Author Topic: I'd like to get started out right....  (Read 7725 times)

sachio

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I'd like to get started out right....
« on: May 27, 2012, 10:12:04 PM »
Dear Mustachians,

I am brand-spanking new to this forum, and I hope, hope, hope that you are ok with me just jumping in and asking for advice! I just discovered the whole MMM thing, and this, combined with the nomoreharvarddebt fellow - have truly inspired me to grow my own proverbial monetary mustache. I am laden with student loans, I have no retirement investments to speak of and I guess I really want to get started on the right foot.

So here are my details. Beginning in just a couple weeks, I will be working for $32,000 annually as a base rate. My salary will be linked with the quality of my work, but I would like to begin calculating with bare facts and figures.

I will also be selling home grown produce at the local farmer's market, nothing major, but enough to pay for a bike or something after a few months, since I will be living 3 miles from work.

So my income then is about $2055 per month AFTER taxes.

My student loans are like so:

private: $25,408.56 ($3.444.32@2.94%, $20,249.96@2.97%) and
consolidated: $40,491.95 (@3.125%)

Minimum payments are $226.40 and $214.00 respectively.

I have a citibank card sitting at $2887.11 @ 29.99% with a payment of $157

On top of this I have rent at $550 and my phone comes out to around $50 a month. For a limited time I will be funneling some cash to my recently divorced mother at her request (ca. $200 a month for maybe 12-24 months?).

So I guess on top of that is my food cost, which I'll place around $200 a month.

To recap then
Income per month: $2055
Minimum expenses: $1597
Extra: $458...

What should I do with this extra income? I suspect pay off my credit card aggressively, and then when that's done, aggressively go after my student loans?

To make things clear - I will be receiving a raise after 90 days, but how much is a factor of my performance. could be a few hundred per year, could be several thousand. Also my farmer's market sales could range anywhere from $200 to $1000 per month, but I'm not into counting my eggs before they hatch, since I'm moving to a new area, and don't know the market/competition. I would like advice on what to do with the money that I DO have over for certain, and then have a plan of action for the potential money I WILL have over if all goes well, be it $100 or $1000!

What would be the mustachian way to approach this? How should I prioritize and calculate for the best possible outcomes? I would like to pay off my student loans like this harvard guy, and am definitely open to ideas, advice and any calculations or tips you could give me to put me on the right track from day 1.

Thank you so much in advance! I hope I gave enough details.

Sincerely,
Eager to learn!
« Last Edit: May 27, 2012, 10:17:13 PM by sachio »

gooki

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Re: I'd like to get started out right....
« Reply #1 on: May 27, 2012, 10:16:11 PM »
You should transfer the balance of the credit card tomorrow to something very low interest rate, and then aggressively pay it down with the goal to have it clear within 6 months or less.

Once that is done tackle the student loans with the highest interest first.
« Last Edit: May 27, 2012, 10:19:23 PM by gooki »

sachio

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Re: I'd like to get started out right....
« Reply #2 on: May 27, 2012, 10:26:38 PM »
Thanks, the thought had occurred to me. Any details perhaps on how much I ought to pay per month? Should ALL of my extra income go to paying off debt? None into investments? Is there a set proportion per month that would be a good idea? Say I make 500 addition dollars each month on top of my $458, what should I do with that? I wonder what a solid financial plan would be following the MMM philosophy?

herisff

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Re: I'd like to get started out right....
« Reply #3 on: May 27, 2012, 10:45:40 PM »
Any details perhaps on how much I ought to pay per month? Should ALL of my extra income go to paying off debt? None into investments? Is there a set proportion per month that would be a good idea? Say I make 500 addition dollars each month on top of my $458, what should I do with that? I wonder what a solid financial plan would be following the MMM philosophy?
I'm a big believer in not counting your eggs before they hatch. It's very good to have plans, but you as yet have no income. Your job won't start for a couple of weeks. I would wait until you see at least your first paycheck before you make any real plans (2 paychecks would be even better). While you can estimate what your taxes may be, you don't yet know what else will be taken out of your paycheck - things like health insurance, SSI deductions, state taxes etc etc etc will bring down what you actually bring home. If you will belong to a union, those payments will come out too. If you can enroll in a 457/401(k) with an employer match, go for it. It's fabulous that you're planning on paying down debt - but I would wait a bit before making plans on specific amounts to pay.

