Starting from scratch...

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Topic Author
weaks4uce
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Joined: Tue Jul 26, 2011 9:30 am

Starting from scratch...

Post by weaks4uce »

Emergency funds:
~5 months worth in a savings account

Debt:
Student Loan #4: ~$4,600 @ 4.00% (subsidized)
Mortgage: ~$169,000 @ 4.75% (30 year fixed)
PAID OFF [Student Loan #1: ~$3,500 @ 3.76% var. (private)]
PAID OFF [Student Loan #2: ~$4,500 @ 4.86% var. (private)]
PAID OFF [Student Loan #3: ~$4,000 @ 4.86% var. (private)]


Tax Filing Status:
Single

Tax Rate:
25% Federal
8.5% State (Maine)

Age:
26

Desired Asset allocation:
Don't know yet (help!)

Intl allocation:
(see above)

Current portfolio:
A little over 100k, all of which is currently just sitting in a 0.4% money market... :oops:

Some additional info...

I have no benefits through my employer... and therefore no options for a retirement account there.

Where do I begin? I've done quite a bit of reading, but having a hard time finding information pertaining to my specific situation. Any input would be greatly appreciated.

What do you wish you'd done back when you were 26? :)

-------
edited to reflect paying of student loans and to add more info
Last edited by weaks4uce on Tue Jul 26, 2011 8:32 pm, edited 3 times in total.
Default User BR
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Post by Default User BR »

Do you have any saved up so far? If so, how much? With no company plan, and your tax bracket, a traditional IRA might be in order.

What exactly is your employment situation? Are you a salaried employee? Contractor? If the latter, W2 or 1099?



Brian
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ObliviousInvestor
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Re: Starting from scratch...

Post by ObliviousInvestor »

Welcome! :)
weaks4uce wrote:Non existent. Working in the 6 figures-ish range, which is currently just sitting in a 0.4% money market... :oops:
Not 100% clear on what this means. Do you mean that you have 6-figures-ish sitting in a money market? (Saying at the same time that your portfolio is non-existent is what's throwing me off here.)

So it looks like the questions to tackle are:

1) What asset allocation is appropriate?

There are an infinite number of reasonable answers here. Given that (as far as I can tell) you haven't had anything in the stock market before, I'd suggest easing your way in. That is, it's probably a good idea to start with a relatively conservative allocation relative to what you might find typically suggested for a 26-year-old.

2) What can you do with regard to retirement accounts to save on taxes?

(See Default User BR's post above.)

3) How much of that $100k (and future income) should go toward paying down debt rather than saving/investing?

You'll get differing opinions on this one. My view is that your rates are in the range where either choice makes sense, though more information about their after-tax rates would be helpful. With regard to your student loans, is the interest fully deductible? And with regard to your mortgage, it depends on how much you claim in other itemized deductions.
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LH
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Post by LH »

at 26, do you need an emergency fund financed at 4 percent interest?

I would chuck the entire emergency fund, and pay off all debt except mortgage.

You are basically financing the emergency fund, it has a cost between 4.86 percent and 3.76 percent interest.

If you had no student loans, and you had no emergency fund, otherwise same situation, would you borrow the amount of your current emergency fund at a circa 4 percent interest rate, to put the money in an emergency fund earning almost nothing in a bank account or MMF?

No. That would be not be done or recommended.

Pay off the loans except mortgage with the Emergency fund, easy money, guaranteed return.

Having an emergency fund in cash, earning little is ok, with no other debt besides mortgage. Having an emergency fund that is de facto created by a loan costing you interest, is an expense that needs to be closely examined, and likely gotten rid of. Its an expensive fund to have.

And if you reverse the situation, have no Emergency fund, have no debt, nobody recommends going into debt, to get the cash for the Emergency fund....... The states are equivalent by a simple transfer of cash one way or the other. Its a type of mental accounting error.
Last edited by LH on Tue Jul 26, 2011 1:14 pm, edited 1 time in total.
Topic Author
weaks4uce
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Re: Starting from scratch...

Post by weaks4uce »

Thanks for the replies!
Default User BR wrote:Do you have any saved up so far? If so, how much? With no company plan, and your tax bracket, a traditional IRA might be in order.

