Newbie 24 year old investor, portofolio and finance Q's.

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Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

Hi All,

I am new to this forum and I am very excited to be here, and to learn from people that are experienced and have tremendous knowledge in the investment field!

A little bit about myself-

I am a 24 year old working professional who would really appreciate some advice in terms of my portfolio allocation and also the financial decisions I will need to make in the future. This post may be a bit longer than usual, so please bear with me.

Emergency Funds: $0

Debts-
1. My Car Loan ($11,800 @ 1.99% APR, $250 monthly payments)
2. Credit Card Debt ($5300 @ 0.00% APR, utilized a balance transfer to take advantage of the 0.00% APR)
3. My Sister's Car Loan ($14,000 @ 1.99%APR, $250 monthly payments, this is "my" debt because my sister lent me $15,000 to help with my tuition during my undergrad )
4. 401K Loan (~ $8,000 @ 3.25% APR, interest goes back to my account, monthly payment is $160)
5. Debt to my Father to pay him back for my undergrad tuition/living expenses ($65,000 @ 0.00% APR, I have not yet started paying him back, and he is okay with that for now, but sooner or later ill need to start paying him back, most likely will start sometime next year, in small incremental payments).

Tax Status-
1. Single
2. Federal Tax Rate: 25% State Tax Rate: ~5%
3. Annual Salary - $76,500 + 401K Match + Medical/Dental + Vacation/Sick
State of Residence: California
Age: 24
Desired Asset Allocation : 75% in index funds (large, mid, small, international) + 25% in Aerospace Company Stock
Desired International Allocation : ~25% of international index funds

Current Investments:
Company 401K - $27,000 (25% S&P index, 25% International Index, 25% Russel 2000 Index, 25% Company Stock-Large Aerospace Company)
For my 401K, i contribute regularly with 8%, company matches 6%, and adds in another 3% as an added benefit, so total I put in around 17% of my bi-weekly paycheck into this 401K.
Roth IRA - $5500 (TDameritrade, I have been utilizing the comission Free ETFs, spread across the board in terms of large, mid, small, international, REITs, also have some individual stocks such as SBUX and MA just to play with).

So now that you know a little bit about my financial situation and where I stand currently with my finances, I want to explain my approach of how I am tackling my financial situation, then i would like to ask particular questions here and there to see what your advice and suggestions might be.

1. Tackle $5300 CC debt @ 0.00% APR before the APR starts to kick in around October 2014.
2. Start contributing to ROTH IRA for Fiscal Year 2014 (max out before April 2015)
3. Save up to finish tackling off the 401K Loan I took out on myself (btw, some of you may be wondering why i have a 401K loan, i decided to take out 10K loan on my 401K to pay off a 9% APR School Loan that I had)
4. Start paying off my dad in $1000.00 monthly payments.
5. Leaving out car loans as last debt to tackle since 1.99% APR is low, so I don't mind leaving this last.

So here are my questions-
1. As you can see, I owe my father a great deal of $$$, my plan is to slowly start paying him off sometime next year, around $1000 per month....but obviously at that pace it will take me more then 5 years to pay him off. So my plan is to "pray" that my 401K will continue "growing" and not tank anytime soon....so that once I hit $60,000 in about 2-3 years (God willing), I can take out $30,000 of it as a loan and give my father that, and since i would be paying him $1000 per month during those 2-3 years, hopefully in 3 years I will have settled my debt with my father ($30,000 + $1000*12 (months) * 3 (years) = $66,000). Then I would try to pay off that $30,000 401K debt within 2 years ($15000 per year) since I wouldn't have any other types of debt, maybe other then my car payments.

So basically my question is.... do you guys think its okay to leave my 401K asset allocation at its current distribution ? (25% in S&P, 25% in Russel 2000, 25% international , 25% in company stock , large aerospace company).

2. Secondly, another goal i have in mind is to try to save up $100,000 for a downpayment for a house here in SoCal. Im looking into places like Irvine, where houses cost minimum $500,000 (2 bed + 2 bath, ridiculous i know).... therefore my goal is after i finish paying off all my debt, which will probably take me another good 6 years, I am hoping to have $100,000K in my 401K by then so that I can take out $50,000 as a loan against myself to put it down on a house somewhere in a nice area like Irvine. which then leads me to my third point.
3. I will be contributing the max to my Roth IRA every year, so im hoping by 30, I will have a good amount in there, if we do a quick math calculation assuming , $5500 * 6 years (24 years --> 30 years) = $33000, Optimistically hope for $10,000 gain on my Roth portfolio which will give me a total of $43,000, which i can then cash out on a down payment on the home. what would be the best type of asset allocation to achieve such returns if possible? Like I mentioned previously Ive been utilizing the TDAmeritrade Commission Free ETFs spread across the board (small, mid, large, international, REITS, etc..) Are you guys okay with my approach using ETFs with dollar cost averaging (bi-weekly)....and then i guess praying that the market doesnt tank lol.

This is my current outlook and plan as of now, so my main question is now that you are familiar with my goals and what my end plan is, what is the best asset allocation you guys would recommend for me at this moment of time with where I stand....both in my 401K and ROTH IRA, are you guys okay with my current approach and how I am doing things with my asset allocation? The reason why i am being so aggressive right now in both my 401K and ROTH IRA is because I feel like im young, so I can really gamble. But obviously I have no idea how the market will do these next 6 years, and the thing is even if it tanks.....im okay with that because if it does...Ill just need to wait a bit longer to obtain my house, if it doesnt tank and returns an average of 5% or even better, I think it may be realistic to achieve the goal of getting my house by 30....this is just my simple logic on things so any advice from you guys would be very much appreciated, such as am i missing something within my logic, am i being too naive with my approach?

