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Recent Grad with some questions

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JGT
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Recent Grad with some questions  Reply with quote  

I am, as the title says, a recent graduate. I have my Bachelors in Business and I am currently looking into graduate school.
I want to get some advice on my finances, I have a really great job, especially since I just graduated last May.

I make about 60k a year (projected,I am on a day rate so it could go up or down depending) I have $570/month in student loans, around 3k left on my truck, plus all my home bills.

I loved finance and took some extra courses in school but that was all business/corporate finance and I am far from a corporation and some of the rules I don't think are applicable to me.

So what should I put my extra money towards? As it is right now 60% +/-5% is taken up by bills (Student loans, house stuff, etc. etc.) and I haven't exactly got a firm budget on the other leftovers because I'm still settling into my house and buying a couple furnishings here and there so it fluctuates.

Should I pay off all the debt as fast as I can? or should I pay it as is and put the extra money in savings or invest with it?
Post Wed Mar 15, 2017 2:07 pm
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oldguy
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quote:
Should I pay off all the debt as fast as I can? or should I pay it as is and put the extra money in savings or invest with it?


I retain the use of my money - and keep my loans full term.

I get LONG LOW loans whenever I can. And I get only fixed rate loans, never variable rate, never balloons - I want to be certain of the safety of my borrowed capital. Then I invest that borrowed capital in the SP500 stock index. I want all of my risk to be on the investment side of the equation, never on the borrowing side. (If I allowed risk on both sides of the equation and they both failed I would be in financial crisis).

Eg, say that my house built up a bunch of equity - I refi into a new 30-yr loan and remove $50,000. That $50k loan will cost me $240/m ($86,000). I place the $50,000 lump sum in an 11%/y SP500 for 30 yrs, it will be $1,150,000.

When I buy a new car, I could - -
A. Sell $33,000 of my SP500 fund, use $3000 to pay cap gains tax and use $30,000 to pay cash for the car.
B. Or. leave my $33,000 invested and finance the entire cost of the car for 5 yrs. I expect the $33K that remains invested to double to $66k in about 6 or 7 years (rule of 72).

But there are two schools of thought - live "debt-fee" - or use management skills to apply leverage.
Your choice depends on your skill set. There are millions of folks who get into CC trouble, run up bills that they cannot pay, get their cars repo'd, lose their house, etc. They should use the "debt free" system.
There are others that have the skills to calculate risk, they can apply leverage techniques to get to their desired risk level.
Post Wed Mar 15, 2017 5:24 pm
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JGT
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No credit Cards  Reply with quote  

I have completely paid off any cards that I had money on, I had a discount tire account (0% interest for 9 months, paid off in 3; Best buy, got a TV and appliances for home, 0% for 6 months, paid that off in 3)

After paying those off I really like having less bills, but to your point some bills are okay to have. I think now that I have no "extra" bills I will look into the market, I work 50 hours on a slow week so I dont know that I can play the markets, should I go to an investment firm or is that something I can do myself, no penny stocks and having 30+ different stocks.
Post Wed Mar 15, 2017 5:53 pm
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christcorp
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JGT. Old guy isn't talking about "Playing the Market". Investing in an S&P500 type FUND is not the same as buying "STOCKS". The whole purpose of a "FUND" is so you DON'T play the market. Either at work, or a private fund manager, you can invest in a good S&P500 fund.

Now, having said that, it is true that the S&P500 averaged 10%+/-. Like Old Guy is stating. But that is very MISLEADING. From 1929 to 2014 it was about 10%. But If you look at the last 10 years, at Dec 31st for the year, the results average 8.8% The numbers are below:

Dec. 31, 2017 5.94%
Dec. 31, 2016 11.96%
Dec. 31, 2015 1.38%
Dec. 31, 2014 13.69%
Dec. 31, 2013 32.39%
Dec. 31, 2012 16.00%
Dec. 31, 2011 2.11%
Dec. 31, 2010 15.06%
Dec. 31, 2009 26.46%
Dec. 31, 2008 -37.00%
Dec. 31, 2007 5.49%

Now don't get me wrong. 8.8% is still very good. But a lot depends on what you're going to use the investments for. If you have a 2,3,4, or 5% loan that you're leveraging, so you can use the money in the investments, what good is that if you're getting 1.38%, 2.11%, 5.49% or worse yet, the -37.00% as in 2008. Then, you are actually losing money.

And remember too. You aren't really making the 8.8% average over those 10-11 years, IF you are PAYING a 2, 3, 4, or 5% loan on debt. In reality, you're making between 2-5%.

