The ABCs of Investing

Excerpted from
It Pays to Talk: How to Have the Essential Conversations with Your Family About Money and Investing
By Charles Schwab, Carrie Schwab-Pomerantz

While growing up, my colleague Kate's father, Eric, never talked about money. The subject was simply off limits, and the household was ruled by an ironclad mantle of financial silence that no one in the family dared to crack. But that didn't mean that Kate's mother or siblings didn't wish things were different. "We'd have done so much better if only your father had invested our savings," Kate overheard her mother lament years after Eric's death. Not that the family was doing poorly. To the contrary, Eric had managed to save a healthy sum, allowing the family to live quite comfortably. But aside from a few perfunctory attempts from time to time, Eric hadn't been an investor. And that cost the family he loved. "We had a very nice lifestyle, but we could have had so much more," says Kate.

Why did an educated man who was successful in so many aspects of his life fail to take control of his finances? "I guarantee you that he was afraid of investing," says Kate. And because he didn't want to reveal his lack of financial acumen, he didn't consult a financial advisor, either. As a result, his hesitancy about money and investing wound up compromising his estate. That unfortunate legacy is now being perpetuated by three of his five children, none of whom invest or even talk about money.

Clearly not everyone is fortunate enough to obtain financial knowledge in a way that he or she can hear and understand. I hope this book will help fill that communication void in your family. For in addition to providing you with information, it's intended to fuel your family's conversations about where you're going, how much money it will take, and which investments might get you there.

This is a chapter for beginners. For those of you who are new to investing, want a refresher, or are introducing a family member or friend to investing, we start at square one and cover the basic concepts. We then launch into a primer on stocks, bonds, and mutual funds: the vocabulary and building blocks you need to talk about to build your financial future. Finally, we discuss professional advice and what you should look for in an advisor.

More experienced investors may want to skip to Chapter 3, where the focus is on putting these basics to work. That's fine, but I urge you to use the information in the following pages to open what I hope will be an ongoing and worthwhile family dialogue about money.

As I hope you'll see in this chapter, investing isn't a sprint to an endless series of finish lines. It's more like a family marathon, with all of you reaching the ends you've identified together, through steady and systematic discussions and planning that allow you to work toward your financial goals.

One more word before we begin: If you are new to investing, you may find that this chapter and the next one are filled with new terminology and concepts. My advice is to simply read through it without worrying too much about remembering everything at once. You may find it useful to flag areas of special interest so that you can easily go back and refer to them later. You may also find it useful to refer to the glossary of investing terms in Appendix C.

Investing to Make Your Dreams Come True

If investing has always seemed like a dry, alien concept that has nothing to do with your life, I have a quick solution for you. Simply put a face on those potential earnings, so they represent a dream instead of a bunch of numbers. Because that's what investing is. It's a tool that enables you to create the life you want for yourself. And that's about as personal as you can get.

But like any tool, it won't do the work by itself. You need to guide it by discussing the vision you want to realize, then setting firm goals. If you don't, you won't be moving toward anything concrete, which will slow you down, if not stop you in your tracks. Let's say you haven't been saving enough money to invest, or you've neglected to invest the money you do have. It is difficult to shift your priorities if you haven't actually defined them.

So think about what you and your family want and why, then challenge yourselves to make it happen. Commit to your vision by making a point to tell family, friends, and even coworkers about your dream and how you plan to achieve it. In addition to clarifying and cementing your vision, making your plans known will make it harder to let them fall by the wayside later on.

Of course, your dreams need to be realistic. It doesn't help to set up a target that you can't possibly reach. If you have several dreams, you'll probably need to prioritize them. You may not be able to buy a boat, acquire a second home, send your three kids to a private college, and retire at age fifty. But when done according to a long-term plan, investing can help you realize the important dreams, the ones that reflect your core values.

Although the stock market-traditionally an "old boys' club"-catered to an elite few not so long ago, now more than half of American households own stock. If you've been sitting on the sidelines, now may be your turn. Do you feel nervous about all this? According to our research, so do about one out of every four men and one out of every two women. Sound familiar? Then let me tell you a story.

You may remember Lauren from Chapter 1, who didn't begin saving for her retirement until her mid-forties. Considering her late start, she thought it would take a miracle for her ever to retire. To be honest, after growing up as the seventh of nine siblings in a family that never invested, then being married to a man who handled all the finances, she figured it would take a miracle for her just to learn what to do on the money front.

"I was caught totally unprepared when I divorced," she recalls. "I had gone from my father's house to my husband's house. Nobody ever talked about money in either one. As a married woman, I was given enough money every month to buy the groceries and whatever else we needed-no more, no less. So when I divorced in my early thirties-after twelve years of marriage and two kids-I didn't know a thing about saving or investing."

Once Lauren got her divorce settlement, instead of investing the money, she put it in a savings account at her bank. Then she proceeded to spend it. She got herself a couple of credit cards-her first, since she'd never had one in her name. That would have been a fine idea if she'd kept them in her wallet most of the time and simply pulled them out to make purchases that she could pay off at the end of each month. (That way she could begin to build her own credit history.) Instead, she bought herself a few of the things she'd wanted during her marriage but never felt she could ask for. After years of wearing ill-fitting hand-me-downs from her sisters, she splurged on some new clothes. Then she bought a new car. She also began to treat herself to dinners out with the family and a few weekend getaways with friends. In addition, she made sure her two children always had the best of everything-from pricey tennis shoes and clothes to vacations in Hawaii, New York, and London.

Within three or four years Lauren's credit card debt had soared to $30,000. Then a legal secretary, she managed to just squeak by every month with the help of some creative money juggling. Amazingly, she managed to pay off her credit card debts a couple of times, but by then she was so used to spending money that she just incurred new debts all over again.

About that time the law firm she worked for scheduled a speaker to discuss investing for retirement. "I don't have any money to put aside for a 401(k)," Lauren immediately concluded after the presentation. Then she thought about what she'd heard. "I don't have to put that much money in for it to really start working for me," she realized.

So she made the commitment. Though every book she'd ever read recommended paying off debts first, knowing that she'd done that several times and was no further ahead than before, Lauren decided that she had to put some money away for herself as well. "When that money started accruing, that was a real motivator," she says. "I could see it." That reinforced her commitment.

Lauren now says, "I believe that when you put your mind to something, it can really happen. So I started focusing on saving money rather than spending it. I started contributing the full amount allowable (15% of my salary) to my 401(k). The first year was tight. Even so I managed to pay my credit cards down. Now I even have enough to contribute to a Roth IRA every year and have also built up an emergency fund to protect myself in case something happens."

In 2001, eleven years after her divorce, with the help of $60,000 worth of stock she sold, Lauren was able to buy a house, something she'd only dreamed of for years. "I can't tell you how great that makes me feel," she says. The fact that it's continued to appreciate in value hasn't hurt a bit either.

As Lauren put it so eloquently, the miracle she was sure she'd need turned out to be her.