The Cookie Jars
I know I should be investing money, but I don’t even know where to start.
This is a statement I would often hear from friends and co-workers.
And it’s no wonder. Between all the acronyms (401k, 403b, IRA), arbitrary rules (over age 59-and-a-half), and tax implications (is this pre-tax or post-tax?), the world of investing looks completely overwhelming.
Luckily, 90% of all the investment information out there is completely irrelevant to that average person like you and me, and the other 10% you don’t need to know all at once before you get started. It’s ok to learn as you go.
In fact, that’s the only way it’s ever been done.
So if you’ve been sitting on the sidelines wondering where in the world to start when it comes to investing, you’re in the right place.
This 5-part Beginner’s Guide to Investing series is designed to give you just the information you need to get started, and nothing more. No overwhelming market analysis. No fancy investor-speak.
Just plain English and simple concepts to help you understand the basics of investing.
If that sounds good to you then…
Let’s Start at the Beginning
Investing is more simple than you probably think. To show just how simple, I like to use the analogy of cookies inside of cookie jars.
We all know that just because we own a cookie jar, doesn’t mean we have any cookies. Our cookie jar could be all empty and sad, setting our friends and neighbors and kids and grandkids and nephews and nieces up for severe disappointment.
We’ve got to buy some cookies and get that cookie jar filled up.
Now let’s think about a savings account. Just like a cookie jar, we all know that just because we have a savings account doesn’t mean we have any savings. We have to earn some money and put some of that money inside our savings account in order to have savings.
Savings Account = Cookie Jar
Money = Cookies
We can use the same concept with investing.
In order to invest, we have to have an investment account (a cookie jar) to place the investments we purchase (the cookies) inside of.
A generic investment account we can open with just about any investment company is called a Brokerage Account. There’s nothing special about this type of account, but remember, it’s just a cookie jar. Our Brokerage Account can be just as empty as our cookie jar on our kitchen counter…and our nieces and nephews will be just as sad too.
Some other types of investment accounts that you’ve probably heard of include a Traditional IRA, a Roth IRA, or your 401k plan at work. These are all investment accounts (cookie jars) that you can put investments you buy (the cookies) inside of.
The cookies and cookie jar distinction is important. I’ve run across a few too many people who have claimed to be investing, only to discover they had a 401k or Roth IRA account with nothing in it.
Nobody intends to just get the cookie jar with no cookies, but it’s easy enough to be mislead in the investing world and think that having an investment account is enough.
Nope. We’ve gotta get some cookies in there.
Why Are There So Many Different Kinds of Investment Accounts
The different types of investment accounts is largely because each one gets treated differently by the government when it comes to how we pay taxes on all our cookies…ahem…I mean investments…that we have stored in them. This is where all the pre-tax and post-tax stuff starts to come into play.
But when getting started, it’s not critical to care about that stuff. In the end, you’ll want some cookies in several different kinds of cookie jars, so just pick one and start with that one. As you learn more and get more comfortable you can start filling other cookie jars down the road.
Your Work 401k Account Is a Great Starting Place
Let’s look at your 401k plan at work real quick.
Your 401k is an investment account (cookie jar) where you can buy investments (cookies) through your paycheck at work. This makes it really easy to get started. Sometimes your employer will even match part of your contribution. If that’s true, then your company is buying you some more cookies. That’s a pretty sweet deal.
It’s important to understand that a 401k account is your cookie jar and your cookies inside, not your company’s.
You own it!
This is important because if you ever leave your company, you get to take your cookie jar and all your cookies with you. Your company doesn’t have any ownership of the account at all. When you leave your job, always take your cookie jar and cookies with you by rolling them into a Traditional IRA.
A Traditional IRA has similar rules and limits as your 401k, but it’s not tied to your employer.
So let’s say you leave job X. You should immediately open a Traditional IRA at an investment company of your choosing and roll over your 401k cookies into that Traditional IRA cookie jar. Then at job Y you’ll start a new 401k. When you leave job Y, roll those cookies over into the same Traditional IRA cookie jar as before.
Over the course of a career, you’ll likely do this several times. You’ll get more comfortable with it as you go.
Now you have a basic understanding that there are investment accounts, just like there are savings accounts, but just having an investment account doesn’t mean we are investing. We have to buy some cookies and fill those cookie jars up.
Move on to Part 2 of our Beginner’s Guide to Investing where we’ll start looking at all the different kinds of cookies we can get our hands on.