Author Topic: Advice for a young man?  (Read 4229 times)

GeorgeInAL

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Advice for a young man?
« on: August 21, 2013, 09:36:17 AM »
I will try to be as brief as possible in describing my situation, and hopefully you can prescribe some meaningful counsel.

Personal situation:
Iím 22 and in good shape
Regrettably I live with my folks, fortunately at little measurable expense other than my pride.
Work in the IT industry (Security Admin) mainly with active directory, have a bachelorís degree in graphic design


Financial situation:
Income: I make a little more than 40k

Side income: I flip antiques and collectibles. I have averaged $750 profit or 18% return over the last 30 days.  I enjoy this, but I am considering starting another side business; either a handyman service, computer repair, or graphic design service. Whichever is the most profitable, as I enjoy all three. Thinking about $35/hour  2 hour minimum, using word of mouth and church as advertising.


Debt: The only debt I have is 17k in student loans at 4%
Expenses: Pretty limited to just car insurance, groceries, gym fee, gas. I am working to make my own reductions here.

Savings: I have about $6000 saved up in cash or soon to be sold flips.


Retirement: I have about $600 to rollover into a retirement account. My employer does not match percentage, but gives profit sharing once per year. 5 years to be 100% vested in what they give you, but I donít want to live here that long.


Here is where I get confused on how to proceed, as this is my five year plan:
1.   Buy a house to fix up, both because I want to move out on my own and to build equity/income from roommate and housing market up-tick. (Low interest rates!) Iím prequalified for 100k for a house

2.   Though Iíve only worked my current job for 3 months, I am planning on moving to Colorado or the Midwest. The rub, I need to stay long enough for my job experience to carry me to the next rung on the job ladder.


Overall Ė What should I be doing to save money fast, and where should I be putting it?  If I want to retire at 40 why should my money go to a Roth or 401k Ė I know it shields the money from taxes, but whatís the point if you canít withdraw it easily (without cost) before you are of conventional retirement age?




Buy a house, or tough it out?

Invest money or use it towards my side business/flips?

Why should I work to pay off 17k at 4%, when I could use the money to get 10% + either through the vanguard fund that MMM mentions, or use the money towards my flips? Flips are more volatile, but tax free    :grin:

Numbers Man

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Re: Advice for a young man?
« Reply #1 on: August 21, 2013, 10:14:10 AM »
Get an apartment since you are planning on moving out of state in the near future. "Flips" are not tax free. You are just choosing to avoid paying taxes on your income. Technically, if you are active in buying and selling products, you should establish a tax id and file the necessary tax forms. One of my pet peeves is the unreported freelance income and not paying the tax obligation.

matchewed

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Re: Advice for a young man?
« Reply #2 on: August 21, 2013, 10:29:08 AM »
What are your goals?

How long until you've moved up the rung? Maybe your goal should be to prepare for that move.

Buying a house just for the sake of building equity is a pretty terrible reason to buy a house.

Mostly I'm going to focus on my first question. Establish a goal and go for it. If things change then your goal changes. Outside of that I don't really have any advice, all of this is up to you.

Cromacster

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Re: Advice for a young man?
« Reply #3 on: August 21, 2013, 10:49:55 AM »
There are many things at play here.

What are your goals?

This will be the key to answering a few of your questions.

If having zero debt is your main priority, focus on the loan.  It sounds like this is not a huge concern for you at the moment.

As for the house, if you are planning on moving, IMO, wait until you are settled.  If your plan is to up and leave in 5 years I would't buy a house.  Its alot of hassle for the short term.

As for the retirement accounts.  Its mostly about diversity.  These retirement accounts still have great purpose in including them into your early retirement plan.  Here are some of the advantages.  For more reading on retirement accounts see http://www.madfientist.com/retire-even-earlier/ Pretty sure MMM has done an article as well.

401(k) - tax free now and has 40 yrs to grow.  And with some finangling can be withdrawn prior to 59.5 without fees (still with taxes).  If you don't have a match, it would be my advice to still contribute (max it if you can, especially while you are so young) and also contribute the entire profit share (I know some companies who profit share in this way but you have the option of a 401(k) contribution or a cash payout).

Roth - Money grows tax free, but you can withdraw your principle at any time.  Max it out.

Stocks - Yes buying low cost mutual funds is a good move.  Mind you returns are over the long term not...5 years.

Cash - If your plan is to buy a house prioritize some savings to cash.

You are young with minimal expenses and a good paying job.  Stash as much as you can now.


