Author Topic: Can't Grow a Beard, But Must Grow a Stache  (Read 1578 times)

HockeyMan

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Can't Grow a Beard, But Must Grow a Stache
« on: August 23, 2017, 10:49:52 PM »
Im 25 years old and by all objective standards, doing well in life. I have no kids, live alone, and earn a salary of 92,000/year. I have several goals that Id like to accomplish over the next few years, including: get out of debt (quickly if it makes good financial sense), max out my 401k contribution, buy one (eventually several) long-term hold rental investment properties, and continue to invest in retirement (Roth, Vangaurd mutual funds, etc). Ultimately, Id like to reach financial independence by age 40.

Id appreciate any advice you can offer on how I can continue to build my stash.

I also have an immediate dilemma. Do I sell my company stock (47k, 25% YTD growth) and immediately pay off my student loans so that I can begin investing more into retirement and house savings fund, or do I continue to make monthly payments on my debt? I suspect that I will continue to squeeze my spending to make larger monthly payments (specifically looking at the car payment here), but realize it may take me a couple more years to do so.

(UPDATE - CORRESPONDS TO CHANGES IN RED BELOW) Thanks to the awesome advice I received on this forum, I've paid off a huge chunk of debt over the last couple of weeks after consulting a CPA (I selected stocks with very little capital gain). I'm also actively looking to sell my Jeep Cherokee and buy an older, used model car. Still debating on model/year so I'd greatly appreciate advice.

While I've made excellent strides to pay down my high interest debt, I'm still debating what to do next. Here's what I'm considering: Maxing out my 401k by increasing my contribution to ~35% by end of year, sell additional stock to continue to pay off low interest debt, or increase my cash reserves to save for a down payment on a rental property. I'm guessing that all are viable options, but still debating what is best or if there are better options out there (i.e. other investments, max HSA, max Roth, etc...). I'd appreciate any suggestions and also recommendations to further cut my expenses.


Thanks for the help!

Monthly Take Home Income: 4,808.82
Gross Pay: 7,666.67
Taxes: -1850.84
Allowances: 0
Benefits (Dental, medical, vision): -87.00
401k: -920
Take-home Pay: 4,808.82

Monthly Expenses: 2786.98 2,314.59
Rent: 950.00
Utilities (Electric + Water): 100
Car: 656.98
-   Loan: 388.37
-   Insurance: 118.61
-   Gas: 150
Groceries: $200
Student Loans: 589.20 116.81
-   Fed Sub & Unsub: 142.98 116.81
-   Parent Plus: 446.22 $0 :)
Internet (no cable or subscriptions): $50
Cell Phone: $40
Other discretionary: $300

Assets: 55,570
Checking: 10,143
Savings: 7,182
401k: 21,245 (Currently contributing 12% w/ company match of 2%)
Company Stock: 47,000 17,000 liquid, taxes already paid. I have 148,623 in unvested company stock. These vests will occur regularly, every 6 months. Currently growing at 25% YTD. These are taxed as income when they vest, but any incremental gains are subject to capital gains tax.

Liabilities: 23,681
Student Loans: $8,774
-   Federal Subsidized 1 4,210 @ 3.61% Interest
-   Federal Subsidized 2 3,003 @ 3.15% Interest
-   Federal Unsubsidized 1 1,561 @ 3.61% Interest
-   Federal Unsubsidized 2 1,782 @ 6.55% Interest
-   Parent Plus 1 14,439 @ 7.65% Interest
-   Parent Plus 2 13,385 @ 6.16% Interest
Car: 14,907 @ 5.49% Interest
« Last Edit: September 08, 2017, 09:49:52 PM by HockeyMan »

EarthSurfer

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #1 on: August 24, 2017, 05:26:35 AM »
HockeyMom, I wish I could get my 25 year old nephew to take such an accurate look at his finances. You are fortunate to have a multitude of options which will vary in subtle differences.

Sell the company stock as soon as reasonably possible! Too much of your assets and life are tied up in your employer. Sixty percent of your assets are tied to your employer as well as essentially 100% of your income.

My personal choice has always been to sell stock received through either a discounted purchase plan or stock options immediately. I do not carry individual stocks in my portfolio, and I definitely do not carry employer stock. If you do carry it, make it no more than a few percent of your assets.

Being in tech, I have seen many times over 30 years when my employer has both substantial layoffs and major plunges in stock price in just a few months. I had a fellow employee boast that the company stock was going to pay for his high school daughters' college. He once boasted of over $90,000 in company stock. He kept assuming the company stock would continue to "grow" at 20+% as it had done for 3 years. The stock market thought otherwise, and the stock plunged to 20% of former value (80% loss), and has not recovered in 15 years.

Be sure to explore the tax implications of the sale, and you may need a investment minded CPA to help. You are looking at some substantial taxes, so paying a few hundred dollars for tax guidance may be a very good value for this transaction. I often use a CPA for my taxes in years with major changes (starting a business, investment real estate transactions), and "my" CPA will provide an hour of consulting at no additional charge after tax season.

