Author Topic: Reader Case Study - Recent graduate, never invested  (Read 2932 times)

marielle

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Reader Case Study - Recent graduate, never invested
« on: December 07, 2016, 09:09:24 AM »
Life Situation: Not married, 23, female. Living in NC, working in SC. Living with roommate so housing expenses are my half. Potential for long-term significant other to move in and combine expenses next year or two (roughly same salary).

Gross Salary/Wages: $60,000

Pre-tax deductions: None. Company does not offer 401k. Hoping to maybe convince them to set up a Simple IRA (less than 100 employees)

Other Ordinary Income: None

Qualified Dividends & Long Term Capital Gains: None

Rental Income, Actual Expenses, and Depreciation: None

Adjusted Gross Income: $60,000

Taxes: $16,190

Current expenses:

Rent: $515
Electric: $22 - $50 (Just moved so this is an estimate, has not gone above $40 yet)
Internet: $18
Phone: $0 (Currently on Ringplus, will have to switch to a $10 paid plan)
Gas (car): $100
Car maintenance: $100 (Estimate for yearly expenses for an older 2003 car)
Car insurance: $25
Groceries/eating out: $175
Entertainment: $50
Clothes/Biking equipment: $30
Pets: $30
Health/hygiene: $50
Misc: $50
Total: $1193

Expected ER expenses: $20k-$30k minimum, hoping to start a business and/or animal rescue so would like a bit more

Assets: None, unless my $2500 car counts

Liabilities: Only student loans, $134/month payments due soon. Just graduated in May 2016.
$3700 @ 4.66%
$5500 @ 4.29%
$190 @ 4.29%
$5600 @ 3.86%
$2250 @ 3.86%
$3560 @ 3.40%

Total $20,800 - after having paid off $6200 in the past four months. I am now paying around $2500 a month on my loans. Started slow because of moving expenses with my first job in August, buying a fancy bike, and major car maintenance.


Specific Question(s): I was originally going to pay off my loans before investing anything, but is this a stupid plan considering my interest rates? Should I stop feeling like my hair is on fire? I have an irrational fear of losing my job for whatever reason, so I really wanted to be debt free as fast as possible. Plus, the satisfaction of just being debt free while my classmates are buying a house or new sports cars (One even has three cars, quite a few have two cars). I know nothing about investing except for reading MMM. I would like to reduce my taxable income as much as possible and stay in the 15% tax bracket in 2017. I definitely will be this year because I started in August and will have only made $20k in 2016. I have no IRA yet. I could theoretically contribute $3500 or so in an IRA before the year is over.

Edit: I have $30k in credit cards for emergencies but otherwise keep very little in my bank account. I use these for regular expenses and pay them off every month, minus one that has no interest until 2018 (keeping a balance of only $1000 though).
« Last Edit: December 07, 2016, 09:57:19 AM by marielle »

Stash Engineer

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Re: Reader Case Study - Recent graduate, never invested
« Reply #1 on: December 07, 2016, 09:49:01 AM »
I wish I had the same mentality as you when I was your age!  I would stay with the hair-on-fire mentality and crush all that debt before investing.  You will sleep better at night knowing that you aren't beholden to anyone.  Keep a credit card or two with 0 balance as your emergency fund for now.  Or put one month's worth of debt repayment cash in an emergency fund if it makes you feel better.  IMHO, don't rush things on changing your living situation but do rush them on crushing that debt!  If you don't succumb to lifestyle inflation, you'll be FI in no time!

marielle

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Re: Reader Case Study - Recent graduate, never invested
« Reply #2 on: December 07, 2016, 09:54:38 AM »
I added to my post that I have $30k in credit cards to use for any major unexpected expenses. I don't pay interest on these. Also, my student loan payment is only $134 a month because I signed up for the graduated repayment plan that starts with low payments. This way I can pay off the high interest loans better. So I guess if I did become strapped for cash the payment isn't that crazy.

mozar

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Re: Reader Case Study - Recent graduate, never invested
« Reply #3 on: December 07, 2016, 10:13:29 AM »
Because you're so young I would pay off the debt first. You'll be done in a year. But if you really don't want to, pay off everything above 4% first.

marielle

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Re: Reader Case Study - Recent graduate, never invested
« Reply #4 on: December 07, 2016, 11:55:19 AM »
Because you're so young I would pay off the debt first. You'll be done in a year. But if you really don't want to, pay off everything above 4% first.

