Author Topic: 24 yr old that needs help understanding the stock market  (Read 2964 times)

euphoria

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24 yr old that needs help understanding the stock market
« on: September 20, 2017, 03:51:30 PM »
Hi,
 A few months ago I discovered this forum from searching about a food budget.. to make a long story short this led me to MMM Blog, JLcollins, madfientist etc.

Since a kid I've always been interested in saving and investing but never took it past a C.D. with my bank. I come from a low income family that never went to college or invested and always lived paycheck to paycheck. I did terrible in school and never really took my education serious but i was always obsessed with saving/finance. I find it funny now that Im more mature, i can't stop myself from trying to learn all I can. Wether through Podcasts, Videos, Books etc. I wish there was a blog or podcast that talked about Investing from a more basic level. Pursuing FI is something I'm going to do no matter how long it takes me to figure this out. I'm currently making close to 6 figures and I'm self employed. I want to put this money in the best place possible to work for me. I'm 100% sure i want to invest in VTSAX.

I say this only to show that I've never had a mentor or anyone to pass on knowledge other than the recent research and help from podcasts and blogs in the FI community.

Here is my question

Im self employed so I'm guessing I need to setup an IRA with vanguard. I understand you can only put a certain amount each year.. So what do you do with the surplus?
Most FI save more than 50% of income so how do you keep investing in VTSAX if you're only allowed 5K a year?

If you have any knowledge or advice please share. I will be forever grateful

THANKS :)
« Last Edit: September 20, 2017, 04:12:43 PM by euphoria »

dandarc

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Re: 24 yr old that needs help understanding the stock market
« Reply #1 on: September 20, 2017, 04:01:40 PM »
If you're self employed, you have options for tax-advantaged accounts.

With some more information, we can give better tailored advice.

Are you incorporated or a sole-proprieter?  Do you have employees?  Will you in the somewhat near term?  How much business income is there?

Telecaster

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Re: 24 yr old that needs help understanding the stock market
« Reply #2 on: September 20, 2017, 04:05:21 PM »
I'm currently making close to 6 figures and I'm self employed. I want to put this money in the best place possible to work for me. I'm 100% sure i want to invest in VTSAX.

Im self employed so I'm guessing I need to setup an IRA with vanguard. I understand you can only put a certain amount each year.. So what do you do with the surplus?
Most FI save more than 50% of income so how do you keep investing in VTSAX if you're only allowed 5K a year?

Wow!  Making close to six figures and being self-employed is a great accomplishment. 

Here's what I think you should do:

1) Make a one time appointment with a tax accountant.  Six figures is a lot of money, there are likely deductions and such that you don't know about. 

2) This of course depends on what the tax guys says, but yes you want to open an IRA, but you also need to open a self-employed 401(k).  That will allow you to save vastly more money tax deferred that you could otherwise.   

3) For money in amounts above what you can contribute to the 401(k), you can just a regular mutual fund in a taxable account.  Easy peasy.   Vanguard (I believe) has account minimums, but for something like $3K you can open a taxable account and stuff all the money you like there, no limit. 

And yes, VTSAX is great.  Eventually as you learn more you will likely want to diversify, but for right now and the indefinite future VTSAX works just fine. 




Financial.Velociraptor

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Re: 24 yr old that needs help understanding the stock market
« Reply #3 on: September 20, 2017, 04:34:53 PM »
If you are starting at 24 with a six figure income and the right attitude, you basically can't mess this thing up.  You could be FIRE before you hit 30. 

You say you've read JL Collins.  Does that include the stock series?

You probably need to start thinking about an Investing Policy Statement.

PaulMaxime

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Re: 24 yr old that needs help understanding the stock market
« Reply #4 on: September 20, 2017, 04:37:36 PM »
You want to save for retirement sure, so you will probably want an IRA or a Roth IRA for that.

But there are limits to that, including when you get to access the money you invested there without penalty.

Let's say you are able to save 50% of your take home pay. You will want to put the max in an IRA, Roth or other "retirement" vehicle.

But the largest majority of your invested capital should just go in a regular taxable investment account.

If you go to this page on vanguard: https://personal.vanguard.com/open-account/oax/app/triage#/ you can select an "individual account" which you can add to in any amount you want to. You can also take that money out whenever you want to for whatever purpose - buying a house, living expenses, whatever.

