Interested in General Feedback on Personal Fin

**bjl584** · 09-24-2012, 09:20 AM

The SL's are low enough of an interest rate that I wouldn't lose too much sleep over them just yet. If you want to buy a house then you will need 20% downpayment plus a 6 month EF saved in cash. You will need cash for a car too. Just don't buy too much house or too much car. The house cost shouldn't exceed more than 3x your annual salary. The car is up to you, but there are plenty of nice cars out there for 15 to 20K, gently used, that will be very reliable and last a long time. pay cash if you can. If you must finance, then make sure the loan is no longer than 3 years, and make sure that the payment doesn't exceed more than 10% of your monthly take home.

After allocated money to the above, I'd turn attention to retirement. Put in at least up to the match, if there is one, in your 401K. And, look into a Roth Ira.

**mikeinannarbor** · 09-24-2012, 10:20 AM

Originally posted by bjl584 View Post

The SL's are low enough of an interest rate that I wouldn't lose too much sleep over them just yet. If you want to buy a house then you will need 20% downpayment plus a 6 month EF saved in cash. You will need cash for a car too. Just don't buy too much house or too much car. The house cost shouldn't exceed more than 3x your annual salary. The car is up to you, but there are plenty of nice cars out there for 15 to 20K, gently used, that will be very reliable and last a long time. pay cash if you can. If you must finance, then make sure the loan is no longer than 3 years, and make sure that the payment doesn't exceed more than 10% of your monthly take home.

After allocated money to the above, I'd turn attention to retirement. Put in at least up to the match, if there is one, in your 401K. And, look into a Roth Ira.

Thanks for the advice and I've made note of it.

On to retirement, which is something i need to address. I have just left an employer where I had a Simple IRA account and now I am working for a start-up company with no benefits off the bat. Long story short - I helped patent a product and my partners and I have generated enough funding to get it off the ground. That being said, I'm not real sure what to do. Should I just open up a Vanguard or Fidelity account? I would be very appreciative of guidance in this arena, one that is fairly gray to me.

**YLTL_Dan** · 09-24-2012, 04:57 PM

I don't like the idea of letting the student loan debt just hang around. I know it's only 3%, but if you don't attack it now, there probably won't ever be a better time.

Since you're working for a start up and the risk is a little higher, I'd stick with 3 months worth of expenses for an emergency fund and then start attacking the student loan debt with the rest. You could probably get it paid off in two years, maybe even faster if you can figure out how to throw more money at it.

Also, I wouldn't feel rushed to buy a house. There are a lot of advantages that come with renting, and it's incredible how expensive it can be to own an house.

As far as when/where to open a savings account... I'd open a Roth IRA (I use Vanguard), but I wouldn't heavily fund it until you get the student loans paid off.

**mikeinannarbor** · 09-24-2012, 05:45 PM

Originally posted by YLTL_Dan View Post

I don't like the idea of letting the student loan debt just hang around. I know it's only 3%, but if you don't attack it now, there probably won't ever be a better time.

Since you're working for a start up and the risk is a little higher, I'd stick with 3 months worth of expenses for an emergency fund and then start attacking the student loan debt with the rest. You could probably get it paid off in two years, maybe even faster if you can figure out how to throw more money at it.

Also, I wouldn't feel rushed to buy a house. There are a lot of advantages that come with renting, and it's incredible how expensive it can be to own an house.

As far as when/where to open a savings account... I'd open a Roth IRA (I use Vanguard), but I wouldn't heavily fund it until you get the student loans paid off.

The SL debt is definitely not something I want to let linger around for too long.

My employment situation isn't all that risky in reality. Should it not work out in the next year or two, the door remains open with my previous employer, which obviously is nice to have in my back pocket.

For a long time I have been against owning a home due to all the additional expense and potential heartache that comes with it. What leads me down this path is that I'm growing tired of traditional renting, but I could assuredly remedy that by simply renting a house and not living in a condo/multi-family type of arrangement. I have a dog that would love to roam and I enjoy my outdoor space, which is tough to come by in most non-home rental arrangements. A home rental with potential to own is most likely ideal.

Funny how quickly you live and you learn. I thought I would love this urban multi-family condo that I currently rent, but I certainly don't and had originally considered buying it. Very glad I didn't.

