Need Advice: Personal Finances & Investments 101 for Late-20's Male?

I love this topic, mostly because it's exactly the position I was in a couple of years ago. Fresh out of college, I had a job and got an apartment, and had no idea what to do with my money. So here's my take-

First, decide how much risk you're willing to take, and how long you're willing to leave your money in your investments. There's a big difference between a 6-month plan and a 10-year plan.

For money you're willing to risk for 3 or more years, I'm a big fan of index funds. Read up on index funds (wikipedia works, but a quick google might find you something easier). I recommend Vanguard for their super-low fees, but Fidelity is also a good option (I use Vanguard, my friend uses Fidelity, we're both happy with what we use). Index funds are low-cost investments that basically buy a bunch of different stocks, and attempt to do about as well as a specific market (such as the S&P 500, or international markets).

If you're not sure about your time frame, or you want much less risk, bond funds and CDs are good options. I know very little about bonds, but supposedly they're less risk than stocks, but also less returns. Don't take my word for it though, do your own research. CDs are almost no-risk (close enough), but have very low returns. Basically, you buy a CD, hold it for a specific amount of time, and get a fixed interest rate in return. The rate is low, but the longer your CD is for, the higher the rate. There is a penalty for pulling out early, but a lot of times you can do better with a high-rate, long-term CD pulled out early than a short-term CD.

401k - This is a retirement account that you can fund through your employer. You get to choose how that money is invested, and you can't take it out until you're 65 (without a penalty, which can be a significant amount). 401k's are 'pre-tax' accounts, meaning that the money you put in only gets taxed when you take it out, so you're essentially investing around 25% more initially. Generally when you retire, you're in a lower tax bracket (and the money has grown a lot over time), so it's a great option for retirement planning. How you invest the money is limited, though (depends on the company), but usually you can do a 'target date fund', where you choose when you plan to retire, and your money automatically gets rebalanced into more 'conservative' funds over time. This means when you're ready to retire, your investments are pretty stable, so hopefully a market crash won't cut your retirement fund in half. If you want more options, a Roth IRA is a similar retirement account, but doesn't go through your employer (there is a lower annual limit on how much you can put into a Roth IRA each year though).

For more info, you can check out What the heck is a 401k [blogspot.com]. For more general investment help, look at investing 101 [blogspot.com].

Hope that helps .

Quote from Comp625 : I've never taken a Personal Finance 101 or an Investments course during college or was never taught any of this by my parents.

Fantastic. Consider yourself ahead cause you don't have to unlearn a bunch of useless garbage.

Like Dwad just said it all comes down to risk tolerance. Never think you have to go all in on anything unless you want to risk it all. A friend of mine is an all-or-nothing, live by the sword type of investor. He's done really well about 20% of the time, the other 80% of the time he's lost his ass (scams, real estate). Guess what he always talks about, the 20% or the 80?

And no "diversification" is not the key. Knowing how money works is. Understanding the scope of fraud and larceny in the financial markets is. Success depends on your ability to think outside the box, not following any cookie cutter plans as suggested by the talking head financial "experts."

I would love to hear more about this topic as well as I am in a similar situation as the OP.

Very interesting resposnes!

To begin an investment vehicle of any sort (whether it's a Stock, Bond, Mutual Fund, CD or RothIRA), how much "entry money" should I be looking at? For example, if I have $1,000 sitting around, how or where should I invest it?

Of course, I have some credit card debt that I'm working off, and any "investing" money should be put towards there. However, I am on schedule to pay off all of my credit card debt by the end of 2012. For all intents and purposes of this conversation, let's assume that my debt is paid off.

Also, I know that I have 401k account from my old employer and will be joining the 401k plan under my new employer once the 1-year waiting period is over. I have about $17,000 sitting in the old employer's 401k -- is that good for where I am right now? I'd rather not reveal my salary to the entire Internet, but my salary is good (but not 6 digits).

Quote from barnz008 : Fantastic. Consider yourself ahead cause you don't have to unlearn a bunch of useless garbage. Like Dwad just said it all comes down to risk tolerance. Never think you have to go all in on anything unless you want to risk it all. A friend of mine is an all-or-nothing, live by the sword type of investor. He's done really well about 20% of the time, the other 80% of the time he's lost his ass (scams, real estate). Guess what he always talks about, the 20% or the 80? And no "diversification" is not the key. Knowing how money works is. Understanding the scope of fraud and larceny in the financial markets is. Success depends on your ability to think outside the box, not following any cookie cutter plans as suggested by the talking head financial "experts."

Ya fark diversification... who needs to diversify!

Okay, well I think you need at least $2,500 to invest in a mutual fund. When I started investing through Fidelity the minimum I could put in a mutual fund was $2,500. Not sure if that differs depending on the brokerage though. As far as how much money to invest well I would start saving an emergency fund first (unless you have one already). You're good on the first baby step, $1,000 saved! Now try three to six months worth of living expenses.

Once you have an emergency fund any disposable income you're bringing in can go in a Roth IRA (funded with post tax income so you get tax free growth). Roth IRAs are good because you've already paid tax on the contributions so when you retire and withdraw from the Roth you won't have to pay tax on the contributions. However, the maximum you can contribute to a Roth is a lot less than a 401(k). Not sure if the IRS raised the limit for 2012 but I believe it's around $5,000 to $6,000. Keep contributing enough money to your employer's 401(k) to get the matching contribution (if there is one) -- well because it's free money!

