Author Topic: Aspiring (20something) Badass Seeking Financial Wisdom  (Read 4939 times)

illah

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Aspiring (20something) Badass Seeking Financial Wisdom
« on: July 13, 2012, 03:49:44 PM »
Hey everybody,

I'd like to say hello to you all, as this is my first post on the MMM forum. I've read a lot of personal finance websites out there, and this is the only one that had me cracking up but at the same time feeling like I've learned how to be a bit wiser with my hard earned cash. I'm hoping you acolytes of badassity can provide some advice for a young college graduate just starting out.

I graduated in May and I'm starting a job this month making $48k or $4k monthly, pre-tax. My employer has a matching 401(k) plan of 5%. I have no savings or investments to speak of, and few assets beyond my bicycle and charming personality. No emergency fund yet. I'm paying $1000/mo for my room with utilities and a bit left over for extra expenses, and I'm carpooling with a friend to work and I'm going to compensate with gas money ($100/mo approx). I like to eat, so I'm budgeting myself $400/mo for groceries and dining, and planning on making all of my own meals. Still on my parents' health insurance and phone policies. I expect my expenses could be $1500/mo at a minimum, but will probably be around $1750/mo.

I have $7460 in student loan debt, 2 Stafford loans of $3730, one at 3.4% and one at 4.5%. My parents say not to pay these off and just pay the minimums, but I've read that the interest that accrues on student loans is tax deductible which gives me even less incentive to pay more than the minimum.

I also have a simple credit card with 1% cash back, I'm planning on paying the balance in full each month just to build up some credit.

My goal for now is to live frugally while building up some credit and also having some fun. My hobbies are pretty cheap (reading, running, cycling, hiking), but my long term goals are pretty expensive (get a pilot's license, buy a house, etc.) Early retirement sounds nice but I've dedicated myself to a path of badassity and financial freedom regardless.

So I have a few questions:

-I think I could save/invest half my income, but what else can I do?

-How much should I contribute to my 401(k)? I'm going for the match at the very least, but I was fooling around on Excel and figured I could afford to contribute 15% easily, leaving me with approx. $2250 to max a Roth IRA, build my emergency fund, and cover my expenses. Alternatively, if I contribute around 27%, my taxable income would be in the 15% bracket (around $34k) rather than the 25% bracket. Would I be able to contribute this much (which is a lot) to my 401k and drop a tax bracket? Is this even feasible/advisable?

-I'm assuming that starting out I should be a bit more aggressive with my 401k. How should I pick which fund to invest in?

-What should I do about my student loans? I'd like to build up some savings now, but it would also be nice to be out of my limited debt.

-How should I go about investing in a 401(k) and a Roth IRA? I've heard some people get the match on the 401(k) then max out the Roth then go back to the 401k, but this seems a little bit involved. Wouldn't it be easier to just be contributing a higher percentage from the get-go?

-What about building up an emergency fund?

I'm sure you guys will have lots of great advice for me, and probably some things I hadn't even considered. Thanks!

mustachio

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #1 on: July 13, 2012, 04:43:21 PM »
Since you haven't started your job yet, it'll probably be good to live out your expected budget and see how things go with your new job.  Definitely get the 5% match. Free money.

I paid off my student loans as fast as I could and it's so nice to not have to worry about it.  Make sure you are making additional payments on the principal and not just making extra payments if this is the route you decide to go.

deciduous

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #2 on: July 13, 2012, 07:14:11 PM »
When I graduated, I was very sure of myself and knew that it was Correct to let the student loans languish, because I could beat them in the market and come out ahead.

Now: to hell with that. Kill it with fire!

I really think being debt-free is powerful, even if you don't appear as wealthy as the people around you. Carrying "good" debt like a student loan is a bit like riding a bike with a VR headset on, feeding you a view of the road ahead of where you actually are. Ok, sure, theoretically that would be advantageous. But I prefer to just take the thing off and work with what's in front of me.

And that strained analogy is the best case, where you have investments which return in excess of your loan interest... the worst case is that many years from now you're still going to have those stupid things oppressing you mercilessly.

velocistar237

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #3 on: July 13, 2012, 07:37:24 PM »
My goal for now is to live frugally while building up some credit and also having some fun.

Google for details about building up credit. You want something like a high number of old accounts with low usage and no late payments. Starting several lines of credit now and never closing them will help you get a solid score.

