28, new to investing, what would you do with my 3k tax retur

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
loserguy
Posts: 24
Joined: Sun Mar 10, 2013 7:59 pm

28, new to investing, what would you do with my 3k tax retur

Post by loserguy » Sun Mar 10, 2013 8:00 pm

Thanks guys for all of your inputs before I start. Long time follower, first time poster.

I am 28, currently single. I just started working as a resident physician in July 2012 after finishing medical school and prior to that never really had a real job. I make nearly 46k/ year and after taxes, benefits, etc. it comes out to 3k in my pocket.

As for my expenses, I have nearly 250k in school debt with ~7% interest, credit card debt of 3k (balance transferred so will pay it off at 0% in 12 months), and just basic bills. My parents bought me a home and car so I don’t have those expenses.

I put about 60% of my paycheck into a savings account and was able to max out my roth IRA with a lump sum into a vanguard VFIFX (2050 target retirement fund). I have about 6k in cash in an internet savings account and 5k in a Roth at the moment. (My program does not offer a 401k matching plan)

Now, I know im not big ballin’ like a lot of folks on this site but it’s a start. My salary after my training should hopefully be very high given my medical specialty (Radiology) and I am hoping to use that to pay off my student debt. For now, I want to have cash on hand so I can at least feel comfortable and take vacations with my soon to be wife and such.

I was thinking of putting the 3k tax return I am expecting into my Roth. This could give me an opportunity to open another fund if I wanted. Any recommendations on whether to just contribute to VFIFX or to open another/better fund or put the money elsewhere all together.

Thank you so much. I look forward to hearing your opinions.

User avatar
grabiner
Advisory Board
Posts: 23085
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: 28, new to investing, what would you do with my 3k tax r

Post by grabiner » Sun Mar 10, 2013 8:50 pm

First, make sure you have an emergency fund; leave at least three months' salary in your bank account to cover unexpected needs so that you won't need to rely on your parents or your credit card if your car needs a new transmission.

Next, I would suggest going after the debt. Yes, a Roth IRA is a good place to invest, and it's good to build tax-deferred savings, but you will earn a risk-free 7% paying down your student loans, and you are earning only 2% on the low-risk part of your investments (Total Bond Market Index, which is about 10% of the Vanguard fund).

One other point: you shouldn't be getting a $3000 tax refund. Adjust your withholding for next year so that you can get the taxes back from every paycheck rather than $3000 after you file in April. The $3000 which you waited a year to receive could have saved you 7% interest if you had put it against your loans with each paycheck; in addition, if something goes wrong (the IRS makes an error, or someone else files a false return with your Social Security number), you won't get the refund until it is straightened out.

When you do start investing, there's no need for a new fund in addition to Target Retirement 2050; the fund already holds everything you are likely to want. The Target Retirement fund is intended to be your entire portfolio, as it adjusts its allocation automatically. When you have a larger portfolio, you may decide to manage the whole portfolio individually, as the lower expenses on individual funds or the freedom to choose a different allocation become more valuable than the simplicity. But you don't have to do that now; the Target Retirement fund is the best way to get started with a small IRA.
Wiki David Grabiner

DaveS
Posts: 1308
Joined: Fri Jun 15, 2007 9:42 am
Location: Reno, NV

Re: 28, new to investing, what would you do with my 3k tax r

Post by DaveS » Sun Mar 10, 2013 11:42 pm

I cant tell if I agree with the prior post or not. I think one should maximize tax free compounding. That grows for 30 years without taxation. With any kind of IRA once the calender goes beyond April 15th contributing for that year is gone. So I would use the money in the Roth till you reach the contribution limit and then pay down debt. I also think target retirement is fine for someone with limited funds to invest. So I would not hunt up another fund. I agree its nice to tweak your withholding to limit refunds but with the recent changes in the tax code and withholding and further limited deductions it's a hard target to hit. You have a great future. Dave

trudy
Posts: 166
Joined: Mon Jan 30, 2012 7:46 pm

Re: 28, new to investing, what would you do with my 3k tax r

Post by trudy » Mon Mar 11, 2013 4:49 am

I also normally think maxing into IRAs is a good policy.

But the interest rate on that student loan is horrifying. I haven't been following the student loan situation except to glance at articles in the news and note that there are some oddities about them, but is it not possible to refinance that or at least some of it, to a lower rate?

assumer
Posts: 432
Joined: Fri Dec 21, 2012 11:11 pm

Re: 28, new to investing, what would you do with my 3k tax r

Post by assumer » Mon Mar 11, 2013 5:28 am

trudy wrote:I haven't been following the student loan situation except to glance at articles in the news and note that there are some oddities about them, but is it not possible to refinance that or at least some of it, to a lower rate?
You can no longer refinance public student loans. If it's private you can possibly shop around for rates, but not public (e.g. federal loans).

RobInCT
Posts: 393
Joined: Sun Dec 09, 2012 2:58 pm

Re: 28, new to investing, what would you do with my 3k tax r

Post by RobInCT » Mon Mar 11, 2013 7:22 am

Fund the Roth every year with target retirement 2050 until the total is big enough to justify breaking it out into component parts. Beyond that, pay down debt aggressively. Those interest rates are terrible, and it will be hard to find investments that have a more reliable return than the one you will get from early debt repayment. With a resident salary, you won't be making a huge dent in the debt right away, but you might as well get started. Every 10k you can pay now is 13k you won't have to pay back in 4 years.

