Looking for investment/savings advice in twenties

[illini1022]

I'll admit I'm hardly an expert in finance, but I've been doing some reading and I'm trying to figure out how to make the most informed decisions I can. I appreciate any help offered.

My wife and I are both 24. I'm working full time in engineering, and she is currently a PHD student (on a fellowship so no tuition, earning a stipend that's basically just enough for a grad student to live off). We have zero debt - I focused on paying off all student loans this year (they weren't subsidized and thus I decided it would be best to get rid of them).

I'm putting 4% of my gross into a 401k, getting the full 4% match = 8% of my gross salary into the 401k. (For reference, thats about 6% of our total combined gross income that is going into my 401k. Furthermore, we're putting 3% of our total combined gross income into a roth IRA.

That puts retirement savings at about 9% of our combined income right now. I'd like this number to get a bit higher - but this will get easier after my wife graduates and is earning a full salary with benefits, likely including her own employer matching 401k.


Since the debt has been gone we set up some ING savings accounts with various goals - vacation, medium term savings, emergency fund, etc. The emergency fund is fully funded with about 12% of our annual gross income. I feel like the rest of our savings could be working harder for us. I'm thinking we should take advantage of dollar cost averaging and start investing, monthly, in some short-term (~5 years) mutual funds such as Vanguard S&P.

Does that sound like a smart route to be going at this point? If so, would sharebuilder be a good choice to do this through? I suggest Sharebuilder because my savings accounts would be nicely linked - not a huge deal. Any advice on particular strategies for this mutual fund options? or any recommendation about our savings strategy in general?

Thanks!

[disneysteve]

Welcome. A few comments...

First, congratulations on where you are at this stage. You are both 24 and debt-free. That alone makes you quite unusual in a good way. You are already contributing to retirement accounts which is fantastic, too. And you've got a fully-funded EF already.

Don't count the company match when stating what percentage of your income is going into retirement savings. Any time you hear a recommendation of how much you should be saving for retirement, whether it is 15% or 10% or whatever, that refers to how much of your actual income you are saving not including any company match.

As for the investing piece, you say something that is an oxymoron: "short-term (~5 years) mutual funds such as Vanguard S&P". Stocks are NOT short-term investments. If this is money you anticipate needing within 5 years, it does not belong in the stock market.

You then asked if using Sharebuilder would be a good way to invest in a Vanguard mutual fund. The answer to that is no. The way to invest in a Vanguard fund is to open an account with Vanguard.

But the bigger question is what is it you are saving this money for? What is the timeline? Are you saving for a new car, a house down payment or something else? Tell us what the money is for and we can help advise you on what to do with it.

[illini1022]

Good to know about not including the employer match, that brings our contribution percentage down a bit.

I see I went off track after that and made it blatantly clear that I don't know what I'm talking about. Is a mutual fund that tracks the entire stock market really a bad idea if dollar-cost averaging is being used? I may have my definitions of short term, medium term, etc mixed up. I have no immediate usage for this money, nor do I even have a target date of when we want to buy a house. It could be in 5 years or possibly longer - it would most likely not be any earlier. New cars aren't in the plan at the moment either - we're OK with what we have at the moment.

To summarize right now, I'm contributing 4% of my income into my 401k, and we are contributing 3% of our combined income into a roth IRA. I also neglected to mention that I maxed out my HSA last year and plan on maxing it out again this year. ($3050 is the contribution limit).

Aside from that, we're just funneling set amounts of our paychecks into ING savings accounts. I'm starting to see that the lack of a defined goal might make financial planning difficult. I'm just trying to figure out how to best save/invest money that I could see us using in 5 or more years.

Does that help at all? We just want to play the house thing by ear - after my wife graduates with her PHD (4-5 years from now) we'll have to evaluate all of our location/career options and figure out what is best at that point.

[kork13]

I'm starting to see that the lack of a defined goal might make financial planning difficult. I'm just trying to figure out how to best save/invest money that I could see us using in 5 or more years.

Does that help at all? We just want to play the house thing by ear - after my wife graduates with her PHD (4-5 years from now) we'll have to evaluate all of our location/career options and figure out what is best at that point.

Not necessarily difficult, just sort of meaningless...which I don't necessarily mean as a bad thing! It's more important that you save, and if you don't know what you want to do with that money right now, or when you might want it, that's FINE! More important is just to get into the practice of saving and investing, which is exactly what you're doing. Having an end-goal simply helps you to know when you've "made it".

It's true that you don't necessarily want all of your money in stocks/stock funds if you're looking at a possible time frame of less than 10 years. That said, you shouldn't avoid them either. Simply set a balance between stocks (higher risk) and bonds or cash (lower and lowest risk). My investments for >5 years down the road are about 65% stocks/25% bonds/10% cash. I'm comfortable with that risk profile. Once you determine what your risk tolerance is, then you can decide what investments you want to use.

In the end, "playing it by ear" is no financial planning crime... it's just saving without a specific goal, which is perfectly fine. As you go, you'll develop your goals better and can adjust/create your plan as desired.