1 How I Learned to Love Investing | The Billfold

How I Learned to Love Investing

“Only four more days until I get to calculate my net worth,” I told a friend last week. Nothing gets me more excited than rebalancing my portfolio. On June 30, 2013, my savings and investments totaled $310,000.

This is not where I thought I’d be when I graduated college 11 years ago. At that point, I was $9,000 in debt, a combination of loans and credit cards. While that’s nothing compared to the hefty student loans many graduates have today, I wasn’t happy about it. It wasn’t how I thought things were supposed to be.

Though my parents made a low-to-average income, my grandparents were rich. When I was a few months old, they gave me a few shares of 3M stock, which my parents said was for college. Growing up, I read the glossy, colorful stockholder reports (I’ve always been an obsessive reader). “Blue-chip” stocks—stocks of big, well-established, financially sound companies—like 3M were supposed to be the path to riches. 3M worked out pretty well for one of my dad’s cousins, who was able to leave the corporate world in his forties to start a small-scale amusement park.

When I got a paper route, I had to put half of my earnings into savings bonds. Again, it was for college. Between the savings bonds, the stock, the money I knew my parents were putting away, and scholarships, I figured my college tuition was set. We’d done everything right.

The summer before my senior year, my parents sold the 3M stock and the savings bonds. As it turned out, the stock hadn’t done that well. We’d held it for eighteen years, but it had grown only modestly. And the savings bonds provided only a tiny contribution to my huge college tuition. Investing, I thought, just wasn’t worth it.

When I graduated, I had debt and no job prospects. Still, I wasn’t totally unprepared for the adult world of finances. I liked to read books about money, especially about how to live cheaply. I didn’t think I would ever earn very much. I wanted to be a writer, and wasn’t sure what else I would do, but knew I didn’t want to work 60 hours a week.

Possum Living by Dolly Freed is a good example of the kind of book I liked: stories of people living really frugally, often without traditional sources of income. I wanted to know how to make my own sandals out of old tires, and how to eat on $20 a week. I wasn’t actually doing this stuff since I lived on a college campus where my housing and food were taken care of, but it was working away in my brain.

At graduation, my parents gave me $2,000—the only money they’ve ever given me as an adult. They put it into a money market account (an account that earns more interest than a savings account but is still almost guaranteed not to lose money) with the understanding that it should be used toward the loans, which at that time were in deferment. A little later my grandparents gave me $10,000. Again, I knew I wasn’t supposed to touch it. I started doing temp work to save up money to move to London.

I had this amount of money—the $12,000 my parents and grandparents gave me—that at the time seemed huge, and I remembered that a friend of mine was a receptionist at a financial advisory firm. I made an appointment with a guy at the firm to see if I should do something different with it besides just keeping it in a CD.

At the time, I was making minimum wage and had no other money except for the amount my family had given me. I wasn’t this guy’s ideal client, but he talked about the impact of compound interest in a way that made me understand it. In scenario one, you start saving X number of dollars per month now (I was 21), and keep saving until you’re 25. Then you stop saving, don’t touch the money, and keep it in the stock market until you’re 65. In scenario two, you start saving when you’re 25, save the same X number of dollars per month, and keep saving until you’re 65. In either scenario, you’ll end up with the same amount of money. (Here’s a similar illustration.) The idea that I needed to start investing as soon as possible stuck with me.

In the meantime, my reading about frugality was paying off. I lived in the cheapest apartment I could find: My place in Austin in 2004 was $400 a month. All my furniture was found by dumpster-diving. It was a big deal when I bought a bed for $70. I lived the frugal lifestyle: I always shopped at thrift stores. I would stay in hostels when I traveled. I didn’t have a car. The bus got me to work and downtown.

Eventually, I got a job that had a 403(b) (the nonprofit’s version of a 401(k), basically). I was still only making about $10 an hour, and I cashed it out when I moved again. So in late 2004, I was still basically at zero.

The second time I got a job with a 403(b), I went to a meeting where I got an explanation of how it all worked. I had read that when you’re young, you should invest aggressively, so I signed up for the most aggressive fund they had. I was making $32,000 a year at this point—enough for me to save a little. When I left that job after two years, I had a few thousand dollars saved. I kept the account, and still have it today.