I'm all for investing in the market; but except for a mortgage, which is impractical to save and pay off immediately, I prefer to eliminate debt, (Which is an AUTOMATIC GAIN IN INVESTMENT), then take the money I WAS USING THERE, and INVEST it, along with original investment money, into the market or whatever investments. If in the future, I need to BORROW some money again, temporarily; say for a car loan; I reduce the amount going into the investments temporarily, and I make that car loan or whatever debt, a very small time period. Better yet, I make sure I have a good emergency fund, like 6 months wages, and I borrow from THAT so I don't need a loan and I can keep investing like normal.

So, you didn't say how much the balance on your student loans are or their interest rates. But if it's a traditional SUBSIDIZED Student Loan, then the rate is around 6.8%. You'll MAKE MORE MONEY paying off that loan, then you will keeping it and investing at the same time.

Double or triple your payments on the student loan. Whatever you can afford. Eliminate that debt in a couple of years. Then, take that $1000-$1500 per month that you WERE paying on that loan, and use that towards investing in a good fund; like an S&P500 type that you can let sit for 30 years.

Remember, there are plenty of BAD WAYS to handle your money. But there isn't just one RIGHT WAY. Whether you maximize debt, leverage it, and invest; or you eliminate debt and MAXIMIZE your Investment Contributions; you tend to come out about the same in the end. The difference is; one allows you the flexibility to handle unforeseen circumstances that are debt related, and makes it so you don't have debt hanging over you when you can't afford it. If I lose my job, have major medical bills, or some other major financial occurrence; it's much more reassuring when I have no mortgage, no car loans, no credit card bills, no personal loans, and am 100% debt free. That gives me a LOT MORE OPTIONS. Vs; losing my job or similar, and having $1000-$1500 a month in recurring debt and watching my savings go down to zero.

Best of luck.
Post Wed Mar 15, 2017 7:14 pm
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JGT
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I have about 35k in student loans, maybe half are above 6%. I have been very lucky to get a great paying job in the energy sector that is taking off these days, and while I like the idea of the fund investment, to your point being debt free or in less debt is a great feeling, I felt like a new man when I got rid of the 3k of credit card items albeit at 0% it was still great knowing I can have that extra 2-300 in my pocket every month.


I think I will take advice from the both of you. can take 10-15% monthly and put it into some kind of investment while making a double payment on student loans or my truck.
Post Wed Mar 15, 2017 7:39 pm
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oldguy
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christcorp is exactly right about 'playing the market", that jumped right off the page when you said it, lol. As he said, the SP500 Index is a longterm investment.

http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.WMmdSKJw-Ul Here is the history, pick a few 30-yr-time blocks, most will average about 11%/yr. Fortunately, most of us are given about 30 years for wealth building, then we transition toward wealth preservation.
It takes about 30 data points (years) for the SP500 index to converge on 11%/y, any individual year has a deviation of about +/- 15%, ie currently in the +/- 300 point range. Statistically, it will be in that range for 19 years out of 20 - and the outlier year can be anything, up or down, and anytime in the 20 yrs. So it takes some patience to become wealthy - as well as the courage to tolerate risk.

quote:
and put it into some kind of investment while making a double payment on student loans or my truck


That's a start - but it also shows the 'emotion' is making that decision. And that's OK - but let your intellectual honesty admit that to yourself.

As for the concept that 'debt-free' makes people feel better - that is true for most people. But you have to consider that money is finite, it comes from somewhere. Extreme eg, say that you have a $200k mortgage and you have $200k saved up. You could use your $200k to pay-off your house and be debt-free. Yipe, what if you lost your income? No cash, can't buy food, gas, phone, no heat. But it you had retained your $200k in the bank, you could make house payments for several years as well as buy food, gas, yada.

I hate to suggest a book to you since you just finished 4 yrs of college - 'The Little Book of Common Sense Investing' by John Bogel does the best job of spelling things out - the book is only 7 years old but it happens to be the recipe that I used since I got out of college (1963).
Post Wed Mar 15, 2017 8:27 pm
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christcorp
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I believe that the formula to financial "SUCCESS" is "Multi-Faceted". I look at it from a long term perspective. Just like Old Guy does; but from a "Different Window" in the "Same House".

When I'm ready to retire; for me mean 60-62 years old. I'm 56 now. I want the following.

1. 100% debt free. No mortgage, no car loans, no credit card balances past 30 days, No loans of ANY TYPE.
2. A guaranteed income that is approximately 75-80% of what my income is now; while working. This DOES NOT INCLUDE INVESTMENTS. Reason for 75-80% is because the other 25% currently is going towards investments, savings, etc. and that won't be needed when I retire. Hence, the lower income, and NO DEBT, will NET me more money and a higher "Standard of Living"
3. Investments that can be used for extravagance, splurging, supplement the guaranteed income due to inflation, unforeseen debt, etc.

