Significant Extra Income at 22 years old- looking for advice

[Foster]

Hi everyone,

I was fortunate enough to just sign a contract as a consultant making $2,000/week (1099, no benefits, gross). I'm a senior in college and will be balancing 40 hours/week with a full course load until I graduate in May. This consulting job should last 5-6 months. Since I've been living on a $12/hr salary the past few years, I plan on continuing to do this and put the extra income in good places. This is where I need your help.

As far as debt goes, I have about $80,000 in disgusting student loans, a lot of which are private with horrible interest rates. I'd like to pay off a chunk of this during this employment period since this is probably the lowest overhead that I'll ever have ($700 in rent, $100 in utilities, cost of living).

I have a measly $2,000 in my checking/savings and about $3,000 in a Roth IRA (100% Vanguard indexed stock).

So my basic question is, where exactly should I allocate my extra income? My initial thoughts are save up some money ($6,000-$8,000) for emergency/liquidity, max out Roth IRA, and put the rest towards shitty loans. But I'd really like to hear everyone's thoughts.

*Bonus Question!*
Since I have a 1099 and will be paying a significant chunk of change to Uncle Sam come spring time, is there anyway to shelter some of my income from taxes? Obviously the Roth IRA but I was wondering if anyone knows any other methods. Also, should I just open a separate savings account to put money into each paycheck that I'll eventually just use to pay all my taxes? That seems better than scrambling to get liquid funds.

Thanks so much for any advice you guys have!

[ritchie70]

On taxes, don't forget to make quarterly payments.

I'd just take out the money I need to live and send every remaining dime to Sallie Mae or whatever blood sucking leech you have. Pay those loans off, worry about saving later. The magic of compounding works both ways.

Once you graduate, try to keep living at a similar expense level. People will say you're crazy or otherwise harass you. Laugh at them. Pay your loans off in a year.

[huadpe]

Hi everyone,

I was fortunate enough to just sign a contract as a consultant making $2,000/week (1099, no benefits, gross). I'm a senior in college and will be balancing 40 hours/week with a full course load until I graduate in May. This consulting job should last 5-6 months. Since I've been living on a $12/hr salary the past few years, I plan on continuing to do this and put the extra income in good places. This is where I need your help.

As far as debt goes, I have about $80,000 in disgusting student loans, a lot of which are private with horrible interest rates. I'd like to pay off a chunk of this during this employment period since this is probably the lowest overhead that I'll ever have ($700 in rent, $100 in utilities, cost of living).

I have a measly $2,000 in my checking/savings and about $3,000 in a Roth IRA (100% Vanguard indexed stock).

So my basic question is, where exactly should I allocate my extra income? My initial thoughts are save up some money ($6,000-$8,000) for emergency/liquidity, max out Roth IRA, and put the rest towards shitty loans. But I'd really like to hear everyone's thoughts.

*Bonus Question!*
Since I have a 1099 and will be paying a significant chunk of change to Uncle Sam come spring time, is there anyway to shelter some of my income from taxes? Obviously the Roth IRA but I was wondering if anyone knows any other methods. Also, should I just open a separate savings account to put money into each paycheck that I'll eventually just use to pay all my taxes? That seems better than scrambling to get liquid funds.

Thanks so much for any advice you guys have!

Re: getting paid on a 1099, I'd set aside 25-35% of each check in a separate boring savings account for taxes (higher percentage depending if you'll be in a higher tax bracket and/or are in a high tax state).  If it's more than you need, you can apply your "refund" to your student loans after you make sure taxes are covered first.  Student loans are bad, but tax debt is much, MUCH worse.  Depending on the calendar, you may not be super high tax this year (i.e. 3 months of 2013 left at 2k a week is about $24,000, which maybe just puts you in the 15% marginal bracket federally, but there's also 15.3% self employment tax).  Even if you end up having an extra $3,000 or so for taxes set aside, the peace of mind will be worth the small amount of interest on your student loans.

The Roth by the way will NOT shelter your income from taxes.  Rather, you pay tax on the income now, but don't pay tax on growth when you take it out later.  It's also good because contributions can be withdrawn tax-and-penalty free at any time (like when you retire early).  Since you're not gonna be in a high bracket, that's a much better deal.  Neither a traditional nor Roth IRA will protect against the self-employment tax though.  If you have legitimate expenses relating to your doing the contract work though, you should deduct those on the schedule C you'll have to file anyway.

[Charlotte]

I also am self-employed. Put aside at least a third for taxes. Maybe slightly more if you're single....  As stated above, a Roth won't shelter you from taxes. However a SEP IRA will. And it has higher limits than the Roth. Or just open a Traditional IRA since this is a temporary gig (keeping it simple).

Or just accept that you will pay a bit more in taxes and pay down some of those loans! It all depends on what your personal priorities are.

Be sure to track all expenses, mileage, tolls, parking, etc. for Schedule C. It's not hard once you get a system set up. You can print a copy of Schedule C from the IRS website to get an idea of deductible business expenses.

Good luck!

[chasesfish]

At that pay rate right out of college, I would keep it simple:

Segregate 30% of your pay into an account for taxes.  Then google IRS Estimate Payments and start learning how to do that.  Under-withholding penalties really stink, its an implied 7% interest rate.

Fund a regular IRA.  There are better options, but with your student loan debt and being 22, the interest paid on that debt over a lifetime if not handled is far more crushing then the benefits of funding more in a retirement plan for the first three years.

Then throw every dollar at that Student loan.

What are the rates on them?

[Foster]

Thank you everyone that took the time to read and comment, this site truly is an incredible source of knowledge.

Then throw every dollar at that Student loan.

What are the rates on them?

