Author Topic: What to do with my savings?  (Read 5003 times)

Bonsai

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What to do with my savings?
« on: October 28, 2014, 09:24:19 AM »
My situation: Longtime reader finally giving in and asking the community for help. I'm currently 24 and just moved out from my parents' house into a rental in Baltimore. I'm having doubts about my situation, so I was hoping some more experienced mustachians could help me assess my situation and allay my fears.

Now, my financial situation is relatively good, and I plan on keeping it that way. An outline:

Assets:
$5k cash
$30k in high yield savings account (CapitalOne360)
$11k in a high-yield savings account that only my parents have access to (leftover college savings; scholarships mitigated a lot of those costs. They will probably only grant me access in the event that I buy a house or have a medical emergency).
$16k in 401k (split between my old and new jobs' 401ks)
$10.5k in Vanguard Total Stock Market Index Fund (all VTSAX)
$8.5k in Vanguard Roth IRA (all in Target 2055 Retirement)

Debts:
$10k on a 2012 Toyota Camry, purchased new in May 2012 (dumb, I know, but at the time I was commuting in DC traffic with a dying clutch and panic and prodding from my parents convinced me to buy new).

Income:
$2500 gross per pay, on the nose.
$500 goes into my 401k per paycheck, and after taxes my net pay is about $1400.
Approximating to 2 pay periods per month, this comes to about $2800 net income each month, with a bonus 3rd paycheck twice a year.

Fixed monthly expenses:
$800/mo rent
$30/mo for phone
$300/mo for car payment (just under $10k left on loan at 2.24%)
$8/mo for Netflix (this technically counts as my utility bill contribution, everything else is included in rent)
$100/mo for car insurance
$50/mo for gas (highball estimate; 1.3 mile commute to work, usually a weekend trip to visit a friend or family once or twice a month)
$50/mo for various hygiene essentials (soap, haircuts, dry cleaning,  etc)
SOON TO COME: $4400 tuition per 2-class semester for Masters program, twice a year. This will begin either this spring or next Fall, depending on if the classes I'm looking at are filled before the college approves my enrollment. It's all reimbursable by my company, but I do have to pay up front and get a B or higher before I get the money.

Total: $1,338 (Soon to be 2071 when the academics kick in)

Typical discretionary expenses:
Restaurants: $80/mo
Dates: $100-$150/mo (This is for me covering both my and my gf's meals/tickets/entertainment when we go out. Other than that, we share no expenses.)
Video Gaming: $50/mo HARD MAXIMUM. I'm a nerd, but I do keep it in check.
Alcohol/Bars: $100/mo (I should really try to reign this in, I know. I'm a sucker for trying new beers.)
Public Transit: $20/mo (I take the light rail or bus whenever I know parking will be a pain where I'm going)
Miscellaneous fun: ~$100/mo. This is a rollercoastery category; sometimes I spend none of it, sometimes I'll blow through $150 on a weekend in NYC. This is more or less a "treat yo'self" category.

Total: About $475

Grand total of expendatures: $1813 ($2546 w/tuition)
Takehome after expenses: ~$900 (~$170)

Now that we have all the basic information out of the way, my big question: What should I do with that big hunka change in my savings account? Obviously a good chunk (I was thinking $10kish) should be dedicated emergency money. I was tentatively planning on buying a house a few months back, but embraced the wild world of renting to maintain flexibility (I don't know if I'll want to stick with my current job after I gradutate from my Masters program). The old "throwing money" adage does keep creeping into my mindset though -- would it be implausible for me to buy a live-in rental and save more money that way? Am I best off sinking the money into wiping out my auto loan and freeing up another $300 a month that I can direct towards my retirement accounts? Should I throw $20k into VTSAX and forget about it? Some combination of the above? I feel like I have a world of possibilities before me but I'm overwhelmed. An impartial eye would go a long way toward helping me make a rational decision in this matter, so I welcome any and all input from the community.

rjbf65

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Re: What to do with my savings?
« Reply #1 on: October 28, 2014, 10:22:20 AM »
Personally..I'd pay off the car with $10K.  Keep $10K as an emergency fund.  And then put the 10K that is left towards your next goal.  For me this year it was a down payment on my house.  For you, it could be adding it to your Vanguard account.   

coffeehound

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Re: What to do with my savings?
« Reply #2 on: October 28, 2014, 10:23:42 AM »
Pay off the car loan.  CapitalOne360 isn't getting you 2.24% returns.

