Questions about my Finances, where to begin w/ investing?

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Questions about my Finances, where to begin w/ investing?

Postby SethBahookey » Fri May 03, 2013 7:49 pm

Hello Everyone!

Sorry if I posted this in the wrong forums. It's a mixture between personal finances and investments. So mods if you need to move it please feel free to do so!

I have been reading many investment books as well as blogs and I think I am finally starting to understand how to invest properly. So I wanted to just have some outside ideas of where I can tweak my finances to make sure I’m efficiently and effectively allocating all my money. Please review, and if any suggestions would be greatly appreciated!

Balance Sheet:
Assets:
Checking Account: $5,800
Savings Account: $3,500

Liabilities:
Car Loan: $9,200 balance
Minimum car payment: $250/month
Current budget: 500-1000/month
Question/Comments: I’d like to pay off this stupid car ASAP, but am I putting too much towards it a month? I’m still trying to figure out if I should pay it off right away so I can put more money towards investments sooner, or just pay a little more than the minimum balance and put the remaining into investing now.

Best Buy CC: $500 balance
Minimum payment: $30/month
Current payment: $60/month
Question/Comments: This purchase was for a SLR camera. It was under the 18 months no interest. So I calculated what the minimum payment would be to pay this off within the 18 months. $60/month. I will keep my payments at this as I don’t need to completely pay it off.

Income Statement:
Net Income:
$2500/month

Expenses:
Rent: $550/month
Groceries: $200/month
Insurance: $75/month (don’t worry I’m looking into lower car insurance here!)
Gas: $80/month
Other: $30/month
Total: $935/month

Money left over: $1565

My Plan:
Ok so there is my mini finance break down. My plan right now is to start moving this money around so it makes more sense, and so that I can start investing. My first plan is to take most of my money right now and put it into a 5 year CD account with Ally bank for my emergency fund. $6000 will go into that.

That leaves me with $3300 left in my checking and savings account. I really want to open up a Roth IRA with Vanguard and I have been looking at both the Vanguard Total Market Share Index Fund and the Target Retirement accounts.

Should I open up the Roth IRA with the Retirement Target Fund as this would be easiest to handle? I plan on keeping a close eye on my finances so I have no problem doing a couple of different index funds in the Roth IRA. I was thinking to get 80-90% VTSMX and 10-20% VBMFX. The only challenge with this is that if I only have about $3000 to play with how would I be able to open both funds? I’d imagine I would have to save up, but the real question is how would I allocate only 10-20% to the Bonds if I have to contribute $3000 to both? Once I open up the bond would I just leave it as is until my Stock fund reached up to 80%?

Eventually I will want to open up a taxable account, but as I’m sure you can imagine I don’t make a lot of money to be putting investments in to both at this time. So if anyone could please point me in the right direction I’d greatly appreciate it! Especially with how I should be paying off my car loan.

Also, if there is anything you need me to clarify please let me know as I know I’m not an accountant and don’t know the best way to list my personal finances.
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Re: Questions about my Finances, where to begin w/ investing

Postby dailybagel » Fri May 03, 2013 9:41 pm

Welcome to the forum. Ca I make a couple of suggestions?

1. If I were you, I would increase your written allocation in the "Other" category in your budget to include entertainment. Say, $200 per month, instead of $30? This may be surprising suggestion from this forum, but I think it's better to have a budget that is credible, and that you can follow, rather than some abstract, ideal spending plan for a spartan lifestyle.

2. I would suggest paying off the best buy bill next month. I understand it's zero interest, but it would make your life simpler: you won't have to make a monthly payment. And you don't have to worry about getting in before the deadline.

3. I would suggest you look at Target Retirement funds in a Roth or Traditional IRA. They have a $1,000 minimum. You could save that up in 1-2 months and invest. This is my main holding in my Roth Ira, even though I could buy individual funds. Simple and I'm comfortable with the risk level. I think TR 2040 is about 85% stocks, off the top of my head.

