| Just turned 30, not sure what to do with my money |
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oldguy
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quote:
You need to get this albatross out of your life as soon as you can.
LOL - too bad there isn't a way to transfer it, those "albatrosses" have been nice money-makers for me over the past 40 years.
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Mon Nov 24, 2014 2:54 pm |
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SyZ
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First, here's a link to the 2050 fund and what it consists of:
http://i.imgur.com/RhSskGA.png
I'm sure you guys understand what that means more than me
Second, I'm still a little confused on the 35k debt versus 35k capital. One of the arguments is that I can leverage the fact I owe 35k and rather than pay the 35k, use it for other investments, either the stock market, real estate, whatever
But then doesn't this logic fall apart, when I'm saving up money for a down payment? If I'm saving up 60k (townhomes in my area are 300k = /) for a 20% down payment, that's 60k earning nothing in the bank whereas I could be investing it and renting in the meantime
My three months income is my Wells Fargo checking account. My credit card has a $0 balance and a $4,800 limit. Where do I go to 'put the money in a mutual fund?' And this is liquid enough that if I need $1,500 one day for some random emergency I can quickly take it out?
I was actually thinking of dropping the 5% in the company stock, even though it's gone up 4% this year ^_^, insurance is not a good field to invest in ...
If I do end up saving for a down payment, that has to come after the debt is taken care of, so real decisions regarding that won't even come for a few years .. right?
With regard to how quickly I can pay off this debt, two years seems unrealistic. 45k is only 90k in two years, gross, and that has to include EVERYTHING
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Tue Nov 25, 2014 4:25 am |
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Wino
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quote:
Originally posted by SyZ
First, here's a link to the 2050 fund and what it consists of:
It basically says it is somewhat aggressive in 75%, and very conservative in the other 25%. I think that at 35 you should be more aggressive, but that is your call. How would you react if your account value dropped 25% in one year? Would you want to pull the money out to make it safer, or would you want to buy more while the price is low? Or, would it be somewhere in the middle? The mix now is "somewhere in the middle." In my case, I'd be in the "buy as much as you can while it's cheap!" category.
quote:
Originally posted by SyZ
Second, I'm still a little confused on the 35k debt versus 35k capital. One of the arguments is that I can leverage the fact I owe 35k and rather than pay the 35k, use it for other investments, either the stock market, real estate, whatever
But then doesn't this logic fall apart, when I'm saving up money for a down payment? If I'm saving up 60k (townhomes in my area are 300k = /) for a 20% down payment, that's 60k earning nothing in the bank whereas I could be investing it and renting in the meantime
I don't suggest you ever save in a savings account. Put the money in a good fund. We seem to always suggest the S&P 500 as your starter fund. The S&P 500 suggestion is basically saying, "Invest in the best 500 companies in the US, with the understanding that they will lead the economy, and over time, the US economy tends to grow about 7% per year after inflation. Your money should see similar gains if you leave it there for 30 years." NOTHING is guaranteed, but this is the past performance.
The $35K invested and borrowed is the point of contention that oldguy and I always seem to be arguing. Oldguy contends that borrowing money at 5% or less, and investing it at (historically) 8% to 11% is mathematically the best way to go. Mathematically, this is correct. What it suggests is that you can afford to leave the money in the investment and cover all problems and downturns that might occur over time. This is the "risk" that I always point out. Basically, if you end up one of the 10 or 15% of the people who have severe problems (medical, accidents, emotional, whatever), then using oldguy's method can lead to bankruptcy. If you're part of the large majority, then his method will gain you more money over time.
I am in the other camp. I suggest you pay off your debt, then save the 20%. All the while, you should be getting at least the match from your employer in your 401K. Once you have the 20%, buy your house at a level no more than 28% of your pay (PITI - principle, interest, taxes, and insurance). Continue to invest in the 401K at the match level at a minimum, and also set aside AT LEAST 15% (total, including the 5% your employer matches) into a retirement account. This means you won't get as good a house, but many folks in nice houses are "house poor;" they cannot afford anything except the house payment.
