Financial advice for a young whippersnapper?

[Exterous]

Since this thread is here, and the OP might be able to use the advice...

I just opened a Vanguard Roth IRA yesterday. Putting 3k into the 2040 fund to start. This where I should be putting my money? All of it, some of it?

Given their fund limits you may not have any other choice than to go with a single fund. Personally, I have found them to be lenient with their fund minimums as long as you setup automatic contributions but YMMV

Minimums aside - the answer depends on your risk tolerance and willingness to pay attention to your nest egg. The target date funds are not perfect for all situations but you could do a lot worse. I would recommend spending the time to understand the reasoning behind the decisions people recommend you make and then maybe take a look at some of these options:

http://www.bogleheads.org/wiki/Lazy_Portfolios

The reason I recommend understanding the how and why behind these is so you will be able to figure out what matches your goals, your situation, and, most importantly, be able to make changes when they are required. The changes could be anything from 'simple' re-balancing to more complex tax planning and withdrawal strategies.

 

[NoCreativity]

Actually, a lot of people are mentioning the "quality" of 401k offerings. I'm rather unsure what this means... I have my 401k portfolio/options open right now, what should I be looking at? What is "ER"?

Expense Ratio, the higher the ER, the more expensive the fund is to own.

It may be useful to go see a flat fee financial advisor/planner who can help you make decisions based on your goals. The guy at the bank will most likely try to sell you their products. A flat fee guy should help to come up with a plan independent of investment products. Probably worth a visit or two if you don't have the time/motivation to learn about it on your own.

 

[DaveSimmons]

Actually, a lot of people are mentioning the "quality" of 401k offerings. I'm rather unsure what this means... I have my 401k portfolio/options open right now, what should I be looking at? What is "ER"?

Expense ratio. All mutual funds charge you a fee every year for running the fund, and it can be anywhere from 0.06% to 1.x% or more of the fund balance.

So if two funds had the same stocks, one charged 1.5% and one charged 0.5%, you get an extra 1% growth out of the fund with the lower expense ratio.

Quality:
Besides the fund fee, there is the make-up of the fund itself.

Vanguard.com specializes in "index funds" where you buy something like an S & P 500 index fund, or the Target 20xx fund which is a fund of other index funds.

Index funds do not use a stock picker to gamble on trying to pick winners, they just buy stocks from a big list and hold them forever. "Actively managed" funds hire gamblers to try to win big.

In general, most gamblers do worse than an S & P 500 index fund or a Target 20xx fund that's based on index funds.

With gamblers, you might win big or lose big. With index funds over decades you have much lower risk and a better chance at good gains.

401k fund choice
Many 401ks are filled with the actively-managed funds I just told you to avoid. Many have no index fund choices at all.


Experienced investors who know what they're doing might still pick actively managed funds, and then make the effort to follow them closely and sell them when it makes sense. For the rest of us, index funds are a safer and easier choice.

 

[ichy]

Actually, a lot of people are mentioning the "quality" of 401k offerings. I'm rather unsure what this means... I have my 401k portfolio/options open right now, what should I be looking at? What is "ER"?

ER = expense ratio

 

[JimKiler]

Since this thread is here, and the OP might be able to use the advice...

I just opened a Vanguard Roth IRA yesterday. Putting 3k into the 2040 fund to start. This where I should be putting my money? All of it, some of it?

A retirement fund like that is fine. It depends on how much you want to play the game and attempt to make a higher than average return. If you want to pick specific stocks, bonds, or just mutual funds be my guest, but most pro's cannot see higher than average returns.

I see nothing wrong with dumping all your money in there. However as we see issues you may want to have accounts with different companies in case one goes under (unless you think they are too big to fail.) I have money in 3 retirement funds, 2035, 2040, and 2045. Most would say i should stick to one, but since i do not plan to withdraw all the money at once i think i will be fine.

It depends. First, look at your 401k offerings. Some people actually have excellent offerings. For example - my wife has access to an ex-US Total Stock Market Index fund that uses (now) the same tracker as Vanguard does but does so at 0.06% ER and that's the highest of all the index funds!

Next comes tax considerations. 401ks contributions are pre-tax - which means you will owe take on the distributions. A Roth IRA contribution is post-tax which means qualified distributions can be withdrawn tax free! There are also some additional qualified events that allow for non-penalty withdrawals from a Roth, like $10,000 for a first time home buyer.

