Author Topic: My Finances - Advice Welcomed  (Read 3928 times)

Cwadda

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My Finances - Advice Welcomed
« on: February 19, 2014, 01:36:16 AM »
Hi, I'm Chad. I'm new here but have been having a Mustachian attitude about things since I can remember. I'm 19 years old in college pursuing a degree in environment science, although this isn't confirmed yet. I'll lay out my finances because I'm looking for advice on what to do next.

Debt
$5400 student loan (6.8% annual fixed)
$16,000 loan from my parents currently at 0% (very lucky)

Expected expenses this year: (my parents pay for half of the first 4 items, which is why they may seem low, I'm very fortunate)
$5,970 for fall semester, can go to debt (this spring semester is already taken into account in debt)
Summer class $750
Used car $3000
Car insurance $700

Gas to and from work $500
Gifts $200
Miscellaneous expenses $300

Expected Income:
Quarter time-part time music director $9,500/yr
Full-time summer internship lasting a few months. Not sure the exact amount, but between $9,000-$10,000

Assets:
$6000 Roth IRA, Mutual Funds Class A shares (10% returns last year)
$7400 cash

I use Bank of America CashRewards because I don't spend a lot on it but I feel like it fits my spending habits closely. Plus there is a $110 reward for spending $500 in the first 3 months. I hear too often that people regret not having built credit earlier.

I plan on having 3 semesters left after this one (which would result in me graduating early to save myself and my parents 6k each).

What should I do next? What should I do with the 20K I will be earning this year? My parents aren't concerned with getting their money back right away; in fact, they would prefer to have an extra check coming in when they're retired ^.^

Let me know if there's any more information I should add. Thanks for your help!










Cwadda

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Re: My Finances - Advice Welcomed
« Reply #1 on: February 19, 2014, 08:11:09 AM »
Thanks for your response. Because I have enough credits to be on pace to graduating early, there is some wiggle room for choosing a major. I've shadowed a good amount of professions. I was originally in pharmacy, but I decided it wasn't for me. I've decided I'm not really interested in doing more than 4 years of school right now. Maybe a master's later though.

The internship gives valuable work experience, but what you're saying about networking is a great idea.

I'm getting charged in interest but I'm not letting it accrue. My Roth returns cover it. Also, I guess it's tax deductible so that saves money there.

nereo

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Re: My Finances - Advice Welcomed
« Reply #2 on: February 19, 2014, 08:34:20 AM »
Hi, I'm Chad. I'm new here but have been having a Mustachian attitude about things since I can remember. I'm 19 years old in college pursuing a degree in environment science, although this isn't confirmed yet. I'll lay out my finances because I'm looking for advice on what to do next.

Debt
$5400 student loan (6.8% annual fixed)
$16,000 loan from my parents currently at 0% (very lucky)

Expected expenses this year: (my parents pay for half of the first 4 items, which is why they may seem low, I'm very fortunate)
$5,970 for fall semester, can go to debt (this spring semester is already taken into account in debt)
Summer class $750
Used car $3000
Car insurance $700

Gas to and from work $500
Gifts $200
Miscellaneous expenses $300

Expected Income:
Quarter time-part time music director $9,500/yr
Full-time summer internship lasting a few months. Not sure the exact amount, but between $9,000-$10,000

Assets:
$6000 Roth IRA, Mutual Funds Class A shares (10% returns last year)
$7400 cash

I use Bank of America CashRewards because I don't spend a lot on it but I feel like it fits my spending habits closely. Plus there is a $110 reward for spending $500 in the first 3 months. I hear too often that people regret not having built credit earlier.

I plan on having 3 semesters left after this one (which would result in me graduating early to save myself and my parents 6k each).

What should I do next? What should I do with the 20K I will be earning this year? My parents aren't concerned with getting their money back right away; in fact, they would prefer to have an extra check coming in when they're retired ^.^

Let me know if there's any more information I should add. Thanks for your help!

Welcome!

I'm somewhat confused about the numbers you gave us, but overall the picture doesn't look that bad for someone your age still in college.  the $500 for fuel is for the entire year?  If so that's great!  If that's per month that's very anti-mustachian.  Also, you mentioned your 10% returns last year for your ROTH IRA and that you can use your ROTH returns to 'cover' the interest on your student loans?  Does that mean you are selling parts of your ROTH each year and putting it towards the interest?

