Flagpole WiIlly

City boy wrote:

And anyone else who considers themselves knowledgeable about personal finances:

I'm one year out of college, put the maximum into my 401K but don't understand personal finances at all. I want to know what books you recommend to get people off on the right foot to maximize their money. I don't understand all of the terminology you use in your threads if that helps explain my current level of economic intelligence.

The Making of a Millionaire by Noah Embree is one book I've seen that seems simple with good reviews.

Thanks for the help.

For a beginner like you, I recommend:

1) Financial Peace Revisited by Dave Ramsey. He's a fundamentalist Christian who isn't afraid to show that side, so be aware of that. Still, even if you don't side with his Christian views (I have Christian views that are different from his) he still gives good financial advice. He has a syndicated radio show that you can listen to online for free here --

You can listen to the archives so you don't have to be listening when he is broadcasting.

2) The Millionaire Next Door by Thomas J. Stanley and William D. Danko. This book is more inspiration than telling you exactly how to do it, but it's a classic anyway.

3) I DON'T recommend the Rich Dad Poor Dad stuff from Robert Kiyosaki. He's all about real estate and he pushes that hard and has horrible things to say about mutual funds which I think is all wrong. If you don't really want to get into real estate as your major way of investing, he's not one to listen to. Besides, his book is all anecdote and little to no direction.

Besides books, you should read up as much as you can about the following:

1) 401k (Traditional and Roth). Most companies that offer 401k plans don't offer the Roth 401k, but that is starting to be an option more and mroe. You should start your investing in a 401k if your company matches. A typical match scenario is that a company will give you 50 cents on the dollar up to 6% of your salary, so that means if you contribute 6% of your salary, they will contribute another 3%; this is FREE money. In most cases you cannot take the money out until you are 59 1/2 years old without a 10% penalty. You can borrow against a 401k, but I would advise against it. If you leave your job (in most cases), you will have to pay back the money very quickly or be subject to the 10% penalty.

2) Roth and Traditional IRAs. With a Roth, you pay the taxes first and then the money grows tax free. With a traditional IRA, you put the money in but are taxed when you pull it out. In most cases, a Roth is a better option -- especially for someone so far out from retirement. In 2008 for people under 50 years old, you can put $5,000 in. Over 50 and there's a catch up option of another $1,000 I believe. With IRAs you also can't take money out before 59 1/2 without the 10% penalty (though you can take CONTRIBUTIONS out of the Roth with no penalty). Best to think of either IRA as a RETIREMENT account (which is its purpose) and not an emergency account.

3) Mutual Funds. You can open a non-retirement mutual fund that you can withdraw from at any time. Mutual funds are simply funds that are made up of stocks mostly. You can get funds that are in different sectors of the market -- international funds, US funds, housing, etc. The benefit of mutual funds over individual stocks is that if one stock in the fund tanks it doesn't necessarily pull the whole fund down with it. With individual stocks, if the stock goes down then you lose all your money. Higher possible gains are made with individual stocks, but it is very risky, and it's a risk I don't take. Many people do though.

4) Money Market Accounts. These are low-return vehicles that people put money in to remain liquid. Most MMAs will allow you to write checks against the account, usually with a minimum check amount -- like $250, so you wouldn't use it to pay for groceries or the electric bill. I use my MMA to park money for short periods of time when I'm deciding what fund (IRA or non-retirement mutual fund) to put some money in.

5) CDs. Usually you buy them for a set amount of time -- 6 months, 1 year, 5 years. There's a guaranteed payment percentage for the time period you buy. Usually over time you'd get better returns in a 401k or IRA or non-retirement mutual fund. The rate of return on these in the early 80s was about 12% so today you hear some older people talking about how great they are, but they haven't kept up with the times. CDs are a place for short-terms stops perhaps. I don't use them at all.

6) Bonds. Bonds are considered conservative investments and often (but don't always) go up when stocks go down. Typical advice is for younger people to have fewer bonds and more stocks and then change to a greater percentage of bonds as you are within 5 years of retirement. At age 41 I have about 13% bonds right now. When I'm 55 I may change that to 30% bonds.

Here's what I would recommend to my children if they were starting out:

1) Be debt free as soon as possible. Don't buy a new car upon graduation, pay those student loans off as soon as you can, don't have credit card debt. Also, no need to buy a house right away either. Houses are for people who are a little more settled and PLAN to be in it at least 15 years. That's my advice anyway.

2) Have an emergency fund of $1,000 saved.

