Financial advice for a young whippersnapper?

[timosyy]

So, last Friday I went to my local bank to request a new debit card (old one had expired, and I lost the replacement they had mailed me), and walked out an hour later with the new debit card, a new credit card (how did that even happen?), a new checking account (so now I have to figure out how to smoothly migrate from my old one), and an appointment with a financial advisor this Tuesday (what?).

I'm sitting here thinking about this and realizing I have no idea what I'm doing with my money... And the financial advisor I'm meeting tomorrow is from my bank (Capital One), so I imagine he will hardly be an objective source of advice. With this in mind, I turn to the collective wisdom of ATOT: Any advice for a young man clearly out of his depth?

Information about me (Let me know if any of this is too revealing/dangerous to have out there)

Two years out of college, steady job at large institution making ~60-65k/year. Own a car I'm making monthly payments on (3-year loan, ~$670/mo. I have enough money to fully pay off the rest, but the interest rate is low enough for me not to have bothered). Excellent credit (mid to high 700's... when I checked last year I think it was ~770).

Banking
Capital One Completely Free Checking: ~$6,000
Capital One Premier Rewards Checking: ~$3,000

Capital One InterestPlus Online Savings: ~$31,000

Credit Cards
Chase Freedom (5k credit limit)
Capital One Cash Rewards (10k credit limit)

Investments
Fidelity 401k: ~$27,000

---

No stocks, bonds, Roth IRA, CDs, etc., what have you. That is the totality of my financial landscape.

Questions right off the bat:

Should I just cancel the credit card (Capital One) I just opened? I'm really only comfortable with one credit card at a time, and I quite like the Chase Freedom rewards.

Should I dip into Savings and pay off my car right now? I think the interest on that 3-year loan was something like 1%, but it's still higher than the interest rate on my savings account. I always just figured better to have actual money in the bank.

Should I be looking into online banking opportunities? In retrospect, I'm not sure why it's even necessary to have a local bank. If yes, suggestions?

Roth IRA? Other easy investments? I feel like I should be doing something with my money besides essentially stuffing it under a virtual bed... But I don't know what.

Thanks!

 

[JM Aggie08]

How old are you? You know, for science.

 

[ichy]

Most "financial advisers" are glorified salespeople who're trying to make commissions by selling you crappy proprietary investment products. Beware. There's no substitute for educating yourself.

 

[poopaskoopa]

Probably Roth IRA for your age, after taking advantage of all the empolyer stuff, assuming they're worthwhile.

I was in a similar situation before in terms of finances and assets, and my only caution to you would be about the advisor. Some of these people are insurance agents in disguise and they'll push various forms of insurance to you non-stop.

 

[DaveSimmons]

You should keep some emergency money in online savings, so cleaning that out to pay off the car isn't a good idea.

In general, the standard investing advice is to do this in this order:

1. Build up emergency money in savings
2. Do 401k up to amount that company matches
3. Pay off any CC debt and never carry a balance
4. Open a Roth IRA account and put in up to the limit. I suggest Vanguard.com for this
5. Max out 401k
6. Save up for a house if you want one

That's a rough guide, some people who want a house sooner might put money into savings for that ahead of the IRA or additional 401k contributions.

The financial adviser will probably push things that you do not want:
- Capital One IRA with funds not as good as Vanguard.com
- Annuities or insurance based things that are poor investments for most people

 

[NutBucket]

Initial comments are there's no issue with the second card. Just keep it around. Use a card that gives the most rewards for your needs.

Second, having that much in your 401 at this point is great. I would definitely consider opening a Roth. Taxed money in, untaxed money out. Max annual contribution is something like $5k. Would definitely max that out.

I wouldn't worry about the car loan as the rate is low. You can pay it faster if you like but I wouldn't use savings to pay it off.

 

[DaveSimmons]

a new credit card (how did that even happen?), a new checking account (so now I have to figure out how to smoothly migrate from my old one)
and an appointment with a financial advisor this Tuesday (what?).

Since you've let them talk you into the card and checking account, you might consider ducking out of this -- just call and say something like you're not ready to do anything more than your 401k at this time.

If you still do go, don't sign anything. if they try to talk you into an investment, ask for the details in writing and say you'll need to think it over.

 

[Vdubchaos]

Stay away from "financial advisers" remember they are the people that make money by investing your money.

Save money for emergency fund (6-9 months of ALL current expenses)
Budget your money ahead of time (be proactive) vs (reactive)
Save for things you want in life
Ohh yea, pay off your car loan. And remember cars are the worst possible investments and usually > money down the drain (read: don't buy expensive cars unless you don't mind flushing the money).

 

[RearAdmiral]

No school loans? Gratz if so!

 

[Corporate Thug]

Should I dip into Savings and pay off my car right now? I think the interest on that 3-year loan was something like 1%, but it's still higher than the interest rate on my savings account.

No. The interest rate is still lower than inflation.

I always just figured better to have actual money in the bank.

In this case, it is.

 

[kranky]

The reason they arranged the appointment with the financial advisor is so that person can sell you on high-priced investments you don't understand. They saw your lush savings account balance and that made you a target.

