Author Topic: investing advice to young mustachians  (Read 3416 times)

rtmc91

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investing advice to young mustachians
« on: March 02, 2015, 04:47:59 PM »
I'm 23 and after a little over a year of Mustachian living have accumulated about 15k idle employees. I'm fortunate enough to have zero debt. I maintain a credit card to build credit and its paid early every month. I've got a pretty good handle on living frugally and saving 50% plus of my take home, despite only working part time while I finish school, but I'm not sure what to do with the cash that's building up. I know the second half of early financial freedom is investing, and MMM seems to be a strong advocate for low cost EFT traded funds. I have zero prior investment experience.

I'm wondering what investing advice more experienced Mustachians could share with someone in my position. What sort of ratio of cash to investments should I maintain? Given my small net worth, what type of assets should I invest in? Should I open a tax deferred account like an IRA?

I suppose I'm asking for the best financial advice on the investment side of building wealth that more experienced Mustachians would give someone like me trying to get as early a start as possible. Feel free to leave investing advice beyond what I've asked if it would be relevant to my position. Thanks for the help.

Cwadda

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Re: investing advice to young mustachians
« Reply #1 on: March 02, 2015, 05:11:02 PM »
Can you give us a few details? Your income and expenses?

It'd be good to open an IRA but details first would help us guide you to a good plan of action.

rtmc91

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Re: investing advice to young mustachians
« Reply #2 on: March 02, 2015, 05:17:31 PM »
Sure, income right now is only about 25k a year, since I'm working part time. I'm a full time student. Monthly expenses total about $850. Take home is about $1600. I was working full time last year and earned 45k a year and at that time put about 1500 in savings a month.

Expected graduation is May 2016 and expected gross income is about 55-65k after graduating.

Thanks

wtjbatman

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Re: investing advice to young mustachians
« Reply #3 on: March 02, 2015, 05:33:31 PM »
First off, keep 3-6 months living expenses in an emergency fund. Hold the emergency fund in a "high" yield (likely online like Ally or Capital One 360) savings account.

Does your job have a 401k with decent (low cost index funds) investment options? Then put as much of your income into that as possible. Choose a target date fund or invest in a diversified total market fund.

If it doesn't, or you don't have access to a 401k, then put $5500 into an IRA (either Roth or Traditional, likely Roth at your current income) at Vanguard. Invest in a Target Retirement Fund that matches your desired AA. At your age, probably something like the 2060 or 2055 fund.

Recommended reading:
http://www.bogleheads.org/wiki/Main_Page
The Bogleheads Guide to Investing
http://jlcollinsnh.com/stock-series/

GizmoTX

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Re: investing advice to young mustachians
« Reply #4 on: March 02, 2015, 05:37:37 PM »
Put the $5,500 into a Roth IRA for 2014 before 4/15/15. Then you can do it again for 2015 when you know your employment status.

rtmc91

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Re: investing advice to young mustachians
« Reply #5 on: March 02, 2015, 05:45:30 PM »
Put the $5,500 into a Roth IRA for 2014 before 4/15/15. Then you can do it again for 2015 when you know your employment status.

I already filed my 2014 return before I knew about the deduction unfortunately. I might be able to file an amended return to get the deduction.

rtmc91

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Re: investing advice to young mustachians
« Reply #6 on: March 02, 2015, 05:47:30 PM »

Does your job have a 401k with decent (low cost index funds) investment options? Then put as much of your income into that as possible. Choose a target date fund or invest in a diversified total market fund.

If it doesn't, or you don't have access to a 401k, then put $5500 into an IRA (either Roth or Traditional, likely Roth at your current income) at Vanguard.

I don't get any benefits at my job since I'm part time. Sounds like that eliminates 401k as an option for now. What the reasoning behind choosing a Roth at my level of income?

Thanks for the suggested reading as well.

GizmoTX

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Re: investing advice to young mustachians
« Reply #7 on: March 02, 2015, 06:02:38 PM »
A Roth IRA doesn't qualify for a deduction, so the fact that you already filed doesn't matter. At your level of income, you don't need/can't use the traditional IRA deduction. A Roth allows your investment to grow & eventually be taken out tax free.


rtmc91

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Re: investing advice to young mustachians
« Reply #8 on: March 02, 2015, 06:13:33 PM »
A Roth IRA doesn't qualify for a deduction, so the fact that you already filed doesn't matter. At your level of income, you don't need/can't use the traditional IRA deduction. A Roth allows your investment to grow & eventually be taken out tax free.

Ok that makes sense. Whats the level of income appropriate to take advantage of the traditional IRA? I'm wondering for when I graduate next summer and start earning about 55-65k. I'll also likely have the option of contributing to a 401k through my employer after graduating. Would you recommend an IRA or a 401k? I'm not very clear on the differences or benefits of either.

Thanks.

FIace

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Re: investing advice to young mustachians
« Reply #9 on: March 02, 2015, 09:36:21 PM »
As a single tax filer, your first 10000 of income is tax free (standard deduction plus 1 personal exemption).  Up to the next 38000 of income is the 15% tax bracket.  So about 48000 of income would put you at the top of the 15% bracket.  Anything over that will be taxed in the 25% bracket until you really start making a lot more money.  In my opinion, the Roth vs. Traditional IRA oftentimes hinges on whether you are in the 15% bracket or above at the time of the contribution.  The Roth for lower earners (15% and below).  The Traditional for higher earners (25% and above), where you will be able to get the most benefit from the up front tax deduction.  At higher income levels though, the Traditional gets phased out before the Roth, so sometimes the Roth comes back into play.  My suggestion is to contribute to the Roth for both 2014 and 2015 because your contributions will be made while you are in the low tax brackets.  When you start making 55-65k, you would want to fund your 401k first, especially for the company match.  Any extra money after the 401k could then be put into the IRA or taxable account of your choice.