I think the ‘Second source of income’ thread took a turn towards a topic that deserves its own thread, that is how to go about investing. For the record, I’m not selling anything and have no financial interest in whether anyone does or doesn’t follow the advice given here. I hope to get a lot of input of what to do, and probably more importantly, what not to do from all the other members. So, my take in order of importance. If a step doesn’t apply in your specific case, ignore that step and go to the next. Several links are embedded to define terms and reference what I’m saying:
Put into your company’s 401k whatever is required to gain their maximum match. This is 100% return every two weeks (if it’s dollar for dollar match) which is the best deal you’ll every see. This really is a case of free money and you’re a financial fool if you’re not taking advantage of it.
Pay off any high interest debt and don’t accumulate more of this debt. By high interest, I mean anything more than about 5 or 6%. Some would say this should be #1 on the list, but I can’t turn down free money (see my #1).
The next extra $6,000 you can come up with should go to a Roth IRA. Some would advise saving an amount for an emergency fund, but the Roth lets you both save and have your emergency fund. You’re funding this investment account which will grow tax free forever - this is good. AND if that dreaded emergency does come up, you can always remove your contributions (not any growth that has occurred) from the Roth with no tax (you’ve already paid tax on the contributions) or penalties. If no emergency, then it continues to grow tax free forever. There are max income limits for contributing to a Roth, so check on that before you do it.
If you still have more money to invest, go back to the 401k and contribute to it up to the max ($19,000 for 2019). If your plan offers ‘Designated Roth Contributions’, I would recommend putting the remaining amount up to $19,000 there rather than in the normal part of the 401k.
If you STILL have money to invest (good for you by the way), I recommend looking into your company’s 401k plan to see if they allow you to make after tax contributions. Doing this, you don’t gain a tax benefit now but the money will grow tax deferred until you take it out.
The combination of all these accounts (401k, Roth IRA, Traditional IRA [not previously mentioned], designated Roth contributions) cannot exceed the IRS’s limit, $56,000 for 2019.
As far as what to actually buy with this money you’ve put away, I advise S&P 500 index funds totally if you’re young and the target date funds as you get to within 10 years of retirement. A comparison of the two is here.
The main point of contention some will have with the above strategy is my advice to direct your funds to the Roth and Designated Roth categories when Traditional IRA and 401k avenues were available. Basically, my strategy has you pay your taxes now on only the contributions and never pay taxes on the account again. The alternative allows you to not pay taxes now on the contributions and pay taxes later (when you’re 59.5 years old or older), at which time you’ll pay taxes on both the contributions you made and any growth that occurred. I advise this (and practice this myself) due to my belief that tax brackets will be higher in the future. With 20+ trillion in debt and socialist winds of change blowing stronger everyday, I think higher tax rates in the future are all but certain.
While I agree with the ‘get rich slow’ concept, I cant agree with the order of your steps. Money management is 90% will power. If someone can’t resist buying the latest toy or house that’s out of thier budget, they’re going to be broke.
I’d encourage everyone to follow Dave Ramsey’s 7 baby steps. No, you do not need to buy the course he sells. It’s pretty much all available online. Paying off debt alleviates a lot of stress, and should be a priority over investing.
But ultimately, you can’t beat tying your investments to an index fund. I’ve seen so many co workers lose money on “sure bets” it’s sad. Professional investors can’t beat the S&P 500, so don’t try to yourself.
I agree on the HSA. It’s a great way to utilize your money. You may not need it is as young person but as you get older, and medical expenses increase, it’s nearly inevitable that you will use it. I’m sure a good investment expert/mariner on the forum here can discuss the utility of an HSA in light of the fact that many Americans go bankrupt over medical bills.
As do I. The problem is that it’s only available if your medical plan is officially designated as a high deductible plan. I didn’t think those were that common, but sounds like I could be mistaken on that.
I agree with that in most cases as when you’re investing, you’re putting money into something hoping to get a return. In the case of company match, you’re getting a guaranteed return at the rate of 100% every two weeks (in the case of dollar for dollar match). That positive rate of return is greater than the interest you’re paying on your debt (at least it better be), so I would prioritize it first.
That’s not to say ignore your debt. Of course make the minimum payments, and every extra dollar you have (after the amount required for 401k match) should be to get rid of the debt.
