Author Topic: Case Study - 23 yrs old with a fresh start  (Read 2900 times)

aeroplane

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Case Study - 23 yrs old with a fresh start
« on: October 08, 2015, 11:49:14 PM »
Sup all,

A little background on myself:  23 years old graduating college in May with a job lined up

I want to put myself in the best financial position as young as possible to be able to reach a retirement in my 30s.  Being that I know nothing, I'm looking for some direction.  Maybe some reading material that would be of particular interest to a person in my position or some hard advice.  Any comments are very much appreciated.

Here's the numbers:
Debt= $0 (got through school on grants and scholarships)
Assets= car: worth about $4k (I own it outright); cash: about $3k

My future job is paying me $58k per year with a $14k starting bonus.  My first paycheck will be about $15k, putting me around $18k in total cash.  It's a tough question to answer, but my real issue here is pretty straightforward: what do I do with this? 

I'm interested in real estate, but I don't know if that is the right first investment being that I am going to be very time invested in work (40-55 hours per week).  Besides that, I don't really have a clue.  I'm looking for some direction here and not necessarily a "put you money into this" so any advice you have for me is really appreciated!

MDM

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Re: Case Study - 23 yrs old with a fresh start
« Reply #1 on: October 09, 2015, 12:17:09 AM »
My first paycheck will be about $15k, putting me around $18k in total cash.  It's a tough question to answer, but my real issue here is pretty straightforward: what do I do with this? 
aeroplane, welcome to the forum.

Yes, tough to answer, not least because there are many unknowns about your situation.  E.g., do you already have a contract on a place to live and paid the upfront money needed, or will that come later?

In short, putting the after-tax portion of the $14K signing bonus into your emergency fund (held at one of the places in http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001 or similar) seems a good way to fulfill step 0 in the following.  You could do worse than working your way through those steps and asking questions as needed.  See also www.etf.com/docs/IfYouCan.pdf.  Good luck!

   
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

forumname123

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Re: Case Study - 23 yrs old with a fresh start
« Reply #2 on: October 09, 2015, 12:19:53 AM »
If you're interested in learning to manage your own investments, my advice would be to park all your money in a HISA for at least a few months while you read a few books/blogs on investing.

You're already way ahead of the game, so there is no need to rush into a mistake. Take it slow and ease into the pool.

aeroplane

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Re: Case Study - 23 yrs old with a fresh start
« Reply #3 on: October 09, 2015, 02:02:31 AM »
Thanks guys!

I gave "If you can" a read and I got a lot out of it so thank you for that.

MDM to answer your question, no I haven't contracted a place to live.  I am staying with my mom for now and I haven't even gotten a location for my upcoming job yet.  I am literally starting completely fresh with no debt, some cash, and a car.  That's about it.

My question is this: if I am planning on retiring before the age limit to take money out of a Roth or a 401(k) without a tax penalty, would it make sense to put any more into these types of accounts than my employer is matching?  Even further, if I was to invest the money in a taxable account and want to keep the asset allocation that is recommended in the PDF (33%/33%/33% in foreign stock/us stock/us bonds) then I will get taxed on capital gains from when I inevitably sell the stocks to balance my portfolio.

Sorry for asking so many questions.  I'm brand new to this and it really is pretty interesting.

ShoulderThingThatGoesUp

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Re: Case Study - 23 yrs old with a fresh start
« Reply #4 on: October 09, 2015, 06:03:29 AM »
You don't pay taxes on sales within your 401k. It's possible to withdraw without taxes if you set it up right. Contribute the maximum from day 1 and you'll never miss it.

FLBiker

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Re: Case Study - 23 yrs old with a fresh start
« Reply #5 on: October 09, 2015, 07:32:12 AM »
If you want a read a bunch of stuff on investing, the Bogleheads site is good.  To be honest, though, I personally believe that the only purpose of reading is to convince yourself that you can't beat the market.  And if you already believe that you can save yourself a lot of time.  People have all sorts of opinions about asset allocation, but I'd keep it simple.

Here are two things to give you an overview of simple asset allocations:

https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Lazy_portfolios

In other words, just put your savings (in your 457/401K/403B & IRA) into low cost index funds.  I do 50% US Stock, 35% INT Stock, 5% REIT, 10% Bond.