I think it would be a very good learning experience to go to the appointment, make sure you agree to nothing and sign nothing, take all the printed information you are offered, then go home and figure out exactly how much their suggestions would cost you. One of the most valuable skills is to be able to figure out what the real costs are for various investment options.

If you have trouble figuring out the costs, come back to this thread and tell us what they were recommending and we'll help.

 

[jagec]

In general, the standard investing advice is to do this in this order:

1. Build up emergency money in savings
2. Do 401k up to amount that company matches
3. Pay off any CC debt and never carry a balance
4. Open a Roth IRA account and put in up to the limit. I suggest Vanguard.com for this
5. Max out 401k
6. Save up for a house if you want one

This is solid advice.

OP, sounds like you're doing pretty well for being right out of college...you have a decent paying job, are living within your means, and are saving money. You didn't mention what percentage of your salary is going into savings, but considering that "0%" is the most common answer for most people your age, I'm sure you're doing better than that.

The biggest financial decision that will affect where you should keep your savings going forward is whether you want a house, and how soon. So...do you?

 

[JimKiler]

You should keep some emergency money in online savings, so cleaning that out to pay off the car isn't a good idea.

In general, the standard investing advice is to do this in this order:

1. Build up emergency money in savings
2. Do 401k up to amount that company matches
3. Pay off any CC debt and never carry a balance
4. Open a Roth IRA account and put in up to the limit. I suggest Vanguard.com for this
5. Max out 401k
6. Save up for a house if you want one

That's a rough guide, some people who want a house sooner might put money into savings for that ahead of the IRA or additional 401k contributions.

The financial adviser will probably push things that you do not want:
- Capital One IRA with funds not as good as Vanguard.com
- Annuities or insurance based things that are poor investments for most people

Vanguard is good, so is T Rowe Price, since you are young be aggressive and over the long term your money will grow. Don't look at it short term, it will go down but as you put money in being down means you get more shares of it. Look at target retirement funds where they blend the stocks to bonds ratio as you get older for you. Also look at index funds which have lower expense ratios.

Advisers may be good, or they could just send you to funds they get commission on. If you do use an adviser make sure you are paying a flat fee and not someone who gets commission for the products they steer you towards. But i don't think you need an adviser.

I would love to see if any advisers can actually keep their clients ahead of the average return.

 

[Imported]

You should keep some emergency money in online savings, so cleaning that out to pay off the car isn't a good idea.

In general, the standard investing advice is to do this in this order:

1. Build up emergency money in savings
2. Do 401k up to amount that company matches
3. Pay off any CC debt and never carry a balance
4. Open a Roth IRA account and put in up to the limit. I suggest Vanguard.com for this
5. Max out 401k
6. Save up for a house if you want one

That's a rough guide, some people who want a house sooner might put money into savings for that ahead of the IRA or additional 401k contributions.

The financial adviser will probably push things that you do not want:
- Capital One IRA with funds not as good as Vanguard.com
- Annuities or insurance based things that are poor investments for most people

Is a Roth the way to go? I already 401k up to my company's match (and I also put in another 10% out of my paycheck). Maybe I should put that extra 10% into a Roth?

 

[KB]

So far you are doing many of the right things.

You have the emergency fund you need which is about 6 months worth of expenses, so 6 x $2,500 = $15,000.

Keep that much in your savings and/or checking at all times. For the rest put your yearly max of $5000 into a Roth IRA and put the remaining into something that pays a bit more than < 1% return. Stock or mutual Funds/ETFs, even though they are risky, should be part of your asset mix since you already have the basics covered.

The advsior will likely mention an annuity, which you should pass on.

 

[Exterous]

Questions right off the bat:

Should I just cancel the credit card (Capital One) I just opened? I'm really only comfortable with one credit card at a time, and I quite like the Chase Freedom rewards.

I am not well versed in what the optimal credit available:credit used:income levels are but if you have good credit then I wouldn't bother with another card unless you actually get something out of it (ie - signup rewards).

Should I dip into Savings and pay off my car right now? I think the interest on that 3-year loan was something like 1%, but it's still higher than the interest rate on my savings account. I always just figured better to have actual money in the bank.

If its around 1% thats going to be lower than inflation so I would keep the loan since the dollars you will be giving them in two years are worth less than the dollars you would be giving them today

Roth IRA? Other easy investments? I feel like I should be doing something with my money besides essentially stuffing it under a virtual bed... But I don't know what.

Thanks!

This depends on what your 401k options look like. Regardless of the options - invest up to the max employee match. Who doesn't like free money? If you have great options (typically low fee index funds) you may want to contribute more to your 401k and forgo the Roth IRA.

In the more likely situation where your 401k options are not that great (high fee/loaded mutual funds) then a Roth IRA would be better after the point of employer match in your 401k since you have the flexibility to choose your provider and choose low fee plans.

 

[KB]

Is a Roth the way to go? I already 401k up to my company's match (and I also put in another 10% out of my paycheck). Maybe I should put that extra 10% into a Roth?