Further, what do you guys think of me taking out a loan against myself on my 401K and cashing out my ROTH to even obtain a home? Good idea?

Last question, when is a good time to start placing some of my assets into bonds in both my 401K and Roth, and how much % should it be and at what age should I start?

Also let me add that I truly understand there are so many different variables that are in play here so there will not be no "exact" solution (for those nerdy engineers/mathematicians, analogous to a 3-D Partial differential equation with the function y in terms of more than one variable such as time t and displacement x) , but any advice from experienced people like yourselves would really be greatly appreciated.

Thanks for reading this long post, really appreciate any guidance on my situation!
PS241
Posts: 41
Joined: Wed Jan 02, 2013 10:49 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by PS241 »

Wow wow wow debt debt debt!

In my opinion you should not be contributing to 401k plan or OR IRA because you think of these as cash savings vehicles. These are retirement plans! I would stop contributing to both while you get out of debt. IF you stop thinking of the 401k as a loan vehicle THEN you may contribute only to the match.

If you lose your job or move to a new one for more $$ it is my understanding the 401k loan will be due in 6 months or you will face penalties and taxes for an early withdrawal. Bad idea as you are locked into your job!

I feel the AA questions are not relevant due to your debt although I would get out of the 25% of the company stock if possible. Maybe have to wait for these to vest?

This is what I would do.
1. Pay off 401k loan.
2. Pay off credit card.
3. Pay off sisters car.
4. Pay off your car.
5. Pay off dad. (Ask for it to come off your inheritance?)
6. Save for house after debt cleaned up.
Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

PS241 wrote:Wow wow wow debt debt debt!

In my opinion you should not be contributing to 401k plan or OR IRA because you think of these as cash savings vehicles. These are retirement plans! I would stop contributing to both while you get out of debt. IF you stop thinking of the 401k as a loan vehicle THEN you may contribute only to the match.

If you lose your job or move to a new one for more $$ it is my understanding the 401k loan will be due in 6 months or you will face penalties and taxes for an early withdrawal. Bad idea as you are locked into your job!

I feel the AA questions are not relevant due to your debt!

This is what I would do.
1. Pay off 401k loan.
2. Pay off credit card.
3. Pay off sisters car.
4. Pay off your car.
5. Pay off dad. (Ask for it to come off your inheritance?)

Hey PS241,

Thanks for the tip, I wasn't expecting that at all...goes to show I am still a complete novice. And yes, unfortunately I am one of those millenials who got into some deep debt during my undergrad, in which I completely regret getting myself into! But life moves on, and I must tackle this debt head on! Thanks for the advice! Ill keep that in mind.

But I do think not contributing 8% into my 401K will be a big no-no since I will be leaving money off the table, right?

My job is pretty stable, will be stable for quite some time...and I wont be leaving anytime soon since I am getting a masters (luckily company is paying for it, so no more school debt to add on to my sticky situation).

In terms of my 401K , I am completely vested right away, there is no waiting period, I can distribute my AA however I feel anytime I want.

And for the debt to my dad, I want to pay him back the full amount, I do not even think about asking him anything about inheritance. It took a lot out of him to actually lend me that much amount of money.... I want to pay back the full principal , no questions asked.

Lastly, I still feel very fortunate, imagine having this kind of debt with 6% APR and no job prospects as some of my millenial peers are facing...so I definitely feel fortunate where I am at even with this entire amount of debt hanging over my head, all about perspective. But i will definitely do my best to get out of this hole ASAP.

Thanks again!
Last edited by sjl333 on Sun Apr 20, 2014 5:07 pm, edited 1 time in total.
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by livesoft »

You are only 24. Why not wait until you are 35 to buy a home?
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Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

livesoft wrote:You are only 24. Why not wait until you are 35 to buy a home?
I guess I am just being too impatient, selfish and greedy ?

the opportunity cost I am losing by not building equity, but instead building someone else's equity kind of gets on my nerves. On the flip side....I am in no position right now to talk about building equity with the debt I'm in.....

Im just trying to do the best in terms of financial optimization... (i.e. getting out of debt as well as building equity at the same time)...but it seems like the previous poster is telling me just to focus on getting out of debt first before looking into building equity...which makes sense, but from my perspective, i am somehow trying to juggle both balls and figuring out the best way in doing so.

But PS241 has got it right, Im using my 401K and Roth not as retirement accounts, but as cash vehicles...so I may be approaching things the wrong way...if more people agree with PS241's approach, I may need to reconsider my approach to this.
berntson
Posts: 1366
Joined: Mon Oct 29, 2012 12:10 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by berntson »

sjl333 wrote: the opportunity cost I am losing by not building equity, but instead building someone else's equity kind of gets on my nerves. On the flip side....I am in no position right now to talk about building equity with the debt I'm in.....
Houses are not necessarily good investments, and renters do not always do worse than owners. You might find this calculator helpful.

I don't know how your family works but, if it were me, I would want to pay my father as quickly as possible. If you invest instead of paying him back, you are investing with someone else's money. Living frugally and putting all of your savings towards the debt, you could pay him back in two or three years. Then you can start your investing life with a clean slate.

