Author Topic: Reader Case Study - Am I on the right track & questions  (Read 6243 times)

FIRE_Buckeye

  • Stubble
  • **
  • Posts: 102
  • Age: 30
Reader Case Study - Am I on the right track & questions
« on: September 25, 2015, 10:32:56 PM »
Life Situation: Hey y'all; long time lurker first time poster. I'm a 26 year old recent transplant to Charlotte, NC (from Ohio). Single by IRS standards (living in an apartment with girlfriend of three years) with no dependents. I work as a financial analyst with a great company and am currently working on my CPA license.

Gross Salary/Wages: 55k base salary + bonus equal to 10% of base salary for ~$60,500 total

Pre-tax deductions: I'm currently contributing 19% pre-tax to my 401k, with a 6% employer match for a total of 25%. The company also pays all medical premiums which is a fantastic little perk.

Adjusted Gross Income: My take-home pay is roughly $1,250/biweekly pay cycle, or $32,500/year plus the 10% bonus (lets be conservative and assume that'll be ~$3,500 take home), for a rough total of $36,000 annually.

Current expenses: Current monthly expenses are as follows:
Rent: $450 (split with gf)
Utilities: $180 (Electric, Gas, Internet, Water/Sewer/Trash)(I cover these)
Student Loans: $360
Groceries:$120 (split with gf)
Travel: ~$150 (usually pretty basic beach vacations, trips with family, occasional golf trip with dad's group)
Gas for car: $100 (15 mile commute/day + occasional trips back to Ohio)
Entertainment: $120 (this covers dinner dates, movies, golf, drinks with friends, you name it)
CPA exams & study material: $100 (composed of 2/3 bulk expenses/year of ~$400 apiece til this is complete)
Prescription: $20
Total monthly expenses: ~$1,600
Total annual expenses: ~$19,200

As mentioned above, currently renting so no mortgage.

Assets: Amount & description - Current assets:
401k: 10k (just started really taking this seriously this year, see allocation plan below)
Taxable Brokerage: 15k (VTSAX)
Cash: 25k (recently sold a few individual stocks ive had for a while, not 100% sure of best use with cash, see questions below)
Total assets: ~$50,000

Liabilities: Student Loans: The breakdown is as follows:
Loan A: $2,151.83 @ 6.8%
Loan C: $1,814.81 @ 6.0%
Loan D: $4,182.08 @ 4.5%
Loan E: $4,047.40 @ 3.4%
Loan F: $7,107.61 @ 6.8%
Loan G: $1,419.30 @ 5.35%

Total due: $20,717.03 at a weighted average of 5.5% interest (assuming my math is correct).

Specific Question(s): I think I'm on the right track, but general feedback is definitely appreciated, as I'm sure there's room for improvement. The current plan is to continue upping my 401k contributions annually (either through % increase, salary increase, or both) until that is maxed, start a Roth through Vanguard and contribute the max to that each year, and to put any remainder in my taxable brokerage account. The ultimate goal is to retire by at least 50. While nowhere near as lofty a goal as many on here, I'll start there and maybe refine it as both my age and earnings continue to grow.

Questions:
:As mentioned above, I've got $25k dry powder currently available. Does is make more financial sense to pay off the 5% student loans (current outstanding balance of $21k), or to add it to my current VTSAX holdings? I'm nowhere near as debt-averse as some on here, but if it makes good financial sense to just pay the loans off I'd be fine with doing that.

:How realistic is maintaining the investment allocation I outlined above (annually maxing pre-tax 401k within a few years, annually maxing roth, excess to taxable brokerage) from now (age 26) to retirement (~age 50) given the desire to settle down, buy a house, make 1-2 FIRE_Buckeye jr's likely within the next five years. I intentionally left my girlfriend out of the equation above, but if she ends up being the other half of my equation, she's a saver too so FIRE will be a common goal.