Hugerat

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Re: What to do with my savings?
« Reply #3 on: October 28, 2014, 10:30:03 AM »
My god man, your commute is 1.3 miles! Get a bike!! Sell the car!!! As always, you need to put your $30k in high yield savings to better use. Invest it in a diversified basket of stock and bond index funds. Too many diligent savers are far too risk-averse with their savings.

Hugerat

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Re: What to do with my savings?
« Reply #4 on: October 28, 2014, 10:35:11 AM »
Re: other comments, don't even think of using your cash to pay off the car loan. At the current 1.7% rate of inflation, your real interest rate on this loan is just over half a percent. Paying this off would be an extremely poor use of capital. Likewise, if your interest rate on the savings accounts is anything under 1.7%, which it probably is, you're earning a negative real return. Invest this money in better assets. And sell the car.

rjbf65

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Re: What to do with my savings?
« Reply #5 on: October 28, 2014, 10:47:10 AM »
Re: other comments, don't even think of using your cash to pay off the car loan. At the current 1.7% rate of inflation, your real interest rate on this loan is just over half a percent. Paying this off would be an extremely poor use of capital. Likewise, if your interest rate on the savings accounts is anything under 1.7%, which it probably is, you're earning a negative real return. Invest this money in better assets. And sell the car.

I agree with the sell the car.. my advice was assuming he was keeping the car.  I guess if I was going to take it a bit furher I would say to sell that particular car to get rid of that particular debt and open up your cash flow.  If you need a car, then buy one for $5K or less for your weekend trips.  You can get a dependable ride for that.  Ride a bike through the week.  Millionaire status in 10-15 years.  :)

Bonsai

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Re: What to do with my savings?
« Reply #6 on: October 28, 2014, 11:15:23 AM »
My god man, your commute is 1.3 miles! Get a bike!! Sell the car!!! As always, you need to put your $30k in high yield savings to better use. Invest it in a diversified basket of stock and bond index funds. Too many diligent savers are far too risk-averse with their savings.

Re: other comments, don't even think of using your cash to pay off the car loan. At the current 1.7% rate of inflation, your real interest rate on this loan is just over half a percent. Paying this off would be an extremely poor use of capital. Likewise, if your interest rate on the savings accounts is anything under 1.7%, which it probably is, you're earning a negative real return. Invest this money in better assets. And sell the car.

I definitely plan to start riding to work! However...  I need to learn how to ride a bike first. I just moved this close to work late last month, but I've got a route planned for when I do get the hang of the whole balance thing (I'm really, really uncoordinated, so it's taking longer than I'd like to admit). I can't really get rid of the car altogether because I sometimes have to travel for work to the middle of nowhere, and I'd rather not anyway because I like the freedom of being able to visit friends and family on a whim and am otherwise happy with the idea of maintaining a beater up until it gives up the ghost. I have no idea of how to go about buying/selling a car outside of the dealership, so this might take some time while I get my bearings on the matter.

The low cost of the loan compared to inflation was the big reason that I haven't paid it off sooner. I'm looking at some of the ETFs that vanguard offers, and it appears that some of the short-term bond ones do quite well. Would Bond ETFs be a viable vehicle for emergency savings, or no? My limited research says that it's best to keep savings in an FDIC insured savings account...
« Last Edit: October 28, 2014, 11:19:21 AM by Bonsai »

Hugerat

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Re: What to do with my savings?
« Reply #7 on: October 28, 2014, 02:04:48 PM »
You might try looking into a trike! Some of those are pretty sweet and owing to the reclined riding position, better aerodynamics, and ability to be permanently clipped into the pedals you can really haul in them.

Regarding investments, remember past performance is no guarantee of future results. Interest rates have been declining for the last 30 years so performance of even short term bond funds will look pretty good. Rates now though are about as close to zero as you can get so there is literally no more room for them to decline. At your age you should still be investing a majority of your money in diversified stocks. Try a 70/20/10 allocation, with 70% global stocks, 20% diversified bonds, and 10% real estate. Vanguard has index funds and ETFs for all of these.

