Author Topic: Helping a young investor to FI  (Read 1787 times)

poorbroni

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Helping a young investor to FI
« on: May 08, 2016, 11:18:10 PM »
Hello all,

I'm new to the forums and new to investing so please excuse my lack of knowledge. I've been slowly educating myself on these topics and would welcome some advice from seasoned investors and strategies you may recommend. So between MMM and Mr Jim over at jlcollinsnh. I've got fundamental understanding of the wild risk and ride the stock market can be. I will be strong and i'm thinking of the long term for my future. So here a little about me.

I'm currently in my early 30's with only one student loan debt which I plan on paying off by the end of this week. Besides this I have zero debt. I've always been a very frugal person and manged to save a lot of money but I didn't know what to do with it. Until now...

What I do have roughly 200k net worth

Savings - 152k currently earning 1% interest was earning 0.01% until recent.

401k - 41k with 50/25/25  in US stocks/Int Stocks/Int Bonds. I plan on changing this to 100% stocks and being 60% in a vanguard fund they have available and the other 40% in the S&P500.

Roth IRA - 11K in VTSAX.

My action plan:

401k - My current employer match is 4% and im currently contributing 5% I plan on turning this up to see if I can max out my 401k contributions for the year.

I plan on opening a traditional IRA account with Vanguard as I prepare to leave my current employer as soon as I find new employment. This is in preparation to roll over my 401k into this account.

Paying off my remaining student debt which is roughly 2k at 2.5% interest.

That should leave me with 150k to invest with. Since i'm young I want to be aggressive with my investing and I believe I have trained myself to be strong and I understand the markets volatility. I plan on investing 142k into VTSAX.

Leaving 8k in cash for emergency fund.

Questions for you season investors:

1. I assume need to open a taxable account with Vanguard such as an brokerage account to invest the 142k. But any gain/losses I made get I have to report this on my tax returns every year going forward correct?

2. I do plan on purchasing a home one day when I can actually afford it but for now I believe stocks are a better option to build wealth. What are your thoughts?

3. Should I only invest VTSAX or should I diversify  for the long term or is there better options with low cost expense ratios that you would recommend?

4. Do you guys think 8k in cash is to high for an emergency fund? Do you think I should shovel more into my investments because of the lost in potential opportunity cost.

Thank you so much for your input. I look forward to hearing from you!
« Last Edit: May 08, 2016, 11:31:08 PM by poorbroni »

humblefi

  • Stubble
  • **
  • Posts: 107
    • Humble FI
Re: Helping a young investor to FI
« Reply #1 on: May 09, 2016, 12:01:34 AM »
Welcome to the path of FI!! Like you, I was there not too long ago and I could not believe that I never came across this concept before. I am sure you will be super glad in a couple years.  After two years on the path of FI, the only  thing I am not happy about is why did I not start it sooner. Seeing that you are starting in your early thirties, I have nothing but envy :-) 

Before I answer your questions, I would recommend one step that was super useful for me. Try to come up with a story on what Financial Independence means to you. I was struggling with direction until I came up with my story and then sacrifices along my FI journey became very easy. Here is what FI means to me: https://humblefi.com/category/financial-independence/financial-independence-to-me/

That said, here are answers to your question.

Questions for you season investors:

>> I assume need to open a taxable account with Vanguard such as an brokerage account to invest the 142k. But any gain/losses I made get I have to report this on
>> my tax returns every year going forward correct?
Yes. If you use Turbo Tax, it will import everything for you :-) If not, just use the tax statement that Vanguard sends you...it is pretty easy to do.
Depending on whether you purchase a mutual fund OR an ETF, the tax treatment is slightly different, but for that, we will need your tax bracket info.

