Author Topic: I have a little money - But it's in so many places I don't know what it's doing!  (Read 2572 times)

Tamgerine

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So Iíve just started reading MMM within the past few months. Iím  interested in adopting a lot of the principles when I return home (Iím currently deployed to Afghanistan) but as for the money right now I just donít know what itís doing or how to allocate it. Iíd like to think Iím decent at saving money, but I just started putting it places with no real regards to a goal or what I wanted as a result.

Iím 26 and Iím currently married. Husband is a student but works. We live separately right now so Iím not really factoring in his finances because he is self-sustaining (but no loans or large credit card debt). When I return weíll be living together and will set up a budget once we know our financial/living situation.

No credit card debt, no student loans. The only thing I owe is 7,300 on my car that I had bought new after my last deployment. Itís a 2013 Ford Fiesta with a 4.69% interest rate originally financed for 14,000. I could pay it off completely, or would that money be better invested somewhere else? I do not know!

Weíre not looking at having kids any time soon. Iíd like to buy a house and eventually use it as a rental property if possible, but we move a lot because of me being in the military so Iím not sure that buying a house is the best financial decision. Do I even have enough of a down-payment to make it a wise option?

Iíll have about 35,000 in cash when I get home. Where should I put it? Hereís my current breakdown:

Investments:
1,000 Emerging Markets Fund (Mutual Fund)
1,300 Aggressive Growth Fund (Mutual Fund)
5,000 Extended Market Index Fund
14,471 in TSP retirement account

32,500 in cash

-7,300 Owed on car.

Attached is a screenshot of my retirement account allocations that I also have no idea how they work!

Appreciate any advice from the more experienced, thanks!

Cooperd0g

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Hi Tamgerine, reading your post was like looking back in time 10 or so years ago for my own situation. I am active duty myself and have faced many of the things you are talking about. I can share with you what I learned and my thoughts.

Car:
As you are reading on MMM and the associated forum people aren't huge fans of buying new cars; and for good reason. My recommendation here is in two parts. Part 1 is to pay off the existing balance immediately with the cash you have on hand. That is a guaranteed return on that money for 4.69%. In part 2 I would say that when you return from deployment to sell the car and buy an older, but similar car. Maybe a used Fit, Versa, Matrix, etc. That way you would get a similar vehicle with plenty of life left and free up a bit of money at the same time. My only knock against the Fiesta is the newness that has cost you more than you needed to spend.

House:
I have many friends who have bought houses in each place and turned it into a rental. For some it has worked and for some it has been a nightmare. I have also seen more friends take a bath on a house resale than came out ahead. The emotion and energy involved in buying and selling homes is much greater than renting homes/apartments. The upkeep on a home is more, the insurance when owning is more and the general hassle is more. Generally, but not always, renting is cheaper than buying. My new place is a "luxury" apartment that is smaller than a house (but I don't need the room), it has no upkeep or maintenance worries and is cheaper than a small house I would rent. I could have gone even cheaper with a less nice apartment, but I have my limits. So for me I am going to keep it simple and stay a renter until I retire from the Navy and figure out where I will spend the rest of my days. I invest the remainder of my money with the goal of having cash to pay for my eventual retirement home. I may choose to own rental properties, but only when I can do it where I live as opposed to owning rental property across the country. Doing it cross country just has much more potential for headaches that I don't want/need.

TSP:
I am a fan of the Bogleheads. They are a group of people that essentially invest in the ways originated with John Bogle, the founder of Vanguard and the inventor of the index mutual fund. They have their own forum and a helpful Wiki. In simplest forms they say that you can't go wrong by sticking with index funds, simplicity and low cost. The TSP is the lowest cost place to invest available. The Lifecycle funds are a mix of domestic and international stocks as well as commercial and government bonds. There is extra simplicity in that the fund automatically changes the mix of stocks and bonds as you get closer to retirement. I recommend you move all of your existing TSP money into the L2050 fund (mine is all in the L2040 fund). I also recommend you change your new contributions to be placed in the L2050 fund. Poof - you never have to play with the TSP again - just let it build and build until you hit 59.5 and start withdrawing.

For references you can read the Bogleheads Philosophy here: http://www.bogleheads.org/wiki/Bogleheadsģ_investment_philosophy
From there you can look at other parts of the Wiki and learn a ton.

Investments/Savings/Cash:
It appears as you will be able to save a significant portion of your income. As such you can afford to do two things when it comes to a monetary emergency: 1) put it on a credit card and pay it off immediately out of your income by suspending that month's non-retirement investments or 2) pull the money from your liquid investments to pay the expense. For high percentage savers with no debt I don't really consider an emergency savings to be necessary. It earns very little interest and is essentially no more liquid than stocks or mutual funds.

Vanguard is THE best mutual fund company. They have the lowest expense ratios in the business (only thing lower is the TSP, which isn't available to everyone like Vanguard is). I would say to move the non-TSP investments over to Vanguard and keep them in one or two mutual funds. This will depend on if you have an IRA or not. Because of your ability to use the TSP I recommend that you invest the maximum allowed there ($17,500) before investing in an IRA. Once you have reached that limit and still want to invest more in tax protected retirement accounts then you open an IRA with Vanguard and select their Target Retirement fund of the appropriate year - it works pretty much exactly the same as the Lifecycle funds in the TSP.

