Originally posted by: vi_edit
General opinion is to max out your match on your 401k, then max out your Roth IRA. If you still have money left over, go back and add more to your 401k.
I disagree with this "general opinion." True, you want to maximize your tax advantaged investments (roth, 401k etc.), but you can't just keep adding money to your 401k willy nilly. First, there is a still a yearly cap on 401k investments. While the OP at 23 is likely not going to push up against it, your "general opinion" doesn't take into account his future earning potential. Moreover, pre-tax investments are only as good as the mount of return you can make on them. If you have a crappy 401k plan like some do (e.g., the government), it might be better in the long run to contribute whatever you need to get the full match from your employer, and throw you extra cash into a non-retirment investment account that affords a lot more flexibility.
Saving for retirement is good, but people need to remember that there are numerous things to save for that occur between the time you get your first job and the time you retire. One of the best and easiest ways to set yourself up right is to get off to a good start when you are young. Then you don't have to scramble socking cash away when you are 40-50. My suggestion? Try the following mix:
1. Contribute enough to get the full match in your 401k, if you get a match. If not, put 7-10% of your gross income in there.
2. Set up an investment account with an online brokerage. I like Vanguard, but any of them will do. Scottrade is great for smaller investors, but doesn't have the really convenient funding options of the bigger services (at least the last time I checked). Anyways, once you have the account set up, look at your finances after your 401k deduction is taken out. Determine, based on your budget, a fixed dollar amount that you can live without out of every paycheck. For me, that's ~50% of my paycheck, but my wife and I are in very good financial shape and have excellent careers. When I started out years ago, it was ~5% of my check. Take that dollar amount, and, here is the absolute secret to this whole plan, have it AUTOMATICALLY deducted from your checking account and transferred to your investment account. It might be tough to see that cash go for the first few weeks, but you will eventually forget you ever had it in your check to begin with.
3. As the pile of money in your investment account grows, make periodic investments in mutual funds that invest in a wide variety of highly traded stocks (i.e., large and mid cap). As you get more money, buy a few more funds to round out your portfolio (i.e., branch out into small cap, bond, international market funds, etc).. If you are young, you can afford to take on more risk then if you are old, because you have more time to recover should the market take a dip (and trust me, over 30-40 years, it will dip and recover, over and over and over again), and so your account can be a little stock, international, small cap heavy to start. As you get older and need toensure that you money will be there when you need it, start converting to income (dividend) producing funds.
4. Finally, DO NOT, unless necessary or for a major life goal (car, house, boat, college education, etc) or an emergency, take money out of your investment account. The money you put in now will be what gives you the most return in 40 years, so exercise some restraint!
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