I am trying to form an investment strategy. I have about $13k in my "Main Savings Account", which is about 1/3 of my net worth. That is too much to just have parked in a low-yield (1.15%) savings account.
Since this is a new year, I can put $5k of that into my Roth IRA (this seems like an obvious course of action). I just don't know what the next step should be. What should I invest in? Dividends? Growth? Because the Roth IRA grows tax free, if I want a dividend strategy, it makes sense that I should do it there. I could put another $5k into my taxable brokerage account and devise a capital growth strategy for that.
To reiterate, I have 5 accounts into which my savings go:
1) "Main Savings"
2) Roth IRA
3) Online brokerage
4) Traditional 401(k)
5) Employee Stock Purchase Plan.
These are ranked by my contribution amounts. Every paycheck goes mostly into these categories. Because I don't have a strategy, I mostly just sock it away into my savings account. I don't have many investment choices in my 401(k), so I am reluctant to contribute more than 10% of my salary. I want to try a basic dividend investment strategy like "Dogs of the Dow", but I think that would be best suited for my Roth IRA, since the dividends would otherwise be taxed at my income tax rate. However, the contribution limits for my IRA are so low. I'd like to be able to invest heavily in my taxable brokerage account and see effective results. I just don't know how to proceed.
My friends, like many of you, I have low expenses and a high savings rate. I just don't know what to do with it! Because I've recently learned so much about investing, everything sounds like a good idea. I'm suffering from analysis paralysis and I don't want to be stuck with a stupid 1.15% return on most of my assets just because I can't decide.
Please advise.
B's Journal
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Robert Muir
- Posts: 280
- Joined: Thu Jul 22, 2010 10:15 pm
Here's my advice. Others would disagree.
1. Until you develop your own investment strategy, I would recommend throwing your Roth and brokerage investments into index funds or ETFs. Vanguard is amazing at providing extremely low cost options in that area. By the time you learn enough to come up with a different strategy, you should have enough working capital to use.
2. If you plan on living on your investments in 5-10 years, (ERE ala Jacob), then yes, you'll only want to put matching funds in the 401k. All the rest should go into your brokerage account. Throw it into your MM sweep account until you decide what to do with it. Again, until you develop a strategy, there's nothing wrong with matching the market with indexes.
Even though I've been doing fairly well with picking some decent stocks, I'm tempted to go back to indexing. Finding great stocks is frickin' hard work! And it's probably to do the work and still get slammed. I'm now only investing in companies that I believe in for the long haul like Intel, IBM, VZ, Citi, etc. Other companies like Google and Apple are good, but are just too expensive for my taste.
Vanguard lets you invest in their funds and ETFs without charge. So you don't even have a brokerage fee or a load to buy them. They don't have the tools to effectively do stuff like options though.
1. Until you develop your own investment strategy, I would recommend throwing your Roth and brokerage investments into index funds or ETFs. Vanguard is amazing at providing extremely low cost options in that area. By the time you learn enough to come up with a different strategy, you should have enough working capital to use.
2. If you plan on living on your investments in 5-10 years, (ERE ala Jacob), then yes, you'll only want to put matching funds in the 401k. All the rest should go into your brokerage account. Throw it into your MM sweep account until you decide what to do with it. Again, until you develop a strategy, there's nothing wrong with matching the market with indexes.
Even though I've been doing fairly well with picking some decent stocks, I'm tempted to go back to indexing. Finding great stocks is frickin' hard work! And it's probably to do the work and still get slammed. I'm now only investing in companies that I believe in for the long haul like Intel, IBM, VZ, Citi, etc. Other companies like Google and Apple are good, but are just too expensive for my taste.
Vanguard lets you invest in their funds and ETFs without charge. So you don't even have a brokerage fee or a load to buy them. They don't have the tools to effectively do stuff like options though.
I have about $13k in my "Main Savings Account", which is ... too much to just have parked in a low-yield (1.15%) savings account.
I too get the feeling that having cash around could be "working for me" in some sort of investment. But cash in a savings account is good; I keep 1yr of expenses in cash as an emergency fund. Maybe that's overly conservative, but I've become comfortable with it. I may dip in to make a particularly nice investment, but always replenish it as money comes in.
dividends would otherwise be taxed at my income tax rate
For qualified dividends, they are only taxed at a maximum of 15%, until at least 2012.
