Author Topic: How am I doing?  (Read 2002 times)

Zeratul

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How am I doing?
« on: November 24, 2017, 10:11:34 PM »
Prefacing this to say thank you all ahead of time. Looking to get some advice on my financial standing, and I want to very humbly outline everything, I understand i'm in a privileged position. I lived most my life through poverty and worked really hard to get here.

25 y.o
Rent+Utils: $1800/mo
Debt: $0

Salary: ~205k (base+bonus)
Assets: $30k car (current resale value)
Vanguard Investment: 110k (90/10 VTSAX/VBTLX making on average a 12% return)
Vanguard 401k rolled-over:  15K
Company 401k :28k (16k vested)
Money Market Savings: 60k


I still live frugally, own no debt, don't spend much money, and sure as hell don't feel wealthy. I don't have any real tax strategy but I exhaust everything I can on my itemized deductions and it's better than the standard deduction (I used to have a house, sold it a few months ago, don't want to deal with owning property until I can buy in cash and still be making my yearly expenditures in investments).

401k: I'm starting to become anti-401k, because I don't stay at companies long enough for the employer-match 401k to vest (usually have to stay for 2 years but I usually move to another company right before the 2 year mark). I feel like i'd rather use the money towards my vanguard account. Why should I keep investing in my 401k?

Car: This is my expensive hobby. I usually purchase a car post-depreciation, drive for a year, and sell. I make all the money back usually minus sales tax, maintenance, repairs. I'm thinking of selling the car, putting the 30k into vanguard, and doing a 9-12 month lease takeover on a ~750/mo BMW M3/M4. So if I lay this out

Current car strategy: ~$7000 average cost first year (total cost of sales tax, maintenance, repairs, depreciation for a year)
New Lease Strategy: ~$9000/yr ($750*12) - returns made from investment  (30k*.11% = 3300/yr average) = $5700/yr

I could pocket a lot of dough if I just get a Honda, but everyone has to have one vice. The ROI does not take into account the compounding investment if I throw it in to the rest of my vanguard account.

I'm putting all my eggs in one basket (vanguard index funds). I need ideas on what I can do to make big lump sums of cash, that's why I haven't put the 60k in my savings account into Vanguard yet. Maybe I can get into property flipping? Should I just dump every penny I get into my vanguard? Would love some ideas.

Thanks again for your help MMM.

« Last Edit: November 25, 2017, 08:48:15 PM by Zeratul »

Imma

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Re: How am I doing?
« Reply #1 on: November 25, 2017, 04:55:43 AM »
Why you should keep investing in a 401k: I'm not American, but from what I've read, those are tax advantaged accounts. Max out tax advantaged investments before you invest in after-tax accounts, for the very simple reason that you avoid paying taxes on that money and instead get to invest it. Even when there are certain legal limits to these accounts, the avoiding of paying all that tax is almost always worth it.

You say you don't feel rich aged 25 making $200k/year. In what kind of environment did you grow up? For reference, the median income is about $45.000 as far as I know. If you're making $200k/year aged 25 (at the start of your career, not at the end) that puts you at the very top income levels of the wealthiest country in the world, without any student loans, that means you're extremely rich. I don't know if FIRE is your goal, but at this income level you could definitely FIRE in a few years if you wanted to.

To give you a better advice, I think it would be helpful to know your goals. You're 25 years old and apparantly succesful in your job. You don't mention a long-term relationship or spouse, so I'm assuming marriage and kids is not on the cards right now. I can imagine you might not want to retire anytime soon at all, but you don't have to pursue RE to want to reach FI. But maybe you are tired of the rat race and in that case, you could achieve that in a very short period of time.

If you're just thinking about FI while pursueing your career, the easiest way to achieve it is to invest all the money in your vanguard accounts. You don't have to do anything except transfer the money on a regular base. You can just go on with your life and career and your money works for you until at some point you're FI and you're free to keep on working, or not.

If you're also thinking of RE, getting out of your current job at some point in the near future, other ways of investing that require a lot more work, like flipping houses or becoming a landlord, come into the picture. Do you have any DIY skills? I know flipping houses looks easy on TV, but we bought a fixer-upper a few years ago (not to flip, but as our family home) and believe me, it's a hell of a lot of work. With the kind of income you have, I'm assuming you have an office type job and lots of professional skills, and likely work some overtime too. Do you have the DIY skills and the time to make this work?

