Evaluate my finances. Young guy.

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
techcrium
Posts: 141
Joined: Sun Mar 24, 2013 12:09 am

Evaluate my finances. Young guy.

Post by techcrium » Tue Jan 21, 2014 9:22 am

Age: 26

Assets:
$185 000 in equities (stocks/etfs/funds)
$5 000 in cash

Debt:
$18 300 at 1% interest credit card
$35 000 at 3% interest from a close relative for 3 years
$26 000 at 3% interest for margin with brokerage

Networth:
$110 000

Salary: 45K per year

Est. Savings per year: 20K

Stock market has been roaring in the last 2 years. I am up 40% last year and already up like 10% this year.

DEBTINATOR
Posts: 72
Joined: Thu Oct 20, 2011 8:05 pm

Re: Evaluate my finances. Young guy.

Post by DEBTINATOR » Tue Jan 21, 2014 9:26 am

It seems odd to be investing money that you owe to a close relative. I would repay the debt immediately.

Also investing with credit cards or balance transfers is not likely to be recommended here. You did well investing with debt, it was risky and paid off. Why not be debt free now and ahead 100k in net worth. If 2008 hits you're basically at 0 net worth.

techcrium
Posts: 141
Joined: Sun Mar 24, 2013 12:09 am

Re: Evaluate my finances. Young guy.

Post by techcrium » Tue Jan 21, 2014 9:37 am

DEBTINATOR wrote:It seems odd to be investing money that you owe to a close relative. I would repay the debt immediately.

Also investing with credit cards or balance transfers is not likely to be recommended here. You did well investing with debt, it was risky and paid off. Why not be debt free now and ahead 100k in net worth. If 2008 hits you're basically at 0 net worth.
I did an analysis and it would have to take the stock market to drop 50% or more to wipe me out. And it would have to happen in less than a year (because I can save $20K a year)

If the stock market indeed dropped that much in a year, then something major is going on, like world war or something which, your wealth probably wouldn't do anything for you.

DEBTINATOR
Posts: 72
Joined: Thu Oct 20, 2011 8:05 pm

Re: Evaluate my finances. Young guy.

Post by DEBTINATOR » Tue Jan 21, 2014 9:46 am

techcrium wrote: I did an analysis and it would have to take the stock market to drop 50% or more to wipe me out. And it would have to happen in less than a year (because I can save $20K a year)

If the stock market indeed dropped that much in a year, then something major is going on, like world war or something which, your wealth probably wouldn't do anything for you.
Dow Jones Industrial Average 14,164 on October 9, 2007.
...October 10, 2008, intraday low of 7,882.

That's pretty close. Do what you want, but you asked for an evaluation :) Gambling with money loaned from relatives is not something I'd recommend. I guess if they are extremely wealthy and could afford to lose it, but that's another issue.

How are you structuring these funds? Have you set up a Roth IRA, 401(k) or emergency fund?

techcrium
Posts: 141
Joined: Sun Mar 24, 2013 12:09 am

Re: Evaluate my finances. Young guy.

Post by techcrium » Tue Jan 21, 2014 9:48 am

DEBTINATOR wrote:
techcrium wrote: I did an analysis and it would have to take the stock market to drop 50% or more to wipe me out. And it would have to happen in less than a year (because I can save $20K a year)

If the stock market indeed dropped that much in a year, then something major is going on, like world war or something which, your wealth probably wouldn't do anything for you.
Dow Jones Industrial Average 14,164 on October 9, 2007.
...October 10, 2008, intraday low of 7,882.

That's pretty close. Do what you want, but you asked for an evaluation :) Gambling with money loaned from relatives is not something I'd recommend. I guess if they are extremely wealthy and could afford to lose it, but that's another issue.

How are you structuring these funds? Have you set up a Roth IRA, 401(k) or emergency fund?
Yeah 5K cash is emergency fund

ROTH IRA has 30K

401K has 14K

rest is non registered

dpusa
Posts: 127
Joined: Thu May 19, 2011 8:07 am

Re: Evaluate my finances. Young guy.

Post by dpusa » Tue Jan 21, 2014 10:00 am

DEBTINATOR wrote:It seems odd to be investing money that you owe to a close relative. I would repay the debt immediately.

Also investing with credit cards or balance transfers is not likely to be recommended here. You did well investing with debt, it was risky and paid off. Why not be debt free now and ahead 100k in net worth. If 2008 hits you're basically at 0 net worth.
What debtinator said. IF I were in your shoes, I would pay off the debt first and then look to invest. Again, IMHO.

