Begining Investor

**am_vanquish** · 06-01-2010, 02:29 AM

Sounds like you've got a pretty decent head on your shoulders. Continue to spend less than you earn and the rest will fall into place. Here's what I would do:

1. Max out employer match in 403(b)
2. Setup emergency fund. Keep it in cash, money markets, or CDs. Start with 3 months of expenses. Then move onto #3 while still building the EF up to 6 months of expenses. (I would even suggest hitting 9-12 months if you know you'll be changing jobs often)
3. Max out the Roth IRA - every single year it's available going forward. Feel free to use another aggressive target date fund or an index fund.

There's nothing wrong with putting some money (less than 5-10% if total portfolio) in an online account to "play" the market. I know several people who do this simply to stay interested in the market. It gives a sense of involvement in the wealth-building process. Just make sure you've got everything else done first, and keep it to a small % of total assets.

**kork13** · 06-01-2010, 05:08 AM

For retirement assets outside of your employer plan, a Roth IRA is definitely your best option. You pay taxes on it now, then owe no taxes when you withdraw (on neither the deposited amount NOR the interest gains). With 40+ years to grow, that will be MAJOR tax savings. Anything beyond the $5000 annual limit, I'd use a standard investment account. It allows you to invest it as desired, but is more accessible to you in the event you want/need it.

Don't worry about using employer plans, even if it's possible (or even likely) that you'll move around. You can bring your 403b assets with you, rolling them over into your new employer's plan (or into an IRA if they don't have an employer plan). But understand that the employer plans allow you to sock away far more in a tax-advantaged status than you can on your own -- $16,500 vs. $5000. Definitely put in enough to at least get the full employer match, and probably then some, just for good measure (if you can afford it). But right now, I'd focus on a Roth.

Lastly, I totally agree with am_vanquish, it's completely alright to have some investing 'fun money' if you so choose. As long as you keep it totally separate from your other funds, using a few thousand to play with and learn from the markets makes sense if you have interest in it. Once I save up a few thousand for that purpose, I plan to do just that.

You seem to be a smart guy on a good course. Keep it up and you'll do great.

**Jre35** · 06-01-2010, 10:26 AM

OK, so it seems that what I have in my mind is a good start. Pay off student loans, start an emergency fund 3-9 months worth, contribute to 403(b) at least match, start a Roth IRA, investment account and then open a small account to play in the market. Here is where my inexperience will show again. As I do not have a large savings currently, and do not expect a financial windfall I will be starting with a very modest amount. Therefore, fees, opening costs etc will have a greater impact. I was wondering where was the best place to go for these services. I'd like to have everything "under one roof" if possible. Would that make a brokerage firm the best choice? Find a local financial adviser to set it up? Is there another option? Also,
of the "best" option do you have any recommendations for a company or firm or something specific I should start looking into?

Thanks again.

**jIM_Ohio** · 06-01-2010, 11:02 AM

Originally posted by Jre35 View Post

Hi,

My name is Jason. I am 22 and about to start my career this summer. I expect to make somewhere around 50-60k. I have very low expenses (car is paid off, rent, insurance etc). I expect to have extra money that I can set aside to invest. I do not plan on taking any vacations, buying a house, getting married, or buying a car in the near future so I have a few major expense-free years. I have roughly 20k in college loans, which I realize are a top prioty to pay off ASAP. I have a 403(b) set up with my current employer where I put 6% in, my employer matches 4%, and it's in the most aggressive portfolio offered. My question deals with the extra money that I would be able to invest and the 403(b). The first question is at this stage, with the possibility of changing jobs frequently (I'm in healthcare), is an employer based RA the best option? Or would it be more prudent to take that money on my own and invest it on my own ( I am responsible enough to reliably set aside money from my check)? Secondly, with or without the money allocated from/to the 403(b) what is the best option for the extra money? A Roth IRA? A mutual fund? An investment account? I have a greater risk tolerance than most people.

From what I have gathered I'm playing a long term game and small gains now add up over the course of a career, and in that sense a Roth IRA seems the most prudent decision. However, I cannot shake the vision of having an account on something like sharebuilder.com, and day trading with a contrarian investing approach. Maybe dipping my toes into penny stocks. The latter, I realize, is a poor financial decision (most likely), and thus why I turn to those with more experience and knowledge to help guide me to a good decision.

Thank you for your time, thoughts and suggestions. All are greatly appreciated.

IMO you are smart to be asking such questions. There is more than one good way to do this.

Here is a generic template most would agree on:

1) spend less than you earn...
1a) the major discussion is the percentage, if you spend 80% and save 20% that is a good place to be for your whole life.

2) Keep about 3-24 months expenses in the bank. Most of us would agree you want 3 months expenses for sure, some would say 6, a few would say 12 and some might say 24, depending on your life and how you live it. 75% of people on these boards would say 3-6 months minimum. If you expect to lose your job, keep this higher than 6 months expenses, if you expect some big purchases (like a car, house or wedding) then keep it above 6 months expenses for sure.

3) If you save 20%, try getting 15% going to retirement accounts and about 5% going to short term savings. The 15% can be divided up between 403b and Roth IRAs to your taste. The 5% going to savings might morph itself into something else (like debt paydown) once you have 3-6 months expenses in the bank (see #2).

4) Debt is OK in small doses if it helps you earn more money (like student loans) and make sure you can differentiate between cash flow (what you earn) and being able to afford something (by paying cash for things). In general, only finance items which go up in value (like houses, education and other good investments).

5) Focus on budgeting so you know what is a necessity and a luxury. Cable is not a necessity (for example) but is a common luxury. By getting some focus on the budget you can improve cash flow when you need money (if you don't have enough). Examples- even if car is paid for, have a car line item in budget where you add to savings each month so in 5-10 years, you have the cash to pay for a new car when your current car costs too much to keep. If you do this, its highly probable you will be spending much less than you earn month over month.

