Module 7: Introduction to Investing

Making Your Money Work for You

Introduction

Welcome to Module 7! This is where things get exciting. Up until now, we've been managing money. Now we're going to make money work for us.

Here's a powerful truth: you can't save your way to wealth. You have to invest. The difference between someone who saves $500/month in a bank account versus someone who invests $500/month can be millions of dollars over a lifetime.

Investing might sound intimidating, but it doesn't have to be. This module will demystify the basics and give you a clear path to start building wealth.

In this module, we'll cover:

Why investing matters (the math is stunning)
The magic of compound interest
Basic investment vehicles (stocks, bonds, funds)
Understanding risk and diversification
Retirement accounts (401k, IRA)
How to start investing with little money
Common beginner mistakes to avoid

Think of investing as planting trees whose shade you'll enjoy later. Let's start planting!

Part 1: Why You MUST Invest

The Inflation Problem

Inflation: The gradual increase in prices over time

Average inflation rate: About 3% per year

What this means: Your money loses purchasing power every year

Example:

Today: $100 buys X amount of groceries
In 10 years: $100 buys only $74 worth of those same groceries
In 30 years: $100 buys only $41 worth

If you keep money under a mattress (or in a 0% savings account), you're actually losing money each year.

The Savings vs. Investing Math

Let's compare three people, each setting aside $500/month for 30 years:

Person A: Under the Mattress (0%)

Saves: $500/month × 12 × 30 = $180,000
Final value: $180,000
Inflation-adjusted: ~$75,000 in today's dollars

Person B: High-Yield Savings (4%)

Saves: $500/month for 30 years
Final value: $348,000
Better, but...

Person C: Invests in Stock Market (10% average)

Invests: $500/month for 30 years
Final value: $1,130,000
Over $1 million!

The difference between saving and investing: $782,000

This is why investing matters.

Time is Your Superpower

The earlier you start investing, the more powerful compound interest becomes.

Example: Two friends, different start times

Emma starts at 25:

Invests $200/month
Stops at 35 (only 10 years!)
Total invested: $24,000
At age 65: $338,000

Ryan starts at 35:

Invests $200/month
Continues until 65 (30 years!)
Total invested: $72,000
At age 65: $454,000

Emma invested less ($24,000 vs $72,000) but her earlier start made a huge difference!

The lesson: Start NOW, even with small amounts.

💡 Exercise 7.1: Your Investing "Why"

Why do I want to invest? What am I investing FOR?

☐ Retirement security
☐ Financial independence / early retirement
☐ Leave inheritance for family
☐ Buy a house
☐ Start a business
☐ Travel and experiences
☐ Not having to worry about money
☐ Help others / give to causes
☐ Other: _______________________________________________

My biggest motivation:

What would having investment income mean for my life?

My investing timeline:

Years until retirement: _______
Other major goal timeline: _______

Part 2: Compound Interest – The Eighth Wonder of the World

What is Compound Interest?

Simple definition: Earning interest on your interest

How it works:

Year 1:

Invest $1,000
Earn 10% = $100
New balance: $1,100

Year 2:

Starting balance: $1,100 (not $1,000!)
Earn 10% = $110 (not $100!)
New balance: $1,210

Year 3:

Starting balance: $1,210
Earn 10% = $121
New balance: $1,331

Notice: Your gains accelerate over time. This is compound interest.

The Power of Time

Same $10,000 invested at 8% annual return:

Time Period	Value
10 years	$21,589
20 years	$46,610
30 years	$100,627
40 years	$217,245

The difference between 10 and 40 years isn't 4x... it's 10x!

This is exponential growth. This is why time matters so much.

The "Rule of 72"

Quick way to calculate how long it takes to double your money:

72 ÷ interest rate = years to double

Examples:

At 6% return: 72 ÷ 6 = 12 years to double
At 8% return: 72 ÷ 8 = 9 years to double
At 10% return: 72 ÷ 10 = 7.2 years to double

Your turn:

If you expect 8% returns, $10,000 becomes:

$20,000 in 9 years
$40,000 in 18 years
$80,000 in 27 years
$160,000 in 36 years

All from a single $10,000 investment!

💡 Exercise 7.2: Calculate Your Compound Interest Potential

Use an online compound interest calculator (search "compound interest calculator")

Scenario 1: Lump sum investment

Amount I could invest today: $__________

Expected annual return: ________% (use 8% if unsure)

Years until I need it: _______

Future value: $__________

Scenario 2: Monthly contributions

Monthly investment amount: $__________

Expected annual return: ________% (use 8% if unsure)

Years of contributions: _______

Future value: $__________

How does this number make you feel?

Part 3: Basic Investment Vehicles

Let's break down the main types of investments.

Stocks (Equities)

What they are: Ownership shares in a company

How you make money:

Price appreciation: Buy at $50, sell at $100
Dividends: Company shares profits with shareholders

Example:

Buy 10 shares of Apple at $150 = $1,500 investment
Stock rises to $180 = your shares worth $1,800
Gain: $300 (20%)

Pros:

✅ Historically highest returns (average 10% per year)
✅ Potential for significant growth
✅ Some pay dividends
✅ Easy to buy and sell

Cons:

❌ Volatile (prices swing up and down)
❌ Individual stocks can lose all value
❌ Requires research (if picking individual stocks)
❌ Risk of loss

Best for: Long-term growth (10+ years)

Bonds

What they are: Loans to companies or governments

How you make money:

Receive regular interest payments
Get principal back at maturity

Example:

Buy a $1,000 bond paying 5% annually
Receive $50/year in interest for 10 years
Get $1,000 back at end

Types:

Government bonds: Very safe, lower returns (2-4%)
Corporate bonds: Higher returns (4-6%), slightly more risk
Municipal bonds: Tax-free, moderate returns

