Personal Finance Advice and Education! (4 Viewers)

[No. 16]

I'm turning to the FBGs to help educate me regarding personal finance and planning. Thanks to my parents hard work and selflessness I was lucky enough to graduate from college without any loans. They live a comfy life, but as immigrants to the US I feel that they did not learn how to make their money work for them when they were younger. So hopefully you guys can help me out with some advice, recommend some books, and/or blogs for me.

I tried wading through the web, but as many of you may know there are thousands of personal finance books. It's a bit overwhelming as a complete n00b to 401ks, Roth IRAs, mutual funds, stocks, portfolios, etc. There's just so much out there it. Hopefully, you guys can point me in the right direction.

Here's a little bit more info about me to help out:

- 26 years old, single, and lives in CA.

- Current job/1st job out of college is per diem in my career field - so no benefits. Looking to land a full-time gig as I gain more experience.

- No debt at all. College was paid for with my parent's help and working as a waiter, still driving around my first car from HS (100k + miles) which is paid off, and no credit card debit (well 2k on a card with 0% APR for 9 months - planning to pay it off by then). I find these are the 3 main debts that most college graduates have. So basically the things I "have" to pay for are only insurance (car and medical) and rent. So I should have a decent amount to save.

I plan on getting married, having kids, owning a home, and blah blah blah. You know the drill. I will put effort educating myself, but again I just don't know where to start. I've read that saving 20% of your paycheck is a good start and I plan on doing that, but there has to be better ways to make your money work for you rather than sitting in a savings account.

Also, this is going to be my first year making big bucks, so what steps should I take to make sure I can keep as much of my money as possible for myself rather than Uncle Sam?

Thanks for the help.

 

[tommyGunZ]

Congrats on being educated and debt free at age 26. You're way ahead of the game already. Without more info re: your options (does work offer 401k, will you have a substantial inheritance, etc.) and life goals (retirement, kids, etc) it's tough to give specific advice.

Generally, avoid picking up a hard drug habit, stay employed, and stay debt free until your early 30s when its time to chill and all that young dumb energy is gone. If you can do that and you're gaining experience while making small contributions to savings and/or 401k accts, you'll be golden.

You're one of the best posters on the board.

 

[Balco]

Invest in low cost index funds.

Here is a fantastic, easy to read book. Of all the personal finance books I have read, this has been by far the best.

The Boglehead's Guide to Investing

 

[honky kong]

Stuff on this page can give you a good place to start without needing a degree in finance to understand it.

 

[IvanKaramazov]

Invest in low coast index funds.

Max out your 401K if available. Max out your Roth or Traditional IRA. Money that you save in your late-20s and early-30s is huge due to compounding. You're doing the right thing by thinking about this stuff now. As long as you're socking money away into something semi-intelligent, it's tough to go wrong.

 

[sports_fan]

The Bogleheads' Guide to Investing is IMO one of the best books to start with. It starts with the very basic (you don't need to know anything to start with) but covers a wide range of topics. It also points you in the right direction to learn more with book and website recommendations at the end.

There's also a great forum (http://www.bogleheads.org/forum/index.php) where the authors of this book and others post regularly.

Highly recommended.

EDIT: Balco beat me to it.

 

[Steve Tasker]

Invest in low coast index funds.

Max out your 401K if available. Max out your Roth or Traditional IRA. Money that you save in your late-20s and early-30s is huge due to compounding. You're doing the right thing by thinking about this stuff now. As long as you're socking money away into something semi-intelligent, it's tough to go wrong.

I'm unsure about how to handle this, myself. I know that traditionally, this has been considered the best solution....but I'm starting to get a bit worried about the economy. I don't know what I'd do if I was 35 and lost a good majority of my savings because I was investing too aggressively.I am 23, nearly 24, and make a pretty good buck for my age/experience level. I'm not rich, obviously, but I do fairly well for myself. I maxed a Roth IRA last year, and maxed by 401k match (our firm has a safe-harbor, so we get a fully-vested 3% regardless of our own contribution). I contribute a portion of my salary as well.I've been wondering how much I should contribute to it? I don't have many expenses...I could probably contribute the maximum this year, but I was extremely wary last year and ended up just putting a good portion of it into a savings account. The risk-averse part of me has more faith in the FDIC than the guys managing the funds that I invest in, I guess.