3) Invest up to the company match in your 401k. So if that's 6% then do 6%. The funds in your 401k should be 90% stocks and the rest bonds. Of the stock allocation, I would do 25% in each of the following types of funds - growth, growth and income, aggressive growth, and international. Talk to your 401k rep about making sure you are aggressive enough as a yound person.

4) Bump that emergency fund up to 3 months if single and kidless. 6 months if married with children.

5) Start a Roth IRA. If the 6% to the 401k isn't killing you, start a Roth IRA. You can put up to $5,000 in this in 2008.

Overall, if you are 25 or under, you should be doing 10% of your salary MINIMUM in retirement vehicles like the 401k and Roth IRA. If you are 26 and haven't started you should do 15%.

Math time (ROUGH estimates):

If you start at age 23 and you are making $38,000 a year and you put 10% into retirement (your company matches another 3%, so you're up to 13%), that's $4,940 going into retirement accounts (13% of 38,000). Lets say you NEVER get a raise (which is crazy) and that you NEVER change the amount you invest. At age 65, you will have $2,172,837.58 at a CONSERVATIVE 9% annual return. Put more than 10% in, make more money along the way, or get better than 9% return and you'll have more.

When you retire at age 65, take 5% of that money each year and that gives you an annual income of $108,641.98, based on what you were able to accumlate with a $38,000 a year income that never went up. That doesn't even include the Social Security you will get (and you WILL get something). Your nest egg should return better than 5% so the amount you get annually will slowly go up each year.

You say you put the maximum into your 401k. Dude, you should be ROLLING in it when you are ready to retire.

Nice job.

I highly recommend this book. Very simple language, easy to understand, and a very entertaining read. He is a typical middle class white boy like you and me. Read it and you won\'t be disappointed. His ability to save is motivating.

http://www.alancorey.com/

Thanks a bunch. That helps. I make 43K and put 15,500 in the 401K, though I don't think I will be keeping that up for many more years. I'm looking at marriage and a house in 5-6 years.

I kind of see you are a mutual funds guy, but how do they compare to buying more a safe stock like Coca Cola or Johnson & Johnson?

I saw my 401K status recently and I have actually lost money so far, so it is very hard to see all that money being made by retirement.

Lastly, what's the best way to make your investments? I would assume brokers charge a lot of fees but I don't know how to do it online either.

City boy wrote:

I saw my 401K status recently and I have actually lost money so far, so it is very hard to see all that money being made by retirement.

Lastly, what's the best way to make your investments? I would assume brokers charge a lot of fees but I don't know how to do it online either.

check out alan corey's book, answers those questions very simply.

City boy wrote:

I saw my 401K status recently and I have actually lost money so far, so it is very hard to see all that money being made by retirement.

The stock market has averaged somewhere between 11-12% returns since the '30s. That's an overall average, so you can expect large short-term fluctuations along the way. Basically, the longer you plan to have your money in stocks, the more likely you are to earn the market average.

Mutual funds diversify the stocks in your profile and tend to mirror the overall market return. If you only have one stock, you're submitting your portfolio to a lot of risk. For example, suppose you had picked Enron as your one safe-bet stock, you'd have nothing today. But to those who diversified their portfolios hardly felt a bump in the road when Enron went under.

You should also take a look at index funds. They have historically out-performed mutual funds, mainly because of broad diversification and low-cost management. Because they are passively managed (meaning you don't deal with a broker), the fees are substantially less. Go to Schwabb's website and you can set yourself up pretty easily.

Flagpole, per the last post, I have now read that index funds beat 80% of all mutual funds despite lacking active management. What do you look for (including the much higher fees) to justify picking mutual funds over index funds?

And this may seem simple, but wouldn\\\'t it now seem silly to invest in index funds since they are a basic reflection of the market?

What\\\'s your two cents on the right way to go if I planned on taking out the money in about 4-5 years?

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Flagpole Willy wrote:

At age 65, you will have $2,172,837.58 at a CONSERVATIVE 9% annual return. Put more than 10% in, make more money along the way, or get better than 9% return and you'll have more.

Nice job.

Who in the world wants to retire at 65. :-)

That's the only unrealistic thing about your math. If I'm saving money for all those years then I'm not going to retire at 65 I'm going to make sure I retire at 55.

But point well taken.

You could also buy a subscription to Money magazine or Kiplinger's Personal Finance for a year. Read it every month. They give good basic advice and in a year you will understand all the basic terms about load/no load/various types of IRAs and other retirement accounts, etc.

Not all the advice is good, so a good book to supplement would be good. In particular they will tell you not to chase the hot funds while simultaneously in the same issue having an article about the hot funds. But either magazine read with a critical eye can teach you the basics.

