Author Topic: What to do next?  (Read 7711 times)

bryanth

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What to do next?
« on: May 17, 2014, 06:23:11 PM »
Hey all.

Currently trying to determine my next step for investing. I am in an "extremely extremely extremely" stable career position, 22 years old, and have been graduated for 1 year. I unfortunately live in an area with a high cost of living and made the poor choice of purchasing a BMW straight out of college... Too late now :(, so I do have some high expense that I wish I could be putting toward investing.

I did the initial step of collecting half a years worth of costs in a savings account in case of an emergency, but my position is extremely secure and I feel like I'm wasting so much money at this time with low interest, when I could invest it elsewhere. I currently max my employer match for 401k and am automatically putting in 10%. I am considering reducing my savings to just three months as this will still provide me with a temporary income, and in a few years I will re-evaluate my job security and increase accordingly. I keep a $2,500 buffer in checking for various expenses, but am currently at around $5,000 as I'm thinking about getting another fund from Vanguard, and they always have minimum buy-in amounts.

Should I just go ahead and plan on getting a Roth IRA (Which fund is this? There are too many) and max that every year, or would it be wise to put it elsewhere. My personal vision is to keep 10% going to my retirement, max the Roth every year, and the remainder I have, place accordingly in my VFINX for the next couple years. Does this make sense?

Savings (.85% interest)- 6 months
Vanguard 401k Retirement Fund- $3,000
Vanguard 500 Index- $5,000
Checking account- $5,000

Thanks!

Jack

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Re: What to do next?
« Reply #1 on: May 18, 2014, 08:58:09 AM »
  • Yes, you should max out an IRA.
  • Whether that IRA should be a Roth or Traditional is a different question. You need to post your income and spending (current and in retirement) so we can help you figure out which is better.
  • After you max your IRA, then you should max your 401k
  • Sell the BMW (unless it's an old one and you do the work on it yourself).
  • If that 6-month emergency fund might turn into a house-downpayment fund, you should consider leaving it in the "wasteful" safe savings account.

bryanth

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Re: What to do next?
« Reply #2 on: May 18, 2014, 01:56:00 PM »
According to my income and spending, I should get a Roth. But whats the fund for that in Vanguard?

Unfortunately I don't plan on selling the BMW. I paid a good amount for it. Put a $20k downpayment on it so even if I were to jump down to a cheaper car, I'd be paying close to the same in terms of monthly payments. Maybe in a couple years.

I honestly don't plan on getting a house within the next 5 years, so no real need for that.

Jack

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Re: What to do next?
« Reply #3 on: May 18, 2014, 03:36:45 PM »
According to my income and spending, I should get a Roth. But whats the fund for that in Vanguard?

A Roth IRA isn't a fund, it's a type of account. (The account is a container that holds the asset (i.e. fund) that you're buying.) After you open said account, you then pick from the same choices of funds that you would in any other case.
  • You have a 401k, but you didn't say which fund it's invested in ("Retirement Fund" isn't a thing, unless maybe you meant one of the Target Retirement Funds).
  • You have a Vanguard S&P Index fund (VFINX), but didn't say what kind of account it's in. (Probably a taxable account, but maybe you've already opened an IRA and don't realize it?)

Unfortunately I don't plan on selling the BMW. I paid a good amount for it. Put a $20k downpayment on it so even if I were to jump down to a cheaper car, I'd be paying close to the same in terms of monthly payments. Maybe in a couple years.

First, punch yourself in the face for me. Second, look up "sunk costs." Third, realize that you would (hopefully!) get decent chunk of that $20k back if you sold (probably not all of it, but at least $10-15k). That $10-15K would be enough to buy a perfectly-good used car free and clear, with thousands of dollars left over.

I honestly don't plan on getting a house within the next 5 years, so no real need for that.

Given that renting also eliminates an entire class of emergency expenses (i.e., you won't suddenly have a water heater break or something) in your situation I'd be comfortable reducing the emergency fund. If you do that though, I'd make sure to at least have access to enough credit to compensate (but, obviously, don't use the credit except in an emergency).

bryanth

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Re: What to do next?
« Reply #4 on: May 18, 2014, 05:27:00 PM »
You're correct. I have the Target retirement and this:
https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT

Honestly, I would like to sell the car, but I went through a lot of hassle getting the car and finding one. I'd feel pretty bad selling it after nine months. I'm going to enjoy it for a bit. But yes, I would be able to recoup about 15k. It just bothers me that I would lose $5k from depreciation, as well as that other $5k I paid off on the car in the meantime.