I don't understand... Would you say this if I was 30? 50? Say I want to retire at fast as possible regardless of age. I get that you might be saying that since I'm young, I have plenty of time to save. But if I can earn significantly more by holding off on my loan payments and instead investing, then I'd prefer to do that. If it's not significant enough, then I'd prefer the peace of mind. I keep seeing people saying if you have a 3% mortgage to hold on to that as long as you can (especially since the interest is tax deductible)...Does that apply here? I wish I knew the exact numbers, but stocks are unpredictable in this short of a time frame.

Prairie Stash

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Re: Reader Case Study - Recent graduate, never invested
« Reply #5 on: December 07, 2016, 11:56:01 AM »
Start investing now. Think of it as a class that has $3000 in tuition. Get it all started so that by 2017 you have it all figured out. Set up accounts, learn to buy and make it a habit. I'm not a fan of leaving it as it tends to get left too long.

Remember its not either/or; typically the best strategy is a blended approach. Get some boring investments going and treat yourself with the occasional loan payoff. Paying off loans is fun; initially investing isn't. After you get some money in investments it becomes fun, but it takes awhile. That's how the blend helps, it takes emotions into account to keep you motivated. Loads of people find their enthusiasm temporarily wanes after paying off all their debts, its an unfortunate phenomenon.

A side benefit of investments is the fear of job loss wanes. Seeing 3 years of expenses in an account can help qualm your emotions, lower stress is a health benefit.

Prairie Stash

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Re: Reader Case Study - Recent graduate, never invested
« Reply #6 on: December 07, 2016, 12:03:00 PM »
Because you're so young I would pay off the debt first. You'll be done in a year. But if you really don't want to, pay off everything above 4% first.

I don't understand... Would you say this if I was 30? 50? Say I want to retire at fast as possible regardless of age. I get that you might be saying that since I'm young, I have plenty of time to save. But if I can earn significantly more by holding off on my loan payments and instead investing, then I'd prefer to do that. If it's not significant enough, then I'd prefer the peace of mind. I keep seeing people saying if you have a 3% mortgage to hold on to that as long as you can (especially since the interest is tax deductible)...Does that apply here? I wish I knew the exact numbers, but stocks are unpredictable in this short of a time frame.
lol, very astute. That's called projection, people telling you something based on their personal history instead of being objective. I too projected my emotions, partially based on reading multiple threads about the emotional let down after paying off loans.

Age is irrelevant; 20, 30 or 40 doesn't matter if you plan to FIRE; government handouts don't apply, age is important if you plan on those. Realistically you could be retired in 10 years, what's there to stop you?

marielle

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Re: Reader Case Study - Recent graduate, never invested
« Reply #7 on: December 07, 2016, 12:03:30 PM »
Start investing now. Think of it as a class that has $3000 in tuition. Get it all started so that by 2017 you have it all figured out. Set up accounts, learn to buy and make it a habit. I'm not a fan of leaving it as it tends to get left too long.

Do you have a recommendation of where to start? I made a Betterment account, but would it be better for a Roth/traditional IRA because the year is almost over? I tried doing some research but got confused...definitely need to do more. I would like something that is tax deductible since I do not have a 401k.

