What should I do with my disposable income investing-wise?
March 12, 2012 7:11 AM   Subscribe

Financial Advice. About to be 30 years old and would like some advice on what to do with disposable income. Details inside!

Bear with me I want to give you a little background.

-Graduated in 2004, I'm about to be 30 in April.
-Went right in as a contractor to a job I summer-interned for 2 years. Lasted 11 months, got laid off. Worked for a company for about a year, had a 401(k) there, laid off, got liquid cash from the 401(k). Worked various contractor positions for the next few years, nothing permanent. Spent about 9 months unemployed at one point, took unemployment during that time. Nearly broke at one point.
-Got a great job in 2008, been there since.

I'm nearly 4 years at my current job and doing very well. (I earn about 70k standard a year, not including OT and bonuses) Job is secure, commute and bills are minimal as well. I currently put 18% of every paycheck into my 401(k) (up to about 60k in there) This isn't the WISEST decision as my company only matches up to 4% but I was freaked out by being so behind to start accruing in a 401(k) due to my employment track that I wanted to "catch up." I'm more than caught up now and ready to scale that amount back to say 8%. I have about 5k left on my student loans and 7k on my car. Both will be paid off this year making me completely debt free. In the meantime I have been accruing savings in sub-accounts through INGDirect on the side:

-House Down Payment Approx 15k (Just slowly accruing till I'm ready to buy and put a down payment etc)
-Investing Fund Approx 10k saved up (I was thinking either a Roth or an Index Fund)
-Engagement Ring savings (I don't have a gf right now, but I figure it can't hurt to slowly save up for this, about 7k)
-Some other assorted accounts towards saving goals, they total probably about 8k. Things like furniture for when I move out, frivolous spending (impulse purchases which I make very rarely) and like a Christmas Gift fund.

I've read Ramit Sethi's I Will Teach You To Be Rich which was really an EXCELLENT primer on how to invest etc. That's where I got the idea for the index fund. Mutuals seem to be too little payoff in the long run. Curious what are some good things to look into investing-wise since in a few short months I will be basically all-income and no-debt.
posted by PetiePal to Work & Money (16 answers total) 22 users marked this as a favorite
 
Er, can I recommend liquidating that "engagement ring savings" account down to maybe a max of $2K and putting it into your downpayment fund or your investment fund? 'Cause seriously, if your nonexistant fiancee expects you to pay $7K+ for an engagement ring, you'll have obtained the wrong kind of fiancee. Find a woman who has the same values you do in regards to money, and she'll appreciate that you have invested, own a home, and don't wave status symbols around on fingers. (end rant)

Beyond that, if you're a save-for-the-future type and you think you want kids, start putting money into a college savings account now. There are tax-free ones depending on your state if you are in the US.

Alternately, liquidate all or some of that ring fund into your car or student loans and get those paid off faster. Even a month lets you save some interest payment.

If your income is comfortable and you have everything you want, it's okay to dump 18% or more into a retirement account. Don't feel like you're losing out if you are truly comfortable with the amount you're putting in, regardless of whether your company is matching any of it. The company match is a nice bonus, sure, but it's still retirement savings, and your current $60K is going to last you a year or two, tops, in retirement if you have to rely on it for 100% of your income.
posted by juniperesque at 7:22 AM on March 12, 2012 [9 favorites]


Have enough 'cash' (or liquid assets) saved up so that you can survive for 6 months should you unexpectedly lose your job.
posted by empath at 7:24 AM on March 12, 2012 [4 favorites]


have you looked into whether buying would be more cheaper in the long run for you than renting?

since you're already saving for an engagement ring with no girlfriend, maybe you can also save for the children you may eventually have. you can save for their college education, or even for their grade-school education if you think you might want to send them to private school. or just a 'general savings' to help cushion the blow to your budget when you add them to the picture.

housing & children would probably be the next things on my list if I was in a similar financial situation.

