Getting Started in Investing, Part 4

money_stuff4

Free money! How often do you hear that phrase? Not very often. But generating free money in a bank account is essentially what investing is.

I’m surprised how many people are scared of the whole topic. Among people under 30 in ministry there are three groups.

1. I’m too young to worry about savings and retirement. These folks are typically focused on their mountain of college debt. And in their minds they shouldn’t save anything until they pay that off.

2. I don’t know anything about investing so I just don’t do it at all. Essentially, this is who this series is for. This group of people plead ignorance or try to pretend it is all too complicated for them.

3. I’m in it to win it. These folks understand the basics of investing and know that starting young means more free money down the road.

It’s all about the interest. Do you remember back to 5th grade where we learned about compounding interest? The teacher would say, “if you put $500 on a credit card with an APR of 22% interest, how much would you owe at the end of 12 months? Essentially, investing is the same process in reverse. The earlier you can put money away the sooner interest will start compounding for you.

This is critical for those in ministry. We have to start earlier than our peers since we will make less over a lifetime than those in other industries! Fortunately for us, there are some great tax benefits that help us save for tomorrow today.

401k, 403b, 529, Traditional IRA, Roth IRA, Education IRA… where do I start?

The basics: Essentially, all of those accounts are going to allow you to defer when you pay taxes on your savings. Theoretically, you could save for retirement with a savings account. Three problems with that. First, the interest rate generally stinks. I’ve never seen a savings account at a bank offer more than 4% interest. Second, you can get to that money way too easily. This is long-term savings so you don’t want to be able to access it with your ATM card. Third, each year you will pay taxes on the interest you earn. A retirement plan of any variety is going to allow you to earn a higher rate of return, the money isn’t readily accessible to you, (unless there is an emergency) and will allow you to defer paying income tax on interest until you withdrawal.

401l/403b: These are essentially the same thing. These are retirement plans for “regular employees” of either for-profit (401k) or non-profit (403b) companies. The great news is that 99% of the time you can invest in 401k/403b through payroll deduction, the money will go into the account pre-tax, and your employer will likely match a certain percentage of your investment. For instance, if they match 100% up to 5% of your income and you make $1000 per week… they would take $100 out of your check and give you an additional $100… depositing $200 per pay period into your account. ($4800 per year) With a 100% match you make 100% interest on day one! There is no better investment on the planet. To not accept this offer of free money is foolish. Since it is payroll deduction you won’t even miss the money. Typically, if you enroll in the program and do nothing else they will automatically select a very conservative mutual fund for you, guaranteeing a small return with minimal risk. Remember, by putting in a little you get free money automatically on the first day. Even if your employer only matches 50% up to 4% of your income… that’s still better interest than you will get anywhere else. The bad news is that you won’t be able to touch that money until you are 59.5 years old. Technically, you can withdrawal early but that will come with some nasty penalties. It is important to understand that money invested in your 401k/403b has almost nothing to do with your employer. Sometimes they will allow you to buy stock in the company through your retirement plan (never do that) but otherwise you are putting money into a bank. This means that the savings belong to you. If you change jobs the money is still yours. (We’ll just not talk about vesting right now to keep it simple) We’ll also talk about investment choices another time. For now, keep it simple.

IRA: (Individual Retirement Accounts) For some reason this one is scarier to people. It shouldn’t be as it is way more fun! This is the most obvious retirement savings option for those church workers who are “self-employed.” These savings are not pre-tax, but when you file your return you typically reap the same benefits so it all works out. Most people end up with an IRA because they change jobs and want to withdrawal money from their previous employers 401k/403b program. (Called a rollover) Kristen and I did this in 2002 to consolidate about five 401k programs, it was simple and pain free. Unlike a 401k, an IRA is going to depend on you depositing money into the account. If you are absolutely unwilling to make any choices, find a broker and have them set it up for you. Any U.S. citizen can have an IRA (or IRAs). Essentially, it is just a savings account that allows you to purchase investments.  Technically, you can invest in all sorts of things with IRA money. But the most common things people invest in with an IRA are stocks and mutual funds. While your employer doesn’t typically match your investment most churches I have worked at will include retirement savings in your contract with them. So, each quarter or month they will give you a check for the agreed amount of money and it is up to you to invest that money. I use E-Trade for my IRA and they allow me to transfer money from my savings account to my IRA. But even writing a check to your broker or mutual fund is a snap.

Which IRA do I want? Unless you have some serious cash, you want a Roth IRA. There is an investment cap for how much money you can put in every year, I’ll be honest, as a youth worker you don’t have to worry about that.

529/Education IRA plans: A 529 is basically a 401k for your kids college education. You make an investment and they manage the funds. When the time comes for your kid to go to college, the college withdrawals the money from the account. If you invest in your state’s 529 plan there may be state tax benefits for you. Typically, the money can be used at any college that is accredited. So if you plan on sending your kids to an non-accredited training school or Christian college… this may not be the best option for you. An Education IRA is basically an IRA for money dedicated to your kids college. (You manage the investments.) So if grandma dies and leaves your kids $10,000… this is your best bet to allow it to earn interest without paying taxes.