What exactly is your employment situation? Are you a salaried employee? Contractor? If the latter, W2 or 1099?



Brian

Salaried employee.

ObliviousInvestor wrote:Welcome! :)
weaks4uce wrote:Non existent. Working in the 6 figures-ish range, which is currently just sitting in a 0.4% money market... :oops:
Not 100% clear on what this means. Do you mean that you have 6-figures-ish sitting in a money market? (Saying at the same time that your portfolio is non-existent is what's throwing me off here.)
Maybe non-existent wasn't the best choice of words, sorry. I do have 100k-ish just sitting in a money market, which obviously isn't doing much for me, which is why I'm here to find advice on building a solid portfolio ;)
ObliviousInvestor wrote: So it looks like the questions to tackle are:

1) What asset allocation is appropriate?

There are an infinite number of reasonable answers here. Given that (as far as I can tell) you haven't had anything in the stock market before, I'd suggest easing your way in. That is, it's probably a good idea to start with a relatively conservative allocation relative to what you might find typically suggested for a 26-year-old.
Correct, no experience with the stock market. What kind of allocation *IS * typically suggested for a 26 year old?
ObliviousInvestor wrote: 3) How much of that $100k (and future income) should go toward paying down debt rather than saving/investing?

You'll get differing opinions on this one. My view is that your rates are in the range where either choice makes sense, though more information about their after-tax rates would be helpful. With regard to your student loans, is the interest fully deductible? And with regard to your mortgage, it depends on how much you claim in other itemized deductions.
The interest on the student loans is fully detectable, which helps a bit. I do file itemized deductions for the mortgage interest, PMI, etc... I haven't calculated out the after-tax rates, though

I guess I should also mention that while long-term goals (retirement) are important to me, being young and impatient I'd also like to have to possibility of seeing some short-term gains
Last edited by weaks4uce on Tue Jul 26, 2011 1:28 pm, edited 1 time in total.
Topic Author
weaks4uce
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Post by weaks4uce »

LH wrote: Having an emergency fund in cash, earning little is ok, with no other debt besides mortgage. Having an emergency fund that is de facto created by a loan costing you interest, is an expense that needs to be closely examined, and likely gotten rid of. Its an expensive fund to have.
Interesting point of view... as the "emergency fund" will never earn a return anywhere close to that which I'm paying on the student loans, it does make sense. However draining my emergency fund does seem a little scary. I have no health/dental/etc insurance (as mentioned above, no benefits). I only have one CC as a backup, with a very low credit limit, which I try to keep at zero balance to keep utilization % down and avoid paying interest
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Re: Starting from scratch...

Post by ObliviousInvestor »

weaks4uce wrote:Salaried employee.
In that case, I second Brian's suggestion of a traditional IRA.
weaks4uce wrote:Correct, no experience with the stock market. What kind of allocation *IS * typically suggested for a 26 year old?
Well, "age in bonds" is often used as a rough guideline. So that would suggest 74% stocks, 26% bonds.

Adjusting that to be a bit more conservative (as discussed above) might produce something like this as a potential portfolio:
35% Vanguard Total Stock Market Index Fund
30% Vanguard Total International Stock Index Fund
35% Vanguard Total Bond Fund (or a Treasury fund of your choice)

But, as I said, there are numerous correct answers here. So think of the above as a starting point for analysis/discussion.
weaks4uce wrote:The interest on the student loans is fully deductible, which helps a bit. I do file itemized deductions for the mortgage interest, PMI, etc... I haven't calculated out the after-tax rates, though.
That makes your after-tax rates on the student loans pretty darned low given a 33.5% total marginal tax rate. That said, I think paying them all off from that pile of cash you have sitting around would still be quite reasonable.
weaks4uce wrote:I guess I should also mention that while long-term goals (retirement) are important to me, being young and impatient I'd also like to have to possibility of seeing some short-term gains.
What exactly do you mean here?

Do you mean that some of this money is not intended for long-term saving (i.e., you might be spending it in the next few years)? If so, whatever portion you might be spending soon should likely stay in the money market or in something else low-risk like CDs.

Or are you making a statement about risk-tolerance--that a loss in the near future would bother you a great deal, for example? (Or perhaps the opposite: that you're young and willing to take risk for the possibility of high rewards?)
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Suggestion DUMP loans 2 and 3 and get rid of PMI,

Post by MathWizard »

If you really have 100K to invest.

