25

I am a little unsure where to put my money at this point in my life. I have followed all the basic advice on what to do with your money and now I am at a point where I just don't know what to do next. It's kind of a boring point in my financial life, but I certainly can't complain for my age. So here is where I am at:

  • 26 years old, making ~50k/yr (United States)

  • No credit card, car, or student loan debt

  • 10 months and growing emergency savings

  • Company stopped matching 401k, but still putting in what I was before (6%)

  • Maxing out my Roth IRA for the past 2 years

  • Own a home with ~80k left on a 20yr mortgage @ ~4.2%

Should I just work at maxing out my 401k? But then I am tied to my company's 401k investment plan with a rather large sum of money per year (up to 16k I believe). Are there options to do this on my own with similar benefits?

Serious investing in stocks and such on my own looks very interesting, but don't think I am quite to that point yet if I can't max my 401k. I wouldn't even know where to start with that anyways. Although I thought the same thing about my Roth IRA at one point as well...

The easiest option I can see is to simply start dumping into my mortgage, which I will likely do to some degree regardless in the next year. But with that interest rate and my current age, I feel like there should be something better to do with the money.

So any advice on where to go from here? Thanks.

Edit: Additional information I either didn't know or didn't know was relevant originally:

  • Tax Bracket 15%, should be able to stay here for the next few years with some 401(k) contributions
  • 401(k) expense ratio ~1.2% throughout
  • What's wrong with the company 401k? Why are you afraid of growing it? – littleadv Dec 19 '11 at 18:07
  • Just higher fees and less control than other options. Not afraid of growing my money at all, that's why I am asking here. Curious if there are better options than throwing my extra money in my companies 401k when there is no match. Plus with an already considerable sum invested in a 401k/Roth, I may come out further ahead just paying my mortgage faster. Especially now with minimal gains coming from my retirement investments. – radix07 Dec 19 '11 at 18:17
14

First, i think you're doing awesomely for your age.

Here's what i'd do in your situation (disclaimer: These are just my personal opinions from experience with my own finances.):

  • Stay out of debt!
  • Don't put any more into a 401k than what your company matches.
  • If you feel safe at your job, stop emergency saving at 10 months or get to a nice, even 12 months.
  • Make sure you can keep Roth IRA max'd yearly.
  • Consider sites like LendingClub for investing but be sure to learn how it works and take the advice of the sites. e.g. Be sure to diversify.
  • Invest in ETF stock indexes that pay dividends and, at your age, remember to choose more aggressive investments that you can hold.
  • Start putting 2x or 3x additional principal to mortgage,
  • There are some other things like insurance. I tend to side with Suze Orman's suggestions on these.

I'd do all those things and partition the money so that i ensure i do them all. That may mean not dollar cost averaging monthly but rather quarterly to keep fees-percentages down, but i think that's reasonable for your age.

Something i don't think you should overlook with regard to your mortgage is the freedom afforded you by paying off a home. It provides you with the freedom to be out of work, between work, or take an extended leave without the fear of how to pay your bills, the mortgage tending to be a significant percentage of the monthly bills. If that's not something you've considered, not a concern, or not something you care about, then paying off your home probably isn't a priority so I'd drop that step and put more money into investments.

  • Very useful feedback, thanks. Dumping into my mortgage is looking rather tempting, especially if I can do that in less than 10 years @ 2-3X. That would free a ton of money later in life to do considerably more investing, as well as just have more fun later in life. – radix07 Dec 19 '11 at 20:13
  • OP's company stopped matching. He didn't mention the fees. This is key, really. As far as Roth goes, I'd Roth the 15% income, but not 25%. It might change each year. – JoeTaxpayer Dec 19 '11 at 22:44
  • @JoeTaxpayer The fees i was primarily considering was brokerage fees related to buying stocks. I personally don't buy a lot of stock unless the brokerage fees are less than 0.5% of the trade. Meaning, e.g. for a brokerage who charges $8-10 per trade, i'll only buy when i can spend more than $1600-$2000 on the trade. – nicerobot Dec 19 '11 at 23:57
  • Yes. Understood. You referenced his 401(k) up to match. There is no match. If the 401(k) expenses are very low, there may still be value in the 401(k), if not, avoid it 100%. – JoeTaxpayer Dec 20 '11 at 0:09
7

As the others said, you're doing everything right. So, at this it's not a matter of what you should do, it's a matter of what do you want to do? What would make you the happiest?

So, what would you like to do most with that extra money?

  • Love the idea of owning your home outright? Then dump it into mortgage payoff!
  • Love the idea retiring rich, with one of those giant RVs? Pile it into the 401k!
  • Love the idea of retiring early, or maybe starting your own business some day? The save it in CDs and/or sensible mutual funds!
  • Love the idea of putting on a top hat and playing real life tycoon? Put it in a discount brokerage and start playing the markets!

