Wednesday, July 22, 2015

Investing: The Beginning

This week I realized that if I wanted to collect all the data on all my contributions to retirement accounts over time, I could, due to the wonder of having everything accessible online.  Because some of my findings were interesting, and because I love transparency, I thought I’d share some details on how my investing career got started.  I’m going to focus on the roughly 3 years between graduating college (wherein I got a job, then went to grad school) and getting married/combining finances/this year.  As you’ll see, sometimes I invested a lot, and sometimes I invested very little.  Mostly, I’ll be explaining why I did things the way I did (sometimes: logic, sometimes: not so logic), in case anything is useful.

We’ll start with … the first job, which I held for about 19 months, before heading to grad school.  Picture it: I’d been enthusiastically reading finance books for about a year (said habit continues to this day), was going to FINALLY be making enough money to invest it, was so eager to get started and to find a financial advisor (I did, and in short it was awesome).  So I was sat down with all the other new-hires on our first day (after a looong day with lots of administrative crap) and was given a list of investments and about 15 minutes to figure things out and basically no information.  It was horribly confusing.  So I set my initial monthly contribution to $375, because … $4,500/year seemed like a good amount?  It seemed doable and not too bad?  No good reason for that particular amount, but what I definitely did right was start contributing.  My employer contributed a set amount every year to my retirement (regardless of my own contributions), and the total (my + their contribution) amounted to about 10% of my salary.  Everyone says to invest 10 or 15%, right?  So I decided that was a good place to start.  If I had high-interest student loans, I would definitely have set to work paying them off instead of contributing, or would have contributed a nominal amount instead.

Here is where things start to get funny: I changed my retirement contribution 6 times over these 19 months.  To do so, I had to email the poor payroll person and ask them to manually change things, which I feel mildly bad about.  This is actually rather unusual - mostly inertia wins out and people continue the way they began where it concerns 401(k)s.  In fact, a 2000 study by Ameriks and Zeldes found that nearly half of retirement account participants made no changes to their plan over the 10-year period.  (Nerd alert: research on retirement savings is my favorite kind of research.)  After 6 months, I increased the contribution from $375 to $500 (nice round number, decent but not crazy increase).  Two months later, I increased it to $1000 (because I could), then 4 months after that to $1416 (which would lead to maxing a 401(k) for that year), then two months later decreased to $1000 (because I felt that was enough?), then increased to $1458 (this makes no sense, regret about prior decision?), then decreased to $541 ( I needed more money/liquidity - we’ll get to that).  I also, after talking to my financial advisor and getting better educated, revised the hastily-made initial decision of which funds to contribute to - basically, there was a ton of learning in these first two years.

The other thing I was able to do was open an IRA (an individual retirement account, which you can open if you have earned income, and is tied only to you and not any employer you have).  I am an impatient person, basically in everything I do, investing included.  I enjoy engulfing myself in a new topic/curiosity or going big when I do something (so like … eat the whole cake instead of a slice).  Thus, in March of 2012 I contributed $10,000 into my IRA to max it out for 2011 and 2012.  There is a yearly limit of how much you can contribute (with the limit being larger if you’re 50+), and you have until April 15 of the following year to do so, which is why I could do both years essentially at once.  This was key because I chose to open my IRA at Vanguard (due to the low-cost index funds they had that I wanted, and their superior company structure and reduced conflict-of-interest).  Many Vanguard funds require a hefty 3K minimum contribution, so they may not be the best choice for someone who prefers to slowly and steadily invest, beginning with a smaller amount.  Given the large minimum fund contributions, I had to work my way to my current IRA allocation, which includes 5 funds (none with expense ratios above .29% and the lowest at .05%).  Yes, Vanguard’s low expense ratios bring all the boys (and girls) to the yard.  They could teach you, but they’d have to charge.  Oh and (naturally) in January of 2013 I contributed the 2013 max of $5,500, because I (sort of) had the money and that’s how I roll.

Now, I have to admit to the reader that (as alluded to above), I probably over-invested in those first few years.  I had a few months between work and grad school, and ended up withdrawing some money ($1,500) from my IRA to fund life.  But that was OK by me, because I chose to contribute to a Roth IRA (and 401(k) as well).  Traditional retirement accounts allow you to contribute pre-tax money, which means the money comes out of your paycheck before you pay taxes, but later, presumably in your old age, when you withdraw money, you need to pay income taxes on this money.  With a Roth account, you put in money you’ve already paid taxes on, but this means that you don’t pay income taxes when you withdraw money later (and so you don’t pay any taxes on the growth of your money).  Having a Roth IRA meant I could withdraw my contributions at any time without penalty and without paying any more taxes.  The discussion of whether to go Roth or Traditional involves a lot of factors (plus most companies don’t offer a Roth 401(k) in the first place, and past a certain income amount, the choice is out of your hands because you’re no longer eligible for a Roth IRA).  In our early years, my husband (then-boyfriend) and I both went with Roth 401(k)s and IRAs, because that’s what I thought was best for us at the time and I was convincing.

Speaking of the husband … let’s make a brief foray (with less details) into his early investment career and first job.  First, let’s acknowledge that I’m the investing-obsessed one, so while he was smart and contributed every month, from the first month, to his retirement, the path and amounts he chose are more typical, but still excellent.  His company contributed a 50% match up to some percentage, I believe 4 or 6%.  So this is what he did - contributed to get the full match.  I mean, who can say no to an instant 50% riskless return?  (A lot of people, unfortunately, but still.)  This is pretty typical - people like to get the full match from their employer, the amount seems doable, and becomes a defacto default for those who want to participate.  I, of course, thought it would be even more excellent if he contributed more.  What’s hilarious is that literally the exact month that I moved in with Sebastien for the time between work and grad school, he goes and increases his contribution by 50%.  I might have been whispering into his ear as he slept, “invest more in your 401(k)!”.  Whatever I was doing, my encouragement was clearly more effective in close proximity.  Then, at the same time that we decided to get married (and become officially engaged), his contribution increased again, to about double his initial contribution, where it stayed for the rest of his tenure at said company.  This data is pretty incredible confirmation of Sebastien’s evolution (with my encouragement & incessant investment talk) into a lean, mean, sexy investing machine.  (Also, I'll say it before you do: correlation doesn't imply causation, but you guys ... I'm pretty convinced!)

One thing I want to make clear is that we haven’t been perfect, nor has the investing path been consistent either.  After my first job, when I was in grad school, I invested nothing in the next 1.5 years except $5,500 to max out my Roth IRA - even then, that wasn’t until August of 2014 because we were spending a bunch on our wedding.  You could say that yearly Roth contribution was my wedding present to myself. ;)  My husband moved to my city and spent a few months looking for a job, then had to wait almost a year to be able to contribute to his 401(k).  Now, in 2015 we’ve gotten into a wonderful pattern of consistently investing more than we spend.  But - what matters most in investing, is starting!  Just start … learning, reading, investing.  We’ve built ourselves a nice base from our investments in the early years, but it’s sticking to our good habits that will really make our net worth grow.

How have your investment habits changed over the years?  Did you make any brilliant (or incredibly stupid) decisions early in your investment career?  Do you feel that starting is the hardest part of investing?  Have you learned anything about yourself by looking at your investment patterns?

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