Author Topic: Reader Case Study: Fresh Graduate, low debt, low income.  (Read 3059 times)

moreless

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Reader Case Study: Fresh Graduate, low debt, low income.
« on: July 01, 2014, 02:57:57 PM »
Assets: Essentially none. I moved to Los Angeles with 5 suitcases via train and have accumulated very little besides a computer, a bike, and my darkroom setup.
Debts: 8,857 in one fixed rate student loans at 4.75%
Consumer Debt: None, as of two months ago. I left home on less than pleasant terms and the months of trying to find work took its toll. I knocked out about 2400 in debt.

Monthly Income (Fixed, after taxes): 1628.00. This will increase to ~2300 in two months. I'm scheduled to switch from temp-to-hire to full time employee soon.
Monthly Income (Variable): Average for past six months ~250. I get paid weekly, which leads to a few months with an additional $407 after taxes. I also freelance in web design, and sell my photographs. I am not pursuing web design actively because my experiences with small businesses have been a nightmare. My only good experiences have been with personal contacts, which I will continue with as available.

Total: 1628 (assuming worst case)

Monthly Expenses
Rent: 650- I live with my boyfriend and three roommates. Moving to a substantially cheaper place would entail living too far away to bike or take public transport to my job and my boyfriend's job. Our apartment was among the lowest rent we could find in the area we work.
Student Loan: 97 a month
Utilities: ~70 a month. I consider this generally fixed, as I split evenly with 5 people. As it is we disdain the use of climate control in all but the absolute worst heat waves, and use a mix of cfl and led lightbulbs. Our main expense is high end internet. Most of us work in technical fields and push data around.
Cell Phone: 20-35 a month. I just got out of a contract with Verizon and switched to Ting.
Health Insurance: 40, which will go away once I'm full time
Groceries: ~180 We plan menus and cook as a household.
Restaurants: ~30, on that note, sometimes people beg off cooking, at which point we go to a taco truck and I buy the cheapest thing possible. BF and I will go dutch on a date at a nicer restaurant once in a blue moon. I will also admit the occasional lunch meal for $7 when I forget to pack one. This rarely happens more than once a month.
Transportation: ~25(+25), my boyfriend has a car which I drive occasionally. Between topping off fuel and taking the bus on occasion, that's about my monthly cost. I help pay for maintenance, so I tuck another 25 aside a month just in case. It is paid off, thank goodness.
Household stuff: ~60 (we have very little furniture or lighting, so we gradually save up for stuff, or build our own)
Photography stuff: ~75 (paper, chemistry, saving up for useful materials, once my darkroom is comfortably complete in another $250 or so, the monthly cost of paper and chemistry should hover around 25-30, unless my sales go waaaaay the heck up. Then all bets are off.)
Other Misc: ~15 (books, hygiene stuff, entertainment that costs anything)

Total: 1302 (assuming most expensive)

My excess income so far has gone to repaying the debt I went into while looking for work, getting my darkroom together, replacing my computer, and buying my bike.

I'm having consumerist thoughts which are variably justifiable. I'd like to replace my drill, which has a battery that is good for about 10 pilot holes at a time. I have plans to build a dining room table in the very near future, so this seems wise to me. I would also like skirt fenders for my bike, and a chain guard. Having an actual press for flattening my photos would be great, especially if they start selling in any volume. A paper/mat board cutting rig would be useful. My guitar (it's nice, was a gift from my godparents, otherwise I'd sell and get a new one) is hanging out with musician friends in the Midwest, and I'd love to have them ship it.

And then there's investing, a thing I plan to do. I'll be making 37,000 a year gross by the time 2015 rolls around. Is the tax exemption for my income worth putting it into a Roth IRA vs. an investment account? Where to put the (soon to be) 1k/month extra? Student loan I suppose, but is it crazy of me to want to put it in an investment account first? I think the amount of interest I would pay is negligible once you take inflation into account.