I appreciate the feedback in advance, and look forward to becoming a regular contributor here.
If any questions, feel free to ask and I'll respond as soon as I'm able.
« Last Edit: September 26, 2015, 08:41:45 AM by FIRE_Buckeye »

brooklynmoney

  • Pencil Stache
  • ****
  • Posts: 528
  • Location: Crooklyn
Re: Reader Case Study - Am I on the right track & questions
« Reply #1 on: September 26, 2015, 06:36:39 AM »
I would pay off the student loan as that's a fairly high interest rate.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3660
  • Location: Texas
Re: Reader Case Study - Am I on the right track & questions
« Reply #2 on: September 26, 2015, 08:12:27 AM »
I would pay off the student loan as that's a fairly high interest rate.
Note he said "average out" - we would need an actual breakdown. If he has $10k @ 9% and $10k @1%, I would only pay off the 9%. ;)

Thegoblinchief

  • Guest
Re: Reader Case Study - Am I on the right track & questions
« Reply #3 on: September 26, 2015, 08:23:59 AM »
Your expenses are solid. Not much to comment on there.

You've got more than $10K of free cashflow between your expenses and your take home. 19% of your pre-tax income is $11,495, which leaves $6,505 of unclaimed space you're neglecting to fill. Fill that.

Take some of your "dry powder" and retire any student loans at 5% or above. My guess is that will free up another couple thousand in cashflow per year.

This should give you enough to completely fill an IRA, type of your choosing, each year plus have some taxable investments, bigger e-fund/other cash savings goal.

At your take home income, it probably makes sense to do a ROTH but unless you want to DCA contributions through the year, you could save it up until tax time, run your taxes both ways and see whether you want to do a trad or a ROTH contribution this year. Then again, I believe (double check) you could DCA contributions as one kind, then recharacterize at the end of the tax year if you changed your mind.

FIRE_Buckeye

  • Stubble
  • **
  • Posts: 102
  • Age: 30
Re: Reader Case Study - Am I on the right track & questions
« Reply #4 on: September 26, 2015, 08:37:05 AM »
I would pay off the student loan as that's a fairly high interest rate.
Note he said "average out" - we would need an actual breakdown. If he has $10k @ 9% and $10k @1%, I would only pay off the 9%. ;)

The figure was a ballpark weighted average. The breakdown is as follows:
Loan A: $2,151.83 @ 6.8%
Loan C: $1,814.81 @ 6.0%
Loan D: $4,182.08 @ 4.5%
Loan E: $4,047.40 @ 3.4%
Loan F: $7,107.61 @ 6.8%
Loan G: $1,419.30 @ 5.35%

Comes to a total of $20,717.03 at a weighted average of 5.5% (assuming my math is correct).
Hope that clarifies the loans a bit. I've also updated my original post with the above figures. Should have probably ran the numbers in the first place, but was feeling a bit lazy at the time.


You've got more than $10K of free cashflow between your expenses and your take home. 19% of your pre-tax income is $11,495, which leaves $6,505 of unclaimed space you're neglecting to fill. Fill that.

Take some of your "dry powder" and retire any student loans at 5% or above. My guess is that will free up another couple thousand in cashflow per year.

This should give you enough to completely fill an IRA, type of your choosing, each year plus have some taxable investments, bigger e-fund/other cash savings goal.
Thanks for the feedback.
The unclaimed space was sort of intentional, but you touched on my reasons in your last sentence above. With engagement, marriage, house, children all as possibilities within the next 5 years, I wanted to leave some flexibility in there as the budget allows. If those things materialize, I'll be covered. If not, I'll continue to load up the taxable investments. To me, the two main necessities for FIRE by my goal age are maxing the 401k and IRA each year. Anything additional I'm able to put into a taxable brokerage will be a bonus (albeit one I hope/expect to be able to utilize each year.
« Last Edit: September 26, 2015, 08:48:44 AM by FIRE_Buckeye »

cerberusss

  • Stubble
  • **
  • Posts: 170
  • Age: 42
  • Location: Netherlands
Re: Reader Case Study - Am I on the right track & questions
« Reply #5 on: September 26, 2015, 08:42:42 AM »
What could be good reasons to keep that student debt? I can see the use of a small emergency fund of say, three four months. But beyond that, why not pay them off?

