Advice for an overwhelmed 18-year-old! (Roth IRA's and more!)

Submitted by BeltedHarpoon t3_126f7k7 in personalfinance

Hello everyone! Over the past couple of weeks, I have learned about the term financial independence, subsequently leading me down this rabbit hole of personal finance. In only a couple of days I have learned about Roth IRA's, Index Funds, and a plethora of other financial terms I never knew about previously. To start this off, I'll talk about my current "financial situation"

I am currently a freshman in CC and paying practically nothing per semester, giving me much more financial freedom.

I currently work and have a car I paid for in cash. I have a monthly budget already set and I am fortunate enough to live with a family that will take care of any emergencies I might encounter! I feel like now is the best time to invest my money as I do not have any debt, high-cost bills, and people that are dependent on me. I plan on transferring to a UC (In state), so the cost of university will fortunately not be something I have to worry about, as I am again fortunate enough to have parents that will pay for my tuition.

After I paid for my car, I have a total of 6k in my bank account. The second I turned 18 my father opened a credit card for me but put it under his name, meaning I am an authorized user. I am still building credit, but I am most definitely sure it's not as good as if I were to have it underneath my name alone.

Here is where my questions come in!

I have opened an account with fidelity, specifically an IRA Roth. It is my understanding that it is a retirement account to where I set aside my after-tax money into, and it has the benefit of providing tax free withdrawals after a certain age (59 or something like that). Within this IRA, I can invest in everything from mutual funds to even crypto currency (which I am definitely staying away from, at least for now). My question is, is it worth to put the majority of my money into a roth IRA? I am most definitely investing for the long game, but it is a bit crazy to me that I will not be able to take in the profits tax /penalty free until I am age 59. Is it worth opening a taxable account AND an IRA account, where I can invest in both with having the added benefit of being able withdraw money from my taxable account much earlier?

Regardless, I am with fidelity, and I would be investing (in the IRA Roth at least) into FZROX, FSKAX, FZILX, etc (Obviously let me know if you guys recommend something else as I am speaking out of the very limited knowledge I have). Even when it comes to my taxable account, I would be investing in index funds/ETFS, and would dedicate a small percentage of my saved income towards individual stocks (just so that I could get more experience with the stock market in general).

Also, just a side question, I hear so much about VTSAX, and that even though FZROX and VTSAX are extremely similar, FZROX can only be bought/and or owned at Fidelty. Is this really that big of a problem

Sorry for the long post and I truly thank anyone who took the time out of their day to read through this! I was just in a pickle and did not know how much I should be investing/what accounts I should even be investing in. Any and all thoughts are appreciated, thank you!!!!

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Pass_Little t1_je8xf8q wrote

You should start by looking at the section of the faq here which describes what order to spend money. Hopefully the helpful blog will post a link since I'm mobile.

That faq will tell you that the first stage is to build up a largish savings account. I'd recommend looking at what your expenses are going to be once you get put off college and start building that up.

Normally I'd tell people not to worry about a Roth until you have that built up, but you're in a unique case.

I'd suggest visiting bogleheads.org and click on the getting started link. That is a community site 100% about index investing. A companion sub is r/bogleheads

As far as what to invest in, you should have a total us market fund, a Total International market fund, and a bond fund.

Your investmentswill be divided up in this way:

First start with the percentage of bonds. 0% is fine at your age. When you get to be 30ish you should start adding some. Let's just say it's 10% so I have a number for the example.

You buy a good low cost bond fund in the amount you want. So if you invested 1000 and wanted 10% you'd buy $100 worth of your chosen bond fund.

The remaining 90% or 900 you'd split between the us and international funds. 60/40 is a fairly commonly recommended split. So you'd buy whatever 60% of $900 is of your US fund and the rest you'd buy the international fund.

As far as what funds, if you're at fidelity, you'd want to buy fzrox or fskax for the us fund, fnilx or fziax for the international fund, and probably something like fxnax for the bond portion.

Doesn't matter which of these you pick, as long as they're in a fidelity roth. The performance between them is so close that it doesn't matter, and because it's a Roth if you need to sell them to move to somewhere else later it doesn't matter.

There is an easier way though. If you bit a fidelity freedom INDEX fund, with a year close to when you'll turn 67, fidelity will automatically buy the equivalent of the funds above and will automatically adjust the ratios to match the most common recommendations of financial advisors for someone your age. You basically buy the fund and keep buying until you retire. Note they have index and non index versions of the funds, you want the index one as they have fewer fees and should perform just as well.

