Investment for Noobs

[Drex]

I think other posts covered your specific situation for now but some general info that may be helpful later/for others:

While it's true that paying off high interest debt first maximizes long-term wealth, it's worth pointing out that cashflow management is even more important. In some cases, you can justify paying off high payment, lower-interest debt first to free up more of each paycheck and limit your risk of default. A lot of people overlook this and then get in trouble when they lose their jobs/have to go to the hospital and can't afford their debt service payments anymore. Defaulting on debt (especially debt you can't discharge, like student loans) ends up extremely expensive in fees and penalty rates, which often offsets any wealth savings you may have accumulated by focusing on longer-term, higher interest rate debts. If paying off debts with higher monthly payments stabilizes your cash flows so that you are less likely to default in the event you lose your job or have an emergency, then it can be very worthwhile to do so.

That said, you can't go wrong paying off high interest student loans first. Generally recommended priorities are emergency fund, 401k to company match, high interest private student loans, other high interest debt, lower interest private student loans, other debt, roth ira or other ira, 401k beyond company match.

Generally speaking, you will be investing through your 401k and IRAs (some definitions below). Your company should walk you through the 401k setup process, but you'll need to set up an IRA for yourself. Just head over to your bank or credit union and they should be able to help you out. You can also set them up online through, say, Vanguard's website but they are obviously biased toward their own products so caveat emptor. Once your IRA is set up, you'll direct it to invest in stocks, bonds, commodities, etc, whatever you want.

For your questions regarding specific investments:

401k: Employee-sponsored account that can invest in stocks, bonds, etc. Contributions are deducted straight from your paycheck and are therefore not taxed until withdrawn after you retire. If you withdraw any money before 59+, it will be taxed as income and penalized 10%, so bear that in mind. Always contribute to employee match because it's basically free money.

IRAs are just investment accounts you direct. You set them up at a brokerage or bank. You contribute what you want to it, when you want, decide what it invests in, etc. Gains are taxed @cap gains rate, which is lower than income tax. Some restrictions on withdrawals etc.

Roth IRAs are special IRAs with tax benefits. Basically the opposite of a 401k: your income is taxed now, then put in the IRA, and it's not taxed when you pull it out later. There are other benefits but you should talk with a rep about them. Limits on how much you can put in each year, and you have to be below around 150k income, which for the vast majority of people is not an issue lol.

CDs are just savings accounts at banks. They are really not worth it at current interest rates. You also can't access the money without penalties or waiting a long time. Your chance of losing money on paper is basically 0 but any money you make will probably be offset by inflation anyway, and you lose access to the money for a long time.

Bonds are corporate debt. You essentially become the lender to a business and therefore collect interest, plus the lump-sum repayment at the end. Biggest risk is that they miss payments and/or go into bankruptcy. Generally a little safer than stocks but typically lower returns.

Stocks are technically ownership interest in a company. Basically, whatever assets they own minus whatever debt they used to get those assets is the value of the stock. Biggest risk is the assets go down in value, because you basically eat all of the gains and losses. Works basically the same way as equity in a house (value of the house - amount owed on mortgage = value of your ownership in the house), except stocks tend to swing more than houses. Have high returns historically but prone to big declines (think '07/'08).

ETFs/indices (indexes) are baskets of investments. A stock index is just a bunch of stocks, a bond index is just a bunch of bonds, etc. Generally recommended for people who can't spend time researching companies because it protects you from the risk of that one company you gave all your money to going bankrupt, eg Enron .

529 plans are worth knowing about too. They're basically savings accounts with tax benefits IF the money is used for education-related expenses. Good for you if you're thinking about masters/phd, good to set up for college funds, etc.

Disclaimer: None of this constitutes official investment advice, please speak to registered advisors, etc. etc.

[Buffy]

Aks, you have the general gist of it. Paying of the high interest school loan first is a legitimate strategy.

One thing that has been mentioned but really needs highlighted is the importance of a 3-6 month savings account. A lot of people live off their credit cards if they lose their jobs. This would simply compound the problem you have, because of the high interest rates.