I'd suggest:
1) Get rid of PMI by paying down house to 80% LTV.
2) Get rid of variable student loans 2 and 3
3) Put half of emergency fund into Roth for this year.
4) Pick allocation that makes sense to you.
See comments below.

It sounds like you are already off to a good start, better than
I was at your age.

Var rate Student Loans:
I'd suggest using some of the $100K to pay off the variable student loans
2 and 3 at least. Var. rates can and are are likely to rise causing problems
with cash flow.

Loan 1 is lower than your mortgage and Loan 2 is low and is fixed.

PMI:
---
Also consider how much you are paying toward PMI, and when
you can get rid of that. That is just money you are spending to
provide insurance to your mortgage company. It should be
eliminated when when you have 20% equity in your house.
(You may need to ask the mortgage company to do this.)

If you bought your house with 10% down, then the house was about $190K,
so by putting $20K more towards the house, not only do you get 4.75 guaranteed
money but should get the PMI payment knocked off which is probably
$50-$100/month. (Check your statement.)
The put the 50-100/month into an after-tax IRA and you get the ax deduction
on that amount rather than just the interest deduction on the 20K.

Note that if you pay off $20K @ 4.75% and don't have to pay $50/month that
is like getting 7.75% on the 20K. If the PMI is $100/month you are getting 10.75%
risk free, you are unlikely to get that by investing.


Roth:
---
You can withdraw principal (not interest) if you have to penalty free, but
while you are not, the earnings will not be taxed ever. At 33.5 % marginal,
if you make $300 in your emergency fund savings, you give $100 away.
Consider the ROTH part of your overall portfollio, put some of the more
in more conservative so that you will have the money if you need it.

The rest allocate according to your risk.
Some say "age in bonds" which for you would be 26% in bonds 74% stocks,
bu you need to be able to stomach that much risk. 50-50 is not unrealistic
at first, that is where I started, but as I got more comfortable and have more
resources I am at 85% stocks, even through 2008. I have a relatively secure
job though which affords me more risk, and 18 months of expenses as
principal in a Roth + 3 months in savings, so I can weather most crisis.





.






Even at $50/month, the combined effect is like getting
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Re: Starting from scratch...

Post by YDNAL »

weaks4uce wrote:What do you wish you'd done back when you were 26? :)
1. Stay out of debt.
2. Save as much as I can. Not THAT much that interferes with life.
3. Use a Target Retirement fund. However, they were not available in 1978 when I was 26yo. :)
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Topic Author
weaks4uce
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Re: Starting from scratch...

Post by weaks4uce »

Once again, thank you for the thorough and informative reply. I'll do my best to answer your questions...

ObliviousInvestor wrote:
weaks4uce wrote:Salaried employee.
In that case, I second Brian's suggestion of a traditional IRA.
Noted. Should this be my primary focus for investing because of the tax benefits?
ObliviousInvestor wrote:
weaks4uce wrote:Correct, no experience with the stock market. What kind of allocation *IS * typically suggested for a 26 year old?
Well, "age in bonds" is often used as a rough guideline. So that would suggest 74% stocks, 26% bonds.

Adjusting that to be a bit more conservative (as discussed above) might produce something like this as a potential portfolio:
35% Vanguard Total Stock Market Index Fund
30% Vanguard Total International Stock Index Fund
35% Vanguard Total Bond Fund (or a Treasury fund of your choice)

But, as I said, there are numerous correct answers here. So think of the above as a starting point for analysis/discussion.
Well that certainly gives me a starting point and some real examples. I've been seeing these Vanguard ETFs mentioned/recommended frequently...
ObliviousInvestor wrote:
weaks4uce wrote:The interest on the student loans is fully deductible, which helps a bit. I do file itemized deductions for the mortgage interest, PMI, etc... I haven't calculated out the after-tax rates, though.
That makes your after-tax rates on the student loans pretty darned low given a 33.5% total marginal tax rate. That said, I think paying them all off from that pile of cash you have sitting around would still be quite reasonable.
I think paying them off may be my first step. Looking at my 1098's from last year, I paid about $1000 in interest, before the tax deduction. Seems like a no-brainer, not to mention ~$200 a month in payments that could be contributed to investments instead.
ObliviousInvestor wrote:
weaks4uce wrote:I guess I should also mention that while long-term goals (retirement) are important to me, being young and impatient I'd also like to have to possibility of seeing some short-term gains.
What exactly do you mean here?

