purplebelle said:
401k was my next question! I'm very good with my $ for a 21 y/o (an excellent saver) so I want to get advice on this stuff. I watch the Suze Orman Show but I must admit I feel lost most of the time. I looked it up and my company will contribute 2% for the 401k.
Is that good/bad/average?
I recently saw a money expert on Oprah who said to be a millionnaire, save 15% of every paycheck.
2% isn't bad, probably about average for comanies that offer matches (so many don't). You should find out whether the match is 50% of the first 4% that you contribute or 100% of your first 2% or just 2% per person. Most companies that I've dealt with have 50% matches, so you would have to contribute 4% of your own money in order to get all 2% of the company's money. If you only contributed 2%, you would only get 1% in matching funds. So it makes sense to contribute at least amount needed to get the full company match!!!!!!
Also, for your own knowledge, you should find out whether the company match is invested in company stock or if it's invested into whatever funds you choose for your investments -- I've worked with companies that did both ways. Most investment folks advise that you don't have too much money invested in the company you work for -- remember all those Enron employees? The Enron company match was invested in Enron stock and many of the employees had their own 401k contributions invested in Enron stock, as well. In one fell swoop, many Enron employees lost their jobs and every dime they had saved for retirement. So, if your company match is in company stock, you may not want to invest any other monies in your company stock.
How do you determine how much to contribute to your 401k? Well, you definitely want to put in enough to get the full company match, at a minimum. And the company will have some kind of limit on pre-tax contributions, probably something between 10% and 15%. You'll have to decide what you feel comfortable with between those two numbers. Factor in your living expenses, any debts, and any future large purchases (car, house, etc.) that you may want to save for. Don't stress too much about figuring out the contribution amount, try to make an educated guestimate -- you could always change the amount later.
(You should also put together a savings account for emergency expenses -- don't worry that you have to save it immediately, but over time you should be putting away some money in case of lay-offs, car trouble, etc. Just put it into savings in a credit union or ING or regular bank and don't touch it.)
Your company probably has an investment firm like Fidelity or Vanguard that oversees the 401k and you'll get a packet of information that offers your investment choices. Most (if not all of the choices) will be Mutual Funds and you may also be offered the opportunity to invest 401k funds in company stock.
Mutual Funds are run by the different investment houses -- each one buys specific stocks and/or bonds and when you invest your money in a certain Mutual Fund, you are buying a small piece of each stock and/or bond that is owned by that Mutual Fund. You may be given the Prospectus for each investment choice -- if not, you should look them up on the internet.
For each investment offering, You should find out: (1) What is the investment strategy of the Fund?, (2) What are the current holdings of the fund? Stocks? Bonds? Cash? If stocks or bonds, which ones? (3) What is the 1 yr, 3 yr, 5 yr, 10 yr return on the Fund and how does that compare to benchmarks like the 500 Index and (4) What are the operating expenses and/or fees?
Stocks are ownership in the company -- if you own a share of Microsoft stock, you literally own a little piece of Microsoft. You make money (on paper, at least) when other people are willing to buy your share of stock for more than you paid. Also, you make a little bit when the company pays out dividends (sharing it's profits). If the company goes belly-up, you have still own a share of the company, but it won't be worth anything because no one will want to buy it.
Bonds, on the other hand, are loans. Loans made for mortgages, loans made to companies, loans made to town or state governments, etc. If the company that is loaned the money goes belly-up, the bond would be added to the list of creditors and might get a little something back.
Stock values (and the values of Mutual Funds that are heavily invested in stocks) can go up and down quite a bit, depending on about a zillion different things. But in general, that volatility is paid off with a better return than Bonds. Bond values don't change much, but bonds churn out a nice steady income in the form of regular dividends. General consensus is that young people (who could recover from a market downturn and have the most to make in the longterm from a market upturn) should be more heavily invested in stocks (and/or Stock Mutual Funds) and older workers should be more heavily invested in bonds (and/or Bond Mutual Funds) in order to have regular income and protect their assets.
So, you should probably be invested more in Stock Mutual Funds and less in Bond Mutual Funds. How do you pick which ones and how many? Well, how many....not too many because it's too confusing and not necessarily just one. As for which ones, well I like index funds for a beginner (heck, I like them for me too). An index fund tries to invest in the same stocks as the benchmark it mimics -- a 500 Index Fund tries to mimic the return of Standard and Poor's 500 Index which represents 70% of U.S. stocks (it's used as a measure of the stock market's overall perfomance). Not all Index Funds are 500 Index Funds. There are index finds that mimic the total stock market, the bond market, the Russell 3000, etc.
What index funds really have going for them is: (1) Your money is going to be doing about as well as everyone else's. Hey, if everyone measures themselves against their perfomance against the S & P 500 Index, then a 500 Index Fund is good enough for me. When the stock market goes down, so does the value of my fund shares, but they don't go down any worse that the market on the whole. And (2) Index Funds aren't actively managed which means that the fund management only buys and sells to continue mimicing the bechmark and they do not buy and sell in order to "time the market". And because they aren't actively managed, index funds have lower operating expenses.
Say you're looking at an Emerging Markets /mutual Fund that owns stocks in Third World countries compared to a 500 Index Fund. Well, investing in Third World countries is pretty exciting and while the 10 year average returns are 8%, the MF has had an average return of 10% over the last 3 years (note, numbers are made up). And the 500 Index, well that's pretty boring and say the average rate of return has been 8.3% for both the last 10 years and the last 3 years (once again, I made these numbers up for educational purposes). But the operating costs of the Emerging Markets Fund are 2.5% and the operating expenses of the 500 Index Fund are 0.3%, so the Emerging Markets Fund would have made you 10%-2.5% = 7.5% average over those three years and the 500 Index Fund would have returned an average of 8.3%-0.3%=8% over those 3 years. Once again, I made these numbers up, but they show the value of investing in funds with low operating expenses.
Still can't decide? You could always just put it all in one or two index funds.
Like I said before, increase your contribution every time you get a raise -- you will painlessly max out your contribution in a few years. When you max out your 401k, check out Roth IRAs. When you max out both your 401k and Roth IRA, you're ready for regular taxable accounts for Mutual Funds.
I highly recommend getting a subscription to Kiplinger's Personal Finance -- I have learned soooo much from that magazine. Also, any errors in this posting are my own -- this post is intended for general advice -- please use your own best judgement when choosing investments.
I hope this helps!
There things are tailored and lined so nicely they fit better than other things I had tried before, but best of all they are put together in sets so I don't have to be too creative 
which could be dangerous! 