I too get the feeling that having cash around could be "working for me" in some sort of investment. But cash in a savings account is good; I keep 1yr of expenses in cash as an emergency fund. Maybe that's overly conservative, but I've become comfortable with it. I may dip in to make a particularly nice investment, but always replenish it as money comes in.
dividends would otherwise be taxed at my income tax rate
For qualified dividends, they are only taxed at a maximum of 15%, until at least 2012.
@Robert Muir
Thank you for the advice. Currently my 401(k) is 100% allocated to a vanguard index fund. As for investing that $13k, I'll take some time think about my options. Again, thanks for your opinion.
@Chris
I think I might be more comfortable with having half a year's expenses. Also, thank you for the dividend tax rate correction. I'm not sure why I thought that.
Right now, I'm leaning towards trying multiple things at once. Indexing in my 401(k) (not much of an option there), Something like Dogs of the Dow, and a selection of growth stocks. It's a decision born of ignorance, just like a varied diet (as Jacob puts it). Sorry Robert, I learn best by trying.
Another thing I've been thinking about: If I intend to leave my company and the workforce in general in 5-10 years, how should that inform my 401(k) contribution decisions? If I can roll it over into IRAs, shouldn't I prefer Roth contributions so I can access them once I roll it into a Roth IRA? Or is the tax benefit of a traditional contributions preferable?
Thank you for the advice. Currently my 401(k) is 100% allocated to a vanguard index fund. As for investing that $13k, I'll take some time think about my options. Again, thanks for your opinion.
@Chris
I think I might be more comfortable with having half a year's expenses. Also, thank you for the dividend tax rate correction. I'm not sure why I thought that.
Right now, I'm leaning towards trying multiple things at once. Indexing in my 401(k) (not much of an option there), Something like Dogs of the Dow, and a selection of growth stocks. It's a decision born of ignorance, just like a varied diet (as Jacob puts it). Sorry Robert, I learn best by trying.
Another thing I've been thinking about: If I intend to leave my company and the workforce in general in 5-10 years, how should that inform my 401(k) contribution decisions? If I can roll it over into IRAs, shouldn't I prefer Roth contributions so I can access them once I roll it into a Roth IRA? Or is the tax benefit of a traditional contributions preferable?
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Robert Muir
- Posts: 280
- Joined: Thu Jul 22, 2010 10:15 pm
The problem with the retirement investments (IRA/401K) is that they aren't designed to be used before 59.5 years old. There are ways of accessing the money prior to that, but you have to be very meticulous and it might not be worth it for the amount of money you'll have in it.
So, you can research how to access the funds prior to 59.5 and then decide how much you want to put in there.
If you intend to retire in just 5 years, then like Jacob recommends in his book, I would recommend you just start throwing as much money as you can into money market or index funds until you decide on an investment strategy. 5 years just isn't enough time to make a lot of difference - the bulk of what you'll have at "retirement" will be what you're able to sock away.
So, you can research how to access the funds prior to 59.5 and then decide how much you want to put in there.
If you intend to retire in just 5 years, then like Jacob recommends in his book, I would recommend you just start throwing as much money as you can into money market or index funds until you decide on an investment strategy. 5 years just isn't enough time to make a lot of difference - the bulk of what you'll have at "retirement" will be what you're able to sock away.
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Robert Muir
- Posts: 280
- Joined: Thu Jul 22, 2010 10:15 pm
There was a good article on the Get Rich Slowly blog this morning:
http://www.getrichslowly.org/blog/2011/ ... val-guide/
http://www.getrichslowly.org/blog/2011/ ... val-guide/
Robert, thanks for your advice. You make a good point that 5 years isn't very long and won't likely make much of a difference, especially during the first couple years during which I have very little to invest anyway.
I'll educate myself before doing anything rash. I've joined a stock investment club at work that has a good track record and some knowledgeable members that I may learn something from. Of course, I'll crack some books myself too.