[Update] Ah, I now see that things are more complicated than I thought. Since your employer has a generous match, this is a strong incentive to contribute to your 401k.
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windhog
Posts: 256
Joined: Tue Dec 09, 2008 1:08 am

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by windhog »

Hi and welcome,

Sometimes the solution to a complex situation lies with just a few moves. To me these include: maximizing your income (including 401(k) match), cutting expenses, and plugging the holes in the bottom of the boat (your debts), starting with the largest first. Do you have an idea of what your CC interest rate will be when that clever bit of financial dealing turns into another hole in your boat? Maybe it will be the biggest problem and needs your attention first.

I have come to recognize that life is about problems and issues. In your case, your problems are debts, which can be fixed with money. Your issue(which is not so easily fixed) is the attitude that says: I will meet my financial needs (and wants) by borrowing, so long as I can manage all the payments. This is a choice that is equivalent to walking into any place of business with a sign on your forehead that says: I will pay more than the list price for anything you want to sell me. Want to guess how that will work out? This is the opposite of living below your means (LBYM), which is the only way people can work for 35 years and accumulate enough to cover their needs for 70+ years of adult life. If you don’t fix this, there are no juggling lessons that will work.

Just my 2 cents.
Paul
Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

berntson wrote:
sjl333 wrote: the opportunity cost I am losing by not building equity, but instead building someone else's equity kind of gets on my nerves. On the flip side....I am in no position right now to talk about building equity with the debt I'm in.....
Houses are not necessarily good investments, and renters do not always do worse than owners. You might find this calculator helpful.

I don't know how your family works but, if it were me, I would want to pay my father as quickly as possible. If you invest instead of paying him back, you are investing with someone else's money. Living frugally and putting all of your savings towards the debt, you could pay him back in two or three years. Then you can start your investing life with a clean slate.

[Update] Ah, I now see that things are more complicated than I thought. Since your employer has a generous match, this is a strong incentive to contribute to your 401k.
Ya it gets quite complicated, I do not see myself *not* putting in the 8% because then i would be throwing away 6% of my salary every year. But it seems like from the responses is that instead of putting that extra $5500 in my Roth IRA, i should instead put it towards my debt.
windhog wrote:Hi and welcome,

Sometimes the solution to a complex situation lies with just a few moves. To me these include: maximizing your income (including 401(k) match), cutting expenses, and plugging the holes in the bottom of the boat (your debts), starting with the largest first. Do you have an idea of what your CC interest rate will be when that clever bit of financial dealing turns into another hole in your boat? Maybe it will be the biggest problem and needs your attention first.

I have come to recognize that life is about problems and issues. In your case, your problems are debts, which can be fixed with money. Your issue(which is not so easily fixed) is the attitude that says: I will meet my financial needs (and wants) by borrowing, so long as I can manage all the payments. This is a choice that is equivalent to walking into any place of business with a sign on your forehead that says: I will pay more than the list price for anything you want to sell me. Want to guess how that will work out? This is the opposite of living below your means (LBYM), which is the only way people can work for 35 years and accumulate enough to cover their needs for 70+ years of adult life. If you don’t fix this, there are no juggling lessons that will work.

Just my 2 cents.
Paul
Hi winghog,

thanks for the advice. I agree, I am trying to chew more then I can bite (essentially living above your means (LAYM))...selfish i know, but i agree with your assessment on things, such as making sure I contribute into my 401K to get the max company match, tackling high interest CC like my current CC i have right now, thats my current debt im actually tackling since I need to get rid of it before Oct 2014 when the interest actually starts to get applied.

But anyhow, it seems like most people are telling me to just focus on getting out of my debt before I try to build equity, so it seems like making sure i contribute to my 401K first and use all the exposable income afterwords to tackle on all my debt.

Thanks for the advice, any more advice and suggestions would be appreciated!
tecmage
Posts: 110
Joined: Mon Apr 14, 2014 9:26 am

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by tecmage »

1. Tackle $5300 CC debt @ 0.00% APR before the APR starts to kick in around October 2014.
2. Start contributing to ROTH IRA for Fiscal Year 2014 (max out before April 2015)
3. Save up to finish tackling off the 401K Loan I took out on myself (btw, some of you may be wondering why i have a 401K loan, i decided to take out 10K loan on my 401K to pay off a 9% APR School Loan that I had)
4. Start paying off my dad in $1000.00 monthly payments.
5. Leaving out car loans as last debt to tackle since 1.99% APR is low, so I don't mind leaving this last.
I believe I understand the situation you're in, I was in one very similar until the last year or so. I'm a newbie here who's only been reading the forums for a few weeks now and just registered recently so take my recommendations with a healthy dose of salt.

1. Live below your means! Put the credit card down and don't use it again. Pay off the $5300 ASAP, if you can see yourself having $1000/mo next year to pay your dad you can probably pay your credit card off very soon by living more frugally now.
2. Start an emergency fund after the CC is paid off. This isn't exclusive of the other items but in addition, save at least $500/mo here before considering moving on.
3. You have almost a year for the ROTH, but that on the back burner for now, maybe some bonus next year or a raise will help save money there.
4. Your 401k loan could hurt your potential returns, I regretted mine a bit since my money wasn't in the market earning 30% last year instead earning the 3.5% I paid myself back. However if I took a large one in 2007 I'd be glad I took the loan. In my place I paid mine back early and reduced my emergency fund a bit to do it. This one has to be done in one lump sum as opposed to increasing payments, at least mine was, I assume yours is the same. Table this for now, it will get paid back out of your paycheck eventually either way.
5. At this point I would discuss things with your dad, see what his thoughts are and what pay schedule he'd be comfortable with. Bring up your ROTH and 401k loan and work with him to make sure he understands you're creating an emergency fund for yourself so you don't have to rely on him in addition to paying back the loan. Maybe start with $250 a paycheck and increase as your debt level goes down. The $1000/mo you were going to pay him is now $500 emergency $500 pay him back.
I agree leave the car to last, paying it off is psychological only. Your returns will likely be better than 2%.

