Low-income 27-year-old Beginning Investor

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lilreddog
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Low-income 27-year-old Beginning Investor

Post by lilreddog » Wed Jan 29, 2014 7:27 am

*Edited later for privacy's sake after I received plenty of good responses

Hi all:

Long time reader, first time poster.

I’ve tried to follow formats in this post as best I know how, so please just tell me if anything is unclear. I’m still quite the beginner… not to mention, I’ve always been more of a word person rather than a number person, so apologies in advance if any of my thoughts on this subject seem scattered.

Income: $22,000 - $24,000 per year (varies)
Living expenses: $3,000 per year (estimated)
Emergency funds: None (no savings account)
Cash on hand: $4,000 (in checking account)
Debt: Two student loans ($1,500 @ 6.55% / $1,500 @ 6.3%)
Tax filing status: Single
Tax rate: 15%
State of residence: VA
Age: 27
Desired asset allocation: 90% stocks / 10% bonds
Desired international allocation: 30%

Current retirement assets: 100% Vanguard Target Retirement 2050 Fund (VFIFX) (0.18% ER)
Allocation to underlying funds (ranking by percentage):
1. Vanguard Total Stock Market Index Fund Investor Shares (63.1%)
2. Vanguard Total International Stock Index Fund Investor Shares (26.9%)
3. Vanguard Total Bond Market II Index Fund Investor Shares (8.1%)
4. Vanguard Total International Bond Index Fund Investor Shares (1.9%)

An ideal 2014 timeline might look something like this:
January – March: Max out Roth IRA for 2013 ($5,500)
April – May: Pay off student loans entirely
May – December: Max out Roth IRA for 2014; also, replenish emergency fund

Questions:
1. To put it simply: does it seem at all like I’m on the right track?

2. Is my assumption correct about the student loan debt vs. maxing out the 2013 Roth IRA? (It’s really one or the other; and if paying off the student loans right now is actually a better idea, I could still probably add at least another $1,000 dollars to the Roth IRA for 2013 for a total of only $2,000 for that year.)

3. What other investments should I make (if any) after I’ve fully funded the Vanguard Target Retirement 2050 Fund? For example, would Vanguard LifeStrategy be a good next investment for a beginner to start saving up the $3,000 minimum? (Also: If not investments, should I start that savings account that never was…?)

4. Finally, would it be possible to come back later with more questions about our small business’s finances? I know this is a Personal Finances forum, so if this isn’t the correct place, just let me know. (Just to note: I’ve already started to check out Vanguard’s small business page to find out about options.)

Well, I guess that’s about all I can think of right now. Any other advice would of course be more than welcome. I came here for the insightful opinions, so I won’t mind any additional input whatsoever.

Thanks so much. I look forward to everyone’s replies.
Last edited by lilreddog on Thu Apr 17, 2014 11:24 am, edited 1 time in total.

Juniper
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Re: Low-income 27-year-old Beginning Investor

Post by Juniper » Wed Jan 29, 2014 10:04 pm

lilreddog wrote:Hi all:

Income: $22,000 - $24,000 per year (varies)
Living expenses: $3,000 per year (estimated)

The plan that got me to where I am today: In 2010, after graduate school I took the six month loan reprieve to beef up my checking account (which I have viewed as a sort of emergency fund until I have the money for an actual savings account).
Is $3,000 per year for living expenses a typo?
There are a lot of good places with $0 minimums for a savings account. Check out http://www.depositaccounts.com. You can link your checking account to them and easily transfer funds between them.
Other than that, I'm sort of bumping this in case anybody has investing comments for you, but the Vanguard Target Retirement fund is a great way to go. And if you have an opportunity to max the 2013 Roth before April, then waiting until later in the year to knock out the loans makes sense to me.
Pax et Bonum! - Juniper

haban01
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Re: Low-income 27-year-old Beginning Investor

Post by haban01 » Wed Jan 29, 2014 10:21 pm

It sounds like he may be living at home yet? Congratulations!

You should qualify for the saver's tax credit on your taxes! Be sure to take the freebie from Uncle Sam!

Congratulations on starting early and developing a plan.

You are on the right track!! I get really excited when I see other people in their 20's get started just like me!

The Target Retirement Fund is a great option up until you get to say 50-100K then could break out to a multiple fund portfolio but it is not necessary!