4. Does Ally let you break that 5-year CD if you need to? You can search the forums for posts on that very issue. Nisiprius has urged caution when the right to withdraw money is not part of a CD contract.

5. That car loan is pretty significant. I would hammer at that as best you could, or you might decide to sell it. But realistically, you could be finished with it in one year, if you sent $800 per month.

All these numbers and details are a matter of judgment that depend on circumstances and even personality. If I were in your shoes, I would send $800 per month to the car loan, and split the remaining available money between investing and a savings account. Simple, and when the car loan is over in a year, you can really throw money into savings for a house fund or something like that.

Good luck!
Last edited by dailybagel on Fri May 03, 2013 9:43 pm, edited 1 time in total.
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Re: Questions about my Finances, where to begin w/ investing

Postby Johm221122 » Fri May 03, 2013 9:42 pm

Do you have 401?
What is interest rate on car loan?
What is your tax bracket and do you think will be in higher tax bracket in the years to come?
How old are you?
John
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Re: Questions about my Finances, where to begin w/ investing

Postby momar » Fri May 03, 2013 9:43 pm

What is the interest rate on your car loan?

Are you sure you want your emergency fund in a 5 year cd? You might need it sooner; many cd's have provisions allowing you to break them for a penalty, but many also say they can alter the terms at any time. Check on this to make sure you are ok.

Just invest in the target date fund for now; if you want to break it out later, it's not a problem. Plus you get international stocks in the TR fund.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
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Re: Questions about my Finances, where to begin w/ investing

Postby SethBahookey » Fri May 03, 2013 9:47 pm

Johm221122 wrote:Do you have 401?
What is interest rate on car loan?
What is your tax bracket and do you think will be in higher tax bracket in the years to come?
How old are you?
John


I don't currently have a 401K set up with my employer because I don't plan on staying till I'm vested. It's with Charles Schwab and I'd rather keep all my investments a one place at this time.
I have no idea what tax bracket I am in. Where can I find this information out?
I'm 26

Thanks!
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Re: Questions about my Finances, where to begin w/ investing

Postby Johm221122 » Fri May 03, 2013 9:50 pm

SethBahookey wrote:
Johm221122 wrote:Do you have 401?
What is interest rate on car loan?
What is your tax bracket and do you think will be in higher tax bracket in the years to come?
How old are you?
John


I don't currently have a 401K set up with my employer because I don't plan on staying till I'm vested. It's with Charles Schwab and I'd rather keep all my investments a one place at this time.
I have no idea what tax bracket I am in. Where can I find this information out?
I'm 26

Thanks!

Tax bracket
http://taxes.about.com/od/Federal-Incom ... x-Year.htm
Why is this important?
http://www.bogleheads.org/wiki/Traditional_versus_Roth
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Re: Questions about my Finances, where to begin w/ investing

Postby Johm221122 » Fri May 03, 2013 9:57 pm

Can you get your income down to come$27, 750 buy cutting your adjusted gross income with traditional ira (or 401)
http://www.irs.gov/uac/Get-Credit-for-Y ... tributions
John
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Re: Questions about my Finances, where to begin w/ investing

Postby SethBahookey » Sat May 04, 2013 12:43 pm

momar wrote:What is the interest rate on your car loan?

Are you sure you want your emergency fund in a 5 year cd? You might need it sooner; many cd's have provisions allowing you to break them for a penalty, but many also say they can alter the terms at any time. Check on this to make sure you are ok.

Just invest in the target date fund for now; if you want to break it out later, it's not a problem. Plus you get international stocks in the TR fund.



Sorry I forgot to mention that. The interest on the car is 2.6%.. According to Ally's 5year CD the only penatly you would incur is that you lose the past 2 interest payments on the account. Doesn't seem that bad to me, and that way I'd be earning a measly 1.5% on my money instead of nothing now.