User avatar
BolderBoy
Posts: 4024
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Evaluate my finances. Young guy.

Post by BolderBoy » Tue Jan 21, 2014 10:28 am

You sound pretty sure of yourself. Why do you care what we think?

HEPennyPacker
Posts: 14
Joined: Fri Mar 29, 2013 8:48 pm

Re: Evaluate my finances. Young guy.

Post by HEPennyPacker » Tue Jan 21, 2014 11:25 am

If I had those assets, I would have paid off the debt yesterday.

User avatar
Clark & Addison
Posts: 140
Joined: Mon Jan 14, 2013 12:15 pm
Location: Indiana

Re: Evaluate my finances. Young guy.

Post by Clark & Addison » Tue Jan 21, 2014 11:33 am

While at 26 it is impressive to have a net worth in the 6 figures, your net worth will not change by paying off the debt, so why not do it?

Grt2bOutdoors
Posts: 19083
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Evaluate my finances. Young guy.

Post by Grt2bOutdoors » Tue Jan 21, 2014 11:36 am

Wise person once and continues to say "Don't confuse strategy with outcome".

Here's my take on margin debt - Live by the sword, die by the sword. Good Luck!
The ride can be swift - up or down! Please post again when you get the phone call from the broker telling you to "post margin or they will close you out". I'm sure that will be a "fun" phone call to get.

You asked for our evaluation, but it seems to me like you think you have it "all under control". The street is littered with the corpses of those who thought they had it all under control in the "commodities pits, options and puts pits, buying stock on margin pits".
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
Posts: 19083
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Evaluate my finances. Young guy.

Post by Grt2bOutdoors » Tue Jan 21, 2014 11:38 am

Clark & Addison wrote:While at 26 it is impressive to have a net worth in the 6 figures, your net worth will not change by paying off the debt, so why not do it?
He's addicted to the ride! Funny thing about rockets, eventually they fall back into orbit. Physics 101. :P
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

User avatar
steadyeddy
Posts: 722
Joined: Tue Mar 31, 2009 5:01 pm
Location: The Alps of the Midwest

Re: Evaluate my finances. Young guy.

Post by steadyeddy » Tue Jan 21, 2014 12:12 pm

If you don't pay off your debts, you'll likely learn a very valuable lesson. If you do pay off your debts, you'll likely learn nothing. This where is gets sticky, I don't know if the lesson you'll learn is fully worth $100,000. But for you, it sounds like it might be.

mnvalue
Posts: 1086
Joined: Sun May 05, 2013 2:22 pm

Re: Evaluate my finances. Young guy.

Post by mnvalue » Tue Jan 21, 2014 12:26 pm

I'm assuming you have only a taxable account. I'm assuming the 1% credit card deal stays at 1% for the life of the balance. If not, you need to have a plan to pay it off.

1) Take $4,000 of that cash and pay down the margin loan.
2) Sell any capital losses, if you have any.
3) Sell any long-term gains (starting in individual stocks) up to the point that you pay off the rest of the margin.
4) Turn off dividend and capital gains re-investment.
5) Post the details of your holdings here so we can help you rebalance into a simple, low-cost, tax-efficient, passive portfolio. Among other things, this will involve selling $5,500 more in the taxable account and starting a Roth IRA with a full contribution for tax year 2013. You'll also sell out of individual stocks and anything else in taxable that doesn't fit the plan, over time, as those lots reach long-term status.
6) Redirect your savings (20k/year) to maxing out your Roth IRA for 2014 and a 401k (pre-tax to get you down under the top of the 15% bracket if needed, then Roth); pay only the minimums on all debt. Invest the 2013 and the first two months of 2014 Roth IRA contributions very conservatively (money market or at most short-term bonds) to act as the rest of your emergency fund. After that, invest the new contributions per your overall asset allocation.

This plan very quickly (basically, as fast you can make it happen) eliminates the margin call risk and gets you into a portfolio and investing plan that will set you up very well.

Calm Man
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: Evaluate my finances. Young guy.

Post by Calm Man » Tue Jan 21, 2014 1:29 pm

deleted
Last edited by Calm Man on Tue Jan 21, 2014 2:20 pm, edited 1 time in total.

Agrippa
Posts: 47
Joined: Sat Jan 04, 2014 8:34 am

Re: Evaluate my finances. Young guy.

