Investing 101: the basics

As a Human and Organizational Development major (a Vanderbilt-specific major that is most similar to a Management degree), I was required to complete a capstone internship –working 32 hours per week – last semester. When thinking about which field to go into, I thought finance was the most daunting option, and therefore I knew I had to pursue it because that’s what college is for, right? Facing your fears and learning about all of the things that you don’t yet know. I figured that I had interned in many different fields – hospitality, digital healthcare, and consulting – and that adding finance to the list would only improve my understanding of management, while also helping me to learn about a topic that intimidated me to the point that I refused to both talk about and think about it; investing.

On my first day at UBS, I was utterly perplexed. As my coworkers were throwing around terms like capital gains and CDs, I was unsure if they had chosen the right person to be their intern. The first page of my internship notebook reads “Finance Acronyms”, and what follows is a list of acronyms that I heard during my first few days – and looked back on many times throughout my internship.

Part of the “capstone experience” includes pursuing a self-identified “learning goal”, which is supposed to instill lifelong learning habits and help us better understand what self-guided learning looks like after we have left the world of academia that has defined our entire existence thus far. Naturally, I chose to focus on learning more about investing and personal finance, as I knew that it was knowledge that I severely lacked. While I would by no means call myself an expert at this point (seriously, I am not even close), I do feel that putting the effort into learning about investing, budgeting, and saving has really helped to prepare me for graduation. I am less stressed about how I am going to handle supporting myself than before, which is progress. After turning in my learning goal, which consisted of an “Intern’s Guide to Investing” and a personal budget sheet, I realized that many of my peers – specifically the females in my capstone program – have never explored investing or personal finance. This served as a major impetus for me to start this blog. While I’ve written much about how the gender investing gap infuriates me, I have not yet offered any tangible learning about investing and personal finance.

While I am in no way qualified to offer advice, nor am I experienced enough to have any finance legitimacy, I do want to share with you how I began my financial literacy education, and why I think every young female should do so as well.

We know that the gender pay gap and the gender investing gap severely disadvantage women. While there are many resources that focus on teaching women how they can turn their life around and in the words of Amanda Steinberg, “own their money stories”, I was disappointed to find very little advice for those of us who haven’t yet messed up. Instead of framing the issue of women and their less-than-stellar handle on money as something that needs to be fixed when we turn 30, I want to look at it as something that can be initiated at 20. The social conditioning that makes women think that we are not equipped to handle money is not only ridiculous, but it’s incredibly damaging to our success. Whoever said that investing and personal finance is a boy’s club needs to be corrected. Money isn’t just for men, and it’s time that we start talking about it.

While personal finance and the ideas of saving, budgeting, and spending are also critical to reclaiming the story of women and money, this post is going to focus just on the investing basics. You will not walk away from this understanding everything about investing, but you will at least have some basic context. Over the next few weeks and months, I will continue to write about this topic. The more I learn, the more I’ll share.

Let’s start with compound interest, which is essentially the principal of investing. Instead of offering the super scientific definition, I will describe compound interest as “gain on investment.” If you think about it in terms of lending someone money such as investing in bonds, it is the interest you receive on your money invested. For example, if you invest $1,000 in a bond paying a yield of 10% (this is an unrealistically high interest % for investing in a bond but it makes for easy math), you will have $1,100 at the end of year. The same is true if you invest $1,000 to purchase a stock that increases in value by 10% over one year (I explain below why 10% is a more realistic growth rate for investing in stocks than bonds). Compounding your investment is the magic of starting with $1,000 in year one and having $1,100 in your investment in year two so the 10% gain you earn in year two will be based on a greater sum of money so you receive a greater return in year two which would be $110 and in year three it will be $121 and so on. If your investment gain is 10% each year, you will double your money in 7.2 years, hence the investment phrase, the Rule of 72.

The easiest way to understand compound interest is to learn the Rule of 72, a mathematical concept that does not guarantee positive results nor predict investment performance, but rather estimates the impact of a targeted rate of return.

The Rule of 72: In the most basic sense, the rule of 72 tells you how long it will take to double your money at a specific interest rate. If you have $5,000 and you want to see how long it will take to grow that $5,000 to $10,000 given a 3% interest rate, divide 72 by 3 and you’ll see it will take 24 years. If you use a 6% interest rate, you get 12 years, and so on.

