A Pretend to Be Poor Investing Primer

So, you’re about to graduate, you got your first job, and you’re ready to invest for retirement. Congrats! Or maybe you’re finally starting to crawl out of student debt, but you don’t want to neglect retirement, either. Good for you! Perhaps you’ve got it all–all the expenses, that is. Kids, a mortgage, student loans, car payments….what does investing look like for you?

Getting started with investing can be overwhelming and confusing. I used to think of the stock market as a realm only rich people understood. I didn’t realize that investing is how regular people “get rich,” i.e. build wealth. Indeed, investing is what’s behind the “pretending” part of Pretend to Be Poor. Rather than allocating resources toward a lot of fancy gadgets, showy cars, or pricey vacations, we’d rather live simply and build wealth that will allow for more flexibility in the future.

Even once you get why to invest, it’s easy to feel intimidated by this seemingly abstract world. Where do I start? What should I invest in? Will I get ripped off? Will I have to start obsessively checking the stock market every day? I’m no expert, but I’m happy to share a few simple principles of investing, from one lay person to another.

Where should you start?

The place to start depends on your benefits. If you have an employer match in a 401k or 403b, start there. It’s like “free money,” or, more accurately, it’s part of your compensation. For example, the employer may contribute 3% of your salary if you contribute 6%. 401k contributions are made on pre-tax income. You can contribute up to $19,000 of pre-tax income per individual per year. But at the very least start maxing out that match!

If you don’t have an employer-matched option, start with an IRA. Individuals can contribute $6,000 to an IRA each year. There are two main types of IRAs: Traditional (pre-tax) and Roth (after tax). With the traditional, you’ll contribute on pre-tax income, and pay taxes later when you withdraw (like the 401k). With the Roth, you pay taxes on your income now, so you will not have to pay taxes later when you withdraw. There are pros and cons to each. Consider whether you are likely to be in a higher tax bracket while you are contributing, or later when you withdraw.

If you are on a typical American lifestyle-inflation plan where your expenses will increase with your income, you may want to pay those taxes now and go with the Roth. If you plan to keep expenses fairly stable as time goes on, and keep them well below your current income, then your “income” when you start withdrawing will be a lower later on.

How much should you invest?

Dave Ramsey recommends directing 15% of household income to investments as the 4th baby step after paying off all but mortgage debt. Others say the sooner you start investing the better, so don’t even wait to pay off debt to get started. It really depends on your comfort level with debt (and what interest rates you are paying).

Time is a key ingredient in growing investment so starting ASAP is wise. I highly recommend contributing enough to get your employer match from the day you get your first job, at the bare minimum. Work up to 15%, and then try to max out accounts as you’re able. If you reach that goal, look into index funds through a low-fee brokerage service such as Vanguard.

One strategy we’ve used to increase investments is to direct “extra” income to retirement. So when we get a bonus, we give at least 10% to our church/charitable causes, we may spend a little on an extra, but the bulk goes straight toward retirement. You might use the same approach to allocating side hustle money, gift money, or your household’s second income, if you’re able.

What should you invest in?

Index funds are a good, low maintenance, low cost approach. Index funds split your investment across lots of companies at once so your fund has diversity and stability. You can also be super lazy, as there’s no trading of individual stocks. Because they don’t require a lot of babysitting these funds have lower fees compared with other types of accounts. Many employer-based plans will have index funds to choose from.

Fees vary widely between different types of accounts and brokerage firms, so be sure to compare. And doesn’t it make sense to pay less fees and keep more of your money? It’s also wise to compare the performance of various index fund options before investing. For more on how to choose an index fund, read this.

What to watch out for

Annuities: these funds guarantee a certain annual income in retirement, but at a huge price. It’s really a type of insurance. While it seems nice to have a guaranteed income, there are lots of fees and charges, and they are less fluid and flexible. Your earning power is much great with an index fund. Do yourself a favor and avoid annuities like the plague.

Really, you’ll want to be wary of advice from anyone selling a financial product. Naturally they’ll have their own stake in the game. Many companies are cutting out the need for human brokers by using robo-advisors, and this is how they are able to provide lower fees. If you want to get professional financial advice choose a fee-only fiduciary. These pros are paid the hour rather than based on a commission for selling products. Radio personalities such a Dave Ramsey and Clark Howard offer lists of trusted financial services providers, searchable by location and type.

Individual stock-trading: while some people “get rich quick” day trading, it’s kind of like gambling in Vegas. Do you really think you’re the rare whiz who is going to beat the house? Your chances of beating the market consistently over decades are slim to none. Even stock market geniuses like Warren Buffet recommend index funds! Trading individual stocks simply isn’t a strategy for building a retirement fund.

High fees: even for solid types of funds, fees can vary widely between different brokerage firms. Be sure to compare fees before choosing a product or firm.

Wrapping it up

Of course, there are countless technical details about how to optimize your investments for tax advantages, balancing stocks with bonds depending on your age, sequencing returns, converting funds, and more. For more in-depth information on investing, check out The Simple Path to Wealth or The Legacy Journey. But when you’re getting started, the main principles are investing are quite simple:

  1. Get your employer match if you have one.
  2. Invest in low-fee index funds (401k or IRA).
  3. Keep investing and let the compounding interest do the work.

What other questions do you have about getting started with investing? Or what books or blogs did you find helpful for learning about it?

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3 Responses to “A Pretend to Be Poor Investing Primer”

  1. DLH says :

    Thank you for your post and for sharing your thoughts and experience on this blog. I have followed the postings for quite some time; however, have not asked a question until today.

    I am a Christian who is preparing to leave the W2 income world and my spouse and I would like to enter full-time mission work in approximately 4-5 years from now. While I have a pension that covers some of our expenses, I have a few other areas that we have invested…think Ecclesiastes 11:2. So we have some investments that can produce income; e.g., 1) pension, 2) rental house in a state, 3) rental house in another state, 4) ROTH IRA (spouse), 5) ROTH IRA (mine), 6) TSP (spouse), 7) TSP (mine), 8) regular IRA (spouse), and 9) FundRise account (joint). My challenge is how to set up exit strategies that will produce income for us to cover living costs in the mission field (not sure where God will put us yet). We will have ~15-years before social security might kick out something to us; however, not planning on that for certain. I was thinking of converting about half of our stock market investments into a fixed annuity with full survivor benefits that would provide a steady income, but saw your comments about the market can do better. The pension is only for one of us and the other will not receive anything as there is no survivor benefit; I was thinking that the annuity would take that place. Would you change your opinion in my case or still attempt to set up to pull from the stocks at age 55 through 67? Thank you

    • Kalie says :

      I would tend to think you’d be better off investing in index funds. You can adjust the stock/bond ratio depending on your age and comfort level if you are looking for more stability. I couldn’t answer your question for sure, though, and please do seek professional advice because: 1. I’m not a professional financial advisor, and 2. Someone would need to see the numbers to give the best answer.

      Best wishes for your transition to the mission field!

  2. Teresa Baker says :

    Thank you for this post. Clear and sensible advice.

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