Growing up in my early teens, I used to have a piggy bank. Anytime someone gave me any money as a gift or what I received from my parents, I used to quickly put it all in my piggy bank. In those days my understanding of investment was if I kept the money in the piggy bank, it somehow would magically grow over the years. Well, I never thought about the laws of compounding as a child, hence all I dreamed of is one day I am going to take out all the money and be a rich person.
At that time, no one really taught me that putting the money in the piggy bank was not really helping as the value of money was actually depreciating each day as inflation increased. This kept going on and on for years. After several years, I was exposed to financial banks and learnt that these banks provided you some interest for keeping your money with them. The other cool factor was that you could quickly know how much money you had saved by going to the bank rather than having to break your piggy bank. Online banking was not a thing earlier and neither did ATM machines existed and hence you had to physically go to the bank to check your current balance.
The idea of getting free money through interest was very compelling and hence I was all in with the strategy. I ended up emptying my piggy bank one day and walked to the bank to have an account opened. The bank representative helped me out with the account opening and gave me few tips on how to deposit and withdraw the money. I walked back home with a feeling of victory thinking that each day now I get free money, just to park my cash. This was happiness and in the future any time I had a little bit of cash, I used to quickly go and deposit at the bank.
Fast forward a few years I get into college and there was no such thing as savings because the cost of education with my $1000 that I had saved in the bank could never be an apples to apples comparison. There was also a lot of debt because of college loans and hence the reverse hypothesis that it was better to pay off loans rather than save money started to kick in as I started to compare interest rates. It just did not make any sense to earn < 1% in a savings account while having to pay around 8% interest on the debt that I had accumulated through college. So my investment aim shifted to basically paying off all my debt. I still feel this was a good decision because at that time I did not really understand financial markets and I had no other means of earning more interest than what I was paying on the debt.
After completing college, I still had a good amount of debt accrued but luckily I had got a nice paying job in a large company as I graduated. So my first few initial bonuses and salaries essentially went towards clearing off my debt. Within a month or two of getting graduated, I remember I had basically paid of all my debt. The best part of this journey was that I did not have to depend on my parents for a single penny during college and managed all of this through the loans I took.
Working through my first few months of corporate life, I was now actually saving some real money and putting it all in my savings account. The bank representative had taught me the difference between checking and savings account, making me very diligent about how much money I had in each of them. Savings account pays a higher interest rate as compared to checking accounts but are also restricted in the number of transactions you can do. Very quickly I started to realize that I was accruing a lot of cash in my savings account and I started thinking if this was the best I could do with my money. Hence I started looking around and started to learn about investing and saving money.
In a short time, I learned about a thing called 401K or retirement accounts and the potential savings and tax benefits you may receive from them. As I learned about the benefits of depositing money in a 401K account, I did not know much about the investment vehicles that needed to be selected. Hence for may be a month or so, my money kept getting invested into a target date fund. But on the other hand I was saving on taxes by doing a pre-tax 401K and the money was just going into this account which I was told will keep growing over the years.
I quickly started feeling as a winner again as I had discovered the edge of earning more free money by investing it in a 401K account. 401K accounts are retirement accounts that you yourself can open or they may be provided by your employer. There are limits on how much you may contribute in an year and specific age limits to take this money out penalty free during retirement. I will be doing a separate article to provide more in depth insight into how I handle my 401K accounts. There are 2 main types of 401K accounts - pre-tax or after tax (to keep it simple). I started off with a pre-tax 401K account and was saving on my taxes today which would grow in this account. Once I would retire, I could take this money out and then pay taxes on it hoping I would be in a lower tax bracket when I retire. I started maximizing my 401K because I was saving on taxes and growing my money faster than the cash in the bank.
From there, I dived into learning about mutual funds as they were the primary investment vehicles in my 401K. It was over a period of month that I went through YouTube videos, a number of beginner finance books, articles to learn about how mutual funds worked. Finance and investment quickly started to become another passion that I was really liking. I learnt about large, medium and small cap funds which are basically the type of companies (size) the funds invests in. Small caps could be more volatile as compared to large caps because of the large company being already well established and may have decent cash flows. Another very important term was expense ratio, which in simple words means the cost/fees the fund charges you to invest your money with them. The other area that spiked my interest was annual performance returns over 10 year periods. I was a firm believer in long time growth and returns and hence comparing the funds with better growth and lower expense ratios looked like the perfect fit for my portfolio.
There was a lot of anxiety while I was selecting these funds because I did not want to lose my money. Hence I went ahead with having a large cap portfolio along with a mix of bonds and some international funds as I had learnt maintaining the right balance was important. As I learnt more, I started taking on more risk and shifted to at least 90% of my portfolio into all US stock mutual funds, some bonds and some international funds. The large cap felt like a safer place as the names of these Fortune 100 and Fortune 500 companies were familiar and I knew something about their business.
Over an year, I started seeing some decent returns in the range of 10% for my portfolio which I had never seen with the cash in my bank. This got me more excited and I started venturing out and learning more about investing. Let me pause here and discuss more in the Part 2 version of How I Started Investing. In it I will be sharing about how I got my first brokerage account, other investment vehicles that I started diversifying in, some of the risks I took and mistakes I made.
(Disclosure: Please review the Disclaimer section prior to any investments.)