Author Topic: Extra 2k in Roth, Student Loan, or Vanguard?  (Read 6639 times)

eyePod

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Extra 2k in Roth, Student Loan, or Vanguard?
« on: December 01, 2012, 09:43:15 AM »
I have an extra 2k in our savings right now which gets a shitty 0.5%.

Student Loan - $3,598.29 @ 5.75% (Currently paying off 800 per month)

Roth IRA - 1100 added so far this year.  Once the student loan is paid off, I'll be moving those payments to filling up my wife and I's Roth IRAs.

I've also been wanting to start investing at Vanguard.

Originally, this money was going to be part of an emergency fund, but honestly, we can't think of something that would be so urgent that would need more than 1k plus some extra money that we have in our checking.

Am I just avoiding the obvious answer that I should throw it at the student loan?  That means we'd be done paying it in just two months, but it also gives me less of buffer cash-wise.

Thanks!

PS - When I finally do start investing at Vanguard, in general, how quickly can you get the funds you've put into there (will be starting in ETFs)?  My wife has never really been into investing much and does not like the idea of not being able to get cash in some sort of bind.  We're working on it though!

iamlindoro

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #1 on: December 01, 2012, 09:49:17 AM »
I would pay off the loan for now.  It will take a huge chunk out of it and leave you only two months worth of your normal payments to go.  You'll be on to your Vanguard investing by February.  Just keep focused and make paying off that loan your number one job-- meaning squeeze your entertainment and disposable budgets to try to pay it off even faster, too.

Catbert

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #2 on: December 01, 2012, 10:03:06 AM »
I'd put it in the Roth.  Your ability to put 5K in for 2012 disappears forever on April 15th 2013. Since you are paying extra on your student loans (and yes I do think they are important to get paid off quickly) you have more flexibility on exactly when to pay them off.

As since this money is currently part of your emergency fund in a pinch you could get the money out of the Roth.  The paid off student loan doesn't have that flexibility.
« Last Edit: December 01, 2012, 10:05:14 AM by mary w »

chucklesmcgee

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #3 on: December 01, 2012, 10:12:03 AM »
I'd put it in the Roth.  Your ability to put 5K in for 2012 disappears forever on April 15th 2013. Since you are paying extra on your student loans (and yes I do think they are important to get paid off quickly) you have more flexibility on exactly when to pay them off.

As since this money is currently part of your emergency fund in a pinch you could get the money out of the Roth.  The paid off student loan doesn't have that flexibility.

I agree. You're aware you can open a Roth IRA at Vanguard, right? That could let you kill two birds with one stone.

eyePod

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #4 on: December 01, 2012, 10:31:06 AM »
I agree. You're aware you can open a Roth IRA at Vanguard, right? That could let you kill two birds with one stone.

I'm aware of that.  Right now, mine's with TRowePrice.  Was opened up ~5 years ago and slowly have been adding to it.  Does anyone understand how transferring it to vanguard would work, or is that even a possibility?

Jamesqf

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #5 on: December 01, 2012, 11:03:46 AM »
Right now, mine's with TRowePrice.  Was opened up ~5 years ago and slowly have been adding to it.  Does anyone understand how transferring it to vanguard would work, or is that even a possibility?

Sure, it's possible, but why would you want to?  I have 401K with Vanguard, personal & IRA with TRP, and (in addition to not having all one's eggs in the same basket), the TRP funds have done rather better over the last decade or so.  Their on-line system is also easier to navigate, IMHO.

As for how long it takes to get funds, in my experience with TRP, 3 days if you have your bank account info set up on line.  That is, if you put in an order to sell $X on Monday, it will be processed that night, and the electronic transfer will appear in your bank account on Wednesday.

One thing you should be aware of is that most mutual funds will charge an annual fee if the balance in the fund (not your account total) is below some minimum, often $10K.

eyePod

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #6 on: December 01, 2012, 11:38:05 AM »
Right now, mine's with TRowePrice.  Was opened up ~5 years ago and slowly have been adding to it.  Does anyone understand how transferring it to vanguard would work, or is that even a possibility?

Sure, it's possible, but why would you want to?  I have 401K with Vanguard, personal & IRA with TRP, and (in addition to not having all one's eggs in the same basket), the TRP funds have done rather better over the last decade or so.  Their on-line system is also easier to navigate, IMHO.

As for how long it takes to get funds, in my experience with TRP, 3 days if you have your bank account info set up on line.  That is, if you put in an order to sell $X on Monday, it will be processed that night, and the electronic transfer will appear in your bank account on Wednesday.

