How do I save for retirement and start building my financial future?
May 2, 2017 12:46 PM Subscribe
I'm 33 years old and way behind on building my nest egg. I haven't started saving for my future and, like a dummy, I have money just sitting around. I need some guidance. Snowflake details below...
I’m 33 years old in the U.S. -- not married, no kids, and not planning on either.
-I put $600 per month into a normal Bank of America savings account, which has about $28,000 in it and gets about 60 cents interest per month.
-The rest of my income goes into my Bank of America checking account, which has about $20,000 in it and makes about 20 cents interest per month. I also generally have a running balance of $3,000 on my Chase Sapphire rewards card which I auto-pay off each month out of the checking account.
-I have a UBS Simple IRA that I previously and briefly put money into because an employer matched it, and it only has $2500 in it because I didn’t work there very long. It seems to earn about $20 per year, from what I can tell.
What do I need to do to start securing my financial future? Keeping $28,000 in a Bank of America savings account that earns 60 cents per month seems like I huge waste of money. Where do I start? What do I do?
I guess I need to get some sort of IRA and put money in it, but I’m not sure which one or how I know which is best for me. Is there a different sort of savings account to consider? (I’m not sure what a CD is, is that a thing?) I think because of my age, I also want to go for a more aggressive/riskier growth strategy that has time to recover and then I will get more conservative as I age.
I opened a Fidelity brokerage account so I can learn a little bit about stocks — it’s basically free, just $5 per buy/sell — and I put $3000 in it. But that’s not really where I want to be doing my main investing for retirement. I want to be investing in mutual funds, right? Where should I put my $28,000 savings?
Please help me. Whenever I google this, I get so much info and I don't feel like I know what it means. I also get information in broad terms, and if I should choose a specific IRA over other ones out there, or if a certain bank has a great offer, I'd like to know. Feeling like I need to do a ton of research and make hard decisions is probably a big reason why I've put this off, so I think I'd like to keep things simple. I am clueless and behind on building my nest egg, so thanks for any guidance!
I’m 33 years old in the U.S. -- not married, no kids, and not planning on either.
-I put $600 per month into a normal Bank of America savings account, which has about $28,000 in it and gets about 60 cents interest per month.
-The rest of my income goes into my Bank of America checking account, which has about $20,000 in it and makes about 20 cents interest per month. I also generally have a running balance of $3,000 on my Chase Sapphire rewards card which I auto-pay off each month out of the checking account.
-I have a UBS Simple IRA that I previously and briefly put money into because an employer matched it, and it only has $2500 in it because I didn’t work there very long. It seems to earn about $20 per year, from what I can tell.
What do I need to do to start securing my financial future? Keeping $28,000 in a Bank of America savings account that earns 60 cents per month seems like I huge waste of money. Where do I start? What do I do?
I guess I need to get some sort of IRA and put money in it, but I’m not sure which one or how I know which is best for me. Is there a different sort of savings account to consider? (I’m not sure what a CD is, is that a thing?) I think because of my age, I also want to go for a more aggressive/riskier growth strategy that has time to recover and then I will get more conservative as I age.
I opened a Fidelity brokerage account so I can learn a little bit about stocks — it’s basically free, just $5 per buy/sell — and I put $3000 in it. But that’s not really where I want to be doing my main investing for retirement. I want to be investing in mutual funds, right? Where should I put my $28,000 savings?
Please help me. Whenever I google this, I get so much info and I don't feel like I know what it means. I also get information in broad terms, and if I should choose a specific IRA over other ones out there, or if a certain bank has a great offer, I'd like to know. Feeling like I need to do a ton of research and make hard decisions is probably a big reason why I've put this off, so I think I'd like to keep things simple. I am clueless and behind on building my nest egg, so thanks for any guidance!
Congratulations, unlike many, many people, you haven't spent a lot of money on pointless fees! That's step one!
Does your employer offer any kind of retirement plan? That's the first question you need to answer before you can get advice.
posted by praemunire at 12:54 PM on May 2, 2017 [1 favorite]
Does your employer offer any kind of retirement plan? That's the first question you need to answer before you can get advice.
posted by praemunire at 12:54 PM on May 2, 2017 [1 favorite]
BoA online is linked to Merrill Lynch and you can (and should) open an IRA through them and move a bunch of your savings over. (I would keep $10k in BoA savings just in case you need to quickly move it to your checking in case of emergency, and move $18k to the ML account).
You can pick a "Retirement 2045" type account from ML.