I moved to New York briefly and then to Chicago, where I decided to stay for good. I had been saving up for my next big move ever since I graduated, and suddenly I didn’t have anything big to save for anymore. I was now earning about $30,000, but I was used to not spending all my money, and I wanted to do something new with the money I was socking away.

My interest rate on my loans was really low, so I had just been paying the minimum, even though I had a little cushion of money. Five years after graduation, the interest rate on my money market account fell so much that it didn’t make sense for me to keep the money in there anymore, so I used the cushion to pay off the loan.

I was looking for a new goal again. I didn’t want to buy a house or a car. I found out about a high-interest savings account with a minimum deposit of $10,000, so saving $10,000 became my next goal. I had spent some of the gift money, either on moving or on paying off my loans, so it took me a little while to get there.

In June 2007 I had $10,117 saved, which I calculated while reading Your Money or Your Life. The book was partially about living cheaply, but more about changing your thinking about money. I started tracking how much I was spending, and keeping a chart the way the book recommended.

In the last chapter, the book talks about financial independence: saving the amount of money you needed so you could live off of the interest. I had heard about idea before, but this was the first time it felt possible.

I was also going through a period where I wasn’t sure what I was going to do with my life. I became bored with every job I had, and although my current job was more stimulating, my boss was toxic, so the idea of someday not having to work was appealing.

The investment advice in YMOYL, though, was dated: It was based on government bonds, which in the ’80s gave a good return, but in 2007 weren’t returning anything. I started reading about early retirement on message boards, and in books. I got the sense that I needed millions of dollars to reach financial independence, and I felt like I was never going to get there. Even so, I could still track my money, draw my little charts, and get closer to it inch-by-inch.

It was around this time that my boyfriend sent me an interview with John C. Bogle, the founder of Vanguard, the world’s largest mutual fund company. It linked to this chart, which showed how drastically fees can affect your returns. Because expenses make such a huge difference, index funds (which have very low fees) can end up giving you better returns than individual stocks or managed mutual funds will. Index funds hold all the funds tracked by a particular index (for instance, a Standard and Poor’s 500 index fund holds a little of each of those 500 stocks).

The article was interesting, but I didn’t care about investing. I had read all this stuff about frugality, about creative ways to make an income, but when people started talking about bonds and stocks I tuned out.

As I was reading about early retirement, I came across How to Retire Early and Live Well by Gillette Edmunds. He talked about asset classes (basically things like stocks, bonds, and real estate) and how diversification (a mix of investments) can make investing a lot safer. He laid it out logically in a step-by-step process, and he talked about a wider range of investments, international stocks and real estate and gold. Suddenly, I got excited about investing. It was this dense little book, and I stayed up late reading it because I was so psyched to learn more. After I finished Edmunds’s book, I started reading other books about investing, and found Early Retirement Extreme, a blog by a guy who had retired in his early thirties.

I decided I wanted to freelance and quit my job, but my boss encouraged me to interview for another company. I had been working from home and wasn’t sure I wanted another office job, but during the interview, I was asked how much money I wanted to make, and I threw out a high number. They offered me $20,000 more.

On that income, plus a small trust fund I was going to get in my mid-thirties, I was sure I could do the early retirement thing. So I took it.

As soon as I was eligible for the 403(b) at my new job, I started contributing the maximum amount of money into it. I also got an IRA account at Vanguard, and started building up money in my checking and savings—too much money. I would buy a CD to put off making decisions about what I should do with it because I was nervous about taxable investments, so for a long time I had about $40,000 in cash.

When the market crashed in 2008, my initial reaction was, “Yay, I can buy more stocks for cheap!” which confirmed to me that I had a pretty high risk tolerance.

Last year, I started buying some bonds to reduce the amount of risk I had in the market. Even so, I think I’ll always have the majority of my money in stocks. Even though there is less chance of losing money in bonds, the value erodes over time with inflation. Because I’m a long-term investor, I’m much more scared of seeing that happen than I am of stocks doing badly for a few years. Historically, over the long-term (periods of 30 years or more), stocks rise.

I’ve completely drunk the Kool-Aid on index funds. It’s really difficult to time the market, which is what people do when they sell or buy stocks based on whether they think the stock market is going to go up or down. You are almost guaranteed to get this wrong. And a mutual fund manager is likely to get this wrong, too. For most people, index funds are the best choice.

