Help a Reader: Money Advice

Here's an email I recently received from a reader:

I am a stay at home mother of two children (3 years, 8 months) in charge of the finances brought in from my husband's income as well as a side gig of online sales.  I feel as if I have hit a brick wall in my financial quest. With so much information readily available for the seasoned investor, I feel lost on where to go next.

Currently, my husband contributes his 401k match, with intentions to go from the 4.5% to an additional 6% (we have heard time and time again the golden rule is 15%) once we are out of debt. On paper, that should be reached in less than 12 months.  We have a modest emergency fund that will cover 3 almost 4 months of expenses. We stopped saving to now throw all extra money at debt, with the plan to save more once our highest interest rate debt is killed off.

I have made calls to hit dead ends- I have nowhere near the minimums required or I am told blanket statements such as "I wish I was thinking about retirement at your age. (23)"  Not once have I been given a suggestion on what to aim for or how to get there. Maybe I am asking the wrong things? When I do return to work, I would like to make the most of the two incomes.

Where is someone like me to go for that advice when friends, neighbors and most of our family don't have ahold of their own finances?  Where can I go to learn more about investing, aside from 'the difference between a traditional/roth ira' and other basics, and what would make the most sense for a younger investor? I love the reader profiles, and often want to ask how each one got their start outside of an employer sponsored account, but with two small children even this email is hard.

Is there a company out there to help the little guy like me, who isn’t financially ready for additional investing but wants to know more and not rush in blind? Or is it all up to me to find the answers, while I nurse the baby, for 15 minutes at a time?

What's your advice for her?

Comments

[Matt]

There are few investment advisor that work with little portfolios. Those that do charge fees that personally you should spend on your own education.

Check out your local library on books and magazines theat they might have. Get a feel for what information is good, what is bad,what is hype and what is boring.

Look at the Vanguard web site. It has plenty of information to also educate yourself. Plus it is a trusted company that is not a ponzie scheme.

Having young children, check to see if your state has a 529 savings plan for college. Michigan has one where you can have as little as $50 to start. $100 to $500 a year over 16 years will not be a full ride but it will be a start in the right direction. Plus they have investment options that you can try to see what they are like.

[Luis]

Agreed with Matt, advisors are hard and remember that you are your best advocate. Keep reading, subscribe to a bunch of blog rolls, books, etc. FMF has a list of the order of finances, someone have the link?

Basically, do a budget, reduce expenses, pay yourself first, pay off debts, match 401ks, get covered with insurance you need, contribute up to $416/ month in a Roth IRA, select Vanguard index funds or ETFs, save a home fund in liquid accounts. Beyond this you can then look at retiring early, investing in taxable accounts, becoming a millionaire, and writing your own books!

[FMF]

Luis --

Do you mean this:

http://www.freemoneyfinance.com/2012/04/30-steps-to-great-finances-steps-1-and-2.html

[JP]

Another vote for Vanguard index funds/ETFs.

[Jessica]

Original poster.

My question, in hindsight, was vague. Where should we be looking to open IRAs and such? Through my husbands work, it was easy, but what should I be comparing as far as different vessels to host through? I've seen my credit union offers IRAs, but I'm not so sure what (if anything) I should be looking for to comparison shop. Savings accounts are cut and dry, no fees and highest interest rate is the best way to go. Is it similar with an IRA? I know once we start, looking at it consistently isn't at all a great idea, but I'd like to not throw money blindly at something I'm not sure is even the best option. I know my credit union offers ira cds, ira savings and ira investing accounts.  

Right now, my plan is to get us free of debt and investing and saving in the best way. And its hard when I don't have any friends to ask for advice from. As stated above, we have been taking the steps to get us out of debt in a years time. Our "free" cash budgeted out is maybe 300$ -- and that's a very high estimate. It's typically around 150. Every extra money we come by goes towards debt. We all have life insurance (kids have small whole life policies I purchased at birth for a whopping 75$ a year for both combined). The only reason we haven't purchased a house, is we are not looking to stay in our area in the next 3 years (poor schools, stagnant economy with no room for growth, etc).

Thank you all for responding. I really look forward to hearing all of the other responses, because rather than making blind phone calls, I can see now where to focus my reading in my spare time. I don't think words can express my gratitude for the few comments I do have (and to FMF for posting my question). 

[Margo]

I first learned about investing during college, in my Personal Finance class. Is there a community college nearby, where you could take this type of class? If not, does your credit union offer any helpful seminars?