Another question:

The 401K is pre-tax dollars so I'm saving tax money now but will be taxed when I take it out when I'm old and gray. You mentioned that the Roth 401K gets taxed right away and then I won't be taxed when I take it out. Is that the same thing? I get "caught" either way.

City boy wrote:

Thanks a bunch. That helps. I make 43K and put 15,500 in the 401K, though I don't think I will be keeping that up for many more years. I'm looking at marriage and a house in 5-6 years.

I kind of see you are a mutual funds guy, but how do they compare to buying more a safe stock like Coca Cola or Johnson & Johnson?

I saw my 401K status recently and I have actually lost money so far, so it is very hard to see all that money being made by retirement.

Lastly, what's the best way to make your investments? I would assume brokers charge a lot of fees but I don't know how to do it online either.

1) There's no such thing as a "safe stock". If you put a lot of money into a single stock, you are taking a big risk.

2) If you started investing recently then yes you've lost money. Don't worry about that. As others have said, the market has averaged 11-12% since the 1930s. You are in RETIREMENT accounts for the long haul. Over time it will be closer to that average for you. You'll make money. Right now you are just buying funds at a discount.

3) If you want to set up a ROTH IRA or a non-retirement mutual fund and you don't want to get hammered with fees, then Vanguard is your place. They have very low fees.

4) If you get married in 5-6 years and get a house, do you see your wife working at least for a little bit? If so, buy a house you can afford and then put EVEN MORE into retirement than you are doing now. Don't marry a spendaholic, and don't buy a ton of crap you don't need. No need for your contribution to diminish once you get married. When the kids come, yes, but while you are kidless, sock that money away.

City boy wrote:

Thanks a bunch. That helps. I make 43K and put 15,500 in the 401K...

So, I don't know how old you are, but let's say you're 25. Let's also say that TODAY you are starting from zero and lets say you can put $15,500 away for 6 years.

So in 6 years you would have put away $93,000. With a 9% average annual return, that money would be worth $127,000. Not a super amount, but now if you QUIT contributing at all at this point (which I wouldn't recommend), then assuming that same conservative 9% average annual return, you'd hit the following milestones:

Age 40 - $276,000

Ag3 45 - $424,000

Age 50 - $656,000

Age 55 - $1,005,551

Age 60 - $1,547,166

Age 65 - $2,380,507

At age 59 1/2 you can take your money out penalty free. Let's say you waited until 60. Take 5% of $1,547,166 at age 60 and you'll have $77,358.30 in income that first year. You should have your money invested conservatively at that point, but still you should be getting at least 6% return, so your money will grow slightly. Then at age 62 you can also start taking Social Security which in future dollars will be at least $45,000 a year (more if you were married), so now you're up to $122,358.30. If you retire before age 65 you just need to make sure you have health care covered.

If you can manage to put the 401k max in even just a couple more years (8 vs. 6) then your gaines will be even greater -- $1,908,925.84 at age 60 instead of $1,547,166.

Honestly, if you can find a way to really go nuts for a couple years when you are first married, you can end up with 3-4+ million dollars by the time you are 60 if you want. If you're going to do that, then you might want to also fund a non-retirement account so you could retire at 55.

You're on the way to financial freedom.

She's definitely working. No question. I started my research, saw that I have to take into account expense ratio when picking a fund, not just the yield. Index funds seem like a very smart way to go, but since they follow the market, I don't know if they make sense anymore. And stupid question, but there are no shares of a mutual fund right? You just decide to put in whatever amount of money you want? So me going in while stocks are down isn't getting a good deal like it would be for buying cheap stocks.

I'm probably going to throw my saved money (marriage and house down payment) into a money market fund though even those don't seem as secure as always from some things I've read. I guess the goal is 50-60K by 2012, and I'll have 10 in May. Just have to decide what investment choice to make. I'm leaning toward index funds at the moment but I don't know with a short term goal while staying conservative. I would definitely use that as a more down the road investment.

City Boy wrote:

Another question:

The 401K is pre-tax dollars so I'm saving tax money now but will be taxed when I take it out when I'm old and gray. You mentioned that the Roth 401K gets taxed right away and then I won't be taxed when I take it out. Is that the same thing? I get "caught" either way.

Most 401ks are the traditional ones like you have -- the money goes in and you pay taxes later when you take it out. This seems nice initially because you can put more in, but when it grows and you take it out, you are taxed on the final amount, so in that way it is bad. Still though, that 401k is a great retirement tool. With the Roth (IRA or 401k), you are taxed NOW, but then it grows tax free, so if you had an IRA that grew to one million dollars, then it is really worth one million dollars. It is better in the long run.

