The Money Hawk

Getting Into Vanguard: Why And How (Part 2 of 2)

Posted on 02. Nov, 2008 by Kevin Geary in Investing

This is a two part series titled “Getting into Vanguard.” The first article detailed why you’d want to invest with Vanguard and this second article teaches you how to make it possible, even if you’re a beginning investor.

Now that you know why I chose Vanguard to house my retirement and non-retirement investments, I have to show you how I’m getting my foot in the door.

At the end of the first post of this series, I detailed two problems that you’ll run into after deciding to invest with Vanguard:

1. Beginner investors don’t usually have $3000 lump sum to buy into a fund (the Vanguard minimum), much less the $12,000 it would take to diversify using a method similar to mine.

2. If you’re investing in a Roth IRA with Vanguard like I am, you can only buy one fund per year while staying under the $5000 maximum Roth contribution (2009).

Thankfully, I have a workaround for these two issues.

Dealing with the $3000 buy-in minimum…

Vanguard has a $3000 minimum buy-in for most of their funds. This makes things a bit difficult unless you have a pile of money lying around.

Thankfully, another one of my top choice fund companies comes to the rescue. T. Rowe Price has a program called “Automatic Asset Builder” (AAB) that allows you to buy into their funds for a minimum of $50 per month as long as you set up the automatic transfer.

If you open a Roth IRA with T. Rowe Price, you can buy into a fund (or funds) through the AAB program until it reaches a balance of $3000 and then transfer the balance over to Vanguard.

Simply repeat the process until you have all the funds you need (to properly diversify) at Vanguard. This technique will also help solve the remaining problem…

Dealing with the Roth IRA max contribution limit…

If you saved money in a money market savings account (for instance) until you had the $3000 minimum for a Vanguard fund, you could only buy one fund per year and stay under the Roth contribution limit. However, with the T. Rowe Price to Vanguard method you can buy into one fund the first year, and then two funds the second year.

Savings to Vanguard method (numbers are hypothetical to make the visualization easy)

Year 1: Save $5000 > Buy a fund.
Year 2: Save $5000 > Buy a fund.
Year 3: Save $5000 > Buy a fund.
Year 4: Save $5000 > Buy a fund.

T. Rowe Price to Vanguard

Year 1: Invest $5000 > Transfer $3000 to buy one Vanguard fund and have $2000 left over.
Year 2: Invest $5000 > Transfer $6000 to buy two Vanguard funds and have $1000 left over.
Year 3: Invest $5000 > Transfer $3000 to buy final Vanguard fund and the other $3000 into current funds.

Addition as of 11/03 Via Commentor Dave
Commenter Dave posted a quicker method for those who are actually able to save the full $5000 per year to invest.

Year 1: Put $5000 in a Vanguard fund (maybe Target Retirement 2050 to get some diversification).
Year 2: Put $5000 in. With approx $10000 balance you can meet the $3K minimum in up to 3 funds, or just keep it in TR 2050 for now.
Year 3: Put $5000 in. With $15K balance you could meet the $3k minimum in 5 funds.

If you can’t save that much and are limited to only a couple hundred dollars a month or less, you’re still better off using the T. Rowe Price method because you’ll get your money in the market faster. However, I thank Dave for his participation and addition to this article as it does save time and headaches for those who are able to save near the maximum every year.

Article continued…

As you can see, the T. Rowe Price to Vanguard method shaves a year off your efforts to acquire four Vanguard funds (I mentioned that my portfolio will consist of four funds. Yours may be different, but the concept is still the same). You’re still investing the same amount of money, but your money is making its way into the market faster. At a time when the market is at a huge discount, you may not want your money sitting on the sidelines in a savings account.

Of course, this assumes that the contribution limit will remain at $5000, which is probably not the case. I believe the limit is set to increase in $500 increments according to inflation. However, if your T. Rowe Price holdings experience a lot of growth as the market recovers, you’ll be able to get your Vanguard funds that much quicker.

These two scenarios also assume that you can save $5000 consistently every year. If you can only save a couple thousand every year, the T. Rowe Price method makes even more sense as you’ll probably realize stronger growth with your money in the market than you will in a money market savings account and you’ll also get the benefit of dollar cost averaging through the AAB program.

The choice is yours…

Obviously, you can do this either way and not dash your hopes of a healthy retirement (just trying to speed up your portfolio formation). If you prefer to simply save the money and buy Vanguard funds as you reach the minimums, you can do that. Just make sure you’re not saving your money in a simple savings account; look for a good online bank that’s paying top interest rates.

As for me, I’d rather get my money in the market now while it’s on sale and utilize dollar cost averaging through the AAB program. I’d also like to get my Vanguard portfolio complete sooner rather than later. Remember, our two scenarios didn’t account for fund growth while you’re with T. Rowe Price. If your funds grow as the market recovers, it’s going to expedite the process and you’ll be that much further ahead.

Once you’re in…

Once you have bought into all the Vanguard funds you want, you can set up automatic investing through Vanguard just as you can with T. Rowe Price. I believe the minimum is $100 per month per fund.

Of course, you need to adjust your contributions to make sure you’re keeping your ratios the way you want them.

Happy investing!

Related posts

• Raising Money Smart Kids: Keep Your Money on a Short Leash (3)
• How an $800 Tax Bill Taught Me Not to Be a Greedy Idiot (15)
• Getting Into Vanguard: Why and How (Part 1 of 2) (2)
• Why I Switched From Standard Health Insurance to an HSA (3)
• The Motley Fool Agrees With The Money Hawk: Social Security Sucks & Vanguard Rocks (2)

Don't miss our next article: Subscribe FREE via RSS or Email

Tags: index funds, Investing, roth ira, Saving, T. Rowe Price, Vanguard