I'm a complete neophyte in the realm of fiscal responsibility. All my income through the end of college went to supporting my financially irresponsible mother. All I know is that I don't want to fritter away my earnings, or be beholden to a given job or income for longer than I have to be. I have virtually NO. IDEA. what do do with my money except not spend it on silly things. But even this is subject to scrutiny.

gimp

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Re: Reader Case Study: Fresh Graduate, low debt, low income.
« Reply #1 on: July 01, 2014, 08:10:54 PM »
My opinion. First of all, you're not doing terrible.

1. Pretend you get paid four times a month. Extra payday that month? Sweet, savings.

2. 180 on groceries per person is a bit high. I'd work with your housemates to figure out how to go a bit cheaper. For example, any time you're using the standard carb-heavy ingredients (pasta, beans, rice, bread/flour, potatoes) consider buying in larger bulk for cheaper. You're doing things as a household but you could easily cut the cost in half for yourself, so what's being bought? Otherwise doing things as a household is a great idea.

3. You're doing pretty well in most areas. Well done! And yes, it is justifiable to spend a little on hobbies, especially when there's a decent chance of making some dollars from them.

Notes:

Your income level doesn't make sense to invest in a roth in my opinion - not unless you're already paying $0 in federal tax. If you are, then roth is right. Otherwise, traditional is better. That assumes you'll be earning more later than today.

When you go full-time, do you get a 401k? Those are awesome if properly managed.

How to invest? The simple answer is this: Index fund. In short, an index fund takes your money and invests it in many - hundreds, thousands - of stocks. For example, the favorite around here is Vanguard's total market fund (VTSMX); it's a fund that invests in most stocks in the US. Market goes up, you go up. Market goes up over time, generally speaking. It's very cheap (you lose very little money to management/maintenance), and has an excellent track record. Alternatively, you could buy shares in VTI which is pretty much the same exact thing, but cheaper.

If that sounds too easy... it is. If you try to be fancy, you will probably lose. A single index fund, or equivalent exchange traded fund, will do the job. Your 401k, if you have one, should offer at least one broad-market index fund with a low expense ratio.

(Do you want any of these words defined?)

Required reading: http://jlcollinsnh.com/stock-series/

Now, the question of loans vs investments. Hard question. Your mileage may vary. Generally speaking, if you have - for example - loans at 5%, then paying them off is like a guaranteed 5% investment. If you assume that over long periods of time, index funds get you 7-8%, then paying off 6% might make sense, and paying 3% off might not. On the other hand, you could have an iron will, and you'd rather invest at 7% than pay off 6%. On the other hand, you might want to be debt free ASAP, and you'd rather pay off 3% than invest at 7%. So! It's completely reasonable to invest as much as possible, pay off as much as possible, or strike a middle ground; whatever you're comfortable with.

(Obviously if your loans are over 7-8%, probably better to pay them off.)

Then you have to think a little about investments and taxes. Remember how I said not to do a roth unless you have 0% federal tax due at the end of the year? That's because any money you put into a traditional IRA is put in tax-free, grows tax-free, but is taxed as income when you take it out. So if you earn $37k, put away $5k, you pay taxes on $32k today. On the other hand, a roth IRA means you pay taxes up-front, but then it grows tax-free and is not taxed as income upon withdrawal.

Similarly, a 401k is pre-tax contributions, roth 401k post-tax. But a 401k often has an employer match, which is nice; it also tends to have worse fund options, which is less nice.

Whew! So many things to consider. Let's simplify.

- See if you can spend less on food.
- Figure out if you get a 401k, and if you get any match. Matches are free dollars.
- Figure out taxes, and whether you should roth or traditional.
- Figure out loan % and your comfort level.
- You'll be fine if you keep thinking about this sort of stuff.

Out of curiosity, what do you do with film? Large format?

tanhanivar

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Re: Reader Case Study: Fresh Graduate, low debt, low income.
« Reply #2 on: July 02, 2014, 12:15:57 AM »
If you don't need the extra (consumerist) purchases straight away, I've found it helps to put the word out that you're looking for things. Freecycle, Facebook, etc... Friends may unexpectedly have things they were wanting to get rid of, or lend. Even if no-one has a drill they won't be using for a while (for example), they may offer you something you didn't know you could use! Or they might be willing to swap you something for photos or dresses, or help you make a press from scrap, etc.