Do you mean that some of this money is not intended for long-term saving (i.e., you might be spending it in the next few years)? If so, whatever portion you might be spending soon should likely stay in the money market or in something else low-risk like CDs.

Or are you making a statement about risk-tolerance--that a loss in the near future would bother you a great deal, for example? (Or perhaps the opposite: that you're young and willing to take risk for the possibility of high rewards?)
Good questions. One thing in the near future that I would like to have some of this money available for (in approximately 5 years time, maybe less) is a down payment on another house. I assume it needs to be somewhere low risk to guarantee that it's going to be there when the time comes to pull it out? :lol: And also somewhere it's accessible without penalty?

As for the second portion of that, I'm willing to tolerate more risk for the possibility of a bigger reward... within reason (very subjective, I know).
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Re: Starting from scratch...

Post by ObliviousInvestor »

weaks4uce wrote:
ObliviousInvestor wrote:I second Brian's suggestion of a traditional IRA.
Should this be my primary focus for investing because of the tax benefits?
In my opinion, yes, given a 33.5% total marginal tax rate. On the other hand, if you have reason to think your tax rate will be even higher in retirement, go with the Roth.
weaks4uce wrote:One thing in the near future that I would like to have some of this money available for (in approximately 5 years time, maybe less) is a down payment on another house. I assume it needs to be somewhere low risk to guarantee that it's going to be there when the time comes to pull it out?
Yes.
weaks4uce wrote:And also somewhere it's accessible without penalty?
Yes.
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weaks4uce
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Re: Starting from scratch...

Post by weaks4uce »

YDNAL wrote:
weaks4uce wrote:What do you wish you'd done back when you were 26? :)
1. Stay out of debt.
2. Save as much as I can. Not THAT much that interferes with life.
3. Use a Target Retirement fund. However, they were not available in 1978 when I was 26yo. :)
1. Will do!
2. Agreed
3. As in a fund with a certain target date? Say... 2049? :o

MathWizard wrote:If you really have 100K to invest.

I'd suggest:
1) Get rid of PMI by paying down house to 80% LTV.
2) Get rid of variable student loans 2 and 3
3) Put half of emergency fund into Roth for this year.
4) Pick allocation that makes sense to you.
See comments below.
Thanks for your input.

I think my intention is to squash all three of those variable rate student loans and leave the subsidized one (the lesser of all the evils) alone for now.

The PMI suggestion is something I never would have thought of. The numbers would be a little different than your example, though. FHA loan at only 3.5% down, so I'm currently sitting at 169,000/180,000 = 93% LTV. To achieve the 80% I'd be looking at putting ~25k toward it to knock off the PMI payments, which (I believe) are about $75/month. Certainly something to consider.

I very much appreciate all of the help thus far, keep the suggestions coming!
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Re: Starting from scratch...

Post by YDNAL »

weaks4uce wrote:
YDNAL wrote:
weaks4uce wrote:What do you wish you'd done back when you were 26? :)
1. Stay out of debt.
2. Save as much as I can. Not THAT much that interferes with life.
3. Use a Target Retirement fund. However, they were not available in 1978 when I was 26yo. :)
1. Will do!
2. Agreed
3. As in a fund with a certain target date? Say... 2049? :o
3. No!... as a fund with the appropriate Stock/Bond split (forget dates) in tax-advantaged account(s).
weaks4uce wrote:Tax Rate:
25% Federal
8.5% State (Maine)

Age:
26

Desired Asset allocation:
Don't know yet (help!)

Intl allocation:
(see above)

Current portfolio:
Working in the 6 figures-ish range, which is currently just sitting in a 0.4% money market... :oops:

I have no benefits through my employer... and therefore no options for a retirement account there.
Target Date funds are not appropriate for Taxable accounts. Don't you have an IRA or Roth IRA?
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Post by Dandy »

Others will help you with investment advice.