You can also set up a recurring monthly auto-transfer from your BoA account to your new IRA.
Depending on how much of your savings you might want liquid, you could start with an auto-deposit of $250/month.
posted by rmless at 12:55 PM on May 2, 2017
You can pick a "Retirement 2045" type account from ML.
You can also set up a recurring monthly auto-transfer from your BoA account to your new IRA.
Depending on how much of your savings you might want liquid, you could start with an auto-deposit of $250/month.
posted by rmless at 12:55 PM on May 2, 2017
Do you have a 401k through work?
If so, calculate what amount you would need to withhold from your pay checks per month or pay cycle (depending on how often you get paid) that would equal $17,500 for the year total (that's the yearly max). Then set up an auto withdraw per month pre-tax.
Do this in addition to the IRA.
posted by floweredfish at 12:58 PM on May 2, 2017 [2 favorites]
If so, calculate what amount you would need to withhold from your pay checks per month or pay cycle (depending on how often you get paid) that would equal $17,500 for the year total (that's the yearly max). Then set up an auto withdraw per month pre-tax.
Do this in addition to the IRA.
posted by floweredfish at 12:58 PM on May 2, 2017 [2 favorites]
If you make less than $118,000/yr as a single-filer, then you should open a Roth IRA as well and put in up to the max ($5,500) each year. It's a special tax-advantaged kind that you should have on top of your normal retirement IRA.
posted by rmless at 12:58 PM on May 2, 2017 [1 favorite]
posted by rmless at 12:58 PM on May 2, 2017 [1 favorite]
This is a great question, and you are in the ideal situation where you have some money to invest. (I am not a financial planner, I don't work for Vanguard, but I am single, childless, and 33 years old too.)
I love my Vanguard Roth IRA for retirement savings. With a Roth IRA, you don't get the initial tax deduction, but you NEVER PAY TAXES AGAIN on your money or your earnings, as long as you wait until retirement age to take it out. You can also take out the amount you've invested without penalties before retirement age (just not your interest/gains).
If I were starting out like you, I would start with a Vanguard Target Retirement Date fund. You can put in $5,500 per year in a Roth IRA. You can sign up and transfer funds from your savings or checking account all online. If I were you, I would start a Vanguard Roth IRA with $5,500 and put all the money in a money market fund (kind of like a savings account), and then invest $1,000 a month into the target retirement date fund that you choose (maybe 2055 or 2060--whenever you expect to retire). I would suggest putting in $1,000 a month to do a bit of dollar-cost-averaging. (If you put all $5,500 in at once and the market goes down, you would lose out on more than if you just put in $1,000 at a time.)
I would also look at a higher interest rate for online savings for the rest of your savings. There are online-only accounts with 1% or so interest, which would be significantly more than 60 cents a month with a $28,000 investment.
posted by shortyJBot at 1:00 PM on May 2, 2017 [3 favorites]
I love my Vanguard Roth IRA for retirement savings. With a Roth IRA, you don't get the initial tax deduction, but you NEVER PAY TAXES AGAIN on your money or your earnings, as long as you wait until retirement age to take it out. You can also take out the amount you've invested without penalties before retirement age (just not your interest/gains).
If I were starting out like you, I would start with a Vanguard Target Retirement Date fund. You can put in $5,500 per year in a Roth IRA. You can sign up and transfer funds from your savings or checking account all online. If I were you, I would start a Vanguard Roth IRA with $5,500 and put all the money in a money market fund (kind of like a savings account), and then invest $1,000 a month into the target retirement date fund that you choose (maybe 2055 or 2060--whenever you expect to retire). I would suggest putting in $1,000 a month to do a bit of dollar-cost-averaging. (If you put all $5,500 in at once and the market goes down, you would lose out on more than if you just put in $1,000 at a time.)
I would also look at a higher interest rate for online savings for the rest of your savings. There are online-only accounts with 1% or so interest, which would be significantly more than 60 cents a month with a $28,000 investment.
posted by shortyJBot at 1:00 PM on May 2, 2017 [3 favorites]
If you make less than $118,000/yr as a single-filer, then you should open a Roth IRA as well and put in up to the max ($5,500) each year. It's a special tax-advantaged kind that you should have on top of your normal retirement IRA.