I would strongly advise against raiding your 401k or ROTH for a house (Read this as a polite way of saying "Don't do this!!!"). Your priority is to get out of debt, make compounding interest work for you and not take on a large debt load at the expense of your future. You've started 10 years earlier than I did, you're going to have a lot of compounding interest working for you if you do it right.

Lots of people suggest your age in bonds, or your age - 10. I'm going with age - 10 for now myself.

One final note for the future, and remember what I said about not raiding your ROTH I believe your 401k plan allows for a backdoor ROTH contribution of after tax dollars. Don't even consider this till after all your debt is gone, but it's something to keep in mind for the future.
Desired Asset Allocation : 75% in index funds (large, mid, small, international) + 25% in Aerospace Company Stock
Desired International Allocation : ~25% of international index funds
Watch the expense ratios on those funds. Read up on the three fund portfolio and maybe reconsider, you can create a nice balance of the stock market with S&P 500 index and a small cap filler, most companies offer this labeled small cap, extended market or Russell 2000. http://www.bogleheads.org/wiki/Approxim ... ock_market has some good information on doing just that with the approx ratios. Add an international index and a bond index and you can create your own mix. Your plan might also offer target date retirement plans if you want to put stuff there to keep it simple until you're more comfortable. I'd recommend against company stock, too many eggs in one basket, no matter how safe and stable the company appears to be things can always change. If you own the entire stock market you own your company as well is another way of looking at it.
Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

tecmage wrote:
1. Tackle $5300 CC debt @ 0.00% APR before the APR starts to kick in around October 2014.
2. Start contributing to ROTH IRA for Fiscal Year 2014 (max out before April 2015)
3. Save up to finish tackling off the 401K Loan I took out on myself (btw, some of you may be wondering why i have a 401K loan, i decided to take out 10K loan on my 401K to pay off a 9% APR School Loan that I had)
4. Start paying off my dad in $1000.00 monthly payments.
5. Leaving out car loans as last debt to tackle since 1.99% APR is low, so I don't mind leaving this last.
I believe I understand the situation you're in, I was in one very similar until the last year or so. I'm a newbie here who's only been reading the forums for a few weeks now and just registered recently so take my recommendations with a healthy dose of salt.

1. Live below your means! Put the credit card down and don't use it again. Pay off the $5300 ASAP, if you can see yourself having $1000/mo next year to pay your dad you can probably pay your credit card off very soon by living more frugally now.

Hi, thanks for the response! Yes I am tackling this CC first before anything else, and will have no trouble getting rid of this debt before the high APR kicks in, so I'm not worrying about this debt. I currently have $1500 disposable income every month after paying off all my bills, so this CC debt should take me around 3-4 months.

2. Start an emergency fund after the CC is paid off. This isn't exclusive of the other items but in addition, save at least $500/mo here before considering moving on.

Understood, thanks. The reason why I decided to put my money in a Roth instead of an emergency fund is because technically your roth can be your emergency fund...so technically i have $5500 in emergency fund because you can withdraw your contributions any time no penalties. but obviously withdrawing from your Roth isnt the wisest move.

3. You have almost a year for the ROTH, but that on the back burner for now, maybe some bonus next year or a raise will help save money there.
Yes I get a hefty bonus every year, so maybe i can put my bonus in there. But from previous posters, Im getting the feeling they think I should pay off all debt before putting into a Roth...thats the sense that I am getting.

4. Your 401k loan could hurt your potential returns, I regretted mine a bit since my money wasn't in the market earning 30% last year instead earning the 3.5% I paid myself back. However if I took a large one in 2007 I'd be glad I took the loan. In my place I paid mine back early and reduced my emergency fund a bit to do it. This one has to be done in one lump sum as opposed to increasing payments, at least mine was, I assume yours is the same. Table this for now, it will get paid back out of your paycheck eventually either way.

TOTALLY AGREE! I took out $10,000 early last year...i lost 30% returns on that $10,000, so i defintiely agree with you on the loss of potential returns. At that time, i figured I would get the guaranteed 9% rate of return....but man was i wrong. And yes, I need to come up with the entire lump sum to pay off the 401K loan, I cannot increase my monthly payments, I need to come up with the entire amount to pay it off.

5. At this point I would discuss things with your dad, see what his thoughts are and what pay schedule he'd be comfortable with. Bring up your ROTH and 401k loan and work with him to make sure he understands you're creating an emergency fund for yourself so you don't have to rely on him in addition to paying back the loan. Maybe start with $250 a paycheck and increase as your debt level goes down. The $1000/mo you were going to pay him is now $500 emergency $500 pay him back.

Yes, I have spoken to him about some of this already. He is actually against me putting money into a Roth since I owe him money. But he is okay with me taking a little longer to pay him back...he knows my financial situation. And he is okay with me paying him $1000 monthly payments starting next year...after I get rid of my CC and 401K Loan.

I agree leave the car to last, paying it off is psychological only. Your returns will likely be better than 2%.