I avoid financial news because it doesn’t matter how my stocks are doing on any given day. What matters is how they perform over the course of a few years. Currently I have money in eight different funds—all index funds except for one actively managed real estate fund. I have both U.S. and international stocks, plus U.S. bonds.

Since I’m confident about my strategy, investing takes basically no time. I spend maybe an hour once every three months reviewing everything. If I have a lot in savings, I might contribute to a fund I already have. Once a year, I rebalance my portfolio, usually buying a little more of things I want to have more of overall. I keep about six months of expenses in a CD as an emergency fund, and my checking account usually has a couple thousand dollars in it.

I’ve been really lucky, both in my family’s generosity at key times and in getting a good-paying job. I’ve also read a lot, probably 20 or 30 books about investing overall. And the power of math has changed my thinking twice: when the financial advisor I met with explained compound interest to me, and when my boyfriend sent me the link about investment fees.

So far, my savings and investments are growing, and it looks like my early retirement goals are in reach. As for whether this works out in the long run, I’ll let you know in 50 years.


Rachel Laban is an editor and writer of young adult novels living in Chicago, Ill. She reads too much.


45 Comments / Post A Comment

So I have this milk jug full of change, I can invest it somewhere right?

Rachel (#4,424)

@The Dauphine If that milk jug has $100 in it, you can open an IRA account at Schwab and invest in their index funds. :)

aetataureate (#1,310)

Okay, I love this, and it might really be in the Billfold sweet spot: A person with modest family money who nonetheless works super hard, educates herself about money, and works at relatable jobs that aren’t, like, “Being a six-figure attorney.” I’m excited for your success after reading this!

@aetataureate second!!

may june july (#2,862)

@aetataureate Agreed. This is the first time I’ve heard someone who I can actually relate to talk about investing. I’ve shied away from it in the past because I feel like I’m still just getting a handle on the basics of managing my money, but I might look more into it after reading this.

I dunno my strategy of investing in a diversified portfolio of tacos, cigarettes, and whiskey seems to paying off pretty well for me.

This was written to make me feel bad, right?

Rachel (#4,424)

@Jake Reinhardt: My brother said the same thing. :) Sorry!

WayDownSouth (#3,431)

@Jake Reinhardt The author writes about some basic financial ideas (e.g., low-fee index funds, spending less and investing what she doesn’t spend). I’m curious as to why it makes you feel bad.

@WayDownSouth This is a joke. I’m curious as to why you didn’t get it.

Worker Parasite (#2,292)

This is exactly what I’d expect to read on Mr Money Moustache, but I’m happy to see it here after MMM got so thoroughly crapped upon here a little while back. This is a well written piece that I hope gets a much less hostile reception.

stonetongue (#3,580)

@Worker Parasite I think it will get a much better reaction, because the tone is wholly different and the author refrains from condemning what MMM considers a wasteful consumer lifestyle.

Of course I agree there are plenty of middle class lifestyle expenditures that most people could do without. But that’s not the whole story for many people, as I think Mike pointed out last time.

Worker Parasite (#2,292)

@stonetongue For clarification, my initial comment wasn’t in reference solely to what Mike wrote in response to MMM, but rather the comments to Mike’s response. I think this piece is much more accessible for this audience, which makes me happy as it’s got some really good info in it.

stonetongue (#3,580)

@Worker Parasite Notice also – the author makes no wild/universal claims about her success and her method being a sure thing for anyone with her moral fortitude. You would *not* see this type of writing on MMM.

Worker Parasite (#2,292)

@stonetongue I’m going to disagree with you there. While I think MMM’s schtick is a bit tiring at times, there have been lots of posts solidly backing up successes, and I’ve yet to see a guarantee that what worked for him will work for everyone. There may be stylistic differences but I have seen this exact basic message there. The writing style there isn’t my favourite, but I don’t go to finance blogs for prose, rather to learn more about investing. Different strokes for different folks I guess – again, I’m happy that the word is being spread about low cost index investing.

stonetongue (#3,580)

@Worker Parasite

>I’m happy that the word is being spread about low cost index investing

I’d definitely agree with you about that!

BarryL (#4,389)

@stonetongue @Worker Parasite

Don’t worry, the MMM boards deservedly eviscerated some of the spoiled brats on this site.

EDaily (#4,396)

Rachel, you sound like you are in a good place, and this is inspiring.

