Critique me

[sneezel22]

Hey All, here is my financial snapshot:

Details
Age: 23 (almost 24)
Contributing 15% of my gross income to my 401k which my employer matches at 4%.
Contributed 5000 to my Roth IRA at the beginning of 2011 and 2012 (will continue this trend).
No debt, but will need to buy a car probably in the next year. Will buy a house when I get tired of renting and want to take that step, probably a few years out from now.

Income
Salary: 68k/year (I expect this to increase about 7-10% per year for the next few years)
Additional income: around 5-7k per year

Expenses
Total monthly expenses combine to be about 1300-1400 per month (600 for rent, 700-800 for everything else).

Current Balances
401k: 11,000
Roth IRA: 10,200
Big Bank online savings account: 40,000
Online brokerage account: 5,500

Due to the relatively low rate of return (< 1%) of the online savings account, I am thinking I need to transfer a big chunk to my online brokerage account and get that money in some mutual funds. However I am having trouble figuring out how much to transfer.. and I also am not sure I want to put that money "at risk" with the market acting as strangely as it has over the last few years. I would have said the same thing last year and probably would have less money that I have now. Also with a car purchase coming up whenever my current car dies... not sure whether I will want to use it for a down payment or full payment.

Any advice or criticism is welcome.

Thanks,
E

[disneysteve]

I think you are doing very well and just need a little tweaking and direction going forward.

Standard advice is to maintain an emergency fund of 6 months worth of living expenses. For you, that means about $8,400 so that leaves cash reserves of $31,600. Have you thought about what kind of car you'd want? I would absolutely advise you to pay cash for that purchase. There is no reason at all with your finances for you to go into debt to buy a car. So let's say $20,000 for a car (hopefully you'll spend less but that is a nice generous number).

That leaves $11,600 unaccounted for. I think it would be fine for you to transfer at least that into your investments. The one other thing to consider, though, is a possible house down payment. If you think you may be house shopping within 5 years or so, you may want to keep that money in cash or low risk investments. Remember, you should have a 20% down payment to buy, plus you'll need a larger EF as your expenses will be higher.

So I think you need to clarify your life plan and then you can clarify your financial plan to match.

[bjl584]

I think that you are doing great.

I agree with Steve that you will need to set money aside for a house downpayment and a car.

Maybe, $10K in an EF, $15 to $20K for a car, and a 20% downpayment for a house in cash.

[MonkeyMama]

A general rule of thumb is to keep money you need in the next 5 years in liquid cash. If you don't need it for 5+ years, you have time to ride out some of the volatility of the stock market.

Another thing to consider is tax efficiency. You can put up to $17,000 per year into a 401k. Unless you had some clearer shorter range goals, I Would not at all bother saving money in taxable mutual funds. I would start putting $17,000 per year into retirement. There are no tax consequences on that money until you withdraw at retirement. You can always scale that back down when you are ready to save up for a home, or something else a little more shorter term than retirement.

I am pretty conservative, so if I were you, I'd keep the $40k cash. ($20k is a generous years worth of expenses and $20k would buy a pretty nice car in cash). I do believe that slowly trickling money into the stock market may be easier for you to stomach. So, I would start putting 25% into your 401k. From everything you said, sounds like you would still be saving money. Start putting any new savings into the stock market. (Versus putting a lump sum in, to start). Start with a balanced fund (something that is 60/40 stocks/bonds) to help you warm up to it. This is also may be a good idea to be a little conservative if you do eventually take the money out for a home. If you regularly contribute, you should do well.

I absolutely agree to save 20% down payment for a home, but without a clearer time frame or goal, I think investing that money in mutual funds and maxing out retirement is wise until you have clearer goals. If you decide tomorrow that you want to own a home in 5 years, then that's the time to start saving for that in cash.

I think you are doing excellent.

[LMA]

Oh boy you are sitting pretty!

The fact that you are 24 and are in this forum asking these type of questions already puts you ahead of 98% of people out there. Good job.

I also am not sure I want to put that money "at risk" with the market acting as strangely as it has over the last few years...

This is the way the market is, period. It's not just the last years. The advantage that you have is TIME. Proper investing requires time and perseverance so that you can ride the stock market in the ups and downs.

IF you were to invest $20k in the market now and in one year your balance drops to $15k, would it really matter? No, because you are going to be investing money that you don't need right now or next year. It would not matter if it goes down in value in one year because you should be looking 10, 15, 20+ years down the road. If the market goes down then as long as you keep on steadily buying through those low points you will keep on making long term money.

I would suggest that you max out your 401k and IRA and also make sure that those two are being invested in a growth mutual fund.

[YLTL_Dan]

There is no reason at all with your finances for you to go into debt to buy a car. So let's say $20,000 for a car (hopefully you'll spend less but that is a nice generous number).

Totally agree with Steve on this one; I recommend not spending more than 20% of your annual salary on a car purchase, which would equal $13,600. As long as you pay with cash, I don't think you'll have a problem finding a great car for that amount. It's when you screw up like I did and finance a brand new $28k car at your age that things go downhill. Great work!