Good luck. I was in a very similar position about 4 years ago with 6 digit professional school debt at high interest rates, and I am now only about 3 months from being debt-free.

The federal student loan interest rates are indeed outrageous, and there is little you can do about it. Mine were at 8.5% with a 4% origination fee. The rates are fixed by Congress and just never got lowered as other interest rates declined. There is little appetite in the current fiscal climate to give up on this particular cash cow, so I don't hold out much hope for rate reductions in the future. Students relatively secure in their high earning potential after graduation (e.g. Med students) are probably better off with private loans these days. At 12.5% in the first year and 8.5% thereafter, I probably could have found a credit card with similar or better terms.

Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 1:02 pm

Re: 28, new to investing, what would you do with my 3k tax r

Post by Twins Fan » Mon Mar 11, 2013 12:05 pm

$3K tax return, $3k in credit card debt, no car payment, no house payment, big student loan debt with high interest, and 60% of each check going into savings??

Start getting rid of debt. I'd say pay off the credit card with the tax return... becasue why not. Sure, small balance and 0% (for now), but just get rid of it. Fund the Roth each year... doesn't have to be now though. Make sure you have some savings.. EF. And, then start paying down that student loan at 7%. JMHO

lovenox11
Posts: 63
Joined: Sat Dec 31, 2011 5:04 pm

Re: 28, new to investing, what would you do with my 3k tax r

Post by lovenox11 » Tue Mar 12, 2013 10:13 pm

I would put that money into an emergency fund. I'm sure things will need to be fixed in that house in the next 4 years.

Just curious, why didn't your parents give you that money to pay off your student loans instead of buying a car and a house?

User avatar
Toons
Posts: 13044
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: 28, new to investing, what would you do with my 3k tax r

Post by Toons » Tue Mar 12, 2013 10:16 pm

Easy decision,wipe out the 3k credit card debt.be done with it,Next work on the school loan debt :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

jeffsleepy
Posts: 1
Joined: Sat Feb 09, 2013 12:54 am

Re: 28, new to investing, what would you do with my 3k tax r

Post by jeffsleepy » Tue Mar 12, 2013 11:15 pm

I was in your position a few years ago.

Build up a small emergency fund to around 5k or so. This fund is for things such as emergency house/car repairs. You won't lose your job unless you quit or do something monumentally stupid so don't worry about that.

The reason you have such a big tax refund this year is because you only worked half the year and the tax deductions from your paycheck didn't account for that. Also, you may have been able to deduct your med school tuition if you paid it in 2012. This will not be the case next year.

If your loans aren't all under the federal direct loan program, consolidate them immediately. Because of your low salary in comparison to your loan burden, you quality for the Pay As You Earn program which is a better version of IBR. Start your monthly payments. They will be super low for the next year because they go by your 2012 tax return where you only worked half the year and barely made any money. Maybe $150 per month or so. I assume you're working for a non-profit institution. If so, then every payment you make now will go towards the 10 year loan forgiveness program. You have five years of residency ahead of you and at least one year of fellowship. After you graduate, if you work for a non-profit for 4 more years, then your loans are forgiven. If you find that a nice private practice position that would allow you to pay off your loans and still come out ahead, then fine, not a big deal.

Put as much into your Roth IRA as you can. If you have money left over, see if your program offers a Roth 403b.

Also, your class is when everyone realized that radiology was on a downward trend and the specialty as a whole became much less competitive. Jobs are scarce and salaries are nowhere near what they used to be. Just ask the fellows.

Default User BR
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: 28, new to investing, what would you do with my 3k tax r

Post by Default User BR » Wed Mar 13, 2013 11:11 am

Toons wrote:Easy decision,wipe out the 3k credit card debt.be done with it,Next work on the school loan debt
Why would you pay off 0% rate CC debt first?


Brian

bigred77
Posts: 2005
Joined: Sat Jun 11, 2011 4:53 pm

Re: 28, new to investing, what would you do with my 3k tax r

Post by bigred77 » Wed Mar 13, 2013 11:15 am

When you say your parents bought you a house does that mean its paid for in cash and titled in your name???

If thats the case, and I would strongly consider a cash out 30 year fixed mortgage to pay off your student loan debt (assuming the value of the home would allow you to do so).

Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 1:02 pm

Re: 28, new to investing, what would you do with my 3k tax r

Post by Twins Fan » Wed Mar 13, 2013 11:32 am

Default User BR wrote:
Toons wrote:Easy decision,wipe out the 3k credit card debt.be done with it,Next work on the school loan debt
Why would you pay off 0% rate CC debt first?


Brian
Because, how many folks have thought, "well, I have a year at 0% to pay it off, so no rush", and then not paid it off in a year, and end up with a high interest rate on a small balance? I know I have in the past. :oops:

I'm in the camp of, just wipe out that credit card balance with the tax return. Why keep it hanging around? Or, why keep playing the balance transfer game?

Post Reply