The ultimate first-world problem: spare money to invest... now what?
June 8, 2013 3:21 PM Subscribe
YANMFA (financial adviser)... but... Thanks to a new, and well-paying, job, I just got my ridiculous 6% student loans paid off. Now I need to figure out the best thing to do with the share of my income that I was putting toward that. Financial wizards of the internet, advise me? Messy details inside...
So I have a good job that's fairly reliable for the near future (there are some bumps in my field, but they probably won't reach my employer anytime soon). Having gotten rid of the high-interest student loans, I have no debt left. Now it's time to save/invest/something?
With the end of loan payments, I have a minimum of a 1k a month to play with, after taxes, and a maximum of 2k a month if I economize, and no unexpected expenses come up. I'm about to turn 34, and could reasonably expect slow but steady income growth, on the range of 2-4% a year, plus one or two big jumps over the next decade if I hop employers, get promotions, etc.
My goals are to have a reasonable amount of liquidity for unplanned expenses, disasters, etc., and otherwise to grow my war chest, both for retirement and just for the general advantages of compound interest/growth. One day, I like the idea of having enough passive income to live on. (Or, who knows, maybe I'll start a startup one day or something.) I'd also like to save up for big expenses... I rent right now, don't want to own, but might want to in a few years, and it would be nice to have a down payment, etc.
Right now, I have about 8k in a savings account, and a few grand hanging around in old retirement accounts. Plus, as of last year, I have a tax-advantaged retirement account, a 401k or something equivalent, in which I contribute 5% of my salary and my employer also contributes 5%.
I can't contribute extra to the main retirement account, but apparently there's a second account type that I can contribute to, up to 17k a year. It appears to be a 403(b) (I'm in that lucky group of people who is eligible for one), and I think contributions are pre-tax, but I'm not super-clear on that... apparently there's an option to make after-tax contributions too (why?). I'm meeting with a person from TIAA-CREF, who administers my employer's retirement stuff, in a few days; hopefully this will all be explained then.
I have a savings account with a really lousy interest rate, below 1%, and I'm a little leery of opening an account at some random internet bank/ING direct/whatever to try and get more interest. I can get a five-year CD from my bank at 1.8%.
Sooo... what do I do with my excess income?
Right now, I'm thinking that I should get at least 25-30k in some combination of savings account and CDs, as a rainy day fund. I'd like at least some of that in savings accounts, for things like car repairs, but I imagine most can go to CDs for an interest rate that might at least come close to beating inflation.
But I'd also like to get the tax advantages of the retirement account. But at what cost, in terms of liquidity? Obviously, the 403(b) isn't going to be a down payment on a house.
And what about other investments? I'd like to get the kind of growth that the stock market can provide, probably in the form of a nice cheap and reliable vanguard index fund portfolio.
Given all that, how should I allocate my 1-2k spare/month? Any wise advice out there?
And, finally, are the amounts of money that I'm playing with enough to justify hiring a pro to help me figure this stuff all out? (Or is there a really good book, etc.?)
So I have a good job that's fairly reliable for the near future (there are some bumps in my field, but they probably won't reach my employer anytime soon). Having gotten rid of the high-interest student loans, I have no debt left. Now it's time to save/invest/something?
With the end of loan payments, I have a minimum of a 1k a month to play with, after taxes, and a maximum of 2k a month if I economize, and no unexpected expenses come up. I'm about to turn 34, and could reasonably expect slow but steady income growth, on the range of 2-4% a year, plus one or two big jumps over the next decade if I hop employers, get promotions, etc.
My goals are to have a reasonable amount of liquidity for unplanned expenses, disasters, etc., and otherwise to grow my war chest, both for retirement and just for the general advantages of compound interest/growth. One day, I like the idea of having enough passive income to live on. (Or, who knows, maybe I'll start a startup one day or something.) I'd also like to save up for big expenses... I rent right now, don't want to own, but might want to in a few years, and it would be nice to have a down payment, etc.
Right now, I have about 8k in a savings account, and a few grand hanging around in old retirement accounts. Plus, as of last year, I have a tax-advantaged retirement account, a 401k or something equivalent, in which I contribute 5% of my salary and my employer also contributes 5%.