FIRE_Buckeye

  • Stubble
  • **
  • Posts: 102
  • Age: 30
Re: Reader Case Study - Am I on the right track & questions
« Reply #6 on: September 26, 2015, 08:53:45 AM »
What could be good reasons to keep that student debt? I can see the use of a small emergency fund of say, three four months. But beyond that, why not pay them off?
The previous logic, while very possibly flawed, was that the money was doing more work for me earning an average annualized return of 6% in the market instead of paying off the 5% loans, for the 1% difference gained.

As it stands, and after running the numbers a bit earlier for the first time in a long time, it's looking like it makes real sense to knock them out, given their 5.5% weighted average rate plus the the additional monthly $360 ($4,320/year) free cash flow paying them off would provide.
« Last Edit: September 26, 2015, 08:57:50 AM by FIRE_Buckeye »

thedayisbrave

  • Pencil Stache
  • ****
  • Posts: 700
  • Location: Raleigh, NC
  • CFO @ My Life
Re: Reader Case Study - Am I on the right track & questions
« Reply #7 on: September 26, 2015, 09:09:54 AM »
What could be good reasons to keep that student debt? I can see the use of a small emergency fund of say, three four months. But beyond that, why not pay them off?
The previous logic, while very possibly flawed, was that the money was doing more work for me earning an average annualized return of 6% in the market instead of paying off the 5% loans, for the 1% difference gained.

As it stands, and after running the numbers a bit earlier for the first time in a long time, it's looking like it makes real sense to knock them out, given their 5.5% weighted average rate plus the the additional monthly $360 ($4,320/year) free cash flow paying them off would provide.

Agreed.  I would pay off the loans completely if I were you, and then start using that $360/month to fund a Roth. 

Bracken_Joy

  • Walrus Stache
  • *******
  • Posts: 8917
  • Location: Oregon
Re: Reader Case Study - Am I on the right track & questions
« Reply #8 on: September 26, 2015, 09:22:50 AM »
Agree with the previous advice re: paying off your loans above 5% (some people say 6% if you feel optimistic about market returns, some people say 4% if you want a safe guaranteed return. Either way, your two highest interest loans should be gone, and possibly some in addition to that).

Your expenses look good, but are those estimates or true numbers from tracking? If you aren't using Mint, Personal Capital, or You Need A Budget, I would highly recommend doing something to track to ensure you don't have leaks. Ex- I don't see a cell plan listed.

FIRE_Buckeye

  • Stubble
  • **
  • Posts: 102
  • Age: 30
Re: Reader Case Study - Am I on the right track & questions
« Reply #9 on: September 26, 2015, 09:29:21 AM »
Agreed.  I would pay off the loans completely if I were you, and then start using that $360/month to fund a Roth.
Agree with the previous advice re: paying off your loans above 5% (some people say 6% if you feel optimistic about market returns, some people say 4% if you want a safe guaranteed return. Either way, your two highest interest loans should be gone, and possibly some in addition to that).

Your expenses look good, but are those estimates or true numbers from tracking? If you aren't using Mint, Personal Capital, or You Need A Budget, I would highly recommend doing something to track to ensure you don't have leaks. Ex- I don't see a cell plan listed.
Thanks for the feedback y'all.
As for the expenses, they're true numbers. I'm blessed in that some obvious things not listed (cell plan, car insurance) are currently paid elsewhere (not by me) for the time being. While that may change, for now the numbers listed above are accurate representations of my monthly expenses.
I utilize both Mint (for a general snapshot of my entire financial position and general tracking), as well as logging every bit of income and expenses into a spreadsheet of my own. While Mint is great, it is lacking some important features like savings rate and annual expenses by category, which the spreadsheet manages quite nicely.
« Last Edit: September 26, 2015, 09:36:28 AM by FIRE_Buckeye »

