Author Topic: 21, have an okay amount in savings and dont know how to invest.  (Read 5207 times)

Jeff_GXP

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Hi all, a little about my current financial situation, i'm 21, i have zero debt, started a new job which started me at 18 an hour but has tons of potential to make money beyond an hourly rate. live with my folks and they only charge me 250 a month to cover my expenses since i spend most my time at work and school. i have a maxed 10k in my credit union investment savings which only accrues 1.0% i have another 3k in a normal savings account and 1k in my checkings. i also have my company 401k which i have at a 2% match and also a roth ira with another 1k.

So where do i start with investing? do i play the stock market? put money in bonds? i dont know how to really do either but what should i do in my current age and situation. thanks in advance!

innerscorecard

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #1 on: March 24, 2015, 12:43:54 AM »
Read the archive on mrmoneymustache.com. Then read A Random Walk Down Wall Street. Maybe that's all you need to know. Then if you are still interested, come back here.

You're in a good spot. Especially for your age. No debt, decent savings so that you're not living month-to-month. Keep on learning more about optimizing your life (you're obviously ahead of the curve since you found this site), and do a good job at work to get your earnings potential up. Your knowledge will compound and so will your money.

(Note to moderators: We really need a stickied FAQ on this sub-forum.)


marketnonsenses

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #2 on: March 24, 2015, 06:18:47 AM »
No one is going to give you good answers on this. Kind of need to figure it out. There are tons of theories that tons of people will claim are all wrong or all right. I find this forum is pretty bad at answering this question.

Ricky

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #3 on: March 24, 2015, 06:26:51 AM »
No one is going to give you good answers on this. Kind of need to figure it out. There are tons of theories that tons of people will claim are all wrong or all right. I find this forum is pretty bad at answering this question.

I agree. Plus, this question is literally asked every other day.

OP, read "The Intelligent Investor" after you've went through Investopedia and mastered some vocabulary. Learn some financial calculations.

I'm a red panda

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #4 on: March 24, 2015, 06:31:57 AM »
Are you maxing your 401k, or just putting in the amount to get a company match?

Before investing in taxable accounts, I'd make sure to max the 401k and the roth IRA (since you say there is only $1k in the roth- that definitely isn't maxed.)

GGNoob

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #5 on: March 24, 2015, 07:31:02 AM »
Hi all, a little about my current financial situation, i'm 21, i have zero debt, started a new job which started me at 18 an hour but has tons of potential to make money beyond an hourly rate. live with my folks and they only charge me 250 a month to cover my expenses since i spend most my time at work and school. i have a maxed 10k in my credit union investment savings which only accrues 1.0% i have another 3k in a normal savings account and 1k in my checkings. i also have my company 401k which i have at a 2% match and also a roth ira with another 1k.

So where do i start with investing? do i play the stock market? put money in bonds? i dont know how to really do either but what should i do in my current age and situation. thanks in advance!

The $1k in a Roth IRA is just enough that you could rollover to Vanguard and purchase a Vanguard Target Retirement Date Fund. Then, take whatever money in your savings that you don't need for emergencies or future expenses, and attempt to max out the Roth IRA contributions for 2014 (up to $5,500, as long as you earned at least that much) and you must contribute for 2014 by April 15. Then you can work towards maxing out 2015.

For the 401k, contribute at least enough to get the full match. But like others have stated, max out the Roth IRA and 401k before going to taxable investments.

marketnonsenses

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #6 on: March 24, 2015, 07:52:14 AM »
HAHAHA Advice to max out 401k and IRA for someone who makes 18/hr at 21. That is going to happen for sure.

frugalnacho

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #7 on: March 24, 2015, 07:57:41 AM »
1. contribute 2% to 401k to get match
2. max your IRA
3. calculate your projected tax bill for the year
4. max your 401k (to the point it is no longer tax advantageous, or the limit, whichever is lower)
5. taxable accounts

Just go with VTSAX.  Go with a low cost total market index fund (or whatever the best option is) in your 401k.

That should be enough to get you started.  After you read the blog, and the other material recommended you can decide to alter your asset allocation.

frugalnacho

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #8 on: March 24, 2015, 07:59:36 AM »
HAHAHA Advice to max out 401k and IRA for someone who makes 18/hr at 21. That is going to happen for sure.

