I'm 23. What else should I be doing financially? TIA.

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Topic Author
awintensiveporpoises
Posts: 14
Joined: Thu Apr 03, 2014 4:06 am

I'm 23. What else should I be doing financially? TIA.

Post by awintensiveporpoises »

I would appreciate any advice from fellow Bogleheads on what else I should be doing to improve my financial situation. Here's the skinny:

My wife (24) and I (23) are both accountants and collectively make about $115,000 gross and have no debt. We save the smaller income of the two, and use the larger to pay bills, rent , fun money, etc. We both max out our Roth IRA contributions ($11K/year) and contribute the max to our respective companies 401K match (me: 25% up to 6% and her 100% up to 6%). I currently have ~$35,000 in Vanguard retirement investments (prior ROTH IRA's - been contributing since I was 17 years old) and around 13K in a truck/new car fund (for a cash payment or a large down payment). Also, we have a collective $20,000 in a 6-month "rainy day" fund in case one of us were to ever lose a job. After we buy a car (both of ours are older models and due to break down any minute), we plan on saving for a 20% house down payment.

Is there anything else we should be doing? TIA.
WorkToLive
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Joined: Thu Nov 12, 2009 1:19 pm

Re: I'm 23. What else should I be doing financially? TIA.

Post by WorkToLive »

Sounds like you guys are doing really well. The best thing I ever did was create a complete budget that told every single dollar of income where to go. It helped me align my spending priorities with my income and set up a solid plan for the future. Some people hate tracking a detailed budget, but I love it. The next best thing I did was waiting until I was financially secure enough to take off a few years to raise my daughter. I had her at 31 and went back to work PT at 34 and FT at 36. It was the perfect balance and we only needed an afternoon nanny for about two years. YMMV.
Topic Author
awintensiveporpoises
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Joined: Thu Apr 03, 2014 4:06 am

Re: I'm 23. What else should I be doing financially? TIA.

Post by awintensiveporpoises »

WorkToLive wrote:Sounds like you guys are doing really well. The best thing I ever did was create a complete budget that told every single dollar of income where to go. It helped me align my spending priorities with my income and set up a solid plan for the future. Some people hate tracking a detailed budget, but I love it. The next best thing I did was waiting until I was financially secure enough to take off a few years to raise my daughter. I had her at 31 and went back to work PT at 34 and FT at 36. It was the perfect balance and we only needed an afternoon nanny for about two years. YMMV.
Yeah - she's more of a budgeting fiend than I. Bar tabs can hurt the "preapportioned" entertainment allotment at times, so I just tend not to consciously overspend.
wholeinone04
Posts: 255
Joined: Thu May 27, 2010 12:45 pm
Location: California

Re: I'm 23. What else should I be doing financially? TIA.

Post by wholeinone04 »

FYI, I write a personal finance blog for young professionals and you guys are off to a great start. I'd probably bank any raises/annual merit increases straight to 401(k) until you have that maxed out. If you can get 401(k)'s maxed out within a few years plus Roth you will never even have to worry about after tax investing.

I would look into HSA's - my fav investment vehicle of all time. After that, I think your next step should without a doubt be real estate. As long as income/location is secure for 3-5 years, buy a starter place and start reaping the benefits(taxes, saving vs rent, rent out a room??).

If you're in a high Cost of Living(COL) area, you'll need to be very careful here since buy/rent spreads typically favor renting(although realtors will tell you otherwise). But if you're somewhere like Texas or AZ(low COL), you should come out wayyy ahead and might even want to consider a duplex. RE is a lot of work but there's a reason why the wealthiest people I know(and probably you too) have a large RE portfolio.

Lastly, start thinking about multiple sources of income and or hobbies that you can turn into a second income source. You guys are right in the spot where it probably wouldn't make sense for one of you to work once you have a kid since a nanny and the tax penalty(the lower income earner would be taxed at the higher income earner's marginal tax rate) wouldn't justify it. If you can generate 20-30k of income from a small business that only takes a few hours a day to manage that would give the freedom for one of you to stay at home and you could offset the income with deductions/expenses or just put it all into a solo 401(K) and probably make about as much as if you would have stayed full time :)
Topic Author
awintensiveporpoises
Posts: 14
Joined: Thu Apr 03, 2014 4:06 am

Re: I'm 23. What else should I be doing financially? TIA.

Post by awintensiveporpoises »

wholeinone04 wrote:FYI, I write a personal finance blog for young professionals and you guys are off to a great start. I'd probably bank any raises/annual merit increases straight to 401(k) until you have that maxed out. If you can get 401(k)'s maxed out within a few years plus Roth you will never even have to worry about after tax investing.

This would be 17,500 each per year, right?

I would look into HSA's - my fav investment vehicle of all time. After that, I think your next step should without a doubt be real estate. As long as income/location is secure for 3-5 years, buy a starter place and start reaping the benefits(taxes, saving vs rent, rent out a room??).

