Financial Literacy...

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
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Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Financial Literacy...

Post by sunshine18 » Mon Jun 18, 2018 9:23 pm

I recently turned 18 and I have decided to start planning for my future now. However, I literally know nothing so I have some questions about terms etc. What are the various type of savings accounts like 529's and 401k's, how do they differ? What are their benefits and downsides?

magicrat
Posts: 797
Joined: Sat Nov 29, 2014 7:04 pm

Re: Financial Literacy...

Post by magicrat » Mon Jun 18, 2018 9:56 pm

sunshine18 wrote:
Mon Jun 18, 2018 9:23 pm
I recently turned 18 and I have decided to start planning for my future now. However, I literally know nothing so I have some questions about terms etc. What are the various type of savings accounts like 529's and 401k's, how do they differ? What are their benefits and downsides?
Welcome to the forum. Here's a quick overview.

401ks: These are tax-favored retirement accounts offered by many employers. They can be regular 401ks where you contribute money pre-tax and pay taxes later, or Roth 401ks where you pay tax on the contributions now but then the growth is tax free. Typical limits are $18.5k in employee contributions, and many employers make matching contributions.

IRAs: These are similar to 401ks, but are not tied to an employer. The contribution limit is $5.5k.

Taxable accounts: The are regular accounts where you just invest and pay some taxes along the way.

529s: Tax-favored accounts for college savings. No need to worry about this now unless you have a kid

Checking accounts and savings accounts

401ks or IRAs are likely places for you to start. If you can post a little about your employment situation, income and expenses we can help more.

User avatar
FiveK
Posts: 8000
Joined: Sun Mar 16, 2014 2:43 pm

Re: Financial Literacy...

Post by FiveK » Mon Jun 18, 2018 9:57 pm

See the 'Basic Terms' tab of the personal finance toolbox spreadsheet,
Getting started - Bogleheads
Investment Order
Stock Series
www.etf.com/docs/IfYouCan.pdf
for some reading material.

You can also try things such as 529 account - Google Search.

If you would like, after doing some self-study you could post something like
"I think the way ________ works is _______, because ________." Then folks can either reinforce or redirect those thoughts. Good luck!

TerryDMillerMBA
Posts: 118
Joined: Tue Jul 05, 2011 8:32 pm

Re: Financial Literacy...

Post by TerryDMillerMBA » Mon Jun 18, 2018 10:00 pm

There some excellent replies above, but I will add that if I were able to go back in time to 18, and "fix" my financial mindset, two things would be paramount--guard my credit with my life, and save at least 20% of my income.

Chrono Triggered
Posts: 138
Joined: Wed Feb 17, 2016 12:55 pm

Re: Financial Literacy...

Post by Chrono Triggered » Mon Jun 18, 2018 10:18 pm

Reading up on investing accounts is great and everything but at 18 years old, pay even greater attention to investing in yourself. Improve your skill-set and grow your income.

iamblessed
Posts: 345
Joined: Sat Jun 09, 2018 11:52 am

Re: Financial Literacy...

Post by iamblessed » Mon Jun 18, 2018 11:09 pm

The Only Investment Guide You'll Ever Need

ExitStageLeft
Posts: 1782
Joined: Sat Jan 20, 2018 4:02 pm

Re: Financial Literacy...

Post by ExitStageLeft » Tue Jun 19, 2018 12:58 pm

Here's a blog post from J. Collins, one of the links FiveK posted above. I wish I had read it when my kids were born. Working hard to get the message through now, but the truth is I hadn't really grasped the core of his message until a few years ago. Live and learn!

Hope this helps.
http://jlcollinsnh.com/2011/06/08/how-i ... to-wealth/

dbr
Posts: 31156
Joined: Sun Mar 04, 2007 9:50 am

Re: Financial Literacy...

Post by dbr » Tue Jun 19, 2018 1:06 pm

In this day of the internet a lot of basic information is at your fingertips by going to Google and looking things up.

For example: https://en.wikipedia.org/wiki/401(k)

Already in the second paragraph of the introduction there are links to some of the other kinds of tax preferred accounts.

