As a recent college graduate with no debt, how should I allocate my savings?
I make around $50,000 a year, have relatively low expenses, and no debt. I contribute 9.5 percent to my pension, 2 percent to my 401(k) without a company match, and 2 percent to my Roth IRA 457. At the end of each month I put my excess money, usually around $1,000, into a low-yielding money market account (MMA). I now have around $18,000 in my MMA. If I'd like some degree of liquidity and I have moderate risk aversion, how should I allocate the savings in my MMA?
You're saving a lot! Great job. You're going to be ahead of the curve.
Depending on what your average monthly expenses are, typically a good rule of thumb to have is to set aside enough cash for 3-6 months worth of living expenses. However, it's up to you what you're comfortable with. That money should be designated for expenses outside your ordinary expenses.
Emergency funds should typically remain in cash or a cash equivalent such as a money market fund. There are high yield savings accounts offering much higher interest rates than typical banks. Ally bank is one for example. Nerdwallet has a review for the best 2018 high yield savings accounts, I suggest checking that out.
Once you've reached the "emergency fund" threshold you're comfortable with, you may consider re-allocating that $1000 in cash flow towards mid-long term investments depending upon any goals you might have. Do you want to begin investing/saving for a home in the next 5-10 years? If so, you could consider investing the cash flow in automatic contributions every month to a taxable brokerage account. While it won't have any tax benefits like your retirement accounts, it will allow you to access the funds before retirement without penalty.
You may also consider maxing out your Roth IRA. There isn't a better time to put away funds in a Roth than when you're young and in a lower tax bracket than you will likely ever be throughout your career. Especially with the recent tax cuts!
All in all, you're in a great position to begin building wealth and have done an excellent job saving thus far. Prioritize your goals and determine what's important to you to save/invest for and that will help you determine where to allocate the $1000 in cash flow that will be free once your emergency fund is sufficiently funded.
All the best,
It's great to see a young person not loaded up with debt! Congrats to you!
One of the things I'd advise is for you to consider a ROTH IRA separate and apart from a 457 plan, so that you can make early withdrawals if needed (which you can do from a ROTH IRA, up to the amount of your contributions). Your risk is mitigated and your liquidity needs are met by just making sure your investment selection meets a moderate risk tolerance.
Think of a ROTH IRA is a tax-sheltered, multi-use account you can access if you need it, but if not, it's there for you in retirement, tax-free!
All my best.
First off congrats on beginning to invest. I like what you are doing spreading around the retirement savings for now. As for the $18,000 liquid and $1,000/mo my thoughts are as follows. I'd keep saving the $1,000 a month into some online savings account like ally or marcus which are paying approx 1.5% interest. I would do that until you feel you have sufficient emergency funds. Most people will tell you that is roughly 6 months expenses but really you'll know that answer. You want to make sure you have enough there to handle and unforeseen major expenses, or even planned, in addition enough funds that if you lose your job it can float you until you find a new one. Once you've hit that comfort level I'd start balancing increasing your retirement savings and putting the excess into a liquid brokerage account. Sounds like you are a moderate investor so some blend of stock and bond mutual funds/etfs would likely be the way to go. These funds will be liquid so that you can access but still longer term growth in mind. If however you'll need these funds in the near future and can't tolerate or withstand volatility might be best to have the full nut go into your savings account.
Congrats on doing such a great job in saving. As everyone has already stated, it's important to have approximately 6 months of living expenses in a liquid account, and online bank accounts are great options for this. One important item I feel was missed is the benefit of contributing more to your Roth IRA. With a Roth IRA, if you were in a pinch, you are allowed to take out your contributions without penalty. You cannot take out earnings without penalty, and if you ever do a Roth Conversion from a Traditional IRA to a Roth account that money can't be touched for five years. But in a standard Roth IRA account you are allowed to withdraw your contributions. You mentioned that you are moderately risk averse, and traditionally you would want to take the most risk in your Roth IRA account to help it grow, and because it is generally the last bucket you withdraw funds from. However, you could allocate a portion of it to less risky investments in the event you needed to access those funds.
Hope that helps, best of luck to you!