Perhaps the most simple way to describe investing is thusly: You buy something with the anticipation that it will increase in value over time. For our purposes on this page, investing means buying a combination of stocks and bonds. Stocks are a little bit of ownership in a company. (Remember those profits that don’t go back to the customer, but instead go to shareholders / stockholders? This would be how you’d get that money back: here, you’re a stockholder.) Bonds are debt – whereby you loan a little money to a company or the government and in exchange, they pay you interest.

By and large, we don’t buy individual stocks and bonds. That’s risky for the average person and an example of putting all your eggs in a particular basket. Instead, you buy into a mutual fund, which has MANY companies’ stocks and bonds all wrapped up into one package. This spreads out the risk – if one company goes kaput, it doesn’t take all your money with it. There are many different flavors and varieties of mutual funds – some are riskier (with the hopes of earning more money off them), some are more stable (lower earnings, but lower risk of loss).

Also, there are generally two ways companies will handle their mutual funds: some will actively manage them, always angling to find the best companies to have in the fund; others will simply peg them to rise and fall with the market – these are index funds. There’s much debate as to which approach is better and it depends upon how you look at the data. However, in terms of basic cost, index investing is MUCH less expensive than active management. This means you keep more money and this helps your account grow better and faster.

Why would you invest your money rather than save it in a bank account? Historically, over the long-run, you will earn roughly 8% growth on your money. Your savings account gives you somewhere in the neighborhood of 0.01%. By investing, you’ll have more and this will provide options for you to live your life according to your values.

The last point, by way of introduction, is the point at which the stocks and bonds become a part of your retirement (or other) investment account. Investment companies, like Vanguard and Fidelity, will have particular accounts or vehicles, into which you load up one or more mutual funds. Say your employer offers a 403(b) and a part of your paycheck goes to it each pay period. Well, that money then gets sent to a company like Fidelity, and they put it in your 403(b), where there’s a bunch of mutual funds (say 5 or 10), each holding a slew of stocks and bonds. Your money then gets distributed or allocated into each of those stocks… a little here, a little there. Do that regularly and your full retirement “portfolio” (think one folder with a bunch of files in it) will start to grow.

Saving & Investing for Retirement:
• Retirement planning – Combination of employer-based and individual activity to save for / ensure a stream of income in retirement. Often includes planning, risk management (insurance), wealth accumulation, and wealth distribution strategies.
• 401(k), 403(b), IRAs – Retirement savings vehicles that receive favorable tax treatment. Generally speaking, 401(k)s are retirement accounts at for-profit companies and 403(b)s are at non-profits and schools. Traditional IRAs (Individual Retirement Accounts) are opened by and for individuals, into which you put pre-tax money. The funds grow tax-free and then you only pay tax when you start withdrawing at the time of retirement. For Roth IRAs, you put in post-tax money, with no additional tax paid thereafter. Employer based accounts often have matching incentives to boost savings – which means that for every dollar you put in, they’ll match it up to a certain percent of your income (THIS IS FREE MONEY). Annual contribution limits exist on all these vehicles. Two resources to learn more about this are at SmartAboutMoney and the CFPB.

Other Investment Accounts:
College Savings Plans – Tax-free savings plan for paying for private education and higher education expenses. 529s and Prepaid plans are most popular, others exist. Some states are incentivizing with auto-enrollment seed money, matching, etc. Search for the one in your state, though you’re not limited to ONLY using your state’s plan for saving. See for details. Note, the money you put in here is usually invested in the stock market so that it can grow faster than inflation weakens your purchasing power. So know that the value in the account may go for a bit of a roller coaster ride, which, if managed well, will smooth out as you get closer to paying for college.

Robo-Investing – This is investing without the personal advisor. It can provide easy entré to start investing with a low amount of money. However, it generally is a bit more expensive than a basic account with a low-cost index mutual fund, though not as expensive as hiring a financial planner to manage your money.

Cryptocurrency – A fully digital investment that is highly volatile (crazy swings where you can lose half your money in a day, and then maybe gain it back the next). Not recommended unless you are fully funding all the emergency, insurance, and retirement parts of your financial plan, and you can truthfully say “While it would stink, I can fully afford to lose the $X I’ve just put into this.”

Investment clubs – Groups that pool money to invest in certain financial products. (Usually these have a poor track record of picking “winners” on their own.)


Some thoughts on retirement planning:

Start now. Two main factors (among many other minor ones) will determine what retirement looks like for you: Most important is the amount of time your money has to sit in the investment account to generate interest. When the interest gets lumped into the amount you put in and then generates interest on that old interest, it’s what we call the magic of compound interest. It’s what allows someone to put in less money overall, but come out WAY ahead of someone who put in more, but over less time.

Secondly, put in what you can and strive to increase it periodically. For instance, each time your income increases, put the increased amount into retirement savings. You won’t miss what you never had and your standard of living will be the same as it was, except now you’ll be feeling a bit more happy and responsible knowing that you’re taking care of this side of life.

This book is a work in progress and we’ll all benefit from your input and collaboration. In the “Leave a Reply” below, please post examples, comments, questions, and needed edits. By posting, you grant permission for inclusion of any content to become part of the book, now or in the future, in whatever form it may take. I’ll give attributions to the extent possible. I know sharing about our financial lives can be sensitive, so if you want to share anonymously, please use the contact form instead and I’ll honor your request.

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