Author Topic: Case study: Just graduated. What should I invest in?  (Read 2633 times)

cautiouslyunconventional

  • 5 O'Clock Shadow
  • *
  • Posts: 22
Case study: Just graduated. What should I invest in?
« on: April 04, 2015, 02:13:16 PM »
I graduated from college and got a full-time job three months ago. I'm interested in FI, but not necessarily RE - I'd probably use the financial security and free time to try starting a business, or businesses. I don't have any debt and I think I'm budgeting pretty well, but all my assets are in savings accounts. I'll qualify for the company 401k soon, so I was hoping you all could advise me on asset allocation and how much to put into pre-tax accounts. I also have some questions about home ownership.

Life Situation:

Location: a small city in the northeastern US

My partner and I live together. I pay for most things and he does most of the housework, but our finances (assets/savings) are separate. He's working on starting a couple businesses, one of which I'm also involved in. I don't want to get into his too much here, though, since it's not a significant source of income yet. He expects to earn a lot more in the long-term, though, whether it's from growing this business or something else.

I like the company I'm at, and it seems stable, but I'm unsure how long I can keep doing this job in this city - people in my field change jobs often, and this company is less than a decade old, so I'm not certain how long this job will last. There are other jobs in my city and field, but not many as good as this one, so if I left or lost this job, I would seriously consider moving. Alternately, I might try to get a job where I work remote, or try starting a business and only seek a new job if it fails.

In FI plans, I'm mainly concerned with providing for myself. My partner has some interest in it, but he's got his own career, and we haven't been together long enough to be comfortable combining finances to that extent.

One reason for seeking FI is I have chronic health problems that might make my energy level too low to hold down a full-time job someday. That might never happen - my doctor doesn't predict it worsening - but I have very bad days occasionally, so I worry. It'd be reassuring to know that I could afford to stay home and read all day, if nothing else.

I'm also really interested in philanthropy. If I'm set for life financially but end up earning more on top of that, it'll probably go toward malaria vaccines or something. (This seems somewhat likely to happen. Finding market inefficiencies and figuring out how to turn them into money is an interesting game to play. And, I can program, which opens up a lot of opportunities of that sort.)

Finances

Gross Salary/Wages: 57,000
I'm hoping to get a bit more income from a side business and renting a spare room to a friend later this year (250/month). I haven't factored this into the numbers here.
Longer-term, if the job market doesn't change too much, I'd probably make 70k-100k/year at a salaried job after 10 years of experience.

Pre-tax deductions: none. I'll qualify for a 401k with a 75% match on the first 6% after a few more weeks at my job.

Taxes: 10k/year total (based on current withholding from my paycheck - 401k not factored in yet)

Assets:
22k in savings accounts (I know this is a stupid amount to have in regular bank accounts. My parents advised me not to invest until I finished college, in case I needed money for starting a business. In retrospect, I wish I'd invested some of that sooner.)
11 year old car in very good shape

Liabilities: nothing (I had a good scholarship, and a lot of help from family in college.)

Current expenses:
I've excluded a few things (phone, netflix, etc.) that my partner pays for.
800 rent (with an extra room - got a good deal on rent, so would only save 100/month on downsizing)
10 renter's insurance
50 electric
150 gas + heat (in winter; will be less when warm)
30 internet
42 car insurance
40 gasoline (usually under budget lately)
370 groceries (for both of us, includes toiletries and cleaning stuff)
20 eating out
35 haircuts
50 pet food and litter (will be a bit less now that I buy in bulk)
50-100 medicine (uncertain because of buying slightly expensive over-the-counter things in bulk)
0 - 200 stupid things
100 - 200 other things
Total: 1,650 - 1,800

Stupid things = I messed up and got a big bank fee and a big parking ticket. I don't expect either to happen again anytime soon (I've gotten more careful), but I'm including them because they happened.

Other things = catch-all for spending that varies a lot, usually a mix of entertainment and things that pay for themselves. About $50 is entertainment, typically. Once it was adoption fees and other "starting costs" for my rabbits. Other months, most of it went toward useful things like getting a used bike and repairing it, and equipment for a future side gig.

I don't expect paying for my healthcare after retirement to be too difficult. My main out-of-the-ordinary expense is medication, and stuff that might not be covered because of my "pre-existing condition" is not very expensive.

Current savings/month: about 1,700 (45 - 50% savings rate)
Savings once I rent the spare room: 1,950

Buy or rent?
It's really, really tempting to see that Trulia's estimates of mortgage+tax+insurance on a lot of the houses in my neighborhood are comparable to what I pay in rent right now. I could probably have a 20% down payment saved by the end of this year. (I'm looking at 100-200k total. There are a fair number of 3br foreclosures in that range.)

But, nearly all of the houses in my neighborhood (one of two low-crime neighborhoods near work, and the other is very similar) were built before 1930. I'd expect most of the well-priced homes to require some work. I'm good with smaller crafts and could probably learn to do some of the work myself, but I don't think I'd have that much energy while employed. (I can do physical work just fine, but I don't know whether finding time for it would be stressful, so I hesitate to take on the commitment.)

I'm also uncertain how long I'll stay in the area. If I need to find a different job, I'd probably move near Boston or Philly where there are more options. (Most of the other jobs for my skillset in this town aren't as good as what I could find elsewhere, in terms of what the work is like.) I might still consider moving if I switched to self-employment; I like this city, but the weather can be harsh.