One thing you should be aware of is that most mutual funds will charge an annual fee if the balance in the fund (not your account total) is below some minimum, often $10K.

Yeah, I'm not sure what I should do in that respect.  I have a work 401k with Fidelity, Roth IRA with TRowe, and want to start with Vanguard.  Having them spread out like that could help avoid any crazy catastrophe at one of them, but I'm guessing if something that big went down, I'd have a lot more to worry about than my retirement savings.

My wife has hers with PNC and absolutely hates everything about it. They charge her an annual 40 dollar fee and can only submit investments through an actual check.  We'll be moving her over to Vanguard regardless of what I end up doing.|

Since I've opened up the account 2007, I've accrued $40 in fees.  Nothing major to worry about, but then again the ER is 0.78% vs. a vanguard 0.19%  From what I've read on here, that ER is too high and I should shy away from it.

mlipps

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #7 on: December 01, 2012, 01:37:51 PM »
Those ER's will hurt you way more than any annual fee. And past performance of any fund is not indicative of future results. Over time, index funds, like those at Vanguard, win out over active funds 80% of the time. Transfer the whole thing, yours and your wife's, to Vanguard ASAP. If you're really concerned about having "all your eggs in one basket", at least find some index fund ETF's at T Rowe if you can.

Anyway, I don't think that extra $1000 is going to make or break it either way, but I'd probably lean towards putting it into the Roth if the student loan is almost paid off anyway.

Another Reader

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #8 on: December 01, 2012, 04:00:31 PM »
If you want to change from TRP to Vanguard, you can have Vanguard initiate the transfer.  That avoids any possibility of the money accidently ending up with you and not being redeposited, thereby becoming a taxable event with a penalty. 

However, I'm with Jamesqf on this one.  Paying the management fee is sometimes worth it.  Depending on the funds you have invested in at T. Rowe Price, you may have significantly outperformed Vanguard's offerings.  A lot of financial websites offer mutual fund snapshots.  I use the chart titled "growth of $10,000" as part of any mutual fund selection.  Average growth is meaningless.  The compound growth is what counts, and that's implicit in that chart. 

I find Vanguard and Oakmark to be difficult to deal with, although I have used both companies.  T. Towe Price and Fidelity have better websites and are much easier to work with.  Like Vanguard, both offer brokerage accounts as well as mutual funds.  Fidelity also offers no load, no transaction cost funds from some of their competitors. 

Vanguard is great for folks that want to set it and forget it.  My experience has been you can do a little better, if you put the time and effort into it.  As they say, YMMV.

chucklesmcgee

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #9 on: December 01, 2012, 06:29:48 PM »
Paying the management fee is sometimes worth it.  Depending on the funds you have invested in at T. Rowe Price, you may have significantly outperformed Vanguard's offerings.

This is flimsy reasoning. A fraction of any actively mutual funds will outperform Vanguard's offerings over a period purely by chance. Doesn't mean those funds have anything special about them that will cause them to continue to outperform the index fund or that it's worth paying the management fee.

Another Reader

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #10 on: December 01, 2012, 06:31:57 PM »
My experience has been you can do a little better, if you put the time and effort into it.  As they say, YMMV.


gmaxwell

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #11 on: December 01, 2012, 06:55:12 PM »
My experience has been you can do a little better, if you put the time and effort into it.  As they say, YMMV.
Your experience is, unfortunately, pretty worthless to everyone else. To understand why consider this old stock scamó  I start with a list of 100,000 potential investors. Every week I fax each of them a flier for my investment service promoting a randomly selected stock as BUY BUY BUY.  Then I throw out all the names that got bad advice from me as I go.  After a few months I have a list of 50 people who I've consistently given amazing stock advice to, people who think I'm some kind of stock selecting god because my advice would have given 1000% returns if they followed it.  Then I call them up and get them to invest in some crazy thing that will benefit me and I take their life savings.  But before the end, in the experience of those 50 people, I gave better returns... and their experience is correct,  but my technique was pure random any my results were not good _on average_.

The same kind of pattern happens with mutual funds and other active investment options.  There are many many thousands of them running at any time, and some of them will do better than the market.  When people apply the statistical correction for multiple comparisons they find that most of the performance relative to indexes is not outside of what you'd expect to happen from chance.   ... and sure, there is a possibility of excess returns, but even when that potential is real you have to balance the risk that they won't materialize against the absolute certainty of the fees.

As far as the original question goesó unless there is no chance otherwise that you'll get the 2013 roth within 2k of the limit, it should probably go in the roth, otherwise pay off the student loan.  The limited annual IRA contributions are a precious thing and you should not let them pass unused.

