My Grand Financial Plan...Help Please!

[Thremp]

Just buy a house. Skip the REIT.

[Jdanz]

max out the 24% you're young and in consulting you'll probably still have enough disposable, but you're throwing away free money when it is the most important to save (young). Say you'll save 16% anyway, ok so that decision is made. Now you're presented with the choice of two nice things, saving more or spending it, only if you save it you'll magically also get a 25% bonus. Seems pretty easy as long as you won't be hurting lifestyle a ton. Plus maxing like this will give you tons of warm fuzzy feeling now, and in a couple years time.

Compound interest is magic.

[pig4bill]

There are times that maxing out a 401k to get the most match is not the best plan. It depends on what your 401k lets you invest in. If it's stuff you would buy anyway, then go ahead. If their offerings stink, you could be giving up some decent return on the money you sock away into the 401k chasing the match. You may end up better off investing it in higher return vehicles that more than make up the 6% matching.

[ChromePony]

[ QUOTE ]
Just buy a house. Skip the REIT.

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I would love to...I'm 22. I would like to put my poker money and savings towards that eventually though.

[ChromePony]

[ QUOTE ]
max out the 24% you're young and in consulting you'll probably still have enough disposable, but you're throwing away free money when it is the most important to save (young). Say you'll save 16% anyway, ok so that decision is made. Now you're presented with the choice of two nice things, saving more or spending it, only if you save it you'll magically also get a 25% bonus. Seems pretty easy as long as you won't be hurting lifestyle a ton. Plus maxing like this will give you tons of warm fuzzy feeling now, and in a couple years time.

Compound interest is magic.

[/ QUOTE ]

This is pretty good advice really, I've always been a fairly thrifty...ok cheap, person and I don't plan on changing that a whole lot now that I actually have an income. Plus that warm fuzzy feeling sounds nice to me, I'll probably start out high and bring it back if I need to. The only thing that worries me is the non liquidity in case I would like to buy a house or travel for a year or whatever soonish.

[ChromePony]

[ QUOTE ]
There are times that maxing out a 401k to get the most match is not the best plan. It depends on what your 401k lets you invest in. If it's stuff you would buy anyway, then go ahead. If their offerings stink, you could be giving up some decent return on the money you sock away into the 401k chasing the match. You may end up better off investing it in higher return vehicles that more than make up the 6% matching.

[/ QUOTE ]

Theres no problem here, the offerings are solid, basically most every Vanguard fund as far as I can tell and a few others as well.

[eriktjohnson]

Now is a pretty good time to buy a house, though; it's a buyer's market in a lot of areas (as I found out when trying to sell mine last year). Plus, I bought a house when I was 23, and a friend bought hers at 20, so age is no excuse. [img]/images/graemlins/smile.gif[/img] If you can handle the payments and have some cash to put down (though that's not necessarily a deal-breaker), I would do it.

[Scorpion Man]

This whole line around the match is freaking ridiculous. Max it out even if you have to beg borrow and steal. You are 22. My guess is you are making $40k per year. I will choose that for ease of calc. A quarter of so of that is $10k. You just said you have $60k. If saving 24% leaves you short, just take the money from your savings and spend it instead, effectively switching your capital from taxable money to tax sheltered money (which is, in general, a very good thing). This is such a no brainer its scary that there is a debate around it.

That company is giving you an immediate 25% return on your money...and I assume its PRETAX money. All the dicking around over allocation is silly in relation to that as a guaranteed immediate return.

So....here are your choices give or take...let's say you are making $50k to further ease the calculation. Here is what you are missing:

If they match $3k on $12k, you will have $15k immediately in your IRA. Lets say it compounds at 10%...you are now making $1500 per year on that money. In 3 years you will have around $20k.

Instead...let's say you did not get the match at all. You take the $12k, pay 1/3 in taxes...now have $8k, no match, and go up 10% per year in taxes. You will have around 11k.

You see the power? This is not 100% fair because at some point in the very distant future you will pay some tax on the money in your 401k...but it ain't even CLOSE folks. Not maxing is moronic and makes a basic human mistake of not understanding fungibility...you are saying you "cant afford" to save an extra $10k or so pretax (6500 after tax) while you are sitting on $60k in cash. Huh?

[ChromePony]

[ QUOTE ]
This whole line around the match is freaking ridiculous. Max it out even if you have to beg borrow and steal. You are 22. My guess is you are making $40k per year. I will choose that for ease of calc. A quarter of so of that is $10k. You just said you have $60k. If saving 24% leaves you short, just take the money from your savings and spend it instead, effectively switching your capital from taxable money to tax sheltered money (which is, in general, a very good thing). This is such a no brainer its scary that there is a debate around it.

That company is giving you an immediate 25% return on your money...and I assume its PRETAX money. All the dicking around over allocation is silly in relation to that as a guaranteed immediate return.

So....here are your choices give or take...let's say you are making $50k to further ease the calculation. Here is what you are missing:

If they match $3k on $12k, you will have $15k immediately in your IRA. Lets say it compounds at 10%...you are now making $1500 per year on that money. In 3 years you will have around $20k.

Instead...let's say you did not get the match at all. You take the $12k, pay 1/3 in taxes...now have $8k, no match, and go up 10% per year in taxes. You will have around 11k.

You see the power? This is not 100% fair because at some point in the very distant future you will pay some tax on the money in your 401k...but it ain't even CLOSE folks. Not maxing is moronic and makes a basic human mistake of not understanding fungibility...you are saying you "cant afford" to save an extra $10k or so pretax (6500 after tax) while you are sitting on $60k in cash. Huh?

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Well thats a good emphatic response, which seems to be your theme around here but it does make great sense so thanks. However, I just found a small wrinkle in that I will not have any of my contributions for the first year matched. How important is it for me to max out now, I might like to keep a portion liquid to use for travel or grad school someday. Perhaps this is something that I just need to address myself by Im curious what you and others might think.

[Scorpion Man]

Bummer. As I said before the match is way too good to pass up. Still, match or no match, everything else being equal, as the other posters mentioned, it is powerful to get money into a tax deferred vehicle at a young age. The money gets the extra pretax compounding for so long that it is a huge benefit even without the match.

I am too lazy, but run a spreadsheet for yourself with 2 scenarios...one where you put the money in the tax deferred account at some high single digit return, and one where you keep it outside at the same return (make sure to capture correctly any tax effects on the original amounts). There is a small wrinkle in this, in that under the current tax regime you pay taxes at ordinary income when the money comes out...this is opposed to the potential of LT cap gains if you hold an index for the very long term outside the IRA, for example. This negates some of the difference if that is how you choose to invest, but the difference is still substantial. If you mostly have short term gains then this difference does not matter. I think you will find some very compelling number pop out (the less return you assume, the less the difference will be).

It also matters whether your contribution uses pretax or aftertax dollars (sorry I don't remember the OP). If its pretax dollars, this weighs heavily on the side of maxing out. Keeping money around for fun and flexibility and foregoing a tax deferral is like any other kind of "consumption"...you are basically "spending" some of your potential net worth to pay for the option value of having money outside this vehicle. Doing the actual calculation is like looking at any price tag before you buy something...

Good emphatic luck.

PS...what tax bracket are you in? Usually the benefit of munis gets much less at lower brackets...you should buy whatever state you live in because they are double tax free that way (i live in CA and own CA munis...so I dont pay state taxes). Generally, for someone your age, munis are not a part of a portfolio...make sure you are running the after tax equivalent yield at your tax rate vs your other options.