“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.