At your age, if you have the skills, you can probably find the time and the energy to flip a few houses or to fix them up to rent them out, but as a permanent side hustle I think this would be hard to combine with a full time, demanding job in the long term, especially if at some point you would marry or have kids. So I think this kind of path would be more advisable if you're planning to RE at some point. This is what MMM did himself too. I think this is also much more of a 'hit or miss' investment than the stock market is. You can make a lot of money in a short amount of time, but there's also a much bigger chance of losing money in the short term. You might need to hold on to certain properties for a very long time until they are profitable because of circumstances that are beyond your control. This happens with index funds and stocks as well, but those don't drain all your energy and money to maintain. They just sit there in your account until they've regained their original value. You don't have to pay property taxes, repair storm damage and replace leaky roofs, not to mention pay lawyers to kick out bad tenants.

Rollin

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Re: How am I doing?
« Reply #2 on: November 25, 2017, 06:13:24 AM »
It would also be helpful to know how much your expenses are. That was the hardest part of becoming FIRE for me. We are a family of 5 and live on much less than half of what you earn, so just ballpark I'd say you should be able to put away about 2/3rds of your earnings without trouble.

You probably cannot take a deduction for an IRA due to your 401K amounts (you'll need to check that through), but it doesn't mean you cannot put money in one - at least a ROTH so that your earnings are not taxed.

Zeratul

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Re: How am I doing?
« Reply #3 on: November 25, 2017, 07:27:57 PM »
I just don't feel comfortable spending money like other people do. Think about it, if I purchased a home with all of my money, that'd only be a ~20% downpayment where I live. Cost of living is sky-high, and I don't have enough ROI to be able to spend money without thinking twice. Hell, I finally spent 30k on a car, I don't know how people making 1/4 of me buy these 30-40k cars. I pay my credit card down and every extra penny goes to savings.

Expenses:
Rent+Utils: $1800/mo
Credit Card average: $2800/mo (WTF! Just pulled this report from online banking... need to lower this)
total monthly expenditures = ~$4600/mo (jesus)

As you see, somehow my credit card expenses are high as hell, that's just average daily life here. Buying food, bars, restaurants, gas, insurance, various expenses somehow equates to $3k. I don't do anything out the ordinary and I don't buy lavish things or clothes.

First call to order will be getting those expenses down. This is probably why I don't feel wealthy.

I don't care about RE at the moment, because I like my career and I like where I am headed. I just need to decide whether I am going to dump everything into my Vanguard account and stick it out with the index funds (passive investing) or if I find another way to use the money and make big gains on the side. Are there any reasons not to put all my eggs into index funds? It's bonus season and i'll have a big lump sum (if I sell my car) of about 100k in the next few months, that will put me at ~220k in vanguard.

rpr

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Re: How am I doing?
« Reply #4 on: November 25, 2017, 07:42:05 PM »

401k: I'm starting to become anti-401k, because I don't stay at companies long enough for the 401k to vest (usually have to stay for 2 years but I usually move to another company right before the 2 year mark). I feel like i'd rather use the money towards my vanguard account. Why should I keep investing in my 401k?


I'm a little confused. Are you saying that any of your (as an employee) contributions to your 401k will be lost if you leave before two years. I have never come across a single 401k plan which does that. It is possible that employer matches and contributions may have a longer vesting period.


Given your pay, you may be in the 33% federal income  tax bracket. Plus there may be high state and local income taxes as well. Lets assume a combined 35% bracket for income tax. For every $ you contribute, you save 35 cents in tax. Assuming you max out your 401k, you can save 18k*0.35 = $6300 in taxes.

The other thing is that you should be able to roll over the 401k balances to an IRA when you leave your employer.

Find out more about your 401k plan. Make a rational and educated decision. You may be leaving money on the table.

Zeratul

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Re: How am I doing?
« Reply #5 on: November 25, 2017, 08:47:35 PM »
Sorry for not being clear, I meant that the employer match never gets vested because it usually requires you to be at a company for two years. At all my companies i've been at, i've never got any 'match' from my employer because i've always left before two years.

So the question is:

Is the $18,000 deduction (aka $18k towards retirement and $6300/yr cash-back) better than putting that $18,000 into my vanguard account and having it compound with the rest of the money I have in there?

I know the answer is yes, in the long run, but I am thinking of the short term. To explain what I mean by this, I don't like how our culture is all focused on retirement savings, because i'd rather get wealth sooner than later. I have the belief that if I get really wealthy early and continue to grow, that money will carry over into retirement anyways so I don't necessarily need a huge 401k. I know 99.9% of the board here does not really see it my way though, so i'd love to hear responses on why else I am wrong so that I can hopefully shift my mindset. Although I do contribute, I have this argument with myself every few months.

