29 yo married Ph.D. student -- looking for financial growth!

[berkeley_grad]

Hi, all -- I just discovered this forum, and have enjoyed reading the posts. It's wonderful to find such a helpful and friendly community.

I'm a recently married Ph.D. student in the English department at Berkeley. I passed my qualifying exam a few weeks ago, so I finally have some time to think about our financial goals and strategies!

Our goals are pretty simple: we'd like to buy a house sometime within the next few years, and we'd like to grow our money for possible early retirement and eventually to begin giving it away to various causes and charities.

Our current thinking on college funds for our yet-to-be-born children is that we don't want to start them. Either they'll get free tuition at my university, or they should deal with the problem of financing their own education -- with some help from us, of course, but we strongly believe in early financial responsibility and emotional independence. (For those of you who have made a similar decision, I'd be interested to hear about your experiences! This sounds sensible to us in theory, but how does it work out in practice?)

A bit about our financial situation. My wife (who's a legal aid attorney) and I have about $212k in assets. Our retirement funds (two ROTHs, her 401k) are worth about $40k combined, and are all in order (target funds and index funds). Outside of our retirement accounts, an additional $26k is in two index funds, another $100k in Beckman Coulter (from which her father recently retired), and about $50k in cash.

Right now our biggest concern is that we have so much cash just sitting around. Aside from $10k in a high-yield savings account, we'd like to put the rest of it to work in investments. We're also concerned about having so much in a single company's stock.

As for our income, my wife brings in about $45k, and I bring in about $30k in fellowships and part-time jobs. Our only debt is in student loans, of which we have a combined $100k. We're not spendy at all (don't worry -- we still manage to have a lot of fun! Drinks with friends and dinners aren't expensive).

So we'd love to hear your recommendations on how we should allocate our assets, and especially on the best way to save up for a down payment on a house when we know we'll be needing it in 2-3 years. Regarding our asset allocation, we'd like to take pressure off saving $5k each for our annual ROTH contributions by using our other stock holdings to fund those contributions. Does this sound wise?

I would also like to know if anyone has any good recommendations for introductory books in active trading.

Thanks very much! I'm looking forward to your responses.

[LOL!]

Welcome to the forum. You had me going until you got to the "books in active trading." The easy way to make money in active trading is to become a stockbroker. That way you benefit from encouraging active trading in your clients accounts. Other than that, no one really makes money in active trading.

And with all the money you make from being a broker, may I suggest that you invest in passively-managed index funds? Books on that are "The Bogleheads Guide to Investing", "All About Asset Allocation", and "The Four Pillars of Investing". These all have the same consistent message as this: Investment Guide

[Darryl]

berkeley, welcome to the forum

Half your assets in a single stock might be your biggest concern. Money you want to use for a house in 2-3 years probably should be someplace like a MM how much will you need for 20% down? I'd suggest you set that aside. When our kids started arriving our expenses went up and our income went down. I would suggest knocking that student loan out now. I don't have any active trading books to recommend. I would recommend Dave Ramseys Total Money Makeover, Four Pillars of Investing, Bogleheads Guide to Investing and I'm sure someone will be along in a moment with a link to other suggested reading.

Sounds like you have a good start just set your priorities and go get them.

[Abreutime]

Quote:

Originally Posted by LOL! Other than that, no one really makes money in active trading.

Regarding the active trader comment, some people make money in active trading. However, many "active" traders know very little about the actual risk they are taking on while trading. You can make money trading, but know that your risk adjusted returns are probably not impressive at all, and usually not worth all the extra effort on your part.

[berkeley_grad]

Thanks everyone for your responses. Re: the active trading, it's really just something I'm curious about -- not just for personal gain, but also because I'd like to understand what's going on in the economy right now.

Darryl, thanks for your advice, re: so many eggs in one basket. As for the down payment, we're probably looking at something like $60 - 100k. I guess we'd then be looking for some sort of product that grows quickly for a finite period and that doesn't hurt us too badly in taxes. Is that about right?