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Originally posted by SyZ
My three months income is my Wells Fargo checking account. My credit card has a $0 balance and a $4,800 limit. Where do I go to 'put the money in a mutual fund?' And this is liquid enough that if I need $1,500 one day for some random emergency I can quickly take it out?
I would take that money and move it to Vanguard. Put it into any equity (stock) fund you like. I hate to say that right now, as the market is overdue for a correction (drop), but it's been overdue for over 2 years, so your choice is to get into mutual funds or not. Just be aware that you might lose value temporarily if there is a correction. Don't let this discourage you. Build the value back up (invest more into the fund while the price is low) while the market is down, and over time it will grow. It takes no more than a week to get the money out of your mutual fund(s). You should have your bank tied to the account for deposits/fund purchases, so the withdrawal is merely reversing that flow.
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Originally posted by SyZ
I was actually thinking of dropping the 5% in the company stock, even though it's gone up 4% this year ^_^, insurance is not a good field to invest in ...
I've already suggested this. If you want to invest, put it into Vanguard, T Rowe Price, or Fidelity as previously mentioned. You should go to the Vanguard site and start working with an online helper to set up the account. Basically, you just put in your personal information and then tie it to a bank account. You then get two deposits and two withdrawals of very small amounts. You check your account, and tell Vanguard how much the deposits/withdrawals were, and from that point forward, the accounts are linked. You can electronically move money in and out of the mutual funds. If you set up an IRA there, then you have all kinds of penalties if you withdraw, but a non-retirement type of account can be accessed with only normal taxes (capital gains taxes, either short or long term).
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Originally posted by SyZ
If I do end up saving for a down payment, that has to come after the debt is taken care of, so real decisions regarding that won't even come for a few years .. right?
This is totally your decision. Oldguy advocates borrowing everything and investing it (though where "it" comes from while you're making payments is one of our points of contention). I advocate saving up at least 20%, getting a conventional loan, then paying it off. Your house payment should not be so high that you cannot continue to invest in your retirement while still making the house payments, repairs, maintenance, etc., that go with the house.
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Originally posted by SyZ
With regard to how quickly I can pay off this debt, two years seems unrealistic. 45k is only 90k in two years, gross, and that has to include EVERYTHING
"I have 35k total debt"
Where did the other 55K come from?
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Tue Nov 25, 2014 6:10 am |
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oldguy
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That Target Fund seems overly conservative (15% bonds), I would probably switch to your funds SP500 Index Fund if one is available to you. (Most of the 2050 target funds (Vanguard, Fidelity, etc) have nearly in the 100% SP500 Index.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
This site gives you a history of the SP500 returns, check some 30-year blocks of time, most of them are about 11%/yr.
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Second, I'm still a little confused on the 35k debt versus 35k capital. One of the arguments is that I can leverage the fact I owe 35k and rather than pay the 35k, use it for other investments, either the stock market, real estate, whatever
I have a SP500 Index Fund at Vanguard - we use it as an EF, we use it to buy houses, pay for kids' college, etc - the money is available in 2 business days. And it grows tax-deferred, you pay cap gains tax only on tye profit when/if you sell some.
In general, I leave our money invested in that SP500 and I borrow for our needs. Eg, if we needed a $30k car, I could (1) sell $33k, use $3k to pay the taxes and $30k to pay for the car. (2) Instead, I 100% finance the car, zero down payment, and pay about $33k (w/ interest) over 5 yrs. Then I sell th eold car for about $4k and add that to the SP500 - ie, the $33k + the $4k stays invested. On average, it doubles every 7 yrs - so the goal is to double that $37k to $74k in 7 yrs.
In your case, I would not divert $35k of your income stream (over the next 2 or 3 yrs) to debt, I would invest it instead. Same thing with a house DP, I borrow the DPs. I pay the PMI, use 2nd mortgages, etc. Often I refi'd a house to raise the DP for more houses.
As wino says, this carries risk. And yu need some risk - a wage earner cannot "save" their way to wealth (there aren't enough yrs), you must "invest" your way to wealth. The Law of investing - Risk and return are directly proportional. So you must assess risk, mitigate it, and manage it.
