Advice needed

[BigVic]

Hey everyone! I was just wondering if maybe someone could get me started on a plan towards my goals. I want to open up a Roth IRA, save for a downpayment on a home, and keep an emergency fund.

Age:24
Savings: $6,000
401k: $3,600 (I contribute up to the max match which is 50% of 5%)

NO CC DEBT!

Net Monthly Income: Around $1,700

Bills

Car Payment: $260 (I owe $13,000 on a 2006 Honda Civic with 30,000 miles)

Car Insurance: $111 (I heard it goes down after I turn 25)

Phone: $20

Gym: $30

Gas: $110

I will be moving out into an apartment within about 3 months and expect to be paying out somewhere around $600 extra towards rent/food/etc.

By April or May I am on track to having around $8,000-$8,500 in savings. I know I can fully fund my 2009 IRA until April, but is that a good idea? What would be my best route here? Thanks for any info!

[jIM_Ohio]

Check these threads to add some information to your posts

Questionaire for people starting retirement planning

and

Investment risk questionaire

You need a budget which lists all expenses. If what you listed in OP is all expenses, then redo this once you move out.

You need to know your income- net is $1700, guessing you gross about $30k per year. List income in terms of gross, as some of retirement savings options are pre-tax (like 401k).

Investing in a 401k up to the match is a good place to start (for retirement savings) and adding a Roth is a good step to continue. It is probably not going to be enough, unless you verify a few things.

1) Look to save 20% of gross pay per paycheck. Put 15% to retirement and another 5% towards house savings. Then learn to live on 80% of gross (which might be 50% of net).

If 401k is 6%
can you put 9% into a Roth (if you gross $30k then another $2700/year into Roth would be 9% of gross pay).

2) Learn how to invest money and understand the risks involved with the choices you make.


3) Always focus on spending less than you earn, and as you get raises, maintain the percentages and risks listed above.

If you have questions- ask them in this thread.

[dczech09]

Look at T Rowe Price for the Roth IRA. I just started one with them and the nice thing is you can put your money into one of their retirement funds for as little as $50 a month through an automatic asset builder. I am in their Retirement 2055 and automatically put $100 per month. I will probably increase the stake.

Another nice thing about T Rowe is that you have the option of investing your retirement money in diverse mutual funds, ETFs, and indexes at a low cost. I will take advantage of that when I have a lot more money and can benefit from economies of scale.

I suggest you do something similar. It looks like you're doing great with the savings and everything. Also, see if their are opportunities to cut costs; use the savings as part of your IRA investment.

[Mike75]

Originally Posted by jIM_Ohio

You need to know your income- net is $1700, guessing you gross about $30k per year. List income in terms of gross, as some of retirement savings options are pre-tax (like 401k).

Investing in a 401k up to the match is a good place to start (for retirement savings) and adding a Roth is a good step to continue. It is probably not going to be enough, unless you verify a few things.

1) Look to save 20% of gross pay per paycheck. Put 15% to retirement and another 5% towards house savings. Then learn to live on 80% of gross (which might be 50% of net).

If 401k is 6%
can you put 9% into a Roth (if you gross $30k then another $2700/year into Roth would be 9% of gross pay).

2) Learn how to invest money and understand the risks involved with the choices you make.


3) Always focus on spending less than you earn, and as you get raises, maintain the percentages and risks listed above.

If you have questions- ask them in this thread.

I don't think its necessar to save 1/5 of your income in the initial stages. Right now, your expenses must be high and aiming to save that much will just put pressure on you.

[jIM_Ohio]

Originally Posted by Mike75

I don't think its necessar to save 1/5 of your income in the initial stages. Right now, your expenses must be high and aiming to save that much will just put pressure on you.

A person has to start somewhere... a savings plan built on percentages will be "easier" to maintain when raises kick in.

If a person makes 30k per year and they start at 5% (with the goal of getting to 15%), they will be saving $1500 per year. Some company's (like Vanguard) will not even let you invest with them at such low amounts.

If in this same situation a person adds 2% per year to savings (based on raises) they will get to the goal in 7 years. If they add 3% to savings they will get to their goal in 5 years. Goal is 15% savings.

This would imply that "most" of any cost of living raises are being added to savings to hit a target saving percentage.

My argument in above situation is for those 5-7 years a person is living well above their means. If the initial saving percentage is set at 15%, any raise a person gets will increase their standard of living, and only a portion of the raise gets added to savings (15% of every raise would be added to maintain savings percentage).

If you use the 20% guideline I used in original post, it would take 10 years at 2% and 7 years at 3%. 20% implies 15% to retirement and 5% to short and mid term savings for large purchases.

Both techniques work, my argument for any person is to spend less than you earn by saving 20% once you decide to start saving or paying down debt. This establishes you as spending less than you earn which is the best way to financial success.

[BigVic]

Thanks for the info! So is it a bad idea to go ahead and fully fund my 2009 IRA taking into account my auto loan and current savings?

[jIM_Ohio]

Originally Posted by BigVic

Thanks for the info! So is it a bad idea to go ahead and fully fund my 2009 IRA taking into account my auto loan and current savings?

By April or May I am on track to having around $8,000-$8,500 in savings. I know I can fully fund my 2009 IRA until April, but is that a good idea? What would be my best route here? Thanks for any info!

Yes its a good idea to fund the Roth IRA. Having a loan should not prevent you from getting an IRA or saving for retirement.

[BigVic]

I understand that. I guess what I meant to say was would it be better to fund the full $5,000 for last year, or maybe try to save longer and pay my car loan off first? The car is considerably new and the rate(4.99%) is fair, I think. By April I would have around $3,000 for EF after loading the $5,000 into the IRA.

[jIM_Ohio]

Originally Posted by BigVic

I understand that. I guess what I meant to say was would it be better to fund the full $5,000 for last year, or maybe try to save longer and pay my car loan off first? The car is considerably new and the rate(4.99%) is fair, I think. By April I would have around $3,000 for EF after loading the $5,000 into the IRA.

IRAs have a time table, and there is no time machine to go back and add more in. I would fund 2009 IRA as soon as reasonable, then also fund 2010 as soon as reasonable, then at that point consider car loan or other.

In my first post I mentioned put 15% of gross pay to retirement
then 5% to short term goals (like debt paydown or EF)

follow that- in sequence (retirement comes first). As you pointed out your rate is not that high, and making sure you are secure financially in 10-20-30 years is as important as removing a bill from today's budget.