hi it's Erica Colberg and before we dive into today's podcast episode I have an exciting announcement that can help you save an extra ,000 without having to Penny pinch or change your lifestyle on Monday I'm running my free 5day savings challenge where you'll discover simple and creative ways that you can save extra money every month and whatever you want to do with that extra money is up to you I'll just show you how to save it the challenge is totally free to join all you need to do is go to Eric ./ go Erica is with a K and you can secure your spot by the way these strategies that you're going to discover can help you easily save money whether you're a budgeting novice or a finance expert and they're going to get better and better throughout the week but I have to tell you I'm so excited about this and don't want you to miss out in November of last year we ran a savings challenge and had over 200,000 people sign up and on average people saved $1,005 that month through what they learn in the challenge that means our Challengers collectively saved over $200 million so trust me when I say you don't want to miss out on this one and the deadline to sign up to be part of this free challenge is Sunday 11:59 p.m. eastern time so make sure you secure your spot and get free access today again that's erica.com go e r ka.com go see you inside what do I invest in the two types of things I would invest in are Jeremy Schneider a multi-millionaire entrepreneur who retired at the age of 36 and has since doubled his net worth by reinvesting should I be investing right now inflation or war or recession this is the spoiler this is the big the big way that I invest ignore everything wealth is built like the Warren Buffett example over time one of the most common questions I get asked is what's the best index fund and the answer is I'm Erica Colberg and you're listening to the Erica taught me podcast so if you were to summarize your money philosophy in one sentence what would it be it has an and but it would be to build wealth you live below your means and invest early and often that's it I love it so let's go through investing 101 what is the first thing people need to know about investing I think the first thing is that in order to invest you need money and to get money you basically need to spend less money than you make and in pop culture and social media and just among friends and peer pressure there's always this constant pressure to spend everything you make or live beyond your means spend all your spend all your income borrow money going into debt fancy trips fancy clothes and that's not wealth that's spending actual wealthy people spend less money than they make so if you make half a million dollars a year and you spend half million dollars a year there's a word for that broke you have Zar at the end of the year but if you make $60,000 a year and you spend $40,000 ,000 a year with that $20,000 a year you're not spending you can invest and over the course of a career you're easily a multi-millionaire with that difference in your spending and your uh earnings do you have a default for what percentage of income you'd like people to be able to save and invest you know what I want people to do whatever they want to do but it's really a pretty simple mathematical equation which is if you invest 0% of your income then you will never be able to retire you will be pushing shopping carts at a big box store in your 70s because you can't live off of the government stien they give you if you invest half of what you earn it takes about 15 years from being broke to never needing to work again and so this idea that you retire at 65 is is kind of a myth nothing happens magically at 65 you retire when you have enough money to retire and you get there by living below your means and investing and so when you say how much like what percent of your income should you invest you know it's kind of Choose Your Own Adventure I certainly recommend more than zero anything less than 10 you're probably in the realm of not being able to retire even when you're old and then beyond 15 and above you can start talking about early retirement and like I said if you invest 50% of your income starting from broke you're only 15 years from retirement yeah I think generally the 50 2030 rule is good where you're using 50% of your income towards your needs 30% towards wants and then 20% towards savings and Investments and it's obviously not going to apply to everyone but I feel like if people want a starting point for this is a great place to start that's a good rule yeah if you're if you're at 20% you're probably in the healthy range and I think once people start and get a little bit of traction and they see what's happening they're like oh my money's making more money it usually accelerates and so if you're not yet able to do 20% just do something like do do 1% do 2% I talked to so many people who have wanted to start investing for years but they don't think they have enough money I'm like just do 10 bucks do 50 bucks you can especially in the US you can do it so so inexpensively and so with such low barriers entry that just get started and I think that static friction that exists from people being afraid to get started will then disappear and then you can increase your savings rate I always had a lot of excuses too for why I couldn't invest my your excuses I don't have enough money I don't know how to do it if I start investing well what do I invest in like all the questions that people ask me now I had those questions myself when I was in my early 20s that's legitimate you and part of that I think is letting perfect be the enemy of good you know I don't want to do it if it's not perfect and I think in in all things we can't let perfect be the enemy of good I'd much rather someone invest in a very mediocre fashion than be afraid to get started but all those questions are perfectly Fair the world of Finance is a very scary place when you're on the outside looking in you see CNBC and day Traders and Bitcoin guys and options and Futures and all this stuff and how could How could a normal person in their 20s working a job get into that without massive amounts of research and education and so it's you know and it's also never a top priority you know you have a lot of things you know vying for your attention in life and so it's understandable that you know you and lots of people not only 20s if you're out there and you're 30 40 50 Beyond I talk to people all the time who feel way behind but it's actually very typical because of these reasons but the reality is it's actually very very easy to invest and it turns out that kind of coinci and and helpfully the best way to invest is also the simplest and we'll just put this out there for the record I think even if you have $10 a month you should start investing with that $10 a month rather than think it's okay to wait two three years until you have $100 a month to invest totally I love I love the $10 a month because you know what is that a cup of coffee I mean I know the cup of coffee thing is in the financial space people get mad that you're trying to not drink coffee but you know you can you can find 10 bucks a month somewhere in your budget and there's very little risk there you know if you lose it all because you did it wrong no