Author Topic: Where to start?  (Read 1799 times)

kandj

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Where to start?
« on: September 17, 2015, 07:17:34 AM »
I've got a 401k started already where I already contribute 10% with an employee match of 3%. They thought I was nuts for going so high, but now I know I should go higher. In order to max out next year I will have to bump to about 30-35%. I think we can do it but as we are saving for a down payment on a house, it might fall a little short. Would that money be better placed elsewhere? We live on only my income, my husbands smaller income has been accumulating in the bank and we are going to invest a large chunk soon, in an index fund and Roth IRA for him. We like what we have seen of Betterment and are going to begin investing his income there.

Back to the original question, does it make more sense to put my income savings into a roth or index fund or should we focus on maxing out my 401K?

wienerdog

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Re: Where to start?
« Reply #1 on: September 17, 2015, 08:07:17 AM »
You always max out the 401k first for the tax advantage.   I was in the same situation back in April.  I was working for a company that let me go where i wasn't maxing the 401k but I put enough in to get their match.  After l lost my job I did a hard look at finances as I left a good job to go to that company as I thought it was more stable than where I was at.  Luckily I landed on my feet a couple months later and I am now pulling a much higher rate to get the 401k caught back up and actually max it by the end of the year. 

After the hard finance study and finding MMM I have found that next year I will probably keep the same rate and increase it more to max it out even earlier in the year just in case.  You never know anymore.  Before MMM I didn't think I could do it but sitting down and tightening the belts has shown me I can and then some.


(Edit)

Not trying to sway you as I do like Betterment as I put some money in when I was transitioning.  I am using their emergency fund feature (40/60 split) for money I had sitting in savings and started a general wealth building taxable account (90/10 split).   Their interface is top notch and if you want something on complete auto pilot they are probably the way to go with the flexible deposit.

That being said I will probably be pulling my money from them and going with Vanguard.  I have started a Roth and a taxable account there and have found that although the Betterment interface and everything else about it is nice I feel I can do just as good with a similar asset allocation that I can do myself.  The only real reason is because of the additional betterment fees and that is money that I would lose.  It really isn't much as if you could save 100,000 a year for the next 10 years with Betterment the fees would only amount to 5500 (with no gain in your money).

You might read around here some and decide if you want to roll your own with somebody like Vanguard or if the hands off approach is better for you then I would fully recommend Betterment.
« Last Edit: September 17, 2015, 08:26:50 AM by wienerdog »

kandj

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Re: Where to start?
« Reply #2 on: September 17, 2015, 08:35:17 AM »
Thanks for the input!

We looked at Vanguard and Betterment and right now, we don't feel knowledgeable enough to want to manage our own. The fees with Betterment are low and it seems to be very low key and easy. That said, once we get in the groove and learn a lot more, I could see why we might want to move towards Vanguard.
We are both new to investing (obviously) and it worries me a tiny bit since I haven't grown up in a family that invests, but it seems to be the only choice really for us to be able to ever retire. We are looking forward to learning through the next few months and starting to increase our net worth.

wienerdog

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Re: Where to start?
« Reply #3 on: September 17, 2015, 08:40:08 AM »
You should also read up on these as they were really helpful to me months ago:

http://www.madfientist.com/

Study this to see how maxing the 401k can help:

http://www.madfientist.com/front-loading/
http://www.madfientist.com/guinea-pig-experiment/

Also a bunch of great info here:

http://jlcollinsnh.com/stock-series/

MDM

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Re: Where to start?
« Reply #4 on: September 17, 2015, 10:05:14 AM »
Back to the original question, does it make more sense to put my income savings into a roth or index fund or should we focus on maxing out my 401K?

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.   
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).
Also, these assume you don't have a need for short term savings.  If having a house down payment is important, insert that wherever it fits for you.
   
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, 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.)
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