also is there any training you could do for your future career or are you all done with that? exams/courses/whatever?
posted by saraindc at 7:25 AM on March 12, 2012 [1 favorite]


A Roth, and some municipal bonds. These are the best bets right now because of the tax benefits. If and when you have kids, a 529 plan is nice.
posted by PJMoore at 7:57 AM on March 12, 2012


1) Back off of your retirement savings. By all means, capture every cent your employer is willing to contribute. But for now, no more than that. True, money invested now is better than money invested later, but odds are really good that you're actually going to need some of that money between now and then. For things like buying a house, buying a car, getting married, sending kids to college, whatever. I'm totally okay with saving 25% or so of one's income--it's what my fiancee and I plan to do--but putting all of that into retirement accounts will probably leave you precariously illiquid, a modern equivalent of being land-poor, i.e. plenty of capital, but no cash.

2) To combat that, use some of what you divert from your retirement contributions to create a savings account that has six months' salary. Cash. Just as a slush fund. This is what you use if you get laid off, get sick, or have to take some kind of leave of absence to take care of family, etc.

3) Once that's done, start saving for a down payment on a house. If you do plan to get married, you're probably going to want to get your own place, and while apartment living has its advantages, privacy and a surplus of space are not among them. While it is still theoretically possible to get one of those FHA-backed mortgages with a 5% down payment, this was never a good idea and is even less so in the current market. You're going to want 20% to put down, and you should probably add another 10% for moving expenses, furnishing, and the innumerable expenses that accrue whenever you move house.

4) $7k is too much for an engagement ring. Look around. Most jewelry sites divide their selections into "Less than $500," "$500-$1,000," and "More than $1,000". Something in the $1,000-2,000 range should do just fine.
posted by valkyryn at 8:05 AM on March 12, 2012 [1 favorite]


If you're concerned about retirement savings, it makes sense to diversify how you're saving. Instead of throwing everything into the 401k, max out a Roth IRA. Vanguard is the most common recommendation, as it's low-fee and a lot of flexibility for starting accounts with only $1000-3000. Also consider what your 401k is invested in - a Target 2040/2050 retirement fund? Are there any other funds offered that you feel strongly about (an emerging markets fund, or a more aggressive risk for now that you'll plan on toning down later?) Or maybe the Roth is the place to investigate that, and leave the 401k simple.

If "engagement ring savings" is important to you, go for it. You'll be getting some feedback here that you've oversaved, but it's really a matter of personal preference. Personally, I'd be horrified if I had to carry a $10k item around on my finger on a daily basis, but I'm an odd woman. And I don't have a mother that would be horrified to see me marry a man who gave me a $800 ring, or really any cultural expectations tied up in how weddings/engagements are supposed to happen. BUT, I sure would be delighted if I found out my husband-to-be had saved up enough for a modest ring and a spectacular honeymoon. Or a nest-egg that made my special wedding idea totally attainable. So instead of calling it "ring", call it "getting married".

This generalizes to my overall advice: Save, but don't get bogged down in deciding now how you're going to spend it. Putting labels on the accounts can help build up enthusiasm for continuing to set money aside, but don't take yourself too seriously. Just because past and current self thought it would be a good idea to save up for X doesn't mean you can't change your mind.
posted by aimedwander at 8:11 AM on March 12, 2012 [3 favorites]


Have enough 'cash' (or liquid assets) saved up so that you can survive for 6 months should you unexpectedly lose your job.

This.

Also I am 50 and I would tell my 30 year old self to not believe in saving for retirement and to spend it now or work less and earn less. In my short life, have twice seen my "retirement" savings stolen by Wall Street. Once in 2001 and again in 2008. YMMV. With the very little extra money I have I save up to avoid taking on debt, I pay cash for everything except my home, and ensure my flow of cash. Having been without an income for some long stretches in my life, it's amazing how fast you burn up your reserves. Cash flow is king.