I would strongly advise against raiding your 401k or ROTH for a house (Read this as a polite way of saying "Don't do this!!!"). Your priority is to get out of debt, make compounding interest work for you and not take on a large debt load at the expense of your future. You've started 10 years earlier than I did, you're going to have a lot of compounding interest working for you if you do it right.

Okay thanks for the advice...so then it looks like i need to do things the old fashioned way and just straight up save the money and put it into a savings account?

Lots of people suggest your age in bonds, or your age - 10. I'm going with age - 10 for now myself.

Okay sounds good, so it seems like i should be putting in around 15% bonds in my portfolio.

One final note for the future, and remember what I said about not raiding your ROTH I believe your 401k plan allows for a backdoor ROTH contribution of after tax dollars. Don't even consider this till after all your debt is gone, but it's something to keep in mind for the future.

Thanks, I have read about backdoor Roths, Ill look into it when i get out of debt.
Desired Asset Allocation : 75% in index funds (large, mid, small, international) + 25% in Aerospace Company Stock
Desired International Allocation : ~25% of international index funds
Watch the expense ratios on those funds. Read up on the three fund portfolio and maybe reconsider, you can create a nice balance of the stock market with S&P 500 index and a small cap filler, most companies offer this labeled small cap, extended market or Russell 2000. http://www.bogleheads.org/wiki/Approxim ... ock_market has some good information on doing just that with the approx ratios. Add an international index and a bond index and you can create your own mix. Your plan might also offer target date retirement plans if you want to put stuff there to keep it simple until you're more comfortable. I'd recommend against company stock, too many eggs in one basket, no matter how safe and stable the company appears to be things can always change. If you own the entire stock market you own your company as well is another way of looking at it.
Okay awesome, ill look into this as well, really appreciate the advice!
tecmage
Posts: 110
Joined: Mon Apr 14, 2014 9:26 am

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by tecmage »

No problem. I'm also in favor of at least putting 8% into the 401k to get the match that's just a smart move(I forgot to mention this before).

As for paying all your debt off or not that's hard to say it's a level of comfort/risk. Say for the next 20 years you'll get 6% return on your investments, math says anything you pay less than 6% interest on you're better off putting the money to work in your investments. Reality is a bit more fuzzy, and some people aren't comfortable with any debt, we can't control the market or time it, or guess it long term, we can control our own exposure and debt. We control what we can (our debt, asset allocation and risk levels) and let the market do what it does knowing that long term our investments will appreciate. By not having any debt you can handle things like getting laid off or transferred a lot easier than if you've leveraged yourself and rely on a steady paycheck. It also reduces your emergency fund size by not having to worry about car payments, house payments etc 6 months can be a lot smaller number and the rest of the money can be working in a taxable or tax advantaged account.

As for the emergency fund right now, I'd recommend a savings account, maybe a high yield online one. http://www.bogleheads.org/wiki/Emergency_fund [edit} sorry didn't quite finish my thought here, there are a lot of ways to keep an emergency fund, like you said Roth is one way, but I'd start with the savings fund first until you're very comfortable with your budget [/edit].

The wiki has a lot of great information on starting out, I'd recommend going through it (full disclosure, I'm still working my way through it too). There are lot of good old threads that still apply so I've been Google searching the site too for particular topics I'm curious on.
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tfb
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Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by tfb »

sjl333 wrote:1. Tackle $5300 CC debt @ 0.00% APR before the APR starts to kick in around October 2014.
2. Start contributing to ROTH IRA for Fiscal Year 2014 (max out before April 2015)
3. Save up to finish tackling off the 401K Loan I took out on myself (btw, some of you may be wondering why i have a 401K loan, i decided to take out 10K loan on my 401K to pay off a 9% APR School Loan that I had)
4. Start paying off my dad in $1000.00 monthly payments.
5. Leaving out car loans as last debt to tackle since 1.99% APR is low, so I don't mind leaving this last.
It's a pretty good plan. You just need a few tweaks, nothing major.
0. Keep the 401k contributions to get the full match (you already know that).
1. Pay off the $5300 CC debt because it has a timer attached to it (you already know that).
2. Pay off the 401k loan because it can potentially become a problem if your employment ends, although you say it's unlikely. Also the 3.25% after-tax rate is quite high.
3. Still contribute full $5,500 to Roth IRA because it can double up as an emergency fund.
4. Pay off your sister's car loan. Thank her for her generosity in helping you.
5. Pay Dad. Parents are usually more forgiving. If you start paying him some money just to show you didn't forget, he'll understand.
6. Pay off your own car loan.
7. Don't worry about buying a house. Rent the smallest/least expensive space you can live with. You need to minimize your housing cost in an expensive area.
8. Don't worry much about asset allocation, except no company stock. You don't have enough assets to allocate yet. 100% in S&P 500 would be fine. 1/3 US Large Cap 1/3 US Small Cap 1/3 Int'l Stocks would be fine too. Use index funds.
Harry Sit, taking a break from the forums.
mnvalue
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Joined: Sun May 05, 2013 2:22 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by mnvalue »

tfb's plan is right on. I'd add: allocate the Roth IRA in either money market or, at most, a short-term bond fund. This is because the Roth IRA is doubling as your emergency fund for now.
etowers
Posts: 75
Joined: Sun Feb 23, 2014 4:18 am

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by etowers »

I can kind of understand where you're coming from in wanting to use debt + youth to leverage up for your investment returns. I am similarly considering another property investment where I borrow the deposit from my equity investments and pay it down over the next few years, as opposed to saving and waiting for a few more years. I would rather build my own equity during those few years then help someone else build their equity.