Do not do this. The contribution limit (currently $5,500), applies across all IRA types. You can contribute $5,500 to either a Roth IRA, or a traditional IRA, or some combination of the two. But you can't contribute $5,500 to a Roth and another $5,500 to a traditional IRA.
posted by AndrewInDC at 1:03 PM on May 2, 2017 [11 favorites]
Do not do this. The contribution limit (currently $5,500), applies across all IRA types. You can contribute $5,500 to either a Roth IRA, or a traditional IRA, or some combination of the two. But you can't contribute $5,500 to a Roth and another $5,500 to a traditional IRA.
posted by AndrewInDC at 1:03 PM on May 2, 2017 [11 favorites]
With a Roth IRA, you don't get the initial tax deduction, but you NEVER PAY TAXES AGAIN on your money or your earnings, as long as you wait until retirement age to take it out.
Which, if you pay the same tax rate now as you do in retirement, works out EXACTLY THE SAME as making pre-tax contributions to an ordinary IRA or 401(k). It is not always the winner.
Seriously, folks, depending on whether he has a retirement plan through work and how much his income is, some of what is being proposed here isn't even possible. Without that information, one will be hard-pressed to give good advice (unless one wants to try to cover all the major permutations!).
posted by praemunire at 1:08 PM on May 2, 2017 [4 favorites]
Which, if you pay the same tax rate now as you do in retirement, works out EXACTLY THE SAME as making pre-tax contributions to an ordinary IRA or 401(k). It is not always the winner.
Seriously, folks, depending on whether he has a retirement plan through work and how much his income is, some of what is being proposed here isn't even possible. Without that information, one will be hard-pressed to give good advice (unless one wants to try to cover all the major permutations!).
posted by praemunire at 1:08 PM on May 2, 2017 [4 favorites]
I prefer Vanguard but if you already have the account you can totally use the Fidelity account for investing for retirement! You just probably want to invest it in low-fee mutual funds like FUSEX, or a target date fund like one of the Fidelity Freedom funds (rather than trading in individual stocks). You can open an IRA with Fidelity, too.
How you want to invest depends on your tolerance for risk. I like to tell everyone how I put my (meager) life savings into a Vanguard target date fund in May of 2008. As you may recall, the stock market tanked almost immediately afterwards. The value of my investment was HALVED. Now, on the one hand, this sucked, but fortunately I just left the money where it was, rather than panicking and withdrawing it (this was largely because I was TOO FREAKING DEMORALIZED to do anything else). Eventually the market recovered and I made a lot of money in the end. But it was disappointing and I felt bad for a while. So, just be aware that that can happen!
Also, do you have a 401k/403b/something like that available to you through work? You can save a ton on taxes by investing your money there, and you *can* stack a 401k and an IRA.
I haven't read this book, The Simple Path to Wealth but it's based on a series of blog posts that I found really, really useful.
posted by mskyle at 1:09 PM on May 2, 2017 [1 favorite]
How you want to invest depends on your tolerance for risk. I like to tell everyone how I put my (meager) life savings into a Vanguard target date fund in May of 2008. As you may recall, the stock market tanked almost immediately afterwards. The value of my investment was HALVED. Now, on the one hand, this sucked, but fortunately I just left the money where it was, rather than panicking and withdrawing it (this was largely because I was TOO FREAKING DEMORALIZED to do anything else). Eventually the market recovered and I made a lot of money in the end. But it was disappointing and I felt bad for a while. So, just be aware that that can happen!
Also, do you have a 401k/403b/something like that available to you through work? You can save a ton on taxes by investing your money there, and you *can* stack a 401k and an IRA.
I haven't read this book, The Simple Path to Wealth but it's based on a series of blog posts that I found really, really useful.
posted by mskyle at 1:09 PM on May 2, 2017 [1 favorite]
It's a special tax-advantaged kind that you should have on top of your normal retirement IRA.
Others have jumped on parts of this comment but both a ROTH and Traditional IRA offer (different!) tax advantages for retirement savings, depending on your current tax rate and presumed tax rates when retired (which are, admittedly, pretty hard to account for).
posted by Exceptional_Hubris at 1:10 PM on May 2, 2017
Others have jumped on parts of this comment but both a ROTH and Traditional IRA offer (different!) tax advantages for retirement savings, depending on your current tax rate and presumed tax rates when retired (which are, admittedly, pretty hard to account for).
posted by Exceptional_Hubris at 1:10 PM on May 2, 2017
You're getting a lot of recommendations for Vanguard. That's because one of the most important things to keep in mind for determining your relative success in investing (that you can actually control) is fees. Mutual funds (which yes, you should invest in) charge an expense ratio*, which is the the percentage of your assets the fund company deducts each year for their management expenses. Usually this is in the neighborhood of 0.05% - 1%.