Post by Agrippa » Tue Jan 21, 2014 1:52 pm

OP,

I suggest you read this epic thread detailing the adventures of forum member "market timer":

http://www.bogleheads.org/forum/viewtopic.php?t=5934

You gambled and won. Congratulations. Time to cash in your chips.
Agrippa

Jack FFR1846
Posts: 7643
Joined: Tue Dec 31, 2013 7:05 am

Re: Evaluate my finances. Young guy.

Post by Jack FFR1846 » Tue Jan 21, 2014 2:05 pm

reminds me of my daytrading days. I rode the wiggles up and up and up, buying on the lows, selling on the highs. 2 little "oopses" and I was taking the maximum loss allowed for the year instead of paying taxes on 5 figure gains.

<shrug> do what you want. Oh.....and I did it with my own money. <burn>
Bogle: Smart Beta is stupid

User avatar
RyeWhiskey
Posts: 864
Joined: Thu Jan 12, 2012 10:04 pm

Re: Evaluate my finances. Young guy.

Post by RyeWhiskey » Tue Jan 21, 2014 2:17 pm

I'm 27 and have a net worth of less than half of what you have.

If I were you I'd pay off the 79k in debt this week and look at my new 110k in debt free assets with new eyes. I'd put 10k aside for playing (margin calls, etc... but no more than 10k total, including the margin; and if/when you lose it, it's gone). Then I'd invest the remaining 100k according to my IPS, contribute the maximum to this plan each year, and live my life. :beer
This post was brought to you by Vanguard Total World Stock Index (VTWSX/VT).

techcrium
Posts: 141
Joined: Sun Mar 24, 2013 12:09 am

Re: Evaluate my finances. Young guy.

Post by techcrium » Tue Jan 21, 2014 3:39 pm

Agrippa wrote:OP,

I suggest you read this epic thread detailing the adventures of forum member "market timer":

http://www.bogleheads.org/forum/viewtopic.php?t=5934

You gambled and won. Congratulations. Time to cash in your chips.
I've read all 29 pages.

surfstar
Posts: 1486
Joined: Fri Sep 13, 2013 12:17 pm
Location: Santa Barbara, CA

Re: Evaluate my finances. Young guy.

Post by surfstar » Tue Jan 21, 2014 4:25 pm

techcrium wrote:
Agrippa wrote:OP,

I suggest you read this epic thread detailing the adventures of forum member "market timer":

http://www.bogleheads.org/forum/viewtopic.php?t=5934

You gambled and won. Congratulations. Time to cash in your chips.
I've read all 29 pages.
So, self-evaluate your finances and tell us how you think you're doing.

jimbojones
Posts: 117
Joined: Sat Feb 18, 2012 7:53 pm

Re: Evaluate my finances. Young guy.

Post by jimbojones » Tue Jan 21, 2014 4:28 pm

It's funny. I bet the responses would be much different if the OP said "I'm debt-free, except for my $79K mortgage at 3.XX%." What most people fail to realize is that all debt is leverage.

I don't like lending between friends and family, but if both parties are happy and understand the risks/rewards, then it shouldn't be a problem. A 3% return for your relative isn't bad if they think the default risk is low.

User avatar
RyeWhiskey
Posts: 864
Joined: Thu Jan 12, 2012 10:04 pm

Re: Evaluate my finances. Young guy.

Post by RyeWhiskey » Tue Jan 21, 2014 4:32 pm

jimbojones wrote:It's funny. I bet the responses would be much different if the OP said "I'm debt-free, except for my $79K mortgage at 3.XX%." What most people fail to realize is that all debt is leverage.

I don't like lending between friends and family, but if both parties are happy and understand the risks/rewards, then it shouldn't be a problem. A 3% return for your relative isn't bad if they think the default risk is low.
I don't think a mortgage is comparable to margin/credit card/personal loans in any sense. The 1% credit card loan changes to 10%+ when the initial promo period is over; the margin can become astronomically worse at any moment; the personal loan is only as good as the person who wrote it (who knows when they may need that money?). In the fruit stand of loans, we're talking apples and bananas here.
This post was brought to you by Vanguard Total World Stock Index (VTWSX/VT).

jimbojones
Posts: 117
Joined: Sat Feb 18, 2012 7:53 pm

Re: Evaluate my finances. Young guy.

Post by jimbojones » Tue Jan 21, 2014 4:42 pm

RyeWhiskey wrote:
jimbojones wrote:It's funny. I bet the responses would be much different if the OP said "I'm debt-free, except for my $79K mortgage at 3.XX%." What most people fail to realize is that all debt is leverage.