Pros:

✅ More stable than stocks
✅ Predictable income
✅ Lower risk
✅ Diversification from stocks

Cons:

❌ Lower returns than stocks
❌ Interest rate risk (value drops when rates rise)
❌ Can lose money if company defaults

Best for: Stability, nearing retirement, balancing stock risk

Mutual Funds

What they are: Pool of money from many investors, professionally managed

How they work:

Fund manager selects stocks/bonds
You own a share of the whole portfolio
Manager charges a fee

Example:

Vanguard Total Stock Market Fund
Holds thousands of stocks
One purchase gives you instant diversification

Pros:

✅ Instant diversification
✅ Professional management
✅ Easy for beginners
✅ Can start with small amounts

Cons:

❌ Management fees (0.1% - 2% annually)
❌ No control over holdings
❌ Potentially tax inefficient

Best for: Hands-off investors, beginners, retirement accounts

Index Funds

What they are: Mutual funds that track a market index (like S&P 500)

How they work:

Automatically holds all stocks in an index
No active manager picking stocks
Very low fees (0.03% - 0.2%)

Example:

S&P 500 Index Fund
Owns all 500 largest US companies
Matches market performance

Pros:

✅ Very low fees
✅ Consistent with market returns
✅ Highly diversified
✅ Simple and effective
✅ Historically beats most active managers

Cons:

❌ Won't beat the market (just matches it)
❌ Still fluctuates with market

Best for: Most people! Simple, low-cost, effective

ETFs (Exchange-Traded Funds)

What they are: Like index funds but trade like stocks

How they differ from mutual funds:

Trade throughout the day (mutual funds once per day)
Often lower fees
More tax efficient
Can be bought/sold instantly

Example:

VOO (Vanguard S&P 500 ETF)
Tracks S&P 500
Fee: 0.03% annually

Pros:

✅ Very low fees
✅ Trade like stocks
✅ Tax efficient
✅ Transparent holdings

Cons:

❌ Must buy whole shares
❌ Trading commissions (though many brokers now free)

Best for: Most investors, especially in taxable accounts

💡 Exercise 7.3: Understanding Investment Types

Match each scenario to the best investment type:

Scenario A: I want the highest long-term growth and can handle volatility
Best choice: ☐ Stocks / Stock funds

Scenario B: I want stability and regular income, less concerned about growth
Best choice: ☐ Bonds / Bond funds

Scenario C: I want diversification with one purchase
Best choice: ☐ Mutual funds / ETFs

Scenario D: I want low fees and market returns
Best choice: ☐ Index funds / ETFs

Scenario E: I'm a beginner and want simple, hands-off investing
Best choice: ☐ Index funds / Target-date funds

Part 4: Risk, Return, and Diversification

The Risk-Return Relationship

Basic principle: Higher potential return = Higher risk

Investment	Risk Level	Expected Return
Cash / Savings	Very Low	0-4%
Bonds	Low-Medium	3-6%
Balanced (60/40)	Medium	6-8%
Stocks	Medium-High	8-12%
Individual stocks	High	Varies widely
Crypto	Very High	Extremely volatile

You cannot have high returns without accepting some risk.

But you CAN manage risk through diversification.

What is Diversification?

Simple definition: Don't put all your eggs in one basket

How it works:

Spread investments across many stocks/bonds/assets
When one drops, others may rise
Reduces overall portfolio volatility

Example of poor diversification:

Invest $10,000 in one tech company
If it fails, you lose everything
High risk!

Example of good diversification:

Invest $10,000 in S&P 500 index fund
Owns 500 companies across all sectors
If one fails, it's only 0.2% of your investment
Much lower risk!

Asset Allocation

What it is: How you divide investments between stocks, bonds, and other assets

Common guidelines:

Aggressive (mostly growth):

90% stocks, 10% bonds
For young investors (20s-30s)
Can handle volatility
Long time horizon

Moderate (balanced):

60% stocks, 40% bonds
For middle-aged investors (40s-50s)
Balance of growth and stability

Conservative (mostly stability):

30% stocks, 70% bonds
For near-retirement or retired
Preserve wealth, less growth

Rule of thumb:

Stock allocation = 110 - your age
Example: Age 30 → 80% stocks, 20% bonds
Example: Age 60 → 50% stocks, 50% bonds

💡 Exercise 7.4: Determine Your Risk Tolerance

1. How would you react if your investments dropped 20% in one year?

☐ A. Panic and sell everything
☐ B. Feel nervous but hold steady
☐ C. See it as an opportunity to buy more

2. When do you need this money?

☐ A. Within 5 years → Lower risk
☐ B. 5-15 years → Moderate risk
☐ C. 15+ years → Higher risk acceptable

3. Which statement fits you best?

☐ A. I want steady, predictable growth – low risk
☐ B. I want balance between growth and stability – moderate risk
☐ C. I want maximum growth and can handle volatility – higher risk

My risk tolerance: ☐ Conservative ☐ Moderate ☐ Aggressive

My suggested asset allocation:

Stocks: _______%
Bonds: _______%

Note: This is a starting point. Adjust based on your comfort level.

Part 5: Retirement Accounts

Retirement accounts offer huge tax advantages. Use them!

401(k) – Employer-Sponsored Retirement Plan

What it is: Retirement account through your employer

How it works:

Money comes out of paycheck pre-tax
Grows tax-free until retirement
Pay taxes when you withdraw (age 59½+)

Contribution limits (2024):

Employee: $23,000/year
Age 50+: $30,500/year

Employer match:

Many employers match contributions
Example: Employer matches 50% up to 6% of salary
If you make $50,000 and contribute 6% ($3,000), employer adds $1,500
This is FREE MONEY – always get the full match!

