23 yr old, debt free besides the mtg, where do I go from here?

[cachd]

Hello all,

I am a 23 years old. I purchased my first home three years ago and have an outstanding mortgage at 5.75% fixed 30yr in the balance of $125000. I do not carry any credit card, car loan, or debt of any other type and have a reliable means of transportation.

The question that eats at me regularly is: where to from here? I have a small savings (approx $15k), no higher education, and no retirement plan such as a 401k or IRA. I currently hold my savings in a brokerage account that invests in municipal bonds returning approx. 3.5% tax free, but am completely at a loss regarding ideas to bring in passive income or plan for retirement. I only know I desperately want to layout a plan and begin making progress! Please help!

In my short time lurking I see this is a fantastic forum full of interesting, passionate people. Kudos to everyone for participating in this community and I hope to be welcomed into the ranks!

[bssc]

Congratulations, you are way ahead of the rest of us.

Welcome to the forums, I would look into both the FIRE and Money forums as well as the Young Dreamers forum.

First, I would ask if you can contribute to a 401k, otherwise I would set up an IRA with a low fee company, such as Vanguard.

Unless you are holding those mutual bonds as your emergency fund, I would recommend that you think about moving your money to stocks or stock based mutual funds. Look for some book recommendations in the forums above.

You will be retired sooner than most people you know.

[TexasGal]

Welcome! You will get lots of good advice and many varied opinions here. You are already ahead of SO many people so kudos to you. Prop up your feet and enjoy!

Tex

[runchman]

If you haven't already, I'd set up an automatic deduction from your pay into an investment account, saving 10% of your salary if you can.

I'm 20 years your senior, and I can tell you that those years seem to fly by, and a simple key to success is tossing money in the savings week, after week, after week.....

simple advice, I know, but a fundamental for long term success in the ER game.

- John

[HFWR]

Welcome, cachd!

If I was 23 again (back 30 years ago...), I'd do something like this:

- Get an education. Doesn't have to be "college"; could be a trade such as construction, HVAC, motorcycle mechanic, etc. Also, if you can get your employer to pay for some/all of it, all the better for you.

- Read a few books on investing. Do a search here for some ideas. Don't try to get too fancy schmancy; invest regularly in low-cost investments such as index-mutual funds, or a set-and-forget Target Retirement fund. Take advantage of tax-deferred accounts, such as 401k, especially one with an employer match, or an IRA. PAY YOURSELF FIRST!! Sorry, didn't mean to yell...

- Watch your expenses, and stay out of debt.

- Enjoy life. One can wish one's life away...

[jnojr]

Quote:

Originally Posted by cachd Hello all, I am a 23 years old. I purchased my first home three years ago and have an outstanding mortgage at 5.75% fixed 30yr in the balance of $125000. I do not carry any credit card, car loan, or debt of any other type and have a reliable means of transportation.

Good for you! Congratulations!

Quote:

The question that eats at me regularly is: where to from here? I have a small savings (approx $15k), no higher education, and no retirement plan such as a 401k or IRA. I currently hold my savings in a brokerage account that invests in municipal bonds returning approx. 3.5% tax free, but am completely at a loss regarding ideas to bring in passive income or plan for retirement. I only know I desperately want to layout a plan and begin making progress! Please help!

You're way to young to be in bonds. I have a mutual fund money market account that's nearly 100% liquid and pays around 5% Get a few months worth of living expenses in something like that and then get other money into something like a no-load S&P500 index fund. Just remember... that would need to be long-term money, as it's possible the market could take a downturn (10-20% isn't unheard of), and it might be a few years before you're "even" again.

Does your employer offer a 401(k) program at all? If so, get into it up to the point that employer matching cuts out. The employer match is free money, and an immediate return. Take eevry cent. If not, or once you're at the employer match limit, get into an IRA. I like the Roth because it's funded with post-tax dollars, and all growth is tax free. A traditional IRA is funded with pre-tax dollars, and do reduces your taxable income, but you have to pay later. The converntional wisdom is that, in retirement, you'll be in a lower tax bracket, and so a traditional IRA makes the most sense in a lot of situations. However, I'm extremely pessimistic... I believe that taxes are going to do nothing but go up. To understand why, I highly recommend that you read The Coming Generational Storm See if your library has it... why buy a book when you can read it for free, unless you really love it or want to keep referring back to it?

