21 yr old in need of advice of investing and saving.

[sublime99]

I can spare $750-1000 a month, I want to make smart choices. Should I invest in stocks? Save up for real estate? or what other options do I have? I would like more return than just the small interest of saving's or cd's. I have a good 401k with my job they match up to 5%, I am putting in 5% of each check now should I put more? What else can I do?

[kork13]

Welcome! A couple questions upfront first...
- Do you have any debt? Credit cards, car loan, student loans, anything like that? In most cases, the best advice is to knock those out first.
- What do you have in cash savings right now? You should keep 3 months' worth of expenses (at the very least...6-8 months is better) in cash savings -- you never know what may happen, so you want some cash to fall back on.
- Do you have any idea of what your goals are for this money? Or are you thinking just "save for the future" for now? (btw at 21, that's fine) But if you have specific goals, we can give you a better idea of how to get there.

For now, I'll say this: For someone just starting out, the best recommendation is normally to start investing with mutual funds. Even a basic S&P 500 index fund will work for now. It gives you a chance to get your money moving while you take some time to educate yourself. Individual stocks/bonds, real estate, commodities, and whatever else can all be good investments....if you know what you're doing. So the first thing you should do: LEARN.

Want something more concrete? Priority #1: Open a Roth IRA. You're 21, and there's no better way to get off on the right foot than starting a Roth right now (okay tomorrow's fine too ) To fully-fund a Roth IRA, it's $416/mo, or about half of your investable cash. In the Roth, start out with either a 2050-2060 Target-date retirement fund, or an S&P 500 fund. As your account grows, you can consider other mutual funds to tailor it to your investing style.

Use the rest to first build your cash reserves (if they're not already where they should be), then open an taxable investment account. You can branch out with that account if you'd like... just be sure you understand what you're investing in. Often times, simplicity will serve you better than the most fantastic plan imaginable. Once you identify your short-/mid-term goals, be ready to adjust this account to help prepare you for to make those reality.

For both accounts, I'd recommend picking a good, low-cost mutual fund company like Vanguard, Fidelity, Charles Schwab, or T Rowe Price.

A whole lot of info that probably isn't very helpful for you yet... give us some more information and we can move forward from there.

[jpg7n16]

I agree with Kork that we need more info. Mainly,

-What does your financial picture look like right now? and
-What are your goals for the investment?

And just cause I'm curious, what prompted you to look into investing today?

[sublime99]

Hey thanks for replying guys,
right now I just have a $1000 in savings, I make about $2500-3000 a month, rent is $400 and car payment with insurance is $500 a month (owe $12k on vehicle) but best of all no credit cards =)
I have just been spending way to much on random things about $300 a week and decided its time to use my money wisely.
I researched the roth IRA a little and believe I am going to start one. So I will be putting $416 a month towards that which leaves me with $400 more to invest, I would really like something short term with long term returns, doubtful theres anything like that though. Should I start my IRA then save the extra $400 a month until it builds up to one or two thousand and buy high risk stocks?
also I was considering real estate buying foreclosures and flipping them or just buying some land to sit on for 10 to 15 years and resale. just a thought, good or bad idea?

[kork13]

The better info helps, and it's good to see no credit card debt. You definitely need to beef up your savings first -- use that extra $400/mo (plus anything else you can spare) to bring it up to at least $3k to start with. That's your safety net in case something unexpected happens. Next, take out the car loan ASAP. As long as you're paying high interest rates (i.e., more than you're earning elsewhere) to somebody else, you'll never get ahead. Then build up your cash savings some more, aiming for $10k-$12k. You won't like the return you get on it, but you'll be safer to have it. All the while, invest in your Roth, and learn about the investments that are right for you.

Starting the Roth IRA soon is a great plan. But there's no reason to lean toward "high risk" stocks. Particularly in the passive-aggressive market we've got right now, there are plenty of opportunities available without betting the farm with your money. Use simple, reliable investments, and they'll serve you better in the long run (and retirement is about as "long-term" as it gets).

As for flipping real estate, and particularly foreclosures... That is an extremely messy proposition, even more so today with the foreclosures under fire for being done improperly and with housing sales in the toilet. That's a very risky plan that also requires a significant amount of capital. Personally, I'd recommend strongly against it.

Last, just to plant a seed... I personally like federal I-Bonds. They're designed to keep pace with inflation, and are currently earning 4.6%. In November, with the recent uptick of inflation, that will likely increase somewhat. You can't cash them in for a year, but after that, it's only a 3-month interest penalty. After 5 years, the penalty goes away, and continues to earn interest for 30 years. It's sort of a long-term investment, but a safe one that is nevertheless fairly accessible after the first year if needed in the short-term.

[jpg7n16]

^^ I pretty much agree 100% with Kork's post.

I did have some questions though...

I have just been spending way to much on random things about $300 a week and decided its time to use my money wisely.

For starters, congrats on coming to an intelligent conclusion there. It's a VERY smart decision to get your finances in order early in life.

I would really like something short term with long term returns

I'm not sure exactly what you mean here. Could you tell us a little bit more about what you're looking for in an investment?

Should I start my IRA then save the extra $400 a month until it builds up to one or two thousand and buy high risk stocks?
also I was considering real estate buying foreclosures and flipping them or just buying some land to sit on for 10 to 15 years and resale. just a thought, good or bad idea?

Just a word of caution, although in general: higher risk = higher reward ... sometimes it's actually: high risk = unnecessary risk = stupid idea.

What has you interested in high risk stocks? Why do you feel they're the investment to begin with?