Pros:

✅ Tax break now (lowers taxable income)
✅ Employer match = instant return
✅ Automatic payroll deduction
✅ High contribution limits

Cons:

❌ Can't access until age 59½ without penalty
❌ Limited investment options
❌ Taxes due on withdrawal

Best for: Everyone with access to one, especially with employer match

Roth 401(k)

What it is: Like regular 401(k) but with Roth tax treatment

How it's different:

Contribute after-tax dollars (no tax break now)
Grows tax-free
Withdraw tax-free in retirement

Who it's good for:

Young people in lower tax brackets
People who expect higher taxes in retirement
Want tax diversification

Traditional IRA

What it is: Individual Retirement Account (not through employer)

How it works:

Contribute money (may be tax-deductible)
Grows tax-free
Pay taxes on withdrawal

Contribution limits (2024):

$7,000/year
Age 50+: $8,000/year

Tax deduction rules:

If you have a 401(k), income limits apply
If no 401(k), fully deductible

Pros:

✅ Open to anyone with earned income
✅ More investment options than 401(k)
✅ Tax-deferred growth

Cons:

❌ Lower contribution limit than 401(k)
❌ Income limits for deductibility
❌ Penalties for early withdrawal

Roth IRA

What it is: IRA with after-tax contributions and tax-free growth

How it works:

Contribute after-tax dollars (no deduction)
Grows tax-free
Withdraw tax-free in retirement

Contribution limits (2024):

Same as Traditional IRA: $7,000 ($8,000 if 50+)
Income limits apply (phases out at higher incomes)

Unique benefits:

Can withdraw contributions anytime penalty-free
No required minimum distributions
Tax-free income in retirement

Pros:

✅ Tax-free growth and withdrawals
✅ Flexibility (access contributions)
✅ No RMDs
✅ Great for young people

Cons:

❌ Income limits
❌ No upfront tax deduction
❌ Lower contribution limit

Best for: Young people, those expecting higher taxes in retirement

Retirement Account Priority

Here's the order for most people:

1. 401(k) up to employer match (free money!)

2. Max out Roth IRA ($7,000/year)

3. Back to 401(k), max it out ($23,000/year total)

4. Taxable brokerage account (if you've maxed everything else)

💡 Exercise 7.5: Your Retirement Account Strategy

What I currently have:

☐ 401(k) through employer

Current contribution: _______%
Employer match: _______%
Am I getting full match? ☐ Yes ☐ No ☐ Not sure

☐ Roth 401(k) option available

☐ Traditional IRA
Current balance: $__________

☐ Roth IRA
Current balance: $__________

☐ None of the above

My action plan:

Immediate actions:

☐ Enroll in 401(k) if not already

☐ Increase 401(k) contribution to get full employer match

☐ Open Roth IRA (if eligible)

☐ Research where to open IRA: ☐ Vanguard ☐ Fidelity ☐ Schwab

☐ Set up automatic IRA contributions

My contribution goals:

Monthly retirement savings goal: $__________

How I'll split it:

401(k): $__________ (______%)
Roth IRA: $__________ ($583/month = $7,000/year)
Other: $__________

Annual retirement savings goal: $__________

Part 6: How to Start Investing

Step-by-Step: Your First Investment

Step 1: Choose where to invest

For retirement accounts (401k, IRA):

Employer 401(k): Use employer's plan
IRA: Vanguard, Fidelity, or Schwab (all excellent)

For regular investing (taxable account):

Vanguard, Fidelity, Schwab (full-service brokers)
Robinhood, Webull (mobile-first, free trades)

What to look for:

Low or no fees
Good fund selection
User-friendly interface
Educational resources

Step 2: Open your account

You'll need:

Social Security number
Employment information
Bank account for transfers
Driver's license/ID

Time: 15-30 minutes online

Step 3: Fund your account

Options:

Link bank account and transfer
Set up automatic monthly transfers
Rollover from old 401(k)

Start small: Even $50 is fine to start

Step 4: Choose your investments

For beginners, keep it simple:

Option A: Target-Date Fund (easiest)

Pick fund with year near your retirement
Example: "Target 2055 Fund" if retiring around 2055
Fund automatically adjusts risk over time
One-fund solution

Option B: Three-Fund Portfolio (simple but effective)

US Stock Index Fund (60%)
International Stock Index Fund (20%)
Bond Index Fund (20%)
Rebalance annually

Option C: Single Index Fund (simplest)

Total Stock Market Index Fund
One fund, instant diversification
Adjust bonds separately as you age

Step 5: Set up automatic investing

Choose amount (e.g., $200/month)
Choose date (day after payday)
Set it and forget it

Dollar-cost averaging: Investing same amount regularly

Buys more shares when prices low
Buys fewer shares when prices high
Reduces timing risk

💡 Exercise 7.6: Your Investment Action Plan

My starting plan:

Account I'll open first:

☐ 401(k) at work
☐ Roth IRA at: _______________
☐ Traditional IRA at: _______________
☐ Taxable brokerage at: _______________

Opening date goal: _______________

My investment strategy:

☐ Target-Date Fund: _______________
☐ Three-fund portfolio
☐ Single index fund: _______________
☐ Will research and decide

My automatic investment:

Amount: $__________ per month

Date: _______ (day after payday)

First investment date: _______________

Resources I'll use:

☐ Brokerage's educational materials
☐ r/personalfinance and r/Bogleheads (Reddit)
☐ "The Simple Path to Wealth" by JL Collins
☐ "The Bogleheads' Guide to Investing"

Part 7: Common Beginner Mistakes

Learn from others' mistakes – don't make these yourself!

