When George Bernard Shaw said that "youth is wasted on the young," he wasn't talking about the under-30 crowd of savers and investors who write me with their on-the-ball financial questions. I have assumed the moniker "Aunt Jill" when talking to these folks, hoping that they see me as my own nieces and nephews do-that is, as Aunt Jill, the cool aunt.
We start with a good balance sheet question:
Aunt Jill! Just wanted to say thank you for being a wonderful guest on The 404. You give great advice yet appeal to the younger crowd by meshing well with Jeff, Wilson and Justin. After listening to your latest appearance, I upped my 401k (from 5% to 10%) and ROTH and from (from 0% to 5%) However, I missed the part where you mentioned the following top three [Jill here -- I added more description of these items within the brackets]:
- Pay down your debt [includes consumer debt, like credit cards and car loans]
- 6-12 months living expenses [in a safe, liquid vehicle, like checking, savings, money market accounts or short-term CDs]
- 401K max out [at least to company match and then fully, when possible]
My questions to you, should I keep my 401k and ROTH at the percentages they're at right now? Maybe drop them to about 7% / 3%? Also, considering #1, should put a little extra more into my car payment because it has a higher APR than my student loan?
- Student loan (approx. $10.8K w/ 2.48% variable interest)
- Car loan (approx. $9.5K w/ about 4-5% interest)
Upcoming budget July wedding (approx. $22k, but having family chip-in an undisclosed amount) and I also can save about $500-700 a month with $3.5k in my savings.
The three steps that I outlined don't have to necessarily be done in order, but in this case, I think that we could pull back on the Roth contribution and maybe even reduce the 401(k) contribution to the level at which the company match is maximized (usually 5-6%). Then direct the extra money towards the accelerated pay-down of the car loan and adding to cash reserves.
Here's the rationale: it's hard to earn an after-tax return of 5% with no risk and that's exactly what you're doing by paying off the auto loan. The extra benefit is that you are paying down a loan on a depreciating asset -- your car. Although the savings is beefed up for the upcoming nuptials (Mazel Tov!), the account is likely to be depleted this summer. If we're wrong and the family pays a larger chunk than expected (how cool is it to end up with MORE money than expected?), then the extra cash could pay off the car loan all together.
Here's a good question from another young investor:
I was listening to the 404 show recorded on 4th March, and I really appreciate the advice you gave. Just as what you advised, I have a Schwab account, and I educate myself by reading news everyday. I have been doing quite well with my technology related stocks, but I am looking to broaden my portfolio. Can you give me some more general advice on how to invest in the stock market, e.g. when to buy in a bearish trend, and when to sell and take profit?
This is an ageless investor question, but one that is better learned as quickly as possible. The first thing to ask yourself is: am I a long-term investor or a trader? If you're an investor, it's important not to get too caught up in the daily market gyrations and instead focus on building a diversified portfolio that you re-balance quarterly. I like portfolios filled with index or exchange-traded funds.
If you're going to take a portion of your portfolio and trade it (I would keep this to 5-10% of your total invested assets), then you need a strict buy and sell discipline. Some set price targets ("if the stock rises by 10%, sell half of the position") and sell stops ("if the stock drops below a certain point, sell all or part of the position"), but as a trader, ask yourself why you believe a company is worth xx price? Would you still buy the stock at a price that is 20% higher than your original purchase price? if not, that could be a good sell signal.
My Uncle Ralph is a 40-year veteran of Wall Street. When he was training me as a clerk on the New York Stock Exchange in the 1980's, he leaned across the booth and said, "Honey, here's a lesson that will serve you well: you only need to be right about half the time in this business to make a lot of money. The key is to recognize when you're wrong and get out fast." That's advice that applies to any age!