I could also suggest picking up a copy of "The Bogleheads' Guide on Investing" and read it as you have time! It is a great foundation. Be sure to set an automatic investment plan up and let the rest to the markets. Dollar Cost Averaging will work to our advantage over the long term. Don't get caught up in the "News today" as looking back 5, 10, 20 years that won't matter!

Congratulations!!!
Eric Haban | | "Stay the Course" | "Press on Regardless" | | Wisconsin Bogleheads Chapter Coordinator

mnvalue
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Re: Low-income 27-year-old Beginning Investor

Post by mnvalue » Thu Jan 30, 2014 12:20 am

Yes, funding the Roth IRA is better than paying the loans. Since the loans are small at this point, I think your plan to do 2013 Roth, finish loans, then 2014 Roth is solid. Then, fill out the emergency fund. Given the living costs, I assume you're still living at home. Budget for what your expenses would be if you were NOT living at home: rent, utilities, food, etc. Using the same "every leftover dollar" approach, work to save up 6 months of that, plus 2x the rent figure (for deposit and first month's rent), plus some "move out" money for basic cookware, a bed, etc. (less whatever of these things you already have). When you move out is a different and non-financial question, but work on saving the money now so you have options. Keep maxing the Roth each year as your first priority.

After the emergency fund...

If you're the anti-debt type: Assuming you have a car, figure out how many years it has left, what a reasonable replacement used car would cost and how long that would last, and start saving up a "car fund" so you'll pay cash for your next car, instead of financing it. For example (and adjust these numbers to your reality), if a decent used car is $15,000 and it'll last you 7 years, then you need to save up 15000/7/12 = $178.57/month. If your existing car has 3 years of life left, then you're 4 years "behind", so you need to save up another 4*12*178.57 = $8,571.36. Another way to look at it is that, for now, you need to save up $15,000 within 3 years, or 15000/3/12 = $416.66/month, then revert to the smaller rate moving forward. Even if you can't get all the way there for cash on the first car, the closer you get, the better. You'll avoid the revolving debt cycle that is car payments. Even right now when rates are crazy low, you can avoid paying the bank 2.9% on a loan and instead earn .9% on your car fund savings.

If you're the "take low rate financing when available and invest for higher return" type: Funnel the extra money into taxable investing (since you don't have retirement plan at work). If those funds are for retirement, you can either use a target fund in taxable too (for the ultimate simplicity) or do a 3-fund portfolio approach across all your accounts. If you're saving for a shorter-term goal (like putting your car fund or house downpayment fund in the market), choose a (conservative) LifeStrategy Fund.

kerplunk
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Re: Low-income 27-year-old Beginning Investor

Post by kerplunk » Thu Jan 30, 2014 12:51 am

I'd like to throw out something else to think about: Maybe change jobs? I am not sure about your exact situation or circumstances, but I believe you mentioned that you went to graduate school. That is a lot of education to only be making barely $22-24k/year. I say this with peace and love.

lilreddog
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Re: Low-income 27-year-old Beginning Investor

Post by lilreddog » Thu Jan 30, 2014 9:15 am

*Edited later for privacy

First off, thanks all for the responses so far. Much appreciated.

I'll respond in kind to everyone individually as follows:
Juniper wrote: Is $3,000 per year for living expenses a typo?
There are a lot of good places with $0 minimums for a savings account. Check out http://www.depositaccounts.com. You can link your checking account to them and easily transfer funds between them.
Three thousand is probably a fairly accurate figure (give or take a few hundred) [...] and did not mention previously that many of my expenses (e.g. car, gas, phone) are company expenses, so I don't incur those bills.

Also, thank you for that link to the info about the savings accounts.
haban01 wrote: You should qualify for the saver's tax credit on your taxes! Be sure to take the freebie from Uncle Sam!
...
The Target Retirement Fund is a great option up until you get to say 50-100K then could break out to a multiple fund portfolio but it is not necessary!
...
Be sure to set an automatic investment plan up and let the rest to the markets. Dollar Cost Averaging will work to our advantage over the long term. Don't get caught up in the "News today" as looking back 5, 10, 20 years that won't matter!
Thanks for the heads up on the saver's tax credit.