MDM

  • Walrus Stache
  • *******
  • Posts: 9677
Re: Reader Case Study - Am I on the right track & questions
« Reply #10 on: September 26, 2015, 11:45:05 AM »
Specific Question(s): I think I'm on the right track, but general feedback is definitely appreciated, as I'm sure there's room for improvement. The current plan is to continue upping my 401k contributions annually (either through % increase, salary increase, or both) until that is maxed
Why not contribute the full $18K in 2015?

Quote
start a Roth through Vanguard and contribute the max to that each year, and to put any remainder in my taxable brokerage account.
Looks good.

Quote
As mentioned above, I've got $25k dry powder currently available. Does is make more financial sense to pay off the 5% student loans (current outstanding balance of $21k), or to add it to my current VTSAX holdings? I'm nowhere near as debt-averse as some on here, but if it makes good financial sense to just pay the loans off I'd be fine with doing that.
You can never go back and add any 401k contributions you don't make this year, so contributing the full $18K seems the first priority. 
You are on track (per the OP) to contribute ~$11.5K this year, so that's another $6.5K.  You can't take this directly from the $25K, but you can increase payroll deduction and earmark ~$5.2K (the smaller amount is due to tax reduction) of the $25K to replace the lost income.
Then fully fund your 2015 IRA, for another $5.5K
Then pay off the 6.8% loans, for another $9.3K.  That's $20K so far.
Then pay off the 6% and 5.35% loans, for another $3.2K.  Keep paying the minimums on the 4.5% and 3.4% loans.
Take the remaining $1.8K and add to your Vanguard taxable account.

Quote
How realistic is maintaining the investment allocation I outlined above (annually maxing pre-tax 401k within a few years, annually maxing roth, excess to taxable brokerage) from now (age 26) to retirement (~age 50) given the desire to settle down, buy a house, make 1-2 FIRE_Buckeye jr's likely within the next five years. I intentionally left my girlfriend out of the equation above, but if she ends up being the other half of my equation, she's a saver too so FIRE will be a common goal.
Very realistic.  Not guaranteed, of course, but one could even say "on the conservative side of realistic."

If your employer has a Roth 401k option, you might consider doing the traditional route until you have reduced your taxable income to the 15% bracket, then switch to Roth contributions.  Depends on your expectation for marginal tax rate when you go to withdraw the money.

Sibley

  • Magnum Stache
  • ******
  • Posts: 3691
  • Location: Chicago, IL
Re: Reader Case Study - Am I on the right track & questions
« Reply #11 on: September 26, 2015, 12:38:59 PM »
First, good luck with the CPA exam! Been there, done that, it's not fun. But that license will open doors in the profession. If your friends, family and pets (if any) don't feel abandoned, you're not studying enough. Makes life hellish for a while, but it does pay off.

Regarding the SLs - Personally, I would pay them all off. Unless you're working somewhere where forgiveness is an option, consider refinancing whatever you don't pay off to a lower rate. MMM has a special option thing for SoFi if you decide to go that route.

Max out your 401k if have the cash to do so. If you have enough cash after that, max the Roth as well.

Dee18

  • Handlebar Stache
  • *****
  • Posts: 1638
Re: Reader Case Study - Am I on the right track & questions
« Reply #12 on: September 26, 2015, 12:48:31 PM »
I'd pay off all the loans right now.  Wouldn't you invest money at a guaranteed return of 5% tax free?  I sure would. 

