Over the last few days Magical Penny has welcomed more new readers to the site than ever before (Hi new readers!).
The influx has been driven by the Carnival of Personal Finance, where Magical Penny was a top editor’s pick, and more significantly, by readers of Trent Hamm’s The Simple Dollar –the personal finance site on the web.
As there are so many new readers I thought it would be a great opportunity to share the transcript of an interview first published as Foreigner’s Finances Podcast.
A 23 year-old from the Chicagoland area teaching English in Japan and who writes about money for twenty-somethings at Foreigner’s Finances.
The 24 year-old British founder of Magical Penny teaching and encouraging twenty and thirty somethings to start investing (it’s not as scary as it seems!)
In the interview we talk about about investing as twenty-somethings and the differences between money in the U.S. and the UK. We also covered what Magical Penny is all about and what will be coming up in the coming months to help you grow your pennies.
Click here to download and listen to the MP3.
Austin Morgan: Welcome to the Foreigner’s Finances podcast. I’m your host, Austin Morgan, from the personal finance site ForeignersFinances.com. One of the main aspects of my blog is the international community, and I really enjoy talking to people who travel, and people who live abroad. I’d like to bring in my guest today, an international finance blogger. This is Adam from MagicalPenny.com. How are you, Adam?
Adam Piplica: Hey, Austin. Thanks for having me today. I’m really looking forward to this opportunity to have a chat with you.
AM: No problem.
[00:47] Adam’s intro to Magical Penny and how he got started writing about personal finance
AM: I’ve been following your blog since the early days. You started off in February, correct?
AP: Yes, February 1st. I was really paranoid that I’d run out of things to say, but that’s not happened so far and it’s all going well.
AM: Well, that’s always the point – to keep pumping out the posts for the readers. So, can you just tell the listeners a little bit about your site, in case they haven’t heard of it before?
AP: Yes, great. MagicalPenny.com is a personal finance site, just about investing and about money for people in their twenties and thirties. I set it up because I didn’t think any of my friends really knew much about money and investing, and I thought they were missing a big opportunity to start young and get saving. Also, it’s not as complicated as people seem to make out, or at least as I thought when I didn’t know much about it.
I kind of got into personal finance when I was still at university, and I just started reading different blogs. I remember reading Trent Hamm’s ‘The Simple Dollar’ back in ’06 when he’d just started it, and I was thinking it was a whole other world. I didn’t know anything about it, and I just started reading, and I just thought, ‘I’ve got something to share now for people in my age group.’
AM: Very cool. So, do your friends read your blog?
AP: I have a few, actually. I was quite surprised, because I didn’t think my friends would actually read it. I wanted them to, and I wanted to keep them in mind as I was writing it, but I didn’t think they actually would. But I’ve actually got a few friends who are regular readers. Sometimes I forget that they’re reading now, and then they’ll say, ‘Oh, hey, I read your blog post,’ and I think, ‘Wow, that’s really cool that they’re actually keeping on reading it,’ and not just reading it at the start, when I first started out, just to be friendly or something.
AM: I’m sure you have some secretive friends also reading who are afraid to admit that they’re learning everything about money from you.
AP: Haha, yes, that would be really cool.
AM: That was actually one of the reasons I started my blog, was it’s just so difficult to talk about money with friends, especially in your twenties. It just seems like a very huffy-puffy topic, and if you know a lot about money there’s this negative connotation that you are either like a miser, or you’re no fun. I really didn’t like that, and I still really don’t like that, and it’s one of the things that I try to change on my site.
So I thought, ‘You know, my friends probably aren’t going to talk about this at the bar, or at someone’s house, so if I start this site, even if nobody else reads it, at least they’ll start to realise, “Hey, Austin’s 23 and he actually pays attention to this stuff. Maybe I should start paying attention to this stuff”,’ because it just makes life so much easier if you start now compared to when you’re 30 or 40.
AP: Yes, that’s so true, and I think some people think:
“‘Well, what’s the point? I’m not earning much, how am I supposed to pay all my bills now? How am I meant to save as well?’
I just wanted to get a lot of the psychology of saving, because everyone finds it hard to save. I don’t think there’s anyone who thinks it’s ridiculously easy, but it’s easy to save if you actually have a goal in mind, and it’s also easy if you automate, so I’m a big fan of just looking at automising it.
[04:30] The first steps to getting your finances in order including proving to yourself you can consistently save before you invest
AM: So, one of the things that you talk a lot about over at Magical Penny is investing. What would you suggest to somebody who’s in their twenties? Maybe they just started their first job, but they’re still paying bills, they’re maybe living on their own for the first time, and they don’t really have that much money to invest. What would you suggest for them?
