- Investing, when most people think of it,
they imagine day trading, stock tickers,
and people screaming at each other.
But apart from what you may have heard,
investing doesn't need to be complicated,
overwhelming, or even boring.
The basics are actually quite simple.
And once you get them down,
you could make millions of dollars in your lifetime.
With the help of my friend and personal finance expert,
Ramit Sethi, we're gonna ditch the generalities
and get into the specifics covering how to start investing,
what accounts you should open up,
and all the things that you should and shouldn't be doing
when it comes to investing.
- This is a critical mistake people make.
And it will cost you hundreds of thousands of dollars.
- This video is sponsored by Squarespace.
More on them later.
My early twenties weren't exactly
my most productive financial years.
I remember counting pennies in line at Wendy's
to get their $1 chicken sandwich.
And if you're in a similar situation,
it might feel impossible
to even start thinking about investing,
and that's because you probably shouldn't.
Before you open up your first investment account,
there are two big steps that you need to take
that most personal finance experts can agree on.
First, you need to build up an emergency fund.
You can start with a month of savings,
but eventually, you should get it up
to three to six months of basic expenses.
We're talking about the bare minimum:
rent, utilities, groceries, and gas.
What is the absolute minimum that you need to get by on?
And second, you should pay off all of your debt
except for your house.
You specifically wanna focus on the debt
with the highest interest rates,
so those credit cards, student loans, and car loans
that are 8%, 9%, 10% or more should be tackled
as soon as you've got your emergency fund filled.
The power of taking these two steps alone are huge
when it comes to your personal finance journey.
And they will likely take years of saving,
patience, frustration, and sacrifice,
especially if you graduated
with $100,000 of student debt like I did.
But once you pay off your last loan,
you'll finally be ready
to start investing in the stock market.
Warren Buffett once famously said,
"My wealth has come from a combination of living in America,
some lucky genes, and compound interest."
Compound interest is the reason
you need to start investing as soon as you possibly can.
- What we know is that
over the course of a long period of time,
we're talking 40, 50, 60 years,
the market tends to return about 7% to 8%.
That's per year.
So people go, "Well, is that a lot? Is that a little?"
Doesn't mean anything to people.
What that means is that your money
will essentially double every 10 years if you do nothing.
Let's say you invest $5,000 a year from age 25 to 65.
At an annual return of 8%,
you'll have a total of nearly $1.3 million.
If you chose not to invest
and instead stash the money away in your sock drawer,
you would have $200,000.
That's a difference that will easily change your life.
- So the minute that I paid off my last student loan,
I knew that I wanted to start investing,
but I still had so many questions.
How do I open an account? What company do I use?
How much should I invest? What stocks do I invest in?
It was truly overwhelming.
There are a number of different accounts
that you could open up with varying fees and tax advantages.
My guess is if you've thought about investing before
but haven't taken the leap,
this is where you've gotten stuck in the weeds.
So let's break down exactly what you should be doing
from the minute that you decide to start investing.
In the U.S., if your employer has a 401k plan
and offers matching contributions,
then this is the first account
that you should start investing in,
and you should probably take advantage of this deal
even before you finish paying off all of your debt.
Put as much money into this 401k plan
as your employer will match.
After that, the first account
you should open up is a Roth IRA.
If you meet the income requirements,
there are some great tax advantages to Roth IRAs,
and it's why most personal finance experts recommend it.
But what companies should you trust with your money?
- There are a few companies I love.
I personally use Vanguard.
I have no financial affiliation with them,
but that's where I suggested my wife open her account.
They're super low-cost.
They don't get you with a bunch of fees. That's important.
Fidelity's also very good. Schwab is also very good.
All three of these are great.
Some people ask about robo-advisors. It's really popular.
I think they're fine.
If you are coming to me, you're saying,
"Ramit, should I do Wealthfront or Betterment or Vanguard?"
There is a slight difference in fees.
You know, you might be paying about 0.3% more
for Wealthfront or Betterment.
In the grand scheme, it's not the worst thing you could do.
Personally, for me, I don't think it's worth it.
I don't mind that Vanguard has a worse interface
because I hardly log in.
It's not important to me.
And I want a company that is focused on low fees.
- So, to keep things simple,
if you haven't opened an account already,
just go with Vanguard.
They've got really low fees,
give you all the investing options you need,
and they make it really easy to get started.