But is the general consensus to focus on the TR fund for my Roth, or should I start off with the Total Market Index Fund and get into bonds once I have enough money going into it?
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Re: Questions about my Finances, where to begin w/ investing

Postby livesoft » Sat May 04, 2013 1:57 pm

One's contributions to a 401(k) belong to you and are vested. So I am not sure what you are writing about when you say "vested". It is true that employer contributions may have a vesting schedule, but I think that should not figure into this.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Questions about my Finances, where to begin w/ investing

Postby spencer99 » Sat May 04, 2013 2:39 pm

Seth,

Welcome to the forum. Thoughts:

401(k) - If there's a match, invest here first up to the match. (if so, post your options and ask for advice)

Funds - Either in the 401 or the Roth, choose the Target Retirement fund. This gives you *everything* you need in an investment vehicle. The only thing you give up at this point is (maybe) flexibility that you do not need.

Your emergency fund - Consider $6,000 @ 1.5%. What's that per year? Is it worth it to make your EM a little (maybe a lot) more difficult to access? You may even by able to find a high interest checking account locally that earns more.

Best Buy CC - Pay it, mostly because the 0% interest on this balance isn't worth the clutter, but also partly to flex your frugal-sense and start to resist these consumer catch/come-ons. Willingness and ability to pay cash for these kinds of purchases sets the bar at the appropriate level.

Car loan - I'm agnostic. The interest rate is pretty low but at a minimum accelerating payment is probably good.

Best,

S
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Re: Questions about my Finances, where to begin w/ investing

Postby SethBahookey » Sat May 04, 2013 3:57 pm

livesoft wrote:One's contributions to a 401(k) belong to you and are vested. So I am not sure what you are writing about when you say "vested". It is true that employer contributions may have a vesting schedule, but I think that should not figure into this.

I mean that any of the contributions my employer would match would be taken away from me if I leave the company before 3 years time. Come June 2013 I'll have been with my employer for 2 years leaving me with 1 year left. I don't plan on staying with this company another year so I wouldn't be able to keep my contributions that the employer would match. So for that reason alone I don't want to take the time to set up an account only to leave it within the next few months. Does that make sense?

Funds - Either in the 401 or the Roth, choose the Target Retirement fund. This gives you *everything* you need in an investment vehicle. The only thing you give up at this point is (maybe) flexibility that you do not need.

One question that I was thinking of last night - if I were to invest in a Roth and invest in index funds within this roth. I know that Vanguard has "admiral" versions of their funds when you have 10K+ contributed to the account. I didn't notice anything like this with the TR Funds. Is there such an option so that I can lower expenses once I have a bit of money packed away in this account or is this a moot point?

I guess at the end of the day I could open up a taxable account and start investing in those types of funds once I max out my Roth IRA.

Your emergency fund - Consider $6,000 @ 1.5%. What's that per year? Is it worth it to make your EM a little (maybe a lot) more difficult to access? You may even by able to find a high interest checking account locally that earns more.

Good point. After looking into this a bit more I think I'll just keep my emergency fund with my current savings account right now.
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Re: Questions about my Finances, where to begin w/ investing

Postby retiredjg » Sat May 04, 2013 4:48 pm

SethBahookey wrote:One question that I was thinking of last night - if I were to invest in a Roth and invest in index funds within this roth. I know that Vanguard has "admiral" versions of their funds when you have 10K+ contributed to the account. I didn't notice anything like this with the TR Funds. Is there such an option so that I can lower expenses once I have a bit of money packed away in this account or is this a moot point?

You are correct - the target funds don't come in admiral shares. But once your portfolio is a larger, you can invest in the underlying funds and eventually get to Admiral shares. Don't worry about it - the investor shares are still very low cost.

I guess at the end of the day I could open up a taxable account and start investing in those types of funds once I max out my Roth IRA.

Yes you could. Put the international fund in taxable and the bonds in the Roth IRA and the total stock market wherever it fits.
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Re: Questions about my Finances, where to begin w/ investing

Postby Twins Fan » Sat May 04, 2013 5:06 pm

SethBahookey wrote:I mean that any of the contributions my employer would match would be taken away from me if I leave the company before 3 years time. Come June 2013 I'll have been with my employer for 2 years leaving me with 1 year left. I don't plan on staying with this company another year so I wouldn't be able to keep my contributions that the employer would match. So for that reason alone I don't want to take the time to set up an account only to leave it within the next few months. Does that make sense?


