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Advice on Saving Effectively Young

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junior7117
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Advice on Saving Effectively Young  Reply with quote  

Hello everyone,

Hope you're having a prosperous 2015 so far. This is my first post here so I'm not expecting much but hoping for some advice. My family was relatively mediocre growing up, until parents divorced leaving us more towards the lower class when I was in grade school. I've always been motivated and passionate. I have graduated college as and landed a well paying job as an engineer. I also have a business outside of work. I am looking to buy a home for about 330k within the next year. I am able to save about 2,000 a month and I already have 5x that saved up. How realistic is this goal? Any advice on saving or perhaps investing?

Thanks for your help.

Ryan
Post Mon Feb 16, 2015 5:21 pm
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oldguy
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quote:
I have graduated college as and landed a well paying job as an engineer. I also have a business outside of work. I am looking to buy a home for about 330k within the next year. I am able to save about 2,000 a month and I already have 5x that saved up. How realistic is this goal? Any advice on saving or perhaps investing?


Congratulations on your education and your engineering job, good job!

The goal for a $330k home - do you need that much room? Or are you in a very HCOL area? Or caught up in "the KUWTJones" mode? At any rate, the PITI payment + PMI will be in the $2300/m range, probably manageable on an engineers' salary. (In a HCOL area your rent is prolly >$1400, so you are adding about $1000/m ($12,0000/yr) to your std of living. Are you young? Married w/ kids?

Mortgage companies are returning to the 'low down payment' cycle, maybe even zero down loans. And rates remain at all-time lows - <4.5% for 30 yrs, fixed rate. With our houses, I make the lowest down payment that I can get, I avoid tying up capital in house equity - especially when the cost of capital is so cheap.

Savings/investing. If you are young, 'time' is your key factor. The generic US market has returned a longterm average of 11%/yr almost forever - those that avoided 'timing' the market, ie they bought the generic market incrementally (monthly) & never sold/traded, were the winners. The power of compounding, uninterrupted for 30 years, is a surprise to most. Eg, $417/m invested at 11%/yr is $1,100,000 in 30 yrs. (If your goal is $2.2M, factor the $417/m to $834/m). And if you do this inside a 401k account, the tax deferral will knock several thousand off your tax bill each yr.
Post Mon Feb 16, 2015 6:14 pm
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junior7117
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Thank you for your reply!  Reply with quote  

I am 23 years old and not married. I have a long time girlfriend that I plan on marrying with kids in about 2 years if all goes well. Ideally I'd like to get married then move into the house about a month or two later. I currently live with her now in an apartment.

I've been thinking about investing in a market index mutual fund for short term and long term. People who are na´ve to the market seem to discourage that while others who are knowledgeable about finance seem to strongly encourage the mutual fund idea. If I start out with 10k and invest 2k per month for the next 15 months, how realistic is it that I can get to 35k? (11% monthly).

Any tips on what mutual funds strategies to avoid?
Post Mon Feb 16, 2015 6:26 pm
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oldguy
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quote:
Ideally I'd like to get married then move into the house about a month or two later.


Sounds like an ideal plan. Does she have a good income or will you be a single income couple?
And is a $330k house a "normal" 1500 to 2000 foot family home in your region? Or a 3500 ft Mcmansion? ($330k varies widely across the US, it would buy about 6 houses in Des Moines - or a very small utility apt in Manhattan or San Fran).

Investing. Your 15 month plan won't work, 'time' is the key parameter for investing. The market (by definition) fluctuates based on supply/demand. The std deviation is about +/- 15%, so 19 yrs out of 20 (2 std dev) it stays in the 30% range. That tells you that predicting the market in 2 or 3 yr increments is an exercise in futility (Altho the TV dudes keep trying, they have 24 hours of air-time to fill). But over time, the +/- cancel and converge on about 11%/yr. Pick any 30yr-block, the answer will be in the 9% to 13% range. (most recent 30 yrs is 11.3%/yr).
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.VOJA8C7meUl