big deal but I think what you'll see is you'll start to see the traction and you'll be like okay this isn't that hard it's not that scary now I can start ramping it up next time I get a raise I'll maybe take half that raise add it to my 10 bucks a month and then all all of a sudden you're on the path to becoming a millionaire okay so let's say people are going to start with $10 a month they're going to start investing $10 a month what is their very first step first it's important to kind of understand what investing is investing is basically putting your money in into something that's going to do two things in my opinion one is pay you money while it's there and the other is go up in value and so I think a lot of people think investing is gambling guessing what's going to happen speculating on the future of the market or options or Bitcoin or your friend's restaurant or whatever it is but that all is gambling investing is putting your money into something that pays you while it's there pays you just for owning it and then is likely to go up in value if you put your money into places that pay you while you own it and goes up in value over time you experience the magic effect of compound growth it gets bigger and bigger and bigger like a snowball rolling down a hill and then that's where real wealth is built and so there's basically two things that I think meet that bar that is the stock market basically owning the companies of the world that you know do Commerce you know these are companies we know like Amazon and Google and FedEx and Home Depot they're all doing work every single day growing profiting when you buy stocks you're owning the growth and profits of those stocks they pay you dividends while you own it and they go up in value and the other is investment in real estate basically buying rental properties that pay you while you own it because you have renters in there paying you rent and they're likely to go up in value as real estate is and so stock market and real estate that is what I believe investing is let's dig into the concept of compounding interest that is such a fundamental thing to understand for investing so how would you describe it if you put a 100 bucks let's say you do 10 bucks a month for year and you miss two months just round numbers and you have 100 bucks and let's say your investment has a 10% return at the end of the year you'll have made 10 more bucks so your $100 plus 10% is $110 you made 10% and so that's just interest but then the next year something interesting happens first of all if you're still investing that next 10 bucks a month now instead of having a 100 bucks you have 200 bucks that you put in there you put in your 100 bucks the first year your 200 bucks the second year so you get 10% growth on that 200 bucks which is 20 bucks but you also get 10% growth of the previous year's growth that 10 bucks you got for free in the first year I know this is a podcast and I'm shouting a bunch of numbers out but it's not it's the concept is pretty simple which is that interest you made the first year now is part of this Nest Egg that's generating more interest the second year and something interesting happens the first two years so your total in those two years is 221 bucks I think because something like that I might have done that mouth wrong but you've got your interest from first year your interest I think it's no 23 one Bucks you have your 10 bucks from interest your first year your 20 bucks from interest the second year and then your $1 of interest from the interest the first year so even though of that 231 bucks 200 bucks is what you put in 30 bucks is interest and only $1 is kind of the compound interest the growth of the growth if you continue that formula going forward at year 40 kind of the end of a typical working career about I think 80 to 90% of your wealth will be from the compound interest that one that what started as a dollar the growth of the growth becomes that exponential portion of this and so while early on early investors early Savers feel like it's a slow process because you're just saving your 10 bucks a month hopefully more over time the compound growth that growth of the growth over time snowballs and becomes huge which is this magical mathematical you know investor dream that we all want to take part in but it does take time and discipline to get started and and hold it for a long period of time brilliant so for people who are visual Learners like me I think you should go watch this episode on the YouTube channel so that's going to be at youtube.com/ er2 e r i Ka A2 and we'll go ahead and show the charts and the graphs so that it's easier for you to understand since this episode we really want this to be a beginner investing 101 course one of the things that made me realize the power of compounding interest was I first saw this chart of Warren Buffett's net worth over Ag and he's been investing since I think 11 years old 14 years old but over 90% of his wealth has come after the age of 50 and you just see this huge upward Trend that happens over the age of 50 because the benefits of compounding interest all kick in no 40 years after he started initially investing yeah no it is wild but also important to note Warren Buffett has like a hundred billion dollars you can become very very wealthy before that too so sometimes I think hearing you know at least I hear push back saying oh I don't want to be rich when I'm 90 um but you can be wealthy earlier and it's much preferable to being broke your entire life right if you start saving and investing now I think two things happen one is you will build a lot of wealth later in life and you'll also be happier now it's a stressful position in life to have zero dollars it's a stressful position to think you're going to have to work until you die it's a stressful position to feel behind to have no EST Nest Egg to have no savings and so when you start even with your 10 bucks a month and increasing as you go you're going to feel better now you're going to have a lot more money later and yeah you're not you're not going to have to wait till you're 90 I mean if you're 90 you might have 100 billion U but you know you might have millions in you're 40s 50s 60s you know when you're still young and can use it so naturally people are going to say okay compounding interest sounds great what do I invest in again broad strokes The two types of things I would invest in are the stock market and real estate and personally my favorite is the stock market not because it's better necessarily but primarily because it's way less work and it's very very simple and takes very very little time and so it's a great place to start you know real estate is great too but that's a kind of worms a lot of risk a lot of work and so I think on this episode we should talk about the stock market and so when you talk about the stock market that scares people it's a scary term I don't even like hearing it come out of my mouth frankly because it sounds like gambling sounds like picking stocks doing research looking you know watching shows on CNBC like Mad Money where there's Jim Kramer's crazy honking horns and saying buy and sell but really when you take a step back from the gambling Persona of the stock market all it is is the culmination of all the companies of