Volatile is a good word to describe a lot of things lately. It’s definitely apt for the financial market, but it also works for the latest news about COVID-19, which changes daily and has given all of us a collective case of figurative whiplash. It works for little things, too—like, oh, say, my thoughts about everything, for example. Some days I wake up with sun in my face, smiling, feeling positive. Some days that’s just not the case.
For those of us who are lucky enough to have any extra dollars lying around right now, investing can seem daunting. The market is all over the place, and the idea of putting some money away for the future seems scary. But it also seems like a good idea. But also, what will the future look like? How do we even plan for “the future” right now?
To answer some of these burning questions, we spoke with Alexa von Tobel, CFP, the founder and managing partner of Inspired Capital, author of Financially Fearless and Financially Forward, and host of The Founders Project. She got real with us about what investing should look like right now: If you’re eligible for a 401(k) account, use it if you can. She chatted with us about the beauty of Roth IRAs, whether real estate is a smart or insane investment right now, and where you should open your investment accounts.
For those of us who are lucky enough to have any extra dollars lying around right now, investing can seem daunting. The market is all over the place, and the idea of putting some money away for the future seems scary. But it also seems like a good idea. But also, what will the future look like? How do we even plan for “the future” right now?
To answer some of these burning questions, we spoke with Alexa von Tobel, CFP, the founder and managing partner of Inspired Capital, author of Financially Fearless and Financially Forward, and host of The Founders Project. She got real with us about what investing should look like right now: If you’re eligible for a 401(k) account, use it if you can. She chatted with us about the beauty of Roth IRAs, whether real estate is a smart or insane investment right now, and where you should open your investment accounts.
So should we be investing right now? The market is volatile at best—if so, what should investing look like right now?
“Great question! The market has been incredibly volatile. Instead of checking your account balances every hour, take a step back and remember that money you invest is meant to be there for the long haul. Now is not the time to panic or cash out.
“In general, investing will primarily take place in your retirement accounts—your 401(k) and IRA. I often hear from people who feel they should be investing more. Remember that saving for retirement is investing—and it’s a smart and tax-advantaged way to do so. If you’re still able to make retirement contributions right now, you should absolutely continue to do so and continue to ensure those contributions are invested properly and not left sitting in cash.”
For those who only have maybe $5,000 or less to invest, what would you suggest they invest in right now?
“Before you invest, make sure you pass what I like to call the ‘Monopoly step.’ I think of this as basic financial security: You have no credit card debt, you have a full emergency fund (three to 12 months of living expenses, depending on your personal situation), and you’re on track for retirement.
“So if you have $5,000 to invest, be sure you’re first investing in yourself and your financial security. If you’re already maxing out your retirement, you can start to think about opening up a separate brokerage account for any long-term goals. With investing, you always want to remember the five-year rule.
“If you’ll need the $5,000 in less than five years for a big goal, like buying a home, it’s safer to keep it out of the market. As we’ve all seen in recent months, investments can be volatile, and you want to be sure you have the cash you need to reach your goals.”
How about those who have only $1,000 to invest? Should they just be contributing to a 401(k), or are there better things to invest in right now for them?
“Yes, you want to work toward maxing out both your 401(k), if your employer offers one, and an IRA. You can have both: In 2020, the 401(k) contribution limit is $19,500, and the IRA limit is $6,000.
“The reason 401(k)s are so important to maximize is that employers often offer a 401(k) match, which is essentially free money or a guaranteed return if you contribute. I never want to see people walk away from that benefit, so I recommend taking full advantage!”
The age-old question: What’s better, paying off your student loans, or investing?
“Psychologically, it can feel good to get rid of your debt, but student loans are considered ‘good debt’ and often have lower interest rates than other types of debt, like credit cards.
“Generally speaking, it’s best to prioritize your retirement savings, particularly if you have an employer match. If you assume that your investments will earn at least 6 percent in the market over the long term, then it typically doesn’t make sense to accelerate paying down student loans unless your interest rate is above 6 percent. In other words, prioritizing an investment in your retirement enables you to take advantage of compound interest. The dollars you set aside today in investments will keep growing and compounding over time.”