I can't contribute extra to the main retirement account, but apparently there's a second account type that I can contribute to, up to 17k a year. It appears to be a 403(b) (I'm in that lucky group of people who is eligible for one), and I think contributions are pre-tax, but I'm not super-clear on that... apparently there's an option to make after-tax contributions too (why?). I'm meeting with a person from TIAA-CREF, who administers my employer's retirement stuff, in a few days; hopefully this will all be explained then.
I have a savings account with a really lousy interest rate, below 1%, and I'm a little leery of opening an account at some random internet bank/ING direct/whatever to try and get more interest. I can get a five-year CD from my bank at 1.8%.
Sooo... what do I do with my excess income?
Right now, I'm thinking that I should get at least 25-30k in some combination of savings account and CDs, as a rainy day fund. I'd like at least some of that in savings accounts, for things like car repairs, but I imagine most can go to CDs for an interest rate that might at least come close to beating inflation.
But I'd also like to get the tax advantages of the retirement account. But at what cost, in terms of liquidity? Obviously, the 403(b) isn't going to be a down payment on a house.
And what about other investments? I'd like to get the kind of growth that the stock market can provide, probably in the form of a nice cheap and reliable vanguard index fund portfolio.
Given all that, how should I allocate my 1-2k spare/month? Any wise advice out there?
And, finally, are the amounts of money that I'm playing with enough to justify hiring a pro to help me figure this stuff all out? (Or is there a really good book, etc.?)
The Seven Baby Steps.
I disagree with Dave on few things.
If I were you, and I more or less am finically (but I'm older) I would pile up cash until I had what I thought I could live off of for a year. In my case this would be about my take-home (I'd have to have COBRA, so need to make sure that's in there).
I get to skip saving for kids since I don't have them. Otherwise I think that's a decent plan.
Don't get hung up on interest rates and specific returns.
The point is to get out there! You can refine as you go. You'll learn. You'll make mistakes. Keep banging on it.
posted by cjorgensen at 3:48 PM on June 8, 2013
I disagree with Dave on few things.
If I were you, and I more or less am finically (but I'm older) I would pile up cash until I had what I thought I could live off of for a year. In my case this would be about my take-home (I'd have to have COBRA, so need to make sure that's in there).
I get to skip saving for kids since I don't have them. Otherwise I think that's a decent plan.
Don't get hung up on interest rates and specific returns.
The point is to get out there! You can refine as you go. You'll learn. You'll make mistakes. Keep banging on it.
posted by cjorgensen at 3:48 PM on June 8, 2013
I wouldn't consider a 5 year 1.8% CD. Too little return for an illiquid investment. My emergency funds sit in a savings account in my regular bank, a phone call or website visit away from being usable in case of a serious problem.
403(b)s are basically 401(k)s for professors and some non-profits. They're a great place to put money.
If you need to save for a down payment on a home, don't use your 401(k) or 403(b) for that. You can take loans against those, but it's an absolutely horrible idea because the small print is fraught with ways for it to go horribly, horribly wrong. (e.g. get laid off and find out the loan is due essentially immediately).
Vanguard/TIAA-CREF style indexes are fine. The lower the fees the better. If you don't like investing in the most terrible of companies you can consider the social choice funds.
posted by grudgebgon at 4:32 PM on June 8, 2013
403(b)s are basically 401(k)s for professors and some non-profits. They're a great place to put money.
If you need to save for a down payment on a home, don't use your 401(k) or 403(b) for that. You can take loans against those, but it's an absolutely horrible idea because the small print is fraught with ways for it to go horribly, horribly wrong. (e.g. get laid off and find out the loan is due essentially immediately).
Vanguard/TIAA-CREF style indexes are fine. The lower the fees the better. If you don't like investing in the most terrible of companies you can consider the social choice funds.
posted by grudgebgon at 4:32 PM on June 8, 2013
I follow the Boglehead approach to investing. Very common sense stuff in my opinion. Also check out the forum. The term Boglehead comes from the name of the founder of Vanguard, Jack Bogle.