 

[Chadstroma]

Invest in low coast index funds.

Max out your 401K if available. Max out your Roth or Traditional IRA. Money that you save in your late-20s and early-30s is huge due to compounding. You're doing the right thing by thinking about this stuff now. As long as you're socking money away into something semi-intelligent, it's tough to go wrong.

Set up automatic payments either out of your paycheck (if at all possible) or out of your checking account. Or in other words, pay yourself first before you pay any of your bills or go out for the weekend. Send the money into your investment accounts. It sounds like you can not do a 401k, so set up a traditional IRA and a ROTH (I like both, but if you favor one, favor the ROTH). Make sure to set up a liquid savings account (use an online savings or credit union savings account to get the most interest) as an emergency account. Don't touch it unless it is an emergency and keep a target of 6 months worth of living expenses in it. If you living expenses go up, put more in it to keep up with that 6 months target. You can also set up a ladder of CD's. What that is is that you have several CD's that mature at intervals of 3, 6, 9, 12 months or whatever you feel comfortable with. As the first one matures, you put it in a longer term CD and gain the higher interest from that in locking it up. After time, you have all the CD's in longer term CD's getting the highest interest but have one maturing every few months or so which gives you access to cash. Then, you can also set up an investment account for long term saving. Pay yourself first in it, throw it into a low cost index fun and forget about it. As you make more money and gain more wealth from these activities, get yourself a flat fee financial advisor to adjust as needed.

 

[No. 16]

Invest in low coast index funds.

Max out your 401K if available. Max out your Roth or Traditional IRA. Money that you save in your late-20s and early-30s is huge due to compounding. You're doing the right thing by thinking about this stuff now. As long as you're socking money away into something semi-intelligent, it's tough to go wrong.

Set up automatic payments either out of your paycheck (if at all possible) or out of your checking account. Or in other words, pay yourself first before you pay any of your bills or go out for the weekend. Send the money into your investment accounts. It sounds like you can not do a 401k, so set up a traditional IRA and a ROTH (I like both, but if you favor one, favor the ROTH). Make sure to set up a liquid savings account (use an online savings or credit union savings account to get the most interest) as an emergency account. Don't touch it unless it is an emergency and keep a target of 6 months worth of living expenses in it. If you living expenses go up, put more in it to keep up with that 6 months target. You can also set up a ladder of CD's. What that is is that you have several CD's that mature at intervals of 3, 6, 9, 12 months or whatever you feel comfortable with. As the first one matures, you put it in a longer term CD and gain the higher interest from that in locking it up. After time, you have all the CD's in longer term CD's getting the highest interest but have one maturing every few months or so which gives you access to cash. Then, you can also set up an investment account for long term saving. Pay yourself first in it, throw it into a low cost index fun and forget about it. As you make more money and gain more wealth from these activities, get yourself a flat fee financial advisor to adjust as needed.

Thanks this sounds very similar to what I just finished reading in this About.com article: 10 Steps to the Complete Portfolio.Yah right now 401k is out of the picture. From the About.com article it states that the ROTH has a max of 95,000 for single and 150,000 for married. Right now I am well under those marks, but what happens in the future if your annual income exceeds those limits?

With no 401k for now it sounds like the best plan is to start a 6 month liquid savings and then begin a ROTH account. Is this the recommended course of action for the time being?

 

[Chadstroma]

Invest in low coast index funds.

Max out your 401K if available. Max out your Roth or Traditional IRA. Money that you save in your late-20s and early-30s is huge due to compounding. You're doing the right thing by thinking about this stuff now. As long as you're socking money away into something semi-intelligent, it's tough to go wrong.

Set up automatic payments either out of your paycheck (if at all possible) or out of your checking account. Or in other words, pay yourself first before you pay any of your bills or go out for the weekend. Send the money into your investment accounts. It sounds like you can not do a 401k, so set up a traditional IRA and a ROTH (I like both, but if you favor one, favor the ROTH). Make sure to set up a liquid savings account (use an online savings or credit union savings account to get the most interest) as an emergency account. Don't touch it unless it is an emergency and keep a target of 6 months worth of living expenses in it. If you living expenses go up, put more in it to keep up with that 6 months target. You can also set up a ladder of CD's. What that is is that you have several CD's that mature at intervals of 3, 6, 9, 12 months or whatever you feel comfortable with. As the first one matures, you put it in a longer term CD and gain the higher interest from that in locking it up. After time, you have all the CD's in longer term CD's getting the highest interest but have one maturing every few months or so which gives you access to cash. Then, you can also set up an investment account for long term saving. Pay yourself first in it, throw it into a low cost index fun and forget about it. As you make more money and gain more wealth from these activities, get yourself a flat fee financial advisor to adjust as needed.