I have some questions about the 401(k) to IRA rollover. Suppose I make both Roth contributions and traditional contributions to my 401(k). In X years, I leave my employer and want to roll that over into IRAs. If I want to avoid getting taxed, wouldn't my Roth 401(k) contributions be rolled over into my Roth IRA? And wouldn't my traditional contributions go into a Traditional IRA?
If so, could I make qualified distributions(*) (up to my contributed amount) from the funds in my Roth IRA before I turn 59.5? Would my contributed amount I could make qualified distributions from include the amount rolled over from my Roth 401(k) contributions?
(*) It is possible to make qualified distributions from a Roth IRA before 59.5, as long as the distributions do not exceed the amount contributed. I understand that these are designed for normal retirement age, and I may leave them untouched until then, but I want to understand my options.
Please excuse me if these questions are inconsistent, if so I probably have some fundamental misunderstanding. Point it out.
Thank you
I'll educate myself before doing anything rash. I've joined a stock investment club at work that has a good track record and some knowledgeable members that I may learn something from. Of course, I'll crack some books myself too.
I have some questions about the 401(k) to IRA rollover. Suppose I make both Roth contributions and traditional contributions to my 401(k). In X years, I leave my employer and want to roll that over into IRAs. If I want to avoid getting taxed, wouldn't my Roth 401(k) contributions be rolled over into my Roth IRA? And wouldn't my traditional contributions go into a Traditional IRA?
If so, could I make qualified distributions(*) (up to my contributed amount) from the funds in my Roth IRA before I turn 59.5? Would my contributed amount I could make qualified distributions from include the amount rolled over from my Roth 401(k) contributions?
(*) It is possible to make qualified distributions from a Roth IRA before 59.5, as long as the distributions do not exceed the amount contributed. I understand that these are designed for normal retirement age, and I may leave them untouched until then, but I want to understand my options.
Please excuse me if these questions are inconsistent, if so I probably have some fundamental misunderstanding. Point it out.
Thank you
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Robert Muir
- Posts: 280
- Joined: Thu Jul 22, 2010 10:15 pm
B, questions like that are why the IRA and 40x rules and regulations are hundreds of pages long. As I said, you'll need to do lots of reading and keep extremely meticulous records if you want to do stuff like that and not be hit by penalties. Even if you follow the rules by the letter of the law, an IRS agent can make a mistake and you might end up having to fight it out in tax court.
For me, it's just not worth it. I would recommend focusing the bulk of your investments in taxable accounts if you are planning on withdrawing them prior to 59.5.
For me, it's just not worth it. I would recommend focusing the bulk of your investments in taxable accounts if you are planning on withdrawing them prior to 59.5.
@B: I looked into this (401k vs investment account). I have high income and I'm very young, and what I ultimately decided was to put 10% of my (after-tax) income into my 401k, to get my company match and tax benefits, and because it's a nice round number. Of the remaining income, I put 60% into an investment account and spend 40%. Depending upon your income, your numbers could be different - I would reduce the amount I put in my 401k to strictly company match if I was making less.
Since I'm in my 20s, I expect the 401k to appreciate nicely and provide a boost in my old age - I will not touch it until I reach 60.
This solution is simple and I think gives me enough flexibility, and I don't feel as though I'm giving up the substantial tax/company match benefits of a standard retirement account.
Since I'm in my 20s, I expect the 401k to appreciate nicely and provide a boost in my old age - I will not touch it until I reach 60.
This solution is simple and I think gives me enough flexibility, and I don't feel as though I'm giving up the substantial tax/company match benefits of a standard retirement account.
Robert and m741, thanks again for the feedback. I've decided to stay the course and treat my retirement accounts (Roth IRA and 401k alike) as funds for regular retirement age.
So, here's my update for last month:
April 2011
Income:
$3620 Salary
$1323 Tax Refund
$4943 Total
Expenses:
$540.82 Food & Dining
$375.00 Rent
$306.51 Auto & Transport
$155.29 Bills & Utilities
$ 52.85 Gifts
$ 8.52 Fees & Charges
$1207
Saving:
$1810 Automatically deposited into my main ERE savings account
$ 466 401(k) Contributions (Not counting employer match)
$ 466 Employee Stock Purchase Plan
$2742 Total Saving
I spent a lot in food and gas because I took a short trip to San Francisco to meet an old friend. I ended up eating out a lot and helping out with gas and other expenses while I was there. The flight was free (friend hooked me up with one of his business flights). I had a wonderful time. All in all, definitely worth it.
