I asked a personal finance expert how to invest.

Summary

This video script offers an accessible guide to investing, emphasizing simplicity and debunking misconceptions. It advises building an emergency fund and paying off high-interest debt before investing. The script introduces the power of compound interest and recommends starting with employer-matched 401k plans and Roth IRAs. It also suggests using low-fee platforms like Vanguard and highlights the importance of diversification through index funds, particularly target date retirement funds. The video warns against market timing and the high fees of some financial advisors, advocating for consistent investing and a long-term perspective.

Takeaways

• 😀 Investing doesn't have to be complicated or boring; mastering the basics can lead to significant wealth over a lifetime.
• 💰 Before investing, it's crucial to establish an emergency fund covering 3-6 months of basic expenses and to pay off high-interest debt, except for mortgages.
• 📈 The power of compound interest is the driving force behind wealth accumulation, emphasizing the importance of starting to invest early.
• 🚀 After debt repayment, investing in the stock market can be a transformative move; historical market returns suggest potential for substantial growth.
• 💼 If an employer offers a 401k plan with matching contributions, this should be the first investment account to maximize, even before debt is fully paid off.
• 🌟 Following the 401k, a Roth IRA is recommended for its tax advantages, making it a favorite among personal finance experts.
• 🏦 When choosing an investment company, low fees are key; Vanguard, Fidelity, and Schwab are highlighted for their cost-effectiveness.
• 🤖 Robo-advisors are a convenient option, but they may come with slightly higher fees compared to traditional investment platforms.
• 🔄 Diversification through index funds reduces risk and is a smart strategy for long-term investment growth.
• 🎯 Target date retirement funds are an excellent choice for hands-off investors, as they automatically adjust the investment mix based on the year of retirement.
• 📉 Market fluctuations are normal, and the key to success in investing is consistent, emotionless contributions regardless of market conditions.
• 💸 Avoid the costly mistake of using financial advisors who charge a percentage of assets under management; opt for hourly or project-based fees instead.

Q & A

What is the first step one should take before starting to invest according to the script?

The first step is to build up an emergency fund, starting with a month of savings and eventually getting it up to three to six months of basic expenses.

Why is it important to pay off high-interest debt before investing?

Paying off high-interest debt is important because the interest rates on credit cards, student loans, and car loans can be significantly higher than the returns from investing, making it a priority to tackle these debts first.

What is the significance of compound interest in wealth accumulation?

Compound interest is significant because it allows your money to grow exponentially over time. The earlier you start investing, the more time your money has to compound and grow.

What is the average annual return of the stock market mentioned in the script?

The script mentions that over a long period of time, the market tends to return about 7% to 8% per year.

Why is it recommended to start with a 401k plan if your employer offers matching contributions?

It is recommended because it is essentially free money from your employer, and it is one of the first accounts you should start investing in to take advantage of this deal.

What are some of the benefits of a Roth IRA according to the script?

A Roth IRA has tax advantages, and if you meet the income requirements, it is recommended by most personal finance experts due to these benefits.

Which companies are mentioned in the script as good options for investing?

The script mentions Vanguard, Fidelity, and Schwab as good options for investing due to their low fees and good service.

What is the main reason the script advises against investing in highly speculative investments like Bitcoin?

The script advises against it because such investments are highly risky and do not consistently provide high returns, which is not a sustainable or reliable way to invest for long-term growth.

What is an index fund and why is it recommended for investing?

An index fund is a type of investment that includes a diversified portfolio of stocks, bonds, and other securities. It is recommended because it reduces the overall amount of risk involved in investing by spreading it across various assets.

What is a target date retirement fund and how does it work?

A target date retirement fund is an investment that automatically diversifies your portfolio based on the year you plan to retire. It adjusts the mix of investments over time to become more conservative as you approach your target date.

What is the strategy of dollar cost averaging and why is it recommended in the script?

Dollar cost averaging is a strategy where you invest a fixed amount of money at regular intervals regardless of the market's performance. It is recommended because it reduces the risk of market timing and can lead to better long-term returns.

What is the main issue with paying a percentage of assets under management fee to a financial advisor?

The main issue is that over the course of a lifetime, a significant portion of your returns can go to the advisor, which can significantly reduce your overall wealth accumulation.