Thanks this sounds very similar to what I just finished reading in this About.com article: 10 Steps to the Complete Portfolio.Yah right now 401k is out of the picture. From the About.com article it states that the ROTH has a max of 95,000 for single and 150,000 for married. Right now I am well under those marks, but what happens in the future if your annual income exceeds those limits?

With no 401k for now it sounds like the best plan is to start a 6 month liquid savings and then begin a ROTH account. Is this the recommended course of action for the time being?

I think the max income for contribution is higher than that for single now but I am not 100%. What that is talking about is the contribution to a ROTH IRA. For this year, as long as you make less than $95K (but again, I don't think that is the limit now- the about.com may be out of date or I may not have a good memory ) then you can make up to the max contribution to a ROTH (Something like $6 or 7K for the year). If, in a few years the max income is $110K and you make $120K that year, then you simply can not contribute more to the ROTH but your existing previous contributions are fine within the ROTH. You also want to keep in mind a traditional IRA, specially since you do not have access to a 401k. The difference, in case you do not know, is simply when the money is taxed. A traditional IRA means the money going in is NOT taxed NOW but then taxed when you withdraw it at retirement (or an early withdrawal). A ROTH is money that has been taxed now but will NOT be taxed when you are retired. You might find some tax benefits in funding some money to a traditional now. However, the reason why I said to favor a ROTH is that the chances of having higher taxes in the future is very high.

You should focus on the liquid savings for now for any money you put away that is not retirement based. Look to fund the liquid savings first as that is the priority. Your retirement is several decades away but you may end up needing that emergency money soon. Even more so if your type of work is hit and miss (contract work, seasonal, etc). You can look to ladder a bit later.

 

[No. 16]

DLing The Boglehead's Guide to Investing for my iPhone as we speak!

 

[Truman]

The best thing to start with is a financial plan.

I plan on getting married, having kids, owning a home, and blah blah blah.

These are all financial goals which cost money. Which do you want to do first, and when?

You know the drill. I will put effort educating myself, but again I just don't know where to start. I've read that saving 20% of your paycheck is a good start and I plan on doing that, but there has to be better ways to make your money work for you rather than sitting in a savings account.

You don't really need to know that much if you have less than 50k to invest. Any differences in interest rates or returns will have a fairly minimal impact on your goals.If you want to educate yourself that's a different matter. Sounds like you're interested in buying a home though, you'll do tough to get a better return on a paper investment than you'll save by paying down a home loan.

 

[Sarnoff]

The first thing you have to do is work out a monthly budget. Mint.com is great for this. Once you start seeing how much is going in and out, then you can tackle the rest of the steps.

 

[Dr. No]

When I was your age (which was only 7 years ago).. i was in the same situation.. single, relatively debt free, and making decent money.

Jam the full amount into a Roth IRA for sure, and if you have a company 401k, jam the max (16,500) into that.

you do those two things and look at some of the threads on this board about 401k investing and you'll be golden, like a shower.

there's a thread here on choosing the best rewards credit card, picking the best online savings account, and the best online brokerage... check those out too.

My basic plan has always been to make decent money, and live like I was broke. The rest took care of itself.

You may want to consider getting into real estate (home, condo, etc) while loans are still historically low and prices are depressed... but only if you have 8 mo. of emergency fund, a down payment, and are confident you'll be living in the same area awhile.

 

[tommyboy]

my main advice is read a lot of financial news, learn as much as you can, educate yourself on markets and the #1 thing is manage your money. Don't hand your money to someone else and expect them to do it for you, don't shove money into your 401k and forget about it. Manage it yourself.

just getting into the habit of constantly saving is good. The other side of the net wealth equation is debt, don't blow money you don't have, buy what you need, keep your debt low.