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Tue Nov 25, 2014 1:51 pm |
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SyZ
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I'm a little confused on a few things, so I'll try to post everything
Also, happy Turkey day ^^
1) Even the 2055 fund has 13% for that 'inflation hedge' and 12% for bonds, so only 75% stocks. I should move 100% to S&P 500? This should theoretically return 8% yearly?
2) I'm a little confused on this Vanguard mutual fund. I literally just sign up and it takes 100% of my money from my Wells Fargo account (keep in mind this is where my check is direct deposited) and moves it into mutual funds, which I can then take out at will? How easy is it to track my money? How easy is it to move money every two weeks into the account? Sounds like something that would be rife with fees for every withdrawal, deposit, etc.
3) Somebody said I could get out of the debt in 2 years if I put $2,000 a month towards it. I make $45k a year -> $90k in 2 years. I haven't done the math on how much money I lose to taxes, but it's probably around 25%. That leaves me with $67.5k. Not factoring in interest on the $35k, that would be $32.5k over 2 years which would need to include rent, gas, insurance, phone, car payment, spending money. Not sure that's doable
4) Is putting 15% towards my work's 401k really a good idea, given I can't touch it at all? I feel like this is a double edged sword: if disaster strikes randomly in 8 years and I'm in medical debt and can't afford my mortgage and I'm supporting my wife and two kids and nobody is working, it won't really matter that my 401k is doing well. On the other hand, if everything goes well, I would need to be disciplined enough to realize that's for retirement and I can't take it out for a house, I can't take it out for a car, I can't touch it. It's basically a tax that I need to deal with. But what happens if I lose my job or move to a new company? Does the money carry over? If so, there's money in 401ks at 3 other jobs I've worked at and I need to know how to access those or link them
5) Totally random but I thought I'd throw it out there - how feasible is it to have my own home built? Realistically, if I could get a large master, large study/office/jigsaw puzzle room, one bathroom, and the rest, I'd be good to go. If I need to get permits, purchase the land, consult an architect, I can't possibly imagine that would end up being more than the 600k + for 1,500 square foot 3 bedroom 2 bath single family residentials in this area
6) When I purchase a home, everything needs to be < 28% of my income ... how is that possible? I make 45k, the mortgage alone would be almost 40% on a townhome in the area
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Sun Nov 30, 2014 4:56 am |
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Wino
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quote:
Originally posted by SyZ
1) Even the 2055 fund has 13% for that 'inflation hedge' and 12% for bonds, so only 75% stocks. I should move 100% to S&P 500? This should theoretically return 8% yearly?
Not theoretically. It will return whatever it returns, and no one knows how much that will be. Historically - in the past 60 years or so - the S&P 500 has grown by about 6.8% per year after inflation. There is no reason to expect this to change, but there is no guarantee or surety that the fund will go up at all. Some years it will do great. Some years it will lose badly. Over time, it has always made more than it has lost for any significant period of time (15 years or so).
quote:
Originally posted by SyZ
2) I'm a little confused on this Vanguard mutual fund. I literally just sign up and it takes 100% of my money from my Wells Fargo account (keep in mind this is where my check is direct deposited) and moves it into mutual funds, which I can then take out at will? How easy is it to track my money? How easy is it to move money every two weeks into the account? Sounds like something that would be rife with fees for every withdrawal, deposit, etc.
No. You open the account with Vanguard and transfer any amount you want from any account you tie to Vanguard, after they prove you own and control the account. If you have it in a 401K, they'll work with the existing custodian to move the funds directly without fees. You can also set up recurring deposits (like $100 every two weeks, or whatever). I personally do my transfers manually, but that's because I'm organized and this gives me a monthly transaction to view my accounts. You would probably want to set up the automatic transfer.
So, basically, the Vanguard is just another account. Within that account ("those accounts," as you can have a Roth-IRA, a rollover IRA, an after tax mutual fund, etc.), you designate which funds or other vehicles you want your money to go in to. We usually suggest the S&P 500 due to its history of gains and the fact that few managed funds beat the S&P 500 over the long haul.
You can check your funds daily, but there is a limit to how many transactions you can do. It's not a really low number, but if you're constantly making changes, you might hit their limit. I don't know the limit, because I rarely do more than one transaction per month per account.
