Author Topic: Case Study - How am I doing at 24?  (Read 6629 times)

j250432

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Case Study - How am I doing at 24?
« on: December 21, 2014, 12:36:49 PM »
Hi Everyone,

Brand new to forum, as I have been studying and reading up on everything possible the last month.

I am 24 years old, and trying to manage my money and build a better financial future. Overall, I am just looking for guidance, as I am a newbie and just getting my feet wet.


Income: $47K a year

Current expenses: $1200/month worth of living expenses (Boston isnt the cheapest)
                                  $300/month car payment (12K left on the car)
                                  $300/month student loans (have $15K left to go)
                                  $200/month toward the 401K
                                   
     

Assets:  $5K in the 401K
              $5200 in mutual funds (MTSMX)
              $5300 in banks monkey market acct
                 

Liabilities:  $15K in student loans (6.8% interest)
                  $12K in a car loan (1.9% interest)


My question(s) are: should I focus on paying off the students loans ASAP? I know some people consider it “good debt,” but it is still debt.  Should I take the 5K out of my personal banks monkey market account and just devote it toward the student loans?  I know it is best to have 6 months of emergency expenses saved up, however.

Should I invest in another mutual fund, or should I just continue to contribute toward the current own one I own? I know that once you hit 10K in this particular index fund the expense ratio drops, so that is something to consider.

Am I doing anything wrong that anyone else can point out for me?


Thanks for the help!

kpd905

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Re: Case Study - How am I doing at 24?
« Reply #1 on: December 21, 2014, 12:42:57 PM »
Student loans at 6.8% are definitely not good debt.  Pay them off as quickly as you can.

Does your employer offer a match on the 401k?  And if so, are you getting the full match with your $200/month?

I would max out both your 401k and an IRA before buying mutual funds in a taxable account.  And that mutual fund you are invested in has an expense ratio of 0.96%.  You shouldn't be paying more than 0.2% or so, with many index funds being around 0.05%.

« Last Edit: December 21, 2014, 12:52:53 PM by kpd905 »

TerriM

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Re: Case Study - How am I doing at 24?
« Reply #2 on: December 21, 2014, 12:51:56 PM »
I would get a 6 month reserve first (seems like you're pretty close), and then pay the debt down aggressively while making sure to get full employer contribution on the 401K.

The rent doesn't seem unreasonable for Boston, but are you renting a studio far out, or have roommates in Boston/Cambridge?  If the latter, can you get rid of the car, and simply T/walk/bus to work?  If you only need a car on occasion, and you're in the denser part of Boston/Cambridge, you can do zip car.

If you're willing to share, would be curious city you're living in, and city you're working in.

socaso

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Re: Case Study - How am I doing at 24?
« Reply #3 on: December 21, 2014, 12:57:15 PM »
You don't say if your annual $47k is pre or post tax but if it is post then my calculation is that you have approximately $1900 per month that isn't spoken for. That's a good bit of money you could be throwing at that student loan. You could be out from under that debt in less than a year. I don't think you ought to cash out any of your savings to pay it. You don't have that much in savings as it is and if you hit any kind of emergency expense you will need what you have.

j250432

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Re: Case Study - How am I doing at 24?
« Reply #4 on: December 21, 2014, 01:15:28 PM »
Thanks for the quick responses everyone.

47K is pre-tax unfortunately.

My company offers a 4% 401K match, which I am doing (actually saving 7% currently, set to increase a percentage each year)

As of right now, I am in a studio. I know I should do the roommate thing as it is a cheaper route, but I cannot stand living with people. It's the one must have for me.

I have 3 separate Stafford student loans. I am wondering if I should potentially look into consolidating them? I briefly looked around, but the rates werent much better at an initial glance.

kpd905

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Re: Case Study - How am I doing at 24?
« Reply #5 on: December 21, 2014, 01:23:43 PM »
Consolidating the loans would eliminate the ability to target extra payments toward the highest interest loan.  If you drop your 401k contributions down to just get the match, you'd have some more to throw at the loans.  You could also think about selling that mutual fund and throwing it at the loans.

j250432

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Re: Case Study - How am I doing at 24?
« Reply #6 on: December 21, 2014, 01:38:35 PM »
Honestly, I am not too sure whats the best way to invest any extra $$$ I have at this stage of my life.