I don't like lending between friends and family, but if both parties are happy and understand the risks/rewards, then it shouldn't be a problem. A 3% return for your relative isn't bad if they think the default risk is low.
I don't think a mortgage is comparable to margin/credit card/personal loans in any sense. The 1% credit card loan changes to 10%+ when the initial promo period is over; the margin can become astronomically worse at any moment; the personal loan is only as good as the person who wrote it (who knows when they may need that money?). In the fruit stand of loans, we're talking apples and bananas here.
Agreed- the terms are vastly different between a mortgage and the OP's loans. CC loans could possibly be extended forever with 0% offers, the relative may never call the loan, and the margin call may never be an issue.

Doesn't change the fact that it's all leverage.

afan
Posts: 3786
Joined: Sun Jul 25, 2010 4:01 pm

Re: Evaluate my finances. Young guy.

Post by afan » Tue Jan 21, 2014 4:53 pm

Mortgage interest would be deductible. Margin interest would be deductible if used for investing. CC and personal loan interest are not deductible as far as I know.

Are the personal loan and CC interest rates fixed? I have to assume the margin loan is not. Stock prices are much more volatile than real estate, so there is a considerably higher risk of going underwater on the stock than on a house. If your house drops to less than the balance of your mortgage you can still live there, and no one is going to demand a mortgage call to make up the difference. If the stocks go down you may need to pony up cash, which you may not have.

But yes. If you want more risk than 100% stocks can provide, then leverage is the way to go. Most BH's see more risk than reward, but it is a free country.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

User avatar
HomerJ
Posts: 11574
Joined: Fri Jun 06, 2008 12:50 pm

Re: Evaluate my finances. Young guy.

Post by HomerJ » Tue Jan 21, 2014 5:43 pm

DEBTINATOR wrote:
techcrium wrote: I did an analysis and it would have to take the stock market to drop 50% or more to wipe me out. And it would have to happen in less than a year (because I can save $20K a year)

If the stock market indeed dropped that much in a year, then something major is going on, like world war or something which, your wealth probably wouldn't do anything for you.
Dow Jones Industrial Average 14,164 on October 9, 2007.
...October 10, 2008, intraday low of 7,882.

That's pretty close. Do what you want, but you asked for an evaluation :) Gambling with money loaned from relatives is not something I'd recommend. I guess if they are extremely wealthy and could afford to lose it, but that's another issue.

How are you structuring these funds? Have you set up a Roth IRA, 401(k) or emergency fund?
I would be impressed if the OP responded to this quote, stating something... "oh, wow... I was wrong.. I guess it IS possible for the stock market to drop nearly 50% in one year."

Also, when the stock market dropped 50% last time (a mere 6 years ago), many people lost their jobs, so OP, you can't count on being able to save $20k a year during a 50% stock market drop.

nash031
Posts: 172
Joined: Fri Oct 11, 2013 10:38 am
Location: Coronado, CA
Contact:

Re: Evaluate my finances. Young guy.

Post by nash031 » Tue Jan 21, 2014 5:59 pm

Jack FFR1846 wrote:reminds me of my daytrading days. I rode the wiggles up and up and up, buying on the lows, selling on the highs. 2 little "oopses" and I was taking the maximum loss allowed for the year instead of paying taxes on 5 figure gains.

<shrug> do what you want. Oh.....and I did it with my own money. <burn>
Always reminded of the former day-trader who joined the Navy after making $100 million in one year, and then losing it in the early 2000s. He asked me "Yeah, but how many guys do you know that made $100M in one year." I said, "The same number of guys that I know who've lost $100M in one year."

abracadabra11
Posts: 111
Joined: Sat May 01, 2010 2:09 pm

Re: Evaluate my finances. Young guy.

Post by abracadabra11 » Tue Jan 21, 2014 6:07 pm

I think your plan is great.

You should probably go on an AOR and try to increase the amount of capital that you can access for additional leverage - more is better, right? :beer

Do us all a favor and continue to update us on your continued success. There's no way this will turn out poorly for you considering the analysis that you've done.

bmelikia
Posts: 541
Joined: Mon Jun 15, 2009 9:23 pm

Re: Evaluate my finances. Young guy.

Post by bmelikia » Tue Jan 21, 2014 6:08 pm

techcrium wrote:
Agrippa wrote:OP,

I suggest you read this epic thread detailing the adventures of forum member "market timer":

http://www.bogleheads.org/forum/viewtopic.php?t=5934

You gambled and won. Congratulations. Time to cash in your chips.
I've read all 29 pages.
And?
"I would rather die with money, than live without it...." - Bogleheads member Ron | | "The greatest enemy of a good plan, is the dream of a perfect plan." | -Bogle

bmelikia
Posts: 541
Joined: Mon Jun 15, 2009 9:23 pm

Re: Evaluate my finances. Young guy.