You say your firm offers no benefits. Do you have health insurance?? If not I would make that a priority. You can build a nice nest egg and can have it easily wiped out with a moderate illness.
Topic Author
weaks4uce
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Post by weaks4uce »

YDNAL wrote:Target Date funds are not appropriate for Taxable accounts. Don't you have an IRA or Roth IRA?
I have neither at the moment. Everything I have available for investment is in a money market.

Dandy wrote:Others will help you with investment advice.

You say your firm offers no benefits. Do you have health insurance?? If not I would make that a priority. You can build a nice nest egg and can have it easily wiped out with a moderate illness.
I do not have health insurance, unfortunately. I haven't even looked into private health insurance, but I assume it isn't cheap.



Paid off the three unsubsidized student loans this evening, and updated the original post accordingly. Now to decide what to do with the rest....
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Post by ObliviousInvestor »

weaks4uce wrote:I do not have health insurance, unfortunately. I haven't even looked into private health insurance, but I assume it isn't cheap.
That's definitely priority #1 then. And, it's not cheap, but it's not back-breakingly expensive either for a single person your age. http://www.ehealthinsurance.com/ is where we purchased ours.

weaks4uce wrote:Paid off the three unsubsidized student loans this evening.
Congratulations!
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Re: Starting from scratch...

Post by YDNAL »

weaks4uce wrote:
YDNAL wrote:Target Date funds are not appropriate for Taxable accounts. Don't you have an IRA or Roth IRA?
I have neither at the moment. Everything I have available for investment is in a money market.

I do not have health insurance, unfortunately. I haven't even looked into private health insurance, but I assume it isn't cheap.

Paid off the three unsubsidized student loans this evening, and updated the original post accordingly. Now to decide what to do with the rest....
weaks4uce wrote:Tax Filing Status: Single

Tax Rate:
25% Federal
8.5% State (Maine)

Age: 26

Emergency funds: ~5 months worth in a savings account

Debt:
Student Loan #4: ~$4,600 @ 4.00% (subsidized)
Mortgage: ~$169,000 @ 4.75% (30 year fixed)
PAID OFF [Student Loan #1: ~$3,500 @ 3.76% var. (private)]
PAID OFF [Student Loan #2: ~$4,500 @ 4.86% var. (private)]
PAID OFF [Student Loan #3: ~$4,000 @ 4.86% var. (private)]

Current portfolio: A little over 100k, all of which is currently just sitting in a 0.4% money market...
-------
edited to reflect paying of student loans and to add more info
So, from a little over $100K in the MM fund, you used $12K to pay debt. Congratulations!

1. You need health insurance.

2. You are in the 33.5% (combined) tax bracket and your investments should be tax-efficient.

3. You haven't said, but are we to assume this is long-term money for which you don't have other plans?
  1. Open an IRA. Make contributions for 2011 (now) and 2012 (in January) and you will have 10% of the money in a tax-deferred (protected) account. Use this account for Bonds.
    https://personal.vanguard.com/us/whatwe ... /factsheet
  2. Other long-term money should be in Tax-efficient index funds like Total US Market (VTSAX) and Total International Market (VTIAX) which are funds from Vanguard.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Post by Default User BR »

Definitely health insurance. Also disability insurance, as I would assume that's not provided by your employer either.




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Post by archbish99 »

Agreed on the health insurance -- you're young, healthy, and well-funded, so you might benefit by looking into an HSA with a high-deductible plan. That's basically:
- You pay for minor expenses out-of-pocket
- Insurance kicks in to cover catastrophic illness only (to protect your assets)
- You get another tax-advantaged account to save money for those minor expenses (HSA)
- If you max out the HSA contribution and don't use it, you can roll it over for future years; if you ultimately don't use it, it acts like a retirement account once you turn 65
- Lower premiums because the insurance company isn't expected to pay for every little bump/bruise/sinus infection
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Post by weaks4uce »

YDNAL wrote: 3. You haven't said, but are we to assume this is long-term money for which you don't have other plans?
  1. Open an IRA. Make contributions for 2011 (now) and 2012 (in January) and you will have 10% of the money in a tax-deferred (protected) account. Use this account for Bonds.
  2. Other long-term money should be in Tax-efficient index funds like Total US Market (VTSAX) and Total International Market (VTIAX) which are funds from Vanguard.
For the most part, yes, long term. Some of it I'd like to earmark to use in the near future, so I will keep that somewhere fairly liquid.