the world the ones I mentioned before that are growing earning and you think about you know we always hear news about oh corporate profits are up and you know billionaires are getting richer that's because they all own companies and you can too by buying the stock of companies and so that is what you should invest in in the stock market and that just made me realize we should go even more fundamental what is a stock so a stock is basically just buying a piece of a company so like let's say you want to start a company and you wanted to make like Erica's Donuts or something like that and a doughnut machine costs $100,000 I do not know anything about Donuts so uh do not this is not donnut advice this is stock market advice but a Don donut machine costs $100,000 and so one of the ways that companies raise money is basically by selling a share of their own business and so Erica's uh Donuts could basically break the ownership of your company into 100 little pieces for example and you maybe you have $50,000 and you want to get $50,000 more so you could sell each share each of those hundred little pieces for $1,000 each and then that would raise $50,000 from selling a part of the company and you could combine that with the $50,000 you already had you'd have $100,000 you could buy your dut machine you could run your dnut company and then hopefully as your doughnut company is successful sales Donuts is profitable and grows the owners of those shares will benefit in two ways one you could give them dividends when you the owner have profits you can pay those profits back to the shareholders so like let's say me a stock buyer I go buy one share of Erica's Donuts I I'm a 1% owner of your company then you have a great year and you say hey we have extra profits this year here's 20 bucks I'm like great I didn't even lose my share I got a free 20 bucks that's called a dividend so while you own stock you get paid dividends and the other benefit of owning stocks is I still own this share so maybe a few days later I could few years later I should say I could go to friend and say hey this this share of stock is great Erica's Donuts is doing great it's now got 10 locations it's growing faster it's being more profitable it's paying a dividend do you want to buy it from me and he's like sure I'll pay you the Thousand doll that you paid and I'm like not so fast I bought it years ago when they weren't so big I'll sell two for $5,000 and he says how about $4,000 and then we agree on a number and so then I profited in two ways one I got paid dividends while I owned it and two I sold it for more than I bought it for the increase in this share price and this is obviously a very simplistic example this all happens very quickly on the internet these days but that's what it stock is it's really basically that simple owning piece of a company but instead of very tiny companies like Erica's Donuts I mean soon to be massive multinational conglomerate Donuts um but you know once companies usually need to be big enough to be publicly traded which is when we can buy a piece of Amazon or Google or Facebook or Ford you know the companies that that run the world that was a great explanation thanks I love that does that make you want to start a donut company yeah I'm very hungry hungry and just to clarify here stock share you'll hear it used interchangeably yeah they they're basically mean the same thing maybe a share means one individual unit of stock the more general term but if you say I'm buying stock I'm buying shares of a company stock in a company it all means the same thing 202 for is here and there are so many of you eager to Kickstart your businesses and achieve your goals having a good website is a no-brainer for any business and often it's one of the first impressions people get about your business and your brand that's where hostinger comes in hostinger is the go-to solution for building a professional website effortlessly and they're one of the top web hosting and website creation brands in the world what I love is that whether you want a Business website or an e-commerce store their userfriendly software means you need no coding skills or technical expertise when I was first building my online business I had to do it 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what stocks do I buy that's a great question and it's also like the billion dollar question because everybody out there is trying to answer that question if you know what is the next Tesla the next Amazon the next the next Facebook the next Google you could buy those shares for a very very small price and then hold them for a few years and sell them at a high price you know people who bought Amazon very early on made tons of money and so everybody wants to know what's the next Amazon the problem is because everybody wants to know that answering it is virtually impossible because the stock market is what we call efficient that means since everybody is trading these stocks you know when I gave the example of Erica's donuts and the fictitious example of me offering it to a friend on you know off the market that's not really how they trade they trade on the internet you know millions of times a second and so when you you can Google a stock price for example you could Google Apple stock and you might see one share of Apple stock is $200 and $232 and then if you click refresh it might be 14 cents or it might might be nine cents because in real time constantly while the stock market is open that price is getting set by everybody who's trading which makes it very very difficult to say okay I know what's going to happen to Apple stock price going forward or I know what the next apple is going to be so unfortunately there's good news and bad news the bad news is it's virtually impossible to pick individual stocks and reliably beat the stock market have those be the great stocks that's the bad news the good news is if since the stock market's efficient and that price is fair like the price that everyone's trading at is kind of the fair current market price you could just basically buy any stock randomly and get the fair price so where does that leave you if you shouldn't buy individual stocks but if you buy any stock you're getting the fair price turns out this is the spoiler this is the big the big way that I invest the best way to invest is actually to buy all the stocks and this was a crazy idea when it was introduced back in the 1970s by Jack Bogle who basically he founded Vanguard and popularized the index fund which is what this is was what which is what this is buying all the stocks but basically he said since all the stocks are priced fairly instead of submitting your yourself to risk by guessing picking and choosing stocks just trying to find the next Amazon he says instead of looking for the needle and the hyack this is a jack Bogle quote he says buy the Hy stack you buy all the stocks and then you're guaranteeing yourself your fair share of the growth of all the all the profits of all the companies in the stock market and so that is how I invest all my I have millions of dollars my net worth is about $4.8 million or so today and other than my home which I own and like a few other real estate Investments most of it is just in index funds buying all of the stocks so you've kind of mentioned