-How much should I contribute to my 401(k)?

As much as you can. It's still worth contributing to a Traditional rather than a Roth even in the 15% bracket, unless you predict your total retirement taxes will be higher (probably not). If you don't max it out this year, definitely make it a priority as you get raises.

-I'm assuming that starting out I should be a bit more aggressive with my 401k. How should I pick which fund to invest in?

I recommend reading through the Boglehead wiki. Read a book like The Intelligent Asset Allocator, pick an allocation, and stick with it. Set up automatic rebalancing. I'm not a big fan of changing allocations based on age.

-What should I do about my student loans? I'd like to build up some savings now, but it would also be nice to be out of my limited debt.

At those interest rates and amounts, I would invest rather than pay it down. If you want to get rid of the debt, do it after you have some solid savings. Your earliest investments will work the hardest.

-What about building up an emergency fund?

Indeed, emergency funds are for people like you who are just starting out. If you want to delay 401k contributions beyond the first 5% until you have an emergency fund, that sounds like a good plan.

elincolnp

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #4 on: July 14, 2012, 07:13:07 AM »
I'm paying $1000/mo for my room with utilities and a bit left over for extra expenses, and I'm carpooling with a friend to work and I'm going to compensate with gas money ($100/mo approx). I like to eat, so I'm budgeting myself $400/mo for groceries and dining, and planning on making all of my own meals. Still on my parents' health insurance and phone policies. I expect my expenses could be $1500/mo at a minimum, but will probably be around $1750/mo.

As another aspiring 20-something badass living in a high-cost area, I wanted to chime in with my thoughts.
I know you're not asking for advice about your expenses, but since this is MMM, I'm gonna' throw it in there anyways. $1000 seems like quite a lot to pay for rent/utilities. Even in SF, LA, NYC and Boston, I've been able to find housing for less than that. Even if you decide to stay in your housing situation for a year or so, keep in mind that your next place could save you an extra $200-$300 a month, money that can go straight into your emergency fund or mutual fund.
Same with food budget - my boyfriend and I combined spend $200-$300 a month on groceries. $400 seems very very generous. Maybe if you just cut down on your coffee habit, or packed a cheap lunch 3 days a week (enchiladas! salad! rice and beans! fried rice!), you could really make a dent in that, while still getting the luxury and deliciousness you require.

Obviously, MMM is all about making choices with your money, and taking charge of your own fate, so you should do whatever feels right to you -- I just wanted to share with you ways that I've made small changes that have HUGE impact on my stash. What I tell myself - every cup of coffee I skip today could be a manicure/t-shirt/haircut/dinner entree by the time I retire early!

Good luck!!

twinge

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #5 on: July 14, 2012, 07:46:14 AM »
Quote
When I graduated, I was very sure of myself and knew that it was Correct to let the student loans languish, because I could beat them in the market and come out ahead.

Now: to hell with that. Kill it with fire!

I really think being debt-free is powerful, even if you don't appear as wealthy as the people around you. Carrying "good" debt like a student loan is a bit like riding a bike with a VR headset on, feeding you a view of the road ahead of where you actually are. Ok, sure, theoretically that would be advantageous. But I prefer to just take the thing off and work with what's in front of me.

I tend to agree with the OP about not paying more than the minimum on fairly low interest student loans.  I don't have any problem keeping student loans as long as what else that money could go to are things like Roth IRAs, 401k contributions.  With your time horizon I would max out these tax-deferred retirement vehicles first.  You can keep conscious of the loans by keeping them on your balance sheet and never thinking of your assets without consciousness of your liabilities.

fumanchu

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #6 on: July 14, 2012, 12:31:57 PM »
Don't allow indolence and wanderlust become vices that make you broke.

deciduous

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #7 on: July 14, 2012, 05:42:38 PM »
$1000 seems like quite a lot to pay for rent/utilities. Even in SF, LA, NYC and Boston, I've been able to find housing for less than that. Even if you decide to stay in your housing situation for a year or so, keep in mind that your next place could save you an extra $200-$300 a month, money that can go straight into your emergency fund or mutual fund.
Same with food budget - my boyfriend and I combined spend $200-$300 a month on groceries. $400 seems very very generous.