Edit: So I looked again and it seems obvious that I should do a traditional IRA so I can deduct all of it on taxes. So now the decision is whether to dump my $3000+ earnings left this year on that or the loans.
« Last Edit: December 07, 2016, 12:22:18 PM by marielle »

Lanthiriel

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Re: Reader Case Study - Recent graduate, never invested
« Reply #8 on: December 07, 2016, 01:06:52 PM »
I've been in your position, and I chose to kill the debt. You basically have a 4% guaranteed return. You never know what the stock market is going to do, but keeping $20k out of it for a year isn't going to make or break your FIRE plans. I personally prefer not having debt and feel that it simplifies the financial decisions I have to make every month. I also feel less guilty when I choose to treat myself to something because choosing not to invest feels less like a slap in the face of my future self that choosing not to pay down debt. Yes, these are emotional reasons, but honestly the numbers game on this one is unlikely to reveal a significant pro or con in either direction.

marielle

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Re: Reader Case Study - Recent graduate, never invested
« Reply #9 on: December 07, 2016, 01:16:46 PM »
I've been in your position, and I chose to kill the debt. You basically have a 4% guaranteed return. You never know what the stock market is going to do, but keeping $20k out of it for a year isn't going to make or break your FIRE plans. I personally prefer not having debt and feel that it simplifies the financial decisions I have to make every month. I also feel less guilty when I choose to treat myself to something because choosing not to invest feels less like a slap in the face of my future self that choosing not to pay down debt. Yes, these are emotional reasons, but honestly the numbers game on this one is unlikely to reveal a significant pro or con in either direction.

Makes sense. I'm leaning that way too, except I'm thinking I might save more money in the long run by dumping the rest of my money this year into a traditional IRA because the limit is only $5500 and I don't have any other tax deductible options. Maybe I'm splitting hairs here. My debt can probably be paid off in 8 months or sooner, so I know I'd be able to max out my IRA next year for sure, I'm just worried about this year. I almost feel like I made a mistake paying so much on my loans already...

Telecaster

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Re: Reader Case Study - Recent graduate, never invested
« Reply #10 on: December 07, 2016, 01:44:56 PM »
Makes sense. I'm leaning that way too, except I'm thinking I might save more money in the long run by dumping the rest of my money this year into a traditional IRA because the limit is only $5500 and I don't have any other tax deductible options. Maybe I'm splitting hairs here. My debt can probably be paid off in 8 months or sooner, so I know I'd be able to max out my IRA next year for sure, I'm just worried about this year. I almost feel like I made a mistake paying so much on my loans already...

You have until April 18th 2017 to make an IRA contribution for 2016, so you can probably make it. 

The good part is that when there isn't an obvious clear choice, then it probably doesn't matter too much which you decide to do.   I don't normally recommend splitting the difference, but with your impressive savings rate you could easily make a full contribution to your IRA for 2016 and then continue paying down your student loans.   That will only set back your payoff date by a couple months.   

Cwadda

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Re: Reader Case Study - Recent graduate, never invested
« Reply #11 on: December 07, 2016, 02:42:07 PM »
Keep doing what you're doing!

Just make sure you max out your Roth before April 2017.

405programmer

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Re: Reader Case Study - Recent graduate, never invested
« Reply #12 on: December 07, 2016, 03:09:57 PM »
I think you mention that you've only made ~20K for 2016. Might be a good idea to do Roth IRA since you're in a very low tax bracket. Then for 2017 definitely do traditional. I had a super low income that first year out of school due to working only a partial year and chose to do the full 5500 Roth IRA before April the next year. The exception is if you qualify for the savers credit if you do traditional. If you were a full time student during any part of the tax year I think it disqualifies you though. Maybe check that out?

A big plus for the Roth is you can use your contributions as an emergency fund if the need arises. Obviously you should stash for FIRE but it's just one more place to have an emergency fund.

Keep up the great work! If I were in your shoes I would split the difference between maxing the 2016 / 2017 IRAs and also throwing every bit of extra income at the debts. I wouldn't worry about taxable investments before you knock out those debts.

marielle

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Re: Reader Case Study - Recent graduate, never invested
« Reply #13 on: December 07, 2016, 03:35:20 PM »
I think you mention that you've only made ~20K for 2016. Might be a good idea to do Roth IRA since you're in a very low tax bracket. Then for 2017 definitely do traditional. I had a super low income that first year out of school due to working only a partial year and chose to do the full 5500 Roth IRA before April the next year. The exception is if you qualify for the savers credit if you do traditional. If you were a full time student during any part of the tax year I think it disqualifies you though. Maybe check that out?