Also, I appreciate that you wrote this in a non-judgmental way. You’re doing what works for you and not doing that thing where you generalize and tell people to stop being wasteful and put their money in an IRA, because omg, we spent all of our money on lattes and that’s why we have no money for retirement.

@EDaily This is the highest epitome of what a “How I Do Money” post should be, even though it wasn’t published as once.

aetataureate (#1,310)

@polka dots vs stripes Good point! MOVE TO RECATEGORIZE

probs (#296)

Neat! I hope you’re successful in retiring early, working sucks mega ding-dong.

BarryL (#4,389)

Probably the best post I’ve read on The Billfold. If only more young people started living more frugally/thrifty and educated themselves on index funds.

TARDIStime (#1,633)

This is a great article, but the link that explains compound interest uses an example of a 12% return, which is bananas. What account offers anything above 5%?
What confuses me is that this article was actually published in 2010, well after the GFC and interest rates had crashed.
Rachel, are you generating this 12% rate of return? Would love a follow-up on how you’re doing it (this is not sarcasm – I’d really love to know).

Rachel (#4,424)

@TARDIStime: They’re basing calculations on a 12% return from the stock market, rather than the much lower returns you’d get from a CD or bond (which have, indeed, decreased since the crash). The problem with this whole illustration is that stock market returns are, of course, not consistent over time, though they have occasionally averaged 12% per year over, say, a 10-year period.

I’ve never calculated my personal rate of return (too lazy), but with a portfolio that’s heavy in US stocks 6 or 7% would be a moderately optimistic long-term projection; 12% is indeed very high.

TARDIStime (#1,633)

@TARDIStime PS: I don’t want you to think that I think this is not great. It is GREAT. This is the stuff I love seeing (regular people on regular-low incomes building portfolios).

TARDIStime (#1,633)

@Rachel Thank for getting back to me, this is SO interesting!

Rachel (#4,424)

@TARDIStime Thanks! And no problem, I love talking about this kind of stuff.

themegnapkin (#444)

@Rachel this may be too personal, but would you mind telling us what index funds you invest in? I’m only familiar with Vanguard’s.

Rachel (#4,424)

@themegnapkin Not at all. (Caveat: obviously none of this should be considered financial advice.) Vanguard is the gold standard for index funds; they have the widest range and the lowest expense ratios. I hold VTMGX, VEIEX, VTSAX, VFSTX, and Vanguard Total Bond Market at Vanguard (I think the “X”s are for admiral shares–if you’re a first-time investor, you’d buy something with a slightly different name). I have the Fidelity S&P 500 fund, from an old job, and in my current 401(K)I have two TIAA-CREF funds: CREF Equity Index and CREF stock (not marketed as an index fund, but mixes several different indexes–I’m not contributing to this one anymore).

themegnapkin (#444)

@Rachel awesome, thanks!

WayDownSouth (#3,431)

I enjoyed the reference to what seems to be a huge amount of money when we’re young isn’t that much when we’re older. When I was young, my grand-aunt had about $20k in one of the BUNCH tech companies. At the time, I thought it was an absolute fortune.

@WayDownSouth You might want to check your privilege-to many people, yes, even older people, that is still an absolute fortune to have in savings.

WayDownSouth (#3,431)

@Jake Reinhardt it’s an interesting use of the word privilege. If I earn the money and save the money, it’s not clear to me why saving this money is a result of privilege.

GrrlWithStones (#3,649)

I went through a similar trajectory to yours, only 10 years earlier. I read YMOYL and still employ the concepts (when calculating the benefit of a new job, subtract cost of commuting, dry cleaning, day care, etc. to come up with the real net benefit). After a decade of beans and rice, I got a job in finance. It’s good in that I know how to invest (btw, you’re right, a money market fun never has negative returns and index funds have delivered higher historical returns, particularly in efficient markets like US large cap), but bad in that I know how to invest. That is, I feel like I need to read everything and worry about everything. I’m starting to loosen up, but if you really get into investing, Your Money can become Your Life.

OllyOlly (#669)

@GrrlWithStones OK I do have to point our that money market funds CAN have a negative return. During the financial crisis (and a few times before) many people with money market funds saw their banks “break the buck” meaning that the exchange rate went below $1 for every dollar they put in. I worked in finance and one of my bosses pointed this out to me when we were talking about high yield savings. Wikipedia tells me that the government stepped in to temporarily garuntee the funds for about a year in 2008, but it is possible that it will happen again.

