Young investor looking for advice of current situation

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smithbt2
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Joined: Fri Oct 05, 2018 8:44 pm

Young investor looking for advice of current situation

Post by smithbt2 » Fri Oct 05, 2018 9:27 pm

Hello! First, I am here today to seek your advice and feedback on my present financial situation / investment strategy. I am quite young and I have a lot to learn. A little bit about me...

Age: 23

Profession: Software Engineer
Education: High School, Some College (76 credits, Computer Science)

Retirement Accounts

401k: $5,872.09
Roth IRA: $1,495.09
Traditional IRA: $0

Other Accounts

High Yield Savings: $17,000
Personal Checking: $552

Debt:

Capital One: $2,400 (0% APR)
CareCredit: $700 (0% APR)
Honda Financial Services (Auto): $16,699 (0.90% APR)
Nationwide Bank (Auto): $24,800 (3.49% APR)
Student Loans: $4,800 (around ~4% APR)

I have contributed $1500 to my Roth this year, but I am down a little today after the market's reaction to a rate increase. I intend to deposit an additional $4,000 by EOY. Presently I have $250 per paycheck contributed, but I had a late start this year.

My present 401k balance does not contain my employer match, I get the match deposited once per year in May. It will be $4,200 in May, which is 6% and dollar for dollar match. I was doing 12% for a period of time this year.

I will get a 10% raise in January, so I'll have higher contributions and match next year. I also do additional contract work on the side, putting me at over $100K this year. But I spent the first 6 months paying down roughly $20K in credit card debt. It was a good life lesson.

My 401k Plan is through Principal and absolutely sucks. I figure the dollar for dollar match is pretty fair though. And, I work from home 99%, so I can manage. I have 80% going to the Principal S&P 500 Index Fund R-1, which has an awful ER of 1.03%... but this is the lowest ER available in the plan. I have 20% going to the Principal Core Bond Index Fund, which has an even worse ER of 1.45%.

As for the Roth, I have 80% going to FUSVX and 20% to FSITX. If I max out the Roth I have a Traditional IRA for any additional funds, but unlikely to happen due to other debts.

I am missing an Index Fund for International (5-10% maybe?) and I have the S&P 500 rather Total Stock Market.

In lieu of current AA and strategy, plus consideration of debts, how should I proceed? Am I on a okay path? I have been thinking maybe 25-30% bonds might provide me a better peace of mind during market turndowns, though either way I have seen my portfolio up 9% and down 5% and made no changes. If 80/20 is a fair AA for my age, then it works.

I have a 2017 Honda Civic, which is a great car. I have 8k miles since I barely drive it. Purchased May 2017, according to KBB the value is $20-21K, so I am not under. My other auto loan is a different story, I have a 09 BMW M3 w/ 95k miles and the KBB value is roughly $18-20K. I love this car and I do not really do anything "fun" but I can't really justify two car payments at nearly $1K total per month. The Civic is a fantastic car w/ 120k/8 year warranty, fully loaded, so I won't get rid of this one. I do know I need to make a change here though. Civic is 435 per month and BMW is 510.

Questions:

- How is my AA? How should this change as I age? I have seen a lot on this topic.

- Is it even worth paying down the 0% debt? The issue is I really want to buy a home within a year, but Maryland is super expensive and my debt to income ratio is too high; something has to go to qualify.

- How do I maintain an AA of 80/20? Rebalance? How often? I am confused on this.

Thanks in advance for your help!

compounding_works
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Re: Young investor looking for advice of current situation

Post by compounding_works » Sat Oct 06, 2018 8:11 am

My advice/observations:

1. Create a spreadsheet showing power of compounding. I am not joking: Column 1: Starting balance; Column 2: Annual contribution (assume you increase this a few percentage points each year); Column 3: Annual Rate of Return (fixed assumption for all years); Column 4: Total account value as of 12/31 for that year. Run it out 50 years. Now play "what if": what if you saved another $5K this year? What if you increased your savings 1 more percentage point in the first 10 years. On December 31 of each year, update the actual year end value of all your investments. You will find these 'little things' have million dollar implications. It should motivate you to invest more, more, more, faster, faster, faster.

