24 Year Old Looking for Savings/Investment Strategy

[brau0300]

Hi,

My name is Marcus and I am a 24-year-old trying to determine an ideal investment/savings strategy. I recently finished paying for my wedding and now have more flexibility to save. Here is my current situation

Savings:
7.5k emergency fund (around 4 months), planning to gradually increase this to a full 6 months

Roth IRA:
8k current value
Maxing annual contributions

401k:
18k current value
Currently contributing 6% of pre-tax income, employer matches 1:1 up to 6%

Debt:
165k owed on a Mortgage at 4.75%
Current Home Value ~170k

At this point, I'm leaning toward having my spouse open a Roth IRA and max funding it as well (we will be filing jointly). Other possibilities that have crossed my mind include:
-Paying down the mortgage quicker
-Increasing 401k contribution
-Opening a taxable account for more mid-term savings

I expect that we will probably want to move to a house (we live in a condo) in the next five years at which point we will need a down payment. I'm struggling to balance this objective with the desire to place ourselves in a strong position for early retirement. I'm thinking that if I pursue the second Roth IRA option, I will likely put any additional savings for the mid-term in some sort of intermediate term tax-exempt bond fund (other suggestions?). I would appreciate any advice that anyone can offer as far as how to best allocate money. I have around an additional $1000/month (after taxes) available for savings at the moment.

Thanks in advance!

 

[bbbamI]

Welcome to the forum Marcus. I'm always delighted to see young dreamers eager to learn more about finances.

IMO, if you want to move in about five years, I would not pay extra on the mortgage now, I would save that money for a down payment on the new home.

I'm sure others will be along to help out. Until then, use the search function in the areas where your interests lie.

 

[srlimoges]

If your concerned about saving for a home downpayment, look into HUD homes using FHA financing. This package offers a house for $100!

 

[PSUgrad2]

Amazing how similar that sounds to my wife and I a few years ago. For whatever it's worth, here's what we did, in rough order - perhaps it helps:

start up period - first 12 months of our saving cycle post-college
- emergency fund to 3 months (MMA)
- 401k to full match
- save and purchase our townhouse with 10% down (temporarily stored in MMA)

Solidification period - next 4 years or so
- add 403(b) for the wife (not maxed)
- increase 401 % every year at annual raise timeframe by about 1/2 of the raise, until maxed
- grow emergency fund slowly to ~5-6 months
- fund Roths for both DW and I, partially at first, then fully each year as we could

Stable saving pattern (~year 5 and beyond)
- added taxable savings layer, with savings available after Roths are maxed each year

For our 2nd house, we used the proceeds from the first, plus funds diverted from the taxable account as needed. We waited a bit for the 2nd house though - about 9 years after graduation, which was longer than the original plan (our original plan was closer to yours).

Couple of things we found along the way:
- maxing the 401k fairly early might not be the most efficient thing to do, but the automatic deductions made it extremely easy to execute. It's hard to spend (or fail to save) money you never see
- opening the 403(b) and Roth's for both of us made the savings a team project. The 403(b) wasn't necessarily the best alternative, but we found it important to see accounts growing in both of our names, not just mine.
- we really wanted to open up the taxable account for years before we finally did it. But found it was hard to juggle slicing the savings between that many accounts until our incomes grew a bit and our annual savings along with it. So we focused on the tax-deferred accounts and used the MMA until then.

 

[FUEGO]

If you are really focused on ER, I would try to max out your tax-advantaged savings each year. You are only allowed to save a certain amount in tax advantaged accounts each year, and once the year is over you cannot get back previous years' unused contribution allowances. As your income rises, it will be easier to max 401k's and IRA's and eventually you will be able to save more for a house and/or regular taxable investment accounts.

One caveat regarding the 401k's - make sure they offer decent fund choices before automatically maxing them out. I'm talking expense ratios ideally around 0.5% or less for at least some reasonable investment choices (probably index funds). Otherwise, if the fund choices are crappy, I would be inclined to put in the 6% to get the match, then think hard about tax savings vs. investment expense savings. I would make a spreadsheet to see which option would be the most optimal. And if 401k is crappy, definitely max your DW's Roth (or traditional) first.

You can always get creative to find some down payment money later, however you cannot get creative and go back in time to use up your 2010, 2011, 2012, etc 401k/IRA contribution limits.

On the other hand, make sure you and your DW are ok with timing the house purchase around being able to get sufficient $$ to put a little down and finance the rest. Ideally you will have some equity in your condo when it comes time to sell (due to paying down the loan principal and real estate appreciation). Your priority may be making sure you can get into a house soon instead of enabling ER as early as possible.

Edit to add: I'll echo the comments about 401k savings being easy, automatic and relatively pain free. You get used to working and receiving your take home pay and never miss the 401k withholding amount. If you get the cash in your paycheck, you will have to make sure you save it every month, and you may not be as disciplined.

 

[jayc]

Welcome. RE: 1000 extra a month. $400 to 401K, take home pay will decrease approx $300, plus what FUEGO said. Get as much tax deferred (401K, IRA) and tax free (roth) money set aside each year. Max is best.

Another $400 to the roth IRA. Can you both have one? I put roth in CD at credit union. That way the principle is around if you need it. The other $200 to the emerg fund. Look for house deal with low down payment. You can use part of Emrg fund and roth principle if you really need it.