As you mention, low risk = low reward and high risk = high reward or possible losses.

Your decision to invest in a 401(k), a particular stock, or any retirement savings plan is a long-term one. Talk to people, read, decide on a strategy and stick with it.

Let me give you a personal example:

I have multiple retirement accounts from different jobs. One of them is a 401(k) that has a mixed strategy. 20% high risk, 30% low risk, 50% medium risk investment mix. When I changed jobs in 2007 (right before the economic downturn hit), I considered cashing out an account that had about $44,000 in it and eating the penalty (I would have gotten about 21k cash back) to pay for going back to school. I chose not to and decided to go the student loan path for my bachelor's. Within the next 18 months, the downturn hit and that money deflated to about 22k which at the time made me regret my decision. However, since then I've finished my bachelor's (and masters, yay!), paid off the student loans out of my normal checks and the bounceback on the stock market has turned my then 22k into 55-ish k today. I stuck with the strategy that was recommended to me and I feel like I've been rewarded. Last year this account had a return of about 24% (this year it is 5% :/ ).

Lots of reading you can do, but a mixed strategy has strong roots. Warren Buffet advocated for it :http://www.sfu.ca/~poitras/BUFFET.pdf

[Zatho]

Anyone here day trades? Any tips or strategies that have worked for you? Basically starting to day trade full time within the next 2 weeks. I will be using a Scottrade account to day trade. A few modest trades in the past month have made me about 2300 dollars with 35k investment. I have only really traded apple and BoA stock. Thanks in advance for any info on the subject.

[Ksandra]

Aks, follow skirk's advice as best you can.

Test, stfu. I am going to guess she can't afford to buy anything realty), and most rental places don't allow subletting.

[Aksannyi]

Living alone and not sharing expenses with another person will cost you. You can almost cut living expenses in half, basically most of your discretionary income won't vanish. Without discretionary income you have nothing to save. There is a HUGE difference in going break even every month living alone and having 1000$+ every month in savings.

I am well aware of all of this, and yet I still choose to live alone because that is something I highly value. Many people would not place such high value on their solitude and their space, however, that is not the case for me. Being around other people is exhausting to me. I can't live like that. I have tried, and it led to a lot of problems. Would it save me a lot of money? Yes, and I acknowledge that. Still, even knowing of my debt and living expenses, I can and will work to maintain that level of individual space for myself.

Obviously you don't value that as highly as I do, and that's fine. But you have to understand, as someone who struggles with interpersonal relationships and who is an extreme introvert, living with another person causes me more anxiety than my finances do. There are some things I will not surrender, and that's one of them.

[Acorn]

sure would be nice if they taught this stuff in high school instead of derp derp P.E., Art, and anything else that isn't math or science

if our parents/teachers told us at 10 years old to buy stocks instead of pokeman cards we'd all be much better off

[Kalmado]

I have nothing of value to offer other than do NOT listen to Test under any circumstance. In fact, moving forward anything Test says, we all should do the exact opposite. Good luck to you Aksannyi. Just remember it's hard out here for a pimp.

[BaneTheBrawler]

unless my house is big enough that I can essentially have my own apartment on one side of the house where that person is unable to interfere with me being a loner.

this is a thing. my buddy lives in a house with one other guy. buddy has the basement floor, his roomie has the upper floor. they share the kitchen, garage, and living room. they each have like 2-3 rooms and their own bathrooms. Dunno what they pay for rent, though.

[test123]

I am well aware of all of this, and yet I still choose to live alone because that is something I highly value. Many people would not place such high value on their solitude and their space, however, that is not the case for me. Being around other people is exhausting to me. I can't live like that. I have tried, and it led to a lot of problems. Would it save me a lot of money? Yes, and I acknowledge that. Still, even knowing of my debt and living expenses, I can and will work to maintain that level of individual space for myself.