What advice does Ramit Sethi give for someone just starting with personal finance?

Ramit Sethi advises people to envision their 'rich life' and the things they want to do, and then work backwards to determine how much money they need to achieve those goals, which can motivate them to invest and manage their finances effectively.

Outlines

00:00

😀 Simplifying the Basics of Investing

This paragraph introduces the topic of investing and clarifies misconceptions about its complexity. It emphasizes that the fundamentals of investing are straightforward and can lead to significant wealth accumulation over time. The speaker introduces Ramit Sethi, a personal finance expert, who will provide specific advice on starting to invest, choosing the right accounts, and common mistakes to avoid. The paragraph also touches on the importance of building an emergency fund and paying off high-interest debt before starting to invest.

05:01

🚀 The Power of Compound Interest and Diversification

The second paragraph delves into the concept of compound interest, highlighting its role in wealth creation and the importance of starting to invest early. It provides an example of how investing consistently over 40 years can lead to substantial returns. The speaker also discusses the dangers of investing in high-risk ventures like Bitcoin and instead advocates for diversification through index funds, which combine various securities to reduce overall risk. The paragraph introduces target date retirement funds as a safe and low-fee investment option that automatically diversifies investments based on the investor's retirement year.

10:02

🛠 Tools and Strategies for Effective Investing

This paragraph focuses on practical steps for investing, including choosing reliable companies for investment accounts and the benefits of using low-cost platforms like Vanguard, Fidelity, and Schwab. It also addresses the concept of robo-advisors and their fee structures. The speaker shares his personal preference for Vanguard due to its focus on low fees and sufficient investment options. Additionally, the paragraph discusses the strategy of dollar-cost averaging, which involves consistent monthly investments regardless of market conditions, as a superior approach to market timing.

15:03

📉 Navigating Market Volatility and the Risks of Financial Advisors

The fourth paragraph discusses the emotional challenges of investing during market fluctuations and the importance of maintaining a long-term perspective. It warns against the pitfalls of market timing and the potential for significant losses when trying to withdraw investments during a downturn. The speaker emphasizes the benefits of consistent, automated investing and the strategy of dollar-cost averaging. The paragraph also cautions against the high fees charged by some financial advisors, which can significantly erode investment returns over time, and suggests considering hourly or project fees as an alternative.

🌟 Embracing Personal Finance for a Rich Life

The final paragraph wraps up the discussion by emphasizing the personal nature of finance and investing. It encourages viewers to research and make informed decisions that align with their individual circumstances. The speaker provides resources for further learning, including flow charts from the personal finance Subreddit and Ramit Sethi's book, 'I Will Teach You to Be Rich.' The paragraph concludes with advice from Ramit Sethi on framing financial goals around one's 'rich life' and the various ways to achieve those goals, including investing, negotiating salary, or starting a business.

Keywords

💡Investing

Investing refers to the act of allocating resources, typically money, with the expectation of generating an income or profit. In the video's context, it is presented as a simple concept that, when mastered, can lead to significant wealth accumulation over a lifetime. The script emphasizes that investing doesn't have to be complicated and can be approached in a straightforward manner to achieve financial goals.

💡Emergency Fund

An emergency fund is a cash reserve that individuals set aside to cover unexpected expenses or financial emergencies, such as job loss or medical bills. The video suggests that building an emergency fund, starting with at least one month and eventually up to six months of basic expenses, is a crucial first step before starting to invest.

💡Debt

Debt is an obligation that an individual owes, typically involving borrowed money that must be repaid with interest. The script highlights the importance of paying off high-interest debt, such as credit cards and student loans, before beginning to invest, to avoid the financial burden and high interest rates that can hinder wealth accumulation.

💡Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. The video underscores the power of compound interest as a driving force behind wealth creation, illustrating how it can exponentially increase one's investment over time.

💡401k Plan

A 401k plan is a retirement savings plan sponsored by an employer in the United States, to which employees can contribute a portion of their pre-tax salary. The video mentions that if an employer offers a 401k plan with matching contributions, it should be the first account to invest in, as it represents a valuable benefit.

💡Roth IRA

A Roth IRA is a type of individual retirement account in the United States that offers tax advantages. Contributions to a Roth IRA are made after-tax, but qualified withdrawals in retirement are tax-free. The script recommends opening a Roth IRA after taking advantage of an employer's 401k match due to its tax benefits.

