20-something wants to get on the right track!

[cashstasherat23]

Hi there!

New reader here, started reading the blog this morning and am completely sucked in! I am 23 years old and trying to build a strong financial base to avoid some of the problems my parents have run into-high credit card debt, missed payments, sunk costs in a very expensive house, etc. I have already been trying to implement some saving of my own as I saw I was going down a path I did not want, but am inspired to become a full-grown Mustachian!


Income:
$45,000/year
$2,442/month after taxes

Current expenses:
Rent: $800/month
Utilities: $70/month
Auto Insurance: $55/month (no car payments, bought a used car for $1,500 last year and it's still going strong with just a few repairs)
Gas: $50/month (I live near NYC so commute most of the time, using my car only about once or twice a month to travel to my parents' or boyfriend's houses)
Bus Pass: $98/month
Groceries: $150-200/month
Restaurants: ~$120/month (I know-face punch! this is one of the areas I mentioned above as trying to implement saving-working on cutting back on this/getting it down to $0 or at least only one nice dinner once a month!)
Gym Membership: $66/month (fitness is something I quite enjoy, but am looking to cancel the membership and just run for free, or go to a $20/month gym membership for the cold NYC winter)
Student Loan: $327/month

TOTAL: $1,736/month

Debts:
$1,000 on one credit card
$25,000 in student loan debt, making payments of $327/month

Assets:
401K-contributing 9% now ($300/month), employer match 3% of salary no matter what my contribution is
Stock Market-$4,200 invested in various stocks
$6,500 in savings account

Goals: I quite enjoy traveling and already travel on a budget when I can, so would love to be able to retire early or move to part time work and have more flexible time to explore the world as early as I can!

Specific Question(s):  I have been traveling a lot in the last year, as well as bought myself a few big ticket items last winter (expensive skis-face punch for that!) and have accrued a couple thousand on my credit card, which I have paid down from carrying a $2,000 on one card to $1,000 in the last few months. The number is not so intimidating, but I actually was probably spending and paying back the same $500 for close to a year until the promo period ended and the interest rate kicked in, and  I said that this had to stop. I completely stopped using the card for the last two months and have paid down about $1000, making payments of $500 a month. Before that interest rate kicked in and the balance was just sitting there, I also managed to put away about $6,500 in my savings account. My question is, it is better to take $1,000 from my savings and pay off that debt instead of racking up another $50 in interest between now and February when I will pay it off fully doing my current plan of $500 a month?

Does anyone else have any other tips for how this fledgling mustachian can get started? Am I on the right track?

[Gone Fishing]

Pay the card off.  You will not earn $50 in interest on your savings in that time period.  Never carry a balance again, EVER.

What is the rate on your student loan?

[cashstasherat23]

Thanks-that makes sense! After that, would it then make sense to just keep the $5,000 in savings as a cash cushion and pay higher payments on my student loans each month, or continue on with the payments of $327 a month and reinvest that extra money somewhere else or save it?

I have six student loans varying from $1,900-$5,800, 4 with a rate of 6.5% and 2 with a rate of 3.15%. I am already working on paying down the smallest of the 6.5% ones, and plan on working my way through those-as I pay off one, I will begin on another until all of the 6.5's are gone, and then the 3.15's. Does that make sense to do?

[Nudelkopf]

... travel to my parents or boyfriends houses

Your lack of apostrophe is confusing me.

[lpep]

Thanks-that makes sense! After that, would it then make sense to just keep the $5,000 in savings as a cash cushion and pay higher payments on my student loans each month, or continue on with the payments of $327 a month and reinvest that extra money somewhere else or save it?

I have six student loans varying from $1,900-$5,800, 4 with a rate of 6.5% and 2 with a rate of 3.15%. I am already working on paying down the smallest of the 6.5% ones, and plan on working my way through those-as I pay off one, I will begin on another until all of the 6.5's are gone, and then the 3.15's. Does that make sense to do?

Your first question is what the other guy wanted to help you with by knowing your loan rates! :) Since you have a high rate on those loans at 6.5%, you should switch to paying down your student loans as soon as you pay off that credit card - throw all your extra money at that high rate. And the order you mention makes perfect sense, but since a 3.15% rate is pretty low, once your 6.5%-ers are paid off, just pay the minimum on those two and get your cash making you a better return in the stock market (if you're comfortable with this - if you'd rather be out of debt sooner, that's really up to you).

