Reader Case Study - What is the best way I can be using my available funds?

[NeoGenMike]

Hi everyone! I wanted to start off by saying thanks so much for volunteering all your times into being so helpful to all of us. This is my first post here and I'm eager to meet and talk with everyone I can!
  I'm currently 27 years old and I'm looking to retire and smell the flowers as soon as humanly possible (Nothing fancy, just sit around not working). I was lucky enough to be born into a family that makes more money than they need, so they allow me to live with them rent/food free without any hassle. I've saved up 70k from work and have a 401k with 4k inside it (with a contribution every paycheck) and about 8k invested in Publix stock. My current plan is to skip the apartment phase all together and buy a house (Something around the 100k range) with a large down payment, and after I get a good grip on how much money I can spare I will invest all I can. I save almost every penny I earn and I'm studying more about stocks and savings every day. I only make about 24k a year (Working towards a better position at 40k) and am looking to retire around 45-50. It's a stretch at my position to retire so soon but it's something I just really want to do and am putting 100% of my efforts into that, so any advice would mean the world to me. I have been asking all over financial and retirement subreddits and I've gained so much knowledge over the past few days and I'm so appreciative of all the help. Thank you all in advance!

Life Situation: Single, living in Bradenton Florida, age 27

Gross Salary/Wages: $25272

Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc. -
 As of right now I just have a 401K through my company. I, currently, invest only 3% of my paycheck, which is matched 50 cents per dollars by the company. My health insurance is also pretaxed and is bought for $24.90

Other Ordinary Income: MechanicalTurk provides me with an extra couple hundred each year.

Adjusted Gross Income: About $450 a week after pretax. It fluctuates as I may get slightly under 40 hours.

Taxes: Witholding is around 15%, Social Security is 8%, and Medicare is 2%, so roughly 25% goes to taxes.

Current expenses: I .. save.. everything. No car, no phone, no food, no clothes. I used to spend around $80 a month, but I think I've cut that in half this year. I've had this same mindset for years, now, and I feel really at home seeing more people feeling the same. I'm not sure what my expenses will be in the next few years, but I'm guessing anywhere between 1500 to 2000 based off of how people calculated it on other financial forums, but I feel like it's going to be far less, especially if I rent to others.

Expected ER expenses: 0, Im never sick, ever.

Assets: 70k in Cash, 8k in Individual Stock (Seeking to pull out and go into Vanguard Indexes ASAP), and 4K in a 401K


Specific Question(s): I was hoping for advice on how to best invest my assets or to know what I could be doings better. I've been talking for days with financial advisors and other investors online to learn as much as I can and am putting all I am into studying this.


My current plans in life are as follows:
-Aquire a higher paying job, whether it be through promotion or a government job. I'm still looking into college and other trained jobs (Such as AC and Plumbing). They are wonderful ideas, but I want to get a better idea about how saturated the job market is.
-Get a Roth IRA through Vanguard into Vanguard Total Stock Market Index Fund VTSMX/VTSAX with a mixture of about 90% in stock and 10% in Bonds. I need to figure out how these work as well as I have yet to find a step by step, and Vanguard is very intimidating for a first-time Investor, so I'm not 100% sure what I'm doing, but I have time to figure it out and would GREATLY appreciate any advice.
-When I buy a house, I want it to be a condo or with a Mother-in-law attachment so I can rent it to cover mortgage. If I go this around, I may up the price of the house.
-Purchase as much stock as possible.

What do you guys think of where I'm headed? I do apologize if this post is formated oddly, asking too much, or in the wrong place. Any help would mean the world to me and more. I appreciate all you guys do, so thank you for all you have to say in advance, I appreciate it all! I've gotten more help these past few days than I deserve and Im going to do my best with what I learn. Thank you again!

[Laura33]

OK, so, first, "ER" = "early retirement," not "emergency room."  :-)  The idea is for you to figure out what your target expenses are after you retire, because that tells you how much you need to have saved by that point (generally, 25x ER expenses = target annual ER income using 4% rule).

I think you are off to a fantastic start to have saved that much money in that short of a time on that low of a salary -- huge congratulations here!  The only downside is that, because you live at home, you don't really have a history to tell you what your reasonable target ER expenses would be, which makes it hard to plan beyond "just save everything I can."  So what I would encourage you to do is start to price out the lifestyle you want to have -- e.g., if you want a $100K house, what are the taxes and insurance on that kind of house, how much mortgage can you afford on your current salary (which then tells you how much of a downpayment you need to have -- I would generally recommend 20% downpayment to avoid PMI), what do utilities tend to run for that size home, etc.?  What about vehicles?  When you buy a home will you need one, or do you plan to target your search to an area where you can walk/bike everywhere.  Medical insurance -- does your employer offer it, do you need your own plan, etc.?  Food -- what do groceries cost?  How good a cook are you?  What do you think it will cost you when you are feeding yourself full-time?  Etc.  I think you need a clear vision of what your "future life" will be, so that you can price it out and figure out what it will cost you -- then you will know what you need to make to afford the kind of home you want, when you can afford to buy that home and move out of your parents', and how much you need to save to get to ER on your timetable.  And then, you know, execute!

