Investing is a scary word especially if you’re fresh out of nursing school looking for a job or starting a new job. My experience with our higher educational system did not include any teaching about how to invest my money. I had one class day where we talked about personal finance during my bachelor of arts program, but I don’t remember any discussion about the stock market, bonds, or real estate investing. My BSN program and my recent MSN did not have ANY education or information about personal finance much less investing the money we’d be soon making. We just learned how much tuition was each year and how much student loan we could take with the promise of tons of good-paying jobs for nurses. Reality is I graduated with too much student debt with no financial advice from my nursing programs. In contrast, could you imagine a generation of nurses who graduate financially savvy and investment smart? There’s a small, yet significant push for educating financially savvy physicians but almost zero energy in educating financially smart nurses. I think the consequences would be pretty far reaching as nurses are a huge sector in the workforce.
The American Heritage Dictionary defines investment as “property or another possession acquired for future financial return or benefit”. Basically investing is buying something because you believe that something will improve your future. In the financial world the something you buy are called assets. Financial assets include cash, stocks, bonds, property, and all the other stuff you own such as cars, jewelry, furniture, and so on. Anything you own that you can sell for money is considered an asset. The opposite of assets are called liabilities. Liabilities are what you owe or your debts. Your assets minus your liabilities equal your net worth. We use a free Personal Capital account to keep track of our net worth and investing progress. According to the US Census Bureau in 2011, the average net worth of an American under the age of 35 is between $4k-6k and $14k-$35k for those under 44. This is scary especially considering the average nurse make about $68,000 a year in 2016 according to US News Money.
7 Steps to Help You Start Investing
Investing money can be a simple or as complicated as you want to make it. I like things simple as possible, so I’ve outlined 7 steps of investing for nurses and other average income earners like nurses. Each step is critical for success so don’t skip over step, and read my disclaimer about financial advice.
Step 1 – Clarify Your Goals
First, clarify your investing goal whether it’s financial independence, retirement, a house, or whatever. If you have a clear goal, then investing is much more powerful and meaningful. You will never really get too far in investing if you don’t create a meaningful, exciting goal to work towards. Instead your money will seem to slip through your life and you will always feel like you don’t have enough. I am investing towards financial independence in 10-15 years. This means I won’t have to work if I don’t want to but can rather pursue a life that I feel I meaningful. A secondary goal is saving and investing for a house in the next 5 years.
Step 2 – Set a Dollar Amount on Your Goals
Second, figure out how much money you’ll need to reach your goal. If your goal is a home, then strive to have 20% of the value of the home plus several thousand extra for buying/selling costs. You can get a loan and buy a home with a smaller downpayment but there are usually extra costs such as PMI insurance and more interest owed. If things go bad with the economy, you’ll have a little extra wiggle room with a 20% downpayment.
If your goal is financial independence or retirement, then figure out how much you expect to spend yearly in retirement. If you’ve been budgeting, then it is pretty easy to figure out how much you spend each year. If you haven’t been budgeting, then now is a good time to start tracking where your money goes every month and eventually you’ll see how much you’ve spent in a year. It took me some time after graduating nursing school to learn the power of tracking my expenses, but now I can’t imagine going without a budget.
Once you estimate how much money you’ll spend yearly, then multiply that amount by 25. That’s how much money you need to have saved or invested for financial independence or retirement. I estimate we’ll spend around $60,000 yearly including paying a mortgage on a house which means I need to have $1,500,000 in savings or investments before I can reasonable retire without worrying about running out of money. The idea is that my investment of $1,500,000 in the long run will make more than the $60,000 I use every year.
Step 3 – Set a Timeframe on Your Goals
Third, figure out how much you’ll need to save each year to get to your goal. This is similar to step 2, but instead of looking at how much money you need, you are now looking at how much money you should save every year to get to your goal in step 2. Basically you’re breaking down your goal into bite sized chunks that you can achieve each month and year.
You need to now look at your income and expense together. The difference between your expenses and income is the amount you can save and invest. To figure out the time frame, there a tons of calculators online but I like the networthify.com calculator. A big unknown factor is the rate of return. We obviously can only look at the past history of different investment options, but a reasonable rate of return is 6-8% a year after factoring in inflation for long-term investments. Play with the calculators until you come up with a realistic monthly savings rate towards your investment goal. When I ran our numbers in the networthify calculator with our income and expenses, the math resulted in a 10-15 year range depending on the actual rate of return before we are financially independent.
Step 4 – Decided if Your Investment is Taxable or Tax-Advantaged
Fourth, decide whether you want to invest in a taxable account or a tax-advantaged account. Most people will want to invest in a tax-advantaged account and max that out before investing in a taxable account. A tax-advantaged account usually ends up reducing how much income tax you will owe come April 15th. The exception is the Roth IRA tax-advantaged account. A taxable account means you will have to pay taxes on the profit you make from your investments this includes interest you earn on most savings accounts. Your goal from step 1 will guide you in deciding what type of account to invest in.