Yeah... You would still be able to keep your contributions and roll it over to your new account and your new job. But, if you're only going to work at your current job for a few more months, probably no real urgency there. I don't know if you have realized the beauty of pre-tax investing like a 401k yet? Make sure you get that to sink in for when you start your next job.


SethBahookey wrote:One question that I was thinking of last night - if I were to invest in a Roth and invest in index funds within this roth. I know that Vanguard has "admiral" versions of their funds when you have 10K+ contributed to the account. I didn't notice anything like this with the TR Funds. Is there such an option so that I can lower expenses once I have a bit of money packed away in this account or is this a moot point?


This was answered earlier for you. But, the TR funds only have a $1000 minimum to open. That's the beauty of them is that you get all the funds that usually have a $3000 minimum for only $1000 to open!!

And, you are looking at that wrong... For the "admiral" funds you need $10K to get into EACH fund. So, you would need $30K to get into the admiral version of TSM, total international, and TBM. But, then what's the AA with $10K in each compared to what you want.

All you really need at this beginning point for you is to pick a TR fund you like AAwise, open up the account, and contribute for a while. Don't overthink it.

SethBahookey wrote:I guess at the end of the day I could open up a taxable account and start investing in those types of funds once I max out my Roth IRA.


If you're just starting out, about to open an IRA, don't even have a 401k of any kind going yet, and want to tackle some debt to pay that down, taxable investing probably shouldn't even be on the table for you yet.

You're eyes are bigger than your stomach right now, youngster. :D
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Re: Questions about my Finances, where to begin w/ investing

Postby spencer99 » Sat May 04, 2013 6:05 pm

SethBahookey wrote:
Funds - Either in the 401 or the Roth, choose the Target Retirement fund. This gives you *everything* you need in an investment vehicle. The only thing you give up at this point is (maybe) flexibility that you do not need.

One question that I was thinking of last night - if I were to invest in a Roth and invest in index funds within this roth. I know that Vanguard has "admiral" versions of their funds when you have 10K+ contributed to the account. I didn't notice anything like this with the TR Funds. Is there such an option so that I can lower expenses once I have a bit of money packed away in this account or is this a moot point?

I guess at the end of the day I could open up a taxable account and start investing in those types of funds once I max out my Roth IRA.


The Target Retirement fund gives you instant diversification that will take you some significant time to achieve with the individual fund components you need (in either regular fund versions or Admiral shares). A good point is made around here that a modest increase in a new investor's savings rate will overwhelm the impact of stretching for return. I suggest something similar is true for fund expenses once you're indexing. At your expected yearly savings, calculate the difference in expense between target retirement, regular shares and admiral shares. What do you think? Are you saving enough to forgo the diversification, auto-rebalancing, and simplicity of the one-fund solution? Could you do as well by just saving a little more?

I don't know much about the relative merits of taxable investing, but another option to consider after you've maxed your yearly Roth contribution is to increase your emergency fund to something more like 6-12 month's expenses.
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Re: Questions about my Finances, where to begin w/ investing

Postby Johm221122 » Sat May 04, 2013 7:39 pm

If your in 25% tax bracket I would use traditional instead of Roth(unless you think your tax rate will be higher in later years)
Would seriously consider 401 instead of taxable
If between 401 and traditional Ira I could get savers credit, I would definitely use 401
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Re: Questions about my Finances, where to begin w/ investing

Postby SethBahookey » Wed May 08, 2013 6:37 am

Thank you for all the advise so far Bogleheads! I figured at this point it was best to start a Roth IRA for now and once I start lowering more expenses and making more money I will contribute to a 401K (once I'm at a new employer) then finally getting into taxable accounts.

