| Just turned 30, not sure what to do with my money |
|
|
|
|
|
SyZ
Contributing Member
Cash: $ 8.55
Posts: 42
Joined: 01 Nov 2014
|
| Just turned 30, not sure what to do with my money |
 |
|
Currently, I earn $46k a year and am looking at around a 6-9% increase in January. I put 7% into my company's 401k, which matches 75% up to 5% -> 10.75% of my income is being put into a 401k
I have 35k total debt, consisting of 28k student loans and 7k in a car loan. The student loans range from 2.8% to 6.8%, and the car loan is 1.95%. My current credit rating is considered 'excellent' by Credit Karma
I'm not in my field, and if I move in to it I might see higher pay, but that's not a guarantee and at this point I need to invest more time into my current profession to learn the business
I'm 18 months into a relationship and uncertain about the future. We're not sure about children, and to be honest I don't think I'm cut out to be a father (she's aware of this). I really don't want to work forever, and I'm not sure if locking myself into a mortgage is the right call
I can't figure out what I should do at this point, and which of these options is best:
1) Aggressively pay off that debt, so that I'm not a slave to monthly payments and interest. I could probably get it gone by 33, and then have no liabilities. At this point I would aggressively invest a large portion of my income (20%? 30%?) with the goal of growing my wealth for early retirement / moving somewhere cheap and buying a house in my 50s to live out my days
2) Make monthly payments on the debt and aggressively invest in the stock market by myself / use an index fund manager / somebody else more qualified than me with the same goal as 1)
3) Make monthly payments on the debt and save for a down payment on a house somewhere (I think this is the worst option, people tell me it's the best option)
4) Aggressively pay off the debt and then do whatever I want with my money since I have financial freedom. Want a new Jag at 40? Sure. Want to drop $5k in Vegas? No problem. (Actually, this is probably the worst option)
|
Sun Nov 16, 2014 10:11 pm |
|
|
Wino
Senior Member
Cash: $ 113.80
Posts: 560
Joined: 03 Aug 2012
Location: Dubai
|
|
|
|
First off, you are single, and probably don't need three years to pay off your debt. Drop the contribution to the 401K to the match level (5% = 8.75%), and use that other money to first pay off the student loan or the car, then aggressively attack the other loan. If you can scrape up $2000 per month, you can pay off both loans in about 2 years. Is it hard? Yes. Is it impossible? No.
I suggest paying off the student loan first, as it is not bankruptable.
Once your loans are paid off, continue to put 5% into the 401K, and start to put 15% into a good mutual fund. Vanguard, TRowe Price, and Fidelity all have good programs that you can set up online. You can get "live" help from all of them. The entire process will be done within a few days.
As to where to put the money, index funds are probably your best bet. I like the S&P500 and the total stock market indices, but where you put it is up to your risk profile. At your age, stay away from "income" funds and lean toward "growth" funds.
Good luck, whatever you decide to do.
|
|
Sun Nov 16, 2014 10:45 pm |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
|
|
|
You mention 'pay off the debt', "debt free", "financial freedom". You should reconsider your concept of 'debt' - most people who are wealthy did it by leveraging, or pyramiding, borrowed capital.
Eg, if you wanted 4 or 5 rental houses but used a pay-as-you-go plan, you would spend maybe 15 yrs paying off #1, a decade on #2, a decade on #3, a decade on #4 - ie you'd be very old even if your plan went w/o a hitch. Conversely, you could put a DP on #1, let it grow a few yrs, refi it, and use the money for DP's on #2 & #3, wait another yr or two, refi one of them and make DP's on #4 & #5. (Not saying buy rentals, just giving you an eg of leverage).
So, rather than use your capital to prepay $35k of low-rate debt, put that capital to work building wealth. $35K placed at 11%/yr for 30yrs = $800,000. That is far better use of $35k than retiring a few small debts. (If I recall, one loan is at <2% - you NEVER prepay 2% capital.)