And I appreciate your suggestion for some levels (50-100K) to which I should look to contribute to the Target Retirement Fund. So look at it almost as a good and steady ten-year investment for now, yes? I'll be setting up automatic investments after I've fully funded for 2013 and paid off those pesky loans, once a bulk of my income is freed back up.

Also, thanks so much for so much congratulations!
mnvalue wrote:Yes, funding the Roth IRA is better than paying the loans. Since the loans are small at this point, I think your plan to do 2013 Roth, finish loans, then 2014 Roth is solid. Then, fill out the emergency fund. Given the living costs, I assume you're still living at home. Budget for what your expenses would be if you were NOT living at home: rent, utilities, food, etc. Using the same "every leftover dollar" approach, work to save up 6 months of that, plus 2x the rent figure (for deposit and first month's rent), plus some "move out" money for basic cookware, a bed, etc. (less whatever of these things you already have).
...
If you're the anti-debt type: Assuming you have a car, figure out how many years it has left, what a reasonable replacement used car would cost and how long that would last, and start saving up a "car fund" so you'll pay cash for your next car, instead of financing it. For example (and adjust these numbers to your reality), if a decent used car is $15,000 and it'll last you 7 years, then you need to save up 15000/7/12 = $178.57/month. If your existing car has 3 years of life left, then you're 4 years "behind", so you need to save up another 4*12*178.57 = $8,571.36. Another way to look at it is that, for now, you need to save up $15,000 within 3 years, or 15000/3/12 = $416.66/month, then revert to the smaller rate moving forward. Even if you can't get all the way there for cash on the first car, the closer you get, the better. You'll avoid the revolving debt cycle that is car payments. Even right now when rates are crazy low, you can avoid paying the bank 2.9% on a loan and instead earn .9% on your car fund savings.

If you're the "take low rate financing when available and invest for higher return" type: Funnel the extra money into taxable investing (since you don't have retirement plan at work). If those funds are for retirement, you can either use a target fund in taxable too (for the ultimate simplicity) or do a 3-fund portfolio approach across all your accounts. If you're saving for a shorter-term goal (like putting your car fund or house downpayment fund in the market), choose a (conservative) LifeStrategy Fund.
Wow. Thanks a lot for the in-depth response.

The step-by-steps you've provided are admittedly perfect for someone like me, and since I'm the former type (anti-debt) I'll go on focusing on the emergency fund and budgeting for a place of my own (which should be in a couple of years, as explained above; and I'm already considering options). I like your approach, and I'll utilize it as part of a larger savings plan.

Maybe, once I've hit some acceptable totals on those funds, I'll then begin to think about more investments.
kerplunk wrote:I'd like to throw out something else to think about: Maybe change jobs? I am not sure about your exact situation or circumstances, but I believe you mentioned that you went to graduate school. That is a lot of education to only be making barely $22-24k/year. I say this with peace and love.
Alas, silly optimistic younger me got degrees out of passion rather than practicality...

Of course, if things stagnate or sour down the road, another change in career might be in order. I suppose I'm lucky just to have options at this point.

Again, thanks to everyone for taking the time and effort to respond. I truly appreciate all the feedback.
Last edited by lilreddog on Thu Apr 17, 2014 11:29 am, edited 2 times in total.

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BL
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Re: Low-income 27-year-old Beginning Investor

Post by BL » Thu Jan 30, 2014 1:12 pm

I get paid as a contractor, not as an employee, which is another subject I’ve been researching to see if we should alter this arrangement in a way that would be more beneficial for my parent, myself, and the business as well
You might also want to research what IRS says regarding Independent Contractors:
http://www.irs.gov/Businesses/Small-Bus ... or-Defined

scone
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Re: Low-income 27-year-old Beginning Investor

Post by scone » Thu Jan 30, 2014 3:58 pm

^ see above. You want to be very sure that the IRS believes you are a contractor, and not your mother's employee. Especially since it's a family business. No sense in getting audited if you can help it. But if you are a contractor, you may want to look at turning yourself into a company, so to speak: Beginning Investor LLC, or some such. On the theory that you may be eligible for the tax breaks of a small business.