One type of a mutual fund that has particularly low expense ratios is an Index Fund, so called because they are passively managed to track a stock index (such as the S&P 500, or a cross-section of the total stock market, or total international stock market, or various bond classes, etc.), rather than actively managed to try to "beat the market." They also have the benefit of giving you broad diversification.
Vanguard, which pioneered index funds way back when, has a lot of them, and they have very low fees. But Fidelity also has many of them, as do the other major fund companies. If you just focus on the fees, and look for index funds that track the market, you will do as well as you can as far as your investment choices go.
As others here have noted, it's hard to give you specific advice on types of savings vehicles without knowing more about your income, tax bracket, etc. You should also take advantage of any 401k or similar plan you have at work. One place you can go to for specific advice is the Bogleheads forum, which is sort of a Vanguard fan club, but they will help you with just about anything, regardless of whether you want to invest with Vanguard or somewhere else.
*For more exotic funds that you probably won't care about, there may be additional costs. If you're sticking with index funds, you won't run into this.
posted by AndrewInDC at 1:22 PM on May 2, 2017 [7 favorites]
One type of a mutual fund that has particularly low expense ratios is an Index Fund, so called because they are passively managed to track a stock index (such as the S&P 500, or a cross-section of the total stock market, or total international stock market, or various bond classes, etc.), rather than actively managed to try to "beat the market." They also have the benefit of giving you broad diversification.
Vanguard, which pioneered index funds way back when, has a lot of them, and they have very low fees. But Fidelity also has many of them, as do the other major fund companies. If you just focus on the fees, and look for index funds that track the market, you will do as well as you can as far as your investment choices go.
As others here have noted, it's hard to give you specific advice on types of savings vehicles without knowing more about your income, tax bracket, etc. You should also take advantage of any 401k or similar plan you have at work. One place you can go to for specific advice is the Bogleheads forum, which is sort of a Vanguard fan club, but they will help you with just about anything, regardless of whether you want to invest with Vanguard or somewhere else.
*For more exotic funds that you probably won't care about, there may be additional costs. If you're sticking with index funds, you won't run into this.
posted by AndrewInDC at 1:22 PM on May 2, 2017 [7 favorites]
-I put $600 per month into a normal Bank of America savings account, which has about $28,000 in it and gets about 60 cents interest per month.
On top of the other advice, if you moved your savings into just a basic Ally savings account, you'd make way more than that (current interest rate is 1.05%). I get several dollars per month, and I have way less money than you in it.
posted by General Malaise at 1:38 PM on May 2, 2017 [3 favorites]
On top of the other advice, if you moved your savings into just a basic Ally savings account, you'd make way more than that (current interest rate is 1.05%). I get several dollars per month, and I have way less money than you in it.
posted by General Malaise at 1:38 PM on May 2, 2017 [3 favorites]
you *can* stack a 401k and an IRA
Depends on your income. Your ability to deduct contributions to a traditional IRA goes away if your modified AGI is more than $62K filing as an individual. Your ability to contribute to a Roth IRA at all (without certain maneuvers) goes away in the low six figures. Which is why more information is needed.
posted by praemunire at 1:42 PM on May 2, 2017 [3 favorites]
Depends on your income. Your ability to deduct contributions to a traditional IRA goes away if your modified AGI is more than $62K filing as an individual. Your ability to contribute to a Roth IRA at all (without certain maneuvers) goes away in the low six figures. Which is why more information is needed.
posted by praemunire at 1:42 PM on May 2, 2017 [3 favorites]
I really like the personal finance subreddit. They give great generic advice that has agreed with what all other sources I trust have food me . This is a step by step generic plan for managing your money, which includes IRAs, 401ks, and other savings, with links to more detailed instructions.
https://www.reddit.com/r/personalfinance/wiki/commontopics/
posted by triscuit at 2:02 PM on May 2, 2017 [7 favorites]
https://www.reddit.com/r/personalfinance/wiki/commontopics/
posted by triscuit at 2:02 PM on May 2, 2017 [7 favorites]
Here's the advice I recommend:
1. Don't follow any of the specific advice in this thread about where/how to invest your money.
2. Don't be ashamed or embarrassed that you are asking these questions - they are exactly the type of questions to ask, and you are exactly the right age to be asking them. I thought you were going to say that you had no money at all, but no, you are doing GREAT at step 1 (save some money). Now it's time for step 2 (figure out what to do with those savings to help you make the most of it.)
