Financial Noob looking for advice

Anonymous · ‎02-03-2019

Hey everyone!

I've just recently found these forums and started focusing on my credit. That focus has now led me to want to focus more on my financial future. I've been trying to read what I can, but honestly it is mostly gibberish to me. I grew up in a household where living paycheck to paycheck was mandatory, and there was no such thing as financial planning. I do not want to live that way. I feel like I'm starting behind the curve, so I'm trying to hit the ground running.

I'm 27 years old, married, one child (17 months), and I have a base salary of $46,000 per year. In addition to my base salary, I receive a certain amount of stocks over the next 4 years (which at the current stock price and amount equals around $32,000 pre-taxes), and I get a bonus in my 2nd year of employment in the amount of $10k spread out evenly over each paycheck. After taxes, 401k, and health insurance I pull in around $1,300 biweekly.
My wife is a self-employed photographer who is just getting her business off the ground so she can pull in anywhere from $100-$2,000 a month depending on. For averages sake, lets call it $500 a month.
I currently contribute 4% of my income to my 401k (which has only been open for 6 months). This is the maximum amount my company matches. They contribute $0.50 per $1.00 invested, so 2% in my case. Meaning 6% of my base salary is contributed to my 401k per paycheck.
I have health insurance but not one that comes with an HSA (though they do have an HSA plan and benefits season is coming up).
For debt, I have a loan for $7,500 with a monthly payment of $166 over 5 years. (Just opened last month)
We have a savings account through Marcus by Goldman Sachs that currently has just over $4k at a 2.25% APY
We live in an apartment (family owned) that costs us about $400 month including utilities.

And that is the extent of my financial portfolio. Our "plan" is to save for a new (to us) car, and a downpayment for a house (utilizing an FHA loan) sometime within the next two years. It feels like a solid "here and now" plan, but lately I've been worried about retirement, college funds, and all those exciting things that come with getting older and our child (eventually children) getting older.

Where do I even start?

Edit: I forgot to mention that I have automatic withdrawal set up so every pay day $100 is deposited into the Marcus savings account.

Anonymous · ‎02-03-2019

I would figure out your current state first. Where do you spend your money? Track it all if possible. Your rent is low, so you must be spending elsewhere. See where you can shave some off.

Find out how much extra you can afford to pay yourself per month and make a point to put that aside. Over time you you see your savings balances grow.

Anonymous · ‎02-03-2019

That is definitely something we are doing, but I guess I’m more asking what exactly should I do with that money? Add it to the savings? Open an IRA? A Roth IRA? Money market account? Robo-advisor investment?

Also, side note, I currently use TD Bank but I’m looking to switch. Can anyone recommend a good brick and mortar bank to switch to? I like having the option to deposit cash so online only doesn’t work for me.

Anonymous · ‎02-04-2019

Here's what I would do.

I would open a Roth IRA. If you don't know, a Roth IRA is a retirement account where you pay taxes on the money before you contribute it. But then when you take it out in 40 years, it's tax free. (With a traditional IRA, you invest it without paying taxes on it, but you have to pay taxes on all of it including what you gain from the investments, when you take it out.)

The reason I suggest a Roth is that you're probably paying the lowest income tax rate right now that you're going to pay, possibly for the rest of your life. For one thing, your income is likely to go up as you advance in your career. And as your wife's business grows, she could increase her income substatially. And in addition to that, income tax rates are historically low right now. If certain politians have their way with many of the entitlements they want to add, your tax rate will need to go up significantly. So pay maybe 15% now instead of maybe 40% or 50% later.

I would open a self-directed Roth IRA at somewhere like TDAmeritrade. Self-directed means you control where the money is invested (what stocks or bonds or funds or whatever). You can invest up to $5,500 for 2018 (and you have until April 15, 2019 to do so).

I would then invest in ETFs. ETFs are Exchange Traded Funds. They are like mutual funds, but they are easier to trade and usually have lower fees. VTI (Vanguard Total Stock Market) is a good option. You buy shares of VTI, which is trading at $139.40 at this moment. The VTI fund manager then uses the funds (along with every other investors' funds) to buy a broad range of stocks (according to defined plan -- not just what he feels like that day). The value of VTI goes up and down based on the value of the underlying stocks.

Generally, a stock EFT (like VTI) is going to loosely follow the DOW and the S&P500. So when they go up, VTI will go up. Over time, they have always gone up (although in the short term, they will at times go down. If you would have invested $5,500 in something like this 40 years ago, it would be worth something like $40,000 today.

The value in this is that if you invest in individual stocks, you never know what they're going to do. Take Apple for instance. That's considered a pretty reasonable investment (and has made a lot of people a lot of money). But it was at about $230 last October. It's at $166 today and has been as low as $142 recently. But by investing in an index fund (one that represents an index of stocks), you spread your exposure and significantly reduce that risk.

If you want, you can spread your risk even more broadly. My wife and I have or IRAs invested in VTI and also ETFs that invest in commodites, bonds, real estate, and international stocks. Generally, if one (or two or three) of these are dropping, others are helping to offset those losses. And overall we've seen nice steady growth (especially over the last couple of years -- the several years before that were tough going -- but even there, the broader exposure helped to limit the losses compared to what many others experienced).