Because I got the tax refund this month, There is a larger than usual gap between money I put into savings accounts and my expenses. I think I'll leave the entire difference in my checking account as usual, a little more wiggle room there is okay.
Percent Income Saved = 100 * 2742 / 4943 = 55.47%
Percent Income Spent = 100 * 1207 / 4943 = 24.42%
Unaccounted = 4943 - (2742 + 1207) = $994
Percent Unaccounted = 100 * 994/4943 = 20.11%
So, although it's not all safely locked away, my savings rate for April is: 75.58%
So, here's my update for last month:
April 2011
Income:
$3620 Salary
$1323 Tax Refund
$4943 Total
Expenses:
$540.82 Food & Dining
$375.00 Rent
$306.51 Auto & Transport
$155.29 Bills & Utilities
$ 52.85 Gifts
$ 8.52 Fees & Charges
$1207
Saving:
$1810 Automatically deposited into my main ERE savings account
$ 466 401(k) Contributions (Not counting employer match)
$ 466 Employee Stock Purchase Plan
$2742 Total Saving
I spent a lot in food and gas because I took a short trip to San Francisco to meet an old friend. I ended up eating out a lot and helping out with gas and other expenses while I was there. The flight was free (friend hooked me up with one of his business flights). I had a wonderful time. All in all, definitely worth it.
Because I got the tax refund this month, There is a larger than usual gap between money I put into savings accounts and my expenses. I think I'll leave the entire difference in my checking account as usual, a little more wiggle room there is okay.
Percent Income Saved = 100 * 2742 / 4943 = 55.47%
Percent Income Spent = 100 * 1207 / 4943 = 24.42%
Unaccounted = 4943 - (2742 + 1207) = $994
Percent Unaccounted = 100 * 994/4943 = 20.11%
So, although it's not all safely locked away, my savings rate for April is: 75.58%
Last month (May), I made a lot of transfers between my different accounts in order to begin investing. Mint, my usual spending tracking tool has become useless in the process. Since I am still fully retained, I don't have the time to sort through the erroneously classified transfers mint is tracking.
It's time to abandon retroactive logging. I should have a budget I can plan and track beforehand.
Once I aggregate the data by hand I'll have a good entry for May. However, I feel that a great change is in order. My work environment has become increasingly hostile. I am in the position to demand a reduction in hours and/or responsibilities. Soon I think I will exercise this option. My flexibility (no debts, at least 3 years in expenses saved, no life responsibilities) allows me to demand something better.
July will be interesting.
It's time to abandon retroactive logging. I should have a budget I can plan and track beforehand.
Once I aggregate the data by hand I'll have a good entry for May. However, I feel that a great change is in order. My work environment has become increasingly hostile. I am in the position to demand a reduction in hours and/or responsibilities. Soon I think I will exercise this option. My flexibility (no debts, at least 3 years in expenses saved, no life responsibilities) allows me to demand something better.
July will be interesting.
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RightClawSouth
- Posts: 123
- Joined: Wed Jul 28, 2010 3:15 am
I had exactly the same problem with mint when I started investing. You wind up with a ton of transactions and it all gets to be a pain in the ass to fix... I wound up just excluding the investment accounts from trends (you can do this on the account page) and just using mint to track net worth (including investment accounts) and expenses (excluding investment accounts).
May 2011
Thanks for the tip RightClawSouth! Looks like I'll continue to use Mint.
Expenses:
Category Spending
Home $375.00
Food & Dining $329.16
Auto & Transport $247.48
Bills & Utilities $104.04
Gifts & Donations $68.47
Entertainment $8.00
Total $1,132.15
Income:
Salary $3622.00
The income figure is just from my salary. I have a few small sources of income aside from that but for now they're too small to keep track of here.
The spending is still out of control. I need to get it to under $800 a month. The main culprit is eating out and bars. When friends from out of town visit I typically end up spending a lot in that category. This can't be treated as an exception because it happens often, about once a month really.