2. You can't invest more without free cash flow. This requires A) minimizing debt, and B) minimizing unnecessary spend. You have an excessive amount of debt. Pay it down. ALL OF IT. AND STAY OUT OF DEBT. IF YOU CAN"T AFFORD TO BUY IT CASH DON'T BUY IT AT ALL. Live within your means where "within means" means you get to do whatever you want with your money AFTER you have ZERO debt AND have invested $1,000 that month. Burn your credit cards. Plan on keeping the honda 10 years; it will last you that long but won't be all shiny in its final days. Every time you think about buying a new car, go back to your compounding spreadsheet and go "what if I dumped $35K in my investments rather than blowing it on a new car that I don't need because my current car runs absolutely fine?". You have 2 cars? really? From a financial health and investing perspective that is truly, spectacularly, breathtakingly stupid. You have a car and instead of putting $30K in an index fund that will compound for 50 years, you "invested" in a chunk of metal with wheels that will depreciate to zero in 5 years. Do the math on that one. What if you sold the car and put $15K into an index fund? Put that in your XLS and see how that one decision alone turns into half a million over next 40 years.

3. Max out on 401K first because of matching and taxing, Max out on Roth IRA next. Don't touch regular IRAs; they are not as good in the long run.

4. Your employer is screwing you on 401K plan options. You need to talk to HR. First of all I never even hear of that company 'Principal' so it probably some local broker. Ask HR point blank: With their fiduciary responsibility, why have they selected index funds that have excessively high fees? Why do fund options not include 'leading fund firms such as Vanguard (first choice), Fidelity, TRowe, etc. Show them the annual expense ratio for SP500 for Vanguard, Fidelity, and Principal and put them on defensive; If all 3 funds deliver the same top line result (i.e. SP500) and the net is based entirely on fund expense ratio, what is the impact on employees of being in a high cost index fund vs. a low cost index fund.

5. Invest the max limit every year, regardless of whether the market goes up or down. All you care about is 50 years of compounding. What happens year to year is all just noise and if you pay too close attention to it you will talk yourself out of investing.

6. Stop blowing money on expensive Starbucks, dinner, whatever. Every time you feel compelled to fritter money away on something useless with no economic value, stop your self and write down on a notepad how much money you were about to likely spend but didn't. Add it up at the end of the month. Annualize that by multiplying by 12. Plug that number into your compounding spreadsheet. Most people your age are literally blowing $1,500 or more every year on Starbucks alone. Plug that number into your spreadsheet.

7. Don't get fancy on asset allocation. You may think you are cool, smart, hipster, whatever but the path to success is VERY simple: Do ALL of your 401K in the SP500 index, ALL ROTH IRA into a small cap index fund, and whatever you can afford each month into ~3-5 DRPs. I'd start with Dominion Energy whose dividend is expected to grow ~9% for next several years, as is Aqua America. Set up direct deposit of ~$250/month and every January 1 raise it by $25/month. When you get it up to ~$100K, let it continue to compound on its own and start your second DRP. I put $60K in Exxon over 20 years and it is now worth over $200K. I have never touched bonds and never will. That is a bet on interest rates which you are not smart enough to outguess and inflation will take half your proceeds. I have never touched international stocks and never will. Exchange rate fluctuations will take half your proceeds and you really think you know the economy of Angola or Portugal or Chile or Latvia that well? The US has the best business climate and long term prospects on the planet period.

8. Remain fully invested at all times. Period. The only reliable path to success is compounding, not market timing (which frankly is what AA really is: "this might go up, and that might go down so I will put some money here and some money there". A week later:" that might go down and this might go up so I will move some money from there to here...". AA=Market timing=Fool's errand

9. Get yourself a subscription to AAII magazine. www.aaii.com. The only investment publication not trying to sell you something.

10. In 20 years, when you have a nice nest egg growing - and NOT before then, if you want to play with individual stocks in a brokerage account, fine, but limit it to 10% of your portfolio as you are almost certain to lose half of it in the first 5 years, half of what is left in the next 5 years, etc. So if you are going to make lots of bad investment decisions, I recommend you try to limit your losses. And have some self discipline and a clue. Google "piotroski f score" and start to understand that.

11. Buy these two books: Stocks For The Long Run by Jeremy Siegel, and What Works on Wall Street by James O'Shaughnessy. I have read dozens of others but these are the only two you need. The Intelligent Investor by Ben Graham is a foundational book as well.

