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24, Short and long term goals, advice appreciated

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BendegitBran
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24, Short and long term goals, advice appreciated  Reply with quote  

Looking for some help with planning. Sorry for the long post, but I want to be thorough so you guys have what you need to help me. I am 24, and in the Marine Corps. I have several goals for the next few years, and am not sure I’m going about them the right way. My monthly income is 4,350 after taxes and a 10% contribution to my TSP (a Roth IRA). Annual is 52,200. My monthly bills come out to about 1,145, but I would say I spend an extra 900 or so on gas, food, entertainment, and other expenses. I’m putting away about 2,000 a month into my savings account right now. I currently have 12,500 in my savings account, and 7,000 in my TSP. I began contributing to my TSP in June of 2016. I am completely debt free as of this summer, two years out of college. I should be getting a pay raise in July of 2018 by several hundred dollars a month. I should be getting promoted sometime in between July of 2019 and July of 2020, which would be a really significant pay boost.

My goals for 2018 are to have 10,000 for an engagement ring (which is already in my account), to have 10,000 to put down on a brand new 4Runner (aka a Slick Rick Mobile), and to have 10,000 set aside for the wedding (which will likely take place in the fall of 2019).

My goals for 2019 are to have 25,000 set aside for the wedding, meaning saving an additional 15,000 in 2019, and to maintain a 1,000 dollar a month payment for the car that I plan on buying at the end of 2018.

Thinking more long term, I plan on buying a house within a few years. If I get stationed in California next (I could be going out there as soon as September of 2018), the houses are extraordinarily expensive (about 500,000 for a 1500 sq ft, 3 bed 2 bath). I want to put the house on a 15 year note. My girlfriend is also military, so if we’re living out there, we would both be pulling in a Basic Allowance for Housing. That would total over 6,000 a month. Rent would likely be around 1,500 to 2,500 a month anyways, so I don’t think a mortgage would be that much more expensive. We would put the remainder of the 6,000 towards the principal if we did buy, and if we rent, we would save that for a down payment somewhere else. With the VA loan, we would not need anything down to purchase. Not even sure if buying out there makes sense given (my estimate) of the current market.

So question time:

Is my 10% contribution to my TSP enough for retirement? I plan on doing 20 years and getting a pension, but obviously things could change, and I’m concerned that only 10% isn’t going to be enough. My girlfriend probably won’t stay in for 20, but she is contributing to her TSP (10% as well) and if she gets out, she is looking at going to dental school.

If my TSP is not enough, what else should I look into? A traditional IRA? Stocks? Blood Diamonds? - I’m aware that I’m having an awful lot of cash sitting around in a savings account that isn’t making me any money, but I’m planning on spending it soon (within a year of me getting it). It is okay to let it sit there right?

Am I going about accomplishing all these things the right way? Really, if you’ve got any suggestions for me, please feel free.

Thanks in advance, I’ve seen you guys help other people out with some really great advice, so I hope you can do the same for me!
Post Sun Dec 31, 2017 9:17 pm
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oldguy
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I'm a retired Defense Engineer. (Lots of trips to the bombing ranges at Eglin AFB, FL).

In the 1980s Reagan went all out to build up the Military, Defense contractors were hiring like crazy. I see that same thing being repeated with Pres Trump. (Boeing, Raytheon, Lockheed, all are hiring) So if you decide to go CS some day, the Defense Contractors will love you, they select retired pilots for customer interface jobs - field rep on bomb missions, witnessing load crews, validating results, overseeing/scoring hits/misses.

House. If you can, hold off on CA real estate, as you know you can spend $500k on a older, tiny house. And if you are not certain of a time-horizon of over 5 years there, you could lose a lot when you sell - RE commission, title fees, etc - several $1000 , it will eat up most of your market gains. Later, if you are sent to a Base in fly-over country, houses will be less than half the cost. (I used to own some rental houses near an AFB, my best tenants were military).
But if you buy, get a 30 year fixed rate loan, make a minimal 'down' and DON'T prepay any principal.

The Toyota is a good choice - don't tie up a bunch of your money in a down payment, make a min 'down' and pay for 60 month. (We have a 2017, the interest is about 2% - meanwhile our money is sitting in the SP500 Index earning over 11%/yr). Again,don't tie up your capital in equity, use your money to build wealth (rather than letting sit idle in house equity).

Wealth. An important thing to grasp is to put your income stream to it's highest and best use. Don't let it sit in savings accounts, don't spent it on prepaying cars, and don't spend it on prepaying mortgages - instead, place it where it will make money. Eg, if you put $5000/year into an 11%/yr investment, it will grow to over $1,050,000 in 30 yrs, (Or, $10k/yr is $2M, $15M is $3M, and so on). If you kept up your $2000/m for 30 years, you would have about $6.6 m.
It doesn't matter too much what account you use your monthly investment as long as you use an 11%/yr item. Ie, the $6m can be in your TSP account, a brokerage account, a Roth, a Traditional IRA, or in some of each (those accounts get different TAX treatment - but $6m is $6m no matter where you keep it.
Post Sun Dec 31, 2017 11:26 pm
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BendegitBran
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Thanks for the thorough reply!