So—where should they invest that money, instead of paying down student loans?
“Within your retirement accounts, I recommend investing in ETFs (exchange-traded funds), since they have diversification built in and tend to be low-cost. Look for target-date funds, a combination of stocks that take your retirement age into account to assess risk levels. Picking a target-date fund is an easy way to set it and forget it—and get you closer to the idea of a self-driving wallet, which I am obsessed with.”
“Great question! The market has been incredibly volatile. Instead of checking your account balances every hour, take a step back and remember that money you invest is meant to be there for the long haul. Now is not the time to panic or cash out.
“In general, investing will primarily take place in your retirement accounts—your 401(k) and IRA. I often hear from people who feel they should be investing more. Remember that saving for retirement is investing—and it’s a smart and tax-advantaged way to do so. If you’re still able to make retirement contributions right now, you should absolutely continue to do so and continue to ensure those contributions are invested properly and not left sitting in cash.”
For those who only have maybe $5,000 or less to invest, what would you suggest they invest in right now?
“Before you invest, make sure you pass what I like to call the ‘Monopoly step.’ I think of this as basic financial security: You have no credit card debt, you have a full emergency fund (three to 12 months of living expenses, depending on your personal situation), and you’re on track for retirement.
“So if you have $5,000 to invest, be sure you’re first investing in yourself and your financial security. If you’re already maxing out your retirement, you can start to think about opening up a separate brokerage account for any long-term goals. With investing, you always want to remember the five-year rule.
“If you’ll need the $5,000 in less than five years for a big goal, like buying a home, it’s safer to keep it out of the market. As we’ve all seen in recent months, investments can be volatile, and you want to be sure you have the cash you need to reach your goals.”
How about those who have only $1,000 to invest? Should they just be contributing to a 401(k), or are there better things to invest in right now for them?
“Yes, you want to work toward maxing out both your 401(k), if your employer offers one, and an IRA. You can have both: In 2020, the 401(k) contribution limit is $19,500, and the IRA limit is $6,000.
“The reason 401(k)s are so important to maximize is that employers often offer a 401(k) match, which is essentially free money or a guaranteed return if you contribute. I never want to see people walk away from that benefit, so I recommend taking full advantage!”
The age-old question: What’s better, paying off your student loans, or investing?
“Psychologically, it can feel good to get rid of your debt, but student loans are considered ‘good debt’ and often have lower interest rates than other types of debt, like credit cards.
“Generally speaking, it’s best to prioritize your retirement savings, particularly if you have an employer match. If you assume that your investments will earn at least 6 percent in the market over the long term, then it typically doesn’t make sense to accelerate paying down student loans unless your interest rate is above 6 percent. In other words, prioritizing an investment in your retirement enables you to take advantage of compound interest. The dollars you set aside today in investments will keep growing and compounding over time.”
So—where should they invest that money, instead of paying down student loans?
“Within your retirement accounts, I recommend investing in ETFs (exchange-traded funds), since they have diversification built in and tend to be low-cost. Look for target-date funds, a combination of stocks that take your retirement age into account to assess risk levels. Picking a target-date fund is an easy way to set it and forget it—and get you closer to the idea of a self-driving wallet, which I am obsessed with.”
What about other investments, like art or real estate?
“Whatever investment decisions you make, you want to do so within the guidelines of a financial plan. A financial plan is a roadmap that breaks down how your financial decisions will help you achieve your goals, like moving to a new city or starting a business.
“If you’re considering buying a home, make sure to do the math on buying vs. renting. You’ll also want to make sure you plan to live there for at least seven years. And remember, in this current economic uncertainty, buying real estate comes with heightened risks, as the market is so unpredictable.
“Before taking any big swings, I recommend talking to a trusted financial advisor. By trusted, I mean a licensed CFP, which stands for Certified Financial Planner. As a CFP myself, I can tell you that the process to become one is rigorous and comes with a high set of ethical standards.
“Try websites like the Garrett Planning Network or your financial institution to find a CFP you can consult, whether for general investing advice or guidance on specific decisions.