One additional thing to note - although this does not often take place. Since 401k withdrawals are pre-tax it reduces your AGI on your taxes. Roth IRA contributions will not do this. Therefore, if you are close to the transition between tax brackets making the determination on which one to contribute to can have noticeable implications on your tax liability come April.

Correction, you can currently withdraw Roth IRA contributions tax free. Remember at one time social security was also tax free income. While i have Roth IRA investments, I will not assume they will still be tax free in 30-50 years.

 

[Exterous]

Actually, a lot of people are mentioning the "quality" of 401k offerings. I'm rather unsure what this means... I have my 401k portfolio/options open right now, what should I be looking at? What is "ER"?

Sorry - ER = Expense Ratio. This is how much they take out of the money you give them to run and maintain the plan. Good Expense Ratios tend to be under 0.20% but will vary based on the 'difficulty' of managing the plan. (ie - its harder to invest internationally so those tend to cost more)

Now - the reason most consider this to be an important consideration is that, really the only way to get a fee this low is to index - that is to own the market weight of a given benchmark. This is called passive investing. There is no picking the next hot stock so no need to pay some analyst to make that determination. You just own a slice of the entire market

This is in contrast to active management where someone(s) goes out and tries to figure out what areas will generate the best returns. These people need to be paid so the expense ratios rise. Before you know if you are paying 1-2%. It may not sound like much but it can easily lead to tens of thousands of dollars in added costs for you. Some even charge you upfront fees ('sales loads') for investing in them! The SEC has a nifty cost calculator out there is you want to compare the cost of various plans: http://www.sec.gov/investor/tools/mfcc/get-started.htm

But surely if you are paying someone to make the picks they can do better right? Well - usually not. Somewhere around 60% of mutual funds under perform the comparable benchmark (and therefore, under perform the comparable index fund). Sometimes it is much worse. I believe it was 85% under performed in 2011.

So you are paying someone a lot of money to generate less money than you could in an index fund, although there are some with enough knowledge of funds and/or luck that they might do well with picking a mutual fund. The odds are very much against you or I being able to do so though

 

[NoCreativity]

Correction, you can currently withdraw Roth IRA contributions tax free. Remember at one time social security was also tax free income. While i have Roth IRA investments, I will not assume they will still be tax free in 30-50 years.

Great point! We just got roth 401k option at work and people are always asking if they should contribute to that instead. My opinion is that you should diversify, some in a roth investment (ira/401k) and some in pre-tax. IRS will get their hands on the money one way or another. They may not tax roth directly but I can see them using that additional income as a reason to increase taxes elsewhere.

 

[Imported]

Is there a difference between a Roth 401k and a Roth IRA? It looks like I have that possibility as well but it is currently its set to 0%. My company uses Schwab and I'm under their GuidedChoice option.

 

[SlitheryDee]

It seems like employer matching is a very large part of the reason for the 401k recommendations going on here. How attractive is a 401K when there is no employer to match your contributions? Are there other investment option that would be better when you consider that all the money going into them will be from me?

 

[timosyy]

Hmm okay. My current investment portfolio looks like this:

Stock Investments (Name, Balance, Gross ER)

SPTN 500 INDEX INST: $7,934.43 (.05%)
TRP MID CAP VALUE: $2,987.97 (.81%)
TRP SM CAP STOCK: $2,913.98 (.92%)
VANG TARGET RET 2050: $12,641.25 (.19%)

Would it be prudent for me then to dump the 2nd & 3rd investments into the 1st one? I thought it would be smart to "diversify" (large cap, mid cap, small cap, blended), but now I'm thinking I could just keep the large cap & the blended...

 

[edro]

gj OP, you are off to a great start in life!

I would not buy a house until you get married.
While you're single, live it up without the worry of yard work/repair/upkeep.
There is no rush to start paying a 30 year loan...

Your gf/wife will invariably want to live somewhere else, so you will be selling it off within the next 5 years anyway.

 

[DaveSimmons]

Would it be prudent for me then to dump the 2nd & 3rd investments into the 1st one? I thought it would be smart to "diversify" (large cap, mid cap, small cap, blended), but now I'm thinking I could just keep the large cap & the blended...

