdome2How would you like to retire a millionaire?  Well, if you’re a teen working a summer job and you put $1000 away into an IRA (Individual Retirement Account) today, you have a shot at reaching that goal even if you do nothing else.  That’s if you earn a 15% return between now and about 50 years later when you’re ready to retire.  If you earn only 12%, you’ll only end up with about $300,000, but still that’s not bad for a $1000 investment.

Now I know that $1,000 is a lot of money when you’re working for $7.25 per hour, especially after taxes are taken out and you factor in expenses like gas to get to work, so you really only earn about $6.00 per hour.  Still, that 170 hours worth of income you give up now could help set you up for retirement.  And it doesn’t even need to be your $1000.  As long as you earn at least $1000 from working, your parents or a nice uncle could give you another $1,000 to invest while you spend the $1,000 you earned.  Maybe you can work out a deal with your parents where they match your contribution, so you actually only need to contribute the earnings from about 80 hours ($500) yourself.

So what is an IRA?

An IRA is an account included in the tax code where contributions are allowed to grow either tax deferred – where you take the money out and then pay taxes, or tax-free – where you pay no taxes.  This means that your money will be able to compound without taxes being taken out all of the time as you go.  The more money you have to earn interest on, the faster your money grows.  If you use a traditional IRA, you don’t pay taxes on the money you contribute, which means Uncle Sam will be putting something like $100 of the $10000 you are investing in for you.  Whatever money you pull out when you retire, however, will be taxed at that point, so your Uncle Sam will take back about $200,000 of your $1 M.  If you do a Roth IRA, you’ll need to pay all of the taxes now, meaning you’ll need to come up with the full $1,000, but when you pull it out the money is all yours.

How do I setup an IRA?

The easiest way with $1,000 is to go to Vanguard, open an IRA (it takes about 15 minutes online), and buy into their Vanguard Target Retirement 2060 Fund.  I choose this fund because it has only a $1,000 minimum investment and because it has mainly stocks, which is what you want for the next 40 years or so.  You then just have your parents send in a check for you or transfer money from a bank account and you’re an investor.  Simple.

What do I do then?

Well, you don’t need to do anything, really, at least for while.  Once you reach the account minimums for Vanguard’s other funds, which currently are at $3,000, you should switch to the Vanguard Total Stock Market Index Fund because that will increase your returns over time since you’ll then get rid of the bonds that are in the 2060 fund and be invested in all stocks.  It will take you until about 2039 to reach that point, however, if you only invest the original $1,000.  (Compounding starts slowly and then accelerates at the end.)

I would rather you become a regular investor, sending in $50 whenever you can through college.  Once you’re working a regular job, see if you can contribute the maximum ($5,500 per year, plus another $5,500 into a spouse’s IRA if you get married).  Also get into the 401k plan at work if there is one.  While $1 M may seem like a lot today, the truth is you’ll need like $10M or $20 M by the time you’re ready to retire since $1 M won’t buy what it does today.  If you invest regularly through your twenties, however, you’ll have it easily.  In fact, if you do a good job of sending in money between 16 and 35, you really won’t need to contribute at all after you reach about 40 since you’ll already be set.

The other thing to do is something not to do:  Do not touch the money for any reason until retirement.  If you take the money out early, you’ll pay extra fines and taxes.  Plus, you’ll be undermining yourself.  Right when you were going to start earning really money from your investments, you’ll take it out.  If you try to start over in your forties or fifties, it will be much more difficult.

What if I wait?

I know, money is tight and you’re busy doing other things.  If you wait until you’re 25 to start investing, however, that $1,000 will only make you $300,000 ($100,000 at a 12% rate-of-return).  Wait until your 40, and it will only net you $33,000.  That means you’ll need to work a lot harder and sacrifice a lot more to retire comfortably.  The other choice would be to retire uncomfortably and be scrounging for food and heat.

So see if you can set aside $1,000 and a half hour to start an account.  Maybe take one extra hours or spend some time with friends doing things that don’t cost money.  Your future self will thank you.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Choose Individual Stocks


jehericobridgecross

There is some pretty good advice that says people shouldn’t bother with individual stock picking. Instead, they should just accept the fact that they cannot outperform the markets and buy well-diversified mutual funds and try to come as close to the returns of the markets as they can by keeping fees low.  It is probably true that most people shouldn’t buy individual stocks, because most people buy (and sell) individual stocks for the wrong reason.

Some people buy stock in companies that they know (think McDonald’s).  Others buy individual stocks because they see they have record earnings.  Still, others buy into a stock because think that their business will do well (for example, everyone uses Google, so I should buy stock in Google).  Sometimes people follow the price of a stock and buy because the stock has fallen significantly in price, increased significantly in price, or follows some price pattern.  Some people buy stock in the company for which they work.  Some people even buy stocks because they like the name or the ticker symbol.

None of these are good reasons to buy stocks and you’d be much better off just putting your money away in low-cost index funds and getting another hobby if these are your reasons.  You will be buying too high, buying too late, selling too soon, and maybe putting your money into stocks that will just do nothing for the next few decades.  You might have some great stories about the stock you bought that did well, but you’ll earn 2-3% returns when the markets provide 10-15% returns over the same period.  In other words, you’ll retire with $500,000 when you would have had $50M if you’d just invested in index funds.

So why would you buy individual stocks?  Well, think about the restaurants that are in your neighborhood.  If you were to invest $10,000 and buy a 0.5% stake in all of the restaurants, over a long period of time you’d probably make a decent return on your money.  Some restaurants wouldn’t make it, but some would do spectacularly well.  Overall, because people need to eat and because inflation will cause the price of the restaurants to increase over time (the value actually stays the same), the price of your investment would increase.  In 30 or 40 years, you might be able to sell your stake for a few million dollars.  This is assuming something like a tornado doesn’t come through and destroy everything – but you could deal with that risk by buying stakes in restaurants across the whole state.  This is like buying mutual funds – you get a small stake in a lot of companies and overall you get a decent return.