Post by bmelikia » Tue Jan 21, 2014 6:17 pm

techcrium wrote: Debt:
$18 300 at 1% interest credit card
$35 000 at 3% interest from a close relative for 3 years
$26 000 at 3% interest for margin with brokerage
Since you're asking for opinions. . .

Your salary is nothing special - but it looks like someone has blessed you with a good start based on the size of your current net worth.

If I were you, I personally wouldn't be able to respect myself if I new that a relative had loaned me money and I was going to make a conscious decision to string out paying that loan off - especially if I had the money to pay that loan off.

If I were your relative, I'd be put off by the fact that you were choosing to postpone paying me back if you had the money right now.

Basically, I can't see any justification for not paying your relative off.

Obviously the choice is yours to make.
"I would rather die with money, than live without it...." - Bogleheads member Ron | | "The greatest enemy of a good plan, is the dream of a perfect plan." | -Bogle

matto
Posts: 140
Joined: Fri Jan 03, 2014 3:51 am

Re: Evaluate my finances. Young guy.

Post by matto » Tue Jan 21, 2014 6:30 pm

Agrippa wrote:OP,

I suggest you read this epic thread detailing the adventures of forum member "market timer":

http://www.bogleheads.org/forum/viewtopic.php?t=5934

You gambled and won. Congratulations. Time to cash in your chips.
I liked Market Timer. His plan made sense, although he even admitted he took on way too much leverage. Nevertheless he worked his way out and is doing well now. I think it's nice to see someone put their actions where the math indicates and to stick to that plan.

The OP doesn't have the same sort of logical plan, it seems more dangerous.

techcrium
Posts: 141
Joined: Sun Mar 24, 2013 12:09 am

Re: Evaluate my finances. Young guy.

Post by techcrium » Tue Jan 21, 2014 6:47 pm

bmelikia wrote:
techcrium wrote:
Agrippa wrote:OP,

I suggest you read this epic thread detailing the adventures of forum member "market timer":

http://www.bogleheads.org/forum/viewtopic.php?t=5934

You gambled and won. Congratulations. Time to cash in your chips.
I've read all 29 pages.
And?
What went wrong was that he took too much leverage and sold alot of his stocks at the bottom. If he wasn't forced into margin call, then today he would be in upwards of $500K-$600K

Theoretically, I agree completely with his thesis. Practically, however, government laws and brokerage regulation implement margin requirements which ultimately killed his strategy.

However, I hear that he is doing well now and I don't know if he is still implementing his strategy or not.

Agrippa
Posts: 47
Joined: Sat Jan 04, 2014 8:34 am

Re: Evaluate my finances. Young guy.

Post by Agrippa » Tue Jan 21, 2014 7:51 pm

OP,

Why do you feel the need to assume the risk of this amount of leverage? Given your age (26) and savings rate (20k per year) you should be able to amass a very respectable nest egg without leverage. Clearly you're not someone who blows through money. Why assume the additional risk?
Agrippa

techcrium
Posts: 141
Joined: Sun Mar 24, 2013 12:09 am

Re: Evaluate my finances. Young guy.

Post by techcrium » Tue Jan 21, 2014 8:05 pm

Agrippa wrote:OP,

Why do you feel the need to assume the risk of this amount of leverage? Given your age (26) and savings rate (20k per year) you should be able to amass a very respectable nest egg without leverage. Clearly you're not someone who blows through money. Why assume the additional risk?
because I am saving 20K per year on a gross salary of 45K per year.

You can imagine the lifestyle I am leading right now :P

If I am going to go through what I am going through, why not assume the risk and get it over with faster? I can obviously handle tougher times if I have to default. (The personal loans will of course be paid back.) If everything works as planned, I may retire at 40. Or at least slowly phase out of working 40 hours a week.

Jim127
Posts: 68
Joined: Sun Mar 04, 2012 3:25 pm

Re: Evaluate my finances. Young guy.

Post by Jim127 » Tue Jan 21, 2014 8:46 pm

Same as the others, I would be paying off that debt asap. You don't need the leverage and it just adds on a level of risk you do not need to take. Given your excellent savings rate, you will have no problem building a significant net worth.

jf89
Posts: 426
Joined: Sun Aug 11, 2013 11:53 pm

Re: Evaluate my finances. Young guy.