In any case, IIWY I wouldn't regret education. My "useless" liberal arts degree has very definitely helped me, in a number of ways I could never have predicted. I'd do it again in a heartbeat.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore

mnvalue
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Re: Low-income 27-year-old Beginning Investor

Post by mnvalue » Fri Jan 31, 2014 4:38 am

scone wrote:But if you are a contractor, you may want to look at turning yourself into a company, so to speak: Beginning Investor LLC, or some such. On the theory that you may be eligible for the tax breaks of a small business.
One of which could be opening your own solo 401k. But do check the facts to ensure you're legally a contractor first, etc. before rushing into the solo 401k. While you should verify the contractor status ASAP, you have time to figure out the solo 401k, given you're going to fill an emergency fund and move out fund first.

lilreddog
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Re: Low-income 27-year-old Beginning Investor

Post by lilreddog » Fri Jan 31, 2014 7:10 am

Thanks everyone for more insight. It's all very valuable indeed.

The small business's finances are of major importance, even as I get my personal in order.

And I kinda sorta gotta feeling once I have a better grasp on this overall financial situation, this is gonna be me: :oops:
BL wrote:You might also want to research what IRS says regarding Independent Contractors:
http://www.irs.gov/Businesses/Small-Bus ... or-Defined
Thanks for the link. This is definitely a priority in the new year. From much of what I've read and heard, the situation needs to be better defined or even altered.
scone wrote:But if you are a contractor, you may want to look at turning yourself into a company, so to speak: Beginning Investor LLC, or some such. On the theory that you may be eligible for the tax breaks of a small business.

In any case, IIWY I wouldn't regret education. My "useless" liberal arts degree has very definitely helped me, in a number of ways I could never have predicted. I'd do it again in a heartbeat.
Interesting point on turning myself into a company, a smart approach I simply overlooked. I'll be doing some major research and clarification on my employee/contractor status this weekend, then deciding on the best approach (probably with some questions here before I proceed).

And I must say I do put my degrees to use in ways everyday, even if it's something at which I'm not making a financial profit. But there's certainly other worth.
mnvalue wrote:One of which could be opening your own solo 401k. But do check the facts to ensure you're legally a contractor first, etc. before rushing into the solo 401k. While you should verify the contractor status ASAP, you have time to figure out the solo 401k, given you're going to fill an emergency fund and move out fund first.
This is the sort of thing I had in mind (either if I end up being an employee, in which case we would set up a company 401(k); or if I remain a contractor, with a solo 401(k)). I'll do my research, and whatever happens to be the case I'll add it to my growing financial to-do list.

After I look into this, I imagine I'll have numerous other questions to post. I'll continue with them on this thread, if that's all right...?

Thanks so much again everyone. Not only are your contributions greatly appreciated, but this dialogue is also a great motivator.

So this'll be me after I get a better grasp on everything: :beer

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thedayisbrave
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Re: Low-income 27-year-old Beginning Investor

Post by thedayisbrave » Fri Jan 31, 2014 8:48 am

Just wanted to add that you sound very clearheaded about it all which is great. I'm a few years younger (23) and somewhat involved in family affairs as well so I know what it's like. Congrats and good luck!

lilreddog
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Re: Low-income 27-year-old Beginning Investor

Post by lilreddog » Sat Feb 01, 2014 9:01 am

*Edited later for privacy
thedayisbrave wrote:Just wanted to add that you sound very clearheaded about it all which is great. I'm a few years younger (23) and somewhat involved in family affairs as well so I know what it's like. Congrats and good luck!
Likewise! Thank you for stopping by to lend those encouraging words. I appreciate the sentiments.
Last edited by lilreddog on Thu Apr 17, 2014 11:31 am, edited 1 time in total.

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ruralavalon
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Re: Low-income 27-year-old Beginning Investor

Post by ruralavalon » Sat Feb 01, 2014 9:53 am

Welcome to the forum :) .

It's always great to see someone starting young, aggressively saving, and aggressively attacking the student loans.
lilreddog wrote: An ideal 2014 timeline might look something like this:
January – March: Max out Roth IRA for 2013 ($5,500)
April – May: Pay off student loans entirely (will still have roughly $2,500 to pay come April)
May – December: Max out Roth IRA for 2014 (roughly $687.50 a month to max out to $5,500 by December if starting in May; but also have until April of 2015 to max out for 2014, so a December deadline isn’t firm); also, replenish so-called “emergency fund” if needed

Questions:
1. To put it simply: does it seem at all like I’m on the right track?.
That is an excellent plan. You are definitely on the right track.

