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What to do with $100K?
Old 09-21-2010, 09:28 AM   #1
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What to do with $100K?

I am currently 22 years old and a military officer. I am married and my wife and I are living below our means. Right now we are assuming we will be leaving the military in about 4 years. After that time we conservatively estimate that we will have saved between $100,000 and $120,000. This is because we can live easily on my paycheck and we pockets hers as a teacher.

At that time we look at having our first child. I would like to have about 15K set aside for the initial costs for that. Hopefully there won't be much to any for medical because we plan on having the child while I am still in the service. The 15K would be for furniture and misc expenses.

Also, it will be our 5 year anniversary and I'd like to set aside about 10K for a return trip to Maui, where we had our honeymoon.

Lastly, I'd like to have a hefty down payment on a house (right now we are renting).

So this is the breakdown:
$110,000 - Saved
-$15,000 - Child
-$10,000 - Anniversary Trip
-$35,000 - Home down payment
---------
$50,000

I would like to start investing in real estate with this $50K, using it as a down payment on our first investment property. I am looking for insight into whether or not this is a good use of this money. If you had about $100-$120K at age 26 what would you do with it? Just invest it and pay for everything else out of your paycheck? Let it compound in an index fund? I know it varies by the person, but consider my situation.

Thanks in advance!
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Old 09-21-2010, 10:01 AM   #2
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Fist- have at least 6 months of expenses in a savings account. Then, fully fund any IRA's and 401's you may be eligible for.. Personally, I'd then invest in a portfolio of stock mutual mostly, and some bonds after that.
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Old 09-21-2010, 10:05 AM   #3
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Quote:
Originally Posted by RetireUnder40 View Post

So this is the breakdown:
$110,000 - Saved
-$15,000 - Child
-$10,000 - Anniversary Trip
-$35,000 - Home down payment
---------
$50,000
Just a couple of thoughts & questions
-$15,000- Child - does this include the new home furniture?
-$35,000 - Home down payment - 20% = 175K home - does this sound correct for the area where you want to live
New home costs missing - closing costs; and misc move in expenses - they add up

Moving costs to new location?

Emergency fund missing

Others with more experience in real estate investment but I would focus on other investments and your (&wife's) new job and new family. And while doing that grow your nest egg and research real estate in your area.
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Old 09-21-2010, 10:55 AM   #4
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+1 on the 6 months expenses in a saving account.

Fully fund your ROTH

Think about a 529 plan for your expected arrival.

If you want to invest in real estate I'd recommend buying a 2 family or duplex home. That way you can can live on the premises and deal with issues easily. If you buy a single family home I wouldn't invest anything else in real estate as I think it messes up your asset allocation.

For mutual funds I'd just index with vanguard, 33.3% Total Stock market, 33.3%, Total Bond market, 33.3% International equity.
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Old 09-21-2010, 11:22 AM   #5
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As a parent with one freshman in college, plus a 17 and 14 year old in the wings, I'd recommend putting a few thousand in a college savings account and then add to it regularly. You'll be amazed at how fast that tuition bill arrives in the mail!
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Old 09-21-2010, 11:25 AM   #6
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This may sound harsh, but: if you're planning to spend $15K on a new child's equipment and $10K on a vacation, I wonder how LBYM you are in other areas. Pretty well anything which you spend on a baby is really money spent on you. (I still remember our son's first Christmas: he was six months old and the only thing he played with was the wrapping paper.)
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Old 09-21-2010, 11:31 AM   #7
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Lots of good advice here.

If you do decide to invest in real estate rental property, as NUN suggested, start small & see if you have an aptitude for it. Real property requires maintenance, tenants create issues, appropriate business decisions need to be made. If for some odd reason you like this investment venue, then I would move on up subsequently to Multifamily Properties which are generally better at generating revenue and easier to manage than a lot of equivalent housing units.

What ever you decide, there is always risk involved.
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Old 09-22-2010, 02:58 AM   #8
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I would not so much focus on and assume what I will have saved in 4 years but focus on how to save every single day.
What is your actual net worth? How much have you saved each month in the last year?
How did you invest that?

Seriously consider with DW to track expenses with lots of detail day to day in writing. You may have paid off some debt in the last year and assume that you just will save the same amount in future. Make sure that you really do it and that you do not fall into the "next month we will save" trap.