[jnojr]

Quote:

Originally Posted by HFWR PAY YOURSELF FIRST!!

+1

Another book I strongly recommend is The Richest Man in Babylon. Also The Millionaire Next Door Both emphasize "paying yourself first", frugality, thrift, saving, etc.

[hayekcapitalist]

Brokerage accounts have higher fees and commisions than many other investment vehicles such as index mutual funds, ETFs, ETC. Unless you need the handholding of an experienced informed professional (and make sure he or she is) take your money to a discount brokerage house. BUT, REMEMBER: regardless of the letters after someone's name (RIA, CFP, CPA) nobody cares about your $$$ more than you. Be healthily skeptical and ask yourself what's in it for him or her as well as what's in it for me.

Get educated (Just read alot, ask questions, and THINK). It doesn't sound like you are in a high enough tax bracket to benefit from tax free munis. While taxes are always to be considered don't let them wag your investment dog. At this stage of your investment life growth of capital to critical mass is your goal, not tax reduction per se.

At a 25% marginal bracket a 3.5% tax "free" yield is equivalent to only about 4.66% before taxes. You can do better in a CD. I have a one year paying 5.4% APR before tax. Try an internet bank (I use Nexity), they seem to pay higher rates and are FDIC. Don't stress; you are way ahead of most of your peers and where most of us were at your age. Most of your return is uncorrelated to the occasional homerun or strikout, but the steady day-to day investing without overthinking it.

It will be your time in the market, not timing the market that will yield compounded future benefits. Good luck and keep us informed.

[cachd]

Thanks for the replies!

Quote:

If you haven't already, I'd set up an automatic deduction from your pay into an investment account, saving 10% of your salary if you can.

I love this idea. Can you elaborate on "investment account?" Is there something better than a 5%+ money market to automatically deduct to?

Quote:

invest regularly in low-cost investments such as index-mutual funds

The only investment I've made (approx 2 weeks ago) is into Vanguard's total-market ETF (VTI) and a S&P 500 index (SPDR). I understand these need to be long-term shares and don't plan to touch them... Is there any way to invest into a total market fund without paying the trade fees each time? $20 per trade is pretty steep (I don't trade much, so pay higher costs) especially if you want to add less than multiple thousands each time.

Quote:

At a 25% marginal bracket a 3.5% tax "free" yield is equivalent to only about 4.66% before taxes. You can do better in a CD. I have a one year paying 5.4% APR before tax. Try an internet bank (I use Nexity), they seem to pay higher rates and are FDIC.

I'm looking into changing to a money market account, that returns greater than 5%. I'll check into Nexity, thanks! Love that FDIC, I don't know if Fidelity is giving me that.



I don't have a 401k plan at work or an IRA started. Since I can't join into a matching program at work shouldn't I focus on investments that look to increase my capital base before starting a IRA?

[jclarksnakes]

cachd,
....The common threads you will see among people here who are financially independent include the following points; stay debt free, live below your means, invest in yourself, save and invest and pay yourself first. Owning a home at your age is impressive. Mortgages allow many people to own a home. Just as a rule of thumb a fixed rate mortgage like yours is a smarter move than any of the gimmick mortgages and a 15 year fixed rate mortgage is smarter than a 30 year one. Your path to financial independence may be a long one if you spend too much of your life paying interest on debts, including mortgages. Consider how nice it would be to be TOTALLY debt free before you are 40.
Jeff

[SteveR]

Welcome to the board. It would appear you have a lot of good questions for one so young. There are a lot of very good books out there to help you understand how to invest and where to invest. One very good book is The Four Pillars of Investing. Look it up on Amazon and read it.

A key to investing is be in it for the long term. Many of us that are now retired did so by getting Financially Independent (FI) slowly through saving and investing. There are a lot of options other than a 401k and many you can do on your own through a low cost brokerage house like Vanguard. Traditional IRAs, Roth IRAs and target retirement funds are the most common. You have to save money to make money. Many folks here save a pretty good chunk of their income and then invest it in a variety of funds. The more you save the sooner you can retire but don't kill yourself in the process. Life is about balance and getting to retirement is not a race.

Search some older threads on book suggestions and investment options. Browse the forums to see what is going on and feel free to ask questions.

Good luck and welcome to the board.