If the shares are unrestricted, you will owe income tax at your top marginal rate (probably 25% federal plus state assessment)  for any shares held less than a year. Shares held over a year will be taxed at the Long Term Capital Gains rate, which is probably 15% federal plus any state assessment. There is also the twist of examining the deduction on your student loans: at your income the deduction is likely phased out, so it may not apply.

The next step is to decide on the safety level for your emergency fund. I'm bad about carrying too much cash, but I should have no more than 6 moths expenses. You could raid the 401K or sell the car if things got bad.

Then start knocking off the loans, one by one.  If none of the interest on the student loans is deductible, the math is simple: paying off the highest interest rate loans first will yield the lowest total payment over time. I'm passionate about hating car loans, and I would write that check as soon as the money from the sale of company stock was settled.
 
You have many great choices ahead!
Retired early, retired often since 1998...

HockeyMan

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #2 on: August 24, 2017, 07:03:35 AM »
Thanks for the advice EarthSurfer!

Hearing you say that I'm carrying 60 percent of my assets in company stock was a bit disturbing. Objectively, I already knew this, but it feels different to have someone else call it out.

I plan to call a local CPA today to set up a consultation. I don't think the tax implications will be too bad - my stock plan is set at "sell to cover" which means I pay taxes when the stocks vest. I think that the only tax I'll have to pay is the capital gains on any investment gain since the time of vest. Regardless, the CPA should be able to confirm. :)

My current company has been very stable and has returned impressive growth YoY (and hopefully will continue to do so). Selling feels like a tough choice given prospect of future returns and the emotional attachment that I have to the stock, but it sounds like best option. Any other thoughts?
« Last Edit: August 24, 2017, 07:05:24 AM by HockeyMan »

Platypuses

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #3 on: August 24, 2017, 08:01:50 AM »
Hi HockeyMan,

At your salary the first thing I would try to do is max out the 401k for the year. If you've been paying $766/mo for the last 8 months you should look at upping that to 33.7% ($2583/mo) for the next 4 months so you can hit the $18,000 max. If you're budget is accurate you have a monthly surplus of $2135/mo. You will need to either find some way to cut out $448/mo from your spending or sell some of your company stock, which as EarthSurfer mentioned earlier is a great idea.

I would sell all of the stock that has been held for > 1year so that you only pay long term capital gains. I also second the advice of talking to a CPA. At a minimum you should sell enough to pay off the 7.65% interest loan and enough to cover the ~$1800 extra needed to fully fund your 401k for the year.

Also shop around for insurance. If you are male at 25 you typically get a pretty significant car insurance deduction. $118 seems pretty high, and if you've been with the same insurance company for the past few years I would bet you could find a better deal.

MrsWolfeRN

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #4 on: August 24, 2017, 11:30:04 AM »
Agree with selling the company stock to pay off the loans, and also maxing your 401k.

I am surprised that nobody has mentioned the car yet. At $150/month for gas, it is either a guzzler or you live too far from work. Since you are renting and do not have kids yet, it would be easy to optimize your life by moving closer to work and selling the car. If you are in a large city with a mild climate, try to go without one. Otherwise buy a used Prius or similar with cash.

HockeyMan

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #5 on: August 24, 2017, 07:01:11 PM »
Thanks all! I have an hour meeting scheduled with a local CPA next week. I'll provide an update on how that goes.

At your salary the first thing I would try to do is max out the 401k for the year. If you've been paying $766/mo for the last 8 months you should look at upping that to 33.7% ($2583/mo) for the next 4 months so you can hit the $18,000 max. If you're budget is accurate you have a monthly surplus of $2135/mo. You will need to either find some way to cut out $448/mo from your spending or sell some of your company stock, which as EarthSurfer mentioned earlier is a great idea.
After I talk to the CPA next week, I'm going to consider making this adjustment to my 401k contribution. My budget is accurate and by using the following calculator, it looks like I should be able to afford it: https://www.calcxml.com/calculators/pay02

Also shop around for insurance. If you are male at 25 you typically get a pretty significant car insurance deduction. $118 seems pretty high, and if you've been with the same insurance company for the past few years I would bet you could find a better deal.
This is awesome advice. I called my insurance agent today and was told that I was not eligible for a mid-term rate readjustment. I put them on notice that I'd be shopping around for a new plan. :)

I am surprised that nobody has mentioned the car yet. At $150/month for gas, it is either a guzzler or you live too far from work. Since you are renting and do not have kids yet, it would be easy to optimize your life by moving closer to work and selling the car. If you are in a large city with a mild climate, try to go without one. Otherwise buy a used Prius or similar with cash.
Thanks MrsWolfeRN! I called it out on my original post that it is an area I'm examining. I drive a 2014 Jeep Cherokee and am considering downgrading to a cheaper vehicle (I made the mistake of buying new when I graduated college 3 years ago... mistake). As far as the gas expense goes, I live 2 miles from work and often bike. I am currently in a long distance relationship that requires me to make a 450 mile round trip drive twice a month (450miles/26mpg=17.3 gallons/trip*$2.80=$48.44 a trip). There is still room to improve here, but the trips are worth it until we can relocate.

maizeman

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #6 on: September 01, 2017, 07:21:14 AM »
Definitely do max out the 401k. That was the first thing that jumped out at me. Even if you cannot quite manage it this year, from January of 2018 onward have it set to $1,500/month (or a bit more if they raise the contribution limit).

