Investment adivce for a 39 y/o clueless guy!
July 28, 2010 9:10 AM   Subscribe

Financial moron w/kids and no investments needs to think about the future. Help needed, I don't know where to start! (mess described inside).

Hello all! I am soon to be 39 years old, am an underemployed lawyer, married, two young kids under 3, familial income of appx $100k and a HUGE mortgage/ property tax liability (3K+ a month). Money is tight, but I really want to put something aside for retirement/college for kids/rainy day. We have limited cash reserves and as I am temping I want to keep our limited cash (10K) liquid in case I end up out-of-work. I live in fear of being unable to keep a roof over our heads.

All that fun stuff aside, outside of out mortgage and my student loans (both at fairly low rates) we have no unsecured debt. No CC debt, no car payment, no nothing.

I want to rustle up a couple thousand through selling odds and ends (yes I am bankrolling this plan through ebay) to start investing in some capacity, if for no other reason than to get into the habit and practice of thinking in that mode.

We have one investment currently and that is our house, which, while not appreciating a whole lot (bought at the top of the market) is in a nice enough neighborhood and near good schools so we are not under water at least and it had "increased in value" nominally, most probably at a rate below the rate of inflation, but considering the housing market in metro Chicago, that isn't too shabby. I have no intention of selling anytime soon if I can help it.

I know you are not my financial advisor, lawyer, my rich dad/poor dad, or anything else that could get you sued in any way shape or form by way of offering me friendly adivce.

So my question is, where does the clueless, but not entirely stupid, person go to start? I met with a Chase financial advisor in better times, but he was 20 and was reading from a script and trying to upsell me on my checking account package which did not inspire confidence.

I fear I am REALLY late off the mark, but something is better than nothing. Ideally I want to put my money into something somewhat participatory so I can have a hand in what happens to it, but I do not have the time or inclination to "day trade" and make my fortune in 5 minute swings in the market (if that is even anything other than a myth).

I am looking longer term, and am fairly risk averse, but as this is a small sum to start I'm not totally opposed to taking some chances.

I have been reading about various companies that sound interesting, but I feel like I am too uniformed to make a grounded decision based on some article I read on about some neat tech company that may be interesting in 5 years. I am open to reading a few book/websites/periodicals but time is very very short so I can't do a ton of research.

Please point me in the right direction for the first step and let me know if I am totally misguided in my thinking.

posted by Ponderance to Work & Money (18 answers total) 26 users marked this as a favorite
You're 39; that's not early, really, but you're hardly late off the mark. What you need to do first is prioritize your goals. For your kids' college savings, you can get an account called a 529 which offers tax benefits, and for your own retirement, you can get an IRA or a Roth IRA (both have different tax benefits). With an IRA, it's also "participatory" in that you can move the money around within the iRA between different stocks, funds, etc. I'd recommend going with Charles Schwab, as they're a solid company with very friendly customer service people; I have both an IRA and a investment account with them, and they've been nothing but awesome every time I've spoken to them.

You're in a fairly good position as you have a good income and few debts; I'd caution against thinking of your home as an investment, though. Think of it as a place to live that also has the investment qualities of a risky stock (you're just as likely to lose money as make money) rather than thinking of it as a savings account with guaranteed value. To give yourself a better background on this stuff and to help you come up with more ideas for saving, cutting spending and planning your financial future, I also recommend reading Get Rich Slowly. I'm pretty sure the guy who writes it as also on MetaFilter, so he might chime in at some point, too.
posted by infinitywaltz at 9:26 AM on July 28, 2010

Seconding Get Rich Slowly.

Simplify your life in any way you can so you don't waste time, money and energy coping with STUFF. Keeping a house relatively uncluttered can save money in several ways: you can avoid buying duplicates of things you already own or letting food spoil, you can avoid paying for storage tubs/shelving/storage units, you can keep things in good condition so they don't need replacing, you can encourage your kids to value the things they have instead of buying new things every week, you can use space more efficiently and not need a larger home, you can enjoy spending time at home instead of going out... you get the picture. I always bring him up, but Peter Walsh, Peter Walsh, Peter Walsh.