Obviously you don't value that as highly as I do, and that's fine. But you have to understand, as someone who struggles with interpersonal relationships and who is an extreme introvert, living with another person causes me more anxiety than my finances do. There are some things I will not surrender, and that's one of them.

The best investment you can make is to get yourself into the housing market. You will stop renting from a landlord and instead pay interest on a mortgage. So instead of having nothing to show for your rent payments in 20 years, you will have a home on which you will own a large share.

1. Inflation and economic growth will tip the income/payments ratio in your favor
2. In 20 years your home will at least be worth twice then what it is today

[Aksannyi]

Yes, but in order to enter the housing market, I have to get out from underneath my current debt.

I have attempted to secure a mortgage a couple of times, with no luck because of my current debt. Once those are paid off, I may be able to enter the housing market. Your advice is completely unhelpful for my individual situation.

[test123]

Are you willing to move to Detroit?

[Raldo]

The housing argument is good in theory, however, if you wind up paying a fair chunk more in pure interest (+PMI and whatever else) on a mortgage than you would in rent, you're better off sticking with renting and just banking the difference.

I got a house early on, and I rather regret it. I would never suggest anyone get a loan for >80% of their house's value after having done it myself. The OP is certainly not in a position to throw down that kind of cash.

[test123]

The housing argument is good in theory, however, if you wind up paying more in pure interest on a mortgage than you would in rent, you're better off sticking with renting and just banking the difference.

I got a house early on, and I rather regret it.

Far from it, the earlier you get in the better. Even if interest is higher then rent. You get home mortgage interest deduction which is basically subsidized housing. It is not as simple as interest > rent. You gotta calculate what you end up with in 20 years.

Juggling pennies in some kind of savings account is a laughable investment.

[Raldo]

Fair enough, I edited for clarity. Don't get a >80% house value mortgage loan, unless you're REALLY secure in what you're doing.

[Seraph]

1. Inflation and economic growth will tip the income/payments ratio in your favor
2. In 20 years your home will at least be worth twice then what it is today

You cannot guarantee either of these things, and you have conveniently ignored maintenance costs and taxes in your money making pipe dream. Stop giving vague real estate advice like it is going to work in her situation. You sound like a pushy Realtor.
Real estate can be an investment, but in reality for most people it's simply a lifestyle choice.

[test123]

You cannot guarantee either of these things, and you have conveniently ignored maintenance costs and taxes in your money making pipe dream.

I can guarantee two things:
1. Everyone dies
2. Inflation will continue for many decades to come

Home ownership is the ticket in life.

http://upload.wikimedia.org/wikipedi...10_Monthly.png
http://static.seekingalpha.com/uploa...5-Ron-Hera.jpg
http://www.econ.umn.edu/~tkehoe/U.S.GDP.gif

[Ksandra]

Test you are a moron. People with a lot of debt won't get approved for a mortgage. And certainly not without a substantial down payment. It's not going to happen.

[BaneTheBrawler]

pushiest of realtors

[test123]

If this lady want to invest for a better future, putting pennies in a Vanguard fund is not gonna do much of a difference. Changing where her income is spent is where things gotta change. Renting a home for a single person while paying down debt for the next 10 years is a sure path down poverty lane. You are the ones that are giving bad advice.

If living with another person is really not an option then lowering your living standards is the next move.
http://graphics8.nytimes.com/images/...30wczo-600.jpg
http://www.millsproperty.com/include...leHomePark.jpg

[Ksandra]

If this lady want to invest for a better future, putting pennies in a Vanguard fund is not gonna do much of a difference. Changing where her income is spent is where things gotta change. Renting a home for a single person while paying down debt for the next 10 years is a sure path down poverty lane. You are the ones that are giving bad advice.

If living with another person is really not an option then lowering your living standards is the next move.
http://graphics8.nytimes.com/images/...30wczo-600.jpg
http://www.millsproperty.com/include...leHomePark.jpg

She lives in fl. She doesn't need sacrifice her safety if she doesn't want to. Get over yourself. Your option isn't the only way and she has already told you she doesn't want to do it. So stop pushing.