You might like this site -
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
Check out a few 30-year-blocks, most average about 11%/yr.
|
|
Sun Nov 16, 2014 11:25 pm |
|
|
littleroc02us
Moderator
Cash: $ 384.35
Posts: 1891
Joined: 09 Feb 2009
|
|
|
|
I personally did #1 myself. We worked to pay all of our school loans off, car loans and cc debts and a lot of our mortgage. As you stated it gave us more financial freedom. Most people I know are broke, but drive fancy 30k to 40k in cars, have a large mortgage and tons of cc debt. These are the type of people you think are doing great, but in reality their broke and have no savings or investments.
Because my wife paid off all of our debts we have a lot of disposable income to buy rental properties with, invest with, donate and save. Having payments is a bad way to increase the risk in your life. As Old guy says, most people leverage and borrow their way to being wealthy, but the majority of people who try that method took to much risk and lost it all and never became wealthy.
Read the book "The Millionaire Next Door" and you'll see that most self made millionaires live modestly in their homes, they drive 3 to 5 year old cars, they use credit cards limitedly and not for the miles and they save up to pay for things.
Pay off your debt and if when that happens your not happy, go out and get yourself some debt.
Risk comes from not knowing what you're doing. (Warren Buffet)
|
|
Mon Nov 17, 2014 9:18 pm |
|
|
SyZ
Contributing Member
Cash: $ 8.55
Posts: 42
Joined: 01 Nov 2014
|
I understand wanting to take on debt in the form of a mortgage, especially if you're going to use it as rental income, but how is this going to be possible while still having other debts? $400 currently in student loans, $200 in my car loan, $100 in insurance, $40 in my cell phone, we're looking at $740 before a mortage. First, I'd have to save $50-60k in a down payment, then after using that all (in today's market) I'd only be able to afford a triple digit mortgage (using homes.com calculator)
And I would literally be a slave to debt, with minimal spending money if any. What would my quality of life be?
How much better would this be than if I were to get out of my debts first, then have freedom to grow my wealth without worry that if I lose $2k in a month in the market I won't end up on the streets?
|
|
Tue Nov 18, 2014 3:47 am |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
quote:
but how is this going to be possible while still having other debts? $400 currently in student loans, $200 in my car loan, $100 in insurance, $40 in my cell phone, we're looking at $740 before a mortgage
It's a hard concept to grasp - most people intuitively jump to being debt-free before starting their wealth-building.
Think of your income stream as a finite flow of money that you need to direct to its highest and best use.
In your case you are considering directing $35k to prepay low-cost debt. (That means that you are taking $35k away from something else). So - what does that mean to your longterm wealth? $35k at 11%/yr for 30 yrs is $801,000.
Remember, you are going to pay that $35k debt - just not PREpay it, use that capital to build wealth. (I'm already wealthy - but I'll borrow 1.9% capital any time it's offered to me - and invest it elsewhere)
|
|
Tue Nov 18, 2014 2:59 pm |
|
|
littleroc02us
Moderator
Cash: $ 384.35
Posts: 1891
Joined: 09 Feb 2009
|
Syz, what Oldguy is saying is true in regards to investing, but what he isn't calculating for is risk. In the time that your taking to pay off the debt which could be two years or it could be three years and the market could tank like it did in 2008 and 2009 and during that time you could lose 35% of your money. Personally I'd rather have my debt cleaned up and then fire on all cylinders at investing for great wealth. Believe me it works. My wife and I have paid off our debts and are building up our networth to the point where when we retire we can do anything we want.
Risk comes from not knowing what you're doing. (Warren Buffet)
|
|
Tue Nov 18, 2014 4:08 pm |
|
|
SyZ
Contributing Member
Cash: $ 8.55
Posts: 42
Joined: 01 Nov 2014
|
|
|
|
So I met with our financial guy at work who is not based on commission, and this is what he recommended based on my input and my thoughts:
1) Up my 7% in my 401k to 15%, and forget about investing outside of this for now. In six months when I have a larger nest egg, we'll re-allocate where everything is (currently 70% in a premixed 2050 retirement fund, and 5% each in small / medium / large / 3 other ranges). This amounts to about a $250 a month increase
2) Keep my student loans non-consolidated, and pay off $500 more than the minimum each month on the loan (of the 7 total I have) that currently has the highest interest. This will be easy as each month when I pay my loans I have $0 interest, and it starts accruing for the month (not sure if this is a special type of loan or what the issue is, but this is how mine work). Essentially, whichever loan of the 7 is giving me the largest amount of interest each month, put the $500 extra towards that
3) Pay the minimum on my car loan forever
4) Keep the rest in my savings account until I have 3 months income saved
5) At this point, start putting a little more than $500 each month towards the loans, making sure I'm not dipping into that nest egg
6) When the student loans are paid off, we'll re-examine how I will save / invest into real estate / my first home, at which point I will be either 32 or 33 and out of debt (my car loan matures early 2018)
What are the actual numbers?