This doesn't always work, but it's better than buying something new only to have your mother say, "Oh, you should have said! I just threw ours out last week." (Grr).

Also, friends might have bicycles they aren't riding which you could try out. Even if the bicycle isn't a perfect fit, you could find out that you really want more adjustable handlebars, or how many gears is too many, or that the skirt guard isn't necessary. And you'd be saving money on transport while practicing! A few people have said that your second bike is usually the one you want.

Thanks for your comment on my young artist question, too, and all the best with that!

moreless

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Re: Reader Case Study: Fresh Graduate, low debt, low income.
« Reply #3 on: July 02, 2014, 12:42:17 AM »
Hey gimp!

1. Yep, this has happened once since I started working and I immediately put it all into debt repayment at the time. This week is my second one, and the drill, skirt fenders, and chain cover call to me. I can't decide how okay to be with this.

2. Yeah, I agree that the cost is a bit high. We all moved in together recently, and I think part of it was just figuring out how/where to source our food in a new neighborhood for a larger household. We have a costco membership, and invested in airtight storage for dry goods last month, which was getting in the way of buying bulk previously. Another roommate and I bake all the bread, and the savings on flour alone in the next few months should cover the cost. There's also a preference for meat oriented meals in the household, which I am trying to break with the help of my fellow baker. When it was just me and my boyfriend I was managing about $120 per person between careful meal planning and figuring out which markets were least expensive. Hopefully I can coax everyone else close to that point, and do the same research for our local groceries. Boyfriend and bread baking roommate are 100% on board. The others are just happy not to be eating frozen meals anymore and don't much care about how much it costs. XD

3. Yeah, currently my sales are just through friends, and people who like what my friends buy and get referred. I'm not quite set up to produce a meaningful quantity. Close! But not quite. For now I'm making around $100 a month from my prints. If I felt equipped to meet a reasonable step up in demand, I would certainly view the extras like a press as an investment.

Notes:
I'm not sure what you mean about paying $0 in federal tax. I have a pretty significant portion of my paycheck withheld for federal and state taxes from each paycheck. I got a complete refund last year because my earning was so low, but I honestly have no idea how this year will look in terms of refund. TurboTax's calculator says I can expect about half of what I pay back, with part of my income taxes at 15%.

I do get a 401k when I go fulltime! Not matching unfortunately. The company has matched to at least 3% for 18 of the past 20 years, but the recession hit them pretty hard. They're recovering very well and anticipate being able to do a match at some level next year, but I won't count on it. I've been told our CFO doesn't publicly 'anticipate' anything that isn't going to happen, but the proof is in the pudding for me.

Yes, I've been reading about the index funds on the blog! I need to wait a bit to have the minimum necessary to invest, but I thought that was where it started, not where it ended- if that's really it, consider me set. XD Though 401k or Vanguard first? Ah!

I will start plugging away at that series. I definitely need a primer.

I'm not skittish, and I like data, and the data says historical 7% return over any extended period, so with my student loan at 4.75%, it seems like investing would be the superior option. I don't like being in debt, not even a little (cried like a baby when I took my loan out), but math is math.

God, I wish I could do medium or large format. I shoot b&w 35mm film, though my enlarger could cheerily deal with large format if I ever had the cash for that kind of camera/film. My camera belonged to my uncle and he dug it out of his attic for me when I took my first photography class. I've paid him for it in family portraits and such. Aside from my own work, I develop and occasionally print for a photographer friend of mine when he's really busy. I'm not terribly concerned with making huge stuff to show in a gallery just now, but if it ever seems like the right time I might step up to that. I probably will, once I feel I know what I enjoy shooting and producing more than I do right now. At the moment, I'm good just making my own art and doing what I like with the occasional happy accident of extra cash.