I thought the mutual fund would bring me a return of 7-8% a year, which I figured is better than letting it rot in a money market (losing money when considering inflation). I was just going to let it sit there for a while and maybe use that as a down payment for a house one day or some other purchase.

Was hoping for some guidance for that.

Sorry forgot to answer the car question. The car is a necessity for the job. Also I tend to travel a bit for the job (which is reimbursed, but still). I probably should have gone for an older, used one. Foolish purchase at the time I guess.
« Last Edit: December 21, 2014, 01:43:24 PM by j250432 »

Travis

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Re: Case Study - How am I doing at 24?
« Reply #7 on: December 21, 2014, 01:51:59 PM »
I agree with everything posted so far.  You need to find an investment that has an expense ratio a hell of a lot lower than 1%.  Over the next 30 years that could be equal to several years earnings going into thin air.  A Roth IRA protects the investment from taxes and you want to maximize those aspects before you put money into taxable investments. 

"Good debt" is only good if you're making more interest in investments than you're paying in interest.  Many people here maintain mortgages because they're paying 3% while earning 7-9% in the market.  With student loans and a car loan it is not good debt.  In general few people on this forum believe in car loans.  Most car advice here will be either a) do you need that car and b) do you need a car at all?

As for your living expenses, would you be willing to detail them to see if we can find some efficiencies?

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Re: Case Study - How am I doing at 24?
« Reply #8 on: December 21, 2014, 02:05:17 PM »
1.  Put what you have in the mutual funds toward the SL

2.  401k up to the Company Match (can you list your choices and expense ratios for that please?)

3.  Open a ROTH and put $5500 a year into invested in low cost index funds ( see boglehead wiki & the Jcollins site below)

4.  Pay off the rest of your SL and Car ASAP.    Once thats clear then you can up your 401K deposits

5.   List your monthly expenses  :)   $1200 a month is pretty low for living expenses where you live.    Where does the rest of your money go?

http://www.bogleheads.org/wiki/Main_Page

http://jlcollinsnh.com/stock-series/
« Last Edit: December 21, 2014, 02:09:35 PM by surfhb »

MDM

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Re: Case Study - How am I doing at 24?
« Reply #9 on: December 21, 2014, 02:14:40 PM »
j250432, welcome to the forums.

I'm going to say things similar to surfhb, but not identical.  No significant disagreements with any of the advice I've seen here.  You're doing well for your age - keep up the good work. 

If you really are getting by on $14,400/yr in Boston, even more congratulations.  Below is how your cash flow appears from the OP.  I agree with the other comments to take the 6.8% "bird in hand" return and pay off the student loan ASAP while maintaining the 401k contribution to get the employer match.  After the SL is done, maintain your spending and put everything you can into
1. 401k up to employer match (for the "free money")
2. Roth IRA (assuming your current 15% marginal rate will be the lowest you'll see for the rest of your life)
3. 401k up to the $18K limit

When you get beyond that, let us know. :)

Good luck!


CategoryMonthly amt.CommentsAnnual
Salary/Wages$3,917$47,000
401(k) / 403(b) / 457(b) / TSP /etc.$200Room to increase?$2,400
Federal Adj. Gross Inc.$3,717$44,600
Federal tax$3712014 rates, stand. ded., 1 exemption$4,448
State/City tax$204Guess, using 5.50% * Fed. AGI$2,453
Soc. Sec.$243Assumes 1 earner paying$2,914
Medicare$57$681
Total income taxes$875$10,500
Income before other expenses  $2,842$34,100
Monthly Expenses:
Miscellaneous$1,200$14,400
Non-mortgage total$1,200$14,400
Loans:
Student Loan$296$3,547
Car$296$3,547
Total Expense$1,791$21,494
Available for taxable investment:$1,051$12,606
Summary:
"Gross" income$3,917$47,000
Income taxes$875$10,500
After-tax income$3,042$36,500
IRA+401k+ESPP+529/other$200$2,400
Living expenses$1,200$14,400
Non-mortgage loans$591$7,094
After-tax investable$1,051$12,606

