1. What should I do with my cash? — Courtney
Everyone’s financial situation is unique, so there is no one-size-fits-all approach. However, an important question to ask yourself is “how hard is my money working for me?” which means how much interest is your cash actually earning? According to the FDIC, holding cash in a traditional checking or savings account currently earns you less than 1%—significantly less than 1%.1 But there are many different account options that may help increase your interest rate on short-term savings, like a high-yield savings account, a money market account, or a brokerage account just to name a few. Whichever account you choose depends on your personal goals and timeline. You worked hard for your money, so it’s important that it also works really hard for you.
Tip: Try Fidelity’s Goal Booster tool to help you explore which account might be right for you and your goals.
Read more: How to start investing
2. Is there a ratio or formula to determine how much you should have in cash, short-term investments, and long-term investments? — Julia
There is no specific ratio, formula, or one-size-fits-all approach to this question either. There are so many variables that are very personal, like your goals, lifestyle, and current financial situation. It’s important to outline your goals and have a financial plan in place, so you can make well-informed decisions that suit you.
However, Fidelity does have a few guidelines intended to serve as a starting point:
- Save 3 to 6 months of your living expenses in emergency savings —think "I can get it today or tomorrow if I needed it" type of account that’s earning interest.
- Try to save 10x your income by 672—but this number will depend on when you plan to retire and what kind of lifestyle you want to live in retirement.
Aside from these general guidelines, the rest of your allocations depend on what’s important to you, where you're at currently, and what your future needs may be. Do you want to retire early? Have you built up emergency savings? Are you saving for education, a wedding, a house? If you’re not sure where to start, that’s OK. Working with a financial professional can help guide you, so you can feel confident in your next steps. No matter how old you are or what your goals are, the key is to have a plan and take action as early as you can.
Tip: Sometimes a conversation is just what you need to get started (or keep going). Call us anytime (for free) at 1-800-FIDELITY (800-343-3548).
Read more: Build a financial plan in 3 easy steps and How much do I need to retire?
3. Is investing in my HSA a tax-smart investing strategy? What are the benefits of an HSA? — Stephanie
HSA stands for a health savings account, and you typically need to be enrolled in an eligible health plan to open an HSA. The short answer is yes—investing in an HSA can be considered beneficial from a tax perspective since an HSA is triple tax advantaged,3 which means:
- Your contributions reduce your taxable income.
- Your contributions are not taxed while they are in the account—even if they earn interest or investment returns.
- You won't owe taxes when you take money out—as long as the money is used for qualified medical expenses.4
So basically, as long as you’re using your HSA funds for medical expenses, you typically don’t have to pay taxes. These 3 reasons are why HSAs can provide more tax advantages than traditional retirement accounts, like 401(k)s or IRAs. And unlike an FSA (flexible spending account), an HSA’s balance is not “use it or lose it.” Instead, your HSA contributions can accumulate interest year after year. You also have the ability to invest your HSA contributions to help your money potentially grow even more over time.
As we think about retirement, one of our biggest expenses is probably going to be health care costs, so it may make sense to save in an HSA account. Plus, many employers offer a company contribution to HSA accounts, so make sure to look into that benefit as well.
Tip: Use our HSA calculator to help estimate your health care expenses and your savings potential.
Read more: What is an HSA, and how does it work?
Consider: The Fidelity HSA® and compare other HSA providers.
4. Can you have both a Roth IRA and a traditional IRA? Can you contribute to both? And when would it make sense to convert a traditional to a Roth? — Ann
Yes. You can have both a traditional and a Roth IRA, and yes, you can contribute to both at the same time. But should you contribute to both probably depends on where you stand for the year. Here are some things to consider:
- You can contribute for the previous year until the tax-filing deadline in April.
- You can contribute for the current year at any point throughout the year.
- There are yearly contribution limits across IRAs.
- For example, in 2024 you can only contribute $7,000 total (or $8,000 for those age 50 or older) to either a traditional IRA, a Roth IRA, or a combination of both—not $7,000 in each account.
- Roth IRA accounts have income requirements.5
If you’re able and eligible, contributing to both a traditional and a Roth IRA can give you taxable and tax-free withdrawal6 options in retirement. Financial professionals call this tax diversification, and it may be a smart strategy when you’re unsure of what your tax picture will look like in retirement. However, it can also be beneficial if you do have an idea of what your tax picture will be in retirement, assuming you have a strategic plan in place.
But taxes may not be the whole story. Reducing your current taxable income through IRA contributions may also help with things like qualifying for student financial aid and various tax credits and deductions.
But as with other financial decisions, choosing which IRA is right for you or deciding whether or not to convert your account(s) depends on your personal situation and goals and can also have tax implications. If you’re unsure, consider working with a financial professional and a tax professional to make sure you understand your options and are prepared for the outcome.
Tip: Try our IRA Contribution Calculator to see which might be right for you and how much you may be able to contribute.
Read more: Traditional or Roth IRA, or both? And understand the difference between the two with our comparison chart.
5. What is a robo advisor and what are the risks and benefits of a robo advisor? — Michelle
A robo advisor, or digital advisor, is considered a managed account, which means professionals manage your investments on your behalf. However, with a robo advisor, there’s limited human involvement. Instead, a robo advisor is a digital financial service that uses technology to help automate investing. This automated investing is based on a series of initial startup questions that outline factors like risk tolerance, timeline, etc., and align to the overall investment strategy for your account.
Robo advisors are often more affordable than other traditional investment management due to their automized nature and minimal human involvement. They may also be a good starting point for beginner investors who aren’t confident making decisions or for those investors looking for a less time-consuming, hands-off approach. There are also hybrid robo advisor options, like Fidelity Go®, that combine robo advisory with access to live, personal financial coaching.7
All investing involves risk and the potential to lose money due to the inevitable fluctuations of the market. And not all robo advisory services are alike. Some may not be the right fit for every investor, and there are many factors to consider, like financial guidance options, advisory fees, investment minimums, and investment types available.
Tip: Learn more about our robo advisor, Fidelity Go®, which can help you ease into investing.
Read more: What’s a robo advisor, and how does it work?