Advice Appreciated - Where/How to invest

[CarolynM]

Hey, guys. I'm Carolyn.

I'm 30 years old, unmarried and with no children (yet) + one little dog. I do have a boyfriend who will be moving in with me soon. We're still ironing out ideas about combining our finances.

I love a budget and I've never been much of a spender. I cook at home for nearly every meal, I don't cut my hair, I have a small used car that I don't have a payment on, I don't drink coffee or alcohol (just happen to hate the taste), I don't like doing "pampery" things like having my nails done, etc.

I hate working for other people and have been working for years towards making a living from fiction writing. This method makes me think that if I could do this retire early plan, there would be time and a financial cushion in my life to allow me to write full time.

The things holding me back:

1) I don't earn a very high salary. On paper it's 50k which works out to around 33k take home. (Boyfriend's salary is a little less). Now that he is moving in I will be able to save about one third of my take home pay. I'm trying to find places to whittle that down further, but Boyfriend does not appreciate my turning off the air conditioner during heat waves and I really can't find much padding to get rid of!

2) I have student loans from my graduate degree in fiction (stupid, I know!) and I'm not trained for anything useful. I'm a secretary now. It's a good job and it pays well for what I do, but I feel like I'm wasting my life doing useless activities day after day. I want to get out now!

3) I don't understand numbers and math very well and know nothing about good investing. I feel lost as to what kind of an account to save my money in to make sure that it's growing. Right now I have a savings account with a rate of 0.95%. My job does not have a 401k or matching or anything like that. I had not previously been thinking much about long term saving, so I only have a couple thousand.

I would appreciate any help or advice people could offer!  (And I would be happy to post a detailed budget).

[needmyfi]

Education can be overpriced but is never stupid.  Also be grateful for the salary you are making, 50k is above the median household income.  At your age my money went to buying and paying off a multifamily house, but beng a homeowner and landlord is not for everyone.  At least you are asking the right questions.

[twinge]

3) I don't understand numbers and math very well and know nothing about good investing.

I would be careful about self-limiting talk like this.  Education sometimes creates this strong implicit idea that you have to choose if you are a "words" or a "numbers" person with many girls/women responding to implicit (and explicit!) cultural suggestions that  words are feminine and numbers are masculine.  This  develops self-limiting conceptions about what you think is interesting/can learn (I won't bore with study citations about this but there are ample--including many studies that show gender differences on math tasks  disappear if framed in a way that girls don't think they are solely math tasks or are even just told these are math tasks that girls tend to do well on).   Numbers are a way of representing information--by going to graduate school in fiction you show yourself as someone who loves playing around with ideas as represented by words, see if you can take the same open-minded approach to numbers.  (BTW I'm a long word-loving female who re-discovered in college/grad school math capacity that went "underground" in middle school).  The good thing to know is that, though I think you are likely capable of learning much higher-level math, the math you need to know for investing is primarily stuff you could handle in elementary school (a little bit of middle school level algebra might come into play too).  If you ever forget how to do some operation--just google it and there's ready instruction on hand. The main thing is just reminding yourself that you are an adult and operating with numbers is a basic adult task and there's no one--barring severe cognitive disabilities-- who should feel  "off the hook" in understanding them.  You'll find --with likely only slight effort--that there's nothing mysterious and a lot of use in numbers.

I feel lost as to what kind of an account to save my money in to make sure that it's growing. Right now I have a savings account with a rate of 0.95%. My job does not have a 401k or matching or anything like that. I had not previously been thinking much about long term saving, so I only have a couple thousand.

My vote would be to begin with opening a Roth IRA and put it in an low cost stock index fund or a target date retirement fund (this is a fund where they rebalance the asset allocation for you based on the age you set that you plan to retire) to start.  Then you can research other options if you become more interested in investing.  Vanguard is where I keep my own Roths because they are low-cost and easy to use.  You often need $3000 to open a fund, so maybe save up to that point and then invest. All the information is on their website and they make it very easy to start an account.  You can contribute $5000 each year (and 2012 contributions are allowed up until April 2013--tax day). Roth IRAs are a good investment because while you don't get the tax deduction up front, you don't pay taxes on the earnings AND if you ever have an emergency you can withdraw contributions penalty-free.

[CarolynM]

Thank you for the help!

I do suffer from negative self-talk, no doubt about it. I'm working on that, but I spend every day wrestling spreadsheets at work and I have daily reminders of how poor I am at conceptualizing the numbers. Keeping track of book sales, I'm pretty good at, though! So maybe it's just how interesting the numbers are.

I'll start with saving to 3k, then, and figure out where to go from there!

[CarolynM]

I keep hearing about this 7% rate.

Where is that coming from? Are those on Roth IRAs? What accounts are people putting money in where they're seeing a 7% interest rate???

[twinge]

Investing for retirement, people generally invest in a combination of stocks/bonds.  There is no guaranteed "interest rate" but many figure the average earnings (combined from appreciation, dividends etc) to be somewhere between 3-8% after inflation (based on how conservative you tend to be--I usually build my estimates expecting 4-5% gains after inflation).  BUT you can always lose money with stocks too (In 2008 many people's investments were cut in half (though if they stayed in the market they've gone up significantly since then).  It's just that if you have a long investment horizon (e.g., for your lifespan after retirement) you need to invest in something that meaningfully beats inflation. 

A Roth IRA is not an investment, it's a tax-sheltered account in which you choose the investments to put in it.  You could choose to put it in a low-interest rate cash account, but inflation would eat away at it.  My suggestion for a novice investor was to choose a low-cost target date retirement fund because then it automatically balances the investments based on your expected retirement age.  BUT you could lose money in doing this--it's just the kind of risk you need to take to beat inflation.

[CarolynM]

Okay... Still confused. :-/

If I get a targeted retirement account, then I pick the one that targets for, say, ten years from now? When that target happens, do I then withdraw the money and put it in some other kind of account? Or are you able to get the interest from an account like this paid to you? Is it like a retirement account in the sense that you can't take out the money you've put in?

On what kind of account are people actually living?

I don't have very much money to put into it now, but I feel like I need to get the money I do have into something that's earning interest and not just my regular savings account. But I don't really understand what kind of accounts people have when they are at the goal. What is it that I'm aiming for? I try to get 500k into a targeted retirement account? And then I get the interest sent to me for living on? Is that what MMM does? In order to grow that money to 500k effectively are people making contributions into a targeted retirement account from the time all they have is $1,000? What exactly happens when that targeted retirement date happens? Does the money move to a different account?

People are suggesting that I not engage in negative self-talk, but it's difficult not to feel stupid right now. My dad says I should talk to his financial adviser, so I guess that's probably what I'll do. I'm just worried he's going to tell me this early retirement idea is insane.