For your position right now - the highlights:
- You need diversification, and for small investors the most efficient way to do that is to look into mutual funds.
- Expense ratios and trading fees matter. A $7 fee per trade eats up a huge portion of a $100/month contribution. Consider putting the monthly amount into savings, and then purchasing your mutual fund shares on a quarterly basis.
- You need retirement funds too, since statistically you'll outlive your husband. Since he has a 401k at work, make sure you two open up a spousal IRA with funds for you.

[chris]

I was in your shoes not to long ago. I would check out T. Rowe Price's Asset Builder.

[retirebyforty]

Don't open an IRA with your bank. The "financial adviser" will try to sell you their crappy mutual funds. You are better off sticking with a discount brokerage like Firstrade or TDAmeritrade and buying your own investments. You can start off with Vanguard index funds like the others say.

[Greg]

Why do you have life insurance policies on your children? Life insurance is typically used to support dependants in the event of death by replacing the deceased's income. No one is depending on your children for income, right?

[Old Limey]

Here's my advice for someone in your position that is young, with two children, debt, and limited finances.

1) First, do you have a family member that is a successful investor? If so I would seek guidance from that person. My three children know next to nothing about investing but I have had limited trading authorization on their accounts for a very long time. Two of them have between 2 and 3 million each and the youngest has close to 1 million. They refer to their accounts a their "Black Hole" because they know that once money goes in they have to deal with me if they want to take it out, so they had better have a good reason.

2) In your situation, and with the current state of the world economy I would forget completely about the Stockmarket and the following data will explain why. First of all, if you only have a small amount to invest, unless you invest only in no-load mutual funds, the seemingly small fees will end up nickel and diming you into losing money.

My recommendation is to start investing in PIMCO's Total Return Bond fund, PTTDX. There are no fees to buy shares, and no fees to sell shares that you have owned for 60 days, at Fidelity Investments where I keep our family's investments. This fund opened on 12/10/1999 so there is a 12+ year record. The minimum initial purchase is $2,500. The minimum for additional purchases is $250.

Here are the results for PTTDX since that time, and for comparison purposes the results for some well known market indexes.

Fund or Index ............ Gain or loss since 12/10/1999
PTTDX ................................ +139.57%
Dow Industrials ..................... +15.32%
Total Market Index .................. +8.40%
S&P 500 .................................. -3.04%
Nasdaq 100 ............................. -17.4%
Nasdaq Composite ................ -17.79%

[Rick Francis]

I would suggest reading a book or two to learn of how to invest, my favorite introductory book is Mike Piper's Investing Made Simple: Index Fund Investing and ETF Investing Explained in 100 Pages or Less. It's a quick read but covers the basics pretty well, you should be able to read it in a day or two. Even using 15min chunks between feedings. It also highlights a lot of investment mistakes you should avoid. A more in depth book is The Bogleheads' Guide to Investing- but I wouldn't read it until you have an understanding of the basics.
>Where should we be looking to open IRAs and such?
Any brokerage can work, but you have to watch two things- selection of funds as you don't want to get stuck with high cost funds and the transaction costs to buy or sell the funds.
Especially when starting out it is easy to lose a few % to transaction costs. If you are investing $300/month a $10 cost to trade that is 3.3%, which is a lot of money to lose up front.
I'm primarily using TD Ameritrade for my Roth IRA and taxable investment account as- they have commission free trades on a number of ETFs- including vanguard funds. I believe other trades cost $10, but I have been sticking to the ETFs to get diversity and low costs.
I believe Schwab also has commission free trades on some of their ETFs. A Vanguard account is another possibility but I believe they have fairly high minimum account balances. At the time TD Ameritrade had no minimum balance.
@Old Limey
I don't think it would be wise for her to sink everything into bonds- with today's historically low interest rates I don't see how bond funds can do as well over the next decade... eventually rates will have to rise and bond funds will go down in value. A balanced allocation including both stocks and short or medium term bonds makes sense to me - as I am not going to try to guess how long it will take for the rates to rise again.

-Rick Francis

[Old Limey]

I agree with Greg - the life insurance policies on your babies are not a prudent use of even $75/year. More to the point, your biggest vulnerability is if your husband should become disabled and unable to work for several months (or even longer), so Disability insurance is necessary. The company for which I worked offered it and when my wife was in the position that you are in I purchased it through a payroll deduction for our most vulnerable years, even though it only covered 2/3 of my income.
My wife was always chafing at the bit to return to work and did so as soon as the children were old enough. Even though I was the major breadwinner we wouldn't be in the position we are today without all of her hard work as well. As you are finding out, the crux of a great marriage is "Teamwork". Now we are enjoying our Golden Years and on July 14th. will have been married for 56 years and retired for the last twenty.

