Getting Started

[Art Vandelay]

I have been lurking on these forums for a little bit, as well as educating myself recently on the philosophies of MMM and other individuals such as Dave Ramsey, Jack Bogle, Ray Dalio, Tim Ferriss (via various podcasts, bigger pockets, YouTube channels et al). I have learned a lot in terms of understanding certain key financial tenants that I must respect and employ if I wish to attain financial independence. I know enough to realize that I must set aside a budget that I shall stick to, plan to save about 40% of my income, utilize my company 401k as well as a Roth IRA of my choosing to take advantage of compound interest. I am also getting into various entrepreneurial endeavors which I will share in the future. Additionally, I wish to get into the world of rental properties and perhaps go full Grant Cardone and buy an apartment complex in the distant future! However, it seems while following so many financial "gurus," that while there are certain aspects of what each says that parallel one another, many of their recommendations and opinions differ to a point where I feel that I do not know which direction to go. I am suffering from paralysis by analysis.

For example, Dave Ramsey says pay down debt immediately, never lease a car, own a home, invest in Growth Stock Mutual Funds (as opposed to Index Funds) which outperform the S&P and break it up into 25% growth, 25% growth and income, 25% international and 25% aggressive growth. He also seems to say that one should utilize a financial adviser and a good accountant and not to worry about fees because, "Fees never prevented anybody from becoming rich." He also recommends Class A shares as opposed to no-load funds, and thinks that one should pay down all of their debt before even considering investing of any kind. Meanwhile, individuals like Bogle and Buffet would recommend Index funds instead.

Then, I listened to Rob Berger, who utilizes a 6-fund mutual fund strategy and also believes in switching up his asset allocation during say a recession period vs a non-recession period. He also believes that target-date funds are a good way to go. Contrary to Ramsey, Berger states that waiting to invest until one pays down all of their debt is foolish, as that can take time and you are losing the ability to take advantage of the compounding by waiting x amount of years to invest.

Then, we have individuals like Grant Cardone (while not a financial adviser), who says the hell with any investing of any kind in terms of a 401k or Roth, and that one should stockpile away cash working hard until they have amassed enough money to put together a deal acquiring a business or real estate, which will then provide them with passive cash flow at a higher percent return rate than any index fund could. He also thinks that owning a home in and of itself does not necessarily mean that it is an "asset," and that one should "rent where they live and live where they rent."

So here is my situation...With all of this information, I am not sure which direction to go. I am not interested in becoming an active investor, and would prefer a solid strategy to apply that I am able to employ consistently and without worry that I am not "doing the thing that would yield the best returns." I am in my early 20's, and have just graduated college with $38,000 to pay back. I have a car payment of $212 per month, car insurance of $140 per month, a cell phone bill of 60$ per month, and my loans (which start in a few months) start at $200 per month and increase $100 each year, (never going above $400). I currently live at home, although in a year or so I plan to have an apartment closer to work, and I have just started a new job which is only 30 minutes from home. The job pays $55,000 base and has an unlimited commission, although the average is about $15,000-$20,000 per year. The company also offers a 100% match up to 5% for my 401K. I also have $1500 in an ETF (SPDR) from a long time ago (before I realized what I was doing or knew anything about investing). I had not contributed to it, so I ruined the compounding, and it has been just sitting there for 5 years.

Given this information, where do I start? I want to set myself up for success. How should I set up my 401K through my company? Also, should I start contributing to a Roth IRA as well, and if so, should I hire a financial adviser to manage it for me or simply use Vanguard? What should my asset allocation look like? How much of my income should I look to save? What smart moves should I make in my 20's to set myself up on the road to financial freedom and independence in the future?

[Tom Bri]

Dave Ramsey if good for a specific type of person. Those with little financial knowledge who have borrowed themselves into near-oblivion and need to climb out of the hole they are in. That hole isn't just financial, it is also moral and emotional. His plan helps them tackle one problem at a time in bites small enough they can swallow them, thus his advice to clear one credit card at a time and not worry about the interest rates so much. It works, but it isn't the ideal strategy for people with a bit more financial savvy and who are a bit more organized. Just from your post it sounds like Ramsey would probably be a step too low for someone like you. If I were deeply in debt it would be ideal for me, since I have never been interested much in money and am not well organized. Fortunately, my spouse makes up for my lacks.

I like MMM because it is a simple and very straightforward approach that initially requires little effort. You can add one step at a time as you become knowledgeable. Setting up a Vanguard account and automatic investing is dead easy even for me who isn't that savvy. Getting your 401K with the max employer is dead easy, just fill in the forms that your employer hands out every year. Etc.

