Author Topic: 27 yrs old, no debt, $60,000 saved/invested, NO CLUE!  (Read 6116 times)

Kyle M

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27 yrs old, no debt, $60,000 saved/invested, NO CLUE!
« on: September 05, 2012, 08:55:28 AM »
Hello Mustachians,

I am a novice here who has no idea what to do with our money. This blog has been very informative, but I am hoping to get a little more advice tailored to our personal situation if you all would be so kind! Here is our situation:

Married. Wife earning gross $52,000/yr. I am currently in between jobs, but will in all likelihood be making around $60,000 gross next year (conservative estimate).

-- Down payment on a house within the next 5 years, (currently renting)
-- Start having kids next year (wife's income will likely drop to $20,000 per year after child)

Current financial situation:
-- no debt
-- very frugal living expenses (after starting to read MMM!)
-- $20,000 in cash recently moved money market fund (Vanguard) because I have no clue what to do with it.
-- $20,000 invested with Wells Fargo in mutual funds (inheritance)
-- $20,000 in Roth IRA (we add $5,000 each year)
-- No 401K, I have been self employed, but will start one with my next job and max it out

I want to maximize the amount we are compounding, but also have funds available to buy a house within the next 5 years. We plan to move within the next 5 years and won't buy a house until we move.

Where should I keep the money I need in the next 5 years? Should I put it in a Vanguard Index fund or is that too volatile? I have a high risk tolerance.

I am guessing we will need about 30-40k for house down payment, so should we consolidate our Wells Fargo and Vanguard?

Any input would be incredibly appreciated!!! This blog is changing my life


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Re: 27 yrs old, no debt, $60,000 saved/invested, NO CLUE!
« Reply #1 on: September 05, 2012, 10:10:55 AM »
What's the expense ratio on the Wells Fargo funds, what do they invest in, and are they index funds or active funds?  If they charge you an exorbitant expense ratio (compared to an equivalent Vanguard fund), or try to beat the market, then you might want to sell them and move over to a Vanguard index fund.  If not, then you probably shouldn't take the tax hit of selling and buying.

At the moment, sadly, a Vanguard money market fund proves little better than a mattress, because interest rates suck everywhere for savers (as opposed to spenders).  Vanguard's money market funds currently pay hundreths of a percent interest.  For lower-risk-than-the-market investments, you can get better than that from a decent bank account; you still can get ~1% from a savings account with no hoops to jump through, or ~2% from a reward checking account with various hoops (that may not prove worth it).

However, you said you have some tolerance for risk, which gives you better investment possibilities.  For the money you're saving for a house, you need access to it in 5 years, which actually makes you somewhat less risk-tolerant than when saving for retirement.  How much flexibility do you have in timing?  Can you afford to move 6 years from now instead of 5, if the market suddenly makes your savings worth less?  If so, then you have a high risk tolerance indeed, and you could probably afford to put the bulk of your savings into something like VFIAX, Vanguard's stock index fund.  On the other hand, if you have less flexibility in that 5-year goal, that increases your risk-aversion level, and you might prefer VBIAX, Vanguard's "balanced" fund, or (if *really* risk-averse) the aforementioned 1-2% bank accounts.

Remember that while your return on investment matters, your savings rate matters much more.  Can you quantify "very frugal living expenses"?  With a total gross income of $112k/year, if you could save 40-60% of your income, you'd have little problem paying *cash* for a house in 5 years, and not having to deal with a monthly payment, which would make it much more tolerable to no longer have your wife's additional income.

On a related note, how strongly attached are you to the idea of having kids next year, as opposed to, say, in 5 years?  One way to think about that that paints a rosier picture: would you rather have kids *now*, even if that would significantly change your financial situation and make you retire significantly later, or would you rather retire early to your paid-off house and enjoy much more time with your kids?  You should give both scenarios serious consideration before making a decision.

To elaborate on that, if you're prepared to lose $32k/year of your wife's income, you're also prepared to save an extra $32k/year starting now.  Hopefully you're saving a lot more than that.  If you can save ~$50k/year for 5 years, you could pay cash for a house in many parts of the country, and remain debt-free.  How awesome would *that* feel, starting a family with *no house note* to worry about?
« Last Edit: September 05, 2012, 10:18:21 AM by J »

Kyle M

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Re: 27 yrs old, no debt, $60,000 saved/invested, NO CLUE!
« Reply #2 on: September 05, 2012, 10:49:20 AM »
Wow, thank you so much for the thoughtful reply!

As for Wells Fargo, I don't know what their expense ratio is. I just learned what an expense ratio even is, so I need to get on that and find out more about what Wells Fargo is doing with our money. The tax issue is something to definitely consider as well.

Considering you advice about where to put our house cash, I like the idea of our money at least having the potential to grow (either VBIAX or VFIAX). Do any Mustachians just rent for their whole lives? After thinking about it, I am considering renting long term and putting our money in something like VFIAX and when the time comes (if we want to) be able to pay cash for our house. We can always rent when we move closer to our parents.

As for our savings rate...we have had a very financially volatile 4 years of marriage. I have played professional golf which is basically like legalized gambling and my wife traveled with me and didn't work. We took a risk, it was fun, but we don't have as much to show for those years. However, we are beginning to be more aggressive in our saving. We are on track this year to spend $29-30k including $1000/mo in rent (thats pretty cheap for where we live). We still hope to decrease our spending next year, and with both of us working, our savings rate should be somewhere between 50-60% net.

You have given us a lot of things to think about! My wife want's kids NOW. Her parents are quite old so we want them to know their grandkids and for our kids to grow up with gparents. However, I think you make a great point that giving up my wife's income can really put us behind the 8 ball in terms of financial independence. Maybe I just need to make more money! Although starting to have kids at 32 or 33 is not that old....

Thanks again for taking the time to respond. I really appreciate it! I hope to learn more and pay it forward on these forums once I have an idea of what I am doing!

Mr. Everyday Dollar

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Re: 27 yrs old, no debt, $60,000 saved/invested, NO CLUE!
« Reply #3 on: September 05, 2012, 11:50:08 AM »
The money in an index fund may or may not grow, it is really dependent on the global economy over the next 5 years. Personally I am not a fan of them but for someone just starting to learn investing it's a decent choice to park money.

So, my suggestion would be to split your house money between index funds like you suggested (VBIAX/VFIAX) and a high interest savings account.

If you're set on purchasing a home in 5 years you want the money to be liquid and generally be risk-averse in your investments. I think by splitting it this way it covers both these points.

If you're unsure and it might be longer your risk appetite can grow and we can talk about some other strategies.

When I was saving for my first home I set up a high interest savings account (ING Direct). On the first of the month I would automatically transfer a set amount of dollars from my savings account - where my paychecks went - to my ING account. Savings rates are much lower now but at the time ING was paying 2%-3%. The high interest savings accounts now are about 1%.

Hope that helps!