Author Topic: I'm a newbie, dept-free, but just have cash... where to start?  (Read 3573 times)

Newbie_Stache

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So I have become super intrigued by this site and would love to retire early.  Here's my situation:  I'm 28 and debt free, minus a house mortgage.  Fortunately, my fiance is also dept-free.  I have a 401k in my current job and a 401k sitting in V-gard from my previous job (I'll be honest.. until now, I haven't ever paid attention to what a 401k is or what it is doing).  My fiance is a nurse and has a 403b through them.  We both pay up to what the company will match, but that is it (I need to do a little more researching on what the max limits are).  Right now, my house is actually 2 states away and is being rented out by some friends which actually pays for the mortgage plus about $300/month. My fiance and I both live in separate apartments and are thinking about buying a house when we get married.  Fortunately when married, our combined income will be around 95-100k.  Neither of us like the idea of being in dept and like a security cushion, therefore we have close to 45-50k in cash.  Neither of us have invested before.  If I want to retire early, do I max out the 401k and 403b, get a ROTH/ reg IRA etc... THEN get the Vanguard mutual fund, or should I put more into the mutual fund since I would like to live off of dividends?  Also, because the house is 2 states away, I'm contemplating selling it and purchasing a condo here in Alabama.  Live in the condo till I can buy the house that I want, and then rent out the condo.  What do y'all think?

Thank you in advanced!  I really have enjoyed reading the website and am excited about the future!

-Nebie_Stache-

gimp

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Re: I'm a newbie, dept-free, but just have cash... where to start?
« Reply #1 on: June 18, 2014, 12:35:45 PM »
Alright... so. One thing at a time.

Owning a house and renting it for mortgage + 300 sounds like a pretty good deal, but it has some pretty big downsides: since you're two states away and don't plan on going back, what happens if shit happens? Will you have to go deal with it? If you want to be a landlord, you should understand the 1% and 50% rules (suggestions, but good ones) to figure out if your property is a decent investment. Part of that is figuring out where the 300 goes - taxes? maintenance and repairs? in your pocket? etc.

Living together with your fiance would mean the two of you can cut your housing cost in half, give or take. Quite a nice thing.

401k and 403b and IRAs are excellent in that they are tax advantaged. You together earn 95-100k. If you max out the 401k and 403b, that's $35000 pre-tax. Add an IRA to that for each of you and that's another $11000 pre-tax. (Of course you have to ask: when you draw on this money, will you be earning more or less? If more, than go roth. Probably.) If you did this, you would put away $46k and be left with about the same amount...

So now there are two questions: First, can you live on $46k for the two of you? Second, remember that you can't draw on the money for a long time (well, you can take out your contributions into your roth ira penalty-free, but that's a different story.) Will you need money sooner? If so, you might consider roth IRAs instead, or you might consider paying a bit more taxes now and putting the money into a taxable investment account.

Now, the cash - that's a ton of cash. What's six months or a year's worth of expenses for you? Can you comfortably put some of that cash away for now? You can throw it into an IRA right now. You can also increase your 401k/403b contributions to their max - and given that there's only half a year left, you might find that to reduce your remaining paycheck too much, and use the cash to make up the "shortfall" in the paycheck. You can also open up a taxable account.

As far as where and how to invest, there are a couple points to look out for. One: risk tolerance. I'm young and single and put 100% into index funds (stocks). Maybe you're less tolerant of risk and want to put some into cash/bonds. That's up to you to research. The main thing I'd recommend, however, is to understand this: First, index funds track the market, and do well when everyone else does well, and don't lose money making poor choices like an actively managed fund might. Second, very low cost funds are generally better, and those are index funds. Everyone here likes Vanguard but the big guys from other firms offer them too - schwab, fidelity, whomever.

If I were you: Keep renting the home to your friends until they move, then sell it - or sell it now. Buy a new home for you and your fiance and move in, if it's cheaper than renting. Max out pre-tax savings contributions. Invest in vanguard index funds (total market - vtsmx or the equivalent ETF.)

Required reading: http://jlcollinsnh.com/stock-series/

brewer12345

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Re: I'm a newbie, dept-free, but just have cash... where to start?
« Reply #2 on: June 18, 2014, 12:43:28 PM »
Before you do much of anything, get some books and read up on financial planning and investing.

As for the house(s), I would not buy anything until you and your fiancÚ get married.  Houses are expensive to buy and sell, so don't waste the money buying a townhome only to have to move again.

AlanStache

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Re: I'm a newbie, dept-free, but just have cash... where to start?
« Reply #3 on: June 18, 2014, 01:32:51 PM »
Before you do much of anything, get some books and read up on financial planning and investing.