As to whether you pay down your loans faster or slower, that depends on you. Personally I hate debt and feel like a slave if I owe money. It's emotional, not logical. Lots of people here will tell you to check the interest rates and if your investments are paying more than your debt is costing you, then invest like crazy and don't worry about the debt. That doesn't work for me because my outlook towards debt is emotional, not logical. I am not happy if I am in debt.

I guess my advice is to know yourself. MMM works, and it works for lots of different kinds of people. I hope some of our investment gurus will chime in now.

[MDM]

Given this information, where do I start? I want to set myself up for success. How should I set up my 401K through my company? Also, should I start contributing to a Roth IRA as well, and if so, should I hire a financial adviser to manage it for me or simply use Vanguard? What should my asset allocation look like? How much of my income should I look to save? What smart moves should I make in my 20's to set myself up on the road to financial freedom and independence in the future?

If you haven't already, see
Getting started - Bogleheads
Investment Order
Stock Series
www.etf.com/docs/IfYouCan.pdf
for more reading material.

Tom Bri has already given a summary of Dave Ramsey's advice with which many would agree.

As for debt vs. investing, emotion won't make money and money won't buy happiness.  In other words, different people will see this topic differently and there is no "correct" answer except the one that works for you.

Back to your questions: rather than the open-ended "what should I do?" questions, consider (based on whatever you have understood from your reading) formulating your own plan and asking "here is a plan - how does it look?" instead.

See How To: Write a "Case Study" Topic and Asking Portfolio Questions for the type of information readers will need to provide informed responses.  And good luck!

[Linea_Norway]

For example, Dave Ramsey says pay down debt immediately, never lease a car, own a home, invest in Growth Stock Mutual Funds (as opposed to Index Funds) which outperform the S&P and break it up into 25% growth, 25% growth and income, 25% international and 25% aggressive growth. He also seems to say that one should utilize a financial adviser and a good accountant and not to worry about fees because, "Fees never prevented anybody from becoming rich." He also recommends Class A shares as opposed to no-load funds, and thinks that one should pay down all of their debt before even considering investing of any kind. Meanwhile, individuals like Bogle and Buffet would recommend Index funds instead.

The rule for paying off debt in here (MMM) is: pay off debt with high interest rate immediately. Low interest debt (like a mortgage) is a matter of choice whether you want to pay it off or not. And if you pay them off, then pay off the highest interest loans first. If you think your money in the stock market will outperform the interest on your debt, then use it to invest.

But if you are a person with lots of small debts, then the David Ramsey method for paying some of them off just to clear up your personal economy, could be a point.

Never leasing a car is a good advice. It is financially much better to buy a car that you can afford to pay cash then to take up a loan or a lease.

Own a home is not always the best financial choice. There is a lot of hidden cost to being a home owner. There is a rent-versus-buy calculator somewhere on the internet and in some cases renting could be the better option for someone's financial or personal situation. You should also consider whether you think there is a housing bubble where you live that could be near bursting. In that case, buying at that moment might not be smart. Buying after a bursting bubble is probably very smart, like buying stocks during a stock market crash.

Financial advisers that take a % of your profit, as well as funds that take some of your profit are in general not guaranteed to give you any more profit than an index fund makes. Index funds blindly follow the market and you can keep most of the profit yourself, except for a little %. The other good thing about investing in index funds is that it is really simple. Everyone can do it and you don't need to pay financial adviser to do it for you. You also don't need to think about your asset allocation, so low mental stress.

[mistymoney]

One step at a time!

My very simplistic advice is to get started. :)

With 55k, maybe more, and living at home, you should take advantage of this year and put the full 19k towards your 401k, max the roth with 6, and you still have plenty left over to pay your bills and save outside of retirement.  Even if you can't maintain that in subsequent years, this one year of maxing will serve you well. (If you can max this for 5 years at your age, maybe 10, your retirement is kind of set. 5 years for reg)

You could likely invest at least 1, maybe up to 2k/month in a separate vanguard fund. Use commissions for spending and other bills.

If you did above, you'd be starting out great in a year, no matter by which standards.

Beyond that -

What interest rate on your car?
What interest rate on your student loans?

[chemistk]

Good on you for getting here!

But since you're here (MMM), I think it's probably most sensible to scrap any sort of Ramsey advice altogether. Most of the other stuff you've listed too. DR is exceedingly simple and the other stuff (cash to buy a business) is risky and takes a lot of finesse to understand how to make a long term profit. Plus a lot of luck.