💡Index Fund

An index fund is a type of mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules of a specific index, such as the S&P 500. The video promotes investing in index funds as a way to diversify investments and reduce risk, rather than investing in individual stocks or speculative assets.

💡Target Date Retirement Fund

A target date retirement fund is a type of fund that automatically adjusts its asset allocation based on a target retirement date. The video suggests that these funds are an excellent choice for long-term investors due to their simplicity and automatic diversification, which adapts over time to suit the investor's retirement goals.

💡Dollar Cost Averaging

Dollar cost averaging is an investment strategy where a fixed amount of money is invested in a particular security at regular intervals, regardless of the price. The video explains that this strategy can be beneficial as it reduces the impact of volatility and eliminates the need to time the market, leading to a more consistent investment approach.

💡Financial Advisor

A financial advisor is a professional who provides financial advice or guidance to individuals based on their financial situation and goals. The script warns against the high fees that some financial advisors charge, which can significantly reduce investment returns over time, and suggests considering hourly or project fees instead of percentage-based fees.

💡Recession

A recession is a period of negative economic growth that lasts for at least two consecutive quarters, indicating a decline in economic activity. The video discusses the potential impact of a recession on the market and advises against the common mistake of pulling investments out of the market during downturns, emphasizing the importance of long-term investment strategies.

Highlights

Investing doesn't need to be complicated, overwhelming, or boring; the basics are simple and can lead to substantial wealth over a lifetime.

A critical financial mistake can cost you hundreds of thousands of dollars over time.

Before investing, build an emergency fund covering three to six months of basic expenses.

Pay off high-interest debt, such as credit cards and student loans, before starting to invest.

Compound interest is a powerful tool for wealth accumulation and emphasizes the importance of early investing.

Investing $5,000 annually from age 25 to 65 at an 8% return can result in nearly $1.3 million, illustrating the power of long-term investing.

When starting to invest, prioritize employer-matched 401k contributions and then open a Roth IRA for tax advantages.

Vanguard, Fidelity, and Schwab are recommended investment companies due to their low fees and quality service.

Robo-advisors like Wealthfront or Betterment may have slightly higher fees but are acceptable for those seeking convenience.

Avoid investing in highly speculative assets like Bitcoin, which is akin to buying a lottery ticket.

Diversify investments using index funds to reduce risk and ensure a balanced portfolio.

Target date retirement funds are recommended for their automatic diversification and low fees.

Invest consistently every month using dollar cost averaging to outperform market timing attempts.

Avoid financial advisors who charge a percentage of assets under management, as they can significantly reduce your returns.

Personal finance and investing require individual research to ensure the best decisions for one's unique situation.

Ramit Sethi's book 'I Will Teach You to Be Rich' is recommended for further insights into personal finance.

Money can be a source of joy, and investing should be tied to one's vision of a rich life, including travel and experiences.

Transcripts

- Investing, when most people think of it,

they imagine day trading, stock tickers,

and people screaming at each other.

But apart from what you may have heard,

investing doesn't need to be complicated,

overwhelming, or even boring.

The basics are actually quite simple.

And once you get them down,

you could make millions of dollars in your lifetime.

With the help of my friend and personal finance expert,

Ramit Sethi, we're gonna ditch the generalities

and get into the specifics covering how to start investing,

what accounts you should open up,

and all the things that you should and shouldn't be doing

when it comes to investing.

- This is a critical mistake people make.

And it will cost you hundreds of thousands of dollars.

- This video is sponsored by Squarespace.

More on them later.

My early twenties weren't exactly

my most productive financial years.

I remember counting pennies in line at Wendy's

to get their $1 chicken sandwich.

And if you're in a similar situation,

it might feel impossible

to even start thinking about investing,

and that's because you probably shouldn't.

Before you open up your first investment account,

there are two big steps that you need to take

that most personal finance experts can agree on.

First, you need to build up an emergency fund.

You can start with a month of savings,

but eventually, you should get it up

to three to six months of basic expenses.

We're talking about the bare minimum:

rent, utilities, groceries, and gas.

What is the absolute minimum that you need to get by on?

And second, you should pay off all of your debt

except for your house.

