I’m 24 and have been working at my first real job after college for about a year now. I’m trying to save as much as possible. Most of my savings are in a savings account, some in my 401K—I’m contributing 10%—and the rest in an index fund from Vanguard.
My goal, ultimately, is to retire comfortably and not worry about money when I’m old. The plan I thought up from college was like this: first, build up an emergency savings account. Once that’s done, put some money in the stock market for a bit of growth in an index fund. So far, so good.
But I didn’t really think past this point (awesome plan) and don’t know where I should allocate my savings from now on. I was thinking of buying some CDs and doing the ladder thing, which sounds kind of neat. I definitely don’t want to let my money stagnate in the savings account, but I also don’t really want to put more money into the index fund. My thinking is that my 401K is doing a lot of the same things as an index fund, only it has the added benefit of being targeted so the mix will automatically shift to bonds as I get older. I know an index fund is more liquid since I can sell the shares without the retirement-age restrictions, but I don’t know, I’d like to be more aggressive in my investments since I’m young. I was looking into the crazier funds with names like “Explorer.” Should I ever even consider buying individual stocks?
So Dopers, I hope you will share how you’ve organized your finances, what worked, what didn’t, and any advice on what I should do with my savings. All ears.
You are off to a great start. Have you considered a Roth IRA? You already have a Vanguard account, and they will set up an IRA for you with a few clicks on the web site. You can then invest your IRA funds in pretty much anything that Vanguard offers.
You can do more risky investing through mutual funds without buying individual stocks, as well. Look for Vanguard funds with “growth” in the name, like the Vanguard Mid-Cap Growth Fund. I’ve been putting a portion of my income into that one (and a much bigger portion into the S&P Index fund.)
There’s nothing wrong with buying individual stocks, if you have the time to do an appropriate amount of research. With everything you do, the best rule is to diversify and go for the long haul.
If everyone were like you, the country would be a much better place. Congrats on your financial savvy at such a young age. You are doing all the right things it sounds like. You didn’t mention if you have any debt but, if you do, getting rid of that is just the reverse side of investing. You didn’t say how big your emergency savings account is but it needs to be pretty big. The rule of thumb is 3 months pay and closer to 6 may be better in these uncertain times. You won’t earn much interest on it but you can put it into a money market account and the peace of mind alone in case you lose your job which isn’t rare.
I would keep six to twelve months of living expenses in a savings account (conventional wisdom used to be three to six, but more and more I keep hearing twelve–personally I think six is plenty), but that is more of a personal choice and decision. As noted, keep debt down to a minimum and mainly for those items (cars and houses) that are difficult to pay cash for, but do establish good credit at the same time.
Then max out your 401k contributions–it is all done pre-tax and that is a huge savings right there. Then max out your Roth IRA, THEN if you have any money left that you want to invest I would buy individual stocks. The best advice from my viewpoint is to diversify and leave it alone and let time do its thing. If something sounds too good to be true-trust your gut. At your age you can afford to take risks (much more then say me), but your risks should be calculated risks and not blunders.
Here is a nice web site that I go to, it is more for people in my age range, (30-40’s) who are looking to retire early. But they have good advice there, and there is a forum dedicated to young dreamers. They also have a great link there to a kick-ass retirement calculator that runs your assets against all known returns since 1874.
The other site below is also a great asset for investing advice.
Good job investing young. I waited a little too long but I am doing extremely well now on my retirement savings. But my wife and I both invest the maximum allowed of our income into our 401k, and max the Roth IRA each year (we both turn 50 this year).
The first thing we did - after making sure we were maxxing 401ks and had something set aside, was get rid of our obligations as much as we could. We don’t have a car payment, a mortgage, a credit card bill.
We’ve maxxed our 401ks for a long time.
I’m currently big on dividend stocks for income, but I also have a lot of money in index funds, bond funds and our employers’ options (that I shed pretty much as fast as I can - salary and investments in one basket is too risky for me).
We don’t really have an emergency savings account. A year or two back the general asset level we maintain made it not really necessary.
At your age, buying a home is something you’ll want to consider planning for. That’s an argument for keeping some savings in a more liquid investment (CDs are fine for that; if you need to tap them, you might lose a couple months of interest but otherwise they’re perfect). Lots of other excellent advice out there.
One thing you might consider with the 401(k) - if it’s an option and you don’t need the tax break right now: If your company offers a Roth 401(k) (mine does), that has all the advantages of a Roth IRA in that you never pay taxes on the proceeds when you draw them out. I do not know whether it allows you to withdraw the principal the way a Roth IRA does, however.
If you do put individual money into an IRA, you can use that for some of the individual stock purchases. The advantage there is you won’t pay capital gains taxes on anything you sell at a profit. The disadvantages are that you don’t get the capital loss deduction (as with non-IRA stock purchases) if you sell at a loss. Also, the gains wind up getting taxed at whatever your rate is when you withdraw them, vs. whatever the capped rate is right now (15% I think) so it could conceivably cause a long-term tax hit. A Roth IRA would eliminate that hit, of course.