I would also strongly urge you to forget the emergency fund. Emergency funds imply a large stash of cash that sits in a bank account earning a negative real return for years or even decades waiting for some extremely unlikely event. They are advocated by people who are, a) terrified of the real world, b) don't know anything about investing in mutual funds or ETFs, and c) often don't even understand their own situation very well. Let's take a look at your own situation: You're 24. You have $80k in financial assets at your disposal. You have no children or other dependents. You rent. You have health insurance? I can think of very few scenarios in which you would have an emergency that costs you more than a couple grand. What's more, money invested in mutual funds or ETFs is still available for emergencies! It just happens to be working to working to make itself bigger while it waits for you to have an emergency.

Bonsai

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Re: What to do with my savings?
« Reply #8 on: October 29, 2014, 06:56:43 AM »
Good suggestion on the tricycle, but I do have a bicycle already -- it's just a matter of learning to negotiate obstacles and slow down properly. It just comes down to practice! Just gotta wait for this strained back muscle of mine to heal up and I'm gonna get back up there, hopefully this weekend.

After a bit of thought, I do agree with your assessment of reallocating my emergency fund. I do have very little liability, and am covered by health insurance. I suppose I'm just a bit afraid of a market downturn coming at an inopportune moment, which I do know is irrational (don't time the market!) and paranoid. My biggest mental block is that every time I run my ideas by my old man (a former CPA and successful contract lawyer), he argues that I should maintain my car for the sake of its reliability and should be maintaining a large cash buffer "in case you find a good deal for a house." Obviously patently ridiculous, but the man is quite successful in his own right and definitely has my best interests at heart, so I find it a little difficult to reject his advice outright.
« Last Edit: October 29, 2014, 06:58:20 AM by Bonsai »

Tetsuya Hondo

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Re: What to do with my savings?
« Reply #9 on: October 29, 2014, 07:31:24 AM »
Re: the biking bit - are you still in the DC area?

If so, check out the W&OD trail (NoVA) or the C&O (DC clear out to Harpers Ferry and Beyond) or the Mt. Vernon (Arlington to Mt. Vernon) trails on the weekend. These offer long flat stretches that would be a good place to get some saddle time and develop more of a feel for your bike. The C&O and Mt. Vernon trails are also very scenic. If you do, you might want to start at a place that's a few miles out where it's less crowded (e.g., the W&OD out by Vienna). And remember, keep to the right and let faster cyclists pass on your left.

FarmerPete

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Re: What to do with my savings?
« Reply #10 on: October 29, 2014, 07:33:48 AM »
Maybe an uncommon view, but I like to make sure that some of my money is hedged against a total market meltdown.  I've got some CDs at Ally making at least above inflation still (2.5%).  I also have a few grand invested in a mutual fund MERFX.  Basically, that mutual fund makes money off buying stocks from companies after announcing mergers.  When company A says they're going to buy Company B for $50 a share, company B's share price typically shoots up to $50 but then slowly goes down as people want to get out of it.  MERFX goes in and buys it at a discount and sits on it till the merger happens.  It's very low risk and can generate ~4% return a year.  It does go up and down, but it's a lot more stable than the market.  Looking at their investment growth charts over the 2008/9 financial crisis makes me feel all warm and tingly.

NinetyFour

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Re: What to do with my savings?
« Reply #11 on: October 29, 2014, 08:46:58 AM »
Use your feet to get to/from your work.

civil

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Re: What to do with my savings?
« Reply #12 on: October 29, 2014, 09:18:42 AM »
Re: the biking bit - are you still in the DC area?

If so, check out the W&OD trail (NoVA) or the C&O (DC clear out to Harpers Ferry and Beyond) or the Mt. Vernon (Arlington to Mt. Vernon) trails on the weekend. These offer long flat stretches that would be a good place to get some saddle time and develop more of a feel for your bike. The C&O and Mt. Vernon trails are also very scenic. If you do, you might want to start at a place that's a few miles out where it's less crowded (e.g., the W&OD out by Vienna). And remember, keep to the right and let faster cyclists pass on your left.

Closer to Baltimore, we have the B&A (Baltimore to Annapolis) trail. One end of it is an 11-mile loop around BWI airport. It's pretty, people don't go too fast on it, and there is a really nice airport observation spot. There is also parking for that loop part. The non-loop part is a rails-to-trails site I believe, so it's a straight shot to Annapolis, good if you're not as comfortable with curves yet.

Tetsuya Hondo

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Re: What to do with my savings?
« Reply #13 on: October 29, 2014, 09:27:00 AM »
Use your feet to get to/from your work.