that your strategy which is also my strategy is to buy all the stocks via a vehicle like an index fund how would you describe an index fund it takes a little bit of history but back in the day you know decades ago probably even before my parents time you would go to a stock broker and they would go to the floor of the New York Stock Exchange they literally travel to New York City and raise their hand in the air and buy these pieces is a paper that were called stock certificates and that would represent your ownership in the company of course now time has gone on they introduced this idea you know that's very problematic because it's burdensome to keep track of these pieces of paper and you buy and sell them of course is timec consuming and logistically difficult so they introduced the idea of a mutual fund a mutual fund is when a bunch of people mutually pull their money and put it into a fund you know kind of hate all these terms like mutual fund because they're scary and they're intimidating to people people who've never been investing before but it's the idea is relatively simple a bunch of people put their money together and put it into a fund and then that fund can then buy and choose all the stocks for all the owners then as all the stocks inside of that fund there's like a manager of that fund who basically collects the money goes to the stock exchange buys all the stocks and then as that fund all the stocks in that fund produce value they're returned back to all the individual owners in the proportion that they contributed their money that mutual fund still exist to this day there you know they were the state-of-the-art for many many decades what I just described is called an actively managed mutual fund because there's a manager who's actively picking and choosing the stocks it's still a good way to invest but the problem with actively managed mutual funds is the manager basically has bad of luck picking and choosing stocks as everyone else who's doing it and they charge a high fee for their service because they have to rent space in Manhattan and pay their staff and profit for their company and do all their research and so that fee comes out of the fund and so the profits returned back to the investors is lower meaning that your rate of return is lower meaning that magical compound growth we talked about over time is lower so enter the index fund it's a type of mutual fund where a bunch of people pull their money put it into a fund but instead of an manager actively picking and choosing stocks there is no manager and you simply buy all of the stocks and the benefit of that is you diversify away all the risk of owning individual stocks you make it extremely simple you can buy an index fund with basically one click on the button of a website and it's extremely low fee instead of paying managers for all their work and profits the fee is extremely low and so that's what index fun is and I know that description was very very abstract if you're listening to this on a podcast or watching it just sounds like people pulling their money where they go to the park and pull out their walls how it actually looks is you can Google these things and so for example there's a an index fund with a ticker symbol VT and VT stands for the Vanguard Total World stock market index fund if you Google the letters VT Google will actually pop up a little section at the top of the screen that shows what it is the cost of buying a share and you know the expense ratio and a lot of the details the history of How It's performed when you buy VT you are buying the stocks of all the stocks of all the companies on planet Earth essentially so every company on planet Earth is working for you now because you own stock in all their and all those and all you know shares of all their companies and so that's what Index Fund is and VT is an example and it's a very simple way to own all the companies of the world I love that I'll give a visual example too because I'm such a visual person so I picture it as if you're going into the grocery store and the grocery store is the stock market and on the aisles you see the individual stock stle where on the individual stock aisle you see apple and you see Amazon and Google and Facebook meta and you can pick to buy those individual stocks and put them in your basket but then you go to this other aisle in the grocery store and that's the index fund aisle and now instead of seeing these individual stocks that you can pick and put into your grocery cart you see these baskets like an like a Halloween basket or like a gift basket or like a holiday bundle where they have apple and Amazon and Netflix and all of these little tiny companies in this basket so then you just grab gra that basket and put it into your cart I love it and yeah in that basket is literally everything in the first style every single stock and the way index funds work is it's in proportion to the size of the company and so you're owning the most of the biggest companies but then you also own a little bit of the small companies and so if one of the small companies becomes next Amazon you've owned it early on at least a little bit of it and if apple and Amazon the biggest companies continue to do well in profit you have most of your money there so you you kind of get the best of all the worlds with ultimate simplicity let's talk about the S&P 500 which a lot of people many people may have heard that but may not really understand what that is so the S&P 500 stands for standard and pores which is a company that's been around for I think 100 years or something and back in the day their job was to basically keep track of the companies you know we live in the internet era now and so tracking companies is easy but back then you needed people working who are writing on manual spreadsheets and things like that and so I think it was introduced in the mid-50s they basically introduced before the S&P 500 there's the Dow Jones and the Dow Jones is another list of companies but the Dow Jones is just a list of 30 companies and that was a good start back in like the 1920s but by the time the 50s rolled around they said we should be tracking more than just 30 companies in all of America so they came out with the S&P 500 which is essentially a list of the 500 biggest companies they say it's a 500 representative companies in the US but essentially the 500 biggest companies in the US and so if you look at the S&P 500 it's just simply a list of companies says you know on the top is Apple and Microsoft and Amazon and Tesla and Google and all the biggest companies from biggest to smallest the first 500 that's the S&P 500 so you can buy an S&P 500 Index Fund and that is simply just that basket of stocks just described with those 500 companies inside and that's a fantastic investment because you're getting the 500 biggest and best companies in the US so again with the grocery store aisle if you're going through the index fund aisle you you would pick up a basket that has little bits of these 500 largest companies in the US in it and then you put it into your cart to buy it I love it and that's that's an index fun and what you just described is exactly how it works except it's on a website and then you type in you know all the baskets have little codes on them maybe at a