“I will say we are seeing great innovations in fintech [financial technology] around opening up access to alternative investment opportunities. I had a great conversation with the founder of Yieldstreet on this very topic, and I’m excited about what he’s building to better empower Americans to have access to investments that are often reserved for institutional investors.”
What’s the one piece of investing advice you wish your younger self knew?
“Time is everything! Compounding interest isn’t magic, it’s math. Get started ASAP, and remember that money you put away today—even if it’s just a little bit—can do a lot more for your future than money you put away a decade from now.”
For people who are just starting out, other than a 401(k), what’s the best way to start putting your money to work for you? A Roth IRA? Something else?
“Yes, you can have both a 401(k) and an IRA. If you’re eligible for an employer match with your 401(k), start there and take full advantage. Once you’re doing that, consider a Roth IRA, which is an individual retirement account that you can contribute after-tax money to. That means in retirement, the money you withdraw—both your deposits and all of your earnings—is entirely tax-free.”
Do you have a favorite type of IRA? Where would you advise a friend to open an IRA account right now?
“If you’re eligible for a Roth IRA (i.e., you make under $139,000 annually), that’s a great place to start. In terms of where to open an IRA, it can definitely help to streamline your accounts at one financial institution. Start by seeing what your current bank offers. Whether you stay with that bank or choose a new institution, you want to look out for a few things.
“First, check out your investment options. Are there low-cost ETFs readily available? Second, understand what the tech experience looks like. Does the account come with an app that lets you see your money grow? And third, look into the fee structure. What are they going to charge you for annual management fees and trades?”
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“Whatever investment decisions you make, you want to do so within the guidelines of a financial plan. A financial plan is a roadmap that breaks down how your financial decisions will help you achieve your goals, like moving to a new city or starting a business.
“If you’re considering buying a home, make sure to do the math on buying vs. renting. You’ll also want to make sure you plan to live there for at least seven years. And remember, in this current economic uncertainty, buying real estate comes with heightened risks, as the market is so unpredictable.
“Before taking any big swings, I recommend talking to a trusted financial advisor. By trusted, I mean a licensed CFP, which stands for Certified Financial Planner. As a CFP myself, I can tell you that the process to become one is rigorous and comes with a high set of ethical standards.
“Try websites like the Garrett Planning Network or your financial institution to find a CFP you can consult, whether for general investing advice or guidance on specific decisions.
“I will say we are seeing great innovations in fintech [financial technology] around opening up access to alternative investment opportunities. I had a great conversation with the founder of Yieldstreet on this very topic, and I’m excited about what he’s building to better empower Americans to have access to investments that are often reserved for institutional investors.”
What’s the one piece of investing advice you wish your younger self knew?
“Time is everything! Compounding interest isn’t magic, it’s math. Get started ASAP, and remember that money you put away today—even if it’s just a little bit—can do a lot more for your future than money you put away a decade from now.”
For people who are just starting out, other than a 401(k), what’s the best way to start putting your money to work for you? A Roth IRA? Something else?
“Yes, you can have both a 401(k) and an IRA. If you’re eligible for an employer match with your 401(k), start there and take full advantage. Once you’re doing that, consider a Roth IRA, which is an individual retirement account that you can contribute after-tax money to. That means in retirement, the money you withdraw—both your deposits and all of your earnings—is entirely tax-free.”
Do you have a favorite type of IRA? Where would you advise a friend to open an IRA account right now?
“If you’re eligible for a Roth IRA (i.e., you make under $139,000 annually), that’s a great place to start. In terms of where to open an IRA, it can definitely help to streamline your accounts at one financial institution. Start by seeing what your current bank offers. Whether you stay with that bank or choose a new institution, you want to look out for a few things.
“First, check out your investment options. Are there low-cost ETFs readily available? Second, understand what the tech experience looks like. Does the account come with an app that lets you see your money grow? And third, look into the fee structure. What are they going to charge you for annual management fees and trades?”
Want more stories like this?
So, What Should We Be Doing about Money Right Now?
Need a Distraction? The Best Shows, Movies, and Books to Delve Into
Friends of Coveteur on What They’re Doing to Take Care of Themselves Right Now