GeorgeInAL

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Re: Advice for a young man?
« Reply #4 on: August 21, 2013, 11:02:36 AM »
Crocmacster:

I intend to save at an alarming rate. 80% or so of my current wages go to my side flips, which have yielded about an 18% return in the past 30 days. But this is volatile and not sustainable.
Working for myself on weekends, evenings and holidays is quite lucrative as all of these proceeds can be saved. But where should I put them?

I am familiar with 401k's, profit sharing, and Roth/traditional IRAs but not intimately so. If the goal is to retire after a minimal working career, why would one invest money that 'can't' be touched until traditional retirement age?



Numbers man:

Obligation is a strong term, especially considering that I currently pay 25% in taxes and 10% in sales tax. Does the little guy down the street mowing lawns need to pay taxes on his earnings? Where is the line?


Matchewed:

My 3 year goal is to move somewhere I can hunt/fish/ski on a regular basis. Colorado most likely, but I have friends in North Dakota and I have lived there previously.

My 5 year goal is to own a home that is modern and minimalist.

My 20 year goal is to be retired and financially capable of occasional travels overseas.


y short term goals are paying off student loans, meeting more people, and physical goals related to exercise.



I'd say at least one year until I'm able to move up position wise, realistically 2-3. My company is in every major international city, and several large areas in the US, unfortunately none of the locations where my career could advance are places I want to/can afford to live.  (Boston, and Alabama where I currently am)




Buying a house is in no way an emotional decision for me, and I am not looking for yes-men to reaffirm my line of thinking. Renting is wasted money in my eyes; with interest rates/housing prices so low it seems a good time to buy. Especially considering if the market up-ticks in the next few years I can sell for a gain, or rent the empty house once I move.




Overall:
What makes the most sense?  Invest, buy a house, pay student loans, focus on side business, all of the above?

Peter

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Re: Advice for a young man?
« Reply #5 on: August 21, 2013, 11:31:46 AM »
...One of my pet peeves is the unreported freelance income and not paying the tax obligation.

One of my pet peeves is paying ~$30,000 in taxes every year and getting access to the same or fewer services than the lower 50% of taxpayers contributing an average of ~$300 per year.

So I'd call it a wash. ;)

Cromacster

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Re: Advice for a young man?
« Reply #6 on: August 21, 2013, 01:55:33 PM »
Crocmacster:


I am familiar with 401k's, profit sharing, and Roth/traditional IRAs but not intimately so. If the goal is to retire after a minimal working career, why would one invest money that 'can't' be touched until traditional retirement age?


First off, retirement lasts and long time, more so when you retire early.  Secondly, you should take every tax advantage that you can.

And essentially all of the money can be touched.  With a Roth, you can always access your principle, which in 20 years should be upwards of 100k assuming the laws don't change.  With a 401(k), when you quit your job, you roll it over to an IRA.  Then, with some planning you convert that to a Roth (paying taxes on the amount) and wait 5 years then its yours.

MMM Details it all very well here.

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

If you want to retire when you are 40, I do not know why you wouldn't use these type of savings accounts.

Stretch

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Re: Advice for a young man?
« Reply #7 on: August 21, 2013, 10:19:40 PM »

Here is where I get confused on how to proceed, as this is my five year plan:
1.   Buy a house to fix up, both because I want to move out on my own and to build equity/income from roommate and housing market up-tick. (Low interest rates!) Iím prequalified for 100k for a house

2.   Though Iíve only worked my current job for 3 months, I am planning on moving to Colorado or the Midwest. The rub, I need to stay long enough for my job experience to carry me to the next rung on the job ladder.


Overall Ė What should I be doing to save money fast, and where should I be putting it?  If I want to retire at 40 why should my money go to a Roth or 401k Ė I know it shields the money from taxes, but whatís the point if you canít withdraw it easily (without cost) before you are of conventional retirement age?




Buy a house, or tough it out?

Invest money or use it towards my side business/flips?

Why should I work to pay off 17k at 4%, when I could use the money to get 10% + either through the vanguard fund that MMM mentions, or use the money towards my flips? Flips are more volatile, but tax free    :grin:

I wouldn't buy a house. Buy a house when you need one (like you have kids and need room to park your minivan and store all of your junk in the garage).  I've moved three times in the last four years, it would have been very difficult if I owned a house in any of my previous locations. You say you want to move to Colorado- how do you plan on being a landlord from afar?

I live we'll below my means (my rent is half of what a mortgage would be) and built up a huge nest egg of stocks and bonds. When I am ready for a house I will buy. The freedom to move when you are young is invaluable.

My sister bought a house, it's great she loves it, but it isn't for me. Find what is best for you.