While you put together your emergency fund and more get some good books on money management from the library and study to find out about your risk tolerance, ups and downs of various investment vehicles, handling of mortgage payments. You will find lots of recommended books in this forums, too.
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Old 09-22-2010, 06:52 AM   #9
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I think our initial child was a $20 co-pay and $10 a week for diapers. We didn't buy any junk and got all kinds of stuff from friends and family who were only too happy to give away their baby stuff. I think $15,000 is waa-a-a-a-y too much unless you are buying a car to take the kid home from the hospital.
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Old 09-22-2010, 08:17 AM   #10
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Originally Posted by BigNick View Post
This may sound harsh, but: if you're planning to spend $15K on a new child's equipment and $10K on a vacation, I wonder how LBYM you are in other areas. Pretty well anything which you spend on a baby is really money spent on you. (I still remember our son's first Christmas: he was six months old and the only thing he played with was the wrapping paper.)
The other thing to keep in mind is that your child will outgrow the furniture/clothes/toys etc. VERY quickly.
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Old 09-22-2010, 08:38 AM   #11
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Advice 'on counting your chickens before they hatch (and kids)' is hard to do.
(After re-reading your post, no one is pregnant and you don't have 100k at the time of posting)

Things and events could change by then. Dollar cost average into something after you have maxed out the tax defer accounts.

15K for Baby Stuff - You are not the first to need it. There is so much nice free/used/out grown stuff available. Keep an eye out and save some/lots of money.

10K vacation - Never spent that on a vacation and I would sure never spend that on someplace I have already been.
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Old 09-22-2010, 08:41 AM   #12
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Originally Posted by chris2008 View Post
I would not so much focus on and assume what I will have saved in 4 years but focus on how to save every single day.
What is your actual net worth? How much have you saved each month in the last year?
How did you invest that?

Seriously consider with DW to track expenses with lots of detail day to day in writing. You may have paid off some debt in the last year and assume that you just will save the same amount in future. Make sure that you really do it and that you do not fall into the "next month we will save" trap.

While you put together your emergency fund and more get some good books on money management from the library and study to find out about your risk tolerance, ups and downs of various investment vehicles, handling of mortgage payments. You will find lots of recommended books in this forums, too.
i agree with this completely. i'm young as well, and while i track my NW monthly (mainly to have a record), i still focus in on the day to day savings opposed to obsessing over what it may be. we have our plan which has been balanced with a lifestyle we want to achieve. and we do all we can each day to try and minimize our spending and increase our savings.

we plan to have kids as well, and i have avoided "putting a price tag" on having kids. it's a decision we have made and we will minimize our costs along the way (we already have a closet full of baby clothes for both genders given to us by relatives) as much as we can. que sera sera.
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Old 09-22-2010, 09:28 AM   #13
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I echo Dex on the homeowner expenses and jayc on the vacation. Is that anniversary trip absolutely necessary (e.g. someone special is dying abroad that you must see now)? If not, I suggest you squirrel away that $10K as you'll need it for your home.
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Old 09-22-2010, 09:31 AM   #14
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Hi Retireunder40....First of all...ditto what others here have said. As I understand it this money is what you have projected in the future so you don't have it "yet". Still..good for you for planning ahead! I suggest you think seriously about where you want to be in 15 or so years ...to see what you need to do to get there. Work backwards...from your target goal. Then determine what you can spend and on what. It's worth the excercise.
Second, you don't mention what you will be doing once out of the military. That is key...for you to be able to "assume" your finances will either be the same or better.
And it dictates the answers for the questions you have asked here. Just my opinion.
For ex: are you going to need some of that money for education to prepare yourself for a new career....etc.
As others have said, Baby should not cost you 15K...especially if all medical expenses are picked up by the military. Anniversaries...are "over rated" especially when spending 10K on them at your age without having substantial assets behind you. Yep..I say that even as a woman!!
Those that are successful forego...the "expensive wants" or at least delay them until later....AFTER...they have built themselves a "cash cow".
The 6 month cushion and downpayment for the house and investing the rest .are about the only things worth serious consideration.
Advice I also gave my daughter who is also 22...and received a large inheritance from her grandfather. Don't spend it...invest it for your retirement. It will compound on itself and be worth way more to you in the future than satisfying a "want" in the moment.
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Old 09-22-2010, 11:29 AM   #15
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This may sound harsh, but: if you're planning to spend $15K on a new child's equipment and $10K on a vacation, I wonder how LBYM you are in other areas.
I say go to Maui before you have kids, but don't spend 10K! That isn't LBYMs. Book on Expedia. Stay at a condo and make your own breakfast and lunch. Eat out on your lanai, by the pool or have a picnic on the beach. Look at the Entertainment web site to see if their Hawaii books have any Maui deals that make it worth buying the book. Spend time doing free or cheap stuff like gardens, scenic drives, and snorkeling and swimming off the beach. Since you don't have kids go in the off season for cheaper rates. Stay in Kihei (sp?) instead of the tourist trap areas. Eat at some place moderately priced restaurant and go to the swanky restaurants on the beach with views for a drink later on.

