College Grad with good job, what to do with the money?

[unexpectedmoney]

Current Topic: I'm currently wondering how much to contribute to a 401k. I'd like to buy a house ASAP (not that I'm close, but I mean thats my goal). I don't believe there's a first time home buyer clause that would let me withdraw from my 401k, only my Roth IRA, is that correct? If that's the case, should I not max out my 401k? Maybe do something like 10-15%? 22% of my salary would put me right at the limit of $17k.

EDIT: This information is updated as of 9/7/12 because I got a new job and left my old company. I'm looking forward to feedback given my updated financial situation. Thank you as always!

I am a 22 year old (23 in 3 weeks) college graduate. I work in the Software Industry. The company I work for hires me through a contracting company, and I'm making roughly 65k/year (I'm hourly, but thats about the conversion). I just got a new full time job for $72k/year. The contracting company offers a 401k with a 25% company match, but I will have to be an active employee through them on Dec 31 2012 to get it. I haven't opened the 401k because I'm not sure if I will be an employee with them then... I might be full time (not contracted) or I might just find a new job instead. I'm not too sure yet about that.  I take home after taxes about $3800 a month, and I spend about $1400 a month, so I think I'm doing really good savings-wise.

I can choose to save in the traditional 401(k), the Roth 401(k), or a combination of the two. They provide a company match of 40% of each dollar up to the first 5% of eligible compensation. The match applies on the combined total of your traditional 401(k) and Roth 401(k) contributions, up to the match limit.
Current Question: How much should I contribute to my 401k? I don't believe there is a first time home buyer clause where I could withdraw early... so I should probably keep money somewhere else right?

My new job has a Employee Stock Purchasing Plan that lets me purchase stock at a 15% discount off the market price  I can contribute from one to 15% of your pay to the plan. This makes me a little nervous. Even though its my own company, buying so much stock in one spot doesn't seem safe. Maybe I just do 5%? Any thoughts here?
I think what I've decided to do here is contribute the max to the ESPP (15%) and then hold it for the minimum period (6 months) and immediately sell it. So if the stock stayed literally flat, that'd be a 15% gain over 6 months.

My question is, what should I do with my money? My portfolio is as follows:

~$15,000 cash
~$12,000 in Vanguard Funds ($3000 in VISGX (ROTH IRA) and $3000 in VGSTX and $6000 in VWNFX)

I have no debt from college (financial aid for classes due to low parental income and free housing from being an RA). I drive a fully paid off car I bought used during my second year, a 2000 Integra with a kelly blue book value of probably about $4500 funded by high school jobs.

So I feel like I'm in good shape, but I feel like I could do more with my money. I'm saving as much as I possibly can and spending little, I have no debt, great credit etc, but I don't think it makes sense to just throw all my earnings into the stock market right? I also know that MMM thinks emergency funds are overrated, so I feel like over 50% of my portfolio in cash is a waste.

My short term plans are to try to buy a small condo when I can (I live in Orange County, Ca... I figure it will be about $300,000 for a 2 bedroom, so if I put 10% down I'll need 30k) and then have a friend rent a room from me to contribute to the mortgage.

What should someone like me at my age do with their portfolio? Time is on my side so I can be aggressive, but I also will want the money for property so I can stop throwing money away with rent and put it into a mortgage, and then turn that into a rental property eventually.

Looking forward to comments, thanks in advance!

[velocistar237]

Contribute to the 401k at least up to the match. Worst case, you don't get the match, but you still keep the money. You're early in your career, so contribute to a Roth while your tax burden is low(er). Learn a bit about asset allocation and tax-efficient fund placement over on the Boglehead wiki.

Can you keep the housing arrangement simple and just rent with a roommate? The buy vs. rent equation probably leans toward renting in your area. Also, you might find many opportunities as you settle in your career, and they might require moving. Moving and selling pretty much negates the financial benefits of a purchase, and unless you can find something for cheaper, it's probably not a good investment to become a landlord on a $300K house. If you have your heart set on buying, the roommate is the right way to go.

[astadt]

Welcome!

I agree with Velocistar on his points.

Contribute to the 401k at least up to the match. Worst case, you don't get the match, but you still keep the money. You're early in your career, so contribute to a Roth while your tax burden is low(er). Learn a bit about asset allocation and tax-efficient fund placement over on the Boglehead wiki.

