Bogleheads® University 101 2023 - 5 Steps to Take Before You Begin Investing with Christine Benz
00:00:00.000 | (audience applauding)
00:00:03.160 | - First of all, thank you all
00:00:07.680 | for making it to this conference.
00:00:09.240 | We think it's the 20th conference.
00:00:12.480 | So it's very exciting that our conference currently
00:00:16.200 | is the largest conference, I think, by a good measure
00:00:19.720 | relative to conferences in the past.
00:00:22.160 | And we're just excited to see all of you
00:00:24.720 | and we're excited about all of the people
00:00:26.400 | who are volunteering and making other contributions.
00:00:28.920 | We're especially excited about our speakers
00:00:31.160 | who are all donating their time to be here.
00:00:33.960 | So one thing we test ran last year
00:00:36.680 | that worked out really well was this idea
00:00:38.640 | of doing a university where we're doing a full day
00:00:41.640 | or a half day of educational sessions.
00:00:44.920 | And that went over really well.
00:00:46.440 | Pretty much everyone who attended the conference
00:00:48.440 | made it to university.
00:00:49.960 | So we decided to do it again,
00:00:51.700 | but we decided to break it into two tracks.
00:00:54.600 | So in this room, we have kind of a somewhat more basic track
00:00:59.600 | and then in the next room, we have a more advanced track.
00:01:03.560 | So this is 101, we have 501 going on next door.
00:01:08.080 | There's absolutely nothing wrong with mixing and matching.
00:01:10.940 | If you wanna be here for part of this one
00:01:13.520 | and move over to the other room for the next one,
00:01:15.860 | that's absolutely fine.
00:01:18.080 | But one thing to know is that the times
00:01:20.120 | don't line up perfectly.
00:01:21.480 | So when we have our breaks for this session,
00:01:23.560 | it won't necessarily be a break for the other session.
00:01:26.260 | So you'll need to mind the schedule
00:01:27.800 | if you want to dip in and see sessions in the adjacent room.
00:01:31.480 | We have a very tight schedule for this session.
00:01:34.260 | If you attended last year,
00:01:35.560 | you remember we really kept things moving along very quickly.
00:01:39.040 | We'll do the same for this event today.
00:01:42.120 | We'll be watching the clock very, very quickly.
00:01:45.560 | I wanted to make a note about questions.
00:01:47.760 | We're handling questions a little bit differently
00:01:49.760 | than we've done in the past.
00:01:51.440 | So some of you may have remembered we had
00:01:53.600 | kind of an open mic set up for questions.
00:01:56.360 | This year we are doing written questions.
00:01:59.400 | So use a sheet of paper, whatever you've got handy
00:02:03.280 | to submit a question.
00:02:05.160 | We have Gauri here who is going to look
00:02:08.440 | through your questions and help us decide
00:02:10.800 | when we get to the question part of the discussion,
00:02:14.520 | will help us decide the most worthy questions.
00:02:17.080 | And I'm sure that we'll have more than we need,
00:02:18.680 | but please go ahead and submit a question.
00:02:21.000 | Wanted to start with my portion of the presentation,
00:02:27.440 | which relates to kind of what I call
00:02:30.080 | primordial asset allocation,
00:02:32.160 | things to do before you actually get started investing.
00:02:35.800 | Because even though at Bogleheads
00:02:37.720 | we're all very passionate about the idea
00:02:39.480 | of getting started in investing,
00:02:41.480 | getting your money to work for you
00:02:43.200 | as soon as humanly possible,
00:02:45.760 | it's actually better to lay the groundwork.
00:02:48.520 | So that's what I'm gonna be talking about today.
00:02:50.920 | So this is just a slide.
00:02:53.000 | We've all seen a million like this
00:02:54.920 | that illustrates the importance of getting an early start.
