Author Topic: Bestow some investment wisdom for a new mustachian?  (Read 3099 times)

Novus Moustachio

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Location: Minnesota
Bestow some investment wisdom for a new mustachian?
« on: August 04, 2014, 09:05:49 PM »
 A couple of months ago I stumbled across this amazing site, and have been trying to absorb every life changing piece of advice I can get my eyes on! I just graduated college this past spring,  being one of the lucky few who netted a desirable job, and have spent the last few weeks meticulously piecing together the best plan I can come up with. I would be ecstatic if you seasoned mustachians would do me the honor of reading through my financial plan, offering any sage advice to help me reach FI sooner!

My current information:

Age: 22
Yearly salary: $61,500
Anticipated yearly expenses: $16,000

Current net worth: $15,250 ($8,000 cash, $3,000 in VTSAX, $1000 VFIFX (both in Vanguard Roth Ira) and $500 S&P 500 in 401k), $250 in HSA account and the rest of my net worth is from a fairly reliable vehicle(~$2,500))
Debt:$0


Edit: broke up into two posts due to length restrictions, read next post for rest of the info

« Last Edit: August 05, 2014, 04:54:07 PM by Novus Moustachio »

Novus Moustachio

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Location: Minnesota
Re: Bestow some investment wisdom for a new mustachian?
« Reply #1 on: August 04, 2014, 09:40:35 PM »

My Plan:

This year I will only make $32,000 in pretax income, so my plan will be a little different for next year, however, the for plan for this year is to invest the leftover money I have after expenses and taxes the following way ( 32,000 - 8,000(expenses) - 500 (taxes) =  $23,500)

$2600 to max out HSA, will invest in VFIFX or VTSAX vanguard funds when I reach the minimum amount of $1000 to invest (work matches up to 700 dollars into my HSA account which is fully vested, unlike my 401k ) --> $20,900 left

$3000 to 401k into 80% Spartan index funds (15% small cap and  65% SP 500), 20% FA total bonds for full employer match of $1500, it vests on a graded scale ( 5 years of employment for 100% vestment, 20% after one year) --> $17,900 left

$5,500 to max out Roth Ira invested with $3000 VTSAX & $2500 VFIFX Vanguard funds. ----> $12,400 left Average Roth expenses = .17%

Rest ($12,400) into my 401k invested with same Asset allocation. Average 401k expenses ~ .25%

If I invest this way I think I can qualify for the Savers credit and get a $2000 tax credit since my AGI will be below $18000 this year, which should negate all my federal taxes, I also believe I will be able to qualify for earned income credit but that may only be a $400 dollar refundable tax credit. So the only taxes I anticipate having are State and FICA (~$500)

I am currently unsure what I should do with my Emergency fund of $8000 cash sitting in my .15% savings account, CDs maybe or is that too high of an Emergency fund to begin with my expenses, lack of dependents and steady income?(anyone have any helpful links to well articulated explanations to calculate adequate EF, and what you should invest in?)

Also next year I plan to invest the same way but switch to a Traditional IRA to lower my AGI further and after I max out my tax advantaged account put the extra money into a taxable VTSAX account. My only idea I have for saving money next year when my AGI climbs is to try to possibly take advantage of tax harvesting, do you guys have any other suggestions for lowering my taxes/maxing my take home?

Also after this year I plan on optimizing what kind of assets are in my different investment accounts (taxable all stock index funds, 401k/Roths have the International stocks/bonds) to take advantage of tax breaks.

I was able to figure this plan out so far thanks to articles written by Mr. MM, JCollins and the MadFIentist. I would really appreciate any financial wisdom you guys could impart to further improve my plan!!

Thanks for reading and your valuable feedback!
« Last Edit: August 05, 2014, 05:01:40 PM by Novus Moustachio »

matchewed

  • Magnum Stache
  • ******
  • Posts: 4313
  • Location: CT
Re: Bestow some investment wisdom for a new mustachian?
« Reply #2 on: August 05, 2014, 06:52:21 AM »
The savers tax credit is not $2k. It is a percentage of $2k or less depending on you income (source and other source).

You need to actually ask some questions if you want wisdom. Beyond what you've already read and are applying there isn't much to say. If you brought up actual specific questions it would help.

For example your question on what to do with your emergency fund is rather specific and can be answered to a degree. Your emergency fund should be a balance of money to cover in an emergency the following things (possibly all of them in a short time frame) medical issues, loss of income, emergencies...etc. See how much these scenarios apply to you and adjust accordingly. Do you have older parents, sick parents, health issues, take on risky activities such as chainsaw juggling? Then hold the appropriate amount based on your risks and the money needed to cover them.

There is no such thing as a Traditional Roth IRA. There are Roth IRAs and Traditional IRAs they get different tax treatments.

