Author Topic: WWAMD/RCS: starting out: debt vs. invest?  (Read 2083 times)

mreyn

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WWAMD/RCS: starting out: debt vs. invest?
« on: June 22, 2015, 04:54:50 PM »
Mustachians: I'm new to the forums but have been interested in MMM for awhile now. I know this is a very long post, but I really, really appreciate any advice you could give. My family isn't exactly down with the MMM way of thinking, so I don't know who else to ask:

After I realized my once dream career made me miserable, I was stuck in a job AND a master's program (going to school and working a job with insane hours - both full-time) that I knew I didn't want to do forever, let alone another second. I got let go from that job (huge blessing in disguise) and had to completely re-evaluate my life. Luckily most people at that time (23 - now age 24) didn't have it together either, so I'm bouncing back. Since then I managed to salvage the Master's by transferring the credits to a different program in the same school and working 2 (sometimes 3) part-time jobs and have recently graduated (with debt) and I'm in need of some life advice:
I have a job that allows me to work remotely full-time and I get paid $4570 a month -- (I'm technically a 1099 subcontractor so no tax-withholding).

I moved home for school (commuting ~1.5 hours each way), and I'm currently living at home (with my mom) now where I'm living "rent-free" (more on that later). It made more sense last year for me to file as her dependent (even though she was unemployed for almost all of 2014 and I was working 2-3 part time jobs for about $15/hr for 20 hrs/week) since I'm on her health insurance (brother still in school and on the insurance plan, costs the same for any number of dependents = no brainer) but I may file singly next year.

Since my mom and I both got laid off within 1 week of each other last year, it took a family financial situation to a new low. My mom (definitely anti-Mustachian) already semi-regularly had to borrow money from me (as a high-school student and a college student, and a grad student) for electric and cell-phone bills. This would really stress me out, not as in having to support the family, but as in, it really irritates me that the last time this bill has been paid I also paid it, and if you had told me you couldn't pay it, I could've paid it on time and avoided these $40 late fees. We live in a townhouse that is my grandfather's rental property and as far as I know, my mom hasn't paid rent in a several months (she’s working now but is likely going to be laid off again).
I'm open to paying my fair share of expenses, but my mom is anti-Mustachian (cable TV, pricey cell phone plan – though not on contract), so I’m unsure of what to do, especially since she isn’t really paying rent herself. I tried to talk to her about wanting to split the bills since we both live here, but she wants me to use the money to “save up” since that’s what she did at my age. So that’s question number one: what should I do with regard to living expenses?

Question number 2: I definitely subscribe to the MM “debt is a big fat emergency on fire” ideology, so I planned on using the remote nature of my work to power through my loan debt from school while living cheaply at home. However, some number-crunching revealed this may not be the case:
Here’s my figures (and I’m attaching a spreadsheet for those interested):
Total Debt: $48,765 (all student loans interest rates in the spreadsheet - no credit card debt)
Invested in Betterment (80% stocks/ 20% bonds): 6,030 (currently contributing $90/month)
IRA [from a 403b rolled over to Betterment (90% stocks/ 10% bonds)]: 1,970 (currently contributing $10/month)
Safety Net (Betterment (50% stocks/ 50% bonds): 2,973
Checking/Savings: 11,315 (way too high – I know)

With a monthly paycheck of 4570, I know I need to withhold money in preparation for taxes. When I was working for them part-time, I held $700 out of each paycheck (so far only one) in preparation for taxes in a Betterment goal (60% stocks/40% bonds) as a majorly conservative effort around 30%. What percent of my current paycheck should I save for taxes?

Other then withholding my own money for taxes – I plan on honing my Mustachian ways and using most of my paycheck to pay down debt/invest. In the spreadsheet, I used a rough number (3500) in which I would withhold slightly less than 25% of my income, and divide the rest between investing and saving. I know I need to have some sort of budget basic things, but, again, see my confusion on living expenses above.
 When I look at dividing up this 3500/month into paying down debt, I realize that if I invest a greater portion of my 3500 (pay down debt with 1500 a month/ invest 2000 vs. pay down debt 2000 a month / invest 1500) I can actually have my investments paying that amount of student loan payments in terms of dividends in about a year (assuming a 5.2% return monthly – which is a big/big-ish assumption).
My current job is a 1 year contract so I’m only imagining myself in the current rent-free-able-to-work-remotely scenario for a year, after which I may want to find an apartment to live in, in which case I would have to pay rent OR have enough money to for a down payment to get a mortgage for a duplex, and rent out the other side to pay my rent 
Regardless, the ability to have my investments pay my loan payment (in a year’s time!) and be debt-free in ~2 years is promising enough for me to reconsider emergency nature of my debt in favor of investing.

