quote:
I go back and forth all the time on how to handle my money. I just started working full-time out of college last June, so I'm exxtremely new to this and really don't know what I'm doing. I've got 9k into my Roth IRA, and will soon hit my limit for this year. I can't contribute to my company's 401k until I've been here a year, and I don't even know if I will contribute (Company makes a discretionary contribution each year to each employee regardless of their individual contributions).

I have a heavy cash flow for someone my age. I have no debt, and I live at home rent free. I make $1300 every 2 weeks, and my only bill is car insurance each month, plus groceries and gas. The extra cash, I just put into savings to build a nest egg but it hardly gets any interest.

I'm wondering if I should just keep around 1-2k in savings, and just open a brokerage account to invest the remainder in. A buy-and-hold account. I wouldn't be day-trading or trading often, but buying a bunch of stocks and just holding them to build up a portfolio. It seems risky because basically all my money would be in stocks (as my Roth is 95% stocks also). But with no debt, why wouldn't I do this? I'm asking because I'm young and dumb and sometimes don't see things the way I should due to inexperience.

My philosophy is 1-2k should cover any emergency expenses, and with my current cash flow I can easily readjust and stop putting all my money into stocks. Living so frugally would suck for now but taking advantage of my current situation with little to no expenses and 0 debt, could pay huge dividends later in life when these stocks mature.

And if I go this route, should I invest in individual stocks or mutual funds?

6-9 months of living expenses

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Posted by Volvagia

Fort Worth

Member since Mar 2006

51896 posts

Posted on 3/5/15 at 12:27 pm to slackster

Alright, tell me how to best prove how there isn't a catch up value that a taxable account needs to immediately make?

Compare values if you attempt to withdraw the 401k contribution a week later? And negate the penalty well, just because to make it fair?

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Posted by TigerstuckinMS

Member since Nov 2005

33687 posts

Posted on 3/5/15 at 4:46 pm to Volvagia

To be fair to Volvagia here, he has pointed out that what he is arguing is a very narrow point and he has admitted that there are definitely other considerations that make the 401k desirable. What he was trying to point out is that the 401k derives zero benefit whatsoever to the account holder solely from the fact that you get to invest the money before Uncle Sam gets his grubby paws on it.

I don't think he's arguing anything else and, in fact, has said elsewhere that considerations of differing income levels at contribution and withdrawal (i.e.: taxation at higher marginal rates on contribution being deferred and taxed at lower rates upon withdrawal), differences in taxable events (i.e.: capital gains taxes vs. no capital gains), etc., definitely makes the 401k attractive in comparison to other investment options.

But, the commutative property of multiplication is the commutative property of multiplication. That means that, all else being equal, taxation before investment with no further tax burdens and taxation only at the end of the investment are identical in terms of what the final value of the account will be. In other words, getting to invest pre-tax dollars doesn't get you squat on its own.

Look at my example below. Let V be the value of the account after some time. Let I be the amount earned. Let TR be the tax rate that is to be levied. Let IR be the interest rate to be applied and let T be the time of the investment. I've used continuous compounding to represent the gain in account balance over time. The grouping of terms represents when the taxation occurs. In the first equation, taxation occurs up front when the initial amount I is earned and then the compounding is applied to what's left. In the second equation, the initial earned amount I is compounded and then the taxes are levied on the final amount after the account balance has grown.

V=(TR*I)*(e^(IR*T))

is equivalent to

V=TR*(I*e^(IR*T))

At least I think that's what the argument's all about. I've been wrong before.

This post was edited on 3/5/15 at 5:31 pm

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Posted by matthew25