Good luck. Drop me a note in 50 years and let me know how many millions you made. At your age, if you follow the above guidance, you should be able to hit $4-5M or so.

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LadyGeek
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Re: Young investor looking for advice of current situation

Post by LadyGeek » Sat Oct 06, 2018 9:06 am

compounding_works, Welcome! I have a few comments:
compounding_works wrote:
Sat Oct 06, 2018 8:11 am
1. Create a spreadsheet showing power of compounding.
This wiki article shows the intent: Importance of saving early
compounding_works wrote:
Sat Oct 06, 2018 8:11 am
4. ...First of all I never even hear of that company 'Principal' so it probably some local broker.
I've heard of them. They're a large 401(k) plan provider company. See: About Us | Principal

-----------
Regarding books, see the wiki: Books: recommendations and reviews

====================
smithbt2, also Welcome!

It's a bit difficult to determine your asset allocation without know what type of funds are held in your Roth IRA, traditional IRA, and your 401(k). You say it's currently 80/20 (stocks / bonds).

If you want to tone it down, we can help you with that. However, it's a bit difficult to figure out in the format you've shown. Can you break those down as shown here? Asking Portfolio Questions

You can edit your post by using the "pencil" icon in the top right corner of the post. Bump the thread if you do that. Or, make a new post in this thread with the revised info.
smithbt2 wrote:
Fri Oct 05, 2018 9:27 pm
- Is it even worth paying down the 0% debt? The issue is I really want to buy a home within a year, but Maryland is super expensive and my debt to income ratio is too high; something has to go to qualify.
There's a lot to be said for the emotional side of investing. Emotion doesn't show in any equations, but if it gives you peace-of-mind to get rid of outstanding debt, do so.

Situations can change. Suppose something bad happens and you lose income in the future? That loan still needs to be paid. Having it out of the way will reduce your stress.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

retiredjg
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Re: Young investor looking for advice of current situation

Post by retiredjg » Sat Oct 06, 2018 9:25 am

Welcome to the forum.

As you've already realized, your problem is debt.
I will get a 10% raise in January, so I'll have higher contributions and match next year. I also do additional contract work on the side, putting me at over $100K this year. But I spent the first 6 months paying down roughly $20K in credit card debt. It was a good life lesson.
Good for you! Now finish it. :happy


As for the Roth, I have 80% going to FUSVX and 20% to FSITX. If I max out the Roth I have a Traditional IRA for any additional funds, but unlikely to happen due to other debts.
No you don't. You get to put a total of $5,500 into IRA, Roth and traditional together.

Please remember to put fund names in your post so that people don't have to look up the tickers.


In lieu of current AA and strategy, plus consideration of debts, how should I proceed? Am I on a okay path? I have been thinking maybe 25-30% bonds might provide me a better peace of mind during market turndowns, though either way I have seen my portfolio up 9% and down 5% and made no changes. If 80/20 is a fair AA for my age, then it works.
20% in bonds is a good number for your age and for the next 15 or 20 years.

- How is my AA? How should this change as I age? I have seen a lot on this topic.
Your AA is fine. The truth of the matter is that it simply does not matter what it is when you are just starting out. It is not the fund choices that is growing your portfolio at this point. It is your contributions. You could be 100% stocks or 100% bonds and not notice much difference at the end of the year.

So even if you want international stocks, not having them at this point is trivial. Add them when your portfolio is larger and more flexible.

- Is it even worth paying down the 0% debt? The issue is I really want to buy a home within a year, but Maryland is super expensive and my debt to income ratio is too high; something has to go to qualify.
Regarding the 0% debt....the debt(0% or not) will work against you in buying a home. But paying it off early will mean you can save less. However, a home within a year does not look realistic based on the information you have provided.
- How do I maintain an AA of 80/20? Rebalance? How often? I am confused on this.
You can rebalance once a year or every other year or you can do it when your ratio gets too out of whack (74/26 or 86/14). Just sell a little of what you have too much of and buy a little of what you have to little of.