Leave yourself some breathing room. You truly do not know what your expenses are as yet. Until you do, you can't really plan. Settle into your new job, your new home, keep track of your expenses. You'll probably have a few one time expenses as you set up at the new workplace - leave yourself some wiggle room for that kind of stuff. Pay what you have been on your cards - once you know what your expenses are and how much extra you have a month, then you can start being aggressive in paying off your debt. And once you are no longer funneling money to your mother, that expense can also go towards paying down debt. Take a breath. Relax. I already know that you'll do great.

sachio

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Re: I'd like to get started out right....
« Reply #4 on: May 27, 2012, 11:52:52 PM »
Any details perhaps on how much I ought to pay per month? Should ALL of my extra income go to paying off debt? None into investments? Is there a set proportion per month that would be a good idea? Say I make 500 addition dollars each month on top of my $458, what should I do with that? I wonder what a solid financial plan would be following the MMM philosophy?
I'm a big believer in not counting your eggs before they hatch. It's very good to have plans, but you as yet have no income. Your job won't start for a couple of weeks. I would wait until you see at least your first paycheck before you make any real plans (2 paychecks would be even better). While you can estimate what your taxes may be, you don't yet know what else will be taken out of your paycheck - things like health insurance, SSI deductions, state taxes etc etc etc will bring down what you actually bring home. If you will belong to a union, those payments will come out too. If you can enroll in a 457/401(k) with an employer match, go for it. It's fabulous that you're planning on paying down debt - but I would wait a bit before making plans on specific amounts to pay.
:) Wise words. I actually used a payroll withholding tax calculator  (http://www.suburbancomputer.com/tips_calculator.php) to get a rough idea for the state I'll be working in. The figure includes basic income tax, ss, medicare, state etc... so I know the figure is at least accurate barring any additional costs that may arise. I will have one time costs, however I'm fortunate to be moving in with an old friend for the time being, and he's definitely being quite generous as terms of furniture and things.

I figure I'll aggressively pay down the credit card within 6 - 7 months, and that will free up another $157 that I can begin using to pay off my lower interest private loans, since my aunt is a cosigner, and I really want that pressure released. I hope that the farmer's market will be enough to supplement my daily expenses, but you're right, I will need a couple of weeks before I really know what the situation is. In any case, I would like to know what good habits to build and in which direction I must go. Thanks for the input!

astadt

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Re: I'd like to get started out right....
« Reply #5 on: May 28, 2012, 02:01:26 AM »
1) Balance Transfer to a lower rate (preferably 0% for 18-24 months)

2) Contribute into your 401K to the match

3) Open a Roth IRA and invest $5000 in Index Mutual funds or ETFs (you have until 15 Apr 13)

4) Pay off debt

Let us know what your situation is like once you get more details. Good luck with the veggies, if you keep it organic you'll likely find some business wherever you go.

gooki

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Re: I'd like to get started out right....
« Reply #6 on: May 28, 2012, 02:37:14 AM »
Thanks, the thought had occurred to me. Any details perhaps on how much I ought to pay per month? Should ALL of my extra income go to paying off debt? None into investments? Is there a set proportion per month that would be a good idea? Say I make 500 addition dollars each month on top of my $458, what should I do with that? I wonder what a solid financial plan would be following the MMM philosophy?

While you are carrying debt with 30% interest every single penny you have should go to paying this down. Even if that means forgoing some luxuries.

My general rule of thumb.

Debt with interest above 10% = urgent, you have a debt emergency

Debt with interest above 7% = get an aggressive repayment plan

Debt around 5%  = personal choice between investing and debt repayment

Debt a 3% and below = repay if you are uncomfortable carrying debt

sachio

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Re: I'd like to get started out right....
« Reply #7 on: May 28, 2012, 05:10:17 AM »
1) Balance Transfer to a lower rate (preferably 0% for 18-24 months)

2) Contribute into your 401K to the match

3) Open a Roth IRA and invest $5000 in Index Mutual funds or ETFs (you have until 15 Apr 13)

4) Pay off debt

Let us know what your situation is like once you get more details. Good luck with the veggies, if you keep it organic you'll likely find some business wherever you go.

So to clarify, you're saying paying off my debt is my last priority, so long as I can open a 0% credit card to transfer the balance to? And why do I have until 15 Apr 13 again??

And yes ;) organic is the way to be!

sachio

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Re: I'd like to get started out right....
« Reply #8 on: May 28, 2012, 05:13:29 AM »
Thanks, the thought had occurred to me. Any details perhaps on how much I ought to pay per month? Should ALL of my extra income go to paying off debt? None into investments? Is there a set proportion per month that would be a good idea? Say I make 500 addition dollars each month on top of my $458, what should I do with that? I wonder what a solid financial plan would be following the MMM philosophy?

While you are carrying debt with 30% interest every single penny you have should go to paying this down. Even if that means forgoing some luxuries.

