Want to start investing- not sure where to start

[thepokercab]

Hello All-

I'm new to the forum, and new to the mustachian way of life!  After finally being awakened though, i'd like to start investing, but not really sure where to start. 

My wife and I just finished paying off our credit cards and student loans and have built up a stash of around $7,000, and through the great ideas on this forum are looking to save around $1,800 a month going forward (or 50% of our income). I also just started to contribute 10% to a Simple IRA through my employer who is matching at 2%. 

I guess my questions are:

1) Should we keep a bunch of cash in a savings account as a "rainy day fund" before investing anything? My wife stays home with our two kids, and I have the only job.  Its pretty secure, but its in politics so you never know what the next election will bring. 

2) If we should start investing- where should we start?  I've been reading a lot about Vanguard index funds and people seem to like them. 

3) We'd also like to purchase a house at some point..  should we save up for a down-payment before starting to invest? 

Thanks everyone!

[the fixer]

This all depends on your goals, and how rigid they are. Investing in stocks is best for "long-term money" because of the volatility in the market. But when you really look at it, "long-term" really just means "not necessarily today."

If your goal is early retirement, buying stock mutual funds or ETFs makes sense. You need all the help you can get in terms of return, and if you're unlucky and the market tanks right as you're accumulating that last dollar for FI, no worries; you'll just need to work another year or two while you wait for things to recover.

Contrast this with, say, a "new roof fund" for a house. You may not know exactly when you'll need the money, but when you need it you NEED it! Stocks are a poor place to keep this kind of money unless you have so much invested that you can afford to take a loss selling to get what you need.

So what you need to figure out is, how badly are you going to want to buy a house? Are you going to approach it opportunistically, where you'll continue to rent until the RE market and stock market are both in a favorable condition for you to buy? Or, are you dead-set on buying a house in a particular year and are willing to give up a bit of return in exchange for guaranteeing you'll make your goal?

[aj_yooper]

Good work on paying off your student loans and credit card debt and building up a liquid stash!  You are also starting long-term investing with the Simple IRA;your employer's contribution gives you a 20% gain before you even decide where to place the IRA funds.  And, the money grows tax free, but LT IRA means, as you know, you can't touch it without Big Penalties. 

Do you have the IRA with a low cost provider, like Vanguard?  Saving investment expenses will really help you in the future;please stay away from the high cost IRAs, as offered by local insurance agents or big name brokerage houses.  If the money is not with the likes of Vanguard, V will be happy to help you move it to them. 

If I were in a one-paid employment household, I would be cautious and build up my cash to about $15,000 before considering other longer term investing.  Cash is King.  Think of the 15K stash as part of your family staff support, operations, or security staff, while your LT investments are your financial independence employees.  Each $ worker bee/employee supports the goal of FI. Go to websites like Vanguard or Bogleheads to learn more; it all takes time, but is worthwhile. 

   

[JasonK]

I think you're definitely on the right track.  My advice would be:

1) Yep, step one is to fund a rainy day fund.  If you don't have a savings account at your current bank set one up to keep the account 'separate'.  I wouldn't mess with money market funds given the low rates of return, no FDIC insurance, but that's just me.  This may be 3 months living expenses, may be 6 months.  Depends on your comfort level, risk tolerance, etc

2) 100% agree on Vanguard funds.  I don't put my stock market investments anywhere else and you shouldn't.  Continue to read about them.  I'd suggest the Gone Fishin' Portfolio book, and the blog by JL Collins as a start. 

3) As far as allocating your excess cash flow after the emergency fund is set up, maybe save 1/2 of your excess each month into a New House Fund and the other half in Vanguard.   Keep in mind you'll need to save up $3K per Vanguard fund to get started unless you do ETF (and I wouldn't).  Start with the Total Stock Market Index Fund (VTSAX).

4) Keep in mind, these Vanguard investments are liquid, so you can draw upon it in cases of emergencies.  In other words, this supplements your rainy day fund.  But I'd suggest you plan on NEVER selling them.  At least for a long time.  Jumping in and out of the market will kill you.  That's why I recommend building up the house fund separately, rather than liquidating Vanguard funds when you are ready to buy. 

5) Stay away from buying individual stocks for a long time.  If you ever do, make sure it's 'play' money, do  a LOT of research and focus on dividend paying stocks.  There are a lot of FI blogs about dividend stocks, but this requires a lot of research.  Start with Vanguard.

6) Consider residential real estate investing at some point, depending on where you live

Jason