Investing: It’s Never Too Late to Start

I was 25 years old when I read my first personal finance book. And, as I shared last week, it was only then that I started thinking seriously about my money and, more precisely, what I should be doing with it.

While answering some of my fundamental questions, the book also made it apparent that I needed more education on the subject of money, so I asked my friends questions.

  • How much should I be saving?
  • How do I “save” when I don’t receive a paycheck?
  • What is this retirement crisis everyone is talking about?

My friends were uncomfortable talking about their personal finance progress – or lack thereof – and instead recommended a hand full of personal finance blogs as the basis of my education.

I pored over the recommended reading but quickly became discouraged. I was a law student with a very negative net worth and, based on the compound interest charts I’d reviewed, I’d already waited too long to start investing. Like any reasonable person, I closed all the tabs I had opened on the subject and ignored the matter until the following year.

The time for financial procrastination came to a halt when I started my first post-law school job, where I noticed that no one else seemed befuddled by what to do with our “Big Law” dollars. I spent much of my orientation hunched over a pile of financial documents and calculating the required payments on my debt. Two frustrated days later, there was no avoiding it, I needed to get it together.

I targeted some low hanging fruit – understanding my 401(k) investment options and deciding how much to contribute from each paycheck. In the interest of starting off strong, I followed the direction of a mentor and contributed 10% of my salary. Having not received a paycheck before that election, I literally never noticed the difference.

What did you invest in? In terms of investment strategy – I had none. I invested my 401(k) into a “target date fund” – a professionally managed fund invested in stocks and bonds that became more conservative as the “target date” (my retirement date) approached – until I got a better sense of how I should otherwise invest. A couple of years later, I shifted those dollars into a less expensive (as measured by the expense ratio) group of funds which better aligned with my long-term goals.

You are a professed member of the #dfc; did you pay off your debt before investing in your 401(k)? No. I am “Dave-ish” (meaning I don’t agree with everything he says, particularly with regard to investing) and did not feel comfortable not contributing to my 401(k) while I paid down my debt for four reasons:

  • I was straddling two tax brackets and received significant tax benefits by contributing to my 401(k);
  • I wanted the benefit of compounding growth and wasn’t sure how long my debt free journey would take;
  • My debt was low interest and therefore investing was a more efficient use of my dollars; and
  • I didn’t want to give up free money by not contributing at least enough to get the match my company provided.

Instead, I ignored the 10% of my salary which went to my 401(k) and planned the rest of my life (and debt repayment) around the 90% of my salary which remained after I got paid.

Are you maxing out your retirement fund? Today, I still contribute 10% of my salary to my tax advantaged retirement accounts I receive a company match on (i) 100% of the first 3% of eligible pay and (ii) 50% of the next 3% of eligible pay. I also receive a matching contribution of 3% of my salary no matter how much I contribute. I have taken full advantage of this matching program (an effective 7.5% match) since the day I started, resulting in my saving approximately $40,000/year in my 401(k) since I started.

How about you? Are you investing in your 401(k)? Are you earning your matching dollars?