Author Topic: New Investor, should I invest with no income?  (Read 3166 times)

Nate4846

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New Investor, should I invest with no income?
« on: March 22, 2017, 08:11:29 AM »
Hello all!

I am a new mustachian and very new to this forum. I wanted to thank you all in advance for your help!

My situation:
I am a undergraduate junior studying electrical engineering. I am doing engineering internship rotations making about $600 per week until august. I have no student debt and I have saved a lot of what I have made already. I have an emergency fund and about 3-5K available right now to invest. I plan on going to graduate school (at little cost to me, I will be applying for work studies and any scholarship/aid that I can get) because the field and career I want to work in requires it.

My question:
I read the Order of investment topic but I have no income that provides reimbursement, retirement, or anything beyond an hourly wage. I will not have that for the next three years but I do not want my savings just sitting in my bank. Should I skip to the last step and put it in low cost funds?

If I invest:
After reading some information here and on the blog, I was thinking of making the minimum investment in a VFINX or VTSMX account and putting the rest into a VTI or something similar.

Miscellaneous Investment idea:
I also read online about motif investing. The motif topics on this forum seem to mention it for ethical investing but I specifically thought it could be used to mimic successful mutual funds. Some successful Mutual funds have %76-90 of their shares in about 30 stocks or so. What do you think about making a motif to mimic these funds and then rebalance and possible invest more 2-4 times a year. This keeps my cost constant at $20-40 per year and over 30 years it rivals the cost of low cost funds. I thought it was a cool idea when I read about it, I'd probably favor making an account on Vanguard though.

Thanks for the help!
« Last Edit: March 22, 2017, 08:31:16 AM by Nate4846 »

FLBiker

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Re: New Investor, should I invest with no income?
« Reply #1 on: March 22, 2017, 08:46:56 AM »
+1 for index investing in a Roth.

Nate4846

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Re: New Investor, should I invest with no income?
« Reply #2 on: March 22, 2017, 09:05:43 AM »
Quote
You have income, you're making $600 per week until August.

Sorry! I did not mean to be misleading. I was trying to have the title comment on the fact that after august I will have no or little income until I finish graduate school.

Thanks for the information! I have read about Roth IRA's and I knew I paid the taxes on it now but I didn't realize there was no penalty for withdrawing the money. I'm going to be evaluating my financial situation some more of the next month but I feel as though I would be comfortable living without those funds for the coming years.

Do you know of any resources you could point me towards that I could learn more about my taxes and tax brackets in the US? Specifically, when my income is hourly and only for part of the year?

EDIT: Didn't think to look for a taxes section on the forum before I said that haha. I'll get reading, thanks!
« Last Edit: March 22, 2017, 09:10:59 AM by Nate4846 »

Aggie1999

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Re: New Investor, should I invest with no income?
« Reply #3 on: March 22, 2017, 09:20:17 AM »
Figure out what your taxable income is after all your deductions. Then put that amount, up to $3350, in an HSA in order to lower your taxable income. Then whatever is still left in taxable income, put that amount towards a traditional IRA (tIRA), up to $5500, in order to lower your taxable income even more. Then if you have made it down to $0 taxable income and still haven't put all of the $5500 in the tIRA put the remainder in a Roth IRA (rIRA).

I'm guessing as a student you have some education expense deductions. So you may already be at $0 taxable income. If so, just go straight to the rIRA. If you still have money after the $5500 in the rIRA, put the remainder, up to $3350, in an HSA. Remember to save all medical receipts so you can deduct the money out of the HSA when you want in later years.

Also, make sure your parents are not claiming you as a dependent on their taxes. If so, that changes things significantly.

NoStacheOhio

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Re: New Investor, should I invest with no income?
« Reply #4 on: March 22, 2017, 09:51:53 AM »
Make sure you have enough cash accessible to cover expenses (this is your vanilla, low interest checking and savings). If you have money left over from there, and IRA is a good option. What you don't want, however, is to have a bunch of money in an IRA, and no money for food or rent.

highflyingstache

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Re: New Investor, should I invest with no income?
« Reply #5 on: March 22, 2017, 12:20:32 PM »
Yes this forum will lean heavily on indexing. It's not wrong; it performs to the market standard, which is a tall order. A few of us practice other ideals as well. I specifically work on contrarian investing on a regular basis. I also index. I must say that I've spent more time reading and learning a bunch of different ideas and approaches (Buffet/Graham, Boggle, etc) before I ever moved  cent the way I did. Certainly I still read, a lot, I tweak, I learn. Repeat. I didn't put a cent in until I was sure of my plan, how to react when things moved up, down, severely.

