*This is part one of a two-part blog post.
“The intention is to help the children and grandchildren of my clients to gain insight into financial planning that they may not be getting from the traditional education system. I hope you will share both of my posts on this topic with your children and grandchildren. I’m happy to meet with them for a no-cost consultation to further their education.” – Marc Montini
Often, my clients will tell me, “If I only knew then what I know now.” They tell me how they would have begun their retirement savings at a much younger age and taken better advantage of their employer sponsored plans such as a 401(k) or 403(b).
Time and Compound Interest
This is easily the most important concept all new investors need to be aware of. Compound Interest is the interest you are earning on your interest that over time could generate exponential growth. The most important advice I tell all young investors is to just start with something. Anything you can afford to invest is vital because time is not something you can get back. Here’s an example:
Let’s say we start with $1000, we make 7.2% interest on the money, and it’s compounded annually. At the end of 10 years, we would have $2004. I’ll provide a more meaningful example later in this post when I cover employer sponsored plans.
What are Stocks and Bonds?
A stock is a certificate of ownership of a company. Companies will sell ownership of their company to generate capital they can invest back into the company to achieve growth. The more value the company is perceived to have the higher the stock price goes up. This is a function of supply and demand. If the perceived value is high, more and more people will want to own the stock and the price of the stock will go up.
A bond is a form of debt that is issued from a government agency or corporation to also generate additional revenue. If you buy a bond for $100, you are loaning the entity money and they agree to pay you interest on that loan for a certain period. When that period expires the entity agrees to pay you all the money back.
Mutual Funds and ETFs
Mutual Funds are a conglomeration of different stocks or bonds. Mutual funds allow you to invest in multiple companies at the same time while averting the high cost of buying the individual stock on your own. For example, you may purchase a mutual fund that contains Apple, Meta(Facebook), Netflix, Alphabet(Google) plus other tech companies. The mutual fund has a fund manager who is responsible for choosing which holding they would like to be contained inside of the fund. Mutual funds have a reputation for being expensive with multiple fees contained inside the fund so it’s wise to do your research.
Exchange Traded Funds or ETFs have become a popular alternative because the fees involved are typically significantly lower than a mutual fund. You can purchase an ETF with the same holdings as a mutual fund but have significantly reduced fees that can help your portfolio grow more quickly.
Employer Sponsored Plans
One-way employers try to attract talented employees is the offer a retirement plan. The most common would be the 401(k) but there are also 403(b) and 457 plans. With a 401(k) your employer will take money from your paycheck and add that money into your 401(k). You will choose how your money is invested from a set of pre-determined investment options, often mutual funds and ETFs. Taking advantage of these plans is often the simplest way to start to build a retirement nest egg. Let’s look at how compound interest can affect your retirement. Here’s an example:
Let’s say you start your retirement plan and contribute $10,000 a year for the next 30 years with an average rate of return of 6%. At the end of 30 years, you would have over $900,000 in your retirement plan.
S&P 500 and Other Stock market Indices
Stock market indices (plural for index) are a way to measure the movement of the financial system. The most common indices would be the Dow Jones Industrial Average, the S&P 500, NASDAQ, and the US Aggregate Bond Index. Every day you can watch to see if these different indices are positive or negative. Generally, this is how you can gauge the performance of your personal portfolio’s performance. The S&P 500 is the most common measuring stick because it contains 500 of the leading publicly traded companies in the United States. You cannot directly invest in the indices themselves, but you can invest in different index funds.
Stay tuned for Part 2 coming soon!
Written by Marc Montini, Financial Planner and licensed Fiduciary.