I think you're right on both counts, that is very high rent for the stated income. But in lots of the high rent cities you mentioned, it seemed to me that cutting costs on rent put you into some pretty rough neighborhoods in a hurry. Being a badass and embracing hardship is one thing, but living in a place where Shit Goes Down every night is probably not worth $300/month savings for me at least.

Generally if we want safe + cheap in an expensive city, we pay for it in commute hassle and expense. Again, it's rarely obvious where to make the tradeoff. Roommates are sometimes doing a bunch of drugs or partying all night, or just jerks... man, it's nice to have more control over this stuff personally now.

fumanchu

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #8 on: July 16, 2012, 05:44:31 AM »
I;m sure you can find a cheaper place. Also consider how much you save in transportation costs per month. It costs roughly 50 cents per mile to operate a car. Of course there are numerous factors at play, but that's a slightly low estimate. Generally, it costs around $200 to $500 a month to drive. Check out Edmunds True Cost of Ownership calculator to determine how much it roughly costs to operate certain makes and models of automobiles. Lastly, incomes in NYC are generally higher than other cities.

Psychstache

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #9 on: July 16, 2012, 06:34:18 PM »
I have $7460 in student loan debt, 2 Stafford loans of $3730, one at 3.4% and one at 4.5%. My parents say not to pay these off and just pay the minimums, but I've read that the interest that accrues on student loans is tax deductible which gives me even less incentive to pay more than the minimum.

Just so you are aware, the tax savings are not a great incentive to keep the loans. You can only deduct student loan interest paid up to $2500, which if you were in the 25% bracket only gets you $625 off your taxes.

The amounts and the interest rates aren't going to break you, so I think this falls on the personal side of personal finance. If you are of the 'I would rather invest and beat the spread' camp, then pay minimums and invest. If you are a 'being debt free provides me the peace of mind to make better financial decisions', then hunker down for a fee months and send them packing. Either option is justifiable. The only choice that isn't ok is 'pay the minimums and go on a shopping spree with all this extra money'.   :)

Nancy

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #10 on: July 16, 2012, 07:04:57 PM »
Do you have backup transportation to work if your friend calls in sick/bails/moves away? Are you close enough where you could bike? Based on how little you have in loans and how low your interest rates are, I agree that there is no rush to pay them off. I think building an emergency fund is critical when you're just starting out. Otherwise, I would maximize 401K and IRA contributions. Also, I think one of the most important things to be mindful of is lifestyle inflation.

illah

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Re: Aspiring (20something) Badass Seeking Financial Wisdom
« Reply #11 on: July 16, 2012, 10:58:41 PM »
$1000 seems like quite a lot to pay for rent/utilities. Even in SF, LA, NYC and Boston, I've been able to find housing for less than that. Even if you decide to stay in your housing situation for a year or so, keep in mind that your next place could save you an extra $200-$300 a month, money that can go straight into your emergency fund or mutual fund.
Same with food budget - my boyfriend and I combined spend $200-$300 a month on groceries. $400 seems very very generous.

I think you're right on both counts, that is very high rent for the stated income. But in lots of the high rent cities you mentioned, it seemed to me that cutting costs on rent put you into some pretty rough neighborhoods in a hurry. Being a badass and embracing hardship is one thing, but living in a place where Shit Goes Down every night is probably not worth $300/month savings for me at least.

Generally if we want safe + cheap in an expensive city, we pay for it in commute hassle and expense. Again, it's rarely obvious where to make the tradeoff. Roommates are sometimes doing a bunch of drugs or partying all night, or just jerks... man, it's nice to have more control over this stuff personally now.

The place I found is going to end up being around $900/mo, which seems like a lot but I honestly wouldn't want to live anywhere else. It's also the only real walkable neighborhood in town. It's worth spending some more on a better landlord and nicer neighbors, in my opinion.

As for food, I'm working on cutting my expenses, especially dining out which my budget includes. It's hard not to go out to eat with good places nearby but I will have to develop some self control here.

Thanks fumanchu.

ksaleh, thanks for breaking that down for me. I've heard that paying down debt is like realizing a return equal to the interest rate, and considering how the market has been performing recently maybe it's better to go paying down debt as a sure thing? It would feel nice to get rid of those.

Nancy, I hadn't even thought about that. I could take public transportation but it'd be a pain. Biking is out of the question, but hopefully this shouldn't be a problem once I've got my fund to cover stuff like this.

Thanks all.