If you combine that with reading in the Wiki in this forum and reading some of the books in the Wiki reading library https://www.bogleheads.org/wiki/Books:_ ... nd_reviews you will quickly be ahead of many of the posters here and ahead of almost all the general population.

User avatar
Sandi_k
Posts: 1158
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: Financial Literacy...

Post by Sandi_k » Tue Jun 19, 2018 1:40 pm

The best "getting started" publication I have seen is William Bernstein's "If You Can."

Free, and only ~ 10 pages.

https://www.etf.com/docs/IfYouCan.pdf

User avatar
Ben Mathew
Posts: 802
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle
Contact:

Re: Financial Literacy...

Post by Ben Mathew » Tue Jun 19, 2018 2:05 pm

There's a lot to cover here. An introductory book like this can provide an overview. But if there's only one idea I can impart to someone starting out, it would be the surprising power of compounding:

$X, growing at a rate of r percent per year, becomes $X(1+r)^t after t years. So $1, growing at 4% per year, becomes 1(1+.04)^30=$3.24 after 30 years. Sorry for the math, but it's necessary.

What's important to note here is that small changes in the growth rate (r) or time (t) has unexpectedly large effects on your wealth. If you bump up the growth rate (r) from 4% to 5%, and time (t) from 30 to 40 years, that $1 would become $7.03 instead of $3.24.

Once you realize the importance of r and t, you'll understand the importance of doing the following:

(1) Start saving as early as possible. This will have an unexpectedly large impact because you are increasing t.

(2) Invest in cheap index funds instead of expensive actively managed funds. This will have an unexpectedly large impact because you are increasing r (after fees).

(3) Invest in tax-shielded accounts instead of taxable accounts whenever possible. This will have an unexpectedly large impact because you are increasing r (after taxes).

(4) Invest as aggressively as your risk tolerance permits. This will have an unexpectedly large impact because you are increasing r.

(5) Always adjust for inflation in your return estimates. If a bond pays 5%, don't assume your r is 5%. If inflation will be 2%, your real r is only 5%-2%=3%. Ignoring inflation and using 5% instead of 3% will have an unexpectedly large impact on your plans because you are assuming too high r.

2015
Posts: 2906
Joined: Mon Feb 10, 2014 2:32 pm

Re: Financial Literacy...

Post by 2015 » Wed Jun 20, 2018 1:35 pm

I highly recommend starting by reading all of Taylor's Gems on this site and then going from there. I can think no other strategy than this to keep you from doing more things that will harm than will help.

Also highly recommended is this:

https://www.etf.com/docs/IfYouCan.pdf

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:01 pm

magicrat wrote:
Mon Jun 18, 2018 9:56 pm
sunshine18 wrote:
Mon Jun 18, 2018 9:23 pm
I recently turned 18 and I have decided to start planning for my future now. However, I literally know nothing so I have some questions about terms etc. What are the various type of savings accounts like 529's and 401k's, how do they differ? What are their benefits and downsides?
Welcome to the forum. Here's a quick overview.

401ks: These are tax-favored retirement accounts offered by many employers. They can be regular 401ks where you contribute money pre-tax and pay taxes later, or Roth 401ks where you pay tax on the contributions now but then the growth is tax free. Typical limits are $18.5k in employee contributions, and many employers make matching contributions.

IRAs: These are similar to 401ks, but are not tied to an employer. The contribution limit is $5.5k.

Taxable accounts: The are regular accounts where you just invest and pay some taxes along the way.

529s: Tax-favored accounts for college savings. No need to worry about this now unless you have a kid

Checking accounts and savings accounts

401ks or IRAs are likely places for you to start. If you can post a little about your employment situation, income and expenses we can help more.
Thank you!

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:03 pm

FiveK wrote:
Mon Jun 18, 2018 9:57 pm
See the 'Basic Terms' tab of the personal finance toolbox spreadsheet,
Getting started - Bogleheads
Investment Order
Stock Series
www.etf.com/docs/IfYouCan.pdf
for some reading material.

You can also try things such as 529 account - Google Search.

