When it comes to investing, I want to get into one of the Vanguard index funds. These seem to make the most sense to me; however, should I also be getting into 401K and IRA as well?
Step one: look up what these terms mean. The first
super super important rule of investing is to know what you're investing in.
A 401(k) is an employer-provided retirement account. Does your employer offer one? If so, do they offer matching? Many employers that offer one have a deal going wherein if you elect to put some fraction of your paycheck into your 401(k) account, they'll also add more (think of it as a free raise to be used for this purpose). For example, if I put 4% of my paycheck into my company 401(k), my employer will put the same amount in as well - on top of my pay! If I add more after that, though, they don't keep adding more. In 2013, you can contribute up to $17,500 to a 401(k), provided an employer offers one. Any employer matches
do not count towards this limit.
An IRA is an account you set up yourself at a place of your choosing - banks offer them, as do many brokerages and mutual fund houses. I'm a big fan of Vanguard as a place for your IRA. I suggest
not using a bank for this service. In 2013, you can contribute $5500 to an IRA.
When you leave an employer who had a 401(k) that you contributed to, you can typically move the money to an IRA (Roth to Roth, traditional to traditional). This does not count as a contribution.
You should also know the distinction between a traditional and Roth variation of each. Traditional is "pre-tax" : the money you contribute doesn't count as earned this year, grows tax free, and is taxed as income upon withdrawal. If you're living frugally now and have a higher income, it generally makes sense to go with traditional as much as you can; in my case, the taxes I save are at the 28% federal level and 9.3% state level; I will almost certainly be in a lower tax bracket when I withdraw money from these accounts!
By contrast, a Roth designation is just like buying something with your paycheck: it's after tax. However, withdrawing from the account post-59.5 (or contributions at any time, with minor restrictions here) is tax-free (since it's already been taxed). If you're at a low income now and expect to be at a higher one in retirement, this is a good plan. It's also good to go Roth for an IRA if your income is such that you can't deduct (take as pre-tax) the contribution to a traditional IRA (the limit is around $60K for 2013 - if you earn more than that, you can't deduct the entire traditional contribution. Look this up if you're near that and are thinking of making a traditional IRA contribution).
Now, I said these are
accounts - just like you have a bank account. You can put money into these accounts, and you can invest in things with that money. Then there are rules for how and when you can take money out. My suggestion is to have your money in low-cost mutual funds; in particular, I think index funds are the best way to go with this. In your IRA and taxable accounts, you have full control of where your money goes, and can pick a place that has these. If your employer has a 401(k), they might have great options and they might have poor ones. I've seen employers (Google comes to mind) that have 401(k) options that are far superior to anything you can get as a retail investor. I've also seen employers who have such poor 401(k) options I'm surprised they haven't been sued for breach of fiduciary responsibility.
Also, the $8k you have saved up: is that your emergency fund, or is that on top of said emergency fund? Unless your income is super secure, I suggest keeping a few months' expenses in the bank that you don't invest, but rather keep as a form of insurance.
Honestly I'm not sure how much money I would be able to contribute to three separate accounts and my goal is to be FI in the next 10 years. In order to make sure I start seeing some return on my investments. I would think that the taxable index fund makes the most sense because they I could start pulling out some money in like 10-20 years once I have a sizable amount in there right?
Yes, taxable investing (whether in mutual funds, real estate, or other things) is necessary in order to achieve FI before 59.5 (with a few exceptions). However, don't disregard the "normal" retirement accounts : the tax-free growth is useful and you do plan to live past 60, right? Fortunately, it's quite possible to contribute to "normal" retirement accounts and also do taxable investing. You might not follow the "normal" suggestions for the order to do this, but that's fine.
The "normal" (for those planning to retire at or after 59.5) suggestion is to contribution enough to your 401(k) to get the company match first. If you have more money to put towards retirement, put it towards an IRA until that's maxed out. Got more? Go back and add to the 401(k) until that's maxed out. Only then do you consider taxable investing towards retirement. This makes sense if your 401(k) isn't excellent and if you plan to retire at 59.5 or later.
Regardless of when you intend to retire, I suggest learning about investing -
first. Since you're interested in index funds, check out the
Bogleheads Wiki for some good information. I'd also like you to find out if your employer offers a 401(k), what the fund choices within it are, and what (if anything) the match amount is. If there's a match, sign up for at least that much ASAP! We can deal with what to put the money into later.