Thank you very much for you help, thoughts and advice to a young mustachian-in-training!

MDM

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Re: WWAMD/RCS: starting out: debt vs. invest?
« Reply #1 on: June 22, 2015, 06:32:34 PM »
So that’s question number one: what should I do with regard to living expenses?
mreyn, welcome to the forum.  Family is tricky.  You are however now an adult, so...have you talked with your grandfather about the situation?  If you haven't signed anything, then this is likely between you mom & g'dad - but you should know, for example, if there is a chance your mom (thus you too) will be evicted any time soon.

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Question number 2: I definitely subscribe to the MM “debt is a big fat emergency on fire” ideology, so I planned on using the remote nature of my work to power through my loan debt from school while living cheaply at home. However, some number-crunching revealed this may not be the case:
Here’s my figures (and I’m attaching a spreadsheet for those interested):
Good job using that tool!  May be the best around for clarifying your payment options.

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With a monthly paycheck of 4570, I know I need to withhold money in preparation for taxes. When I was working for them part-time, I held $700 out of each paycheck (so far only one) in preparation for taxes in a Betterment goal (60% stocks/40% bonds) as a majorly conservative effort around 30%. What percent of my current paycheck should I save for taxes?
Not only do you need to set aside money for taxes, but you may have to send some amount every quarter to the IRS.  Are you aware of this?  As for the amount, see http://www.irs.gov/Individuals/IRS-Withholding-Calculator for one tool.

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Regardless, the ability to have my investments pay my loan payment (in a year’s time!) and be debt-free in ~2 years is promising enough for me to reconsider emergency nature of my debt in favor of investing.
Your interest rates aren't as bad as credit card debt (24% or more), but not as good as some mortgage debt (3% or less).  Personally, paying the >5.5% loans ASAP seems "a good thing to do" but reasonable folks may differ. 

Perhaps you could fund a Roth IRA this year ($5500) and put the rest toward debt payment....


mreyn

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Re: WWAMD/RCS: starting out: debt vs. invest?
« Reply #2 on: June 23, 2015, 10:14:53 AM »
Thanks MDM!

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Not only do you need to set aside money for taxes, but you may have to send some amount every quarter to the IRS.  Are you aware of this?  As for the amount, see http://www.irs.gov/Individuals/IRS-Withholding-Calculator for one tool.

Ugh, didn't know that - thanks for letting me know!

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Perhaps you could fund a Roth IRA this year ($5500) and put the rest toward debt payment....

Just wondering, why a Roth IRA? I know I have to save for retirement, especially since I don't have any sort of employer plan, but it seems frustrating to put money in a form I can't access for ~40 years. Are you suggesting it for tax purposes?

neo von retorch

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Re: WWAMD/RCS: starting out: debt vs. invest?
« Reply #3 on: June 23, 2015, 10:26:13 AM »
A Roth IRA is specifically post-tax. Any contributions you make to a Roth IRA can be withdrawn at any time. The growth portion cannot be withdrawn, but it grows post-tax (tax-free). There are arguments for Traditional and Roth IRAs depending on your situation, but the Roth is definitely the easier one to pull money back out of - since you already paid taxes on those contributions, there are no limitations placed on them.
« Last Edit: June 23, 2015, 10:55:25 AM by neogodless »

mreyn

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Re: WWAMD/RCS: starting out: debt vs. invest?
« Reply #4 on: June 23, 2015, 10:39:27 AM »
Thanks neogodless! That seems like a really good option...reading up on the Five Year Rule now. Thanks again.

MDM

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Re: WWAMD/RCS: starting out: debt vs. invest?
« Reply #5 on: June 23, 2015, 10:54:18 AM »
See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes regarding what you may (or may not, if you fit in one of the exceptions) have to send to the IRS every quarter.  You have already missed the first two quarters.  Fortunately the extra tax, if you even have to pay it, won't be awful.  Of course, better not to have to pay it at all.

neogodless summarized the Roth advantages well.  Once you get used to Roths, traditional plans (401k, IRA, etc.) may be even better.  See https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/ for why you won't need to wait 40 years.