How I Got Started with DIY Investing
I didn't have a boatload of money
If you’ve read any of my other posts about my relationship with money, you’ll know that for the first 40 years of my life, thinking about money made me feel bad. So I didn’t think about it as much as possible. I certainly was never one of those people who got an early start and bought stock in Disney or McDonald’s as a child.
What woke me from my trance of money just happening to me was reading a book called Your Money or Your Life. As a self-employed person, I already priced things I wanted to buy in terms of how many clients per week or month I needed to see. But reading this book made the connection crystal clear for me: I was trading my time and life energy in return for money to buy stuff with.
It hit me on a visceral level that unless something changed, I’d be working until the day I died. While I loved my work and my clients, my income varied from month to month, I had little in savings, and at that point had never worked at a job that offered any kind of retirement plan, let alone a matching contribution from the employer. While many of my peers had graduated from college and were starting careers in salaried jobs, I had been living on tips—in those days I worked a variety of restaurant jobs, waitressing and bartending. I was still figuring out what I wanted to do with my life. Then I discovered massage therapy.
Becoming a massage therapist, going back to finish my bachelor’s, and starting a private practice was steady work on my own terms. It helped that being married meant I had some financial flexibility as I built my practice. I contributed to our household expenses knowing that I would still have a roof over my head and food even if I had a slow month or two. My practice grew and I decided to pursue a graduate degree. My husband and I divorced. Eventually I owned a house, a paying business, graduate school loans, and quite a bit of credit card debt. Something had to change. For the first time in my life, I became intentional about spending. I also committed to paying and keeping off credit card debt.
Once I had some emergency savings and had made progress on paying off my high interest debt, I started teaching myself about investing. Buying a stock and hoping its price would go up so I could sell it for an unknown amount of profit seemed risky to me. Dividend stocks, where I got paid regularly just for holding on to the stock, seemed like a great way to create an alternate income stream now for current me. It could also grow over time to supplement my Social Security income once future me stopped working.
As part of a promotion, I opened a taxable account with a retail brokerage firm, TD Ameritrade. I deposited $100, connected my checking account, and pledged to add $50 a month for the next 12 months. At the end of those 12 months I had held up my end of the bargain and TD Ameritrade matched my $600. I now had $1300 in my account and it felt like a fortune to me.
After that, I continued to add $50 a month. And once I had put money into my short term savings and made my loan payment (I took out a lower interest personal loan to pay off my credit card debt), I put some of the remaining money into the taxable account. Then I started to buy shares of stocks I had researched, sometimes just 1 or 2 shares at a time. I also added some portion of any windfall money I received, like tax refunds or higher than usual monthly income from my practice.
That was in 2008. It was both a great and terrible time to start investing. It was great because stock prices plummeted when the housing market imploded. It was also terrible because they kept right on plummeting. Every time I looked at my tiny portfolio it was a disconcerting sea of red. I did a lot of deep breathing, and reminded myself that I was not selling anything. The red ink on my dashboard was only a loss on paper as long as I didn’t panic-sell. I was building a replacement income stream, and prices going down meant that the blue chip companies I wanted to buy were on sale that day.
My initial $100 portfolio in that taxable account has grown substantially since then. It’s taken time, and progress was slow for the first few years. My goal for that account is to generate $12,000 annually without selling shares, and I’ll definitely reach that goal before the end of 2024 just by reinvesting dividends every month. The current value has increased as well, so if I wanted to sell some shares of a low-yielding stock for some extra cash, I could do that without putting a big dent in my income stream.
In fact, I’ve already done that at a couple of points, like taking money out as part of a down payment for a house. I’ve also used dividends as supplemental income when my husband or I were between jobs—I’m getting taxed on them anyway so I might as well spend some of them. I continue to add a small amount in the account every month, mostly selectively re-invested dividends now, so that the income stream continues to grow.
The dividends from the taxable account are a great supplement to an existing income, but it’s not enough to retire on. So, I also have both a traditional and a Roth IRA that I’m still building, as does my husband. Every year we contribute the max to our Roths first, and then any other money we want to invest goes into the taxable.
I started the Roth in 2017, when I started to understand the future tax advantages in retirement and had enough earned income from consulting and writing. I opened the account with $100, and added money in chunks since my paychecks were irregular. The traditional IRA came about by accident just a few years ago. Much later in life I had a series of salaried jobs that offered 401(k)s with a matching employer contribution. I took advantage of these and contributed just enough to get the employer match—it’s free money now that will only be taxed when future me withdraws it. When the jobs ended, I opened a traditional IRA and cashed out the 401(k). Then I directly rolled over the money from the 401(k) into the traditional IRA and used about half the cash to buy more dividend paying stocks. I expect my taxable income to be lower next year, so I’ll probably wait for a downturn in the market and convert the traditional IRA over to my Roth then.
In future articles for paid subscribers, I’ll go into more detail about how I created and currently manage these accounts. To close out this post, let me explain a little more about retail brokerages and the different types of accounts you can set up for yourself. It’s really easy.
About retail brokerages
The three main DIY brokerage firms are Schwab, Vanguard, and Fidelity. All three offer educational resources and research for account holders, offer $0 commission trades and fractional shares, and have a selection of low fee funds for people who don’t want to research and choose individual stocks. There are other trading platforms like Robinhood and Interactive Brokers, but these three are good for beginning investors because of the educational resources they offer.
