Advice to my non-financial son

[Taxman59]

My son has been working about a year, and he is saving about 30% of his gross wages. This is on top of his 401K contribution (he isn't offering that info, but would share it if I asked, it is at least 4% as he knows to put in what it will take to get the match). He has built up a savings account equal to about 4 months of expenses, and his checking has another month or so. Given that he is being frugal, I expect that he will be at the 6 months of expenses in savings within the first quarter of the new year. I suggested that when he gets there, he take about 2 months expenses and put it in a 1 year CD to get better interest, and when he gets another 2 months, savings, do the same, building a ladder of CDs while keeping 3-5 months in cash. When he gets about a year's worth of expenses saved in a CD ladder, start a monthly mutual fund contribution (or two depending on the monthly $ he saves and the fund minimums).

Am I steering him wrong? Should I have him be more aggressive (like I was) or stick with the "slow and steady" plan?

 

[Another Reader]

Never too young to start an IRA, even if he can only set aside a couple of hundred a month.

 

[travelover]

Once he has an emergency fund, I'd invest in a stock index fund in an IRA.

 

[retire2020]

After 401K match, I would encourage him to put money in Roth IRA as he may be at lower tax bracket now. My daughter is in 3rd year of college and has 16K in her Roth IRA - 2K gain on 14K she earned and put away!

 

[Texas Proud]

Once he has an emergency fund, I'd invest in a stock index fund in an IRA.

After 401K match, I would encourage him to put money in Roth IRA as he may be at lower tax bracket now. My daughter is in 3rd year of college and has 16K in her Roth IRA - 2K gain on 14K she earned and put away!

I am with these two... invest in a stock fund inside a ROTH... unless he is in a high tax bracket...


The savings will come... do not try and get a years worth of emergency cash set aside with zero going into stocks... it is always good to start putting money into both so the habit continues...

 

[Montecfo]

I believe in an emergency fund, but I would consider putting any cash representing more than a month or so of expenses in the market. His funds will grow a lot faster.

On the Roth, the tax rate schedule for a single person rises so rapidly, a Roth for a young person is not a no-brainer in my opinion, depending on income. But early in a career is a good time to consider it.

Sounds like he has a good head on his shoulders. I would encourage him to read financial publications and websites-to advance thr great habits he already has.

 

[6miths]

They're talking about "The Millionaire Next Door" in another thread and there is a link to a pdf of it. Maybe send him a copy of it.

 

[brucethebroker]

I like the early years of MMM (Mr. Money Mustache) which are available on the website. If he starts at blog #1 and works his way through, he will find gold.

IMHO, MMM has gotten a little full of himself the last year or so. But the older stuff is good, especially for younger people who might be turned off by Millionaire next door (one of my faves!).

Rich Dad/Poor Dad is also a good read.

 

[FrankiesGirl]

For someone at the beginning of their career, I would not go into CDs or bonds. He's got decades of investing in front of him and CDs and bonds are really too conservative for a young investor. There needs to be a good lesson in here somewhere about learning the difference between risk and volatility.

I would recommend giving him this link (or get the book) of Jim Collins' stock series. Stock Series

And I'd also direct you to his post describing what he would suggest for his own daughter just starting out. It is easy and practically bulletproof as far as I'm concerned.
How I failed my daughter and a simple path to wealth

 

[DrRoy]

They're talking about "The Millionaire Next Door" in another thread and there is a link to a pdf of it. Maybe send him a copy of it.

I also recommend "Your Money and Your Brain" by Jason Zweig.

 

[panacea]

Assuming the money isn't needed for something else like a car or down payment on a house, I would immediately shift as much as $5,500 from savings to a Roth so he doesn't miss the 2016 contribution ($11,000 for both 2016 and 2017 if he waits until January 2). That can be his emergency fund. Only earnings need to remain invested to avoid a penalty... contributions can be withdrawn anytime. He can leave it in something safer for now but later (if there's no emergency) he can invest money intended for retirement more aggressively.

 

[pb4uski]

Yes, I think you are being too conservative. Equities worked well for his old man... why not for him?

Many online savings accounts offer better interest and liquidity than CDs so that may be a better option than a CD ladder for his emergency fund.