Ok - my advice:  It's good that you are thinking about establishing credit, but don't let the teaser "$500 back!" cloud your judgement.  What is the annual fee on your credit card?  It's likely $75+.  Most important is to always, always pay it off it full.  Second to that is to find a card with either no annual fee or make sure you get more rewards than the annual fees you pay.  Establishing credit early is a good thing, IF It is good credit! 

You said your ROTH earned 10% last year?  That would be considered a good year except the S&P rose 30% last year.  So you actually lagged behind the markets by a lot.  I'd strongly recommend that you put all your IRA contributions into a low-cost index fund like the Vanguard 500 fund. Also, unless you really need it, leave that money alone right now.  You have cash-flow to pay towards your student loans, and at your age compounding interest is your greatest friend.

Is your student loan subsidized (e.g. does the government pay the interest until 6months after you graduate)?  If yes, then save money up now but wait to pay it back until you enter your repayment period, then pay it down aggressively.  If your parents are ok with not being payed abck immediately then take their advice and pay them back slowly.  it's a 0% loan.  You're actually coming out ahead every year with inflation.

Finally (and perhaps most importantly) I agree with Flostache in that the most important thing you can be doing now is making yourself as marketable as possible.  Work internships, gain experience, etc.  Find out what programs the industry uses and learn them (for environmental science programs like R and Matlab are in demand).  Most importantly, make contacts with people.  If there's a company or a field you want to work in, make connections with someone there who's work you admire. 

Cwadda

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Re: My Finances - Advice Welcomed
« Reply #3 on: February 19, 2014, 09:53:15 AM »
Quote
Welcome!

I'm somewhat confused about the numbers you gave us, but overall the picture doesn't look that bad for someone your age still in college.  the $500 for fuel is for the entire year?  If so that's great!  If that's per month that's very anti-mustachian.  Also, you mentioned your 10% returns last year for your ROTH IRA and that you can use your ROTH returns to 'cover' the interest on your student loans?  Does that mean you are selling parts of your ROTH each year and putting it towards the interest?

Ok - my advice:  It's good that you are thinking about establishing credit, but don't let the teaser "$500 back!" cloud your judgement.  What is the annual fee on your credit card?  It's likely $75+.  Most important is to always, always pay it off it full.  Second to that is to find a card with either no annual fee or make sure you get more rewards than the annual fees you pay.  Establishing credit early is a good thing, IF It is good credit! 

You said your ROTH earned 10% last year?  That would be considered a good year except the S&P rose 30% last year.  So you actually lagged behind the markets by a lot.  I'd strongly recommend that you put all your IRA contributions into a low-cost index fund like the Vanguard 500 fund. Also, unless you really need it, leave that money alone right now.  You have cash-flow to pay towards your student loans, and at your age compounding interest is your greatest friend.

Is your student loan subsidized (e.g. does the government pay the interest until 6months after you graduate)?  If yes, then save money up now but wait to pay it back until you enter your repayment period, then pay it down aggressively.  If your parents are ok with not being payed back immediately then take their advice and pay them back slowly.  it's a 0% loan.  You're actually coming out ahead every year with inflation.

Finally (and perhaps most importantly) I agree with Flostache in that the most important thing you can be doing now is making yourself as marketable as possible.  Work internships, gain experience, etc.  Find out what programs the industry uses and learn them (for environmental science programs like R and Matlab are in demand).  Most importantly, make contacts with people.  If there's a company or a field you want to work in, make connections with someone there who's work you admire.

All of the expenses I gave were yearly. Gas costs me around $500 per year because my internship pays for mileage (which gives me more than I spend). Also, because the $9500 from my other part-time job is miscellaneous income, I can write off 56 cents per mile, which again, is more than double what I spend. I am not selling parts of my ROTH, because it's best to leave it untouched. If anything, I will only add to it. That's interesting that you mention the S&P went up 30% - just shows how naive I am  to the financial world. The government loan is unsubsidized. I pay interest automatically every few months to ensure the interest doesn't accrue. Do you think I should use some of my cash to add to my ROTH again? I haven't contributed anything for the year 2014 yet.