Full disclosure: I'm not an expert, just some guy with an interest in my own money.
posted by moonlit walk on the sun at 5:11 PM on June 8, 2013 [3 favorites]
Full disclosure: I'm not an expert, just some guy with an interest in my own money.
posted by moonlit walk on the sun at 5:11 PM on June 8, 2013 [3 favorites]
Way to go on paying off your loans.
- Get referrals and sit down with a Fee Paid financial advisor. (fee paid = they won't try to sell you stuff) They can help you define financial goals and plan for them and explain types of accounts, tax consequences, etc.
- I'm a fan of Andrew Tobias' The Only Investment Guide You’ll Ever Need.
I find common sense on these blogs:
Get Rich Slowly
The Simple Dollar
Wise Bread
and I'll check bogleheads out.
Years ago, I read Your Money or Your Life. I don't closely follow their plan, didn't buy their planning kit, but I have always planned financially so that I'd have some stability, and lived simply.
posted by theora55 at 5:45 PM on June 8, 2013
- Get referrals and sit down with a Fee Paid financial advisor. (fee paid = they won't try to sell you stuff) They can help you define financial goals and plan for them and explain types of accounts, tax consequences, etc.
- I'm a fan of Andrew Tobias' The Only Investment Guide You’ll Ever Need.
I find common sense on these blogs:
Get Rich Slowly
The Simple Dollar
Wise Bread
and I'll check bogleheads out.
Years ago, I read Your Money or Your Life. I don't closely follow their plan, didn't buy their planning kit, but I have always planned financially so that I'd have some stability, and lived simply.
posted by theora55 at 5:45 PM on June 8, 2013
I'm making it a habit now of favoriting the first person in a financial post that recommends Bogleheads. It's good advice. Read their wiki, understand the principles, and then make your own plan.
posted by ifandonlyif at 9:26 PM on June 8, 2013
posted by ifandonlyif at 9:26 PM on June 8, 2013
Invest in the stock market the amount that you can afford to lose.
posted by Cranberry at 12:10 AM on June 9, 2013
posted by Cranberry at 12:10 AM on June 9, 2013
The Bogleheads also have a fairly extensive reading list, it sounds like you should go with one of the Start-Up section books. Do some reading and prioritize your list of goals so that if you decide that you do want to see a fee only financial advisor that you go in with a set list of what you want to achieve. I think that if you read a few of the books that you would have enough information to make those decisions independently, but the forums are also a great place to confirm that whatever plan you make sounds reasonable (but only do this after you read the wiki and at least some of the basic books).
posted by tangaroo at 5:35 AM on June 9, 2013
posted by tangaroo at 5:35 AM on June 9, 2013
regarding emergency funds: try to itemize what emergencies you might have, and match liquidity to that. for example, if you want an emergency fund in case you loose your job and you want to have X each month to live on for a year, buy, say, 12 1-year CDs so that 1 matures every month. for that kind of emergency you don't need all of the money immediately.
in contrast, something like your house burning down or a medical emergency, keep an amount equal to the deductible in a savings account. or more generally, add up all of your deductibles and keep that amount. more complex: it's unlikely that all will happen at the same time, so you can keep less, but that depends on how risky you want to be. once you have money saved, you can start getting higher deductibles on your insurance which will lower your premiums, and you can use the savings to increase your emergency fund.
posted by cupcake1337 at 8:37 AM on June 9, 2013 [1 favorite]
in contrast, something like your house burning down or a medical emergency, keep an amount equal to the deductible in a savings account. or more generally, add up all of your deductibles and keep that amount. more complex: it's unlikely that all will happen at the same time, so you can keep less, but that depends on how risky you want to be. once you have money saved, you can start getting higher deductibles on your insurance which will lower your premiums, and you can use the savings to increase your emergency fund.
posted by cupcake1337 at 8:37 AM on June 9, 2013 [1 favorite]
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If you're looking for something more, index funds. And again, fire and forget, come back in 40 years and pick up your winnings.
Compound interest really works.
posted by Cool Papa Bell at 3:46 PM on June 8, 2013