FWIW, I do not think it's a "stretch" to retire soon at your income -- it's not about how much money you make, it's about the percentage that you save of what you make.  See http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/  Sure, it's easier to save a higher percentage if you make $40K than $25K -- but most people who go from $25K to $40K just increase their lifestyle to eat up the difference.  If you can keep your lifestyle to what you can easily afford at $25K, and then sock away the delta when you jump to $40K or more, you will be set in a very short time.  But this is why you need to price out the lifestyle you want vs. your current salary -- that's the only way to see where you fall on the chart, and then tinker with changes in income/expenses to see how that affects your time to FIRE. 

In terms of the investments, your low income means you should probably open a Roth IRA instead of a traditional one.  Open that and max it out.  Also, are you getting the full match on your 401(k)?  If not, increase your contributions to make sure you do that -- that is free money you are giving away.  You currently have more than enough saved for a 20% downpayment on a house, so if I were you, I would keep @$30-35K of that in your savings account (20% down + closing costs/unexpected immediate expenses + emergency fund), and then put the rest in a regular investment account at Vanguard.  Note: you can open both a Roth IRA and a regular investment account with Vanguard, and you can even keep both accounts invested in the same fund (VSTAX is my own personal choice, BTW) -- you just need to tell them that these dollars go to the Roth and those dollars go to the regular investment account.  They do actually make it pretty easy; I would just call them up and have them walk you through opening a regular account first, transferring the remaining $30-40K from your savings account to do so.  Then once that is set up, you can call them and have them walk you through setting up the Roth and transfer the $ directly from your regular account that you already set up.

Also, good call on the individual stocks -- the vast majority of us don't know enough about stocks to justifying trying to pick individual winners.  Make your life easy and let Vanguard and the market make your money for you.

Congrats again, and good luck!

[NeoGenMike]

Thank you so much for the long and detailed post! I appreciate it so much!
ER.. Im dumb, haha, thanks for correcting me.
I crunch numbers often and from my calculations. Given my calculations I should be able to live off of what I make a week if I dont get a car (Maybe lose a little, but there is always room to cut back).
Ill post a breakdown when I get off work today and see what I can come up with!
On purchasing the house, What exactly is PMI and why should I avoid it (If you dont mind me asking)?
I was led to believe just having less interest would be best. But Ive learned so much these past few days that it wouldnt surprise me if thats wrong, haha.
But wow, 35-40K in a Vanguard account? Im surprised people trust the market that much. I just wanted to make sure I understood correctly, I'd hate to lose my progress.
And thanks again for your help and assurance!

[Laura33]

Thank you so much for the long and detailed post! I appreciate it so much!
ER.. Im dumb, haha, thanks for correcting me.
I crunch numbers often and from my calculations. Given my calculations I should be able to live off of what I make a week if I dont get a car (Maybe lose a little, but there is always room to cut back).
Ill post a breakdown when I get off work today and see what I can come up with!
On purchasing the house, What exactly is PMI and why should I avoid it (If you dont mind me asking)?
I was led to believe just having less interest would be best. But Ive learned so much these past few days that it wouldnt surprise me if thats wrong, haha.
But wow, 35-40K in a Vanguard account? Im surprised people trust the market that much. I just wanted to make sure I understood correctly, I'd hate to lose my progress.
And thanks again for your help and assurance!

PMI is "private mortgage insurance."  A/k/a it is money that *you* pay your lender every month so that *they* can buy insurance to cover *them* if you default on your loan.  You get no benefit from it whatsoever.  Therefore, you should avoid it if you can.

"Less interest" is always good, of course.  But you can only use each dollar for one thing -- you can put that dollar in a house, you can put it in the bank, you can put it in the market (hell, you can take it to Vegas and watch it fly away!).  So the question is what is the greatest overall return for you -- what's the best way to convince that dollar to go out in the world and bring back a lot more of his buddies to play with?  A dollar in the house will save you the amount of interest you pay, so if you have a 4% loan, that dollar in your house has an effective return of 4%, forever.  A dollar in the bank is going to earn you about 1% a year (and that's being generous).  So if your choice is to put your dollar in the house vs. keep it in the bank, you get a much better return from putting it in the house.  OTOH, the stock market returns something like 8-10% on average, over time (note that I am expecting lower than historic returns going forward, so I am assuming 7-8% in my own planning).  So if you get a 7-8% return (on average!) in the stock market over time, then your dollar will bring you much more money in the market than in the house, to the tune of 3-4% more every year.

