I’m about to graduate and head into the working world, and that means that I need to start thinking about saving for retirement. I know the basics: spend less than you make, invest money, use tax-sheltered stuff like 401(k)s and IRAs, blah blah. My problem is that whenever I look for more in-depth advice, I end up on some website offering very specific stock insights. What can the experts tell me about investing, saving, credit reports, and the rest that goes beyond the basics, but doesn’t veer into the esoteric? I’m not talking about some weird special investment fund or a secret way to calculate value–I’m talking about puts and calls and shorts and stuff like that, plus credit scores and interest rates and all of that. Please enlighten me!
It’s great that you’re so interested in learning more about personal finance. Your commitment to smart budgeting, investing, and credit building will make a big difference as you progress in your career and your life. All too many Americans know the other side of this story: 69% of us have less than $1,000 in savings. No wonder 38% of people making between $35,000 and $150,000 a year worry about money at least once a week!
You asked about a few different concepts, but let’s start with investing. As you note, the basics are pretty straightforward: it’s best to have a diverse array of stocks and bonds in a portfolio that takes advantage of tax-advantaged accounts like 401(k)s and IRAs. But what are “puts” and “calls?”
These are types of options contracts. An options contract is a way to bet on the direction of a stock price. The “option” referred to is the option to sell or buy the stock at an agreed-upon price. The person gaining the option pays for the right to the option (in some cases, companies may award stock options to employees). So if you believe a stock is going down, you might cut a deal that gives you the option to sell it at a given price. If it plunges, you can still sell it at the agreed-upon price thanks to your option–which is called a put option. A call works the opposite way: you agree to buy a stock at a given price. In this case, you’d be hoping for the stock to go way up, giving you a great deal on a valuable stock. These options can be used to “short” a stock, because you can write call options even if you don’t own the stock. When you do own the stock, that’s called a covered call. The more conservative methods are probably best to start with, experts caution. Shorting stocks is much more risky than simply owning stocks and bonds. If you’re short a stock that ends up skyrocketing in value, you may find yourself forced to pay huge prices to buy it–just to turn around and fulfill your agreement by selling it for much less. So be careful!
You also asked about credit reports. Credit scores and credit reports can seem opaque, and they are indeed very complicated, but a functional understanding is really all you’ll need to keep your score in a healthy spot. Credit scores are generated by the three major credit reporting agencies: Equifax, Experian, and TransUnion. Different companies use different scoring systems, but they all use funny numbering systems that top out around 800 or so. In the end, though, the complexity hides a fairly simple truth. About a third of your FICO score (35%) is simply your payment history: pay your debts, credit card bills, and loan payments in a timely way and you’ll have that covered. Another 30% is how you use credit–to keep this part looking good, don’t use all of the credit you’re eligible for (there’s no real rule as to how much you can use, though 30% is a popular figure) and avoid unnecessary and unhealthy forms of debt. The length of that payment history also looms large (this is a big part of why experts say it’s necessary to build credit over time–you can’t just get great credit right from the start). Ultimately, maintaining a good credit score really just requires you to maintain good credit habits!
“I see retirement as just another of these reinventions, another chance to do new things and be a new version of myself,” Walt Mossberg