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23 Year Old Starting Out
Old 01-11-2013, 07:23 PM   #1
Confused about dryer sheets
 
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23 Year Old Starting Out

Hi everyone,

I'm 23 and believe that I have given myself a pretty strong financial start. I make $21k a year and am now looking to see where I can further myself even more.

I currently have a traditional IRA with $2,500 that I make monthly contributions to.

I am also in the process of creating a CD ladder so I will end up with all five year accounts with one maturing every six months. (Being optimistic towards the interest rates) Each one of these accounts is started with $500 and I will add more once all of the accounts are started.

I also have a money market account with $12k and a normal checking account.

I have one car loan for $13k and a consumer loan that I started to build my credit.

I am in the process of looking into stocks to create a decent portfolio.

Should I be doing anything else, or am I in a pretty decent spot right now?
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Old 01-11-2013, 07:39 PM   #2
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Welcome aboard Dan,

Nice start. I'm happy to see young people like you are thinking about savings instead of fancy cars and partying out. I'll first try to pay off loan as soon as possible and then will try to save money in this order -

1) Have emergency money in savings/CD
2) Fund 401K and get the employer match
3) Invest into Roth IRA
4) Then Traditional IRA

And all my money will be in some sort of mutual fund, not in any individual stock. I learned my lesson hard way by loosing 500K during .com bust and had all my money invested in individual companies. About 90% of those companies do not even exist any more - stay away from greed. There is no easy money.

All the BEST for your ER.
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Old 01-11-2013, 07:57 PM   #3
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Stick with your plan. If you have $30k saved by age 30 you will retire a rich man. If or when you have children please buy some life insurance protection, the world is a dangerous place...
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Old 01-11-2013, 08:04 PM   #4
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Thanks for your response, Retire.

I had been researching mutual funds and were finding those to be the better choice. On the topic of the Roth and Traditional IRA, I just want to make sure I'm understanding you correctly. Should I continue with the Traditional IRA as I already am, and and put only the money I plan on investing in the Roth since it's taxed on deposit?

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Originally Posted by heeyy_joe View Post
Stick with your plan. If you have $30k saved by age 30 you will retire a rich man. If or when you have children please buy some life insurance protection, the world is a dangerous place...
If all goes well, I will have that much by then. I'm very conservative fiscally and enjoy seeing my savings rise. Life insurance protection will definitely be purchased. You never know what will happen.
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Old 01-11-2013, 08:13 PM   #5
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I hate to be a downer, but your not exactly in great shape financially. Someone making 21k / year will be working for life, barring a pension. So, can you increase your income? Work while going to school and get a better paying job in the end? Stocks are also not a bad choice, though it won't make a huge difference until you have more money to invest.

Save like a bandit. I was spent less than most folks on welfare when I was in my 20s. When my friends were buying houses, sports cars, etc., I was looking for the next Apple. The result? My peers were in crazy debt by 30 while I was banking north of 250k. And I had my living expenses mostly covered by investments. Today, I play all day and am happy as a clam. Most of my peers are still slaving away with no end in sight.
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Old 01-11-2013, 08:16 PM   #6
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Dan -- Roth investment is after tax but it grows tax free then on. You'll never have to pay any tax on any of the gains in future...imagine a tax free growth of your Roth for 35 years.
Traditional IRA is tax deferred but you'll have to pay tax when you withdraw money. You can google IRA vs Roth IRA, compare it and decide it your self. I would choose Roth over Traditional IRA any day but that's my opinion.
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Old 01-11-2013, 08:32 PM   #7
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Originally Posted by vxp036000 View Post
I hate to be a downer, but your not exactly in great shape financially. Someone making 21k / year will be working for life, barring a pension. So, can you increase your income? Work while going to school and get a better paying job in the end? Stocks are also not a bad choice, though it won't make a huge difference until you have more money to invest.

Save like a bandit. I was spent less than most folks on welfare when I was in my 20s. When my friends were buying houses, sports cars, etc., I was looking for the next Apple. The result? My peers were in crazy debt by 30 while I was banking north of 250k. And I had my living expenses mostly covered by investments. Today, I play all day and am happy as a clam. Most of my peers are still slaving away with no end in sight.
You're not being a downer, I completely agree. I'm currently attending college right now while working and will be leaving my current job as soon as a better opportunity arises. A large portion of my income is saved towards tuition and as of right now, I will graduate without any student loans.


Retire- I'm reading up on it and Roth does sound like the better choice.
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Old 01-11-2013, 08:54 PM   #8
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It sounds like you have a great attitude and you are off to a good start! One more thing I'll add to the mix - if you marry, marry someone who is financially responsible. Financial independence can be a great "team effort" but hard to achieve if your SO has bad habits.