AlexK

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Re: Advice for a young man?
« Reply #8 on: August 22, 2013, 01:02:28 AM »
Quote
why would one invest money that 'can't' be touched until traditional retirement age?

The problem with having a high income and only working for a few years is the income tax rate is high for your earnings now, even though you are living modestly. For example my income taxes cost me as much as every other expense combined. With a 401k you can defer the taxation of some income to a later date, when your income will be much lower and taxed at a lower rate. If you retire at 40 you will still need to pay for things from age 59.5+ so why not avoid the taxes? Also most 401k plans allow you to borrow the money from yourself (interest paid back to your 401k account) if you need it so there is little opportunity cost to stashing money there. One drawback to a 401k is some providers offer lousy funds to choose from with high expense ratios. My solution to that will be to transfer from Prudential to a Vanguard IRA when I retire.

A Roth IRA is a good idea too because there is no risk to it. If you need the contributions earlier than age 59.5 you can withdraw it penalty free. If not, it grows tax free.

On  the subject of real estate, The best way to acquire it is to buy houses as primary residence and qualify for low down payment and best interest rates. Live in it while you save up next down payment, repeat and rent out the ones you move out of. Start small though because banks get suspicious if you live in a big house and try to finance a smaller one as a primary residence. I ran into this issue when downsizing to reduce my expenses. Wait until you live where you want to be forever though, you will be pretty tied down once you have a few rentals.

Roses

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Re: Advice for a young man?
« Reply #9 on: August 22, 2013, 01:48:29 AM »
Sounds like you're on the right track, George!  It also sounds like you are pretty handy and could do a lot with a fixer.  I tend to agree with you about renting but I know the more seasoned Mustachians have good points as well.  If you really want to buy a house you could consider buying a fixer that would be livable enough to be a temporary residence for you while you work on it.  If you end up moving you can make money on it as a flip.  My husband and I did that somewhat unintentionally with our first two homes.  We bought cosmetic fixers because we didn't want to deal with anything major (and didn't have the know-how) but we also didn't want to pay for someone else's remodel.  So we lived in each place a couple of years, fixing things as time & money allowed.  In both cases we didn't intend to move so soon but once we did we made a lot of money on the 'flip' (after accounting for all expenses and a recession in the first case).  In our area having a rental home doesn't pan out since rents are too low compared to the ridiculous prices so keeping the homes was not an option for us.  This strategy may or may not work in your market so you have to research that and proceed with caution, of course.  Also, the advice of waiting until you are settled to purchase a house may not be great for such a young person.  Things can change rather quickly - jobs, marriage, children - and that can have an impact on where you live.  There is only so much you can plan in life.  So I don't know that I'd wait to be 'settled' if I were you.  That could take a long time.  Of course, if you know for sure you want to leave your town very soon then that's different.

matchewed

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Re: Advice for a young man?
« Reply #10 on: August 22, 2013, 04:17:43 AM »
Matchewed:

My 3 year goal is to move somewhere I can hunt/fish/ski on a regular basis. Colorado most likely, but I have friends in North Dakota and I have lived there previously.

My 5 year goal is to own a home that is modern and minimalist.

My 20 year goal is to be retired and financially capable of occasional travels overseas.

y short term goals are paying off student loans, meeting more people, and physical goals related to exercise.

I'd say at least one year until I'm able to move up position wise, realistically 2-3. My company is in every major international city, and several large areas in the US, unfortunately none of the locations where my career could advance are places I want to/can afford to live.  (Boston, and Alabama where I currently am)

Buying a house is in no way an emotional decision for me, and I am not looking for yes-men to reaffirm my line of thinking. Renting is wasted money in my eyes; with interest rates/housing prices so low it seems a good time to buy. Especially considering if the market up-ticks in the next few years I can sell for a gain, or rent the empty house once I move.

Overall:
What makes the most sense?  Invest, buy a house, pay student loans, focus on side business, all of the above?

The timing for your position move seems to align with your goal of a moving. Figure out which is cheaper renting or buying - http://www.nytimes.com/interactive/business/buy-rent-calculator.html

You state buying a home isn't emotional but yet you state renting is wasted money. You've approached it with an obvious and erroneous bias. Houses are terrible investments when you're just using it as shelter. If you're looking to get into being a landlord it is a different story and uses different criteria. In some places in the country it is a good time to buy, but maybe for you it isn't. You assume a great deal about house prices or how much you can get from rent without running any numbers.

Personally I'd find the cheapest housing I could for the next three years. Save the rest of your money. Pay the minimum on your student loans, find a reasonable mix of pre-tax and post-tax savings which still gets you enough cash to execute moves and savings for a down payment.

But as for what makes sense, I can't tell you that. It's your life.