You specifically wanna focus on the debt

with the highest interest rates,

so those credit cards, student loans, and car loans

that are 8%, 9%, 10% or more should be tackled

as soon as you've got your emergency fund filled.

The power of taking these two steps alone are huge

when it comes to your personal finance journey.

And they will likely take years of saving,

patience, frustration, and sacrifice,

especially if you graduated

with $100,000 of student debt like I did.

But once you pay off your last loan,

you'll finally be ready

to start investing in the stock market.

Warren Buffett once famously said,

"My wealth has come from a combination of living in America,

some lucky genes, and compound interest."

Compound interest is the reason

you need to start investing as soon as you possibly can.

- What we know is that

over the course of a long period of time,

we're talking 40, 50, 60 years,

the market tends to return about 7% to 8%.

That's per year.

So people go, "Well, is that a lot? Is that a little?"

Doesn't mean anything to people.

What that means is that your money

will essentially double every 10 years if you do nothing.

Let's say you invest $5,000 a year from age 25 to 65.

At an annual return of 8%,

you'll have a total of nearly $1.3 million.

If you chose not to invest

and instead stash the money away in your sock drawer,

you would have $200,000.

That's a difference that will easily change your life.

- So the minute that I paid off my last student loan,

I knew that I wanted to start investing,

but I still had so many questions.

How do I open an account? What company do I use?

How much should I invest? What stocks do I invest in?

It was truly overwhelming.

There are a number of different accounts

that you could open up with varying fees and tax advantages.

My guess is if you've thought about investing before

but haven't taken the leap,

this is where you've gotten stuck in the weeds.

So let's break down exactly what you should be doing

from the minute that you decide to start investing.

In the U.S., if your employer has a 401k plan

and offers matching contributions,

then this is the first account

that you should start investing in,

and you should probably take advantage of this deal

even before you finish paying off all of your debt.

Put as much money into this 401k plan

as your employer will match.

After that, the first account

you should open up is a Roth IRA.

If you meet the income requirements,

there are some great tax advantages to Roth IRAs,

and it's why most personal finance experts recommend it.

But what companies should you trust with your money?

- There are a few companies I love.

I personally use Vanguard.

I have no financial affiliation with them,

but that's where I suggested my wife open her account.

They're super low-cost.

They don't get you with a bunch of fees. That's important.

Fidelity's also very good. Schwab is also very good.

All three of these are great.

Some people ask about robo-advisors. It's really popular.

I think they're fine.

If you are coming to me, you're saying,

"Ramit, should I do Wealthfront or Betterment or Vanguard?"

There is a slight difference in fees.

You know, you might be paying about 0.3% more

for Wealthfront or Betterment.

In the grand scheme, it's not the worst thing you could do.

Personally, for me, I don't think it's worth it.

I don't mind that Vanguard has a worse interface

because I hardly log in.

It's not important to me.

And I want a company that is focused on low fees.

- So, to keep things simple,

if you haven't opened an account already,

just go with Vanguard.

They've got really low fees,

give you all the investing options you need,

and they make it really easy to get started.

Okay, now that you've created an account,

what do you do next?

Well, you actually need to invest your money,

and regardless of what your brother-in-law told you,

investing your life savings into Bitcoin

is probably a terrible option.

I think when a lot of people

think about investing in the stock market,

they think about, like, you said, Tesla.

They think about investing in specific companies.

Some of them go,

"Ramit, why would I invest in the stock market?

7%? That's for losers.

Bitcoin, you can average 50% to 60% a year."

I go, "All right, let's start with some basic math here,

which you missed the day they taught that."

If you're getting 60% returns per year,

pretty soon you have more money

than all the money in the universe,

and there are essentially no investments

that are consistently getting you 60% returns.

Oftentimes, really what people are doing

with these highly speculative investments

is they are admitting

I have lost the game of money for myself

and the only chance I believe I have to win

is to buy a lottery ticket.

And that is not how you invest. That's not how you do it.

- So, instead of investing your money into one company,

one stock, or one risky bet,

you need to diversify by investing

in something called an index fund.

An index fund is a type of investment

that pulls together stocks, bonds,

and other securities into one diversified portfolio.

While there is always a risk when it comes to investing,

this reduces the overall amount of risk

that you need to take.