If you're like me, though, you could also spend a decade or two thinking you know better than others, trying to pick individual stocks, then actively managed mutual funds, then other investment strategies, before realizing that actually just picking 3 or 4 low cost index funds (depending on if you want a REIT) is the way to go.

Bradfurd

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Re: Case Study - 23 yrs old with a fresh start
« Reply #6 on: October 09, 2015, 08:00:41 AM »
Aeroplane - this is all great advice, and I would definitely concur with MDM. I found myself in a similar situation at your age. Getting through college with no debt and starting with your income and bonus is A HUGE FREAKING DEAL. If you remain diligent, it will surely alter the course of your life. The fact that you are on these forums at 23 is a good sign! Definitely max out your retirement. Starting early is the most important input in the compound interest world.

Some other questions:

1) How long do you plan to live at home?
2) How reliable is your car?
3) Is marriage in your near future?
4) What is your employer's company match policy for their retirement program?

aeroplane

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Re: Case Study - 23 yrs old with a fresh start
« Reply #7 on: October 09, 2015, 09:56:31 AM »
Aeroplane - this is all great advice, and I would definitely concur with MDM. I found myself in a similar situation at your age. Getting through college with no debt and starting with your income and bonus is A HUGE FREAKING DEAL. If you remain diligent, it will surely alter the course of your life. The fact that you are on these forums at 23 is a good sign! Definitely max out your retirement. Starting early is the most important input in the compound interest world.

Some other questions:

1) How long do you plan to live at home?
2) How reliable is your car?
3) Is marriage in your near future?
4) What is your employer's company match policy for their retirement program?


Hey Bradfurd.  I appreciate the kind words man.  To answer your questions:

1)  I am not sure how long I plan on living at home.  The company I am going to work for has a bunch of different locations and I am not sure where they are placing me yet.  If I do get placed > 50 miles from home, I will receive an addition $5k for relocation expenses (can't see it costing me this much to move so I'll make some money off of that).  I have always had a plan that I would buy a duplex, rent one unit, and live with a roommate to minimize my out of pocket expense every month.  I am not sure if this is a feasible plan at this time, being that I will be very busy for the next year getting settled at my new job, but it is something that I want to pursue down the line.  If anyone has any experience with this, I'd love to hear about it.

2) The car is very reliable.  70k miles on it, almost all of which were put on by me.  I have maintained it very well in the time that I've had it.

3) Definitely not getting married any time soon

4) Their match policy is 4% of eligible deferred pay at a rate of 50% for a maximum company match of 2% of my entire eligible pay... tbh I don't know what most of that means haha.
The one thing I do know for sure is that I am going to max my 401(k) up to match and probably max it in general.  My only gripe with maxing it is I am going to need to withdraw before 60 years old, but someone else mentioned that there are ways around paying the penalties.  I am going to look into it further.

Bradfurd

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Re: Case Study - 23 yrs old with a fresh start
« Reply #8 on: October 09, 2015, 11:16:03 AM »
http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
I'm not familiar with anyone who has used the method described within the above link, other than the comments on the thread...so investigate that when you have time. I didn't know about this possibility until a few days ago.

Typically, you are allowed, by law, to place up to $18,000 per year into your 401K. Regardless of when you take funds out of that account, you will always pay taxes on whatever you take out. Before I saw the above link, I always understood that you would have to pay an additional 10% "penalty" on top of the tax rate if you took out the funds before age 59.5.

So...if you had $100,000 in a 401K and you wanted to pull it all out at age 30, you would lose 35% of it (25% tax rate + 10% penalty).

Check out this link for a pretty good explanation on Roth IRAs and 401Ks.
http://www.thesimpledollar.com/roth-ira-vs-401k/

I'm assuming you don't have any credit card debt or any debt of any kind?

2ndTimer

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Re: Case Study - 23 yrs old with a fresh start
« Reply #9 on: October 09, 2015, 11:53:48 AM »
Not investing advice but:  Learn to cook.  When people look back on their 20's they are nearly always appalled on what they spent on completely forgettable eating out.