Author Topic: Case Study: Next steps for a Mustachioed 20-something  (Read 5106 times)

illah

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Case Study: Next steps for a Mustachioed 20-something
« on: February 16, 2015, 07:16:41 PM »
Hello everybody,

First of all: I am inspired and humbled by many of the stories I read here about people turning their fortunes around with Mr. Mustache's fairly simple principles. You guys rock, keep up the good work.

Now, about me:

-Mid 20s making $70k/yr
-$10k cash, $40k in investments split between a roth IRA and a 401k
-One student loan of $3000 left at 3% interest
-I own a car (which is paid off), drive it sparingly, and try to ride my bike to work as much as possible

After saving as much as I possibly could for the past 2 years (my professional career so far), I feel like I'm in a pretty good spot. I'm contributing regularly to my 401k, maxing my roth IRA (automated), and saving $500/mo directly from my paycheck into savings account. Besides my pretty low expenses ($725 for rent, $250 for food, etc.), I save the rest of what I make in my checking account.

My question is: what do I do now?

As I throw more and more money at the stache, my take home pay grows, and things get more comfortable...I still want to keep up an aggressive set of goals that will keep me on track for a badass financial future. Here's what I've been considering:

-Paying off remaining student loan: 3% interest, but a guaranteed return on the $3000 I would drop into it. Worth taking care of and being debt free?

-Saving up for a downpayment: I don't think I could buy a house just yet, but perhaps it's worth expanding upon my cash stash in order to save up to buy myself a sweet place to live? Housing is currently my biggest expense, and building up some equity would definitely be nice moving forward. What do you guys think?

-Investing more: The sky's the limit here. With the stock market pretty lofty (in my opinion), I'm hesitant to drop a lot of my cash into stocks (especially my 401k). However, at a certain point, it probably makes sense to up my investments and earn a return on some of the cash I'm sitting on. What do you guys think is a rational course of action here?


It feels like I'm maybe missing something? Perhaps you guys can give me some advice on reaching financial independence quicker, and maybe some next steps to take. I'm pretty good at staying disciplined, but only if I know what I'm working towards. Any help you guys (and girls!) can provide is greatly appreciated.

-illah
« Last Edit: February 16, 2015, 07:21:26 PM by illah »

marty998

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #1 on: February 16, 2015, 07:44:28 PM »
$3k? Just pay it off and simplify your finances a bit. Is it not a seriously annoying outflow each month for you?

-Saving up for a downpayment: I don't think I could buy a house just yet, but perhaps it's worth expanding upon my cash stash in order to save up to buy myself a sweet place to live? Housing is currently my biggest expense, and building up some equity would definitely be nice moving forward. What do you guys think?

This sounds all wishy washy to me. Strike some hard numbers and goals. Figure out exactly how much of a deposit you need and how big a mortgage you can afford and go searching. Have an investing mindset. Don't buy because you fell in love with the place. Think about what will still be in demand in 15-20 years time.

-Investing more: The sky's the limit here. With the stock market pretty lofty (in my opinion), I'm hesitant to drop a lot of my cash into stocks (especially my 401k). However, at a certain point, it probably makes sense to up my investments and earn a return on some of the cash I'm sitting on. What do you guys think is a rational course of action here?

The market doesn't care about your opinion or how you feel. And besides you have a hell of a lot of time to ride out ups and downs in your 401k. Nothing short of the full scale destruction of Western Civilisation will see the US stockmarket at a lower level in 35 years time than it is now.

Make a choice about what you want in life. FI requires income producing assets. Umming and ahhing over whether to start is the wrong mindset. Pick your poison (stocks or realestate, or both) and start drinking like the rest of us :)

Hey It's Me

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #2 on: February 17, 2015, 04:12:44 AM »
The way I think about my tax-advantaged accounts (401k, Roths, etc.) is that each dollar I put in gives me a return of 15-25% immediately because of the money I'll save on taxes. On top of that are the stock market returns.

Since you're squarely in the 25% bracket, if you were to max out both your tIRA and 401k, you'd pay $5,875 less in just Federal taxes alone, plus whatever your state tax rate is. Who cares what the market is doing if you're getting those kinds of returns.