I have this radical investment scheme where instead of making extra money with my time, I work less and spend more time with my wife and kids. My ambition is to be able to take a four week holiday every year. These are things no Wall Street huckster can ever take from me and I know I will never regret making these choices. Again YMMV.
posted by three blind mice at 8:14 AM on March 12, 2012


I can't tell you what you should do but I can tell you what I did.

First I made sure I had six months living expenses in case of sudden unemployment or car emergency.

Then I saved like crazy for a house (and a house only). I did this until I had bought _and paid off_ a modest sized house in a walkable town next to some beautiful countryside. I'm about your age, and I could have an enormous mortgage right now on a big flash house, but I don't. Instead my living expenses are minimal, so I can now reassess my priorities and scale my income needs WAY back in order to spend more of my time on things I love but which are no good for paying off a mortgage.

I drive an old compact car that I bought second hand ten years ago. I don't spend lots of money on flash electronics or diamond jewellery or status symbol stuff. But I do enjoy my lazy life a great deal!
posted by emilyw at 8:26 AM on March 12, 2012 [2 favorites]


So you have about $40,000 cash in various "envelopes" and $12,000 in debt? I'd pay off that debt immediately (it wont take long to rebuild the savings, especially without the debt payments). You are in a lucky place but it sounds like you live super cheaply in order to save for the future (maybe because you saw how easy it is to be broke). Too much of that is unhealthy (as is the other extreme of spending all money in the present). Make sure to treat yourself and reward your hard work with vacations or hobbies. I'd also like to chime I that the engagement ring fund is kinda off-putting. If I dated a guy that had a ring fund from when he was single (and a way too generous idea of what to spend) I'd wonder how much of our relationship was because of my fabulous personality and how much is him wanting to be in any relationship, with anyone.
posted by saucysault at 9:00 AM on March 12, 2012 [3 favorites]


There's sort of a standard template for this type of stuff, and you can deviate from it depending on what you value the most in your life and what your tolerance for risk is. But the template goes:

(1) Have an emergency fund. I'd argue that if you have an engagment ring fund, a house down payment fund, and other miscellaneous savings coupled with a stable employment situation, you have a sufficient emergency fund for now. "Emergency fund" is a kind of fluid concept, and by my way of thinking, you have this covered. People with less tolerance for risk or in obviously unstable financial situations may prioritize this higher.

(2) Invest up to your employer match in 401(k) because you get a 100% return on that money.

(3) Max out a Roth IRA.

(4) Max out your 401(k). Make sure that you're appropriately diversified within your IRA/401(k) accounts.

(5) Additional funds into a house fund; if you already have a house, additonal funds into some other type of investment.

In your particular case, I think whether you stick money into maxing out your 401(k) or into a fund for a house depends just how badly you want to own a home. I think home ownership is fantastic, but there's also a lot to be said for waiting a while.

While I almost always agree with every single word valyryn writes, this is one case where I disagree: stash lots into retirement accounts. The tax deferral and compound interest benefits of this are enormous. But, I also agree that it's silly to make yourself illiquid if what you really want is to have money to spend on a house or on kids, or whatever. Nevertheless, you're better off contributing a greater amount now and backing off later when you want to increase your cash flow than investing less in retirement accounts now and trying to catch up later.
posted by MoonOrb at 9:22 AM on March 12, 2012 [1 favorite]


Good suggestions so far. I'll clarify some things:

-I have 9 months of emergency fund saved up. Neglected to mention that in the original post.

-The ring fund isn't about meeting a woman and deciding to propose in a month...or even within a year. It's not even about HAVING to spend that much. Chances are I probably have a family heirloom diamond waiting. I was just letting this accrue during my last relationship that ended after 3 years. My plan would be to be with my s/o for at LEAST a year and a half before I was considering marriage. My saving mentality is slowly over time, so instead of "3 months salary" or whatever the heck is the recommendation these days I'd never really miss the money. Realistically I'd spend less on the ring and diamond and shuffle money to an investment or house down payment. I'm reassessing all my finances right now and I'll probably halt any further transfers to that account until down the road.