I wish someone gave me that advice when I got my first full time job and was still living with my parents.  Maybe i'd be blogging about my early retirement by now.

GGNoob

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #9 on: March 24, 2015, 08:09:16 AM »
HAHAHA Advice to max out 401k and IRA for someone who makes 18/hr at 21. That is going to happen for sure.

I wish someone gave me that advice when I got my first full time job and was still living with my parents.  Maybe i'd be blogging about my early retirement by now.

Exactly.

All the advice I see says "before investing in a taxable, max your 401k." While living at home he probably could max the 401k and IRA. But if not, at least he knows the general advice of investing in a tax-advantage account first.

I'm a red panda

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #10 on: March 24, 2015, 08:25:53 AM »
HAHAHA Advice to max out 401k and IRA for someone who makes 18/hr at 21. That is going to happen for sure.

I wish someone gave me that advice when I got my first full time job and was still living with my parents.  Maybe i'd be blogging about my early retirement by now.

Yep- when I was very young I actually didn't realize you could put in more.   Getting on the path to maxing it out when your salary is high enough is smart. 

He has extra money at $18/hr because his expenses are low. So even if he can't max it yet, he can get on the path to do so.

Dodge

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #11 on: March 24, 2015, 08:54:13 AM »
Hi all, a little about my current financial situation, i'm 21, i have zero debt, started a new job which started me at 18 an hour but has tons of potential to make money beyond an hourly rate. live with my folks and they only charge me 250 a month to cover my expenses since i spend most my time at work and school. i have a maxed 10k in my credit union investment savings which only accrues 1.0% i have another 3k in a normal savings account and 1k in my checkings. i also have my company 401k which i have at a 2% match and also a roth ira with another 1k.

So where do i start with investing? do i play the stock market? put money in bonds? i dont know how to really do either but what should i do in my current age and situation. thanks in advance!

The easiest way to get started, is to watch the boglehead videos.  Yes the guy is over the top silly, but he explains the concepts very well:

http://www.bogleheads.org/wiki/Video:Bogleheads®_investment_philosophy

kscubz

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #12 on: March 24, 2015, 11:22:23 AM »
1. contribute 2% to 401k to get match
2. max your IRA
3. calculate your projected tax bill for the year
4. max your 401k (to the point it is no longer tax advantageous, or the limit, whichever is lower)
5. taxable accounts

Just go with VTSAX.  Go with a low cost total market index fund (or whatever the best option is) in your 401k.

That should be enough to get you started.  After you read the blog, and the other material recommended you can decide to alter your asset allocation.

in what case would it ever not be tax advantageous to max a 401k?

frugalnacho

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #13 on: March 24, 2015, 12:07:45 PM »
1. contribute 2% to 401k to get match
2. max your IRA
3. calculate your projected tax bill for the year
4. max your 401k (to the point it is no longer tax advantageous, or the limit, whichever is lower)
5. taxable accounts

Just go with VTSAX.  Go with a low cost total market index fund (or whatever the best option is) in your 401k.

That should be enough to get you started.  After you read the blog, and the other material recommended you can decide to alter your asset allocation.

in what case would it ever not be tax advantageous to max a 401k?

If you get your federal taxes down to zero.  Say you are single and make $30,000 for this year.  Standard deduction is $6,300 and your personal exemption is $4,000.   You put $5,500 into an IRA and $14,200 into your 401k.

income                                 $30,000.00
IRA                                          -$5,500.00
401k                                         -$14,200.00
standard deduction                   -$6,300.00
exemption                                   -$4,000.00
taxable income                           $0.00

In this case it would be silly to continue to invest another $3,800 into your 401k because you are already at zero federal tax liability, so it offers you no further tax incentive.  You could put that money into a regular taxable account and your dividends and any capital gains would be end up being free so long as you stayed in the 10% or 15% income brackets.  You could also shuffle things around so you contribute more to your 401k, and less to your traditional ira, which frees up more room for roth ira contributions.   But at that point (and those income levels) I don't see much advantage to roth over a taxable account.   