I'm not too familiar with HSAs, but from a cursory look, it appears that if I don't use the money preapportioned for health issues, I lose it. Is this correct? In general, why do you think this is a good investment?

If you're in a high Cost of Living(COL) area, you'll need to be very careful here since buy/rent spreads typically favor renting(although realtors will tell you otherwise). But if you're somewhere like Texas or AZ(low COL), you should come out wayyy ahead and might even want to consider a duplex. RE is a lot of work but there's a reason why the wealthiest people I know(and probably you too) have a large RE portfolio.

I'm VERY interested in Real Estate, and, at risk of encroaching upon your recommendation below, I have considered setting up an LLC per rental property, to be managed by a Property Management LLC, owned by me. However, I'm SEVERAL years away from this, as I would need to have a significant amount of capital to begin this endeavor. This would be perfect for the wife to manage during and/or post pregnancy. However, I would need to improve my handyman skills.

Lastly, start thinking about multiple sources of income and or hobbies that you can turn into a second income source. You guys are right in the spot where it probably wouldn't make sense for one of you to work once you have a kid since a nanny and the tax penalty(the lower income earner would be taxed at the higher income earner's marginal tax rate) wouldn't justify it. If you can generate 20-30k of income from a small business that only takes a few hours a day to manage that would give the freedom for one of you to stay at home and you could offset the income with deductions/expenses or just put it all into a solo 401(K) and probably make about as much as if you would have stayed full time :)
Thank you so much for your comments and recommendations. This is exactly the type of advice for which I was looking. I look forward to hearing your responses! Oh, and if you want to link your blog, I'd be more than happy to follow.
Saving$
Posts: 2518
Joined: Sat Nov 05, 2011 8:33 pm

Re: I'm 23. What else should I be doing financially? TIA.

Post by Saving$ »

Great start.

1. Try to max the 401k's, not just to the match. At $110k you should be able to do this.
2. HSA is different than FSA. You don't lose the HSA. If you are eligible for an HSA, might even do that before a 401k, and then resolve never to use the HSA money. Google.
3. Save for a house. Think about a duplex. You should not own any property you are not willing to live in yourself. This will be a good start to see if you like landlording, and a good first property. Landlording can become you hobby. You are correct; you need to learn handyperson/repair skills. Call up your local Habitat affiliate and volunteer. Listen to the construction supervisor and ask lots of questions so you understand why you are doing things. Most of what you do at a HFH build will not translate directly to your home maintenance, but it will give you confidence, a sense of how long it takes to do something, and a rudimentary understanding.
wholeinone04
Posts: 255
Joined: Thu May 27, 2010 12:45 pm
Location: California

Re: I'm 23. What else should I be doing financially? TIA.

Post by wholeinone04 »

Yes 401k max is $17,500 per year per person. If you can do it now, I'd say do it since once you pay taxes that money is gone forever. If you delay taxes there are always things you can do to lower your tax burden. For example, rolling over part of your wife's 401(k) to a roth once she leaves her employer to have a baby while you guys are temporarily lower tax bracket or retiring early and doing the same thing :) There are lots of fun ways to legally avoid paying taxes. Here's a good post from a site I found the other day if you need some motivation: http://www.gocurrycracker.com/the-go-cu ... 013-taxes/

If you like investing/saving and it seems like you do, you'll start having wet dreams about HSA's... People who have them don't even realize the potential, hopefully you're both healthy, have good luck(ie dont get sick often) and one of your employers offers them. Here are all the posts I've written about HSA's that will be very applicable to your situation: http://yourpfpro.com/tag/hsa/ (That's my site btw)

I'd need to know more about where you live(high COL vs low COL), job security, etc before recommending you buy but it sounds like it will be a good fit. You're right, RE requires a lot of active income first, that's the tough part. FHA/3.5% down could be an option but that is more risky/higher payments. Still if the math makes sense, then it's a no brainer(not sure what renting vs buying is like in your area but there are a lot of threads on that). Even if you're breaking even every month compared to renting, capital appreciation over 5-10 years could mean a giant increase.

Bigger Pockets Forum is also a great resource if you want more investment/landlord type blog posts/questions/etc. Otherwise BH forum has some really smart people that can handle RE, investing, etc. I also started writing for another site about my RE experience/landlord experience last year: http://www.rentprep.com/blog/author/hcampbell/

I think it's a good idea to smart stall with RE whether you're buying for primary residence or landlording purposes. You'll make a lot of mistakes and learn so much, you don't want to F up the property you're going to live in for 20 years. It's a lot better to screw up a 200k property than it is to screw up a 1 million dollar property :) But there are some awesome tax benefits to owning rental property. One word: depreciation :)

I didn't know much about DIY when I bought my condo but learned a ton(I was pretty handy though to start with). I started with basic plumbing, sink/faucet installation and right before I moved out installed recessed lighting. I enjoy that stuff though :) It's not necessary to be handy but it will save you money. I live 1 hour away from my property now and haven't visited it once since I rented it out, yet I've had a new dishwasher installed, new A/C, plumbing repair, etc. It's easier than ever to manage a property from anywhere in the world today with the internet but it will cost you more. Luckily I have a nice cushion(plus principal, tax benny's, etc) so I'm still making a lot of money on the property but just to get a handy man to your property will cost you $75.