Jack

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Re: What to do next?
« Reply #5 on: May 19, 2014, 08:37:07 AM »
You're correct. I have the Target retirement and this:
https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT

You still haven't said if the VFINX is in a taxable account yet. I'll just assume that it is.

Here's what I would suggest you do:

  • Decide if you can afford to save more than $17,500 before tax + $5500 after tax
  • If yes, then:
    • Create a Vanguard Roth IRA account and buy $5500 of VFINX in it.
    • Increase your 401k withholding to the maximum
    • Use any additional savings to buy more VFINX in your taxable account (remember, you want to get to $10,000 in a single fund ASAP to get to the "Admiral" share class with a lower expense ratio).
    • In subsequent years, keep the 401K withholding maxed, add $5500 (or whatever the maximum is for that year) to the Roth IRA (same account, same fund), and then add any extra to the taxable account (again, same fund)
  • If no, then:
    • Call up Vanguard and tell them that you want to change your taxable account to a Roth IRA (or close the former and then open the latter), keeping the fund (VFINX) the same.
    • Increase your 401k contribution by at least $5000/year, up to whatever you can afford.
    • In subsequent years, add the maximum to the Roth IRA (same fund) then set your 401k withholding to the max you can afford.

Your fund choices, by the way, are not quite optimal (in my opinion) but they are close enough. Don't change them or buy additional different funds until you've learned a lot more.

Honestly, I would like to sell the car, but I went through a lot of hassle getting the car and finding one. I'd feel pretty bad selling it after nine months. I'm going to enjoy it for a bit. But yes, I would be able to recoup about 15k. It just bothers me that I would lose $5k from depreciation, as well as that other $5k I paid off on the car in the meantime.

That money is gone now no matter what you do. The question is, do you want to lose more by letting the car continue to depreciate?

Now, don't get me wrong: if you were a car enthusiast and told me that it was your dream car or that you bought it for a specific purpose (like autocross) or something then I'd say keep it. But it sounds to me like you just thought "I graduated, so I deserve a fancy car" and in that case it's gotta go.

SDREMNGR

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Re: What to do next?
« Reply #6 on: May 19, 2014, 11:12:22 AM »
You're correct. I have the Target retirement and this:
https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT

Honestly, I would like to sell the car, but I went through a lot of hassle getting the car and finding one. I'd feel pretty bad selling it after nine months. I'm going to enjoy it for a bit. But yes, I would be able to recoup about 15k. It just bothers me that I would lose $5k from depreciation, as well as that other $5k I paid off on the car in the meantime.

Enjoy the heck out of it and get whatever status symbol, feel good about yourself, chick magnet, driving enjoyment out of it as you can and perhaps keep it as a life lesson.  I loved cars early on in my life and still have my 2005 Acura which has seen better days but I do still enjoy driving it.  Then never buy another fancy car again unless it is such a small part of your net worth that it makes sense in a performance / safety vs. cost to you sort of way.

dragoncar

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Re: What to do next?
« Reply #7 on: May 19, 2014, 11:23:49 AM »
I am curious what kind of job is this secure.

SDREMNGR

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Re: What to do next?
« Reply #8 on: May 19, 2014, 04:57:26 PM »
I am curious what kind of job is this secure.

Tax collector & funeral director.

dragoncar

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Re: What to do next?
« Reply #9 on: May 19, 2014, 05:20:56 PM »
I am curious what kind of job is this secure.

Tax collector & funeral director.

OP replied to me via PM with a really vague answer, so I'm pretty sure he's a spy.

Pylortes

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Re: What to do next?
« Reply #10 on: May 19, 2014, 08:10:10 PM »
Roth IRA is likely the way to go if you are young and are likely to see higher taxes/income down the road (which is likely).

Also tax collector is not nearly as secure as it used to be.  The IRS is a popular whipping boy in Congress.  They keep cutting the budget even when the budget office projections show what a great return on investment it would be for the IRS budget to increase.   Funeral director is a stable job that's pretty lucrative from my understanding.

Freedom2016

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Re: What to do next?
« Reply #11 on: May 19, 2014, 09:13:22 PM »
Curious why no one's advice is to max the 401k immediately/first/before funding any other kind of retirement vehicle?