AP: I think first off I’d say, ‘Don’t invest straight away.’ I’d want you to make sure that you can do it consistently, and you can put a little bit of money away. Make sure you get your general savings up, because there are always going to be things that come up, and if you haven’t actually got a good groundwork, a good kind of setting, then putting money into investments is going to be very bad. You’d start panicking if things go down, or if you need the money in advance.
But assuming the person did have enough money set aside for their immediate needs and if something went wrong, I’d say get in the habit of automatically putting money into a savings account, and then when you’ve managed to do that for a few months, start reading about investment funds – like index funds, or mutual funds – and just start actually looking at what it actually is all about. I think it seems more complicated from the outside than it actually is.
Essentially, you’re just investing – if you invest in index funds – in the whole market itself, and being as you’re investing for the long term, it doesn’t matter if it goes up and down. I have some of my friends who go:
‘Oh, have you seen the market today? Have you seen how it’s up? You must be rich!’
Or the next day, they’d say,
‘Have you seen the market? It’s down. I bet you’re not going out tonight,’
And I’m just thinking: ‘No, it’s not about that at all. It’s about the long-term.’ Whilst I think it’s good to kind of keep on track of how things are going each month, I’m definitely not worried about any fluctuations. I think that’s the main thing that people need to remember.
AM: That’s great advice, because I think a lot of people our age, when they first start investing and they first start their job, they think they need to have their 401k ready, and they need to have their stocks picked out, when in reality you need to prove to yourself that you can create some savings and not blow it over time. It does change your perspective of money when you start to actually get that paycheck every month, or twice a month, and you actually have money. It’s a very big change in your life, and you don’t even realise it until you start to look at your bank account and you go, ‘Oh, man, I actually have money.’ So I think, yes, a couple of months of savings.
One of the things I did when I first started investing, I opened up an account with Zecco; they’re just like a cheap brokerage. I wanted to prove to myself that I wouldn’t worry about the stock swings, like you were talking about. So I just put, like, $2,000 in there, and it was a good learning experience. Like you said, your friends were like, ‘Oh, are you nervous about today?’ or, ‘The market did really well, what do you think?’ and I wanted to avoid that and prove to myself that I could avoid that. So I just purchased a bunch of little stocks, and I kind of rode the waves a little bit, and I proved to myself that I could handle it and I could invest more money in the future. So I think that was a good option for some people out there.
[08:16] Common misconceptions of investing
AP: I’m quite curious about brokerage accounts, though, because I think that’s what most people think of when they think of investing. They think, ‘Oh, right, you’re opening up a brokerage account, and you’re buying a stock, or two stocks, and you’re following the business, and you’re researching the companies,’ and I think that can put people off because they might not be interested in that, or think it’s excessively risky.
The thing that I want to try and impress on my readers, and the people that I meet in real life when I get to talk about this stuff – although it’s admittedly quite rare – is that it’s not all about the picking of the stocks themselves, because who knows what stock is going to go up or down? Who has the time to look through the company reports? I’ve tried looking at a few, and they’re not the most interesting reads. I think people might get hung up on that.
So rather than say, ‘Oh, go to a brokerage account,’ I’d say, ‘Start looking at the investment prospectuses of mutual funds and index funds, which just have all the different stocks in a particular class or a particular country, and invest in those as a group.’ That’s a lot easier to actually look at how they’re performing, and also through diversification means it’s less risky. They do all the work for you in terms of setting it up, the companies that have them, so admittedly there are lots of traps and lots of expense ratios you need to be mindful of, but I think that they are a way better option than the individual stocks.
AM: Oh yes, definitely, because that’s what I have in my retirement account and my Roth IRA, is through an index fund, and I can’t even imagine trying to pick individual stocks, because I did, but just for the sake of research. I admitted it on my site, I wrote about it, and I said that I just picked up a money magazine, and some of the ‘Hot Stocks’, and those were the ones that I purchased. This was when I was like nineteen, twenty, so that was a stupid move on my part, but it was a test period.
AP: Did you make any money?
AM: I made, maybe, less than $100.
AP: At least you didn’t lose loads.
AP: When some people try it, it’s like, ‘Oh, I lost half my money! I’m never doing it again!’
AM: I really like those horror stories, actually. They’re always really interesting. But the index fund, it’s so simple, and it’s so easy, and the biggest thing that I really enjoy about them is that if you buy an individual stock – say, Wal-Mart – there’s a small chance that Wal-Mart could go out of business. I mean, Wal-Mart probably won’t go out of business, but tomorrow there could be a CEO scandal, and they could find bad bugs in all of their meat across all of their stores in America, and their stock price would plummet, to the point where it would be worth pennies. With an index fund, the chance of that happening is very, very slim, and if that does happen then we’ve got bigger issues, because economies are failing and we’re going to have to worry about keeping people about of our houses and trying to steal stuff.