I have a few questions for you. I've been thinking that if I rent for about 2,000 in CA, I could put the remaining 4,000 of our BAH in an account. We would do that for 3-5 years and would be able to put a big down payment on a house if we were staying in California. It seems like you're saying that isn't worth it. Correct?

Also, if I get a 30 year not, wouldn't I end up paying about 3 times the amount of the house over time? Meaning a 400k house would end up being 1.2M at the end of the 30 years?

Do you think there's anything to be said for the security of having equity in a home (and maybe a vehicle) and getting it paid off quickly so that you can live debt free again sooner?

Thanks for all the advice as I'm trying to get all this sorted out!
Post Mon Jan 01, 2018 4:23 am
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oldguy
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quote:
Do you think there's anything to be said for the security of having equity in a home (and maybe a vehicle) and getting it paid off quickly so that you can live debt free again sooner?


No, the opposite is true. But it depends on your money skills and your math skills. When I was your age and just starting out as an engineer, I did what society calls the 'right thing', paid off car, no cc debt , etc.

Then we bought a house, then a rental, then carefully added to the rentals. And we were still prepaying, putting our money into house equity. (This before 401k, IRA, Roth, etc, were invented).
After getting a couple of our houses paid off, I realized that our Return on Equity went down, rather than up. Did the math, refinanced our houses - at one point we had 6 loans on 4 houses. The money that we borrowed went into the stock market. Continually refi'd the houses for 35 years.

Here is an example of the math. Say a house had built up some equity - I would refi and remove $50k. That extra $50k, 30-year loan costs about $270/m for 30 yrs, ie almost $100,000. I put the $50k in the SP500 Index (longterm average of 11%/yr) and let it grow to $1,150,000 in 30 yr.

As you said, I paid double for the use of $50k over a 30 year period - but I used the $50k to earn a million more.

So I never left my capital setting idle in house equity, I cashed out my available equity and put it to work elsewhere. And that's how you build wealth.

As for "debt-free security" - consider this hypothetical choice.
1. You have $100k in savings and you owe $100k on your house. You lose your job. OK, you take $600/m from savings for the mortgage and about $1000/m for food & gas. And go job hunting. The $100k savings would last about 5 years.
2. You took your $100k savings and paid off the $100k loan, you are 'debt-free'. You lose your job.
No house payment, but you have no money - no food, no gas, the job hunt is now an emergency. You can't refi the house cuz you have no income - you can't get a signature loan, maybe you can live off your credit cards? Or sell the car? Or sell the house quick at a discount?

The point is - is 'debt-free' really a good idea? If you are an out-of-control, instant gratification person (who has to freeze credit cards in ice cubes to control their spending) - then, yes, debt free is good. But if you are a grown-up who is trying to understand wealth, debt is an important tool. You obviously are the latter - you are analyzing money and money growth.[/quote]
Post Mon Jan 01, 2018 3:45 pm
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GardenCat
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Old Guy has good advice. Putting your money to its best use is the best for long term AND short term thinking... and investing (NOT "saving") for your future.

Just some somewhat contrarian ideas...

Wedding Ring - yeah beautiful diamonds are nice BUT take a look at rings from a jeweler who really knows stones and jewelry. IMHO a new diamond ring for $10K is throwing good money away. We found a beautiful ring with the main stone a great Ruby with small diamonds around it, less than $1000!! That $10K for a ring could be used for "best use" of your money - investment!

Brand new 4-Runner - yeah it is nice but again, a two year old vehicle, maybe not even such a 'hot' vehicle, will put you out much less $$. The minute you drive a brand new vehicle off the lot it is worth probably 25% less than you just promised to pay for it! Find a great condition 2-3 year old vehicle and have it thoroughly checked out by a trusted mechanic. You will end up with a great vehicle and probably have the same payment terms as going new.

Banking - Try to find a good Credit Union near where you will be living and make that your main bank. Loans will usually be cheaper rates, checking accts will probably be free, it is easier to develop a solid relationship with the managers...

Wedding - again, you can save considerable $$$ by toning down whatever you are planning for. You don't really NEED a huge, elaborate extravaganza unless you just like spending money for some instant gratification... Try to keep it personal and local and put the savings into your investments for your future - you will appreciate it later!

I don't mean to be a downer, just some advice from having lived through what you are beginning on and knowing how we managed to make a good and stable life for ourselves!

Best wishes and good luck on all...
Post Mon Jan 01, 2018 11:50 pm
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BendegitBran
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Thanks a lot for the advice you guys. I have a lot of learning to do to try to and figure out what a more realistic range is dollar wise for these events/purchases, and I'll take everything you're saying into account as I try to educate myself further on all of this.

Cheers!
Post Tue Jan 02, 2018 3:38 am
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boatswain2PA
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Ben - Oldguy gives good advice, but I generally disagree with a lot of it!

His strategy makes mathematical sense: Borrow money (for your Toyota, house, or anything else) at a low interest rate, meanwhile take he money you have and invest it at a higher interest rate. Who wouldn't borrow money at 4% and make 10% on it!