**jpg7n16** · 09-24-2012, 08:18 PM

Originally posted by YLTL_Dan View Post

I don't like the idea of letting the student loan debt just hang around. I know it's only 3%, but if you don't attack it now, there probably won't ever be a better time.

Originally posted by mikeinannarbor View Post

The SL debt is definitely not something I want to let linger around for too long.

Why?

It's charging you 3%, possibly deductible whether you itemize or not. That's super cheap.

A concept many people don't seem to get is "opportunity cost." Sure, you have the cashflow today to pay it off early -- but at what opportunity cost? Every dollar you take and pay extra on that debt could have been used to build up retirement savings, in investments expected to earn much more than 3% long term.

I much more agree with Brian on this. I pay that off as slowly as possible, and take advantage of the opportunity to invest for your future.

Originally posted by mikeinannarbor View Post

On to retirement, which is something i need to address.

I have just left an employer where I had a Simple IRA account and now I am working for a start-up company with no benefits off the bat. Long story short - I helped patent a product and my partners and I have generated enough funding to get it off the ground. That being said, I'm not real sure what to do.

4 words: small business retirement plan

elaws - Small Business Retirement Savings Advisor

Should I just open up a Vanguard or Fidelity account? I would be very appreciative of guidance in this arena, one that is fairly gray to me.

I believe you should also open both a Roth IRA and a taxable brokerage account.

For you to be on track, the goal for retirement should be 15-20%. On $80k, that's $12,000-16,000. An IRA only lets you put away $5,000, so you'll need somewhere to stock the remaining $7-11k. I would strongly recommend a small business retirement plan in order to do so, but if that does not exist, you need a taxable brokerage account to save additional funds.

Just for your own enlightenment, I also suggest running through this calculator:
AARP Retirement Calculator - How to Retire, Plan for Retirement

**TBH** · 09-25-2012, 03:48 AM

I know it's no fun to have debt, but I agree that you need to beef up your retirement savings and your cash savings (for car replacement and eventual house purchase) before you pay off your student loans.

Get used to putting 15-20% in a retirement account, and do that from now on, no matter what your job is or what you're making. Just get used to thinking of your available money as the amount AFTER retirement savings. Put the rest in cash savings. If you find a better rental and manage to replace your car with something affordable (I'd say $10K is plenty to spend on a good used car) and you want to use your cash to make a lump sum payment on your student loans in a year or two, you're keeping that option open.

Congrats on the exciting job situation!

**YLTL_Dan** · 09-25-2012, 05:09 AM

Originally posted by jpg7n16 View Post

Why?

It's charging you 3%, possibly deductible whether you itemize or not. That's super cheap.

You can get a 3% mortgage rate right now, does that mean you should take out as much money as you can on a mortgage and invest it in the market? I'd much rather have my debts paid off and then invest money in the stock market than keep my debts around so I can invest that borrowed money in a very risky asset.

$60k is a huge amount of debt and I don't think justifying having it around by saying you could use the money more intelligently in other areas works... it could be around forever if that's the case.

I do agree there is no straight answer to this, but this is my personal preference... once I finally paid off all of my debt, it was much easier to save/invest.

**mikeinannarbor** · 09-25-2012, 05:52 AM

Originally posted by YLTL_Dan View Post

$60k is a huge amount of debt and I don't think justifying having it around by saying you could use the money more intelligently in other areas works... it could be around forever if that's the case.

I agree - to me $60K is a lot to let hang out there. FWIW, my monthly minimum is $411. No question is bugs the heck out of me. However, right now I believe the priorities are to save as much as possible and contribute to retirement as much as possible. I need a much greater level of comfort in both places.

I'm very focused on my career and making the right decisions, developing multiple revenue streams (always so much easier said than done!!), and not letting this debt hang around.

Originally posted by jpg7n16 View Post

Why?

It's charging you 3%, possibly deductible whether you itemize or not. That's super cheap.

A concept many people don't seem to get is "opportunity cost." Sure, you have the cashflow today to pay it off early -- but at what opportunity cost? Every dollar you take and pay extra on that debt could have been used to build up retirement savings, in investments expected to earn much more than 3% long term.