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Originally posted by SyZ
3) Somebody said I could get out of the debt in 2 years if I put $2,000 a month towards it. I make $45k a year -> $90k in 2 years. I haven't done the math on how much money I lose to taxes, but it's probably around 25%. That leaves me with $67.5k. Not factoring in interest on the $35k, that would be $32.5k over 2 years which would need to include rent, gas, insurance, phone, car payment, spending money. Not sure that's doable
You're over-estimating your taxes. You get a standard deduction of about $6K = $39K. You pay 10% on the first $9K ($900; total now $30K). You pay 15% until you hit about $37K ($4500 = 15% of the remaining $30K). This assumes single, and no 401K or IRA deductions. You'll have roughly $5500 in taxes, so $39K to work with for the year. And you'll get the same amount the next year. This leaves you roughly $3200 per month for expenses and pay back. Maybe $2K is optimistic, but it is doable if you really, really cut back. (I hope you like Ramen noodles, beans, rice, and bread.)
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Originally posted by SyZ
4) Is putting 15% towards my work's 401k really a good idea, given I can't touch it at all?
My crystal ball is broken, so I can't give you an answer to this. I think that 15% toward your 401K while you still have bills is not a good idea. Also, your company fees are probably higher than Vanguard, et al. I suggest you put in enough to get the company match, and once you pay your debt down, you can put more into either the company 401K or personal IRA.
quote:
Originally posted by SyZ
5) Totally random but I thought I'd throw it out there - how feasible is it to have my own home built? Realistically, if I could get a large master, large study/office/jigsaw puzzle room, one bathroom, and the rest, I'd be good to go. If I need to get permits, purchase the land, consult an architect, I can't possibly imagine that would end up being more than the 600k + for 1,500 square foot 3 bedroom 2 bath single family residentials in this area
People do this all the time. I'm looking at $425K for a 2800 sqft house and $200K for the lot. I don't know if I'll do it, but I am researching it, and those numbers seem to be easily obtainable while still getting a quality place in the area I want. Research "Build on your Lot" in your area.
quote:
Originally posted by SyZ
6) When I purchase a home, everything needs to be < 28% of my income ... how is that possible? I make 45k, the mortgage alone would be almost 40% on a townhome in the area
If you're correct on your numbers, then you need to bring up your income, or save up more for a down payment. Twenty-eight is the conservative rate. Realtors want you to spend up to 33% or even 36%. Of course, realtors get paid on sale price, so the more you spend, the more they make. Just remember that when they're telling you how much you can afford. Don't become house poor, which means having a nice house, but nothing else, because the payment is as large as you can handle. Also, you can assume a minimum of 1% of the market value of your house per year in maintenance. Some years it will be more, but some years it will be less. A $400K house will require about $4K per year in maintenance, over time. More accurately, you should set aside $4K per year for house maintenance. Furnaces, roofs, new appliances, etc., aren't cheap, and everything breaks eventually.
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Sun Nov 30, 2014 8:15 am |
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oldguy
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quote:
Is putting 15% towards my work's 401k really a good idea, given I can't touch it at all? I feel like this is a double edged sword: if disaster strikes randomly in 8 years and I'm in medical debt and can't afford my mortgage and I'm supporting my wife and two kids and nobody is working, it won't really matter that my 401k is doing well. On the other hand, if everything goes well, I would need to be disciplined enough to realize that's for retirement and I can't take it out for a house, I can't take it out for a car, I can't touch it.
You are probably over-estimating your disasters - if you plan for disaster you'll probably fail to achieve success - instead, plan for success and learn to manage the actual hiccups that happen to you.
BTW, you can touch your 401k (altho it's a bad idea), you just have to pay a 10% penalty and catchup the unpaid taxes. But you car right, it is mostly irreversible, you should keep a separate 'reversible' fund also. We have a SP500 Index Fund at Vanguard, the cash is available in 2 days - and that is where we would go for disaster money. (the standard 3 mon or 6 mon EF is good for replacing washer/dryers, an auto transmission, yada, but it won't cover the biggies, ie 6 months w/o a job, etc).