00:02:57.560 | And there are other versions of this
00:03:00.240 | that show that even if someone got started later
00:03:04.960 | and contributed a larger sum
00:03:07.480 | than that person who got started very early,
00:03:10.040 | it's very hard to make good strides on catch up
00:03:13.560 | if you haven't started early,
00:03:14.800 | which is one of the reasons why we all evangelize
00:03:17.600 | about the importance of first job,
00:03:19.720 | get started in investing.
00:03:21.520 | So getting started is super important,
00:03:23.640 | but there are other things that you need to attend to
00:03:26.120 | before you start investing.
00:03:28.160 | So what are the things that you need to address
00:03:32.120 | before you begin investing?
00:03:34.840 | The first thing is identify your why.
00:03:36.920 | Why are you investing?
00:03:37.960 | What are your goals?
00:03:38.840 | Articulating, quantifying, probably prioritizing goals,
00:03:43.400 | that's top of the heap.
00:03:45.100 | Then thinking about human capital.
00:03:47.520 | Especially for people who are young
00:03:49.280 | and just starting out in their lives,
00:03:50.960 | their human capital is their most valuable asset by far.
00:03:54.760 | We'll talk about how to burnish human capital.
00:03:57.840 | Creating a safety net should also precede
00:04:00.960 | investing for the long term,
00:04:02.580 | so you'd wanna be sure to have
00:04:04.520 | property and casualty insurance and so forth,
00:04:06.960 | as well as a basic emergency fund.
00:04:09.760 | We'll talk about how debt fits into this.
00:04:12.500 | Many new graduates especially
00:04:16.280 | come out of school with significant loads of debt
00:04:19.280 | and have to figure out how to balance
00:04:21.480 | having debt and paying down that debt
00:04:23.440 | alongside longer term investing goals.
00:04:26.160 | And finally creating a budget and a savings target.
00:04:29.880 | So this is just a slide of what I think of
00:04:34.160 | as kind of a pyramid when you're thinking about
00:04:36.240 | your financial plan.
00:04:38.200 | And you can see that at the tippy top
00:04:41.020 | is the thing that many of us obsess over,
00:04:43.400 | investment selection.
00:04:44.920 | But really when you think about the most important
00:04:47.080 | determinants of whether someone succeeds or fails,
00:04:50.640 | I would say that having a goal,
00:04:52.360 | having a well articulated goal,
00:04:54.480 | and also having a vision for what you're investing for
00:04:57.920 | is one of the key reasons why you would want to
00:05:01.600 | put that at the bottom of the pyramid.
00:05:06.360 | Human capital, I discussed just in passing,
00:05:11.040 | but the human capital is the value of your earnings power
00:05:14.380 | over your lifetime.
00:05:15.400 | It's the economic value of your earnings power.
00:05:18.760 | It's, as I mentioned, young people's most powerful asset.
00:05:22.500 | So it's important to be really thoughtful
00:05:24.520 | about growing that human capital
00:05:27.240 | because there's a direct connection
00:05:29.340 | between your eventual investments.
00:05:32.680 | The more you have to, the more income you have,
00:05:36.240 | the more you will have to save and invest.
00:05:39.400 | So thinking about human capital is super important.
00:05:42.400 | For younger people especially,
00:05:44.220 | thinking about making additional investments in education
00:05:47.680 | can be very, very valuable
00:05:49.220 | and pay for itself many times over.
00:05:52.020 | But even those of us who are older
00:05:54.020 | and further along in our careers,
00:05:56.340 | I would argue that there are still plenty of opportunities
00:05:59.180 | to continue to invest in your own human capital.
00:06:02.740 | So how do we do that?
00:06:03.780 | Well, we would think about investing in our own health.
00:06:07.060 | We'd think about investing in additional training.
00:06:10.480 | We'd think about making sure that our connections
00:06:13.940 | within our employment circle are robust.
00:06:18.060 | And so really thinking about that whole range of activities
00:06:21.840 | that you can do to embellish your own human capital
00:06:25.200 | is really important.
00:06:27.180 | But as I mentioned, higher earnings,
00:06:30.580 | there's a very tight connection
00:06:32.560 | with higher savings opportunities.