TerriM

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Re: Case Study - How am I doing at 24?
« Reply #10 on: December 21, 2014, 02:18:42 PM »
Sorry forgot to answer the car question. The car is a necessity for the job. Also I tend to travel a bit for the job (which is reimbursed, but still). I probably should have gone for an older, used one. Foolish purchase at the time I guess.

Ok.  No worries on the car then if you need it for the job.  Zipcar isn't a good match for that.  Don't kick yourself over the car at this point. It is what it is.  Looks like you have it half paid off if you bought it new.  You should be able to go a number of years before having to pay anything for fixit at least.

Also regarding "good debt", there are two different ways to look at debt.... The first is that debt for a house or a degree is an investment that pays off in the long run.  That's why college is often considered "good debt" whereas consumer debt is "bad debt."  But the question of whether to keep certain debts in the long-run has to do with the percentage, and 6.8% is pretty high.  You don't have a "good interest rate" if you want to put it that way.

[I read the $1200 wrong--thought that was all rent.  I think you're doing fine for Boston.  Keep up the good work.]
« Last Edit: December 21, 2014, 02:23:44 PM by TerriM »

mozar

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Re: Case Study - How am I doing at 24?
« Reply #11 on: December 21, 2014, 02:23:49 PM »
I would sell the car and get a much cheaper car, and put the rest toward the student loan. I think you have to earn your comfort. Maybe once you have paid off your student loans and have no car debt, then you can rent a studio. But if you can rent a room for 900, that's an extra 300 you could be investing a month. For compounding your age is your most valuable resource.

j250432

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Re: Case Study - How am I doing at 24?
« Reply #12 on: December 21, 2014, 02:31:13 PM »
Clearly I did not come into this prepared. My apologies.

I know right now for the 401K that I am in Vanguard target 2055 retirement fund. I am not exactly sure the ratio on that one. I will have to dig up some info and return with that.

Expense wise, I am actually really fortunate right now. I have a bit of a commute, but a close family friend lets me rent out a place they own for a cheaper than normal price, hence the 1200 (including everything).

I do not have cable (netflix), and my company pays for my cell. No gym membership at the moment.

I would say that my main issues are spending money on clothes (first year at this job, so i've REALLY revamped my wardrobe), spending money every day on lunch (lets say between $7-10) and occasional weekend outings. I do not have a set consistent amount I spend every weekend, but tend to stay in more than I go out anymore. I will splurge on other things such as sporting events ($200 for an NFL game the other week). I will probably eat out 2x a week for dinner. Other nights, I am an absolutely miserable cook, but will eat cereal for dinner if i have to.

So the way I look at it, I have about 2800 a month to play with (after taxes)..... How to slice it up is the question.


TerriM

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Re: Case Study - How am I doing at 24?
« Reply #13 on: December 21, 2014, 02:35:58 PM »
I would sell the car and get a much cheaper car, and put the rest toward the student loan. I think you have to earn your comfort. Maybe once you have paid off your student loans and have no car debt, then you can rent a studio. But if you can rent a room for 900, that's an extra 300 you could be investing a month. For compounding your age is your most valuable resource.

Does that make sense?  At this point, he's taken the loss for buying new, but he still has some gain that there shouldn't be fixit until maybe year 7 or 8.  5 year warranty at least, I would hope.   The loan on the car is 2%, so if he pays it off in 2 years, interest is about $300/yr and declining.   If he sells and buys a 10 year old car, he probably loses at least $4-5K in the sale, and then adds $1K/yr in fixit. 

