| Just hit 30. What am I doing with my money? |
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SyZ
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Cash: $ 8.55
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Joined: 01 Nov 2014
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| Just hit 30. What am I doing with my money? |
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I turned 30 last week, and paid off my credit card today. My current credit rating, at 50% utilization, was 747, and if it went above 750 after this last payment and paying it off I should qualify for all the 'excellent' credit cards, and I need to find which one I should get
I owe $7,200 on my 2011 Toyota Yaris, at 1.9% APR with a maturity date of 06/18
I owe $18k to Sallie Mae split across 5 loans with 3.8-6.9% interest
I owe $10k to MyFedLoan split across 2 loans with 2.8-6.8% interest
My current rent is ~ $750 after utilities, and I make $45k with an expected 9% increase in March 2015
I live in the Bay Area, and can probably never afford a house, and not sure I want one as I don't know if I'll be going the distance with my current girlfriend, and if so, I'll need to be financially wealthy on my own as my situation is better than hers
To that end, what should I be doing? I've been watching stock market videos for a few months, learning about options trading and I understand it better than most who would try as my background is in math/stats
Should I be actively investing a % of my income in trading to actively grow my wealth, while also aggressively paying down my debt? I DON'T want debt. I'd rather remove debt as a liability than attempt to add a house as an asset, which it isn't. And I'm not sure how to quantify adding stock market returns as an asset, as it's random and varies
I currently put 7% into my company's 401k, and they match 75% up to 5% -> my 7% plus their 3.75% means I'm putting 10.75% into my company's 401k, which I've split into 70% small cap, 10% mid cap, 10% large cap, and 10% company stock
I'm not sure I want to do bonds, as the return is low. Same with CD. I don't understand the point of Mutual funds if I already have a 401k through work, and I'd rather take an active role in my investing at this point if I'm going to put a significant portion of my income towards investing
Thoughts?
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Sat Nov 01, 2014 8:02 am |
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blixet
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If you think you understand options trading better than most after a few months of watching videos and want to become an active trader, I'd say that the market is an awfully expensive place to get a lesson in humility. 
Maybe it's a biological drive associated with the Y chromosome, but what you are expressing is unfortunately very common. If you can't fight the urge, limit yourself to a small portion of your overall portfolio, say no more than 5%, to speculating.
Information is more valuable sold than used – Fischer Black
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Sat Nov 01, 2014 2:08 pm |
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Publius
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Location: Georgia
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Actively trading individual stocks is inherently more risky than owning actively managed mutual funds. Actively managed mutual funds are inherently more risky than index funds. Option trading individual stocks/commodities etc is EXCEEDINGLY risky. It is true that risk and potential reward are proportional, but so is the potential loss.
Like blixet said, if you really want to see how well your knowledge plays out in the real market, limit it to a small part of your portfolio. And practice that discipline in both an up and down market before you decide to up that percentage. A lot of people have the impression that they are investing geniuses after seeing their accounts swell over the last few years, but this bull market has been good to almost all sectors across the globe. The test of a strategy will be to see how it weathers the inevitable downturn.
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Sat Nov 01, 2014 2:30 pm |
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SyZ
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Cash: $ 8.55
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Joined: 01 Nov 2014
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I don't quite see how putting something small like $2,500 into an account and making a few $50-$100 options trades every month knowing if I lose it all I'm done will risk my financial security - I'm not talking about putting $500 a month into this
Also, what am I losing by doing this, and what other alternatives are suggested? If I just put my money into safer investing options, and then paying off my debt, I'd end up ~ 33 or 34 with no debt and nothing to spend my paycheck on, trapped in the 'I better save for a down payment for a 30 year mortgage lifestyle' I'm not a fan of
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Sat Nov 01, 2014 5:36 pm |
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Publius
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Making bets with 2500 isn't going to financially ruin you and that was what Blixet and I said -- if you are going to trade in options, we suggested that you keep it to a small portion of your overall portfolio.
Keep in mind, if you are going to trade in $50-100 increments, the transaction fees are going to be a disproportionately large percentage of each investment.
As far as what to suggest, I personally use index funds for all of my long term investments. I do have a brokerage account where I play with some individual stocks, but, as I said before, this is a small part of the overall picture.
And having your debts paid off and your extra income going into safe investments doesn't necessarily mean you have to default to the 'save for a downpayment' lifestyle. It could mean that you have a 'I know my future is secure with my current savings plan, so I feel good about blowing my discretionary income on fast cars and trips to vegas' lifestyle.
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Sat Nov 01, 2014 11:24 pm |
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SyZ
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Cash: $ 8.55
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I'm a little confused
I'm being told that option trading and high risk trading in general is not a good call for my financial future, so instead I should safely invest and then use my money for fast cars and trips to vegas, completely defeating the purpose
What are the benefits of index funds?
What are the benefits of using a broker who is going to take a cut and who will give you very limited control over your investing?
Are you advocating paying off my debts asap without investing on the side, paying minimum payments while investing on the side more aggressively, or something else entirely?