grocery store it might just have a price tag but instead it's got a little code like VT or the S&P 500 Index Fund is vo so you could open up a an account with a brokerage like Vanguard Fidelity or Schwab and then type in vo and put in how much money you want to buy you know the a basket might be like one share but turns out you usually invest in dollars so you don't invest in shares so you say Okay I want to invest at 10 bucks or 100 bucks or whatever it is then you get that basket with all those stocks uh in the proportion of like you know the 500 best stocks in the US yeah and to your point you were saying earlier about how you don't need to have so much more money to then buy all 5 100 stocks if you're going to go buy an individual stock and you have $100 that's fine you can do that but with that same $100 you can go buy fractional pieces of those 500 companies so it's not like you need to have 500 times more money to buy those 500 stocks I mean the nice thing about index funds is if you look up one share of Apple I think it I don't even know but I think it's around 200 bucks a share right now and that is logistically difficult because to buy one share you need $200 to buy two you need $400 then you only own exactly one company and so if Apple the unexpected happens and Tim Cook has an affair or something and apple goes out of business or whatever the worst could happen you would lose you could lose all your money in one company but with an index fund you own tiny tiny little fractions of shares of all the companies and so any one company if it goes out of business that's no problem because you own hundreds of other shares and you and you don't need enough money to buy full shares you know if you only have a 100 bucks you can put in just your hundred bucks and it's going to buy you the right amount of every company so you're have a you know a well Diversified portfolio so you gave us the ticker symbols which is basically what you type in on your investing platform to buy these index funds VT is the total World vo is S&P 500 Index Fund is there a reason you choose the Vanguard versions I give Vanguard as an example just because Vanguard kind of invented and popularized the index fund but there's lots of equivalent index funds that do virtually the same thing and so one of the most common questions I get asked is what's the best index fund and the answer is there isn't really a best Index Fund they all do the same thing so if you look at any us stock market index fund whether it's from Vanguard or Fidelity or Schwab or ey shares and you chart them against each other they'll look like a line on top of each other because they all do the same thing and so there's no real reason to pick one over the other other than basically making sure sure you're not paying additional fees to purchase it some of the brokerages charge fees if you buy their competitor's version of the exact same index fund and so that's one thing to watch out for and a very simple way to figure out these ticker symbols is for example S&P 500 Vanguard or S&P 500 Fidelity and those ticker symbols will come up and then you'll know what to invest in yeah okay so then the next logical question is probably okay now I understand what index funds are I understand what to invest in now how do I invest index funds can't go in your savings account we probably are all familiar with a checking account or or savings account you open it up with a bank it holds cash you get a little debit card that's kind of how bank accounts work with Investments you need a new type of account called a brokerage account and a brokerage account is similar to a checking account or a savings account you go to a website you click open account put in your details then you have the account but instead of just holding cash it can also hold index funds or stocks or bonds and so basically the next step is going to a brokerage website the three biggest in the US are Vanguard Fidelity or Schwab you click open account and then you transfer your money in you like link a bank account like you would link your venmo account or something so you could transfer 100 bucks in you click buy you know there's the interfaces are a little different but they're not too hard you click buy so once you're 100 bucks in there you click buy then it asks you for that ticker symbol so you could type VT to buy all the stocks on Earth and you say how much VT do you want 100 bucks and then yeah you've done it so a brokerage account is kind of the critical piece that holds all of your index funds and you're I have this concept called the layers of investing and at its core investing is stocks stocks and bonds because a lot of people ask me like what's better a brokerage account or an index fund and the answer is that doesn't make sense because you need both so at its core you have stocks and bonds like kind of and we haven't talked about bonds but it's the same idea with stocks you these are things you buy that go up in value but buying individual stocks is problematic because it's logistically hard and you don't know which ones to buy so you buy them all in an index fund and then an index fund needs to go in something so it goes inside of your brokerage account and then a brokerage account needs to go in something namely like a website or a brokerage and so your brokerage account goes in a brokerage like Vanguard Fidelity or Schwab and going back to my visual which people are going to get sick of but I think it's very helpful for visual Learners like me so I think of the brokerage account as before you enter that grocery store you need to open an account so you have to go to Vanguard or Fidelity or Charles Schwab and open account when you open an account they're going to provide you with that shopping cart yeah that shopping cart allows you to roll in and then within the shopping cart put that basket or the individual stock into it and then there are different shopping carts too there are there are and we're this is an incredible podcast because we're basically in this you know 45 minutes or hour whatever this will be it's essentially everything you need for optimal investing for decades and you can ignore all the noise that we hear about day trading and options and and you know Futures and insurance and all this other stuff you can ignore all that noise because this is optimal investing but you know it takes a few minutes to explain and so I love that I love the analogy because you know the bunch of stocks needs to go on something and that's your shopping cart and then your carts your account and so the normal regular type of account the normal type of shopping cart is just called a brokerage account that's been around forever it doesn't have any special rules really you can put money into it and take money out of it whenever you want but this point becomes kind of a tax issue for the US the US government I think back in the 70s said hey not enough people are buying stocks inside of their brokerage account we want people to invest so we don't have a bunch of broke old people in the US because it's not a good look to have old people on the streets and it's not fun for those people and it's it puts too much stress on Social Security and so we want to encourage people to invest and so they introduced the idea of the IRA that