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Need some Advice for a 22 y/o recent graduate!
Old 06-15-2014, 11:33 AM   #1
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Need some Advice for a 22 y/o recent graduate!

Hello All,

This is my first post on the forum after lurking for a while! I will say, I've been on a real personal finance and ER kick lately, but seeing what some of yall have accomplished has only increased my interest in FI!

Apologies for the book:

So, I just graduated with a Finance/Economics degree and got a job as a licensed sales rep for a State Farm Agent while I figure out what path I would like to take. I've been working there for about 3+ months fully time. I also still work a couple nights/weekends at a restaurant to make some extra cash while I'm young and don't have a family.

So, where I'm at currently. I'm expecting to make 35-40k this year at my sales job (plus a 3k year end bonus) and another 14-17k at my restaurant job.

Currently I am about to finish maxing my IRA for this year (got a late start on my IRA last year). Unfortunately, I do not get an 401k through either of my jobs.

Here is where I'm at:

Roth IRA: Roughly $8500 (by the end of next month)
Emergency Fund (Cash) : $2200
Permanent Life Insurance: $5300 cash value
Cash: $22,000

The permanent life insurance is something my dad setup for me when I was 5 and will be done in 5 more years ($50 month) so its something I would like to hold on to as an emergency fund. I figure between the cash value in that and my actual cash emergency fund, The emergency fund is set.

I will have maxed my Roth IRA as of next month and I'm wondering what my next move is. I am wanting to buy a home in the next year or two, with that $20,000 set aside as the start of the down payment fund (eventually want to get it to $40,000).

So I guess what I'm getting at is, should I leave that $20,000 in a bank account to keep it safe? Invest in inflation pegged bonds? Or should I risk it since I'm a couple years away?

Also, since my IRA is maxed this year and I don't have a 401k, I was wondering if I should start investing in a general brokerage account. The only issue is, I don't want those gains to be realized income.

Anyone have any advice for a young investor getting started?
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Old 06-15-2014, 11:59 AM   #2
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Save your $20k where it is. Save 15% of everything from here on out, Roth first.

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Old 06-15-2014, 12:35 PM   #3
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Make sure the $20k is earning at least 0.80% at an online bank account, or in a comparable CD. Not sitting around earning nothing. Since bonds have the whole increasing interest rates thing hanging over them, I'd avoid them. Stock funds are too risky for a two year period.

Yes, if you can't invest any more in your tax advantaged accounts the rest of your long-term/retirement funds should be invested in a taxable account. You may have some fund distributions that would generate some income, but it shouldn't be much. Target Retirement funds are easiest, with lots of diversification in a single fund. Or you might start with something like an S&P 500, all U.S., or all World ETF. An ETF might avoid some of the capital gains distributions a mutual fund might give you. The main thing will be to buy whatever and hang on to it. Selling triggers most of the tax consequences.
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Old 06-15-2014, 01:08 PM   #4
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Buy 100 shares of KMB and forget about it. Keep the rest as an emergency fund.
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Old 06-17-2014, 06:33 PM   #5
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I'd get your Emergency Fund up to at least 10K or thereabouts (3 months living expenses minimum), and your target goal for your house fund is 20% of the total value to avoid having to pay PMI on a home loan. If you're looking at 3 years or more before you'll have 20%, I'd use at least a balanced fund (with global stocks) to save. So my view on a home is you can't afford it if you have to pay PMI.

I'd keep maxing the Roth, and wouldn't suspend that.

Work on setting up a lifestyle that will have you living on no more than 85% of take-home pay but, IMO, 80% is even better.
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Old 06-17-2014, 07:42 PM   #6
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You want to keep your house down payment liquid and safe so I would stick with bank savings or CDs. You will loose a little to inflation, but it is a short time period. As for the emergency fund, you are young, how much you need depends on if you can temporarily move in with your parents if things turn sour.

If you really want to buy a house I would make that the priority, since house prices will likely rise in faster than your bank savings or CDs. At 20% down, 40K will get you into about a 200K house. If a house is your priority now (not a bad idea in my opinion if you intend to stay put for a while) then make that the main savings goal. Live way below your means until you get the down payment, and make sure you buy a house you can reasonably afford, preferably without the second job.