00:06:36.180 | So this is a slide that depicts income groupings
00:06:41.180 | and shows that folks with higher incomes quite logically
00:06:46.560 | have many more opportunities to put money to work.
00:06:49.400 | And many of us have likely found this in our own lives
00:06:52.840 | where as we earn more,
00:06:55.440 | we have more funds at our disposable for saving.
00:06:59.440 | So kind of a logical, intuitive connection there.
00:07:04.080 | Creating a safety net is another thing
00:07:06.260 | that I would urge everyone to think about
00:07:08.100 | before beginning investing in long-term securities.
00:07:12.180 | So there are really two ways that I think about this.
00:07:15.220 | The first would be to make sure that you have purchased
00:07:17.960 | all the appropriate insurance products,
00:07:20.920 | probably don't wanna overdo insurance,
00:07:23.100 | but make sure that you are covered
00:07:25.480 | in terms of property and casualty, disability.
00:07:28.860 | We've all heard statistics
00:07:30.380 | about how you're much more likely to be disabled
00:07:33.620 | than certainly to die.
00:07:35.860 | And so it makes sense to have disability insurance
00:07:39.900 | and then life insurance, obviously,
00:07:41.820 | if you have dependents,
00:07:43.780 | people who are depending on your economic wherewithal.
00:07:47.420 | So laying a safety net
00:07:48.860 | in terms of having those insurance products,
00:07:51.500 | and then the old sort of the self-funded insurance
00:07:55.180 | where you have your own emergency fund,
00:07:57.720 | where you have liquid reserves set aside.
00:08:00.780 | When I think about young people
00:08:03.660 | who are just getting their lives started,
00:08:05.660 | I would say this is really job one, two, and three,
00:08:09.420 | is making sure that they have liquid reserves set aside
00:08:12.700 | to cover them for those outlays
00:08:16.820 | that are really difficult to predict.
00:08:19.300 | So the baseline in terms of emergency funding,
00:08:22.540 | the one I learned when I went through the CFP program
00:08:25.100 | was that you would wanna have three to six months'
00:08:27.940 | worth of living expenses at a minimum.
00:08:30.300 | But I like the idea of really customizing that
00:08:32.780 | based on your own situation.
00:08:35.500 | So if you're a higher earner, if you're an older worker,
00:08:39.300 | if you're someone who has,
00:08:41.020 | if you're the sole earner in your household,
00:08:43.260 | so you have other people depending on your income,
00:08:45.700 | I would argue you would think about
00:08:47.560 | having an even larger emergency fund,
00:08:51.100 | more like a year's worth of living expenses.
00:08:53.940 | And I think young people sometimes get daunted
00:08:56.540 | by that three to six months reserve.
00:08:59.940 | And the way I always think about it is
00:09:01.820 | it's not how much you're spending currently,
00:09:04.180 | it's how much you could get by on in a pinch, right?
00:09:06.860 | That you don't wanna think about
00:09:08.660 | this overwhelming sum of what your current spending is.
00:09:11.980 | Think about the things that you might change
00:09:14.340 | if, for example, you experience job loss.
00:09:17.220 | But I like the idea of each of us stepping back
00:09:19.460 | and thinking about, well, how much do we wanna hold
00:09:22.200 | in terms of liquid reserves?
00:09:24.140 | Little bit more on emergency funds.
00:09:29.340 | I like the idea of keeping it super liquid.
00:09:31.480 | I think it makes sense to keep it liquid.
00:09:33.140 | The idea is that it is there in a pinch.
00:09:36.100 | So you wouldn't want to invest in anything
00:09:38.620 | where there is a risk of you not being made whole
00:09:42.180 | if you, in fact, need those funds.
00:09:44.620 | So I would say bond funds,
00:09:46.260 | even very safe short-term bond funds,
00:09:48.680 | I would take off the table in terms of emergency funding.
00:09:52.660 | Stocks, absolutely off the table
00:09:55.260 | in terms of emergency funding.