After writing this all out, I think I should keep renting until I'm working part-time or from home. Staying flexible is probably important at this point in my life. But, I'll leave this here in case any of you have something to say about it.

What should I invest in? Should I focus on pre-tax or post-tax?
I want to focus on index investing, and not try to time the market. I think it might make sense for me to be less risk-averse than the average investor, since realistically I can probably just keep working another year or two if I get unlucky (health problems are not actually that likely). Because of my interest in funding disease eradication, extra money above what I need for myself is still pretty useful (less diminishing returns). So putting almost everything in stock index funds sounds appealing, since that allocation performs best on average (mean). Is there any reason why I shouldn't?

If I get some good raises along the way, I think I would only need around 10 -15 years to build up a minimum stash. (In my industry, I could probably almost double my gross salary by the time I have 10 years of experience.) I'd be in my late 30s then, so it would be a long time until I could start withdrawing from my 401k in the typical way.

I know the roth pipeline is a thing, but I worry that the laws about that might change. I'm considering filling the 401k just enough for retirement-age expenses and the small fixed payouts, maxing Roth, and putting the rest into an after-tax index fund. Does this seem reasonable? Would I be missing out on a big tax benefit by doing this?

The other element here, is that I don't know what my post-FI taxes will be like. Some people do very well at selling apps and such (one of the things I'll try after FI), even working less than full time at it. But if I did end up doing something lucrative, I'd probably donate most of what I made, since I wouldn't really need it. Would earning 100k in a year from my business and then donating it all (living off savings instead) be roughly equivalent to not earning anything besides withdrawing from investments, tax-wise? I'm trying to get a rough idea of what would happen to my tax liability if my business does really well, because if there's a chance that my tax liability could stay the same or increase after FI, I'd want to focus my savings now on Roth and taxable accounts.

Thank you in advance for your advice. I really appreciate the help.

MDM

  • Walrus Stache
  • *******
  • Posts: 9497
Re: Case study: Just graduated. What should I invest in?
« Reply #1 on: April 04, 2015, 02:38:00 PM »
What should I invest in? Should I focus on pre-tax or post-tax?
So putting almost everything in stock index funds sounds appealing, since that allocation performs best on average (mean). Is there any reason why I shouldn't?
That is a very defensible option for someone your age.

Quote
I know the roth pipeline is a thing, but I worry that the laws about that might change. I'm considering filling the 401k just enough for retirement-age expenses and the small fixed payouts, maxing Roth, and putting the rest into an after-tax index fund. Does this seem reasonable?
No, because...
Quote
Would I be missing out on a big tax benefit by doing this?
Yes.

Quote
Would earning 100k in a year from my business and then donating it all (living off savings instead) be roughly equivalent to not earning anything besides withdrawing from investments, tax-wise?
Yes, unless...
Quote
I'm trying to get a rough idea of what would happen to my tax liability if my business does really well
...it does so well that your income is so high that your deductions are limited.  There would of course be worse problems to have than that.

East River Guide

  • 5 O'Clock Shadow
  • *
  • Posts: 42
  • Location: Margaritaville
Re: Case study: Just graduated. What should I invest in?
« Reply #2 on: April 04, 2015, 03:02:55 PM »


What should I invest in?

The space between your ears. 

Retired To Win

  • Handlebar Stache
  • *****
  • Posts: 1494
  • Age: 71
  • Location: Virginia
  • making the most of my time and my money
    • Retired To Win
Re: Case study: Just graduated. What should I invest in?
« Reply #3 on: April 04, 2015, 03:22:38 PM »
OP, you've got $22,000 cash in a savings account and monthly expenses of $1800 or less.  Please set aside $1800 x 6 = $10,800 of your savings into a dedicated 6-month emergency reserve and leave that money liquid and alone.  This will really free you up mentally to tackle investing the rest.

Good luck.

P.S.: I maintain a one-year emergency reserve in a savings account.

cakie

  • Stubble
  • **
  • Posts: 143
  • Age: 29
  • Location: Australia
Re: Case study: Just graduated. What should I invest in?
« Reply #4 on: April 04, 2015, 05:10:05 PM »
I'm at a similar point in my life, and I found writing an investment plan based on the bogleheads wiki to be really useful. This way i spelt out three goals that are the most important for me (6 mth emergency fund, money for international trip next year, and long term goal of FI).

It might be easier to get specific advice on here then if you get stuck. It sounds like you're on the right track though! I would keep renting :)

Retired To Win

  • Handlebar Stache
  • *****
  • Posts: 1494
  • Age: 71
  • Location: Virginia
  • making the most of my time and my money
    • Retired To Win
Re: Case study: Just graduated. What should I invest in?
« Reply #5 on: April 04, 2015, 08:52:47 PM »
...I would keep renting :)

I would second that.  You're on your first job.  Take some time to look around and get some clear idea of the type of area you would like to really end up living.  Then search for that "location fit" in a reasonable cost of living area where houses don't cost an arm and a leg.  Then see if it's feasible for you to relocate there.

In any case, don't buy just to buy.  Try to make sure the area location is going to work for you personally and financially.

Good luck.

cautiouslyunconventional

  • 5 O'Clock Shadow
  • *
  • Posts: 22
Re: Case study: Just graduated. What should I invest in?
« Reply #6 on: April 08, 2015, 10:24:10 AM »
Thank you all for your advice. It's really reassuring to know that I'm headed in the right direction.

I will definitely check out the Bogle heads wiki. I'm making it a goal to get an IRA (of roth) opened this weekend, and the rest of what I don't need short-term put in a taxable account.