[11:36] Differences in investing between the UK and the US
AP: I’m jealous of you guys, though, in America, in terms of the choice you have for index funds and mutual funds. Maybe it’s that I’m naïve, and I haven’t seen what’s out there, but I think investing in general is a lot more acceptable and popular in America than in the UK. That’s why I thought I had to start my site, because I’ve been quite exposed to a lot of American bloggers, and a lot of American-focused investing, and then when I went to try and apply those things in the UK, I found that the options just weren’t there.
When I first started investing, I looked high and low and I couldn’t find an index fund. It sounds crazy, but I got all the different investment prospectuses, and looked through, and I was looking for these. ‘Oh, I wonder if there’s a British word for “index funds”? Because I can’t see it.’ I think they’re more often called “tracker funds” in the UK. I’m not sure if they’re called tracker funds in the US as well. I eventually found this tracker fund that tracked the FTSE, which is the equivalent of the American S&P, although obviously because the UK is a smaller economy than the US it’s slightly smaller.
I eventually found one index fund, but I could only find it for the UK, and it took me several months before I came across other index funds that allowed me to invest in, say, Europe or in South-East Asia for example. I’ve yet to find an index fund for any of the emerging markets, or any of the mid- to small-cap investment funds that seem to be available in America.
AM: So do a lot of people in the UK just invest in individual stocks, or mutual funds? What’s popular there?
AP: I don’t think investing is as popular full stop, really. For example, my parents have never really invested, and neither have their peers as far as I’m aware. People tend to rely on just their pensions, and I don’t think there was that kind of proactivity, or just knowledge or anything like that.
That’s why I think it’s amazing that we live in this Internet age, because I’ve managed to be exposed to-, the world’s information is out there for anyone to look at. If you’re interested in anything, or even just mildly curious, in a few minutes you can click around and find information that-, my parents wouldn’t have a clue about investing when they were my age, and yet I’ve managed to go online and the Internet has broken down the barriers.
I want to fully take advantage of that, and kind of spread the message. I’ve made a big point about evangelising the power of compounding returns on my website, because I don’t think people realise it. Even if they do, the information’s out there, if people just know where to look or just give it some thought.
AM: Yes, definitely.
[14:50] Adam’s favourite money topics to write about at Magical Penny
AM: So what are some of your favourite topics to write about at Magical Penny?
AP: Number one is psychology, really. I never thought I’d be talking so much about psychology, but that is money. That is money management, because everyone knows that they should spend less than they earn, and not spend money on crazy things, or make sure that they put some money away each month, but then life happens, and then you don’t hit your goals. So I think you always need to be mindful of your spending, and the reasons why you’re spending, and why it’s okay to spend on some things, and why it’s not okay to spend on other things. So kind of the psychology of money management is a big thing for me.
AM: Yes, you were talking earlier about automising everything. With the internet and online banks, and even the brokerages now – I know, like I use Vanguard, and you can do automatic investing with them – it makes it so easy, and it takes the human element out of it. Like you said, things come up, expenses, vacations, weddings, whatever. You have to pay for stuff, and your savings and your investments are always easy to cut if you have other things that you need to pay for, but you can set up your online bank to take $200 a month from your checking account, and then you can tell your brokerage, like Vanguard, to take $1,000 four times a year and buy stocks with that. That’s really a great tool to use if you don’t really care too much about the money portion of it, you just want to set it and forget about it. I really suggest people check those out with your online banks and your brokerages. So what are some other things that you talk about over at Magical Penny?
AP: I also talk quite a lot about the actual nuts and bolts of investing from a UK perspective, because I found the information hard to seek out. Even though there’s all this information online, it did take some digging to find good companies to get information on, and where to find those index funds.
For example, I found my favourite index fund at Fidelity, which I’m sure you’ve heard of but the UK branch of Fidelity have some really good index funds available in their funds supermarket. If you look at all the investment prospectuses, a lot of them have terrible funds with crazy expense ratios. If I hadn’t actually read online to actually have a base amount that is reasonable for an expense ratio, I would have said, ‘Oh, yes, 2.5% a year is fine,’ whereas I know now that that’s ridiculously expensive.
The great thing about using a funds supermarket, which kind of consolidates all the different investment companies – like Fidelity’s fund network – is you can search by expense ratios, and it will just pull up all the different mutual finds and index funds that you might want to invest in, and find the ones with the lowest fees. Ultimately, you never know how much a fund is going to go up and down, but you do know how much, through the fund, you’ll be charged. So I just try to keep things as low as possible.
