‘I currently invest 5% in my 401(k) and $225 a month in an individual account’: Should I increase my 401(k) contributions and switch to a Roth IRA, or keep my current strategy?

Hi Money Minder

Got a couple of questions, and I’d really appreciate some recommendations.

Here’s the rundown:

25, Male
Salary: $45K
Paycheck: $1254 bi-weekly
No credit card debt
Checking account: $600
Housing: $4745

Monthly Fixed Expenses

Rent/Utilities: $300 (I live with my girlfriend; rent’s $500 and utilities range from $75-$200)
Groceries: $200
Entertainment: $50
Gas: $150
Student loan payment: $400 (balance is $7,360)

Monthly Variable Spending

$800

My company’s got this cool match thing going on — 100% of the first 3% and 50% of the next 2%. I’m currently investing 5%, which is $86.59 per paycheck. My account’s at $3,847 right now.

SS S&P 500 Index II: 47.70%
Mercer Intl Stock: 16.54%
Mercer DVSFD Bond: 13.60%
SS RSL SMMDCP IDX II: 12.70%
SS GACEQ EXUS IDX II: 9.46%

So, should I bump up my investments to 15% to get on track to 1x my salary by the time I’m 30?

Also, I’m chucking $225 a month into my own account on Robinhood. It’s like this:

$116 in SPY
$792 in VOO
$652 in OR

Just opened a Roth IRA on Fidelity and I’m wondering—should I redirect that $225 monthly into the Roth instead? Or should I stop investing that money and tackle my student loans first?

Thanks a bunch for reading, and I’d love to hear any recommendations.

Cheers,
Budget Seeker

Response from THE MONEY MINDER:

Hello There,

Hello [Name],

Thank you for reaching out and sharing your financial situation in such detail. It’s clear that you’re taking thoughtful steps towards managing your finances, and that’s commendable.

Firstly, congratulations on having no credit card debt and being diligent about contributing to your retirement savings, even at this early stage of your career. Now, let’s address your specific concerns about whether to increase your retirement contributions, continue with your individual investments, or prioritize paying off your student loans.

Given your current financial standing and goals, here’s a practical approach to consider:

Employer-Sponsored 401(k) Contributions: You’re currently investing 5% of your income to get the full employer match. This is a great start! Given your goal to have 1x your salary saved by 30, increasing your 401(k) contributions to 15% could significantly help you reach that milestone. However, this should be balanced with other financial obligations and goals.
Student Loans: Paying off your student loans entirely should indeed be a priority, especially since you’re carrying a $7,360 balance. With a monthly payment of $400, it’s evident you’re keen on reducing that debt. Considering the psychological and financial relief that comes with being debt-free, you might want to focus on accelerating those payments. This could involve reallocating the $225 you currently invest in Robinhood to your student loan payments, which would expedite the payoff period.
Roth IRA Contributions: Opening a Roth IRA with Fidelity is a smart move due to the tax advantages. Since Roth IRA contributions are made with after-tax dollars and qualified withdrawals are tax-free, it’s a beneficial investment for the long term. Once your student loans are more manageable or paid off entirely, channeling the $225 monthly into your Roth IRA could be highly advantageous for your retirement planning.
Emergency Fund: Although not directly mentioned, it’s crucial to have an emergency fund. With only $600 in your checking account, consider increasing this amount to cover at least 3-6 months of expenses. This safety net ensures that unexpected costs don’t derail your financial stability. You might consider setting aside a portion of your variable spending towards this fund.
Variable Spending: Keeping a close eye on your variable spending (which currently stands at $800 monthly) can free up additional funds to either expedite debt repayment, bolster your emergency fund, or increase your retirement contributions. Small adjustments here could yield significant long-term benefits.

Overall, a balanced approach that initially focuses on paying off your student loans while maintaining your existing 401(k) contributions seems practical. Once your loans are paid off, redirecting funds towards your Roth IRA and other investments will help you catch up and meet your retirement goals.

Thank you again for sharing your situation. It’s evident you’re on a thoughtful financial journey, and with a few adjustments, you’ll be well on your way to achieving your goals.

Best regards,

THE MONEY MINDER