That was my first thought. Throw everything you can into the 401k ($17,500), then open a Roth.

Pylortes

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Re: What to do next?
« Reply #12 on: May 19, 2014, 11:22:07 PM »
I agree with you assuming there are halfway decent index funds with low fees in the 401k plan.  If not I'd go do the Roth where I had more control.

Strawberrykiwi75

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Re: What to do next?
« Reply #13 on: May 20, 2014, 01:47:38 AM »
Seriously, sell the car. Your reasons for keeping it seem to be purely emotional, not logical. No-one NEEDS a BMW, and the sooner you sell it the less depreciation there will be; the longer you wait, the less money you get back. Everyone makes mistakes, but are you willing to recover from yours?

wtjbatman

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Re: What to do next?
« Reply #14 on: May 20, 2014, 03:05:07 AM »
Seriously, sell the car. Your reasons for keeping it seem to be purely emotional, not logical. No-one NEEDS a BMW, and the sooner you sell it the less depreciation there will be; the longer you wait, the less money you get back. Everyone makes mistakes, but are you willing to recover from yours?

Every spy needs a tricked out BMW.

Or, you know...

blizeH

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Re: What to do next?
« Reply #15 on: May 20, 2014, 04:06:32 AM »
Seriously, sell the car. Your reasons for keeping it seem to be purely emotional, not logical. No-one NEEDS a BMW, and the sooner you sell it the less depreciation there will be; the longer you wait, the less money you get back.
That's exactly what I did with my old car, ever since a young age I was keen on having a particular Audi, they were around 35k new (~$60k) so I waited until it was around 5 years old, bought it for 13k which seemed a smarter option, but even then I always knew that it was still a pretty costly, and definitely not frugal decision. I had it for two years and recently sold it for 11k and I don't regret owning it for one second - but I made sure to get my fair amount of enjoyment out of it and haven't missed it even once since I sold it, and I don't think the OP is quite at this stage yet.

bryanth

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Re: What to do next?
« Reply #16 on: May 21, 2014, 08:03:37 PM »
Repost of Jack's Pm to me, which I found to be fantastic!

"To sum up, you currently have the following funds that could be invested:
$5000 in a Vanguard taxable account
$3500 in savings
$5000 in checking

If you subtract, say, $2500 for an emergency fund, then you're left with $11,000 to invest.

In that case, I suggest you take $5500 of it to establish a Roth IRA, then move all the rest of it to your checking account. Your goal is to get the other $5500 into your 401K, but you can't just deposit it directly. Instead, you need to increase your 401K withholding to the point that you run a deficit each month and then spend down the extra savings to compensate.

For example, assume there are 14 pay periods remaining in 2014 and that you normally put $500 per pay period in your savings or checking account. In that case, you want to increase your per-paycheck 401K withholding by $500 + ($5500 / 14) = about $893. Once you do this your take-home pay will be less than your spending by $393 per paycheck, so you'll spend down your excess savings to compensate.

Then at the beginning of 2015 you can adjust your withholding again so that your take-home pay exceeds spending by exactly $5500 annually (for funding next year's Roth contribution) and your checking account stays at a steady-state $2500."

Mutton Chop

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Re: What to do next?
« Reply #17 on: May 23, 2014, 10:17:40 AM »
Kudos to the fact that you are 22, gainfully employed, and don't live w/Mom and Dad

Double kudos that you are EVEN thinking about investing at your age.  Your peer group is taking selfies from Mom & Dad's basement and sharing useless shit from BuzzFeed.

That being said, what you should do with the BMW really depends on why you bought it in the first place. 

1.  If you bought it for a status symbol, to impress the ladies, or your buddies - ID sell it.  There are always going to be people with more money than you, and if you try to keep up with them, you'll be making poor financial decisions.  If you are impressing the ladies with the car, you're going to attract girls who want you to buy them shiny things. 
2.  If you are a true automotive enthusiast, then what the hell!  Just don't wear a BMW hat please.

If I was you, I'd sell the BMW and eat the loss as a lesson in personal finance.

Since you are on the MMM website, it makes me think you are an intelligent person.  If you do keep the BMW, see if you can make up the extra costs in other 22 year old ways, such as:  Less jagerbombs for 10 of your friends, dining out 20 times per week, buying fancy clothes, etc, etc, etc.

Good luck!