stands for the individual retirement account and it's a type of brokerage account so it's just like a regular old brokerage account it's another shopping cart but this time with in in the case of the Roth IRA any money you put in there and any growth of all the stocks inside of your Roth IRA shopping cart is never ever taxed again inside of a regular brokerage account the growth is taxed so for example if you put $1,000 in a becomes $3,000 $2,000 the government's going to say hey that's new money that's growth you haven't paid income tax on that so you're goingon to have to pay capital gains tax on that capital gains just means Capital that stuff gains goes up in value so you owe tax on the $22,000 of growth but inside of an IRA like a Roth IRA you never have to pay tax ever again and so it's a special type of shopping cart where you never have to pay tax ever again so if you're a working person in the US and you want kind of the best deal in investing you would open up You' go to Vanguard Fidelity or Schwab open up a raw th that's your shopping cart go buy an index fund put inside Roth IRA and you are optimally investing so now that we kind of understand this concept of index funds which index funds do you think people should be buying so we talked about two great ones the S&P 500 Index Fund which is US companies and the global Index Fund which is which is all companies us and non- us and there's basically three main categories of of index funds that I think everyone should buy a US stock market index fund a non- US stock market index fund or or what we call an international stock market index fund and the third is a bond index fund and we haven't talked about bonds but they're basically a a way to invest and get interest back with less volatility than stocks but those are the three main categories and so you can buy what's called a three fund portfolio by one US stock market index fund one international market index fund and one Bond Index Fund and you generally want to buy less Bonds on you're young and more Bonds on your old and so you have this kind of progression of when you're young you're mostly stocks when you're middle age you got maybe two3 stocks then when you're retirement age you're about 5050 and then when you're beyond retirement age you might be 70% bonds and so there's an even easier way if this three fund portfolio got a little bit scary there's a type of index fund called a Target date Index Fund which is just a simple basket of those three index funds I described so the going back to the grocery store analogy it might be getting a little bit abstract here but you know you could find a basket of US Stocks a basket of international stocks and a basket of bonds or there's yet another you go to maybe the next row and there's a really big basket that has these three baskets inside of it and and that basket has everything you need and it also has it based on your age and so these Target date index funds are named based on your age so for example and they're actually named based on the year you plan to retire but I wish they're named based on your birth year because it has much more to do with your birth year nothing nothing happens in that year when you retire it just is simply trying to identify your age and so for example I was born in 1980 so if I had 65 to my birth year 1980 plus 65 the typical retirement age gets me 2045 I can go buy a 2045 index fund and put every penny to my name into this fund and I will own essentially every us stock every International stock every bond in the correct proportion rebalanced over time as the prices of the stocks change it's going to rebalance it for me and reallocate it as I age so I'm 40 so I'm getting to I'm 42 in my 40s I'm getting to the point where I'm like okay I might start slowly introducing bonds into my portfolio as I age by the time I'm 70 then I'll be more like a 5050 portfolio of stocks and bonds and I visualize it again as right outside of this grocery store you see the shopping cart choices so the label on the shopping cart is 401k or Roth IRA or normal taxable brokerage account and then you get to choose and then you go into to the store and some of the shopping carts by the way have caps to how much you can fill that card up so the 401K or the Roth IRA is going to have a limit to how much you can put in it each year the normal taxable brokerage account will not have a limit so there's also an order that I think you should follow when you're deciding which carts to fill up first would you agree I agree I love it that's totally true so for so to put some numbers on it in a raw th the max amount of money you can put in per year is $6,500 and a 401k the max amount of money you can put in per year is $222,500 and so basically the government has said hey we want to encourage you to invest inside these accounts but they're not for billionaires to you know shelter all their money from taxes they're for regular people to build some wealth and have that wealth be protected from tax to encourage them to invest and so in terms of the order and you know the shopping cart metaphor you said is great what that looks like in real life is you go to a website and then you click open an account and then it says what type of account and then you'll see your shopping cart choices there and in terms of the order this is like we're really into the nitty-gritty now I would preface this with this isn't critical if you don't get this exactly right that's okay you're still doing a good thing you're still investing and Building Wealth this is more of an optimization saying Hey Now That We're investing Building Wealth let's maximize that you know let's go from an getting an a to an A+ by you know tweaking these little things and so the order goes like this first if you have a job that offers a 401k that 401k offers a match that's the first place you should be investing the match means your company has offered as a company benefit a employee perk that if you put in a certain percent of your own income they will match that they will add to your income so if you don't do that that your company is taking that money and keeping it instead of giving it to you it's like free usually a 100% match usually a one for one like every dollar you put in they put a dollar in so that's the first place you should go so if you have not started investing at all or you have a company 401K and you're not taking advantage of it you should so first stop 401K up to your match second stop I'd go to the Roth IRA that's a kind of a usually lower fees better investment options than your 401k but there's a lower limit 6500 so like let's say you can put $1,000 a year into your 4K to max out your match and then you can put 6,500 into a Roth IRA that's a total of 7500 so if you're investing only 7500 a year that's what you do $1,000 in your 41k 6,500 raw IR if you can invest more then you go back to your 401k that can go up to 22,500 so for example 22,500 plus 6,500 is what $229,000 right so if you you can invest up to $29,000 per year and not overflow the limits on those two accounts if you're investing more than that and you're going to be a millionaire if you're investing more than $29,000 per year then you go just to your regular old brokerage account and you can invest an unlimited amount of money in that