If motif investing speaks to you so, don't let us stop you. Certainly find good council, read and discuss your pros and cons, as there's always some. From what I can see, the fees of buying 30 stocks must be huge compared to a mutual fund for such a small amount. If you're even paying a 5$ commission on each, that would be incredible loss.


The issue here that isn't being addressed is that you have little or no income and money to move. You have no assurances! So, this is your only stop-loss before debt. If things went sour the next while, you may need to lean on such money. No pension, no disability and no back up savings to cover you (for now) so this must act as that savior. It can still work for you, for sure: there's great interest rates on chequing/saving accounts, you just have to find them (In Canada Tangerine, PC Financial, etc.). Second, putting the money to work for you, invested, but being accessible without penalty, would be great (Canadian TFSA, American IRA, I believe). When the music stops you have access again.
The cost of not having that money available, as an insurance policy could be high. I guess the worst case scenario would be 20% on credit card debt, or less on a line of credit, etc. But that's certainly the angle I'm looking at from here, less what you can make.


Nate4846

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Re: New Investor, should I invest with no income?
« Reply #6 on: March 23, 2017, 07:22:22 AM »
Quote
Also, make sure your parents are not claiming you as a dependent on their taxes. If so, that changes things significantly.

I am not positive but it is very likely I am declared a dependent at the moment. It's become very apparent that I need to be learning more about taxing and my tax situation before I start investing. I'll probably be reading up on taxes the next week or two. I will especially be looking to see the pros and cons of my dependency status. Any suggestions are welcome!

Thanks for all the great advice!

« Last Edit: March 23, 2017, 07:52:20 AM by Nate4846 »

Gin1984

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Re: New Investor, should I invest with no income?
« Reply #7 on: March 23, 2017, 07:25:35 AM »
Figure out what your taxable income is after all your deductions. Then put that amount, up to $3350, in an HSA in order to lower your taxable income. Then whatever is still left in taxable income, put that amount towards a traditional IRA (tIRA), up to $5500, in order to lower your taxable income even more. Then if you have made it down to $0 taxable income and still haven't put all of the $5500 in the tIRA put the remainder in a Roth IRA (rIRA).

I'm guessing as a student you have some education expense deductions. So you may already be at $0 taxable income. If so, just go straight to the rIRA. If you still have money after the $5500 in the rIRA, put the remainder, up to $3350, in an HSA. Remember to save all medical receipts so you can deduct the money out of the HSA when you want in later years.

Also, make sure your parents are not claiming you as a dependent on their taxes. If so, that changes things significantly.
Don't assume you have access to an HSA as a student.  This depends on what your health insurance coverage is.

Gin1984

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Re: New Investor, should I invest with no income?
« Reply #8 on: March 23, 2017, 07:28:22 AM »
Quote
Also, make sure your parents are not claiming you as a dependent on their taxes. If so, that changes things significantly.

I am not positive but it is very likely I am declared a dependent at the moment. It's become very apparent that I need to do be learning more about taxing and my tax situation before I start investing. I'll probably be reading up on taxes the next week or two. I will especially be looking to see the pros and cons of my dependency status. Any suggestions are welcome!

Thanks for all the great advice!
Are your parents paying more than 50% of your bills?  If so, yes you are a dependent and that is not a bad thing.  You still can earn up to $6300 and pay no federal tax. 
If you get a W-2 for your internship, put all you can, up to $5500 into a Roth.  If it was considered a scholarship, put the money into a broad-based index fund in taxable account, fidelity or vanguard can help with either.

Heckler

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Re: New Investor, should I invest with no income?
« Reply #9 on: March 23, 2017, 07:59:20 AM »
In order to prevent yourself going into debt in the next five years, I would keep your cash today but start a plan to invest a portion of your income as it comes in.   This will let you adjust to an even lower income, but when it comes time you need to buy a couch, some dishes and a small car (I'm assuming), you won't fall into the credit trap.