So I should open a Vanguard IRA and make the max contribution each year?
When you say "use this account for bonds", can you recommend any in particular?
What do you think suits my situation better, Roth or Traditional?

What makes one index fund more tax efficient than another?

Sorry for all the questions, and thanks for the help!
archbish99 wrote:Agreed on the health insurance -- you're young, healthy, and well-funded, so you might benefit by looking into an HSA with a high-deductible plan. That's basically:
- You pay for minor expenses out-of-pocket
- Insurance kicks in to cover catastrophic illness only (to protect your assets)
- You get another tax-advantaged account to save money for those minor expenses (HSA)
- If you max out the HSA contribution and don't use it, you can roll it over for future years; if you ultimately don't use it, it acts like a retirement account once you turn 65
- Lower premiums because the insurance company isn't expected to pay for every little bump/bruise/sinus infection
Very interesting. I didn't realize this was out there as an option. I will research this...
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Post by ObliviousInvestor »

weaks4uce wrote:What makes one index fund more tax efficient than another?
This wiki article may be of use: http://www.bogleheads.org/wiki/Principl ... _Placement

The idea is to tax-shelter the funds that generate the most "ordinary income" (as opposed to dividends and capital gains, which are taxed at lower rates). In general, this results in the following order of priority when choosing which investments to tax-shelter first:
1) REITs first (if any),
2) bonds,
3) US stocks, then
4) international stocks.
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Re: Starting from scratch...

Post by YDNAL »

weaks4uce wrote:
YDNAL wrote:3. You haven't said, but are we to assume this is long-term money for which you don't have other plans?
  1. Open an IRA. Make contributions for 2011 (now) and 2012 (in January) and you will have 10% of the money in a tax-deferred (protected) account. Use this account for Bonds.
  2. Other long-term money should be in Tax-efficient index funds like Total US Market (VTSAX) and Total International Market (VTIAX) which are funds from Vanguard.
For the most part, yes, long term. Some of it I'd like to earmark to use in the near future, so I will keep that somewhere fairly liquid.

So I should open a Vanguard IRA and make the max contribution each year?
Yes!
weaks4uce wrote:When you say "use this account for bonds", can you recommend any in particular?
Vanguard Intermediate Term Index (VBIIX)
weaks4uce wrote:What do you think suits my situation better, Roth or Traditional?
You pay 33.5% Taxes and a traditional IRA will reduce your taxable compensation (defer those taxes until retirement).
weaks4uce wrote:What makes one index fund more tax efficient than another?

Sorry for all the questions, and thanks for the help!
Transactions, capital gains taxes, ordinary income taxes. Broad Market index funds, like what I suggested, limit the transactions, distribute capital gains (not ordinary income), and limit the tax burden.
http://www.bogleheads.org/wiki/Principl ... _Placement

ps. I just noticed that Mike Piper also responded while I typed.
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Post by weaks4uce »

Once again, thanks for the info... and your patience.

Opened a vanguard IRA and made the max contribution yesterday.

Also opened vangaurd brokerage account and am ready to buy some funds as soon as the transfer clears. Looking into health insurance in the meantime

I guess now its time to decide how to allocate the rest, then what specific funds to buy. Should I include the IRA (in bonds) in when calculating my overall allocation?
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Re: Starting from scratch...

Post by YDNAL »

weaks4uce wrote:Once again, thanks for the info... and your patience.

Opened a vanguard IRA and made the max contribution yesterday.

Also opened vangaurd brokerage account and am ready to buy some funds as soon as the transfer clears. Looking into health insurance in the meantime

I guess now its time to decide how to allocate the rest, then what specific funds to buy. Should I include the IRA (in bonds) in when calculating my overall allocation?
Congratulations for taking the first (baby) steps.

1. Don't forget to take the IRA deduction in your taxes for 2011. See line 32 in last year's (2010) tax return.
http://www.irs.gov/pub/irs-pdf/f1040.pdf

2. Yes, the IRA and Taxable (retirement) accounts should become a unified portfolio. Please continue with self-education.
http://www.bogleheads.org/readbooks.htm
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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