As for the $5k, an emergency fund is always a good idea. You can get money you put in the stock market back to pay for emergencies, but you can't get it back if you're paying off debt. It's whatever you're comfortable with, and I think a lot of people would say you actually could have a bigger emergency fund.

[BBub]

Hi Kwaz - first off, congrats on getting an early start!  And yes, you are on the right track.  Here's my take:

1. pay off the CC immediately. no doubt.
2. keep $5k cash in E-fund.
3. Focus on SL debts with highest interest first.
4. Focus on advancing your career / increasing income

I'm not sure what field you are in or whether there is a possibility to increase your employment income over the next several years.  However, I firmly believe your time is best spent focusing on the income aspect while you are very young.  I was in your shoes 6 yrs ago - almost exactly (except that I'm a guy, so the shoes were probably a slightly different style).  I did not find MMM until about age 27, so you have a leg up on me there.  However, I spent the first 5 years of my career trying to advance as rapidly as possible.  This has paid off big time.  If you aren't into following the traditional career advancement track, you could consider interesting side hustles or passive income ideas.  Anyway, that's where I'd recommend you focus the majority of your efforts.  Your $25k SL's, in the big mustachian scheme of things, are just a very small speed bump on your path to FI.  Think bigger picture & play the long game.

Good luck!

[geek101]

To add to the good advice so far:

Ditch your taxable investment account and open a Roth IRA. The general rule is to max out your tax-advantage options before contributing to a taxable account.

Especially since you are young, a Roth IRA is a very powerful tool, run a roth vs traditional calculator and you'll see how 40 years of tax free growth affects the ending balance.

[HairyUpperLip]

... travel to my parents or boyfriends houses

Your lack of apostrophe is confusing me.

lol - it's a modern world, maybe she has a couple boyfriends. :-P

[cashstasherat23]

... travel to my parents or boyfriends houses

Your lack of apostrophe is confusing me.

lol - it's a modern world, maybe she has a couple boyfriends. :-P

Whoops-didn't catch that! Only one boyfriend-think of all the gas money that would be spent on driving to multiple boyfriends' houses! :)

[cashstasherat23]

Thanks-that makes sense! After that, would it then make sense to just keep the $5,000 in savings as a cash cushion and pay higher payments on my student loans each month, or continue on with the payments of $327 a month and reinvest that extra money somewhere else or save it?

I have six student loans varying from $1,900-$5,800, 4 with a rate of 6.5% and 2 with a rate of 3.15%. I am already working on paying down the smallest of the 6.5% ones, and plan on working my way through those-as I pay off one, I will begin on another until all of the 6.5's are gone, and then the 3.15's. Does that make sense to do?

Your first question is what the other guy wanted to help you with by knowing your loan rates! :) Since you have a high rate on those loans at 6.5%, you should switch to paying down your student loans as soon as you pay off that credit card - throw all your extra money at that high rate. And the order you mention makes perfect sense, but since a 3.15% rate is pretty low, once your 6.5%-ers are paid off, just pay the minimum on those two and get your cash making you a better return in the stock market (if you're comfortable with this - if you'd rather be out of debt sooner, that's really up to you).

As for the $5k, an emergency fund is always a good idea. You can get money you put in the stock market back to pay for emergencies, but you can't get it back if you're paying off debt. It's whatever you're comfortable with, and I think a lot of people would say you actually could have a bigger emergency fund.

Thanks for the advice. The 3.5% loans are only about $5,000 each, so should be able to knock those out pretty quickly once the 6.5% loans are done! Since it's not that much, I am definitely open to putting money in the stock market, just wasn't sure if that was the best place to put it to maximize returns! Will certainly look into that further.

[cashstasherat23]

Hi Kwaz - first off, congrats on getting an early start!  And yes, you are on the right track.  Here's my take:

1. pay off the CC immediately. no doubt.
2. keep $5k cash in E-fund.
3. Focus on SL debts with highest interest first.
4. Focus on advancing your career / increasing income

I'm not sure what field you are in or whether there is a possibility to increase your employment income over the next several years.  However, I firmly believe your time is best spent focusing on the income aspect while you are very young.  I was in your shoes 6 yrs ago - almost exactly (except that I'm a guy, so the shoes were probably a slightly different style).  I did not find MMM until about age 27, so you have a leg up on me there.  However, I spent the first 5 years of my career trying to advance as rapidly as possible.  This has paid off big time.  If you aren't into following the traditional career advancement track, you could consider interesting side hustles or passive income ideas.  Anyway, that's where I'd recommend you focus the majority of your efforts.  Your $25k SL's, in the big mustachian scheme of things, are just a very small speed bump on your path to FI.  Think bigger picture & play the long game.