Nate4846

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Re: New Investor, should I invest with no income?
« Reply #10 on: March 23, 2017, 08:01:24 AM »
Quote
Are your parents paying more than 50% of your bills?  If so, yes you are a dependent and that is not a bad thing.  You still can earn up to $6300 and pay no federal tax.

This is likely although I'm not sure how it is all reported for taxes. My weekly income pays for my groceries, transportation, and utilities. I pay for rent out of my checking account but my parents transfer funds to cover it. My parents pay for my tuition directly but I transfer 2500/semester to them as a contribution. I/my parents do not pay tuition for the time period that I am working (January-August 2017).
 
Quote
If you get a W-2 for your internship, put all you can, up to $5500 into a Roth.  If it was considered a scholarship, put the money into a broad-based index fund in taxable account, fidelity or vanguard can help with either

I did get a W-2 for my internship.

SeattleCPA

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Re: New Investor, should I invest with no income?
« Reply #11 on: March 23, 2017, 08:18:54 AM »
Can I take a slightly different angle here?

I am all for starting the compound interest engine early... but your best investment option right now is finishing up your education in a way that lets you get a great job you enjoy and which provides a high income. The return you earn on that investment dwarfs what any traditional asset class (like stocks or bonds) will earn.

And kind of related to this point... if you have time and energy outside your education, I would not worry or focus on making deposits into an account at this point. Rather, I'd buff up your investment skills. If through that investment in your financial education you can just avoid the nonsense that many of us get involved in, you'll quickly, quickly build wealth once you start working.

P.S. Anything written by John Bogle, David Swensen, Burton Malkiel, is a good place to start your self-learning.

Gin1984

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Re: New Investor, should I invest with no income?
« Reply #12 on: March 23, 2017, 08:31:27 AM »
Quote
Are your parents paying more than 50% of your bills?  If so, yes you are a dependent and that is not a bad thing.  You still can earn up to $6300 and pay no federal tax.

This is likely although I'm not sure how it is all reported for taxes. My weekly income pays for my groceries, transportation, and utilities. I pay for rent out of my checking account but my parents transfer funds to cover it. My parents pay for my tuition directly but I transfer 2500/semester to them as a contribution. I/my parents do not pay tuition for the time period that I am working (January-August 2017).
 
Quote
If you get a W-2 for your internship, put all you can, up to $5500 into a Roth.  If it was considered a scholarship, put the money into a broad-based index fund in taxable account, fidelity or vanguard can help with either

I did get a W-2 for my internship.
Then I'd recommend opening either a fidelity or vanguard Roth IRA and funding it.  You may not be able to max out out but starting it starts the five year clock. 
Don't worry about which fund, just open the account and start.

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PizzaSteve

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Re: New Investor, should I invest with no income?
« Reply #13 on: March 23, 2017, 09:50:49 AM »
+1 on funding Roth.  Maxing that space is golden, and frankly if it had been available when i was an undergrad, i would have put 100% of income in up to max, even if i had to take student loans to fund expenses.

Note, this assumes you will have marketable skills and the ambition to quickly grow your income on graduation (i did with engineering and business degrees).

Google the Bogleheads investing WIKI and study up.  Very good resource. 

talltexan

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Re: New Investor, should I invest with no income?
« Reply #14 on: March 24, 2017, 09:36:05 AM »
When I was as young as you, they capped Roth IRA contributions at $2000/year. Take advantage!

Cwadda

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Re: New Investor, should I invest with no income?
« Reply #15 on: March 24, 2017, 09:49:33 AM »
You want a Roth IRA, and be absolutely sure not to contribute more than your claimable income in a given year. You will be penalized and it gets messy.

MustacheAndaHalf

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Re: New Investor, should I invest with no income?
« Reply #16 on: March 24, 2017, 10:18:16 AM »
Regarding "successful Mutual funds":

"This year's top-performing mutual funds aren't necessarily going to be next year's best performers. Itís not uncommon for a fund to have better-than-average performance one year and mediocre or below-average performance the following year. That's why the SEC requires funds to tell investors that a fund's past performance does not necessarily predict future results."
https://www.sec.gov/fast-answers/answersmperfhtm.html