Author Topic: Just Getting Started with Investing  (Read 3020 times)

LikeAHawlk

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Just Getting Started with Investing
« on: July 29, 2013, 10:33:43 AM »
Hi all! I posted this in "Ask a Mustachian" initially, but I feel like I may get more specific answers and advice here. (I apologize if you've already seen this in the other area of the forum!)

I'm hoping I can get some advice/answers to a few questions I have about what to do with the small 'stache that we've pulled together. I've spent the last two weeks reading tons of old posts on the MMM blog, trying to learn exactly what my husband and I need to do to get the snowball going. We've got the frugal lifestyle part down, as well as knowing how to save and actively doing so - it's just what to do with that savings, and how much is going to be enough for our goals, that we get a little confused about.

We both currently have "traditional" 9 to 5, Monday-through-Friday office jobs. Our goal is to be able to grow our 'stache to the point where we can quit those jobs and switch to work that generates enough income to cover our small living expenses. Specifically, we want to be able to have the freedom to move around as much as we want (the ideal would be teaching abroad, and coming back to the US for a few months between teaching contracts). In other words, the goal isn't total early retirement, it's putting enough away now that in ten, fifteen years we can switch to something we find fun and fulfilling, but doesn't necessarily pay enough to allow for both covering living expenses AND contributing to a retirement account. We're looking for the freedom to pick up jobs that might not pay a whole lot but enable us to do things we love. Those jobs that don't pay much would cover current expenses, so that we wouldn't have to use the 'stache for income, but at the same time we also wouldn't be able to contribute very much to it during this period of doing low-income-is-okay-because-this-is-fun work. We need to grow it enough in these next 10-15 years so that it can continue to quietly grow enough to provide for us when we WOULD need the 'stache for income in our 50s or 60s. I hope all that makes sense!

So this is where we need some advice.. 1. where is the best place to invest our current 'stache while we're still heavily contributing to it? I feel like I understand the broad picture - invest in mutual funds and index funds - but is that all I need to know and do? Are there more specifics and details I should know and understand? And 2. based on our goals - which include continuing to work after 10-15 years of serious 'stache building which will allow us to make enough to cover current living expenses but probably not enough to also keep up with serious 'stache-building - how much do we need before we can safely quit our traditional 9 to 5 jobs with all their benefits like employer matching into retirement accounts? I read MMM's blog post "The Shockingly Simple Math to Early Retirement," and I can see and understand how much one would need for early retirement where all their income comes exclusively from what the 'stache's returns provide. But our goals are slightly different, so I am assuming we would need slightly less in the 'stache (because of the whole not-really-retiring part). And this is where I'm a little scared, because I don't know at what point we could safely jump ship from the traditional work-til-you're-nearly-dead life and to the do-fun-but-less-stable-stuff-for-a-living life.

I'll share some of our financial details to give a better idea of what we've got going on for anyone interested in answering what turned into a really lengthy question/plea for advice (sorry!):

I am currently 23, my husband is 26. Together we make about $70,000 annually pre-tax - yearly take-home pay is about $60,000 (breaks down to about $4200 per month).
We bank with a credit union. We currently have ~$3000 in our checking account (which pays .05% interest on funds over $2500) and we have $20,000 in a high-yield savings account (pays 1.5% interest). We pooled all of our non-retirement savings into this account so that it would bear the most interest for us - that chunk of change represents our emergency savings of about $13,000 and our "short-term" savings (stuff like trips and big unexpected or one-time purchases) of $7,000.
We each just opened a Roth IRA account. They currently hold a total of $1000 - we just opened these this month, so we have yet to buy into anything here. We will be contributing $100 to each account per month ($200/month total).
We also each have retirement accounts through our employers; both are Simple Plan IRAs and have ~$3000 each in them. We have not bought into anything here yet, either, but have been contributing 5% each with an employer match of 3%.
My husband also has a 401k from a previous employer with about $14,000. This is on a "life cycle plan" where as the account ages, the funds are automatically reinvested from higher-risk/potentially higher growth into things that are more risk-adverse. Essentially it's on autopilot and seems to have worked pretty well so far, but we have been told we should roll the funds from this account into a Roth IRA.
He also has stocks from the same employer that he is planning on selling soon. He has about $600 worth of dividends and the stocks are valued at $8000. Our current plan is to pay off his car once everything is cashed out (the loan as a balance of $3000), reallocate the $300/month car payment into savings, and save/invest most of what will be left over (~$5000).

So to conclude, we currently save about 20% of our take-home income through retirement accounts and a high-yield savings account with our credit union. Once we pay off my husband's car, we'll be saving about 28%. I've looked at our budget and I believe we can easily save ~$100 extra per month right now, which would bring us to saving about 30%. Now we've just gotta figure out what to DO with these savings and the little 'stache! Thank you all who take the time to read all this and provide opinions and feedback! I can't tell you how much I appreciate it. Looking forward to getting your advice and words of wisdom :)

matchewed

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Re: Just Getting Started with Investing
« Reply #1 on: July 29, 2013, 11:01:19 AM »
The approach is still basically the same. Outline the end goal. What will life be like for you when you retire? How much would that lifestyle cost you per year?

