feldm093 wrote:I'm just starting out in the world of investing having finished undergrad in 2016 and starting the first "real" job a few months later.
The issue I'm coming up against is understanding where to even begin. I've got pretty onerous student loan payments to be made every month which soak up a good chunk of my income, and I contribute double-digit percentage to my company 401k while also trying to build up a little nest-egg of savings.
Should I be looking to continue to lean out non-essentially expenses even more than I've already got them and then put that extra money into another investing vehicle?
I'll be curious to read along as the discussion evolves. Definitely want to get a big jump-start on saving and would like to make the right early decisions.
The answer to the bolded part is yes 90% of the time when looking at it from a financial standpoint. Do I need nice gym membership? No. My kitchen is outdated by 30 years, should i upgrade it? No. The older (only 29) I get the more I try to live without the luxuries and down size. You have to live your life, but just recognize you are trading money you could invest for simple luxuries now.
If you are starting out, here is a good overview on how you should invest your money. It is pretty conservative since it focuses on paying down debt, versus essentially using it as a loan to invest (when you decide against not paying it down). IMHO, you should already be past step 6 before you look into any investing that requires you to research (thus probably more risk). If you are doing that, you are pointing in close to $30k a year between 401k/Company Match/IRA/HSA Just ride the low-cost index wave and max out for 20-25 years and you will have more than enough to retire.
WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to your 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
6. Fund a mega backdoor Roth if applicable.
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.
WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 25%; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise.
See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
See Traditional versus Roth - Bogleheads for even more details and exceptions. State tax (or lack thereof) should also be considered.
The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k. In a 401k there are no income-based limits for deductions or contributions.
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough. Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
(e.g., target retirement date) that provides a blend of stock and bond returns. If you wish to consider separate bond funds, compare the yield on a fund
with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.
8. Because any earnings, even if taxed, will help your FI journey.