Okay, now that you've created an account,
what do you do next?
Well, you actually need to invest your money,
and regardless of what your brother-in-law told you,
investing your life savings into Bitcoin
is probably a terrible option.
I think when a lot of people
think about investing in the stock market,
they think about, like, you said, Tesla.
They think about investing in specific companies.
Some of them go,
"Ramit, why would I invest in the stock market?
7%? That's for losers.
Bitcoin, you can average 50% to 60% a year."
I go, "All right, let's start with some basic math here,
which you missed the day they taught that."
If you're getting 60% returns per year,
pretty soon you have more money
than all the money in the universe,
and there are essentially no investments
that are consistently getting you 60% returns.
Oftentimes, really what people are doing
with these highly speculative investments
is they are admitting
I have lost the game of money for myself
and the only chance I believe I have to win
is to buy a lottery ticket.
And that is not how you invest. That's not how you do it.
- So, instead of investing your money into one company,
one stock, or one risky bet,
you need to diversify by investing
in something called an index fund.
An index fund is a type of investment
that pulls together stocks, bonds,
and other securities into one diversified portfolio.
While there is always a risk when it comes to investing,
this reduces the overall amount of risk
that you need to take.
What are the investments that are safe in the long run
but that will also give us a return
where we can actually have a living when we retire?
- I love a target date retirement fund.
You simply pick the year that you're gonna retire.
Basically, the year you're gonna be 65.
And you just put all your money into it.
It's automatically diversified, automatically.
It includes stocks, bonds.
It includes domestic, large caps, all that,
and you just put as much as you can.
They charge essentially no fees.
This is not a financial advisor that's charging you 1%.
It's just a computer that's doing it for you.
People almost find it unbelievable.
They go, "Ramit, you're telling me
that I just pick one target date fund,
and I invest in that same fund in my 401k, in my Roth IRA,
even in a taxable brokerage account?"
For the most part, yes.
For the vast majority of people,
a target date fund is a fantastic thing.
If I had, like, if I were telling a brother or sister,
family member, and they're 25 years old, what should I do?
I'd be like, put every extra dollar you've got
in a target date fund and get on with your life.
- I wanna share the exact index fund that I invest in
as well as the strategy you need to know
once you start investing your money into the stock market.
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Thanks for considering. I forgot to turn the camera off.
All right, so let me show you
the exact target retirement fund that I invest into
when it comes to Vanguard.
So this is it.
It's the Vanguard target retirement 2050 fund.
Obviously, if you plan on retiring earlier or later,
you would pick a different fund,
but this is because I plan on retiring around 2050.
You can see, over the past 10 years,
it's performing at 8.36% annually.
After you've actually invested
your hard-earned money into the stock market,
the hard part comes, waiting.
How you manage your emotions and risk tolerance
is one of the most important aspects
to building wealth over time
because growth isn't a straight line.
- It goes like this. It's up. It's down.
Some years it's up 30%. Some years it's down 6%.
This year happens to be down.
But you have to remember that it was way up
for the last 10-plus years.
- Most people just can't stomach
the twists and turns that the market takes,
and over the past year,
things have been looking a bit dicey.
- But it does seem we are kind of
slipping into a recession, doesn't it?
- People are gonna feel a lot of pain.
- Concerns, of course, about the potential recession,
they continue to loom.
- In a poll for the Wall Street Journal,
economist put the probability
of a recession in the next 12 months at 61%.
- And the fear is that we are much more likely now
heading toward a recession.
- What would you say to somebody
who sees this happening right now
and wants to pull their money out of their 401k?
- If you do this, you are doomed.
It's one of the worst financial decisions you can make
to try to pull your money out.
Let me explain.
It's called timing the market
when you try to pull it out at the right time
and then get back in at the right time.
There's several problems with this.
First of all, you don't know
if it's gonna go lower or higher.
And people go, "Well, dude, it's so obvious."
It's actually not obvious.
People said it was obvious in 2008, 9, 10, 16, 20, 22.
It's not obvious. It can go up. It can go down.
The market does what the market's gonna do.
You cannot predict it.
Second, even if you pulled it out at a great time
where things are really high, and then it goes low,
you need to be right a second time
to put it in at the right time.
The solution is to simply invest
every single month consistently.
Doesn't matter whether it's up.
Doesn't matter whether it's down because you don't know
where that fits in the overall scheme.