You are young, no family, and can afford to take some risks, imo. I think your original plan is ok. However if you can save your bonuses and increments diligently, you may find that when it is time to buy your house, you may not need to raid your 401k or Roth at all. Good luck!
jh-1391
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Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by jh-1391 »

Reading that makes me cringe. I don't mean to insult you, but just be happy you found this forum.

I can understand being impatient (I'm 23 myself and hate waiting for things to gradually happen) but STOP taking on debt. STOP viewing retirement accounts as savings accounts. I would take money out of my Roth/a loan on my 401k only if I was close to bankruptcy or if something terrible would happen if I didn't get money ASAP. Like I said, I get it, I actually spend too much (still below my means, but more than I "should"), but I take on debt very rarely. I know I'm in a very ideal situation (no college debt), but I don't normally buy something on credit/loan unless I KNOW I can pay it off immediately if I wanted to and I didn't to keep savings intact.

Priority for me would be:

401k to match ONLY
Credit card
Pay your dad back
401k loan (I would personally do this before paying my family back, but it sounds like our family dynamic is different there, so use your discretion)
Pay off your sister's car
Roth IRA
Start saving for house
Pay off your car

All while saving 3-6 months' expenses with as much priority as any item on the list - basically do this first while also tackling your debt. I also prioritized paying off your sister's car for the sole reason that that isn't "your" debt. While it's low interest, I think the mental bonus of not owing any of your family money would be awesome.

I also would get rid of the company stock in your 401k. You may lose out on money, but you could seriously lose your retirement savings if something happens to your company. I would much rather hedge my retirement savings on the performance of the majority of the stock market than one company, and that is coming from an imperfect Boglehead who still holds small amounts of individual company stock in a taxable account.

I'm sorry if I was harsh, but sometimes that's what you need.
Jack FFR1846
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Location: 26 miles, 385 yards west of Copley Square

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by Jack FFR1846 »

I'm going to add only one thing. Look into a credit union car refinance for your car and your sister's car and stretch the payments as long as possible at the lowest rate. Digital Federal Credit Union has these loans right now at 1.24%. This will reduce both your cost and your payments and give you breathing room to get the CC paid off (huge priority) and continue to fund the 401k to match.

You have a great future doing grad school while working. Chances are that your salary will start to increase after finishing, so don't think of your present income as a set amount that you have to work with forever. But I would absolutely get rid of the CC first. I have heard too many stories of 0% cards being nearly paid off or being paid off and a small charge put on and the company considering the entire balance.....not just the old balance and then hitting holders with all of the interest. I hope the card is cut up and burned now. If it's not, get out the matches.
Bogle: Smart Beta is stupid
Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

tfb wrote:
sjl333 wrote:1. Tackle $5300 CC debt @ 0.00% APR before the APR starts to kick in around October 2014.
2. Start contributing to ROTH IRA for Fiscal Year 2014 (max out before April 2015)
3. Save up to finish tackling off the 401K Loan I took out on myself (btw, some of you may be wondering why i have a 401K loan, i decided to take out 10K loan on my 401K to pay off a 9% APR School Loan that I had)
4. Start paying off my dad in $1000.00 monthly payments.
5. Leaving out car loans as last debt to tackle since 1.99% APR is low, so I don't mind leaving this last.
It's a pretty good plan. You just need a few tweaks, nothing major.
0. Keep the 401k contributions to get the full match (you already know that).
1. Pay off the $5300 CC debt because it has a timer attached to it (you already know that).
2. Pay off the 401k loan because it can potentially become a problem if your employment ends, although you say it's unlikely. Also the 3.25% after-tax rate is quite high.
3. Still contribute full $5,500 to Roth IRA because it can double up as an emergency fund.
4. Pay off your sister's car loan. Thank her for her generosity in helping you.
5. Pay Dad. Parents are usually more forgiving. If you start paying him some money just to show you didn't forget, he'll understand.
6. Pay off your own car loan.
7. Don't worry about buying a house. Rent the smallest/least expensive space you can live with. You need to minimize your housing cost in an expensive area.
8. Don't worry much about asset allocation, except no company stock. You don't have enough assets to allocate yet. 100% in S&P 500 would be fine. 1/3 US Large Cap 1/3 US Small Cap 1/3 Int'l Stocks would be fine too. Use index funds.
Awesome advice tfb! Thanks for the minor tweaks and adjustments to my approach in tackling my debt situation. Your advice will definitely be duly noted.
And yes, currently i am renting out a 240 sq ft guest house, extremely small i know, but im trying to save as much as i can in my living expenses to pay off my debt faster, and plus im only there to sleep....since im usually in the office working/studying.
And thanks for the allocation advice! I'll rebalance my portfolio today to change it to 34% S&P 33% International and 33% Russel 2000 index funds.

Jack FFR1846 wrote:I'm going to add only one thing. Look into a credit union car refinance for your car and your sister's car and stretch the payments as long as possible at the lowest rate. Digital Federal Credit Union has these loans right now at 1.24%. This will reduce both your cost and your payments and give you breathing room to get the CC paid off (huge priority) and continue to fund the 401k to match.

Ok sure definitely! I'm actually currently financing my car loan through a federal credit union, maybe i can inquire to them if they can lower the interest rate for me. For my sister's car, she is financing it through the dealership. And for paying off the CC, it should not be a problem, I currently have $1500 in disposable income every month, so I am currently putting all of that disposable income towards my CC at the moment, should be completely paid off in 3-4 months.