Post by jf89 » Tue Jan 21, 2014 9:22 pm

Reading back through everything it seems like you missed the part where:

1) a 50% decline in the market in a year is very possible
2) that potential 50% decline and your job security likely have a higher correlation than you are considering
3) if you lose your job no amount of saying "The personal loans will of course be paid back" makes your relatives whole again

People in this (and your other) thread are not attacking you, but pointing out that you are taking on a great deal of risk and bringing those that presumably love you along on that same path.
"Save as much as you can, diversify diversify diversify, and you can't go wrong with tech stocks" | -First investing advice I recall from my parents in the 90's (two outta three ain't bad)

dgdevil
Posts: 938
Joined: Sun Feb 20, 2011 1:42 pm

Re: Evaluate my finances. Young guy.

Post by dgdevil » Tue Jan 21, 2014 9:36 pm

Pay off the debt AND reward yourself with a little splurge, a foreign trip? Your savings rate and investment skills (to date) are excellent. You'll do well, especially if you absorb the gist of the preceding posts.

newboggler
Posts: 72
Joined: Thu Jul 18, 2013 7:09 am

Re: Evaluate my finances. Young guy.

Post by newboggler » Tue Jan 21, 2014 9:47 pm

HEPennyPacker wrote:If I had those assets, I would have paid off the debt yesterday.
+ 1 millionzz

My 2 cents - keep it or throw it !

1. More reading will help - Boglehead guide to investing; Millionaire next door, Some asset allocation / risk management books
2. Great beginners luck - Settle down before market settles you down !
3. Unpaid Advice on this forum is better than top 10 financial advisor's paid advice combined; trust me !
4. Mistakes are very important for learning; do cheaper mistakes and learn valuable lessons and not the other way! May be learn from someones mistake !
5. Mixing money with relationship usually ends in destroying relationships; whether lending or borrowing - A wise man told me long back.

BTW a close friend of mine with similar setup like yours (only thing different was that my friend had no debt); lost 240-250K in one year of market crash; his net saving rate was more than twice your gross income (100K+) and he was able to take this blow calmly bcoz of his job (MD internal medicine).

Evaluate your scenario again...

Not trying to discourage but trying to warn !

Hope for the best; but prepare for the worst !

Good luck !
Last edited by newboggler on Tue Jan 21, 2014 10:19 pm, edited 1 time in total.

MapleHermit
Posts: 68
Joined: Sat Oct 26, 2013 2:37 am

Re: Evaluate my finances. Young guy.

Post by MapleHermit » Tue Jan 21, 2014 9:56 pm

A lot of people are saying pay off the debt.

However, 3% is pretty much the approximate rate of inflation. This means you are borrowing money at a nearly free rate. I would recommend staying in debt unless the interest rates increase to a higher number such as 5% or more.

Also remember margin interest is tax deductible and kudos to your savings rate: it's really high.

techcrium
Posts: 141
Joined: Sun Mar 24, 2013 12:09 am

Re: Evaluate my finances. Young guy.

Post by techcrium » Tue Jan 21, 2014 10:09 pm

jf89 wrote:Reading back through everything it seems like you missed the part where:

1) a 50% decline in the market in a year is very possible
2) that potential 50% decline and your job security likely have a higher correlation than you are considering
3) if you lose your job no amount of saying "The personal loans will of course be paid back" makes your relatives whole again

People in this (and your other) thread are not attacking you, but pointing out that you are taking on a great deal of risk and bringing those that presumably love you along on that same path.
1. 50% decline is very possible. I am keeping my debts but I won't be adding to it, meaning by the end of this year, I will have saved another 20K, which means by then, it would take 65%-70% market decline to wipe me out

2. I cannot address this. This is a good point. However this affects everyone. If one was 100% in equities and he loses his job at the bottom of the market, he would have to sell at the bottom to continue to fund his living expenses
As well, for my job field, IT, it is fairly easy to land a job.

3. You are assuming that I won't ever be able to pay off the debt ever again...which is not true. Unless I die, which my company insurance would pay off the debt.

User avatar
grap0013
Posts: 1884
Joined: Thu Mar 18, 2010 1:24 pm

Re: Evaluate my finances. Young guy.

Post by grap0013 » Tue Jan 21, 2014 10:13 pm

techcrium wrote: .... and already up like 10% this year.
I think you need to double check your math http://www.bogleheads.org/forum/viewtop ... 5#p1916525

Have you watched "The Patriot"? Pride is a weakness.
There are no guarantees, only probabilities.

