A question I got this week is where does one start investing after funding a 401-k and Roth IRA?
First off I want to say today's workers are blessed with the opportunity to use pre-tax vehicles like 401-k's and such to accumulate assets. I was into my 40's before I ever had a 401-k to use and could only put about $2000 in a IRA for many years. So I was forced to find other ways to invest assets. One other thing to note here is that a married couple can put away $43000 their dual retirement plans and IRA's before they have money to invest elsewhere. $56000 if the couple is both over 50 years old. (both of these assume your company allows you the max and not a certain percentage ) Frankly for most people that pretty well soaks up all their investable assets annually. If you are doing the max over a 30 plus year working life you will accumulate a ton of money. Doing a quick figure for 30 years of max investing would net about $4.5 million in assets. Nice! One might ask why do all your retirement investing in a pre-tax vehicle. Fairly simple answer is that no where else you can put the money where you will get about a 22% immediate return ( in NC ) on your money. That coming from the 15% federal tax and 7% state tax you get to keep up front. That is about three years of 7% return on your investment. You get to use money that you would normally pay the feds and state for 30 years or more. Do not be concerned with anyone arguing that the tax rate might be higher later on, having use of the money for 3 decades more than offsets any tax later on.
One of the biggest mistakes most people make is confusing "savings" and "investing". Saving is putting away money in a CD or some form of savings account that pays a certain percentage of interest. There is no risk to your money, no chance it will go backwards in value. This is safe, but you risk the chance inflation will eat away at the value of your principal. Everyone needs a safety net of cash, but having too much is foolish in my opinion. For me three months of expenses is satisfactory assuming you have marketable skills that can gain you employment rather quickly if you lose your current employment. Once you have some serious assets, several years of savings and investments, use your credit card for such. Yeah, that sounds crazy, but if you PAY OFF your card every month and just use it for convenience, the credit line makes for emergency cash just fine. Control your credit card, do not let it control you. Additional Tip: Get you a couple of cash back credit cards and use the built up cash back to pay for Christmas each year. You will be surprised just how much cash you can accumulate.
Also accept up front few people if any accumulate assets quickly. Rather than trying to hit home runs, attempt to hit lots of singles. Place your money in good stock funds if you are below 50, then as you move past 50 begin a systematic slow movement of some funds into bonds. Good corporate bonds are better than government bonds here. About the best you will do with US treasuries is stay even with inflation. If you can not sleep at night from your investments, or worry about safety, you are better left to CD's and short term treasuries.
When I began saving money I too was putting it in a safe CD at a local savings and loan. About 10 years into saving money it dawned on me that there was no way to accumulate enough real assets to be financially independent just saving money. It was about then that I began looking for how other people actually made real money with their savings. As I searched for help, two people came into my life that changed my approach. One, a bond trader with over 30 years experience, taught me the value of tax free investing. Two, a stock trader, taught me that the only way to get ahead, was to take calculated carefully thought out risks. Back in the 1970's, yeah that seems like ancient times to most people, believe it or not there was nothing like the Internet and the information available today to retirement investors. So as I say on my bio on the front page, I indeed had to make lots of mistakes before actually knowing the best approach to take to investing money. I envy the opportunity young people have today for retirement assets. Especially in today's bad economy, the chance to make serious money from a this lower level in 30 years is just awesome.
One last thought here on investing. If you are serious about having assets some decades later, (unless you are making lots and lots of money ) you must decide to be willing to sacrifice some buying of things now. That means you give up that fancy widescreen, eating out everyday, expensive vacations, etc. Again, this is a choice you make, that being financially secure is more important than owning things. Tough for most people.
If you reach the point where you have excess investable funds after the retirement investing I mentioned above, there are numerous stock brokerages out there from which to choose. I would personally suggest you select a good online discount broker, Scotttrade, Schwab, Fidelity, and even Vanguard can provide you access to the market. Most of these require $10000 or so to get started and frankly it would take that to buy 100 shares of your first stock. If you get this far, again do not look to hit home runs, find a good stock value and buy it. Then move on from there adding selections with the knowledge any sales makes taxable events.
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