Read through what MDM posted, especially the investment order. All your bolded questions will be answered there.

But then, more importantly, you need to figure you what you actually want to do with yourself. I see you're interested in most aspects of FI/RE, but to what extent? Do you truly want to RE, or does FI seem like it will be enough for you? Those questions will dictate how you will want to handle the ins and outs of day-to-day living. If MMM speaks to you the most, you'll want to really look at your current spending and figure out how you can be as frugal as possible at this point in your life (aka decent earnings, relatively low debt, and free rent).

It's a long journey. When you dive in, it feels like it's all a quick and easy path but in reality there's a lot more than just figuring out where to put your money. 

[NonprofitER]

You've got great advice here already. The only thing I would add is that if I could go back and do my early 20's again, I would have house-hacked (https://www.biggerpockets.com/blog/2013-11-02-hack-housing-get-paid-live-free) my first home. Given that you're potentially interested in real estate, consider the rent vs. buy situation, and if buying makes sense, house-hack while you're still young and childless.

[Art Vandelay]

Thanks guys! Great stuff here definitely, and I am currently digging into the Bogleheads wiki when I have time. So I must say, I was given the wrong information about my company 401K. They match 100% up to 3%, and then 50% for the additional 2%. Also, it automatically enrolls you in a Target Date fund unless you actively tell them that you want to choose the fund. I have to make a quick decision on this as they need to know. I was wondering if anybody had any advice? I also can choose between a Roth or traditional, however based on my research around here, the traditional seems to be more suggested. Since I am new to this, if I were to pick my own Index funds here, do I just choose one S&P Index fund? Or do I need to choose a few funds? And going off of that, do I need to actively review these funds and switch things around over time based on their performance? I would prefer passive investing in that regard. The options they provided me included various T. Rowe target date funds which they stated are professionally managed. Then they provided a list of individual funds. The individual fund options include: Fidelity Blue Chip Growth, Vanguard 500 Index Admiral, Invesco Diversified Dividend R6, Vanguard Mid Cap Index Admiral, Vanguard Small Cap Index Admiral, Vanguard Total Intl Stock Index Admiral, Fidelity International Small Cap Opp, Fidelity Total Bond Fund, Fidelity Balanced.

As you can see, for a newbie this seems overwhelming! Being that I need to make a decision quickly, can anyone offer some guidance? I do not have the time to educate myself fully on the market to the degree where I could do this on my own given the window of time provided. Thank you all again for all of your help and the information you all presented me!

[MDM]

Thanks guys! Great stuff here definitely, and I am currently digging into the Bogleheads wiki when I have time. So I must say, I was given the wrong information about my company 401K. They match 100% up to 3%, and then 50% for the additional 2%. Also, it automatically enrolls you in a Target Date fund unless you actively tell them that you want to choose the fund. I have to make a quick decision on this as they need to know. I was wondering if anybody had any advice? I also can choose between a Roth or traditional, however based on my research around here, the traditional seems to be more suggested. Since I am new to this, if I were to pick my own Index funds here, do I just choose one S&P Index fund? Or do I need to choose a few funds? And going off of that, do I need to actively review these funds and switch things around over time based on their performance? I would prefer passive investing in that regard. The options they provided me included various T. Rowe target date funds which they stated are professionally managed. Then they provided a list of individual funds. The individual fund options include: Fidelity Blue Chip Growth, Vanguard 500 Index Admiral, Invesco Diversified Dividend R6, Vanguard Mid Cap Index Admiral, Vanguard Small Cap Index Admiral, Vanguard Total Intl Stock Index Admiral, Fidelity International Small Cap Opp, Fidelity Total Bond Fund, Fidelity Balanced.

As you can see, for a newbie this seems overwhelming! Being that I need to make a decision quickly, can anyone offer some guidance? I do not have the time to educate myself fully on the market to the degree where I could do this on my own given the window of time provided. Thank you all again for all of your help and the information you all presented me!

You can change your investments within a 401k without tax consequences, so your initial choice isn't completely critical.

Do you know the fees you would be paying for each of the funds listed?

Just guessing, but either
- some combination (including 0% of Intl if you don't want that at all) of Vanguard 500 Index Admiral and Vanguard Total Intl Stock Index Admiral, or
- a 2060 (or similar year) target date fund
might be good for you.

[Tom Bri]

Agree with MDM above. It's your first year. Just make a simple decision and go with it knowing you can improve later. I have been happy with the results of my Vanguard 500 index fund.
Also start chipping away at useless spending that doesn't add to your mid or long-term happiness.