00:09:57.380 | And then if you're using CDs,
00:09:59.140 | and the good news is is that interest rates
00:10:01.820 | on all manner of savings instruments
00:10:04.260 | are looking better today.
00:10:05.840 | But if you are using CDs,
00:10:07.300 | you'd wanna make sure that you're not going to pay a penalty
00:10:09.680 | if you need to tap into those funds earlier
00:10:13.020 | than you expected to.
00:10:14.200 | So just read the fine print if you're using CDs.
00:10:18.460 | Another key point here is that your emergency fund
00:10:21.400 | can be kind of scattered in a few places.
00:10:24.080 | So maybe it's whatever you keep in your checking account
00:10:27.640 | on an ongoing basis.
00:10:29.000 | Maybe it's some liquid reserves that you hold
00:10:31.640 | in your taxable investment account side by side
00:10:35.600 | with your investment,
00:10:36.560 | so it doesn't have to be all in one place.
00:10:39.380 | In terms of the where,
00:10:43.200 | a key thing to note while we're talking about strictures,
00:10:46.420 | you just wanna be careful to hold those emergency reserves
00:10:50.100 | in something that you could easily tap
00:10:52.040 | without taxes or penalty.
00:10:54.640 | So retirement accounts would generally not be a first stop
00:10:59.640 | or would not be a stop at all.
00:11:01.880 | In terms of emergency funding,
00:11:03.540 | you'd probably wanna use some sort of taxable
00:11:06.720 | non-retirement account for those assets.
00:11:09.540 | But I would say there are a couple of investment accounts
00:11:13.440 | that could be sort of standby liquid reserve accounts.
00:11:17.840 | So one I like to call out is Roth IRAs.
00:11:21.300 | Ideally, you would have the money invested for long-term
00:11:24.160 | and you would never touch it until you reached retirement.
00:11:27.840 | But the Roth IRAs do offer a really nice escape hatch
00:11:32.120 | in terms of being able to withdraw those contributions
00:11:35.380 | without any penalty or taxes at any time.
00:11:38.360 | So especially for sometimes young savers,
00:11:41.220 | when I talk to young workers,
00:11:43.960 | I often say that the Roth IRA can be a really great
00:11:48.720 | sort of compliment to the emergency fund.
00:11:53.720 | So if in a worst case scenario,
00:11:56.100 | you need to tap those funds, they are there for you.
00:12:00.020 | Another account that can fit in here
00:12:01.820 | would be a health savings account.
00:12:03.980 | It shouldn't be anyone's first stop emergency fund,
00:12:07.620 | but health savings accounts have a really nice feature
00:12:10.740 | in that if you're using the health savings account
00:12:16.100 | to save and to invest for long-term
00:12:18.640 | and you're using non-HSA assets
00:12:21.080 | to actually cover your health savings
00:12:23.520 | or your health expenses as you incur them,
00:12:26.400 | the good news is that you can tap the HSA at a later date
00:12:31.400 | as long as you have receipts available
00:12:33.760 | to substantiate those expenses
00:12:36.920 | that you paid with non-HSA assets.
00:12:39.760 | So it's a super nice feature.
00:12:41.240 | I know Mike Piper is going to talk about
00:12:43.680 | all manner of tax-advantaged vehicles,
00:12:46.900 | but from a pure tax standpoint,
00:12:49.660 | HSAs are easy to love
00:12:51.300 | because they have a lot of nice features.
00:12:54.100 | So the debt versus invest question,
00:12:59.700 | that's a fork in the road that many people hit
00:13:02.700 | really at all life stages.
00:13:04.700 | And a key point I would make there
00:13:06.860 | is that you want to use your return on investment,
00:13:10.780 | and I would put that in quotes, to light the way.
00:13:13.540 | So I'll just use a simple example from my own life.
00:13:17.220 | Probably seven years ago, my husband and I
00:13:19.360 | still had a little bit left on our 15-year mortgage.
00:13:23.140 | And I remember my husband had shopped around
00:13:25.580 | and locked in a 2.875% mortgage rate,
00:13:29.320 | which at the time was really quite a low mortgage.