The other thing to keep in mind in all of this is risk.  The stock market seems scary, because it goes up, down, and sideways, and we mere mortals can't predict what is going to send it into a tizzy or when that's going to happen.  A savings account, with its steady little 0.5% interest a year, feels "safe."  But the reality is that that ignores inflation:  at the same time your bank account is paying you 0.5%-1% per year, inflation is going up 2-4% per year.  So every single year, you are actually *losing* purchasing power -- it's just invisible, because it happens so slowly over time.  Imagine today, you have a dollar in the bank, which can buy you a loaf of bread.  Next year, you'll have $1.01 in the bank -- huzzah, free money!  But then you go to the store, and that loaf of bread is now $1.03.  You *feel* safe and secure, because you are watching your 'stache grow; but in reality, you are actually worse off!  OTOH, the stock market went up 8%, so if you had put that money into the market, you'd have $1.08 now -- you could buy that loaf of bread and a piece of bubble gum on the way out of the store. 

So putting your money in the bank is not trading "risk" for "safety."  It is trading the risk of watching your investments drop 10-50% overnight against the *guarantee* that your investments will buy you 10-50% less stuff in the future.  But, hey, no one says you have to do it all at once -- put a little in every month as you get comfortable with it.

[NeoGenMike]

Man, you've done homework.
Thanks for all the effort you put into these posts, you didnt have to do that, but God bless you.
But jeez, that's an eye opener that I never thought of. Thanks so much for your insight! It was beyond helpful!
So just to make sure I understand, you think getting a house with a 20k downpayment, keeping 30Kish for emergency funds, and putting the remaining 20k in Vanguard with 5.5K a year in the Roth (Preferably VSTAX (Or whatever works best)) would be the best route?
Again, thanks for the advice, that's fantastic of you.

[natb2347]

IMO (and according to MMM) 30K in a savings account for an emergency fund is way too much.  As mentioned, savings don't factor inflation and have paltry returns. You will need to keep adding to the savings account to top it off and cover inflation. 

Personally, I put my emergency fund in Betterment Safety Net Fund.  I have the amount I NEED for emergencies for 6 months of bare bones expenses plus 30% extra to buffer ups and downs in the market so I don't worry too much.  I love it.  Returns are much better than if it were rotting away in a savings account.  Wish I had 30K in there! 

Outside of an emergency fund (which has to be extremely low since you have no financial responsibilities/obligations right now) I do agree with putting the rest of your money in the stock market (after you've maxed 401K and IRA and bought a house).  I also agree with starting with an amount you are comfortable starting with to see how it works and I can tell you it is invigorating and motivating seeing new little green employees appear in your account with zero effort or work!!!  Woohoooooooo!

Good luck.  I got a later start than you and I have a long way to go myself but knowledge is power and at your rate you are on a very good track.  Keep learning and asking questions and ignoring the spendy behavior of the majority of Americans in your midst!!

I also find solace and inspiration and strength from reading this forum regularly to keep my butt in check and my mind enriched.


:)

[Laura33]

Almost - the $30K-ish was supposed to represent both your $20k downpayment + closing costs + a little extra for "I just bought a house and now it needs XYZ" + emergency fund.  I agree with natb2347 - $30k just for an EF is too much to just keep in savings, especially when your expenses are so low and no one is depending on you.

Great start!  Keep it up!

[NeoGenMike]

IMO (and according to MMM) 30K in a savings account for an emergency fund is way too much.  As mentioned, savings don't factor inflation and have paltry returns. You will need to keep adding to the savings account to top it off and cover inflation. 

Personally, I put my emergency fund in Betterment Safety Net Fund.  I have the amount I NEED for emergencies for 6 months of bare bones expenses plus 30% extra to buffer ups and downs in the market so I don't worry too much.  I love it.  Returns are much better than if it were rotting away in a savings account.  Wish I had 30K in there! 

Outside of an emergency fund (which has to be extremely low since you have no financial responsibilities/obligations right now) I do agree with putting the rest of your money in the stock market (after you've maxed 401K and IRA and bought a house).  I also agree with starting with an amount you are comfortable starting with to see how it works and I can tell you it is invigorating and motivating seeing new little green employees appear in your account with zero effort or work!!!  Woohoooooooo!

Good luck.  I got a later start than you and I have a long way to go myself but knowledge is power and at your rate you are on a very good track.  Keep learning and asking questions and ignoring the spendy behavior of the majority of Americans in your midst!!

I also find solace and inspiration and strength from reading this forum regularly to keep my butt in check and my mind enriched.


:)

Thanks for the response! Yeah, I thought it was a bit high sounding, but I thought, hey, that's why im not the expert, haha. Thanks for the assurance, too. It's nice to know what everyone is doing. I've been making lists and taking, litterally, everyone's advice into consideration to make the best plan out of everyone's discoveries, so because of you, I will definatly look into the Betterment Safety Net Fund. I have absolutely no idea what it is, but you have my trust!

[NeoGenMike]

ALRIGHT! I've spent many sleepless nights researching the best spread for my Roth/normal account!
Please feel free to trash this and call me dumb!
40% VTI
30% VGT
20% Eithers BND or VXUS ( leaning towards)
10% Bonds
What do you think? And thanks again for all you've contributed to my studies!!