Author Topic: Debt free as of today.Where do I go from here?  (Read 1698 times)

Bevn182

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Debt free as of today.Where do I go from here?
« on: September 21, 2017, 11:45:41 AM »
Hey everyone,
March 2017 I came on here asking for financial advice.I had 19k in student loans left(Originally I had 32k).As of today,I am debt free.(I sent in my last payment last night)I am so excited and I am looking forward to the next chapter in my life.This is where you guys come in.

Life Situation: I am a 27 year old single female, living in Los Angeles,California.No kids/don't plan on having any.

Life Goals- Become Financially Independent.

Gross Salary/Wages: $36,400 , working in Public health (full time job).I have a side job that brings in $10 k a year.

Pre-tax deductions 403B: $100 per pay check(7.5 employee match but I am not fully vested until 5 years)

Adjusted Gross Income: $2200 monthly from full time job and about $822 from part time job

Current expenses
Rent   $480 Includes Utilities
Car Insurance   $41
Dining (Lunch/Dinner/Etc.)   $20
Transportation   $80
Groceries   $60
Medical Insurance  $100 
Phone (cell)   $0 
Credit card $0 (paid in full every month)

Living Expenses total   $781


I have no phone bill as I rely on wifi alone. I started biking/public transportation to work as sitting in traffic was killing my mental well being.At the moment I cant move close to work as I have a pretty good living arrangement.

Assets:
$3k in 403B
$500 in liquid cash
Car is paid off worth $2k according to Kelly blue book

Liabilities:
  $0 as I am now debt free:)                             


Estimated Net Cash Flow per month  ~$2k/month

Specific Question(s):

1)I am looking to save 5k for my emergency fund and then open up a Roth IRA.(Should I max out the Roth this year or start contributing next year(2018)
2)Should I increase my contribution to my 403b or leave as it is. 
3) Should I open up a brokerage account and if so which one or just stick with the retirement accounts?
« Last Edit: September 21, 2017, 03:56:01 PM by Bevn182 »

wonkette

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Re: Debt free as of today.Where do I go from here?
« Reply #1 on: September 21, 2017, 12:00:16 PM »
Where did the $500k come from and why is it in cash?

dcamnc

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Re: Debt free as of today.Where do I go from here?
« Reply #2 on: September 21, 2017, 12:02:11 PM »
Is that 500k in cash, or $500?

Bevn182

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Re: Debt free as of today.Where do I go from here?
« Reply #3 on: September 21, 2017, 12:04:47 PM »
It was a typo.Its $500.

dcamnc

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Re: Debt free as of today.Where do I go from here?
« Reply #4 on: September 21, 2017, 01:20:52 PM »
Congrats on being debt free! Some things I have questions about...Your monthly grocery bill is only $60? You state 403b in question #2, I don't see a 403b listed on your balance sheet, are you meaning your 401k? You have no "me" budgeting category, do you really not have any general spending (ie: vacation, doodads, house stuff, clothes)?

Personally, I would fund your 5k e-fund throughout the rest of this year, you should have your goal by Dec if you have a positive 2k/month cash flow. I would research what IRA you may want, and start it in January (using any "above your e-fund goal" money you have set aside for the emergency fund).  How you balance the contributions to your 401/IRA is going to be up to you. Most folks seem to fully fund their ira's as soon possible in the year; others (like me) break the $5500 total down into 12 monthly inflows, just for monthly consistency in the budget. Whenever you get vested, I would definitely take advantage of the match, it would be nuts not to, that's 100% roi right off the bat. You may want to go ahead and open a brokerage account, and start getting used to/playing with it. You are pretty early on in your building phase, but I see lots of folks having all their money tied up in real estate and retirement accounts. Have some "now" money in your e-fund and your brokerage accounts, you never know when a big life event will happen, and you don't want to drain your 401/ira to cover it (others may disagree, and this is fine, everyone's different). You have some mighty low living expenses to be in LA, good job with that.