MoonOrb
Posts: 959
Joined: Thu Jan 24, 2013 6:58 pm

Re: Evaluate my finances. Young guy.

Post by MoonOrb » Tue Jan 21, 2014 10:20 pm

If your plan is to possibly retire in 14 years, then I don't think the typical BH model will work for you, except you're doing an excellent job at the "live beneath your means part," saving about 45% of your salary. That's great.

I think given your goal of such an early retirement, you're doing things as well as you can, right? Options for growing investments are basically: 1) increase savings rate; 2) increase time money is invested; and 3) assume more risk.

If you can't further increase your savings rate and you don't want to increase the amount of time your money is invested, then all that's left is to assume more risk.

It's not a risk that I would want to assume, and I imagine I'm not alone in that view in this community. So I think in the first instance the sensibility of your plan turns on why it's so significant for you to take such a big gamble. If upon reflection you decide that you can increase the time horizon of your investing, then I think your current plan sucks and you should make some changes. If upon reflection you insist on such a short time span to achieve your goal, then I think you have to keep on leveraging.

User avatar
market timer
Posts: 5940
Joined: Tue Aug 21, 2007 1:42 am

Re: Evaluate my finances. Young guy.

Post by market timer » Wed Jan 22, 2014 7:49 am

You're in a great position, especially relative to your spending. In your situation, I'd pay off the loans ASAP, if for no other reason than that you can currently borrow at much less than 3% using derivatives. You may have done this already, but I think it is worth having a very clear plan for how you would handle a severe correction, and a good justification for taking on the risk of leverage. For example, if you want want to end up with a 50/50 stock/bond portfolio at age 40, with $250K in stocks and $250K in bonds, taking on some leverage might make sense up to $250K. That is the Mortgage Your Retirement approach. Personally, I'm not a fan of leveraging equities at current valuations, and think you would have more success figuring out ways to increase your income.

ot1138
Posts: 146
Joined: Sun Mar 10, 2013 12:46 pm

Re: Evaluate my finances. Young guy.

Post by ot1138 » Wed Jan 22, 2014 12:28 pm

OP should consider the fact that he is getting advice from a forum populated with an absurdly high percentage of millionaires and an even higher percentage of people with 20+ years of market experience. He sounds a bit overconfident.

Simple answer: Pay off the debt.

Who cares if it's from a relative (they obviously don't care because they lent it to you). 3% is a low interest rate (although inflation is 1.5% so you are actually paying a 1.5% real interest rate right now.) Why not use it?

Because you don't have anything to invest it in that's better. Your mistake is that you looked at the last two years of stellar, once-in-a-lifetime returns and think it's going to happen again. It might but the odds are against it.

You're gambling, face it.

A sensible person would pay off all of their debts and exit their 20s with a solid financial foundation and a huge headstart in life. The extra $10k you might make isn't worth giving up that.

User avatar
Meg77
Posts: 2383
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Evaluate my finances. Young guy.

Post by Meg77 » Wed Jan 22, 2014 1:22 pm

Liquidity
You are OK liquidity-wise for now (since I assume you can access much of your Roth IRA balances tax and penalty free), but I'd make maintaining some additional cash a priority - or at least maintaining some unlevered investments in taxable/accessible accounts. Given your age and salary, and presuming that you are an educated and moderately intelligent person, then you should be able to replace your income fairly easily even if you lose your job at this stage. The more you make and the higher up the career ladder you go, the less true this is, but for now a $5K emergency fund is probably just fine for you since you are living on nearly half your salary. However additional cash balances are prudent not only for emergencies and not only to enable you to cover any margin calls if need be, but also for short to mid term needs/wants (new car, engagement ring, home purchase, whatever).

Income
The best way to improve your financial situation at your stage in life is to maximize your earning potential. I don't know what you do or what your education is, but earning more is the surest quickest and easiest way to investing more and also having more to spend (which is, ultimately, the point). Especially now while time is not as valuable for you, focus on moving up the income bracket at your company and/or getting additional credentials.

Taxes
You're in a low tax bracket so max out a Roth IRA every year while you can. Also get any 401k match - and use the Roth 401k if you have the option. Then focus on maxing out the 401k and an HSA if you have that option. Move money from taxable to do so if necessary for a few years until your income will cover those contributions. THEN if you have money leftover, invest in taxable.