I much more agree with Brian on this. I pay that off as slowly as possible, and take advantage of the opportunity to invest for your future.

I believe you should also open both a Roth IRA and a taxable brokerage account.

Thank you for the advice on the Roth and taxable brokerage account.

The feedback is awesome and I've already learned quite a bit. So thank you to all you posters out there.

It seems as though my goal of $25K in cash savings is solid, if anything a bit low. I want to ensure that I allocate the appropriate funds for a car (lets say $10K for a used vehicle) and enough for 3-6 months of expenses, which I should have in $25K.

**EEinNJ** · 09-25-2012, 06:01 AM

I'm going to suggest you do something about your commute and car. You're probably spending at least an hour each way, plus gas & wear & tear on the car. It sounds like you don't really like where you live and are having car problems besides. Less time commuting is cheaper, and you might put the extra energy into your start-up venture.

**mikeinannarbor** · 09-25-2012, 06:57 AM

Originally posted by EEinNJ View Post

I'm going to suggest you do something about your commute and car. You're probably spending at least an hour each way, plus gas & wear & tear on the car. It sounds like you don't really like where you live and are having car problems besides. Less time commuting is cheaper, and you might put the extra energy into your start-up venture.

Two things are happening on this front. My start-up organization will be moving about 20 miles closer to me and I plan to move once my lease expires this coming Feb. At worst, I'd like to cut my commute in half to 30 miles one way.

The commute should be short-lived. Otherwise, I think I'd go crazy spending 2 hrs per day on the road

It's flat out unsafe to be on the road that much, esp. in today's world of smart phones.

**jpg7n16** · 09-25-2012, 07:00 AM

Originally posted by YLTL_Dan View Post

You can get a 3% mortgage rate right now, does that mean you should take out as much money as you can on a mortgage and invest it in the market?

You should buy a house at a level you can afford. The mortgage is available to help you do so. And if your mortgage is at 3%, I do not feel you should be in any hurry to pay it off early. Making extra payments each year? Nope. Paying bi-weekly to shorten it's life? Nope.

Whether you should take on debt specifically for the purpose of investing is something you have to decide based on your personal preferences, but yes, I'd do it. If I could borrow $300k at 2-3% solely for the purpose of long term investing, I would.

$60k is a huge amount of debt and I don't think justifying having it around by saying you could use the money more intelligently in other areas works... it could be around forever if that's the case.

So what if it's around forever? Why do you automatically assume that's a bad thing?

What if it were 0% debt? Would you care that you have piles of debt out there that charges you absolutely nothing?? How about 0.5%? 1%? At some point it stops making sense, but IMO that is closer to 5-6%.

I do agree there is no straight answer to this, but this is my personal preference... once I finally paid off all of my debt, it was much easier to save/invest.

Well yeah, on a month by month basis, it's easier to save your cashflow without debt payments. But "easier to save" doesn't mean "more money."

2 scenarios: Each person starts with $60k in debt, with debt service of $400/month, and has $600/month free.

jpg: Pays off the debt as slowly as they'll let him, and invests the rest in a proper portfolio expected to earn 7-11% long term.

Debt is paid off on time in 188.23 months. Will pay a total of $75294.54 to remove the debt of $60, meaning he paid $15,294.54 interest. (If deductible, this saves $3800 on taxes)

Because he was paying $400/month to his debts, he was only able to save $200/month (more "difficult"). At 7-11% returns, that $200/month would turn into between $68,185.71 and $99,738.79.

So when it's all said and done, jpg has no debt and $68k-100k built up in savings.

Dan: Pays off his debt early to make it "easier" to save.

@$600/month pays off the debt in 115.2 months paying $69,129.97 to remove $60k of debt, meaning he paid only $9,129.97 of interest (If deductible this saves $2300 on taxes)

Because he paid off all his debts first, he is now free to invest all $600/month (much "easier"). And over the remaining 73 months he builds up between $54,426.69 and $61,986.57.

So when it's all said and done, Dan found it easier to invest, paid over $6k less interest than jpg, and what does he have to show for it? Anywhere from $13k-$37k less in his investment account.

That difference amplifies over the next 15 years as both men continue to save for retirement. And this one decision alone could mean an extra $40-200k at retirement. (continuing the 7-11% returns on investment balances for another 15 years)

And several people here will only focus that dan paid $6k less interest than jpg, and ignore all the rest.