Here is the credit card I'm currently using. https://www.bankofamerica.com/credit-cards/products/cash-back-credit-card.go. No annual fees. I think I've made a decent choice, but any advice/cautions about this card is encouraged. I always pay the bill in full (and automatically); my mom has been drilling that idea into my head since I was 6 years old.

You and Flostache have great ideas about marketing yourself. I like your idea about learning the programs in the industry. I actually have a good connection with my brother-in-law, who offered me the internship in the first place. I do admire his work and professionalism. I also have a family friend who has a degree in geology and an extremely high position at a power plant who has offered me to help me get a job and has assisted other college grads. I'm so fortunate to be surrounded by helpful people!

« Last Edit: February 19, 2014, 09:55:24 AM by Cwadda »

nereo

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Re: My Finances - Advice Welcomed
« Reply #4 on: February 19, 2014, 10:48:30 AM »
Ok - the credit card doesn't look too bad, IF you pay it off in full each and every month.  If not they'll give you a "pants-on-fire" 22.99% interest rate, which includes all NEW purchases. So whatever you do never, ever be late and you'll be fine.
Also, you don't need to use your credit card extensively to get a good credit history.  You could use your card once a month (and pay in full) and that would be sufficient.  It's the history of payment, not the history of use that matters for your FICO score.

The stock market has/was on a tear from 2010-2013.  It had greater returns than almost any other 4 year period in the last century.  Yet recent polls have shown that about a third of american think the market went down during this period, and more than half said down or flat.  There is a shocking disconnect between perception and reality in this arena.  I don't want to get this off-topic but most Americans have lots of debt, no savings, and no clue what the markets are doing and how compounding interest can save (or kill) their financial freedom.
Regardless, since you have a decades-long timeline, I'd strongly encourage you to park your IRA money in a low-cost index fund.  Vanguard 500 is a popular choice here (and the one I use) https://personal.vanguard.com/us/openaccount?CompLocation=WWOIRA_Tab1&Component=OpenIRA_Body&acctType=NewAcct.  They charge the absolute minimum in fees, and it mirrors wht the S&P 500 does (the 500 largest publically traded stocks in the US).  It will go up some years, it will go down others... but if you buy and hold, you should have annualized gains >7% over a 10+ year time frame.

As to what you can/should do now - As I've said, the most important thing I think is for you to make professional connections and be as employable as you can following graduation.  Right now, it's kind of a tossup as to what you do with your extra money.  If you paid down your 6.8% student loan you'd get a virtual 6.8% return, which is overall pretty good.  But, I think you can do better putting that money into your IRA and letting it compound for a few decades.  In 2014 you are permitted a $5,500 contribution.  My advice is to pay enough to your student loan that the principle doesn't increase and maybe goes down very slightly (e.g. pay slightly more than the annual interest), and then put the rest into a Vanguard 500 IRA.  Since your tax bill will be miniscule already, I'd recommend the ROTH IRA - a traditional IRA gives you a tax break now, but you wouldn't likely utilize that to it's full extent, and I'm not sure you want to get into rolling over traditional IRA funds into ROTH IRA funds just yet...

Just by being here and being aware you are on to a GREAT start. Keep saving, make yourself marketable and you'll have FI well before you turn 40.

GregO

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Re: My Finances - Advice Welcomed
« Reply #5 on: February 19, 2014, 11:02:21 AM »
pay off your $5400 student loan debt. You have a lot of cash on hand. Since your parents are acting as your safety net, probably don't need so much on hand esp when you have a 6.8% loan.

I second this.  If you have money coming in like you say, your #1 goal should be finishing school without anymore student loans.  As everything on this forum talks about, debt is a financial killer.  And those loan rates are not insignificant.  Every time you pay interest on those loans (like you say you are doing to keep them down), you're giving money to the bank.  I think you should take your cash and pay off the 6.8% loan entirely.  If you aren't comfortable having that little cash in the bank, at least pay off a good chunk of the loan.  But you have very few expenses, so I'd think most of your savings should go to paying off the loan.

