Young Investor- New Boglehead

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Young Investor- New Boglehead

Post by Noynek » Mon Jul 15, 2013 6:37 pm

Hi everyone. First off, thank you all for creating such a great forum. I've read lots of posts and topics over the last few months however this is my first time posting. I plan on being a long time contributor and help out in all the discussions. You guys really do a great job and this forum is a wonderful resource to always learn something new. I'd like to thank you guys for your time and any advice or thoughts would be appreciated.

I am a recent college graduate and I'm trying to figure out the best way to go about things....

I have $43,000 in student loans and I'm trying to figure out if it is best to put any extra money towards them or into the retirement accounts and savings.

Emergency Funds: 6 Months ($10,000 in checking account)
Student Loans - $11,000 @ 3.4 Fixed
$2,000 @ 6.8 Fixed
$30,000 @ 2.75% + Libor
Tax Filing: Single
State of Residence: NC
Age: 23
Income: $50-55k

Because of having roommates and being relatively frugal my expenses every month (rent, car, food, insurance, loans, etc) is about $1600. My minimum payments on my student loans are around $330/month and I pay $500 every month on them.

Other assets?

401k-I put in 4% of salary and my work puts in 14%. A total of 18%, of everything I make goes into the 401k.

I'm a diehard boglehead and am using low cost Vanguard Index Funds within my 401k.

I understand the power of compounding and the importance of saving early. That is why I'm trying to figure out where I should put any extra money I have every month. I'm in a serious relationship and within the next year or so I plan on being engaged. I've been hesitant on putting extra money towards the loans because of the fact that I could be saving that money for a down payment on a house. Obviously that is a few years down the road at the earliest, but none the less this forum suggests having 20% for the down payment. The liquidity of the assets is what I lose by putting the money towards paying down the loans.

Any thoughts and suggestions would be greatly appreciated. Thanks again for your time and input.

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Re: Young Investor- New Boglehead

Post by Chris33 » Mon Jul 15, 2013 8:22 pm

Like you, I had a lot of student loans after graduating from law school. You are doing a fine job investing in the tax deferred account, but In my opinion, the extra should go on the debt. You get rid of that and you're home free to take advantage of the compounding interest. I attacked my debt when I was your age and simply eradicated it. I now have a paid off house and a nice nest egg at age 46. I don't think I would've been nearly successful had I let the debt linger. My friends have never agreed with me on paying off the debt first before investing, and then when the market crashed in 08 and 09, they were wishing they had followed my lead.

Trust me, the psychological aspects of being debt free will give you all the confidence you need to be successful. The FHA loan is a wonderful vehicle for buying your first home. I closed a transaction just today whereby the client was able to buy his house with very little down payment. That's another subject, but just know if your credit is good, you won't need a boat load of money to put down on a house.

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Re: Young Investor- New Boglehead

Post by pennstater2005 » Tue Jul 16, 2013 7:55 pm

Pay down the debt. Especially the 6.8% fixed loan. Then attack the rest of the debt as you can.
“If you think nobody cares if you're alive, try missing a couple of car payments.” – Earl Wilson

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Re: Young Investor- New Boglehead

Post by M_to_the_G » Wed Jul 17, 2013 12:03 am

First, kudos to you for living frugally. It's not as bad as some people say, is it? :D

Second, I would say definitely pay down the student loans. They are a weight around your neck. I don't buy into all the financial literature about playing interest rates against each other in debt/investment to maximize this and that, etc. That is just "blah blah" to me. I'm definitely very Dave Ramsey-esque in that sense. I say we should forget all that complicated nonsense and pay debts down, starting with the smallest loan and then working up to the biggest loans. All the statistics and charts about how we should do this with that interest rate first, and then roll this into that, etc. is painful noise to me and obfuscates a simple and solid principal. With your frugality and intelligence, you should have those student loans squared away in a few years.

What is your AA in those Vanguard index investments (what percentage in what funds)?
"It’s basically the plot of 'Charlie and the Chocolate Factory.' If you stick around, doing nothing, while everyone around you ****s up, you’re going to win big." - John Oliver

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Re: Young Investor- New Boglehead

Post by Bob's not my name » Wed Jul 17, 2013 6:25 am

Your tax situation is rather interesting.

