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Monday, June 17, 2024

I know I’m supposed to be investing. How do I start?


On the Money is a monthly advice column. If you want advice on spending, saving, or investing — or any of the complicated emotions that may come up as you prepare to make big financial decisions — you can submit your question on this form. Here, we answer two questions asked by Vox readers, which have been edited and condensed.

I’m currently 27 and am fortunate enough to still live at home with my parents and have a solid-paying local government job. I could be more financially literate in a lot of areas, however, investment is one that I should probably focus on now. I have not been using any of my life earnings to grow a larger sum.

I’m fairly bearish on investing, as you may know if you’ve read my column for a while. Yes, you can do the math on “if you invest $1,000 every month for 35 years with an average 6 percent return, you’ll retire a millionaire,” but the way to figure out if that kind of advice is worth your attention is to look around at all of the retirees you know and ask yourself how many of them are millionaires. 

It’s not just that investing $1,000 every month for 35 years is unrealistic for most people, although it very much is. It’s also that you can’t count on the 6 percent return. Some years may only deliver a 4 percent return. Other years may deliver a negative return — and that’s before you get into the crashes and corrections. Even if today’s retirees had been diligent about adding money to their portfolios every month, they might have lost a significant chunk of the value of their portfolio three separate times (the dot-com bust, the global financial crisis, and the post-pandemic bear market). The market may rebound relatively quickly, but it takes much longer for compound interest to catch up.

With that in mind, let me ask you the questions I always ask. Why do you want to grow your life’s earnings into a larger sum, and is investing the only way to do that? Living with your parents while working a solid-paying government job is an excellent way to add to your savings. CD ladders are guaranteed bets right now, and high-yield savings accounts (HYSAs) are still going strong. From my perspective, there are many different ways to increase your net worth — and that’s even before we get into the question of how you might grow your income over the next 35 years.

I’m not going to discourage you from investing, of course, especially because you can get significant tax advantages from traditional IRAs, 401(k)s, HSAs, and the like. I’ll also remind you that I am not an investment advisor, but standard financial advice suggests that you look into index funds instead of, like, becoming a day trader. Also, don’t forget to compare expense ratios.

That said, we need to go back to the question of why you want more money. Down payment for a house? You probably don’t want to invest to do that, as the time horizon’s too small. Start a business? Ditto. Retirement? Sure, get those tax deductions and put your money somewhere that you can’t touch without paying a penalty. Investment could work, in that case, even though you could also put your retirement savings in CDs.

But if you just feel this weird sense that you’re leaving money on the table by not investing, well — go read Helaine Olen’s excellent book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, go watch any of Dan Olson’s investing analyses on Folding Ideas (including “Line Goes Up” and “This Is Financial Advice”), and remember that there is no such thing as an average 6 percent return. Know the risk you’re taking before you take it, and don’t invest any money you can’t afford to lose.

I’m starting a business and I want to find a mentor. I’m emailing everyone I can, but I’m not getting any response. How do I build that kind of relationship?

Dear Mentees (since there were two of you who wrote in with a variation of this question),

While there are various organizations that could help you match your small business with a small business mentor, including your local library, your local Chamber of Commerce, and the alumni center of any institution you may have graduated from, the type of mentorship you’re going to find after an evening of networking or an hour-long lunch with a patient alumnus is likely to be shallow at best. 

The best way to earn true mentorship — the kind that can actually help you get a business off the  ground — is by proving you’re ready to do the work.

Mentorship, like nearly all forms of relationship, is one of those deals where you can’t just go ask someone to give you what you want. Not even if your small business idea is a really, really good one. You have to help someone else first before people will be willing to help you. 

In some cases, you may need to get someone to hire you. However, you don’t want to end up working a demanding or unfulfilling job just because you think the boss might notice you someday. If you can find a potential mentor who needs a right-hand assistant in a business that is coincidentally similar to the one you want to start, well, that could work — but those kinds of jobs often go to people the mentor already knows.

Which means you may have to be helpful in other ways. There are in-person and online communities for small business owners, for example, and if you contribute positively to those communities you may find people eager to mentor your business. This would, of course, be a more positive contribution than simply showing up to an event and passing out your business cards. You want to be the kind of person whom everyone knows, and the kind of person who can be counted on to add value to a conversation. You may even want to become the kind of person who helps to plan and host the events where all of the other people stand around and pass out their business cards.

You could also volunteer at any kind of organization that attracts smart, ambitious people — arts groups, political groups, and so on — and catch a potential mentor’s eye that way.

If your business idea is really, really, really good and you want to shortcut all of that, look into stuff like Emergent Ventures or Y Combinator. Keep in mind that the first question these mentor-investors may ask is, “How is your business going to help someone else?” Make sure you know that answer — like, really, really, really know it — along with the answer to the question, “How is your business going to make money?”

But you can stop the cold emails. As you already know, they aren’t getting you any response.

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