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Sun Nov 02, 2014 5:10 pm |
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Publius
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Location: Georgia
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Ok, I'll be a little more direct. My remark about fast cars etc was about your discretionary income. Meaning after your obligations including your long term savings goals. My point was that if you have a solid plan that will have you on track for a retirement you want, the extra money is simply that -- extra. You can use to save for a house, buy cars, pile up cash in your garage, speculate -- whatever.
As to your questions:
1. The advantage of index funds is cost. The one thing that we have control over as individual investors is cost. The higher the cost of a mutual fund or other investment, the higher the return that it must capture to keep up with its benchmarks. Investing in index funds exposes the investor to large numbers of stocks across a sector at very low cost. They are managed by a computer algorithm to mimic the index to which they are pegged. Take a look at this https://pressroom.vanguard.com/content/nonindexed/Updated_The_Case_for_Index_Fund_Investing_4.9.2014.pdf
2. There is always a broker at some level. If you are going to open a brokerage account that you have complete control over, there is still a computerized broker that charges you a transaction fee on each trade. If you are asking what is the advantage of using a financial advisor that you pay to manage your funds, that is more complicated. I don't personally allow an FA to manage my funds. I use index funds and check in with a CFP annually for a fee.
3. Some debts are better than others. If you are debt averse, then it is probably a good idea to start paying it down aggressively. If you have some debt that is long term and low interest rates (like subsidized student loan debt) it probably makes mathematical sense to pay the minimums while you invest your extra money that you would have used to pay down that debt. Of course, any high interest debt, such as credit cards, should be taken care of as soon as possible.
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Sun Nov 02, 2014 10:38 pm |
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SyZ
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Joined: 01 Nov 2014
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I'm currently losing about $175 a month in interest to these loans, so unless I can gain more than that by investing, it's not worth it
If I commit to the minimum payments, then I need to consolidate my loans asap, as they're currently not. If I want to aggressively pay them down, there's no reason to consolidate as I should put extra towards the highest interest loans and get them gone
I still don't understand the point of index funds - how is this any different from going to a broker / financial adviser / somebody to invest for me and tell him 'here's my money, invest it aggressively/moderately/conservatively'
I don't have a retirement plan other than currently living below my means. To be quite honest, if in 5 years when I'm totally out of debt and have nothing else to spend my money on, if I came into $25,000 I'd want to invest it so that I can retire earlier, instead of driving a Jaguar, as nice as that sounds. I hear stories about people needing millions and millions for retirement, I don't see how I can get there without being willing to put a lot of capital into the market early, ie now
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Mon Nov 03, 2014 2:54 am |
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Wino
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quote:
Originally posted by SyZ
I'm currently losing about $175 a month in interest to these loans, so unless I can gain more than that by investing, it's not worth it
$175 per month for 30 years (when you're 60) is a net of $260K on a $63K investment, which is only at 8% per annum, which should be about the buying power after inflation, all things considered. The actual money in the account will probably be closer to $600K, but using 8% lets us rely on "today's dollars" as far as spending power is concerned. That $200K is what you're giving the bank rather than keeping yourself.
quote:
Originally posted by SyZ
If I commit to the minimum payments, then I need to consolidate my loans asap, as they're currently not. If I want to aggressively pay them down, there's no reason to consolidate as I should put extra towards the highest interest loans and get them gone
Consolidation loans are only worthwhile for loans that have a higher interest rate than the consolidation loan. Most of your loans are low-interest, so I do not recommend you consolidate for any reason. The method you recommend is called the "debt avalanche," and if you follow that plan, it is mathematically the best.
I recommend you pay off loans/debts in the following order:
1. IRS Debt. No other entity on earth has more power with fewer checks than this agency. I think much of what they do is without due process and therefore illegal, but I'm not about to put myself into their sights so I can be a test case. Pay them off, because they can take your bank account, house, car... anything, and all of it without a court hearing. You just find the account empty and a lock on your door.
2. Student loan debt. This debt is not bankruptable, so you ARE going to pay it, eventually, unless you die first.
3. Collateralized debt. If you have a car or house, then pay it off before debt that is unsecured.
4. Unsecured debt. This is credit cards and signature loans. If you have only this debt left and you go bankrupt, your creditors are the ones who lose. Of course, I recommend you pay off all debts, but if you are disabled due to some drunk driver who dies in the wreck with no insurance, you're not going to be able to work, so having only this debt is "too bad for them, not for me."
quote:
Originally posted by SyZ
I still don't understand the point of index funds - how is this any different from going to a broker / financial adviser / somebody to invest for me and tell him 'here's my money, invest it aggressively/moderately/conservatively'
Index funds are very low administrative fees. A typical index fund at Vanguard costs you about 0.1% per year for your fees. Compare this with 5% loads on some funds. Now, paying the 5% does have its advantages, but it comes down to your ability to ignore the markets and your ability to analyze the investments. If you can "stay the course," the index funds come out ahead almost every time.
Since most folks use the S&P 500 Index or the Total Stock Market index, they are actually saying, "I think that if my money grows at the same rate as the US economy or the top 500 companies in the US economy, then I'll come out ahead over the next 30 years." And historically, this has always proven out. Will it prove out over the next 30 years? Probably. Ask me in 31 years, and I'll answer.