If you have not found it yet, here is a good place to start your learning. https://www.bogleheads.org/wiki/Getting_started

The fact that you have started your financial makeover and have started saving at your young age will carry you far. Saving a little for a long time is a very successful strategy. You are 10 or 20 years ahead of most people your age.

workerbeeengineer
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Re: Young investor looking for advice of current situation

Post by workerbeeengineer » Sat Oct 06, 2018 9:49 am

Smithbt2, as others have said...Welcome! I will try not to pile on too much here. As you were already advised, you need to get your debt under control. Realistically, you should defer any plans to purchase a house. As you basically realize....the Beamer has to go. You did not mention it, but I’m pretty sure your auto insurance premium is also a big recurring expense. Those nasty old insurance companies just love those fancy high performance autos, especially when driven by a younger person. Post again after you get the BMW out of your life.

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CyclingDuo
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Re: Young investor looking for advice of current situation

Post by CyclingDuo » Sat Oct 06, 2018 10:12 am

smithbt2 wrote:
Fri Oct 05, 2018 9:27 pm

Honda Financial Services (Auto): $16,699 (0.90% APR)
Nationwide Bank (Auto): $24,800 (3.49% APR)

And, I work from home 99%, so I can manage.

I have a 2017 Honda Civic, which is a great car. I have 8k miles since I barely drive it. Purchased May 2017, according to KBB the value is $20-21K, so I am not under. My other auto loan is a different story, I have a 09 BMW M3 w/ 95k miles and the KBB value is roughly $18-20K. I love this car and I do not really do anything "fun" but I can't really justify two car payments at nearly $1K total per month. The Civic is a fantastic car w/ 120k/8 year warranty, fully loaded, so I won't get rid of this one. I do know I need to make a change here though. Civic is 435 per month and BMW is 510.
The transportation red flags jumped out at me more than anything else in your post:

$41,499 in auto debt!
Two cars for somebody at age 23!
No commute since you work from home 99% of the time!


I would dump both cars (sell them), pay off the loans, and take public transportation for the 1% of the time you are not working from home. (Of course, I would have a bike as well for transportation. 8-) )

If you need a car, I would dial it way down and get a dependable used car that you can afford to pay cash for in the price range of $10-12K based on your income (you are paying $11.3K every year in auto loans!!!!). This will free up that money currently going to those loan payments, lowers your car insurance, and removes a lot of financial stress. You'll have plenty of years ahead of you when your assets have grown enough that you can upgrade to a nice new car after you have earned it.

If the above is done, you would have an immediate extra $11,340 to pay off this remaining debt and still have $3440 leftover that was going to two car loans before for the first year:

Capital One: $2,400 (0% APR)
CareCredit: $700 (0% APR)
Student Loans: $4,800 (around ~4% APR)


Not to mention, you would have that $11,340 per year on an annual basis to use for savings after those debts are retired. That amount saved each year for 10 years, means if compounded at 6%, you would have a nice pot worth about $155K to $169K.

We have been dogmatic our entire lives when it comes to automobiles about paying in cash. We have never financed any vehicle. Sure, that meant a few used cars over the years, but also has included 5 new car purchases at various points along the way once we had accumulated enough savings to upgrade.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

staythecourse
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Re: Young investor looking for advice of current situation

Post by staythecourse » Sat Oct 06, 2018 10:32 am

If you really want the best bang for your buck get a higher education. I know you didn't ask, but that is the big elephant in the room. If you are keen on being rich/ wealthy it is much easier to do with the more money you make. The correlation between higher education and income is pretty good and my guess holds pretty true in STEM fields AT LEAST when comparing no college degree to college degree.

Forget about asset allocation. Just invest in yourself. Get a better education which will hopefully lead to higher income. Then save A TON. THEN worry about asset allocation. That should be the stepwise pattern to be followed. The problem with asset allocation is it is sexy in the financial world, but in itself does NOT make you any rich.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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smithbt2
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Re: Young investor looking for advice of current situation

Post by smithbt2 » Sat Oct 06, 2018 1:18 pm

staythecourse wrote:
Sat Oct 06, 2018 10:32 am
If you really want the best bang for your buck get a higher education. I know you didn't ask, but that is the big elephant in the room. If you are keen on being rich/ wealthy it is much easier to do with the more money you make. The correlation between higher education and income is pretty good and my guess holds pretty true in STEM fields AT LEAST when comparing no college degree to college degree.