ShoulderThingThatGoesUp

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #3 on: February 17, 2015, 04:44:03 AM »
The way I think about my tax-advantaged accounts (401k, Roths, etc.) is that each dollar I put in gives me a return of 15-25% immediately because of the money I'll save on taxes. On top of that are the stock market returns.

Since you're squarely in the 25% bracket, if you were to max out both your tIRA and 401k, you'd pay $5,875 less in just Federal taxes alone, plus whatever your state tax rate is. Who cares what the market is doing if you're getting those kinds of returns.

In Pennsylvania these accounts are not state- and local-tax advantaged. My wife puts nearly her entire part-time income into her 401k but has to leave some out in order to pay Pennsylvania. This throws up a lot of red flags in Turbotax when your state wages are 4x your federal wages.

Hey It's Me

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #4 on: February 17, 2015, 04:48:59 AM »
The way I think about my tax-advantaged accounts (401k, Roths, etc.) is that each dollar I put in gives me a return of 15-25% immediately because of the money I'll save on taxes. On top of that are the stock market returns.

Since you're squarely in the 25% bracket, if you were to max out both your tIRA and 401k, you'd pay $5,875 less in just Federal taxes alone, plus whatever your state tax rate is. Who cares what the market is doing if you're getting those kinds of returns.

In Pennsylvania these accounts are not state- and local-tax advantaged. My wife puts nearly her entire part-time income into her 401k but has to leave some out in order to pay Pennsylvania. This throws up a lot of red flags in Turbotax when your state wages are 4x your federal wages.

Ouch! I live in the tax hell that is NYC, so the 401(k) gives me pretty insane returns on the state/local level too.

ShoulderThingThatGoesUp

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #5 on: February 17, 2015, 04:55:16 AM »
The way I think about my tax-advantaged accounts (401k, Roths, etc.) is that each dollar I put in gives me a return of 15-25% immediately because of the money I'll save on taxes. On top of that are the stock market returns.

Since you're squarely in the 25% bracket, if you were to max out both your tIRA and 401k, you'd pay $5,875 less in just Federal taxes alone, plus whatever your state tax rate is. Who cares what the market is doing if you're getting those kinds of returns.

In Pennsylvania these accounts are not state- and local-tax advantaged. My wife puts nearly her entire part-time income into her 401k but has to leave some out in order to pay Pennsylvania. This throws up a lot of red flags in Turbotax when your state wages are 4x your federal wages.

Ouch! I live in the tax hell that is NYC, so the 401(k) gives me pretty insane returns on the state/local level too.

The total of that tax rate is 4.07% (unless you live in a "financially distressed municipality" or Philadelphia) so it's not horrible. Just important for everybody to check for local conditions when considering taxes.

4alpacas

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #6 on: February 17, 2015, 09:36:52 AM »
1. Max out 401k
2. Max out tIRA
3. Index funds in a brokerage account. 


thedayisbrave

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #7 on: February 17, 2015, 09:50:18 AM »
Where are you located and how long do you plan to stay? That will pretty much be the determing factor with regards to purchasing real estate.  In sme markets, it's more feasible to buy.. in others, more feasible to rent.. so it's really impossible to advise you without knowing this.

Also may be helpful to you to write out some near-term goals.  It's difficult to remain disciplined if you don't have something you're working toward.  Whether that's to be FI by 30, or take a mini retirement and travel for 3-6 months, etc. it would be a helpful exercise for you.

The Dutchman

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #8 on: February 17, 2015, 03:08:56 PM »
Well, my friend you and I are in the same boat.  Nearly exactly the same numbers.  I am 28 right now so hopefully you are a little ahead of me.  I stumbled onto MMM much later than I would have liked. 

It is all about priorities.  You need to decide what is high priority for you.  My priorities are to build a house as soon as I can.  I want to do it while I am young and able and be able to enjoy it.  I am willing to put off retirement to do it.  I am socking away 15% of my pay to retirement and 15% to my house savings account.  My goal is 60k saved up and start building. 

Anyway, the point is spend some time soul searching and figure out what you want most next, what your long term goal is, and make sure the numbers will tie out.  If your goal is to buy a house then go after it.  It is not as cut and dry as asking the MMM forum what is the best option.  I posted my plans to have people tear them apart.  They did I didn't cry and I am still on the same course. 

trailrated

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #9 on: February 17, 2015, 03:48:01 PM »
-Investing more: The sky's the limit here. With the stock market pretty lofty (in my opinion), I'm hesitant to drop a lot of my cash into stocks (especially my 401k).