A big plus for the Roth is you can use your contributions as an emergency fund if the need arises. Obviously you should stash for FIRE but it's just one more place to have an emergency fund.

Keep up the great work! If I were in your shoes I would split the difference between maxing the 2016 / 2017 IRAs and also throwing every bit of extra income at the debts. I wouldn't worry about taxable investments before you knock out those debts.

This makes sense, I would only be saving 15% versus 25% since I won't be in the higher tax bracket yet. Will definitely look more into it, thanks!

For now I will at least pay off the 4.66% loan before any retirement accounts. I adjusted my w4 so I will have even more the next couple paychecks. Unfortunately my tax return is probably still going to be high because the withholding is based off my full income even though it will be 1/3 of that in 2016.

MEJG

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Re: Reader Case Study - Recent graduate, never invested
« Reply #14 on: December 08, 2016, 08:38:04 AM »
In your shoes I would:
1. Contribute $5,500 to a Roth IRA at vanaguard and put it in the total stock market index (before tax day.)
2. Contribute $5,500 to a traditional IRA at vanguard, in the total stock market index.
3. Crush the debts over 4% interest
Then open a taxable account at vanguard or get started on your 2018 TIRA- depending on the date you finished taking out those 4+% student loans.

While you work your plan develop an investment plan and decide on an AA you can live with and stick to for the long haul.

Your loans are low interest, and if they could be gone in 8 months like you predicted and your case study supports then get your Stach going and be wise about your taxes :) I would let those 3% loans ride until they die a natural death- just like a low interest mortgage.

Looks like you're in a great spot!


MDM

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Re: Reader Case Study - Recent graduate, never invested
« Reply #15 on: December 08, 2016, 12:18:12 PM »
Before you skip the traditional IRA, if you were not a "full time student" for 2016 (i.e., enrolled for <5 months) then deducting enough to get the full saver's credit could be the best return you'll ever get.

Your marginal savings rate might look something like


Not too often you get a 60% ROI.

If that matches your situation, put enough into the tIRA so you pay no federal tax at all, then the rest into a Roth IRA.  See the case study spreadsheet if you want to do some "what if?" studies on your own.  You can use IRA recharacterization combined with your actual tax calculations in early 2017 to do this.

marielle

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Re: Reader Case Study - Recent graduate, never invested
« Reply #16 on: December 08, 2016, 01:31:10 PM »
Before you skip the traditional IRA, if you were not a "full time student" for 2016 (i.e., enrolled for <5 months) then deducting enough to get the full saver's credit could be the best return you'll ever get.

Your marginal savings rate might look something like


Not too often you get a 60% ROI.

If that matches your situation, put enough into the tIRA so you pay no federal tax at all, then the rest into a Roth IRA.  See the case study spreadsheet if you want to do some "what if?" studies on your own.  You can use IRA recharacterization combined with your actual tax calculations in early 2017 to do this.

I've been trying to find more specifics about the saver's credit. I'm thinking I don't qualify because I was enrolled for a full semester, January 2016 - May 12, 2016. Technically under 5 months if they count it by days...

MDM

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Re: Reader Case Study - Recent graduate, never invested
« Reply #17 on: December 08, 2016, 01:38:58 PM »
I've been trying to find more specifics about the saver's credit. I'm thinking I don't qualify because I was enrolled for a full semester, January 2016 - May 12, 2016. Technically under 5 months if they count it by days...
That's too bad.  If the semester had ended in April you would have been ok.  As it is, according to 2016 Form 8880
Quote
You were a student if during any part of 5 calendar months of
2016 you:
Were enrolled as a full-time student at a school