I stress the whole emergency fund first though. Investing will be the last thing on your mind if you lose your job.

I am pretty much in the same boat as you. I'll be 25 in August, and was fortunate enough to have four years of college paid for by my parents. I decided after graduation to live at home for a few years and build myself a nest egg. In the next year or so I'll have enough to put 20% down on a house and live in it without a job for 6-12 months. I can't plan for everything, but I can at least be smart about it.

Hey, at least you're thinking about these things.

Quote from Louisville S : Okay, well I think you need at least $2,500 to invest in a mutual fund. When I started investing through Fidelity the minimum I could put in a mutual fund was $2,500. Not sure if that differs depending on the brokerage though. As far as how much money to invest well I would start saving an emergency fund first (unless you have one already). You're good on the first baby step, $1,000 saved! Now try three to six months worth of living expenses. Once you have an emergency fund any disposable income you're bringing in can go in a Roth IRA (funded with post tax income so you get tax free growth). Roth IRAs are good because you've already paid tax on the contributions so when you retire and withdraw from the Roth you won't have to pay tax on the contributions. However, the maximum you can contribute to a Roth is a lot less than a 401(k). Not sure if the IRS raised the limit for 2012 but I believe it's around $5,000 to $6,000. Keep contributing enough money to your employer's 401(k) to get the matching contribution (if there is one) -- well because it's free money! I stress the whole emergency fund first though. Investing will be the last thing on your mind if you lose your job. I am pretty much in the same boat as you. I'll be 25 in August, and was fortunate enough to have four years of college paid for by my parents. I decided after graduation to live at home for a few years and build myself a nest egg. In the next year or so I'll have enough to put 20% down on a house and live in it without a job for 6-12 months. I can't plan for everything, but I can at least be smart about it. Hey, at least you're thinking about these things.

You should looking into renting before you drop 20% into a house.

Quote from WildChickenDanc : You should looking into renting before you drop 20% into a house.

Yeah, I agree, but I want to at least have options.

Quote from PiratesSayARRR : Ya fark diversification... who needs to diversify!

Only those who invest.

Quote from barnz008 : Only those who invest.

perhaps I misunderstood your comment about diversification

I am in a similar position to you. In the beginning of my career journey and finally getting a real paycheck. There is a lot of good information out there and a lot of bad information out there as well. Suzie Orman is pretty basic, a lot of common sense stuff that people tend to forget when they have their eyes on something bigger, be it a new car or a stock tip that you have been told will beat the market. If you like Suzie Orman's advice you will probably like Clark Howard's. His website also has forums on personal finance related topics. There is a lot of advice right here on Slickdeals, but there is also some bad advice. Reading books like Suzie's is probably a good start because unlike the internet, hopefully it is fact checked and credible.

To keep a beat on the overall state of the economy, both the US and world, I like to do some casual reading on CNN Money and the Financial Times. I also prefer Yahoo Finance for research individual stocks, trends, and news. Take it all in, even on the big sites there is a lot of crap. Remember they write in the now, what is the market going to do today, tomorrow, a week from now. You are investing for retirement, and let's face it, our generation won't be retiring for at least 50 years. Hopefully you will fair better than the average person from our generation.

In my opinion, the most overlooked things for the average investor is managing taxes and transactional fees. Indexed funds were mentioned and preferred over mutual funds partial because of their lower management fees. When you invest smaller sums of money over a long period higher management rates, even tenths and hundredths of a percent can add up to a considerable amount of money. Compound interest is an amazing thing. Transactional fees should also be factored. If you are making 20% in the stock market, but are paying $7 to buy and $7 to sell, your return might not be great at all. As for taxes, they should also be brought into the balance. Personally, right now I am contributing just over my employer match for my 401k. I am saving other money in a roth because I think I am probably in the lowest tax bracket of my life. If I end up in the same tax bracket when I take it out, it really won't matter if it was taxed when I put it in or take it out. After that is maxed out I am putting money in another IRA simply because I do not like the investment vehicles my company offers through Fidelity and the high management fees. Taxes should also be factored into your living situation, whether to rent or buy. There are a number of tax benefits to owning a home. Honestly with the way the real estate market is right now, if you can buy a home with as little as 3.5 or 5% down it is hard to pass up. Even if you have to pay a higher interest rate 4.5% or 5%, that is cheap money over 30 years. I am not advocating you should or should not buy a home though.

In this long winded brain fart of a post, what it really boils down to is read often, keep up on the changing economic climate and investing vehicles because just when you got it all figured out the game will change. Be it a great recession, a new investment vehicle such an etf, or hyper inflation; the future is uncertain and that is the only certain.

One site that has helped me a ton is www.investopedia.com

Lots of great info. Hope that site helps you at some point..good luck!

i'm in the same boat as all of you here.

i was fortunate to have saved as much as i have after 1 year... (saved $10K my first year) and my salary is about average for a political science major so it's possible! (and yes, i did have a life... i was just a great slick dealer).

here's how i invested:
short term: savings account with enough buffer room in case i over spent
my mid-long term investment are US I-bonds (emergency fund... i was pretty confident that my employer wasn't going to fire me after i passed my initial 3 month trial period)
my long term is an S&P 500 index ETS and a retirement fund and maxing my employer's 401K

now i'm trying to set up a new account for future purchases (ie. car, house, etc.) and another short term account (my goal is to take 1 trip per year out of state)