Wolf359

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #14 on: March 24, 2015, 12:12:09 PM »
Hi all, a little about my current financial situation, i'm 21, i have zero debt, started a new job which started me at 18 an hour but has tons of potential to make money beyond an hourly rate. live with my folks and they only charge me 250 a month to cover my expenses since i spend most my time at work and school. i have a maxed 10k in my credit union investment savings which only accrues 1.0% i have another 3k in a normal savings account and 1k in my checkings. i also have my company 401k which i have at a 2% match and also a roth ira with another 1k.

So where do i start with investing? do i play the stock market? put money in bonds? i dont know how to really do either but what should i do in my current age and situation. thanks in advance!

Read "If You Can," by William Bernstein.  He has some excellent financial books out there, but he sums it up for new investors in that short booklet.  Although you can buy it on Amazon for 99 cents, you can also download it for free from his website.  http://www.etf.com/docs/IfYouCan.pdf

It provides the same advice as the BogleHeads, so if the Bogleheads convince you to follow their basic advice, his is similar.

"If You Can" assumes no investment knowledge.

frugalnacho

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #15 on: March 24, 2015, 12:12:15 PM »
I was actually in that position this year with my federal tax liability down to zero.  I contributed about $16k to my 401k, and about 8k to me and my wifes ira, which along with the tax savers credit got us down to zero.  So I used the last $3,300 of ira contribution space to start a roth for my wife and then we dumped some money into regular taxable accounts too.  This year I am selling some of the appreciated s&p 500 stocks in my taxable account in order to lock those gains in this year since they will not push me out of the 15% tax bracket and thus will not be taxed for me.

kscubz

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #16 on: March 24, 2015, 12:58:05 PM »
thanks for the example frugalnacho

Doulos

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Re: 21, have an okay amount in savings and dont know how to invest.
« Reply #17 on: March 24, 2015, 01:50:59 PM »
I am going to try to help with some of the lingo.

FIRE = Financial Independence and Retire Early. 
- if you plan to still work, such as a hobby as a real estate land lord that makes you money, just say retired anyway.  for simplicity
401k = retirement account at a job = PreTax dollars. 
- This means you pay no tax on that money when it goes in the account.  At 59.5 you can take it out.  You then pay taxes on what you take out.
Roth = Roth IRA retirement account, usually separate from a job = PostTax dollars.
- This means you pay tax on that money before it goes in to the account.  You can take the money you put in out after 5 years.  At 59.5 you can take gains out.  You do not pay taxes on money you take out.
HSA = Health Savings Account. 
- This is No-Tax.  No tax in, no tax out.  But you can only spend the money on medical expenses (which is a broad term including just about anything related).
- You must have high deductible health insurance to get this.  High deductible means it is cheap, but you must pay the first several thousand of a bill out of your emergency fund.  Then the insurance pays the rest.
Taxable = People use this as shorthand for "Taxable investment accounts".  This is all the various forms of investments you have that are not sheltered by tax advantages.

"How to I retire early?"
Stash 4% is generally considered 'safe' (but people vary widely in opinion on this).  Take your total expenses per month x 300, or your yearly x 25.
Ladder because you can take money out of a Roth 5 years after you put it in, you can use a Roth account to retire early.
You need your total stash number amoung all accounts (HSA, 401k, Roth, Taxable) And 5 years buffer in only (RothPrinciple and Taxable) to retire.
1 Max the Roth ($5.5k per year).  You can only touch the money you put in, not the total, until 59.5.
2 Have Taxable Investment account(s).
3 After these two above cover your yearly expenses x5, you are ready.
4 Post retirement.  Transfer money from your 401k to your Roth, each year to cover expenses.

How much are reasonable expenses?
This opinion also varies widely.
Generally we are looking at $12k-21k per person.  So 24k-42k when/if you get married.
You cannot possibly be spending more than that yet, so dont start.

Companies tend to give you matches on HSA and 401k.  That means if you put in some money, your company also puts in the same amount to "match" what you put in.  This is up to a limit.  So a 2% match means they will match up to 2% of your annual gross salary ($18x2000 = $36000 -> 2% = $720)

Everything is more complicated than what I just said.  This is the simple version.