Also, I do rollover my 401k to an IRA within my Vanguard account when I leave employers, that's where the 15k in Vanguard 401k is from. That number would probably have been close to 30k if I stayed at the employers for 2 years (for their match to vest)
« Last Edit: November 25, 2017, 08:51:48 PM by Zeratul »

rpr

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Re: How am I doing?
« Reply #6 on: November 25, 2017, 09:40:23 PM »
Sorry for not being clear, I meant that the employer match never gets vested because it usually requires you to be at a company for two years. At all my companies i've been at, i've never got any 'match' from my employer because i've always left before two years.

So the question is:

Is the $18,000 deduction (aka $18k towards retirement and $6300/yr cash-back) better than putting that $18,000 into my vanguard account and having it compound with the rest of the money I have in there?

I know the answer is yes, in the long run, but I am thinking of the short term. To explain what I mean by this, I don't like how our culture is all focused on retirement savings, because i'd rather get wealth sooner than later. I have the belief that if I get really wealthy early and continue to grow, that money will carry over into retirement anyways so I don't necessarily need a huge 401k. I know 99.9% of the board here does not really see it my way though, so i'd love to hear responses on why else I am wrong so that I can hopefully shift my mindset. Although I do contribute, I have this argument with myself every few months.

Also, I do rollover my 401k to an IRA within my Vanguard account when I leave employers, that's where the 15k in Vanguard 401k is from. That number would probably have been close to 30k if I stayed at the employers for 2 years (for their match to vest)

The money in the 401k is your money. It is your wealth. Whether money is in a 401k account or in a taxable account, it is still your money. Yes, there are some restrictions on the 401k, but there are many ways to get around it.

In your case, given the high tax bracket it is a no brainer to contribute to the 401k. Unless you like giving throwing away $6300 bucks every year ;)

Make a spreadsheet or search for a spreadsheet online to do this calculation  of the tax benefit to convince yourself. Try to think long term. 

Lady SA

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Re: How am I doing?
« Reply #7 on: November 25, 2017, 10:53:53 PM »
I'm putting all my eggs in one basket (vanguard index funds). I need ideas on what I can do to make big lump sums of cash.

I just need to decide whether I am going to dump everything into my Vanguard account and stick it out with the index funds (passive investing) or if I find another way to use the money and make big gains on the side. Are there any reasons not to put all my eggs into index funds?

Can I go back to these statements? It sounds like your fundamental question is "do I continue passively investing with index funds?" and are worried because index funds don't seem diversified enough (your statement about all your eggs in one basket is telling). But the entire point of Index Funds is that they ARE diversified and follow the trend of the market as a whole. So really, by index fund investing, you are putting your eggs in many, many markets, not just one basket.

Is your question more on "should I take my lump sum and actively invest some of it because passive investing doesn't seem "diversified enough"? Well, "actively investing" is slang for "stock picking" which is slang for "gambling". So a resounding NO on picking stocks. Take your lump sum, put it in your vanguard index funds and forget about it. You can take a teeny portion for "fun money" if you wish and pick stocks with that, but it should not be considered in your 'stash.

Lady SA

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Re: How am I doing?
« Reply #8 on: November 25, 2017, 11:05:03 PM »
Is the $18,000 deduction (aka $18k towards retirement and $6300/yr cash-back) better than putting that $18,000 into my vanguard account and having it compound with the rest of the money I have in there?

I know the answer is yes, in the long run, but I am thinking of the short term. To explain what I mean by this, I don't like how our culture is all focused on retirement savings, because i'd rather get wealth sooner than later. I have the belief that if I get really wealthy early and continue to grow, that money will carry over into retirement anyways so I don't necessarily need a huge 401k. I know 99.9% of the board here does not really see it my way though, so i'd love to hear responses on why else I am wrong so that I can hopefully shift my mindset. Although I do contribute, I have this argument with myself every few months.

Even early retirees (who want access to their money "in the short term" use 401ks and the reason is this: TAXES. Taxes are your single biggest "chunk" taken out of earnings, so you need to learn to optimize paying taxes over the long term otherwise you lose thousands of dollars needlessly.

Taxes are inescapable, and you will pay taxes on your savings. It is guaranteed and a given. BUT, you have the power to choose WHEN you will pay taxes on your investments: either now, or later.

The question of now vs later comes down to tax brackets. If you believe your tax bracket now is higher than it will be when you are taking the money out, then you want to choose to pay taxes later. If your income now is lower than you expect it will be when you are retired, then you want to pay taxes now when your burden is lower.

Pre-tax accounts work because they remove those savings from your earnings in the eyes of the IRS (until you take the money out, that is), so for this year, you are being taxed on (your salary-18k) instead of your full salary. Then the money you DIDN'T have to pay the IRS is still in your pocket and compounding interest.