As you have noticed, the interest rate is what drives your money’s growth. While I am using the term interest rate, when investing in stocks think of it more as the % growth of a stock over a one-year period which is essentially the investment growth rate. While a savings account probably offers a 0-1% return, different investment decisions will provide higher rates of return.

Understanding compound interest and the Rule of 72 shows that the earlier you invest your money, the less money you will need to invest to achieve your financial goals because of compound investment growth. This means that if you start investing now, your money will probably be worth more later. This is important because the time value of money. With investing, you are earning an investment return not only on your original dollar but on the growth. Conversely, if you do not invest a dollar today, its value will likely decline due to inflation. As we all know from our parents, $1 is used to buy more than a loaf of bread.  Investing gives you the opportunity for your money to appreciate exponentially over time. As I mentioned last week, the S&P 500 has about an average 10% rate of return annually. This is measured by Standard and Poor’s 500 (S&P 500), which contains 500 of the largest stocks in the U.S., making it a reliable tool for estimating the overall health of large American companies. Therefore, if you’re keeping money in a savings account that is earning a 0-1% annual return, it appears that you’d be better off long-term investing that same money in the S&P 500.

However, don’t start investing money that you can’t afford to set aside for a long time (especially if you have high credit card debt because waiting to pay credit card debt will only cost you more money). Further, if you’re planning to spend the money soon, you may be better off keeping that in your savings account (otherwise you’ll have to pay fees upon withdrawing it). When I recently opened my first investment account, I didn’t put all my money in there because I know that I want to use some of my money to travel after graduation (in four months), pay a deposit on my apartment (this summer), and have a cushion when I move to Chicago in July. You also don’t want to invest all your savings because you want to have money in case of an emergency. This is what they call an “emergency fund” and generally consists of 3-6 months’ take-home pay that you have saved away in the case of an emergency. Although 3-6 months’ pay may not be doable as a recent college graduate, the idea is to have some money put away in a separate savings account for emergencies. This is quite a conservative approach to investing, but it’s what is advised for those just starting out.

Once you understand the Rule of 72, you can probably see why investing is worthwhile, as it essentially offers what I like to call “free money” – and who doesn’t want that? While money does not grow on trees, it usually grows from investing, especially with patience over a longer period of time. It’s important that we start investing at a young age because we’ll not only reap greater rewards, but we’re also developing better habits. Next time, I am going to go into the different types of investments that exist, and how I came about choosing a specific one. I’ll show you that you don’t need a ton of money to start investing, and that literally anyone can open an investment account from the comfort of their own bedroom. One thing to leave you with regarding investing is that it is critically important to think about your goals.

I always think it is best to set goals before embarking on any journey – be it the road to financial independence, perfecting your spin in tennis, or studying for the GMAT. With a goal in mind, I am typically more determined to learn, and I can identify a starting point to focus on that is related to my goal. Therefore, if you are coming from a completely blank slate (as I was), I would encourage you to set your goals first, and then learn about the different types of investments. This allows you to always keep your goals in the back of your mind. This will inevitably help you to narrow down which type of investment you’ll choose. It doesn’t matter whether you want to start investing to buy a car in 5 years, a house in 10 years, or contribute to your retirement decades down the road. Your goals will determine your approach to investing. If you’re not quite sure, and you just want to learn, then it’s never too early to think about retirement. However, as a student without a steady income, it’s understandable that retirement may seem daunting.

I was personally looking to invest a smaller amount of money to grow over the next 6-10 years. I may use this money to buy a house, start a business, or contribute to some other venture in the next decade. Once I start a full-time job next year, I will also begin investing for my retirement savings, but for now, I simply want to learn the rules of the investing game with a modest amount of money and a closer objective. But you may be different from me. Maybe you’re looking to save for something closer – like graduate school – or perhaps you’re looking for a long-term investment and ready to open a retirement account. Whatever your circumstances may be, remember that your goals are probably different from mine, and therefore you should not simply follow my exact steps, but rather use my thought process as a guide for determining your own investing path.

Also, don’t think of your goals as static – once you start learning about investing and its intricacies, your goals may shift. Further, do not consider your financial education complete once you have decided on an investment method. Remember, investing should be a life-long endeavor, and therefore you will always want to stay educated and aware.

Stay tuned for more investing basics next time!



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