Remember that you MUST diversify. That's how Bernie Madoff ran off with people's money: people put all of their money in one place. I'm not saying you need multiple money managers, but if you're just starting out you can split your money in multiple ways. Maybe you have a bank account for home expenses, one for rainy-day fun or vacations and one for investments. Or maybe you have your investments divided so you have one part in a high risk fund that could earn a lot, one part in a low-risk fund that still earns a decent amount and one in a fund that is doing very little but is easy to add to or access in an emergency.

You're absolutely right that starting late is better than not starting at all. I'm in the same boat. Even if you can only afford to put $5 in a couple accounts per week, do it anyway.

Good luck!
posted by Madamina at 9:34 AM on July 28, 2010 [3 favorites]

Two books that I have found very helpful (and I've read about a million personal finance books) are All Your Worth by Elizabeth Warren et al, and Jane Bryant Quinn's Smart and Simple Financial Strategies for Busy People. JBQ's Making the Most of Your Money, which has been recently updated, is extremely thorough and informative, and Smart & Simple is basically that content distilled for people who don't want or need to read all the background and arguments and reasons why X is the right thing to do.

Both of these books strike me as useful for someone just starting to learn about financial planning, as they give very simple strategies to get someone off on the right foot.
posted by not that girl at 9:43 AM on July 28, 2010 [3 favorites]

Be careful with 529 funds for college. They aren't regulated in quite the same way and there are transparency issues. Some of them charge truly ridiculous fees. Some states give deductions if you invest in an in-state 529, but not all do. Make sure you understand all the details of the plans available to you. This is complicated and I don't know of a good source for it, but I'm sure the various financial magazines have covered them in recent issues and Google will probably provide if you ask nicely.

Now, investing money in general is, IMHO, very easy. Vanguard Index Funds. Put some domestically (e.g. S&P 500), some internationally, and some in bonds. Then, leave it alone. You can add more money and rebalance every couple of years, but resist the temptation to guess the market. The people who try to do that do it as a full time job and they still fail most of the time. Be boring. It's more fun.

Don't invest in individual stocks unless it is money you are prepared to lose (it's okay to invest a small sum in a speculative venture, but it should be an amount you are prepared to write off if things don't go well and the majority of your investments should be safe and boring). In fact, just don't do it. It's not worth the loss of sleep (I recently had an investment like this go south on me. With a lot of luck I'll get my money back when I was originally hoping for a big return. It's money that I can afford to lose and it's still stressing me out).

When you put money into an IRA, remember that it is for retirement. Resist the temptation to empty it for "emergencies". I think that legit emergencies are life, limb, lodging. If you are going to lose one of those then it's an emergency. If not, it isn't. That means that you should have a decent amount available outside a retirement account first (that's the usual "six months of expenses" rule).
posted by It's Never Lurgi at 9:52 AM on July 28, 2010 [4 favorites]

I recommend reading The Four Pillars of Investing by William Bernstein

It's the best investment book I've read.
posted by COD at 9:52 AM on July 28, 2010 [1 favorite]

The most important thing you can do is *start right now.* Don't beat yourself up about just getting started. Don't look back. Just assess what you can do *right now* and get on it.

Prioritizing is key. I get that you have kids and you want to start college funds but you *need* to start putting something away for retirement. Your kids can take out loans for college. You cannot take out loans for retirement. Start an IRA and focus on maxing it out. I think you can deposit up to $5,000 annually.

I am not your financial advisor (I shouldn't even be my own financial advisor) but I think if you have a house, you have a rainy day fund. Get a HELOC today. It's just a line of credit - you don't have to use it now but it's there if something happens. Now, if something actually does happen, your first line of defense is a credit card for two reasons: 1) you should keep cash on hand to keep making payments and pay for things that are cash only and 2) unlike a HELOC, if you default on your credit card, no one can take your house (but don't quote me on that). But your HELOC is a decent Plan B or C, just be careful because you're putting your house on the line.

Is your wife working? If so, you don't need as flush of an emergency fund as you would otherwise (because odds are that if one of you loses a job, the other is still working). If not, you should direct some cash there, too. Your goal should be somewhere around 6-8 months of living expenses if your wife is a SAHM, 3-4 months if not. That may sound like an insurmountable sum but once you have it, you can redirect the money you're putting there to something else, like your IRA.