Mistake #1: Not Starting

The trap: "I'll start when I have more money / when I understand it better / when the market is lower"

Reality: The best time to start is NOW, with whatever you have

Fix: Start with $25/month if that's all you can do. Just start.

Mistake #2: Trying to Time the Market

The trap: Waiting for the "right time" to invest or selling when scared

Reality: Nobody can consistently predict market movements

Data: Missing the 10 best days in the market over 20 years reduced returns by 50%

Fix: Invest regularly regardless of market conditions (dollar-cost averaging)

Mistake #3: Putting All Money in Savings

The trap: Savings feel safe, so keeping everything in high-yield savings

Reality: Inflation erodes value; missing decades of growth

Fix: Keep emergency fund in savings, invest the rest for long-term goals

Mistake #4: Picking Individual Stocks

The trap: Trying to find the next Apple or Amazon

Reality:

95% of active fund managers can't beat the market
Individual investors do even worse
Requires enormous time and expertise

Fix: Use index funds and accept market returns (which beat most professionals!)

Mistake #5: Panicking and Selling During Downturns

The trap: Market drops 20%, you sell to "prevent more losses"

Reality:

Markets always recover eventually
Selling locks in losses
You miss the recovery

Famous example:

2008 crash: Market down 50%
2009-2020: Market more than recovered
Investors who stayed invested more than doubled their money

Fix: Don't look at your investments daily. Remember your timeline (decades, not days).

Mistake #6: Paying High Fees

The trap: Not paying attention to expense ratios and fees

Reality: Fees compound negatively over time

Example:

$100,000 invested for 30 years at 8% return
Fund A (0.05% fee): Ends at $977,000
Fund B (1% fee): Ends at $761,000
Difference: $216,000 lost to fees!

Fix: Choose low-cost index funds (under 0.20% expense ratio)

Mistake #7: Not Diversifying

The trap: All money in one stock, one sector, or one investment

Reality: Concentration = high risk

Example: Enron employees with entire retirement in Enron stock lost everything

Fix: Use index funds for automatic diversification across hundreds of companies

💡 Exercise 7.7: Commit to Avoiding Mistakes

Which mistakes am I most at risk of making?

☐ Not starting / procrastinating
☐ Trying to time the market
☐ Keeping too much in savings
☐ Picking individual stocks
☐ Panicking during downturns
☐ Paying high fees
☐ Not diversifying

My commitment to avoid these:

Mistake I'm most likely to make: _______________________________________________

How I'll prevent it:

My accountability: Who will help keep me on track? _______________

Common Questions Answered

Q: How much do I need to start investing?
A: As little as $1 with some brokers. Many have no minimums. Start with whatever you can.

Q: What if the market crashes right after I invest?
A: Keep investing! Crashes are buying opportunities. You're buying at discount prices.

Q: Should I pay off debt or invest? A:

High-interest debt (>7%): Pay off first
Get employer 401(k) match first (free money)
Low-interest debt (<4%): Can invest while paying off

Q: How do I know which funds to choose?
A: Target-date funds or total market index funds are great for beginners. Simple and effective.

Q: Do I need a financial advisor?
A: Not for basic investing. Index funds make it simple enough to DIY. Save the 1% fee.

Q: What if I need the money before retirement? A:

Emergency fund stays in savings (not invested)
Money needed in <5 years: savings/bonds
Money for 10+ years: can invest

Key Takeaways

✅ Investing is essential for building wealth – saving alone isn't enough
✅ Compound interest is incredibly powerful with time
✅ Index funds offer simple, low-cost diversification
✅ Always get your full 401(k) employer match (free money!)
✅ Start early, invest regularly, and stay invested for decades
✅ Don't try to time the market or pick individual stocks
✅ Keep fees low (under 0.20% expense ratio)
✅ Your asset allocation should match your age and risk tolerance
✅ The perfect plan you'll follow beats the optimal plan you won't

Quick Wins You Can Do Right Now

Check if you're getting full 401(k) match – if not, increase contribution today
Open a Roth IRA at Vanguard, Fidelity, or Schwab (takes 20 minutes)
Set up automatic investment of just $50 for next month
Calculate how much you'd have in 30 years investing $200/month at 8% (use calculator)
Choose your first investment – Target-Date Fund or Total Stock Market Index Fund

Before You Move to Module 8

Make sure you've completed:

✓ Exercise 7.1: Identified your investing "why"
✓ Exercise 7.2: Calculated compound interest potential
✓ Exercise 7.4: Determined risk tolerance and asset allocation
✓ Exercise 7.5: Created retirement account strategy
✓ Exercise 7.6: Made investment action plan

Reflection Questions

How does understanding compound interest change your view of investing?

What's your biggest fear about investing?

How will you overcome that fear?

What excites you most about starting to invest?

Looking Ahead

In Module 8, we'll cover Insurance Essentials – protecting yourself and your investments from financial disasters. You're building wealth through investing, and insurance makes sure you don't lose it all to unexpected events.

See you in the next module!

Additional Resources

Brokerages (All Excellent for Beginners):

Vanguard (lowest fees, created index funds)
Fidelity (great customer service, $0 minimums)
Charles Schwab (excellent all-around)

Books:

"The Simple Path to Wealth" by JL Collins (highly recommended!)
"The Bogleheads' Guide to Investing" by Taylor Larimore
"A Random Walk Down Wall Street" by Burton Malkiel
"The Little Book of Common Sense Investing" by John Bogle

Online Communities:

r/Bogleheads (Reddit)
r/personalfinance (Reddit)
Bogleheads.org forum

Calculators:

Compound interest: Investor.gov/financial-tools-calculators
Retirement: Bankrate.com/retirement/calculators/

Further Learning:

Khan Academy (free investing courses)
Investopedia (investment encyclopedia)

"The stock market is a device for transferring money from the impatient to the patient." – Warren Buffett

"Time in the market beats timing the market." – Ken Fisher

"Don't look for the needle in the haystack. Just buy the haystack!" – John Bogle

"The best time to plant a tree was 20 years ago. The second best time is now." – Chinese Proverb

Module 7: Introduction to Investing

Making Your Money Work for You

Introduction

Welcome to Module 7! This is where things get exciting. Up until now, we've been managing money. Now we're going to make money work for us.

