For My Friends: A Millenial Guide to Finance
So you've just graduated from college (or grad school). You have $40,000 in loans and don't know whether it's better to pay it now or in small increments so that you can begin the coveted journey of 'saving'. You have limited investment knowledge, but know that 2015 is the year you need to change. Stock basics? Sure, you own 15 shares of a company or two. Bank account, brokerage account, trading account? Yup. You have them, but hardly use them.
If this sounds even remotely familiar then you’ve come to the right place. Personal finance is not really that scary. Like most things, however, it takes time, practice, committment, and a bit of a learning curve to overcome. The hard truth is that developing a knowledge & understanding of how finance works in your own personal context is one of the most important things you can do to set yourself up for long-term success. You’ve heard this before, but honestly, you should not put this off; start learning right now.
In the conversations I’ve had about investing with my friends, the question I always get is, “Where do I even start?” Easy. Start by reading “The Neatest Little Guide to Stock Market Investing” by Jason Kelly. It’s one of the best books I have ever read on the basics of the stock market and will help get you up to speed with the jargon needed to manage your finances.
Once you’ve taken a swing at your first finance read, you should know that reading and learning is the only way to become truly proficient with personal finance. You should (try) to read all of these in your 20’s:
- Intelligent Investor by Benjamin Graham
- Market Wizards by Jack D. Schwager
- “The Essays of Warren Buffett: Lessons For Corporate America” by Warren Buffett, or you can find the PDF free online almost anywhere…
- Free Lunch by David Smith
- Rich Dad, Poor Dad by Robert Kiyosaki
- Beating the Street by Peter Lynch
- Investment Science by David Luenberger
- Corporate Finance by Berk DeMarzo
- Investopediais also a great online resource to reference when you get stuck, or if you’re just curious.
Beyond this, it helps to develop a better understanding of financial terms and how they apply to long-term investing. Ultimately, you want to know as much as you can so that you can protect yourself from getting in trouble. Equally important is knowledge of what to do with your money as it starts to grow. I’m a big believer in people – you can and will make more money in time if you dedicate yourself to improving by learning!
This resource list is usually enough to get people started, but I get a lot of common questions. Here are some of the top ones that are worth exploring.
What are "securities"?
These are not home protection systems. They refer to the different types of financial objects that exist in the market. Some are very risk-averse – meaning you’re not going to expose yourself and your portfolio to a huge catastrophy if the market goes up in flames. Other securities are very risky. If you like Vegas, anxiety, sleepless nights, and roller coasters, then you’re at home here. Here are examples of different securities by type.
- Mutual Funds
- Government Bonds
- Corporate Bonds (Still kinda risky, since a corporation can default)
- Plane Jane Interest (ie interest paid from keeping cash in a savings account)
Is a retirement account different from a savings account?
Yes, ABSOLUTELY. Generally speaking a savings account – the most common way that young individuals save – is held with a bank. You deposit cash into your account and the bank gives you interest on the money held every month – usually to an abysmally low tune of 0.5%. A retirement account is a different beast of its own. It is usually managed and operated by a brokerage firm and can take many different forms such as…
- Individual Retirement Arrangement (IRA)
- Roth IRA
- Savings Incentive Match Plans for Employees (SIMPLE IRA)
- Simplified Employee Pension (SEP IRA)
- And many more…
What’s really important to take away from all of these different options is that each one has different rules associated with it. For instance, there’s a $5,500 limit per year on ROTH IRA accounts. That means you can’t deposit more than this amount without violating IRS tax rules. And you can’t even hold this type of account if you make over $115,000 per year. These types of rules apply to all different types of brokerage and retirement accounts. As you start to invest and put your money down, make sure to read and understand your account types. This will save you tons of time on the back-end when you pay taxes and will also help you grow your financial literacy.
All this information was super cool -- but what do you do?
Personally speaking, I invest across a few different platforms and in a few different accounts. I have two bank accounts where I hold checking and savings accounts to meet my daily needs. For investing and retirement I have Indvidual Investing, IRA, and ROTH IRA accounts with a brokerage firm which I won’t disclose for personal security reasons. One of my employers also gives me a 403(b). For fun I trade options and stocks on the side with two separate smaller trading firms.
On that same note, a great and cheap way to flex your actual trading abilities is to open up an account with Robinhood. It’s a quick, easy, nimble, and millenial-centric app. It cuts out transaction fees, has a streamlined UI, and is highly intuitive. This app would be a great place to start with a few hundred dollars just to test out what it feels like to buy and sell stock or mutual funds.
My 4 Simple Rules for Sound Financial Implementation
This always seems like the next step after you’ve taken the time to read and learn about financial investing. I am going to say beforehand that the following simple rules should be taken with a grain of salt! There is no “best” way to invest or save, but there are certain things that can really help you get started on the right foot. Here we go:
1. Consolidate you cash and streamline your liquidity. What this means is to get your money together from all of the accounts you have and develop a game-plan of how you hope to invest. Streamlining your liquidity means getting your processes down so that you can convert assets into cash easily.
2. Develop a strategy and STRUCTURE. Every sound financial plan has structure. My suggestion is this:
25%-35% of your income and assets in bank checking and savings accounts for daily use, a rainy day, emergencies, vacations and fun.
50-60% of your income and assets across your retirement accounts - 401K, 403, IRA, ROTH, SEP, whatever you choose is fine! Just know your accounts and why you have them as you start depositing.
25-35% of your income and assets into your growth fund. You can view this as the money you hope to grow as a function of your risk profile. If you’re super risky, maybe this should be lower, or vice-versa. Again this is a personal choice, and there is no right or wrong answer. Make sure you draw the line somewhere. One way people lose lots of money is by not drawing a hard line on how much money they choose to risk in their portfolio. Make the plan, draw the line, and don’t deviate from it until you revisit your strategy for investing.
3. Read all the time. Learn about finance, talk to your parents and friends about finance, and treat your financial understanding as part of your personal development. The sooner you realize this is part of your overall growth, the better.
4. Re-evaluate your strategy. It’s really as simple as it sounds. Every 6 months, year or 2 years come back to your accounts. Consolidate your assets. Keep winners, sell losers, take profits and loses and rethink about how you are investing your money. This requires committment, diligence, and structure, but it’s the best way to make sure you don’t let your portfolio slide.
More Food for Thought
There is always room for growth and additional learning. Maybe you’re already there (awesome!), but if not, just keep up reading and asking questions. You’ll learn by reading, reflecting and doing. When the time is right, take a look at some of these additional investment concepts that I think are important for all beginners:
- Risk & Diversification are inversely related; i.e. to reduce risk you need to DIVERSIFY! How? Different securities; different markets.
- Random Walk [ Market Makers v.s. Long Term Impact ]
- Mutual Fund Returns vs Market Returns Historically
- The Optimal Portfolio
- Currency Markets
- What is Arbitrage [ Free Lunch ]
- 20 Year Cycles
- Rollover Accounts
- The concept of “riding the waves”