What are the investments that are safe in the long run

but that will also give us a return

where we can actually have a living when we retire?

- I love a target date retirement fund.

You simply pick the year that you're gonna retire.

Basically, the year you're gonna be 65.

And you just put all your money into it.

It's automatically diversified, automatically.

It includes stocks, bonds.

It includes domestic, large caps, all that,

and you just put as much as you can.

They charge essentially no fees.

This is not a financial advisor that's charging you 1%.

It's just a computer that's doing it for you.

People almost find it unbelievable.

They go, "Ramit, you're telling me

that I just pick one target date fund,

and I invest in that same fund in my 401k, in my Roth IRA,

even in a taxable brokerage account?"

For the most part, yes.

For the vast majority of people,

a target date fund is a fantastic thing.

If I had, like, if I were telling a brother or sister,

family member, and they're 25 years old, what should I do?

I'd be like, put every extra dollar you've got

in a target date fund and get on with your life.

- I wanna share the exact index fund that I invest in

as well as the strategy you need to know

once you start investing your money into the stock market.

But first, a quick word from my sponsor, Squarespace.

So I chose to build my first website

on Squarespace eight years ago for three main reasons.

Their templates are beautiful.

It's really simple to make changes,

and you don't need to know any code.

Let me show you exactly how easy it is.

Let's say you wanna create a blog

documenting your journey out of debt

and towards financial freedom.

You get started by going to squarespace.com

and buying your first domain name,

something like mattonthemoney.com.

Next up, you grab a template that matches your vision.

This one's perfect. And then the fun part.

You start creating by simply

dragging and dropping your content,

set your brand colors, add your logo,

and take that terrifying step

of writing and publishing your very first blog post.

I honestly think that everybody should have a website.

It can help you build an audience, land a better job,

and share your rags to riches story with the world.

Visit squarespace.com today for a free trial.

Then, when you're ready to launch,

go to squarespace.com/mattdavella

to save 10% off your first purchase of a website or domain.

The brands that I choose to partner with on this channel

help me to invest back into my videos

so I can create better content every week.

If you wanna get started and make a website for yourself,

click the link in the description below.

Thanks for considering. I forgot to turn the camera off.

All right, so let me show you

the exact target retirement fund that I invest into

when it comes to Vanguard.

So this is it.

It's the Vanguard target retirement 2050 fund.

Obviously, if you plan on retiring earlier or later,

you would pick a different fund,

but this is because I plan on retiring around 2050.

You can see, over the past 10 years,

it's performing at 8.36% annually.

After you've actually invested

your hard-earned money into the stock market,

the hard part comes, waiting.

How you manage your emotions and risk tolerance

is one of the most important aspects

to building wealth over time

because growth isn't a straight line.

- It goes like this. It's up. It's down.

Some years it's up 30%. Some years it's down 6%.

This year happens to be down.

But you have to remember that it was way up

for the last 10-plus years.

- Most people just can't stomach

the twists and turns that the market takes,

and over the past year,

things have been looking a bit dicey.

- But it does seem we are kind of

slipping into a recession, doesn't it?

- People are gonna feel a lot of pain.

- Concerns, of course, about the potential recession,

they continue to loom.

- In a poll for the Wall Street Journal,

economist put the probability

of a recession in the next 12 months at 61%.

- And the fear is that we are much more likely now

heading toward a recession.

- What would you say to somebody

who sees this happening right now

and wants to pull their money out of their 401k?

- If you do this, you are doomed.

It's one of the worst financial decisions you can make

to try to pull your money out.

Let me explain.

It's called timing the market

when you try to pull it out at the right time

and then get back in at the right time.

There's several problems with this.

First of all, you don't know

if it's gonna go lower or higher.

And people go, "Well, dude, it's so obvious."

It's actually not obvious.

People said it was obvious in 2008, 9, 10, 16, 20, 22.

It's not obvious. It can go up. It can go down.

The market does what the market's gonna do.

You cannot predict it.

Second, even if you pulled it out at a great time

where things are really high, and then it goes low,

you need to be right a second time

to put it in at the right time.

The solution is to simply invest

every single month consistently.

Doesn't matter whether it's up.

Doesn't matter whether it's down because you don't know

where that fits in the overall scheme.