As a ridiculously high earner, you absolutely want to shield as much as you can from the tax man right now and pay taxes later after becoming financially independent, when you will draw an income that is equal to your expenses. That is precisely what pre-tax accounts are for.

Pretax accounts - pay taxes later
401k, HSA, trad IRA, etc

Post-tax accounts - pay taxes now (income tax taken out before it even lands in your bank account) but not later when you take it out
Roth anything

Pay taxes now (income tax) AND pay taxes later on gains:
normal brokerage account

Only after exhausting the tax-advantaged accounts available to you, do you do the last resort: a normal brokerage account.

But now your question is, how do you get at the money if it is trapped in accounts you can't access until 59?
There are many ways to get at the money early. I can't find the links right now, but the Mad Fientist has many posts about that topic. But for now, just focus on accumulating assets in the most tax-optimized way, and worry about getting at it later. Rest assured that it is possible.
« Last Edit: November 25, 2017, 11:13:32 PM by Lady SA »

Imma

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Re: How am I doing?
« Reply #9 on: November 26, 2017, 03:54:43 AM »
I just don't feel comfortable spending money like other people do. Think about it, if I purchased a home with all of my money, that'd only be a ~20% downpayment where I live. Cost of living is sky-high, and I don't have enough ROI to be able to spend money without thinking twice. Hell, I finally spent 30k on a car, I don't know how people making 1/4 of me buy these 30-40k cars. I pay my credit card down and every extra penny goes to savings.

Expenses:
Rent+Utils: $1800/mo
Credit Card average: $2800/mo (WTF! Just pulled this report from online banking... need to lower this)
total monthly expenditures = ~$4600/mo (jesus)

As you see, somehow my credit card expenses are high as hell, that's just average daily life here. Buying food, bars, restaurants, gas, insurance, various expenses somehow equates to $3k. I don't do anything out the ordinary and I don't buy lavish things or clothes.

First call to order will be getting those expenses down. This is probably why I don't feel wealthy.


This happens to a lot of people, especially those who are young, living in the big (expensive) city and making lots of money. I do believe you when you say that's just average daily life in our environment. Still I'm sure it's absolutely possible to bring those numbers down without feeling you are sacrificing every single fun thing in your life.

doneby35

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Re: How am I doing?
« Reply #10 on: November 26, 2017, 07:55:56 AM »
1. You should be feeling rich. You ARE rich. Anyone making 200K/year, at the age of 25, is incredibly rich. If you lower your expenses, you should be able to FIRE by 30-35.
2. Yes pre-tax 401k contributions are better than putting your money into your taxable vanguard account. Only after you max out your pre-tax accounts (401k, HSA, traditional IRA), is when you start dumping money into your taxable accounts. Even if you're not staying long enough at your employer to get the match because of the vesting schedule, you're still savings quite a bit on taxes.
3. There are ways to access 401k funds early.
4. Your monthly credit card expenses are too high. I'm not sure what you're spending all that money on, bars and restaurants maybe? but you should definitely work on that.
5. The car thing, I don't really get it, seems like a big waste of money, but oh well.
6. You're doing extremely well for your age. Congrats.

Zamboni

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Re: How am I doing?
« Reply #11 on: November 26, 2017, 08:23:47 AM »
$18000 max into 401K is actually a drop in the bucket for you. For all of the reasons others have stated, you should max your contribution to that.

Also, I hate to burst your bubble, but eventually companies will start to look sourly on a repetitive job hopping history on a resume. You are only 25, so you can't have hopped too much yet, therefore it is not hurting your prospect for another job yet.

There is some expense in hiring a new person . . . even just the candidate search costs money, interviewing people takes time out of the day of skilled people which costs even more money, etc. There is some expense in training a new person, even if you are highly skilled. There are expenses in the signing of the employment paperwork and in having HR go over benefits with you. Companies understand that limiting turnover is a key to minimizing all of these expenses, and so they do hire people hoping they will stick around long enough for this expense to become background noise on their hire. So, you will have to stay at a job for at least 2 years at some point of you will torpedo your own career with a resume that says "I can't keep a job long enough."

Have you read MMM's blog posts?

Retire-Canada

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Re: How am I doing?
« Reply #12 on: November 27, 2017, 12:20:16 PM »
Also, I hate to burst your bubble, but eventually companies will start to look sourly on a repetitive job hopping history on a resume. You are only 25, so you can't have hopped too much yet, therefore it is not hurting your prospect for another job yet.

That also sounds really tiring changing companies all the time!