Author Topic: Economics student seeks financial advice  (Read 4361 times)

sr794

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Economics student seeks financial advice
« on: April 03, 2016, 11:54:39 AM »
Hi everyone. I just found MMM the other day but I've been working to read all the blog posts and I have long shared many of his views (investing in index funds, living frugally, anti-consumerism, etc). I will detail my financial situation below but essentially I have a $20,000 cash cushion and MMM has made me think about dumping that into my Vanguard index funds and relying on an unsecured line of credit.

Here's my situation:
-21 years old, graduating college with a degree in Political Science and Economics.
-0 debt due to scholarship.
-$6,000 in Vanguard VOO
-$21,000 sitting in bank account :(
-$11,000 credit card limit, which I pay off completely every month. (The limit is high because I put my parents' income on the application -- this is allowed)
-Looking for a full time job and hoping not to live with parents.
-Hoping to avoid getting into the rat race, so looking at university administrative jobs in small towns so I can have low cost of living with a pretty good salary and take classes for free. I could use library computers in my free time so I wouldn't need to buy a computer or have WiFi.
-Pretty frugal.
-No clue when I will be buying a home/settling down.
-Really interested in the Ithaca, NY area. I could walk/bike to work and everywhere so I wouldn't need a car.
-no money in IRA or Roth IRA...I've always been worried about needing the money so I haven't even put it in a Roth IRA. (I think MMM discourages regular IRAs).

My current thinking is that once I get a job I should go to my credit union and request an unsecured line of credit (I think having a job will make them more likely to give me a good interest rate and accept the request). Then I will dump all but $1,000 into my Vanguard fund except moving/adjustment costs and living expenses until my first paycheck comes. As MMM recommends, I then will have the line of credit as backup.

My major concern with this is that this could be a downpayment on a mortgage so I don't want to tie it up in the market.

My other concern is that my job search takes some extra time so maybe from graduation (May) onward I am stuck in a minimum wage job. I would prefer not to move back home.

What do you guys think? Should I dump it? Should I dump it via a Roth IRA?
Also, what if I get rejected for the line of credit? I assume using the credit card as a line of credit is a bad idea because interest is high.

Note: Actually, the credit card is new so I have no interest for 9 months...so technically I guess I could dump everything now and use the credit card as a really cheap line of credit. I also realize I don't need to pay my credit card off every month because of this feature but I've been too skeeved out about carrying a balance. I worry this could affect my chance at the unsecured line of credit too.

I really appreciate your help! I'm looking forward to getting involved in the MMM community.

P.S. I've been worrying about needing the money for a future degree too, but now that I think about it and read MMM, I doubt most paid degrees that I'm interested in (i.e. teaching) are worth it...I could just invest the $50,000.

mcj

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Re: Economics student seeks financial advice
« Reply #1 on: April 03, 2016, 01:14:49 PM »
If you have no clue if/when you will be buying a home as you say, then I wouldn't worry too much about saving up a down payment if you aren't seriously considering buying before 7-10 years. Renting is a great option.

Since you don't currently have a secure income, perhaps consider keeping the 21k cash in your account, until you have secure income. Otherwise I would suggest you dump it.

Roth IRA contributions can be withdrawn without penalty since they are already taxed. The untaxed earnings are what you have to pay penalties on.

I am not sure why you need an unsecured line of credit. a 27k net worth for an unmarried (I assume?) 21 year old and a 0% interest 11k credit card should be more than enough for emergencies, especially if you find work reasonably soon.

My .02

mcj

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Re: Economics student seeks financial advice
« Reply #2 on: April 03, 2016, 01:22:41 PM »
Also, you can only contribute earned income to a Roth IRA, so unless you worked for pay while in school you would not be able to make eligible contributions

sr794

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Re: Economics student seeks financial advice
« Reply #3 on: April 03, 2016, 02:29:05 PM »
If you have no clue if/when you will be buying a home as you say, then I wouldn't worry too much about saving up a down payment if you aren't seriously considering buying before 7-10 years. Renting is a great option.

Since you don't currently have a secure income, perhaps consider keeping the 21k cash in your account, until you have secure income. Otherwise I would suggest you dump it.

Roth IRA contributions can be withdrawn without penalty since they are already taxed. The untaxed earnings are what you have to pay penalties on.