[HFWR]

Quote:

Originally Posted by cachd Is there any way to invest into a total market fund without paying the trade fees each time? $20 per trade is pretty steep (I don't trade much, so pay higher costs) especially if you want to add less than multiple thousands each time.

Best to use a fund, rather than an ETF, for this purpose.

[hayekcapitalist]

Quote:

Originally Posted by HFWR Best to use a fund, rather than an ETF, for this purpose.

Vanguard has a Total Stock Market Index Fund (VTSMX) that is no load which has been around much longer than the ETF which means it has been stress tested. Yet they invest in virutally the same space, only cheaper if you are going to do frequent smaller investments. ETF's are superior for a one-time large investment that is held long-term. Also, you have greater control over when taxable events are recognized because you decidde when to sell and realize capital gains or losses and their character as short-term or long-term.load of commissions

Vanguards mutual fund, as opposed to its ETF, is no load, meaning nada up-front commisions and its annual fee is only 19 basis points, initial minimum investment of $3,000, but subsequent investment minimum of only $50. For much of its history, "this fund was the place to go for the cheapest, broadest exposure to the U.S. equity market. That's no longer the case. Fellow Analyst Pick Fidelity Spartan Total Market Index caseConvert('FSTMX')FSTMX's 0.10% expense ratio undercuts this fund's 0.19% levy. Since expenses are the biggest differentiating factor among index funds tracking similar benchmarks, you can be reasonably certain this fund will lag the Fidelity option by the difference in their expense ratios. "

If you want more exposure to the smaller cap stocks without buying a small cap index fund per se try Vanguard Extended Market Index Fund (VEXMX) which weights the S&P 500 lighter and one of the DJ Wilshire 4500 heavier. If you want more or less mid- and small-cap exposure--relative to the mega- and large-cap stake provided by S&P 500 500--you can adjust your allocations to the two funds accordingly.

Smaller-cap stocks have delivered much higher returns than their large-cap counterparts since the end of the 2000-02 bear market...many beleive this run is over for now and the large cap stocks with international exposure represent historically attractive entry points now.

[jIMOh]

Quote:

Originally Posted by cachd Hello all, I am a 23 years old. I purchased my first home three years ago and have an outstanding mortgage at 5.75% fixed 30yr in the balance of $125000. I do not carry any credit card, car loan, or debt of any other type and have a reliable means of transportation. The question that eats at me regularly is: where to from here? I have a small savings (approx $15k), no higher education, and no retirement plan such as a 401k or IRA. I currently hold my savings in a brokerage account that invests in municipal bonds returning approx. 3.5% tax free, but am completely at a loss regarding ideas to bring in passive income or plan for retirement. I only know I desperately want to layout a plan and begin making progress! Please help! In my short time lurking I see this is a fantastic forum full of interesting, passionate people. Kudos to everyone for participating in this community and I hope to be welcomed into the ranks!

excellent job.

Here's some food for thoughts. You need a goal. Once you have that goal, you will probably start to learn how to achieve it.

If retirement is the goal, then knowing how much it will take is probably a good follow up question. My basic starting point is "expenses/.04"= goal.

Meaning take your yearly expenses (mortgages, bills, payments, groceries, gas, social...) and divide by .04. If you have this amount saved up, you could retire.

It is not that simple, but it gives you an estimate for what you will need. retirement planning involves assumptions and trying to guess/calculate and mitigate through various assumptions.

Next step is set goals/milestones to achieve the larger goal.

Let's say your expenses were $40,000 each year (a guess)
divide by .04 and 40,000/.04= $ 1 M.

Then to create some simple check points (again it's more complicated than this, but I am trying to get you started).

retirement age (guessing 65)= $1 M needed
subtract 8, divide by two
age 57 $500,000
subtract 8, divide by two
age 49 $250,000
subtract 8, divide by two
age 41 $125,000
subtract 8, divide by two
age 33 $62,250
subtract 8, divide by two
age 25 $31,125

This is a list of age and amount milestones which use the rule of 72. take any interest rate, divide it into 72, and that is the number of years it takes money to double.

Working backwards, if you have $31,125 at age 25, earning 9%, that money will double every 8 years ("72"/"9"="8"). In this example the $31,125 can double 6 times over 40 years.