AM: That’s convenient.
[18:24] What the future of Magical Penny holds
AM: So you’ve been blogging since February, so that’s what, five months, six months?
AP: I’m just about to come up to my six-month anniversary [August 2010], so I’m really excited about that.
AM: So what do you picture for the next six to twelve months of Magical Penny?
AP: I think the next six months, it’s going to be more of the same in terms of psychology, because I don’t think you can ever get enough of thinking about new ways to think about your money, and make sure that you’re spending and saving consciously
Also, I want to go even more granular into how to actually invest. I spent a lot of the first six months getting people prepared, because I didn’t want people to rush into investing and then they might need the money, and if the stock market had gone down since they’d put money in, they could lose it. I wanted people to have a good, solid grounding, understand it, and now these next six months are going to be all about taking people through how to actually invest, and how to actually start.
AM: So, you said that you write sometimes towards the UK audience, but could anybody from America to Japan read your site and take something away from it?
AP: Oh, definitely. The amazing thing about the Internet is we’re all one global community, so people from all over the world can get something out of it. As the personal finance blogosphere is so US-based, I actually know so much useless information about 401ks, 403bs, Roth IRAs. I know all about the limits and everything else. So often, when I’m describing things, I’m writing it for a UK audience but almost all my posts have a little, in brackets, ‘And if you’re a US person, make sure you’re doing the same in your 401k,’ for example, or ‘your Roth IRA’.
I did talk about, earlier, that I was jealous of the options that seem to be available in the US in terms of investing, and having a much more investment-focused society, in a way. However, I do think the British ISAs, the Individual Savings Accounts, completely are way better than anything that’s available in the US. For example, the Roth IRA has, is it a $5,000 limit a year?
AM: Yes, and if you’re over 50, I believe, it goes up to $6,000, to help them catch up.
AP: But get this. Using a British ISA, and the stocks and shares component of that, it’s basically like a Roth IRA in terms of you earn everything tax-free, but you don’t have to use it for retirement. You can use it for anything, and you can put up to £10,000 a year, so that’s almost $20,000. So you could use it just the same way that someone would use a Roth IRA, and save for retirement, or save for something in the future, but you’re not limited. You can take any of the money out, you don’t have to wait until you’re retired, which does have pros and cons because I suppose locking it away means that you don’t have the flexibility to take it out if and when you need it. At least with an ISA you do have that flexibility, and you can have a really great wrapper for shielding your savings away from tax.
AM: Yes, it’s really fascinating to read your site, because everyone handles money differently, and it’s not too often that you actually talk to somebody from a different country and a different cultural background about how they attack money and their finances. So that’s one reason I really like going to your site, is I know I’m going to completely change how I think about money. Last thing, did you start a newsletter recently on your site?
AP: Yes, I did. I haven’t made as many newsletters as I initially intended to, but yes, you can sign up at www.magicalpenny.com/join, and it’s kind of in two parts. I’ve got the actual newsletter itself, which has different content from the blog, but you can also sign up to get the updates via email and the reminders and things like that, so I’ve got some really good plans for competitions.
True fact: I launched one competition and I didn’t have a single person enter, so even if one person had entered, I would have been forced to have given them the prize of I Will Teach You To Be Rich by Ramit Sethi. Nobody took part in the competition. I was just waiting for one email so I could say, ‘Yes, you’re the winner!’ So yes, some people missed out there. The odds of winning any prizes that I have in the future, I’m sure, are quite good.
AM: Yes, definitely. I mean, free books? You can’t really beat that. This is Adam from MagicalPenny.com. Thank you so much, Adam, for coming on today. I really appreciate it.
AP: Thanks for having me, Austin.
AM: Make sure to check out his site, MagicalPenny.com. He’s from-, are you from Leeds?
AP: Yes, Leeds. It’s directly between Edinburgh and London, so right in the centre of the UK.
AM: So you can broaden your money knowledge by reading a little bit about how he handles money in the UK, and I’m sure you can take something away from it. You can also follow him on Twitter at @magicalpenny, and it seems like you’ll be giving away some great stuff coming up here, so make sure to follow him and you can hopefully get some great prizes and have a good chance of winning.
AP: Yes, definitely. Thanks, Austin.
AM: Thanks a lot, Adam, and thank you for listening to another episode of the Foreigner’s Finances podcast. I will see you next week.
Be sure to check out Austin’s personal finance site, Foreigner’s Finances and if you’re a new reader to Magical Penny, welcome.
If you want to learn more about investing here are some of my favourite articles on the site so far: