Author Topic: What should I do with my CA$H as a Young Man beginning to invest?  (Read 6339 times)

Alligan

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Hi all -
I have been reading MMM for a few months now (a truly life-changing occurrence, and I already considered myself very frugal), and while my frugality muscle is doing quite well, I am an Investment Ignoramus trying to soak up all the info I can about what to do with this cash that will be accumulating. 

My info:
I am 25, and I have about $15,000 that is currently sitting in an ING savings account earning a thwomping 0.8% interest.  I am currently saving at a rate of around 20-25k per year, but I only have 15k built up because I just finished paying off student loans and then made investments in a business I am starting.  I am renting with my girlfriend instead of buying a home due to the expense of real estate in Boston, at least for the next 2-3 years (not willing to leave Boston for cheaper market), so extra mortgage principal payments are not relevant to me.  My business is a sole-proprietorship, and my other day job (from which I currently derive most of my income) offers no retirement benefits/plan. 

From what I gather, I will want either a Traditional IRA, a Roth IRA, a Solo 401k, or a SEP IRA.  I haven't quite been able to make sense of the benefits between these types, so hopefully I can get some good advice here! 
I gather that Vanguard has many virtues, and I'd like to avail of their services where possible.  My goal (and that of my girlfriend, who will be joining me in setting up what I find after research to be most prudent), is of course to retire and live off my investments and enjoyable self-employment ASAP.  Does anyone have some advice on where I should start?  Please let me know if I need to provide any additional info to get better advice.  Thank you!

Sparafusile

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #1 on: February 17, 2012, 06:15:24 PM »
Here's an applicable blog entry from the horse's mustache:

http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/

Other than that, look into investing in the dividend aristocrats (http://www.forbes.com/sites/moneybuilder/2012/01/06/sp-dividend-aristocrats-for-2012/).

Here's a comparison of IRA and 401k plans:

http://en.wikipedia.org/wiki/401(k)_IRA_matrix

For what it's worth, I currently have a 401k through my employer, but I've heard much better things about IRAs. These are hard to draw from before you're of normal retirement age, so may not be what you're looking for.
« Last Edit: February 17, 2012, 06:17:34 PM by Sparafusile »

Stubbleman

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #2 on: February 17, 2012, 07:34:38 PM »
Check out:
http://www.fool.com/how-to-invest/thirteen-steps/index.aspx?source=ifltnvsnv0000001

There is a very basic primer into the different types of investment accounts, how to handle them and some things to avoid.

My first piece of advice would be to start slooowly.  Don't go and invest all 15k in one stock or even multiple stocks at the same time.  Start out with small chunks, costs be damned.  Buy $100 worth for your first purchase.  Watch it.  Learn from the experience.  Heck, find a company that will give you free trades for a month or two. Do not risk much of your capital until you are more comfortable.  When you are comfortable, move in slowly over months.  You don't want to end up buying $15,000 worth of anything at the wrong time.

Read about different investment methods and theories. 
  • Fundamental Analysis: Value investing, growth investing, dividend investing.
  • Index investing vs stock picking.
  • Technical analysis (not my cup of tea, but you should evaluate it for yourself)
  • Quantitative Analysis
 

See what sits well with you and what doesn't.

Chris

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #3 on: February 17, 2012, 07:49:47 PM »
From what I gather, I will want either a Traditional IRA, a Roth IRA, a Solo 401k, or a SEP IRA.

Maybe you should condier Roth and a SEP IRA.

Roth and Traditional IRAs contributions can be made with earned income, which you have from your employer. And as a sole proprietor, you will be earning self-employment income, which makes you eligible for something like a SEP or a SIMPLE. So it's possible to contribute to both in your situation. Something you should consider to increase tax savings.

And one other thing, you can still make contributions for tax-year 2011 (until tax day). So once you decide what to do, don't short yourself on your initial contribution! 

Mike Key

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #4 on: February 17, 2012, 08:56:59 PM »
Here's a piece of investing advice I'm really surprised no one has made yet, even though it might sound cheesy. Get a library card and read the recommend books you see here, and the ones you want to keep, buy used, cause not everything is always at your library.

Alligan

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #5 on: February 17, 2012, 09:12:55 PM »
Thanks all for the tips so far!
I am indeed working my way through the recommended reading list here, almost done with A Random Walk - good read!
I am more specifically looking for advice about the tax-advantaged account types I have available to me, and what priority to place upon them - rather than general investment strategies.  For whatever reason, I am finding it more difficult to find good, concise information on that when I would think it would be a way simpler topic to address as compared to general investing.