If I were you, I'd take a good hard look at how much money you can reasonably redirect each month and put 60-80 percent towards retirement and emergency fund and 20-40 percent into college funds for each kid.

But get started *now*.
posted by kat518 at 9:55 AM on July 28, 2010

Generic advice: find yourself a good, fee-only financial advisor. This is someone who does not work on commission and is basically being paid as a consultant. Because it's a fixed fee, they aren't going to try to sell you a bunch of products that aren't so great for you but pay them really fat commissions. Ask your business contacts for referrals.

Put as much money as you can afford to in tax-advantaged retirement accounts.

Never make financial decisions from a place of anxiety or fear; wait until you are thinking rationally.

More specific advice:

In stocks, invest for the long-haul: buy and hold. But don't be afraid to sell your losers if they drop some pre-determined percentage (I cut my losses at around 20%), or if something changes about their business that negates the reason you bought them in the first place. Let your winners run, run, run.

Most people hold their losers, hoping they will come back. They sell their winners, trying to "lock in" their profits. Unsurprisingly, that strategy underperforms the market.

My IRA is currently invested in an index fund, and in dividend-yielding stocks. Each dividend stock is enrolled in the dividend reinvestment plan (DRIP), so the dividends are automatically used to buy more shares each time they are paid. DRIPs can make the tax accounting a pain if used outside of tax-advantaged accounts, however. I buy boring stocks—like consumer goods companies—that have a long-term record of increasing their dividends year after year.

I recommend avoiding the high-risk/high-reward class of investments until you have built up a reasonable amount of capital. Then become an expert (or find one you trust) in one area, and invest 10% or less of your capital in things that have a chance of an "out of the park" return: perhaps a risky tech/bio/medical stock, or a commodity, or leveraged real estate, or (if you have become an accredited investor) a start-up company. You don't want to lose everything on one bad investment, or on a portfolio of risky investments when the whole market decides to move against you.

I'm assuming that when you say you're underemployed, this means that you have your own practice, but not enough business to keep you fully occupied. Your best investment now might be in finding and retaining an excellent marketing consultant, who can help you get your business up to a level that will be providing you with more income to invest in the first place. How do you find one of those? Talk to the most successful lawyers you know.

There are also some easy things you can do to drum up more business on your own. Do you blog about topics that would be of interest to your clients? You should have some idea about what they might search for on the Internet when deciding if/who to hire as their lawyer. Write articles about these topics as they relate to your local area and promote them using social media, etc. (you can find many how-to guides for this online).
posted by brain at 9:55 AM on July 28, 2010 [1 favorite]

Your priorities should be:

Get your liquid savings (as in CD ladders or a decent savings account, not stocks and IRAs) to 9 to 12 months of mortgage/gas/food/utilities. In other words, $10k is not enough.

THEN, life insurance. Lots of it; Social Security survivor benefits will pay about half of your mortgage, and you have two young children.

THEN, if you need it, short-term disability or supplemental insurance. I get it through work, but you might not. What will happen if you get a hernia or in a car wreck?

THEN, your retirement. 401k or other IRA to the max, probably 40 or 50% bonds since you're risk averse (there are lots of AskMe questions about that part.)

THEN college for the kids; 529 plans are complicated (has to do with picking which state, mainly.). There are at least a few AskMes on that, too.

After you have taken care of the above - and seriously, to really take care of it all you probably need to move to a cheaper place - feel free to dabble in the markets.

Also, don't do all of that stuff to the point that you feel oppressed, because you have to keep doing it all for years or it won't work.
posted by SMPA at 9:55 AM on July 28, 2010 [3 favorites]

From your description of your current financial situation, it seems like saving for college should actually be fairly far down on your list of priorities. Your first priorities should be building a larger emergency fund, getting your financial house in order and clarifying your savings goals.

First, you need to build up your emergency fund. If you have 10K in cash, that will only cover 3 months worth of your mortgage should you become unemployed; it won't even cover your other expenses. You need at least 6 months worth of living expenses (possibly more, depending on the volatility of your employment situation) in a savings account or money market fund.