The SP500 Index Fund grows tax deferred, you pay the 15% cap gains tax on your profit if/when you sell some - if you don't use it you heirs get it tax-free.
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Sun Nov 30, 2014 5:39 pm |
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SyZ
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Interesting
I'm trying to understand what the purpose of this Vanguard fund is, but, as usual, I have a lot of questions
The first, is the 28% mortgage rate. Now, let's assume in 5 years when I have enough for a down payment, I have no other debt (because, as we've outlined, I won't have student loans and my car loan matures in 2018). We'll assume I get a 6% raise each year (not sure how realistic this is but I'll get my first raise at this company in February and it's been hinted to be 6-9%) -> this puts me at almost exactly 60k income in 5 years
Now, at 60k, I'm probably bringing him around $3,500 take home each month (just doing math in my head for illustration purposes). If my mortgage were 28%, that would be $1,400 each month. (or $980, if we're doing 28% of my net, not gross income. But that can't be right)
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Where else does the bank think I need $2,100 for? I have no other loans, taxes are accounted for, I'm just not understanding why I'm restricted to such a low number when I have $3,500 a month to play with and my mortgage is $1,400
Second, let's address the actual Vanguard fund. My understanding was that this 15% I put in my 401k at work would be my investing, and everything else is being allocated towards loans (now), and then putting towards saving for a house (in 2-3 years)
For now, it seems like both of you are advocating saving up around 6 months income, but having this money inside a mutual fund account with Vanguard so that it's growing much more than in savings and still readily accessible. I'm fine with this (wish I knew about it sooner when there was a period of my life I had $6k in savings for 2 years doing nothing  )
When my loans are paid off, is the idea that I start aggressively putting money in this Vanguard account, and eventually taking out 20% for a down payment?
Once I have a mortgage, what am I doing with my money? Again, let's assume the 60k income. Standard deduction of 6k -> 54k. 10% on the first 9k is $540, and leaves $45k. You said 15% on the first 37k, and I don't know what is above that, so let's just say 15% on the whole 42k -> $6,750. Total is $6,750 + $540 = $7,290
$7,290 goes to taxes (this seems awfully low)
$9,000 goes to the 401k (15% pre tax)
$16,800 goes to the mortgage (using a 28% of $1,400)
$4,000 home maintenance
That leaves $22,910. To make things simple (bad habit), let's just say $7,910 is enough for insurance + phones + cable + gas + all the rest
What is then happening with the remaining $15,000, 25% of my income? Is this extra that is going in the Vanguard account? Is this extra that is going towards retirement? Something else entirely?
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Sun Nov 30, 2014 9:45 pm |
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oldguy
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Where else does the bank think I need $2,100 for? I have no other loans, taxes are accounted for, I'm just not understanding why I'm restricted to such a low number when I have $3,500 a month to play with and my mortgage is $1,400
Lenders use 28% as a rule of thumb, that doesn't consider car payments, boat payments, credit cards, and all the 'stuff' people buy/have. The lender has the discretion to bump that 28% up, often in SoCal a few yrs ago they used 33%. But the lender can't know/predict what you might buy after the loan is written - nothing stops you from going out and buying a motorhome and leasing a new Beemer for $800/m.
Your 1400/m calculation is correct - that would get a $300k 4% 30 yr loan (a $375k house if you put 20% down).
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For now, it seems like both of you are advocating saving up around 6 months income, but having this money inside a mutual fund account with Vanguard
When you use this method, the 6 months isn't a factor - there is no upper limit, nothing wrong with having $500,000 of a million in your taxable account.
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That leaves $22,910.
Your SS payment is probably close to $4700.
And medical insurance costs about $8000/yr (maybe your employer pays some of that for you?)
Cars are a big one - people seldom realize what they are spending, they thing only of gas and payments. The depreciation on a late model car is about $4000/yr. Gas is about $4000/yr. Insurance $1200/yr. Plates $500/yr. Tires/brakes/batts (wear items) are about $750/yr. Oil & washes about $500/yr. Repairs - maybe $500/yr. So that's about $11,500/yr.