JLE1990

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Re: Debt free as of today.Where do I go from here?
« Reply #5 on: September 21, 2017, 02:16:48 PM »
Hey awesome that you are debt free! I'm about where you were six mon ago with about the same income. Encouraging to know people actually do change things that quickly ;)

Bevn182

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Re: Debt free as of today.Where do I go from here?
« Reply #6 on: September 21, 2017, 03:55:14 PM »
Thank you!

I have catered lunch at work and I bag left overs for dinner hence why the low monthly grocery bill.I don't go shopping and my vacations include backpacking/camping locally and free plus  I prep/dehydrate me food.My mistake my work offers a 403b not a 401k. It definitely took some discipline and luck to get my expenses this low. Any brokerage accounts you might recommend?

BigHaus89

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Re: Debt free as of today.Where do I go from here?
« Reply #7 on: September 21, 2017, 05:55:54 PM »
Thank you!

I have catered lunch at work and I bag left overs for dinner hence why the low monthly grocery bill.I don't go shopping and my vacations include backpacking/camping locally and free plus  I prep/dehydrate me food.My mistake my work offers a 403b not a 401k. It definitely took some discipline and luck to get my expenses this low. Any brokerage accounts you might recommend?

Wow, you're in a great position. Excellent job at keeping your expenses so low. You should be able to stockpile money fast. Vanguard seems to be the go-to for IRA's and brokerages around here.

Laura33

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Re: Debt free as of today.Where do I go from here?
« Reply #8 on: September 21, 2017, 06:21:06 PM »
Wow, way to kill it!  $19K in 6 months on that salary is seriously bad-ass!  You are also dead on on the next steps:  emergency fund and increasing Roth/403(b).  My recommendations:

1.  If you are not yet getting the full match, up the 403(b) until you get to that point.  If someone is going to hand you free money, it's in your best interest to let them. :-)

2.  Next priority is to fund a Roth for 2017, for two reasons:  (i) Roths are use-it-or-lose-it (if you don't put in the $5500 this year, you can't make up for it by putting in more in later years); and (ii) you can withdraw your contributions from a Roth at any time if you really need it, so it can substitute as an emergency fund for a few months or a year. 

3.  Then build your EF outside of your Roth.  Once you do that, you can switch your Roth over to a broad index fund (since you no longer need it to double as an EF). 

4.  Once you have your EF set and your Roth fully funded, start throwing the extra money into your 403(b).

Since you have $2K/mo. to play with, you can accomplish multiple goals at the same time.  For ex., you have about 6 months until the April 15 2018 deadline for a 2017 Roth, so you can put $1K each month into a Roth ($500 for the final month) and $1K into the EF.  Just call Vanguard and open two accounts, one for the Roth, and one for a taxable account.  For now, put all the $ in both accounts into a money market fund. 

Then in April, you will now have $5500 in a 2017 Roth and $6K in the EF.  Now you stop the EF.  And you do two things with the Roth:  first, you sell the money market shares and invest them into VTSMX.  Second, you also now need to readjust how much you are sending in to fully fund the 2018 Roth -- just do the math for whatever the 2018 limits are and set up automatic withdrawals from your bank account into your Roth divided by the remaining months in the year.*

At this point, you will also have more free cash left over to invest, because you'll only need like $500+/- for the Roth each month.  So now you go in to HR and max out your 403(b) (or as close to maxed out as you can afford).  Choose a broad index fund with the lowest expenses.

Then all you need to do every January is re-adjust your automatic withdrawals based on the annual limits and the amount you have to invest.

Two other things I'd encourage you to think about:

1. Do you have disability insurance? $5K won't go very far if you are out of work for months or years, so that is good protection while you are building up assets that could carry you through on your own.

2.  After you do the Roth and EF, think about whether you need/want to save for longer-term expenses, like major car repairs or a new-to-you car when this one dies, moving costs if you need to move somewhere, travel if you want to take a big trip, etc.  $5K is a decent EF, and with your expenses you don't need huge amounts sitting in cash, but it isn't enough to serve as both an EF and cover those kinds of big, periodic expense.

