CASE STUDY: Help me get started smart

[lkc4863]

Hi! I've been lurking here for the last few months and am hoping you all can help me make some wise decisions.

About me: 23, graduated from college in 2013 (no loans!) with dual degrees in Business (Marketing) and International Relations. Now working full-time in corporate PR plus a couple little side gigs. Living alone in a fairly low COL city.

Finances:

Income: $36k gross, net about $2500/month. Only got this job and bought my car a few months ago, which is why my savings is fairly low.
Debt: $0
Assets: I own my car (2004 Subaru Forester)
Saving: About 50%. My parents cover my health insurance and I share their Netflix account, I pay for everything else.

I feel like I'm on a good track with my savings, so I'm not listing out my budget since other than paying WAY too much for a cell phone (working on fixing that) I'm happy with my spending level. I'd really like some advice on the best way to structure savings/investing:

Right now, I have $2500 in a savings account with a dismally low interest rate (.01%). I consider this my cash cushion. I only have a debit card, no credit at this point.

I'm contributing 4% to my 401(k), which gets me the highest possible employer match of 2% (so that's about $180/month total). I am confused about whether or not I should be contributing to a higher level, since I hope to retire long before I would be eligible to withdraw the money.

I have about $2500 split between about eight specific stocks, which my dad recommended to me. He enjoys "playing the market" with some of his money (my parents have plenty of other savings, so I'm not worried about supporting them in retirement) and I got this stock around when I graduated. I'm not particularly interested in selling these, since they're a big topic of conversation between my dad and I and generally good for our relationship, I think. However, I obviously don't plan to buy any more either.

Opened a Betterment account recently, after paying off the last bit of my car. There is about $1500 sitting in there right now, this is where I've started dumping my savings now that I have a reasonable cushion. It's a normal account, not an IRA of any sort - again, I'm confused about the benefits of an IRA if you intend/hope to hit FI significantly before 65.

In total, my net worth is about $7k, which I realize is pretty pathetic compared to everyone else here, but I've finally reached a point in my life where I'm able to start growing it! I want to do so in the smartest way so I'm hoping to benefit from some people's what-I-wish-I-knew. Thanks!

[shotgunwilly]

Do some research on the "Roth conversion pipeline."  You will discover that it is possible to transfer funds from a 401k, to a Traditional IRA, to a Roth IRA, and then withdraw them without incurring 10% withdraw penalties.

For your current income and situation, it would be a good idea to contribute $5500 a year to a Roth IRA in addition to your 401k contribution.  Also, you can always withdraw Roth IRA contributions without any penalty (except opportunity cost).  In the future in early retirement, this could be one source of your funds until your 401k conversion starts to kick in. (It takes 5 years.)

Vanguard is one of the best investment vehicles as they have very low cost index funds.  I would use them instead of Betterment.  Basically continue to contribute to the funds (Dollar Cost Average) and forget about it.  Don't listen to fear and never panic and sell.

I would also apply to a few credit cards to start building credit.  Always pay each balance in full every month.  Credit can help you tremendously in the future.

[ltt]

Definitely look at Vanguard.

Also, someone here suggested Republic Wireless for cell phone.  We got one for our daughter--$10 a month unltd talk and text. 

[DrF]

Good job starting so young. If you are able to save $18,000 per year for the next 15 years you should have ~$500,000.

Every time you get a raise, increase your savings rate!

Options for saving. Since you are in such a low tax bracket I would contribute the maximum you can into a Roth IRA as fast as possible. Take $5,500 from your investment account and put it into a Roth IRA by April 15th and mark it for year 2014. Invest in either VTI or ITOT or similar. Then you can contribute another $5,500 over the rest of this year and mark it for 2015. Those 2, plus your 401k contributions will probably eat up most of your savings for this year. Make sure you always at least get your match in your 401k. Always go with low cost index funds. You can set up your IRA with betterment, but many here on MMM forums don't really see the value in Betterment. If you want an alternative, just go to Vanguard or Fidelity website and set up your Roth IRA and they will initiate a transfer for you.

Once you get a higher wage, and are in a higher tax bracket you can think about opening up a traditional IRA. Any extra after you get your 401k match and max out your Roth I would put into the 401k. Don't worry that they are "retirement" accounts. There are ways to get the money if you need it.

Please read MadFientist.

[NewStachian]

You are in great shape - simply asking yourself these questions at age 23 is going to set you up very well. This is what I would do in your situation in the near term:

1) Get a credit card - set it to pay in full each month and build your credit. Properly using a credit card is very beneficial and gives you much more fraud protection than a debit card. Do not get a credit card if you don't set up automatic full balance payment. People who hate on credit cards are usually people who don't have the self-discipline to use them properly.

2) Decide what level of emergency fund is right for you - Don't fret the 0.01% interest for your emergency fund, but once you've hit your goal, start putting money into:

3) Max a ROTH IRA - This will be financially optimal for you given your current income - you're not paying much in taxes so tax-deferred accounts don't give you the bang for your buck that a ROTH will.

4) Increase your 401(k) contribution - Setting the 4% to get your company match is an excellent top priority. If you get all the above going, then I'd keep working on bumping yourself up beyond the 4%.

That would by my general priority list of things to do. For investing, I recommend getting Vanguard or Fidelity (I use Fidelity, but Vanguard is the consensus on this forum, which is fine). Stop picking stocks and find a good portfolio of large, mid, small cap ETFs, a bond fund, and a few international funds. Keep it simple and keep it balanced. I personally roll with: IVV(40%), IJH(15%), IJR(15%), IEFA(10%), IEMG(10%), AGG(10%). I tell you that as 1 data point - you will have many, many other very good recommendations from people on this forum. Take them all with a grain of salt and research them yourself, but I figured I'd give you a good starting point, which is the portfolio I've landed on after ~12 years of investing.

The last major piece I'd focus on is continuing to develop your professional skills and keeping your eyes peeled for more lucrative positions, both financially, and in terms of enjoyment/work-life balance. The highest paying job I've ever had was also the most fun, least stressful, and highest reward. Maintaining a solid spending plan and not succumbing to "lifestyle inflation" is critical. But, also remember that there is a limit on how much you can trim from your budget, but no limit on your earnings.

Good luck and keep asking questions on this forum. The people here are amazing!

[MDM]

+1 to all comments so far.

Based on the numbers in your OP, it appears you can maximize your 401k contribution plus the Roth IRA and still meet your expenses.  Do you see it this way also?

Category	Monthly	Comments	Annual
Salary/Wages	$3,000		$36,000
401(k) / 403(b) / TSP / etc.	$1,500	At maximum	$18,000
Federal Adj. Gross Inc.	$1,500		$18,000
Soc. Sec.	$186	Assumes 1 earner paying	$2,232
Medicare	$44		$522
Total income taxes	$230		$2,760
Income before other expenses	$1,270		$15,240
Monthly Expenses:
Miscellaneous	$1,250		$15,000
Non-mortgage total	$1,250		$15,000
Total Expense	$1,250		$15,000
Total to invest	$20		$240

[lkc4863]

Thanks everyone for your thoughts! I'll work on moving over to Vanguard (the simplicity of Betterment drew me in, but I'm starting to figure out that it can be pretty dang simple to do it yourself and avoid the extra fee), and applying for some sort of credit card.

Also, glad to hear that there are ways of avoiding the fees for early withdrawal from retirement accounts when it gets to that point, that's super reassuring.

You've all given me the advice I thought you would - but it's been very helpful to have real people take a look at my situation instead of trying to figure it out from reading other people's post. Thanks!