My general rule of thumb.

Debt with interest above 10% = urgent, you have a debt emergency

Debt with interest above 7% = get an aggressive repayment plan

Debt around 5%  = personal choice between investing and debt repayment

Debt a 3% and below = repay if you are uncomfortable carrying debt

ok, interesting. How do I calculate the math involved in these decisions? Why is debt < 3% not very important to pay back? The $440 a month payments for the next 10-20 years are surely a thorn in my side.

astadt

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Re: I'd like to get started out right....
« Reply #9 on: May 28, 2012, 06:59:24 AM »
1) Balance Transfer to a lower rate (preferably 0% for 18-24 months)

2) Contribute into your 401K to the match

3) Open a Roth IRA and invest $5000 in Index Mutual funds or ETFs (you have until 15 Apr 13)

4) Pay off debt

Let us know what your situation is like once you get more details. Good luck with the veggies, if you keep it organic you'll likely find some business wherever you go.

So to clarify, you're saying paying off my debt is my last priority, so long as I can open a 0% credit card to transfer the balance to? And why do I have until 15 Apr 13 again??

And yes ;) organic is the way to be!

Paying off debt isnt your last priority...just the last point I recommended for you. It really shouldnt be too difficult to get there. We've got no idea what your 401K match looks like, so it could be really small or non existent. Once you match the match you go to your Roth. To get to 5,000 you contribute $416.67 per month. Its just a rule that allows you to contribute up to Tax day.

Once you've contributed to your Roth, With your Debt situation its more of a choice, pay off the debt and get that guaranteed  3-3.5% or if you put it in investments and potentially make more...Thats a tough one and you'll get a bunch of different recommendations.

Let us know

velocistar237

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Re: I'd like to get started out right....
« Reply #10 on: May 28, 2012, 11:49:37 AM »
So to clarify, you're saying paying off my debt is my last priority, so long as I can open a 0% credit card to transfer the balance to?

The 0% introductory rate on balance transfers usually lasts for 6 months, and you'd probably want to pay down the balance before the higher rate kicks in.

ok, interesting. How do I calculate the math involved in these decisions? Why is debt < 3% not very important to pay back? The $440 a month payments for the next 10-20 years are surely a thorn in my side.

Ten years from now, inflation will make that $440/month seem very small. As your salary increases, if you ever itemize deductions, the student loan interest might be deductible, reducing the interest burden even further.

You can find investments that will beat 3% without much risk, so the better financial decision is to invest rather than make any extra debt payments, ever. Investing rather than making extra payments will likely leave you tens of thousands of dollars ahead. Also, once you make a payment, you no longer have access to that money if you need it. The only reason to pay faster is if you really, really don't like the debt. A mild aversion shouldn't be a good enough reason to leave that much on the table.

gooki

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Re: I'd like to get started out right....
« Reply #11 on: May 28, 2012, 03:05:31 PM »
ok, interesting. How do I calculate the math involved in these decisions? Why is debt < 3% not very important to pay back? The $440 a month payments for the next 10-20 years are surely a thorn in my side.

The maths is pretty simple.

If the return on investment (interest rate less any taxes and fees) is greater than the true interest rate (interest rate plus fees, less tax write off) of the debt, then financially it is wiser to invest instead of repaying debt.

Now if you are likely to spend your spare $500 a month on "stuff", instead of investing it, then I'd recommend also paying down your 3% and below debts instead.

grantmeaname

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Re: I'd like to get started out right....
« Reply #12 on: May 29, 2012, 08:59:59 AM »
There is no way you're going to get better than a 30% return on your Roth IRA investments, so you shouldn't invest in the Roth until after you've paid off your credit card. Even if you do a balance transfer it's pretty unlikely you'll get a rate lower than market returns. Once the credit card is paid off a Roth IRA is a good choice for you, but it should be your lowest priority until then.

onehappypanda

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Re: I'd like to get started out right....
« Reply #13 on: May 29, 2012, 09:22:56 AM »
Thanks, the thought had occurred to me. Any details perhaps on how much I ought to pay per month? Should ALL of my extra income go to paying off debt? None into investments? Is there a set proportion per month that would be a good idea? Say I make 500 addition dollars each month on top of my $458, what should I do with that? I wonder what a solid financial plan would be following the MMM philosophy?

While you are carrying debt with 30% interest every single penny you have should go to paying this down. Even if that means forgoing some luxuries.

My general rule of thumb.

