Many of you may be novices like I was not too long ago. I am still no expert, but I feel like a have a good grasp of how to manage my finances all on my own. That’s right, I am confident I don’t need a financial advisor. How did I get to this place where I can do it on my own? First I read the White Coat Investor book. From there I read hundreds of his blog posts. I then read his second book. I then listened to all of his podcasts several times. I also took his “Fire your Financial Adviser” course. And I have also read about 12 other financial books. Sounds like a lot of work right? Not for me. It’s a hobby. I’d rather read this stuff than go fishing or something else. Maybe I’m a nerd I don’t know.
Many of you may not have the time or desire to do that much reading. And that is ok. You still shouldn’t blindly use a financial advisor with no knowledge yourself. If you do some reading and researching and learn some of the basics, it can go a long way in making sure you are getting good advice and not getting swindled by a financial adviser.
So start reading some financial blogs and books such as those suggested in my learn more tab. You may find you enjoy it. If not, at least you will learn something that will be very valuable.
So let’s briefly discuss some basic vocabulary and best practices to get you started. Again, I will not discuss real estate. This can be a great investment vehicle, but I will not discuss it much here. So you must get that information elsewhere if it is something you want to invest in. Also, the things I do discuss are not official or personalized financial advice. It is just stuff I have learned and want to share.
First of all, investing in single stocks is not a good idea. No matter how good you think you are at picking them, you are not. At least not over the long term. You really should just invest in mutual funds. Specifically, low cost mutual funds. Be aware of loads and fees. You should not have to pay them. There are mutual fund salespeople that will try to get you to pay them. Don’t do it. Just go somewhere like Vanguard or Fidelity and buy no load/fee indexed mutual funds. The only fee you should pay is the expense ratio and that should be below 0.2%.
What is a mutual fund? Basically a bunch of investments all together. So if you buy a stock mutual fund, it will have a bunch of different stocks in it. This helps you diversify. You will get the winners, but you will get some losers. There are also Bond mutual funds. Actively managed mutual funds means there will be fees and someone managing it and trying to beat the market. Passively managed or “Indexed” mutual funds means there is no active management and you just get the index. You won’t beat the market, but you won’t get below market returns either.
What is a retirement account? It is basically a tax advantaged account like an IRA or 401k. In general it is best to get as much of your mutual funds/investments as you can in these accounts. You don’t have to pay taxes on the money you put in them, and they grow tax free. You will have to pay taxes when you withdraw the money. But remember you can’t withdraw the money until a certain age which right now is 59 1/2. If you withdraw before that, there will be a penalty. There are also Roth options for some of these accounts. This is different in that you do have to pay taxes on the money you put in it, but it grows tax free and you don’t have to pay taxes when you withdraw it. Some good general advice is if you are in a very high tax bracket now you should take the tax break up front. But if you are in a lower tax bracket then Roth contributions could be better.
Remember if you have a 40lk, you can also do a back door Roth. To better learn what that is I recommend you read from The White Coat Investor here.
What is a taxable investing account? It is similar to a retirement account in that its a place to have stocks/bonds/mutual funds. However, there are not the same tax advantages. You pay tax on the money you put in, you are taxed on the growth, and you pay tax when you withdraw. It still has some advantages and it is a great place to save for retirement once you have maxed all of your retirement/tax advantaged accounts.
In summary, some good basic advice is to save 20% of your money, put as much as you can in tax advantaged/retirement accounts, and put the rest in a taxable brokerage account. In those accounts you should be investing in low cost, load free, indexed mutual funds. Again, please read further in other places regarding this advice. But I am confident it is a great way to see your money grow. Remember there will be ups and downs in the stock market, but if you have an asset allocation you are comfortable with and you stay the course and don’t bail and sell high and buy low, you should be in a great situation in the end.
*Nothing on my website is professional or legal advice. I am only sharing information that I have learned and it may or may not be accurate. I am not liable for any problems you may have by following this advice. Please do further research and get professional and/or legal advice about any of these topics.