23 And Need a Pulse Check

[MacDddy678]

Hi Guys/Gals,

I stumbled onto this site today, and I've been enjoying/cringing as I read several threads. I consider myself a somewhat frugal 23 year old guy, but if the community wouldn't mind giving some opinion on my financial situation/direction, I'd appreciate it! I live in a suburb of Detroit and recently bought a house in a friendly neighborhood which I live in and rent out the extra rooms to interns at my place of business. I believe I have a stable job and do not have any large out-flows of cash on the horizon.

Income
Job - 80K
Rent 2 rooms in my house - $600/mo each room (not guaranteed income but have been lucky for 5 months)

Investments
401(k) - Set at 10% with 7% company match (~10K present value)
Roth - Putting first 5K into a Vanguard Fund next month (any opinions on the fund?)
Personal Trading - $500 sitting there not currently invested
Savings Account Balance - 3K

Debt
Mortgage- 38K (4.7% interest)
Car - 9K (6% interest)
Student Loans - 10K (3% interest)
Loan from Parents - 10K (Gotta love my folks - 0% interest expected)

My three to five year outlook is to return for an MBA (employer assisted), pay off my house (continue to rent if possible), and look to purchase another property that I may rent. I consider myself pretty handy and do not mind dealing with the "hassles" of tenants, although so far I've been lucky with the roommates. I'm currently not married and do not plan to be for 5+ years.

One of my greatest financial challenges is limiting the material investment in my house (i.e. buying furniture, TV's, upgrading flooring, modifying rooms, etc). I've sunk about 10K this year into my house, and I estimate I have about 7K more before I'm "happy" and done what I can with this first house. After I've paid off this house, I plan to purchase another property where I'll be the sole occupant while renting out this smaller one.

I do not aspire to necessarily retire by 35-40, but I want to financially stable by 50 with enough cushion to live with my wife and give my children financial help.

Thanks everyone, keep sharing your experiences and wisdom!

[aaronc879]

You're renting out 2 rooms in your current house so i'm assuming you have at least 3 bedrooms. You say you want to buy a larger house that you will occupy by yourself. WHY? Why buy a 3+ bedroom house for one person? Buying more house than needed is one of the greatest FIRE-busters.

As far as debt goes, i'd pay off the car as soon as possible then just make normal payments on the rest. Everything else looks good

[Meadbh]

Welcome, MacDaddy! Seems like you are on the right track.

Aaron, I think he mentioned a future wife and kids. He's going to need the space!

[aaronc879]

Quote:

Originally Posted by Meadbh Welcome, MacDaddy! Seems like you are on the right track. Aaron, I think he mentioned a future wife and kids. He's going to need the space!

He said he's not married and plans to be that way for 5+ years. IMO he should go with a smaller, but good quality, house for now and upgrade when/if needed.

[JPatrick]

Heck Mac, you are several light years ahead of the rest of the pack of 23 year olds, that I'd rather pat you on the back than advise you.

But I will anyway:

After you capture your company match, stop adding to the 401K. Roth instead.
Pound away at those loans.
Regarding your Vanguard 5K.. I'd put the whole thing in energy. VGENX or VDE. I'm assuming this is a long term bet.
Don't get a tattoo on your forehead and don't put any weird stuff on your facebook page.
Don't wait until you retire to enjoy life.

[Meadbh]

Quote:

Originally Posted by JPatrick Don't get a tattoo on your forehead and don't put any weird stuff on your facebook page.

That's the best advice yet!