Personally, I would keep those loans, retain the use of your $35k, and keep it in the taxable SP500 Index at Vanguard (where my goal is to double it every 7 years - the Rule of 72). And that is also where I would put any extra income stream. And I would get a mortgage with as close to zero DP as possible, you don't want to tie up 20% ($75k) in house equity, instead keep it in the taxable SP500 Index and try to double it to $150k.
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Sun Nov 30, 2014 11:20 pm |
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littleroc02us
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quote:
Originally posted by SyZ
2) I'm a little confused on this Vanguard mutual fund. I literally just sign up and it takes 100% of my money from my Wells Fargo account (keep in mind this is where my check is direct deposited) and moves it into mutual funds, which I can then take out at will? How easy is it to track my money? How easy is it to move money every two weeks into the account? Sounds like something that would be rife with fees for every withdrawal, deposit, etc.
There aren't any fees for transferring money into your Vanguard funds. It's free. In fact this weekend I put $1,000 into my vanguard and another $1,000 into my wives. You can do an automatic direct deposit if that makes you happy. I check my accounts once a week and track them in Exel spreadsheets. It's amazing how simple they are.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Mon Dec 01, 2014 4:37 pm |
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littleroc02us
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quote:
Originally posted by SyZ
6) When I purchase a home, everything needs to be < 28% of my income ... how is that possible? I make 45k, the mortgage alone would be almost 40% on a townhome in the area
Your gonna need to either build up a much larger DP or build a smaller home you can afford.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Mon Dec 01, 2014 5:19 pm |
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littleroc02us
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quote:
Originally posted by SyZ
The first, is the 28% mortgage rate. Now, let's assume in 5 years when I have enough for a down payment, I have no other debt (because, as we've outlined, I won't have student loans and my car loan matures in 2018). We'll assume I get a 6% raise each year (not sure how realistic this is but I'll get my first raise at this company in February and it's been hinted to be 6-9%) -> this puts me at almost exactly 60k income in 5 years
Now, at 60k, I'm probably bringing him around $3,500 take home each month (just doing math in my head for illustration purposes). If my mortgage were 28%, that would be $1,400 each month. (or $980, if we're doing 28% of my net, not gross income. But that can't be right)
...
Where else does the bank think I need $2,100 for? I have no other loans, taxes are accounted for, I'm just not understanding why I'm restricted to such a low number when I have $3,500 a month to play with and my mortgage is $1,400
Personally I think 28% is even to high. Our mortgage, taxes and insurance is 19% of our net income. We have no debt besides my rental mortgage and primary mortgage. I personally believe you shouldn't go over 25% for your primary.
Now you mentioned that 28% of your net income is $980. Does that also include taxes and insurance? What your missing when you ask "Why is the bank restricting what I can spend when I have $2,100 left to spend?" is that let's say you spend 28% of your net income on your mortgage including taxes and insurance. And then you invest 15% of your income for retirement. Now your at 43% of your income. Now you spend 35% on entertainment, going out to eat, gas, food at home, electricty, gas, cable and phone. So now your up to 78% of your income. That leaves 22% of your income for saving for a car, furniture, a DP, gifts, donations and other taxes not paid yet.
Now you see why spending less on your primary leaves your more flexibility to pay cash for things and to invest for retirement. I just read a study that talks about those who spend a lot on their primary home typically aren't millionaires when they retire, because they are to house poor to invest.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Mon Dec 01, 2014 9:07 pm |
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SyZ
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I've never really doubted anything you guys have said because clearly you're all more than financially stable and wealthy, but some of the #s old guy is coming up with don't add up
$4,000 a year for gas? I currently go through about 10 gallons in 10 days, and this is the highest consumption I've ever used (my girlfriend lives 11 miles from me) -> that comes out to 365 gallons a year * about $3.50 a gallon, let's say = $1277.5, and this already factors in random 50 mile Saturday trips to Wine Country to stroll around or going into San Francisco every month or so from Pleasanton (60 mile round trip) etc
$4,000 for depreciation? I don't even understand that, my car is worth about $8,000 and I owe $7,000, it's a Toyota with 62k miles and should last another 200k, I don't anticipate any major issues with it until at least, what, 150k miles? I only average 8-9k miles a year over the last 3. At this rate, I'll have it paid off and be around 90k, using the worst case scenario
So now that I better understand the Vanguard / Mutual fund idea, you are essentially stating "Instead of paying off 2.8 and 3.8% and 5.8% loans, put that extra money in a Vanguard Mutual Fund SP500 Index that will statistically grow about 6.8% a year and is still highly liquid
The only downside to this is that, let's say in X years I have 100k in the account, and the bull market turns into a bear market, and now instead of seeing my money go up it's going down. This will happen, as 6.8% positive average could be one year of 6.4% negative and the next year of 20% positive
Is this then a summary of oldguy's stance?
