Author Topic: Index Funds- Tight Budget  (Read 4615 times)

josephkentcraig

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Index Funds- Tight Budget
« on: February 26, 2016, 11:36:22 PM »
I'm 22. Full time student. Don't have much to my name, but I'm relatively good at living a thrifty/frugal life. I'd like to start investing in an Index fund. Monthly. Though, I don't have any large sums to begin with. I'd like to have dividends coming each month or interest that I reinvest/ eventually live on.

I like these funds:
  • VTSAX (Vanguard Total Stock Market Index Fund)
  • VBTLX (Vanguard Total Bond Market Index Fund)
Though my biggest issue is the large minimum investment of $10,000!! Which I just don't have right now.

What are you suggestions?
« Last Edit: February 26, 2016, 11:49:52 PM by josephkentcraig »

BallardStubble

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Re: Index Funds- Tight Budget
« Reply #1 on: February 26, 2016, 11:51:27 PM »
Do you have a part time job or any debt?

josephkentcraig

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Re: Index Funds- Tight Budget
« Reply #2 on: February 27, 2016, 12:03:38 AM »
Do you have a part time job or any debt?
I currently have about $5,500 in Student Loan debt. Not much compared to most. No part time job, just a full time student. Living off of scholarship, grants and student loans. My wife makes roughly $12,000 a year. Part time. We are frugal though.

Seppia

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Re: Index Funds- Tight Budget
« Reply #3 on: February 27, 2016, 01:04:20 AM »
Kill the debt first.
Then you can start by buying VBINX, which is basically a combination of the two funds you mentioned, only you buy two in one with a minimum investment of $3000
This should help you start.
Once you get to $10000 by adding the monthly contributions it will automatically transform (super sayan style) into VBIAX, which is exactly the same fund only with a 0.09 expense ratio instead of 0.23
Then once you have $20.000 you can sell VBIAX and buy the two funds you want, thus being able to select your stock/bond allocation over time (at the start it will have to be 50/50 obviously)

josephkentcraig

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Re: Index Funds- Tight Budget
« Reply #4 on: February 27, 2016, 02:04:33 AM »
Kill the debt first.
Then you can start by buying VBINX, which is basically a combination of the two funds you mentioned, only you buy two in one with a minimum investment of $3000
This should help you start.
Once you get to $10000 by adding the monthly contributions it will automatically transform (super sayan style) into VBIAX, which is exactly the same fund only with a 0.09 expense ratio instead of 0.23
Then once you have $20.000 you can sell VBIAX and buy the two funds you want, thus being able to select your stock/bond allocation over time (at the start it will have to be 50/50 obviously)
Alright, great plan, which I'll probably follow! One hiccup though, I'm a full time student. I'll be incurring student loan debt. Roughly $15,000 more at my current projections. I'm doing a lot to keep it down (living frugally). $15,000 is miniscule compared to what others incur.

Should I just wait till 2019 to start investing? (Lot's of time put to waste) Or is there a wise way to do it, without waiting?

slugline

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Re: Index Funds- Tight Budget
« Reply #5 on: February 27, 2016, 04:36:21 AM »
http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

Quote
if you still have a car loan, credit card, department store or even a student loan debt, you should destroy that as a prerequisite to beginning the more relaxed stage of saving for financial independence.

Paying down debt is effectively the same as investment with a rate of return equivalent to the lender's interest rate.

BallardStubble

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Re: Index Funds- Tight Budget
« Reply #6 on: February 27, 2016, 12:44:08 PM »
Can you get a part time job or can your spouse increase their take home pay? A part time job as a full time student is definitely doable :)

Travis

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Re: Index Funds- Tight Budget
« Reply #7 on: February 27, 2016, 01:45:39 PM »
Kill the debt first.
Then you can start by buying VBINX, which is basically a combination of the two funds you mentioned, only you buy two in one with a minimum investment of $3000
This should help you start.
Once you get to $10000 by adding the monthly contributions it will automatically transform (super sayan style) into VBIAX, which is exactly the same fund only with a 0.09 expense ratio instead of 0.23
Then once you have $20.000 you can sell VBIAX and buy the two funds you want, thus being able to select your stock/bond allocation over time (at the start it will have to be 50/50 obviously)
Alright, great plan, which I'll probably follow! One hiccup though, I'm a full time student. I'll be incurring student loan debt. Roughly $15,000 more at my current projections. I'm doing a lot to keep it down (living frugally). $15,000 is miniscule compared to what others incur.

Should I just wait till 2019 to start investing? (Lot's of time put to waste) Or is there a wise way to do it, without waiting?

