I was 23 when I first became eligible to participate in my job’s 401k plan. They made us attend a presentation about what a 401k was and how to use the website. It was more of a how to use the plan rather than a how to save for retirement. Which makes sense. It was our HR department leading the presentation, and I’m sure they weren’t legally allowed to give financial advice on behalf of the company.
I bring this story up because over the last 5 years I’ve saved a halfway decent amount of money. I’ve also come a really long way as an investor. At 23, I’d never heard of index funds or expense ratios and had never looked at that famous chart of the history of the Dow (you know, the one where it only goes up over time?)
I did what most people probably do when they start out. Pick a percentage (usually ranging from employer match to 10 or 15%) and pick some funds, usually whatever has done the best over the last 5 years. I can’t remember what percentage I elected, but it wasn’t a whole lot. I think I contributed maybe $150 a month. But I was sure as hell going to pick my funds carefully, because that’s where you make and lose money…right?
The thing is, when you’re young and just starting out, picking the right funds really isn’t that important. You usually can’t buy individual stocks in a 401k, so you don’t have to worry about those. But what about expense ratios?
It’s true that over time, especially in your later years, expense ratios can eat away at up to a third of your money. It’s also true that the best strategy for most people is going to be picking a target date fund, or a total stock market fund and a total bond market fund.
These things don’t make a whole lot of difference if your account balance is $1000 and you’re adding another hundred a month. Picking the right funds isn’t going to make you rich quick, and picking the wrong funds won’t make you lose all your money.
I’ve read a lot about investing over the last few years, partly because I think it’s interesting stuff and mostly because I wanted to make sure I wasn’t screwing myself by putting my money in the wrong place. And I don’t have any real strategy or deep insight, except for this:
Save First, Ask Questions Later
Over 5 years later I’ve finally realized what I think is the key to becoming a successful investor.
Focus on Saving first!
I’ve seen a lot more progress come from my contributions than from swings in the market. I’m more exited about seeing my dividend payouts go up and could care less what the market is doing. My real progress came when I decided to focus on my savings rate and keeping the rest simple.
Picking the right funds when I first started out may or may not have increased how much I have today. But creating a habit of saving a larger portion of my income certainly would have. What if I contributed 25% instead of just 10 or 15? I’d probably have almost double the money. Was it doable? Who knows – I never ran the numbers to find out.
At some point, you’ll have to ask the questions and find the answers and learn at least a little bit more about investing. It turns out though that that’s the easy part. The hard part is making the decision to have a little less money now for more in the future. The hard part is delaying gratification, running the numbers and being honest about your spending AND your income, and learning that TIME is your most valuable asset, not MONEY.
And life is usually better once you get the hard stuff over with.
Image by Sira Anamwong at FreeDigitalPhotos.net