Author Topic: Low Salary, High Motivation - Advice Needed  (Read 1171 times)

gravitysmiles

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Low Salary, High Motivation - Advice Needed
« on: September 06, 2017, 01:23:21 PM »
The run down: I'm a 27 year old female living in a relatively HCOL area. My partner and I live together and are both making relatively the same income of $38k a year. We work for nonprofits. All numbers given are of my individual income and spending (after it is split).

I just became eligible for the 401k plan at my company that is an awful plan with high fees from TIAA (Gross/Net Expense Ratio 1.39%/1.20%), but they do offer a 5% match at least. I've only been putting up to the match right now, because I'm wondering if it's better for me to put my money in a Traditional IRA instead.

Goals: Become financially independent as soon as possible.

Advice Needed:
  • Right now I have about $20,907 in cash split between a money market account and my checking. This is too high. I only want about $13,000 on hand. What should I do with this extra almost $10,000?
  • Would it be better to open a Traditional IRA with Vanguard, continue investing in my Roth IRA with Vanguard, or just start investing in a straight up index fund or something?
    OR is it best to invest more in my company 401k?
  • Should I switch my Roth IRA to something else? Right now it is Vanguard STAR Fund (VGSTX).

Gross Salary: $38,000
Monthly Take Home Income:
Gross Pay: 3,166.66
Taxes: -611.08
401k: -158.34
Take-home Pay: 2,397.24
(we don't pay anything for benefits)

Monthly Expenses
Rent: $550
Car Insurance: $75
Cell Phone: $60
Utilities: $15
Internet: $25
Groceries: $150
Eating Out: $50
Entertainment: $50
Gas: $50
Hulu & Netflix: $16
Household products and pet: $80
Miscellaneous:$75
Total Monthly Expenses: $1,146
I usually have a surplus of about $900 a month.

Assets:
Cash: $20,907
Roth IRA: $4,100
401k: $400
2014 VW Jetta: worth maybe $6000?

Debt:
None
« Last Edit: September 06, 2017, 01:51:32 PM by gravitysmiles »

Laura33

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Re: Low Salary, High Motivation
« Reply #1 on: September 06, 2017, 02:00:23 PM »
So, first, do you track expenses?  Your expenses say you should have about $1150 left over each month, but you say you actually usually have around $900.  Overall, you've done a good job of keeping expenses low, especially in a HCOL area -- but that's 10% of your take-home pay that is disappearing!  Figuring out where that is going will give you a more realistic picture and help you see if some of the stuff you are spending on isn't really stuff you value.

Also:  do you have a HSA available to you?  Those can be excellent for tax-free savings.

On your actual questions:  I wouldn't go beyond the match at those expense ratios -- you are thinking along the right lines there and are likely better off putting it into an IRA.  Whether you choose a traditional or a Roth depends on whether you think your tax brackets will be higher or lower in retirement.  I am guessing that you are in the 15% bracket now, which means every $1K you put in a tIRA will save you $150 on your taxes for this year; OTOH, you will need to pay taxes on that money when you withdraw it at whatever your tax rates are then, so a traditional IRA is the right call if your tax bracket will be lower at retirement, but you're worse off if you are in a higher bracket then.  But this is also a "don't let the perfect be the enemy of the good" moment -- maxing out either option is better than doing nothing.

(And you do have to choose, btw -- each year you can do only a Roth or a traditional IRA.  Well, you can split the money between them, but only up to the annual cap ($5500 this year), and that seems more trouble than it's worth). 

With respect to the leftover funds after you do the 5% to the 401(k) and the IRA (and HSA if applicable), I'd just put it in VTSAX.  But if you're looking for a single balanced fund that isn't as aggressive, you can do a lot worse than the Star fund. 
Laugh while you can, monkey-boy

gravitysmiles

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Re: Low Salary, High Motivation
« Reply #2 on: September 06, 2017, 02:46:39 PM »
Thank you for your reply!
  • I do track my spending, but I need to watch it more closely. I really appreciate you pointing that out. I say an average of $900 because some months I have to go to the doctor or the dentist, and my copays and deductibles are quite high, or other things come up such as needing to visit family who live a bit far. I suppose I need an "unexpected" category haha.
  • Unfortunately, work doesn't offer an HSA. They are very tiny nonprofit who are extremely reluctant to change. It's just not worth the effort of doing anything for employees here.
  • I suppose for the rest of 2017 I will focus on maxing out my Roth IRA. Do you suggest I switch the fund? The STAR fund has  .32% expense ratio. Obviously that isn't bad, but I know it can be lower with vanguard.
  • VTSAX has a minimum $10,000 investment, right? Is that a good place to allocate about half of my cash to, or should I save up a bit more first and then start investing in that?

bacchi

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Re: Low Salary, High Motivation
« Reply #3 on: September 06, 2017, 03:03:16 PM »
  • VTSAX has a minimum $10,000 investment, right? Is that a good place to allocate about half of my cash to, or should I save up a bit more first and then start investing in that?