Isn't the real question what the gas mileage is on his car, and how many miles a year?

Travis

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Re: Case Study - How am I doing at 24?
« Reply #14 on: December 21, 2014, 02:42:12 PM »
Quote
I would say that my main issues are spending money on clothes (first year at this job, so i've REALLY revamped my wardrobe), spending money every day on lunch (lets say between $7-10) and occasional weekend outings. I do not have a set consistent amount I spend every weekend, but tend to stay in more than I go out anymore. I will splurge on other things such as sporting events ($200 for an NFL game the other week). I will probably eat out 2x a week for dinner. Other nights, I am an absolutely miserable cook, but will eat cereal for dinner if i have to.

If you're looking for some ways to cut expenses further, look at what you're spending on food.  When I started getting serious about budgeting the first place I went to was my lunch expenses.  Every day was $8 subs.  It took me months to realize I was spending a car payment on lunch each month.  That's pretty much what you're doing now too.

j250432

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Re: Case Study - How am I doing at 24?
« Reply #15 on: December 21, 2014, 02:45:01 PM »
Thanks for all of the responses everyone. I truly appreciate it. I will have to come back when I have more for everyone to analyze.

In regards to the car, it has about 4500 miles on it currently. Bought a 2014 Subaru Legacy.

One question I cant seem to make sense of: Why does it not make sense to invest in Mutual/ Index funds? Is that not where I want my $$? Sorry if that is a dumb question. I thought the 5200 in the mutual fund was a good idea.
« Last Edit: December 21, 2014, 02:46:42 PM by j250432 »

kpd905

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Re: Case Study - How am I doing at 24?
« Reply #16 on: December 21, 2014, 03:43:37 PM »

One question I cant seem to make sense of: Why does it not make sense to invest in Mutual/ Index funds? Is that not where I want my $$? Sorry if that is a dumb question. I thought the 5200 in the mutual fund was a good idea.

It would be better to max out your 401k and an IRA first.  Always use a tax advantaged account before one that is not.  Then if you have more to invest after that, go to the taxable account and put more in those mutual funds.

TerriM

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Re: Case Study - How am I doing at 24?
« Reply #17 on: December 21, 2014, 04:26:01 PM »
If you prioritized your savings to the student loan, how long would it take to payoff?

j250432

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Re: Case Study - How am I doing at 24?
« Reply #18 on: December 21, 2014, 04:41:46 PM »
I understand the benefits of the IRA, but if I contribute to that I can only take out my earnings and not my contributions (without penalty), right?

Thats why I chose to go the mutual fund route. I figured I could snag all of that $5200 whenever I needed it.

j250432

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Re: Case Study - How am I doing at 24?
« Reply #19 on: December 21, 2014, 04:45:34 PM »
If you prioritized your savings to the student loan, how long would it take to payoff?

This is a really good question. If I dumped all of my current savings (10K with my money market and mutual fund) into it, I would only have 5K left to go. That 5K could then be finished in the next year or so obviously if I focused on it.

However, if i keep going at my current paltry rate of 300/ month, I will be in my 30s before they're finished off...


windypig

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Re: Case Study - How am I doing at 24?
« Reply #20 on: December 21, 2014, 04:51:45 PM »
What part of town do you live and where do you work? You say you have a long commute with a car but are paying 1200 for a studio, you must be in a desirable-ish part of town.

Is it possible to move closer to work, lower your rent and almost eliminate your gas cost?

TerriM

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Re: Case Study - How am I doing at 24?
« Reply #21 on: December 21, 2014, 04:53:07 PM »
How much extra can you save from your salary in 2015 if you keep your same expenses and continue to save only in the 401K up to the necessary amount for employer matching?