[chemistk]

I've personally stuck with the Vanguard TDF for the time being, simply because the expense ratios that my company was able negotiate are so much lower than the rest of the available options. Generally the TDFs are 90/10 stocks/bonds for a number of years and then gradually progress toward bonds as you get along. I've found the mix of funds that are held within a TDF to be adequate - to the point that the simplicity of fewer funds (if I were to pick my own) becomes a wash when the fees are considered.

What I will likely do, at least for the next couple years, is shift all my funds to the 'next' TDF once the fund I'm in moves toward bonds, so that I can maintain that high stock exposure.

[kei te pai]

You are living at home (parents , I assume). Include in your budget contribution of money time and effort to their household. Discuss with them what is fair and reasonable. They may offer to subsidize your living cost to help you, you should still contribute time and effort, eg meals, yard work/maintenance.

Plenty of investment advice here, but the most important part is understanding your spending, your goals, and what it is that you want to achieve.

[Art Vandelay]

Great information here guys! As far as the loans go (my only debt)... My federal student loan comes out to $37,707. They obviously have a percentage of the loan which is subsidized and a percentage of the loan which is unsubsidized, however on studentloans.gov, it is telling me that my interest rate for the full loan is 4.5%. I suppose they average the interest rates to get this number? This means that I will have paid about an extra $10,000 in interest if I follow their 120-month minimum monthly payment protocol! I am obviously going to try to pay more than the minimum per month!

And, while I am staying at home and am not required to pay rent, as mentioned above I do pull my weight entirely, I even forgo family dinners and pay for all of my own food (I am a weightlifter) and help out around the house in any way I can in addition to covering all of my own expenses obviously.

I read the Bogleheads wiki and dug around the forums some more and I have come up with a plan to start which I feel is at least a good entry point for somebody just getting their feet wet into the MMM world. If anybody had any critiques of my gameplan here, let em rip!

-I am purely basing this plan off of my base salary. I feel it is a smart strategy to try and make my calculations off of my base, which is guaranteed, and then I will take the commissions I make (along with my yearly tax return) and aggressively pay down my student loan.
-For this reason, I am operating under the assumption that my yearly base salary is $50,000 (I recognize that I wrote 55,000 in the original post above, which was a mistake)
-   $50,000 Yearly Salary minus $2,500 for 401k  contribution is $47,500
-   Minus $3,500 to max out HSA and $2,113.68 for yearly Medical Insurance (both pre-tax as well)
-   $2,810/Month take home pay after taxes (I live in NJ)
-   Minus $500/Month to max out Roth IRA = $2,310/Month left

And here are my current expenses:
Car Payment: $212/Month (3-year lease, Hyundai Elantra. BUT, I can buy the car in 20 weeks for $8,000 when the lease is up and own a reliable car with below 40,000 miles on it) If anybody thinks this is not a great plan then I would love to know!
Car Insurance: $142/Month (Currently Progressive, but am looking at Allstate for a better deal)
Cell Phone: $30/Month
Gas: $150/Month (My job is exactly 30 minutes from home)
Food: $280/Month
Gym Membership: $20/Month plus 60$ one time yearly maintenance fee
Student Loans: $220/Month (payments increase slightly every two years starting at $220 and reaching $659 over the course of 120 months given current 10-year payment plan. However I plan to have this paid off in far less than 10 years).

Left Over: $1,236/Month ($8,000 by May of 2021 to buy Hyundai)
- Save $400/Month towards car (to have $8,000) by May 2021
- Save $600/Month to start my Emergency Fund (Plan to place in Goldman Sach's Marcus Savings account)
- $236 left over for dates (I know I know, but I am a young guy who is actively dating)

-If you factor in the 401K contributions (plus match), the Roth IRA and HSA contributions, as well as the $1,000 a month I  am saving toward buying my car and putting into my emergency fund, I am saving roughly $26,000 per year. My $50,000 salary becomes $39,495 after taxes, so I am essentially saving roughly 66% of my income. I hope this is the correct way to go about things, and if I am missing anything or anything could be improved, I would love to learn!

[MDM]

-I am purely basing this plan off of my base salary. I feel it is a smart strategy to try and make my calculations off of my base, which is guaranteed, and then I will take the commissions I make (along with my yearly tax return) and aggressively pay down my student loan.
...
I hope this is the correct way to go about things, and if I am missing anything or anything could be improved, I would love to learn!

If you are making tax-related decisions, you might do better to use your expected total gross income as a starting point rather than ignoring a reasonable guess at your commissions.  E.g., 22% vs 12% marginal rate, student loan interest subtractability, etc.