Investing Options - What should I do?

**MakeAStash** · 04-01-2014, 07:36 PM

The real estate market in many places has not fully recovered so RE prices are more reasonable than they were, say, 10 years ago. That makes RE more attractive as an investment. I assume you are thinking of buying then renting out the properties. Landlording can be a lot of work, IMO work probably better spent advancing your career. At your age it will be easier to double your salary by working hard than it will be to earn the equivalent via RE.

If it were me, I'd invest the bulk in index funds with a low expense ratio. Outside of a retirement account I would also put some into a growth stock like BRKB. A growth stock that pays no dividend generates no taxable income until you sell. In effect, it's like a 401k or IRA, except you get to choose if and when to sell, plus when you do finally sell gains are currently taxed at a lower rate than equivalent gains made inside a 401k or IRA.

**element926** · 04-01-2014, 07:41 PM

Yes, you are correct besides the the place that I would purchase myself I would like to buy and rent them out. I have a family friend who would do the management (he would take percentage of the rent). So that's a loss, but it would take the stress away so like you said - I can focus on my career.

But you are saying, just purchase my house to live in and pump the rest of my money into my 401k and stocks and use time essentially? I wasn't familiar with a growth stock, thanks for that information!

**feh** · 04-02-2014, 06:04 AM

I suggest you do some reading. Don't look for answers from folks on an internet forum; rather, educate yourself.

Click on the link in my signature below. After that, move on to this page:

http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit

**element926** · 04-02-2014, 12:08 PM

Well, I'm trying to do both as you can see I have some mutual funds so I thought that was a good idea to do something with my money until I graduated. I'm researching different mortgage types (15 years, 30 years, paying more or less etc.)

However, the goal of this was to get some information based on my position from anyone with experience. A kind of - look back at what you WOULD have done if you were in my shoes. Thanks for the blogs though, I'll take a look.

**autoxer** · 04-02-2014, 01:48 PM

Originally posted by element926 View Post

33k debt load due to car loan, $800.00 a month. This was the worst mistake I have made yet, but at least I learned from it. Right now, it doesn't make sense to sell it (I would be selling at a loss) if I wait a few more years when the warranty expires I'll get a better return on it.

I wouldn't say that you have learned from the mistake if you are still driving the car.

The car will continue to depreciate and loan interest will continue accruing over the next two years. I'm sure it would be easier to replace if you weren't underwater, but you could do more to limit the damage by downsizing sooner than later.

If you are saving money as a down payment in the short term, then you might not want to be in something as volatile as those equity funds. Savings accounts aren't exciting, but if you are preparing to jump on a property, then you can't exactly wait for a market recovery. Any money that you know you are saving for the long term should be invested more aggressively.

Take advantage of the tax deferred accounts, especially while you are in a high tax bracket. They won't help you save for your real estate empire, but they can help you become financially independent sooner.

Originally posted by MakeAStash View Post

Outside of a retirement account I would also put some into a growth stock like BRKB. A growth stock that pays no dividend generates no taxable income until you sell. In effect, it's like a 401k or IRA, except you get to choose if and when to sell, plus when you do finally sell gains are currently taxed at a lower rate than equivalent gains made inside a 401k or IRA.

And growth stocks are not 'like' 401k's or ira's. One is a type of security and the other is a tax treatment. Qualified dividends are also taxed at the long term gains rate, so avoiding dividends isn't the only way to get the preferred tax rate. But neither one of those is a good reason to avoid the preferential treatment of a 401k or IRA. When you get into the higher tax brackets, the 401k becomes more favorable, but the real magic happens if you can defer the tax when you are in a high bracket and withdrawal the money when you are in a lower tax bracket.

Here is another blog with a lot of good info on stocks: http://jlcollinsnh.com/stock-series/

**element926** · 04-02-2014, 03:18 PM

I see what you are saying, but I mean I learned my lesson as in after this car I won't make the same mistake. I've already put 10k into the car and the interest rate is very low, while it's under warranty for me it makes more sense to just pay for it unless I'm ready to sell it in a few years - pay off the remaining loan and take the rest and buy a car flat out.

**MakeAStash** · 04-02-2014, 06:31 PM

Originally posted by autoxer View Post

When you get into the higher tax brackets, the 401k becomes more favorable, but the real magic happens if you can defer the tax when you are in a high bracket and withdrawal the money when you are in a lower tax bracket.

That can be true for some people, however a high earner who saves/invests, as the OP suggests he is doing, is likely to never be in a lower tax bracket. After he retires his investments will generate enough income to keep him in a high tax bracket. All the gains inside an IRA will upon required withdrawal be taxed at that high ordinary income tax rate, unlike investments outside an IRA which (under current tax law) can get more favorable tax treatment. Diversification of investment types while working, i.e. saving via both retirement snd non-retirement account, will provide maximum tax handling flexibility when withdrawals occur later.

**autoxer** · 04-02-2014, 08:01 PM

Originally posted by MakeAStash View Post

That can be true for some people, however a high earner who saves/invests, as the OP suggests he is doing, is likely to never be in a lower tax bracket. After he retires his investments will generate enough income to keep him in a high tax bracket. All the gains inside an IRA will upon required withdrawal be taxed at that high ordinary income tax rate, unlike investments outside an IRA which (under current tax law) can get more favorable tax treatment. Diversification of investment types while working, i.e. saving via both retirement snd non-retirement account, will provide maximum tax handling flexibility when withdrawals occur later.