Also, it's great that you have a Roth IRA already.  Do some research on investing and learn how to invest it well, that's education that will pay off for the rest of your life.  I agree that index funds are the best, but do your research and learn about it and understand why we all think that.  Vanguard is a great place to put your money, but do some research on it and come to your own conclusions.  And then keep learning more about it for the rest of your life :-)

Cwadda

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Re: My Finances - Advice Welcomed
« Reply #6 on: February 19, 2014, 11:33:58 AM »
I also didn't mention this, but my parents are considering buying real estate for investing. They have offered to let me go in with them. It's hard to know where to allocate my money. Should I pay down my loan before making any investments? Does my loan give me tax benefits (like getting to write off interest payments) to the point where it's better to invest extra money than pay off the loan?

Cwadda

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Re: My Finances - Advice Welcomed
« Reply #7 on: February 19, 2014, 11:41:17 AM »
Ok - the credit card doesn't look too bad, IF you pay it off in full each and every month.  If not they'll give you a "pants-on-fire" 22.99% interest rate, which includes all NEW purchases. So whatever you do never, ever be late and you'll be fine.
Also, you don't need to use your credit card extensively to get a good credit history.  You could use your card once a month (and pay in full) and that would be sufficient.  It's the history of payment, not the history of use that matters for your FICO score.

The stock market has/was on a tear from 2010-2013.  It had greater returns than almost any other 4 year period in the last century.  Yet recent polls have shown that about a third of american think the market went down during this period, and more than half said down or flat.  There is a shocking disconnect between perception and reality in this arena.  I don't want to get this off-topic but most Americans have lots of debt, no savings, and no clue what the markets are doing and how compounding interest can save (or kill) their financial freedom.
Regardless, since you have a decades-long timeline, I'd strongly encourage you to park your IRA money in a low-cost index fund.  Vanguard 500 is a popular choice here (and the one I use) https://personal.vanguard.com/us/openaccount?CompLocation=WWOIRA_Tab1&Component=OpenIRA_Body&acctType=NewAcct.  They charge the absolute minimum in fees, and it mirrors wht the S&P 500 does (the 500 largest publically traded stocks in the US).  It will go up some years, it will go down others... but if you buy and hold, you should have annualized gains >7% over a 10+ year time frame.

As to what you can/should do now - As I've said, the most important thing I think is for you to make professional connections and be as employable as you can following graduation.  Right now, it's kind of a tossup as to what you do with your extra money.  If you paid down your 6.8% student loan you'd get a virtual 6.8% return, which is overall pretty good.  But, I think you can do better putting that money into your IRA and letting it compound for a few decades.  In 2014 you are permitted a $5,500 contribution.  My advice is to pay enough to your student loan that the principle doesn't increase and maybe goes down very slightly (e.g. pay slightly more than the annual interest), and then put the rest into a Vanguard 500 IRA.  Since your tax bill will be miniscule already, I'd recommend the ROTH IRA - a traditional IRA gives you a tax break now, but you wouldn't likely utilize that to it's full extent, and I'm not sure you want to get into rolling over traditional IRA funds into ROTH IRA funds just yet...

Just by being here and being aware you are on to a GREAT start. Keep saving, make yourself marketable and you'll have FI well before you turn 40.

This is exactly what I've done for my loan payment - paid slightly more than the annual interest. I'm definitely going to ask my financial adviser about Vanguard. Maybe I'll put $4000 in there and then pay $2000 off my student loan. By the end of the semester I'll have another $1000 to start building my cash back.
« Last Edit: February 19, 2014, 11:43:06 AM by Cwadda »

GregO

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Re: My Finances - Advice Welcomed
« Reply #8 on: February 19, 2014, 12:20:20 PM »
It's hard to know where to allocate my money. Should I pay down my loan before making any investments?

The direct answer to your question is you should put put your money where you'll get the greatest return with the least amount of risk.

The risk vs. reward is always the tough part of investing.  If you paid off the loans, you know you get 6.8% return on your money with no risk.  If you invest it, then you'll likely get a higher return, but at a greater risk.  Nereo's thought is that since you have such a long time, there is plenty of time for the returns to even out and you should get better than a 7% return on your money.  And I agree, that is very likely.  But it's still a risk that the market won't give that kind of return.  The other risk with investing first is the risk that you won't be able to pay the loan at some point.  If you couldn't find a job, had a big medical expense, something like that.

So the answer is, you just have to decide what level of risk you'd like to take.  Like Nereo said, it's close between those two options, I doubt you'll regret either one.  As far as the real estate goes, you'd have to analyze that in a lot more detail to compare it to the other options.

Good luck!