[panacea]

Hi Mac-
Sounds like you're doing great. Surely you know that most people don't do anything close to what you're doing until they're in the 30s (or 40s, or ever). Here are a few thoughts:

1) If you want early financial security (age 50) you probably need to target savings of at least 20% of your gross income.
2) If you don't have a good cash reserves/rainy day fund, I think that would be a good priority- 6 months of expenses is a good target.
3) Not sure where your comfort level is for investing, but if you want a good "set it and forget it" investment for your IRA, the Vanguard Wellington is a well diversified, moderate allocation fund. Of course with your time horizon, you could also look at a Total Stock index fund as well.
4) Review your insurance to make sure nothing can trip you up. Do you have disability insurance and an umbrella policy?
5) I would consider the following as priority for your future income (in this order):
- 401(k) up to match (100% return on your money)
- Max Roth IRA (tax-free growth)
- More toward the car loan (the interest isn't deductible)
- Continue with the 401(k) up to the max (while not matched, you're essentially getting an interest- free loan from the gov't that is equal to your tax bracket (25%+state)
- Extra toward your mortgage (only a rate of about 3.5% after tax, excluding your state tax rate).
- Extra toward the 3% student loan (not sure if this is deductible at your income level)
- 0% loan (although there may be a benefit to not having a family loan hanging out there)

Love the Facebook and Tattoo advice! I would also add this: buy your cars used and drive them forever. New cars, replaced frequently, will kill you.

Have fun!

[MacDddy678]

Thanks team; I'll take your advice and run!

Panacea, I don't have an umbrella policy simply because I don't have enough assets yet. In five or so years I'll look at adding it. When you say target 20% in savings, do you mean just keep in a standard liquid, money market account or should I be putting that into stock, etc?

[Nords]

Mac, you're far ahead of your peers in a "Millionaire Next Door" kind of way. Sounds like you're doing fine.

As far as home furnishings, you may find wonderful bargains on Craigslist. We haven't bought retail furniture in years but we've upgraded our entire house from Craigslist.

Quote:

Originally Posted by aaronc879 He said he's not married and plans to be that way for 5+ years.

Yeah, and we all know how that works out. Just like deciding not to have kids for a few years, too.

But I agree with you on keeping the minimum house until after the marriage. The new spouse would want to have a vote on the next estate in which to not raise a family for a few years.

[Aiming_4_55]

Mac - you are doing great. I would consider 20% targeted into your target investment/asset allocation.

I'm not an attorney, while you may be focusing at needing an umbrella policy to protect yourself when you have greater assets, I would consider future earnings too that can be targeted in a suit. As a landlord you have additional risk. If a judgement is made against you tomorrow, your future salary/income can be garnished. YMMV

Quote:

Originally Posted by MacDddy678 Thanks team; I'll take your advice and run! Panacea, I don't have an umbrella policy simply because I don't have enough assets yet. In five or so years I'll look at adding it. When you say target 20% in savings, do you mean just keep in a standard liquid, money market account or should I be putting that into stock, etc?

[wildcat]

Keep the housing expenses low as other mentioned. There's always a good chance you would move to a nice big house only to find your SO doesn't share your taste in housing. So why not wait?

As far as the auto loan goes, everyone is saying pay it off but they are forgetting the alternative. Refi the auto loan. Paying 6% on an auto loan is highway robbery with all the incredible refi deals available. PendFed for ex - 1.99% on new/used refis. I did mine @ 2.49% & thought I hit the low. Depends on one's attitude toward debt but I say refi at those rates and bank the money.

When people say 20% they typically mean investments accounts that grow your $ over time - 401k, Roth, after-tax ETFs/mutual funds.

[obgyn65]

Hello MacDddy678 - it looks like you are doing great. Welcome to the boards.

[Sandhog]

Quote:

Originally Posted by JPatrick Don't wait until you retire to enjoy life.

I concurred with JP on the most important advice as quote.

Put 5% aside to spend on things that you enjoy. If you just save and save, you won't be able to enjoy things while you are young. Certain things that you can no longer do as you get older. Live your life as you are saving for future. Otherwise, me think you are doing better than 99% of 23 year olds.

If I could give you an advise, I would say don't get married to a high maintenance girl without a job. If you do get married to a girl who likes to spend and live day by day, from paycheck to paycheck, Don't have kids. If you do have kids, make sure, you teach them the value and managing budget. They have to learn early on that you can not spend more than you earn.