Don't worry about LLC's for now btw.

Take a look at my site, I have 3-4 years worth of articles that will directly apply to your situation(I started the blog when I was 23). Use the search, tags and categories to find what you're looking for, otherwise just shoot me an e-mail and I'll be happy to help :)

Good luck bud.
Topic Author
awintensiveporpoises
Posts: 14
Joined: Thu Apr 03, 2014 4:06 am

Re: I'm 23. What else should I be doing financially? TIA.

Post by awintensiveporpoises »

Saving$ wrote:Great start.

1. Try to max the 401k's, not just to the match. At $110k you should be able to do this.
If we both contribute 17.5K pre-tax and then 5.5K post-tax, that's a significant portion of our income. Would love to do this, but it would take us quite a while to save up for the multi-family house as mentioned below, assuming we put down 20% to receive the mortgage.

2. HSA is different than FSA. You don't lose the HSA. If you are eligible for an HSA, might even do that before a 401k, and then resolve never to use the HSA money. Google.

I will definitely research this. Thanks for the tip.
3. Save for a house. Think about a duplex. You should not own any property you are not willing to live in yourself. This will be a good start to see if you like landlording, and a good first property. Landlording can become you hobby. You are correct; you need to learn handyperson/repair skills. Call up your local Habitat affiliate and volunteer. Listen to the construction supervisor and ask lots of questions so you understand why you are doing things. Most of what you do at a HFH build will not translate directly to your home maintenance, but it will give you confidence, a sense of how long it takes to do something, and a rudimentary understanding.
This is definitely on my list of to-do's. I figure I start with a 2 unit property, and the wife & I will live in one. This will allow us to start slow & small and see how we like landlording. Addditionally, I don't think one other tenant will be overwhelming in terms of repairs, rent collections, etc.

Would you recommend establishing a Property Ownership LLC, borrowing against the Property Ownership LLC (I'm assuming I won't be able to get a first time loan/mortgage without a personal guarantee), and then personally paying rent into the Property Ownership LLC? So two rent checks into the newly formed company - one from us and one from our next-door tenant.
Saving$
Posts: 2518
Joined: Sat Nov 05, 2011 8:33 pm

Re: I'm 23. What else should I be doing financially? TIA.

Post by Saving$ »

awintensiveporpoises wrote:This is definitely on my list of to-do's. I figure I start with a 2 unit property, and the wife & I will live in one. This will allow us to start slow & small and see how we like landlording. Addditionally, I don't think one other tenant will be overwhelming in terms of repairs, rent collections, etc.

Would you recommend establishing a Property Ownership LLC, borrowing against the Property Ownership LLC (I'm assuming I won't be able to get a first time loan/mortgage without a personal guarantee), and then personally paying rent into the Property Ownership LLC? So two rent checks into the newly formed company - one from us and one from our next-door tenant. [/color]
Correct - buy a duplex and live in 1/2 yourself. That is what I meant, but was not explicit. Glad you inferred! LOL!

My personal recommendation is to not mess around with all this LLC stuff, etc. Just get a good Umbrella Policy. However, I am not a lawyer, so research this yourself. My larger comment is that you are WAY ahead of yourself on all this LLC stuff if you have not yet saved for a downpayment. The answer to your question may (but probably wont) be different two years from now than it is now.

The other comment is that you make $115k combined, with no debt. I would recommend figuring out where your money is going if you don't think you can fully fund 401k and Roth while still saving for a house. I would agree your saving will not accumulate as quickly, but you really need to run some numbers.
wholeinone04
Posts: 255
Joined: Thu May 27, 2010 12:45 pm
Location: California

Re: I'm 23. What else should I be doing financially? TIA.

Post by wholeinone04 »

Yea don't even worry about LLC's for now, that is a more advanced real estate topic. Work on maxing our retirement/savings accounts even if that means you'll save a little less for real estate.

Maybe look for a second source of income and use all that money to fund your downpayment fund. Could be something fun, for ex. I started coaching volleyball when I was first working and it provided around 1k/month in extra income that I put straight into my downpayment fund. Since it was my business, I was also able to deduct mileage, home office, etc so there was very little income tax to be paid.
DTSC
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Location: Illinois

Re: I'm 23. What else should I be doing financially? TIA.

Post by DTSC »

You're doing great. I wish I was like you at age 23 (or 33 for that matter)
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