Investments
You aren't diversified. You're investing 100% in equities; you need exposure to bonds, more cash, and some real estate in my opinion (I get not wanting bonds right now but you can get 2% at credit unions on checking accounts in many areas; put your bond allocation in cash for now until rates rise a bit). 100% stocks might be fine at your age if you weren't levered, but since you have margined pretty much your entire taxable investments, you need to diversify those holdings so that your portfolio isn't as volatile when the market swings. Unless you have access to some other assets you aren't telling us about, you're going to be forced to sell low to cover the margin when the market dips.

Debt
You're over-levered and for no good reason. Not only do you have too much debt by a debt/income ratio, but you also have the three worst kinds of debt: credit card debt (which messes with your credit rating and will adjust upward to the double digit interest rate eventually), family debt (which can cause resentment when the relatives see you spending money and is psychologically more difficult to deal with), and margin debt (which is volatile based on equity prices and can be called with no warning if prices fall). Your debt isn't tax deductible, it isn't fixed rate (with the exception of the family debt), and it isn't being used to invest in any assets with a stable value (such as an education or a piece of real estate). Do yourself a favor and start to address this now.

You rode the wave up 40% last year and 10% already this year, as you said. Do you really expect that to happen year after year? Buy low, sell high - right? Well the market is at all time highs. You do the math. I'm not saying sell now; I'm saying stop adding to investments for a few months (except your 401k) and get some of that margin debt down.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Greentree
Posts: 126
Joined: Sun Jul 28, 2013 9:34 am

Re: Evaluate my finances. Young guy.

Post by Greentree » Wed Jan 22, 2014 1:51 pm

Nice job saving.

The interest rate you are borrowing at is low, but it would still make me nervous especially to mix with a close relative. Not to say I didn't think of doing a similar thing when I was younger, but I'm sure glad I didn't! At this point, you think you know how you will act through a downturn and unemployment, and your friend asking for their money back, but I would bet that isn't reality. Maybe later you will see that it is not worth any potential headache and stress.

Your risk profile is that you could get hammered on the one hand/gain a little bit more through leveraging. It's worked so far, but I would flip that around soon.

A few quotes to chew on:
“More people fail because of liquor and leverage – leverage being borrowed money.”
"You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing."
"Only when the tide goes out do you discover who's been swimming naked."
Warren Buffett

"A man who carries a cat by the tail learns something he can learn in no other way."
Mark Twain

"Everyone has a plan until they get punched in the mouth."
Mike Tyson

thisismyusername123
Posts: 95
Joined: Tue Nov 05, 2013 8:52 am

Re: Evaluate my finances. Young guy.

Post by thisismyusername123 » Wed Jan 22, 2014 2:46 pm

What the hell are you investing in that appreciated 10% in the past three weeks?

wedsep
Posts: 13
Joined: Thu Sep 19, 2013 10:19 am

Re: Evaluate my finances. Young guy.

Post by wedsep » Wed Jan 22, 2014 4:43 pm

If I borrowed money from a relative and friend, even at 0% interest, I will pay it off immediately when I have the money, certainly before investing.

engineer4286
Posts: 62
Joined: Fri Jun 21, 2013 11:50 am

Re: Evaluate my finances. Young guy.

Post by engineer4286 » Wed Jan 22, 2014 4:47 pm

"The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge." - Stephen Hawking

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

Re: Evaluate my finances. Young guy.

Post by Twins Fan » Wed Jan 22, 2014 4:49 pm

thisismyusername123 wrote:What the hell are you investing in that appreciated 10% in the past three weeks?
I was wondering this also. The market has been pretty flat to start the year. What is the OP in that, as I took it, his portolio is up 10% YTD???

techcrium
Posts: 141
Joined: Sun Mar 24, 2013 12:09 am

Re: Evaluate my finances. Young guy.

Post by techcrium » Wed Jan 22, 2014 4:53 pm

Twins Fan wrote:
thisismyusername123 wrote:What the hell are you investing in that appreciated 10% in the past three weeks?
I was wondering this also. The market has been pretty flat to start the year. What is the OP in that, as I took it, his portolio is up 10% YTD???
I am actually Canadian investing in mostly US indexes. So...since Canadian dollar has dropped recently, I am up 10% on all my funds by definition.

I have Roth equivalent and 401 equivalent if anyone asks.

dgdevil
Posts: 938
Joined: Sun Feb 20, 2011 1:42 pm

Re: Evaluate my finances. Young guy.

Post by dgdevil » Wed Jan 22, 2014 5:00 pm

If you like some excitement, buy NZD assets - everyone bullish about the kiwis this year.

Post Reply