Debt with interest above 10% = urgent, you have a debt emergency

Debt with interest above 7% = get an aggressive repayment plan

Debt around 5%  = personal choice between investing and debt repayment

Debt a 3% and below = repay if you are uncomfortable carrying debt

Pretty much agree with this. The credit card is your current emergency. Pay only for the things that are absolutely necessary to your life until you've eliminated that 30% interest rate debt. Put everything toward high interest debt first. If you can get a 0% introductory card and transfer the debt, that's a good option but make sure you pay it off within the intro period (generally 6-12 months) or you'll be right back where you started.

The student loan debt is pretty big but the interest rate is low enough that it's not an emergency quite yet. Like the others said, the interest is often tax deductible and you can easily beat the interest rate by investing the money instead. But there's no way that an investment will make up for a 30% interest rate on that credit card. So if I were making steps they'd be:
1. Pay off that credit card however you have to, using whatever money you currently have leftover after paying basic life expenses.
2. Once that's done, look into some investment options (401K/Roth IRA/whatever).
3. Once you have solid base savings/investments, then consider ramping up your student loan payments a little to speed up how quickly you pay them off.


Will

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Re: I'd like to get started out right....
« Reply #14 on: June 20, 2012, 08:41:37 PM »
I've been reading David Bach's Start Late, Finish Rich and in it, he says it is best to take half of your "extra" to pay off debt and the other half should be invested.  So if I had $500 extra, he is saying that if you put $250 to debt repayment and $250 to investment, you'd end up better off financially in the long run, because you'd still be paying down your debt while you build up some assets.  In his example, focusing on debt repayment first, it takes someone 10 years to pay off debt, then they invest the same amount for the next 20 years.  Someone that split it the way he suggests, at the end of those 30 years is debt-free and has 50% more in the investment account.  Now, I surely don't have 10 years worth of debt remaining, but I am wondering if anyone has run the numbers on something like this?  I've only got about a year's worth of debt left with my current plan of attack, and I'm not investing anything.  Do you think it'd be worth having debt for 2 years and investing the other half?

arebelspy

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Re: I'd like to get started out right....
« Reply #15 on: June 20, 2012, 09:34:10 PM »
I've been reading David Bach's Start Late, Finish Rich and in it, he says it is best to take half of your "extra" to pay off debt and the other half should be invested.  So if I had $500 extra, he is saying that if you put $250 to debt repayment and $250 to investment, you'd end up better off financially in the long run, because you'd still be paying down your debt while you build up some assets.  In his example, focusing on debt repayment first, it takes someone 10 years to pay off debt, then they invest the same amount for the next 20 years.  Someone that split it the way he suggests, at the end of those 30 years is debt-free and has 50% more in the investment account.  Now, I surely don't have 10 years worth of debt remaining, but I am wondering if anyone has run the numbers on something like this?  I've only got about a year's worth of debt left with my current plan of attack, and I'm not investing anything.  Do you think it'd be worth having debt for 2 years and investing the other half?

All of those arguments hinge on what interest rate your debt is at, and what interest rate your investments earn (and how they're each treated tax-wise).

Thus, without being able to predict the future, it comes down to one making the best guess they can given their risk tolerance.

I don't mind holding debt while investing.  Some hate debt.  It's a personal decision, but there's no "right" answer unless you rig the numbers when running the calculation.
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Lars

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Re: I'd like to get started out right....
« Reply #16 on: June 20, 2012, 10:56:24 PM »
I've been reading David Bach's Start Late, Finish Rich and in it, he says it is best to take half of your "extra" to pay off debt and the other half should be invested.  So if I had $500 extra, he is saying that if you put $250 to debt repayment and $250 to investment, you'd end up better off financially in the long run, because you'd still be paying down your debt while you build up some assets.  In his example, focusing on debt repayment first, it takes someone 10 years to pay off debt, then they invest the same amount for the next 20 years.  Someone that split it the way he suggests, at the end of those 30 years is debt-free and has 50% more in the investment account.  Now, I surely don't have 10 years worth of debt remaining, but I am wondering if anyone has run the numbers on something like this?  I've only got about a year's worth of debt left with my current plan of attack, and I'm not investing anything.  Do you think it'd be worth having debt for 2 years and investing the other half?

As a rule of thumb goes, it has one thing going for it - a suggestion that with debt and investing the answer is rarely all debt repayment or all investment. Other than that I am not a fan of that rule of thumb since credit card debt is so different from mortgage debt.

I think It is probably worth it if its
-not credit card debt
-you're not maxing out tax advantaged accounts and have decent marginal tax rate

grantmeaname

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Re: I'd like to get started out right....
« Reply #17 on: June 21, 2012, 07:13:04 AM »
Don't just wave your hands and play fuzzy numbers! If the interest rate on the debt is higher than the investment interest rate, considering tax implications, then it is mathematically better to pay off the debt. If it's not, it's mathematically better to keep it. Period, end of story.