Independent of whatever is done with the loan, your investment accounts should be moved someplace with low ERs and fees.

« Last Edit: December 01, 2012, 06:57:20 PM by gmaxwell »

Another Reader

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #12 on: December 01, 2012, 07:03:36 PM »
Have another glass of Koolaid while I'm at the bank, depositing my excess returns.

Most managed mutual funds are worthless, but some are not.  Stare at some of those hypothetical growth of $10,000 charts while you are enjoying that drink.

chucklesmcgee

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #13 on: December 01, 2012, 07:04:48 PM »
My experience has been you can do a little better, if you put the time and effort into it.  As they say, YMMV.

The evidence shows you can't do a little better if you put the time and effort into it. If that's the case, actively managed funds run by full time financial managers should consistently outperform or at least match the indexes. But they don't. Why not? Do you, as a part time, investor really have the gifts and capacity to choose better than average funds than these experts or the index itself? Are you really that good? Or do you think it's possible, given the length of your portfolio's existence and the relatively few trades, might merely be operating within a level of performance that could be explained by chance alone? Because if it's by chance alone, yes YMMV, with an expected return below the index, in which case there's no point in paying these high expense ratios or brokerage fees.

chucklesmcgee

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #14 on: December 01, 2012, 07:10:58 PM »
My experience has been you can do a little better, if you put the time and effort into it.  As they say, YMMV.
The same kind of pattern happens with mutual funds and other active investment options.  There are many many thousands of them running at any time, and some of them will do better than the market.

And a lot of the ones that do worse than the market get closed by the fund and no longer show up! That makes it even more deceptive. You'll have one or two funds offered by a company that have been around for 10+ years, the rest are usually much younger and look like they've offered phenomenal returns, when it's just the case that they were started when the markets were in a slump.  Almost any fund that was started in late 2008/early 2009 looks like it's given awesome returns!

Jamesqf

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #15 on: December 01, 2012, 09:03:48 PM »
Paying the management fee is sometimes worth it.  Depending on the funds you have invested in at T. Rowe Price, you may have significantly outperformed Vanguard's offerings.

This is flimsy reasoning. A fraction of any actively mutual funds will outperform Vanguard's offerings over a period purely by chance. Doesn't mean those funds have anything special about them that will cause them to continue to outperform the index fund or that it's worth paying the management fee.

I think one of us must be missing something important here.  Both Vanguard and T. Rowe Price (and Fidelity, etc) are mutual fund companies which offer a range of funds, running the gamut from index funds through various sorts of managed & sector funds - and most of Vanguard's funds are indeed actively managed.  Both have similar management fees &c.

So why does it seem that any inquiry on this site gets the lemming-like response: Vanguard?  As I said, I have accounts with both, and find TRP much easier to deal with.  The TRP account has also done better over the last decade or so, though I'll grant that this may be because I can put the 401K only in a limited selection of Vanguard's funds.

eyePod

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #16 on: December 02, 2012, 06:26:50 AM »
Both have similar management fees &c.

So why does it seem that any inquiry on this site gets the lemming-like response: Vanguard?  As I said, I have accounts with both, and find TRP much easier to deal with.  The TRP account has also done better over the last decade or so, though I'll grant that this may be because I can put the 401K only in a limited selection of Vanguard's funds.

I don't think what you say here is true about management fees is true. I showed that the expense ratios aren't the same, and actually, both funds have performed almost identically over the time frame that I had the TRP Roth IRA.  I know past performance doesn't dictate future and all that, but over that time, I could be doing better off if my fund was with Vanguard instead of TRP because of the extra 0.59% (0.78% for TRP and 0.19 for Vanguard).

The reason people love vanguard is that the ER's are so low because the firm is designed to give returns on investments with minimal fees, not like most other companies where they are designed to give shareholders returns by getting good returns on investments.  If both have similar returns but one costs more, it's not hard to make the switch.



As a follow up, I know the smart money move is to put it into the Roth, but this loan has been over my head for over a year.  I ended up squeezing some pennies otherwise, and shift some other savings to pay off the entire loan. I can use this as a springboard with the new year coming around.

grantmeaname

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #17 on: December 02, 2012, 12:27:21 PM »
Good move! Honestly, that's what I would have done in your shoes. Congrats on killing some high-interest debt!

eyePod

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Re: Extra 2k in Roth, Student Loan, or Vanguard?
« Reply #18 on: December 02, 2012, 04:35:55 PM »
Good move! Honestly, that's what I would have done in your shoes. Congrats on killing some high-interest debt!

The best part?  That was the last of my debt!  Debt free baby!