If you are planning on retiring early you should probably have most of your money in an "Individual Account" like this.

There are more complex things you can do but nothing is stopping you from getting started as soon as you want to.

euphoria

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Re: 24 yr old that needs help understanding the stock market
« Reply #5 on: September 20, 2017, 04:41:36 PM »
You want to save for retirement sure, so you will probably want an IRA or a Roth IRA for that.

But there are limits to that, including when you get to access the money you invested there without penalty.

Let's say you are able to save 50% of your take home pay. You will want to put the max in an IRA, Roth or other "retirement" vehicle.

But the largest majority of your invested capital should just go in a regular taxable investment account.

If you go to this page on vanguard: https://personal.vanguard.com/open-account/oax/app/triage#/ you can select an "individual account" which you can add to in any amount you want to. You can also take that money out whenever you want to for whatever purpose - buying a house, living expenses, whatever.

If you are planning on retiring early you should probably have most of your money in an "Individual Account" like this.

There are more complex things you can do but nothing is stopping you from getting started as soon as you want to.

Thanks so much for the reply! so the purpose of having a IRA is to allow the $5,500 max contribution to grow without being taxed when withdrawn?

dandarc

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Re: 24 yr old that needs help understanding the stock market
« Reply #6 on: September 20, 2017, 04:42:44 PM »
Missed the "close to six figures" on the original post.  I'll assume you're a sole proprietor for the following, and you're making 90K net profit on the business, and that you have no employees and don't intend to hire any in the future, other than possibly your spouse.  All of the figures that follow are for 2017.

As Telecaster mentions, you can use an individual 401K.  The individual 401K limit on 90K of schedule C net income is $34,728.  Which, if you max it out, is convenient - you're now under the income limit to deduct a traditional IRA.  So another $5500 there.  If you make more and cannot deduct the tIRA, then you're well within the limits for Roth IRA.  Then, since you're providing your own health insurance (also deductible if you're self-employed), you can choose a High-Deductible plan and put $3400 in to an HSA.

So you've got at minimum $43,628 of tax-advantaged space for investments you could use.  If you want to invest even more of your income than that, then a taxable account is a fine choice.  Or real estate, or whatever you're inclined to invest in.  If you want even more tax-advantaged space, look for an individual 401K that allows for after-tax (not Roth) contributions and in-service rollovers and do a Megabackdoor Roth.

euphoria

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Re: 24 yr old that needs help understanding the stock market
« Reply #7 on: September 20, 2017, 04:44:03 PM »
If you are starting at 24 with a six figure income and the right attitude, you basically can't mess this thing up.  You could be FIRE before you hit 30. 

You say you've read JL Collins.  Does that include the stock series?

You probably need to start thinking about an Investing Policy Statement.

Yes, I'm currently listening to his book Simple Path To Wealth on Audible. Its just hard to keep up with some of the ideas due to me being brand new to all of this information. Don't get me wrong, he makes it sound extremely simple but there are a few things I get confused with.

dandarc

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Re: 24 yr old that needs help understanding the stock market
« Reply #8 on: September 20, 2017, 04:46:00 PM »

But the largest majority of your invested capital should just go in a regular taxable investment account.

That's just not true - there is no need to have a regular taxable account until you've used all of your Tax-Advantaged space.  And for someone who is self employed, that is a large amount of space - $40K+ for the OP here.

Remember that with a bit of organization, you can withdraw from your retirement accounts at pretty much any age.

https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

euphoria

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Re: 24 yr old that needs help understanding the stock market
« Reply #9 on: September 20, 2017, 04:47:45 PM »
Missed the "close to six figures" on the original post.  I'll assume you're a sole proprietor for the following, and you're making 90K net profit on the business, and that you have no employees and don't intend to hire any in the future, other than possibly your spouse.  All of the figures that follow are for 2017.

As Telecaster mentions, you can use an individual 401K.  The individual 401K limit on 90K of schedule C net income is $34,728.  Which, if you max it out, is convenient - you're now under the income limit to deduct a traditional IRA.  So another $5500 there.  If you make more and cannot deduct the tIRA, then you're well within the limits for Roth IRA.  Then, since you're providing your own health insurance (also deductible if you're self-employed), you can choose a High-Deductible plan and put $3400 in to an HSA.