**kv968** · 09-25-2012, 12:41 PM

I agree with JPG as far as not being so worried about paying off the loan, but if you do want to pay it off you should still contribute to your retirement. My suggest would be to, at the very least, fully fund an IRA (traditional or Roth, probably Roth). You can't go back after the debt is paid off and put the money in retroactively.

You said you have about $2000/month extra...

If you were to fully fund a Roth for 2012 by the end of the year it would be $1666.66/month until December if you started it in October then it would be $416.66/month from there on out.

If you wanted to stretch it out until April (still putting in for 2012) it would be $714.28/month through April then $625/month for the remainder of the year to max it out for 2013. After that you'd be back to the $416.66/month in January of 2014.

It's great that you want to build up your emergency fund more and get out of debt, but you also don't have to do it all at once. And with a 3% rate (assuming it's fixed and won't go up), you should divert some money towards retirement while paying it down. It doesn't have to be an "either/or" decision.

**YLTL_Dan** · 09-26-2012, 05:15 AM

Originally posted by jpg7n16 View Post

You should buy a house at a level you can afford. The mortgage is available to help you do so. And if your mortgage is at 3%, I do not feel you should be in any hurry to pay it off early. Making extra payments each year? Nope. Paying bi-weekly to shorten it's life? Nope.

Whether you should take on debt specifically for the purpose of investing is something you have to decide based on your personal preferences, but yes, I'd do it. If I could borrow $300k at 2-3% solely for the purpose of long term investing, I would.

So what if it's around forever? Why do you automatically assume that's a bad thing?

What if it were 0% debt? Would you care that you have piles of debt out there that charges you absolutely nothing?? How about 0.5%? 1%? At some point it stops making sense, but IMO that is closer to 5-6%.

We disagree on a very fundamental basis, and I feel our discussion has turned somewhat pointless because neither of us will convince the other.

I totally disagree with your point about the use of OPM (other people's money). First off, I want to pay my mortgage off asap. The beauty of amortized mortgages (for the banks) is that they charge the interest rate on the full amount - so your interest is very front loaded. Let's look at a 3%, 30 yr $250k loan. If you make straight payments for 7 years, you'll have paid the bank $42,092 in interest and $33,797 in principal. So, for the first 7 years, 55% of your payment isn't even going towards your house.

Also, your investment scenario is flawed. As we've seen in the last decade, you can't guarantee a 7-11% return. I'm as big of a believer in the long term strength of the market as anyone else, but I don't use 7-11% returns (and not factor in capital gains tax rates) to favor my projections of investing vs paying off debt.

I pay off my debt because I don't want to have to work for anyone else. I don't want $400/month hanging over my head for the rest of my life because I'm making "smart" choices by investing and hoping. I'd rather clear it out, then double down on my investing after I'm debt free.

**mikeinannarbor** · 09-26-2012, 06:12 AM

Originally posted by YLTL_Dan View Post

As we've seen in the last decade, you can't guarantee a 7-11% return. I'm as big of a believer in the long term strength of the market as anyone else, but I don't use 7-11% returns (and not factor in capital gains tax rates) to favor my projections of investing vs paying off debt.

I pay off my debt because I don't want to have to work for anyone else. I don't want $400/month hanging over my head for the rest of my life because I'm making "smart" choices by investing and hoping. I'd rather clear it out, then double down on my investing after I'm debt free.

Reading jpg7n16's scenario was very interesting and intriguing to me, but at the end of the day I'd much rather be debt free. Now, I want to be smart, but I want to sleep easy at night as well. The 7-11% return seems like an ideal rate of return, but could very likely not come to fruition. I don't have extensive investing experience by any means, but I'm just going off of what I've seen in my relatively short adult life.

I'm having a blast with this conversation by the way - I'm loving all the help and ideas. Clearly, every person has their own comfort levels when it comes to debt management and investing. I'm leaning towards this routine: stockpiling cash, getting through any near-future major life purchases (car, home, etc.), satisfying retirement funding, then paying off the debt (as opposed to investing and paying the debt off at a slow rate).

Interested in General Feedback on Personal Fin