$55,000 gross income
- $2,000 401k contribution
- $2,000 pre-tax health, dental, and disability insurance premiums withheld from your pay (or maybe zero if you're still covered by your parents' insurance)
$51,000 AGI --> under the phaseout for the student loan interest deduction, which starts at $55,000 ... so it may be at risk in future years as your pay increases
- $1,500 student loan interest deduction (I estimated this based on your loan sizes and rates)
- $6,100 standard deduction
- $3,900 personal exemption
$39,500 taxable income --> just into the 25% federal bracket, which starts at $36,250

Consider these interesting points:
  • Depending on your precise gross income, you might be just into the 25% federal bracket or just inside the 15% bracket. Note that this determines how your marginal income is taxed, not your total income, e.g., on the top $1,000 of income you pay $250 of tax in the 25% bracket.
  • Your state tax bracket is 7%. If you're in the 15% federal bracket, your state tax is a third of your marginal tax burden.
  • In the 25% federal bracket, and assuming your state tax accommodates (doesn't add back in) the student loan interest deduction, your student loans effectively cost you only 68% of the nominal rate, so a 3.4% interest rate is effectively 2.3%, not bad. However, in the 15% federal bracket, 3.4% is effectively 2.65%.
  • If your gross income exceeds $57,000, you start to be at risk of your AGI exceeding $55,000, which puts you in the student loan interest deduction phaseout. The phaseout effectively increases your marginal rate by 3.2%, because you're losing a $1,500 deduction over a $15,000 phaseout, which means you lose 10% of the deduction for each increment of income above $55,000 AGI, and the deduction is worth 32% because you're avoiding 25% federal and 7% state tax, so 10% x 32% = 3.2%. So in the phaseout your total marginal rate is 25% federal nominal + 7% state nominal + 3.2% effective tax due to the phaseout = 35%. 35% is a high marginal rate.
  • Finally, NC allows you to make a state-tax-deductible Roth IRA contribution up to $2,000. If you are in the 15% federal bracket and can dodge the 7% state tax, a Roth contribution is pretty attractive. Read more about this here: ... 10&t=86262 You are eligible for a deductible TIRA contribution provided your MAGI is under $59,000.
Your head may be spinning by now, but if you study these various factors and think hard about your true income and your true pre-tax insurance costs, you can do some clever tax mitigation. And tax mitigation can make you way more money than even choosing the right low cost investments. You can reduce your AGI and your taxable income by increasing your 401k contributions, so you have the power. Also, bear in mind that if you decide to do the state-deductible Roth IRA trick, you will shift $2,000 of income from 2013 to 2014 --> that has implications for how all these thresholds will affect you in both years, so be sure to optimize for multiple years, not just 2013.

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Re: Young Investor- New Boglehead

Post by Noynek » Thu Jul 18, 2013 5:42 pm

Thanks so much for all the information and replies. I really do appreciate all the feedback.

I hate the thought of having any debt and like you guys have suggested I'll pay down the debt as fast as possible.

I was looking at my 401k and I was mistaken. I am currently invested in the Target Retirement 2055 Fund. I picked it because of it being so simple and easy. Once the account grows and I have more assets I'll think about moving it around into other funds.

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Re: Young Investor- New Boglehead

Post by sharx » Thu Jul 18, 2013 6:46 pm

If your gross income exceeds $57,000, you start to be at risk of your AGI exceeding $55,000, which puts you in the student loan interest deduction phaseout.
I thought the phaseout starts at $60,000 ... tion-2013/

I'm in a very similar situation to the OP, but I have more high interest rate loans (10k @ 7.7%, 11k @ 6.8 %, the rest below 5%). I estimate that my AGI for this year will be in the neighborhood of $67k. With standard deduction/personal exemption, my AGI should fall below $60k right? And as a result I'll be able to take advantage of the student loan interest deduction? This will be the only year I will be able to do so because I will be well above the phase out next year.

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Re: Young Investor- New Boglehead

Post by Bob's not my name » Thu Jul 18, 2013 6:51 pm

1. Edit: You may be right. I can't find 2013 info at and what I Google up elsewhere is contradictory.
2. Your personal exemption and standard deduction don't affect your AGI. You can reduce your AGI with traditional 401k contributions.

This article's out of date, too, but it may be useful to you. Hope you didn't pay your last tuition bill before Jan 1! ... taxes.html
Last edited by Bob's not my name on Thu Jul 18, 2013 7:12 pm, edited 1 time in total.

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Re: Young Investor- New Boglehead

Post by Tipro » Thu Jul 18, 2013 6:58 pm

Don't forget to save for that engagement ring! Making your wife happy is a wise investment imo

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