As for the kids stuff, for your fist child, people done having kids may give you stuff for free, you may get stuff from baby showers or gifts from relatives. The things I would buy brand new, if you don't get them as gifts, are car seats, cribs, play pens, etc. to make sure everything meets the latest safety standards and nothing is under a safety recall.
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Old 09-22-2010, 12:44 PM   #16
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Looking at your earlier threads this may be another case of "here we go again", but other military reading this board may benefit from the info in this post as well, so I'll make it more general.

My apologies if this seems overly critical. You're far ahead of your peers in terms of assets and planning (at least five years ahead of me), and money may be the least of your problems. Figuring out what you want to do with it will help you put realistic numbers on the costs.

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I am currently 22 years old and a military officer. I am married and my wife and I are living below our means. Right now we are assuming we will be leaving the military in about 4 years.
This may seem like a nit-picking distinction, but everybody leaves the military eventually. That's easy to do. Your perspective might be better framed on what you're going to do that's going to cause you to leave the military. It's not your departure that's significant, it's your journey & destination. If you're leaving for a graduate degree, you could do some portion of that on active duty. OK, I see the MBA on active duty is already in your plan. If you're leaving for a better quality of life then there's a wealth of different military specialties or the Reserves/NG. (FIREup2020 knows what she's talking about.) If you're leaving because you only have a four-year obligation, then you might want to keep an eye on your options while waiting for your assignment officer (or another specialty's assignment officer) to tap into the pool of bonus money to tempt you to change your mind.

In other words, what are you planning to do that would require you to get out? Would you stay in the military if you could do whatever it is while you were on active duty or in the Reserves/NG?

I don't mean to preach to the choir; you may have already figured out this step. It's just that the "This sucks, I'm outta here" attitude frequently gets in the way of planning. Five years from now you might find yourself barefoot in the kitchen with a baby in one arm and dinner fixings in the other. That's not necessarily a bad idea (it worked for me) but it's better if it's your plan.

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At that time we look at having our first child. I would like to have about 15K set aside for the initial costs for that. Hopefully there won't be much to any for medical because we plan on having the child while I am still in the service. The 15K would be for furniture and misc expenses.
Yowza-- this would be one of the best-capitalized startups ever!

We raised our kid on hand-me-downs, garage sales, and Goodwill. (Incidentally it taught her the value of shopping at Goodwill and Craigslist, habits that are serving her well in college.) The only furniture you'll care about for the first year is a crib and maybe a changing table, and the biggest "misc" expense would be a combo stroller/baby carrier/car seat. Family and the baby shower will supply you with a couple months of diapers.

A nine-month pregnancy seems to last forever, and there'll be plenty of time for Craigslist, garage sales, & thrift shops. You're LBYM, you'll find plenty of bargains.

$15K might be a good number for full-time newborn childcare. (Or would that be your job while your spouse is teaching?) It's also a great start on a college fund, although you may not want to overcapitalize that project either.

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Also, it will be our 5 year anniversary and I'd like to set aside about 10K for a return trip to Maui, where we had our honeymoon.
Again, double yowza. Maybe that's the budget for flying first-class to a Kapalua resort or for renting Thompson Ranch from Oprah, but that amount will get you an awful lot of Ma'alaea condo on VRBO.com or one of the veteran's rentals websites like Vacations for Veterans from Veterans Holidays. Depending on the activities you have in mind, you might have a lot more left over than you expect.