3. READ read read. Bogleheads is good, reddit's personalfinance subreddit is good, getrichslowly.org is good, there are a couple of others. Look for posts for complete beginners or how to start investing.
3a. Also look for posts that explain the definitions of all these terms: IRA, Roth IRA, brokerage account, stocks, mutual funds, 401k, etc. Anything you don't understand from this thread, write it down and look it up.
3b. Also look for posts that talk about retirement for 30-year-olds or Money mistakes 30-year-olds make - stuff like that. You'll find good advice about the kinds of investments you should be making at your age.
4. Consider talking to a fee-based financial advisor. Ask your friends or coworkers or your HR dept or your church for some recommendations. Or start a new AskMe with your location and ask for recommendations. Talk to the advisor about your goals, your resources and your fears, and see what the advisor has to say.
5. FINALLY, invest your money according to your new knowledge and advice. Make a plan to reevaluate in 6-12 months and make changes then.
posted by CathyG at 2:27 PM on May 2, 2017 [3 favorites]
1. Don't follow any of the specific advice in this thread about where/how to invest your money.
2. Don't be ashamed or embarrassed that you are asking these questions - they are exactly the type of questions to ask, and you are exactly the right age to be asking them. I thought you were going to say that you had no money at all, but no, you are doing GREAT at step 1 (save some money). Now it's time for step 2 (figure out what to do with those savings to help you make the most of it.)
3. READ read read. Bogleheads is good, reddit's personalfinance subreddit is good, getrichslowly.org is good, there are a couple of others. Look for posts for complete beginners or how to start investing.
3a. Also look for posts that explain the definitions of all these terms: IRA, Roth IRA, brokerage account, stocks, mutual funds, 401k, etc. Anything you don't understand from this thread, write it down and look it up.
3b. Also look for posts that talk about retirement for 30-year-olds or Money mistakes 30-year-olds make - stuff like that. You'll find good advice about the kinds of investments you should be making at your age.
4. Consider talking to a fee-based financial advisor. Ask your friends or coworkers or your HR dept or your church for some recommendations. Or start a new AskMe with your location and ask for recommendations. Talk to the advisor about your goals, your resources and your fears, and see what the advisor has to say.
5. FINALLY, invest your money according to your new knowledge and advice. Make a plan to reevaluate in 6-12 months and make changes then.
posted by CathyG at 2:27 PM on May 2, 2017 [3 favorites]
It's fantastic that you are thinking about securing your future!
One book that I found extremely empowering was 'Millionaire Teacher' by Andrew Hallam. It supports what many previous posters have recommended here including 1) minimizing costs, 2) looking at the long term, 3) using Index Funds.
Great read as a first step to investing! Enjoy.
posted by Sauter Vaguely at 3:02 PM on May 2, 2017
One book that I found extremely empowering was 'Millionaire Teacher' by Andrew Hallam. It supports what many previous posters have recommended here including 1) minimizing costs, 2) looking at the long term, 3) using Index Funds.
Great read as a first step to investing! Enjoy.
posted by Sauter Vaguely at 3:02 PM on May 2, 2017
When I was your age I found Beth Kobliner's Get a Financial Life: Personal Finance in Your Twenties and Thirties very helpful. Link is to the latest edition, which came out this year.
posted by needled at 3:19 PM on May 2, 2017 [2 favorites]
posted by needled at 3:19 PM on May 2, 2017 [2 favorites]
Mod note: From the OP:
My employer does not offer a 401k, pension or anything like that. Any sort of saving and financial planning would be me on my own.posted by restless_nomad (staff) at 4:31 PM on May 2, 2017 [1 favorite]
One thing to forgive yourself for, and this is a cold hard fact, not me being nice: emergency funds ought to be in liquid, and if you are the cautious sort, you might consider what you've done to be an accidentally genius move. What the Bogleheads and R/pf'ers recommend is 6-12months of expenses saved up in cash. I dream of the cushion you've built!
posted by mahorn at 5:09 PM on May 2, 2017 [1 favorite]
posted by mahorn at 5:09 PM on May 2, 2017 [1 favorite]
To highlight what mahorn just said, it's really important to have an idea of how much of an emergency fund you want available prior to making your investments. There is no one size fits all approach to emergency funds - some people prefer to be super conservative and others don't. Most people try to keep somewhere from 1 to 6 months worth of their expenses in an emergency fund. This money could then be put into a place where you could easily access it if needed but also doesn't have to be earning the paltry interest you're getting at BOA - you could use the Ally Bank account for this (like General Malaise I also keep my emergency fund money there earning 1%).