00:13:32.240 | And he loved having that very low,
00:13:34.720 | no one had a mortgage rate that low.
00:13:36.540 | But we looked at our savings
00:13:38.780 | and we looked at our liquid reserves
00:13:40.680 | and what we were earning on the money,
00:13:42.540 | and this is before yields went up as they have recently,
00:13:45.620 | and we said, well, this is kind of an easy decision
00:13:48.780 | to pay off this mortgage.
00:13:51.460 | We weren't getting any mortgage interest deduction
00:13:54.860 | at that point either.
00:13:56.220 | It was an easy decision to pay off our mortgage
00:13:59.740 | rather than earning next to nothing in our savings,
00:14:02.580 | especially 'cause we really didn't need
00:14:04.060 | those savings imminently.
00:14:06.380 | So I like the idea of using that concept.
00:14:09.060 | Think about the expected return on your debt pay down,
00:14:12.140 | which is basically your interest rate
00:14:15.520 | plus any, or less any tax benefits
00:14:19.340 | that you're earning to hold that debt,
00:14:22.200 | alongside whatever you expect to earn on your funds,
00:14:27.280 | on your invested funds.
00:14:28.820 | And I think that that can be a great
00:14:31.260 | sort of centering mechanism when figuring out
00:14:33.740 | how to address debt pay down.
00:14:36.900 | Right now, I would say that given how high interest rates
00:14:41.340 | are on very safe investments,
00:14:43.380 | and how low many mortgage holders rates are
00:14:46.700 | relative to those safe returns,
00:14:50.220 | it's probably much less attractive
00:14:52.180 | to consider mortgage pay down.
00:14:54.540 | But it's a very personal decision.
00:14:56.380 | Use your expected return on each of those uses of funds
00:15:01.380 | to help illuminate.
00:15:03.980 | Finally, creating a budget and setting a savings target
00:15:09.340 | would be the next step before you actually determine
00:15:13.580 | whether you want to go ahead and invest.
00:15:17.100 | You'd wanna think about having that budget
00:15:19.060 | that you use on an ongoing basis.
00:15:21.340 | And there are really two main ways to think about budgeting.
00:15:24.700 | There's certainly lots of software out there
00:15:26.740 | to assist people with budgeting.
00:15:28.460 | But two ways I think about it would be,
00:15:31.420 | think about using the old-fashioned expense tracking,
00:15:35.380 | or you can use some sort of digital expense tracking system
00:15:38.780 | to track your outlays on an ongoing basis,
00:15:42.900 | and periodically check up on your spending
00:15:45.860 | to make sure that it's in line
00:15:47.420 | with whatever you said you would spend
00:15:49.300 | within those categories.
00:15:51.900 | The way that we do it in our household,
00:15:54.200 | and have done for many, many years,
00:15:56.740 | is that we let our savings target light the way.
00:16:00.180 | So we just automate those contributions
00:16:02.700 | to our retirement plans, to our IRAs,
00:16:06.100 | to our taxable brokerage account,
00:16:09.420 | and we have those funds coming out of our checking account
00:16:13.100 | on an ongoing basis.
00:16:14.660 | And then the amount that's left over for us
00:16:17.620 | is an amount that we are free to spend,
00:16:20.340 | or we can certainly save more if we're able to do so.
00:16:24.000 | But that's been a really powerful tool for us,
00:16:26.660 | where we're not monkeying around
00:16:28.180 | with tracking spending in each category.
00:16:31.100 | So I would say it's very individual-specific for us,
00:16:34.640 | for my husband and me, that was kind of an intuitive way
00:16:37.980 | to approach it, it was something that worked for us.
00:16:40.580 | But I would urge you each to experiment
00:16:42.900 | with different strategies.
00:16:45.580 | If you're working with young people,
00:16:47.140 | talking to young people in your life,
00:16:49.780 | I would counsel them to choose one of those two strategies.
00:16:54.300 | Thank you.
00:16:55.140 | [BLANK_AUDIO]