So after reading quite a bit about AA I'm still curious as to how it would work with my overall portfolio. I set up a Roth IRA Target Fund 2060 yesterday (already made 4.50 8-) ) the 2060 fund is roughly 68% us index, 22% international, 10% bonds. If I opened up an additional account, say my 401K, where would I focus my contributions in that account?

Would I want to contribute more to an stock index fund, or would I want to split it up like in the Roth getting a little piece of both stock and bond? I think I have a faint idea of how the overall scheme of AA works, but if anyone could point me in the right direction or briefly explain how it works. I'd appreciate it!
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Re: Questions about my Finances, where to begin w/ investing

Postby fulltilt » Wed May 08, 2013 9:26 am

SethBahookey wrote:...
So after reading quite a bit about AA I'm still curious as to how it would work with my overall portfolio. I set up a Roth IRA Target Fund 2060 yesterday (already made 4.50 8-) ) the 2060 fund is roughly 68% us index, 22% international, 10% bonds. If I opened up an additional account, say my 401K, where would I focus my contributions in that account?
...!


Congrats on getting started. That is an important step. If you haven't set up automatic contributions, do that right away. You will never miss the money if you don't see it. When you're getting started, the most important factor is how much you save.
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Re: Questions about my Finances, where to begin w/ investing

Postby retiredjg » Wed May 08, 2013 9:31 am

SethBahookey wrote:If I opened up an additional account, say my 401K, where would I focus my contributions in that account?

You would focus on the low cost funds. Often this is a 500 Index and a bond fund. Sometimes, it can be a target type fund.

The idea that usually works best is to pick the lowest 1 or 2 funds in the 401k and then build the rest of the portfolio around that in IRAs.
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Re: Questions about my Finances, where to begin w/ investing

Postby SethBahookey » Wed May 08, 2013 9:56 am

Congrats on getting started. That is an important step. If you haven't set up automatic contributions, do that right away. You will never miss the money if you don't see it. When you're getting started, the most important factor is how much you save.

Thank you! I did set up weekly contributions as I get paid weekly. I set it up so by the time next April rolls around it'll be maxed out.

Also to the last comment made by retiredjg (sorry id quote your post but my iPhone isn't fancy enough to copy/paste additional posts). I believe that the retirement fund I'm in now is pretty low fee wise. If I just want to make sure my AA is set right. So if I did s&p 500 index fund in a 401k - would that technically raise my stock allocation up for all of my overall investments? Is that how I should be looking at it? As an overall view of all my different accounts or look at AA individually in each account? Thanks!
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Re: Questions about my Finances, where to begin w/ investing

Postby 22twain » Wed May 08, 2013 10:00 am

You should be looking at all of your investments together (inside the 401k and outside it) when figuring your asset allocation.
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Re: Questions about my Finances, where to begin w/ investing

Postby retiredjg » Wed May 08, 2013 10:14 am

SethBahookey wrote:If I just want to make sure my AA is set right. So if I did s&p 500 index fund in a 401k - would that technically raise my stock allocation up for all of my overall investments?

Yes. If you put 500 Index in your 401k plan that would increase your stock to bond ratio for the portfolio. But if you used the 500 index in your 401k plan, the target fund in your roth IRA may not be the best choice - something else might be better.

Is that how I should be looking at it? As an overall view of all my different accounts or look at AA individually in each account? Thanks!

Look at the overall picture - it does not matter what is in each account, just what you have overall.
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Re: Questions about my Finances, where to begin w/ investing

Postby SethBahookey » Wed May 08, 2013 10:36 am

retiredjg wrote:
SethBahookey wrote:If I just want to make sure my AA is set right. So if I did s&p 500 index fund in a 401k - would that technically raise my stock allocation up for all of my overall investments?

Yes. If you put 500 Index in your 401k plan that would increase your stock to bond ratio for the portfolio. But if you used the 500 index in your 401k plan, the target fund in your roth IRA may not be the best choice - something else might be better.