The point is that index funds are pretty much low-cost and mostly lower risk to return than almost any other investment.
quote:
Originally posted by SyZ
I don't have a retirement plan other than currently living below my means. To be quite honest, if in 5 years when I'm totally out of debt and have nothing else to spend my money on, if I came into $25,000 I'd want to invest it so that I can retire earlier, instead of driving a Jaguar, as nice as that sounds. I hear stories about people needing millions and millions for retirement, I don't see how I can get there without being willing to put a lot of capital into the market early, ie now
I suggest you cut back your retirement plan to 5% to get the 3.75% match, and use that money to pay off your debts in any order you want. Once your debts are paid off, take 10% of your money - not touching the 5% you're already using for the match (never stop that) - and put it into index funds. I think Vanguard, Fidelity, and T Rowe Price are all easy to use and you can sign up and invest online quite easily. It takes less than a week to finish the account set up.
Once you have enough in the investments above, and you still have money left over, go to your options and futures investing with some "blow money." It doesn't matter then what happens, as you'll have your future assured. You should easily have a million dollars at your retirement in today's dollars, and you could then withdraw your current salary every month without depleting your principle. If you invest more because you have no debt, then you can actually give yourself more money to spend each month than you're making now. This is all because you're starting this at 30, and not at 45 like most people.
Of course, you can do what you want. I've just outlined the reasons for the suggestions you're hearing. What you do is up to you, and you have to live with the consequences.
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Mon Nov 03, 2014 4:08 am |
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oldguy
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Most of your $35,200 debt is low interest, I'd probably keep it - maybe pay down a little of the 6.9% - but keep the low rate longterm debt - and use that capital to build wealth. Put your math/stats skills to work. A $35K investment at 11%/yr will $775,000 in 30 yrs. And an additional $5000/yr investment at 11%/yr is $1,100,000. That's almost $2M at age 60.
There is a dichotomy to investing - it is complex in theory but when the theory is reduced to practice it is simple. Theory - derivatives, options, stocastics, grain futures, sectors, ETFs, trending - they are all based on history. But history is in the rear-view mirror, it has little to relevance to predicting the future. And that is useful - it is actually liberating to grasp the concept that the future cannot be predicted. You are then free to quit trying to 'beat' the market or 'time' the market simply invest.
The US stock market (SP500 index) returns about 11%/yr over the longterm (30 yrs). The annual ups & downs may be +/-50% but, over 30 yrs, the ups/downs statistically average and converge on about an 11%/yr average in 30 yrs. The published STD DEV of the SP500 is about 15%.
The law of investing: " risk and return are directly proportional". You have about 30 yrs of wealth building (moderate risk) and then you need to transition into wealth preservation (low risk) a few yrs before retirement.
In the wealth building phase, you must avoid high risk - or you will lose your capital and be forced to start over from nothing. And you must avoid low risk - a wage earner cannot save enough money at <1%/yr to build wealth. That leaves moderate risk - approx 11%/yr.
Managed vs unmanaged. An index is unmanaged, a mutual fund is managed and stocks are traded by a fund manager. It turns out that about 85% of the professional fund managers are unable to beat/match the SP500 index, they have sort bursts of 'wins', maybe 5 or 10 yrs, then their system flips. So - just buy the index, accept the 11%/yr average, and don't try to 'beat/time' the market. Yes, being a millionaire takes patience and it's boring - but rewarding. (And, just for fun, you can take a flyer in the corn futures market - you won't make any money but it's fun.) 
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Mon Nov 03, 2014 5:14 am |
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Wino
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quote:
Originally posted by oldguy
and then you need to transition into wealth preservation (low risk) a few yrs before retirement.
This is one bit of conventional wisdom with which I disagree. Let's say you retire at 65, and you live to about 85-90, because that's the probable outcome. I know that the life expectancy is closer to 80, but that includes everyone who died at age 5 and age 20. Once you hit 65, you can expect to live another 20 years. When I retire, it may even be closer to 25 years with medical advances.
So, if investing in an index fund was correct for the preceding 30 years, why would the same strategy not be acceptable for the next 20 or 25 years? Of course, you'd have to have enough in the account to ride through the troughs, but I don't see that as an issue.
I plan to stay invested, live on rental income, and withdraw no more than 4% per year, based on the amount I had in the account when I retire. By this, let's say I have $300K in my account at retirement. I plan to withdraw $1K per month, and never to increase that amount, regardless of the balance. Four percent of 300K is 12K, so $1K per month.
Again, there's more conventional wisdom I disagree with. Most folks suggest you calculate your withdrawal rate every year at 4%. I disagree. I will withdraw 4% per annum, based on the amount at retirement age. My needs should decrease with inflation, but the balance should remain or even grow, related to inflation, given the 20-25 year window.
Will my plan work? I hope so. I'll let you know in 40 years. As well, I will have more than $300K at retirement, but the figures above were just for illustration purposes.
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Mon Nov 03, 2014 6:31 am |
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