I strongly endorse the ideas that have been brought up above regarding:
- Opening and maxing out an IRA (there are calculators to help you determine which one is right for you, basically it boils down to whether you expect to be in a higher tax bracket now or in retirement).
- Using a low fee account such as what Vanguard offers.
- Investing in index funds to begin with. You can't just put money into an IRA and have it grow without investing it - it has to be invested in something else and index funds are a solid option to consider. Vanguard's S&P 500 Index is a solid one. If you use a target retirement fund, you can choose the furthest out possible target date in order to get a more aggressive investment mix (for example even though you might be expected to retire closer to 2050, you could choose 2060).
- Read read read basic personal finance books and blogs before making those more aggressive investments you are thinking about.
- To follow on that last point I would strongly encourage you to rethink investing that $3000 in stocks at this point, unless you just want to throw it away. Put it into an index fund for at least a year or two while you read more about investing and personal finance and I can almost guarantee you that you may decide against investing in individual stocks by that time.
posted by treehorn+bunny at 7:40 PM on May 2, 2017 [1 favorite]
I strongly endorse the ideas that have been brought up above regarding:
- Opening and maxing out an IRA (there are calculators to help you determine which one is right for you, basically it boils down to whether you expect to be in a higher tax bracket now or in retirement).
- Using a low fee account such as what Vanguard offers.
- Investing in index funds to begin with. You can't just put money into an IRA and have it grow without investing it - it has to be invested in something else and index funds are a solid option to consider. Vanguard's S&P 500 Index is a solid one. If you use a target retirement fund, you can choose the furthest out possible target date in order to get a more aggressive investment mix (for example even though you might be expected to retire closer to 2050, you could choose 2060).
- Read read read basic personal finance books and blogs before making those more aggressive investments you are thinking about.
- To follow on that last point I would strongly encourage you to rethink investing that $3000 in stocks at this point, unless you just want to throw it away. Put it into an index fund for at least a year or two while you read more about investing and personal finance and I can almost guarantee you that you may decide against investing in individual stocks by that time.
posted by treehorn+bunny at 7:40 PM on May 2, 2017 [1 favorite]
Honestly, if you don't own a house, the best investment you could make is buying a house.
If you're not buying a house, put your money into a target date fund right away. And don't look at it again for 10 years. I think the market is pretty overpriced right now, but you're far enough out that even if it corrects majorly in the next year or two, you'll be fine.
There's nothing wrong with putting a few grand in a stock picking fund to play around with, but you have to understand that you are just playing around with it, and make a promise to yourself that when it's gone, it's gone. Don't throw good money after bad.
I rolled over an old retirement account with a few thousand in it into an IRA and immediately lost 45% picking garbage stocks. Then I made 300% the next year. Those are the kind of swings you get. You don't want that with your life savings.
posted by empath at 7:51 PM on May 2, 2017
If you're not buying a house, put your money into a target date fund right away. And don't look at it again for 10 years. I think the market is pretty overpriced right now, but you're far enough out that even if it corrects majorly in the next year or two, you'll be fine.
There's nothing wrong with putting a few grand in a stock picking fund to play around with, but you have to understand that you are just playing around with it, and make a promise to yourself that when it's gone, it's gone. Don't throw good money after bad.
I rolled over an old retirement account with a few thousand in it into an IRA and immediately lost 45% picking garbage stocks. Then I made 300% the next year. Those are the kind of swings you get. You don't want that with your life savings.
posted by empath at 7:51 PM on May 2, 2017
Personal Finance Blogs I like:
Mr. Money Mustache
Get Rich Slowly (I got my initial personal finance education on this blog back when I was in college, from Mefi's own jdroth - although I apologize, JD, it's not as good now that you're gone)
I was going to recommend some more, but it seems that many of them have gotten bought out and don't look as useful at this point - so instead I will refer you to this list from GRS of best personal finance books and recommend that you check those out because most of the ones listed are classic and great.
posted by treehorn+bunny at 8:07 PM on May 2, 2017
Mr. Money Mustache
Get Rich Slowly (I got my initial personal finance education on this blog back when I was in college, from Mefi's own jdroth - although I apologize, JD, it's not as good now that you're gone)
I was going to recommend some more, but it seems that many of them have gotten bought out and don't look as useful at this point - so instead I will refer you to this list from GRS of best personal finance books and recommend that you check those out because most of the ones listed are classic and great.
posted by treehorn+bunny at 8:07 PM on May 2, 2017
I'm with General Malaise -- whatever portion you do keep in savings, move it to Ally. I keep roughly $20k on average in my savings account, and it gets about $16/mo interest.