Investing might sound intimidating, but it doesn't have to be. This module will demystify the basics and give you a clear path to start building wealth.

In this module, we'll cover:

Why investing matters (the math is stunning)
The magic of compound interest
Basic investment vehicles (stocks, bonds, funds)
Understanding risk and diversification
Retirement accounts (401k, IRA)
How to start investing with little money
Common beginner mistakes to avoid

Think of investing as planting trees whose shade you'll enjoy later. Let's start planting!

Part 1: Why You MUST Invest

The Inflation Problem

Inflation: The gradual increase in prices over time

Average inflation rate: About 3% per year

What this means: Your money loses purchasing power every year

Example:

Today: $100 buys X amount of groceries
In 10 years: $100 buys only $74 worth of those same groceries
In 30 years: $100 buys only $41 worth

If you keep money under a mattress (or in a 0% savings account), you're actually losing money each year.

The Savings vs. Investing Math

Let's compare three people, each setting aside $500/month for 30 years:

Person A: Under the Mattress (0%)

Saves: $500/month × 12 × 30 = $180,000
Final value: $180,000
Inflation-adjusted: ~$75,000 in today's dollars

Person B: High-Yield Savings (4%)

Saves: $500/month for 30 years
Final value: $348,000
Better, but...

Person C: Invests in Stock Market (10% average)

Invests: $500/month for 30 years
Final value: $1,130,000
Over $1 million!

The difference between saving and investing: $782,000

This is why investing matters.

Time is Your Superpower

The earlier you start investing, the more powerful compound interest becomes.

Example: Two friends, different start times

Emma starts at 25:

Invests $200/month
Stops at 35 (only 10 years!)
Total invested: $24,000
At age 65: $338,000

Ryan starts at 35:

Invests $200/month
Continues until 65 (30 years!)
Total invested: $72,000
At age 65: $454,000

Emma invested less ($24,000 vs $72,000) but her earlier start made a huge difference!

The lesson: Start NOW, even with small amounts.

💡 Exercise 7.1: Your Investing "Why"

Why do I want to invest? What am I investing FOR?

My biggest motivation:

What would having investment income mean for my life?

My investing timeline:

Years until retirement: _______
Other major goal timeline: _______

Part 2: Compound Interest – The Eighth Wonder of the World

What is Compound Interest?

Simple definition: Earning interest on your interest

How it works:

Year 1:

Invest $1,000
Earn 10% = $100
New balance: $1,100

Year 2:

Starting balance: $1,100 (not $1,000!)
Earn 10% = $110 (not $100!)
New balance: $1,210

Year 3:

Starting balance: $1,210
Earn 10% = $121
New balance: $1,331

Notice: Your gains accelerate over time. This is compound interest.

The Power of Time

Same $10,000 invested at 8% annual return:

Time Period	Value
10 years	$21,589
20 years	$46,610
30 years	$100,627
40 years	$217,245

The difference between 10 and 40 years isn't 4x... it's 10x!

This is exponential growth. This is why time matters so much.

The "Rule of 72"

Quick way to calculate how long it takes to double your money:

72 ÷ interest rate = years to double

Examples:

At 6% return: 72 ÷ 6 = 12 years to double
At 8% return: 72 ÷ 8 = 9 years to double
At 10% return: 72 ÷ 10 = 7.2 years to double

Your turn:

If you expect 8% returns, $10,000 becomes:

$20,000 in 9 years
$40,000 in 18 years
$80,000 in 27 years
$160,000 in 36 years

All from a single $10,000 investment!

💡 Exercise 7.2: Calculate Your Compound Interest Potential

Use an online compound interest calculator (search "compound interest calculator")

Scenario 1: Lump sum investment

Amount I could invest today: $__________

Expected annual return: ________% (use 8% if unsure)

Years until I need it: _______

Future value: $__________

Scenario 2: Monthly contributions

Monthly investment amount: $__________

Expected annual return: ________% (use 8% if unsure)

Years of contributions: _______

Future value: $__________

How does this number make you feel?

Part 3: Basic Investment Vehicles

Let's break down the main types of investments.

Stocks (Equities)

What they are: Ownership shares in a company

How you make money:

Price appreciation: Buy at $50, sell at $100
Dividends: Company shares profits with shareholders

Example:

Buy 10 shares of Apple at $150 = $1,500 investment
Stock rises to $180 = your shares worth $1,800
Gain: $300 (20%)

Pros:

✅ Historically highest returns (average 10% per year)
✅ Potential for significant growth
✅ Some pay dividends
✅ Easy to buy and sell

Cons:

❌ Volatile (prices swing up and down)
❌ Individual stocks can lose all value
❌ Requires research (if picking individual stocks)
❌ Risk of loss

Best for: Long-term growth (10+ years)

Bonds

What they are: Loans to companies or governments

How you make money:

Receive regular interest payments
Get principal back at maturity

Example:

Buy a $1,000 bond paying 5% annually
Receive $50/year in interest for 10 years
Get $1,000 back at end

Types:

Government bonds: Very safe, lower returns (2-4%)
Corporate bonds: Higher returns (4-6%), slightly more risk
Municipal bonds: Tax-free, moderate returns

Pros:

