Investment question

[GreenandCars]

Ok I am 19 and I will be starting a job soon that will have a 401k program(the terms of which still have to be worked out so I dont know what percentage will be matched). My question is: should I start puting money into the 401k plan now or should I save it to use for a down payment on a house? My thoughts are that getting a house now would be a better investment because morgage payments are a better investment than rent and if i put money in the 401k now I wont see that money for a loooong time. The way I see it, saving the money for a down payment would help me out more overall than investment into 401k. Any thoughts on this? Thanks in advance.


BTW, I will probably be in a unique opporotunity to live with my parents for the next year or two. By my estimates, I should be able to save about 10- 15 thousand a year if I play my cards right (I will be making about 40k/year) so I could probably buy a house in a relatively short period of time. Just a little context to help with the advice.

[Ze Juice]

First off, I admire the fact that you're starting to think about your financial future at such a young age. I wish I had your foresight 10 years ago. Here's what I would recommend:
If your company will match your contributions into their 401K, take the money. If you can live with your folks and save money for a while, put your savings into an IRA, which will grow tax-deferred until you are ready to buy a house. You are allowed to make a one-time withdrawal of 10K with no penalty, if that money is used as a first home purchase. There is a limit (4K this year, 5K next year) of what you can put into an IRA. I would put any additional savings into a high-yield savings account. ING has a good one, and you can link it to your bank account to make automatic contributions when you get paid.
Good luck!

[GreenandCars]

Hey, Thanks alot for the advice. Rep! (first one for ya) Welcome to webrats!

[ET1(SS)]

The most common thought on 401Ks is as follows:

If your 401k is 6% with a matching 3%, then every penny of you 3% is matched by the employee 100%. Which means that money is being paid into your account that you would not have been paid otherwise. So to pay 3% of your income into the 401K is smart.

As for the remainding 3%, meaning the portion that does not get matched 100% by your employer, that is entirely up to you. Is your 401K plan such that you think that you can still get a better return somewhere else? Then invest somewhere else.

The portion of investment that gets matched by your employer, is the best amount to put in. Because it gets you investment money that you would not have had otherwise.

To invest further into the plan, above and beyond how much your employer is willing to match, is really up to you and whatelse you have going on in your portfolio.

:-)

[skyextrm]

I agree, plus if you are ever in a jam you can take a loan againt your 401K

[ET1(SS)]

You just cant beat a 401k with employer anticipation. Like free money.

IRAs can have down sides: The long wait for a delayed retirement, the terribly low ceiling which means that your IRA will NEVER add up to enough to support you, and the 'tax benefit' is low.

As a devout 'tax-itemizer' we have never used an IRA simply because we ahve always found far better tax write-offs.

Use that 401k plan.

And invest on the side, pick some investment vehilce that gives a good tax-benefit.

[kacaman]

If you have a good job and some money saved in whatever investment program, you need very little down payment anymore to buy a house. There are plenty of loan programs requiring as little as 5% or even 0% down to buy houses. As long as you look like a good risk, banks want your business these days. You might pay a little more interest with nothing down, or a little more upfront costs, but that all gets added back to principle and you don't have to come up with it on the front end.

[ET1(SS)]

I have never made any down payment when buying a home. We only buy MFRs though, we like money makers that also shelter us from paying taxes.

If you want to, then that is good to. But it has nothing to do with the topic of how to invest his money.

Buy houses with credit, not money.

Invest money.

Drink rum.

And make love to women.

Get those confused and nothings works anymore :-)

[GreenandCars]

Well, isnt it a good idea to pay some down for the purposes of instant equity?

[ET1(SS)]

'instant equity'?

What for? Equity is what my renters build with their money, not my money.

I hold my money, well I should say, I hold some aside in case there is some emergency repair that needs to happen. So maybe $1,000 is in savings earning interest.

After all repairs are made, and we have no other emergencys, we do commonly make one extra payment to the principle each month. It needs to be a completely seperate payment, and written on the check 'Principle payment'.

If we look at how much you will have paid onto a mortgage, over the life of it. Often a $100,000 mortgage paid for 30-years, will have as much as $300,000 paid to the bank. So looking at that $300,000 as a debt, then each $200 that I send in as a principle only payment, will lower that debt by a huge amount.

Playing with the numbers, in fact on one of our mortgages an extra $200 each month principle payment, effectively earns 16% interest. Which is a really good rate in today's market.

I would recommend paying some small extra priciple payments, but only after your done running things, and if you still have some rent money left over with.

I certainly would not do it with my money [that I had worked for]

:-)

As far as when you buy, and making some down payment, no.

Save your money. When closing on a building, you really dont know what is going to break the following month. What cosmetic work the seller has done, without truly fixing anything.

Many times guys out there are 'flipping' property. They buy, planning on only making cosmetic repairs, and then selling again quickly. So underneath that new paint, could be lurking anything.

That is why I urge folks to get a 30-year mortgage, to make the minimum payments low. Yes, if nothing breaks, if you have money left over at the end of the month, you can always send in an extra $200 onto the principle, and it does real good. But you need to give yourself the option.

If something bad does happen, give yourself a chance to recover.

:-)

[o1legacygt]

Hey bud, I am about the same age as you and in IL. I invest 15% of my check to 401k, and allocate that 15% so that 5% of my total pay goes to my company match. Company matches are very good investments. I bought a house about 5 months ago and earned about 21k in equity. The thing is with purchasing a house is getting a good deal. If you need some help with that we can chat and I would be happy to. My best friend is a agent and owns his own brokerage firm for financing. I would never put any money down on a car or a house. Nor did I put money down for my house. There are so many ways to finance houses as long as you have pretty good credit. You dont have to worry about PMI insurance if you do like a 20/80% loans...But you will get a higher interest rate on ur 20%... But if you buy in undeveloped knowig it will devlop you can earn some pretty good returns on property that is on the rise or devolping rapidly. Either way a home is a good investment... Just remember putting anything less then 20% down is not going to help you.

IMO Dont put any money down because it is not needed! =)
Tlak to you soon
Raini

[inimyaudi]

be careful taking advice from anyone who doesn't know principal from principle.

sock away your extra money in a roth IRA and you'll never be taxed on the returns and you can withdraw your contribution at any time in the future with no penalty for the purpose of buying a home or paying for education

if you absolutely don't want to pass up the extra compensation that your company match means, go ahead and particpate in the 401(k), but only up to the ceiling of the company match