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Want to take the fast lane
Old 06-16-2013, 11:33 PM   #1
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Want to take the fast lane

Hello everyone,

A little background, I recently turned 24 and purchased my first home at the age of 23. I purchased the home for $280,000 and put down $60,000. I've also paid off all of my credit card debt and all of my student loans ($20,000) in the past 6 months. Currently I'm debt free minus my $220,000 home mortgage that I purchased with 3.6% 30 year fixed-rate financing. My payment is around 25% of my take-home pay per month, I used the Dave Ramsey principle for below 30% for my mortgage. My car is paid off, I don't have cable TV, and my cell phone is paid for by my work. I'm working as a computer engineer and am making a very nice annual salary.

I'm now in a position where I can start investing much of my income to work towards becoming financially independent. I do not plan on financing anything else and will only pay cash for future purchases. I am reading a lot of personal finance books and starting to learn the stock market as I have upwards of $2500-3000 per month of excess income to invest. Currently my only investments are my 401k and my EPP (Employee Stock Purchase Program) to which I deposit 5% of my income to stock at a 15% discount of the lowest quarterly price. What are your recommendations for me if you were in my position at age 24?
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Old 06-17-2013, 12:04 AM   #2
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What are your recommendations for me if you were in my position at age 24?
Uh, follow the advice in all those books you have read?

Tell us about those books, so that we can tell you if we like the advice or not.
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Old 06-17-2013, 12:10 AM   #3
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Uh, follow the advice in all those books you have read?

Tell us about those books, so that we can tell you if we like the advice or not.
Well, the books have been more of how to stay out of debt etc, not so much how to invest once I've done that. I've read Think and Grow Rich, The Science of Getting Rich, The Total Money Makeover, The Millionaire Next Door, Unleash the Giant Within, Rich Dad Poor Dad etc. I'm new to actually buying assets that will bring more income, have not touched that subject yet.
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Old 06-17-2013, 12:46 AM   #4
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OK, please read some books on this list: Investment Books
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Old 06-17-2013, 05:56 AM   #5
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You are clearly on the right track. My first question is: is 5% the max your company will allow you to put into the ESPP? Most are 10%. If you are not already, put the max you can into this and your 401k. After that, I'd set up a small emergency fund, whatever you are comfortable with but like 3-6 months expenses somewhere safe. After that, if I wasn't sure what to do, I'd probably open a vanguard account and start investing in either total stock market or s&P 500. As you learn more about investing, you can add some diversity, but this would be a good way to get started and you will likely want something like this as a core holding going forward anyway.
Just my $.02.
-Pan-
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Old 06-17-2013, 06:00 AM   #6
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oh yeah, one more thing, I'd sell the company stock as soon as it posts to your account and move it to vanguard. Too many eggs and all that....
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Old 06-17-2013, 08:05 AM   #7
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Congratulations. You are doing wonderful for your age.

One of my favorite investing books - The Four Pillars of Investing: Lessons for Building a Winning Portfolio: William Bernstein: 9780071747059: Amazon.com: Books

Somebody already mentioned it I'll repeat it VANGUARD. You can find any 2-3-4 fund folio (probably VTSMX & some bond fund + some international fund) and invest every month. Lowest expense ratios and wide market exposure, can't do much better than that unless you are super investor.

What are your 401K choices?

-DesiGirl
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Old 06-17-2013, 09:12 AM   #8
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I'm impressed. You paid off $20k in student loans, paid off a car, and accumulated $60k for a down payment in only ___ months of full time work. Congratulations!

I'd think about flexibility. You're probably single and childless, and the job probably looks solid. I'd say that life happens, stay flexible. Oh, and I hope you're enjoying your current situation.
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Old 06-17-2013, 10:42 AM   #9
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OK, please read some books on this list: Investment Books
Excellent, thank you I will get going on these.

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You are clearly on the right track. My first question is: is 5% the max your company will allow you to put into the ESPP? Most are 10%. If you are not already, put the max you can into this and your 401k. After that, I'd set up a small emergency fund, whatever you are comfortable with but like 3-6 months expenses somewhere safe. After that, if I wasn't sure what to do, I'd probably open a vanguard account and start investing in either total stock market or s&P 500. As you learn more about investing, you can add some diversity, but this would be a good way to get started and you will likely want something like this as a core holding going forward anyway.
Just my $.02.
-Pan-
Yes, 5% is the max contribution for my ESPP. You mention I should max this out but move my stock to Vanguard ASAP? I have heard good things about the VTSMX but need to do some research as I'm unfamiliar. I do have a small emergency fund, I'm pretty much ready to get things going. Thank you for the input!


