Author Topic: Confused about where to put my money first  (Read 2409 times)

PartyMummy

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Confused about where to put my money first
« on: July 24, 2014, 09:53:20 AM »
Hello Mustachians! I'm relatively new to this blog and forum, and am having trouble wrapping my head around a few things.

Here's my basics:
I'm 24 years old, with no debt.
I'm currently devoting 15% of my pre-tax paycheck to my traditional 401k, with an employer match of .50 cents on the dollar for the first 3%.
I'm saving about 10% of my take-home pay (post-tax, post-401k) into a savings account.

I have about $12k sitting in a savings account earning hardly any interest. I have about $10k in my 401k.

I've been looking through the blog and forums posts, and get a little confused by some of the stuff that's thrown around. A lot of suggestions on the site and in the forums are helping people to deal with debt first, but since I don't have any I'm having a hard time figuring out where to put my money.

Questions that bounce around in my head as I look around:
-Should I max out my 401k, or just max out for employer contributions and then put money into a Roth 401k/IRA?
-If I put money in a Roth is the Roth 401k a good choice, or should I set up a Roth IRA on my own?
-What should I do with my 12k in savings? I am on contract work, so having a bit of money in case of unemployment is a good idea. Should I move this into a retirement or investment account, or simply get a CD with a higher APY?
-When people talk about investing, such as in VBINX, are they doing this in a retirement fund, or in a separate investment fund?
-Should I even be saving the 10% a month post-tax? Or should I devote the entirety of my savings into a retirement account?
-What should I do with extra money that I save? If, for instance, I get an extra $1000 for some reason one month, should I put that in my savings account, or into my 401k, or somewhere else?

Sorry for throwing so many questions out at once, I'm just feeling a little overwhelmed with information. Any help is appreciated!

neo von retorch

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Re: Confused about where to put my money first
« Reply #1 on: July 24, 2014, 10:10:52 AM »
I'll try to answer some of your questions.

First, the decision between maxing our your 401k or contributing to a Roth or Traditional IRA depends on your overall tax situation now as well as your plans for the future. The Roth vs Traditional IRA debate depends on if you expect to be making more when you're withdrawing money from those accounts than you are now. For most MMM / FIRE folk, assuming you make income largely from your job now and will live off investments and retirement withdrawals later, you'll be taxed much heavier now. So it makes sense to max out your 401k and contribute to a Traditional IRA. (The exception is if you make too much money now, you'll get no tax benefit from a Traditional IRA, so it's better to put the money in a Roth IRA.)

It's hard to say if your savings is "too big" without knowing what your monthly expenses are. If it's more than 6 months expenses, you might want to move the rest of the money into an individual investment account and start learning more about your options there.

You can invest in funds like VBINX in retirement accounts and individual accounts. Overall, you have different assets, and collectively, you want to allocate them in a way that helps them grow while matching your goals and risk profile.

You might want to shift how much you are saving post tax towards retirement funds, and then, if there's left over, start saving that into your new individual investment account. Again, this kind of varies with your current income, current/expected expenses in retirement and the tax implications of those options.

Your retirement savings should probably be on auto-pilot, so assuming those are maxed or close to it, you can probably put windfalls or saving achievements into your individual investments. But if you haven't yet maxed out on a Roth IRA, you could move the money there.

Numbers Man

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Re: Confused about where to put my money first
« Reply #2 on: July 24, 2014, 10:20:18 AM »
Contribute $5,500 a year to a ROTH IRA and 15% to your 401(k), put $17,500 in your 401(k) plan after fully funding the ROTH. Not knowing your income and how quickly you can get a job after being laid off makes suggestions on what you have in savings difficult. I would say that $12k in savings is an excellent start. I can tell that you're a natural saver or really must be making bank at your job.