[aida2003]

Quote:

Originally Posted by aaronc879 He said he's not married and plans to be that way for 5+ years. IMO he should go with a smaller, but good quality, house for now and upgrade when/if needed.

But the OP has a mortgage on the current house which will take a few years to pay off. So, by the time that's finished he'll have a wife and a kid (maybe not in that order, but that's his business) and hence a larger house. Of course, my advice is to buy not too large, someone gotta clean it

[MacDddy678]

Quote:

Originally Posted by wildcat As far as the auto loan goes, everyone is saying pay it off but they are forgetting the alternative. Refi the auto loan. Paying 6% on an auto loan is highway robbery with all the incredible refi deals available. PendFed for ex - 1.99% on new/used refis. I did mine @ 2.49% & thought I hit the low. Depends on one's attitude toward debt but I say refi at those rates and bank the money. When people say 20% they typically mean investments accounts that grow your $ over time - 401k, Roth, after-tax ETFs/mutual funds.

Thanks for the info, I don't know why I haven't looked into that!

[MacDddy678]

Quote:

Originally Posted by Sandhog If I could give you an advise, I would say don't get married to a high maintenance girl without a job. If you do get married to a girl who likes to spend and live day by day, from paycheck to paycheck, Don't have kids. If you do have kids, make sure, you teach them the value and managing budget. They have to learn early on that you can not spend more than you earn.

Sand, I can guarantee you that won't be the case for me. My buddies and I are pretty conservative when it comes to money, and our cardinal life rule to to marry late, marry right (to the right woman, no divorce) and marry a woman who hoards money better than we can on our own! Or hell, just marry rich, stay at home with the kids day trading, and live off a sugar mama! haha!

[brewer12345]

You are doing well, but you do not appear to have much cash on hand. If things go wrong (and they will, with depressing regularity) cash is king. Make sure you have a bunch of it on hand.

[JPatrick]

Quote:

Originally Posted by MacDddy678 our cardinal life rule to to marry late, marry right (to the right woman, no divorce) and marry a woman who hoards money better than we can on our own! Or hell, just marry rich, stay at home with the kids day trading, and live off a sugar mama! haha!

Well you've boiled it down to a coin toss..A coin toss you can't lose. Shoot, why can't we have two lives..

[52andout]

You have gotten excellent advice and are off to a great start.

I have two things to add. Write down every penny you spend for three months. You need no extravagant software, just a piece of paper or simple spreadsheet. At the end of three months take a look at what you are spending money on. Then figure out how much you make per hour after taxes, commuting expenses etc.

When you do this you then have a idea of how many hours you need to work for everything that you spend money on. It is a great way to put in perspective your true hourly wage and how many hours you need to work to afford things. The value in this is that you will see a cup of Dunkin Donuts coffee in a totally different light. Do you want to spend the first hour of your working day to pay for a cup of coffee? Or the first five minutes if you buy a simple coffeemaker and a can of coffee. This is just an example but you get my drift. But you also have to make sure that at your age you are spending money on having fun and pursuing things that give you pleasure. It is a hard balance but learning it at an early age is extremely important.

I want to add I have no idea why all these links appear when I post . I am not selling anything. I am just living a simple uncluttered life.

#2 I would suggest is to go to the library and check out the books that have changed many peoples lives here. Your Money or Your Life. The Millionaire Next Door. Richest man in Babylon. The Wealthy Barber. Books by Dave Ramsey, Suze Orman, Mary Hunt, Jack Bogle (founder of Vanguard) and Amy Dacyczyn. You may think some of the ideas are crazy, or too religious but take what is applicable to your life and leave the rest. I don't think you will be sorry if you educate yourself.

[52andout]

wanted to add a blog you might like to read of someone who did retire early and is raising a child on a very low income.

Meet Mr. Money Mustache | Mr. Money Mustache