Currently, I bring home about $1325 every 2 weeks (28 days), so we'll adjust for 30 days --> 1325 / 14 * 30 = $2840 a month
All my current liabilities (outside car insurance) are covered by half that. Taking away $250 for the added money into the 401k, and $500 to the student loans, that still leaves me with well over $500 a month unaccounted for, which will go towards the next egg
Thoughts?
|
|
Thu Nov 20, 2014 7:25 am |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
|
|
|
quote:
3) Pay the minimum on my car loan forever
Excellent - like I said before, you don't prepay <2% capital.
quote:
Up my 7% in my 401k to 15%, and forget about investing outside of this for now.
I would caution you not to 'divide' your 401k from the rest of your life - 2 million dollars is 2 million dollars, doesn't matter a lot whether you have $1M inside a 401k and $1M in a taxable fund. You pay tax on all of the fund-types - ie, the 401k, the Roth, the taxable account. They are taxed differently - but it's not a major issue.
But your $8625/yr is great whether you split your investing accounts or keep it in the 401k. Your $8625/yr, invested at 11%/yr, will be $1,905,000 when you are age 60. (That is not counting what you already have - eg, if you have $25k now, that will add $550,000 to the $1.9M at age 60). With that info, you can adjust your investing to hit a goal - eg, if you double the $8625/yr, that will double the $1.9M to $3.8M.
Personally, I wouldn't prepay the 2.8% SL - in any case, don't do anything that would cause you to derail your $1.9M plan. Don't blow your income stream on retiring low-cost debt at the expense of building wealth.
|
|
Thu Nov 20, 2014 4:29 pm |
|
|
Wino
Senior Member
Cash: $ 113.80
Posts: 560
Joined: 03 Aug 2012
Location: Dubai
|
|
|
|
quote:
Up my 7% in my 401k to 15%
What are the options in your 401K plan? Often, the options are not very good, so before telling you to put the money here, I'd expect the advisor to tell you which funds to select. Likewise, the tax advantage is only there IF you pay a lower rate upon withdrawal than upon deposit. You would likely be better off in a Roth IRA for tax purposes, especially now while you are paying so little in taxes.
His "wait for 6 months to reallocate" also doesn't make sense within a 401K. You should be in the most aggressive funds you can find at the age of 30. Unless he has some crystal ball that says the market is going to tank in 6 months - which has been predicted for at least two years during 40% increases - then telling you to wait doesn't make any sense at all. Also, using mixed funds or even the 2050 fund just doesn't make sense to me, again because you are 30 years old. This approach will likely cost you a lot of money at the tail end.
quote:
Keep my student loans non-consolidated, and pay off $500 more than the minimum each month on the loan
You can only consolidate a school loan one time, ever, and they never go away, so I agree with the suggestion to pay them off early. These are a curse, not a blessing, no matter what the interest rate.
quote:
Pay the minimum on my car loan forever
Yeah. Great idea (NOT). The best time to have your car repossessed is two months after you lose your job, by this reasoning. Pay off the car, regardless of the interest rate you are paying. You should aim to be debt free, and to insulate yourself from real-world calamities. If you plan for optimistic outcomes, you're going to get burnt, eventually.
quote:
Keep the rest in my savings account until I have 3 months income saved
Three month's income? Is that some arbitrary figure he made up? Look at your expenses, and come up with 6 months to a year of what it would take you to live, and put it into a taxable mutual fund. Put maybe two month's expenses into a savings or money market account. It takes only a couple of days to get money out of a mutual fund, so two month's of expenses earning nearly zero in a savings account is more than sufficient. If you keep a credit card at zero balance, then just $1000 would be sufficient to tide you over until you can get to the money in the mutual fund. I still don't understand people who suggest you keep money in a savings account so it is readily accessible. I cannot come up with any reason why one would need 6 month's worth of money available in two hours.