15% in the 401k
Minimums on all student loans (even the 5.8% and 6.8% loans)
Minimums on the car payment
Everything that is left in a Vanguard S&P500 Index (here's where I'm still a little cloudy. Maybe by 'everything that is left' I mean leave X in the checking account, where X is my rent, gas, insurance, etc. No reason to move it into the Vanguard account and then remove it every month)
Eventually, at some point in the future, when we determine I have enough to take out a mortgage, take out a full 100% loan as the 6.8% in the S&P500 is still growing faster than I'm losing to a mortgage, and just pray that I can somehow make the payments (if I did this method, we can no longer assume I have zero debt since I did not wipe out my 35k debt)
On paper, it seems like the right choice. It's simple. Making 6.8% average compared to losing 2.8% on loans is a net gain of 4%. But if it were this easy, why isn't everyone doing this? I made some bad decisions and didn't graduate until I was 27, didn't work for a lot of my 20s, and am still underpaid, single, in the most expensive area in the country, and could still theoretically own a home by 35. Realistically, by 40.
Is the downside to this theory that, theoretically, the market will turn into a bear market at some point, and I'll be losing money on everything I'm putting in that fund. And if I'm losing money on everything I'm putting in that fund, and then sitting with student loans I could have paid off, I'll be upset. And it's not oldguy's fault, or my fault, it's just the way the market goes. Isn't that kind of risk what I DON'T want to have right now in my life, and am only ok with after I remove this debt? Or is this the risk I NEED in my life to get on the way to financial wealth and stability
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Tue Dec 02, 2014 6:32 am |
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Wino
Senior Member
Cash: $ 113.80
Posts: 560
Joined: 03 Aug 2012
Location: Dubai
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quote:
Originally posted by SyZ
I've never really doubted anything you guys have said because clearly you're all more than financially stable and wealthy
First wrong move. Doubt everything that everyone says. Look in to it yourself. Ask for references. Search the internet. Question everything until YOU understand it. For all you know, I am homeless and using a library computer to send these suggestions.
quote:
Originally posted by SyZ
$4,000 a year for gas?
"Gasoline expenditures in 2012 for the average U.S. household reached $2,912, or just under 4% of income before taxes, according to EIA estimates." From http://www.eia.gov/todayinenergy/detail.cfm?id=9831His figure was conservative for the average household, but that's how you estimate your expenses: conservatively. You want to have money left over. You don't want to run short. If you're in the bottom 25% in gas usage, your numbers are probably correct. Even with the numbers you gave, I'd still use at least $150 per month for gasoline in my budget.
quote:
Originally posted by SyZ
$4,000 for depreciation?
The example was for a new car at $25,000 - $30,000 coming off the lot. Most Americans (and Canadians) buy new cars as soon as they can afford the payments. Absolutely no one who is concerned about finances recommends buying a new car until you can afford to pay cash for it without strapping yourself. If you MUST have a new car, buy a two year old car off of a car lot for 60% of the cost of a brand new car. http://www.carsdirect.com/auto-loans/what-is-the-average-car-depreciation-rate
quote:
Originally posted by SyZ
Maybe by 'everything that is left' I mean leave X in the checking account, where X is my rent, gas, insurance, etc
The "everything else" is after you pay all monthly bills, set aside funds for unexpected large bills, and have accounted for annual bills such as taxes, car insurance, etc. You then put a little more aside in your checking for "just in case money." I suggested in the "less than $5000 range" (paraphrased), or whatever you're comfortable with for this stand-by emergency fund. The thing you DO NOT want to do is have money in Vanguard and be forced to pull it out while it is at -40%. My personal numbers are not yours. I keep over $10K in my checking account, but I also have personal credit cards that have limits of over $40K, and their interest rates are in the 9% to 10% range. I would prefer to pay those cards back than to pull money out of Vanguard.