BUT, don't get too discouraged about taxes. You said you make $43,000 right now. Well, that's your salary. You don't really take home $43,000 -- there's income tax. So, the same is true with non-Roth retirement vehicles. If you have $1.54 million dollars and take from that about $77,000 a year initially as income, you would be taxed so you really wouldn't get $77,000, but a little less. Still, if you base your spending on a $43,000 SALARY now, then could you imagine $77,000 of SALARY being helpful in 35 years? The answer should be yes. You should plan to have NO debt when you retire -- no mortgage (and you should OWN your house), no credit card debt or any other debt. $77,000 35 years from now with no kids at home and no debt is still pretty good. When you figure that your wife will probably have invested some also and that you'll get even more money from Social Security, you should be fine. The way you have started out saving, you should have even more than 1.54 million at age 60 anyway.

"Someone is sitting in the shade today because someone planted a seed a long time ago."

Sit in that shade brother!

POTY!!!!

City Boy,

An index fund IS a mutual fund. It's just one that follows a specific index. Warren Buffet highly recommends index funds. SOME of my mutual funds within my retirement accounts are index funds, but not all.

You can have mutual funds that go a different way. For example a mutual fund that has international stocks in it.

Mutual funds and index funds are just funds that have a bunch of stocks in them. When the market is down like it is now, then you are buying more shares of stocks within that mutual fund, so YES, you are getting a good deal on the mutual funds RIGHT NOW.

You shouldn't think of ANY of your 401k or potential Roth IRA as short term investing. You can't take the bulk of it out penalty free until 59 1/2 anyway. If you're putting $15,500 in that 401k, you will likely have more than $60,000 in 2012. That's $62,000 if the market stays flat. Remember though, you don't look for gains over a short period of time like 4 years. You may have a flat or down market for a few years and then a 43% jump. That's what happened for me in 2003 -- 43% followed by three years of 20+% gains annuall and then about 9% in 2007. So far in 2008 I'm down, but so what? The market has down periods. Keep putting that money in. Don't be discouraged by a down market. You are buying shares for cheap now, and when the market turns upward again (and it will) you'll have tons of shares that will all explode).

I didn't mean 60K in my 401K to take out. I put the max in my 401K and out of the remainder of my money that I actually see in the paycheck, I'm saving 10K of that. So I'm trying to find the best vehicle to put that 10K into to see in 4 years.

City boy wrote:

I didn't mean 60K in my 401K to take out. I put the max in my 401K and out of the remainder of my money that I actually see in the paycheck, I'm saving 10K of that. So I'm trying to find the best vehicle to put that 10K into to see in 4 years.

Ok, so you make $43,000 and you are putting $15,500 in to your 401k and you'ge got another $10,000 that you want to invest on top of that? That's pretty damn good brother.

NORMALLY I would tell a person to max out their 401k AND ROTH IRA first and THEN invest in non-retirement mutual funds, but you're startin pretty early so as long as yo ukeep funding that 401k like that, you should do almost anything you want with the remaining $10,000.

You could:

1) Fully fund your ROTH IRA for 2008 ($5,000) and then start a non-retirement mutual fund for $5,000.

2) Pay off debt. If you have debt (car, high student loan rate debt, credit card debt, etc.) you should get rid of it if you can.

3) Just put $10,000 into a non-retirement mutual fund. If you keep funding that 401k like that, you'll have millions by age 60, but if you'd like to retire at age 55 for example, you'll need money in a non-retirement fund to get you to 59 1/2, so you could do that.

$25,500 is a LOT for a guy making $43,000 to be investing. Not that I'm against that, but that's even more than I would suggest. I'm OK with it if you want to, but you should know that you don't HAVE to do that much. If you were able to do $15,500 in that 401k ONLY and you did that until age 60, assuming your company doesn't match (a company match can take it above $15,500) then you'd have $3,644,433.20. If your company matches then it would be even more. Take 5% of that $3,644,433.20 and you'll have $182,221.66 annual income at age 60. That should be plenty, especially if you are debt free.

They don't match. No credit card debt. I'm sucking it up and living at home to explain how I have all this money unspent. My work hours are too long for my parents to have a chance to annoy me.

Sorry for trying to drive my question home (I really appreciate your insights), but I want to take the 10K (and whatever else I can save up the next few years, prob. not 10K each time but we'll see), and figure out what investment vehicle to use so that in 4 years, it's what I take out to pay for the wedding, honeymoon and house down payment. I wouldn't be keeping this money in for the long haul.