Any account where you are getting a return carries risk, even if it is small.

(Hope this doesn’t sound mean?? I just happened to know that and wanted to share since a lot of people reading this may know a minimal amount about financial markets and banking products)

@fo (#839)

@OllyOlly I had thought the same thing–a money market fund *does* still have risk of loss and in most (all?) cases are not FDIC insured ‘deposit accounts’.

I would consider an FDIC-insured account (up to insured limit) to be without (realistic) risk of loss, bc if there’s an FDIC insurance shortfall, we’ll all have bigger problems than not getting all our worthless paper back from the bank.

Rachel (#4,424)

@GrrlWithStones Great to hear from someone who has done this sort of thing!

bltaug3 (#501)

I like the idea of being financially smart, and getting into investing, but I just haven’t been able to jump the hurdle where I feel confident enough to do anything. Reading up on investing would be a great beginning, but I dont know where to start…future billfold article?

Runawaytwin (#2,693)

@bltaug3 this. yes. please. I am ready to make the jump. I fund my 401k. I have my emergency savings. I dont have debt. Investing is my last major hurdle but i feel like im standing at the bottom of the mountain and unsure of how to even start the climb.

Kthompson (#1,858)

Excellent article! I really liked this a lot. I liked her tone of voice, and like some other commenters have pointed out, it was refreshing to hear someone who worked hard and had to save, not just “I became an attorney and now have boatloads woohoo!” I felt like I could relate to this writer. She educated herself about PF, she paid attention to the math, she keeps it simple, and she started fairly early. Those are big keys for financial success.

I was surprised to read about MMM down in the comments. This article didn’t strike me as MMM-ish at all. Her writing style is casual and informative; not once did I get a sense of preaching or holier-than-thou. I can’t stand MMM sometimes for that. I only check out his site once in a while, because he does have some interesting stuff, but god, that attitude, small doses only.

I thought this piece was great and would love to see more, either of a similar type or from this writer. I hope to be in your shoes one day, Rachel!

facepalm (#4,409)

Get it girl. This is me, minus the big salary. I’m only three years in to working/saving/investing. I’m looking to make more money in another two years. So maybe (hopefully!?) I can land the job (and salary) I’m looking for and join your awesome club. Here’s hoping!

GrrlWithStones (#3,649)

@ OllyOlly, Thanks for the clarifying– you’re right, it’s an important distinction. You are absolutely right to point out that there is always an element of risk. I work for an asset management firm which runs money market funds, so am painfully aware of breaking the buck. I am also aware that breaking the buck is a death knell for an asset manager. Unless there is a major barrier (i.e. BK), asset managers would rather take the bad paper onto their own books than break the buck, and in 2008, that’s what many of us did. However, many of the MMFs went illiquid (didn’t decline in value, just couldn’t cash out of your investment). If you’re saving for the long run, the illiquidity shouldn’t be an issue, still, not exactly a comforting state of affairs. The MMF market has regained liquidity but isn’t generally paying much more than savings accounts. We would never let a MMF lose money (and I think most asset managers would echo this sentiment), but the Reserve Primary Fund did it, so there are always exceptions to the general rule. You were right to call me out on this.

SpringDog (#4,459)

Great article!!! Very inspirational and explained in a way that seems simple enough to do. But, I do have a question and understand if you don’t want to give too many details. But it looks like in June 2007, you had around $10,000 dollars. And in 6 years you manage to accumulate $300,000. That is amazing!!! But, I wonder how much did you put into the funds? Could you give us some kind of idea? It seems that your amazing growth is more due to putting a lot of money into your funds rather than the amazing effect of “compound growth”. The fact of the matter is that 6 years is probably not enough time to really get this great of a boost from “compound growth”.

I hope that makes sense. I looked at getting 8% on a fund and it would take 9 years to just double your money. And in 6 years, you have 30 times the money you started with.

Anyhoo, any other details you could provide would be wonderful.

And I think this article could go on to a bigger audience. I really think it could be featured in the New York Times and perhaps whatever the biggest newspaper there is (USA Today?).

Best of luck to you. And thanks for the inspiration.

jquick (#3,730)

@SpringDog If she invested when the market crashed, then she has increased her holdings by at least 100%, cuz the stock market has gone up 100%+ since March 2009. Nice move. And of course, the more money you have, the more you make.

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