OMG, yes! My brain passed right over the 1.3 mile commute. That's hardly worth even biking, let alone driving. You're missing out on some good, relaxing exercise every day. 1.3 miles is a short walk.

Bonsai

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Re: What to do with my savings?
« Reply #14 on: October 29, 2014, 11:04:21 AM »
Definitely hearing all of you on the biking thing! The weird thing about the exact place where I live is, the highway actually is the most direct route to my work -- getting there on foot (or bike) will add another 3/4ths of a mile or so. Trivial for a bike, but that tacks on another 10-15 minutes if I'm walking (fine for Spring/summer, but it's starting to get pretty cold!). Thanks for the riding area suggestions -- I'm actually pretty familiar with the C&O Canal trail, and I'm definitely down to check out the route around the airport. Now it's just a matter of saddling up...

Maybe an uncommon view, but I like to make sure that some of my money is hedged against a total market meltdown.  I've got some CDs at Ally making at least above inflation still (2.5%).  I also have a few grand invested in a mutual fund MERFX.  Basically, that mutual fund makes money off buying stocks from companies after announcing mergers.  When company A says they're going to buy Company B for $50 a share, company B's share price typically shoots up to $50 but then slowly goes down as people want to get out of it.  MERFX goes in and buys it at a discount and sits on it till the merger happens.  It's very low risk and can generate ~4% return a year.  It does go up and down, but it's a lot more stable than the market.  Looking at their investment growth charts over the 2008/9 financial crisis makes me feel all warm and tingly.

This is the kind of stuff I was looking for. I'm definitely not going to stick the majority of my savings in super conservative funds (I'm only 24, after all!) but I'll sleep a lot easier if I know I can pull out a few thousand no matter what happens.
« Last Edit: October 30, 2014, 06:52:25 AM by Bonsai »

Hugerat

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Re: What to do with my savings?
« Reply #15 on: October 29, 2014, 12:38:58 PM »
Forgive me, I'm beating a dead horse here, but nothing gets me riled up like the subject of emergency funds. Lots of people will tell you that it is their "opinion" that holding onto a large cash reserve or emergencies or a rare opportunity like a house is "better." Or that it will help you "sleep better at night." But this is wrong. Leave aside the fact that even if you were to stumble upon a terrific deal on a house you can redeem mutual funds for cash way faster than you could ever close on the house so this money, despite being invested in productive assets, is still available for just about every contingency. Consider instead that hoarding cash is wrong because the math says it is wrong, and there really isn't any room for opinion in financial matters when the math so unequivocally stacks up on the other side.

Here's a back of the envelop calculation. Let's assume you start with an emergency fund of $10,000, can earn an average annual nominal rate of return investing in an S&P 500 index fund of 7%, and today's inflation rate of 1.7% for a real rate of return of 5.3%, and the potential for a 20% downturn sometime in the future that happens to coincide with an emergency for you. Bear in mind these are extremely low-ball estimates of the returns you are likely to experience investing in stocks. The average annual REAL return (AKA net of inflation) is considerably greater than this number for the last 140 years or so. That real return figure also already includes periodic market downturns, so even despite occasionally losing your shirt you can expect something north of a 7% real rate of return.

By comparison, Ally bank is currently offering a 0.9% APY on a "high yeild" (LOL) savings account. Today's inflation rate yields a GUARANTEED NEGATIVE rate of return of .8% every year. But hey, this is in a demand deposit account and is accessible to you today if you want it. I guess that's worth... something.

So let's calculate this out. If you invest your money for, say, 4 years with the above assumptions and in year 5 you experience a 20% market downturn. Here are your balances at the end of these 5 years:

Invested: $9,835.66
Savings Acct: $9,683.82

Even despite just coming off a 20% downturn you are STILL AHEAD by investing the money. Now let's say you go 10 years before having an emergency in year 11 that also coincides with a 20% market downturn. Remember, these numbers are after the 20% drawdown.

Invested: $16,760.37
Savings Acct: $9,218.21

The longer you go the more striking it gets. In fact, in year 11 it would take a 45% meltdown for the savings account to come out ahead and even then it is only worth $10 more than the money that was invested. Even if you had invested at the absolute peak of the dot-com bubble you would still be way ahead today! The only possible way the savings account comes out ahead is if you assume an emergency within 3 years or less, huge market meltdowns, or preposterously low market returns.

If someone tries to tell you that, at 24 years old, you need an emergency fund, ask them to prove it with some math.