Advice for First Time Investor, Ineligible for Tax-Advantaged Accounts

[lovesasa]

I posted this as part of a Case Study but got no replies, so I thought maybe this belongs more in the investment category. This is the first time I have disposable income and no high interest debt to immediately throw it at, so I want to make sure I'm investing prudently. I currently have no investments except for $1,550 in a Roth IRA that I just discovered I am ineligible to contribute to*. So assuming I am ineligible for any tax-advantaged accounts (which seems to be the case), here is my plan for the next ~1.25 years.

*https://americansabroad.org/issues/taxation/foreign-earned-income-and-roth-ira-contributions-revised/

I currently have ~$8,148.53 in my US checking/savings accounts and ~$5K in my Chinese checking accounts. I intend to send some more money home soon, to complete steps 1 and 2 by the end of Q1 2015 (so... this month).

1. 2015 Q1: $3,200 to pay off student loan @5.8%
2. 2015 Q1: $5,000 EF to Mango @~5.28% (after $3 monthly fee)
3. 2015 Q2: $3K into VTSMX Total (US) Stock Market Index Investor Shares
4. 2015 Q3: $3K into VGTSX Total International Stock Market Index Investor Shares
5. 2015 Q4: $3K into VBTLX Total Bond Market Index Fund Investor Shares
6. 2016 Q1: $3K into VISVX Small-Cap Value Index Fund (US) Investor Shares
7. 2016 Q2: $3K into VGSIX REIT Index Fund Investor Shares Investor Shares

My current income is ~$2,300 a month exept for February and July, when I have holiday time and earn 80% salary. I am currently saving ~$1080/month, which should increase to $1,370/month next quarter, as I am cancelling my health and life insurance policies this month. I anticipate this will increase again in Q3, as I am negotiating my contract for next school year. My manager has already implied a ~$159/month raise, and I will be pushing for a bit more as I don't have a teaching assistant and teach a fairly high courseload. More details of my income and expenses can be found here:
http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-us-expat-in-china-pay-low-interest-loan-or-invest/

As far as I know, I am ineligible for most tax advantaged savings accounts as I work abroad and claim the Foreign Earned Income Exemption (FEIE), so my US taxable income is $0. I currently have no investments and earn little interest, so I'm not sure how these investments might affect my tax burden in the future.

I think allocating $1000/month towards long term investments and the rest ($370-$500) a month toward short term savings is a reasonable goal. I am on a year-to-year teaching contract in China and plan on changing fields in a year or two, so I would like to have some "slush" money in a shorter term savings account.

In the short term I will be a little heavy on stocks and low on bonds, but in the long run this allocation will allow me to get into the funds that appeal to me and closer to the allocation I want. By the end of 2015 my allocation will be 66%/33% Stocks/Bonds, moving to 75%/25% in 2016 Q1 and 60%/20%/20% Stocks/Bonds/REIT in Q2. Or would you classify REIT as stocks, still? I'm only 25 and live on less than $1K a month so I think I can tolerate a reasonable amount of risk, assuming a fairly diversified portfolio.

This would also leave me with a minimum of $3,600 in "slush" savings by the end of my contract in June 2016 (even without considering the probable raise, which would bring this to ~$6K), which could cover a flight back to America and moving expenses, or tuition and living expenses for a semester of language courses (in China, with possible part time teaching), depending on what career transition I choose to make. This is in addition to the $5K Emergency Fund that is untouched. Minimum payments to my remaining student loans ($5,200 total at 4.25% and 3.15%) are factored into my regular spending budget, currently at $90/month. If I get any unexpected windfalls, this money would probably go towards paying down the last of my loans rather than additional investment.
 
I'm not sure what my career situation will be after June 2016. I'm fairly certain it would be easy to get another teaching gig in China, but after 3 years I think I will be ready to move on. I'm looking at a few different options for the future, including applying to the US Foreign Service. If I find myself in a low pay position I can at least be comfortable knowing I have $15K in investments that I can let sit and grow. If I (more hopefully) take a comparably paying position, I would continue to invest in these funds monthly at an equal breakdown (i.e. 20% each).