The Vanguard Target 2050 fund contains the US total stock market, foreign stocks, and a small amount of money in bond funds that increases as you get closer to retirement. It is already fully diversified by including over 1,000 different stocks.

You could do pretty well putting 100% of your money in the target fund, and notice that the expense ratio is 1/5 the fee for the TRP funds.

The S&P fund has an even lower expense ratio, but it includes "only" 500 different US stocks, no bonds or foreign stocks.

What you might do is (grabbing numbers from hat) maybe 25% in the S&P 500 fund and 75% in the Target 2050 fund.

 

[ichy]

Another Roth IRA option is to open an account with a discount brokerage like Scottrade and use that to buy the ETF versions of index funds. You have to pay a few bucks in commissions but ETFs normally have lower ERs than their mutual fund equivalents.

 

[Corporate Thug]

gj OP, you are off to a great start in life!

I would not buy a house until you get married.
While you're single, live it up without the worry of yard work/repair/upkeep.
There is no rush to start paying a 30 year loan...

Your gf/wife will invariably want to live somewhere else, so you will be selling it off within the next 5 years anyway for a hefty profit.

Fixed that for you. I think a house is a terrific investment in this market, even w/ a target sell date of 5 years.

 

[Red Squirrel]

Pay off all debt you can if you have any, with highest interest first. From there, the savings/investment options are a topic I'm not that familiar with so I wont suggest anything specific but there are many different options. Some are locked, some arn't, some are risky, some arn't. So it's all about what you feel like doing. At the vest least you should have a "high interest" savings account and put money in there. Tax free saving accounts are nice too.

People who think "I don't want to pay off my debt with my savings because now I wont have savings!" don't know what they're talking about. If you have debt, it is costing you in interest. Pay it off, then rebuild your savings. If by chance there is an emergency and you don't have the cash, at least you don't have any debt, so it wont hurt as much to get into debt (temporarily) to deal with the emergency. It's not any different than staying in debt than using the savings... and the end of the day, your'e in debt. At least by paying off the debt you have greater chance of not being in debt. Only debt you should carry is a mortgage, unless you happen to have 200k+ sitting in the bank or whatever the house is worth. 😛 I do like to make extra payments when I can though.

Also one option to always keep in mind is using your home equity. As you pay off your mortgage and as time passes by, your equity grows. House value goes up over time, and your mortgage is paid off over time, so both of these things make equity go up pretty fast. In a big emergency you could take that equity out.

I recently did this to pay off my new (to me) car and weeping tiles. I'm paying slightly higher interest on my mortgage my payments went up slightly, but I have no other debts even after spending close to 20k. Idealy I should increase my mortgage payments though. I keep wanting to call to do that but I always forget. I'm making 60k base (will probably be close to 70k due to overtime, shift differentials etc) so I consider myself in a pretty good standing financially. I really need to put more money into savings though. I keep buying myself toys. 😛

You should try to have at least a couple months of reserve in case you lose your job. Gives you time to find another job or way to make money. Obviously the longer of a buffer you give yourself, the better.

 

[Doppel]

So, last Friday I went to my local bank to request a new debit card (old one had expired, and I lost the replacement they had mailed me), and walked out an hour later with the new debit card, a new credit card (how did that even happen?), a new checking account (so now I have to figure out how to smoothly migrate from my old one), and an appointment with a financial advisor this Tuesday (what?).

I'm sitting here thinking about this and realizing I have no idea what I'm doing with my money... And the financial advisor I'm meeting tomorrow is from my bank (Capital One), so I imagine he will hardly be an objective source of advice. With this in mind, I turn to the collective wisdom of ATOT: Any advice for a young man clearly out of his depth?

Information about me (Let me know if any of this is too revealing/dangerous to have out there)

Two years out of college, steady job at large institution making ~60-65k/year. Own a car I'm making monthly payments on (3-year loan, ~$670/mo. I have enough money to fully pay off the rest, but the interest rate is low enough for me not to have bothered). Excellent credit (mid to high 700's... when I checked last year I think it was ~770).

Banking
Capital One Completely Free Checking: ~$6,000
Capital One Premier Rewards Checking: ~$3,000

Capital One InterestPlus Online Savings: ~$31,000

Credit Cards
Chase Freedom (5k credit limit)
Capital One Cash Rewards (10k credit limit)

Investments
Fidelity 401k: ~$27,000

---

No stocks, bonds, Roth IRA, CDs, etc., what have you. That is the totality of my financial landscape.

