I’ve noticed the boards to be kind of slow lately so I thought I’d ask for your opinions on something I’ve been considering lately.
I’m 24 years old, own my own home, have zero CC debt, my vehicle is paid off and almost have my student loans paid off. While I dont have a great deal of money for savings at the end of each month, I can afford to invest 4% of my income to a 401k plan which the company I work for will match. The question is, is this a good time to start a 401k?
I was planning on saving for about 18 months in which time I’d have enough $$$ to possibly put together my first buy and hold RE deal. I’m having trouble balancing short and long term goals here.
From a financial planner/mortgage planner standpoint, I would say “it depends”. If you have a stable job and plenty of equity in your house, I would refinance, take out as much cash as possible, and plan your investment portfolio appropriately. Money in home equity is like money in a piggy bank…it earns no interest!
Here are the steps in order of importance for building long term wealth.
Step #1: Pay off bad debt. Take your time with the student loans as they are a small income tax decution.
Step #2: Build a savings with 6-12 months of living expenses. This is for a rainy day. It will earn small interst in savings, but it’s liquid for you if you need it.
Step #3: Find a financial planner, and begin building your portfolio. Make sure you are diversified in your investments. Real estate should only be a portion, not the whole pie.
If you do this, I can assure you that you will one day, “be rolling in it”!
e123low - if your company matches the first 4% you put in the 401k, so you basically get 100% profit just by putting the money there. If you put 100.00 the company puts a 100.00… BANG… 100% profit. Even if you take the money the next day and pay the penalty, you would pay 10% of the total, which would still give you a 80% return… :O)
So I don’t think it depends. The answer is yes - invest at least up to the amount your company matches.
Thanks a lot for the input, guys! I really appreciate and respect your opinions. It’s hard to talk about these things with my peers as most of them are in debt to their eye balls and mostly broke within 48hrs of pay day. So, as you can imagine, they all have nothing productive to say in terms of building wealth and becoming financially independant. I think I’m going to sign up on Monday and contribute only the 4%, which they will match.
“Be careful…lots of people did this and are losing their homes over it. This would be an easy way to become upside down with falling prices.”
The max cash you can get would be about 75-80% LTV which gives you enough cushion to weather the storm.
You’re correct. Lots of people did this, but blew the money on crap as opposed to being smart and investing it properly. Refinancing is selling without actually selling. So, if you have enough equity, liquidate it! If you do nothing with it, you could essentially “buy low and sell low” if you wait for the value to come back down.
My best advice would be to speak to a mortgage planner in your area. Always remember, cash is king!
The company match sounds great on the surface. My company matches up to 8 % which I have contributed for the last 5 years. But I have lost all of that match as of this date and then some. I think the 401ks are a little hyped up. My company is as cheap as they come, there is a reason they participate in 401Ks and it’s not for our benefit. I would love to know the agreements between the two. Another thing that bothers me, nowhere in either my online statements or my paper statements, do I get to see the total amount of fees deducted from the fund managers. Here is a good article that speaks of this. I have a feeling that my 401k is making other people rich, not me.
Using a 401K as a short term savings is NOT a good idea. You’d have to put it in higher risk investments in order get a better return. But you can also lose most or all of the priciple. You’d have to put it in conservative investments. You’d be better off putting the money into a savings or money market acct. I suggest you work your butt off to earn as much you can to save as much as you can. That means earning as much as you can and sacrificing as much as you can, to save as much as you can. If you can do this for 18 - 24 months, you’d have a good idea of what you can do. It wil then give you good idea of what you need to adjust to get where you want to go. I think at this point, you should concern yourself with saving money, improving your credit, and educate yourself on the various types of REI. Then you can focus on the areas that interest you. At that point you can make a long term goal of 10 yrs. Your goal must be very specific and measurable. Then you break it down into shorter term goals that will lead you to your long term goal.
John_in_NC and phlemboy - I believe you missed one important part of my advice - you don’t have to leave the money in the 401k. You can make the contribution, get the 100% match and then take the money out. All you would have to do is to pay the 10% penalty (+ taxes based on your marginal tax bracket, which you would have to pay anyway if you didn’t contribute). In the end of the day you would still come out ahead.
In my book it beats any other investment I can think of.
JDias, I understood your point about the emplyer contribution. I just feel that you’re tying a lot into a 401K. What if something happens to the company/employment staus that affects the 401K (think Enron)? Some employers don’t add in their contributions until the end of the year. There also many be a limit as to just how much you can contribute to the 401K each year.
Something that you wrote really struck me–“I can’t talk to my peers as they are all in debt living paycheck to paycheck”… (I have got to figure out how to move text into those little blocks!)
I just was listening to a Robert Kiyosaki tape. He said that he had to keep changing out his friends as he moved up in the world. You, too have out-grown your present peer group. You need to go hang out with some gung-ho investors as your new peers. Those 'ol friends are dragging you down and it is a waste of time to talk finance with them. Trust me on that, I have been there. You need someone to emulate, not drag you down.
Also, e123low, since I am already lecturing you, why not get some rent money? Can you put in a couple of doors and make your house roommate-friendly? (make separate bedroom/bath suites)
Or rent it out and buy another in this buyer’s market? Or swap into a duplex? Your 401K plan only sounds way too conservative for someone young, smart and ambitious.
phlemboy - my point is that you don’t need to tie anything. You can make the contribution one month, get the employers match immediately, and take the money out next month. Repeat this every month. You don’t have to leave any money in the 401k. All you are doing is a short term investment every month to get 80% return. this sounds preatty good to me.
And after you get your money out, than you can do whatever you want with it… :O)
The limit to the 401k contribution is probably irrelevant (unless you are making a lot of money and 4% of your salary is above the limit). Per this approach you would contribute only up to the max your employer matches - in this case 4%.