Chris

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #6 on: February 18, 2012, 01:29:19 AM »
I am more specifically looking for advice about the tax-advantaged account types I have available to me, and what priority to place upon them - rather than general investment strategies.

Let's see what I can do....

IRAs (generally): allow for tax-efficient investment. These accounts can grow via capital gains and dividends without being immediately taxed. Check that out some time: calculate compounding interest over a decade or two, first with annual tax and then without. The benefits are quite clear.

Roth and Traditional: allow up to 5k of contributions per tax year. You may only contribute earned income. Accounts available at most brokerages. Invest in stocks, bonds, mutual funds, etc. Most discount brokers don't charge a fee for having an account. Contribution limits do phase-out at higher income levels.

The major difference between the two is that Traditional IRAs are tax-free (deduct the contributions from your income tax), whereas Roth takes after-tax contributions (no tax benefits in the contribution year).  So one is tax later, the other is tax now.  It seems simple, but a Roth presents some clear advantages:

Roth advantages:
  • When withdrawing, everything comes out tax-free
  • You can withdraw your contributions at any time. (After all, you already paid tax on these)
  • You can withdraw up to $10k without penalty to purchase your "first home"
  • You can contribute even if you have a 401k
  • You are never required to take distributions, and can pass the whole thing on to your heirs

The main disadvantage is you can't deduct your contribution. This could be a problem if, say, you only have $5k to put toward retirement. Such an amount would allow you to max-out a Traditional IRA, but you'd only have ($5k minus taxes) to contribute to a Roth. The other potential disadvantage is that if tax rates are significantly lower at the time you take your distributions, it would have been wiser to deduct the taxes when they were higher (using a Traditional IRA).

SEP IRA: This is more or less like a Traditional IRA. The main difference is that you must have self-employment income to contribute and the contribution limit is based on adjusted net profit from the business. The contribution you make is tax-deductible in that year. Again, you can open one of these at a discount brokerage for now annual fee, and invest in stocks, bonds, etc.

SIMPLE and self 401k: These two are more complicated than a SEP. You will incur a cost for setting it up, however the contribution amount will likely be higher. You should determine how much your business is likely to earn for you to see if it's worth the trouble setting one of these two up. Also consider that if you stop contributing to a SEP, you can contribute two one of these types of accounts in subsequent years.

Prioritizing: In my view, a Roth IRA is the more flexible tax-advantaged retirement offering. I would max out this before anything else.

Alligan

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #7 on: February 18, 2012, 06:55:32 AM »
Great, thank you!  Makes sense, Roth IRA it is for now.

Stubbleman

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #8 on: February 18, 2012, 07:30:53 AM »
That link I posted above delves into your question a few sections in.  Don't mind the impression you get from the first page, it isn't really trying to sell you anything and it has some good advice.

velocistar237

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #9 on: February 18, 2012, 11:41:08 AM »
http://badmoneyadvice.com/2009/08/why-are-roth-iras-so-confusing.html

The question is: do you expect to be taxed more during retirement than now? If so, get a Roth. Most people on this forum are earning way more now than their future expenses will be, so they should get a Traditional IRA rather than a Roth. You want to defer taxes until your tax rate is lower.

In the future, when you have a low-income year, you can take some of that Traditional IRA and roll it over into a Roth. Overall, you will probably pay less tax.

Chris

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #10 on: February 18, 2012, 02:13:06 PM »
Most people on this forum are earning way more now than their future expenses will be, so they should get a Traditional IRA rather than a Roth.

I think a lot of people on this forum are also covered by an employer's retirement plan, meaning they wouldn't be eligible to make a deuctible contribution to a Traditional IRA.  Alligan is not in this situation though, so he does have a choice.

velocistar237

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #11 on: February 18, 2012, 05:31:36 PM »
Good point. I guess I should clarify and say that most people here would benefit more from contributing to employer plans or other tax-deferred accounts rather than going with the post-tax Roth IRA. There are ways to convert 401k's and the like to Roth IRAs. I, for one, will probably not contribute to a Roth again except for conversions, considering this:

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Alligan

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Re: What should I do with my CA$H as a Young Man beginning to invest?
« Reply #12 on: February 19, 2012, 11:25:40 AM »
Awesome.  Thank you to everyone who replied - I read through all the info and links provided and I've now got a plan well in hand!
And thanks to MMM for setting up this forum!