[MC]

Like Greg, I wonder why you have life insurance policies on your children. Makes more sense to have life insurance on you and your husband. I expect that you fell victim to some hard-selling salesperson--get rid of these policies right away would be my advice.

As others have said, handling your finances is not that complicated at your level.

Just do the basics: Pay off your highest % rate debt first, pay off all your debt, and don't take on any more credit card debt. Keep your spending under control. Build an emergency fund and keep it in a bank savings account. Invest up to the max permitted in 401K/IRAs available through your workplaces, and don't borrow against these accounts ever. Probably you personally can wait to start an IRA/401K until you return to work--its just a few years and you are young. If you have $ left over after you have paid off all your debt and invested the max in your work retirement accounts, put it into a savings account until you build up $20,000-$100,000 or more--you could then use it for a down payment for a home or you will have it for college savings for your kids. It will take a long time (15 years?) before you have enough extra $ to try risky investments where you could lose the money. If it were me, I wouldn't risk it. Why not get rich slowly and surely? Consider buying a home with 20% down and a fixed 30 year mortgage when you have enough saved up for the down payment. Also, look into 529 accounts to help save for your kids' education--depending on your income and the state you live in, you could be eligible for some state support/tax break for that. Or just save for college using a bank savings account--it works just fine. These basics should keep you in good shape and take up most of your available $ for at least the next 10-15 years.

Apart from these basics, you just need to TOTALLY IGNORE all the "financial wizards" who will try to convince you to "invest" in their particular get rich quick scheme, whether it is gold, stocks, a business venture, real estate, etc. This goes for insurance agents too who try to sell you "whole life" savings policies such as on your kids. Unless you have money you can afford to absolutely throw away (and you don't), you should stay far, far away from these guys. They target people like you who lack the knowledge to recognize their scams, they make you feel like you are missing out, that they have specialized knowledge, they try to gain your trust so they can take off with your money. You do not need to be a financial genius to spot these--all you need to know is that every single person who tells you there is a new, or unknown, or inside deal to make money quickly apart from the basics detailed above is LYING and JUST TRYING TO SCAM YOU. If it were that easy, everyone would do it. Be smart and ignore them.

[Old Limey]

@Rick
The price of a total return bond fund is a function of the income it receives from its bond holdings and the movement in their value.

You are quite correct that as treasury yields rise the return on a total return bond fund will be reduced because the income paid on new bond purchases will be higher but the value of existing bond holdings will decrease. The bond fund will continue to rise but stock investments will rise much faster.

The "savvy" investor realizes this and adjusts his weighting accordingly but even the Federal Reserve has indicated that a rise in interest rates is several years away. Thus for now I believe that owning bond investments is more desirable than owning stock investments.

In my own particular case, considering my age and the value of my portfolio I will never go back into owning stocks because I have become very risk averse and the volatility of the stockmarket is way above my comfort zone.

If you look at the period of the last 5 years, the US30 treasury has gone from 5.14% to 2.74% while PTTDX has gained 53.59% and the Total Market index has lost 6.9% while experiencing violent volatility. Over the last 5 years the worst possible drawdown on PTTDX was -6.65% whereas on the Total Market index it was a gut wrenching -56.61%.

[Old Limey]

@MC
You must be getting some of the same "get rich quick" e-mails that arrive in my spam folder almost every day. I guess there are enough suckers out there for it to be a profitable scam.

[Mac Hildebrand]

I agree with the people that have noted in the comments above that the life insurance policies on the children might not be the best investment at this time. Since you are still focusing on getting out of debt, making that the main focus is not under-achieving!

I might be assuming too much, but it seems like you are a very driven person. It is easy for responsible, driven people to feel like they are missing out if interest is not building in their favor for every bit of savings as much as possible or if they are not financially prepared in every way imaginable. When we we over-manage finances, we tend to make too many decisions that seemingly have the potential to be "the best financial move possible!" instead of making reasonable and smart decisions that will have modest rewards. Investing either way in a Roth or traditional IRA will not be a financial killer down the road.

Investing will drive perfectionists insane because there is no perfect way to do it. The wisest and so-called perfect investment strategies can fail, and trying to invest a small amount with the workload you mentioned is difficult. Reading in your spare time could be beneficial for preparing for wise investing when the debt is paid off, but there is no secret key of IRA or investment knowledge that you should feel pressured to unlock in that time. I would recommend just picking up principles from FMF blog, biographies, and personal accounts of investing and experience with IRA's and focus on the tasks at hand.

[Catherine]

Hi Young Mom --
I'm going to pop back in later and post what I did, starting at about your age.