I am not sure why you need an unsecured line of credit. a 27k net worth for an unmarried (I assume?) 21 year old and a 0% interest 11k credit card should be more than enough for emergencies, especially if you find work reasonably soon.

My .02

Thanks for the helpful advice. I would need the unsecured line of credit because once I get a job I will dump the 21k in my account and 9 months from now the credit card will no longer be 0% interest. I assumed a line of credit would have lower interest rate than the credit card.

I knew the Roth IRA contributions could be withdrawn, so I'm only tying up the interest. But won't I need access to the interest if I retire early? Some of my savings is earned income (1099).

Thanks again.

Financial.Velociraptor

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Re: Economics student seeks financial advice
« Reply #4 on: April 03, 2016, 06:21:22 PM »
Your mileage may vary on this...

What I do is invest my emergency fund in the fixed income/debt instruments space, e.g. there isn't one.  If expenses crop up above budget, I put them on credit card and take a margin loan for a few month from my broker - Interactive Brokers.  Margin rate at IB is about 1.65% annually.  I get 2% cash back on main credit card by paying in full each month so if I have the margin loan for less than a year...free money.  Has worked out every time so far.

Wouldn't recommend it until you have an income stream though.  Sounds like you have life figured out early.  Gratz!

Retire-Canada

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Re: Economics student seeks financial advice
« Reply #5 on: April 03, 2016, 06:55:11 PM »
Thanks for the helpful advice. I would need the unsecured line of credit because once I get a job I will dump the 21k in my account and 9 months from now the credit card will no longer be 0% interest. I assumed a line of credit would have lower interest rate than the credit card.

I used an unsecured $30K LOC as my emergency fund and invest all my cash. It's a good strategy to keep your money working for you.

sr794

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Re: Economics student seeks financial advice
« Reply #6 on: April 06, 2016, 09:23:37 AM »
Your mileage may vary on this...

What I do is invest my emergency fund in the fixed income/debt instruments space, e.g. there isn't one.  If expenses crop up above budget, I put them on credit card and take a margin loan for a few month from my broker - Interactive Brokers.  Margin rate at IB is about 1.65% annually.  I get 2% cash back on main credit card by paying in full each month so if I have the margin loan for less than a year...free money.  Has worked out every time so far.

Wouldn't recommend it until you have an income stream though.  Sounds like you have life figured out early.  Gratz!

Thanks for the message. Are you saying you keep an emergency fund invested in "safe" investments like bonds?

I just took a quick look at Interactive Brokers and I'm confused a little. So if you need $2,000 in an emergency, you put it on your credit card (for which you get 2% cash back), and pay off the credit card with a margin loan from Interactive Brokers? And this is a loan at 1.65%?! How do you get a loan rate so good? (looking at it, I see these margin loans have something to do with getting loaned money to invest in the market...but how does that pay off your credit card?)

Sorry for all the questions. Thanks for the advice

NP

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Re: Economics student seeks financial advice
« Reply #7 on: April 06, 2016, 10:41:53 AM »
Thanks for the helpful advice. I would need the unsecured line of credit because once I get a job I will dump the 21k in my account and 9 months from now the credit card will no longer be 0% interest. I assumed a line of credit would have lower interest rate than the credit card.

I used an unsecured $30K LOC as my emergency fund and invest all my cash. It's a good strategy to keep your money working for you.

That'll work fine in a minor personal emergency. But suppose the economy is moderately (or severely) distressed and because of this (1) you lose your job, (2) it takes longer than expected to find a job and (3) financial institutions start using stricter rules about credit and your unsecured LOC is canceled now that you're without a job.

I don't see how an unsecured LOC without any guarantees that it'll be available when you really need it, could be considered an emergency fund.

EarlyStart

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Re: Economics student seeks financial advice
« Reply #8 on: April 06, 2016, 05:52:42 PM »

My other concern is that my job search takes some extra time so maybe from graduation (May) onward I am stuck in a minimum wage job. I would prefer not to move back home.



Landing a job is probably more consequential than how exactly you invest low five digit savings. I would focus on that part for now.

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Re: Economics student seeks financial advice
« Reply #9 on: April 06, 2016, 07:09:23 PM »
Yeah, no offense, but you seem trigger happy, despite your strong discipline in getting to this spot. Well done btw. Slow down. Hang on to your cash, get a steady income, and then make moves.