Edit: one final note. There are both minimum and maximum income limits for the Roth. Please double check you're within them.

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BeltedHarpoon OP t1_je8zeca wrote

Wow, thank you so much for the detailed response! I have actually been looking into Three Fund Portfolio , and that is where I got FZROX, FSKAX, and the rest from! I will follow the 60/40 split you are referencing (Total Market and International) but was wanting to ask how much you believe I should invest into my Roth IRA. I have 6k total in savings and no real expenses besides food, gas, and my shopping expenses (which are all quite negligible). I only ask this as I assume you are using the 1k total as a reference rather than an actual example of what I should be doing (unless that is what you are recommending, and in that case that it sounds fine to me!)

Finally, would you recommend me only opening and investing into a Roth IRA, or also opening a brokerage account? I only ask this as I never hear anyone talk about brokerage account, and I am assuming not everyone is JUST investing into a IRA. I would also assume you would follow the same approach, as in investing into index funds, specifically the ones I have listed. Again, I truly thank you for your response!

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Pass_Little t1_je9147i wrote

Follow the faq on here.

Here's what I was saying about the emergency fund:

In a few years, you're going to find yourself with a lot more expenses than you have now. A typical household expense is around $5k per month. The recommendation is to have an emergency fund with somewhere between 3 and 6 months of expenses. So that would be $15k to $30K. Plus, you'll be ahead if you start saving for your replacement car now.

The point of financial independence is that you never have to worry about whether you have cash on hand to pay for life's unexpected events, such as job loss, broken cars, new roofs on houses, and so on.

A worthwhile goal is to never take a loan out ever again except for the home you're living in.

All of that money should be in a high yield savings account, not the stock market.

But, it's stil important to contribute to your retirement fund, but make sure you're both contributing enough to meet your retirement goals but also not so much that you aren't able to live your life today. A good mindset is that every dollar you put in your roth is locked away until you're 67. Now that dollar is likely to have grown to be around $30 by retirement, so it's important to put it away (waiting 10 years cuts the growth in half). If you can afford to max the Roth every year do that. But when starting out be mindful of over investing.

You shouldn't worry about a brokerage account until you've got enough emergency fund and savings built up. Money you put in a brokerage should be thought of as money you're not necessarily going to be able to take out without losing money, depending on what the market situation is at the moment. For instance, many people have less value in the stock market today than they did 6 months ago due to the market taking a nose dive. So it's best for things you might want to do someday but you don't know when but it is likely to be a few years down the road and you can delay if necessary depending on the market.

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Fluffy_Marsupial_937 t1_je8xkh2 wrote

I suggest reading some books. The Simple Path to Wealth by JL Collins. The Ultimate Dividend Playbook by Josh Peters. A Random Walk Down Wall Street by Burton Malkiel

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BeltedHarpoon OP t1_je8ycb8 wrote

Forgot to mention that I've actually been reading JL Colin's Simple Path to Wealh. I just started yesterday and I'm around 60 pages in! I'll give the other books a shot as well, thank you very much!

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KReddit934 t1_je91g30 wrote

Don't rush. Bit seems like you are off to a good start.

A Roth IRA right now would be a great idea.

>FZROX can only be bought/and or owned at Fidelty. Is this really that big of a problem

Not a problem. If you decide to move it later you can sell inside the IRA without tax consequences.

Save up a good pile of money for car-related stuff and for misc expenses and travel during college.

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teejay44 t1_je97cij wrote

For the tax year 2023, you can contribute up to $6500 of earned income (meaning, income that results from a job) into your Roth IRA. Once you reach that limit, you are done contributing to this year's Roth IRA. Fortunately, the contribution counter starts fresh each year. If you have additional money you want to invest, you could do it in a non-tax-advantaged account like a brokerage account.

Given your current living situation, it's probably not imperative that you set aside a 3-6 month emergency fund, but it also wouldn't be a bad idea to have 2-3 months set aside, just in case something really unexpected comes up.

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wijwijwij t1_je9bf21 wrote

>a taxable account ... with having the added benefit of being able withdraw money from my taxable account much earlier?

I think you probably know this, but you can withdraw your contributions from your Roth IRA without any penalty any time. It's just the earnings that have restrictions on when they can be taken out without penalty.

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Cruian t1_je9tk05 wrote

>and I would be investing (in the IRA Roth at least) into FZROX, FSKAX

Pick 1 of these 2, they fill the same role, so there's no real benefit to holding both. Then pick an ex-US fund (FZILX or FTIHX would be my top 2 at Fidelity).

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