Can you keep the housing arrangement simple and just rent with a roommate? The buy vs. rent equation probably leans toward renting in your area. Also, you might find many opportunities as you settle in your career, and they might require moving. Moving and selling pretty much negates the financial benefits of a purchase, and unless you can find something for cheaper, it's probably not a good investment to become a landlord on a $300K house. If you have your heart set on buying, the roommate is the right way to go.

Your tax advantaged accounts are too valuable for you to ignore. So go up to the match on your 401k and then open a Roth IRA with Vanguard and start throwing money in there. You can contribute $5K into that account and it will grow tax free, pretty sweet.

As for your house, think about what Asset Allocation you want to maintain and then go from there. Having over a 60% allocation for real assets is very lopsided and isnt for everyone. Though I do think your roommate idea is a fantastic one.

[Ben]

Congratulations! Sounds like you are in an enviable position. As Velocistar mentioned, if you leave the company before January you will lose the match but keep your contribution, so take advantage of the tax advantaged account (and possible match).

If there is so much uncertainty on your employment future, you should be cautious with purchasing a home. This crowd is evenly split on Buy vs. Rent, but nearly all agree that buying can limit your ability to move and pursue a better job.

If home ownership is a priority (but the timeline is uncertain), I would max out the Roth and include some short/mid term bonds or CDs in my portfolio, with the intent that these are to be for a future home purchase. That money can continue to grow as you wait for your employment situation to stabilize.

[grantmeaname]

I figure I should mention this explicitly in case you're confused about why we've jumped to Roth IRAs:
Roth contributions are able to be withdrawn without tax in all cases, and Roth earnings are capable of being withdrawn without tax in certain scenarios, like medical expenses or paying a qualifying first home down payment. If you save $5k a year in the Roth, when it comes time to buy your home any growth in the account will be tax free; alternately, if you later decide not to buy, you'll have a nicely sized nest egg that can continue to grow tax-free until your eventual (hopefully early) retirement.

[James]

The contracting company offers a 401k with a 2.5% company match, but I will have to be an active employee through them on Dec 31 2012 to get it. I haven't opened the 401k because I'm not sure if I will be an employee with them then...

Excellent financial start!  Not many come out of college in such great shape, congrats on many great choices and hard work!


Regarding the 401k, I'd go ahead and open the account and start contributions.  You have enough savings to be able to do both that and max out a Roth IRA.  I realize opening a 401k with the company might seem like a bother since you don't know if you will be there long term, but I'd just go ahead with it anyway.  With the way jobs are now days, chances are you will keep getting jobs with companies that use the 401k for retirement.  So each time you leave a job you will simply roll that over into a rollover 401k.  So might as well go ahead and start those contributions and get the tax advantage working for you.  If you can max out the Roth, 401k, and still add to your Vanguard, you will be on your way to a very early FI date.

[arebelspy]

While I agree with everyone that contributing to the 401k is potentially a good idea, I'd do it differently.

I'd start saving up in an after tax account.  If you're still with the company in December, contribute the whole chunk then to get the match.

No need to start contributing early when you can dump the whole chunk in at once, if you need to.  Just make sure you're saving it up along the way.

[Ben]

arebelspy,

The employer likely only contributes that match per pay period. In that case, you would not be able to receive the 'full match' retroactively. It would be a shame to save (65K*2.5%=$1625) to receive a $62.50 match, instead of getting your full $1625.

Ben

edit: numbers are for full year, not from our current pay period through the end of the year. But the point should still stand.

[unexpectedmoney]

Wow, thanks so much for the comments everyone, this is great to read.

About a ROTH, is this something I can just open up with Vanguard and contribute money to just like any of their other funds? And if I do this, should I take the money out of my funds that I already have (in my first post) and put them in this ROTH instead?

So one thing I guess I should have made more clear in my first post is, how much exactly should I keep around in my bank account for cash? I don't really want to start the whole "emergency fund" conversation, but like what percent of my portfolio at my age seems appropriate to have in cash?

[AJ]

The employer likely only contributes that match per pay period. In that case, you would not be able to receive the 'full match' retroactively. It would be a shame to save (65K*2.5%=$1625) to receive a $62.50 match, instead of getting your full $1625.

That is how my 401k works as well. Which, as a side note, is why you don't want to max it out early in the year (you'll lose your match for the last few paychecks.) I almost had to learn that one the hard way...

[skyrefuge]

That is how my 401k works as well. Which, as a side note, is why you don't want to max it out early in the year (you'll lose your match for the last few paychecks.) I almost had to learn that one the hard way...