Forget about asset allocation. Just invest in yourself. Get a better education which will hopefully lead to higher income. Then save A TON. THEN worry about asset allocation. That should be the stepwise pattern to be followed. The problem with asset allocation is it is sexy in the financial world, but in itself does NOT make you any rich.

Good luck.
Sorry, I entirely disagree. I dropped out of college because I did not feel I was gaining any knowledge useful to my field. I have been programming since I was 10. Btw, I declined a job offer of $90K this week and remained with my current employer. I make more than my classmates who graduated from college. In the software field, the degree serves little purpose and they care more about what you can do, have done and your skills. I help with hiring at my company and you would not believe how many resumes we receive from college educated individuals with 15+ years of development experience, but fail to pass even an elementary test we use to guage knowledge. Worse, they ask for 100-120k salary and are years behind even some of our junior developers. I learn every day, through experience in and outside of work and have been for a long time.

staythecourse
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Re: Young investor looking for advice of current situation

Post by staythecourse » Sat Oct 06, 2018 2:33 pm

How will you get to be in a high paying exec. Position without an advance degree let alone college degree. Trust me your salary will limit how much you save. Making 300k at a VP or level is easier to be rich then making 90k.

Guess we will have to agree to disagree.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

runner540
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Re: Young investor looking for advice of current situation

Post by runner540 » Sat Oct 06, 2018 2:46 pm

It looks like you have ~$40k in debt and $24k in assets (not counting cars). I second the recommendations to sell one or both vehicles, and finish your degree.

justsomeguy2018
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Re: Young investor looking for advice of current situation

Post by justsomeguy2018 » Sat Oct 06, 2018 3:05 pm

staythecourse wrote:
Sat Oct 06, 2018 2:33 pm
How will you get to be in a high paying exec. Position without an advance degree let alone college degree. Trust me your salary will limit how much you save. Making 300k at a VP or level is easier to be rich then making 90k.

Guess we will have to agree to disagree.

Good luck.
I second this. Seems like your future earnings potential is brighter with a degree. Also might make it easier to find another job if you get laid off. Some employers won't consider candidates without a degree.

Northern Flicker
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Re: Young investor looking for advice of current situation

Post by Northern Flicker » Sat Oct 06, 2018 3:22 pm

In the software field, the degree serves little purpose and they care more about what you can do, have done and your skills.
This is short-term thinking. The degree is about fundamental education providing a foundation for future education which may be informal work you do on your own to develop new skills or future formal education. I think very few people who complete a BS in computer science and work in the software development field would trade the degree for an extra year or two of work experience.
Index fund investor since 1987.

abonder
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Re: Young investor looking for advice of current situation

Post by abonder » Sat Oct 06, 2018 3:29 pm

I think you’ve gotten a lot of good advice. I’d summarize your immediate needs
/action steps as follows.

1. Dump the M3. It’s an awesome car but you have a more practical option and, honestly, you can’t afford to have two cars. Some have suggested dumping the Civic, but I personally would keep it since you’ve already taken a hit on some of the depreciation and it’s a truly awesome vehicle that should serve your needs for years to come and it even has an extended warranty. Sure, you could sell it and buy a 5-7 year old vehicle, but it wouldn’t make a huge difference and I’d rather just keep the excellent civic.

2. Don’t swear asset allocation and portfolio details. Just stick with something and focus on growing income, saving more. That’s where the bang for your buck is, rather than sweating 80/20 vs. 70/30.

3. Defer buying a home. Just put it off and start to build a down payment. Forget all the realtor-speak about rent being a waste of money. Renting affords you flexibility - maybe you get a sweet job offer in another locale. If renting, you can move with fewer restrictions. Unless you know that you want to remain where you are, I’d put house dreams on hold. If you want to decrease living expenses, find a Roomate or get a crappier/smaller apt. I’ve done both and it never was much of a sacrifice.

4. Grow your income/skill set. Find out how to advance at work. Get a good mentor. Take online courses. Find out what skills are most valuable and get really really good at them. Constantly search for new jobs and even interview for good opportunities. This keeps you in the game and also sharpens your insight into the most valuable skills. Also, Grow your consulting gig and utilize tax-deferred options to improve your retirement savings and decrease tax burden.

You’re in a great place but you can transition to even greater by taking these steps.