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Congratulations. You are doing wonderful for your age.

One of my favorite investing books - The Four Pillars of Investing: Lessons for Building a Winning Portfolio: William Bernstein: 9780071747059: Amazon.com: Books

Somebody already mentioned it I'll repeat it VANGUARD. You can find any 2-3-4 fund folio (probably VTSMX & some bond fund + some international fund) and invest every month. Lowest expense ratios and wide market exposure, can't do much better than that unless you are super investor.

What are your 401K choices?

-DesiGirl
I will look into a VTSMX very soon and see what options are available. I'd have to look into my 401K, I should be paying more attention to it but have had other things I've put as higher priority recently.

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I'm impressed. You paid off $20k in student loans, paid off a car, and accumulated $60k for a down payment in only ___ months of full time work. Congratulations!

I'd think about flexibility. You're probably single and childless, and the job probably looks solid. I'd say that life happens, stay flexible. Oh, and I hope you're enjoying your current situation.
Thank you! I haven't really stopped to think about what I've done thus far, but that is the largest sum of money I've ever been able to save and never thought I'd have done all of this so soon.

When you speak of flexibility, I am single and childless and my job is great (although nothing is ever secure). What do you mean by stay flexible? Can you elaborate a bit? And I am very much so enjoying my current situation, I am pretty frugal but am enjoying the sense of freedom that has already come.
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Old 06-17-2013, 12:01 PM   #10
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If you want the fast line to FIRE, take a 2nd job. That doubly boosts savings since it also lessens the time you have to spend.

If I redid my 20s, I would invest less in mutual funds and more in individual growth stocks.
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Old 06-17-2013, 12:07 PM   #11
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If you want the fast line to FIRE, take a 2nd job. That doubly boosts savings since it also lessens the time you have to spend.

If I redid my 20s, I would invest less in mutual funds and more in individual growth stocks.
I am actually looking into a second job to make extra money on the side. Would VTSMX be sufficient for individual growth stocks or are you talking about one stock at a time and not a grouping?
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Old 06-17-2013, 12:18 PM   #12
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I like at least some individual growth stocks because you can buy and hold them, and pay no tax on the paper gains until you sell (retirement?) at which time you pay at the historically-lower capital gain's tax rate. This approach functions like an IRA but with less tax and you can withdraw without any age restrictions!
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Old 06-17-2013, 12:27 PM   #13
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ESPP - either sell right away, or wait the year or whatever is needed for long term capital gains. Then use that to diversify. It all depends on how much you want to have invested in the company you work for.

Vanguard account - get the money in there, a general fund that tracks the market is a pretty good choice, and you can fine tune it later.

Second job - good idea, but don't burn yourself out. Remember to enjoy life. Is there something you can do in your spare time that might make money but is still fun? I do wood carving and some other crafty things, my husband writes iphone apps for fun. Neither have made us a lot of money, but they're fun, and bring in a little bit of money.

I was in a similar place at your age (although married with 2 incomes), but we definitely let our spending increase over the years instead of saving more. Our 401ks are in great shape, but we're really stuck for money that we can access between 40-55.
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Old 06-17-2013, 02:15 PM   #14
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When you speak of flexibility, I am single and childless and my job is great (although nothing is ever secure). What do you mean by stay flexible? Can you elaborate a bit? And I am very much so enjoying my current situation, I am pretty frugal but am enjoying the sense of freedom that has already come.
I worked in a very narrow field. One job I had was for the only employer within any sort of commuting distance that hired people like me. So, if I lost my job, I would have had the double loss of being forced to sell a house besides looking for another job (maybe at a loss since my employer was a big chunk of the local economy). In that case, "staying flexible" may have meant renting.

You're buying your employer's stock at a discount. That of course doubles up on your risk of your employer failing. So, I'd say that selling the stock is a defensive move that might make it easier to move some day.

Maybe some of that 401k money should be in shorter assets than would be justified if your only goal were retirement. Again, if you're laid off, you might be looking at the 401k as an emergency fund.