account and just to be very clear with Target dat retirement funds you buy it once so Jeremy could have bought the target date Index Fund for 20 45 2045 when he was 20 years old put $1,000 into buying that and then he could just sit back and do nothing for the next however many years and all of that would automatically happen in the back end where that allocation and when we say allocation that's like uh in that Mega basket what portion of it is stocks what portion of it is bonds that's all changing as he ages so he for at age 20 he could put $1,000 and then not touch it until retirement and at at age 20 it would have had way more stocks and at retirement it's going to have way more bonds but he could do nothing he could just like open the account once and then look at it at age 65 and it would have been all handled for him exactly and in my opinion is essentially optimal investing done for you automatically at a very low fee one of the mistakes that I want to talk about that I think a lot of people make and even people close to me in my life they didn't realize that they thought they were investing but really all they did was fund the account and they never picked what to invest in so the analogy there is you go to the grocery store you pick hey I want that cart the 401K cart or the Roth IRA cart here's $100 that I'm going to put into it but then you never go inside the shop and you put anything into your cart and that happens to a lot of people I have a list of seven SS of investing and that's the number one which is holding cash in these in these investment accounts and my my nightmares are fueled by Young investors who do exactly what you said which is they they get the Roth IRA cart they put their money in and then they just look at the cash sitting there on in their cart and they they forgot to go and buy the the um the index fund so it's really important to separate that concept of the investment the index fund from the account if you just put money into a Roth IRA you haven't yet invested you have to take that money and then click the buy button and and do the following step and so if you have started investing if you're already investing a little bit if you have a 41k if you have an IRA if you have a brokerage account go log into those accounts and look at what's in there you shouldn't ever see any money sitting in a position called cash or settlement or sweep or money market or anything that sounds like it might be cash and there's all these different terms for it and I apologize for that on behalf of the finance industry they don't make it that simple um but if there's cash sitting inside of your retirement account you haven't invested you just put cash there what are some of your other SS that you think people need to know a lot of have to do with behavior so for example picking individual individual stocks we talked about that timing the market is a sin I think that's SIN number three timing the market means jumping in and out of the market based on what you think is going to happen so one of the most common questions I get is should I be investing right now inflation or war or recession OR tech stocks or this or that and the answer is ignore everything just buy regularly monthly over time and don't try to time the market because jumping out of the market this year is a great example people say hey I did great high yield savings accounts are paying 5% I'm just going to wait out this uncertainty of the market and keep my money in cash and take my 5 per. well the stock market this year is up about 14% And so if you got a 5% return because you're trying to time the market you've actually underperformed by 9% losing to the market by 9% is horrific is is uh catastrophic in terms of your la long-term returns and so timing the Market's bad thinking shortterm is another sin a lot of investors a lot of young investors want to get rich quick want to put money in something that's like the next hot stock or the friends restaurant or whatever it is and get rich in a year but wealth is built like the Warren Buffett example over time and so if you're thinking short term about turn making a turnaround this you know by training or whatever it is you're almost always going to be you know it's going to hurt you long term the sin is chasing past performance I see this all the time from Young investors we're talking about a very measured strategic approach to investing but a lot of investors are it's kind of like this shiny object experience where you you see something that's just did well and you know tech stocks are a great example two years ago tech stocks were going crazy and everyone said why would you invest in the total Market where you could just buy the tech stocks those are going up the fastest but what they mean is those went up the fastest in the past what really happened in 22 is those went down the fastest and so we don't we know what happened in the past if you buy the best performing the best performing stock or fund or whatever of 2023 it's not going to be the best performing stock or fund of 2024 we don't know what it is so instead of chasing past performance we buy broadly we buy the total stock market index fund the next the next sin is paying high fees and so there's been studies after studies after studies that look look at what you can do to improve your investment performance is it looking for managers who have a long tenure or past performance or sharp ratios or morning star ratings or you know the you know the dozens of different aspects of Investments that can maybe predict what's going to do better and they found that all of them but one had no correlation to Future performance and the one that correlated to Future performance is fees the more you're paying in fees the worse your returns and so that's why we talk about index funds because they're very very low fees and the last sin of investing is not investing early and often so for example if you invest $500 a month for 40 years after accounting for inflation your investments will be worth about $12 million because that investor has invested early and often so 500 bucks a month 40 years $1.2 million if you invest 500 bucks per year for 10 years your Investments are worth $6,900 $600 bucks and so with everything we've talked about this is the most deadly sin you know we've talked about the intricacies of individual stocks versus mutual funds versus index funds the shopping carts the IRA the 401K all that pales in comparison to just how often in how much money you're putting in if you just throw in a few bucks once and look at it five years later not much will happen if you're consistently investing a big chunk of money over time you'll see you know a huge return even if you're not investing perfectly so the laston is not investing early and often and on that note with your sins about not overthinking it not trying to time the market and not doing it often enough I think automation is a really key thing too to be automating everything you can about the process yeah everything we talked about seems like a lot but at the end of the day investing is so simple involves going to website clicking the automated investment button so you say Okay I want to invest 10 bucks a month 50 bucks a month 100 bucks a month whatever you can afford and then just you know