Author Topic: Reader Case Study - What should I do next?  (Read 3766 times)

forestj

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Reader Case Study - What should I do next?
« on: January 08, 2016, 12:12:28 AM »
Single, 24, no kids, living with 6 other young adults in a large apartment. Twin Cities, MN.

Current salary before tax: $85,000 (Average throughout 2015: ~70k)

Pre-tax deductions:
401k max $18,000

Income Taxes: ~$15,000 or %30 from state and federal income taxes.

Current expenses (yearly):

Total:  $16596


rent *$4370
grocery *$2392
credit extended $2248
car $1568
restaurant $1276
travel $954
alcohol $840
moving $784
gifts $500
roller derby $416
utility $283
hobbies $245
bike $212
other $197
clothes $89
home upkeep $76
public transit $72
fees $70







* These were about 1.35x higher than they "should" have been, because I have assumed all financial risk for the shared living situation, and we weren't able to fill all the rooms right away, or because someone left and we had re-fill the room.

  this is money I spent on things shared with my house that I have not been paid back for but could theoretically be. I listed it as an expense since historically I have not been paid back for this stuff and while I may be in the future, I wouldn't count on it.

I tended to share the booze with everyone :)

Assets:

$16,000 in 401k, 100% total market equities, 50% US, 50% international. High ERs, like 1.5%, because my company's 401k is garbage.
~$3000 in bitcoin.
~$2500 in checking account.

Liabilities: 0!

Debt paid down in 2015:  $18455

I want to make sure of two things:
1. That I can eventually roll over the 401k into a Vangaurd IRA or Roth IRA so that I don't get eaten by the fees and so that the money has a way out before I hit 65.
2. That I can do the Roth IRA conversion ladder to minimize the amount I pay in taxes while allowing myself to begin to draw down my investments before I hit 65.

I am trying to get about $300,000 or $400,000 asap, at that point I will quit my job. I'm hoping to get there around when I turn 30.

I work as a software developer so I am hoping that I can continue getting raises up to about $140,000 a year.

I don't plan on buying a house unless I can go in on it with other people and buy it with cash. Something like start an LLC that would own the house, and each person has part ownership of the LLC.

I know that there are a few obvious things I could do to decrease spending:
1. Start being harder financially on your housemates!
2. Ditch the car!
3. Stop drinking and going out to eat so much!

For #1, I am hesitant to because sharing a house is very beneficial for me even with this stuff, and the people that have trouble paying, while its not entirely out of their control, they don't make much money and are working on getting on their feet so I don't feel bad about it.

For #2, I would love to, but right now I work as a consultant/contractor, so I might have to go somewhere out of bus or bike range in a month, I don't really get to pick my assignments. Although right now I can bike to work which is nice.

For #3: Well... Yeah, you're right ;). I'm definitely cutting back on drinking.


What are some things I might have omitted and things I should be thinking about? I am relatively new to financial planning, and I don't know what to focus on at this stage in the game.

How can I monitor the tax laws and retirement account rules that relate to my plans of using the Roth ladder? Do I need to hit the 401k plan's fine print with an electron microscope? Are there any watchdogs for federal or state rule changes that I can subscribe to? Something else I'm not thinking of?

« Last Edit: January 08, 2016, 09:41:17 PM by forestj »

former player

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Re: Reader Case Study - What should I do next?
« Reply #1 on: January 08, 2016, 01:44:40 AM »
At a saving rate of over 70% there is not much you are doing wrong.  And at single and 24, it's not worth cutting out your social life to increase on that rate, so I wouldn't change the eating out budget.  And the car is a tool of your job and so has a very good return on investment - think of it as a dividend earner rather than a capital appreciation investment.

The most obvious danger point is that you have become the "responsible person" for 7 young adults in a shared living situation.  The set-up costs are probably a lost cause unless you get hard on your roommates about it and that chance has probably gone.   They aren't much in the scheme of things if the living situation works longer-term.  It should be relatively simple to stop paying for groceries and booze for others, and I suggest that you do so quickly - you do not want to create a culture of dependence, much better to try to keep things as equal as possible between the 7 of you.  And paying rent on time and in the full amount is part of someone getting on their feet so the same thing applies - you are not a patron of the arts, or whatever other field these people are trying to get into, so there is no reason for you to be subsidising anyone else's rent.

On the whole, good job.


bearandmoose

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Re: Reader Case Study - What should I do next?
« Reply #2 on: January 08, 2016, 04:54:34 AM »
Are you doing an IRA?  You still have time to do one for 2015.

jda1984

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Re: Reader Case Study - What should I do next?
« Reply #3 on: January 08, 2016, 08:52:50 AM »
Do you have a HDHP through your employer or the exchange?  If so, you can put away some more money pre-tax in an HSA.

edmundblackadder

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Re: Reader Case Study - What should I do next?
« Reply #4 on: January 08, 2016, 09:59:54 AM »
Seconding the 2015 traditional IRA -- should give you a tax deduction.