But, mostly I meant the you can't really make a life plan. It's more of an attitude than specific investment advice.
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Old 06-17-2013, 03:44 PM   #15
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Would VTSMX be sufficient for individual growth stocks or are you talking about one stock at a time and not a grouping?
VTSMX, like all/most funds, buys and sells assets during the year, actions that generate capital gains (or losses) on which each fund holder must pay taxes that year. You have no control over when the fund will sell, thus no control over when you'll pay any corresponding CG taxes. By comparison, holding a stock yourself lets you decide when to sell, and thus lets you maximize tax efficiency to suit your needs. It does, however, mean you need to keep an eye on things and potentially sell a stock pre-retirement if you believe the company is in decline.
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Old 06-17-2013, 08:18 PM   #16
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VTSMX, like all/most funds, buys and sells assets during the year, actions that generate capital gains (or losses) on which each fund holder must pay taxes that year. You have no control over when the fund will sell, thus no control over when you'll pay any corresponding CG taxes. By comparison, holding a stock yourself lets you decide when to sell, and thus lets you maximize tax efficiency to suit your needs.
One should do their own research on VTSMX and similar index funds. They have paid no capital gains distributions in quite a few years because of the legal way they are set up. Thus, they are as tax-efficient as holding individual company stocks, but with much better diversification. In short, I think there are no positive reasons to own individual company stocks and there are many negatives.

The book list will lead you on the right path. I like Bernstein's "Four Pillars" that was already mentioned, too.
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Old 06-17-2013, 09:40 PM   #17
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Per Yahoo, VTSMX has a 1.89% yield, a dividend that subjects its holders to tax annually. For a holding company like BRKB, for example, Warren Buffett prefers to not pay dividends but rather reinvest the dollars for more growth, thus deferring taxes for owners of that stock.
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Old 06-18-2013, 01:06 AM   #18
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Per Yahoo, VTSMX has a 1.89% yield, a dividend that subjects its holders to tax annually. For a holding company like BRKB, for example, Warren Buffett prefers to not pay dividends but rather reinvest the dollars for more growth, thus deferring taxes for owners of that stock.
Yes, you have picked a stock which pays no dividend and gives you the risk of the death of Warren Buffett. There are a number of stocks that do not pay dividends and they would all have undiversified risk. VTSMX will not have that undiversified risk because of the thousands of stocks it is composed of.

Many stocks pay dividends. Those are the same dividends that VTSMX gets and passes on to owners of shares of VTSMX.

There is little that one can do to get away from dividends. One can go for so-called qualified dividends with their lower tax rate. VTSMX paid out 100% qualified dividends in the past few years. One can buy a "growth" index fund which pays a lower dividend rate and also has 100% qualified dividends. But one doesn't really gain much by doing so.

But if you want no dividends, BRKB is not a bad way to go.
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Old 06-18-2013, 07:08 AM   #19
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Couple more comments:
1) ESPP: yeah the idea here is that since you work for the company you don't want to have a lot of money invested in the company at the same time. If things go bad your job and investment could be at risk. I usually sell right away and suck up the tax bill. You make 15% so after tax say it's about 10% basically risk free. You can try to wait till after long term gains kick in, but I'd put a stop order on it if I did that.

2) Individual stocks vs funds: You are going to have to make up your own mind here. I've done both. Just remember: if you are going to hold individual stocks, you are going to have to babysit it alot. I've moved to only funds these days and just monitor my asset allocation.

3) dividends vs growth: Others may disagree, but because a fund (or stock) issues a dividend is no reason not to hold it (in many cases, it's a reason TO hold it). You will be taxed at dividend rates for qualified dividends (15%). This thinking goes back to the tax tail wagging the investment dog.

4) 2nd Job: unless you think it will be fun, dont' bother. You are young, you are in a high paying field, and you got plenty of time ahead of you. Spend the extra time focusing on your career and learning about how to invest....oh yeah, and having fun! If you insist on a 2nd job and real estate interests you, a rental or two might be an option in the future. They are far from hands off, but don't require regular hours.

Other than that, just keep on doing what you are doing and it will lead to FI soon enough!
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Old 06-18-2013, 07:27 AM   #20
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Is your income low enough to invest in a Roth IRA? The new phase-out range for 2013 is $112,000 to $127,000. Fill that sucker up ($5k/year) at Vanguard. Pick a Target Retirement fund to use until you figure out what you want to do?

Somewhere along the lines you'll have to figure out which order to fund taxable vs. non-taxable, etc. and all that, too.

I second (or third or whatever) the 4 Pillars book.

-CC
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