Next should be a little reading like: The Bogleheads' Guide to Investing, or any other book on the reading list you can find linked at the home page; and the "Getting Started" article in the wiki (see link below).

Also check out the wiki articles on: (1) solo 401k; (2) SEP IRA; and (3) SIMPLE IRA -- which deal with tax-protected plans for small businesses owners and employees.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

lilreddog
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Re: Low-income 27-year-old Beginning Investor

Post by lilreddog » Mon Feb 03, 2014 3:51 pm

ruralavalon wrote:Welcome to the forum :) .

It's always great to see someone starting young, aggressively saving, and aggressively attacking the student loans.
...
Also check out the wiki articles on: (1) solo 401k; (2) SEP IRA; and (3) SIMPLE IRA -- which deal with tax-protected plans for small businesses owners and employees.
Thank you for the warm welcome. It's nice to get that reassurance I'm on the right track.

And I appreciate the heads up on those small business wiki articles. While I might have a rough idea what will be my saving and investing outlook for the next year or so, it certainly won't hurt to begin brushing up on these topics now for later. All recommended texts are certainly gonna come in handy.

lilreddog
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Re: Low-income 27-year-old Beginning Investor

Post by lilreddog » Wed Feb 05, 2014 4:04 pm

One other quick question: if I post questions about my mother's finances, would it be best to post that information on this thread or should I start a separate thread?

Please, let me know. Thank you.

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thedayisbrave
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Re: Low-income 27-year-old Beginning Investor

Post by thedayisbrave » Wed Feb 05, 2014 4:34 pm

lilreddog wrote: 2. If it seems like I'm an independent contractor, should I look to become part of my mother's LLC (establishing a family LLC) or simply start a separate LLC for myself? (Would overall tax efficiency be greater with one combined or two separate, or would it even make much of a difference?)
As far as tax efficiency, it doesn't really matter because both single-member and multi-member LLCs are eligible for pass through taxation - meaning the LLC itself doesn't have to pay federal income tax - it passes through to the members to be included in their individual tax returns. Definitely one of the benefits of having an LLC.

So the decision IMO would be based on the operating costs of the LLC, as they vary by state.

Edited to add: Here's a link to the IRS site with more details: http://www.irs.gov/Individuals/Self-Emp ... artnership.

lilreddog
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Re: Low-income 27-year-old Beginning Investor

Post by lilreddog » Thu Feb 06, 2014 6:51 am

thedayisbrave wrote:As far as tax efficiency, it doesn't really matter because both single-member and multi-member LLCs are eligible for pass through taxation - meaning the LLC itself doesn't have to pay federal income tax - it passes through to the members to be included in their individual tax returns. Definitely one of the benefits of having an LLC.

So the decision IMO would be based on the operating costs of the LLC, as they vary by state.
It appears that in my state after an initial $100 filing fee, it would be only $10 annually to renew. Personally, I wouldn't mind eating those small costs if it means more financial flexibility in the end. Thanks for your input and the info. It was good to hear from you again. Hope all is well.

lazyday
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Re: Low-income 27-year-old Beginning Investor

Post by lazyday » Thu Feb 06, 2014 8:02 am

lilreddog wrote: if I post questions about my mother's finances, would it be best to post that information on this thread or should I start a separate thread?
I think it would be less confusing to use a separate thread.

If you again use the portfolio posting format guidelines or something like it in the first post of a new thread, like in this thread, I'd think that makes it easier to follow.

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thedayisbrave
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Re: Low-income 27-year-old Beginning Investor

Post by thedayisbrave » Thu Feb 06, 2014 9:17 am

lilreddog wrote: Thanks for your input and the info. It was good to hear from you again. Hope all is well.
Happy to help! It's exciting to be able to answer someone's question, haha... I'm going through the same process myself and had the same question :)

lilreddog
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Re: Low-income 27-year-old Beginning Investor

Post by lilreddog » Fri Feb 07, 2014 7:23 am

lazyday wrote:I think it would be less confusing to use a separate thread.
Sounds good. I thought that might be the case. Thanks for the response.
thedayisbrave wrote:Happy to help! It's exciting to be able to answer someone's question, haha... I'm going through the same process myself and had the same question :)
Yep, once I'm able to actually answer someone else's questions (let alone mine own), I'll know then that I've learned a little something about all this stuff.

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