✅ More stable than stocks
✅ Predictable income
✅ Lower risk
✅ Diversification from stocks

Cons:

❌ Lower returns than stocks
❌ Interest rate risk (value drops when rates rise)
❌ Can lose money if company defaults

Best for: Stability, nearing retirement, balancing stock risk

Mutual Funds

What they are: Pool of money from many investors, professionally managed

How they work:

Fund manager selects stocks/bonds
You own a share of the whole portfolio
Manager charges a fee

Example:

Vanguard Total Stock Market Fund
Holds thousands of stocks
One purchase gives you instant diversification

Pros:

✅ Instant diversification
✅ Professional management
✅ Easy for beginners
✅ Can start with small amounts

Cons:

❌ Management fees (0.1% - 2% annually)
❌ No control over holdings
❌ Potentially tax inefficient

Best for: Hands-off investors, beginners, retirement accounts

Index Funds

What they are: Mutual funds that track a market index (like S&P 500)

How they work:

Automatically holds all stocks in an index
No active manager picking stocks
Very low fees (0.03% - 0.2%)

Example:

S&P 500 Index Fund
Owns all 500 largest US companies
Matches market performance

Pros:

✅ Very low fees
✅ Consistent with market returns
✅ Highly diversified
✅ Simple and effective
✅ Historically beats most active managers

Cons:

❌ Won't beat the market (just matches it)
❌ Still fluctuates with market

Best for: Most people! Simple, low-cost, effective

ETFs (Exchange-Traded Funds)

What they are: Like index funds but trade like stocks

How they differ from mutual funds:

Trade throughout the day (mutual funds once per day)
Often lower fees
More tax efficient
Can be bought/sold instantly

Example:

VOO (Vanguard S&P 500 ETF)
Tracks S&P 500
Fee: 0.03% annually

Pros:

✅ Very low fees
✅ Trade like stocks
✅ Tax efficient
✅ Transparent holdings

Cons:

❌ Must buy whole shares
❌ Trading commissions (though many brokers now free)

Best for: Most investors, especially in taxable accounts

💡 Exercise 7.3: Understanding Investment Types

Match each scenario to the best investment type:

Scenario A: I want the highest long-term growth and can handle volatility
Best choice: ☐ Stocks / Stock funds

Scenario B: I want stability and regular income, less concerned about growth
Best choice: ☐ Bonds / Bond funds

Scenario C: I want diversification with one purchase
Best choice: ☐ Mutual funds / ETFs

Scenario D: I want low fees and market returns
Best choice: ☐ Index funds / ETFs

Scenario E: I'm a beginner and want simple, hands-off investing
Best choice: ☐ Index funds / Target-date funds

Part 4: Risk, Return, and Diversification

The Risk-Return Relationship

Basic principle: Higher potential return = Higher risk

Investment	Risk Level	Expected Return
Cash / Savings	Very Low	0-4%
Bonds	Low-Medium	3-6%
Balanced (60/40)	Medium	6-8%
Stocks	Medium-High	8-12%
Individual stocks	High	Varies widely
Crypto	Very High	Extremely volatile

You cannot have high returns without accepting some risk.

But you CAN manage risk through diversification.

What is Diversification?

Simple definition: Don't put all your eggs in one basket

How it works:

Spread investments across many stocks/bonds/assets
When one drops, others may rise
Reduces overall portfolio volatility

Example of poor diversification:

Invest $10,000 in one tech company
If it fails, you lose everything
High risk!

Example of good diversification:

Invest $10,000 in S&P 500 index fund
Owns 500 companies across all sectors
If one fails, it's only 0.2% of your investment
Much lower risk!

Asset Allocation

What it is: How you divide investments between stocks, bonds, and other assets

Common guidelines:

Aggressive (mostly growth):

90% stocks, 10% bonds
For young investors (20s-30s)
Can handle volatility
Long time horizon

Moderate (balanced):

60% stocks, 40% bonds
For middle-aged investors (40s-50s)
Balance of growth and stability

Conservative (mostly stability):

30% stocks, 70% bonds
For near-retirement or retired
Preserve wealth, less growth

Rule of thumb:

Stock allocation = 110 - your age
Example: Age 30 → 80% stocks, 20% bonds
Example: Age 60 → 50% stocks, 50% bonds

💡 Exercise 7.4: Determine Your Risk Tolerance

1. How would you react if your investments dropped 20% in one year?

☐ A. Panic and sell everything
☐ B. Feel nervous but hold steady
☐ C. See it as an opportunity to buy more

2. When do you need this money?

☐ A. Within 5 years → Lower risk
☐ B. 5-15 years → Moderate risk
☐ C. 15+ years → Higher risk acceptable

3. Which statement fits you best?

☐ A. I want steady, predictable growth – low risk
☐ B. I want balance between growth and stability – moderate risk
☐ C. I want maximum growth and can handle volatility – higher risk

My risk tolerance: ☐ Conservative ☐ Moderate ☐ Aggressive

My suggested asset allocation:

Stocks: _______%
Bonds: _______%

Note: This is a starting point. Adjust based on your comfort level.

Part 5: Retirement Accounts

Retirement accounts offer huge tax advantages. Use them!

401(k) – Employer-Sponsored Retirement Plan

What it is: Retirement account through your employer

How it works:

Money comes out of paycheck pre-tax
Grows tax-free until retirement
Pay taxes when you withdraw (age 59½+)

Contribution limits (2024):

Employee: $23,000/year
Age 50+: $30,500/year

Employer match:

Many employers match contributions
Example: Employer matches 50% up to 6% of salary
If you make $50,000 and contribute 6% ($3,000), employer adds $1,500
This is FREE MONEY – always get the full match!

