Investing in 20s

[id243059]

Hi All-

I am 25 years old and recently purchased my first home. After all the closing costs and the down payment I have just under $20k in savings. About 10% of my paycheck goes into my 401k and I have a couple grand in a mutual fund. The rest is a money market account.

I am looking for advice on what to do with the remaining savings. I am interested in purchasing real estate in the near future, but would also like to invest more in the stock market. On one hand I want to have enough available cash to buy a property and on the other hand I want my savings to earn more in the market.

Does anyone have any suggestions on how I should approach this situation?


Thanks!

[kork13]

I'm in a somewhat similar situation, in wanting to save up for an upcoming home purchase. I'm 24 myself, and what I've been doing has been to invest with a moderate asset mix. I've got 40% in a large-cap index, 30% in a mid-/small-cap index, and 30% in a bond fund. I've got that money set aside as my 'house fund', and when a good opportunity arises, I'll have it available to sell the investments and fund the property purchase. Obviously there are risks there, primarily in that it's still quite stock-heavy, so a large slide in stock values would hurt me quite a bit. However, because I'm pretty fluid in my prospects of when I'm looking to buy (anywhere between 1-5+ years from now), I'm willing accept that risk. Also, a consideration is that gains could be taxes as regular income if not held beyond a year, and also if the Bush tax cuts expire next year. I think over the next year or so, I'll also be taming down my asset mix by beefing up the bond portion.

~~ALL OF THAT ASIDE!~~
I think right now for you, it's more important that you establish for yourself an emergency fund. Particularly with a newly-purchased house, you'll want to keep a pretty good amount in savings as a backstop to any large, unexpected expenses or a sudden loss of income. 6 months' worth of expenses is a good rule of thumb answer, but it does depend on your personal situation. Do you know what your monthly expenses are? That $20k is probably a pretty good figure for your EF as it stands. You should just keep that in a cash/liquid account and leave it alone, (mostly) regardless of how poor of a return you get on it. Build up your savings for the next property purchase outside and completely separate from that emergency fund. It'll take time to build up the cash for another purchase, but better to do it safely than to take on too much risk (by not having a cash backstop for yourself) and have it bite you when something doesn't go to plan.

[jIM_Ohio]

Hi All-

I am 25 years old and recently purchased my first home. After all the closing costs and the down payment I have just under $20k in savings. About 10% of my paycheck goes into my 401k and I have a couple grand in a mutual fund. The rest is a money market account.

I am looking for advice on what to do with the remaining savings. I am interested in purchasing real estate in the near future, but would also like to invest more in the stock market. On one hand I want to have enough available cash to buy a property and on the other hand I want my savings to earn more in the market.

Does anyone have any suggestions on how I should approach this situation?


Thanks!

You need to assess 4 issues

1) risk
2) return
3) how much you value your time
4) liquidity

and weight all 4 against one another.

In general if you take a risk, you expect some higher return. In addition you need to know the risks of each investment you participate in. Real Estate has some risks and rewards which are different than the risks and rewards of the stock market.

For example...
Real estate is not liquid- you cannot sell tomorrow and get money in 1-2 days. Stocks have almost immediate liquidity. Meaning you can sell tomorrow and have money before end of day in most cases.

Real Estate is generally a low return investment, but it provides a constant cash flow, where as stocks have a much higher return, but that return comes with significant volatility.

The positives of real estate will depend on what you do with the cash flow it generates, where as with stocks, the appreciation of the stock is unlimited (it can go up, then go up higher) but the income stream of stocks is much lower than real estate.

Real estate also takes time. This means you have to spend time maintaining the property every year. You can buy a stock in 2010, sell it in 2030, and it did not take much time to "watch" or maintain the stock over those 20 years. Real Estate is a passive investment because you do not have to be present for the income to come to you (this is a tax distinction, not a description of the effort you need to take), however it is not passive in the effort needed to generate the income.

Most people invest in stocks for growth and real estate for income.


My suggestion would be this

1) Keep doing 10% to 401k and increase this slightly each year (like 1-2% every year or every other year). If you have 20% going to 401k by time you are 40, that is great.

2) Create an emergency fund of 3 months expenses

3a) For any real estate purchase, double the emergency fund and add the rental expenses to it.
example-
If you have $3000 of expenses now, that is an emergency fund of $9000.
If you buy a property which has $2000 of monthly expenses, you now want 6 months times $5000 of expenses ($30,000) in the emergency fund.

The purpose of adding to the EF is you have more risks with short term cash with a rental property. This gives you 6 months of safety if you either lose your job, the rental burns down, or some other catastrophe (like a renter not paying you- evicting can be difficult).

3b) For further purchases in stocks, consider adding to 401k or a Roth IRA. I would try to get income into 15% tax bracket before contributing to Roth for highest savings. A Roth is still quite valueable if you are in 25% bracket, but it is more valueable in 15% bracket AND the savings of a 401k in 25% bracket are too much to pass up IMO until 401k is maxed out at $15,500 per year.

4) With real estate, there are synergies as you add a third, fourth or fifth property. Meaning you won't need to increase the emergency fund if the income from 4 rentals can pay the costs of the 5th rental (for example) but this will depend if the 5 properties are all of similar value and rent.

In addition, with real estate, IMO the best way to make money is to put as little down as possible to obtain property. This lowers your risk. The property will generate $X per month and 12*$X per year. Whether you put 10% down, 50% down or 100% down, that revenue stream does not change at the core (the cash flow is the same). When you factor in taxes, this can change (some), so make sure you have a tax knowledge when making decisions like this.

