Author Topic: 20 y/o overwhelmed with options  (Read 5558 times)

pbeejay

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20 y/o overwhelmed with options
« on: June 06, 2012, 12:49:36 PM »
Hello folks. I recently stumbled upon MMM and have been overjoyed to find a community that shares my financial outlook. I've spent the past week or so going through MMM's posts and love what I've been reading. However, I'm feeling overwhelmed with the sheer number of options available to me. This can be attributed to a lack of knowledge and experience. So I've come here to ask Mustachian's for some direction or advice on how to get on the road to FI.

Some background about me: I am currently living with my parents while I finish my last year of university, I'm single, no children and my only monthly expense is my gym membership ($55/month). I have saved up approximately $9000 and expect to have approximately $12,000 by the of the summer. $7000 of this will be going towards paying for school. The $9000 is currently sitting in a high-interest savings account. I have a job that I intend to keep until I graduate next April. It is minimum wage but my job options are limited in this small town until I finish school and am able to move to a bigger city. I will have $16000 in student debt when I graduate.

I think that covers the basics. So now I turn to you for some advice about what to do with my money and any tips you might have for my future. Thank you all, much respect.

grantmeaname

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Re: 20 y/o overwhelmed with options
« Reply #1 on: June 06, 2012, 12:54:43 PM »
If you have $5,000 more dollars for next year than you need, why don't you borrow $5,000 fewer dollars in student loans?

pbeejay

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Re: 20 y/o overwhelmed with options
« Reply #2 on: June 06, 2012, 12:59:16 PM »
i'm not borrowing anything from student loans next year. $7000 is the cost of of the whole year. The $16,000 was accumulated over the previous 3 years, in which my parents recommended I used loans and being a clueless teenager, I listened. Sorry I didn't make that clear in the original post.

grantmeaname

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Re: 20 y/o overwhelmed with options
« Reply #3 on: June 06, 2012, 01:17:38 PM »
Oh, I understand. That's an impressively low college bill!

You could invest the money you have left over, or you could use it to pay down student loans. If you invest you're taking on some volatility and some risk but you'll probably end up with something like an 8% annual return in the long run, but in a shorter period it could vary much more than that. If you do invest, you'll want to put the whole $5,000 in a Roth IRA, because you'll get some great tax advantages from doing so. The Roth IRA is the vehicle, and then you'll just want to worry about what you're holding. Your options here will depend on the company you go with... we can get more into this if it's the route you want to take.

You could also pay off $5,000 of student loans. Doing so will earn you an annual return equal to the interest rate on your loans, so if you borrowed at 3.4% you'd be getting a 3.4% on your $5k, and if you borrowed at 9% you'd be getting a 9% return on your $5,000. If your rate is higher than about 6%, it's better to pay down loans than invest because you're getting a guaranteed good return. If it's worse than 6%, it depends on your disposition. If you don't mind the hassle and the state of being in debt, it's better to invest and keep around the low-interest loan. If you do mind the hassle or you don't want to be in debt, it's better for you personally to just pay off some of the loans.

It may also be reasonable to keep some of the money around to tie you over between graduation and gainful employment.

AJ

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Re: 20 y/o overwhelmed with options
« Reply #4 on: June 06, 2012, 01:43:34 PM »
At age 20, I think you could make a strong case for the psychological benefits of debt repayment and creating an environment of artificial scarcity. Unless your student loans are in the neighborhood of 2%, I would make it a goal to save up enough to pay them off when they go into repayment (6 months after graduation). That depends on what you have majored in, of course, but if you could get a decent job and live on ramen with roommates in your new city, you could do it. You'd have to save $2k a month for those 6 months, so it might not be possible without a side hustle, but that is what I would try to do.

Your life will probably change a lot in the next 5 years, so creating flexibility (either by increasing savings, decreasing debt, or increasing cash flow) will make the transitions easier.