With your Vanguard IRA, you can buy the equivalent ETFs (for example, VTI), which have very low expense ratios.


Finances_With_Purpose

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Re: Low Salary, High Motivation
« Reply #4 on: September 06, 2017, 05:28:41 PM »
  • VTSAX has a minimum $10,000 investment, right? Is that a good place to allocate about half of my cash to, or should I save up a bit more first and then start investing in that?

With your Vanguard IRA, you can buy the equivalent ETFs (for example, VTI), which have very low expense ratios.

Or VTSMX - same thing, but only a $3k minimum, I believe.  It'll be functionally identical.  And my understanding is that they'll bump you up to VTSAX (admiral shares) automatically if you ever hit 10k (thus lowering your expenses automatically).  But all three are more similar than different. 

Finances_With_Purpose

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Re: Low Salary, High Motivation - Advice Needed
« Reply #5 on: September 06, 2017, 05:32:50 PM »
I forgot to add this, but great job, by the way!  You're already doing really well. 

The questions you ask are all minor relative to what you're actually already accomplishing. 

And as for 3, I love Vanguard, so I might.  But if you don't have much in your account, maybe keep it where it is - sometimes funds charge up to $100 for switching out.  Per Google, VTSMX has a .15% expense ratio, and VTSAX runs 0.04%.  So you could eventually get some savings. 

I love optimizing my stuff then putting it on autopilot indefinitely, that way I rarely check it. 

gravitysmiles

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Re: Low Salary, High Motivation - Advice Needed
« Reply #6 on: September 07, 2017, 09:57:46 AM »
I forgot to add this, but great job, by the way!  You're already doing really well. 

The questions you ask are all minor relative to what you're actually already accomplishing. 

And as for 3, I love Vanguard, so I might.  But if you don't have much in your account, maybe keep it where it is - sometimes funds charge up to $100 for switching out.  Per Google, VTSMX has a .15% expense ratio, and VTSAX runs 0.04%.  So you could eventually get some savings. 

I love optimizing my stuff then putting it on autopilot indefinitely, that way I rarely check it.

Thank you! It still feels like early retirement is out of reach due to my low income, but hopefully I can make it a reality. I really appreciate your reply.

My current Roth IRA is with vanguard, just in their STAR fund (VGSTX), it has a bit higher expense ratio. I don't think they will charge me to change it, what do you think?

Can I use anything for my Roth IRA? I'd kind of like to move it to something else, but I'm not sure what's best, or if it's good where it's at. I'd like to be able to set it and forget it. After this year, I'll probably start investing in a Traditional IRA. Can I put the money into the same ETF or Fund?

Rufus.T.Firefly

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Re: Low Salary, High Motivation - Advice Needed
« Reply #7 on: September 07, 2017, 10:18:30 AM »
I'm slightly more conservative in my liquidity approach - so even though your extra 10K should be working for you in investments, I personally would rather have it available in a straightforward taxable account.

My income level fluctuates from year-to-year significantly. In years where my marginal tax bracket is 15%, I prefer to go with Roth contributions instead of pre-tax contributions.

My reasoning is that I'll have to declare the money as income eventually when I convert from pre-tax to Roth and it will likely be at the 15% bracket when I do it. So there's really no savings advantage in doing pre-tax - it's just a matter of paying the 15% now or later. On the other hand, if I dump it in Roth at the beginning, I get all that investment growth tax-free. I'm not a tax expert so other's may want to chime in if they have a more advanced understanding of tax theory/practices.

All that said, your first goal should be to take the 5% 401(K) match. I wouldn't put any more in the account after the 5%, but anytime someone's giving out free money, take it. That's a 100%  guaranteed return on your investment.

So here's my suggested order of operation:
  • 10K in investment account
  • 5% in company 401(k)
  • extra investments in Roth
"I have worked my way up from nothing to a state of extreme poverty"

~ Groucho Marx

Finances_With_Purpose

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Re: Low Salary, High Motivation - Advice Needed
« Reply #8 on: September 08, 2017, 01:06:01 PM »
I forgot to add this, but great job, by the way!  You're already doing really well. 

The questions you ask are all minor relative to what you're actually already accomplishing. 

