Author Topic: Case Study - How to allocate new capital?  (Read 3664 times)

rmendpara

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Case Study - How to allocate new capital?
« on: May 13, 2014, 11:32:14 AM »
Income:
- $3,700/mo (net of tax and $1,333 to 401k) from day job
- ~$300/mo avg from dividends (reinvested)
- ~$90/mo from P2P (Prosper-all reinvested)
- $1,220/mo - rental income
Total cash income = $4,920

Current expenses: (all are averages below, most variances are in the "Misc" category which is zero some months and much higher other times)
- Rent - $1,150 (includes parking)
- Utilities - $150 (blended fee for water/gas/power/internet--varies slightly)
- Groceries - $300 (mostly Trader Joe's)
- Food/eating out - $350 (lunch at work & out with friends)
- Health/Auto Ins. - $150
- Gas - $75
- Entertainment/shopping/stuff - $325
- Condo rental HOA/taxes/ins./maint. - $650
Total exp: ~$3,150

Assets:
- $12,000 in P2P (Prosper)
- $7,000 in 529 plan (maybe for kids, or grad school?)
- $21,000 in 401k
- $21,000 in Roth
- $58,000 in Brokerage (mostly stocks/ETFs)
- $12,000 in Cash (checking + savings)
- $15,000 family loan (to sibling)
Total: ~$134,000
*Does not include condo that is worth ~$125K (paid off late 2013).

Liabilities: No debt other than credit card (paid in full each month), condo rental is also paid off

Regular Investments (annual totals):
- 401k contributions: $16,000
- Roth contributions: $5,500
- P2P contributions: $2,500
- 529 plan contributions: $600
Total (per yr): ~$25,000 (does not include 401k match)

Net cash flows: ~$14,000 after living expenses and $25k invested in various places

Specific Question(s):
How would you proceed in allocation capital/investing? I have around $14K in extra cash flow for the year. I'd like to slowly increase my cash/liquid savings in case of an emergency/condo repairs/rental vacancy/etc. to around $20K cash. After that, a continued steady buildup for a second rental in the next 5 years perhaps.

I'm 25, single, and not sure what to focus on. A lot of investing is on auto pilot ($1,333/mo in 401k, $458/mo in Roth, $200/mo in Prosper, $50/mo in 529 plan).

I want to max out (or nearly max out) my 401k and Roth (while my income is low enough). Effective tax rate is ~30.5% (fed/SS/state/local).

Net worth, on Personal Capital, is $145K (all investments + cash - zero debt).

Gross income (day job) is $80K, Net rental income is ~$6.6K, Dividends ~$3.6K, P2P ~$1.2K.

Total expenses look to be around $30K/yr (maybe more if I take a vacation or make some sort of big purchase). My car is a '07 Acura TSX with 80k miles. A little pricey for what I need, but I own it outright and love it... and plan to keep it until 150K or it starts giving me expensive problems.

I work long hours, so another rental would definitely require a property manager.

My apt is expensive b/c I wanted to live close to work and in a safer area (it's definitely not a luxury place). It could probably drop my rent/util costs from $1.3K to 1.0K if I moved into a 2br with a roommate.

I feel a little lost since I'm just throwing money into investments, but have a good amount left over. I'm sure I'll get married in the next 5-10 yrs, maybe have a kid(s), a new house, perhaps go back to business school, but nothing is really certain.

Some of my numbers above probably don't agree exactly (monthly averages that I tried to give based on annual estimates... and rounding).

Readers, what goals are important for my age/income/stage of life?

**I will admit, I thought I could pick stocks like a genius early on, but have stopped after I realized my stock portfolio underperformed my 401k (all index funds). I still plan on occasional buys when something appears undervalued, but I want to avoid the temptation to buy/sell momentum names and rather try to buy and hold as much as possible.
« Last Edit: May 13, 2014, 01:01:21 PM by rmendpara »

MDM

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Re: Case Study - How to allocate new capital?
« Reply #1 on: May 13, 2014, 12:27:30 PM »
Specific Question(s):
How would you proceed in allocation capital/investing? I have around $14K in extra cash flow for the year. I'd like to slowly increase my cash/liquid savings in case of an emergency/condo repairs/rental vacancy/etc. to around $20K cash. After that, a continued steady buildup for a second rental in the next 5 years perhaps.

I'm 25, single, and not sure what to focus on. A lot of investing is on auto pilot ($1,333/mo in 401k, $458/mo in Roth, $200/mo in Prosper, $50/mo in 529 plan).

I want to max out (or nearly max out) my 401k and Roth (while my income is low enough). Effective tax rate is ~30.5% (fed/SS/state/local).
...

