This is the second part in a series I’m doing called “Younger Me,” in which I write as if this were something the younger version of myself could pick up, read and have a head start on achieving financial independence.
Message #2: Knowing Helps but Execution Is What Matters
When I was around 18, I had a bank account but I barely knew what to do with it. I had a very vague concept that you could put your money into it and take money out, but I was interested in other things. Mainly, programming. But at the time, there was just so much I didn’t know and I suppose part of me was just waiting for someone to come along and teach me. Someone to take me aside and say, “What are you doing with all the money you’re making? Nothing? Well, let me show you what can be done.”
That never happened.
And even if it had, who knows whether it would help? Looking back, I can honestly say that I wasted so much money on things that didn’t matter. To paint a picture, I bought a pair of $80 polyester pants once when I was 17. I think I wore them a few times. That’s the kind of hole money was burning in my pocket back then. So even if someone had taken me aside and shown me how investing works, I probably would have assumed I’d start sometime later and just push the burden on future me. Knowing wouldn’t have helped. Young FI Monkey thought he had all the time in the world to stuff money into a savings account and catch up. Of course, if he had seen message #1 in this series, he would have known how much easier things are if you start earlier. But that doesn’t mean he would have actually done anything about it. And I suspect it’s the same way for most people in our generation. And probably for most people in the next generation, too.
So what was holding young FI Monkey back? Well, if we go back to the bit on how much I didn’t know, that was probably the biggest factor. To clarify further, it was what I didn’t know about investing beyond scratching the surface with a simple graph, as I did in the previous post. For example, I didn’t know that in 2001, the year I graduated, it wasn’t unheard of to see high-yield interest rates at around 5%. Had I stuffed the $2000/year I mentioned in the last post into an account that averaged even 3%, over the last 10 years that $20,000 would have already been over $25,000. And that’s just a savings account!
Had I known about the power of an IRA, I would have jumped on it. Except, no I wouldn’t have, because around 2003 or 2004, I actually started my first IRA after my roommate — who was studying to become a CPA — talked me into setting one up with regular deposits. Yes, I did honor the $100/month deposits but I remember it feeling like I couldn’t touch the money. Then there were the fees. I just didn’t realize how, if you don’t pay attention, fees eat away at your savings. But again, no one told me and I wasn’t willing to put in the leg work to figure it out. Still, I had an IRA at that point, but I was putting the bare minimum into it. So bare, in fact, that by the time I rolled that IRA into a new one not too long ago, the account had about $4,000 sitting in it. You read that correctly. An account that I had been stuffing $100/month into for the past ten years didn’t have anywhere near $12,000 in it. Because I had been so naive and careless (and because of the 2008 crash), fees had eaten away at most of the money I’d been mindlessly shoving into the account. Had I done even a bit of research and done some comparisons between banks offering retirement accounts, I would have inevitably stumbled on the fact that most banks charge you a monthly fee if your balance is below a certain mark — usually $5,000 from what I’ve seen. This is something my roommate had left out of his very moving sales pitch.
The point is, I should have done my research. Because someone was telling me, but I still felt like there was too much involved. You know what I’ve learned since then that was so powerful? There just isn’t that much involved. Had someone given me the following plan and told me where to go for each of them, I’m fairly certain an 18-year-old could handle it:
- Find a bank with no required minimums and a high APY for savings accounts. Open an account.
- Figure out what your average expenses are, multiply that by six and save that amount in the bank as fast as possible. This is your emergency fund. Don’t touch it unless there’s an emergency. If you take money out, you must replace it as soon as possible.
- Once you complete number two, open up a new savings account in the same bank.
- Go to Vanguard.com and look at Roth IRA accounts. Whatever the minimum amount is to avoid fees (say, $3,000), that’s your new savings goal. Save that up in your second savings account.
- Once your savings reaches $3,000, open up that Roth IRA account and transfer over the funds. Invest it all in VFINX. Your new goal is to invest AT LEAST $2,000 in this account each year.
And that’s it. Had someone who knew what they were talking about given me those instructions, I would have been well on my way. Of course, I would throw something in about what to do during potential bear markets and crashes (and what a bear market is).
Obviously I could tell young FI Monkey to buy up all the Apple Stock he can get his hands on, but that’s cheating.
Young FI Monkey would have been able to establish two savings accounts. In the process, learning that opening a savings account is no big deal and costs nothing. It’s like having a separate envelope for your money (just please, never over draft). Also young FI Monkey would have learned that a Roth IRA is just a tax-efficient vehicle for investing in things as opposed to imagining it to be the slimy pocket of a salesman who would add money once in a while but always charge enough fees to make sure it would never grow. (I still have some issues to sort out).
To wrap things up, my point is that even if I knew I needed an emergency fund and a Roth IRA, I wouldn’t have known how to set them up. At least, not initially. And that’s the missing piece. In the end, narrowing the gap between knowing a thing and actually doing a thing is what I hope this post to be.
Until next time.
Disclaimer: I am not a financial advisor, but merely explaining what I would have told younger me. And the funny thing is, not much of that would change if it were 42-year-old me saying the same thing to 32-year-old me. Suffice it to say, if you do all this and the stock market crashes or somehow Vanguard goes under, please don’t blame me. Also, I understand that the above scenario may not be the absolute best, but the point is that it would have been 1000X better than what actually did happen.