Living Below Your Means

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By 4inthefamily
April 30, 2004

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I've been on the Fool for about five months. I knew that I had learned a lot about LBYM. I have successfully refinanced my house. I've learned about Roths and other retirement vehicles. I've become quite competent at tax planning, but I still didn't feel like I had learned a whole lot about actual investing...until last night.

My husband and I went out to celebrate some good news and dropped by a work social afterwards. When we came in there was a heated discussion about the new company and what every one thought about the ESPP and the new 401(k). Also, many were discussing what they were going to do with their old 401(k). I immediately started listening in, since I was curious what people thought too.

Now, a little background at this point. My husband is the youngest on his project by several years. Most of his coworkers have been in the workforce for decades. So, usually, we look to them for advice. Last night the tables turned a little.

I joined in the conversation by declaring that we planned to roll our 401(k) over into some Vanguard funds instead of to the new company. My husband's boss looked at me and said, "Why? It seems the new 401(k) has some pretty good choices?" I said, "Yes, but most of the expense ratios run at about 1.5 - 2% and the choices they listed have actually under-performed the basic index markets over the last decade. If I go with Vanguard, my expense ratio will average closer to .28% and I will probably have a similar, if not better, performance."

Then someone asked me, if I was going to invest in the new 401(k) at all. I said, "Of course, I am not giving up that 3% match on the first 6%. I will put it into the one index fund that they have available in our plan - the PREIX, which only has an expense ratio of .35%. But, before I put additional money beyond the 6%+match into this fund, I will be funding a ROTH IRA since our tax bracket is fairly low at this point in life. I might as well take advantage of it."

More questions came and I found that I had a captive audience. People were asking about my diversification strategy and what the expenses were on different funds. I noticed one of the woman jotting down some of the stuff I was saying. She caught me after and told me that she is petrified, since she has no clue what she is going to do with her $100K+ 401(k) balance from the old company. We talked for a while about the options available.

I realized on the ride home that I knew a lot more than I thought. Some of it I've actually asked about here. Most of it came from posts I had just skimmed over. If nothing else, I feel that I have finally gained the confidence to look at the numbers myself and make a decision.


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