If you would like, after doing some self-study you could post something like
"I think the way ________ works is _______, because ________." Then folks can either reinforce or redirect those thoughts. Good luck!
Thank you! I'll definitely study some more and post things like that,

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:04 pm

TerryDMillerMBA wrote:
Mon Jun 18, 2018 10:00 pm
There some excellent replies above, but I will add that if I were able to go back in time to 18, and "fix" my financial mindset, two things would be paramount--guard my credit with my life, and save at least 20% of my income.
I appreciate that advice!

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:25 pm

Chrono Triggered wrote:
Mon Jun 18, 2018 10:18 pm
Reading up on investing accounts is great and everything but at 18 years old, pay even greater attention to investing in yourself. Improve your skill-set and grow your income.
Thanks! I'm heading into college this fall!

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:26 pm

ExitStageLeft wrote:
Tue Jun 19, 2018 12:58 pm
Here's a blog post from J. Collins, one of the links FiveK posted above. I wish I had read it when my kids were born. Working hard to get the message through now, but the truth is I hadn't really grasped the core of his message until a few years ago. Live and learn!

Hope this helps.
http://jlcollinsnh.com/2011/06/08/how-i ... to-wealth/
Thanks! I'll give it a look.

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:28 pm

dbr wrote:
Tue Jun 19, 2018 1:06 pm
In this day of the internet a lot of basic information is at your fingertips by going to Google and looking things up.

For example: https://en.wikipedia.org/wiki/401(k)

Already in the second paragraph of the introduction there are links to some of the other kinds of tax preferred accounts.

If you combine that with reading in the Wiki in this forum and reading some of the books in the Wiki reading library https://www.bogleheads.org/wiki/Books:_ ... nd_reviews you will quickly be ahead of many of the posters here and ahead of almost all the general population.
Thank you! I will look into that!

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:30 pm

Sandi_k wrote:
Tue Jun 19, 2018 1:40 pm
The best "getting started" publication I have seen is William Bernstein's "If You Can."

Free, and only ~ 10 pages.

https://www.etf.com/docs/IfYouCan.pdf
Thank you!

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:35 pm

Ben Mathew wrote:
Tue Jun 19, 2018 2:05 pm
There's a lot to cover here. An introductory book like this can provide an overview. But if there's only one idea I can impart to someone starting out, it would be the surprising power of compounding:

$X, growing at a rate of r percent per year, becomes $X(1+r)^t after t years. So $1, growing at 4% per year, becomes 1(1+.04)^30=$3.24 after 30 years. Sorry for the math, but it's necessary.

What's important to note here is that small changes in the growth rate (r) or time (t) has unexpectedly large effects on your wealth. If you bump up the growth rate (r) from 4% to 5%, and time (t) from 30 to 40 years, that $1 would become $7.03 instead of $3.24.

Once you realize the importance of r and t, you'll understand the importance of doing the following:

(1) Start saving as early as possible. This will have an unexpectedly large impact because you are increasing t.

(2) Invest in cheap index funds instead of expensive actively managed funds. This will have an unexpectedly large impact because you are increasing r (after fees).

(3) Invest in tax-shielded accounts instead of taxable accounts whenever possible. This will have an unexpectedly large impact because you are increasing r (after taxes).

(4) Invest as aggressively as your risk tolerance permits. This will have an unexpectedly large impact because you are increasing r.

(5) Always adjust for inflation in your return estimates. If a bond pays 5%, don't assume your r is 5%. If inflation will be 2%, your real r is only 5%-2%=3%. Ignoring inflation and using 5% instead of 3% will have an unexpectedly large impact on your plans because you are assuming too high r.
Thank you for your advice!

Topic Author
sunshine18
Posts: 33
Joined: Fri Jun 08, 2018 12:22 pm

Re: Financial Literacy...

Post by sunshine18 » Wed Jun 20, 2018 5:35 pm

2015 wrote:
Wed Jun 20, 2018 1:35 pm
I highly recommend starting by reading all of Taylor's Gems on this site and then going from there. I can think no other strategy than this to keep you from doing more things that will harm than will help.

Also highly recommended is this:

https://www.etf.com/docs/IfYouCan.pdf
Thank you, I will!

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