At the big three, it costs nothing to open an account and there are no monthly maintenance fees. I think they are all pretty much of a muchness at this point. A lot of people like Vanguard because of their low cost funds; I use Fidelity now because TD Ameritrade was bought out by Charles Schwab and my husband had his retirement accounts with Fidelity, so it was convenient. I already was familiar with their platform plus they offer a credit card that gives 2% cash back on everything and automatically deposits it into your account every month. I like their customer support too.
Side note: there are two kinds of accounts you can have at a retail brokerage. Think of these as containers you put money into. Side side note: you still have to buy something with the money, otherwise it sits there in the container earning interest—which right now, while interest rates are in the 4-5% range, is not a bad idea to still grow your money while you are deciding how to invest it. I’ve heard stories from clients who simply didn’t understand they needed to choose a fund to invest their 401(k) money in, had contributions deducted from their paycheck for months, and then realized their money had just being sitting there the whole time.
The type of container you put money into determines how the money plus any growth gets treated in terms of income tax. A taxable account lets you add money you’ve already paid Federal income tax on (after tax dollars), and you can add as much money as you can afford. When you take money out from selling an investment, tax is calculated on the difference between the price you paid, aka cost basis, and the price you sold it for.
If I bought a share of Google for $120 and sold it at $150, I’d have a profit, aka capital gain, of $30 and would owe tax only on that $30. If I sold it at $100 (maybe I need the money for something else), I’d have a tax loss of $20. That means I can subtract $20 from my taxable income on April 15.
The other kind of container is tax advantaged, and there are two types, tax-deferred and tax-free. Both come with some restrictions because they are designed to help you save for retirement.
Tax-deferred accounts at a retail brokerage let you add after tax money, deduct that amount from your taxable income, and pay tax later when you withdraw any of it, both the money you contributed and any growth since you contributed it. Traditional IRAs are a good example. The catch is that there’s a limit to how much you can contribute (and reduce your taxable income) every year. You also need to be age 59 and a half to withdraw money without penalty. There are a few special situations where that penalty is waived. But you’ll still owe tax on all the money you withdraw.
Roth IRAs are tax-free. In a Roth IRA, you contribute money you’ve already paid tax on. Like the traditional IRA, there’s a limit to how much you can contribute each year. And then you never pay any tax on withdrawals ever again! The trade-off is that you can’t deduct your contribution from your taxable income. To make withdrawals, you do have to be 59 and a half, and have the the account for at least five years to be able to withdraw any compounded growth from your contributions. But because you are contributing money you’ve already paid taxes on, you can withdraw the amount of your contributions at any point without penalty or taxes—this means a Roth IRA can function as an emergency savings account in a pinch. You can also have both a traditional IRA and a Roth IRA. But you have to divide the maximum amount you contribute each year between the two accounts. Bottom line, there’s no avoiding income tax—it’s either pay now (Roth) or pay later (traditional IRA).
One other kind of tax-free account you can open at a retail brokerage deserves a special mention and that’s the Health Savings Account (HSA). HSAs are one of the best things to come along in the financial products world in a long time. With most people now having high deductible health plans out of necessity, you likely already meet the criteria to open a HSA account through a retail brokerage. The intent with a HSA is to have enough money in the account to meet that high deductible every year. Some employers offer HSAs too. If there’s an employer match for your contributions, consider it. Otherwise you’ll have more investment options and low or no fees going through a retail brokerage. While you always want to have enough cash to cover your deductible (and some cushion in addition to that), as money accumulates in an HSA, you have the option to invest some of it.
An HSA is the only investment container that is triple tax-advantaged (be still my heart). You can use the money for healthcare-related expenses any time, no waiting for retirement. While there is a limit to how much you can contribute as an individual or family each year, contributions reduce your taxable income now, grow tax-free, and withdrawals are tax free as long as you use the money for healthcare-related expenses. Unlike flexible spending accounts, HSAs are not use-it-or-lose-it at the end of the year—it’s your money and it can grow over time as it earns interest or as you invest it. Especially for younger people who have time on their side for all that lovely compounding to happen, HSAs can be a good way to cover health care expenses both now and in retirement that insurance doesn’t cover. I could write an entire post (and will at some point) on the advantages of having an HSA.
So that’s my story. I didn’t start investing until I was in my 40s. I suspect this may be true for others, because financial goals around student debt, children, and home ownership are often bigger priorities in our 20s and 30s. My only regret about investing is that I waited so long to get started—it’s one of the few things I would do differently if I had the ability to go back and change the past.
But even with a late start, the money I’ve invested has now had 15 years to grow, and I couldn’t have imagined I’d be where I am now. I’ve created a financial asset that has cushioned some financial curveballs, helped me buy a home, and already replaced a significant chunk of my income. Every year, my income gets a little bigger, plus the principal tends to appreciate. I don’t stress about money any more. That’s wealth, y’all.
DIY investing the way I’ve chosen to do it isn’t everyone’s cup of tea. Hardly anyone talks about using a taxable account as a way to build a supplemental income stream. But it can be as simple as putting x amount of dollars into an index fund every payday. It helps that I like doing the research and tracking my milestones, and it’s definitely not going to make you rich overnight. There’s a saying that the best time to plant a tree is 20 years ago. But the next best time is now.
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