If your loans are super low (2-3%), I would put the money into a Roth IRA. That way it is still "out of sight, out of mind", but could be tapped if you really need it.

cosmie

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Re: 20 y/o overwhelmed with options
« Reply #5 on: June 06, 2012, 07:35:00 PM »
What are the rates on your outstanding loans, and what are the current going rates for loans?

If the current rates are lower and there's no early payment penalties on your outstanding loans, you might use that $7,000 to pay off an outstanding loan early and take out a new loan at a lower rate.

I'm not sure if student loan rates are raising or lowering, as all my loans are subsidized Stafford loans at ridiculously low rates. So this may or may not apply.

Grigory

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Re: 20 y/o overwhelmed with options
« Reply #6 on: June 08, 2012, 01:23:10 AM »
If you do invest, you'll want to put the whole $5,000 in a Roth IRA, because you'll get some great tax advantages from doing so.
I would advise against it until the author has more money saved up for emergencies. If he pays $7K for his tuition and puts the remaining $5K in Roth IRA, he'll have exactly $0 left. I'm sure you're aware of the 10% tax penalty if you withdraw your IRA money prematurely...

As for my advice, see if you can make safe and fast profit on the $9K you currently have. You said it's in a high-interest account. How high is the interest? 3-4%? See if you can use some of that money to do some arbitrage in high-demand items. For example, back when I was in college, I made a pretty penny by buying and reselling Nintendo Wii's. That was before the 2008 collapse, back when there was a huge demand for them.

Will

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Re: 20 y/o overwhelmed with options
« Reply #7 on: June 08, 2012, 01:51:01 AM »
If you do invest, you'll want to put the whole $5,000 in a Roth IRA, because you'll get some great tax advantages from doing so.
I would advise against it until the author has more money saved up for emergencies. If he pays $7K for his tuition and puts the remaining $5K in Roth IRA, he'll have exactly $0 left. I'm sure you're aware of the 10% tax penalty if you withdraw your IRA money prematurely...


Is that accurate?  It is my understanding that you can withdraw your contributions any time, penalty free.

Grigory

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Re: 20 y/o overwhelmed with options
« Reply #8 on: June 08, 2012, 02:43:49 AM »
Only the original contributions, and only after five years. If you put $5,000 in a Roth IRA right now, in June 2012, you'll have to pay a 10% penalty if you touch the money before June 2017. So once again, that's a pretty bad strategy for somebody who doesn't have a big emergency fund and/or a high-paying job.

makincaid

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Re: 20 y/o overwhelmed with options
« Reply #9 on: June 08, 2012, 05:44:41 AM »
Actually, contributions made directly to a a Roth IRA  can be withdrawn tax-free anytime:
http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.htm

On the other hand, if you roll money from a traditional IRA to a Roth IRA, then you have to wait 5 years to avoid the penalty.

arebelspy

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Re: 20 y/o overwhelmed with options
« Reply #10 on: June 08, 2012, 07:28:40 AM »
If you do invest, you'll want to put the whole $5,000 in a Roth IRA, because you'll get some great tax advantages from doing so.
I would advise against it until the author has more money saved up for emergencies. If he pays $7K for his tuition and puts the remaining $5K in Roth IRA, he'll have exactly $0 left. I'm sure you're aware of the 10% tax penalty if you withdraw your IRA money prematurely...


Is that accurate?  It is my understanding that you can withdraw your contributions any time, penalty free.

Your understanding is correct.  Contributions can be withdrawn any time, penalty free.

That being said, it does take a few days to access, so make sure you have some spongable way to cover it, like a credit card (any of which will give you a month to pay it without any interest due).
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Grigory

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Re: 20 y/o overwhelmed with options
« Reply #11 on: June 08, 2012, 01:22:17 PM »
Actually, contributions made directly to a a Roth IRA  can be withdrawn tax-free anytime:
http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.htm

On the other hand, if you roll money from a traditional IRA to a Roth IRA, then you have to wait 5 years to avoid the penalty.
My bad. I was so certain that was the case. Strange. Well, in that case I take my entire original comment back. :) The link you posted didn't work, by the way - here's a new one.