I also drove a lot in May, mostly to visit family. I made two 600 mile trips. That's unusual.
Savings Rate: 68.7%
I'm looking to make a change in my employment situation. I'm a little nervous about the likely result, but lately the alternative of everything staying the same sounds worse than the worst case scenario of trying for change.
I'm not going into much detail yet, but I realize that "semi-retirement" better suits me. I have no big responsibilities to other people in my life (meaning I have no wife, kids or mortgage). I think spending the next 4 years chained to a desk with little else in my life is likely to make me very unhappy, maybe even permanently changing my personality for the worse. I'd rather take a risk and pursue happiness now, even if it means more work later on. Hopefully it'll be happier work.
In any case, I need my spending habits to be congruent with the rest of my plan. Burning 1.5 times my goal spending rate won't be sustainable.
Thanks for the tip RightClawSouth! Looks like I'll continue to use Mint.
Expenses:
Category Spending
Home $375.00
Food & Dining $329.16
Auto & Transport $247.48
Bills & Utilities $104.04
Gifts & Donations $68.47
Entertainment $8.00
Total $1,132.15
Income:
Salary $3622.00
The income figure is just from my salary. I have a few small sources of income aside from that but for now they're too small to keep track of here.
The spending is still out of control. I need to get it to under $800 a month. The main culprit is eating out and bars. When friends from out of town visit I typically end up spending a lot in that category. This can't be treated as an exception because it happens often, about once a month really.
I also drove a lot in May, mostly to visit family. I made two 600 mile trips. That's unusual.
Savings Rate: 68.7%
I'm looking to make a change in my employment situation. I'm a little nervous about the likely result, but lately the alternative of everything staying the same sounds worse than the worst case scenario of trying for change.
I'm not going into much detail yet, but I realize that "semi-retirement" better suits me. I have no big responsibilities to other people in my life (meaning I have no wife, kids or mortgage). I think spending the next 4 years chained to a desk with little else in my life is likely to make me very unhappy, maybe even permanently changing my personality for the worse. I'd rather take a risk and pursue happiness now, even if it means more work later on. Hopefully it'll be happier work.
In any case, I need my spending habits to be congruent with the rest of my plan. Burning 1.5 times my goal spending rate won't be sustainable.
JUNE 2011
Expenses:
Rent $375.00
Food&Dining $226.72
Auto&Transport $145.94
Shopping $115.20
Health&Fitness $110.00
Uncategorized $34.00
Total $1,006.86
Income:
Salary $2,156.81
Big Change:
The situation at work became impossible to continue. After taking advantage of the benefits I never needed to begin with (free dental exam and physical, why not?). I left my supposedly cozy job. Goodbye to all that.
I don't have a solid plan for the future, but I know a trap when I see one. I am not going to jump right into a new jay oh bee just yet. I plan to crank down my expenses (another room mate is moving in in August), and focus on myself. I can't wait to live the life of a mind unchained.
July will be (has been) quite the experience.
Expenses:
Rent $375.00
Food&Dining $226.72
Auto&Transport $145.94
Shopping $115.20
Health&Fitness $110.00
Uncategorized $34.00
Total $1,006.86
Income:
Salary $2,156.81
Big Change:
The situation at work became impossible to continue. After taking advantage of the benefits I never needed to begin with (free dental exam and physical, why not?). I left my supposedly cozy job. Goodbye to all that.
I don't have a solid plan for the future, but I know a trap when I see one. I am not going to jump right into a new jay oh bee just yet. I plan to crank down my expenses (another room mate is moving in in August), and focus on myself. I can't wait to live the life of a mind unchained.
July will be (has been) quite the experience.
JULY 2011
Expenses:
Rent,"$375.00"
Food & Dining,"$289.20"
Bills & Utilities,"$179.08"
Auto & Transport,"$113.14"
Shopping,"$51.04"
Uncategorized,"$40.18"
Gifts & Donations,"$18.35"
Personal Care,"$16.50"
Health & Fitness,"$10.00"
Pets,"$4.34"
Total,"$1,096.84"
Income:
Salary, "$1084.27"
Although I quit in June, I still had some checks coming to me.
My spending is still not quite under control. I expect this month will be better. Also, I am not tracking investment income here. It's not exactly substantial yet.
