Author Topic: Advice for unexpected cash flow  (Read 3999 times)

cosmie

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Advice for unexpected cash flow
« on: May 15, 2012, 04:53:09 PM »
Many of you guys are older, have stable careers that make copious (or at least predictable) amounts of money, and have regular investment vehicles.

I'm none of that. I'm a self-supportive 20-year-old college student with a fiance and a 6-month-old daughter, have worked in 5 different student positions in 4 different departments at my university within the last 2 years, with pay rates ranging from $7.50/hr to $20/hr. During semesters I'm restricted by university policy to only 30 hours per week, during breaks and holidays I can work a full 40 hours. The university shuts down for every federal holiday and, while real employees get holiday pay, student employees do not. This means that my monthly income fluctuates significantly through the year. For the past year my income has stabilized at $10/hr and I've structured my life to fit within that budget. I've recently engineered my way into a position with a payrate of $20/hr, and it's guaranteed for at least the next year, most likely until I finish my degree (at which time I may be hired on as a full time employee (where I could get my Master's for free), I might stay for my Master's and get the ripoff of a stipend they pay graduate assistants, or I may go into industry at about ~$60,000 starting salary - ~$90,000 starting with a Masters).

Normally, any excess income I just leave in my checking account, as it'll equalize out on a month with deficit income. However, with my recent raise of an unexpected $10/hr, I'm not sure where to put or what to do with this money. I don't want to sack it away into an untouchable retirement account, as it may be unexpectedly needed for a myriad of unpredictable variables anytime between now and a few years from now.

Things to note:
I also receive financial aid of approximately $18,000 every year; with roughly $4,000 of which has traditionally been used for living expenses. This financial aid will continue for 2 more years, at least.
My fiance will be returning to school this fall and will receive pretty much the same financial aid package now that she's no longer her parent's dependent (her parents combined income is in excess of $200,000, so even though she was paying for school herself she didn't qualify for any aid before our daughter was born).
I qualify for a Subsidized Federal Stafford loan, which is approximately $4,000 annually. The loan does not begin accruing interest until 6 months after I graduate, and can be paid back early with no penalty. I plan on taking one out next year to have as an emergency fund in case it's needed, and simply not touching it otherwise. That way I have it if needed (there are yearly limits to the loan, and you can't retroactively take one out), and can pay it back immediately otherwise. I'm debating having my fiance do the same (I take care of all of the finances). I see no downside to this, since I know I have the ability to not touch it.
I also will get the Earned Income Credit, which will be additional income every February.


The only caveat to my extra cashflow is insurance. that it will bump me out of receiving Tenncare (Tennessee's Medicaid program). I've been self-supportive since 17, so I would have continued receiving it until I finished college. My daughter should continue receiving it due to me not having access to a group policy, however my fiance and I will more than likely lose it. My university does have a group policy for students only through Aetna, which will have a premium of approx. $1,100 each per year with a yearly deductible of $850 and an as-of-yet unknown maximum out-of-pocket expense. I take a fairly expensive stomach medication called Kapidex (full price ~$300/month); I've tried 5 medications before this one, so going for a cheaper generic has already been tried and tested. I stopped taking it for a while and tried to adjust my diet instead, but that didn't work. My family has a strong history of gastrointestinal problems and my grandfather recently passed away of esophageal cancer, so I have a strong feeling I'll be taking this medication for a while. As wlell, I had a surgery a year and a half ago that would have cost me roughly $20,000 if Tenncare hadn't paid for it. This surgery was to remove scar tissue causing a blockage, and has a 90% rate of needing to be repeated within 5 years of the initial surgery to remove tissue regrowth. This insurance unknown is one of the biggest motivating factors behind me keeping a slush fund with my subsidized Stafford loans.


So, with all that said, what would you do with the extra cashflow? I'd be willing to invest it into endeavors that would result in side income, or put it into a savings account and just ignore it, or pretty much anything else. I already have a slush fund covered from other sources, so the investment doesn't have to be particularly liquid, but it also can't be fully permanent (such as a retirement account).

Devils Advocate

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Re: Advice for unexpected cash flow
« Reply #1 on: May 15, 2012, 05:42:45 PM »
Put it in a Roth IRA and invest it in an index fund (vanguard!)

Apparently you can take the contributions out penalty free, but the earnings would be subject to income tax and a 10% fine if distributed.

Max is 5000/yr/individual.

I would do this first.

DA

http://www.irs.gov/publications/p590/index.html

arebelspy

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Re: Advice for unexpected cash flow
« Reply #2 on: May 15, 2012, 08:10:23 PM »
Agree with DA.  Max out a Roth. 

After that, just save in a money market account for a dual purpose of emergency fund and wedding savings.

Starting savings at 20, if you can max that Roth for the next few years, you'll be WAY ahead of the game.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

cosmie

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Re: Advice for unexpected cash flow
« Reply #3 on: May 15, 2012, 08:56:48 PM »
Put it in a Roth IRA and invest it in an index fund (vanguard!)
Sadly, Vanguard has a $3,000 minimum, which would severely lower my current slush fund. However, I should have that much extra soon enough; my raise goes into effect this week and I also go from 30 to 40 hours per week for summer, so my income will increase by ~$2,000/month.

Apparently you can take the contributions out penalty free, but the earnings would be subject to income tax and a 10% fine if distributed.
I hadn't realized that! I'd stayed away from IRAs due to the 10% penalty, but I hadn't realized that the Roth wasn't subject to it.

After that, just save in a money market account for a dual purpose of emergency fund and wedding savings.
I actually don't need a wedding savings. Neither one of us cares for a large wedding, so at her families annual trip to a beach in Carolina (her extended family from Maryland and her parents from Nashville all chip in to rent a beach house for a few days every August), we plan on having a small ceremony.
However, I do plan on starting saving towards a home down payment.


Do either of you know any good resources to learn more about investment options related to a Roth?

arebelspy

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Re: Advice for unexpected cash flow
« Reply #4 on: May 15, 2012, 10:14:15 PM »
A Roth is an investment vehicle.  Inside of it you can invest in basically anything. 

At this point in your life, I'd probably KISS.  Open the Vanguard acct. once you save up 3k, buy the total stock market index fund and forget about it (aside from maxing it out every year).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

cosmie

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Re: Advice for unexpected cash flow
« Reply #5 on: May 15, 2012, 10:32:58 PM »
Yes, I understand the Roth IRA is simply an investment vehicle, not the investment itself. It's just a particular account somewhere with specific retirement-friendly tax implications that's then utilized to invest in something. I haven't done much investment research outside of a few of my business classes, as it's never been pertinent to me previous, however I have learned that much.

I meant resources that explained what can and can't be done with it, the advantages, disadvantages, how it differs from a traditional IRA, etc.

Devils Advocate

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Re: Advice for unexpected cash flow
« Reply #6 on: May 16, 2012, 06:08:33 AM »
http://www.bogleheads.org/wiki/Category:IRAs


This is a boglehead wiki.  A huge amount of great info on all kinds of investing advice.  The forum is awesome too!

DA