Start to early investments - 401k, Roth IRA, Mutual Fund

Hey guys,

I have a few questions on investing and hopefully you can answer them. I am starting my first job and have just recently graduated from college. I am debt free, own a car (reliable) and making a salary of $65,000.

Besides fully contributing into my companies 401k (7%) and getting it matched I would like to start a Roth IRA and possibly invest some into a mutual fund. 

I plan to basically use the mutual fund as my "emergency money" and let it sit only unless I need to get the money for emergency purposes. Is this a good strategy? What are some good companies you recommend? I have looked at Scotttrade and they look like a reliable company with no fees unless I plan on trading stocks ($7 per trade).

Should I just instead skip the Roth IRA and only contribute the 401K?

Clue me in and thanks for the answers

Tags: 401k, investing, investments, ira, roth

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Emergency money, usually 3-9 months worth of living expenses, shouldn't be in an account that charges a fee to put cash in your hand, or that will mean taxes if you do that. There are penalty-free CDs (certificates of deposit) for this. Last I checked, they paid about 0.05% more in interest than regular savings accounts. That wasn't worth the hassle to me, and I keep my emergency fund in a regular savings account.

If you want to invest beyond the 7% match with your 401(k), you can just contribute more to your 401(k). It just won't be matched. At some threshold (percentage of income), it also becomes taxed, so look into that. This is a good option for investing if you like the options with your 401(k) and also if you don't want tax time to mean a big check either to you to the IRS or from the IRS to you. Your employer is aware of your tax strategy (which is also your investment strategy), and so it's calculated into your with holdings and taxes each pay period.

If you don't like your 401(k) options, my family likes Vanguard for !RAs. This is based on low fees, high returns, breadth of investment options, and ease of use. Breadth of investment options is important to us, as my family includes investing professionals. I don't like that Vanguard has no offices; everything is online.

Given that people have taken 1-2 years to find a new job, I have started to wonder if the right emergency fund amount needs to be far greater then 3-9 months.  But 3-9 months would cover shocks such as appendicitis or car wreck.

 

3 months was the pre-recession rule of thumb. 9 months is the most "professionals" have dared to recommend now, that I've seen. If I had to justify the professionals' thinking, I'd consider:

*At some point after losing your job, you're going to adjust your lifestyle; prudent people will adjust immediately with regard to eating out, vacations, etc. So "9 months" could easily pull you through 12 months.

*You have to balance liquid savings with investment opportunities. 12 months' salary is a down payment on a house for a lot of people.

*Likewise, eventually tax penalties and HELOCs don't seem so bad. Long-term unemployment is just that, and you can strategize within it.

*Strategizing during unemployment is a particular practical key when you look at the 2012/2013 numbers showing the newly unemployed are generally finding jobs quickly.

I don't like car wrecks and appendicitis as examples here. You can get insurance for those things. It's usually better to just have the savings, but the very risk-adverse or good investors might be happier with insurance. I do think people should have their health insurance out-of-pocket-max in liquid savings (or an invested HSA). Besides unemployment, the "professionals" talk about emergency funds for car and home repairs. I also think about family emergencies if your family is far away. (Conversely, if your family is nearby and friendly, you could save during unemployment by living with them, so you wouldn't need as big of an emergency fund)The reality is there's no way to know for sure how much you should have in liquid savings. My feeling is most people who even think to ask themselves the question will either be alright, or will be hit by something so big, no amount of savings could spare them.

Rebekah, 

As usual you have very good points!.  Losing ones job will adjust one's lifestyle.  I will take note of your idea that insurance will cover the cost. Many policies only cover 80% of the bill.  That bill can still be a shock to the finances.  Yes you can pay things off over time.  But having the padding such as 3 -9 months income would let you just pay it off and rebuild the padding.

My comment was mostly focused on the 3-9 months rule of thumb.  There is a balance everyone should really decide for themselves.  I was also thinking of the costs to transition across the country/world.  Those costs can include owning two properties etc...  

Now as to how liquid ones assets are is another matter.  I would suggest 3 months cash the rest in CDs  But again each needs to factor their own risk and reaction factors. 

Your mutual fund is not your emergency money.  You would face heavy penalties for removing the money if you needed it.  I would build up an emergency money fund and set that aside.  After that I would bet the market.  What I mean is invest on in mutual funds that will chew up your income in fees but rather choose a couple of index funds and invest in those.  They are not managed funds so they don't have overhead fees.  You are investing in the bar that everyone measures their mutual funds against.  Some funds "under perform" or end up below this bar.  

Do the math yourself,  but I found it made sense to bet that the stock market or the S&P 500 would gain in value and that it was nice to have all the return reinvested rather having a chunk of it skimmed off for "management".

Thanks for all the replies guys!

I would say start a Roth IRA and put in as much as you feel you are able. Think of it this way: With a 401(k) you pay taxes when you take the money out. With a Roth IRA you pay the taxes now. Think taxes are going to go down over the next 50+ years?

For emergency money just open a savings account at a bank. I have both a savings account and a mutual fund my grandmother opened for me over 10 years ago. I think my mutual fund has lost money in the last year, so it isn't a good option for emergency funds.

Paying a financial planner once every year or two might not be a bad idea. You will need to be sure to build up as much retirement savings as possible, because Social Security will probably not be around in its current form when you retire. Don't plan to have it there to help.

Thanks for the info! I am definitely not planning for SS to be around for me or anyone in the near future! (that's another discussion). 

So basically start my company 401(k), Roth IRA, have a checking account, savings account (emergency $$), and then potentially with enough additional money start a mutual fund?

A mutual fund is up to you. From my understanding of how they work if you get in now there is the potential for gains as the economy improves, but if things take a down turn you could lose that money as well.

Think of mutual funds as a bunch of people going together and buying stocks or something. So that group as a whole will either do well or lose money.

I would suggest finding a few companies that do mutual funds and seeing what sort of documents they put out showing the fund's performance.

Your 401(k) and IRA will probably be mutual funds. Maybe you can find an IRA administrator that lets you choose individual stocks or other commodities, but I can't imagine getting excellent long-term returns that way, if only because you'll be charged for each trade.

People who are very interested in investing buy individual stocks, and certain amounts of bonds, etc. It takes a lot of knowledge and a lot of work to do well. A mutual fund allows you to buy and trade stocks and bonds according to a certain theme (blue chip stocks, state and local bonds, foreign emerging economies, European big industry, maximum returns in 40 years, etc.) without doing that work. The fund administrator makes the trading decisions. You just invest the cash.

Standard information from a 401(k) or IRA administrator on mutual funds will contain the theme or goal, the inception date, the approximate value of the entire fund, and performance numbers over some period of time. Fine print will tell you the exact investments of the fund, a narrative of the investing strategy, and losses and returns for each year from the fund's inception.

Because mutual funds invest in uninsured investments - stocks, local bonds, etc. - they carry risk. There's no investment with no risk that also beats inflation.

Good thread.  I can use some of this info myself.  I can't speak to the ins and outs of the various options, but I'd suggest keeping at least a portion or your savings in the form of a gold-backed IRA or in physical gold or silver.  I personally don't trust investments in the stock market, so holding physical gold/silver is how I hedge against a loss if the stock market tanks (which I believe is inevitable given that its current high is directly related to the activity of the Federal Reserve).  This is more of a doomsday strategy though - protection against risk and inflation - so best for maintaining what you have, not for growing it.

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