Questions right off the bat:

Should I just cancel the credit card (Capital One) I just opened? I'm really only comfortable with one credit card at a time, and I quite like the Chase Freedom rewards.

Should I dip into Savings and pay off my car right now? I think the interest on that 3-year loan was something like 1%, but it's still higher than the interest rate on my savings account. I always just figured better to have actual money in the bank.

Should I be looking into online banking opportunities? In retrospect, I'm not sure why it's even necessary to have a local bank. If yes, suggestions?

Roth IRA? Other easy investments? I feel like I should be doing something with my money besides essentially stuffing it under a virtual bed... But I don't know what.

Thanks!

Lol if this is not knowing wnat you are doing with your money! For your age you're doing fantastically.

 

[RockinZ28]

Well you can only put up to 5k/year into it. But if you can do that i would. Make sure you are doing your company math on 401k if you have one. If you are already doing that and still have more money youd like to invest after the 5k into the Roth IRA then add that to your 401k contributions.

But first id have 6-9/month emeregency savings.

Yea I do all that. My situation is eerily similar to the OP's. Probably put the remaining 2k in over the next 2-3 weeks.

Given their fund limits you may not have any other choice than to go with a single fund. Personally, I have found them to be lenient with their fund minimums as long as you setup automatic contributions but YMMV

Minimums aside - the answer depends on your risk tolerance and willingness to pay attention to your nest egg. The target date funds are not perfect for all situations but you could do a lot worse. I would recommend spending the time to understand the reasoning behind the decisions people recommend you make and then maybe take a look at some of these options:

http://www.bogleheads.org/wiki/Lazy_Portfolios

The reason I recommend understanding the how and why behind these is so you will be able to figure out what matches your goals, your situation, and, most importantly, be able to make changes when they are required. The changes could be anything from 'simple' re-balancing to more complex tax planning and withdrawal strategies.

A retirement fund like that is fine. It depends on how much you want to play the game and attempt to make a higher than average return. If you want to pick specific stocks, bonds, or just mutual funds be my guest, but most pro's cannot see higher than average returns.

I see nothing wrong with dumping all your money in there. However as we see issues you may want to have accounts with different companies in case one goes under (unless you think they are too big to fail.) I have money in 3 retirement funds, 2035, 2040, and 2045. Most would say i should stick to one, but since i do not plan to withdraw all the money at once i think i will be fine.

Thx for the advice. I'll have to look into it more, just wanted to make sure I get my 5k in before the year ends, and not put it in a bad spot.

To the OP, I've moved my savings from Cap one Interest sav since it kept dropping .1% or more each month since I opened it. Went to CIT bank, currently 1.05% with 25k+ balance.

Personally wouldn't keep over $2k in a checking account either, unless your monthly expenses exceed that.

 

[Svnla]

OP, just remember this. Spend less than what you make, save for the rainy days = you will be ok. I just glanced by post #1, why you have so much in the checking accounts? Why not do the Reward Checking and earn some money (3 to 4% at least). And no, do not cancel your CC, you need as much as "longevity" to build up your credit score, as long as you do not owe anything on them.

Go to Fat Wallet and read the Finance sub forum. There are some good suggestions in that area.

I will reply in detail later when I have more time.

 

[Exterous]

Great point! We just got roth 401k option at work and people are always asking if they should contribute to that instead. My opinion is that you should diversify, some in a roth investment (ira/401k) and some in pre-tax. IRS will get their hands on the money one way or another. They may not tax roth directly but I can see them using that additional income as a reason to increase taxes elsewhere.

While the point about tax changes is valid at this point I would stay away from having both an IRA and a Roth IRA just from the standpoint that having both removes the ability to do a backdoor Roth conversion.

Of course this is only valid if you think you might reach the income limit to be able to contribute to a Roth IRA

Is there a difference between a Roth 401k and a Roth IRA? It looks like I have that possibility as well but it is currently its set to 0%. My company uses Schwab and I'm under their GuidedChoice option.

