I just paid off my debt and built up a four-month emergency fund; what's next?
I just paid off my debt and built up a four-month emergency account. My work does not offer a 401(k) account, but I would like to open up a retirement account and also look into long term investing. Where should I start?
Joshua Escalante Troesh was voted the #1 Advisor nationally by the Investopedia Advisor Insights audience.*
Congratulations on giving yourself the foundation for financial freedom. If you were a client, I would respond to your "what's next?" question with asking you the same thing. What is next on your personal life agenda?
Think about your major life goals you want to accomplish in your future. Retirement is obviously one of the major ones, but also think about whether you want to buy a house, start a business, send a child to college, or take a major vacation in the future.
Open an Appropriate Investment Account(s) For your Goals
Most of the above goals would require you to have some of your investments in a normal (taxable) investment account so you have access to the funds when you want to achieve the goal. While tax advantages are helpful, they only are a benefit if the account allows you to use the money for the goal you want. For example: with a goal of sending a child to college, a 529 plan is likely a good place to start exploring your options. But a 529 would be horrible for saving for a house.
Creating Your Own Retirement Account
For retirement, although your work doesn't offer a 401(k), that won't stop you from investing for retirement. You can open an Individual Retirement Account (IRA) at any number of different financial institutions, including through Purposeful SP. You will need to choose whether a Roth or Traditional account is right for you, what to invest in, how to title the account, and a number of other options. While this might seem daunting, the good news is you can get started now and then correct any mistakes in the future when you get a full retirement plan (and without much cost as long as you don’t sign an annuity contract).
Go it alone or get professional help
You can invest for any goal on your own, or you can seek the help of a professional adviser to help you balance your priorities. My recommendation to students is generally to either (1) seek a fee-only and fiduciary financial adviser or (2) go directly to a mutual fund company (I'm partial to Vanguard, Fidelity, and Blackrock) and open up an IRA with them. Once you have an IRA opened up, set up an automatic contribution each month to invest in a broadly diversified fund.
Going it Alone
When you are first starting, investing into a single fund makes the most sense while you build your initial nest egg. Make sure it is a broadly diversified fund which invests in a wide variety of investments. If you are younger begin your search by researching S&P 500 index funds, Russell 3000 index funds, or a global equities index fund which invests in companies in the U.S. and all over the world. Other investors will want to explore funds which invest in both stocks and bonds (balanced funds) or Target Date Funds as a starting point for investing.
Your age and risk tolerance will help you decide which option(s) are best for you. Keep in mind if you choose a stock-only fund, your entire portfolio is expected to drop during a market downturn and you have to be comfortable with a potential big (but likely temporary) loss of value.