So I'm still wondering about our idea of transferring stock into our ROTH every year instead of funding it from our salaries -- what does the forum think?

Thanks again, everyone.

[jIMOh]

welcome.

it appears you have 212k in assets, with 100k in one asset itself (single stock).

Other than that one flag, I think you are off to a solid start. I always thought I would let my kids fund their own education (I funded mine), until my wife had twins in March, and now I am rethinking that plan.

My child savings plan is this- I am opening a taxable investment account which has a mid term time horizon on it. This fund collect contributions for many things:

1) instead of paying down mortgage, any extra payment we would apply (based on bonuses, budget, or windfall) get placed into this single taxable acccount.
2) this fund is also for new cars, large repairs and any non periodic expense. We try to budget around $100/month for this and put this money into this same taxable account. Non periodic repairs include new HVAC, plumbing, hot water heater, new roof etc... These are things which will need anywhere from 1k-5k for when the occur.
3) school funds for kids. Any money we would mark towards education funds for kids get put into this same account.

My thoughts on this:
1) I don't like 529s because they tie money up for one purpose. I cannot predict if my kids will want to attend college 18 years from now any better than any of us could predict whether I could retire 18 years from now or if SS is around 18 years from now. I'd prefer not to tie my money up for one purpose.
2) The fund I have is of moderate risk (PRPFX) so I don't need to worry about changing asset allocation over time. All expenses this fund provides for have the same timeline (less than 18 years). I am comfortable with the risk level of this fund now. If I decide this fund has too much in it (based on the expenses it has to cover), I can always redirect new contributions somewhere else.
3) The taxable account is a great way to fund ER if that is an option, so having money which I can apply to expense A or expense B is quite appealing.

[Milton]

Quote:

Originally Posted by berkeley_grad Our current thinking on college funds for our yet-to-be-born children is that we don't want to start them. Either they'll get free tuition at my university, or they should deal with the problem of financing their own education -- with some help from us, of course, but we strongly believe in early financial responsibility and emotional independence. (For those of you who have made a similar decision, I'd be interested to hear about your experiences! This sounds sensible to us in theory, but how does it work out in practice?)

Presumably(?) the $100,000 in Beckman Coulter stock was a gift from your wife's father.

Rather than worrying about putting aside future money, why not segregate half of the intergenerational windfall towards the cost of your children's (and his grandchildren's) education? Of course, you will want to diversify it into a broadly-based index fund.

That would leave you some $50,000 to fund the down payment on the house you'd like to purchase. This assumes that you can stomach spending any part of the parental gift on yourselves, which admittedly could be a problem given your stated view on the importance of financial responsibility and emotional independence. If you prefer to remain true to your principles, another option would be to donate the $50,000 balance to the causes and charities you believe in (they would probably prefer to have the money now rather than "eventually").

[honobob]

Quote:

Originally Posted by berkeley_grad I'm a recently married Ph.D. student in the English department at Berkeley. Our goals are pretty simple: we'd like to buy a house sometime within the next few years, and we'd like to grow our money for possible early retirement and eventually to begin giving it away to various causes and charities. Right now our biggest concern is that we have so much cash just sitting around. ....... especially on the best way to save up for a down payment on a house when we know we'll be needing it in 2-3 years.

Hi b_g
Have you lived in SFBay area long? I'm curious why you'd wait 2-3 years to buy a house. Any money you save up could be completely wiped out by a sudden rise in market value or change in financing rates. You seem to have enough to make payments and there are first time home buyer programs out there. I'm not saying buy the first thing you see but now would be a great time to check the market and get financing in order and buy the best you can now. Things could drop a little but unless you're looking in Brentwood or Vallejo you probably won't find the "deals" you think you might get in a couple of years especially if you're lookin near Berkeley. A good Realtor could give you a lot of help now. Find someone that bought in the frenzy and ask them how fun it was to keep being offer #42 and writing a letter to the seller telling them how their house is your dream home if only they'd take your way over asking offer. P.S. We'll name our first child after you.