Second, you need to make sure that your children are provided for just for the immediate future (see why college is low on the list of priorities?). Do you and your wife have term life insurance policies (and have you adjusted the dollar amount of those policies after having children)? Do you have a long term disability policy? Do you and your wife have a will which specifies things like who you want your children to go to in the event of your untimely demise?

Third, you need to make a household budget. Before starting to save money, you need to know where your money is going, and eliminate any waste. There are zillions of personal finance blogs to help with this issue, I recommend Get Rich Slowly or The Simple Dollar as a start.

Fourth, you need to start saving for retirement FIRST, before saving for college expenses. This may seem selfish, but it is far more expensive to support an aging parent in poor health with no financial resources than it is to pay for your own student loans. The next two decades are probably your prime earning years, so saving for retirement in a serious way needs to be your largest savings goal. Saving for retirement is a fairly broad topic, but the blogs mentioned above should give you a start. At the very least, open a Roth IRA with Vanguard and invest in one of their target retirement date funds while you continue your reading about saving for retirement.

Finally, once all of the above has been addressed, you can start thinking about the best financial instruments for saving for college, or other goals. Once you have a grasp on investment strategies for retirement, you can extend those strategies to other savings goals.

It may be worth your time to seek out a good, fee based certified financial planner. But personal finance is something that you can learn on your own. Regardless of which route you take, now that you have children it is essential that you make financial literacy a priority in your life.
posted by Wavelet at 9:59 AM on July 28, 2010

Also, SMPA: jinx!
posted by Wavelet at 10:00 AM on July 28, 2010

I may be pulling against the current, but I will say a word about your mortgage: sell.

If you can find an acceptable living situation at half the expense ($1500 instead of $3K), your income will become dramatically more powerful and you will be far more flexible in how you can spend your newfound monthly surplus.

No, moving house is no fun. But if you're planning for 20 years down the road, maybe you should think about getting a living situation for the next 5 years that isn't bleeding you dry. Then, with your retirement and liquid assets on a much stronger ground, you can again look for your "forever home."
posted by seanmpuckett at 11:03 AM on July 28, 2010

Here's an opinion and some points ponder on housing that are probably going to come across as very radical:

The housing crisis isn't over, just in a temporary reprieve. In the '02 to '06 bubble buildup, the money to fund mortgages mostly came from private sources (private investors/pension funds buying mortgage backed securities put together by banks).

The "reprieve" has come about from the shifting of funding of mortgages from private sources to almost entirely government funding (FHA, Fannie Mae, Freddie Mac with the Federal Reserve buying the mortgage backed securities) in combination with the $8k tax credit which recently expired.

The gov't currently enjoys the ability to borrow money at very low rates, which supports both the current low mortgage rates and the ability to continue to fund the majority of the mortgages in the US. In the event that the government's cost to borrow money goes up this will likely immediately translate into higher mortgage rates and a decreased ability to fund the entire US mortgage market. That translates into lower house prices.

Another factor is the shadow inventory of homes that banks keep in foreclosure "limbo", an attempt to prop up house prices, which in turn supports the value of the collateral on the bank's books against non-performing loans, which in turn supports the banks not having to raise more capital. Should some event such as an accounting rule change or another credit crisis occur, this "shadow inventory" might suddenly come to market.

In short, perhaps a house is not quite the asset many currently think it to be.

What if you rented instead? What would your rental payments be for equivalent (or just "satisfactory") housing compared to your mortgage/property tax? Would it free up a lot of cash flow? Would renting allow you the flexibility to move to another area quickly if you had to find a new job?
posted by de void at 11:11 AM on July 28, 2010

I have nothing specific to add except that:

A) I agree that savings and investment ranks well below insurance. If insurance is covered, congratulations. If it isn't, you absolutely need to deal with that as the highest priority.

B) Bankrolling this via Ebay should not be the sole capital strategy you implement here. I get that money is tight, but on 100K a year you can shake loose $100 per month, or even better $100 per kid per month to set aside regular monthly savings.