Then you need to find a way to invest money so it earns 9%. A diversified portfolio of stocks and a few bonds should get you there (maybe 80% stocks and 20% bonds).

In my case I am 34 yo, have 99% equities and 1% bonds... and recently I have been earning well beyond the 9% annual returns I estimated when doing my own calculations.

[skittles]

You're getting an awfully low return. That's what you'll want at age 60. For now, go for higher return investments. They carry more risk, but you're investing long term, and you'll come out way ahead with performance mutual funds.

My advice: sock away 25% of your income if you can afford it. When the money piles up, resist the temptation to splurge. When you get a raise, pretend it never happened. Put that extra money into savings.

NEVER be tempted to keep up with the Joneses. Don't be embarrassed by what kind of car you drive, or what kind of vacations you take. Spending money to impress others is reckless and foolish. I have a net worth of about a million dollars, and I drive a 13-year-old pickup truck that I bought second hand ten years ago. Doesn't bother me a bit. The people in my office call me a cheapskate, but they also call me rich. They probably think I have $200K in the bank. That's their idea of rich.

I don't ever plan to live a lavish lifestyle. I plan to be independent, and continue to live my same lifestyle after retirement, but I'll be free of this job, and free to do what I want. I have no intention of spending my money to impress other people.

Try to keep your take-home pay low. Have savings taken directly out of your check, and into tax-deferred accounts if possible.

Remember, you don't need an iPhone, PS2, or any of those other expensive toys on the market. Don't get trapped into too much consumerism. Buy things with real value, that will last.

Learn how to do things for yourself. Every time you call a plumber or electrician, you contribute to his retirement, not your own. Be sensible about this, of course. Sometimes it makes more sense to just pay someone to get the job done. Buy some decent tools.

Remember, if you decide to have children, early retirement may not be an option for you. The kids come first, and your savings will probably be spent on them at some point in the future. That's no reason not to have kids, but you may have to forget about early retirement if you start a family. I never had any myself. Someone once told me that they can be rather expensive

[megacorp-firee]

Quote:

Originally Posted by skittles Remember, if you decide to have children, early retirement may not be an option for you. The kids come first, and your savings will probably be spent on them at some point in the future. That's no reason not to have kids, but you may have to forget about early retirement if you start a family. I never had any myself. Someone once told me that they can be rather expensive

I agree with most of what skittles says except for the kids part of it. If you are conscientious in you LBYM and teach the kids the values that LBYMers live by then you have a a good chance of ER. It isn't easy, since peer pressure (your kids from other kids) comes into play and it can be tough. IMO, it is very tough to 'go backwards'. So if you start the 'easy spending' life, then you can't go back. If you don't do it when the kids are younger (and they don't miss it), then you can add 'luxuries' as they get older (and can better appreciate them) and you can better afford it. Teach them the values of the dollar, ... I had my kids get summer jobs when they went into high school. They didn't need to work, but it taught them the value of a dollar earned. It also got them out of bed and out of the house, it gave them the work ethic that has gotten them on their way in life.
At 56 I just have retired... after paying for 2 kids worth of college. So it can be done... but LBYM is the key.
...my 2 cents worth

[Andy H]

CACHD! Pat yourself on the back! Excellent progress to date and replies herein are all outstanding. "too young for bonds" - I agree, think about the impact of inflation and your net return. Thoughts from JNOJR also excellent (re: tax bite at retirement vs. Roth) and start reading... another one to consider: Think and Grow Rich , although written in the 30's, incredibly applicable today! Great start!!!

[Eyerishgold]

cachd, I was in a similar situation to you 4 short years ago. You're doing a great job saving your money and living below your means. What you need to do now is to learn how to invest your money. A 23 year old like yourself shouldn't, according to traditional wisdom, have so much in cash and fixed income.

My first question is, why the muni's? Are you in a high tax bracket where you need the tax free income? At 23 I doubt it, but maybe you are.

My second question is, why aren't you contributing to a 401k if it's offered through your company? If your company doesn't offer a 401k, why aren't you contributing to a Roth IRA?

It's great that you have a large savings account built up. Make sure to have 3-6 months living expenses available for emergencies such as a job loss. Other than that someone as young as you and I are should be invested more heavily in equities. Think 80-90% of your portfolio.

My last piece of advice it to read as much as you can on the subject. Keep learning and you'll be fine.