I did this one year (maxed out my 401(k) contribution before year-end), and didn't even know that I had cheated myself out of some company matching money.   ....until a couple months into the next year when I had a "true-up" contribution added to my account.  At first I didn't even know what it was, but then I learned that it was to "make up" for my "lost" matching money.

According to http://www.forbes.com/sites/ashleaebeling/2012/01/13/the-big-401k-match-mistake/ not all 401(k) plans have this nice feature, so Ben's advice is certainly still worth investigating:

Some plans have what’s called a “true-up” feature to help you get the maximum match. The employer looks at your account to determine if the average percentage you contributed would have resulted in a larger match; it that’s the case, the employer makes a “true-up” contribution. Check with your plan provider and/or your benefits department.

Also, since the 401(k) contribution is deducted from each paycheck, and you can't contribute more than 100% of your paycheck (and I believe most plans limit your contribution percentage to something less than 100%), the OP can't "dump the whole chunk in at once".  It would take at least 4 months if he was contributing the $17k max.

[velocistar237]

About a ROTH, is this something I can just open up with Vanguard and contribute money to just like any of their other funds?

Yes. Go here. There will be an option for a Roth account.

And if I do this, should I take the money out of my funds that I already have (in my first post) and put them in this ROTH instead?

I wouldn't sell shares just to transfer money to the Roth. The won't be internally transferable because they're different accounts. You could take from your cash pile, or you could put money into the Roth as the year goes on. Make sure you have it maxed out by tax day of 2013.

Are you happy with your current fund choices?

So one thing I guess I should have made more clear in my first post is, how much exactly should I keep around in my bank account for cash? I don't really want to start the whole "emergency fund" conversation, but like what percent of my portfolio at my age seems appropriate to have in cash?

That's up to you. Some people like to have cash around so they can jump on real estate opportunities and such. Some people have a quarter of their portfolio in a cash-like investment as part of the Permanent Portfolio. You probably want to keep a sensible multiple of your monthly expenses in an emergency fund until you don't need it anymore. If you want a cash portion to your portfolio, put it in something like VFISX. Otherwise, I wouldn't keep much in cash without a specific reason.

[unexpectedmoney]

Are you happy with your current fund choices?

To be quite honest, I don't know. I mean I was happy until last week when the DOW dropped, lol. But seriously I only had VGSTX because it was a minimum $1000 investment, which is all I could afford at the time. And VWNFX I got later because it was a minimum of $3000 and seemed similar to VGSTX and had a good morningstar rating.......

If you have additional suggestions I'm open to that. I'm basically doing funds for now because I don't know what individual stocks I'd buy, and I'm also scared of them.

[grantmeaname]

There's no reason not to hold index funds. It's mathematically superior to holding individual stocks -- you are taking on much less risk than holding an individual stock by diversifying. You just need to figure out which funds you want to invest in.

[velocistar237]

Maybe it would help to read up a bit.
Bogleheads investing start-up kit

Usually, index fund investors diversify between a few somewhat uncorrelated asset classes, weighted mostly toward stocks. Here's basically what I do, from this book, though there are plenty of other portfolios that make just as much sense:

35% Total Stock Market Index
25% Total International Stock Index
5% Emerging Markets Stock Index
15% REIT Index
10% Long-Term Treasury Fund
10% Inflation-Protected Securities Fund

If you want to invest this way from the start, you'd have to use ETFs so you wouldn't have to satisfy minimum fund limits. Otherwise, you would have to add them in chunks as you save. To hold ETFs, you need a Vanguard Brokerage Services account instead of the regular variety.

Holding funds according to asset class allows you to control the allocation percentages yourself. Another advantage is that you can place them in your accounts in a tax-efficient way. I'm in the process of figuring this out myself.

[jpo]

I am one year ahead of you in exactly the same situation but with a little more savings.

Open the Roth IRA as soon as possible and dump $5k in. I use TD Ameritrade and have been happy with them.

[unexpectedmoney]

I am one year ahead of you in exactly the same situation but with a little more savings.

Open the Roth IRA as soon as possible and dump $5k in. I use TD Ameritrade and have been happy with them.

I totally should have done this last year (before April 17th 2012) huh.........

[jpo]

I am one year ahead of you in exactly the same situation but with a little more savings.

Open the Roth IRA as soon as possible and dump $5k in. I use TD Ameritrade and have been happy with them.

I totally should have done this last year (before April 17th 2012) huh.........

Yes. That's what I ended up doing in January 2010, is making the 2009 and 2010 contributions.

Also, I know some people like to dollar cost average (invest monthly), but you'll have more time for your money to work if you invest as early in the year as possible.