Others have some very good advice above.
Re the title of the thread: our personal finance plan right now is to sock away every dime we can into the retirement accounts (and it’s not enough, right now) so that when we retire we don’t have to worry where our next meal is coming from. Also we need to leave enough money to help supplement our son’s income (he has autism… and will likely never hold a high-paying job).
I live in the UK, so things may be somewhat different.
I retired at 55 years old and am financially secure for the rest of my life.
Obviously not all of it will be possible for others, but here’s what I did:
worked in well-paid jobs with good pension schemes
We could probably retire about that age (maybe a little later - kids in college through 58), if we didn’t have to save for our own retirement (i.e. had a pension because SS will not keep us in the manner to which we’d like) and had Universal Health Care available to us. But we will work until we qualify for Medicare because the cost of insurance in the U.S. is prohibitive to most people having an early and comfortable retirement.
Also something more apropos for younger workers in the US: decent pension plans are becoming harder to find. Defined benefit (something the employer guarantees, usually based on your longevity with the employer and your average salary) plans are pretty much nonexistent now with the exception of government employers (and even then, are less-generous than they were), so you really have to save, and save hard, and take maximum advantage of any defined-contribution plans.
Oh, and from a purely financial perspective, don’t have kids. They’re expensive and take away from the retirement savings you could be putting aside. Sure, there’re plenty of other reasons to have kids, but from a financial angle, they’re quite a pricey hobby.
What worked for me was two things. First, I defined a few savings goals. 12 months’ worth of living expenses in savings accounts/short-term CDs. $X in my 401k/IRA by age 65 assuming various rates of return. $Y towards a possible home down payment by age 35. And so on. That helped define how much I would need to save per month towards each of these goals. Second, I created a monthly budget that included these savings as outright expenses. “IRA” is on a budget spreadsheet line right underneath “Cell Phone.”
I found it hard to save “for the future”; it was much easier for me to save for something specific. Also, these savings goals could sometimes point me in the right direction regarding how savings should be invested. In addition, by treating savings as a budget expense, it made it a whole lot easier to see how much income I could safely treat as discretionary income. Doesn’t mean I don’t try to save more than my budgeted amounts some months, but rather that I can spend a certain amount each month and not feel irresponsible about it.
Quicken was helpful in estimating expenses that have monthly variations since I could take an average of previous months’ expenditures.
No particular advice to offer regarding investments. To me, the common investment vehicles all seem to be a bit of a mess right now.
Oh, yeah. And - assuming you are not married - choose a spouse who has similar financial values and goals to you. Supporting a spendthrift spouse can be just as expensive as supporting kids.
Likewise, surround yourself with frugal people. If you fall into a BMW driving crowd, it starts to look like “EVERYONE” has a nice car - you deserve one. If you surround yourself with people who drink Miller Lite, your nights out are a lot cheaper than if you are splitting the bar tab on 12 year old single malts.
Financial security is three parts - making it, saving it and spending it. Honestly, the part most people have the most control over is the spending it part.
What Dangerosa just posted is very VERY good advice. If you indeed want to be financially successful long term, you will need to pick your spouse wisely. I have a good younger friend who was like you, financially on the right path. Unfortunately the spouse he chose does not appear to share the same goals, I predict unhappy times for them in the future (I hope I am wrong, but I don’t think I am).
The friendship issue is also a big one. Trying to ‘keep up with the Jones’ is the downfall of many couples. Understand the difference between need and want, this is something that I honestly most people never grasp.
You don’t need a new car every year, you might want one though. You don’t need a new 72 inch TV, although you might want one. Knowing the difference can save you a lot of money over the years.
You do need to plan for your future and do it–most people seem to want to. We all want to, you have to do it though to be successful.
Thanks for the helpful advice everybody. It churned up some more questions.
Would you suggest I start an IRA only once I max out my 401k? The two seem very similar—I’ve heard that 401ks get rolled over into IRAs. This makes me think that 401ks won’t be enough and I’d need an additional retirement account.
Also, I’ve picked the tax-deferred option on my 401k rather than the after-tax option. So when I do get an IRA, I’d likely stick with a traditional IRA over a Roth IRA. I saw some threads about this once and pre-tax makes sense to me; what do you think? I’d like the money that would otherwise go to taxes to be invested now and grow. And as my income increases when I go along —hopefully!—wouldn’t it be better still to pick traditional, tax-deferred IRAs because my old fogey withdrawals will likely be taxed at a lower bracket than my prime-earning-years contributions?
Minimum of 6 months living expenses emergency fund
401K up to employer match
IRA (ROTH for most…see below)
Max out 401k
After that it gets murky and depends on what your life goals are. If you want a house or new car within 5 years, you would probably dump any remaining money in a CD. If you want to save more for retirement, the stock market. If you want to have some fun, hookers and blow;) .