choose your target date index fund and then you just do nothing you literally just put it in there and leave it alone and do nothing and that is optimal investing the less you do actually the better other than putting more money in and so people think it needs to be this very complex process of research and choosing stocks it's really not the most important thing is just that automation choosing your target date index fund and leaving it alone for a long period of time guys it really is that simple investing early and often everything we've said covers everything but if it went fast for you or we missed some things or you want to see you know video examples Erica has a course it it goes over the same stuff in Greater detail video examples you can refer back to it it's going to walk you through you know hearing it on a podcast is one thing but seeing it done is another and so that's the course that will take you through what you need showing the examples you can have your brokerage account and the video right next to each other and you know mirror it and it literally takes 10 minutes to set up your investment account to do optimal investing for years and there's probably no better return on investment in the world than spending a few bucks on an investment course a good one that's going to teach you how to do it right and then leave it alone for decades thank you for that and if you guys are interested I'll put the link in the bio for that hey so in addition to putting the link in the description for you I also want to take a moment to explain a little more about my course that Jeremy mentioned 3D money is my signature transformative course that will show you how to eliminate debt grow wealth and change your financial future 3D money takes you through the three stages that you need to go through in order to get yourself financially secure and to a place where your money is making money for you so the first stage is called decode and that's where we're going to take control of your financial situation and uncover the truth about your spending habits your savings and debt then we have the design part where we develop a plan for you to become debt free for you to build up savings and for you to earn more money and then finally that third stage is called diversify and that's how you're learning to make your money work for you you're going to learn how to invest wisely and diversify your income streams I've spent hundreds of hours making 3D money perfect for you and it has over 94 lessons as well as eight bonuses including one of them being every credit card that I use to get the most benefits I truly believe that you you deserve to live a life free from Financial stress and 3D money is going to help you transform from someone who is worrying about money to someone who has their financial picture completely under control and is paying off debt budgeting better and investing wisely so if you're ready to say yes to that and start your journey towards Financial Freedom then go to erica.com 3dm that's Erica with a K erica.com 3dm once again again I'll also put the link in the description now back to the episode something I also want to ask you is I get a lot of people that are in their 40s or 50s or 60s that say is it too late for me to invest it feels like I've missed the boat the answer is no you know compound growth is amazing we all wish we started when we were two years old and could see this m magic thing happen but the good news about being later in your career is often you have more income and you're often more focused too and so while you're most of us in our 20s are spending all of our money and non-investing when you're in your 40s 50s and 60s you're getting more serious about it and so a few things IID say first of all you're not alone everyone I talk to thinks they're behind everyone I talk to thinks they're alone you're not second you have a long time to live if you look at the actal tables like when people are expected to die and you're 60 years old you probably have 30 years or so left you know the the average age in the US I think is approaching 80 or so but if you made it to 60 you have avoided much of the death early in your life and you're actually going to live beyond 80 so you have 30 years of life to look forward to and you want to be saving and investing to take care of that right and you know like I said you don't want to be the 70y old pushing shopping carts uh at The Big Box store so when you're 60 or 50 you know and if you're 40 you're listening to this pitch Me Pitch the 60y old then you're in really good shape right the 60y olds wishes wish they s when they're 40 and so whatever your age you probably have many many years to live and so you want to start this process and you'll you'll feel better like I said if you have a plan in place and you're saving and investing and putting into this this you know this this system you're going to feel better today and you're going to be in better shape down the road and I can't remember who first said this but I think the best time to start investing is yesterday the second best time is today yeah I think I think that like an ancient Chinese proverb like the best time to plant a tree is 20 years ago and the second best time is today and you know you'll never Beed it yeah I mean it's same idea but like you'll never be as young for the rest of your life as you are today and so you know don't wait another five years because even you know even at 605 years can make a huge difference no this was excellent and if you're a visual learner like I am Jeremy's Instagram it's personal finance Club it has some of the best visuals to really help you understand these Concepts and I think it's an excellent you've done an excellent job with it thank you it's lots of very simple emojis and very simple examples and breaks down the same thing that we talked about here is the same thing on my Instagram it's the same thing in Erica's course it's just the basics of investing but it also happens to be optimal investing and there's no commissions there's no pitch I kind of feel like a little but like we're on an infomercial be like and also but but there's no there's no sales pitch at the end because no one gets a commission from index funds because they're very low fee that's why I put my millions of dollars into them the podcast is called Erica taught me but really today is all about Jeremy taught me so what do you want people to walk away saying Jeremy taught me this I would say if you take away one thing from today's episode it's to follow the two rules of Building Wealth rule number one is to live below your means you have to save money in order to build wealth and rule number two is to invest early and often if you spend less than you make and you invest the difference even if you're not doing it perfectly you're going to build wealth if you spend all your money and don't invest it doesn't matter how much you know about index funds you're going to stay broke so live below your means invest early and often that's how you build wealth thank you so much yay thanks for having me Erica if you've enjoyed the episode please take a moment to leave a review it really helps support what we're doing thanks for listening and I'll talk to you next Tuesday on a brand new episode of Erica toau me