Sounds like you are way ahead of most people your age, and way ahead of where I was at that age. I am sure you will have a prosperous future whatever you decide.
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Old 06-17-2014, 08:46 PM   #7
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Thanks for all of the replies guys and gals! As for my emergency fund, I consider it about $7500 right now between the cash-value in the life insurance and the actual cash. The last two months I've been living off around $1300 a month so that would be about 5 months. I think I'll try to save a bit more and get that to 6 months. The house is a year or two away simply because I feel like I will be moving within that time period and try to put down some roots. I think $40,000 is a good goal to have, so I guess I'll just try to get there in the meantime with the leftover money (after maxing my IRA). On my IRA, currently I'm sitting in Vanguard's SP500 Investor Shares. Should I be using the ETF instead? The expense ratio is lower and it seems like the exact same thing. Thanks for all of the insight guys, I really do appreciate it!
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Old 06-18-2014, 08:13 AM   #8
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Quote:
Originally Posted by adfilar1 View Post
On my IRA, currently I'm sitting in Vanguard's SP500 Investor Shares. Should I be using the ETF instead? The expense ratio is lower and it seems like the exact same thing. Thanks for all of the insight guys, I really do appreciate it!
I see no issue using a mutual fund (personally i prefer those over ETFs), but what I strongly consider is that you start out of the gate with a more traditional asset allocation appropriate for your age, so a great "one-fund" solution would be Vanguard LifeStrategy Growth Focus (VASGX). You still get a reasonably low fee 0.17%, but also get much needed international stock exposure as well as 20% bonds. In theory, 100% stocks would be a great strategy for the first 20 yrs but the problem is, in practice, very few have the temperment for it. And in fact, even from just a return perspective, an S&P 500 index would have its work cut out for it beating VASGX on return, and that is saying nothing about an almost certain reduced volatility.

Granted you only have $8500 at stake at the moment, but still, why not have a reasonable asset allocation since its so easy to do it via VASGX or something similar.
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Old 06-27-2014, 09:42 AM   #9
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Quote:
Originally Posted by heeyy_joe View Post
Buy 100 shares of KMB and forget about it. Keep the rest as an emergency fund.
That's lousy advice, Joe. Why in the world would you tell an inexperienced investor (or any investor, really) to put 30% of his net worth into one stock?

@adfilar1: Since you plan to buy a house in a short while, I personally would not put my down payment money into the stock market. I'm not saying *nobody* should ever do that, but I wouldn't feel comfortable putting that money at risk.

But if you are saving for retirement, you absolutely need significant exposure to equities in order to beat inflation and generate decent returns. Stick to a small number of ETFs, a target retirement fund, or other low-cost index investments. Keep costs to a minimum, and do not trade, except with a small amount of "fun money" if you have to!

Good luck, you are on the right track.
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Old 06-28-2014, 10:07 AM   #10
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Congrats on your graduation and starting on your personal finance and ER journey.

I would dip my toe in investing like setting up an automatic investment in an indexed fund. Then read up about concepts like indexing, dollar cost averaging, asset allocation.

Also, remember to have fun too...nice to be 22.
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Old 07-10-2014, 07:38 PM   #11
Confused about dryer sheets
 
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Hey yall, Thanks for all the great advice! Quick update: I wound up having a really great end of the month and was able to make enough in commission bonuses to max my IRA a month earlier than I expected. Where I'm now facing a dilemma is whether or not to keep investing, or quickly pay down the remaining student loans I have. I have about a $5000 balance with 3% interest and I'm thinking maybe I should take half of my extra money and put it towards loans and the other half towards investing. I was going to originally just pay 150/mo and knock them out while taking advantage of the low interest, but now I'm wondering if I should just eliminate them. What do yall think?
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Old 07-10-2014, 08:37 PM   #12
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Paying down your loan gets you a 3% return on your money, not bad for these days. Of course you might make more investing, but then again you might not. Your idea of half and half seems sensible to me. But if it were me I would probably opt to pay down the debt first before investing more, be rid of the debt, as you have already maxed out our IRA with investments. Either way you seem to be on the right track and doing well.
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Old 07-10-2014, 08:57 PM   #13
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For me it would depend on the time frame. If the loan is longer than maybe 5 years I'd keep it and invest the money in my normal AA. If it is shorter, then I might pay it off. Unless I had an interesting short term investment in mind.
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Old 07-17-2014, 05:15 PM   #14
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That $5300 "Permanent Life Insurance" doesn't sound like a good deal… If you have to pay $50 month for 60 more months ($3000), and dad's been paying into it for 17 years… Unless something is missing in the information, if insurable & you need it, I'd get a term policy with a LOT more coverage for $50/month.
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Old 07-18-2014, 01:01 PM   #15
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I'm going to go out on a bit of a limb here with my advice which is: don't buy a house (yet). Yes, the market is low(er) in some places, but you are quite young and just starting out. I made the mistake of buying a place at around your age and wish I had just rented instead. Owning a place can really be an anchor and may hold you back from either cool experiences or great opportunities, or both.
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