The other decisions are difficult, but this part is easy.
posted by ktkt at 2:31 AM on May 3, 2017
The other decisions are difficult, but this part is easy.
posted by ktkt at 2:31 AM on May 3, 2017
I do not agree that buying a house is the best investment. I've gone through two "buy at the peak" (accidentally) house purchases that have ended in massive failure.
Nthing bogleheads. Nthing getrichslowly. You'll need to figure out what your comfort level is with risk - are you okay with the swings empath talked about for the chance of huge gains? Or would you rather see your money grow at 3-4% annually nearly without fail?
posted by getawaysticks at 5:56 AM on May 3, 2017
Nthing bogleheads. Nthing getrichslowly. You'll need to figure out what your comfort level is with risk - are you okay with the swings empath talked about for the chance of huge gains? Or would you rather see your money grow at 3-4% annually nearly without fail?
posted by getawaysticks at 5:56 AM on May 3, 2017
Yes, a lot of these matters hinge to some extent on personal risk tolerance.
What you can do right now:
* Realize that perfect money management requires predicting the future. But we can't predict the future, you say! Correct. So you have to accept and work with uncertainty. Your goal can't be perfection. For individuals investing for retirement, I think not being stupid should be a higher priority than perfect optimization of one's portfolio. Being stupid is (among other things): paying a dime more in fees than you need to be; moving funds around in response to short-term changes in the market; letting anyone talk you into an investment you don't understand; chasing big or "guaranteed" returns in the short run.
* Also realize that this means that spending a significant amount of money for anybody's advice is a waste. For the most part, financial professionals make their money off hustling you. They are salespeople, not trusted counselors. Even amateurs who wish you well will give you very ill-informed advice on these matters, not out of malice, but of ignorance. You are so far ahead of the game in realizing that you don't know what you don't know, you have no idea.
* Move your savings to a higher-interest online savings account. HSBC pays 1%. It's not a huge difference, but why give the money away?
* Decide how much of that savings you feel you need to keep as an emergency reserve. Being without kids means you need less, being unmarried tends to mean you need more (because you don't have a spouse's income to fall back on). How volatile is your employment situation? Do you have any health issues? For a person not otherwise struggling with debt, I think three months' expenses is a good number, but it really is a matter of personal judgment. At a certain point, money you're keeping in a liquid, low-return account is money you're not investing, so you probably don't want to keep all $28K there indefinitely, but I think most people undershoot on this number.
* Think about whether you might want to buy a house in the relatively short term. Do not listen to people who tell you that a house is the best possible investment. Historically, this has absolutely not been the case except in a few markets over a short period of time. But whether you want to do this will affect your investments--you will need to keep more money in more liquid, less volatile assets so that the money is actually there when you want to make the down payment. (Basically, wanting to buy a house means your otherwise long time horizon gets shortened, at least for some of your money.)
* Open an IRA with Vanguard (lowest fees. Fees are just losses to you. Always shoot for the lowest fees). I'm guessing from your numbers that you have a decent salary, so probably you'll be paying lower taxes in retirement than you are now (again, one of those things no one can actually predict with confidence). Contribute the maximum, which is only $5500 at your age. Put it in a target-date retirement fund corresponding to your anticipated retirement year. Leave the rest alone and do some reading. If it were me, I would continue to iterate putting the maximum in the IRA every year and invest the rest in the same fund in a taxable account--but you don't need to rush. Get better informed first.
* Realize that, at your age, you are in it for the long haul. People talking to you about "big gains vs. steady returns" are completely misframing the issue. With the exception of the emergency fund, this is not money that you should be expecting to touch for decades. A one-time big gain in your retirement fund means exactly zero to you. Zero. Because you're not moving the money (in many cases, you can't), and that big gain could be wiped out next year. You have to think in terms of likely average outcomes. It is true that, as a general matter, risk and reward are correlated. A young person as yourself should probably therefore be in more aggressive investments (that is, more equity, and riskier equity) than a person twenty-five years older. (Even this is not entirely optimal, according to some fairly persuasive current thinking, but the alternative strategies are complicated and expensive to execute, and so probably not best for a single person's retirement plan.) On average and over the long run, you should do better this way, and "on average" and "over the long run" are the best you can do in the face of our inability to know the future. But do not use your retirement funds to take on excessive risk shooting for "big gains" that probably won't be there when you actually need the money.
posted by praemunire at 8:51 AM on May 3, 2017 [1 favorite]
What you can do right now:
* Realize that perfect money management requires predicting the future. But we can't predict the future, you say! Correct. So you have to accept and work with uncertainty. Your goal can't be perfection. For individuals investing for retirement, I think not being stupid should be a higher priority than perfect optimization of one's portfolio. Being stupid is (among other things): paying a dime more in fees than you need to be; moving funds around in response to short-term changes in the market; letting anyone talk you into an investment you don't understand; chasing big or "guaranteed" returns in the short run.
