The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Miedinger on December 06, 2013, 03:50:57 PM
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Hello, MMM forums. I'm a college student who's been lurking now and then and am now in a position where I can probably invest some money this summer. I have a summer internship offer that will net me around $20,000 (pre-tax, will be in CA/USA). I'd love advice on what to do with it (also, how do I figure out how much I have after tax?).
Some financial priorities:
- Roth IRA? I think Vanguard gets suggested a lot. I could probably max it out if desired.
- Index funds? I don't really know how to look into this.
- Helping my parents pay for my college tuition, although the interest rate on the money they've borrowed might be lower than the money I'd make saving/investing somewhere else?
- And, obviously, reserving some money for everyday expenses (entertainment, food). To make myself better at spending frugally (instead of spending a lot at the beginning of the year when I'm flush with cash and irresponsible), I'd like to have a setup where I have two accounts and pay myself a monthly "allowance" into another spending account. Does anyone know if/how this is possible?
Some general motivations for spending my money:
- I really want to get in the habit of saving my money (I was pretty spendthrifty in high school, when I got my first job), so I want to put in a bit of money into investments/retirement/whatever just so I get into that mindset & habit
- I've been reading personal finance stuff (although sadly I absorbed pretty little in terms of concrete info, just general concepts/mindset) for years, so I just feel all cool and adultlike having the extra money to actually do this
- I'm pretty into fashion (I know, not a frugal activity!) but I'm trying to at least control my purchases so I don't spend indiscriminately (buying only things I really like instead of things I regret) and still prioritize the future over today.
Advice would be so great. I apologize if this is against any rules and I am definitely happy to read any resources/other threads/sites you guys would suggest.
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Why don't you pay for your own college? If your parents had plenty of cash to finance your education that would be one thing, but you are going to let them go into debt when you can pay for it yourself???
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If the $20k is your only income, your taxes will be quite low. Depending on your deductions, you'll probably take home $17-19k.
Since you're in a low tax bracket now, you'd probably be wise to max out a Roth IRA. Open a Roth IRA with Vanguard and invest the money in a target date fund. Something like year 2050 should be fine.
While you're at it, you might as well open a taxable investment account too (also with Vanguard). You can invest your residual money in another target date fund.
As for the other particulars, you'll be able to answer better than us. Offering to help your parents with tuition would be a nice gesture, but a personal decision (depending on their financial situation, they may prefer to see their child on firm financial footing). The cash liquidity you want to maintain is going to be a function of how much you need. If you want to give yourself an "allowance", open two bank accounts and have one automatically transfer $X every month. This can be done within one bank for simplicity (open a checking and savings account for instance).
The investment advice above is obviously incredibly simplified. Your best "investment" is going to be picking up 5 books on introductory personal finance and reading until you feel fluent in major investing concepts like risk vs reward and the tenants of proper portfolio construction. You'll want to be able to explain in fairly precise terms what stocks, bonds, and REITs are and their risk and tax characteristics. You'll also want to have a good feeling for the characteristics of 401k, IRA, and taxable investment accounts.
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Agree with maxing out IRAs. Max out your 401k if you get a job where that is available.
ETFs are where beginners should start. Look for expense ratios <0.2%, I think VTIX is like 0.12, and iShares S&P500 is like 0.09. Mutual funds tend to be more like 0.8%.
Don't purchase all your ETF shares on the same day. Maybe purchase $800-1200 chunks. Large enough that the commission is less than 2% of the purchase, but small to allow you to average your cost over time (maybe today is a high for the next year).
Cheers,
Forrest
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And don't let your parents go into debt for tuition ... unless they can afford it ... sounds like they may not be able to ... at least help out.
My 2c
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Not directly related to what to do with $20k, but I suspect I know which company you are referring to (as few pay their interns this much-- technically it could be among three I am thinking of at this amount). If it's "the big one," definitely work your ass off this summer. This is a big leg up towards landing a long term position with them, and if you want to really supercharge your savings and show gratitude to your parents, landing a lucrative job with this company would likely allow you to do so. Make it clear (assuming the following is true) that you are a tireless worker and would like to be considered in the future for full time employment.
Again, if this is who I am thinking of, you will also be surrounded by MASSIVE lifestyle inflation both amongst your peers and full time employees-- resist!
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Don't purchase all your ETF shares on the same day. Maybe purchase $800-1200 chunks. Large enough that the commission is less than 2% of the purchase, but small to allow you to average your cost over time (maybe today is a high for the next year).
While opinions differ somewhat here, I'd just invest it all in one shot (unless you want to spread it over the course of your internship). Investing as early as possible maximizes expected returns (as well as being the easiest thing to do). Spreading over a number of purchases is just a psychological ploy to avoid buyer's remorse, rather than a strategy that makes economic sense. This is all especially true when you're investing a small amount (under 10k) over the long haul (over 30 years).
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New investors don't know how they will respond.
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I'd say focus, and learn to do one thing at a time. There's a lot to take in as a new investor...
To me, the best approach would be to concentrate on maxing out an IRA. This will allow you to see what it is like investing $5,500... 25% of your income now and seemingly a lot of money, but probably not a lot of money compared to your expected starting full time salary. Any investing mistakes won't be a big deal in the long run, so be fearless and just jump in and learn by doing.
When you have put money in a new IRA account, you could invest in/buy lots of things with it (stocks, bonds, funds, etc). This is the time to learn what index funds are all about and how to buy one.