Every month you set up an automation in your Vanguard,
Fidelity, Schwab account,
and it might be $100, it might be $1000, it might be $5,000.
It's just continually going in.
So when it's expensive, you're buying fewer shares.
When it's cheaper, you're buying more shares.
Over time, that strategy called dollar cost averaging
tends to dramatically outperform timing the market.
- I remember the day that I first invested money
into the stock market through Vanguard.
I knew that I wasn't supposed to be checking these accounts.
I had read books by Ramit and others that told me so,
but I couldn't help it.
I refreshed that thing every single day,
tracking the changes and watching as it went up and down.
But eventually, I decided to stop obsessing,
and I just let the investments
do their work in the background,
and it was the best decision that I made.
Now I check in every six months to see how things are going.
And over the past eight years, on average,
I've returned about 8% annually.
If you invested $5,000 per year over the same time period,
you'd have made $13,000 in interest.
And if you remember that graph from earlier in this video,
if you keep investing,
your money will soon grow exponentially.
That is, of course,
unless you make one fatal investing mistake.
- This is a critical mistake people make,
and it will cost you hundreds of thousands of dollars.
A lot of you watching have parents
who are using a financial advisor.
I want you to pull out your phone right now.
I want you to text mommy and daddy, and I want you to say,
"Hey, how much are you paying Chet,
our neighborhood financial advisor?"
Chet, when he gets the question,
is going to go into a very long monologue about,
"Well, you know, we're here to protect your money.
I wanna keep you safe, and I'm always looking over it,
and blah, I'm making decisions.
(bleep) Chet is ripping your parents off.
Chet is charging: I can almost guarantee,
a 1% assets under management fee.
Now, you go, "1%, what's the big deal?
That's not bad to have somebody look over it."
Over the course of your lifetime,
if you pay a 1% fee, 28% of your returns
will go right into your advisor's pocket.
If you pay a 2% fee, which some of these ripoff artists do,
you will pay over 50% of your returns
straight into their pocket.
If you have a modest income, you're starting in your 20s:
it could be hundreds of thousands of dollars.
Most finances we've heard today, it's really simple.
Target date fund, automate your money,
focus on living your life.
But if you really need a financial advisor
because things have gotten complicated
or you have stepchildren or all kinds of crazy stuff,
fine, pay an hourly fee or a project fee,
but never a percentage of assets under management.
- Since personal finance and investing
is really different for everyone,
it requires you to do a bit of extra research
to make sure that you're making
the best decision for yourself and your family.
So to help you identify
what you should and shouldn't be doing right now,
I've linked to some really helpful resources
in the description below this video.
There are some flow charts
from the personal finance Subreddit
that I've found to be very helpful,
and I also highly recommend
you check out Ramit Sethi's book,
"I Will Teach You to Be Rich".
It helped me out a ton when I first got started,
and I think it'll help you as well.
As you start to dig into your own personal finances,
it's often easy to lose sight of the big picture:
the reason why it's so important
to start investing, to begin with.
Say somebody just starts getting into personal finance now,
what advice would you give them?
- I think money is an amazing source of joy,
and I think when we typically think about money,
it feels like flossing to us.
"Ah, I really should like do something with my 401k."
So I always start by asking people,
"What's your rich life? What do you wanna do?
You wanna take a trip to Italy?
You wanna take a quarterly camping trip?
Awesome. Let's build that into your rich life.
Let's start there."
And once you do that, suddenly you realize,
"Oh, my gosh. In order to do these things that I wanna do,
whether it's solo or with a partner,
or bring my family and friends with me,
maybe I need to have more money."
Now you have lots of ways to do it.
You can negotiate your salary. We've talked about that.
You can start a business. But certainly, you can invest.
Every year you wait to invest is costing you thousands,
sometimes tens of thousands of dollars.
- Ramit, thank you so much for doing this.
If people wanna learn more about your work,
where should we send them?
- Come to my YouTube channel.
Come to my podcast, where I interview couples
where they share real numbers.
Sometimes they cry. Sometimes they laugh.
It's really insightful when it comes to money psychology.
And you can come to my website, iwt.com,
and all my other social channels.
[Matt] Check the description out for all the things
that we mentioned in this video.
Thanks so much for watching.
Don't forget to hit subscribe.
And turn on notifications for future videos from me.
Thanks for watching.