Another option is the "Dave Ramsey method," which I agree with in principle but not specifics. He wants you to cut up your credit cards and put 6 months of expenses in a checking account (close enough), and financially walk a tightrope while paying off all your debts except your mortgage. In Dave's defense, his method has worked for millions of people, so you can't argue with the efficacy of it. I just feel that self-discipline works just as well without strapping yourself down to "no recourse" if things go very wrong, very quickly. One thousand reserve with no credit card and nothing but debt is not the kind of risk I'd want to take, either.
As long as you don't do anything stupid with a credit card, it's a great tool. If all you own is a hammer, all problems look like nails. If you only have a credit card and no back up funds, every spending decision is to go into debt. I see no reason to leave an additional $20K in a checking account instead of earning on average about $100 per month on that same money. Even if it took me 6 months to pay back $20K, that's less than $600 in interest on my highest-interest card. And believe me, I can pay back $20K in less than 6 months without breaking a sweat or stopping my investments. What I lose is some of my pay down rate on my 3.5% house loan. Looking at it that way, instead of paying off a 3.5% loan, I'm paying off an emergency 10% loan, so it's effectively only costing me 6.5% (annualized) over a six month period.
So, make your own decisions on how to preserve your sanity and fiscal health. You've got two opposing views - three if you count Dave Ramsey's suggestion above (but listen to him or read his stuff yourself. Don't let me tell you what he says. Get it from the horse's mouth). As long as you have a plan that covers almost everything, you have a way to cover what you didn't think about, you have a way to change the plan to account for life changes, and you follow the plan, your plan will work.
One thing I think we all agree on: You should have a written budget every month or every two weeks. Write it down, and do what you write down. Don't "cheat" on yourself.
quote:
Originally posted by SyZ
Is the downside to this theory that...
In a word, the downside is risk. What I have suggested is that you first minimize risk by eliminating drains on your income, which is your debt. Once you have no debt, you can more easily set money aside for a plan such as oldguy suggests. You have to get some money first, though, before oldguy's plan makes any financial sense. As I said before, the mathematics works for his plan, but for my tastes, it is too risky.
By paying off your debt first, and conservatively planning your investments, you lessen the likelihood of something going wrong that derails your plan.
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Tue Dec 02, 2014 12:37 pm |
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littleroc02us
Moderator
Cash: $ 384.35
Posts: 1891
Joined: 09 Feb 2009
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quote:
Originally posted by SyZ
On paper, it seems like the right choice. It's simple. Making 6.8% average compared to losing 2.8% on loans is a net gain of 4%. But if it were this easy, why isn't everyone doing this?
Is the downside to this theory that, theoretically, the market will turn into a bear market at some point, and I'll be losing money on everything I'm putting in that fund. And if I'm losing money on everything I'm putting in that fund, and then sitting with student loans I could have paid off, I'll be upset. And it's not oldguy's fault, or my fault, it's just the way the market goes. Isn't that kind of risk what I DON'T want to have right now in my life, and am only ok with after I remove this debt? Or is this the risk I NEED in my life to get on the way to financial wealth and stability
What your listing out isn't what my family has done, we didn't take that type of risk that Old Guys is suggesting. We worked to pay all of our debt off first which opened up a ton of cash and then we invested like crazy and are in the market for long term no matter if it's a bull or bear market. I could care less if the market drops, because just as everyone here has stated, the S&P 500 has average around 11% before inflation is calculated. If your going to pull out your money when the market crashes and then put it back in when the market has risen your always going to be broke. Both Old Guy's method and my method worked for us, the main difference is that he leverages investing, whereas I would rather pay off debt and increase my disposable cash to invest and gain wealth for retirement.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Tue Dec 02, 2014 3:48 pm |
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