FIRE_Buckeye

  • Stubble
  • **
  • Posts: 102
  • Age: 30
Re: Reader Case Study - Am I on the right track & questions
« Reply #13 on: September 26, 2015, 03:33:15 PM »
You can never go back and add any 401k contributions you don't make this year, so contributing the full $18K seems the first priority. 
You are on track (per the OP) to contribute ~$11.5K this year, so that's another $6.5K.  You can't take this directly from the $25K, but you can increase payroll deduction and earmark ~$5.2K (the smaller amount is due to tax reduction) of the $25K to replace the lost income.
Then fully fund your 2015 IRA, for another $5.5K
Then pay off the 6.8% loans, for another $9.3K.  That's $20K so far.
Then pay off the 6% and 5.35% loans, for another $3.2K.  Keep paying the minimums on the 4.5% and 3.4% loans.
Take the remaining $1.8K and add to your Vanguard taxable account.
This sounds like a good course of action I think I'll pursue.
The look on our office manager's face (she manages the documentation for our 401k contributions) when I jack up my contribution % for the second time in as many months should be pretty amusing.

Thanks for the help everyone.
The advice is much appreciated, and the help toward achieving my ER goals is invaluable.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3660
  • Location: Texas
Re: Reader Case Study - Am I on the right track & questions
« Reply #14 on: September 26, 2015, 04:15:55 PM »
What could be good reasons to keep that student debt? I can see the use of a small emergency fund of say, three four months. But beyond that, why not pay them off?
The previous logic, while very possibly flawed, was that the money was doing more work for me earning an average annualized return of 6% in the market instead of paying off the 5% loans, for the 1% difference gained.

As it stands, and after running the numbers a bit earlier for the first time in a long time, it's looking like it makes real sense to knock them out, given their 5.5% weighted average rate plus the the additional monthly $360 ($4,320/year) free cash flow paying them off would provide.

Knock off the "weighted average" bullshit. You are deluding yourself.

You've got loans at 6.8%, which is above even your projected market returns.

Pay them off.

FIRE_Buckeye

  • Stubble
  • **
  • Posts: 102
  • Age: 30
Re: Reader Case Study - Am I on the right track & questions
« Reply #15 on: September 27, 2015, 10:00:22 AM »
What could be good reasons to keep that student debt? I can see the use of a small emergency fund of say, three four months. But beyond that, why not pay them off?
The previous logic, while very possibly flawed, was that the money was doing more work for me earning an average annualized return of 6% in the market instead of paying off the 5% loans, for the 1% difference gained.

As it stands, and after running the numbers a bit earlier for the first time in a long time, it's looking like it makes real sense to knock them out, given their 5.5% weighted average rate plus the the additional monthly $360 ($4,320/year) free cash flow paying them off would provide.

Knock off the "weighted average" bullshit. You are deluding yourself.

You've got loans at 6.8%, which is above even your projected market returns.

Pay them off.
As I said in the post you quoted, previous logic (that was clearly flawed).
All of the loans above 5% are set to be paid off this week.

Easye418

  • Bristles
  • ***
  • Posts: 472
Re: Reader Case Study - Am I on the right track & questions
« Reply #16 on: September 28, 2015, 08:07:08 AM »
Hello fellow FA,

First of all, we don't get paid enough, do we? :)   

Second, Mix between raising 401k and using the cash to pay down the high interest loans. 


2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5662
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Reader Case Study - Am I on the right track & questions
« Reply #17 on: September 28, 2015, 11:15:19 AM »
Welcome! You are off to a great start, once you have those 5%+ loans paid off, max out tax sheltered investment space and continue to increase investment amounts as your income grows.

As far as the SO, is she on board with all of this? Do you believe you will spend a long time together?

TomTX

  • Magnum Stache
  • ******
  • Posts: 3660
  • Location: Texas
Re: Reader Case Study - Am I on the right track & questions
« Reply #18 on: September 28, 2015, 07:13:49 PM »
What could be good reasons to keep that student debt? I can see the use of a small emergency fund of say, three four months. But beyond that, why not pay them off?
The previous logic, while very possibly flawed, was that the money was doing more work for me earning an average annualized return of 6% in the market instead of paying off the 5% loans, for the 1% difference gained.