And as for 3, I love Vanguard, so I might.  But if you don't have much in your account, maybe keep it where it is - sometimes funds charge up to $100 for switching out.  Per Google, VTSMX has a .15% expense ratio, and VTSAX runs 0.04%.  So you could eventually get some savings. 

I love optimizing my stuff then putting it on autopilot indefinitely, that way I rarely check it.

Thank you! It still feels like early retirement is out of reach due to my low income, but hopefully I can make it a reality. I really appreciate your reply.

My current Roth IRA is with vanguard, just in their STAR fund (VGSTX), it has a bit higher expense ratio. I don't think they will charge me to change it, what do you think?

Can I use anything for my Roth IRA? I'd kind of like to move it to something else, but I'm not sure what's best, or if it's good where it's at. I'd like to be able to set it and forget it. After this year, I'll probably start investing in a Traditional IRA. Can I put the money into the same ETF or Fund?

If I'm understanding you, you're asking about trading things at Vanguard.  And yes, there shouldn't be any fee for buying other funds within Vanguard - you may want to check though. 

I'm a little unsure what you're asking about your Roth IRA: are you talking about moving it to another firm, or about what you're investing?  Laura33 is dead on about it in general: Star fund seems fine, though she and I both (apparently) use VTSAX - personal preference. 

I'll take a stab at what I think you're asking - so forgive me if you're asking something else.  You can invest in any fund your Roth/IRA account holder offers.  At Vanguard, for instance, you can buy Vanguard funds and such, at very little cost/no trading fees (generally).  But you can also buy some Vanguard funds (especially ETFs) if you have a Fidelity account, TD Ameritrade account, and so on.  They may charge you a fee to buy/sell the fund: typically $7-$9.  Though some may allow you to automatically deposit at no/low fee, and reinvest your returns for free.  You'd have to compare brokerages; there's tons here and online elsewhere about that. 

Personally, I love Vanguard and find they're the cheapest for what I want to do, so I park most things there, even though I funds several places due to various employers/other things/laziness. 

Since you make less, and invest small amounts often, I'd try to find a place that won't charge you much in fees, either for your account OR for purchases as you move money in.  Vanguard is excellent on that.  (I think their only fee is $20/year per account for accounts below $10k, I think - but you'd have to check that.)  But there may be other places/options.

Also, for what it's worth, I find it helpful to have as few accounts as I can.  I keep my various Roths in one fund/place, because it saves a little on account fees and it's less paperwork to deal with. 

I can see wisdom in having accounts with more than one brokerage - if you're worried that one of them might fail in a catastrophe, for instance (a la Bear Stearns) - but it's also costly (admin fees and time-wise), so may not be worth it until you have a pretty good chunk.  Plus, your employer or others probably require to use at least one other account you wouldn't normally have otherwise. 

Anyway, I hope that answers your questions. 

robartsd

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Re: Low Salary, High Motivation - Advice Needed
« Reply #9 on: September 08, 2017, 03:12:21 PM »
Since you make less, and invest small amounts often, I'd try to find a place that won't charge you much in fees, either for your account OR for purchases as you move money in.  Vanguard is excellent on that.  (I think their only fee is $20/year per account for accounts below $10k, I think - but you'd have to check that.)  But there may be other places/options.
I haven't paid any fees (other than the expense ratios of the funds I hold) with my Vanguard accounts (Roth IRA started with 3K about a decade ago, Traditional IRA started with even less in last few years). I believe electronic delivery (everything except security alerts) is a key part of having the fee waived.

I like automatic investments with mutual funds that is not available with ETF, so I started my Traditional IRA with a Vanguard Target Date Fund ($1000 minimum) rather than an ETF.


Goldielocks

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Re: Low Salary, High Motivation - Advice Needed
« Reply #10 on: September 09, 2017, 06:53:01 AM »
Hey gravity,
 
Currently you are saving 50 percent of your income, approx.  That is less than 20 years to FIRE, according to shockingly simple math, and even less if you take into account SS at age 65 that will let you spend a bit more in the bridging years.

Also, as you get older, most people your age start to make more money.   My guess is that your income may double within the next 12 years.
So, your key to an even earlier retirement, is to maintain your spending rate and keep saving the extra.

Even if you stay on the current track, you are FIRE by 45.   Which I guarantee is still very young.   Lots of people have kids in their 40's, me, I have kids starting college now that I am 45, so have a lot of time with good health and energy for hiking and travel.   I could even change careers and have another 20 year career in another field, if I wanted...

I think you are doing awesome right now.   Keep tracking expenses so things don't fall through the cracks.

And at the lower marginal tax rates, the ROTH is your first friend, after you claim any employer matching (free) money.
« Last Edit: September 09, 2017, 06:56:23 AM by Goldielocks »