>> 2. I do plan on purchasing a home one day when I can actually afford it but for now I believe stocks are a better option to build wealth. What are your thoughts?
You will find arguments for both sides on this one. I would recommend you read up on what Financial Samurai has to say. He is amazing like MMM but a different kind. Take a peek here: http://www.financialsamurai.com/which-is-a-better-investment-real-estate-or-stocks/

>> 3. Should I only invest VTSAX or should I diversify  for the long term or is there better options with low cost expense ratios that you would recommend?
Develop your FI story first and then you can look for appropriate answers. For example, factors like if you need income from this fund to support early retirement, OR if your tax bracket is low/high, OR you are not going to touch your money for the next 30 years, etc can change your investment vehicles.

That said, it might be better to add a bond component to your investment to act as a buffer for market variations.

>> 4. Do you guys think 8k in cash is to high for an emergency fund? Do you think I should shovel more into my investments because of the lost in potential opportunity
>> cost.
This depends on how much you need to survive each month in the event of job loss or other emergencies. If your monthly budget is $800, then $8K is 10 months expense....a nice cushion. If your monthly budget is $2000, then 4 months of emergency money may be cutting it too short. But, if you work in a super stable job, then 4 months is more than appropriate.

Hope that helps. Best wishes for your FI journey!

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1421
  • Location: West of the Mountains, East of the Sea
  • hedonismbot
Re: Helping a young investor to FI
« Reply #2 on: May 09, 2016, 01:23:35 AM »
1. Not an expert, but gains don't count until you sell. Dividends need to be reported though.

2. If you don't have a fixed time frame for buying a house then you can put it all in stocks, but recently it seems like stocks and home prices rise and fall together, so it may make it harder to get the best deal when you do buy. Bonds are more inversely correlated, especially treasuries.

3. I always argue on the side of greater diversification. Even if you go 100% stocks it should be something like 50% US, 30% developed international , 20% emerging international. 100% stocks is fine for a starting point, but you might want to add bonds as you approach a fixed year when you will need money.

4. No 8k is fine. You can change it to a 10% target bond allocation if you want it to be useful.

thedayisbrave

  • Pencil Stache
  • ****
  • Posts: 700
  • Location: Raleigh, NC
  • CFO @ My Life
Re: Helping a young investor to FI
« Reply #3 on: May 09, 2016, 06:27:35 AM »
Questions for you season investors:

1. I assume need to open a taxable account with Vanguard such as an brokerage account to invest the 142k. But any gain/losses I made get I have to report this on my tax returns every year going forward correct?

Yes, once you fill your IRA for the year, taxable is the next logical account.  Like others have mentioned, gains/losses are not realized until you actually sell.  You will get taxed on dividends but otherwise, the taxes are somewhat in your control.

2. I do plan on purchasing a home one day when I can actually afford it but for now I believe stocks are a better option to build wealth. What are your thoughts?

Where do you live? How affordable is home ownership is your area? If you think you will be buying anytime within the next 5 years, I wouldn't invest any money that you may be thinking of using as a down payment.  Personally, I am heavy in real estate but I also work in real estate, so I have that expertise.  What I've done to keep expenses low is purchase properties with 3-4 bedrooms, live in one, and then rent the others out.  It has helped me build wealth, as my tenants cover all my house-related expenses, essentially letting me live rent/mortgage free in my own house.

3. Should I only invest VTSAX or should I diversify  for the long term or is there better options with low cost expense ratios that you would recommend?

Definitely diversify.  I am 100% stocks too, but I have something like 56% VTSAX, 10% Asia/Pacific, 10% Europe, 10% Emerging, 10% Small Cap Value (obviously that doesn't add up to 100, but I'm too short on time to look at my spreadsheet for exact #s).  You can keep it even simpler than I did though, and do 70% VTSAX and 30% VTIAX.

4. Do you guys think 8k in cash is to high for an emergency fund? Do you think I should shovel more into my investments because of the lost in potential opportunity cost.

What are your monthly expenses? I used to worry about the opportunity cost of holding cash too, but having cash makes me feel better, so I'm allowing it to accumulate.  Your mileage may vary.

Thank you so much for your input. I look forward to hearing from you!