Author Topic: Out of debt! I... what do I do now?  (Read 5521 times)

Justaerin

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Out of debt! I... what do I do now?
« on: April 16, 2013, 04:38:41 PM »
Finally paid off all CCs and my one vehicle and want to really make a good start toward FI out of the gate, retiring ASAP.  I was so close to paying off my motorcycle that I (probably unwisely) just drained my emergency fund to do so.  At least I can start building back up now. 

Reading through some old posts, MMM suggests"just pay off all your debts, than start throwing it all into the Vanguard index fund."  Once I get the minimum $3,000 to invest in VFINX, I plan to do so.  I contribute to my 401k up to my employer's match of 4% (aggressively allocated).  I need to save an emergency fund and would like some cash to leverage on a vehicle for when I sell my paid-off motorcycle.  One thing to take into account is that I do not own a home, I rent, so I consider this a necessary future debt that I'd like to save up a down payment for.  I am eligible for a VA loan, so I don't think the down payment is even necessary, not sure but I should look into that... I won't be buying a home for at least 5 years due to needing to move around (professional and personal life reasons), so I have time to save with a relatively good income.

What % of your savings would you put where?  How should I disperse my savings for my future long- and short-term savings goals?  Should I max my 401k?  If so, before or after I have one or all of these short-term goals met?

I'm currently 32, have $7700 in my 401k and only a motorcycle as my primary asset (year-round driving here, but will sell and purchase a car due to moving to a less hospitable climate).  If you need specific numbers, I can list them out, but just some general guidance would be much appreciated.  Thanks!

brewer12345

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Re: Out of debt! I... what do I do now?
« Reply #1 on: April 16, 2013, 05:19:33 PM »
Congrats on digging out of a hole.  You now can start running up the score in the opposite direction.

I would suggest accumulating a healthy emergency fund before you do anything else.  Bad things happen and most of them are easier to  deal with when you have a bag of cash handy.

After that, you will need to think about whether it makes more sense for you to boost 401k contributions or save after tax.

teamzissou00

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Re: Out of debt! I... what do I do now?
« Reply #2 on: April 16, 2013, 05:20:52 PM »
Congrats on your success!!!!  Enjoy that.

My first thought was starting a Roth through Vanguard.  Split your money 1/2 to that and 1/2 to emergency fund

Justaerin

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Re: Out of debt! I... what do I do now?
« Reply #3 on: April 16, 2013, 05:33:58 PM »
Agreed on the emergency fund.  Is a Roth of greater benefit over the index fund, or is it just because I don't have the $3k for VFINX?  Or should I be using both?

I've read other ways of keeping a pretty liquid emergency fund in something a little higher-earning than a savings account.  Any suggestions on that?

As for saving after tax... I'm in a fairly high tax bracket so I guess it would be wiser to max my contributions after the emergency fund is fleshed out?  Hard pill to swallow, not being able to access that soon (other than MMMs "Roth IRA Escape Hatch Loophole").

Sunflower

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Re: Out of debt! I... what do I do now?
« Reply #4 on: April 16, 2013, 06:04:50 PM »
The Roth is just a vessel for your index fund. Basically, you go to Vanguard and open a Roth rather than a taxable account. Then you choose to put funds into whatever index fund you want within the Roth. You'll still need $3000 minimum investment.

Another Reader

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Re: Out of debt! I... what do I do now?
« Reply #5 on: April 16, 2013, 06:36:26 PM »
Since you will be moving around for awhile, in your shoes, I would accumulate several thousand dollars in emergency/moving funds.  Those I would keep in safe but accessible accounts.  Try some of the on-line banks such as Sallie Mae and Ally to earn a few pennies extra yield on the non-emergency portion.

You can open a brokerage account at Vanguard for your Roth IRA and purchase the ETF versions of the mutual funds that interest you.  ETF trades for Vanguard ETF's are commission free at Vanguard and there are no minimum purchase amounts.  As you accumulate more cash, you can switch to buying the mutual funds with the $3,000 minimum and then at $10,000, you can trade those shares for Admiral class shares with lower fees.  The advantage to the mutual funds is the ability to invest dollar amounts instead of buying specific numbers of shares.  At your age, I want to save as much as I can in tax deferred and tax free vehicles. 