I feel a little lost since I'm just throwing money into investments, but have a good amount left over. I'm sure I'll get married in the next 5-10 yrs, maybe have a kid(s), a new house, perhaps go back to business school, but nothing is really certain.

Readers, what goals are important for my age/income/stage of life?

First, you could do a lot worse than "keep doing what you are doing" - good for you.

Some minor points to consider:
  - Why settle for "nearly"?  Go ahead and max your 401k to $17.5K
  - Appears you are over the cutoff for a traditional IRA - if not, fund that instead of the Roth.
  - Based on your age, your 401k investments should be heavily weighted toward stocks (and in low fee funds) - are they?
  - Auto pilot for your investments is good.  In financial terms, improving your day job pay is likely to be best at this stage so concentrating on that (e.g., getting pay increases, promotions, etc.) makes sense.  How your day job interacts with broader life goals is a somewhat different question...so I'd turn your last question back to you.

rmendpara

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Re: Case Study - How to allocate new capital?
« Reply #2 on: May 13, 2014, 12:55:04 PM »
I had some issues in setting up my contributions. Our system (old and annoying) only allows us to specify a % of salary, rather than a dollar amount, to contribute. I don't want to go over the limit and then have to deal with taking the money out in what I assume is a huge headache. Hopefully, will be resolved this year.

I am over the trad IRA limit, which is why I put money into a Roth. I know that I will be 401k eligible for my entire career, but my trad IRA time is up, and I will likely lose Roth eligibility within the next few years.

IRA/401K is nearly all in stocks, close to 95%. A small amount in an inflation protected treasury bond fund (5%).

As far as the broader life goals, I meant to ask if anyone had ideas/thoughts/questions I should be asking myself as I am thinking about prioritizing certain financial goals (ex. cash is dumb to keep lying around, but how else do you come up with a $50K down payment other than hoarding cash?).

I definitely will have some big expenses coming up in the next 5-10 years with business school (possible), marriage, kids, house, etc coming up. It seems like the expenditures never end! I'm a little conservative/paranoid financially, but I'm trying to stick to a plan as much as possible.

Earlier, I invested a bit emotionally and bought/sold on some swings, but I'm trying to thinking more carefully and not actively invest so much (more automatic and passive, with occasional buys when the timing seems right), but to avoid selling unless I chose a real dog.

Thanks for the reply! I do appreciate it. It truly irks me to not have an easy way to get to $17,500 in my 401k without going over.

badassprof

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Re: Case Study - How to allocate new capital?
« Reply #3 on: May 13, 2014, 12:59:13 PM »
It might vary company by company, but my partner and I both have percentages taken out. When we reach the max contribution, which is before the end of the year, they just stop making withdraws and we have some extra fat paychecks.  Check with your HR: probably the same thing.

rmendpara

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Re: Case Study - How to allocate new capital?
« Reply #4 on: May 13, 2014, 01:07:00 PM »
It might vary company by company, but my partner and I both have percentages taken out. When we reach the max contribution, which is before the end of the year, they just stop making withdraws and we have some extra fat paychecks.  Check with your HR: probably the same thing.

Good point. I have reached out to HR and Fidelity a few times, but have gotten some conflicting answers. I want to get this figured out. It's a relatively minor item, but it seems like it should be easier!

Thanks for the reply!

gimp

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Re: Case Study - How to allocate new capital?
« Reply #5 on: May 13, 2014, 01:18:02 PM »
Just out of curiosity, why would you no longer be roth ira eligible? I'm a bit new to the game and am just curious.

Now, as far as that condo goes. You have a $125k condo, getting approximately $14.5k a year in rent. On the face of it, awesome. However, $650/month HOA fees / taxes / etc are killer! You're paying $7800 a year for that, bringing you down to just under $7k/year in income. That's about 5.5% ROI, which is quite a bit worse than a normal index fund, and takes a lot more of your time to boot. Have you considered selling it?

rmendpara

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Re: Case Study - How to allocate new capital?
« Reply #6 on: May 13, 2014, 02:22:34 PM »
Just out of curiosity, why would you no longer be roth ira eligible? I'm a bit new to the game and am just curious.

Now, as far as that condo goes. You have a $125k condo, getting approximately $14.5k a year in rent. On the face of it, awesome. However, $650/month HOA fees / taxes / etc are killer! You're paying $7800 a year for that, bringing you down to just under $7k/year in income. That's about 5.5% ROI, which is quite a bit worse than a normal index fund, and takes a lot more of your time to boot. Have you considered selling it?

Roth: Income limits apply around $114K annual income. Technically there is a "backdoor Roth" option where you can convert a trad IRA to Roth and pay tax, but it defeats the purpose since I'd be paying a high effective tax rate at that income level.