For savings after the emergency fund is filled, at his young age, equities is the way to go.... in a Roth IRA if he is still in a low tax bracket, otherwise in a taxable account.

Also, buy him a subscription to Money and Kiplinger's Personal Finance magazine and he'll learn by reading those monthly.

 

[gerntz]

The kid's doing great IMO & see no reason for you to denigrate him as "non-financial". Stay out of his way unless asked. Independence is good.

 

[target2019]

What makes this individual "non financial"? Sounds light years ahead of the average.

 

[Bestwifeever]

A non-financial person probably won't enjoy managing a six-CD ladder, will he? Is the interest for a year's expenses going to be materially better than just a savings account?

 

[RetireAge50]

More aggressive like you. Roth IRA in 100% stocks.

For me personally I have never had a CD or an emergency fund.

 

[Options]

Berntein's "If You Can-How Millennials Can Get Rich Slowly". Probably the best and most accessible pieces written for a young person starting out (and you don't even have to pay for it):

https://www.etf.com/docs/IfYouCan.pdf

 

[gauss]

Technically/Legally a Roth IRA could serve as an emergency fund in that there is no tax nor penalty due for a withdrawal of contributions at any time for any reason.

That being said it may be a good idea to maintain a separate after-tax emergency fund to keep a wall of separation between the "retirement money" and everything else.

Of course this is a bit of a Behavioral Finance mind trick since money in fungible.

-gauss

 

[6miths]

More aggressive like you. Roth IRA in 100% stocks.

For me personally I have never had a CD or an emergency fund.

Well I agree with the sentiment and took a similar direction when I was younger, one of the major downsides of this approach is that sometimes young investors are so traumatized during their first big market downturn that they abandon and never return to the market. As well, having some cash and bonds gives you something to rebalance into stocks when the market does go south.

Agree with recommendations of 'If You Can' and 'Your Money and Your Brain'. Another good intro book is 'The Millionaire Teacher'.

 

[pb4uski]

Technically/Legally a Roth IRA could serve as an emergency fund in that there is no tax nor penalty due for a withdrawal of contributions at any time for any reason. ...

True.... and that is fine as a backup after some online savings and perhaps even credit cards (or the bank of Dad)... the thing that I don't like about it is that there are limitations on getting money into a Roth so I don't like the idea of taking it out and destroying the future tax-free status of that money if other better alternatives exist.

 

[growing_older]

Sounds like the kid is doing great, and I completely don't understand the "non-financial" label. Your advice sounds inappropriate and far too conservative for a young person. What emergency could he possibly have that would require a YEAR of expenses in a CD ladder? Not to mention that as a young person, why should he give up decades of potential market growth to build and maintain such a large cash position.

Annual limits for tax deferred (or tax-free Roth) space are limited and expire if you do not use them. At his age, these are much more valuable than building an emergency fund beyond a few months of expenses. Also, it sounds like his extended family situation is very supportive, which could allow him to invest age-appropriately without risking dire misfortune if he ever encounters an emergency bigger than a few months of expenses.

 

[target2019]

Here is a link to 2 Bernstein books: http://efficientfrontier.com/ef/0adhoc/2books.htm

I have the second title in my Kindle library. It is oriented to younger persons.

 

[Texas Proud]

Berntein's "If You Can-How Millennials Can Get Rich Slowly". Probably the best and most accessible pieces written for a young person starting out (and you don't even have to pay for it):

https://www.etf.com/docs/IfYouCan.pdf

Thanks for this link.... the best I have seen so far... I just sent this to my DS...

I also sent him the link to Millionaire next door which is also good, but much longer...

 

[Bryan Barnfellow]

After 401K match, I would encourage him to put money in Roth IRA as he may be at lower tax bracket now. My daughter is in 3rd year of college and has 16K in her Roth IRA - 2K gain on 14K she earned and put away!

I only wish I had a child her age and we could introduce them!

-BB

 

[Bryan Barnfellow]

The only reservation about Bernstein's nice, little (and free!) guide is that some of the references he makes won't quite land with today's young people, such as his comment that some people would rather watch Monday Night Football than jog. Jog?! Hee hee. Also, that some people don't save, instead preferring to vacation in Cancun. Cancun? Seriously? The young people I know would likely not get those references. That said, it's a good read and I will send it along to some kids I am mentoring/coaching.