-Buying a house isn't that important to me. It's just me...and no pets so it's not like I NEED crazy space. I would love to have a townhouse or condo though but it's not crucial right now, my living situation is ideal

-I'm currently overpaying my car and student loans and I plan to have them paid off within 6 months. The car loan first because that's much higher interest. The student loan is next to nothing. I had considered fully wiping out the car loan and when it gets down to 5k I may just do that. The money for the frivolous spending and the checking account with ING is really just sitting there.
posted by PetiePal at 9:33 AM on March 12, 2012


It's unlikely that you're making even 1% on your savings while your debt very likely has an interest rate of more than 1%. I would use any available money that isn't your emergency fund and clear out those debts. Saving money shouldn't be a money-losing proposition.
posted by the jam at 10:05 AM on March 12, 2012


Think about investing for cash flow. If you're sitting on 9months of living expenses, making matching retirement contributions, are essentially debt free apart from student loans and still have another 7k+ sitting in the bank, you've got the basics covered. You're actually in a better position than probably 80% of Americans. Check out sites about dividend investing and consider how you can start letting your earnings from investments start to replace hours of your time spent at work.
posted by T.D. Strange at 10:24 AM on March 12, 2012


You're in great shape and you're going to be thrilled that you have this money saved when you enter a more high-cost period in life (probably marriage/kids)

My only advice would be to pay off the car now - that's likely higher interest than the student loan and it's not worth carrying that debt with the amount of savings you have. Maybe use the engagement ring or house fund to pay off the car since you don't need that money right now.

Perhaps people would be happier if you label the ring fund as a general wedding/honeymoon/ring fund. I agree that 7K for a ring is excessive, but you will easily spend that and more on your wedding and honeymoon if your parents aren't paying for it. It's a really shocking expense that most people don't plan for, so I personally think it's smart to plan ahead.
posted by rainydayfilms at 11:19 AM on March 12, 2012


Curious what are some good things to look into investing-wise since in a few short months I will be basically all-income and no-debt.

Like you, I'm about ready to pay off my car (student loans are cheap and forgivable in my line of work). I have a Roth IRA I'm hoping to squeeze in a 2011 contribution into once my moving expenses are reimbursed. I have a 403b, and once the car is paid off I'll be opening a 457 as well.

You've got plenty of advice on how to invest what comes in, so I'll share a thought about spending. I've recently read that people get used to a certain level of comfort. A sudden increase in income will make you happy at first, until you grow accustomed to the things it buys and slide back into "normal." Loan payments will be similar to an increase in income. So based on that information, it seems you might maximize your savings and your personal mental wellbeing by letting your realized income grow slower than actual income. So every loan payment stream that ends, every raise you get goes straight to savings, and you allow yourself more spending annually. Sometimes versions of this are called "save more later."

Annual improvements in quality of life might be maid service, or a roomba, or a new TV, a week on the slopes, whatever you desire (and fits the budget). At my last job I seriously had enough vacation annually to consider half-day fridays. Some people have long miserable commutes. I have a list of such things that I try not to look at too often lest it somehow ruin the principle. The point is to space them out such that your life is always gradually getting better, even though major bumps tend to be lumpy -- new jobs, promotions, loans paid off, etc.

In the meantime, you throw all the "extra" income into long term savings. IRA, 401k, etc. So you still get all the pleasure of seeing your net worth increase, and the insurance of having that money on tap through 401k loan programs or Roth IRA contribution withdrawals.
posted by pwnguin at 7:47 PM on March 12, 2012


I'm very good about "raises" and "bonuses" not increasing my standard of living. I just received my yearly bonus last Friday, and that's going into ROTH savings and another 2 car payments in a lump sump.

Unfortunately I also found out yesterday I am not getting a raise this year which really sucks. Bonuses are nice but they're one time things...the company is in flux so there's not much I can do at the moment.
posted by PetiePal at 10:28 AM on March 13, 2012


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