Absolute worst case scenario I can fly home, move back in with my parents (they repeatedly offer this... I think they miss me), and take a minimum wage retail job. I can't forsee this happening, but it's nice to see that the "absolute worst case scenario" is still not that bad. I have a fairly good credit score (~769 to ~780 according to CreditKarma and Mint, respectively) and two very high limit credit cards (paid off every month) for "springy" debt, so I feel comfortable with only a $5K emergency fund and investing the rest, minus my short term savings "slush" fund. This would give me some flexibility without having to liquidate my investments unless I faced a longer term (>6-8 months) bout of total unemployment.

Does anyone see any immediate problems with my investment plan? Any red flags? Any suggestions?

[expatartist]

From a cursory glance, this looks like a good plan given the relatively short time you'll be spending in China.

Best of luck! I love the west of China.

[lovesasa]

From a cursory glance, this looks like a good plan given the relatively short time you'll be spending in China.

Best of luck! I love the west of China.

Thank you! :)

I also love that you realize I'm only spending a "short" time here. I'm pretty sure my entire family thinks I'm (a) insane and (b) never coming home. (Ok, they might be a little bit right...)

[Wolf359]

It looks like a good plan.  If you open a brokerage account with Vanguard (minimum $3,000), you can buy the Vanguard ETFs directly for $0 commission.  That provides:

1) The ability to diversify to all your desired funds immediately.
2) Removes fund minimums (you only have to buy one share of any given ETF).
3) Reduces your fund expenses to the Admiral-class level.

The disadvantages of this approach are:

1) Approach can't be automated like buying into a mutual fund.  Not sure if this is a factor for you.
2) Can't buy fractional shares.  Some small amount of money is going to be cash each investment period.

Overall, your approach is good.  If you build up savings sufficiently, you can contribute to tax-advantaged accounts in the States once you return.  Usually when you're just getting started, you can't afford to divert too much from income.  If you build up a buffer, you can pull from savings to invest once you have US income to qualify you for the tax-advantaged accounts.

[lovesasa]

It looks like a good plan.  If you open a brokerage account with Vanguard (minimum $3,000), you can buy the Vanguard ETFs directly for $0 commission.  That provides:

1) The ability to diversify to all your desired funds immediately.
2) Removes fund minimums (you only have to buy one share of any given ETF).
3) Reduces your fund expenses to the Admiral-class level.

The disadvantages of this approach are:

1) Approach can't be automated like buying into a mutual fund.  Not sure if this is a factor for you.
2) Can't buy fractional shares.  Some small amount of money is going to be cash each investment period.

Thanks for the advice! I didn't realize that this option was $0 fee. Between that and the decreased fund expenses, this might be a smarter way to go. I don't really mind having to purchase my own shares, I'm a big tinkerer anyway. That also gives me some more flexibility in case I have a month or two where I'd rather have the cash for something else, although that also is a bit of a temptation... Usually I'm pretty good so maybe if I do it myself, I would be more likely to put extra in if I have it lying around. :)

If I have to buy the shares individually, couldn't I just choose to only put in enough money to buy those shares? Or will some cash be liquid within the brokerage account? After the initial $3K, I mean.

Overall, your approach is good.  If you build up savings sufficiently, you can contribute to tax-advantaged accounts in the States once you return.  Usually when you're just getting started, you can't afford to divert too much from income.  If you build up a buffer, you can pull from savings to invest once you have US income to qualify you for the tax-advantaged accounts.

My original plan was to save up all this money and periodically move it to the US to max out my Roth each year, but since I'm ineligible I figured I would invest it instead of leaving it to sit in a 0.75% interest savings account. I know I need some savings to cover moving expenses and my initial month or so transitioning back to the US, but is there any reason to keep much more than that and my emergency fund in liquid assets?

Stockpiling cash with the intention of investing it later seems a bit counterproductive. Won't I lose out on some of the gains of early investing if I wait just for the sake of tax benefits? I feel like I might be misunderstanding your intended point.

[Doulos]

How are living expenses in China?
It seems like you should be able to live on less in China than the US.  I mention this because of your low income, which I also assume is because of China.
My thoughts are...
1) dont delete health insurance.  Is there high deductible insurance in china like HSA options in the US?  And are you eligible for a HSA in the US?
HSA might be a tax free investment option for you and also keep you health insured.