But I’ll bet there are a couple of restaurants in your area that are better run than others.  When you go in the door, they’re always crowded yet people don’t mind waiting.  The food is fantastic.  The servers are consistent and generally make the experience fun and pleasurable.  You can tell that they have every aspect of the experience down to a science.  They are even located on just the right corner.

Looking at how things are run, you can expect this restaurant to earn more money than the others.  Even more important, you think they might expand the dining room to serve even more people each night or open a second restaurant across town.  While something could happen such as a divorce of the owners, a fire, or a change in management, in general, you can reasonably predict that this restaurant will do better than the others, so you would want to have a bigger stake in this restaurant than the others.

Now things do happen, even to great restaurants.  You therefore don’t want to put all of your money into one restaurant.  But maybe you find the best restaurant in your neighborhood, then find the best one in the neighboring town.  Maybe you find the best five or ten restaurants, one or two in each town or city, and buy stakes. Maybe you invest a quarter or half of your money this way, then invest the rest in a small stake in the rest of the restaurants, just in case your picks don’t work out.

This is the same way you choose and invest in individual stocks.  You find the great companies – the ones that are well run and have a consistent record of performance.  You find companies that have room to grow since the stock price increases roughly at the same rate as earnings growth.  You buy larger stakes in these companies, perhaps even just starting with one company when you only have a couple of thousand dollars to invest.  As your portfolio increases in size through regular investment, you then start to diversify out into mutual funds to protect your gains and hedge against bad stock choices.

So in looking for stocks, I try to find the best stocks in each sector and buy into those.  I look at management, through the history of earnings growth and factors like return on equity.  I look at debt and try to find companies that are able to fund growth without needing to borrow a lot of money.  I look for companies that still have a lot of room to expand and grow.  I look for the companies who are the best at what they do, both in how they treat their customers and how they treat their employees.  That is how you choose individual stocks.

 Your investing questions are wanted. Please leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Want a Better Financial Life? Stop what You’re Doing.


jehericomeadow

Everybody comes from a different economic and social background.  Some are born to loving parents who dote on them.  Some are born to parents who give them nothing.  Some are born to parents who raise and teach them.  Some are born to parents who totally ignore them.  Some parents are always around.  Some parents are gone all of the time.  And yes, some parents are hooked on crack and die when kids are 10 years old.  Some parents are abusive monsters.  And some parents are just gone.

It’s easy to blame how you were raised.  It’s also easy to blame things that happen to you along the way – a job loss, a car accident, a tornado – and certainly these things can set us back a lot.  It’s easy to play the victim, saying nothing can be done and that we’re just stuck with this lot in life.  It is also easy to get jealous and envy those who are doing better, to the point of wanting to take what they have or destroy it if we can’t.

Many people who live perpetually on welfare continue to make bad decisions.  They figure out ways to misuse the money they receive so they don’t have money to feed their children.  They continue to have children when they aren’t able to take care of the ones they have and they pick men who won’t stay around and support their family.  They keep their income down, never trying to do better so that they will not see a reduction in their welfare payments.

A very small percentage of people are truly destined to live a life of dependency.  People who have virtually no mental capability due to an accident or the way their brains were formed.  People who go through an accident that destroys them physically and they don’t have the ability at their stage in life to develop the mental skills needed to earn an income with their minds.  For everyone else, while we may go through some circumstances that may make us dependent for a brief period of time, like a tornado or a hurricane, we can change our future and become independent again (or for the first time).

Regardless of how we got where we are, if you keep doing what you have been doing, you’ll stay right where you are.  If you keep spending all of your money on junk each time you get a paycheck, you’ll never have a savings.  If you keep borrowing money, you’ll always be in debt.  If you keep taking a check from the government and never do anything to earn more money, you’ll always be taking a check from the government.

I’m not being mean.  I’m not being judgemental.  I’m just stating a simple fact:

If you keep doing the same things, you’ll get the same results.

People who stay in poverty all of their lives, for the most part, made bad decisions while they were in school.  They continue to make bad financial decisions as adults.

People who have a middle-class income but are always in debt made bad financial decisions when they started working and continue to make them.

If you want things to be different in your life, change what you’re doing.  Get a better paying job.  Stop spending your money on crap.  Stop taking out car loans and home equity loans.  Start saving for car repairs and medical bills.  Start saving for retirement – it’s coming.  Start taking advantage of the power of investing by putting your savings that you don’t need for a few years into mutual funds.

Start being about your investments and not about your electronics.  Start being about acquiring wealth and not acquiring stuff.  Start being about financial security and not impressing your friends and neighbors with your opulence.

And speaking of friends, maybe think about changing yours.  Do they encourage you to better yourself or complain there is nothing that can be done.  Do they handle money well or spend every dime, encouraging you to spend yours along the way.  Are they going somewhere or just staying where they are forever?

You don’t need to change all of your friends, but try to find people who are better about handling their money and their lives and spend some time with them.  Start talking to the guy who drives an older car yet makes a middle-class income.  The one who has a neat and clean, but modest house.  Start getting involved in volunteer events, Boy Scouts, and community organizations.  Find someone up the chain at work and start talking to him about things he did to get where he was.

It’s trite but true – changing your circumstance begins with changing you.  How you spend your time.  How you handle your money.  Who you hang out with.  Your attitude at work and what you do while you’re there.

If you don’t like your life, change it.  If you life is getting better, keep doing the things that are making it better.  It really is as simple as that.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.