Author Topic: Help me help my friend  (Read 2014 times)

BORN SAVER

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Help me help my friend
« on: September 30, 2016, 10:48:05 AM »
Hey guys im looking for investing advise and unfortunately I'm still very new to investing. SO I was hoping you could help me out

So he is making some where around 40k maybe a little less.
He wants to get a house some time next year.and wants to start putting away a little in investments as well. And the only debt he has is his car I believe. And can save around 1k a month.I am hoping you guys could give me a check list of where he should start putting his money such as 401k, roths, and etfs and in what order.

Sailor Sam

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Re: Help me help my friend
« Reply #1 on: September 30, 2016, 11:04:57 AM »
Here's the order of investments, from MDM's case study spreadsheet.

WHAT               
0. Establish an emergency fund to your satisfaction               
1. Contribute to 401k up to any company match               
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.               
3. Max HSA                
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level               
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)               
6. Fund mega backdoor Roth if applicable               
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.               
8. Invest in a taxable account with any extra.               
               
WHY               
0. Give yourself at least enough buffer to avoid worries about bouncing checks               
1. Company match rates are likely the highest percent return you can get on your money               
2. When the guaranteed return is this high, take it.               
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.               
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see               
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/            
   if you want even more details on that topic).  See also            
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,            
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845            
   and other posts in that thread about exceptions to the rule.            
5. See #4 for choice of traditional or Roth for 401k               
6. Applicability depends on the rules for the specific 401k               
7. Again, take the risk-free return if high enough               
8. Because earnings, even if taxed, are beneficial               

I'd say the most important thing is to get forward progress, while your friend is still excited. Lots of people look into investing, but only a few of those actually start investing. Sometimes good is better than perfect.

BORN SAVER

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Re: Help me help my friend
« Reply #2 on: September 30, 2016, 01:00:46 PM »
Exactly what I was looking for thank you

robartsd

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Re: Help me help my friend
« Reply #3 on: September 30, 2016, 01:25:56 PM »
MDM's order of investments is for long-term investing/savings. Money he's putting away for a house down payment in about a year should go in a CD or savings account.

solon

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Re: Help me help my friend
« Reply #4 on: September 30, 2016, 09:43:46 PM »
Step #4 is an IRA, but you can't contribute to an IRA if you have access to a 401k, right?  IOW, you lose the benefit of the IRA if you can contribute to a 401k. In that case, it seems like you would skip step 4.

MDM

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Re: Help me help my friend
« Reply #5 on: September 30, 2016, 10:38:47 PM »
Step #4 is an IRA, but you can't contribute to an IRA if you have access to a 401k, right?
Not true.  See http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits.  Your deduction may be limited, but not necessarily.


MDM's order of investments is for long-term investing/savings. Money he's putting away for a house down payment in about a year should go in a CD or savings account.
Yes.  It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.   
If you are renting, you may not be throwing away as much on rent as you might think.  See   
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ for some thoughts.