Also, thanks for thinking I'm not doing terribly :)

Tanhanivar:
Good call on putting the word out! I always forget to do that sort of thing. Misplaced pride, perhaps? I'll see what I can rustle up. :)

I actually really love my bike. The fit/geometry is pretty much exactly what my body seems to want. Maybe I'll ride a dutch bike someday and fall in love, but except for the few changes I've listed, I'm VERY happy with my Raleigh. I really do need a skirt fender though. Second time riding it my skirt got caught and I nearly face planted. Needless to say pants and cuffs ever since, but I'm beginning to miss the other half of my wardrobe.

I just hope someone finds it useful!

MDM

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Re: Reader Case Study: Fresh Graduate, low debt, low income.
« Reply #4 on: July 02, 2014, 01:37:17 AM »
I'm having consumerist thoughts which are variably justifiable. I'd like to replace my drill, which has a battery that is good for about 10 pilot holes at a time. I have plans to build a dining room table in the very near future, so this seems wise to me. I would also like skirt fenders for my bike, and a chain guard. Having an actual press for flattening my photos would be great, especially if they start selling in any volume. A paper/mat board cutting rig would be useful. My guitar (it's nice, was a gift from my godparents, otherwise I'd sell and get a new one) is hanging out with musician friends in the Midwest, and I'd love to have them ship it.

And then there's investing, a thing I plan to do. I'll be making 37,000 a year gross by the time 2015 rolls around. Is the tax exemption for my income worth putting it into a Roth IRA vs. an investment account? Where to put the (soon to be) 1k/month extra? Student loan I suppose, but is it crazy of me to want to put it in an investment account first? I think the amount of interest I would pay is negligible once you take inflation into account.

I'm a complete neophyte in the realm of fiscal responsibility. All my income through the end of college went to supporting my financially irresponsible mother. All I know is that I don't want to fritter away my earnings, or be beholden to a given job or income for longer than I have to be. I have virtually NO. IDEA. what do do with my money except not spend it on silly things. But even this is subject to scrutiny.

moreless, welcome aboard.  As others have already noted, you are doing well managing things at this point.  Period.  No "for a neophyte" qualifiers needed.  As for the drill, bike accessories, photo equipment, and guitar: all seem either "quality of life" or "investment capital" and thus eminently reasonable.

For investments, you asked about "a Roth IRA vs. an investment account."  Answering that question as written is easy: Roth IRA, because you don't have to pay any taxes on investment returns.

If you meant to ask "a Roth IRA vs. a traditional IRA," that's a little harder.  E.g., see http://www.bogleheads.org/wiki/Traditional_versus_Roth.  At $37K/yr gross, it appears you will be in the 15% tax bracket.  That probably means a Roth is correct for you, but it depends on a bunch of things.  The important point is to establish an IRA - whether you make it traditional or Roth is less critical.

Attached is a spreadsheet containing numbers from your post.  There's a bit of "neither fish nor fowl" about it: e.g. it has your 2015 estimated income, but the federal tax calculations are for 2014, etc.  See this post for other disclaimers.  But it may be useful for you to evaluate some "what if?" scenarios. 

You should adjust your withholding so you get no refund from the IRS in April.  The IRS is just holding your money and then returning it to you.  Better to invest it as you earn it.

Good to hear you will have a 401k option, even without the company match.  The main advantage of 401k over IRA is the amount of money you can invest: up to $17.5K in a 401k vs. $5.5K in IRAs.  E.g., you might be able to put ~$10K/yr into your 401k, plus the $5500/yr into a Roth IRA, based on your posted expenses.

In any case, good luck!

Thegoblinchief

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Re: Reader Case Study: Fresh Graduate, low debt, low income.
« Reply #5 on: July 02, 2014, 06:52:31 AM »
At that income level, I generally lean toward recommending a Roth over tIRA.

When you get access to the 401(k), scrutinize the fund offerings. If they have high expenses (over 1%), avoid it without a match.

You're doing pretty good!

On the drill, can you replace just the battery?

When saving up for things, I find it helpful to have a "bucket" approach. My income is variable, so we fund our various savings buckets based on a % of net cashflow for the month. With a fixed income and largely fixed expenses, you could fund it with a set dollar amount. When calculating things like NW, consider money in those buckets as spent money.