Right now they're 6.8% on most of the loans, but I haven't consolidated any and the rate isn't fixed so I can expect it to go up.

Be sure to track all expenses, mileage, tolls, parking, etc. for Schedule C. It's not hard once you get a system set up. You can print a copy of Schedule C from the IRS website to get an idea of deductible business expenses.

Very good point regarding keeping track of expenses for Schedule C form, I'll be sure to do that.

It seems like the general consensus is set aside a significant chunk for taxes and attack the loan debt before investing/saving much.

Thanks again for everyone's help, I truly appreciate it.

[Peony]

I am not being snarky but genuinely curious -- what kind of consulting does a person do right out of college? Is this common? I thought consultants were generally people who already had long careers behind them? Has consulting changed?

[Monkey stache]

You could also pay upcoming upcoming tuition and fees out of pocket (max $2,500) and then get that right back in your taxes through the American Opportunity Credit (if you make less than $80k this year) and put that towards your loans. It's not a tax deduction, rather you get it as a credit. This doesn't answer your tax shelter question but it turns $2,500 into $5,000 towards your education expenses.

More info here: http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center

[ritchie70]

I am not being snarky but genuinely curious -- what kind of consulting does a person do right out of college? Is this common? I thought consultants were generally people who already had long careers behind them? Has consulting changed?

There are two totally different things that are both called "consulting":

1. Highly experienced people who come in and help you sort things out in one way or another based on their extensive experience or knowledge. They come in for a short engagement and then go.
2. People with a variety of experience (including none) who are paid under a 1099 rather than W-2 arrangement. This has nothing to do with their experience (at least at first) and everything to do with their not being employees of the company and therefore not getting any company benefits.

Those #2 people can hang on for quite a long while, or they can be in for a project then gone. I've worked at my current employer 12 years and there are "consultants" who have been there far longer than I.

The #2 people have occasionally sued employer claiming that they are in fact employees and due all sorts of things like stock options. Sometimes they have won, which has resulted in other companies treating their #2's even worse than they used to.

[Foster]

I am not being snarky but genuinely curious -- what kind of consulting does a person do right out of college? Is this common? I thought consultants were generally people who already had long careers behind them? Has consulting changed?

Hey, sorry about the delay in responding.

ritchie70 pretty much hit the nail on the head in his #2. I'm in no way what you would call option #1. I was applying for jobs for when I graduate in May, someone happened to need people that had experience in my field, and I was fortunate enough to sign a contract for a few months. Pretty much like being a regular employee but without benefits. However, the pay is pretty high to compensate for that.

[CommonCents]

I am not being snarky but genuinely curious -- what kind of consulting does a person do right out of college? Is this common? I thought consultants were generally people who already had long careers behind them? Has consulting changed?

There are two totally different things that are both called "consulting":

1. Highly experienced people who come in and help you sort things out in one way or another based on their extensive experience or knowledge. They come in for a short engagement and then go.
2. People with a variety of experience (including none) who are paid under a 1099 rather than W-2 arrangement. This has nothing to do with their experience (at least at first) and everything to do with their not being employees of the company and therefore not getting any company benefits.

Those #2 people can hang on for quite a long while, or they can be in for a project then gone. I've worked at my current employer 12 years and there are "consultants" who have been there far longer than I.

The #2 people have occasionally sued employer claiming that they are in fact employees and due all sorts of things like stock options. Sometimes they have won, which has resulted in other companies treating their #2's even worse than they used to.

And then there is option 3: People who are hired straight out of college with no exp who are in fact employees of a consulting company.

I was offered and accepted a full-time, W2 job like this out of college.  Think Bain, McKinsey, BCG, Deloitte, Monitor, Accenture etc.  A lot of kids from my school and similar caliber schools did this actually.  But then I graduated in 2001, the economy tanked and the employers for the most part reneged on their job offers just before starting (less than 10 days in my case) and 9/11 happened.  Fun times.  Some folks did get to start though.

I agree it makes no sense, and had a hard time explaining to my dad what I would do, but really it just boils down employers thinking they'll hire smart people and teach them how to research/analyze/make them temporary experts in certain subjects.

[Peony]

Thanks, everyone, for filling me in!

[mikefixac]

2013 Tax Brackets in US for Single Person

10% up to ~$9000
15% ~$9K to ~$36K
25% ~$36K to ~$88K
28% ~$88K to ~$183K

So if you make $100K, taking standard deduction and 1 exemption, let's say that puts you then at $90K that would be taxed.

Realistically, if you could shelter ~$20K in an IRA of some kind, you're right away making 25% on your money saved, because instead of it going to tax man, it's going into a tax protected account. Then, in the future year or years you don't make as much money, you can roll that IRA over into a ROTH with less tax consequences. Does that make sense?

If you want some really good ideas, go post this over at the Boglehead forum. Lots of smart people over there. (Not at all do I mean to denigrate the previous comments.)

[Foster]

2013 Tax Brackets in US for Single Person

10% up to ~$9000
15% ~$9K to ~$36K
25% ~$36K to ~$88K
28% ~$88K to ~$183K

So if you make $100K, taking standard deduction and 1 exemption, let's say that puts you then at $90K that would be taxed.

Realistically, if you could shelter ~$20K in an IRA of some kind, you're right away making 25% on your money saved, because instead of it going to tax man, it's going into a tax protected account. Then, in the future year or years you don't make as much money, you can roll that IRA over into a ROTH with less tax consequences. Does that make sense?

If you want some really good ideas, go post this over at the Boglehead forum. Lots of smart people over there. (Not at all do I mean to denigrate the previous comments.)

Really good idea, they love that stuff over there. Thanks