And why risky real estate transactions? Is this something you have prior experience working with?

[EpicFinances]

I write a lot about this on my personal blog (I myself am a 25-year old). Just be sure that you understand the risks associated with any investment.

I would also tell you to steer clear of the real estate market -- It could appreciate, but the problem is so many people get their hands in the pot --- too many closing fees to get in and out -- It's not a good investment unless its 5+years.

I have to completely disagree with the idea of buying 30-year I-bonds. Someone your age can afford to take more risk -- but be sure to get some reserves in cash before you do any investing.

[kork13]

I have to completely disagree with the idea of buying 30-year I-bonds. Someone your age can afford to take more risk -- but be sure to get some reserves in cash before you do any investing.

Would you say that bonds have no place in a 20-something's investments? Besides, I-Bonds are really more like 5-year bonds that continue to earn interest for 30 years -- after those 5 years, you can cash them in at any time for ZERO penalty.

I'm 26, so I'm in about the same place you and sublime are at. I actually use the I-Bonds as the majority of my emergency fund. I've been buying them over the last 2 years, essentially laddering the I-Bonds. They're making at least twice what any comparable CD is earning, and cash accounts aren't even worth talking about. For a secure investment, I see them as a great option. Shoot, there are even good quality corporate and municipal bonds making 5%-6% (even better returns). Not exactly chump change in today's markets.

[jadet]

I can spare $750-1000 a month, I want to make smart choices. Should I invest in stocks? Save up for real estate? or what other options do I have? I would like more return than just the small interest of saving's or cd's. I have a good 401k with my job they match up to 5%, I am putting in 5% of each check now should I put more? What else can I do?

My advice:
Open a Roth IRA (I'm assuming since you're 21 you qualify)
Research high dividend yielding blue chip stocks
Purchase 2-3 different ones a year.

Stock goes up = Portfolio goes up
Stock goes down = Higher dividend yield

Your advantage is you have tons of time!

PS: I am not in the financial industry that is just what I would do. Yes I did the same and it has worked out well for me.

[jpg7n16]

Stock goes up = Portfolio goes up
Stock goes down = Higher dividend yield

Stated another way...

Stock goes up = lower dividend yield
Stock goes down = portfolio goes down

You can't just ignore the possibility that stocks will go down, solely because they pay a dividend. And you likely shouldn't have your entire portfolio invested in 3 blue chip stocks. I have no problem investing in stocks, but its unrealistic to ignore their risks.


I'd still like to know why OP thinks risky investments are the way to go.

[jadet]

Stated another way...

Stock goes up = lower dividend yield
Stock goes down = portfolio goes down

You can't just ignore the possibility that stocks will go down, solely because they pay a dividend. And you likely shouldn't have your entire portfolio invested in 3 blue chip stocks. I have no problem investing in stocks, but its unrealistic to ignore their risks.


I'd still like to know why OP thinks risky investments are the way to go.

There's a risk in every investment. I have not ignored the possibility of it going down in any way. 2-3 stocks per year not total.

[jpg7n16]

2-3 stocks per year not total.

So what would the portfolio look like after year 1?
If a small portion of your portfolio - 95% cash and 5% dividend stocks. That seems counterproductive to trying to earn a good return.
If a large part of your portfolio - then my statement above was correct. You'd have your entire portfolio (at that point) in only 3 stocks max.

What is the eventual goal of adding 2-3 div stocks? How many years would it take until your portfolio eventually got how you want it? Why wait that long?


I think it'd just be easier (and better) to develop an asset allocation for your goal and go with that. If you want a dividend stock fund as part of that allocation - cool. Then you'd at least have diversification.

[khriscoslay]

Pay ahead on your mortgage. By paying an extra $100 a month toward the principal on a $150,000, 30-year mortgage with a fixed interest rate of 6.5 percent, you’ll save more than $51,000 in interest and be able to retire your mortgage nearly seven years early. An extra monthly payment of even $20 or $25 can make a surprising difference.

[bjl584]

Pay ahead on your mortgage. By paying an extra $100 a month toward the principal on a $150,000, 30-year mortgage with a fixed interest rate of 6.5 percent, you’ll save more than $51,000 in interest and be able to retire your mortgage nearly seven years early. An extra monthly payment of even $20 or $25 can make a surprising difference.

Or you could refinance to a 15 year mortgage.

[jadet]

So what would the portfolio look like after year 1?
If a small portion of your portfolio - 95% cash and 5% dividend stocks. That seems counterproductive to trying to earn a good return.
If a large part of your portfolio - then my statement above was correct. You'd have your entire portfolio (at that point) in only 3 stocks max.

What is the eventual goal of adding 2-3 div stocks? How many years would it take until your portfolio eventually got how you want it? Why wait that long?


I think it'd just be easier (and better) to develop an asset allocation for your goal and go with that. If you want a dividend stock fund as part of that allocation - cool. Then you'd at least have diversification.

Didn't understand the 95% cash and 5% dividend stock thing. Not sure where that came from. I've personally purchased 4 stocks a year in my Roth. I have over 10 in my Roth portfolio. I'm fine with it not being as "diversified" as you'd like but I'm comfortable with the amount.

2-3 because it doesn't make sense to go more than that based on the amount of money he has. The amount of years it takes until the portfolio grows the way you want is dependent on the person of course. Why wait that long? I didn't understand that part....if you need the money simply sell it. For me I'm keeping it for at least another 10-15 years.

I do have a pretty diversified 401k. I don't feel a need to do the same with my Roth IRA. If I did I would have just placed it all in a all market index.