I've been obsessed with repairing the parts of my life that have been neglected while I was salaried, working 65+ hours a week.
Expenses:
Rent,"$375.00"
Food & Dining,"$289.20"
Bills & Utilities,"$179.08"
Auto & Transport,"$113.14"
Shopping,"$51.04"
Uncategorized,"$40.18"
Gifts & Donations,"$18.35"
Personal Care,"$16.50"
Health & Fitness,"$10.00"
Pets,"$4.34"
Total,"$1,096.84"
Income:
Salary, "$1084.27"
Although I quit in June, I still had some checks coming to me.
My spending is still not quite under control. I expect this month will be better. Also, I am not tracking investment income here. It's not exactly substantial yet.
I've been obsessed with repairing the parts of my life that have been neglected while I was salaried, working 65+ hours a week.
AUGUST - SEPTEMBER 2011
Just wanted to check in with a sign of life.
No budget break down for these months. The automatic tracking with mint.com is still in place, but I haven't been following it very closely. Frugality is such a ingrained habit at this point that I haven't felt the need to use tools to keep me on track.
I'm back in school and focused on my research lately. I don't have a lot of headspace for much else these days. I still come and read these forums. I'd like to spend more time on investment but I'm a bit too busy these days.
I'm very pleased with how the forums are flourishing. Maybe one day I'll attend a meetup.
Take care all
Just wanted to check in with a sign of life.
No budget break down for these months. The automatic tracking with mint.com is still in place, but I haven't been following it very closely. Frugality is such a ingrained habit at this point that I haven't felt the need to use tools to keep me on track.
I'm back in school and focused on my research lately. I don't have a lot of headspace for much else these days. I still come and read these forums. I'd like to spend more time on investment but I'm a bit too busy these days.
I'm very pleased with how the forums are flourishing. Maybe one day I'll attend a meetup.
Take care all
@B,
Lots of Good luck & Godspeed for your future. Hope you'll still contribute to the forums as often as you could.
What is the most contagious parasite?
An idea
Unsolicited suggestion:
As a former PhD and recovering researcher, I would say this: Think twice, and then some, and think carefully once again before wanting to go down the route of post-grad/research in these times.
Lots of Good luck & Godspeed for your future. Hope you'll still contribute to the forums as often as you could.
What is the most contagious parasite?
An idea
Unsolicited suggestion:
As a former PhD and recovering researcher, I would say this: Think twice, and then some, and think carefully once again before wanting to go down the route of post-grad/research in these times.
@Surio
As always, thank you for your kind words and encouragement.
I appreciate the suggestion as well. I am somewhat in limbo right now and haven't commited to a PhD route. In a way this maybe a waste of time if I don't, but it's better than doing nothing and opens more doors than it closes.
Trust me, I am considering my next steps very carefully. If I look backwards, I can still see the sign post at the fork of the road, so I'm not too far gone down this route.
As always, thank you for your kind words and encouragement.
I appreciate the suggestion as well. I am somewhat in limbo right now and haven't commited to a PhD route. In a way this maybe a waste of time if I don't, but it's better than doing nothing and opens more doors than it closes.
Trust me, I am considering my next steps very carefully. If I look backwards, I can still see the sign post at the fork of the road, so I'm not too far gone down this route.
Hey!
I did not mean to imply that you haven't thought it through enough. I can empathise with what you are saying:
You never really understand a man until you consider things from his point of view... Until you climb inside of his skin and walk around in it.
--- To Kill a Mockingbird.
I sincerely believe that you probably know best, what is the right thing to do in your situation.
You know, since the opportunity presented itself, I simply voiced my first thought aloud when I read your journal.
Good Luck.
Have fun, but Take Care.
Surio.
I did not mean to imply that you haven't thought it through enough.
I can empathise with what you are saying:You never really understand a man until you consider things from his point of view... Until you climb inside of his skin and walk around in it.
--- To Kill a Mockingbird.
I sincerely believe that you probably know best, what is the right thing to do in your situation.
You know, since the opportunity presented itself, I simply voiced my first thought aloud when I read your journal.
Good Luck.
Have fun, but Take Care.
Surio.