Rpesek6904

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Re: Case Study - How am I doing at 24?
« Reply #22 on: December 21, 2014, 04:58:30 PM »
The $5,200 you invested is not "bad." However, it is not optimal. People here are saying you need to invest money in an order. The order is this:

1. 401k - BUT ONLY UP TO THE MATCH.
2. Student Loan at 6.8% Interest.
3. Roth IRA up to the limit ($5,500)
4. Car Loan at 2%
5. 401K up to the Maximum individual contribution ($17,500 in 2014.$18,000 2015)
6. After Tax Investments (where you currently have the $5,200)

Please understand the order is not set in stone. But is it clear your $5,200 is being invested way out of order.

The other issue being debated is your car loan and which order your car loan should be paid off. Some might put the car debt as the absolute lowest priority (i.e. #6 in the order) because your interest rate is low. Others are saying you should sell the car because that will eliminate the debt immediately. I have put the car loan at number 4 because that is my opinion - IF YOU KEEP THE CAR.

IF YOU SELL THE CAR, you would, theoretically, move more quickly on the "order of investing" by eliminating the car debt. Eliminating the car debt would have two benefits. One, you now have less debt to pay. Two, you have $300 in monthly cash flow to invest. But, this only works if you can use the proceeds to purchase a vehicle that fits your needs or stop using a car altogether.

Part of the unwritten assumption of the other posters,  is that you lost big money buying a new car. It is unwritten because buying a new car is considered a rookie mistake on this blog. You likely need to accept that you made a bad decision on the car and simply do your best to salvage what you can. "Salvaging" might be keeping the car, paying the debt, driving the car for 10+ years and knowing you bought something really expensive and unnecessary OR "salvaging" might mean selling, eating a loss and buying a cheaper car cash (but eliminating the debt.)

By the way, I am not trying to be a jerk by saying that purchasing a new car is a rookie mistake. I can tell you from my personal experience that you are not alone in making a bad car decision. I once bought a (used) Lincoln Navigator in cash but then sold it 6 months later after I found this blog and realized my error. So, don't be too hard on yourself - at least you didn't buy a Navigator :)



TerriM

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Re: Case Study - How am I doing at 24?
« Reply #23 on: December 21, 2014, 05:09:20 PM »
Right.  I think the question is whether mozar is right about selling the car and putting whatever proceeds you get towards the student loan, or whether you can pay the SL quickly enough to justify keeping the car.  Whatever you do, do not buy another new car in three years. 

There are some benefits to a new car--primarily that you have no fixit for a number of years and that you know what you're getting (we got a used car which had body work done that didn't show up on the carfax.  Suck.).  In order to take advantage of that, you should need to drive it regularly for good reasons.  Since you have trips for work and are getting a lower-than-market apartment, keeping the car sounds like it makes sense, especially if the gas is included in your $1200 living expenses.

shuffler

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Re: Case Study - How am I doing at 24?
« Reply #24 on: December 21, 2014, 07:12:57 PM »
I understand the benefits of the IRA, but if I contribute to that I can only take out my earnings and not my contributions (without penalty), right?
Generally speaking, no, you can't make penalty-free withdrawals from a Traditional IRA at all (whether your contribution or the growth).
But there are some exceptions (see link).
http://www.bogleheads.org/wiki/Traditional_IRA#Penalties:_Early_Withdrawals_and_Excess_Contributions

You may have been thinking of a Roth IRA, from which you can withdraw contributions (but not growth) without penalty.
http://www.bogleheads.org/wiki/Roth_IRA

... you may want to spend some time poking around the Bogleheads wiki.  It's got a lot of useful info.

Thats why I chose to go the mutual fund route.
I think you meant to say "That's why I chose to go the taxable brokerage account route."
Because you can hold mutual funds in either a standard taxable brokerage account, or in an IRA.  So comparing "mutual funds vs. an IRA" doesn't really make sense.

I figured I could snag all of that $5200 whenever I needed it.
I think most people here would advise that you not consider your tax-sheltered accounts (whether IRA, 401k, whatever) as something you can draw on outside of an extreme emergency.  Most of us highly value the favorable tax treatment these accounts provide, and we wouldn't want to diminish the relatively small amount that we can put in them (because of the yearly contribution limits).