Good luck!

Thanks for the advice! I am employed as an event coordinator and working on career advancement-I just graduated last year and began working within two days of graduation, and within the 9 months moved up to another job at a different company, paying $10,000 more than the first. I am hoping that my current position has plenty of potential for growth, but will not know if I will be getting a raise until our January reviews. Even if not, I am gaining a lot of great experience so should be able to find another higher paying position elsewhere if they are not able to advance me.

I am looking in to professional development through extra courses and certifications. My parents are advising me to go back to school for an MBA, but not sure if I want to take on more debt if it is not necessary to advance at this time. To me, an MBA is something that would be more worthwhile in the future, as I am teetering on the edge of senior management, not starting at the bottom :) Any thoughts?

As for side hustles, I am always looking for ways I can make money. I currently write for Textbroker and am starting to look in to selling or flipping items on Craigslist or Ebay-will see how that goes! Every dollar counts, right?

[cashstasherat23]

To add to the good advice so far:

Ditch your taxable investment account and open a Roth IRA. The general rule is to max out your tax-advantage options before contributing to a taxable account.

Especially since you are young, a Roth IRA is a very powerful tool, run a roth vs traditional calculator and you'll see how 40 years of tax free growth affects the ending balance.

To clarify, are you saying that I should completely stop payments to my 401k and just take the 3% contribution that my employer puts in automatically each year (regardless of whether I put any money in) and just put any money that I would have put into the 401k into a Roth instead? This is all very  new to me, so will definitely look into the calculator, but any further advice is appreciated!

[BBub]

I am looking in to professional development through extra courses and certifications. My parents are advising me to go back to school for an MBA, but not sure if I want to take on more debt if it is not necessary to advance at this time. To me, an MBA is something that would be more worthwhile in the future, as I am teetering on the edge of senior management, not starting at the bottom :) Any thoughts?

Here are my thoughts - Hell no, don't get an MBA right now.  So many of my friends who did that (not to mention ppl on the forums) are now straddled with even more, even higher interest SL debt with no improvement in income or job prospects.  Think about it from the employer's perspective... what's the difference between someone with little experience and an MBA v. someone w/ little experience and a bachelor's degree?  not a damn cent.. ok, maybe a little extra on the starting salary if the applicant is a good negotiator (hint: you don't need an expensive degree to be a good negotiator).  After that, it's up to you to add value.

Now don't get me wrong - I'm all about lifetime learning and the pursuit of knowledge.  However, timing is critical.  Once you are in senior management, making big strategic and complicated decisions, if you need an MBA then odds are the organization you are working for will happily foot the bill.  If that doesn't happen & you still want to get an advanced degree - why not build the goal into your FI plans?  At that point, you could have a stash spewing out your tuition money, living expenses, leisure money and so on.  In my opinion, that's a far better option than forgoing current income & advancement while accruing even more high interest debt.

[cashstasherat23]

I am looking in to professional development through extra courses and certifications. My parents are advising me to go back to school for an MBA, but not sure if I want to take on more debt if it is not necessary to advance at this time. To me, an MBA is something that would be more worthwhile in the future, as I am teetering on the edge of senior management, not starting at the bottom :) Any thoughts?

Here are my thoughts - Hell no, don't get an MBA right now.  So many of my friends who did that (not to mention ppl on the forums) are now straddled with even more, even higher interest SL debt with no improvement in income or job prospects.  Think about it from the employer's perspective... what's the difference between someone with little experience and an MBA v. someone w/ little experience and a bachelor's degree?  not a damn cent.. ok, maybe a little extra on the starting salary if the applicant is a good negotiator (hint: you don't need an expensive degree to be a good negotiator).  After that, it's up to you to add value.

Now don't get me wrong - I'm all about lifetime learning and the pursuit of knowledge.  However, timing is critical.  Once you are in senior management, making big strategic and complicated decisions, if you need an MBA then odds are the organization you are working for will happily foot the bill.  If that doesn't happen & you still want to get an advanced degree - why not build the goal into your FI plans?  At that point, you could have a stash spewing out your tuition money, living expenses, leisure money and so on.  In my opinion, that's a far better option than forgoing current income & advancement while accruing even more high interest debt.

