So one thing I didn’t see in the comments is a break down of financial terms. I know you can just google it, but it gets really overwhelming because you end up looking up words in the definitions of the terms you just looked up! I’ve worked for several investment management firms and I still get confused! Here are some basics that will hopefully help you feel empowered.
Stock – a share in an individual company. That company does well, you earn money with them, does poorly, you loose money.
Bonds- a loan to a company that is paid back with interest. You get a share of the interest along with your principle. Generally safer than stocks, but lower returns.
Mutual fund – everyone tosses their money into a bucket and a team decides what stocks and bonds to buy and everyone gets their share depending on how the fund does. Management hopefully is able to do better than the general stock market.
Index fund – type of mutual fund, but instead of being managed by a team of analysts, it is designed just to follow the general stock market. It doesn’t cost as much to run an index fund because you don’t have to pay all of those analysts and managers to make adjustments to the plan. There are arguments that the money that is saved in running it will more than make up for the average returns.
Front End Load – $ taken out of your initial investment, often goes to commissions and fund managers. Stay away from these, someone is selling you something and that % up front will really impact what you can earn.
Expense Ratio – the % of the fund’s money that is used to run the fund. Includes paying managers, advertising and all administrative fees. This is an important number! You don’t have to go with the lowest expense ratio, but it can make a big difference for you in the long run. Make sure it is at least below 1%
ETF- Electronically Traded Fund – Most firms will offer these commission free. There is nothing wrong with these funds, just because it’s electronically traded they have no overhead for getting you involved so they don’t charge you anything. There are great ETFs, you should pick one of these.
What you are looking for in a fund is a good morningstar rating, a high return, low expenses and reasonable risk tolerance. You can use this awesome fidelity tool for free to compare funds: https://www.fidelity.com/fund-screener/research.shtml
IRA -Individual Retirement Account
IRAs are used for tax purposes when saving for retirement. If you put money in without paying tax on it now, you pay tax when you take it out. The benefit to this is that you have that extra money up front that continues to grow while it is locked into your account. There are penalties for taking money out early. But you can open an individual or joint account and invest in mutual funds, stocks and bonds and not worry about taking money out early, you just use money you have already paid tax on! So if you are planning to save this money for decades, use a roth or traditional IRA, if you want access to the money earlier, use a non-retirement account.
401K- Retirement account associated with an employer. You get to put in money without paying tax first and often the employer will match that to a certain level of your earnings. If your employer does a 6% match and you earn 25k a year, they are basically giving you 1500 on top of your earnings! That is why people say to always max out your 401k. You would be putting in $3000 which would then earn interest until you retire… if that is in 30 years, that $3000 will turn into $17,000 (magic!)
I prefer not having an account manager. Larger firms like Fidelity will have employees that can advise you for free, both in office and over the phone. For almost all investors, this will be sufficient. They can explain to you the difference between account types, funds, costs and some basic strategies. They will help you open an account and invest in 1-3 well balanced funds. If/when you have more wealth to worry about you may choose to connect with a planner that can advise you on tax advantages and other savings vehicles.
It really is great to start as early as possible, even if that means not being able to contribute regularly. Using your tax return for this instead of bills or splurging would be a great place to start. When I was younger I paid my bills with my regular 9-5 job and picked up babysitting and other odd jobs and used that money for investing. I did this even when I had student loans because you do want that account there, earning money, even if it is small.