Is that how I should be looking at it? As an overall view of all my different accounts or look at AA individually in each account? Thanks!

Look at the overall picture - it does not matter what is in each account, just what you have overall.


So when I start up the 401k. Change my TR to a more conservative package. Got it! Hopefully making that kind of switch won't cost me much.
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Re: Questions about my Finances, where to begin w/ investing

Postby JupiterJones » Wed May 08, 2013 11:26 am

My opinion, for what it's worth:

1.) I agree with dailybagel about paying off the Best Buy card. Yeah, it's interest free and you could earn interest on the money that would go towards paying it off. But really, how much extra money would all this finagling actually get you? Five bucks a year? Not worth the hassle. Just pay the thing--today--and get it off your back.

2.) If it were me, I'd next start chunking money at the car. It shouldn't take you long at the rate you're going.
Stay on target...
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Re: Questions about my Finances, where to begin w/ investing

Postby MoonOrb » Wed May 08, 2013 12:15 pm

I might be going against the grain a little here. My perspective is that you should prioritize investing in tax-advantaged accounts as much as possible, both because of the awesome advantage that compounding will later reap and because once tax-advantaged space is passed up on, you can't get it back.

My thoughts are:

1. Keep things status quo with the Best Buy card--you can automate payment to ensure it's paid off in time. You will still "not have to worry" about the card if payment is automated and you won't have to spend $500 right now. I like the plan you have in place now. Don't change it.

2. Your car loan at 2.6% is not that high, frankly. I suspect that there are many people who hate debt so much their default position is to pay debt down as rapidly as possible. Just pay the normal monthly payment. Use the money you were planning to pay down the loan with on filling as much of your tax-advantaged space (401k, Roth, etc) as possible.

3. You might be a candidate for considering a Roth IRA as a source for an emergency fund. You can withdraw your contributions from Roth penalty-free. You obviously don't want to ever have to do this. But I think it can make sense for people in your situation: you keep some money on hand in a checking account earning whatever amount of interest it's going to earn; you don't want to have to tap your Roth IRA if you have to buy new tires for your car or pay for a dental procedure or something. The rest of the money you have allocated for an emergency fund you can put into a Roth. If you DO have an emergency and need the money, you can get to it. I think this is something that you should consider.

4. A TR account is appropriate for you. You can make changes later. It is much more important now to get started and contribute early and often than it is to stress about your asset allocation. Continue to learn and read and absorb stuff and you'll be in a better position to make decisions about this stuff soon. In the meantime, just cram money into tax-advantaged accounts.
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Re: Questions about my Finances, where to begin w/ investing

Postby retiredjg » Wed May 08, 2013 2:29 pm

SethBahookey wrote:So when I start up the 401k. Change my TR to a more conservative package. Got it! Hopefully making that kind of switch won't cost me much.

Not what I meant. This would work for a little while, but eventually your international allocation would decrease too much.

This is more what I was talking about:

    401k
    500 Index
    Bonds

    Roth IRA
    International
    an extended market index or small cap index to complete the 500 Index (if room permits)
    maybe bonds here too

But it all depends on the best choices from what is available in the 401k. If there is a low cost target type fund in the 401k, you could just use parallel target type funds in each account, picked by the stock to bond ratio that you want (ignoring the date in the name).
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Re: Questions about my Finances, where to begin w/ investing

Postby retiredjg » Wed May 08, 2013 2:41 pm

SethBahookey wrote: Got it! Hopefully making that kind of switch won't cost me much.

It should not cost you anything. You can buy and sell with tax or other costs in a tax-advantaged account like a 401k or an IRA. I'm not recommending that you do that willy-nilly, but exchanging funds in these accounts occasionally is something that you will want to do as your portfolio goes from tiny to moderate size. It's just the growing pains of getting past minimums, etc. After that, exchanging funds may be needed less often but can certainly be done to rebalance, etc.

I agree with MoonOrb that there is no financial reason to accelerate payments on your low cost debts. Some people, however, just like to get rid of it and there is nothing wrong with that.
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