Investing!

Investing!

I currently invest in the stock market in both pre-tax and post-tax accounts. I’m in the process of developing my knowledge and skill at fundamental security analysis (analysis of a company via their finances AKA The Numbers!).

Compound interest has been referred to as “the 8th wonder of the world”, and rightly so. Over time, compound interest can generate incredible amounts of wealth – Someone like Warren Buffet is a prime example of the power of steady long-term compounding interest.

Pre-Tax

401(k) contributions can be directly taken from your paycheck without being taxed, which means that even though you get “less money” to live on, you won’t suffer a 1-for-1 hit to your take-home pay by contributing. If you can afford it, a 401(k) contribution is a fantastic way to start saving for your future.

At first, it can seem a little pointless, or like your account isn’t doing anything. It might seem like it’s better to wait until you’re making more money to start contributing.

Let me show you graphically why that’s not true.

I plotted two examples below. Person A starts contributing 5% of their paycheck at year 1 of employment, and makes $50,000 per year. Person B starts contributing 5% of their paycheck at year 10 of employment, at which point they are making the same amount as Person A ($65,238.66 per year). I assumed each person’s salary increased by 3% per year every year, and they never changed their 401(k) contribution. I also assumed each person’s 401(k) account achieved a 7% rate of return, simply compounded annually. Check out the difference at year 35 of employment:

At 35 years of service, Person A will have roughly 65% more money in their account than Person B!

Does your employer offer a 401(k) match? If so, you are throwing away free money if you don’t take advantage of it. Some employers will match, say, 50% of your contribution up to a maximum of some percentage, such as perhaps 8% of your pay. That means if you contribute 8% of your pay, your employer will contribute the equivalent of another 4% into your 401(k). That’s huge. To put the impact of that in visual format, check out another plot. In this case Person A contributes 8% with a company match of 50% of their contribution, and person B contributes 5% with the same company match (both start at the same time, year 1):

Now Person A has over $1.2 Million by the time they retire, while Person B has roughly $800,000.

What’s the bottom line? Start contributing early if you can afford it, and take advantage of any and all company matching that may be available to you.

As to what to invest your 401(k) funds in, that is between you and your financial advisor. I have found through some research that very few if any fund choices can do better than a simple S&P 500 Index fund over the long term.

After-Tax

My after-tax investing is mainly value investments with a very long-term, buy-and-hold approach, and some shorter term speculative investments.  In a nutshell, I attempt to find companies that are making money, have a solid history of good earnings, are well established in their market, and that are currently trading for much less than what their “intrinsic value” may be. Many, many books have been written on the subject of value investing and fundamental analysis and I encourage you to seek out knowledge in this area if it interests you! A great place to start would be to read “The Intelligent Investor” by Benjamin Graham.

I have a lot to learn, but I’m excited to get there. I think my next post will be a fundamental analysis of a company I am considering for investment, with my own personal spin on how I approach estimating value. If you’re interested in value investing, or fundamental analysis of securities, drop a comment below!

 

Wondering who I am? Want to know what the game plan is for this blog? Check out my Introduction!

Not Another Personal Finance Blog!

Ahh, that new blog smell! So here we are. The question is, why? What’s the purpose of this? Why bother?

Bear with me. This might take a while to really flesh out.

This blog is intended to serve as a reference guide, helpful chronicle of mistakes I might make along my personal finance journey, a resource of fundamental stock analysis and investment discussions, and a list of what I’m doing to move from “lets pay these student loans off, shall we?” to “why yes, I *will* have the lobster with my steak”.

I’ll be posting as regularly as I can, making sure to keep things simple and hopefully helpful to people in a similar situation as I am. I’ll keep the posts somewhere between personal finance topics and investment discussions with a tendency towards a Buffet/Graham style of long-term value investing. And that leads me to the most important part of this post: The Disclaimer!

I am NOT a financial advisor, investment planner, broker, accountant, or even a finance major. I have absolutely zero qualifications in this arena. I’m an engineer who’s good with math and who is working (somewhat successfully) to improve my financial situation. Nothing on this blog should be misconstrued as financial advice or investment advice. I suggest you take everything here with a grain of salt, and note that all content is presented without any claims of  benefit stated or implied.

That said, I can hopefully provide some helpful tips here and there, and can at the very least document my own personal journey in the hopes that you find it useful. Unlike many blogs, this is NOT a “SIX WAYS TO GET YOU RICH OVERNIGHT” conglomerate of snake-oil and useless lists. I’m going to try and keep things interesting, crunch some numbers, and develop my understanding of fundamental stock analysis and value investing. Along the way I may be able to help people looking to follow a similar path as the one I’m on. I’m not an expert. I’m learning. Let’s learn together.

So. Who am I? I’m an engineer. I have less than 10 years of industry experience, and like many of you, I have thousands in student loan debt, which I’ve been paying diligently since graduating a few years ago. I make enough money to get by and pay my bills, and I consider myself very fortunate indeed to be able to say that. But one can be grateful and wish for more at the same time. So my plan is this:

Through a combination of solid long-term investments, consistent budgeting, and general financial common-sense, I will reach my financial independence goals – as lofty as they may be. More on that later.

Do you go out to bars once a week? Once every two weeks? I don’t. Do you eat lunch out at work? I don’t, I bring mine from home. Do you own a luxury car (perhaps because “the other folks at the office” drive Audis or Mercs)? I don’t.

So what DO I do? I exercise, I read, I play video games. I learn. I cook as many of my meals as possible. I enjoy beer – but at home, not out at the bar. I am currently making a car payment on a 2014 Ford, financed at 1.6% interest over 5 years. I’ll drive this car into the ground because I bought it new and depreciation is a bear.  My point is this. I don’t starve myself, I don’t forgo cable TV or other nice-to-have’s. But I keep things simple. I budget, I plan, I don’t splurge. I’ll talk more about my roadmap to my financial goals in my next post, but I wanted to introduce myself (Hi, I’m Numbers Guy) and get things rolling here.

So if you’re interested in seeing where this goes, or if you’re waiting for what you may assume is my inevitable public-display of crashing and burning (ha..ha..), drop a comment below and check back soon. Hopefully I’ll have this thing up and running more as we move into the middle of the summer.

-Numbers Guy