MDM

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Re: Reader Case Study - What should I do next?
« Reply #5 on: January 08, 2016, 10:55:42 AM »
Seconding the 2015 traditional IRA -- should give you a tax deduction.
If your salary is exactly $85K/yr and your only pre-tax deduction is the $18K 401k, that puts your AGI at $67K, partway into the tIRA deduction phaseout.  With those numbers, you could deduct $2200 into a tIRA, then put $3300 into a Roth IRA.

You could either wait until you calculate your taxes so you know the exact numbers and contribute then, or contribute $5500 to a tIRA now and then recharacterize (see https://www.bogleheads.org/wiki/IRA_recharacterization) to the correct amounts when you do the taxes.

forestj

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Re: Reader Case Study - What should I do next?
« Reply #6 on: January 08, 2016, 09:18:57 PM »
Thanks for the IRA comments, I will look into it. I was under the impression that adding to an IRA would subtract from the maximum allowed in the 401k, but it sounds like that is not the case.  Also, I had no idea I could open an IRA for 2015 even though it is now 2016. Who'da thunk :P

much better to try to keep things as equal as possible between the 7 of you.  And paying rent on time and in the full amount is part of someone getting on their feet so the same thing applies

Yeah everyone is paying their share now, it was mostly a setup cost.

Something doesn't add up here

Ah, I realize my mistake now. -- The numbers look weird because during 2015, I switched jobs and got promoted, ending at 85k. So, in reality, the salary was more like 70k before taxes.

 I've been working out of college for about 1.7 years, and yeah I did recently finish paying off the loans.  Most of my "saving" category this year ex 401k was me getting rid of debt. I'll put both of those things as notes in the main post.

I didn't want to mention that the 3k is bitcoin, because its generally not advisable to go around advertising that you own gold or bitcoin. I own it because I understand how it works under the hood, and I think it has a lot of potential and offers completely unique utility. I don't think I will get rich quick from it, but I believe it fits with my investment strategy.  I think that because I believe it both has the potential to appreciate over time and act as a tail-risk hedge for the established financial system. How can you talk me out of it?*

I don't want a mortgage, because a mortgage is usually certainty of debt for a long time. I don't want to have to work that long. I've read the MMM "rent vs buy" article and decided that renting is for me. The co-ownership thing is a response to that -- I would consider owning a house if I was very very rich, or if I didn't have to put 100 or 200k into it. Also, I am in a unique living situation and part of a unique subculture -- co-housing, or whatever you want to call it. I've been doing it since I left my parent's house, and I really enjoy it. The LLC would exist to remove the commitment requirement for ownership. Buy and sell "shares" of a house that are worth either ability to live there or rent paid to you. But that's only a daydream at this point, just a theory. I won't be engaging in anything like that until I stop working anyway, since it would require my full attention.

I have read most of the stock series, I really enjoyed it.



*Either forge a signature of this post that verifies with this ecdsa public key, or show me a SHA-2 merkle tree with this post in it, and a root hash with a numeric value less than 2^128 :)

ecdsa-sha2-nistp521 AAAAE2VjZHNhLXNoYTItbmlzdHA1MjEAAAAIbmlzdHA1MjEAAACFBABMjFlyXR7NP7q+a23q4Xol3Hwosnf56c4KCF/
bOlc5LZNXnIQfYha3CBqcDBLoPP4Qqo9kIfF7abUVGd80YQPItQExIxFYzMDr6MLzDUwXtNz3zoLbG3tEJXwyntznLs1
pipoGPTNFr76HDZBhIHVAeG/nsyNdHiBmCyn4zR0069WUZg==

I know that's a pithy and meaningless reply. I admit that I am emotionally attached to the idea of bitcoin, and yeah, that is mental accounting. If nothing else, I think they were a good and relatively cheap lesson in market psychology. After trying to market-time small amounts of bitcoin back in 2013-14, I am certainly not going to try to market-time huge amounts of stocks...  I've seen firsthand how risky it really is.
« Last Edit: January 08, 2016, 10:46:51 PM by forestj »

mozar

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Re: Reader Case Study - What should I do next?
« Reply #7 on: January 09, 2016, 03:01:05 PM »
I know some people who have a shared house co-op that they bought together. But they were all rich and put a lot of money into the downpayment. I think that helps if you are making similar incomes.
I lived in group housing from 17 to 27 and I thought I would do it forever. But I got tired of it. So give yourself a few years before you decide that.

alsoknownasDean

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Re: Reader Case Study - What should I do next?
« Reply #8 on: January 09, 2016, 05:02:54 PM »
Yeah from experience you eventually get over share houses.

Financially I reckon you're doing pretty well as is. Just keep at it and increasing your income.

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Kriegsspiel

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Re: Reader Case Study - What should I do next?
« Reply #9 on: January 09, 2016, 05:14:02 PM »
Live in a van.