Author Topic: Just starting out with investing need some help  (Read 3017 times)

Kevin S.

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Just starting out with investing need some help
« on: August 18, 2016, 11:00:40 AM »
So I plan on buying the VTSAX Index fund once I have 10k but for now I do not.

What do you guys recommend for investing - I will be roughly a year away from having the 10k to invest in VTSAX.

I match my 401k currently.

My debt of 2k will be paid off this month. After that I will have zero debt ! Pretty stoked for that !

After my debt is paid off what should I invest in ? I will have roughly $ 1500 a month to work with fyi

Thanks all,
            Kevin. 

forummm

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Re: Just starting out with investing need some help
« Reply #1 on: August 18, 2016, 11:08:51 AM »
You can buy VTSMX with only $3k. It's the same as VTSAX but with a slightly higher (but still very small) expense ratio. When you get to $10k you can convert to VTSAX tax free.

Kevin S.

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Re: Just starting out with investing need some help
« Reply #2 on: August 18, 2016, 11:11:50 AM »
You can buy VTSMX with only $3k. It's the same as VTSAX but with a slightly higher (but still very small) expense ratio. When you get to $10k you can convert to VTSAX tax free.

Awesome ! Thank you for the info.

DrF

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Re: Just starting out with investing need some help
« Reply #3 on: August 18, 2016, 12:26:56 PM »
Kevin,

1) Do you have an emergency fund?
2) Are you comfortable keeping your emergency fund invested in VTSAX?
3) You say you are "matching" your 401k, does this mean "only enough to get the XX% company match"?
4) Likely, the best option for you is to put a small portion ($100-200) of your extra $1500 into whatever taxable account fund you buy. This can be withdrawn in the future for major purchases/emergencies.
5) The rest of the $1500 would likely be best put into your 401k (depending on your answer to point #3) to lower your tax burden and allow you to save more. In fact, if you added more to your 401k every month you could likely do ~$1700-1900 and still have the same take home pay.

Kevin S.

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Re: Just starting out with investing need some help
« Reply #4 on: August 18, 2016, 04:02:42 PM »
Kevin,

1) Do you have an emergency fund?
2) Are you comfortable keeping your emergency fund invested in VTSAX?
3) You say you are "matching" your 401k, does this mean "only enough to get the XX% company match"?
4) Likely, the best option for you is to put a small portion ($100-200) of your extra $1500 into whatever taxable account fund you buy. This can be withdrawn in the future for major purchases/emergencies.
5) The rest of the $1500 would likely be best put into your 401k (depending on your answer to point #3) to lower your tax burden and allow you to save more. In fact, if you added more to your 401k every month you could likely do ~$1700-1900 and still have the same take home pay.

Yes I have an emergency fund.

Why does my emergency fund need to be in VTSAX?

I'm matching the 6 % of my employer currently yes.

Why do you not recommend investing in a index fund but rather adding to my 401k ?

MDM

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Re: Just starting out with investing need some help
« Reply #5 on: August 19, 2016, 12:27:40 AM »
Why do you not recommend investing in a index fund but rather adding to my 401k ?

If you can, you should invest in a low fee index fund within your 401k.

Things get less clear if you have poor investment options within the 401. 

Here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   
   
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.
   
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b -
   due to penalty-free access to 457 funds at retirement, even if younger than 59 1/2.
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
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   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   
   
Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),   
   putting money into that business might come somewhere before, in parallel with, or after step 5.

DrF

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Re: Just starting out with investing need some help
« Reply #6 on: August 19, 2016, 07:50:50 AM »
I love you MDM!

Kevin, you can also find more reading material on MADFIentist.
http://www.madfientist.com/retire-even-earlier/

DrF

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Re: Just starting out with investing need some help
« Reply #7 on: August 19, 2016, 08:06:54 AM »
Why does my emergency fund need to be in VTSAX?

Also, Interest Compound (and likely others) have been posting about the stupidity of keeping an emergency fund in cash. Basically, it never pays to keep cash as the returns you receive through investing will always provide extra cushion.
http://forum.mrmoneymustache.com/investor-alley/good-investment-for-emergency-fund-money/msg1064090/#msg1064090

more here:
http://forum.mrmoneymustache.com/investor-alley/where-to-keep-emergency-funds/msg1053087/#msg1053087
« Last Edit: August 19, 2016, 08:11:08 AM by DrFunk »

sisto

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Re: Just starting out with investing need some help
« Reply #8 on: August 19, 2016, 11:37:41 AM »
You can buy VTSMX with only $3k. It's the same as VTSAX but with a slightly higher (but still very small) expense ratio. When you get to $10k you can convert to VTSAX tax free.
They automatically converted my VTSMX to VTSAX for me when I went over $10K

Mother Fussbudget

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Re: Just starting out with investing need some help
« Reply #9 on: August 19, 2016, 12:21:31 PM »
You can buy VTSMX with only $3k. It's the same as VTSAX but with a slightly higher (but still very small) expense ratio. When you get to $10k you can convert to VTSAX tax free.
If your brokerage account is at Vanguard, they will automatically convert $10K in VTSMX to VTSAX (happened to me).  Other brokerages may do the same thing - I believe Vanguard drives this conversion.

Djeayzonne

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Re: Just starting out with investing need some help
« Reply #10 on: August 22, 2016, 04:13:56 PM »
Why do you not recommend investing in a index fund but rather adding to my 401k ?

If you can, you should invest in a low fee index fund within your 401k.

Things get less clear if you have poor investment options within the 401. 

Here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   
   
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.
   
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b -
   due to penalty-free access to 457 funds at retirement, even if younger than 59 1/2.
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
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   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   
   
Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),   
   putting money into that business might come somewhere before, in parallel with, or after step 5.

I am just getting started with this frugality philosophy with the goal of financial independence, and I keep seeing this recurring theme that I don't quite understand. Can you explain why we want to prioritize money we can't touch until we are old when the goal is to become financially independent ASAP?

Interest Compound

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Re: Just starting out with investing need some help
« Reply #11 on: August 22, 2016, 06:15:28 PM »
I am just getting started with this frugality philosophy with the goal of financial independence, and I keep seeing this recurring theme that I don't quite understand. Can you explain why we want to prioritize money we can't touch until we are old when the goal is to become financially independent ASAP?

Welcome to the forum!

Check out our top "sticky" thread: How to withdraw funds from your IRA and 401k without penalty before age 59.5

Feel free to post if you have more questions! :D

Djeayzonne

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Re: Just starting out with investing need some help
« Reply #12 on: August 22, 2016, 09:05:17 PM »
Thanks for that. Not sure it really applies to me, so with that and some other questions, I will start a new thread.

Kevin S.

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Re: Just starting out with investing need some help
« Reply #13 on: August 23, 2016, 10:32:57 AM »
So my work only offers 401k. What do you think is my best option ? I am currently maxing out my 401k


DrF

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Re: Just starting out with investing need some help
« Reply #14 on: August 23, 2016, 10:41:04 AM »
Now max out your Traditional IRA for the year.

After that, I'd open a taxable brokerage account and invest the remainder in low cost index funds (etf or mutual).