If you're still in school accumulating debt, this is probably a little early to be concerned about investing.  In the near future you'll have an obligation to start paying down those loans at 4-6% interest or whatever your rate is.  Ensuring you pay as little of that interest as possible really is a more secure rate of return than putting that money in an index fund and hoping it's a good year for the market.  It's a similar situation to people debating whether to pay down a mortgage or invest.  You can pay off your mortgage at a guaranteed rate of whatever your mortgage is, or invest and possibly make double that (or only half that).

Heckler

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Re: Index Funds- Tight Budget
« Reply #8 on: February 27, 2016, 06:20:50 PM »
at 22, forget about a bond mutual fund, but also realize 100% stocks will be a roller coaster you need to ride out till you're 40.

After you kill your debt, go with VTI instead - total market index ETF.  No minimums as far as I know.

http://money.usnews.com/funds/etfs/large-blend/vanguard-total-stock-market-etf/vti
« Last Edit: February 27, 2016, 06:25:48 PM by Heckler »

MustacheAndaHalf

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Re: Index Funds- Tight Budget
« Reply #9 on: February 27, 2016, 08:58:30 PM »
After you kill your debt, go with VTI instead - total market index ETF.  No minimums as far as I know.
With an account at Vanguard, buying Vanguard Total Stock Market ETF ("VTI") is free to buy/sell ($0 commission).
https://personal.vanguard.com/us/whatweoffer/stocksbondscds/feescommissions

meyling

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Re: Index Funds- Tight Budget
« Reply #10 on: February 27, 2016, 09:00:01 PM »
There is a cheaper version of VTSAX, VTSMX, which has a minimum of $3000, though the expense ratio is a little higher. You can also invest in VTI, which is the ETF version. I would do some research on this if you don't know how ETFs work.

I wouldnt worry about adding bonds yet. But that's just my opinion. And you might want to pay off your student debt first depending on the interest rate of that. I'm not too familiar with how student debt works though.

Woody Viet

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Re: Index Funds- Tight Budget
« Reply #11 on: February 29, 2016, 02:42:37 AM »
What's the interest rate on your student debt? Is it linked to the rate of inflation? If I were in your shoes I'd probably start pumping money into stocks and use the loans as leverage to ramp that up. Are you likely to get a well paying job relatively easily out of university? Such a strategy is riskier if you can't count on employment to meet your student loan interest.

Also don't worry about bonds. They do relatively little for you at such a young age where the long term compounding advantages of stocks are really really powerful.

josephkentcraig

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Re: Index Funds- Tight Budget
« Reply #12 on: March 06, 2016, 12:31:57 AM »
What's the interest rate on your student debt? Is it linked to the rate of inflation? If I were in your shoes I'd probably start pumping money into stocks and use the loans as leverage to ramp that up. Are you likely to get a well paying job relatively easily out of university? Such a strategy is riskier if you can't count on employment to meet your student loan interest.

Also don't worry about bonds. They do relatively little for you at such a young age where the long term compounding advantages of stocks are really really powerful.
Thank you and everyone^^^ for their responses. I've given it more thought and etc.

https://drive.google.com/file/d/0B_2Ds6V8C96wR2ZSalJZT0xOSkU/view?usp=sharing

Rate is 4.29%. My major is Financial Economics. Very likely to get a well paying job just due to networking. So let me see if we are on the same page, you'd recommend that I pump as much money into VTI. Including excess student loan/paychecks/grants. Create a surplus from living thrifty and throw that money into a VTI. Graduate, then pay off student loan debt, but have 4 years worth of investing (compound interest as well) on my side?

Woody Viet

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Re: Index Funds- Tight Budget
« Reply #13 on: March 06, 2016, 07:34:36 AM »
At 4.29% I think that is going to work out over a long time horizon for 10+ years. You've got a real borrowing cost of 1-2.5% so you need to make that post-tax on your investments to come ahead. Contrary to what's been said here I would invest that abroad where the expected returns right now are a bit higher. A mix of USA, Europe and Emerging Markets would be my choice but do your own due diligence.

Apart from a few long tail risks (think deflations, political confiscation, broker fraud, changes to tax law), your major risk is liquidity. Will you always be able to pay those interest payments? I'll probably be seen as a bit old fashioned in saying this but dividends will lower your liquidity risk.

When does your debts interest kick in and is it linked to you having a job at all? If you only start paying them back once you get a job then I would be very tempted to borrow all I could get. This is what I did in my home country (the UK), where you only pay back student loans once you pass a certain threshold. Worked out very well in 2008-2010 when I did it but then again I did get very lucky. That is a reason why I'm optimistic this kind of strategy (so take such optimism into account!)