Young professional with extra money - How should I save/invest it?

[bobthabuilda]

I'm 23 years old, I just graduated from college last week and I start my new job this week. I've been planning my finances, and I'm coming up with some extra money per month that I'm not sure how to save/invest. Here's my plan.

Employer 401K in a Small Cap Value Fund
This fund is high risk but since I'll be investing into my 401K for the next 40~ years I'm sure it will weather any market downturns by the time it's ready to be withdrawn.

Emergency Savings 60/40 High Quality Bonds/Large Cap Stocks Fund
I chose this plan to have a steady, more reliable stream of income. It will hold 6 months worth of my living expenses in case anything happens. I think this is a good alternative to the sub 2% traditional savings accounts right now.

I'll be getting an extra stream of cash (roughly $3.5K) coming in every month despite the amount I'll be using on car payments, rent, bills, funds and entertainment.

What should I do with this money?

I was thinking of starting another fund, but I'm not sure what portfolio to target. Of course, I want to get the most returns possible from this money but I also want the ability to pull it out for some things such as a house, or a vacation.

What should I do?

[jIM_Ohio]

I think your plan is decent (better than many) but has some shortfalls.

Try this

401k:
Invest it 100-0, 80-20 or 60-40 based on how you see your retirement plan go... do not invest in just one fund. A target date fund could also work.

Emergency fund
put 3 months expenses in cash or CDs or cash equivalents
then put 3 months expenses in a moderate risk mutual fund- I suggest not more aggressive than 40-60, and even 40-60 would be too aggressive for me (I use PRPFX- Permanent Portfolio for this... 25% equity, 25% bonds, 25% gold and 25% swiss francs)

Most important-
spend less than you earn... I suggest spend 80% save 20%
15% of what you save should be directed to 401k or a Roth IRA
5% should go to savings

with the 5%, get 3 months expenses cash
then get 3 months expenses invested at low overall risk, but trying for about double return of the cash.
then add additional monies to either the same investment, or one with slightly more risk (higher return).

If job pays 40k, 5% of this is $2000. This means it will take about 18 months to get 1 months expenses (3k) in the bank. So most of above is still a 3-4 year plan.

If you need money for a vacation, you know you could tap emergency fund for about $1000-$2000, and the 5% you have in the budget will replace it. Use this cash flow technique for first few years until savings builds up.

[dczech09]

Welcome to the forum!

You and I are in similar situations: 23 years old and just starting out making decent money and trying to figure out what to do with it. You've got your head in the right place, so congrats on that!

As far as your plan goes, I think you should add a little more diversification to your 401k simply because you do not want to put all your eggs in one basket. Even if you put 10% in bonds, you would be doing a bit betters.

OPEN A ROTH IRA!!! This is very important. I opened mine several months ago and never looked back. The 401k is great, but you may want to have the tax free account so that you get the best of both worlds. The most you can put into this is $5,000 per year ($416.67 per month). At the age of 23, you could put only $200 in per month and you will still be on track to be a millionaire at retirement (assuming you keep the contributions going).

Now for the emergency fund. This is a big topic but I have found that the emergency fund is not something to get rich off of, but rather protect yourself. Put this into an online savings account or money market account. I know the stocks sounds like you could get better return on, but do not forget that you have taxes to pay and liquidated stocks and getting a check can take a almost a week.

Do you have any student loans, car loans, or any other debts? If you do, tackle them! That is what I am focussed on right now and it is going great. I recommend having a few thousand in savings (I have a mix of emergency funds and goal-oriented growth funds). Contribute modestly to retirement, but enough to make a difference. Then focus everything you have got to become debt free as soon as possible.

I know this may sound like a lot, but trust me, its worth it. Again, you're on track but these few things could make things so much better. Good luck!

[Johngate2100]

That totally depends on you.Higher risk leads to higher profit.If you can take risk then you should invest in stock market funds.