[arebelspy]

arebelspy,

The employer likely only contributes that match per pay period. In that case, you would not be able to receive the 'full match' retroactively. It would be a shame to save (65K*2.5%=$1625) to receive a $62.50 match, instead of getting your full $1625.

Ben

edit: numbers are for full year, not from our current pay period through the end of the year. But the point should still stand.

Ah, good to know.  I don't have a match, so I didn't realize that.  Thanks for the correction.

[unexpectedmoney]

I edited my first post...... I totally misread my 401k information. My match isn't 2.5%, its 25%..... big difference lol.

"The match is 25% up to the first $5000 the employee contributes. So if an employee contributes $5000, 25% company match is $1250. If an employee contributes less than $5000, the 25% company match is 25% of that amount. To be eligible for the Collabrus company match, an employee must be enrolled in our 401k plan and must be an active employee on Dec 31 to be eligible for the company match for that calendar year. The company match is applied to the 401k accounts in January."

[Ben]

Usually, index fund investors diversify between a few somewhat uncorrelated asset classes, weighted mostly toward stocks. Here's basically what I do

Great, concise summary. Absolutely.

35% Total Stock Market Index
25% Total International Stock Index
5% Emerging Markets Stock Index
15% REIT Index
10% Long-Term Treasury Fund
10% Inflation-Protected Securities Fund

If you want to invest this way from the start, you'd have to use ETFs so you wouldn't have to satisfy minimum fund limits. Otherwise, you would have to add them in chunks as you save.

Since you're investing for the long term, there isn't much harm in working your way up to more asset classes over a couple of years, buying the bigger chunks first. For example, if you were following Velocistar's asset allocation and had 10K to invest you could put $4k in total stock market, $3k in international, and $3k in a bond index or US treasuries. Then, in a few months, you could add an REIT index, etc.

The smaller your portfolio, the fewer $$ are at risk by having a less-than-optimal allocation, so don't be too concerned if your asset allocation is a bit out of whack for the first year or two- as your stache grows, it will become easier to add funds and money to existing funds to get it to approximate your desired asset allocation. You can easily correct a 5% imbalance with a couple months' savings, so you will get there quickly.

Ben

P.S. Cheat Sheet: Terms to research via bogleheads website BEFORE moving money around:
1. Tax-Efficient Fund Placement
2. ROTH IRA
3. Asset Allocation (research and choose your own: then stay the course!)

[Ben]

I edited my first post...... I totally misread my 401k information. My match isn't 2.5%, its 25%..... big difference lol.

"The match is 25% up to the first $5000 the employee contributes. So if an employee contributes $5000, 25% company match is $1250. If an employee contributes less than $5000, the 25% company match is 25% of that amount. To be eligible for the Collabrus company match, an employee must be enrolled in our 401k plan and must be an active employee on Dec 31 to be eligible for the company match for that calendar year. The company match is applied to the 401k accounts in January."

Interesting. I had assumed it was a 100% match on up to 2.5% of your salary. It sounds like you are in a more unusual arrangement, and you would be able to dump all $5000 in at the end of the year if you so desired. I don't see any harm in going ahead and beginning 401k contribution now regardless, but it seems that you have more flexibility in that area. You may want to check your benefits rep at your company to make sure...

[plantingourpennies]

Hey Unexpected,

You're off to a great start! Have you ever considered pushing things a little and doing something like Jacob from Early Retirement Extreme? I'm too old for it, but if I was in your situation, and know what I know now, I would be sorely tempted.

Best,
Dan

[grantmeaname]

He already saves 65% of what he makes. That's pretty extreme, no?

[unexpectedmoney]

I have good news! I found a new full time job with a very good offer and I'm leaving my old company. I updated the first post and have some new questions. I have two 401k options, and an Employee stock purchasing plan I'm unsure how to best utilize.

I can choose to save in the traditional 401(k), the Roth 401(k), or a combination of the two. They provide a company match of 40% of each dollar up to the first 5% of eligible compensation. The match applies on the combined total of your traditional 401(k) and Roth 401(k) contributions, up to the match limit .

My new job has a Employee Stock Purchasing Plan that lets me purchase stock at a 15% discount off the market price  I can contribute from one to 15% of your pay to the plan. This makes me a little nervous. Even though its my own company, buying so much stock in one spot doesn't seem safe. Maybe I just do 5%? Any thoughts here?