Pros:

✅ Tax break now (lowers taxable income)
✅ Employer match = instant return
✅ Automatic payroll deduction
✅ High contribution limits

Cons:

❌ Can't access until age 59½ without penalty
❌ Limited investment options
❌ Taxes due on withdrawal

Best for: Everyone with access to one, especially with employer match

Roth 401(k)

What it is: Like regular 401(k) but with Roth tax treatment

How it's different:

Contribute after-tax dollars (no tax break now)
Grows tax-free
Withdraw tax-free in retirement

Who it's good for:

Young people in lower tax brackets
People who expect higher taxes in retirement
Want tax diversification

Traditional IRA

What it is: Individual Retirement Account (not through employer)

How it works:

Contribute money (may be tax-deductible)
Grows tax-free
Pay taxes on withdrawal

Contribution limits (2024):

$7,000/year
Age 50+: $8,000/year

Tax deduction rules:

If you have a 401(k), income limits apply
If no 401(k), fully deductible

Pros:

✅ Open to anyone with earned income
✅ More investment options than 401(k)
✅ Tax-deferred growth

Cons:

❌ Lower contribution limit than 401(k)
❌ Income limits for deductibility
❌ Penalties for early withdrawal

Roth IRA

What it is: IRA with after-tax contributions and tax-free growth

How it works:

Contribute after-tax dollars (no deduction)
Grows tax-free
Withdraw tax-free in retirement

Contribution limits (2024):

Same as Traditional IRA: $7,000 ($8,000 if 50+)
Income limits apply (phases out at higher incomes)

Unique benefits:

Can withdraw contributions anytime penalty-free
No required minimum distributions
Tax-free income in retirement

Pros:

✅ Tax-free growth and withdrawals
✅ Flexibility (access contributions)
✅ No RMDs
✅ Great for young people

Cons:

❌ Income limits
❌ No upfront tax deduction
❌ Lower contribution limit

Best for: Young people, those expecting higher taxes in retirement

Retirement Account Priority

Here's the order for most people:

1. 401(k) up to employer match (free money!)

2. Max out Roth IRA ($7,000/year)

3. Back to 401(k), max it out ($23,000/year total)

4. Taxable brokerage account (if you've maxed everything else)

💡 Exercise 7.5: Your Retirement Account Strategy

What I currently have:

☐ 401(k) through employer

Current contribution: _______%
Employer match: _______%
Am I getting full match? ☐ Yes ☐ No ☐ Not sure

☐ Roth 401(k) option available

☐ Traditional IRA
Current balance: $__________

☐ Roth IRA
Current balance: $__________

☐ None of the above

My action plan:

Immediate actions:

☐ Enroll in 401(k) if not already

☐ Increase 401(k) contribution to get full employer match

☐ Open Roth IRA (if eligible)

☐ Research where to open IRA: ☐ Vanguard ☐ Fidelity ☐ Schwab

☐ Set up automatic IRA contributions

My contribution goals:

Monthly retirement savings goal: $__________

How I'll split it:

401(k): $__________ (______%)
Roth IRA: $__________ ($583/month = $7,000/year)
Other: $__________

Annual retirement savings goal: $__________

Part 6: How to Start Investing

Step-by-Step: Your First Investment

Step 1: Choose where to invest

For retirement accounts (401k, IRA):

Employer 401(k): Use employer's plan
IRA: Vanguard, Fidelity, or Schwab (all excellent)

For regular investing (taxable account):

Vanguard, Fidelity, Schwab (full-service brokers)
Robinhood, Webull (mobile-first, free trades)

What to look for:

Low or no fees
Good fund selection
User-friendly interface
Educational resources

Step 2: Open your account

You'll need:

Social Security number
Employment information
Bank account for transfers
Driver's license/ID

Time: 15-30 minutes online

Step 3: Fund your account

Options:

Link bank account and transfer
Set up automatic monthly transfers
Rollover from old 401(k)

Start small: Even $50 is fine to start

Step 4: Choose your investments

For beginners, keep it simple:

Option A: Target-Date Fund (easiest)

Pick fund with year near your retirement
Example: "Target 2055 Fund" if retiring around 2055
Fund automatically adjusts risk over time
One-fund solution

Option B: Three-Fund Portfolio (simple but effective)

US Stock Index Fund (60%)
International Stock Index Fund (20%)
Bond Index Fund (20%)
Rebalance annually

Option C: Single Index Fund (simplest)

Total Stock Market Index Fund
One fund, instant diversification
Adjust bonds separately as you age

Step 5: Set up automatic investing

Choose amount (e.g., $200/month)
Choose date (day after payday)
Set it and forget it

Dollar-cost averaging: Investing same amount regularly

Buys more shares when prices low
Buys fewer shares when prices high
Reduces timing risk

💡 Exercise 7.6: Your Investment Action Plan

My starting plan:

Account I'll open first:

☐ 401(k) at work
☐ Roth IRA at: _______________
☐ Traditional IRA at: _______________
☐ Taxable brokerage at: _______________

Opening date goal: _______________

My investment strategy:

☐ Target-Date Fund: _______________
☐ Three-fund portfolio
☐ Single index fund: _______________
☐ Will research and decide

My automatic investment:

Amount: $__________ per month

Date: _______ (day after payday)

First investment date: _______________

Resources I'll use:

☐ Brokerage's educational materials
☐ r/personalfinance and r/Bogleheads (Reddit)
☐ "The Simple Path to Wealth" by JL Collins
☐ "The Bogleheads' Guide to Investing"

Part 7: Common Beginner Mistakes

Learn from others' mistakes – don't make these yourself!

Mistake #1: Not Starting

The trap: "I'll start when I have more money / when I understand it better / when the market is lower"

Reality: The best time to start is NOW, with whatever you have

Fix: Start with $25/month if that's all you can do. Just start.