Tax-advantaged accounts are best used for a retirement or financial independence goal because you generally can’t use them until you reach a certain age or are retired. There are ways and situations to get around these general rules for tax-advantaged accounts, but those are beyond the scope of this article. Examples of tax-advantaged accounts are the 401k, 403b, 457, Roth IRA, and traditional IRA. The IRAs you setup yourself through Vanguard or Fidelity or any other financial investment company just like opening a bank account for yourself. Beside the IRAs, the other tax-advantaged accounts (401k or 403b) are generally setup through your employer and invested straight from your paycheck. You still have to pick and buy the specific index fund in all of these tax-advantaged types including the employer plans. I started investing in a Roth IRA with Vanguard when I got out of nursing school and would recommend that for most new grad nurse during their first couple of years. Getting married radically changed my financial story, so I now currently invest in a traditional IRA and an employee plan for tax reasons.
Taxable accounts are best for everything else you save outside of retirement or financial independence. All the taxable accounts you can setup on your own or with the help of a financial advisor. You save for your downpayment, short-term savings, and other investments in a taxable account. On the other hand, you save for long-term retirement or financial independence in the tax-advantaged accounts. If you max out your contribution limits for your tax-advantaged accounts and still want to save more for financial independence and retirement (a good idea) you can definitely use a taxable account.
Step 5 – Decide What Type of Assets You Want to Invest In
Fifth, decide what exactly you want to invest money in. In other words, what asset type you want to invest in? If you need the money in under 10 years, you should probably save in a money market account, CD, or high-yield savings account. If you won’t need the money in under ten years, then you should invest in mutual funds. An even simpler, more hands off but a slightly more expense way to invest is with Betterment or another low-cost investment management group. I don’t have any experience with Betterment or Wealthfront, but I know other financial independent bloggers who use and recommend Betterment as a simple, low-cost alternative to DIY investing. Setting up an account with Vanguard or Fidelity and investing in their mutual funds is super easy and can save you money in the long run compared to Betterment or Wealthfront.
A simple and effective way to invest in mutual funds is to invest in funds called a target date fund or target retirement fund such as the target date funds offered by Vanguard or Fidelity. Probably 90% of people who aren’t that interested in the specifics of investing would benefit most by investing in these target date funds or even with the Betterment service. Why? They are cheap, they follow a great investment philosophy (diversifying with indexing), and are practically zero maintenance. Most people should probably stop here, invest in target date funds, and skip to step 6.
A key point in mutual fund investing is to make sure the expense ratio or E/R is less than 1% and preferably less than 0.5%. The best mutual funds in my opinion are funds that follow an index like the S&P 500 or total stock market index. A low-cost index fund is low-cost because they’re inexpensive to maintain, so they charge you less fees, and they usually perform better than almost all non-index funds or actively managed funds. It’s a win, win situation with index funds in comparison to the thousands of other actively managed funds. And it’s simple because you just look for funds that say they follow an index and have a low E/R. You really only need to invest in a couple of broad-market index funds such as a total US stock market index fund and a total bond index fund. Many would also add a total international stock market index fund too. We’re diving deeper into DIY investing, so I’ll stop here and write another post about DIY Investing for those interested.
Step 6 – Automate Your Investing
Sixth, automate your investment goal. Once you have a goal and a plan to reach your goal, then go ahead and automate it. Financial investing works best when you don’t have to make a lot of decisions over and over again. Since we are emotional beings who tend to make irrational choices, anything to protect ourselves from make more decisions is usually better. When you invest in mutual funds, they go up and down in value throughout the year. The goal is not to time the market because few can successfully. The goal is to invest consistently throughout the year and stay the course when the market goes down. In fact, I view a downturn in the market as an opportunity to buy a piece of the market on sale. Who doesn’t love sales? Automating your investing takes the emotional roller-coaster feelings out of the picture. How you automate is person by person dependent. I automate by having a “Financial Independence” line item in our monthly budget which goes directly into our traditional IRAs every month. Also, our employers automate the investment process by taking a percentage of our paycheck out and putting it in our 401k or 403b which are invested in total stock market index funds and a bond index fund.
Step 7 – Time, Not Money is Your Greatest Asset
Seventh, enjoy the life you have now and don’t worry too much about your investments. The economy grows up and crashes down. Stay the course with your investments, and you’ll likely be rewarded greatly. So ignore the hype and news in the financial world. Money isn’t the point of life. As I’ve been learning from Vicki Robin in Your Money or Your Life, time is our greatest asset. Invest your time in the things that matter most to you especially the relationships and people in your life. Money and financial investment is just a means to a greater end – freedom to enjoy the life we’ve been given with those we love.