So you've got at minimum $43,628 of tax-advantaged space for investments you could use.  If you want to invest even more of your income than that, then a taxable account is a fine choice.  Or real estate, or whatever you're inclined to invest in.  If you want even more tax-advantaged space, look for an individual 401K that allows for after-tax (not Roth) contributions and in-service rollovers and do a Megabackdoor Roth.

Wow, you pretty much nailed my situation. Single Member LLC and don't plan on having employees since my business is Ecommerce based. Thanks for the response

Telecaster

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Re: 24 yr old that needs help understanding the stock market
« Reply #10 on: September 20, 2017, 04:49:51 PM »
Thanks so much for the reply! so the purpose of having a IRA is to allow the $5,500 max contribution to grow without being taxed when withdrawn?

That's the purpose of a Roth IRA.  A regular IRA lowers your taxes now, and then is taxed normally when withdrawn.

For you, most likely the regular IRA is better.  Here's why:  You are in a high tax bracket now, and when you retire you will be in a lower tax bracket.  Who knows for sure, but that's a good assumption, right?  So you effectively move the money from being highly taxed to being slightly taxed.  That's a good deal. 

As people have mentioned above, the IRA will only be a small part of your tax advantaged space.  You have several other place to stash tax advantaged money as well. 


dandarc

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Re: 24 yr old that needs help understanding the stock market
« Reply #11 on: September 20, 2017, 04:50:13 PM »
Missed the "close to six figures" on the original post.  I'll assume you're a sole proprietor for the following, and you're making 90K net profit on the business, and that you have no employees and don't intend to hire any in the future, other than possibly your spouse.  All of the figures that follow are for 2017.

As Telecaster mentions, you can use an individual 401K.  The individual 401K limit on 90K of schedule C net income is $34,728.  Which, if you max it out, is convenient - you're now under the income limit to deduct a traditional IRA.  So another $5500 there.  If you make more and cannot deduct the tIRA, then you're well within the limits for Roth IRA.  Then, since you're providing your own health insurance (also deductible if you're self-employed), you can choose a High-Deductible plan and put $3400 in to an HSA.

So you've got at minimum $43,628 of tax-advantaged space for investments you could use.  If you want to invest even more of your income than that, then a taxable account is a fine choice.  Or real estate, or whatever you're inclined to invest in.  If you want even more tax-advantaged space, look for an individual 401K that allows for after-tax (not Roth) contributions and in-service rollovers and do a Megabackdoor Roth.

Wow, you pretty much nailed my situation. Single Member LLC and don't plan on having employees since my business is Ecommerce based. Thanks for the response
And your LLC will not be taxed as an S-Corp, right?  (ETA - or a C-Corp, for that matter)

euphoria

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Re: 24 yr old that needs help understanding the stock market
« Reply #12 on: September 20, 2017, 04:51:50 PM »
Thanks so much for the reply! so the purpose of having a IRA is to allow the $5,500 max contribution to grow without being taxed when withdrawn?

That's the purpose of a Roth IRA.  A regular IRA lowers your taxes now, and then is taxed normally when withdrawn.

For you, most likely the regular IRA is better.  Here's why:  You are in a high tax bracket now, and when you retire you will be in a lower tax bracket.  Who knows for sure, but that's a good assumption, right?  So you effectively move the money from being highly taxed to being slightly taxed.  That's a good deal. 

As people have mentioned above, the IRA will only be a small part of your tax advantaged space.  You have several other place to stash tax advantaged money as well.

Thanks so much for the response! I will begin looking into all of this information you guys have shared.

PaulMaxime

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Re: 24 yr old that needs help understanding the stock market
« Reply #13 on: September 20, 2017, 04:52:10 PM »
You want to save for retirement sure, so you will probably want an IRA or a Roth IRA for that.

But there are limits to that, including when you get to access the money you invested there without penalty.

Let's say you are able to save 50% of your take home pay. You will want to put the max in an IRA, Roth or other "retirement" vehicle.

But the largest majority of your invested capital should just go in a regular taxable investment account.