But those are relatively minor -- you are really doing awesome things.  Congrats -- it just gets better from here!

*I prefer to do my Roths on a calendar year -- I know I have until April, but I don't want to forget or get confused, so I just go from Jan-Dec.  So if it were me, I'd divide whatever the 2018 limit is by the remaining 8 calendar months to figure out the monthly contributions, but you can obviously do it either way.
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Bevn182

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Re: Debt free as of today.Where do I go from here?
« Reply #9 on: September 21, 2017, 09:00:07 PM »
Thank you so much for the detailed response.I will be looking at Vanguard first think tomorrow morning.As for the disability insurance,my work offers long term disability but I don't know for how long.I will look into it tomorrow as well.So to be on a safe side,should I increase my EF to 10-15k?I just don't want so much money siting around but idk.Again thank you so much for the detailed answer.I appreciate it.

Laura33

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Re: Debt free as of today.Where do I go from here?
« Reply #10 on: September 22, 2017, 06:38:49 AM »
Thank you so much for the detailed response.I will be looking at Vanguard first think tomorrow morning.As for the disability insurance,my work offers long term disability but I don't know for how long.I will look into it tomorrow as well.So to be on a safe side,should I increase my EF to 10-15k?I just don't want so much money siting around but idk.Again thank you so much for the detailed answer.I appreciate it.

The good news is that if you can get long-term disability for a reasonable price, then you only need enough set aside to cover the waiting period before that kicks in -- I think that's usually 90 days but could be 180.  At your level of expenses, your $5K EF may be enough to cover you for that period. 

For the other stuff, I think what I would do would be to look at the likely big expenses over the next maybe 2-3 years, and keep a separate "sinking fund" to cover those (note: it can be literally separate, or in the same account as the EF and just something you track separately in your head).  So for ex if you will need say $800 in likely car repairs (tires, big service, one breakdown, etc.) and you will want to take one trip that you estimate at $600, then that's $1400.  So you can put an extra $50/mo in the account and have that in about 2 years (or just decide to target $6400 for the EF now before you stop contributing).  Or if you anticipate needing a new car in 5 years, and you want to target $5K for the purchase price, then you set up your automatic withdrawals to add another $1K/yr to your EF.

The exact answer doesn't matter as much as the analysis -- the important thing is to try to look into the future and plan for likely expenses so you will have the cash on hand to cover them before they happen.
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noplaceliketheroad

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Re: Debt free as of today.Where do I go from here?
« Reply #11 on: September 28, 2017, 05:51:07 PM »
So curious to know more about how your rent situation is so low in LA! DH and I just left LA and we thought we had an amazing deal - $1450/month for a rent-controlled 1 bd we'd been in for 5 years. Are there opportunities to increase your salary at your current job? And my priority would be funding the emergency fund first, but that might just be me since DH and I work freelance and work is so up and down that having that safety net is a top priority for us. If you have good security at your job, then maybe it isn't the first priority.

FindingFI

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Re: Debt free as of today.Where do I go from here?
« Reply #12 on: October 11, 2017, 01:54:31 PM »
Check out the Investment Order thread for some additional guidance on where to start.  Now that you're debt free you can completely ignore steps 2 and 7 :)

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Here's the nut and bolts, but the full post has lots of other info and links that might be helpful.

Quote
WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.           
           
WHY           
0. Give yourself at least enough buffer to avoid worries about bouncing checks           
1. Company match rates are likely the highest percent return you can get on your money           
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 25%; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.     
6. Applicability depends on the rules for the specific 401k           
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.
8. Because any earnings, even if taxed, will help your FI journey.

civil4life

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Re: Debt free as of today.Where do I go from here?
« Reply #13 on: October 12, 2017, 11:08:59 AM »
Only one comment:  I think you will want to fund a traditional IRA before a Roth for the tax benefit.  You make under $62k a year so you will be able to get the tax benefit of the traditional. 

Just follow the Investment Order thread suggested by FindingFI.

Great job!!!  It makes it so much easier when you start out young.