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CyclingDuo
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Re: Young investor looking for advice of current situation

Post by CyclingDuo » Sat Oct 06, 2018 3:30 pm

staythecourse wrote:
Sat Oct 06, 2018 2:33 pm
How will you get to be in a high paying exec. Position without an advance degree let alone college degree. Trust me your salary will limit how much you save. Making 300k at a VP or level is easier to be rich then making 90k.

Guess we will have to agree to disagree.

Good luck.
We should all take great care not to create any sort of insults regarding one's chosen profession and the income that is associated with it - be it with or without an advanced degree. Plenty of Boglehead forum members have shown time and time again, that wealth can be accumulated from a variety of income levels and professions. We would venture to guess there are more of us commoners here on the threads than VP's making $300K in annual salary. 8-)

Savings rates of 15%-20%, or even up to 25-30%+ don't care what the profession is or if a college degree is or isn't associated with it. As long as the OP runs a cash flow positive household and contributes year in and year out to savings/investments, the formula works.

The OP mentioned an income this year of over $100K at age 23. Maxing out a 401k on that salary, plus the employer's match, and maxing out a Roth IRA until the income limit is hit over a 35-40 year career should bode quite well for the OP provided a similar level of income and saving were maintained. Possibility of a potential dual income household at some point in the future even improves the ability to accumulate household wealth.

Coming from a household of advanced degrees, we can attest to the OP making more money than either of us are making in our peak earning years on an individual basis living in an LCOL area. The OP's income also tops our 23 year old's salary - who has a degree and works for one of the largest software companies in the world in a HCOL area. Difference being, our child has $0 debt, and already has a six figure investment portfolio between 401k, Roth IRA, Traditional IRA, and taxable accounts.

The OP needs to take care of the debt using the current salary ASAP. Degree wise, if one wanted to push the issue (and being a household of educators - we would support a gentle push), the OP could still maintain the current job with the possibility of picking up an associated BS degree with evening/weekend/online courses and not miss a beat.

OP, here is one of the studies I share with the college students that I teach:

https://www2.ed.gov/policy/highered/reg ... payoff.pdf
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Topic Author
smithbt2
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Re: Young investor looking for advice of current situation

Post by smithbt2 » Sat Oct 06, 2018 7:41 pm

staythecourse wrote:
Sat Oct 06, 2018 2:33 pm
How will you get to be in a high paying exec. Position without an advance degree let alone college degree. Trust me your salary will limit how much you save. Making 300k at a VP or level is easier to be rich then making 90k.

Guess we will have to agree to disagree.

Good luck.
I do not necessarily want to be a high paying exec or a VP. It is not my cup of tea. I am a very talented programmer and I am very passionate about my work. If it means anything, I do serve as the Director of Engineering for a start-up and I own 2.5% of the company. It does require my full attention but I have not been able to part ways with my current employer yet.
justsomeguy2018 wrote:
Sat Oct 06, 2018 3:05 pm
I second this. Seems like your future earnings potential is brighter with a degree. Also might make it easier to find another job if you get laid off. Some employers won't consider candidates without a degree.
I am not convinced a degree is going to help me at this point. It will end up costing roughly $20K to finish my education and what are the options for completing a BS in Comp Sci online? I exited my previous company on Sep 1 2017 and by the third to fourth week of September, I had three job offers to choose from. I didn't even select the highest paying choice, rather the one with the best benefits and a competitive salary.
CyclingDuo wrote:
Sat Oct 06, 2018 3:30 pm
We should all take great care not to create any sort of insults regarding one's chosen profession and the income that is associated with it - be it with or without an advanced degree. Plenty of Boglehead forum members have shown time and time again, that wealth can be accumulated from a variety of income levels and professions. We would venture to guess there are more of us commoners here on the threads than VP's making $300K in annual salary. 8-)

Savings rates of 15%-20%, or even up to 25-30%+ don't care what the profession is or if a college degree is or isn't associated with it. As long as the OP runs a cash flow positive household and contributes year in and year out to savings/investments, the formula works.

The OP mentioned an income this year of over $100K at age 23. Maxing out a 401k on that salary, plus the employer's match, and maxing out a Roth IRA until the income limit is hit over a 35-40 year career should bode quite well for the OP provided a similar level of income and saving were maintained. Possibility of a potential dual income household at some point in the future even improves the ability to accumulate household wealth.