In the meantime, here is where to go:

Your public library. Bring the kids. It's air-conditioned and full if things a three year old will love to explore. While you are there, browse a bit in the shelves around 332.024; which is the dewey decimal number for Personal finance.

The problem with free advice on the internet is well, that it's free advice on the internet. There is no requirement that internet published information be good, accurate or relevant to your situation. Books in the library have passed a minimum threshold, having been through a publishing hurdle and then selection by a librarian.

The library is your best first resource.

[Mark]

I have to say I SECOND everything Catherine said above and I vote for the public library, specifically the 332.024 section. This is the personal finance section. AFter reading enough of these books, you'll get a feel for what they're saying.

[Anon]

One thought I would throw out there that hasn't already been mentioned. You are right that it is tough to meet with a reputable financial adviser unless you already have a good size nest egg ($250k seems to be the minimum these days). Some companies have been even more up front about this emphasis. Merrill Lynch announced last year that they no longer pay commissions to brokers for accounts under $250k -- not saying Merrill is where you want to go, just take it as my opinion that you will get hosed on fees if the person you talk to is working primarily with smaller clients.

My thought is this - if you really want to speak with someone, do your parents or any other family members have someone they work with? I know an adviser very well who will meet with children or family members of existing clients even though they may not individually have enough assets to meet his minimum ($250k).

[chuck]

@Limey, why are you constantly pushing PTTDX with an expense ratio of .75% when it's lagging the comparable index fund VBILX due to it's expense ratio of .11%? Yes, comparing PTTDX to the S&P over the last 10 years looks great, but who to say it won't flip flop over the next 30 years? It is really really bad advise to suggest anyone, maybe except a market timer extraordinaire like yourself, to go 100% bond.

[Catherine]

Hi Young Mom,

My further recommendations with some of what I did.

1. Set goals. Decide why you want to have money and how soon you need it.

Like you, I began thinking about personal finance at a very young age. My goals were to own a home and have a retirement that didn't include keeping all of my belongings in a shopping cart.

Those were some pretty basic goals. Nothing too fancy.

2. Get started, no matter how small. Don't wait to find the perfect investment. Just start taking some steps.

I worked in a bank, starting as a teller, to put myself through college. At a certain point, I worked up to customer service representative, opening IRAs for customers. It seemed natural to have one for myself and I started with an IRA in a simple bank CD. This was the eighties and interest rates were much better than today.

After graduating from school, I was working in IT for a library system where we had a 457b plan. This was similar to a 401K, but with no employer match. My co-workers, several grandmotherly librarian types, were very influential at getting me to invest the max and choose the most aggressive mutual fund options. This suited my risk tolerance. I got in the habit of setting aside 25% of my income.

This is where I began reading all those personal finance books. Which leads to my third recommendation:

3. Read alot. Keep reading.

I loved reading about stocks and investing. I was intrigued by the stock market, but had very little money. I read about direct purchase plans and dividend re-investment plans and sent off a check for $250 with an agreement to buy $50 each month of a single stock. I budgeted for this as education/entertainment, because it was both a learning experience and a roller coaster ride. When I researched another stock that looked good, I bought it in the same way. Some were winners and some weren't.

Through my job, I had the opportunity to meet with a financial planner from a well known firm. I transferred my IRAs from bank CD's to this firm. Eventually what I learned from meeting with the financial adviser from the big name firm was that they were no smarter than I am. Everything they said was straight out of one of those books I read. All that reading served another function and it fueled my interest in a career change. I made the leap from IT for a library system to Finance IT for one of those well known firms.

4. Trust yourself and don't be afraid to go against the herd. Let your own risk-tolerance guide you. You know your situation better than anyone and you are probably smarter and more capable than most. Just by thinking about and prioritizing your finances, you are already ahead of the curve. I mentioned earlier that I chose the most aggressive mutual funds and I do invest in individual stocks. I encourage that for any twenty-something, because you have a long horizon to weather potential losses, however the deciding factor is your own individual risk profile. The other reason I want you to trust yourself is that the field of financial advisers, planners and brokers runs the gammut from awesome to awful and there isn't a clear ranking system. You might as well become your own expert.

5. Enjoy the journey.
You will add to your goals. You will grow in your financial education. You will see your balances grow and you will see them fall. I point this out because online and in blogs, everyone is quick to boast about their impressive returns so it seems like nobody ever has losses or bad investments. Ninety-five percent of investors have losses at some point and the other five percent are lying. OK, that's a made up statistic, but everyone has some losses or mistakes. Don't be discouraged, just make necessary corrections and rebalances along the way.

Good luck to you.