If you are reading this, chances are that you didn’t exactly grow up in a family full of financial wizards. I was raised by a single mother on welfare, so our idea of “financial planning” was rationing out how much powdered milk we could drink before our next trip to the food bank. There were many sucky things about growing up that way, but one of the worst is that I never learned how money works and what I should do as far as personal finance goes. The good news is that it’s actually pretty simple once you understand the basics.
I get a lot of questions about this stuff on Tumblr, so I figured I would outline the basics here in terms that people who have wasted their youth on music will understand. If you are an expert in this stuff please understand that this is just the very basics, and I am leaving out lots and lots of details for the sake of brevity.
401(k)s, IRAs, mutual funds, stocks, etc
You have probably heard all these terms and have a vague idea of what they mean, but what it boils down to is this (in hardcore terms): think of a 401k or IRA as a crate, and think of stocks, mutual funds, etc as the records you put in it. A 401k or IRA is basically just a savings account except you you can’t take the money out until you are 59.5 years old. There are some other details but don’t worry about those for now. Just think of it as a big milk crate which you can fill with different kinds of investments (like choosing what records to put in your crate).
Just like there is a nearly endless amount of different pressings, colors, limited editions, and other variations of records for dorks to obsess over, there is an insanely massive amount of different investment vehicles: stocks, bonds, CDs, mutual funds, and zillions more. It gets SUPER complicated, but the goods news is that you don’t need to worry about it. In the same way as I would tell you to stop wasting your time tracking down obscure colored vinyl versions of crappy, over-hyped bands whose peak will be opening 2 shows for SUBURBAN SCUM, you really don’t need to think about any of those obscure and complex investment vehicles. Do NOT feel like you need to fuck around buying shares of individual companies and try to flip them for a profit. You will almost certainly lose money this way.
The power of index funds: ff you invested $1 in an index fund in 1984, today you would have $12. Pretty fucking cool, huh??
If you are investing for your retirement, IMO your best option is something called index funds. Essentially, index funds are a way of investing in EVERY stock on the market, which is a good thing for lots of reasons, in particular because it means that you aren’t dependent on the future of any one individual company. Think of it like this: instead of trying to flip merch from one specific band, you’re investing in merch flipping as a whole– as long as Belgians exist, you’re sure to make money!
WHAT YOU SHOULD DO WITH THIS INFO: If your employer offers a 401k, make sure that you are enrolled and taking advantage of any matching programs they have (it’s literally free money). If they don’t, start your own IRA through someone like Fidelity.
If you’re 25 and put away $500 a month until you’re 65, you can very easily have a million dollars when you retire
Compound interest
This involves a little math, but it’s really important to understand so pay attention! In a nutshell, compound interest is simply the idea that you earn interest on interest, which is the key to how investments grow over time. Read more about it here, but to put it in hardcore terms think about it like this: once a band gets a little hype (*cough ANGEL DU$T cough*) it snowballs and they get hype on top of hype and all of a sudden they are the scene’s favorite band. Hype builds on itself and creates more hype, interest builds on itself and creates more interest (where interest = money).
WHAT YOU SHOULD DO WITH THIS INFO: Put away money every month and leave it there! You literally do not have to do anything else, at least not for decades when you might need to move things into super-safe investment vehicles likes CDs.
Yep, that’s right: it would take over ELEVEN FUCKING YEARS to pay off that $5k if you just make the minimum payment!
Note that the same ideas about compound interest apply in reverse to debt, especially credit cards. Credit cards are BAD BAD BAD NEWS, and you should use them very sparingly. As you can see from the diagram above, if you rack up a lot of credit card debt, it can be reallllly hard to get out from under it, especially if you only make the minimum monthly payment.
THE BOTTOM LINE: The most important thing is that you get started on this as early as possible, and simply put money away every month and forget about it. If you aren’t sure how to proceed, call up the folks at Fidelity, Vanguard, etc and they will talk you through it (I personally like Fidelity’s web interface a lot better but it’s not super important who you go with). Even if you can only put away $50 a month, that’s ok– just do SOMETHING.
The good news is that investing is actually pretty simple– don’t be fooled by the E-Trade commercials with all the fancy charts and graphs and stuff like that, those are just to trick idiots into daytrading away all their money (daytrading is almost universally recognized as a really bad idea). You do NOT need to know about “the market” or any of that, just like there is no need for you to know what the latest flavor-of-the-week hypecore band is on Tumblr. Stick with the basics and you will be just fine!
Again, this is an EXTREMELY broad and simple overview and I definitely encourage you to read more. Investopedia is my personal favorite site for all this stuff. If you’re more advanced then check out the Bogleheads forum, it’s really great.