You have a great future doing grad school while working. Chances are that your salary will start to increase after finishing, so don't think of your present income as a set amount that you have to work with forever. But I would absolutely get rid of the CC first. I have heard too many stories of 0% cards being nearly paid off or being paid off and a small charge put on and the company considering the entire balance.....not just the old balance and then hitting holders with all of the interest. I hope the card is cut up and burned now. If it's not, get out the matches.
Most definitely agree! I feel fortunate even with my debt load to be where I'm at. And yes i understand my salary will not remain at this level, I'm doing my best to learn valuable skills and furthering my education so that I can become a more valuable member to the team, and hopefully lead to higher pay raises. And yes, the CC is my #1 goal at this moment, all my attention is going at this CC.

jh-1391 wrote:Reading that makes me cringe. I don't mean to insult you, but just be happy you found this forum. No offense taken, I know I am still a complete novice, and willing to learn from experienced and more knowledgeable people like yourselves.

I can understand being impatient (I'm 23 myself and hate waiting for things to gradually happen) but STOP taking on debt. STOP viewing retirement accounts as savings accounts. I would take money out of my Roth/a loan on my 401k only if I was close to bankruptcy or if something terrible would happen if I didn't get money ASAP. Like I said, I get it, I actually spend too much (still below my means, but more than I "should"), but I take on debt very rarely. I know I'm in a very ideal situation (no college debt), but I don't normally buy something on credit/loan unless I KNOW I can pay it off immediately if I wanted to and I didn't to keep savings intact.

Priority for me would be:

401k to match ONLY
Credit card
Pay your dad back
401k loan (I would personally do this before paying my family back, but it sounds like our family dynamic is different there, so use your discretion)
Pay off your sister's car
Roth IRA
Start saving for house
Pay off your car

All while saving 3-6 months' expenses with as much priority as any item on the list - basically do this first while also tackling your debt. I also prioritized paying off your sister's car for the sole reason that that isn't "your" debt. While it's low interest, I think the mental bonus of not owing any of your family money would be awesome.

I also would get rid of the company stock in your 401k. You may lose out on money, but you could seriously lose your retirement savings if something happens to your company. I would much rather hedge my retirement savings on the performance of the majority of the stock market than one company, and that is coming from an imperfect Boglehead who still holds small amounts of individual company stock in a taxable account.

I'm sorry if I was harsh, but sometimes that's what you need.
Wasn't harsh at all, your recommendation and advice is duly noted! much appreciated.

etowers wrote:I can kind of understand where you're coming from in wanting to use debt + youth to leverage up for your investment returns. I am similarly considering another property investment where I borrow the deposit from my equity investments and pay it down over the next few years, as opposed to saving and waiting for a few more years. I would rather build my own equity during those few years then help someone else build their equity.

You are young, no family, and can afford to take some risks, imo. I think your original plan is ok. However if you can save your bonuses and increments diligently, you may find that when it is time to buy your house, you may not need to raid your 401k or Roth at all. Good luck!
Thanks! Awesome, glad that you agreed somewhat with my approach and understand where I am coming from, in terms of trying to balance my debt and increasing my equity at the same time, by leveraging my youth. This is exactly what my thinking approach was in all of this, but it seems like other members in this forum are advising against some of my rationale, which i totally understand and respect. But yes one common theme I am seeing among the advice of fellow bogleheads is "Thou shall not raid retirement accounts (i.e. 401K's and Roth IRA's) to come up with a downpayment on a home"...so it looks like I'll need to do it the old fasioned way and just save up the money in a savings account.
mnvalue wrote:tfb's plan is right on. I'd add: allocate the Roth IRA in either money market or, at most, a short-term bond fund. This is because the Roth IRA is doubling as your emergency fund for now.
Ya I agree, I really liked tfb's recommended plan to my situation. And thanks for the advice on the AA i should be doing in my Roth IRA. However it does seem that in my situation, some bogleheads are recommending me "not" to put any money into a Roth until i finish paying off all my debt, whereas some are still recommending me to do it. So it looks like this situation is more subjective, and i guess it will be up to me to decide how I want to approach it. But thanks again for the AA advice, ill definitely take a look into doing that.
mnvalue
Posts: 1098
Joined: Sun May 05, 2013 2:22 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by mnvalue »

sjl333 wrote:it does seem that in my situation, some bogleheads are recommending me "not" to put any money into a Roth until i finish paying off all my debt, whereas some are still recommending me to do it. So it looks like this situation is more subjective
Yes, there are different opinions on this. I'm firmly on the side of tfb, recommending that you max the Roth and use it as your emergency fund. Here's why: you have $1,500/month in extra cash flow available. I believe you're saying that's after contributing to the Roth. To paragraph EmergDoc: You have a big [debt] hole, but you also have a big [income] shovel. (Your hole and shovel aren't as big as the doctors he advises on his website, but they're probably around the same proportion to each other.) Not counting interest, you have just under 6 years worth of debt repayments. And they're all at low interest rates, most of it 0%. In a few years, once you get those loans paid off, you'll still be generating $1,500/month in extra cash flow. You can't put all of that into your 401k, as you're already contributing something, and even if you weren't, $1,500/month is $18,000/year, which is more than the $17,500/year 401k contribution limit. If your $1,500/month is after already maxing a Roth IRA, then it's going to spill over into taxable. In that case, the extra Roth IRA space you're getting now will be useful. And remember, if you have an emergency and need to pull the money, you're no worse off than if you had never contributed to the Roth IRA in the first place. So in your situation, the Roth IRA is probably going to be a win, but can't be a loss. After all, you need an emergency fund anyway.