For non-retirement funds they are going to be in taxable accounts. I still recommend Vanguard for these. You can keep it super simple by using the same Target Retirement funds or what they call Life Strategy funds (those just don't change the stock/bond mix over time - they remain fixed). You can pick other funds if you like, but these are the best places to start. Once you get more knowledgable you can decide for yourself if the complexity of using different funds is worth it over the simplicity of the combination funds.

As a person in the military who has the option of a pension if you stick around until 20+ I recommend that your TSP and IRA be in the Roth format. Lastly as you get more advanced you'll want to know things like "should I invest more in taxable accounts before maxing out the TSP/IRAs?" and "should I do a slice and dice portfolio?" That will take some detailed goal and financial planning to figure out.
« Last Edit: December 06, 2013, 11:02:15 AM by Cooperd0g »

the fixer

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+1 to everything above.

You have an awful lot of assets in cash, which MMM likes to refer to as your employees hanging out on smoking breaks and not doing anything useful. Put your little employees to work for you, by paying off that car loan and starting to invest more.

If you agree with the logic of selling the car to buy something cheaper, pay off the loan now. Otherwise, whether or not you pay off that loan is a question of your risk tolerance. Would you be comfortable investing $7300 of someone else's money in the stock market (10% historical return) while repaying the loan at a lower interest rate? You're more likely to profit from this than take a loss, and if you're young and have the income to service the debt you can certainly afford to take a risk like this. It all comes down to whether or not you can sleep well at night after making this decision.

Nords

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Welcome, Tamgerine.  Hopefully your Afghanistan time gets cut short and you can come home sooner.

So Iíve just started reading MMM within the past few months. Iím  interested in adopting a lot of the principles when I return home (Iím currently deployed to Afghanistan) but as for the money right now I just donít know what itís doing or how to allocate it. Iíd like to think Iím decent at saving money, but I just started putting it places with no real regards to a goal or what I wanted as a result.
A high savings rate is more important than being a brilliant investor, so you're on the right track.  As for your asset allocation, you should spend a few hours figuring out what you'd like to do and then automate it so that you don't have to revisit it more than once or twice a year.  Your TSP allocation looks fine now, and you can always tweak it once you decide what to do. 

The first thing you should do (this week!-- if you're not already) is get started on the Savings Deposit Program:  http://www.dfas.mil/militarymembers/payentitlements/sdp.html
You're stuck there in a combat zone, so you might as well get paid an extra 10% interest for it.

The Bogleheads Wiki is a great start on asset allocation:
http://www.bogleheads.org/wiki/Main_Page
and they have a dedicated section on military finances:
http://www.bogleheads.org/wiki/Military_finances  Some of this section may be a little "Well, duh" depending on your experience.

There are thousands of asset allocations that will get you to financial independence.  Many of them are good enough, and none of them are perfect.  You want to find one that lets you sleep at night, that you feel comfortable investing in during a recession, and that's easy to maintain.

In general, as long as you're in the military (and once you've paid off debt) you can afford to be a little aggressive in your savings and your asset allocation.  The key is to set your asset allocation in the TSP, and then make sure your MyPay allotment is maxing it out.  Ideally you'd contribute first to the Roth TSP, then as much as you can in the conventional TSP, and then max out your Roth IRAs.  Remember that while the govt is paying you to live in Afghanistan you can contribute as much as $52K of tax-free pay to the TSP in 2014, so this is a (hopefully) once-in-a-lifetime opportunity.

... he is self-sustaining...
Those are good to have.  Easy to maintain.  They're certainly difficult to replace...

No credit card debt, no student loans. The only thing I owe is 7,300 on my car that I had bought new after my last deployment. Itís a 2013 Ford Fiesta with a 4.69% interest rate originally financed for 14,000. I could pay it off completely, or would that money be better invested somewhere else? I do not know!
As others have said, pay it off now.  You have the cash and that 4.69% is just sucking money out of your accounts.  Then just drive the car into the ground for the next decade or so while you're setting aside $50-$100 per month for your car maintenance/replacement fund.

Iíd like to buy a house and eventually use it as a rental property if possible, but we move a lot because of me being in the military so Iím not sure that buying a house is the best financial decision. Do I even have enough of a down-payment to make it a wise option?
Appreciate any advice from the more experienced, thanks!
In general, the risks (and hassles) of military home ownership outweigh the rewards.  If you're hard-wired to be a landlord then you'll figure out how to take the plunge and succeed at it, but if you think it's a chore (let alone from a different time zone) then keep renting until you figure out where you want to spend the rest of your life.  The fixed costs of buying & selling will usually wipe out your profit margins when you transfer frequently, and the property management fees (and other expenses) of landlording will generally make it difficult to achieve positive cash flow.  But as I've said, if you're hard-wired to be a landlord then feel free to ignore this advice and jump in. 

When you start researching asset allocation and savings rates, take a look at this post:
http://the-military-guide.com/2013/06/24/how-many-years-does-it-take-to-reach-financial-independence/