Summary
1) spend less than you earn
2) keep 3-6 months expenses in the bank
3) save 20% of your gross pay
4) debt is OK if the item appreciates in value
5) Budgeting is an important step to controlling finances

To answer your questions (if it was not clear)

I have roughly 20k in college loans, which I realize are a top prioty to pay off ASA

I would get retirement contributions to 15% before I paid extra on the student loans

I have a 403(b) set up with my current employer where I put 6% in, my employer matches 4%, and it's in the most aggressive portfolio offered. My question deals with the extra money that I would be able to invest and the 403(b). The first question is at this stage, with the possibility of changing jobs frequently (I'm in healthcare), is an employer based RA the best option?

403b with a match is better than a Roth
I don't know your degree type, tax status, earnings now, earning potential to know for sure if a Roth is better than 403b with money available after getting the match. Focus on the 15% to retirement funds, put 5k into a Roth, and the rest into the 403b if you can. The main emphasis here is 15% to retirement accounts however you decide to split it up.

econdly, with or without the money allocated from/to the 403(b) what is the best option for the extra money? A Roth IRA? A mutual fund? An investment account? I have a greater risk tolerance than most people

Risk comes in many shapes and sizes. I assume from description you can tolerate lots of volatility in returns and investment account balance to get a higher return.

So focus on this
15% to retirement accounts. Keep this 15% in a tax shelter like a 401k, 403b or Roth IRA. It would take $21,000+ of investments to max out both. If this is 15% of your gross pay (if $21,000 is 15% of your gross) then more than likely a Roth is not on the table to begin with.

5% to short term savings. Get 3-6 months expenses in cash. Because you like high risk, I suggest trying this:
3 months expenses in cash (CDs, money market or savings). If you are asked for money, you need to get it within 24 hours, so cash is what you are after (no volatility) with 3 months expenses
Then get 9 months expenses in a moderate risk investment- I like PRPFX- and keep this in a taxable account. If you expect tax bracket to rise soon, be mindful of taxes, and possibly consider muni bonds. What this 12 months expenses lets you do is 2 things
1) take on additional risks everywhere else
2) if you lose a job, you can live on this money for a year.

Because the outline has 5% going to this portion of budget, its possible it takes you 3-10 years to build up 12 months expenses.

Once you get 12 months expenses in cash or conservative investments, I would then put any extra monies in a more aggressive investment which is tax efficient in a taxable account.

Consider the following risks
a) interest rate risks
b) inflation risks on expenses
c) being single is a risk- if you get hurt, what happens to your finances if you cannot work?
d) LIQUIDITY RISK- this is a big one- if you put all your money into retirement accounts or real estate its tough to actually "USE" the money. Think of this another way- if you needed the money, could you access it without penalty, or another way to think of this is do you want a high net worth only, or the ability to spend some of what your worth is?

Manage all your risks so the main part of your plan (high risk investments in retirement accounts) is not cut off by less likely risks (like you not able to earn money for 6 months if you are in a car accident).

**kork13** · 06-01-2010, 03:25 PM

Originally posted by Jre35 View Post

OK, so it seems that what I have in my mind is a good start. Pay off student loans, start an emergency fund 3-9 months worth, contribute to 403(b) at least match, start a Roth IRA, investment account and then open a small account to play in the market. Here is where my inexperience will show again. As I do not have a large savings currently, and do not expect a financial windfall I will be starting with a very modest amount. Therefore, fees, opening costs etc will have a greater impact. I was wondering where was the best place to go for these services. I'd like to have everything "under one roof" if possible. Would that make a brokerage firm the best choice? Find a local financial adviser to set it up? Is there another option? Also,
of the "best" option do you have any recommendations for a company or firm or something specific I should start looking into?

Keep in mind what Jim said above about retirement before student loan pre-payment. Otherwise, you've got it exactly.

Be careful working with hiring a financial adviser to set up your investments. Many (though not all) of them end up as salesmen, pushing you toward either over-expensive investments or investments from which they receive kick-backs (often both). Starting out, I'd recommend using primarily index funds (or ETF's tracking indexes) or target-date funds (in a retirement account). Also, stick with a simple online discount brokerage company for your investments (and many also do banking). Most here will probably recommend any of the following: Vanguard, T. Rowe Price, Fidelity, Scottrade, eTrade, Charles Schwab, and others. I use Charles Schwab and USAA and like them both, but all of those companies have their followers, and are all good options. I believe most (all?) of those companies will enable you to keep everything 'under one roof', and most will also help you set everything up if you give them a call. Some even offer free financial/investment advice and research tools. Look for free mutual fund investing (a couple offer free in-house ETF trading), low initial investment requirements (could be between $1k-$5k for some mutual funds), and low stock trading costs (below $10/trade). Those will make it easier for you to start into it with lower starting funds.

**Geoffrey** · 06-03-2010, 10:34 AM

I think that if you follow all this good advice you will do great!
In terms of keeping everything under one roof, I use Fidelity and love it, as it gives me all the services I want, plus is only $7.95 per stock trade (this is a great price compare to most big brokerage firms).
In terms of your "play money" i would suggest that you spend the first $10 of it on the book "how to make money in stocks" by william O'neil. I was recommended this book a long long time ago and have done very well by its advice.

Geoffrey
Take Stock, Take Charge, Take Profits

**Geoffrey** · 06-03-2010, 10:35 AM

This is all great advice...

I also believe that you can and should contribute to both a Roth and an employer matching program.
Good luck,

Geoffrey

Begining Investor