(As arebelspy notes, math isn't all that matters. You'll have to consider debt aversion, stability of income, and risk tolerance as well to get a picture of the non-mathematical side of things).

Example:
Say that you know that the market returns 7%, and you owe $1,000 at 11%. Let's say you're paying an effective tax rate of 20%, and you'll pay something like 10% tax on your tax-deferred account when you retire.
  • You could invest $1000 at 7%, and then pay 10% taxes on it when you retire (the same as investing $900 now at 7%). You'd make $70 next year on interest, because you have $1000 dollars compounding at 7%, but really it's more like $63 and $7 of future tax liability.
  • You could pay off your debt with the $800 you have left after you pay your taxes. There are now $800 dollars that are no longer compounding annually at 11% against you and your savings, which is the same as having $800 dollars compounding at 11% for you. You'd make $88 next year, from your debt generating $88 fewer in interest.
  • What about a mixed case? Here's why it's not magical: You could take $500 and put it in your 401k/IRA, and use the other $500 to pay off debt. Your $500 generates $35, but $3.50 of that is really future tax liability, so it generates $31.50. You then pay taxes on the other $500, and use the $400 to pay off debt. That $400 is going to keep $44 in interest from appearing next year. Between the two, you've made $75.50, which is halfway between the returns of the other two scenarios.
In this example, paying off all the debt is mathematically better than paying off half of the debt, and much better than paying off all the debt.
« Last Edit: June 21, 2012, 07:16:38 AM by grantmeaname »

bogart

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Re: I'd like to get started out right....
« Reply #18 on: June 21, 2012, 09:21:16 AM »
Congratulations on your job, and your plans.

Add me to those horrified at the thought of 30% debt.  Your balance on that card is low enough that it's plausible to imagine paying it off pretty fast if you get the interest gone.  if you go to moneybluebook.com and then add to that URL this text "/compare-balance-transfer-credit-cards/" (without the quotes, sorry to be so oblique but I'm trying to avoid the URL getting yanked out as promotional -- I have nothing to do with that site except that I use it occasionally), you'll see an assortment of pretty decent BT offers, e.g. Chase Slate (0%, 15 months, no transfer fee) and Discover More (0%, 18 months, 3% one-time fee tagged on to amount transferred).  My situation is so different from yours I have no idea if you'll qualify for such cards or not, but assuming you're current on payments and have no late ones, I'd guess maybe, at least for a lowish balance, which yours is.  If you could get even a 12 month 0% interest card with a 3% fee, you'd need to increase your monthly payment (on that balance) by a little less than $100 and you'd have the card paid off before the teaser rate expired.

Note, though, that if you pursue a balance transfer (which you should), it will likely take a month or more to clear (for the BT card to pay off the Citi card) and that you absolutely positively must continue making at least the minimum payment until the Citi balance is $0.  If you happen to end up overpaying, it's easy to get the overpaid card to issue you a refund check (or just use it to purchase something for the amount overpaid -- but not more).  And, as or more important, you must then never, ever carry a balance on the paid-off card (get rid of it, or use it but pay it off every single month, promptly), and you must never ever use the balance transfer card for anything other than the balance transfer until that balance is paid off (lest you start owing interest on that one).  Got that?

grantmeaname

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Re: I'd like to get started out right....
« Reply #19 on: June 21, 2012, 01:16:05 PM »
You mean this url? You can post a link if you're a productive member of the community with a handful of posts under your belt. It's just links in the first couple posts or affiliate links with kickbacks that tend to get removed.

bogart

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Re: I'd like to get started out right....
« Reply #20 on: June 21, 2012, 02:02:56 PM »
You mean this url? You can post a link if you're a productive member of the community with a handful of posts under your belt. It's just links in the first couple posts or affiliate links with kickbacks that tend to get removed.

Oh, OK, thanks -- yes, that's the one!

velocistar237

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Re: I'd like to get started out right....
« Reply #21 on: June 22, 2012, 05:41:58 PM »
You can post a link if you're a productive member of the community with a handful of posts under your belt.

Well, that and the koolaid drinking ceremony you have to go through...

arebelspy

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Re: I'd like to get started out right....
« Reply #22 on: June 22, 2012, 06:25:33 PM »
On the plus side it's deeeeelicious.
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Will

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Re: I'd like to get started out right....
« Reply #23 on: June 22, 2012, 10:18:17 PM »
You can post a link if you're a productive member of the community with a handful of posts under your belt.

What if you are non-productive?  Or what if you are reproductive with a handful under your belt?  ;)