What his strategy doesn't include is human nature and RISK.

You're a Marine, you know about risk management. While Trump is VERY pro-military, about 40% of the nation wants him impeached for collusion, or calling Haiti a $hithole....or something. Worse yet, about 49% of the Senate wants him removed (not including Republicans). What's going to happen if the Repubs lose the house this year, then Trump (and Pence) are impeached? Pelosi is the President and the military trades in their M-4's for solar powered vehicles. Suddenly you are out of a job with a crapload of debt.....

Human nature also gets in the way. With OldGuy's all-American high-debt strategy, you can "leverage" your debt to get a better long-term outcome (assuming the risk works out for you). Unfortunately most American's don't have the discipline to leverage that debt for long-term outcomes, and instead leverage that debt for short-term benefits. Instead of taking the money and investing it, most Americans spend it on something. Or worse, they look at their monthly income and say "I can afford another payment", so get something else.

I did the same thing for many years, including through my 20 year military career. Retired broke (TSP came out little before I retired) and in ENORMOUS debt from leveraging debt for real estate. Seemed like I was always broke! Few years ago I realized I was paying almost $20K in INTEREST every year and was shocked. Since then I have worked HARD to get OUT of debt, even payed off the mortgage. Still got a ways to go, but I can't tell you how great it feels as I get closer to no debt at all.

Regarding buying a new car - vehicles ALWAYS go down in value. You buy a 2018 4-runner for $38,000 and, even with $10K down, you will likely have ZERO wealth in that vehicle in 1 year. Congrats Jarhead, you just LOST $10,000 in WEALTH (defined as the value of what you own minus what you owe). Terrible idea. Buy a 2010 4-runner for $15,000, for CASH, and you will save yourself a $hitton of money.

Regarding buying a house in the military - generally a bad idea. It costs you 1-4% in closing costs to buy the house, then 4-8% in closing costs to sell the house. That's 5-10% of the cost of the house you will pay just to buy & sell it. Add in maintenance costs & such and buying/selling a house every 2-4 years (when most military move) and you wind up losing money buying.

My suggestion: 1) Fully fund your ROTH, then increase your retirement to 15%. 2) $10K for an engagement ring is a LOT. You can get an amazing ring for 25% of that. 3) BUY A USED CAR. 4) RENT as long as your are in the military (unless you are AF....for some reason lots of those guys stay in the same place for DECADES!).

Thank you for your service, and stay safe.
Post Fri Jan 19, 2018 3:16 am
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oldguy
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quote:
What his strategy doesn't include is human nature and RISK.


'Boat' makes a couple good points.
1. 'Human nature' has driven millions of people to spend their income stream on trendy stuff - 3000 foot homes with 3 car garages, tow or three late-model cars, several monthly costs - ie, lawn service, house cleaners, cable, satellite, gym, laundry, convenience foods. When I was growing up (WW2) most of those things weren't even invented - no attached garage, no garage door opener, no fast food, no TV. The result has been an entire generation (Boomers) that are approaching retirement age but they have only a few $100,000 saved.

But the key isn't to avoid having those things (I have them), the key is to direct your income stream to the highest and best use so that you can do BOTH - ie, build wealth, have fun, and own all of the fun stuff, it's not an 'either/or' choice. Consider someone making the US average income, $58k/yr. They should be able to save/invest $500/m. If they "saved" $500/m for 35 years they would have $210,000. If they 'invested' that $500/m at 11%/yr they would have $2,500,000. BIG difference for the same $500/m input.

And as 'Boat' says most people don't do that, human nature, "I want a McMansion NOW". lol So there aren't that many millionaires. But you can have both - as long as you ALWAYS prioritize the $500/m. First, you pay your $500/m, then you can spend all the rest of your income stream on whatever you want - car, house, ATV, yada.

2. Risk. Yes, you need to learn risk management and risk mitigation. The Law of investing - risk and return are directly proportional. If you are risk averse, you must use CDs and savings accounts, they pay about 1% and they are risk free. Or, if you want an 8% or 10% return, you need to learn to accept and manage a 10% risk. (As a pilot, a major part of your job is risk management, so you know the drill).
When I was a young engineer, one of my early assignments was on the lunar project, Apollo. We did the risk statistics on every single part - transistor, resistor, capacitor, bolt, screw, etc. Compiled that into each sub-assembly probability of success , multiplied that up to the module-level, and finally up to the 'bird' level. But then comes a problem - what is an acceptable answer? Is a 0.9 probability of success OK? Or does it need to be 0.99? Or 0.999? Or 0.9999? Even if the answer is 1 in 10,000 that it will fail and kill all astronauts, no one wants to hear it or call it 'good enough'. You don't want to think of a crew stuck in lunar orbit until death.

quote:
What's going to happen if the Repubs lose the house this year, then Trump (and Pence) are impeached? Pelosi is the President and the military trades in their M-4's for solar powered vehicles. Suddenly you are out of a job with a crapload of debt.....


lol - that makes the phrase "May you live in interesting times" sound trivial. OTOH, that's why humans were given management skills, we can manage our way around those obstacles.
Post Fri Jan 19, 2018 4:32 pm
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