For me currently, #1 above is taken care of. If I was 60-62 years old and could retire and access 2 different pensions and social security, then #2 would be taken care of also. As for #3; the investments aren't quite as high as I'd like. But, even with an anticipated market drop or correction, (Which I believe is coming soon); it should be stable again and my investment balance will be where I want it to be in 4-6 years.

I bring this up, because it's important to know what you want for your future. There are some people whereby WORK IS THEIR LIFE. They WANT or NEED to continue working until they are 67-70. Hell; we have a guy at our company who is 91. Well, that's not me. I work TO LIVE. I DON'T LIVE TO WORK. If it wasn't for the 59 1/2 age issue for 401k, IRA, etc. I'd retire today. But #2 and #3 aren't high enough to do that. But it's important you decide what you want for your future. Some people want to save heavily and pay for their kids to go to college. I think that's a waste. There's plenty of ways to go to college for almost free. But it's not my life, and some save their whole life for their kids. Some live for the moment and live in the most expensive house they can get, the most expensive cars they can drive, travel 2-3 times a year, and have nothing saved. And there are some that do nothing but save and invest, and have NO LIFE per se. They just work and save. You need to determine what is best for you.

You say you have about 35K in student loans. Paying $1000 per month will pay that off in LESS than 3 years. Paying $1500 a month would pay it off in LESS than 2 years. And considering how many years you took off of the loan, that MEANS you MADE 6% interest on your money for every one of those years you didn't have the loan. Not a bad return. Not sure where else you can find a GUARANTEED 6% return on your money.

But I think if you can do both; make $1000 a month student loan payments, and invest in an S&P500 type of fund, (Preferably in a 401K or other tax benefitting account); you'll be in great shape. Then.... when the student load is paid off in 3 years, take that $1000; give yourself a $500 a month PAY RAISE; and add the remaining $500 to the S&P500 investment to make that larger.

One CAVEAT: Make sure you have an Emergency Fund started. Something in case you get laid off; lose your job; etc. to keep you above water for a while until you get back on your feet. I recommend 4-6 months of your pay. In your case, about $25-$35K. This really needs to be your FIRST THING TO DO. Take the money you WERE going to invest in the S&P500 fund; AND the EXTRA Money you WERE going to put towards the student loans, and build your emergency fund. You should be able to do this somewhat quickly. Depending on ho much you have saved now.
Post Wed Mar 15, 2017 8:57 pm
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oldguy
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quote:
1. 100% debt free.
2. A guaranteed income that is approximately 75-80%
3. Investments that can be used for extravagance,


True, that will give you a safe and solid retirement. And that's all you really need.

But I've noticed over the years that the Financial Planners are churning out mediocre planning and the result is mediocre outcomes. My generation (pre-WW2) often has millionaires & multi's. Look at who owns the Car Dealership, the 50-to-100 worker Factories, the Trucking Companies, the Dairy Farms, the Real Estate.

To build wealth, risk taking, risk management, risk mitigation, are requirements, not something to avoid. A guaranteed 6% return? No young person should seek that, that's a guarantee that 6% is ALL you'll get. Same with a $25,000 EF, that is dead-money (instead, put it to work to build $500k in 30 yrs). When I want to increase my risk level, I refi one of our houses and add leverage (I don't tie up my capital in house equity that's worth 4%).

quote:
If it wasn't for the 59 1/2 age issue for 401k, IRA, etc. I'd retire today.

Actually, that's what I did. Except that I didn't use the 401k/IRA until the age 70 1/2 mandatory distributions hit. It was a surprise to us how low our post-retirement costs were, even trips to Europe and Alaska don't really add that much.
Post Wed Mar 15, 2017 10:19 pm
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christcorp
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Yes, retirement planning can definitely be complicated. And reaching the 75-80% of working income can be even more difficult if you have a rather large working income.

But there is definitely something to leveraging the equity in your home. There's not much use for all that equity if the house is paid off and you're living in it. Other than not having monthly debt, it is definitely a waste to have $200-$500K in equity sitting there doing nothing.

But that's why I said was I believe the financial success steps would be. That's not to say you can't EXCEED that. That success; "FOR ME"; is the MINIMUM. When I set goals, I set the MINIMUM I'm wiling to accept.

1. 100% debt free.
2. A guaranteed income that is approximately 75-80%
3. Investments that can be used for extravagance,

But I "PLAN" on expanding beyond that. If my plans work out, I'll be able to already forecast the inheritance I plan on leaving to my children. And if things go as planned, I'll be able to give them that inheritance while I'm still alive. While they're young enough to need and can use it. I'm at the age that when my parents and in-laws pass away, they are going to leave us a lot. That sounds good, but I would have been able to maximize the potential if I had it 10-15 years ago. Fortunately, other than the house we're living in, the kids should be able to get the majority of their inheritance while they're at a younger age and can use it; and we can still be around to enjoy them using it. This still leaves us a very comfortable life in our retirement.