As it stands, and after running the numbers a bit earlier for the first time in a long time, it's looking like it makes real sense to knock them out, given their 5.5% weighted average rate plus the the additional monthly $360 ($4,320/year) free cash flow paying them off would provide.

Knock off the "weighted average" bullshit. You are deluding yourself.

You've got loans at 6.8%, which is above even your projected market returns.

Pay them off.
As I said in the post you quoted, previous logic (that was clearly flawed).
All of the loans above 5% are set to be paid off this week.

Good. The phrasing of your post led me to believe you were still considering the student loans as a mass, instead of discriminating between the various interest rates.

FIRE_Buckeye

  • Stubble
  • **
  • Posts: 102
  • Age: 30
Re: Reader Case Study - Am I on the right track & questions
« Reply #19 on: October 03, 2015, 10:26:12 AM »
Just wanted to give a quick update on things, as its been about a week since posting this thread, and I personally like to see how/if people tend to follow through with suggested courses of action after making a thread like this.
I had 25k in cash available, as well as ~21k in student loans broken down below. The advice and how it has been/will be followed is also below.
Liabilities: Student Loans: The breakdown is as follows:
Loan A: $2,151.83 @ 6.8%
Loan C: $1,814.81 @ 6.0%
Loan D: $4,182.08 @ 4.5%
Loan E: $4,047.40 @ 3.4%
Loan F: $7,107.61 @ 6.8%
Loan G: $1,419.30 @ 5.35%

Total due: $20,717.03
You can never go back and add any 401k contributions you don't make this year, so contributing the full $18K seems the first priority. 
You are on track (per the OP) to contribute ~$11.5K this year, so that's another $6.5K.  You can't take this directly from the $25K, but you can increase payroll deduction and earmark ~$5.2K (the smaller amount is due to tax reduction) of the $25K to replace the lost income.
Then fully fund your 2015 IRA, for another $5.5K
Then pay off the 6.8% loans, for another $9.3K.  That's $20K so far.
Then pay off the 6% and 5.35% loans, for another $3.2K.  Keep paying the minimums on the 4.5% and 3.4% loans.
Take the remaining $1.8K and add to your Vanguard taxable account.
1. I've increased my payroll deduction to maximize my 401k contribution for the year
2. All student loans above 5% (listed above) have been paid off. Took 12.5k to do so, but decreased my monthly student loan payment from $360 to $115 which I'm ecstatic about. The 4.5% and 3.4% loans are still there with a total balance owed of ~4k each. Those will stay on the books for the time being as I don't want to have to deplete my cash and dig into my EF to pay them off.
3. I'll be fully funding the Roth IRA (with Vanguard) in the next month or so.
4. Taxable brokerage (also Vanguard) will also be funded to the tune of ~4k likely before the end of the year.

Just wanted to thank everyone again for the advice and encouragement. Have since put together an ER spreadsheet consisting of annual 401k/IRA/Taxable Brokerage contribution goals that, if followed, will have my (not yet acquired) family sitting pretty come retirement time (whenever we ultimately decide that to be).

MDM

  • Walrus Stache
  • *******
  • Posts: 9677
Re: Reader Case Study - Am I on the right track & questions
« Reply #20 on: October 03, 2015, 10:29:36 AM »
Just wanted to give a quick update on things, as its been about a week since posting this thread, and I personally like to see how/if people tend to follow through with suggested courses of action after making a thread like this.

Good for you, and very well done!

cincystache

  • Stubble
  • **
  • Posts: 208
Re: Reader Case Study - Am I on the right track & questions
« Reply #21 on: October 03, 2015, 10:47:10 AM »
Great Job Buckeye! Keep up the good work.

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5662
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Reader Case Study - Am I on the right track & questions
« Reply #22 on: October 03, 2015, 12:56:00 PM »
Great moves in the right direction! With a foundation like this at your age, you are in a very good spot!!