SIS
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Old 01-11-2013, 09:06 PM   #9
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It sounds like you have a great attitude and you are off to a good start! One more thing I'll add to the mix - if you marry, marry someone who is financially responsible. Financial independence can be a great "team effort" but hard to achieve if your SO has bad habits.

SIS
Thank you! That is a huge quality I look for. Like you said, it could be pointless to save if they just spend it away.
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Old 01-13-2013, 07:23 AM   #10
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Welcome Dan,

You are in a unique position to get everything right from the very beginning. It's great that you're thinking about this already. I'm only 28, but I've been investing since 16, and now follow the Boglehead approach, and it's the only system I've found that makes sense. I have some comments about your current situation if you don't mind.

"I currently have a traditional IRA with $2,500 that I make monthly contributions to."

At 21k and a student you should be doing the ROTH IRA. If you made all those $2,500 of contributions in 2012, you can call your custodian and "recharacterize" the contributions you already made from traditional to ROTH. This money will now be tax-free upon withdrawal. You can also take out your ROTH contributions (not gains) at any time without penalty so you can use it as an emergency fund. Roth IRA as an emergency fund - Bogleheads

With that in mind, I would max out the 2012 contribution (which you can do until April 15 of this year) to ROTH for $5,000 for last year. I don't know who your current custodian is, but if you view the ROTH as an emergency fund, keep pretty safe investments in it for now. You might consider something like this fund- only 30% stocks, and the rest is inflation protected bonds, nominal bonds, and cash. The idea is preserving your precious ROTH space now by maxing the 2012 contribution. It's more important how much you save at the beginning than what it's in.
https://personal.vanguard.com/us/fun...FundIntExt=INT

The ROTH limit increases to $5,500 for 2013 so that should be your next target by April 15, 2014.


"I am also in the process of creating a CD ladder so I will end up with all five year accounts with one maturing every six months. (Being optimistic towards the interest rates) Each one of these accounts is started with $500 and I will add more once all of the accounts are started."

Rather than do a CD ladder, look into series I savings bonds from treasury direct. You can read up on them here. You can buy $10,000 annually in your name, great emergency fund.
I Savings Bonds - Bogleheads

"I also have a money market account with $12k and a normal checking account."

As mentioned above, I would move these around, max out whatever is remanining in the ROTH for 2012, and then buy $X amount in I bonds for your emergency fund needs. Money market accounts are not FDIC insured and are paying next to nothing. You need to do tax efficient things with your money and use funds to start earning a real return.

"I have one car loan for $13k and a consumer loan that I started to build my credit."

What are the rates on these and how big is the consumer loan? You might want to shop around for refinance deals on the car. Let's say the car loan is 4%. Right now https://www.penfed.org/refinance-auto-loan/ you can get a 1.49% no cost auto refinance. So theoretically, you could take out a loan for the full value of the car as it lists it at www.nada.com and then pay off both your existing car loan and the consumer loan (which doesn't sound good to me) at a low rate. Depending on how big the consumer loan is or what the interest rates are, it might change my above advice. Your credit will take care of itself, unless that's a 0% loan, pay it off.

"I am in the process of looking into stocks to create a decent portfolio."

The Boglehead philosophy is pretty easy to follow, which is why I like it.

Bogleheads® investment philosophy - Bogleheads

Video:Bogleheads® investment philosophy - Bogleheads

I can also recommend The Boglehead's Guide to Investing revised edition by Larimore et al.
and All About Asset Allocation 2nd edition by Rick Ferri.

That should give you plenty of homework for now.
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Old 01-13-2013, 08:50 AM   #11
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I like this CD approach. Welcome, Dan.
Quote:
Originally Posted by dan.t

I am also in the process of creating a CD ladder so I will end up with all five year accounts with one maturing every six months. (Being optimistic towards the interest rates)

Should I be doing anything else, or am I in a pretty decent spot right now?
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Old 01-13-2013, 09:08 AM   #12
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Originally Posted by ShortInSeattle View Post
It sounds like you have a great attitude and you are off to a good start! One more thing I'll add to the mix - if you marry, marry someone who is financially responsible. Financial independence can be a great "team effort" but hard to achieve if your SO has bad habits.

SIS
+1 with emphasis added.

Many people here have been through that wringer. If you even think you might marry someone look carefully at how they handle their money and what their spending priorities are.

As the result of a bad decision I made in 1978 I had to start over from scratch at age 35. I thought she would grow up; she didn't.
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