I'm much more sympathetic to burning gas on long distance relationships that on a commute. But resolving that (assuming you're happy with the relationship) would be a big game changer in terms of increased savings rates. Do you anticipate moving to where your partner lives or vice versa or is it still up in the air? Unless you know you're living at the location the two of you plan to end up, probably good to hold off on your goal of buying a house for now.

I think you've correctly identified the issue with selling the company stock is the emotional component. Presumably all your coworkers also keep most of their stock options so every time the price goes up, you can all celebrate together. While the company is growing faster than the market, it's no fun to feel like the guy who foolishly sold all his stock and put it in index funds. However, like EarthSurfer said, holding that stock means you're investing your stash in the one asset that is most likely to lose value at the exact same time you lose your source of income and will need to draw on savings.
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Raenia

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #7 on: September 01, 2017, 07:49:52 AM »
Concur on maxing the 401k as soon as you can, at your income level the tax savings will be well worth it.  I also agree with selling your company stock as it vests - you've got all your eggs in one basket here.  I know you said the company is very stable, but you never know what might happen and it's better to be diversified.

I would use the money from the stock sale to pay off the 7.65% student loan, followed by the 6.55% and 6.16% loans.  Those interest rates are too high to keep paying the minimums.  For the logic behind that, take a look at MGM's Investment Order post, it has a great discussion of when to pay off debt and when to pay the minimums.

Driving for a long distance relationship is tough, but way better than commuting for your job.  I would seriously consider selling the Cherokee and getting something cheaper with great gas mileage for your long trips.  Good job on biking to work!

Your expenses look pretty good, but I would consider splitting out that 300/mo "other" category so you have a better idea what you're spending on.  Is it clothes, convenience food, entertainment...  Some of that might be non-value-added, but you can't tell unless you know what it is.

You're in a great place for your age, with good habits and a great income.  Good job getting started early!

zoe2dot

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #8 on: September 08, 2017, 07:41:17 PM »
Nice work getting started on this so young.
How was meeting with CPA?
I'm thinkng about hiring one for this year's taxes.

HockeyMan

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Re: Can't Grow a Beard, But Must Grow a Stache
« Reply #9 on: September 08, 2017, 10:13:01 PM »
I'm much more sympathetic to burning gas on long distance relationships that on a commute. But resolving that (assuming you're happy with the relationship) would be a big game changer in terms of increased savings rates. Do you anticipate moving to where your partner lives or vice versa or is it still up in the air? Unless you know you're living at the location the two of you plan to end up, probably good to hold off on your goal of buying a house for now.
Totally should have clarified in my original post - primarily looking at rental investment properties and will likely do an out of town rental using a property manager. I'm also super happy in the relationship so totally worth it now. We'll likely both relocate to a new location, or I'll move to her within the next 6 months.
I would use the money from the stock sale to pay off the 7.65% student loan, followed by the 6.55% and 6.16% loans.  Those interest rates are too high to keep paying the minimums.  For the logic behind that, take a look at MGM's Investment Order post, it has a great discussion of when to pay off debt and when to pay the minimums.

Your expenses look pretty good, but I would consider splitting out that 300/mo "other" category so you have a better idea what you're spending on.  Is it clothes, convenience food, entertainment...  Some of that might be non-value-added, but you can't tell unless you know what it is.

You're in a great place for your age, with good habits and a great income.  Good job getting started early!
Thanks for the kudos! I just updated my original post and totally forgot to split out my "other" expenses category. I'll be sure to do that soon. Anecdotally, I can tell you that most is travel-related spending. I'm an avid backpacker/camper so that is typically a related expense.
I'm also very familiar with the Investment Order Guide, but not sure where my aspirations at creating passive income through rental investing lie in that order. That is primarily the reason I didn't sell ALL of my company stock in my last sale. I wanted to hang on to enough for one (or multiple) down payments.
Nice work getting started on this so young.
How was meeting with CPA?
I'm thinkng about hiring one for this year's taxes.
Thanks! I'm quickly realizing that having a W2 job is not a long term goal of mine :) The meeting with the CPA went OK. He wasn't very investment minded, but offered some general advice that aligned with what I've been told in this thread and pushed me to sell enough stock to pay off my high interest loans. This CPA does a free review of past tax returns, so I'm waiting on his review to determine if I'll continue to work with him.