13 – Invest your Savings

Alright. You’ve settled into your pace for the first half of the Money Marathon. You certainly aren’t going the fastest, but that’s OK. Let the others run at a pace they can’t sustain. You are just fine holding back a bit and storing some of your energy away for the long haul…

---

Since I’ve convinced you to set aside 10% for retirement accounts and 20% from your take home pay too, you might now be thinking, “Where do I put all this money I’m saving?”

• Under your mattress?
• Buried under a tree?
• With your Uncle Alphonse for “safekeeping?”
• In the bank?

None of these are great options. Heck, putting money in the bank these days is almost as bad as the first 3 options, and I’m not even sure who Uncle Alphonse is, but he’s probably less than trustworthy.

I kid, I kid…

Some of it should go in the bank, but just enough so that if you have a significant and unexpected large expense – say, a monkey gets loose from the local zoo and busts through the window of your car to get at the bag of twinkies you left on the front seat, leaving you with a $425 repair bill – you can afford to pay it quickly without having to run up credit card debt and without pulling money from the place you actually stash most of your savings.

Actionable Content: Keep 1 to 3 months of your income in a bank account that pays interest. If an unexpected expense comes up, use your credit card to pay for it in the moment, but you’ll have enough money in the bank account to pay for the extra expenses on the credit card without dipping into your invested funds. To replenish the bank account after the extra expense, cut back on your entertainment spending the next couple months. Don’t pull funds out of your investments unless you have to, or its part of a planned expense.

So, where, you might ask, is the right place to stash the rest of your savings?

In the stock market.

I won’t use a bunch of space making the case that stocks are the best place to put your money to work for you. The case has been made many times over by others with far greater authority than on the subject than I.

There really is no better choice. At least, not one that makes more sense at this stage of your Money Marathon.

You might be wondering about real estate. It’s true that I’ve alluded to the merits of real estate investing in earlier posts, and it could be another place that you’d put your savings to work for you, but my vote for stocks at this stage of your Money Marathon is based on a couple of likely realities:

• You probably don’t have a lot of money saved up yet
• You are putting a lot of time and effort into growing your career and its not in real estate

While neither of these points explicitly eliminate real estate as a place to invest, buying property generally requires that you have at least one of them – a chunk of money or time to hustle – in abundance to realize outstanding returns on your investment. There are some exceptions that can ease the money & time burden of real estate investment. Buying your first home and renting out the extra bedrooms to friends to help cover your mortgage costs is a good example, but in general real estate investment requires resources you probably don’t have yet.

On the contrary, you don’t need a lot of time or money to invest in the stock market.

It’s possible with just a few hours a year and modest monthly contributions to make investments that will grow your financial nest egg quite nicely, year after year, while you are focused on the growth of your career.

How?

It begins with opening an online discount brokerage account. There are plenty to choose from and most of them make it very easy to get started. Look for a few key features they offer to make sure the one you choose is a good fit for you:

• No minimum account balance – as long as you can put a $1 in, you can invest.
• Automatic electronic deposits – automate transfers to your trading account each month
• $0 trade costs and no trade minimums – buy 1 share, or a 1000, it’s still a no-cost trade
• Choice -allows you to trade stocks, bonds, ETFs, and options (more on this in a later post)
• Compounding – offers a dividend re-investment plan (DRiP)…a what?….more on this later

Why are they important? These features make it easy-peasy for you to invest effectively at this early stage of your Money Marathon. The good news is almost all of the well-known discount brokers offer these features today, so finding one that works for you won’t be hard.

---

OK. You’ve opened an online brokerage account, you’ve linked it to your bank account so that you automatically transfer 20% of your take-home pay in each month, and you’ve made your first month’s deposit.

Now what?

For now, we’ll keep it simple. Remember, we are assuming you don’t have a lot of time – or don’t want to use your free time – to research individual companies and their long-term growth prospects. Luckily, there’s a shortcut that allows you to invest in stocks responsibly without having to do the research. You can invest in something called exchange-traded funds (ETFs). An ETF is like a “stock of stocks.” That’s not entirely accurate, but for our purposes, its good enough. If you want more detail, you can find it here.

Why are ETFs a shortcut? Because they take most of the research and analysis out of the process. For example, if you buy shares of the Vanguard Total Stock Market ETF (ticker symbol: VTI) you are getting a tiny fractional share of every stock in the US market. You can also expect your investment to closely match the overall performance of the US stock market, and let me tell you…that ain’t bad! Historically, the average yearly return from the broad US Stock Market has been about 9%, when the dividends are re-invested. Remember way back in Post 6 when I said that “…compounded returns of 8% are totally achievable?” This is what I meant, and this is where the Dividend Reinvestment Plan comes in.

Dividend What?

I won’t go any deeper into what a dividend is for now other than to say that it is a portion of the profits from the company you own stock in. If you want to dig deeper into the topic, you can read this. Not all companies pay dividends to their shareholders, but many do, including a great number of them that are fractional parts of 1 share of the Vanguard VTI ETF. So when those companies pay a dividend, the ETF simply passes along all those fractional dividends to it’s owner on a quarterly basis.

You might be thinking, “Awesome…I’m gonna get paaaaaid for owning the VTI,” but slow your roll. You will get paid, but not much. Typically, if a company pays a dividend, its between 1-3% of the current price of a share of stock in the company. There are exceptions to this, but most worthwhile companies to invest in don’t payout much more than 4%.

An example: Microsoft currently pays a combined annual dividend to its shareholders of $2.04 per share. If you own 1 share of MSFT stock, you’ll see $2.04 deposited into your brokerage account (actually, you’ll see $0.51 deposited once each quarter) as a result. Two bucks…yippee!

Rather than pulling that little bit of money out of your investment account as it comes in, you can use the Dividend Reinvestment Plan (DRiP) available from your brokerage to automatically reinvest the dividends to buy a teeny-weeny, tiny bit more of the ETF, which in turn is buying an even teenier-weenier bit more of all the underlying stocks in the ETF. In other words, you will be compounding the returns of your original investment! And, I assure you, while it won’t seem like its doing much to help you when are first starting out, as those months and years of regular investment and re-investment of dividends pile up, the compounding effect will result in you owning a bunch of shares of the ETF and yes….even little ‘ol you likely ends up a millionaire by the time your Money Marathon is ended!

Now, there’s lots of things related to investing that I still haven’t covered:

• What about individual stocks? Shouldn’t you consider them?
• I mentioned the VTI ETF, but is that the only ETF you should buy? If not, what others should you consider and how should you split up your investments across them?
• We’ve covered investing your post-tax funds, but what about the pre-tax retirement funds?

On the first bullet…you already know I’m an advocate for buying stocks of individual companies. I believe it’s the way to “turbocharge” your returns from your investments However, it also requires that you research the long-term growth opportunities and inherent risks for the companies you are considering for investment. That requires you make the time to do the work. Since we are assuming you don’t have the time – or don’t want to put in the time – for now we’ll set aside my love of individual stock ownership and stick to a strategy focused on matching the broad return of the market with ETFs. In this case, being “just average” ain’t bad.

The other couple bullets are important to cover, and they will be the topic in the next couple of posts.