Overall, the advice you got was good. I know it sounds like I'm slamming the advisor, but I definitely disagree with the details of the strategy. You need to learn a phrase, and repeat it: "There is no such thing as 'good debt.'"
|
|
Thu Nov 20, 2014 11:58 pm |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
wino, I agree with your comments - except this one.
quote:
Yeah. Great idea (NOT). The best time to have your car repossessed is two months after you lose your job, by this reasoning. Pay off the car, regardless of the interest rate you are paying.
You're forgetting that money is a finite commodity - if you pay off the car that money came from somewhere. So, in your scenario when he loses his job he will have $7000 less available in the bank. That $7000 would have made the$200/m car payments for 3 years, or would have bought gas, rent, & food while he job-hunted. Personally I would want to retain control of the $7000, especially since he is paying only 1.9%.
|
|
Fri Nov 21, 2014 2:05 am |
|
|
Wino
Senior Member
Cash: $ 113.80
Posts: 560
Joined: 03 Aug 2012
Location: Dubai
|
|
|
|
The risk side of your plan has been debated here several times. You aren't going to change, and I'm not going to change. Once he has money in the bank to cover his bills - a situation he is not yet in; he does not have the $7000 you have magically bestowed unto him - then he may want to try your strategy. Until the money is there to be invested, he has only the debt and no investment capital.
You suggest he keep debt and invest the money that he does not have. I suggest he eliminate the debt, then WHEN he has money, he can use leverage to finance his investments. That's twice as risky as merely the investment itself, so I would still advocate against it. Right now, though, it isn't even an option. He has only a car which he cannot use for investment, and the debt attached to the car. Future funds can either be applied to investing which may lose money, or to paying off the debt which guarantees a 1.9% return. He cannot do both simultaneously.
If the market continues its 5 year bull run, then the leveraged-investing option would be the best choice. If the market has a pull back, then the car pay off would be the best choice. Without a crystal ball, the answer won't be known until after the market has already changed. As no one knows the direction the market will go, I suggest the OP go with the guaranteed low return. He is still investing some surplus funds, so he will get some benefit with an up market, instead of a double hit while he still has bills due.
|
|
Fri Nov 21, 2014 2:28 am |
|
|
SyZ
Contributing Member
Cash: $ 8.55
Posts: 42
Joined: 01 Nov 2014
|
|
|
|
Lots of responses so I'll try address everything
- The three months income was a figure we came up with based on how much I feel I would need just for some peace of mind, not even really factoring in job loss. I have fairly good job security, and if I lost it unemployment alone would take care of my rent + most of my bills. The number should probably change (I've heard 6 months income is best), but either way, I'm not at that. The main goal of that plan is to jumpstart where I want to be - currently I have 3/4 of a month's income saved. Whether I stop at 3, 6, 12, I'm currently only at 3/4 so it's easily changeable
2) Not sure what options you mean - options as in stock options, or options as in choices? It's 70% in a 2050 retirement fund which is by default fairly aggressive as it's 35 years out. 5% each in small, medium, large cap. 5% in my company (top 3 insurance company). 5% in two other categories I can't remember, I believe one is international markets
3) The ultimate, paramount goal here is to be able to retire early, safely, and with more than enough money to live - so if I need to delay owning a home for a few years in order to grow the 401k while I'm still young and compound interest can do its thing, that's what I want
4) A better idea for the 2.8% loans is to not pay them down immediately and treat it like the 1.95% loan? But the 1.9% matures in 2018 so I'll need to pay it off, the 2.8%s mature in 2022 and that's a lot of lost interest when you consider the only thing I'd be doing with my money at that time is saving for real estate (because at that time, the only loans I have left are my 2.8% student loans)
|
|
Sun Nov 23, 2014 11:07 pm |
|
|
oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
|
|
|
|
quote:
But the 1.9% matures in 2018 so I'll need to pay it off, the 2.8%s mature in 2022 and that's a lot of lost interest
You are missing the concept - the money isn't "lost to interest", is paying for the 'time value of money'.