Mistake #2: Trying to Time the Market

The trap: Waiting for the "right time" to invest or selling when scared

Reality: Nobody can consistently predict market movements

Data: Missing the 10 best days in the market over 20 years reduced returns by 50%

Fix: Invest regularly regardless of market conditions (dollar-cost averaging)

Mistake #3: Putting All Money in Savings

The trap: Savings feel safe, so keeping everything in high-yield savings

Reality: Inflation erodes value; missing decades of growth

Fix: Keep emergency fund in savings, invest the rest for long-term goals

Mistake #4: Picking Individual Stocks

The trap: Trying to find the next Apple or Amazon

Reality:

95% of active fund managers can't beat the market
Individual investors do even worse
Requires enormous time and expertise

Fix: Use index funds and accept market returns (which beat most professionals!)

Mistake #5: Panicking and Selling During Downturns

The trap: Market drops 20%, you sell to "prevent more losses"

Reality:

Markets always recover eventually
Selling locks in losses
You miss the recovery

Famous example:

2008 crash: Market down 50%
2009-2020: Market more than recovered
Investors who stayed invested more than doubled their money

Fix: Don't look at your investments daily. Remember your timeline (decades, not days).

Mistake #6: Paying High Fees

The trap: Not paying attention to expense ratios and fees

Reality: Fees compound negatively over time

Example:

$100,000 invested for 30 years at 8% return
Fund A (0.05% fee): Ends at $977,000
Fund B (1% fee): Ends at $761,000
Difference: $216,000 lost to fees!

Fix: Choose low-cost index funds (under 0.20% expense ratio)

Mistake #7: Not Diversifying

The trap: All money in one stock, one sector, or one investment

Reality: Concentration = high risk

Example: Enron employees with entire retirement in Enron stock lost everything

Fix: Use index funds for automatic diversification across hundreds of companies

💡 Exercise 7.7: Commit to Avoiding Mistakes

Which mistakes am I most at risk of making?

☐ Not starting / procrastinating
☐ Trying to time the market
☐ Keeping too much in savings
☐ Picking individual stocks
☐ Panicking during downturns
☐ Paying high fees
☐ Not diversifying

My commitment to avoid these:

Mistake I'm most likely to make: _______________________________________________

How I'll prevent it:

My accountability: Who will help keep me on track? _______________

Common Questions Answered

Q: How much do I need to start investing?
A: As little as $1 with some brokers. Many have no minimums. Start with whatever you can.

Q: What if the market crashes right after I invest?
A: Keep investing! Crashes are buying opportunities. You're buying at discount prices.

Q: Should I pay off debt or invest? A:

High-interest debt (>7%): Pay off first
Get employer 401(k) match first (free money)
Low-interest debt (<4%): Can invest while paying off

Q: How do I know which funds to choose?
A: Target-date funds or total market index funds are great for beginners. Simple and effective.

Q: Do I need a financial advisor?
A: Not for basic investing. Index funds make it simple enough to DIY. Save the 1% fee.

Q: What if I need the money before retirement? A:

Emergency fund stays in savings (not invested)
Money needed in <5 years: savings/bonds
Money for 10+ years: can invest

Key Takeaways

✅ Investing is essential for building wealth – saving alone isn't enough
✅ Compound interest is incredibly powerful with time
✅ Index funds offer simple, low-cost diversification
✅ Always get your full 401(k) employer match (free money!)
✅ Start early, invest regularly, and stay invested for decades
✅ Don't try to time the market or pick individual stocks
✅ Keep fees low (under 0.20% expense ratio)
✅ Your asset allocation should match your age and risk tolerance
✅ The perfect plan you'll follow beats the optimal plan you won't

Quick Wins You Can Do Right Now

Check if you're getting full 401(k) match – if not, increase contribution today
Open a Roth IRA at Vanguard, Fidelity, or Schwab (takes 20 minutes)
Set up automatic investment of just $50 for next month
Calculate how much you'd have in 30 years investing $200/month at 8% (use calculator)
Choose your first investment – Target-Date Fund or Total Stock Market Index Fund

Before You Move to Module 8

Make sure you've completed:

✓ Exercise 7.1: Identified your investing "why"
✓ Exercise 7.2: Calculated compound interest potential
✓ Exercise 7.4: Determined risk tolerance and asset allocation
✓ Exercise 7.5: Created retirement account strategy
✓ Exercise 7.6: Made investment action plan

Reflection Questions

How does understanding compound interest change your view of investing?

What's your biggest fear about investing?

How will you overcome that fear?

What excites you most about starting to invest?

Looking Ahead

See you in the next module!

Additional Resources

Brokerages (All Excellent for Beginners):

Vanguard (lowest fees, created index funds)
Fidelity (great customer service, $0 minimums)
Charles Schwab (excellent all-around)

Books:

"The Simple Path to Wealth" by JL Collins (highly recommended!)
"The Bogleheads' Guide to Investing" by Taylor Larimore
"A Random Walk Down Wall Street" by Burton Malkiel
"The Little Book of Common Sense Investing" by John Bogle

Online Communities:

r/Bogleheads (Reddit)
r/personalfinance (Reddit)
Bogleheads.org forum

Calculators:

Compound interest: Investor.gov/financial-tools-calculators
Retirement: Bankrate.com/retirement/calculators/

Further Learning:

Khan Academy (free investing courses)
Investopedia (investment encyclopedia)

"The stock market is a device for transferring money from the impatient to the patient." – Warren Buffett

"Time in the market beats timing the market." – Ken Fisher

"Don't look for the needle in the haystack. Just buy the haystack!" – John Bogle

"The best time to plant a tree was 20 years ago. The second best time is now." – Chinese Proverb