Now if you've taken a good look at the market and feel comfortable waiting fine, but if you are only making a guess from what you're reading in the paper or here you may be very sorry when your extra $20K in down payment savings is decimated by a $200,000 increase in market value.

Good luck

Isn't your new Chancellor getting $11,000 a month to rent since they're doing repairs on the state owned residence? And isn't it your Campus police chief who was allowed to quit, take her couple of million dollar retirement money and then get back at a HIGHER salary(she's in her early 50's right? Single?). Must be tough policing them tree sitters. Hey, maybe they got a good deal for you. No worries about buying then.

[jclarksnakes]

Berkeley,
....Welcome to the forum. I have a different opinion than what others have posted about the 100K in your FIL's old law firm. Sometimes keeping family happy is a whole lot more important than money. At your age it is not such a big deal to diversify to reduce overall risk. If you were to lose that investment it would not be the end of the world. You could just work a little harder or longer to make it back. Of course, as you get closer to FIRE diversification should become a more important consideration in financial planning.
Jeff

[Lagniappe]

Quote:

Originally Posted by berkeley_grad Thanks everyone for your responses. Re: the active trading, it's really just something I'm curious about -- not just for personal gain, but also because I'd like to understand what's going on in the economy right now.

Have you thought about taking an economics course, or corporate finance and valuation courses at Haas (the b-school at Berkeley)? After taking many of these types of courses, I became a convinced indexer. There's just not enough energy at the end of the day for the odds of identifying an undervalued stock and having its value recognized while I own it.

[Ed_The_Gypsy]

"Active trading"? I give 80/20 that you will be broke within five years.

[Milton]

Apparently FIL has retired from Beckman Coulter (not a law firm, BTW), so presumably he wouldn't mind if the stock is diversified into other investments.

I have to agree with Ed: given the information provided in Berkeley's original post, he would be ill-advised to consider "active trading".

[LOL!]

On the subject of the stock: We see from time to time here folks asking the quesion: "I got stock as a gift from a relative and I sold it. What is my cost basis so I can fill out my tax return."

The cost basis is the amount paid for the stock by the original owner who gave you the stock. (More correctly, it's the cost basis in the stock of t he donor.) The stock does not have the cost basis of the value on the day the shares were given to you. The stock does not get a stepped-up basis up the death of the donor either.

Such gifted shares often become a useless albatross around the neck of the recipient because they fall into a behavioral finance trap: "Dad gave me these shares. He didn't want me to sell them." So not only do you not know the cost basis, but you also feel you can't sell them. The only way out is to die, then your children get the stepped-up basis which is easy to figure out, but you should have told them to sell them freely when you are dead.

Your asset allocation and age are not the same as your parents'. It is unlikely that your investments should be the same as theirs as well. I would get the cost basis of these shares from your FIL and sell them and put the money to better use.

[xynny]

Hey there Berkeley_Grad. I graduated from Berkeley, too. (EECS '05) I'm wondering if you are planning to stay in the Bay Area after you graduate? I did, and it's pretty darn expensive here. As to saving for a downpayment, I wrote a post about it here:

Reader Question — Should You Save for Retirement or a House? — The Baglady

Overall, I think the Bay Area is just not a great area to buy a house right now because everything is way too overpriced. It might be different in 2 to 3 years, but I don't know really.

I agree with the others about active trading, it's too much trouble and you could easily lose your shirt. Plus, the tax bite on short term gains is ridiculously high. Index funds are nice and steady and lets you sleep at night.

Finally, funding the Roth is great before your income goes up to where you don't qualify anymore. My husband and I probably won't qualify this year, and that kind of sucks.

Anyway, I'm done rambling now. Good luck!