Every month you set up an automation in your Vanguard,

Fidelity, Schwab account,

and it might be $100, it might be $1000, it might be $5,000.

It's just continually going in.

So when it's expensive, you're buying fewer shares.

When it's cheaper, you're buying more shares.

Over time, that strategy called dollar cost averaging

tends to dramatically outperform timing the market.

- I remember the day that I first invested money

into the stock market through Vanguard.

I knew that I wasn't supposed to be checking these accounts.

I had read books by Ramit and others that told me so,

but I couldn't help it.

I refreshed that thing every single day,

tracking the changes and watching as it went up and down.

But eventually, I decided to stop obsessing,

and I just let the investments

do their work in the background,

and it was the best decision that I made.

Now I check in every six months to see how things are going.

And over the past eight years, on average,

I've returned about 8% annually.

If you invested $5,000 per year over the same time period,

you'd have made $13,000 in interest.

And if you remember that graph from earlier in this video,

if you keep investing,

your money will soon grow exponentially.

That is, of course,

unless you make one fatal investing mistake.

- This is a critical mistake people make,

and it will cost you hundreds of thousands of dollars.

A lot of you watching have parents

who are using a financial advisor.

I want you to pull out your phone right now.

I want you to text mommy and daddy, and I want you to say,

"Hey, how much are you paying Chet,

our neighborhood financial advisor?"

Chet, when he gets the question,

is going to go into a very long monologue about,

"Well, you know, we're here to protect your money.

I wanna keep you safe, and I'm always looking over it,

and blah, I'm making decisions.

(bleep) Chet is ripping your parents off.

Chet is charging: I can almost guarantee,

a 1% assets under management fee.

Now, you go, "1%, what's the big deal?

That's not bad to have somebody look over it."

Over the course of your lifetime,

if you pay a 1% fee, 28% of your returns

will go right into your advisor's pocket.

If you pay a 2% fee, which some of these ripoff artists do,

you will pay over 50% of your returns

straight into their pocket.

If you have a modest income, you're starting in your 20s:

it could be hundreds of thousands of dollars.

Most finances we've heard today, it's really simple.

Target date fund, automate your money,

focus on living your life.

But if you really need a financial advisor

because things have gotten complicated

or you have stepchildren or all kinds of crazy stuff,

fine, pay an hourly fee or a project fee,

but never a percentage of assets under management.

- Since personal finance and investing

is really different for everyone,

it requires you to do a bit of extra research

to make sure that you're making

the best decision for yourself and your family.

So to help you identify

what you should and shouldn't be doing right now,

I've linked to some really helpful resources

in the description below this video.

There are some flow charts

from the personal finance Subreddit

that I've found to be very helpful,

and I also highly recommend

you check out Ramit Sethi's book,

"I Will Teach You to Be Rich".

It helped me out a ton when I first got started,

and I think it'll help you as well.

As you start to dig into your own personal finances,

it's often easy to lose sight of the big picture:

the reason why it's so important

to start investing, to begin with.

Say somebody just starts getting into personal finance now,

what advice would you give them?

- I think money is an amazing source of joy,

and I think when we typically think about money,

it feels like flossing to us.

"Ah, I really should like do something with my 401k."

So I always start by asking people,

"What's your rich life? What do you wanna do?

You wanna take a trip to Italy?

You wanna take a quarterly camping trip?

Awesome. Let's build that into your rich life.

Let's start there."

And once you do that, suddenly you realize,

"Oh, my gosh. In order to do these things that I wanna do,

whether it's solo or with a partner,

or bring my family and friends with me,

maybe I need to have more money."

Now you have lots of ways to do it.

You can negotiate your salary. We've talked about that.

You can start a business. But certainly, you can invest.

Every year you wait to invest is costing you thousands,

sometimes tens of thousands of dollars.

- Ramit, thank you so much for doing this.

If people wanna learn more about your work,

where should we send them?

- Come to my YouTube channel.

Come to my podcast, where I interview couples

where they share real numbers.

Sometimes they cry. Sometimes they laugh.

It's really insightful when it comes to money psychology.

And you can come to my website, iwt.com,

and all my other social channels.

[Matt] Check the description out for all the things

that we mentioned in this video.

Thanks so much for watching.

Don't forget to hit subscribe.

And turn on notifications for future videos from me.

Thanks for watching.