I’m a cheapskate, though a more polite way to say it would be “frugal.” I like saving money wherever I can, and that becomes even more important when it comes to investing. You may have seen charts that show “compound interest” over time, demonstrating how a little money saved in an interest-bearing account can grow exponentially with enough time. Well, the cost of a few percentage points in things like fees and commissions can add up just the same way if you’re not careful.
That’s why I like to invest for retirement using the cheapest method possible — bypassing as many fees, commissions, and other “gotchas” on the way as I can. Investing can be complicated, but I’ll try to lay out a few quick warnings if you’re itching for a place to put your money.
- Skip the bank. Investing money in your local brick-and-mortar bank is like taking your car to the QuikLube when it needs a new transmission. Investing just isn’t what your local bank is meant for, even if it’s a friendly little credit union where everyone knows your name.
- Run from anyone selling insurance. All too often someone will push a “can’t lose” investment vehicle wrapped up in words like “indexed annuity” or “variable universal life.” Forget about it. The tax advantages of investments wrapped in life insurance can’t make up for the sky-high commissions and “surrender charges” you may be assessed. Focus more on the investments themselves and less about keeping them “safe” in something that caps the growth while promising to minimize loss.
- Beware of investing in gold, single stocks, foreign currency, and anything sold to you in a hotel ballroom. Investment scams are everywhere, and if anyone promises you a 12% guaranteed return on your investment, there’s a guy named Bernie Madoff you should Google. The smartest way to invest — especially if you don’t do this sort of thing for a living — is to diversify. That means spreading your money across many different kinds of investments instead of hoping for the quick fix. It means buying every single stock in the S&P 500 instead of trying to get lucky with one or two. You can do just this with an investment called index funds (we’ll get into that later).
So, where can you put your money? I recommend starting with a discount broker, such as Charles Schwab (where I keep my Roth IRA), Vanguard (where my wife keeps hers), T. Rowe Price, Fidelity, or even Omaha’s own TD Ameritrade could be a good choice. Any one of these can allow you to open a retirement account and fill it with low-cost investment choices with no commissions and very low fees. This gets you into the market with as little cost as possible, and that’s the kind of compound interest that will only help you in the long run.
We’ll get into more of those investment choices later.