How should I balance discretionary investments with retirement investments?

As a recent college graduate at 22 years old, how should my investments be split between investments not for retirement, and those for retirement? I earn enough money to max out my employer's 401(k) match and Roth IRA.

Financial Planning, Retirement Savings, Investing
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June 2017
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Wow!  Fantastic questions to hear from a 22 year old.  Too few young people realize how critically important it is to start saving and avoid debt early in your career. As for your question, lets prioritize your action steps.  

1. Establish a small emergency fund (lets say 1-2 months rent and basic expenses).  Leave it in cash / cash equivalents. 

2. Contribute up to your employers matching level in 401k.  Use Roth option if available, unless you are in 25% tax bracket or higher, in which case I would use pre-tax funds. 

3. Aggressively payoff non-mortgage debts including student loans 

4. Beef up the emergency fund to 3-6 months worth of expenses.  High end of this range if your income is at risk, low end if if employment is stable.  Dont touch these funds except for a true financial emergency, and replenish as quickly as possible (put other steps on hold) if they are depleted.  

5. Increase retirement contributions to 15% of income.  Fill up company match, then max Roth IRA if you qualify, then back to the employer plan.  You can invest these funds aggressively for growth. 

6. Accumulate assets toward medium term goals such as buying a home.  If the goal is more than 5 years off, you may choose to invest the funds using a moderate allocation fund.  Otherwise, stick to cash or short term instruments like CD's, short term bonds, etc. 

7. Accumulate wealth outside retirement accounts for long term goals (retirement, college for kids, etc.).  

You can pursue # 5 and # 6 simulaneously.  Otherwise, I would encourage you to fully implement each step before moving on to the next one.  

I hope you find this guidance useful.  

 

June 2017
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