Kristen and I don’t believe it is our responsibility to fund our kids college. But we do have a 529 plan for them with the intention of helping out a little. (Books?) We make a simple investment each month… the same dollar amount since Megan was born… and it adds up really fast! We have a few thousand bucks in that account already and it was completely pain free. Also, we’ve always taken the small checks for their birthday’s ($10, $20) and added that to their monthly investment. We still give them the money (of course!) but we want them to know later on that grandma and grandpa invested in their education and every little bit counts.

The key to all of this is starting now. It’s all about compounding interest to make your small investments today work for you later. (Remember 5th grade!) If you are 22 and just out of college…. this is the right time to get started! If you are 32 and haven’t gotten started… get on your horse and get it done.

Still got questions about this stuff? Ask a question in the comments and I’ll hunt down the answer.


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9 responses to “Getting Started in Investing, Part 4”

  1. Kevin I Avatar

    With the 403b’s and having your employer matching it, how do you go about that in a small church, how do you bring up the idea of matching?

    Also with the education IRA, what if your kid chooses not to go to college?

  2. Ben Avatar
    Ben

    Adam,
    Thanks again for the great post. This info is great. I have been in the ministry now for 3 years and haven’t heard a single thing about COLA or retirement or anything. I thought I was doing good because I have a savings account. I am wondering more about how to get started with a IRA – I think that would be my best option but I really don’t know. I’m 27 with no school debt and I want to get on my horse and get this done.
    Thanks again for these great posts. In my experience, these types of things aren’t being discussed and they really need to be. Maybe this needs to be addressed in some way at a future NYWC. I know that I’m not the only youth pastor who needs more of that kind of info/advice/direction.

  3. adam mclane Avatar

    Kevin- If it’s a small church and they don’t have a 403b already (like, not part of a denom) than I think your shortest route is a Roth IRA.

    here is stuff on the IRS site about Education IRAs, now called Coverdell Education Savings Accounts:
    http://www.irs.gov/newsroom/article/0,,id=107636,00.html

    Basically, if a child doesn’t use the money for college they can still have it, just have to pay taxes on it.

  4. Matt Cleaver Avatar

    Ben, on the IRA, any mutual fund company can open one for you. I would suggest a company known for low expenses such as Fidelity, Vanguard, or T. Rowe Price (I use Vanguard).

    I’m sure Adam will chime in as well.

  5. adam mclane Avatar

    @ben- I like Matt’s recommendations. Personally, I’m a do it yourself kind of guy and I like to buy stocks as well as mutuals. So I have a Roth with http://etrade.com. I feel espeecially big time since they have an iPhone app. 🙂

    I would be willing to be your church has a broker in the pews. Ask around as there are lots of people who do it PT.

  6. Ken Avatar

    As always, Adam, Great series. Great stuff.

    The bad part of compound interest is that it really matters when you get in. My dad told me and showed me how if I put $2K into an IRA when I was 18 for 10 years I would be a millionaire when I was 60 or something.

    Unfortunately, at that time I thought $2K was an astrnomical figure and never did it. Then I got married, had kids, etc. BUT I WISH I HAD.

    If I did it now, I could still do it, but I won’t be a millionaire until I’m 75…and then at that point…what will a millionaire really be worth? More than the $20K I would have put away!

    I need to get on that! nice job adam!

    one more thing: I’d recommend most people to NOT use a 529 because it is not guaranteed. You could lose it all. I guess it goes back to your risk factor. I’d put that money in a CD, that way you’ll never lose it and it’s always more than inflation…although not much.

    Living in Kansas, the gov had a deal that if you put $600 into a 529 they would match it up to two kids. So we did that for our kids. We put in $1,200 and the state of Kansas put in $1,200. GREAT deal! Except…that $2,400 is down to $1,400 because of the economy. I’m still doing better than I had…but not by much. Wish I would have put it in a CD.

    Great stuff my friend!

  7. adam mclane Avatar

    Ken- you’ve not lost money, you’ve lost value. We’ll touch on this in a later post… but right now is a GREAT time to convert cash into shares of a mutual fund or stock. (my portfolio is actually up 11% in the last 12 months)

    While you once had $2400 in value you still have the same amount of shares. Once that mutual fund (what backs most 529s) you’ll be right back at it. The key to 529s is a little phrase called “dollar cost averaging.” Basically, if you invest the same amount each month in a mutual fund the 10 year look at those funds will equal that return you were hoping for. There will always be market highs and lows. But the wise investor keeps chugging along. The tragedy is when kids hit college in 2008 and 2009 when those values die!

    CDs are fine. The problem is that they aren’t tax-deferred and they generally require a min. deposit of $1000. Too rich for most YWers salary!

  8. Ken Avatar

    Yes, you are right. I do own shares and because I had a dad to give me a heads up, I’m in it for the long haul and won’t take them out. But it is still not guaranteed to keep it’s value.

    Your point is valid on CD’s. One can also get a high interest savings account from ING for nearly the same as CD’s and the money is liquid too. That is another option for the low risk investor.

    dude, none of this info was available to me when I started youth ministry. Nice job, man.

  9. adam mclane Avatar

    @ken- I guess I stumbled on a blind spot in training. I have a BA in YM and parts of a MA in YM… and I can remember exactly half of a class where we talked about pay. And no one ever told me that if I didn’t get ahead on things early I wouldn’t be able to afford to be in YM forever.

    There are so many options for investing. Really, the key is getting started and the hope here is to give people who know nothing a little motivation to understand that they have to do something NOW if they want to be in this for the long haul. I hope that’s come through. 🙂

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