I would look at the 401k and raise my contribution for the same reason.  If I could max out and meet my other goals, I would do so, especially because you say you are in a high tax bracket.

After the E-fund goal is reached and the tax deferred/tax-free retirement accounts are on auto-pilot, I would start saving the down-payment and investing in taxable accounts.  As you near this point, raises should be kicking in, giving you extra money to invest.

The car is a depreciating asset.  I would buy what I could afford when the need arose.

Percentages should be aligned with your goals and will change over time.

mikefixac

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Re: Out of debt! I... what do I do now?
« Reply #6 on: April 16, 2013, 07:53:08 PM »
I don't get the emergency fund thing. Why not fully fund the Roth and if you need money, pull it out from the Roth?

Time isn't an issue, I would think any needed funds, the check would arrive in 2 days.

And I thought there's no penalty for pulling out the money that I actually put in the Roth.

Anyway, please show me the error of my ways.

Another Reader

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Re: Out of debt! I... what do I do now?
« Reply #7 on: April 16, 2013, 08:03:48 PM »
1.  The Roth is designed for your retirement.  The benefit of tax-free growth over a long period of time cannot be duplicated elsewhere. 

2.  Once you take out the contributions, you can't put them back in. 

3.  You may be forced to liquidate when the market is down.

4.  In an emergency, you may need the money the same day.

5.  You cannot count on credit cards or a HELOC to be available when you need money.

icefr

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Re: Out of debt! I... what do I do now?
« Reply #8 on: April 16, 2013, 09:19:25 PM »
Agree on the Roth idea. I would also look into "Vanguard Total Stock Market Index Fund" instead of VFINX. VFINX just contains the top 500 US stocks by market capitalization and the Total Stock Market fund contains ALL US stocks, including small and mid cap, so it's a bit more diversified.

Justaerin

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Re: Out of debt! I... what do I do now?
« Reply #9 on: April 16, 2013, 09:32:45 PM »

3.  You may be forced to liquidate when the market is down.

4.  In an emergency, you may need the money the same day.


These scare me the most.  Thank you all so far for the input.  I need to do some reading though, as the terminology is over my head at this point (as ridiculous as that sounds, I'm sure you're all quite familiar with it).  I'm guess by purchasing the ETF versions of the mutual funds that interest me means that I can kind of simulate VFINX without the $3k minimum - is that what you're suggesting?

Also, when you say "I would start saving the down-payment and investing in taxable accounts", do you mean the house down payment?  And by taxable accounts... I realize that's accounts other than the Roth IRA and 401k, but are you referring to VFINX? 

Maybe I need to find a dummy's guide so I can at least understand there awesome advice I'm sure you're giving me.  Thanks for your time!
« Last Edit: April 17, 2013, 11:04:22 AM by Justaerin »

Another Reader

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Re: Out of debt! I... what do I do now?
« Reply #10 on: April 16, 2013, 09:55:16 PM »
Read up on asset allocation to start.  There are a number of threads in this forum and referrals to other sources.  You may also want to look at J.L. Collins' blog:  http://jlcollinsnh.com/ for a detailed series of articles on a simple investing approach.

Yes, you can buy the Vanguard ETF's as substitutes for the mutual funds if you want to start with small amounts.  You need a brokerage account at Vanguard to do this without paying a commission.  You may want two accounts - one now for the Roth IRA and one later for the taxable account.  If you want a little more hand-holding, Fidelity offers similar mutual funds and ETF's with no commission.  They have retail bricks and mortar offices where you can talk to someone about what you are trying to do.  Fidelity and Schwab offer seminars for beginning investors as well - free and you don't have to be a customer.

VFINX is a Vanguard mutual fund you can choose for any of your investment accounts.  I distinguish between short term savings and long term investing.  I keep savings in FDIC insured bank accounts and in US Treasury instruments.  Others here take on more risk and put pretty much everything into investment accounts.  What you choose to do will depend on how comfortable you are with risking your principal. 

Hope this helps.

Justaerin

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Re: Out of debt! I... what do I do now?
« Reply #11 on: April 16, 2013, 10:08:03 PM »
Awesome, thank you again for the advice and the resources.  I'll check out the blog and educate myself while I'm building my E-Fund.  Really appreciate your time and everyone's input.