That's my thinking as well-thanks for your input!

[geek101]

To clarify, are you saying that I should completely stop payments to my 401k and just take the 3% contribution that my employer puts in automatically each year (regardless of whether I put any money in) and just put any money that I would have put into the 401k into a Roth instead? This is all very  new to me, so will definitely look into the calculator, but any further advice is appreciated!

I might have misunderstood your post.

Stock Market-$4,200 invested in various stocks

Is this inside of your 401k, or in a separate account? I am assuming it is in a separate account. If it's inside your 401k, you should still research the advantages and disadvantages of a traditional IRA/401k vs. Roth IRA/Roth 401k. Spoiler alert: traditional probably makes the most sense for you right now.

It's when the money gets taxed. Traditional is when you take it out (contributions are pre-tax). Roth is when you put it in (contributions are post-tax).

If those stocks are inside of your 401k, no need to change anything. If they are in a brokerage account, move it to an IRA.

One additional note: look at your cash needs and determine how much cash you really need on hand. Saving is great but it can be easy to leave most of your money in savings for various goals, but don't leave the majority of your assets "on the sidelines" in cash. Depending on your situation 1-2k may be all you need in cash for emergencies. Even medium term goals (3-5 years) can be invested in a conservative allocation (Roth IRA is a great place to store this money and still earn some return). Time is your biggest asset, the earlier and the more you invest, it just snowballs in the future.

[cashstasherat23]

To clarify, are you saying that I should completely stop payments to my 401k and just take the 3% contribution that my employer puts in automatically each year (regardless of whether I put any money in) and just put any money that I would have put into the 401k into a Roth instead? This is all very  new to me, so will definitely look into the calculator, but any further advice is appreciated!

I might have misunderstood your post.

Stock Market-$4,200 invested in various stocks

Is this inside of your 401k, or in a separate account? I am assuming it is in a separate account. If it's inside your 401k, you should still research the advantages and disadvantages of a traditional IRA/401k vs. Roth IRA/Roth 401k. Spoiler alert: traditional probably makes the most sense for you right now.

It's when the money gets taxed. Traditional is when you take it out (contributions are pre-tax). Roth is when you put it in (contributions are post-tax).

If those stocks are inside of your 401k, no need to change anything. If they are in a brokerage account, move it to an IRA.

One additional note: look at your cash needs and determine how much cash you really need on hand. Saving is great but it can be easy to leave most of your money in savings for various goals, but don't leave the majority of your assets "on the sidelines" in cash. Depending on your situation 1-2k may be all you need in cash for emergencies. Even medium term goals (3-5 years) can be invested in a conservative allocation (Roth IRA is a great place to store this money and still earn some return). Time is your biggest asset, the earlier and the more you invest, it just snowballs in the future.

The $4,200 in stocks are in a TDAmeritrade account now. I only have about $1,700 in my 401k as I just opened it a month or two ago. Since my employer puts in 3% of my salary each year no matter what, it seems like it is advisable to stop contributing to the 401k and put all the money that I would be contributing into a Roth instead. Is that correct?

[BBub]

I've personally grappled with the same issue for years & have written about it in my journal (I'm a bit paranoid about future tax increases).  The generally accepted line of thinking among mustachians is to contribute to a traditional, then deal with converting to roth & paying taxes later in RE when you are in a lower bracket and have more control over your taxable situation.  This blog post from the mad fientist explains it best:

http://www.madfientist.com/traditional-ira-vs-roth-ira/

[geek101]

The $4,200 in stocks are in a TDAmeritrade account now. I only have about $1,700 in my 401k as I just opened it a month or two ago. Since my employer puts in 3% of my salary each year no matter what, it seems like it is advisable to stop contributing to the 401k and put all the money that I would be contributing into a Roth instead. Is that correct?

I wouldn't touch your 401k contribution. 9% is a reasonable number to be contributing there. What I'm talking about is moving your TDAmeritrade account over to a tax advantaged account type, like an IRA or a Roth IRA. That decision is based on tax efficiency and maximizing the tax benefits. Since you seem to be in the 25% bracket, traditional (pre-tax) contributions make sense, as you should expect to retire in the 15% bracket. A Roth probably has no advantage to you currently. In that case, a traditional IRA and your 401k receive the same tax treatment, so the only good reason to stop your 401k contributions and only contribute to the IRA would be if your 401k only has bad funds with high fees, an IRA will usually offer far better funds. Because you can only contribute $5,500 to an IRA vs. $17,500 in 401k, you should keep your 401k contribution at the same level.

