Scenario No. 2: A young single professional in their late 20s to mid 30s. Perhaps they are either finished paying off their college loans or close to it. They may have credit card debt. Maybe they just received a recent promotion or have taken a new job; they are making more money, and want to start being more aggressive when it comes to saving, perhaps for retirement, perhaps as a nest egg to start a family. What is the best investment option for a young, single professional?
Do: Buy a home you can call your own. There will never be a better tax write-off than a home. Next, contribute into your company’s 401k if the company matches their contribution, but only up to the point of the match. Finally, contribute to a Roth IRA (if you qualify), or a nondeductible IRA if you don’t qualify for the Roth, so you can take advantage of the Roth conversion possibility in 2010. However, before putting money toward any of the investments above, you MUST pay off any and all credit card debt you have. Getting out of debt is the most important priority before investing for retirement.
Never: Never buy a home or piece of real estate if you do not have at least 10% to 20% to put down. While buying a home is a great investment, if you do not have at least 10% to 20% of the purchase price to put down, then you can’t afford the home and are buying before you have demonstrated the ability to save, which is a bad idea in the current market. Also, never ever borrow against your 401k plan because you will pay double taxation on the money you borrow. Because you don’t pay taxes on the money you put into a 401k, when you pay back the loan (which you must do within five years, or 15 years if used to buy a home), you pay it back with money you have paid taxes on. Then, when you retire and take the money out again, you end up paying taxes on it a second time. And that isn’t even considering the penalties you have to pay if you change jobs/quit/lose your job, in which case the money is due immediately and subject to taxes and a 10% penalty.