You should put into an IRA versus your non-matched 401k due to the fact that you have way more control over an IRA in terms of where to invest, ease of taking the money out in an emergency (which really should be avoided at all costs), and usually IRA’s have lower fees.
Roth (post tax) versus Traditional (pretax) is a somewhat complicated question. It largely comes down to whether you believe your taxes when you retire will be higher or lower than what they are right now. For most people, especially those that are younger and perhaps not making as much money as they will be later in their career it is pretty likely your taxes will be lower now (this is the opposite of what you seem to think, but most experts agree taxes will be going up). I am assuming when I say this that you are making closer to say 50K versus 100k.
As far as investing in more aggressive mutual funds, now is the time in your life to do it. Read the prospective, decide if the risk is worth the potential gain, and go for it if you feel it is worth it.
Lastly, if you think you might be interested in individual stocks, you need to start out by educating yourself. Read some intro to the stock market type books. Move on to doing a practice portfolio where you take a set amount of play money and invest it like you would real money. See how you do after say 6 months (remember to take into account trading fees) and if it something you enjoy doing. I probably would not invest in individual stocks unless it is actually something you enjoy as a hobby as except in some relatively rare cases you will probably just end up doing the same or worse than if you had the money in a low fee index/mutual find.
I think the standard advice for maxing out the 401(k) is to maximize any matching you get from the employer.
Once you’ve done that (ensuring you’re not leaving any “free money” on the table), then your individual tax situation will drive where to go next.
Maxing out the 401(k) can give you pretax savings. You might or might not be able to do a pretax IRA depending on your income (the ability to do so phases out based on your income).
Let’s say that phases out if you earn 50,000 dollars (I know that’s not the right figure, and it’s a gradual phaseout, but for simplicity, let’s say 49,999 you can deduct the IRA, 50,000 you can’t). Also let’s ignore social security, state tax, pretax health insurance etc. And let’s assume an IRA limit of 5,000 per year.
So: you earn 50,000. You put aside 6% (3,000) of your income in the 401(k) (to get the employer match). That gives you taxable income of 47,000. Assuming a 15% tax bracket, that’s an income tax of 7,050. Your net pay is therefore 39,950.
You can afford to put another 5,000 into retirement savings. But your gross income is 50,000, so any IRA money isn’t deductible. If you put that 5,000 into a non-deductible IRA, that lowers your take-home to 34,950 exactly.
Or you could put the 5,000 into the 401(k). Your total contributions are 8,000 (the 3,000 above, plus the extra 5,000). So your taxable income is 42,000. Tax is 6,300 and take-home is 35,700. So you come out ahead by putting that money into the 401K.
Whether you put it into a deductible IRA, or the 401(k) as pretax, you pay income on the full amount you withdraw in the future. Hopefully at a lower tax rate than your current one. If you put it into a nondeductible IRA, you pay tax only on the earnings, not the original 5,000.
If you put that 5,000 into a Roth IRA, you get back to the 34,950 take-home. But you never pay a dime in income tax on the 5,000 or its earnings. Roths have other benefits, e.g. in the future, you can withdraw that 5,000 if you need it even before retirement age (there are some restrictions regarding how long it has to be in the account).
Really, you have to look at your own tax situation now and with what you think it’ll be in the future.
We’re not doing IRA contributions at all right now due to cash flow. When we’ve had spare cash, we’ve maxed out our 401(k) to minimize our taxable income, and thrown extra into the Roth accounts. Roths also phase out based on income; if we weren’t doing the 401(k), we’d have exceeded that income, so it was a synergistic thing for us.
Wanted to specifically comment on this: With a Roth, you do pay the taxes right now - but then you never pay another dime in taxes in the future. Play with figures where you invest 3,000 and let it grow at 6% for 30 years and see which one gives you a better net figure in 30 years. Well, the net figure will be the same, but if you go with a regular IRA, you have to pay income taxes on that when you take it out. Of course if you do it pretax, you have an extra 15-25% to throw in now which gives you a bit more to invest.
I’d do everything as a Roth now if we didn’t need the tax break right now.
I’m a naysayer on the Roth thing - I’m a believer in “don’t pay taxes today you can put off until tomorrow.”
One proposal to “fix” social security has been up in committee twice. It hasn’t come out of committee yet, but I think it will - the idea is that you can waive your social security payments, and in exchange take out your traditional 401k out tax free. If that passes, you’d never pay tax on that money at all.
But that is the sort of crystal ball bet you are making - trying to project the tax code out 45 years is not an easy thing to do…Its possible you could pay your fairly reasonable tax rate on a Roth today, and see tax rates in excess of 50% when you retire. Hard to tell…its a long time away.
Yes, you are very wise to have medical care covered before you retire.
I’ve posted in other threads about how wonderful UK UHC is and how it’s really affordable.
Whenever I visit the US, I bring at least $1,000,000 of medical insurance.