The contribution limits are different (Roth 401k $17,000, Roth IRA $5,000) and the Roth IRA will have some extra qualifying events the 401k wont but I believe they are the same from a tax liability standpoint. Note contributions to a 401k and Roth 401k come from the same pool just like Roth IRA and IRA contributions, meaning you can only contribute a total of $17,000 between your Roth 401k and Traditional 401k and $5,000 combined between your IRA and Roth IRA. If you have access to a 457 plan this has its own separate contribution limit

 

[Exterous]

Hmm okay. My current investment portfolio looks like this:

Stock Investments (Name, Balance, Gross ER)

SPTN 500 INDEX INST: $7,934.43 (.05%)
TRP MID CAP VALUE: $2,987.97 (.81%)
TRP SM CAP STOCK: $2,913.98 (.92%)
VANG TARGET RET 2050: $12,641.25 (.19%)

Would it be prudent for me then to dump the 2nd & 3rd investments into the 1st one? I thought it would be smart to "diversify" (large cap, mid cap, small cap, blended), but now I'm thinking I could just keep the large cap & the blended...

Do you have other options as well? As Davesimmons said the Target will already have a mix of Large, small and mid caps included so they aren't really adding much diversification. Depending on your contribution percents you may be over-weighted on small and mid cap stocks. While some could say this added risk premium is rewarded with higher potential returns I would encourage you to understand the risks associated with the increased volatility and deviation to determine if that is something you would want to do or not. Its not just about making an informed choice but knowing the ins and outs and how to stay with your investment philosophy. You don't want to throw a bunch of money in there now without really knowing why only to see them bottom out over the next two years and then pull the money out right before those areas shoot back up. All you managed to do then was buy high and sell low.

 

[brianmanahan]

Hmm okay. My current investment portfolio looks like this:

Stock Investments (Name, Balance, Gross ER)

SPTN 500 INDEX INST: $7,934.43 (.05%)
TRP MID CAP VALUE: $2,987.97 (.81%)
TRP SM CAP STOCK: $2,913.98 (.92%)
VANG TARGET RET 2050: $12,641.25 (.19%)

Would it be prudent for me then to dump the 2nd & 3rd investments into the 1st one? I thought it would be smart to "diversify" (large cap, mid cap, small cap, blended), but now I'm thinking I could just keep the large cap & the blended...

i would suggest that you just use the Target Retirement fund until you have learned more. and you might just want to use it even after you have. they are great because they take care of rebalancing stocks/bonds for you, as well as getting more conservative (more bonds less stocks) as you approach retirement age.

it also diversifies into international stocks, which is very important and something that the other 3 funds in that list don't do.

if you want a good starter book to read on investments, i say get this one. http://www.amazon.com/Bogleheads-Gui.../dp/0470067365

or just go to bogleheads.org, most everything in the book is there plus a great forum specific to all things financial

 

[Jeff7]

...
401k fund choice
Many 401ks are filled with the actively-managed funds I just told you to avoid. Many have no index fund choices at all.

Experienced investors who know what they're doing might still pick actively managed funds, and then make the effort to follow them closely and sell them when it makes sense. For the rest of us, index funds are a safer and easier choice.

And besides having no low-cost funds, they can also add some extra fees just for their "services."
The company that manages my employer's 401k plan adds 0.75% straight away. The lowest expense ratio on any of their funds is 0.64%, so 1.39% is the best I've got.
The only reason I'm in that plan is employer matching - 50% of up to 4% of salary.

 

[Imp]

You just announced to the interwebs how much you'd be worth in a kidnapping... Your name's visible in your profile, dude.

 

[Jeff7]

You just announced to the interwebs how much you'd be worth in a kidnapping... Your name's visible in your profile, dude.

And just think - some people like that might refer to him as "an investment." 🙂

 

[timosyy]

You just announced to the interwebs how much you'd be worth in a kidnapping... Your name's visible in your profile, dude.

Valid. Removed surname, not really that worried though.

Moved the small & mid-cap investments into the target retirement fund, and have a 75/25 split (target, S&P500) now. I'll report back with what the financial advisor says, and try not to get talked into actually doing anything 😛

So... with retirement saving squared away (401k, potentially Roth IRA), a generous checking account, and enough "rainy day" money sitting in Savings (~half my gross income atm, which is well over a year's worth of expenses)... what now? Bonds? CDs? ...Stocks? (I'm mildly risk-adverse). Granted I don't even really know what those words really mean (learned in school, promptly forgot) and I should/will do some research, but wondering if there's anything I should be doing right now that has slipped my notice.