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I would like to start investing in real estate with this $50K, using it as a down payment on our first investment property. I am looking for insight into whether or not this is a good use of this money.
The "advantage" of real estate investing is that it keeps landlords from frittering away their money by locking up large amounts of capital in very illiquid, depreciating assets.

OTOH you'd have to be a landlord, and that takes a certain special type of personality. Even if you already have that experience, I found these two books to be very helpful:
(1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) and
(2) Landlording by Leigh Robinson (7th edition or later).

You might also want to read Arif's posts, another veteran who's done quite well with landlording. A lot of your success depends on your access to cheap real estate, good tenants, and high rates of return. Otherwise you're working awful hard for 3-4% APY that could be just as easily realized by an investment portfolio of blue-chip dividend stocks.

I think your plan to enrich yourself through professional property-management companies will certainly enrich the professional property-management companies. There are better ways to enrich yourself.

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If you had about $100-$120K at age 26 what would you do with it? Just invest it and pay for everything else out of your paycheck? Let it compound in an index fund? I know it varies by the person, but consider my situation.
Yep-- I'd diversify across 2-3 low-cost equity index funds, either mutual funds or ETFs. If I'd decided on the landlord lifestyle (and expected to be able to stay in that area for the next decade or so to make it worth the effort) then I'd put the down-payment money in a CD.

You're probably already planning some sort of bridge career and maybe some at-home parenting. That may or may not be complemented by a Reserves/NG career (especially IRR) or some other paid employment in addition to landlording. Once you plan those aspects of your life it'll be a lot easier to figure out what you're doing with the assets and how they should be allocated.
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Old 09-22-2010, 03:22 PM   #17
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Otherwise you're working awful hard for 3-4% APY that could be just as easily realized by an investment portfolio of blue-chip dividend stocks.
Yes, with real estate you have to factor in the lost opportunity cost of your time. Investments like index funds, CDs and TIPS take close to zero time after purchase. But with real estate you have to figure in your time in looking for the properties, arranging financing, upkeep, finding tenants, etc.
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Old 09-22-2010, 03:50 PM   #18
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Real estate is good if you don't mind the kind of boss you are. Takes a fair dinkum of self actualization. Took me and my degree in the high dollar field of philosophy to 50 free and clear units. Did have to work for the man for a while - but my highest return was $15k/yr. from corporate. Haven't worked at anything else since I was 45 or so and got my BA when 27. Rental profit, even after giving 10% of gross rents to a manager, excedes my planned retirement income by about 20%.

Of course, if you think that stock research takes no time at all and you have lots of faith in going along for the ride with the rest of the crowd, secure in the knowledge that the corporate management and funds managers have your best interests in mind and exist only to make you money without you doing anything, well stocks are where it's at!

Rentals are work - no doubt. Have this antiquated notion that return and effort have a direct correlation.
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Old 09-22-2010, 04:57 PM   #19
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Of course, if you think that stock research takes no time at all and you have lots of faith in going along for the ride with the rest of the crowd, secure in the knowledge that the corporate management and funds managers have your best interests in mind and exist only to make you money without you doing anything, well stocks are where it's at!
Stocks are not the only alternative investment to real estate. I make the most money on a per hour basis working on our small businesses. I just invest the savings in simple stuff like TIPS, CDs, mutual funds, etc. Real estate works for a lot of people but you can't just look at your rate of return, you after to look at your return after factoring in your time and how much your time is worth.

Quote:
Rentals are work - no doubt. Have this antiquated notion that return and effort have a direct correlation.
Not always. People who write a book and have it become a best seller may make easy money for years they do not do any extra work. To me those are the really cool ways to make money - minimal effort, maximum earnings.
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Old 09-22-2010, 05:28 PM   #20
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Thanks everyone for your replies thus far. As far as the 15K for the child, I suppose that is a bit extreme and I realize that now. Obviously I've never had a child and that 15K would be set aside as a more "child emergency fund". That could eventually turn into a start of a 529 for him/her later on.

I understand everyone's opinions on the expensive vacation. The LBYM people here are in an uproar lol. Keep in mind, we will only have that much saved in the next 4 years because of our LBYM. This trip is kind of our release from that, but the trip is capped at 10K, so I will try to cut down on that cost, however when it comes to vacation, I don't like to cut corners (just how I do things, to each their own).
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