Condo: I lived in this condo initially, but moved due to a new city for a job (raise from $55K salary to $80K... so a no brainer!). I rented out 1 room at the time for $600/mo, so I was basically paying HOA/tax/mortgage. Once paid off, my monthly (net) cost went down to barely anything 600 rent - 650 HOA/tax/ins/maintenance = -50 cash flow... this is MUCH LESS than how much I would pay in rent, plus I own an asset... but then I moved, so I had to accept the rental situation.

I bought into it at $95K, so it's closer to 6.9% yield on cost.. but you are correct, it's around 5.5% at current value. I keep it since 5.5% cash return is much higher than the cash return I would expect on a stock portfolio of comparable risk. I like the mix of having some real estate that provides cash, and this will reduce as a % of overall assets fairly quickly, since no new capital is going into real estate at this time. I also don't want to sell unless I have somewhere I want to put it.

I don't see real estate as a way to get rich, like stocks, but a way to get cash flow and have the value keep up with inflation (I hope).

If I really wanted to go nuts, I could leverage up and take out a $50K home equity loan and deploy the equity elsewhere, while having tenants cover my mortgage, and still get a small positive cash flow.

If I don't buy another property, and invest according to the automatic investments, I'll have approximately $40K additional by 12/31/2015 (total investments of $174K, and a condo with value of $125K). So it's % will continue decreasing.

Long term, I think ~1/3 of my net worth in real estate and 2/3 in securities is a good target asset mix. Even if the stock market drops 15% in 2015, I'll still be making (close to) $6.6K in net rental income. Of course, if it spikes 15%, I won't make much more either. Diversification is a little disappointing. :)
« Last Edit: May 13, 2014, 02:32:15 PM by rmendpara »

ZiziPB

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Re: Case Study - How to allocate new capital?
« Reply #7 on: May 13, 2014, 02:59:09 PM »
Re 401k contributions - most employers just stop your contributions when you reach the limit.  If you go that route, make sure you understand how your match works so that you don't lose any matching contributions by maxing your contributions too early in the year.

Thegoblinchief

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Re: Case Study - How to allocate new capital?
« Reply #8 on: May 13, 2014, 03:05:59 PM »
Weight yourself heavily to equities, though there are a number of bond funds offering yields of ~10% or more according to the "what bond fund do you like?" thread.

You mention working long hours. Don't burn yourself out. Avoid lifestyle inflation and golden handcuffs. Find a cheap hobby. Get outdoors.

Money is only a tool.

rmendpara

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Re: Case Study - How to allocate new capital?
« Reply #9 on: May 13, 2014, 04:41:39 PM »
Re 401k contributions - most employers just stop your contributions when you reach the limit.  If you go that route, make sure you understand how your match works so that you don't lose any matching contributions by maxing your contributions too early in the year.

Good point. Our match is a portion up to 8% of monthly pay. So things would probably get messed up if I contributed 100% of pay in the first few months of the year and then zero for the rest, but I think as long as I'm not doing that, I am receiving the full match.

Thanks for the reply!

rmendpara

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Re: Case Study - How to allocate new capital?
« Reply #10 on: May 13, 2014, 04:52:54 PM »
Weight yourself heavily to equities, though there are a number of bond funds offering yields of ~10% or more according to the "what bond fund do you like?" thread.

You mention working long hours. Don't burn yourself out. Avoid lifestyle inflation and golden handcuffs. Find a cheap hobby. Get outdoors.

Money is only a tool.

Agreed. I have the vast majority of my securities invested in equities (>95%). I'm particularly bullish on Intl. equities, due to all the trouble in Russia, S. America, and Europe right now, it just seems like a time to get (relatively) good value over the long term.

Hours really aren't too bad. By way of comparison, my dad works longer hours than me, and is 61 yrs old. But, we are in different places. Parents worked hard so I wouldn't have to make the same sacrifices they did, so I'll do my best to work hard, save, invest, and one day give back even 1/10 of what they gave to me.

Lifestyle is the toughest thing. I'm on business in NYC right now, and have friends who live in the city who enjoy going out. It's tough to say no, but I definitely limit myself to one drink at the pricey places. Last weekend this bar had $14 drinks. WTF?!! I miss my college town...

You're absolutely right though. Being in NYC has opened my eyes to the unlimited potential for lifestyle inflation. Personally, I like to enjoy myself and buy very nice things, but would start to cut back seriously if my savings rate dropped below 30%.

Golden handcuffs are actually something I don't worry about. Pensions don't exist, and I value experience/people/new places more than a slight premium to stay in one place. Of course, if someone starts paying me an absurd $200K salary for my current skill set, I'd be a little stuck (and skeptical...).

Thanks for your input!