A high saver is extremely likely to end up in a lower tax bracket. If someone is making $100k, and saving half of it, then they are living off of $50k. They only need $50k in investment income when they retire to maintain the same standard of living. If you are a high earner but not a high saver, then it'll take you an extremely long time to build up enough of a nest egg to maintain your standard of living through retirement.

The long term capital gains rate may seem lower, but if you do the math, the 401k will provide more even if you maintain the same ordinary income tax rate. The problem with the taxable accounts is that you have to pay your normal income tax rate before you even get the money into your taxable account. With a 401k, the tax is deferred, so you are starting with a larger amount that can compound.

If you are in the 25% tax bracket and you invest $10,000 in a 401k, it'll grow to $20,000 in 10 years and after tax you will have $15,000. If instead of putting the money in the 401k, you pay tax on it immediately, then you have $7,500 left to put into your taxable brokerage account. That $7,500 grows to $15,000 after 10 years, but then you have to pay the long term gains rate and you are left with $13,875.00. Even if you earned the money in the 25% tax bracket and moved up into the 28% tax bracket in retirement, the 401k would still provide you with more money than the long term gains rate on an after tax brokerage account. The longer it compounds before being taxed, the more favorable the 401k is.

It almost always makes sense to max out the 401k before putting money into a taxable brokerage account, but I agree with you on the tax diversification. Having money in deferred accounts, Roth accounts and taxable accounts, can give you a lot of flexibility with your tax planning.

**poorgradstudent** · 04-03-2014, 11:24 PM

I'd say outside of the car loan you are doing quite well.

Based on the information you provided, I would suggest continuing to invest in your 401k as much as possible, and then save up for a down payment on a house. Obviously the interest rates on typical cash accounts is pretty depressing right now, but as you say you will only be living at your parents for 1.5 years, so finding another place to live is in your near future. If you could save up enough for a 20% downpayment on a house it would be very beneficial to you in the long run. Admittedly in both the houses I have purchased so far I had to sell stocks in order to make the down payment, which is probably not ideal.

Otherwise the majority of the advice you will get here is diversify, search for mutual funds with low fees (aka Vanguard), and save as much as possible (oh and of course don't waste money on expensive cars).

Welcome to the forum.

**snafu** · 04-04-2014, 04:31 PM

It's incredibly important to focus on career year one and begin building business network.

Fully understand what are you investing in at present. What are you holding in 401k, what are the fees and MER? I suggest reading a couple of straight forward books like Millionaire Next Door, Automatic Millionaire, or Wealthy Barber, all available as e-books at the library. I found it helpful to set some goals for what I wanted to accomplish in 5 years in personal relationship, career, investment allocation and financial status.

If I had it to do over, predicated on current interest rates... I'd save up 20% to buy a condo in need of refurbishment/updating with the idea of living there for a year and learning to fix-it at HD Saturday classes. Rent or sell depending on circumstances.

**Eagle** · 04-07-2014, 06:57 AM

Originally posted by element926 View Post

Any suggestions are welcomed! Thank you

p.s. new to the forums...

Re: Debt
Pay off your debt fast. At 100k a year you should be able to knock out the car loan in no time. With the pay increase consider living like your a college student while paying off your debt.

Re: Investments
Once that is done... Consider a Roth IRA which you can invest 5.5k a year.

Maybe I missed it but on your 401k what % does your employer match? Something to look into.

Home Purchase
Do you plan on living in the area for say 5-10 years or more? Consider saving money too towards purchasing a house. If you put 20% down on a mortgage you can avoid mortgage interest (also known as PMI or Private Mortgage Interest).

**John213** · 04-12-2014, 08:11 AM

I agree with posts above. Besides the car loan, I think you are actually doing good. I don't want to compare myself but I think you're doing better than me. I have BS in Computer Science and have few years experience in the field now but still at 75k. Take note I live in a major city. For a 23 years old, recent college grad for 100k/year with thousands in savings and stocks, that's pretty impressive in my opinion. I don't know how you did it but good job.

**janecropper** · 05-11-2014, 10:40 PM

There are different four ways to invest options. You can buy or sell puts or options. If you buy a put and the price goes up, you lose money because you've bought the right to "put" it at the strike price when you can sell it cheaper without the option. If you sell a put, then you gain money as price goes up. You sold the option to someone and they won't execute it because it will cause them to lose money, so you earned the paid premium. If you buy a call and the price goes up, you earn $$. You can "call" it at the strike price and sell it at the higher market price. If you sell a call and price goes up, you lose money. That person who bought will cause you to sell it to them at a lower price when you could've sold it for market. I'd suggest sticking to buying options. You can never lose more then the premium you paid for it. I love options!

**AlejandroDapousa** · 05-26-2014, 04:06 AM

As they've told you before make sure you pay the car debt and make a >20% in mortgage to avoid postinterests. You are doing really good til now.

Investing Options - What should I do?