The recommended retirement route is:

First put funds into 401K up to company match.
Second put into Roth IRA up to yearly max of $5,000.
Third put any additional funds you can spare up to 401K limit ($17,000 I believe).

So yes you should have a Roth IRA. Put as much as you can toward that yearly $5,000.
The Roth will be untaxed when withdrawn at 59 years old, while 401K is taxed when withdrawn. As you can imagine tax rates are likely to increase in the future.

 

[darkewaffle]

Blow it all on hookers and blow!

 

[DaveSimmons]

Is a Roth the way to go? I already 401k up to my company's match (and I also put in another 10% out of my paycheck). Maybe I should put that extra 10% into a Roth?

You want all of the employer matching money from the 401k, but once you have that an IRA is usually better. With an IRA (Roth or Traditional) you can usually pick better funds that have lower expenses than with the 401k, at a company like vanguard.com

Traditional IRA = save on taxes now, but pay taxes when you take the money out at retirement

Roth IRA = pay taxes now (does not reduce your taxable income like 401k or trad IRA) but you pay -0- taxes at retirement.

Roth is usually recommended for younger investors.

 

[timosyy]

If it matters... I'm 25.

To answer some other questions in this thread: I do not have student loans. I'm currently contributing 10% of my paycheck to 401k (was as high as 20% at one point, but had to scale down when I started renting an apartment). I always pay off my credit card balances. Savings is kind of variable... Typically I like to keep ~5k in my checking account (credit card limit is also 5k, but I typically only charge half or less of that in any given month), so I'll manually transfer anything over 5k into Savings. The reason those numbers look weird right now is because I opened that new checking account, and I'm in the middle of moving over my direct deposit/automatic bills to the new account. Once I figure that out and make sure nothing funny happens for a month or so, I'll clear out the old account and close it.

I'm tempted to call and cancel the appointment, but I'm also somewhat curious what he has to say. I definitely will not be signing anything. I was wary even accepting the appointment, but what can I say... the lady was very convincing. She has a point, too. I have an awful lot of money in Savings not really doing anything for me. Even upping my 401k contribution and maxxing Roth, I'll probably have a lot left over.

Re: Buying a house, my parents keep telling me I should, but it just feels like too much of a headache at the moment.

Any thoughts on online banking/ditching Capital One altogether? Honestly the only reason I'm with them is because it's the closest bank to my house, and the one my parents use.

Here is the "Premier Rewards Checking": http://www.money-rates.com/bankdeals/10-4-2011/capital-one-premier-rewards-checking-account.html

If there are better options for a checking account out there, I may as well do it now (before I transfer all the deposits/bills/payments over to the new checking account).

 

[Exterous]

Is a Roth the way to go? I already 401k up to my company's match (and I also put in another 10% out of my paycheck). Maybe I should put that extra 10% into a Roth?

It depends. First, look at your 401k offerings. Some people actually have excellent offerings. For example - my wife has access to an ex-US Total Stock Market Index fund that uses (now) the same tracker as Vanguard does but does so at 0.06% ER and that's the highest of all the index funds!

Next comes tax considerations. 401ks contributions are pre-tax - which means you will owe take on the distributions. A Roth IRA contribution is post-tax which means qualified distributions can be withdrawn tax free! There are also some additional qualified events that allow for non-penalty withdrawals from a Roth, like $10,000 for a first time home buyer.

One additional thing to note - although this does not often take place. Since 401k withdrawals are pre-tax it reduces your AGI on your taxes. Roth IRA contributions will not do this. Therefore, if you are close to the transition between tax brackets making the determination on which one to contribute to can have noticeable implications on your tax liability come April.

 

[soulcougher73]

I am not a financial wiz by any means but i agree with mostly what was said here.

Dont pay the car off. Keep 9 months emergency savings account. Maybe take any of your savings left over and get a year jump start on a Roth IRA and put the whole 5k in up front and then start monthly contributions next year.

I would not meet with the financial advisor if it was me. Id cancel. They are going to push things beneficial to them and they are usually pretty good at making it all sound good. You may go in with no intnetions of getting anythign and walk about having bought all they offer. Sort of like your first trip to the bank

 

[RockinZ28]

Since this thread is here, and the OP might be able to use the advice...

I just opened a Vanguard Roth IRA yesterday. Putting 3k into the 2040 fund to start. This where I should be putting my money? All of it, some of it?

 

[timosyy]

Actually, a lot of people are mentioning the "quality" of 401k offerings. I'm rather unsure what this means... I have my 401k portfolio/options open right now, what should I be looking at? What is "ER"?

 

[soulcougher73]

Since this thread is here, and the OP might be able to use the advice...

I just opened a Vanguard Roth IRA yesterday. Putting 3k into the 2040 fund to start. This where I should be putting my money? All of it, some of it?

Well you can only put up to 5k/year into it. But if you can do that i would. Make sure you are doing your company math on 401k if you have one. If you are already doing that and still have more money youd like to invest after the 5k into the Roth IRA then add that to your 401k contributions.

But first id have 6-9/month emeregency savings.