As for the house(s), I would not buy anything until you and your fiancÚ get married.  Houses are expensive to buy and sell, so don't waste the money buying a townhome only to have to move again.

yep dont casually buy a house.  make sure you want to be in that house for years, or have a plain to rent it out-in that case make sure the numbers work before buying.

with investing also you need to get use to accounts going up and down on a daily basis.  dropping 50k in the market then seeing it go down 5% in a day might be more than you can take and you panic sell locking in the losses.  might suggest starting slow and reading as much as you can.  dont invest in something you dont understand.  if someone is selling you something understand how they make money.

lisahi

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Re: I'm a newbie, dept-free, but just have cash... where to start?
« Reply #4 on: June 18, 2014, 01:52:04 PM »
When I first started looking into really growing my stache, the advice given to me regarding my future income was:

1. First max out your 401K, 403b, TSP (i.e., the retirement account that is offered by your job). This will come out to $17,500 per year per person. If you can do that... fantastic.

2. If you can max out your retirement fund from work, open an IRA and max that out ($5500 per year per person). Whether to choose a Roth IRA or a Traditional IRA is a question personal to your particular financial situation. If you expect that you are your fiancÚ's income will be greater in retirement than it is now, then you want to go with a Roth IRA because you pay taxes on that money now, rather than when you withdraw as a retiree.  If you expect to have a lower income in retirement than you do now, stick with a Traditional IRA because you're likely to be paying less taxes on that money when you withdraw it after retirement.

3. If you can max out your retirement fund from work and an IRA, then move as much cash as you are comfortable with into non-tax-advantaged investments.  A lot of people here use Vanguard and invest in index funds or ETFs.

Keeping too much cash in Checking or Savings accounts will lose you money over time because the interest earned is unlikely to keep up with inflation. That's not to say that you don't keep some money in a Checking or Savings (you need to pay bills each month). You have a lot of cash, though. Comments above have given more detailed and helpful advice as to how to handle that cash. Just remember that you want your money to work for you and not against you.

myDogIsFI

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Re: I'm a newbie, dept-free, but just have cash... where to start?
« Reply #5 on: June 18, 2014, 10:47:24 PM »
I agree with Brewer - at this point, you really should head to the library and get a book.  I suggest the Bogleheads' Guide to Investing (or the retirement one).  You could spend a ton of time cobbling together what you need from blog and forum posts, and it's a waste when all of the basics have been conveniently distilled into a book. 

You've got a lot of good questions in your post but there's too much going on in it for anybody to answer it all in a single post.

Newbie_Stache

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Re: I'm a newbie, dept-free, but just have cash... where to start?
« Reply #6 on: June 19, 2014, 08:14:54 AM »
Thank you for the replies.  I agree... I need to learn more.  In all honestly, I never worried about the market b/c I was misinformed; and I figured if I didn't spend too much money, pay off all debts, and keep a cushion then I wouldn't have to worry.  A friend told me about this site and b/c of it, I have now become extremely interested in learning.

So my original intent was to invest in Index funds so that I can live off of the dividends in early retirement and not worry as much on the 401ks, IRAs, etc... but obviously that is where I need to read a little more.  So to attempt to understand this as I begin to study more, if I max out all of the retirement pre-tax options... this will eventually allow me to get into a lower tax bracket and essentially allow me to have the same amount of take home cash (give or take) as I would if I was paying taxes on the higher income rate?  Then I'd be basically where I'm at right now but with actual money stashed?? Sound's like a plan to me.

As far as the house goes... one of the roommates is interested in buying the house and another is going to be moving out at the end of the year.  It presents I nice situation to sell as I will probably get a little more than I put in it.  I've been on the fence for awhile on this topic.

Thanks again for the comments.

Bateaux

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Re: I'm a newbie, dept-free, but just have cash... where to start?
« Reply #7 on: July 04, 2014, 07:43:48 PM »
Sell the house asap.  Get that equity redeemed.  If the rent is cheap enough get married and live in the apartment for a while.  Skipp the condo unless you plan to stay there long term.  Look for a reasonable house you can afford close to work as possible.  You don't need a mansion,  buy only in a neighborhood with low crime, and appreciating value.  Put at least 25% down, you may even be able to pay cash.  I wouldn't miss out on 401k and Roth IRA contributions just to buy the house cash however.  Max those out for you and your soon to be wife.  Keep nonessential buying to a minimum for a few years and gradually you will build that nest egg needed for FI.  Then it gets much easier.

nereo

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Re: I'm a newbie, dept-free, but just have cash... where to start?
« Reply #8 on: July 05, 2014, 11:43:38 AM »
Hi newbie-stach

I'm sorry to be the forum spelling police (especially since I make lots of typos myself), but I can't help myself here.  It's debt, not dept. 
Now - you have a home that is cash flow positive.  That's great.  Personally I see no reason to sell that until/unless a better opportunity comes along, in time it could become an even better income generator for you as the mortgage gets paid down and equity increases.
As for where to put your savings, I've found the following flow-chart to apply to almost everyone who is debt free and has some emergency funds:
1) contribute to 401(k)/403(b) enough to get the company match
2) max out your IRA and HSA accounts
3a) continue funding either your 401(k) until max
3b) taxable accounts with anything leftover.
3a/3b depends a bit on other things, like your tax burden, your 401(k) plans, and whether you are saving up for something like a large down payment.

continue reading and learning.  A good place to start is here: http://jlcollinsnh.com/stock-series/
cheers
N