Be Smarter Than I Was When Investing For Retirement

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Assuming you have little or no debt and are investing for retirement, I beg you, don’t make the same mistakes I have.  Investing money for beginners is easier than you might think, but it requires a little bit of upfront homework and then you can set cruise control. 

Put time in now and peel back the few layers required to get started investing for retirement.  There’s not even that many layers to peel, I promise!

investing for retirement

Investing for Retirement Basics

Understanding the Power of Compound Interest 

The key to knowing how to invest money wisely is compound interest.  The longer you are investing for retirement the more powerful compound interest is.  Not only does the money you add to your retirement account earn you interest, the interest you earn on that money earns you interest. 

Compound interest is where you earn interest on top of interest you already earned.  The longer the money can grow the better. 

For example:  $1,000 invested today, with a 7% interest rate will grow to about:

  • $1,950 in 10 years
  • $3,900 in 20 years
  • $7,600 in 30 years. 

There’s more than a 700% increase over 30 years while there’s a 100% increase in 10 years.  A 100% increase is great but it’s not even on the same scale as a 700% increase.

Index Funds

What is an index fund?  It is a type of mutual fund you can select to invest your retirement accounts in that tracks a specific index.  It is arguably the best way to start investing.

Why should you invest in an index funds? Typically, the cost associated with an index fund is lower than the standard mutual fund.  Therefore, if you can find an index fund with low cost and a high rate of return, your money will grow faster.  This is thanks to the power of compound interest.

An index typically measures a designated section of the stock market.  For example, the S&P 500 stock market index tracks the stocks of 500 large-cap U.S. companies. 

A financial institution like Vanguard creates an index to follow the performance of the S&P 500.  If you chose to invest in one, then you would own a very small piece of all 500 of those companies. 

The cost for most index funds is relatively low compared to other investment options.  This is because the fund does not need to be actively managed as it is holding the investments.

There are a variety of different mutual funds available to invest in.  However, many mutual funds are actively managed and shares are bought and sold more frequently. 

There is simply less overhead expenses on an index fund so the fees are naturally lower.  The less you pay to have your money invested, the more money you will have to grow your portfolio.

Mistakes in Investing for Retirement 

About 5 years ago I was watching a PBS special with Suzy Orman where she was telling the audience low-cost index funds was one way how to invest money wisely.  I was so excited to hear this.  I thought I was being let in on a special secret. 

I was at a new job and the 401k money from my previous employer was sitting where it had been before.  I thought this was my opportunity to roll the money over into an IRA and invest it more wisely.

So what did I do?  I reached out to a financial advisor, to invest my money in low-cost index funds. 

investing money for beginners

Investing Mistake #1

Of all the investing tips available, avoiding financial advisor fees is the most impactful.  If you’re an average Joe like me, don’t pay someone to manage your money for you. 

When I met with the financial advisor, I asked if he was a fiduciary.  He said yes.  What is a fiduciary, you ask?  Basically, in this situation, it’s someone who you should be able to trust ethically to invest your money. 

Fiduciaries need to be certified and part of me wishes I had asked to see the advisor’s certificate but I’m not sure what that would have established.  Ethics is one of those intangible traits that are hard to measure.  Click to Tweet this.

All one can hope is the courses required for a fiduciary to get their certificate and the fees associated with not following the rules makes an individual think twice before trying to scam you.

Investing Mistake #2: 

I asked the advisor if I could invest all my money into low cost index funds.  He said yes.  I thought this is perfect. 

When my first statement came, I noticed the names of funds didn’t all reference index funds.  I questioned the financial advisor on this and he quickly reassured me all my money was being invested in low-cost funds – the word “index” was left out. 

I didn’t necessarily trust the advisor, but I chose to be complacent and accept his response.

Investing Mistake #3

Index funds is the best way to start investing for beginners.  Unfortunately, I had not do enough upfront work to make sure I really understood what low-cost index funds even were.  If I had, I likely would have decided to manage my own funds. 

Over the following year, I didn’t see my money growing and noticed I was being charged about $250 a quarter on a $65K portfolio.  That may not seem like a lot but if the money had been invested in VTSAX where the fee is 0.04% I would have only been paying $26 annually in fees.  That’s nearly $1,000 more per year in fees and a lot of compound interest lost! 

investing tips

Investing Mistake #1 – Repeated

Fast forward a couple years and my current company merged with another company.  Due to this, all the employees had to move their 401Ks into an IRA. 

I chose to rollover my current 401K into an IRA with the company where the money already was.  There was no way I was going to repeat my mistake and roll these funds into my existing IRA. 

The company that had managed my 401K over the past several years seemed to have done a good job as the balance had steadily grown. So, despite how displeased I was with how my other IRA account was being managed, I agreed to have this other company manage my new IRA funds. 

I was too scared to take responsibility over the management of my funds because I still had not done the homework to properly educate myself on low-cost index funds.

Investing Mistake #4

Another important aspect of knowing how to invest money wisely is understanding the current market.  I failed to understand the market in general was doing very well during the time I had contributed to my employer 401K.  Imagine my surprise when my investments weren’t doing as well later when the market took a hit in general.

Take the Investment Challenge

Wow!  I was so naïve, ignorant, plain lazy, whatever you want to call it.  I uncovered a very valuable way to invest my money 5 years ago in low-cost index funds, but I failed to gather enough information to properly execute it.  No point in dwelling in the past though.  

I have finally done enough research and implemented the necessary steps to set myself up for a prosperous future.  What’s different this time?  A bit more knowledge and simple math. 

Don’t make the same mistakes I did.  Put these investing tips to the test.

You will learn how to understand the true profitability of a fund.  The growth of a fund is just as important as the fees associated with it.  By the end of the challenge, you will be able to tell where your current investment funds rank against other fund options available in your portfolio.

When I took the challenge I was surprised to learn one of the best fund options available to me wasn’t even an index fund.  This challenge will open your eyes to the various options available in your portfolio.

Let your hard-earned money work for you.  Wise investments today will give you more money and flexibility in your future.  

investing money tips for beginners in pursuit of financial freedom

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