Read more both on the blog and forums. Lots of smart people on here that have solid wisdom, but you need to separate the young hot shots from the seasoned veterans. Emphasis on taking advice from the latter.

Financial.Velociraptor

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Re: Economics student seeks financial advice
« Reply #10 on: April 07, 2016, 08:14:14 AM »
Your mileage may vary on this...

What I do is invest my emergency fund in the fixed income/debt instruments space, e.g. there isn't one.  If expenses crop up above budget, I put them on credit card and take a margin loan for a few month from my broker - Interactive Brokers.  Margin rate at IB is about 1.65% annually.  I get 2% cash back on main credit card by paying in full each month so if I have the margin loan for less than a year...free money.  Has worked out every time so far.

Wouldn't recommend it until you have an income stream though.  Sounds like you have life figured out early.  Gratz!

Thanks for the message. Are you saying you keep an emergency fund invested in "safe" investments like bonds?

I just took a quick look at Interactive Brokers and I'm confused a little. So if you need $2,000 in an emergency, you put it on your credit card (for which you get 2% cash back), and pay off the credit card with a margin loan from Interactive Brokers? And this is a loan at 1.65%?! How do you get a loan rate so good? (looking at it, I see these margin loans have something to do with getting loaned money to invest in the market...but how does that pay off your credit card?)

Sorry for all the questions. Thanks for the advice

My bonds are all at a different brokerage.  IB is for my dividend paying long and options investments.  You can be fully invested at IB (no cash on hand) and make a withdrawal resulting in negative cash balance (which is treated as a margin loan).  The IB margin rate has always been very low.  Today's rate is 1.87% and can be viewed here: https://www.interactivebrokers.com/en/index.php?f=1595

dess1313

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Re: Economics student seeks financial advice
« Reply #11 on: April 09, 2016, 12:33:11 AM »
1. keep your cash for now.
2. find a job.  stay at home for a few months if you must. 
3. start looking for stuff if you plan on moving out.  furniture and basic living supplies.  craigs list, yard sales, etc. 
4. if the job is not in a good location/fit for you, then with some experience already working, find a job that is easy to live near/low cost of living rental in your desired area
5. now decide what to do investment wise with your income you are making at that time.  invest or save for a house.  what ever suits your long term plans.  but get settled in a job you like, in an area you like before you start trying to buy a house or investing heavily

hyla

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Re: Economics student seeks financial advice
« Reply #12 on: April 12, 2016, 09:35:36 PM »
It sounds like your job and financial situation is a bit uncertain now, so I would keep the emergency fund in cash.  The purpose of your emergency fund isn't to make boatloads of money off interest.  That's what your other investments is for.  The purpose of an emergency fund is to have liquid, accessible assets so that you do not need to go into debt if emergencies crop up.

For a perfect example of why your emergency fund should be in conservative investments, NOT an unsecured line of credit so you can throw all your money in the market -  Just after the 2008 recession, I injured myself pretty badly on one job and was out of work for a while, then had an extremely difficult time finding a new job because most of the jobs in my field are government jobs and legislatures were cutting budgets and positions all over.  I was ok, because my emergency fund was in cash, and the amount of money I had didn't change... but if it had been invested, I would have lost a lot and that would have been much harder. 

sr794

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Re: Economics student seeks financial advice
« Reply #13 on: May 22, 2016, 08:42:46 AM »
This is a delayed response but I wanted to thank everyone for their replies. I signed a great lease at $400 a month (great deal for Ithaca, NY) and also linked my accounts to Personal Capital to give me a better idea of my assets. In the end I am following this model:

$10,000 in cash
all other assets invested

So, as I earn more money through my summer job and exceed $10,000 in cash, I put it into investments (Roth IRA).

I have done a budget and I think the $10,000 cash is more than enough to get by for one year, including rent, food, and all expenses. (I budgeted a modest $200 for health care because I'm covered by my mom's insurance until I am 26 and she has been working for state government for 25 years so I won't lose it. So I only pay $20 copay for each doctor's visit).

So, if I did not work for an entire year I should be just fine. And my plan is to work (at least a little) because I like working and I don't want to deplete my savings.

I understand my low 5 digit savings is good for my age but small in the long run, but I'm investing the time to learn all this now so I am more prepared for when my 'stache gets bigger. :)