If you go to this page on vanguard: https://personal.vanguard.com/open-account/oax/app/triage#/ you can select an "individual account" which you can add to in any amount you want to. You can also take that money out whenever you want to for whatever purpose - buying a house, living expenses, whatever.

If you are planning on retiring early you should probably have most of your money in an "Individual Account" like this.

There are more complex things you can do but nothing is stopping you from getting started as soon as you want to.

Thanks so much for the reply! so the purpose of having a IRA is to allow the $5,500 max contribution to grow without being taxed when withdrawn?

The purpose of an IRA (Individual Retirement Arrangement) is that you (potentially) get a tax deduction when you put the money in, you get to grow it tax free but you have to pay taxes when you take it out later. The other thing about IRAs is that you generally can't access the money without penalty until you are 59.5 years old.

Roth IRA is a bit different. You put in money that has already been taxed, it grows tax-free, and when you withdraw later in life you don't pay any taxes.

I generally think Roth is better (assuming you meet the income limits) but you will still put most of your capital into a regular "Individual" account.

dandarc

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Re: 24 yr old that needs help understanding the stock market
« Reply #14 on: September 20, 2017, 05:11:39 PM »
The purpose of an IRA (Individual Retirement Arrangement) is that you (potentially) get a tax deduction when you put the money in, you get to grow it tax free but you have to pay taxes when you take it out later. The other thing about IRAs is that you generally can't access the money without penalty until you are 59.5 years old.

Roth IRA is a bit different. You put in money that has already been taxed, it grows tax-free, and when you withdraw later in life you don't pay any taxes.

I generally think Roth is better (assuming you meet the income limits) but you will still put most of your capital into a regular "Individual" account.
Your description of traditional and Roth is correct, but I disagree that OP should be putting "most of OP's capital into a regular "Individual" account."  As the link up-thread shows, there are multiple ways to get at your tax-advantaged accounts before 59.5 without paying a penalty.  And if OP has a substantial Roth IRA at retirement, remember that regular contributions to Roth IRAs can be withdrawn at any time - tax and penalty free.

So OP would be best served by maxing out the $40K+ in tax advantaged space that is available first.  If there is yet more to be invested in a given year, a taxable account is a good place for that.

And, practically speaking, there are no income limits for contributing to a Roth IRA.  Sure if you're over the stated limits there are a couple of hoops to jump through, but if it was straightforward, it wouldn't be called the "backdoor Roth IRA".  Roth vs. Traditional boils down to marginal rate today vs. marginal rate on withdrawal - it is not at all clear that Roth is better for most, particularly on a frugality / early retirement forum.  If anything, traditional should be the default recommendation.

BTDretire

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Re: 24 yr old that needs help understanding the stock market
« Reply #15 on: September 21, 2017, 08:27:32 AM »
 Lots of information coming at you. Just keep reading, in a couple of years, a lot of it will just be common knowledge to you. It will sink in and be actionable knowledge in a short time.
 Congratulations on grasping the saving idea and finding a method to earn a good income.
 Also, don't ignore increasing the business income for learning to invest your savings.
Just throw your excess savings in a tax advantaged VTSAX account within the rules.

Heroes821

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Re: 24 yr old that needs help understanding the stock market
« Reply #16 on: September 21, 2017, 09:30:20 AM »
For the sake of honesty, I didn't read every reply more than skimming.

To answer your what do with money left to invest outside of retirement accounts. You can open a taxable investment account at Vanguard very quickly and easily just following the steps on their website and then pick your VTSAX or w/e. 

I think this is one of the best starting point posts in this thread: https://forum.mrmoneymustache.com/investor-alley/investment-order/

This ordering is appropriate for investors in the US.

WHAT            
0. Establish an emergency fund to your satisfaction            
1. Contribute to your 401k up to any company match            
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.            
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level            
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)            
6. Fund mega backdoor Roth if applicable            
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.            
8. Invest in a taxable account with any extra.            
            
WHY            
0. Give yourself at least enough buffer to avoid worries about bouncing checks            
1. Company match rates are likely the highest percent return you can get on your money            
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 25%; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.      
6. Applicability depends on the rules for the specific 401k            
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.
8. Because any earnings, even if taxed, will help your FI journey.

Similar to "put on your own oxygen mask before assisting others," you should fund your own retirement before funding 529 or similar plans for children's college costs.