I put both our short & long money into our SP500 Index at Vanguard. And then borrow elsewhere for shortterm needs. When we buy houses, I get the largest loan available and leave my own capital in the index. When we buy a new car, I get a zero down 5-yr loan and leave our money in the index. If companies offer zero down, zero interest on furniture, appliances, carpet, I take it. This is my way of getting longterm returns (11%) on my shortterm needs - ie, paying 3% to 5% for 'short' capital and putting it out at 11%. Our index grows tax-deferred so I try to let it compound undisturbed. Doesn't always happen - sometimes we have to make a down payment on rental houses (tighter rules than on personal residences), we paid for our childrens' college educations, their cars, yada. Of course when we sell a rental house, etc, much of that money goes back in the index.
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Post Mon Feb 16, 2015 7:14 pm
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junior7117
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330k is confirmed price for the houses I've looking at, new model home in a small town 40 minutes outside of the big city here. Sq. ft about 2,000, single story ranch.

That's incredible advice, I never thought of the market that way. Borrow for short term at a very low rate and invest in the index for the long term. Thank you.

I am debating what company to go with for the mutual fund. Since it's an index fund, how can I invest without getting slammed with fees. I know there's a difference between managed and not so managed funds. Any light that can be shed on this subject?
Post Mon Feb 16, 2015 7:49 pm
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oldguy
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I am debating what company to go with for the mutual fund. Since it's an index fund, how can I invest without getting slammed with fees. I know there's a difference between managed and not so managed funds. Any light that can be shed on this subject?


Sure. The big-two no-load fund companies are Vanguard and Fidelity. The symbol for Van's SP500 Fund is VFINX, fee is 0.17%. Fidelity's symbol is FUSEX, their fee is 0.1%. So the cost is almost inconsequential, you get to keep 10.8% or 10.9% of the 11% return.

Both are unmanaged, the manager is required by law to maintain the 500 companies in proportion to the index, s/he is not allowed to load up (or sell) stocks. The big feature of this (other than low cost) is that you are not faced with an annual tax bill from the buy/sell activity. Your shares grow, and your unrealized capital gains are deferred.

IMO this is the 'purest' way to own equities. Your risk is defined by the 500 stocks that make up the US and most of the world's commerce. You need risk to build wealth - the Law of investing is "risk and return are directly proportional". If you narrow your focus to sectors, you superimpose sector risk onto sp500 risk. And if you further narrow to individual companies, you superimpose the risk of company failures onto the sector risk. The latter two risks are largely uncompensated risk (the worst kind). Since those stocks are selected from the same population of 500 companies, they will ultimately revert to the same 11%/yr return.

You guys are postured for a super financial future. You mentioned $2000/m in an earlier post. That would be $5.3M at age 53. And $15.5M at age 63.
Post Mon Feb 16, 2015 9:34 pm
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Wino
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Once you hit $10,000 in each of the S&P funds mentioned, you can convert your shares to the higher-balance option which has lower fees. At that point, the Vanguard fund fee drops to 0.05% and the Fidelity drops to 0.07% It's marginal which one is better at that point. In your Roth or Traditional IRA fund, you can contribute $5,500 annually, so you will most likely hit the threshhold in two years, but certainly you will hit it within 3, barring a severe and sustained economic downturn.

I, too, have most of my funds in an S&P 500 index, and they are with Vanguard. I also have money in the total stock market index and the total world market index. The last one has a higher expense ratio and no "admiralty" fund for lower fees.

I also have a small amount in a sector fund and some "play" money in individual stocks. I follow much the same strategy that oldguy espouses within the market, which is to buy and hold. I don't "trade" stocks or funds.

Lastly, I want to advocate against oldguy's "borrow to invest" strategy. That is called leveraging your debt. Now, it isn't nearly as bad as leveraging futures, but it still entails more risk than using just your own money to invest. In my case, all of the money I have invested is mine. My only debt is a small mortgage, and I have a large amount of equity in that house. If I were forced to sell, I'd walk away with enough money to buy another house.

Investing your own money without unnecessary debt - a mortgage, probably - is the safest route to a secure and comfortable retirement. Once you have some wealth, you can revert to oldguy's method, but I caution against it as you are starting out. You have no cushion to protect yourself from the vagaries of life. You are leaving yourself open to problems that you can avoid.

