Financial Guidance

**dpb** · 04-07-2011, 05:51 PM

I should add that I have considered working a part-time job for additional income as my hours are fairly low and my schedule is flexible.

**creditcardfree** · 04-07-2011, 05:57 PM

Welcome to SA!!

I would highly suggest saving at least 10% (or maybe 15%)of your gross income in retirement. I would definitely fund a Roth IRA before adding to the TSP, however, as your income increases do not dismiss it as an option.

I'd also pay off your car early with some of that extra cash, and skip refinancing.

**dczech09** · 04-07-2011, 06:54 PM

Definitely pay off the car loan with some of the excess cash. Do you have any other debts besides? If so, pay that off completely if possible.

Keep 6 months of expenses in liquid savings for emergencies then focus on 15% of your income for retirement. Do you plan on owning a home? If so you should start saving up for a down payment.

**dpb** · 04-07-2011, 07:52 PM

Thank you for the replies.

I have no other debts besides the auto loan. I just purchased this vehicle a few weeks ago and have yet to make my first monthly payment. I am trying to establish credit history. When referring to percentages towards retirement, are those calculated pre-taxes or post-taxes?

**creditcardfree** · 04-08-2011, 03:44 AM

We personally save 15% of our gross pay (pre-tax), simply because it ends up being more cash saved for retirement. When we were your age we were saving 10% of gross.

**kork13** · 04-08-2011, 04:06 AM

Welcome, dpb!
You should definitely start a Roth IRA. Believe me, it's better to start now, start maxing it out every year ASAP, and give it the opportunity to grow over the next 40+ years. Plus, if you start a Roth before 18Apr, you can still max it out for both 2010 and 2011. Easily the smartest thing you could possibly do with $10k right now. As for the TSP (which again, I highly recommend you start into, even if you don't put alot into it right now... maybe start with just 5% of your base pay), those contributions would come out of your pay pre-tax. For that reason (and because portions of our military compensation is non-taxable), I find it easier to do all of my financial planning based on pre-tax numbers. Thus, saving at least 15% of your total, pre-tax income is a great rule of thumb to follow.

Next, something to consider... There's no reason you should "buy" your credit history. Do you have a credit card or two that you use regularly (or even occasionally)? That activity will be enough to get your credit history started. Don't get into an overly-expensive loan just for the sake of gaining credit history. All of that said, however, since you've already gone and gotten the car loan, make it work for you as best you can. All you need to do for the car loan to have a good positive impact on your credit is to keep in around for 1-2 years. I highly recommend making (at least) double payments on your car loan (making a monthly payment to the loan's principle balance). That way, you'll pay as little interest as possible and get rid of the loan quickly, while still giving it a chance to demonstrate a history of timely payments (credit worthiness).

I personally disagree slightly some of the previous posts as far as the emergency fund... In the military, our job security is pretty darn high, even considering the current predicament that Congress is putting us in. Thus, I think that for most military members, keeping 3 months' expenses is sufficient to keep in a 100% liquid savings account as your EF. Money beyond that, I would recommend that you start throwing it into a regular (taxable) investment account. That way it's doing alot more work for you, averaging 5-7% gains as opposed to <1% returns in a basic savings account. Also, if for some reason the 3 months' expenses just don't cut it for some reason, just about anything in an an investment account can be sold and provide you with additional funds within a week at the most. By investing smartly, and in accordance with your personal risk tolerance, you don't really have to worry about unrecoverable losses.

Stick around, and keep asking questions!

ETA: Also, you might want to read through this thread, Kilboy had largely similar questions, so you might find those responses useful for you as well.

**dpb** · 04-08-2011, 06:11 AM

I do have a credit card that I could use for small purchases. I didn't finance the vehicle necessarily because of credit history, but more because I didn't want to drop $22,000 on a vehicle right away.

Back to percentages toward retirement, would the $5,000 annual IRA contributions count toward that? Should I be withdrawing a certain percentage towards the TSP from my base pay, or from net pay?

**creditcardfree** · 04-08-2011, 06:47 AM

Yes, the $5,000 would count towards your percentage of income towards retirement.

In our case we save 15% of our gross. However, the first $10k is put into roth ira's (one for me, one for my husband). In order to get to the 15% of our gross, we also put 7% of my husband's basic pay into the TSP.

First figure your annual gross pay. Multiply that figure by the percentage you want to save for retirement. The result is the dollar amount you want to save per year.

If the amount is less than $5K, put that amount in a roth during the year and you are done. If, the amount per year is more than the roth limit, subtract the $5,000 for the roth to determine the amount you need to contribute to the TSP. To figure what percentage that figure is of your base pay, divide that amount by your basic pay. This is then the percentage you select with DFAS for contribution to the TSP.

I hope that helps!

**jpg7n16** · 04-08-2011, 07:17 AM

Put me in the 'don't pay off your car' camp.

Given my calculations - $13k, with a $227.21/month pmt for 60 months = 0.157% interest rate (***edit - this is wrong, see edit in post below s/b 1.89%***)

That's less than some online savings accounts will earn.