The most important component of compound interest is time, you can never go back in time and put more in. Fill it up, NOW!!!!

McStache

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #10 on: February 17, 2015, 06:08:13 PM »
illah, that is very nearly a description of me as well.  I'm currently going with option three (investing more), especially in tax advantaged accounts where I can.  We have the huge advantage of decades of compound interest ahead, so we may as well take advantage.  The market will always be uncertain in the short term.

frugaldrummer

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #11 on: February 17, 2015, 06:27:40 PM »
If you think you might want to buy a house in the next couple of years, I'd advise:
 A) don't rush to pay off the student loan (the relatively small minimum payment on that will have little effect on your ability to qualify for a house loan, but that extra $3k might make a big difference in your ability to make a 20% down payment and avoid PMI). 

B) put the savings for that down payment in something very safe like a CD.  Boring but if you have a short timeline you don't want to risk stock market fluctuations for your down payment money.

C) Since you're young, only buy a house if you are pretty sure you're staying in that town for several years, can rent out some rooms to room mates to pay it off quicker, and are buying a house that would work for you as a married person with kids (if that's your future goal) OR would work well as a rental if your needs changed in a few years.

ClovisKid

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #12 on: February 17, 2015, 07:36:04 PM »
My question is: what do I do now?

You say that you are contributing to your 401(k).  Are you maxing it out?  If not, you should - even if you don't get a match on it.  With your income, you are in the 25% tax bracket.  You essentially get an immediate 25% return on every dollar you contribute AND THEN it continues to compound tax free.

As I throw more and more money at the stache, my take home pay grows, and things get more comfortable...I still want to keep up an aggressive set of goals that will keep me on track for a badass financial future.

At a minimum, take every pay increase from now on and save that additional amount.  So, if you land a 3% increase, drop the extra amount into savings before you even get used to having it.  You are already living comfortably and probably having a ton of fun with more money than you've ever made in your life.  You don't need to start blowing more and more each time you get a raise.  That money will buy you a ton of freedom and flexibility in the future.


Here's what I've been considering:

-Paying off remaining student loan: 3% interest, but a guaranteed return on the $3000 I would drop into it. Worth taking care of and being debt free?
Yeah, pay it off.

-Saving up for a downpayment: I don't think I could buy a house just yet, but perhaps it's worth expanding upon my cash stash in order to save up to buy myself a sweet place to live? Housing is currently my biggest expense, and building up some equity would definitely be nice moving forward. What do you guys think?
Here's where I will deviate from a good chunk of the crowd.  I'm 46 now.  My biggest financial mistake was buying a house 2 years out of college at age 24.  A house is generally an awful investment for a young, unmarried person starting off in their career.  It is a mistake for several reasons:

  • A house is a total resource suck.  It will drain you of more money than you'll ever imagine.  It will do it slowly and insidiously over time (i.e. more heat, more A/C than an apartment, sewer bill, trash bill) and it will knock you upside the head with windfall expenses (fallen tree, pipe bursts, dishwasher dies, property taxes due).  Even if you are handy at fixing things, there's stuff that's going to happen to it that you can't fix.  Furnaces that stop working, pipes need to be replaced, roofs need repairs, drains clog, etc. 
  • You may get married at some point.  What if she/he has a house?  What if they don't, but they don't like yours or otherwise don't want to live in yours because it's too far from their job?  A house is something that you will want to pick out with your future mate TOGETHER.  Otherwise, it will always be 'your' house.  Also, remember that the transaction costs of real estate are expensive.  Loan fees, sales commissions (6%), etc.  If you buy a house, hold for 2 years, and then meet the girl of your dreams and want to sell the house, you will be fortunate to break even.
  • The tax advantages of home ownership are much less desirable in a low interest rate world.  The standard deduction for individuals is $6,200 for 2014.  With a house purchase of $250K, 20% down, financing $200K for 15 years at 2.875%, you'll pay $5,600 in interest expense year 1, and $5,300 year 2.  You wouldn't even pay enough in interest to itemize.  Sure, add property tax, state income tax deductions and some charity, and you'll go over the standard deduction, but not by too much.  For every dollar over the standard deduction, you'll save 25% of it in tax avoidance.  It will not equal the added expense of owning that home.  I guarantee that.  Bottom line: not worth the 'tax break'.
  • You're early in your career and you don't have kids in school.  It's quite possible that a higher-paying employment opportunity will become available in another city.  You want the flexibility to move anywhere at any time.  Don't get stuck owning a home somewhere and limiting your options at such a young age.  Explore some.  Have fun.  Travel.  Don't tie yourself down.
  • Finally, real estate is a shitty investment compared to the stock market.  (This is where I may get some criticism.)  Take a look at Dr. Robert Shiller's research on this topic.  When he compares stock returns to real estate returns over decades, it's shocking.  Clearly, you have to consider the utility of the house you live in, but don't be convinced by people who continually repeat that real estate is a "good investment".  It can be,  and I've made a good amount of money in real estate, but, overall, real estate is a poor performer compared to stocks.  Check it out.
 