That gives you your 4% (or whatever you're comfortable with) SWR. You can work backwards from there to determine how big your stash needs to be.

Once you have your overall stash you need to figure how to save for it. For instance you're saying you can work work work until you hit your stash, or you can work for say 5 years and then stop contributing and move onto a job which won't give enough for you to contribute. How do you figure out that number for the second scenario seems to be your question.

I would use a simple compounding calculator for that one. Use contribution times while working, non-contribution times while working, and different return amounts to determine how big your stash needs to be before you move onto your lower level of income.

Captain and Mrs Slow

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Re: Just Getting Started with Investing
« Reply #2 on: July 29, 2013, 11:18:47 AM »
Probably one of the best investing books I read is Millionaire Teacher by Andrew Hallman, it's a fun entertaining book, he lays out an easy to understand investment philosophy, buy index funds and rebalance. main difference from MMM is he recommends bonds

   

LikeAHawlk

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Re: Just Getting Started with Investing
« Reply #3 on: July 29, 2013, 12:41:23 PM »
Once you have your overall stash you need to figure how to save for it. For instance you're saying you can work work work until you hit your stash, or you can work for say 5 years and then stop contributing and move onto a job which won't give enough for you to contribute. How do you figure out that number for the second scenario seems to be your question.

Thanks very much for the reply! I definitely understand what you're saying about it's our question - I know it's all going to be based on what our lifestyle looks like and what that lifestyle costs, but I wasn't sure if there wasn't also some sort of general rule out there that would allow us to work out a definite number that we could feel really secure with. I guess that's the average 4%, and for us we could probably use 5% or even 6% (is that totally crazy?) since we both want that big-time security blanket if possible. I'll definitely look up a compounding calculator and play around with different factors to see what that gives us. Should be a good starting point for us, which is really what we need right now since we're so new to the investing side of money.. saving's not a problem, it's the "what now?" that we've got to learn. Thanks again!


Probably one of the best investing books I read is Millionaire Teacher by Andrew Hallman, it's a fun entertaining book, he lays out an easy to understand investment philosophy, buy index funds and rebalance. main difference from MMM is he recommends bonds

Excellent, thanks so much for the recommendation! I'll certainly check that book out.

Eric

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Re: Just Getting Started with Investing
« Reply #4 on: July 29, 2013, 02:37:13 PM »
Thanks very much for the reply! I definitely understand what you're saying about it's our question - I know it's all going to be based on what our lifestyle looks like and what that lifestyle costs, but I wasn't sure if there wasn't also some sort of general rule out there that would allow us to work out a definite number that we could feel really secure with. I guess that's the average 4%, and for us we could probably use 5% or even 6% (is that totally crazy?) since we both want that big-time security blanket if possible. I'll definitely look up a compounding calculator and play around with different factors to see what that gives us. Should be a good starting point for us, which is really what we need right now since we're so new to the investing side of money.. saving's not a problem, it's the "what now?" that we've got to learn. Thanks again!

The 4% Safe Withdrawal Rate that gets thrown around here a lot is exactly that, a withdrawal rate.  So if you're trying to be more conservative than this, your withdrawal rate would be smaller (i.e. 3%), not larger.

So if you think a 3% SWR is better for you than 4%, you'd want a stash 33 times larger than your expenses minus income.  (1 / .03)

LikeAHawlk

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Re: Just Getting Started with Investing
« Reply #5 on: July 29, 2013, 03:15:19 PM »
Thanks very much for the reply! I definitely understand what you're saying about it's our question - I know it's all going to be based on what our lifestyle looks like and what that lifestyle costs, but I wasn't sure if there wasn't also some sort of general rule out there that would allow us to work out a definite number that we could feel really secure with. I guess that's the average 4%, and for us we could probably use 5% or even 6% (is that totally crazy?) since we both want that big-time security blanket if possible. I'll definitely look up a compounding calculator and play around with different factors to see what that gives us. Should be a good starting point for us, which is really what we need right now since we're so new to the investing side of money.. saving's not a problem, it's the "what now?" that we've got to learn. Thanks again!

The 4% Safe Withdrawal Rate that gets thrown around here a lot is exactly that, a withdrawal rate.  So if you're trying to be more conservative than this, your withdrawal rate would be smaller (i.e. 3%), not larger.

So if you think a 3% SWR is better for you than 4%, you'd want a stash 33 times larger than your expenses minus income.  (1 / .03)

Yikes, thanks for catching me on that one. I had my thinking backwards/didn't immediately pick up on the meaning of the acronym. Thanks for the correction and clarification!