It can seem like an annoying amount to give up to get something not that useful back, but even doing a really really rough ($100 a month * 2 kids * 3 years), you'd have $7,200 in savings right now, plus magical compound interest.

By all means, look to Ebay to kick-start your investment strategy but realise that you need to shake out your budget and spending to free money for regular monthly contributions, like clockwork, in order to grow this fund.
posted by DarlingBri at 11:20 AM on July 28, 2010

I fear I am REALLY late off the mark, but something is better than nothing. Ideally I want to put my money into something somewhat participatory so I can have a hand in what happens to it, but I do not have the time or inclination to "day trade" and make my fortune in 5 minute swings in the market (if that is even anything other than a myth).

I am looking longer term, and am fairly risk averse, but as this is a small sum to start I'm not totally opposed to taking some chances.

I have been reading about various companies that sound interesting, but I feel like I am too uniformed to make a grounded decision based on some article I read on about some neat tech company that may be interesting in 5 years. I am open to reading a few book/websites/periodicals but time is very very short so I can't do a ton of research.

I do day/swing trade and I also invest very long term on fundamentals. I am telling you this because you should not be trying to pick which tech company may be interesting in 5 years. Trying to trade/stock pick is a full time job, or at least a several hour a day hobby. If you do not have serious time to invest you will lose your money very very quickly. Listen to the people who are telling you to go find some nice low fee index or mutual funds. You can not, in general, compensate for not saving enough money by trying to outperform the market. You need to save substantially more money. Start by getting your emergency fund to at least 20-25k. Then work on your retirement account. Your kids will probably have to pay for most of college because there is no way for you to pay for their college and fund your retirement unless you dramatically cut back on your expenses by selling your house and finding something substantially less expensive.
posted by An algorithmic dog at 11:42 AM on July 28, 2010 [1 favorite]

Also, your house is not an investment. It is a place to live. Price how much house you can afford based on this and it doesn't matter what the housing market is doing.
posted by An algorithmic dog at 11:43 AM on July 28, 2010

Ponderance: "Money is tight, but I really want to put something aside for retirement/college for kids/rainy day. We have limited cash reserves and as I am temping I want to keep our limited cash (10K) liquid in case I end up out-of-work. I live in fear of being unable to keep a roof over our heads."

All the advise above on portfolio allocation is misguided, or at least, too early. The most important step you need to take is to free up cash flow. As a lawyer with a pretty good income, raising your income is a tax disadvantaged way to find money to invest. Every extra dollar earned costs you 30 odd cents in tax. And I'm sure, as a lawyer, you have every intention of reporting income to the IRS rather than risk your right to practice law.

In contrast, every dollar in reduced expenses is subject to no additional taxation. So it's way more rewarding to go over your expenses with great care. There's simple stuff you can do. Get competing quotes on insurance, raise deductibles, ask your cable and telco for a better deal. Trade in your netflix account for a library card (your property taxes pay for it, use it!). But that stuff is usually low dollar; use it as low stakes practice. I can't tell you what the most important expenses to work on cutting is, but it's going to be your biggest ones.

As far as investment advice, there's no point trading "based on some article I read on about some neat tech company that may be interesting in 5 years." By the time you read the article, any information it contained is priced into the market. If you want to get US stock exposure, I recommend index funds rather than specific stock picks or mutual funds. On any given year, the vast majority of mutual funds don't beat the S&P 500, and very few do so for more than a year or two in a row. Yet they charge you a management fee. I'd suggest a retirement target date fund, but they're not made equal. The purpose of these funds is to move from high-yield, high-risk stocks to low-yield, low-risk funds in step as you age.

But really, I think you're better off focusing your mental efforts something besides investing. Finance researchers point out that men attempt to trade more often than women, resulting in lower performance by way of broker fees. Buy and hold, while boring for idle hands, is a sound strategy for small investors.
posted by pwnguin at 12:23 PM on July 28, 2010

Retirement date funds have all sorts of issues right now. If you use them it is *critical* that you read the disclosures carefully and understand exactly what you are buying.
posted by An algorithmic dog at 6:35 PM on July 28, 2010

Response by poster: Thank you everyone!!! I really appreciate it.
posted by Ponderance at 11:22 PM on August 2, 2010

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