[Russ]

My new job has a Employee Stock Purchasing Plan that lets me purchase stock at a 15% discount off the market price  I can contribute from one to 15% of your pay to the plan. This makes me a little nervous. Even though its my own company, buying so much stock in one spot doesn't seem safe. Maybe I just do 5%? Any thoughts here?

The last place I worked had a deal like this with the added assurance that if the stock price dropped below your purchase price, the company would buy it back at the same price you paid for it. The only way to "lose" money was if you would have gotten a better return from a different investment; you couldn't actually come out with less money than you started (minus inflation, I guess). I would gladly have taken part if I were eligible. Even if the stock price stays the same, that's an automatic 17.5% return.  I would double-check to see if your company has a similar buyback policy; from what I've heard they're pretty common. If so, I'd definitely go for it. How much is up to what your research says about the company's performance and the corresponding risk you think you'll be taking.

[unexpectedmoney]

My new job has a Employee Stock Purchasing Plan that lets me purchase stock at a 15% discount off the market price  I can contribute from one to 15% of your pay to the plan. This makes me a little nervous. Even though its my own company, buying so much stock in one spot doesn't seem safe. Maybe I just do 5%? Any thoughts here?

The last place I worked had a deal like this with the added assurance that if the stock price dropped below your purchase price, the company would buy it back at the same price you paid for it. The only way to "lose" money was if you would have gotten a better return from a different investment; you couldn't actually come out with less money than you started (minus inflation, I guess). I would gladly have taken part if I were eligible. Even if the stock price stays the same, that's an automatic 17.5% return.  I would double-check to see if your company has a similar buyback policy; from what I've heard they're pretty common. If so, I'd definitely go for it. How much is up to what your research says about the company's performance and the corresponding risk you think you'll be taking.

You know what - you're right. I forgot about this. I haven't had a new employee orientation yet, but my friend works there told me something along these lines. If this is the case and I could afford it, there's no reason not to just max it out huh.

[ShavinItForLater]

I would advise you to limit your investment into your own company.  Check out the story of Enron for an example of why.  A promise from the company to restore "losses" isn't any good if the company goes bankrupt. 

Apart from that, if for example your company stock price went sideways for 10 years, even a 17.5% "guaranteed" return sucks if it's 17.5% over 10 years.

The rule of thumb recommendation I've heard is that generally speaking you should have no more than 4% of your portfolio in any one company's stock.  I've also heard a possible exception, that if you work there and have really good visibility into the future of the company with insider information, and are really bullish on it, then you could stretch that up to about 10%.

Any more than that and you're taking very big specific company risk, not to mention that if your company went under, that also means you're simultaneously out of a job.  Even really great companies can have bad things happen, and the statistical evidence shows that it's just not worth taking that kind of risk.  If you can immediately sell the stock you buy at a discount, fine, do that and make sure you sell right away to stay under the 4%/10% limit.  If you're required to keep it for any significant length of time, I'd say just don't exceed those guidelines.

[arebelspy]

Still probably worth buying the company stock and selling it as soon as you can.  Find out the restrictions on that.

[MooreBonds]

Still probably worth buying the company stock and selling it as soon as you can.  Find out the restrictions on that.

+1 I'm willing to bet that with a discount as generous as 15%, you won't be the first person to be doing this. :)

And don't be bashful - your executives far above you are getting buku bucks in FREE options handed to them as part of their annual compensation package, so consider your 15% discount as simply part of your annual bonus for being so much lower down the totem pole. And the practice of flipping discounted stock is definitely not unheard of at public companies. Simply read the fine print and understand all of the holding period requirements before you sign up. A typical holding period might be 3 months or so before you're allowed to sell.....

And even if the stock drops a few percent during that holding period, and you wind up "only" making 3%, and you had to hold the stock for (say) 3 months, that still works out to a 12% annual return!  If the holding period isn't extreme, I'd buy as much company stock as possible, and simply constantly liquidate it as soon as possible.

[electricdisco]

Ahh envious.. my parents make just enough so I get no financial aid. Pair that with mortgage... my life is hell. I'm also in the OC...

[kkbmustang]

Make sure you read up on the wash sale rules for stock. I don't remember all the particulars (it's pretty complicated) but something you need to be aware of in the event it would apply to an ESPP.

[unexpectedmoney]

I'm currently wondering how much to contribute to a 401k. I'd like to buy a house ASAP (not that I'm close, but I mean thats my goal). I don't believe there's a first time home buyer clause that would let me withdraw from my 401k, only my Roth IRA, is that correct? If that's the case, should I not max out my 401k? Maybe do something like 10-15%? 22% of my salary would put me right at the limit of $17k.