Anyway, like I said, there are always different opinions and this thread will get everyone to post theirs I hope.
I agree with you somewhat about Ramseys investment advice. But if a person is smart enough to follow Dave Ramseys proven plan to become debt free they should be smart enough to continue growing financial wise & venture into more sophisticated, profitable forms of investing later. He knows his audience well & he tells them exactly what they need to hear & about as much as they can handle during their financial baby steps.
One thing I agree 100% with Dave Ramsey about for everyone is having a 6 months to a year emergency fund in cash. I have worked with dozens of guys who were 401k & real estate rich who had to take loans or liquidate investments with penalties & at loses because they lost there incomes for short periods of time for various reasons. Unexpected events & emergencies are what causes people to lose their fortunes. Planning for unexpected events & emergencies that can happen today should take precedence over investing for 20 years from now.
Sorry what about saving at least 15% of your income for retirement in a reliable index or mutual fund is bad advice? Sure it might not help you if your 60, but for anyone smart enough to start out in thier 20s it’ll make them a millionaire a couple times over.
That’s what’s nice about the Roth IRA. You can do both at the same time. Save and invest in a tax advantaged account, and IF that emergency happens, you can withdraw the contributions you previously put in with no new taxes and no penalties. And in the more likely case that you don’t experience an emergency, then it continues to grow in the IRA.
It’s true that you’re limited to putting $6k per year there so you can also set some aside for your emergency fund, but it doesn’t have to be only this or only that. Putting off starting investing is probably the most common mistake that people (myself included) make/have made.
Always check in to what Vanguard has to offer - their Dividend Growth Fund is excellent - for now. Will be watching this presidential election with great interest as I think it will have a HUGE effect on the stock market. That said, I worry about having all my investments in the stock market - since I do all of the above (wish I had been doing that in my early 20’s) I’m looking in to investment properties for a little passive income. Anyone else have luck with this? I guess it’s all about what the rents are doing where you are investing (or in Colorado, at least - rents are high but everyone seems to be renting in these fancy apartment complexes and not condos/houses these days soooooooo)
Having 6 months to one year of living expenses set aside before making long term retirement investments is VERY important especially if you’re a mariner. Our job opportunities go up and down. If you don’t have enough in ready cash you inevitably make costly decisions with your investment accounts due to panic. Roth is a great investment as long as your income is below the max. Regular IRA is works well for those who are above the income limit for Roth accounts. Of course max out the match on your 401k, it’s free money but move it out of the 401k and into a IRA as soon as you’re age eligible. Your investment choices will be greater and the fees they don’t tell you about will be lower. One should never plan on using any of their retirement funds for anything other than retirement barring some catastrophic event.
Vanguard World Stock and World bond index funds are probably best for 95% of investors. Hedge fund professionals can’t beat them so why should an amateur try? Honestly right now I wouldn’t buy any stock. Most are at historic highs or overvalued. I’d save in a safe place and buy when the next recession comes about which it inevitably will. Having dry powder in bad times has made my retirement comfortable. The most valuable thing in any investment is time.
Mutual funds lack the liquidity for an emergency fund. A conventional contributory IRA works well for retirement but when one gets above a certain amount it may be wise to have a regular investment account that is not subject to IRA rules. The minimum required annual withdrawals for a IRA are a PIA if you have to withdraw more than needed for living and playing.
I am curious if many others are into investment properties as a savings/earning choice? i come close to maxing out my 401 k but i think in the long term real estate will pay off much better, especially if it pays for itself,or even almost does, from the start. i make money on my house now that i live in the in law apartment out back and rent out 2/3 of it. i want another property next year when i pay my first place off as its seen huge appreciation in just 6 years… Dad recommends Vanguard mutual funds but i am leary of having all my eggs in the stock market. Especially if warren gets elected…
Man, I keep thinking that this stock market is way over valued just by the fact that Trump is in office and very business friendly (please, oh please, leave off with any kind of political commentary on here - we all know how people feel about Trump). If the man gets reelected, then it’s going to last another four years at most. If one of the Dems gets in, just by sheer emotion and etc, this stock market will come crashing down - good buying opportunity for sure but it will still be unsettling. I’m about 14 years away from conventional retirement - would dearly love to retire early - I keep thinking real estate investment and passive income would be the way to go - but where to invest? I don’t think it’s here where I live in Colorado.