This, of course, is just one approach. It's worked well for us, but who knows what the future holds.

Anonymous · ‎02-04-2019

Thank you for such an in depth reply! I just have a few follow up questions.

Why a self directed IRA? I understand having the freedom to decide where the money goes, but not having any previous experience with stocks/bonds/certs is this still the route to go? I like to consider myself intelligent, but this is not a subject I've ever looked into on my own.

How would you invest the IRA into the ETF? Is that just an option when opening the IRA?

Revelate · ‎02-04-2019

@Anonymous wrote:
Thank you for such an in depth reply! I just have a few follow up questions.

Why a self directed IRA? I understand having the freedom to decide where the money goes, but not having any previous experience with stocks/bonds/certs is this still the route to go? I like to consider myself intelligent, but this is not a subject I've ever looked into on my own.

How would you invest the IRA into the ETF? Is that just an option when opening the IRA?

Once the account is funded you simply (online) say you want to buy said ETF for this many shares equal to however much money you want to invest in it and go. Honestly these days it's less involved than ordering from Dominoes haha.

As you suggest, the reason you want self-directed (as opposed to a managed one) is you can choose. Fees do indeed suck, and only make sense much like an AF on a credit card, you have a higher spread to beat now and a lot of managed funds (someone else chooses your investment) didn't actually do that over time compared to a passive low-cost ETF. There's some caveats there, being 100% equities later on isn't where you want to be but when you're talking long term time horizons, it's hard to do better consistently.

You can always transfer to a managed service later if you so choose, but generally speaking picking VTI or SPY or whatever is a good choice for a novice investor: as you gain more experience and knowledge around it you can always do something different later but the important thing is to get money invested sooner rather than later, keep making regular investments, and let the financial magic of compounding work for you.

Anonymous · ‎02-04-2019

@Anonymous wrote:
Why a self directed IRA?

You know, that's a really good question. And when I step back and think about it a little, it may not be the best for everyone (maybe not even for most people). In fact, in order to be successful (with a self-directed account), I believe you need to be disciplined. And that means not exercising the freedom to do whatever suits you on a given day (that is a recipe for disaster). You have to stick with your plan. But, if you're going to do that, then you're probably just as well going with the right managed plan.

So if I'm honest, I do it this way be cause I like to. I like being able to look and see where five different ETFs are at any given time rather than just getting a statement at the end of the month. When one ETF does better for awhile, I sell some of it and buy others, so that I'm equally balanced among all of them, and I enjoy doing that.

But you're right, that's not for everyone. If you just want a simple, turn-key kind of approach (which probably makes more sense than the way I approach it), this probably isn't the best way to do it.

@Anonymous wrote:
How would you invest the IRA into the ETF? Is that just an option when opening the IRA?

This is what I do with TDAmeritrade. I assume it'd be pretty much the same for any of them.

If you opened an account for $5,500, you would log into your account and you would see $5,500 in cash (just like it was in your checking account).

Suppose you wanted to invest 20% of it in VTI. You would click on "Trade" and then "Stocks & ETF" and it would bring up a form. In the form, you would select "Buy" for the action, enter "8" for the quantity, and enter "VTI" for the symbol. Then you select either "Market" (to buy at whatever the current offer price is) or "Limit" (to set your price and see if the market meets your price). I typically just choose market because a few pennies one way or the other doesn't matter for my long-term approach. Then you click "Review Order" and then "Submit Order."

For a market order, you would see an indication that it was filled virtually immediately (for a limit order, it might show as "open" until the market meets your price, or until the order expires (it defaults to the end of the day, but you can change that. You can also cancel open orders if you change your mind).

Right now, VTI is $139.72. So that amount (x8 shares) would be deducted from your cash. VTI trades commission-free on TDAmeritrade, otherwise, you also pay $6.95 for the trade. So your accound would now show $4,383.24 in cash and 8 shares of VTI.

DBC is the commodity ETF that we invest in. It's trading for $15.67 right now. So in order to have about 20% invested in that, I'd repeat the process except with "70" for quantity and "DBC" for symbol.

Let's say after six months, DBC has been doing great and is up to $20, while VTI has stayed the same. I would then sell (same process, just choose "Sell" instead of "Buy") 7 or 8 DBC for about $140 and buy one more VTI. That way I would continue to have approximately the same value in each (which would be approximately $1,250 each, in this example).

Anyway, that's how I approach our IRAs, and how it works with TDAmeritrade.

Incidentally, this is exactly how their other investment accounts work, too. Suppose you wanted to invest in the stock market, but didn't want to commit to an IRA. You open a regular account with them and do the same thing. You can also do things like futures, options, forex (trading foreign currencies) and other things, but I wouldn't recommend it.

Anonymous · ‎02-04-2019

Understood. That all makes sense, but does bring me to an additional follow up question.

Is it worth opening an IRA (roth or otherwise) when my 401k is only maxed to the MATCH and maxed to the year? What is the benefit of opening an IRA rather than contributing more to my 401k (which is supplied by Vanguard through my company, if that makes any difference)?

And are ETFs the same thing as an Index? I was advised to open a vanguard account and buy into any of their 40+ indexes commission free? The explanation was rather similar to yours in terms of "Set it and forget it" and the way it tends to mimic the dow.