As long as you're maximizing your tax deferment, minimizing your expenses (both financial fee based and general life based) then you're doing just fine. Good job and keep going you should be done in no time.

Cromacster

  • Handlebar Stache
  • *****
  • Posts: 1661
  • Location: Minnesnowta
Re: Bestow some investment wisdom for a new mustachian?
« Reply #3 on: August 05, 2014, 07:28:37 AM »
The savers tax credit is not $2k. It is a percentage of $2k or less depending on you income (source and other source).

It's actually a percentage of your contributions, up to 2k.  The percentage of your contributions you receive depends on your income.

Looks like you are on the right track.  Avoid lifestyle inflation as you earn.  Keep saving.  One exercise that could be beneficial would be to breakdown your expenses to be aware of where all of your money is going.  Some people use mint.com as it automates alot of the nit picky work.
« Last Edit: August 05, 2014, 07:31:25 AM by Cromacster »

lurker

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: Bestow some investment wisdom for a new mustachian?
« Reply #4 on: August 05, 2014, 07:57:08 AM »
Regarding your current tax situation, a couple comments:

1)  Savers Credit - •A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.  http://www.irs.gov/uac/Newsroom/Plan-Now-to-Get-Full-Benefit-of-Saver%E2%80%99s-Credit;-Tax-Credit-Helps-Low-and-Moderate-Income-Workers-Save-for-Retirement

2)  Earned Income Tax Credit - •Either you or your spouse, if filing a joint return, must be at least age 25 but under age 65.  http://www.irs.gov/Individuals/EITC---it's-not-just-for-families-with-children
« Last Edit: August 05, 2014, 07:58:50 AM by lurker »

BooksAreNerdy

  • Bristles
  • ***
  • Posts: 257
Re: Bestow some investment wisdom for a new mustachian?
« Reply #5 on: August 05, 2014, 09:26:21 AM »
Avoid hedonistic adaptation (search the MMM blog if you haven't read that post)

Simplify your investments. Max out your 401k ($17.5k). Max out HSA, Max out IRA (Roth or trad). You are young and have a lot of time to be aggressive, consider investing entirely in VTSAX or its equivelant, depending on who holds your 401k or HSA.

Your EF should be an amount that makes you comfortable. For us, we can cash flow about $2200 a month for an emergency and are living on last months pay (check out YNAB, a budgeting software that helps you set goals and learn to live a month ahead) so we are comfortable with one months expenses in a savings acct. Check out an online bank like capital one 360 to get an interest rate like .75%.  We are a one car family and my DH bikes to work, so we actually have enough for one months expenses ($3200) plus enough to buy an $800 car off craigslist in case DH loses his job and has to take a job in a nearby city and can no long bike.

It sounds like you are on the right track.

You said that your employer matches up to $700, fully vested. Is that your 401k? Usually, employers do a % match. Do they contribute anything to the HSA. The HSA employer contribution counts towards the IRS annual limit. The 401k match does not count towards the IRS limit. Just a friendly FYI. :)

*edit* I just reread your post, looks like the company matches $700 in the HSA. I see you are almost maxing out the 401k. That's great. One suggestion on the IRA, rather than splitting that amount between two funds, stick to VTSAX, and as soon as you get up to $10k in that acct your  ER lowers to .05%. Take advantage of the admiral fund status as soon as you can.
« Last Edit: August 05, 2014, 10:10:02 AM by BooksAreNerdy »

Novus Moustachio

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Location: Minnesota
Re: Bestow some investment wisdom for a new mustachian?
« Reply #6 on: August 05, 2014, 05:37:32 PM »
Avoid hedonistic adaptation (search the MMM blog if you haven't read that post)

*edit* I just reread your post, looks like the company matches $700 in the HSA. I see you are almost maxing out the 401k. That's great. One suggestion on the IRA, rather than splitting that amount between two funds, stick to VTSAX, and as soon as you get up to $10k in that acct your  ER lowers to .05%. Take advantage of the admiral fund status as soon as you can.

My logic behind using the Vanguard retirement fund (VFIFX) was to try to add a degree of asset allocation to try to limit long term risk while I saved up enough in the account to do something like a personally allocated 3 fund lazy portfolio (http://www.bogleheads.org/wiki/Three-fund_portfolio) with 3 Vanguard index admiral funds. I have read that holding ~ 80% stock 20% bond AA has been shown to match long term performance of 100% stocks with less risk, but I haven't seen any explicit data in any articles I've read to support this claim? what do you guys think? ( I'm looking at 60+ year time frame)

Also thanks for setting me straight on the tax credit qualifications, in the future I'll have to do a much better job reading the fine print in the tax forms. I would be very interested in hearing any advice on how to minimize my taxes further (other then the tried & true pile money into your tax advantaged accounts, then Roth pipeline when you are in a lower bracket).