Here's a fun link that's been posted before on the topic:
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

-Investing more: The sky's the limit here. With the stock market pretty lofty (in my opinion), I'm hesitant to drop a lot of my cash into stocks (especially my 401k). However, at a certain point, it probably makes sense to up my investments and earn a return on some of the cash I'm sitting on. What do you guys think is a rational course of action here?
Keep piling money into the market over time.  Diversify your holdings internationally.  Right now, domestic stocks are hot and the rest of the world economy seems crappy.  At some point, that is going to reverse itself (again) and the US will be bemoaning the loss of it's once dominant role in world weath creation as other developing countries outgrow us (again).  Celebrate every time the markets drop as you are young enough and you will be buying stocks on sale.  When I graduated college, the S&P 500 was at 330.  I've been convinced it was overvalued about 500 times since then.  It closed at 2,100 today.  That's more than 5x higher.  With dividends reinvested, it's more than 9x higher!  My first house in Los Angeles cost me $168K in 1994.  It's worth $360K today, a bit more than double.
Have others done better in real estate that in the stock market?  Definitely!  Consistently? nope. 

illah

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #13 on: February 17, 2015, 07:50:41 PM »
Thanks to everybody for the helpful responses! It's given me a good deal of clarity to have you guys opine on my financial plans.

Maxing my 401k seems to make more and more sense. I remember how excited I was when I finally got my Roth IRA to the point where I could contribute a certain amount each month that would max it out over the year. Now the contributions barely even register, and I think about other things. I'm asking myself, why should my 401k be any different? It would be about $500/mo over what I currently contribute, not too bad.

ClovisKid, you touched on some things I didn't even consider when buying a house. Thank you. It would definitely be easier once I find that special someone to split it with. No use tying myself down to a highly illiquid asset. I've considered positions internationally where my housing would be totally free. It would be a shame to pass up something like that because I dove into a house way early on.

What about passive/secondary income? I make a good amount of money, but I'm always looking for ways I might be able to make a few extra bucks on the side.


Hey It's Me

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #14 on: February 18, 2015, 05:57:26 AM »
Side incomes are always helpful; I've actually challenged myself to live 100% off of my side gig income (tutoring) in 2015 and invest the income from my day job.

What skills do you have that others would be willing to pay for? Tutoring is ludicrous, honestly. I have a client that pays $50/hr at the moment and probably would have paid $75 had I asked. You could also check with your local college and see if you can teach a weekend/evening class. In addition to being good money, you'll pick up valuable public speaking skills they're gonna earn you more in your career.

Travis

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Re: Case Study: Next steps for a Mustachioed 20-something
« Reply #15 on: February 18, 2015, 11:44:24 AM »
-Investing more: The sky's the limit here. With the stock market pretty lofty (in my opinion), I'm hesitant to drop a lot of my cash into stocks (especially my 401k).

The most important component of compound interest is time, you can never go back in time and put more in. Fill it up, NOW!!!!

+1 to include the comment about civilization collapsing.  I was ultra risk averse in my 20s with a high income and pretty much lost a decade of compounding.  The market trends ever upward with a significant drop once a decade (with fairly quick recovery).  Waiting gets you nowhere, especially at your age.