So you would actually come out better, paying only the 227/month - and taking any extra you wanted to pay, and instead invest it in a 1% online bank account which is FDIC insured.

Although I would personally invest it in something with a little more risk. Like a mid-term bond fund (expected 4-5%) or a stock mutual fund (expected 8%). Or even inflation protected bonds (2-4%, gov insured - close to risk free) Individual - I Savings Bonds In Depth

Maxing the Roths would be a no-brainer, and I'd do that today as suggested above. You have way too much in cash! For you, 3-6 months expenses would be $5,400 - 10,800. You have nearly 4 times that amount.

I see that you're very risk averse, so after maxing the roths, I would advise moving about $17,500 into a short-mid term bond fund. Something like FBIDX Fidelity US Bond Index, mutual funds, quote, price - Morningstar - which is yielding about 3%/year + share price appreciation. So maybe 4-5% total return before taxes.

This would keep all your money liquid in case you really needed it, but would at least get some return on your money to help win the race against inflation. And it's lower risk. You'll notice the market 'crash' in 2008 barely made a blip on the fund's value. But it did affect the value.

I mention this to say that bonds have a lower risk of losing your principal, but they do still carry some risk.

**dpb** · 04-08-2011, 07:43 AM

Because I have no credit history, my auto loan is actually 7.98% APR for a 72 month term. I owe $13,000 as of now. $17,000 (assuming I didn't refinance) total including interest after 72 months. I realize that's an extremely high interest rate, but it was also the lowest I could get given my credit history.

I have all of my banking services through USAA because it's convenient and they have outstanding customer service and discounts/benefits for military. I'm thinking about opening up a Roth IRA through them also. Anyone else have a retirement plan with USAA?

**jpg7n16** · 04-08-2011, 08:26 AM

Originally posted by dpb View Post

Because I have no credit history, my auto loan is actually 7.98% APR for a 72 month term. I owe $13,000 as of now. $17,000 (assuming I didn't refinance) total including interest after 72 months. I realize that's an extremely high interest rate, but it was also the lowest I could get given my credit history.

I have all of my banking services through USAA because it's convenient and they have outstanding customer service and discounts/benefits for military. I'm thinking about opening up a Roth IRA through them also. Anyone else have a retirement plan with USAA?

Wow sorry, I forgot to multiply by 12 to get back to the yearly amount. My mistake! (60 months should have been 1.89%, which limits your investing options a little bit, to not include online banks)

And in that case (of 7.98%), I change my advice completely. Pay off the loan in full. You only need credit history for needing a credit line. Which you have no need to borrow this money for a car. I mean, you have $40k in cash! What do you need to borrow money for?? Your credit card history will start to build over time anyways. If you want a house later in life or something, you'll have a decent credit history by that time.

I see no need to give a car company an extra $4,000 just to establish a history to let me borrow money I don't need. Esp when credit cards will establish a history close enough to the same, where you would be able to pay them off in full each month and not pay a dime in interest.

**creditcardfree** · 04-08-2011, 08:30 AM

I do not have a retirement plan with USAA, just banking and insurance. It might be okay. Not sure. Vanguard is very good company with very low fees. You would need a least a $3K minimum with them to open an account.

**dpb** · 04-08-2011, 09:02 AM

So, is everyone in agreement that I should pay off my car loan first even though I opened it a few weeks ago?

**kork13** · 04-08-2011, 10:06 AM

Originally posted by dpb View Post

I have all of my banking services through USAA because it's convenient and they have outstanding customer service and discounts/benefits for military. I'm thinking about opening up a Roth IRA through them also. Anyone else have a retirement plan with USAA?

I have mine with USAA as well, and as you mentioned, they're excellent. Personally, I just have my entire Roth IRA in their 2050 target-date mutual fund. Their index funds are also pretty good foundations for a basic starter portfolio, whether in a retirement account or in a taxable account (I've got one of those with them too).

Originally posted by dpb View Post

So, is everyone in agreement that I should pay off my car loan first even though I opened it a few weeks ago?

Yes.......sort of. As I said, it would look kinda weird on your credit report to have a $13k loan paid off in a month. I'd spread it out over no less than 6 months (a year would probably be best, credit-wise), just to establish the payment/credit history. You've already got the loan, so take advantage of it as much as is reasonable. Taking it over a year would cost you an extra $1,000 or so of interest charges.

When you do that, however, make sure that you make your regular monthly payment as scheduled, then make an additional monthly payment specifically designated as 'Principle only'. This will actually reduce the interest paid, as opposed to just making a single, large payment monthly. The bank would see this as simply "pre-paying" the next few months, as opposed to reducing the principle, which is what the interest is calculated off of. It's a minor difference, but a potentially significant one. I don't have an amortization table handy, but it would probably save you a couple hundred dollars in interest over the year.

ALTERNATELY, just pay off the sucker and tell the credit rating bureaus to buzz off. Both are good options.

Financial Guidance