Coming from a household of advanced degrees, we can attest to the OP making more money than either of us are making in our peak earning years on an individual basis living in an LCOL area. The OP's income also tops our 23 year old's salary - who has a degree and works for one of the largest software companies in the world in a HCOL area. Difference being, our child has $0 debt, and already has a six figure investment portfolio between 401k, Roth IRA, Traditional IRA, and taxable accounts.

The OP needs to take care of the debt using the current salary ASAP. Degree wise, if one wanted to push the issue (and being a household of educators - we would support a gentle push), the OP could still maintain the current job with the possibility of picking up an associated BS degree with evening/weekend/online courses and not miss a beat.

OP, here is one of the studies I share with the college students that I teach:

https://www2.ed.gov/policy/highered/reg ... payoff.pdf
Thank you for the advice and offering an alternate point of view :D It is awesome to hear your son already has a six digit portfolio. I have made some mistakes financially, but I am learning early so there is plenty of time to recover from them! I desire $0 debt and I believe it is the way to live a stress-free and comfortable lifestyle. Do you recommend any particular online degree programs? I have 76 credits from Virginia Commonwealth University toward a BS in Computer Science. I made all As throughout freshman and sophomore year, but I stopped showing up for class in junior year and received a few Bs. GPA is ~3.9

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smithbt2
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Re: Young investor looking for advice of current situation

Post by smithbt2 » Sat Oct 06, 2018 8:22 pm

I should mention I will be receiving a sum of ~$40,000 as part of a settlement agreement. It is expected to be finalized by the end of the year and is not taxable. What do you recommend doing with the money? It stems from an injury which is part of the reason I accumulated a lot of credit card debt.

ProfWengen
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Re: Young investor looking for advice of current situation

Post by ProfWengen » Sat Oct 06, 2018 10:00 pm

I haven't read this word for word, but this is what I would do.
  • Ditch the BMW, you're not financially ready for it.
    Transfer some assets from the HY savings into a ROTH and max it out for 2018. Max it out again in January for 2019.
    Wait to pay off the debt until right before you start getting charged interest.

retiredjg
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Re: Young investor looking for advice of current situation

Post by retiredjg » Sun Oct 07, 2018 5:12 am

I recommend paying off all debt and establishing an emergency fund with the rest.

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LadyGeek
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Re: Young investor looking for advice of current situation

Post by LadyGeek » Sun Oct 07, 2018 7:23 am

The wiki has some background info: Emergency fund

ProfWengen, Welcome!
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Chris K Jones
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Re: Young investor looking for advice of current situation

Post by Chris K Jones » Sun Oct 07, 2018 7:54 am

I would skip bonds at your young age. Revisit the issue when you are in your 30s. A side effect of a 100% equity allocation is you wont have to rebalance and you will eliminate the ridiculous ER for that bond fund.

As a general principle, I would get rid of debt. You seem to be kind of car heavy. Do you make alot of money?

Best wishes

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smithbt2
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Re: Young investor looking for advice of current situation

Post by smithbt2 » Sun Oct 07, 2018 10:05 am

compounding_works wrote:
Sat Oct 06, 2018 8:11 am
My advice/observations:

1. Create a spreadsheet showing power of compounding. I am not joking: Column 1: Starting balance; Column 2: Annual contribution (assume you increase this a few percentage points each year); Column 3: Annual Rate of Return (fixed assumption for all years); Column 4: Total account value as of 12/31 for that year. Run it out 50 years. Now play "what if": what if you saved another $5K this year? What if you increased your savings 1 more percentage point in the first 10 years. On December 31 of each year, update the actual year end value of all your investments. You will find these 'little things' have million dollar implications. It should motivate you to invest more, more, more, faster, faster, faster.