Here is a example - I refi a rental house and add $50,000 to the mortgage for 30 yrs. I invest that $50,000 in an index fund that averages 11%/yr and leave it for 30 yrs. That is $1,140,000. My cost is $268/m (@5%), $96,600 total. So I'm paying $46,600 for the use of that $50,000 for 30 years. "lost to interest?" It's well worth spending $47k to build a million dollar fund.
I like your 2.8% loan better than the 1.9% loan because it's longer - I look for loans that are "long & low", the 30 yr real estate loans are especially good - but I also invest 5 yr car loans.
Your 2050 Target Fund is a great choice. But you should put 100% into it (rather than 70%), it is already allocated for your goals - it has the small,mid, big caps, the international, etc, already included. So you are confounding that allocation by breaking out 30% and adding it to the allocations that you already have. 
|
|
Mon Nov 24, 2014 2:50 am |
|
|
Wino
Senior Member
Cash: $ 113.80
Posts: 560
Joined: 03 Aug 2012
Location: Dubai
|
|
|
|
quote:
Originally posted by SyZ
The three months income was a figure we came up with based on how much I feel I would need just for some peace of mind
Three months' worth of income should be sufficient for this. Where is the money kept? Most folks recommend a money market, but I think this is a wasted opportunity. This money is for unforeseen large problems, of which there are relatively few in life. I suggest some type of mutual fund, with maybe $5,000 in a savings account. If you have a credit card with zero balance, then I'd suggest you drop the $5K down to maybe $2K or $3K. You pull the money out of the mutual fund (not a 401K, IRA, or Roth IRA) that is not a retirement fund.
quote:
Originally posted by SyZ
It's 70% in a 2050 retirement fund which is by default fairly aggressive as it's 35 years out. 5% each in small, medium, large cap. 5% in my company (top 3 insurance company). 5% in two other categories I can't remember, I believe one is international markets
I go with oldguy on this. Put everything into the 2050 fund (unless they have a 2060 or 2070 fund). You should be as aggressive as you can while young and contributing. Even if there is a drop in the market, you will be buying more cheaply during that time. When the market recovers, your money that bought during the downturn grows even more than the money pre-downturn.
One other item: Don't keep money in your company's stock. If they go bankrupt, you lose your job and your investment simultaneously. Invest in a competitor if you like the industry, but don't put all of your eggs in one basket. You would be better off with the 2050 or an S&P500 fund.
quote:
Originally posted by SyZ
The ultimate, paramount goal here is to be able to retire early, safely, and with more than enough money to live - so if I need to delay owning a home for a few years in order to grow the 401k while I'm still young and compound interest can do its thing, that's what I want
Owning a house is not contradictory to your goals. The best thing about owning your house is that you buy it with today's money at today's prices. If inflation hits, home prices will go up, and so will your rent A fixed 3.5% interest rate loan means your house payment remains the same. Foregoing a house for a 401K is not a smart move. Whether you use oldguy's method to leverage your investments with your house is up to you. I happen to think that oldguy's method is a very good idea for a second/rental house. I just don't want to risk my main residence for such a plan.
quote:
Originally posted by SyZ
A better idea for the 2.8% loans is to not pay them down immediately and treat it like the 1.95% loan? But the 1.9% matures in 2018 so I'll need to pay it off, the 2.8%s mature in 2022 and that's a lot of lost interest when you consider the only thing I'd be doing with my money at that time is saving for real estate (because at that time, the only loans I have left are my 2.8% student loans)
Student loan debts are like luggage and herpes: They never go away, and they just get uglier the longer they're around. You need to pay off those loans as soon as you can. Even oldguy's method does not make sense with these loans, because they are a permanent problem while you still owe on them. You need to get this albatross out of your life as soon as you can.
|
|
Mon Nov 24, 2014 4:09 am |
|
|
|
