Author Topic: How much to invest?  (Read 1869 times)

runhb82

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How much to invest?
« on: December 16, 2014, 05:23:14 AM »
I recently started thinking about my overall savings and realized while I've done a good job stacking--where my cash is sitting, may not be the smartest. Do people have thoughts as to how much of your cash should be allocated to investing/long term savings/safety net? I'm a 30 year old female, no debt...and my only fixed expenses are rent and my cell. All my holdings are currently in CD's/Smarty Pig/Ally. I've been researching Betterment and Wealthfront--unfortunately, I live in DC and the Lending Club does not service DC residents yet. I'm a newbie in the investing game--so any advice would be greatly appreciated...thanks!

MooseOutFront

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Re: How much to invest?
« Reply #1 on: December 16, 2014, 06:17:48 AM »
Do you contribute to a 401k?  That would be an easy place to start automatically investing via payroll deductions each month.  I would look for the lowest expense ratio S&P500 or total stock market index fund in there and forget about it for now.  Also now would be a good time to open an IRA, traditional or Roth for 2014 and send $5500 to it.  Use Vanguard.

At 30, you really shouldn't have fear of losing your money. 

Read some books asap.  I would start with the following series of blog posts from JL Collins
http://jlcollinsnh.com/stock-series/

Then I would read Bogleheads Guide to Investments and then Swedroe's The only Guide to a Winning Investment Strategy you'll ever need.  You should be able to get all that done within a couple months.  Then you'll know more than my cardiologist buddy that fancies himself a successful investor (he is not.  just an active investor.)


ioseftavi

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Re: How much to invest?
« Reply #2 on: December 16, 2014, 07:51:25 AM »
I recently started thinking about my overall savings and realized while I've done a good job stacking--where my cash is sitting, may not be the smartest. Do people have thoughts as to how much of your cash should be allocated to investing/long term savings/safety net? I'm a 30 year old female, no debt...and my only fixed expenses are rent and my cell. All my holdings are currently in CD's/Smarty Pig/Ally. I've been researching Betterment and Wealthfront--unfortunately, I live in DC and the Lending Club does not service DC residents yet. I'm a newbie in the investing game--so any advice would be greatly appreciated...thanks!

My advice below is generally correct - complete the prior 'level' as best you can before progressing to the next.  This will yield a good mix of stability (emergency fund) and tax-efficiency (retirement accounts are heavily favored as your building blocks).

First level of savings: Emergency fund.  3 months basic expenses (be realistic, not "we are only going to eat peanut butter") at a minimum.  6 months is standard.  More than this is optional, but it seems to be common for people near the end of their FI quest to have perhaps nearly a year of cash just floating around.  Max in this bucket at any given time: 6 months living expenses is a good rule to start with.  More than that is usually too much cash on hand that could be better redeployed elsewhere.

Second level of savings: Retirement/Tax Advantaged accounts.  Usually the order of preference (most desirable to fill to least) is 401(k) > Roth IRA > HSA > Traditional (deductible) IRA > Non-deductible IRA.  This order is not set in stone but usually holds.  Max contributions to this account per year: Up to the limits for the account type you want to fill.  Offhand, I think yearly limits are: 401(k): $17,500.  More than that if your plan allows after-tax contributions.  Roth/Traditional/Non-deductible IRA: $5,000 max between all IRAs of any type.  HSA: $3,300 for an individual plan.

Third level of savings: Non tax advantaged accounts/vehicles.  Depending on your priorities, this can include taxable investment accounts, real estate, or special purpose accounts like  529 plans for college.  Max contributions to these accounts per year: No limits in most cases (529 plans for college do have limits, though).  You are only bound by the amount you feel comfortable investing - however, keep in mind that investments here are the least tax efficient type of accounts, so you'll be looking at paying taxes on realized gains/losses and investment income, usually.  Tax loss harvesting can help with this.

I think that's the kind of thing you were asking for, I hope that helps.  Basically, reading between the lines of your situation - it sounds like you probably have done a good job saving, but could be doing better at allocating your savings and investing them.  Get money into tax-advantaged accounts, as above, and get it invested in stuff that will grow long-term within those accounts.

ANOTHER EDIT, CONCERNING ASSET ALLOCATION: 
As a rule, your entire emergency fund (first level of savings) should remain in cash. 
2nd level accounts (retirement accounts) should be invested in an asset allocation appropriate for your age and desired risk level.  For a 30 year old, I would say that something in the realm of 80-85% stocks, 15-20% bonds would be correct.
3rd level accounts (non-tax advantaged accounts) should be invested in an asset allocation appropriate for how long you think the money will be invested.  If your 3rd level accounts are actually just more retirement savings, simply duplicate your 2nd level asset allocation.
« Last Edit: December 16, 2014, 08:07:26 AM by ioseftavi »