* Also realize that this means that spending a significant amount of money for anybody's advice is a waste. For the most part, financial professionals make their money off hustling you. They are salespeople, not trusted counselors. Even amateurs who wish you well will give you very ill-informed advice on these matters, not out of malice, but of ignorance. You are so far ahead of the game in realizing that you don't know what you don't know, you have no idea.
* Move your savings to a higher-interest online savings account. HSBC pays 1%. It's not a huge difference, but why give the money away?
* Decide how much of that savings you feel you need to keep as an emergency reserve. Being without kids means you need less, being unmarried tends to mean you need more (because you don't have a spouse's income to fall back on). How volatile is your employment situation? Do you have any health issues? For a person not otherwise struggling with debt, I think three months' expenses is a good number, but it really is a matter of personal judgment. At a certain point, money you're keeping in a liquid, low-return account is money you're not investing, so you probably don't want to keep all $28K there indefinitely, but I think most people undershoot on this number.
* Think about whether you might want to buy a house in the relatively short term. Do not listen to people who tell you that a house is the best possible investment. Historically, this has absolutely not been the case except in a few markets over a short period of time. But whether you want to do this will affect your investments--you will need to keep more money in more liquid, less volatile assets so that the money is actually there when you want to make the down payment. (Basically, wanting to buy a house means your otherwise long time horizon gets shortened, at least for some of your money.)
* Open an IRA with Vanguard (lowest fees. Fees are just losses to you. Always shoot for the lowest fees). I'm guessing from your numbers that you have a decent salary, so probably you'll be paying lower taxes in retirement than you are now (again, one of those things no one can actually predict with confidence). Contribute the maximum, which is only $5500 at your age. Put it in a target-date retirement fund corresponding to your anticipated retirement year. Leave the rest alone and do some reading. If it were me, I would continue to iterate putting the maximum in the IRA every year and invest the rest in the same fund in a taxable account--but you don't need to rush. Get better informed first.
* Realize that, at your age, you are in it for the long haul. People talking to you about "big gains vs. steady returns" are completely misframing the issue. With the exception of the emergency fund, this is not money that you should be expecting to touch for decades. A one-time big gain in your retirement fund means exactly zero to you. Zero. Because you're not moving the money (in many cases, you can't), and that big gain could be wiped out next year. You have to think in terms of likely average outcomes. It is true that, as a general matter, risk and reward are correlated. A young person as yourself should probably therefore be in more aggressive investments (that is, more equity, and riskier equity) than a person twenty-five years older. (Even this is not entirely optimal, according to some fairly persuasive current thinking, but the alternative strategies are complicated and expensive to execute, and so probably not best for a single person's retirement plan.) On average and over the long run, you should do better this way, and "on average" and "over the long run" are the best you can do in the face of our inability to know the future. But do not use your retirement funds to take on excessive risk shooting for "big gains" that probably won't be there when you actually need the money.
posted by praemunire at 8:51 AM on May 3, 2017 [1 favorite]
One great book to start thinking about your investing strategy with is Carl Richards' The Behavior Gap: Smart Ways to Stop Doing Dumb Things With Your Money. It is not as prescriptive as other resources on this topic; instead, it helps you avoid common investing pitfalls while also acknowledging that one-size-fits-all rules often fail to consider people's personal goals and circumstances.
posted by R a c h e l at 1:28 PM on May 3, 2017
posted by R a c h e l at 1:28 PM on May 3, 2017
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That is the first step, off the top of my head. I would also say that you should put about $50,000 more into other, non-IRA investments. For simplicity, go with Vanguard (or hey, if you like T Rowe Price better, more power to you). Buy shares of the Total Stock Market Index, Total International Stock Index, and Total Bond Index, probably about equally.
That'll get you started.
posted by gideonfrog at 12:52 PM on May 2, 2017 [22 favorites]