The point is, since you're already doing everything right with the rest of your money, there's really nothing you can do that's wrong with this money. Except using it on something that increases your monthly expenses, like a down payment on a car.

In fact, there's no reason you have to do anything "sensible" with this money at all. You could blow it at nightclubs if you wanted to, and that would be perfectly ok. In fact, since you've got everything else covered, why not "invest" it in making some memories? How about vacations to exotic and rugged places, while you're still young enough to enjoy them?

6

I frequently advise to go 401(k) up to the match. With no match, I'm not so sure. If you are in the 15% bracket, I'd skip the 401(k). Your standard deduction is $5800 this year, do you itemize? I ask because the 15% bracket ends at $34,500, and I don't know if you manage enough deductions to get under that. But - I'd only pt into the 401(k) what would otherwise be taxed at 25%, no more. Even then only if the 401(k) expenses were pretty reasonable.

Will all the hoopla over retirement accounts, we easily forget the beauty of the investment in ETFs long term. You buy the SPY (S&P 500 ETF) and hold it forever. The gains are all deferred until you sell, and then they have a favored rate. You control the timing of the sale with no risk of penalty. The expenses are low, and over time, can make up for the lack of tax deduction (The pretax deposit) vs the 401(k) account. You die and the beneficiaries have a stepped up basis with no tax due (under whatever the limit is that year).

Long term, I'd go with low cost ETFs and pay the mortgage at the minimum payments. Even without itemizing, 4.2% is pretty low compared to the expected return over the next decade in stocks.

I recommend a look at Fairmark to help understand your marginal rate. Your gross doesn't matter as much as that line on 1040 "taxable income." This will tell you if you are in the 25% bracket and if so, how deep.

Edit - If one's taxable income, line 43 on your 1040, I believe, puts him into the 15% bracket, there are issues using a pretax 401(k). The priority should be to use a Roth IRA or Roth 401(k). Being so close to that 25% bracket at 26 tells me you will grow, and/o marry into it over time, that's the ideal time to use the pre-tax 401(k) to stay at 15%. i.e. deposit just enough to bring your taxable income right to that line of 15/25%.

  • 5
    Ridiculous amount of useful information from JoeTaxpayer lately. Subscribing to his blog! – radix07 Dec 20 '11 at 18:35
  • Investing in ETFs was definitely what I was going to suggest. – justkt Dec 20 '11 at 19:58
  • Find out if your company offers a Roth 401(k) option (different than a Roth). If they do, you should max that (limit is higher than regular Roth). – Michael Pryor Dec 23 '11 at 15:59
5

I'd invest in yourself. Start up a side business. Take a certification class that gets your foot in the door for something else (auctioneering, real estate sales, whatever). Bid on a storage auction and try to re-sell it. Learn Spanish (or whatever second language is best for your area). And so forth.

Most of the suggestions thus far are either debt reduction or passive investment. You have good control on your debt, and most passive investments pay jack (though Lending Club might be a bit better than most). Build up another basket to put your eggs in and build equity and cash flow instead of interest and dividends. You're young. This is the time to learn how to do it.

  • Great advice, I agree that the best way to truly increase your worth is by investing in yourself. But as far as this site is concerned I am more interested in financial options. Although I certainly have my foot in a few doors I have been looking into, from web design, to renting out a house, to various other side projects that are always popping into my head. – radix07 Dec 20 '11 at 13:37
3

There's a ton of great advice here. It's very challenging to come up with something that hasn't already been suggested. I'm curious to know how many years you have left to pay down the mortgage at the regular rate of payment. If it's more than 15 years, it might be worthwhile to consider refinancing your mortgage to a shorter term (15 years or even 10 years if your income supports it). Rates on fixed-interest mortgages at those terms are down in the 3% range and lower (at least according to bankrate.com). Refinancing to a shorter term would be another way of paying off your home faster (with fewer of those dollars going toward interest payments).

If you've got fewer than 15 years left to pay off your mortgage, following any of the other advice you've received here should keep you in great financial shape.

  • One step ahead of you, actually signing the papers to finish up my refinance next week. Was in my 2nd year of my 20 year mortgage and just got a 15 year @ 2.75%. Although will have to dump about half of my backup stash (~1yr) to keep ahead of the PMI with the lower appraisal. Thanks for the info! – radix07 Aug 21 '12 at 20:22
  • If rates are still that low in another 6 months, I'll have to see if the math works for me to refinance again. I refinanced from a 20-year @ 5.25% (with 12 years remaining) into a 15-year @ 3.4% at the start of 2012 as part of consolidating a home equity line of credit and paying off credit card debt. – Scott Lawrence Aug 23 '12 at 13:44

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.