I suggest you not borrow except for a mortgage, and with that, arrange to avoid PMI (20% downpayment - $66K plus closing costs; call it $75K). According to your figures, you can save up $75K in 3 years, but let's call it four years, as you'll want to invest at least $5500 per year into a Roth during that time. If your pay goes up in that time - it should as a baby engineer - invest the extra into your house fund while continuing to max out your Roth.

In addition, if your employer offers a match, you should invest enough in his 401K plan to get the match. Talk to your HR group about the firm's retirement plans/fund.

Short plan:
Invest in employer's 401K or Roth 401K enough to get the match
Invest $5500 into a Roth IRA on your own (with Vanguard or Fidelity)
Borrow nothing for anything
Save at least $15K for emergencies; money market or checking account
Save for your house down payment.

If you follow the outline above, you'll be comfortable and in your house before you're 30. If you really, really scrimp and save and get a couple of pay raises, you could have the house paid off by the time you're 35, and after that, you could put $50K into your retirement every year without hesitation, and retire at 55 with $3 million, and that's assuming 8% returns, not 11%. It also assumes only $5500 per year until you're 35, followed by $50000 per year thereafter, for 20 years. If you take it out to 30 years, the amount becomes about $7.5 million (30 years of investing $50K per year = $1.5M invested).

If you get the 11% that oldguy espouses, the money at retirement is $3.6M and $15M at 55 or 65, respectively.

As an engineer, you'll be able to do the above, and still live very well. You should be making at least $120K if not much more by the time you are 35. That still leaves you with about $40K for living expenses and toys (plus whatever you make over $120K).
Post Tue Feb 17, 2015 2:45 am
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Publius
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quote:
Originally posted by junior7117
If I start out with 10k and invest 2k per month for the next 15 months, how realistic is it that I can get to 35k? (11% monthly).


I didn't see this addressed directly. If your goal is to get to a 10% down payment (which I would suggest even if you don't need it to get the loan -- taking the time to save it up as a buffer is important) then the savings vehicle doesn't matter in this scenario.

If you start with 10k and invest 2k for 15 months, you will have 40k even if you just stuff it in your mattress. If you know you are going to need it in 15 months, that isn't a bad idea. With a short time horizon, you don't want to see a 20% correction right before you need it for a down payment.
Post Wed Feb 18, 2015 3:03 pm
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junior7117
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Great advice so far. I guess I am a little impatient and very eager to buy my own house, as most would be in this position. It comes down to if I just have patience I and wait a little extra time it'll benefit me more anyways. Let's say I have 10K now and save 2K a month for 24 months from now. What are my best options?
Post Fri Feb 20, 2015 2:07 pm
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oldguy
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Let's say I have 10K now and save 2K a month for 24 months from now. What are my best options?


I would save up the money for the 'down' and then NOT use it for the 'down'. Keep it in reserve (that gives you the same safety as a big 'down' - but you are storing that portion of your NW in SP500 instead of in house equity.) And you are not at the mercy of yearly market fluctuations cuz you aren't going to use that money for 30 yrs. And you aren't at the mercy of the calendar in your decision to pull the trigger on a house - eg, if the house drops 20% and zero down 4% loans become available (the stars align?) you are free to do it, with or without the whole $58k.
Aside - very important to not make calendar-dependent investments/loans. Balloon loans (with a lump payment) at the end - if you had planned to refi at the end but rates happen to be 15% you are screwed. Same with a VAR, if your rate jumps to 10%, all new loans will be even worse. So always use fully amortized 30 yr, fixed rate loans. You don't want to be forced into selling a house early. Same with investments, no futures contracts, options, etc that require money on a set date - you might find yourself being forced to pay dearly to close a position in a few years (I once had to sell a truck/camper to meet a balloon date). Very Happy
Post Fri Feb 20, 2015 3:31 pm
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JackClark
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Congratulation, Thanks for the advice it's matter a lot in everybody life.

Thanks & Regards

http://trantr.com/category/finance
Post Thu Apr 16, 2015 12:04 pm
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