For JGT; it's important that he determine what they want for their life 30+ years from now. That is what will determine HOW they should LIVE and INVEST today. Like I mentioned earlier, for some, how they live today is much more important than 30 years from now. I can appreciate that. When I and my wife first married, our friends were getting settled in their jobs, starting families, and building their life. My wife and I spent our first 5 years traveling, living in multiple countries, and not having kids. We started the family and "Settling" into our jobs/community/etc much later than many of our friends. That's why there's so many different ways to save, invest, etc. There's not just one right way. But it depends on what it is you want 30 years from now.

My method works fine for me. I made a lot of money at one of my previous jobs, which made it easier to be debt free and still invest. It freed me up to change careers and enjoy more of my life today. My kids busted their butts and both went to college 100% free ride. Just cost me for them to have some spending money each month. That was nice. A lot of money that was set aside for college education was able to be used for other things.

So figure out where you want to be in 30+ years; and work your way BACKWARDS. If you do that, based on the 3 attributes I mentioned, you'll be able to figure out a path to get you there.
Post Thu Mar 16, 2017 3:09 am
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oldguy
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quote:
and work your way BACKWARDS.


We did that. I remember we were on the living room floor with a yellow pad, a slide rule, sketching rental house appreciations and stock market growth. That was years before hand-held calculators were invented - we used a Log Book to make e^x curves. At the time we were earning $10k annually and setting longterm goals in terms of $100,000s. Never in our dreams would we have envisioned double-digit house appreciation. Or 18 years of 18%/yr SP500 returns (1981 to 1999). Money was doubling every 4 years. Our goals were soon revised upward an order of magnitude.

In my era, there was a 16-yr market flat spot (I think is was 1964 to 1980). Many people of that era swore that if they ever got their money back, they would never ever own another stock. Sadly they stuck to that, many of my peers broke even & sold in about 1980 - and missed the entire 18 yrs of 18%/yr. Hard to watch - and a very hard lesson about market timing.
Post Thu Mar 16, 2017 3:56 am
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christcorp
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You are so correct Old guy. There are a lot of people who are afraid of the market. My dad and mom for instance will have NOTHING to do with stocks, 401k, ira, roth, etc. They don't trust the market. On the other hand, they invested over time, $300,000 in US Savings Bonds. Fortunately for them, many of their bonds are making 3-4% interest. They think that's great compared to savings accounts at the bank. But they can't understand when I tell them that my funds are averaging currently, 11%. And even over the last 10 years, with some ups and downs, my different funds still averaged between 5-10%; depending on the fund. Some people simply don't learn.

But you've also read my posts in the past. I am the definition of "DIVERSIFICATION". Diversifying can actually be complicated. I've see some invest half their money on one side of the market and the other half on the other side. They think if one goes down, the other goes up. That's like playing roulette and betting $10 on Red and $10 on Black. Yes, you break even and can play indefinitely on the same amount of money, but there are no gains. Plus, a lot of people don't realize that a large portion of gains in a fund/portfolio, come from dividends.

But I diversify in many different sectors, for many DIFFERENT SCENARIOS. I have many funds, but I also have cash. I also have gold and silver. (PHYSICAL, NOT ETF, Stocks, etc). I also have Real Estate, Bonds, fixed incomes, etc. Granted, I won't recognize as LARGE of gains that I could potentially if I invested more/all in a specific area; e.g. Mutual Fund Index Funds. On the other hand, I won't take anywhere near the loss either should something happen. I've developed an investment that pretty much as a MINIMUM (When averaged all together) approximately 5% and a maximum in the 11-15% range. I'm currently averaging in the 7-9% when all combined. For me and my risk tolerance, that's acceptable. But 7-9% averaged, with NO DEBT, is close to what it would be if I was making 12-15% averaged, but I did have debt in the 3,4,5,6% range. So for me, it works out well.
Post Thu Mar 16, 2017 3:40 pm
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JGT
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Thanks for the suggestions  Reply with quote  

Great feedback guys.

I guess, for me, I'll go ahead a start putting money in a Roth IRA and invest that in ETFs and funds. Work towards paying off the smaller debts I have and once that's done I can get more into funds do some more investing in more income type investments maybe even refinance my house and leverage the debt.

One thing my finance teacher always said was debt is better than equity when it comes to purchasing. The thing about that is though it nis da to be done with thorough research and everything that goes with it.

This was a ton of help and you guys basically wrote a book for me so thanks!
Post Fri Mar 17, 2017 10:52 pm
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CredoWealthManagement
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The Roth IRA is a good idea while you gradually tackle the debt. For extra cash, you can put some of that in an Individual account that is more conservative to fight inflation while you save.
Post Mon Mar 20, 2017 9:24 pm
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