2. You can't invest more without free cash flow. This requires A) minimizing debt, and B) minimizing unnecessary spend. You have an excessive amount of debt. Pay it down. ALL OF IT. AND STAY OUT OF DEBT. IF YOU CAN"T AFFORD TO BUY IT CASH DON'T BUY IT AT ALL. Live within your means where "within means" means you get to do whatever you want with your money AFTER you have ZERO debt AND have invested $1,000 that month. Burn your credit cards. Plan on keeping the honda 10 years; it will last you that long but won't be all shiny in its final days. Every time you think about buying a new car, go back to your compounding spreadsheet and go "what if I dumped $35K in my investments rather than blowing it on a new car that I don't need because my current car runs absolutely fine?". You have 2 cars? really? From a financial health and investing perspective that is truly, spectacularly, breathtakingly stupid. You have a car and instead of putting $30K in an index fund that will compound for 50 years, you "invested" in a chunk of metal with wheels that will depreciate to zero in 5 years. Do the math on that one. What if you sold the car and put $15K into an index fund? Put that in your XLS and see how that one decision alone turns into half a million over next 40 years.

3. Max out on 401K first because of matching and taxing, Max out on Roth IRA next. Don't touch regular IRAs; they are not as good in the long run.

4. Your employer is screwing you on 401K plan options. You need to talk to HR. First of all I never even hear of that company 'Principal' so it probably some local broker. Ask HR point blank: With their fiduciary responsibility, why have they selected index funds that have excessively high fees? Why do fund options not include 'leading fund firms such as Vanguard (first choice), Fidelity, TRowe, etc. Show them the annual expense ratio for SP500 for Vanguard, Fidelity, and Principal and put them on defensive; If all 3 funds deliver the same top line result (i.e. SP500) and the net is based entirely on fund expense ratio, what is the impact on employees of being in a high cost index fund vs. a low cost index fund.

5. Invest the max limit every year, regardless of whether the market goes up or down. All you care about is 50 years of compounding. What happens year to year is all just noise and if you pay too close attention to it you will talk yourself out of investing.

6. Stop blowing money on expensive Starbucks, dinner, whatever. Every time you feel compelled to fritter money away on something useless with no economic value, stop your self and write down on a notepad how much money you were about to likely spend but didn't. Add it up at the end of the month. Annualize that by multiplying by 12. Plug that number into your compounding spreadsheet. Most people your age are literally blowing $1,500 or more every year on Starbucks alone. Plug that number into your spreadsheet.

7. Don't get fancy on asset allocation. You may think you are cool, smart, hipster, whatever but the path to success is VERY simple: Do ALL of your 401K in the SP500 index, ALL ROTH IRA into a small cap index fund, and whatever you can afford each month into ~3-5 DRPs. I'd start with Dominion Energy whose dividend is expected to grow ~9% for next several years, as is Aqua America. Set up direct deposit of ~$250/month and every January 1 raise it by $25/month. When you get it up to ~$100K, let it continue to compound on its own and start your second DRP. I put $60K in Exxon over 20 years and it is now worth over $200K. I have never touched bonds and never will. That is a bet on interest rates which you are not smart enough to outguess and inflation will take half your proceeds. I have never touched international stocks and never will. Exchange rate fluctuations will take half your proceeds and you really think you know the economy of Angola or Portugal or Chile or Latvia that well? The US has the best business climate and long term prospects on the planet period.

8. Remain fully invested at all times. Period. The only reliable path to success is compounding, not market timing (which frankly is what AA really is: "this might go up, and that might go down so I will put some money here and some money there". A week later:" that might go down and this might go up so I will move some money from there to here...". AA=Market timing=Fool's errand

9. Get yourself a subscription to AAII magazine. www.aaii.com. The only investment publication not trying to sell you something.

10. In 20 years, when you have a nice nest egg growing - and NOT before then, if you want to play with individual stocks in a brokerage account, fine, but limit it to 10% of your portfolio as you are almost certain to lose half of it in the first 5 years, half of what is left in the next 5 years, etc. So if you are going to make lots of bad investment decisions, I recommend you try to limit your losses. And have some self discipline and a clue. Google "piotroski f score" and start to understand that.

11. Buy these two books: Stocks For The Long Run by Jeremy Siegel, and What Works on Wall Street by James O'Shaughnessy. I have read dozens of others but these are the only two you need. The Intelligent Investor by Ben Graham is a foundational book as well.

Good luck. Drop me a note in 50 years and let me know how many millions you made. At your age, if you follow the above guidance, you should be able to hit $4-5M or so.
I contacted HR about this in May. I followed up again with them yesterday and received a response they will pressure the broker to get answers to my questions and discuss with me further. I suspect the broker is acting in a "non-fiduciary" capacity.

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