As Bbub said, you can learn about the traditional to Roth pipeline, and get the Roth benefits later if you desire. Go with a traditional IRA for now.

The point is to get rid of your 'regular' investing account and max out your tax advantaged opportunities first (401k and IRA options). The tax savings are significant over time.

If you find you can easily max out an IRA ($5,500 limit in 2014 and 2015), then up your 401k contributions. The 2015 limit is $18k. Only once you reach the contribution limits on both of those accounts should you be investing in a regular taxable account.

Also, after you pay off your credit card, look at how much cash you really need on hand. Depending on your living situation and your short and medium term goals (down payment fund? Wedding fund? car fund?), you might not need to have much cash around at all, and would be better served investing that cash in a tax advantaged account.

How much is in your emergency fund is a completely personal choice. Most of the advice around here is to have 3-6 months of living expenses in your emergency fund. Depending on your living situation, insurance, and cash flow, you may need far less than that. I only keep 2k in my emergency fund for these reasons.

The point is to not have too much of your net worth "on the sidelines" in cash. Saving is great, investing is better (time is your greatest asset.) Examine your short and medium term goals, and what you feel comfortable with in your emergency fund, and invest any excess cash in the IRA you will be opening.

[BBub]

+1.  well said

[cashstasherat23]

The $4,200 in stocks are in a TDAmeritrade account now. I only have about $1,700 in my 401k as I just opened it a month or two ago. Since my employer puts in 3% of my salary each year no matter what, it seems like it is advisable to stop contributing to the 401k and put all the money that I would be contributing into a Roth instead. Is that correct?

I wouldn't touch your 401k contribution. 9% is a reasonable number to be contributing there. What I'm talking about is moving your TDAmeritrade account over to a tax advantaged account type, like an IRA or a Roth IRA. That decision is based on tax efficiency and maximizing the tax benefits. Since you seem to be in the 25% bracket, traditional (pre-tax) contributions make sense, as you should expect to retire in the 15% bracket. A Roth probably has no advantage to you currently. In that case, a traditional IRA and your 401k receive the same tax treatment, so the only good reason to stop your 401k contributions and only contribute to the IRA would be if your 401k only has bad funds with high fees, an IRA will usually offer far better funds. Because you can only contribute $5,500 to an IRA vs. $17,500 in 401k, you should keep your 401k contribution at the same level.

As Bbub said, you can learn about the traditional to Roth pipeline, and get the Roth benefits later if you desire. Go with a traditional IRA for now.

The point is to get rid of your 'regular' investing account and max out your tax advantaged opportunities first (401k and IRA options). The tax savings are significant over time.

If you find you can easily max out an IRA ($5,500 limit in 2014 and 2015), then up your 401k contributions. The 2015 limit is $18k. Only once you reach the contribution limits on both of those accounts should you be investing in a regular taxable account.

Also, after you pay off your credit card, look at how much cash you really need on hand. Depending on your living situation and your short and medium term goals (down payment fund? Wedding fund? car fund?), you might not need to have much cash around at all, and would be better served investing that cash in a tax advantaged account.

How much is in your emergency fund is a completely personal choice. Most of the advice around here is to have 3-6 months of living expenses in your emergency fund. Depending on your living situation, insurance, and cash flow, you may need far less than that. I only keep 2k in my emergency fund for these reasons.

The point is to not have too much of your net worth "on the sidelines" in cash. Saving is great, investing is better (time is your greatest asset.) Examine your short and medium term goals, and what you feel comfortable with in your emergency fund, and invest any excess cash in the IRA you will be opening.

Thanks a lot. This is very helpful!

[geek101]

Thanks a lot. This is very helpful!

I would also add that cashing out your stock investments and using that money to pay down one of your higher interest student loans is worth considering. You will probably owe some taxes on your gains with those stocks. Regardless you should be looking at moving that money elsewhere. 6.5% is a good investment return if you chose to tackle the student loans. Because it's guaranteed I would be tempted to pay those off first. We are still in a recovery, and the potential for stocks to out perform that is there, so you could do better in the market. It's a toss up. It's up to you.