In an IRA, you don't have to worry about keeping track of investment gains and losses for tax purposes yet. Learn the basics of reporting your new income and taking the usual deductions on a standard 1040 first. To figure out what your taxes will be, plug $20,000 of income into a 1040 and try to calculate it through. It will take forever, but becoming your own tax expert will save you a ton of money over the years.
As people have said, a Roth is best for your situation since you're currently in a very low tax bracket.
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I really appreciate all the advice and feedback. Thanks so much. I'll try to respond a bit to some suggestions and questions:
Why don't you pay for your own college? If your parents had plenty of cash to finance your education that would be one thing, but you are going to let them go into debt when you can pay for it yourself???
My parents have told me that the debt they are incurring is manageable and they expect to pay it off without hardship, so there is no pressure at all that I contribute. In the past I have volunteered about 30% of my earnings, but I was also making fairly little then (so the other 70% was my personal allowance for going out and textbooks and things like that).
Without disclosing too much about the financial state of my parents, they have said they have the investments to provide me with a college education and retire comfortably, and I have no reason not to trust them. If they need my help in the future I fully intend on being in a position where I can do so comfortably. I'll definitely talk to my parents on whether they think it's wiser I contribute to my college costs or wiser to invest. In any case, I could probably split it and max out a Roth IRA contribution and then put the excess towards tuition costs?
Since you're in a low tax bracket now, you'd probably be wise to max out a Roth IRA. Open a Roth IRA with Vanguard and invest the money in a target date fund. Something like year 2050 should be fine.
While you're at it, you might as well open a taxable investment account too (also with Vanguard). You can invest your residual money in another target date fund.
Would you mind explaining why the target date 2050? What do you consider when picking a target date?
Anyways, I definitely appreciate your advice on picking up some books and learning more. I'll try to scour the forums/blog for resources to do so over winter break.
ETFs are where beginners should start. Look for expense ratios <0.2%, I think VTIX is like 0.12, and iShares S&P500 is like 0.09. Mutual funds tend to be more like 0.8%.
Thanks. I don't know anything about ETFs so I'll look into them, and read more about purchasing all at once vs. over time. I appreciate the suggestion.
If it's "the big one," definitely work your ass off this summer. This is a big leg up towards landing a long term position with them, and if you want to really supercharge your savings and show gratitude to your parents, landing a lucrative job with this company would likely allow you to do so. Make it clear (assuming the following is true) that you are a tireless worker and would like to be considered in the future for full time employment.
Again, if this is who I am thinking of, you will also be surrounded by MASSIVE lifestyle inflation both amongst your peers and full time employees-- resist!
You're probably thinking of the right place. It's a fantastic opportunity and I am really, really committed to doing my best and working hard. I feel this is a good chance for me to put myself on solid professional/financial foundations for my early 20s.
And I will do my best to avoid lifestyle inflation! Hopefully spending time around here will help with that. I really like the idea of being FI and intend to aggressively pursue that.
I'd say focus, and learn to do one thing at a time. There's a lot to take in as a new investor...
To me, the best approach would be to concentrate on maxing out an IRA…Any investing mistakes won't be a big deal in the long run, so be fearless and just jump in and learn by doing…Learn the basics of reporting your new income and taking the usual deductions on a standard 1040 first. To figure out what your taxes will be, plug $20,000 of income into a 1040 and try to calculate it through. It will take forever, but becoming your own tax expert will save you a ton of money over the years.
Thanks, and good advice. I'm embarrassed to admit I still don't know how to do taxes on my own, so this year will be the year I learn, I think.
Thanks again everyone. I really appreciate the thoughtfulness and helpfulness around here.
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Definitely max the Roth IRA as this should be the lowest tax bracket you are ever in (until maybe retirement with low expenses). Invest in a 401K if your internship offers one and gives a match. Otherwise I would probably save for school costs or invest in a taxable.
ETFs are where beginners should start. Look for expense ratios <0.2%, I think VTIX is like 0.12, and iShares S&P500 is like 0.09. Mutual funds tend to be more like 0.8%.
This isn't necessarily true. Mutual funds can have just as low of expense ratios. If you invest through Vanguard the ETFs and mutual funds are almost the same, its just what you prefer. ETFs can change a fee for buying and selling too depending on what ETF you want to buy and what platform you choose to invest in. (Vanguard and some others don't change fees for buying selling of certain funds, you should check them out first.) Good luck! Look into the boglehead wikis for basic investing info (or search this forum for some key words).
If I was you I would open the Roth and max it through Vanguard in their total stock fund to hopefully maximize your growth over time. Good luck!
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Would you mind explaining why the target date 2050? What do you consider when picking a target date?
The target date basically means Vanguard keeps the asset allocation where they think it should be for someone retiring in 2050, or any year. You will probably be retiring around 2050, or if seeking to retire early, will likely want a more asset allocation approaching and during retirement, similar to that of someone retiring in 2050.
More: http://www.bogleheads.org/wiki/Vanguard_target_retirement_funds
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And here's some non-investment advice: save a goodly chunk of that money for travel if you're interested, perhaps over your winter break, because it's a whole lot harder to get a month off for travel when you're working than when you're an undergrad. Since you're making that kind of money in an undergrad internship, you'll likely have a lot more trouble putting together big chunks of free time for adventures than saving up big chunks of money, so take advantage of the free time you have now rather than waiting for early retirement when you're 35 or whatever, and potentially married and with child.