Now, in truth, once you pay off the loans, you'll undoubtedly increase your spending (larger apartment or house, etc.). But, you're young and could very well see raises above the inflation rate too, which would offset some of that increased consumption.
Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

mnvalue wrote:
sjl333 wrote:it does seem that in my situation, some bogleheads are recommending me "not" to put any money into a Roth until i finish paying off all my debt, whereas some are still recommending me to do it. So it looks like this situation is more subjective
Yes, there are different opinions on this. I'm firmly on the side of tfb, recommending that you max the Roth and use it as your emergency fund. Here's why: you have $1,500/month in extra cash flow available. I believe you're saying that's after contributing to the Roth. To paragraph EmergDoc: You have a big [debt] hole, but you also have a big [income] shovel. (Your hole and shovel aren't as big as the doctors he advises on his website, but they're probably around the same proportion to each other.) Not counting interest, you have just under 6 years worth of debt repayments. And they're all at low interest rates, most of it 0%. In a few years, once you get those loans paid off, you'll still be generating $1,500/month in extra cash flow. You can't put all of that into your 401k, as you're already contributing something, and even if you weren't, $1,500/month is $18,000/year, which is more than the $17,500/year 401k contribution limit. If your $1,500/month is after already maxing a Roth IRA, then it's going to spill over into taxable. In that case, the extra Roth IRA space you're getting now will be useful. And remember, if you have an emergency and need to pull the money, you're no worse off than if you had never contributed to the Roth IRA in the first place. So in your situation, the Roth IRA is probably going to be a win, but can't be a loss. After all, you need an emergency fund anyway.

Now, in truth, once you pay off the loans, you'll undoubtedly increase your spending (larger apartment or house, etc.). But, you're young and could very well see raises above the inflation rate too, which would offset some of that increased consumption.
Your exact logic is why i decided to place money into my roth, i'd be killing two birds with one stone, I need an emergency fund, so why not use the Roth in doing so...of course I would need to do my best not to raid it whatsoever, but if it unfortunately comes to that situation, that option will be there. Btw, my monthly cash flow is $1500 NOT including contributions to my Roth...if I average the contributions to my Roth monthly (~500), then my monthly cash flow in essence would only be $1000 for other debts.
mnvalue
Posts: 1098
Joined: Sun May 05, 2013 2:22 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by mnvalue »

sjl333 wrote:my monthly cash flow in essence would only be $1000 for other debts.
I don't think that changes my overall advice. I'm assuming the $1,000/month is after accounting for the minimum payments on debt. If it's not, then you're a lot more cash flow constrained. But even then, since you can always pull the money out of the Roth in a pinch, continuing to contribute to the Roth is fine.

One thing to consider: if you're not paying your Dad anything yet, you might want to discuss the overall plan with him. It could be bad if, for example, in a year, you happen to say something about your Roth. He might be upset to find out you have $10k in a Roth and you haven't paid him a dime. If he's unhappy with the overall plan, then work with him to come to an agreement on required payments, and stick to that just as you would if it was a bank loan. I don't know what your dad is like, but I know mine would rather see me pay my sister back first (i.e. pay off her loan), so he'd be on board with the plan. But, if your dad is depending on this money to fund his own retirement soon, then maybe he's going to need it back much sooner than your sister needs her loan paid off.

And again, move the entire Roth into a short-term bond fund at the most. You shouldn't be gambling (playing with individual stocks) your emergency fund ever, and you shouldn't be gambling any money at all when you have this much debt, including significant amounts of money owed to family where you haven't even started making payments.
Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

mnvalue wrote:
sjl333 wrote:my monthly cash flow in essence would only be $1000 for other debts.
I don't think that changes my overall advice. I'm assuming the $1,000/month is after accounting for the minimum payments on debt. Yes, exactly correct, this is after all my minimum required debt payments (car, 401K loans) If it's not, then you're a lot more cash flow constrained. But even then, since you can always pull the money out of the Roth in a pinch, continuing to contribute to the Roth is fine.

One thing to consider: if you're not paying your Dad anything yet, you might want to discuss the overall plan with him. It could be bad if, for example, in a year, you happen to say something about your Roth. He might be upset to find out you have $10k in a Roth and you haven't paid him a dime. If he's unhappy with the overall plan, then work with him to come to an agreement on required payments, and stick to that just as you would if it was a bank loan. I don't know what your dad is like, but I know mine would rather see me pay my sister back first (i.e. pay off her loan), so he'd be on board with the plan. But, if your dad is depending on this money to fund his own retirement soon, then maybe he's going to need it back much sooner than your sister needs her loan paid off.
Good point, yes i definitely should sit down with him and talk to him about my plan and see if he is "okay" with me funding my Roth.
Topic Author
sjl333
Posts: 194
Joined: Sun Apr 20, 2014 2:59 pm

Re: Newbie 24 year old investor, portofolio and finance Q's.

Post by sjl333 »

mnvalue wrote:
sjl333 wrote:
And again, move the entire Roth into a short-term bond fund at the most. You shouldn't be gambling (playing with individual stocks) your emergency fund ever, and you shouldn't be gambling any money at all when you have this much debt, including significant amounts of money owed to family where you haven't even started making payments.

duly noted, ya i guess I'm just getting a bit too greedy...
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