[littleroc02us]

~~ALL OF THAT ASIDE!~~
I think right now for you, it's more important that you establish for yourself an emergency fund. Particularly with a newly-purchased house, you'll want to keep a pretty good amount in savings as a backstop to any large, unexpected expenses or a sudden loss of income. 6 months' worth of expenses is a good rule of thumb answer, but it does depend on your personal situation. Do you know what your monthly expenses are? That $20k is probably a pretty good figure for your EF as it stands. You should just keep that in a cash/liquid account and leave it alone, (mostly) regardless of how poor of a return you get on it. Build up your savings for the next property purchase outside and completely separate from that emergency fund. It'll take time to build up the cash for another purchase, but better to do it safely than to take on too much risk (by not having a cash backstop for yourself) and have it bite you when something doesn't go to plan.

Fantastic assessment of the situation. Patience and sacrifice has it's rewards, while reducing a large percentage of the risk. IMO, don't let anyone tell you that you must have greater risk for greater reward. Your 25, you have the time to save, save, save for that big purchase and minimize risk.

[MonkeyMama]

My only additional advice is to make sure you are being tax efficient. (As Jim did mention). You should probably be doing most of your investing in IRAs and 401ks (tax deferred).

I agree with the advice to keep an emergency fund, and to invest outside of retirement, for future real estate purchases, etc.

OF course, you can put your emergency fund & real estate purchase savings in a ROTH. (This is a way to sock it away into retirement for the tax efficiency, but you can pull it out any time, if need be. If you don't buy real estate or need taxable investments down the road - then you have it socked away for retirement. It's a win-win kind of strategy). Just something to consider.

[jasedona]

I would recommend keeping this as liquid cash, probably in a high-yield money market account. Also, don't rush into purchasing a second home. I don't think most young people realize what home ownership entails. It's really not just about making more cash or building equity. Owning a home can tie you down to a place long term, and in your 20s and early 30s, you'll want probably want a lifestyle (if you don't already) of being able to move to places, etc. The burden of a mortgage is one that is not easy to get rid of. I made this mistake...currently 31, bought my first home at 23, and owned several properties by 26. I love being a homeowner, but I didn't realize how many opportunities to travel and start new businesses that I would miss just being saddled by mortgages.

[thefamilyfinanceguide]

I see some long posts here on where to put your money. Now that you own house, you now are at risk of household emergencies, not including other family medical emergencies. The first thing you MUST do is assess all your debt (i.e. credit cards, car loans, student loans, etc.) If you have any of these get $1000 in an initial emergency fund. Then get rid of the debt, even apply that 20K you have towards it. If you have no debt except the mortgage (which by the way Dave Ramsey recommends your mortgage payment be no more than 1/4 of your monthly income), then build a 6 month emergency fund. Put it aside then save. Only buy a second home with CASH! Your second home is a liability now and the market is still uncertain even with low interest rates.

Sincerely,
The Family Finance Guide (check me out at thefamilyfinanceguide dot come

[briandownie]

I just joined this forum. I have to say that I'm very impressed by all the young folks that are already well established. I was in a similar situation in my twenties so let me speak from experience.

Set a goal for yourself, where would you like to be short term and where would you like to see yourself long term? Then remember the most important step... don't forget to have fun along the way! Money isn't everything.

Brian

[maat55]

[QUOTE]

OF course, you can put your emergency fund & real estate purchase savings in a ROTH.

I second the Roth, if you qualify.

[tulog]

You already have one real property, and have only $20K in liquid savings. Any investment in real estate earns simple interest (by prepayment of a fixed interest rate loan) or market appreciation.

Do not keep money in cash as that loses value to inflation and earns no return. Consider investing into common stocks. Learn technical analysis.

[buildmybudget]

Technical Analysis,..Really?

Learn technical analysis.

Technical analysis should be the last thing you consider if you are looking to make logical, smart investment decisions. TA is nothing more than gambling in the stock market.

After paying down debt, establishing an EF, maximizing your 401k and Roth contributions to lower your AGI, learn how to fundamentally assess companies that you would like to invest in. Remember, buying a stock means you own the company and have an interest in how it performs, from top to bottom! Reading a company's 10k and researching market conditions and internal/external factors that will affect the company's success is a start to learning how to identify good stock opportunities.

If you really want to learn about stock investing, begin with Benjamin Graham's "The Intelligent Investor."

[gambler2075]

Technical analysis should be the last thing you consider if you are looking to make logical, smart investment decisions. TA is nothing more than gambling in the stock market.

Take it from a trader, TA is marginally useful, but noobs ascribe far more power to TA than it actually has. For traders, TA is just one of many tools they should have in their armamentarium. It adds maybe 5% of an edge over not having it. The place where noobs fail is that they think once they learn the basics of TA, then they can turn the stockmarket into an ATM. TA is far more complicated than they think. There are a few professional traders I know that can use TA properly (WeeklyTA is one), but for most it is a pipedream.

g

[fiscallyprudent]

in the order of importance, i'd say:

1. Establish an emergency fund of at least 6 months of household expenses (living frugally)
2. Fund your Roth IRA - Do this at Vanguard, T Rowe Price or Fidelity as they have the lowest fees
3. Keep investing on your 401k - 10% is good ... you may even want to go up if you can to find some tax shelter. Now that you own a home, you'll be able to write off some interest.

The rest is up to you, depending on your life's priorities.

Good luck!