 

[No. 16]

Thanks guys for the help.

It looks like the main thing right now is to save as much money as possible and educate myself so that when I have boatloads I can make smart investments. I'm reading through The Bogleheads book and it's really very interesting. So far everything is explained in a way that I can understand it.

 

[Random]

When I was your age (which was only 7 years ago).. i was in the same situation.. single, relatively debt free, and making decent money.Jam the full amount into a Roth IRA for sure, and if you have a company 401k, jam the max (16,500) into that.you do those two things and look at some of the threads on this board about 401k investing and you'll be golden, like a shower.there's a thread here on choosing the best rewards credit card, picking the best online savings account, and the best online brokerage... check those out too.My basic plan has always been to make decent money, and live like I was broke. The rest took care of itself.You may want to consider getting into real estate (home, condo, etc) while loans are still historically low and prices are depressed... but only if you have 8 mo. of emergency fund, a down payment, and are confident you'll be living in the same area awhile.

 

[Rick James]

The first thing you have to do is work out a monthly budget. Mint.com is great for this. Once you start seeing how much is going in and out, then you can tackle the rest of the steps.

I just enlisted (free) at Mint.com, and I can already see how this will be useful. thanks for the tip

 

[Chadstroma]

The first thing you have to do is work out a monthly budget. Mint.com is great for this. Once you start seeing how much is going in and out, then you can tackle the rest of the steps.

The only reason why I shy away from saying this is the first step is that a lot of people really have problems/issues with monthly budgets. For those that put in the time and effort in them, they can be very helpful. However, for those who can not, you still can save- you simply need to pay yourself first. That works with or without a budget.

 

[Dr. No]

When I was your age (which was only 7 years ago).. i was in the same situation.. single, relatively debt free, and making decent money.Jam the full amount into a Roth IRA for sure, and if you have a company 401k, jam the max (16,500) into that.you do those two things and look at some of the threads on this board about 401k investing and you'll be golden, like a shower.there's a thread here on choosing the best rewards credit card, picking the best online savings account, and the best online brokerage... check those out too.My basic plan has always been to make decent money, and live like I was broke. The rest took care of itself.You may want to consider getting into real estate (home, condo, etc) while loans are still historically low and prices are depressed... but only if you have 8 mo. of emergency fund, a down payment, and are confident you'll be living in the same area awhile.

why is this funny?

 

[No. 16]

I'm am reading through the Boglehead's book, still only 60 pages in, but I was wondering what type of impact has the recent recession and stock market crash has on the advice/information in this book?

The answer maybe there when I finish the book, but it is a question at the back of my mind as I am reading.

 

[Chadstroma]

When I was your age (which was only 7 years ago).. i was in the same situation.. single, relatively debt free, and making decent money.Jam the full amount into a Roth IRA for sure, and if you have a company 401k, jam the max (16,500) into that.you do those two things and look at some of the threads on this board about 401k investing and you'll be golden, like a shower.there's a thread here on choosing the best rewards credit card, picking the best online savings account, and the best online brokerage... check those out too.My basic plan has always been to make decent money, and live like I was broke. The rest took care of itself.You may want to consider getting into real estate (home, condo, etc) while loans are still historically low and prices are depressed... but only if you have 8 mo. of emergency fund, a down payment, and are confident you'll be living in the same area awhile.

why is this funny?

I am thinking the 'golden, like a shower' comment.

 

[Chadstroma]

I'm am reading through the Boglehead's book, still only 60 pages in, but I was wondering what type of impact has the recent recession and stock market crash has on the advice/information in this book? The answer maybe there when I finish the book, but it is a question at the back of my mind as I am reading.

The general idea is that when the market is down it is a good buying opportunity. If you have set up automatic investments (basically taking money out of each paycheck and automatically investing it in your index fund) then times when the market is down are the best of times for you because that is when you will make your return when the market goes back up.

 

[bushdocda]

Good question. Hopefully the book is telling you to have your liquid savings and invest based on your risk tolerance. The market is going to do some wacky #### so shouldn't be into things that are more volatile than you can handle.

 

[No. 16]

I'm am reading through the Boglehead's book, still only 60 pages in, but I was wondering what type of impact has the recent recession and stock market crash has on the advice/information in this book? The answer maybe there when I finish the book, but it is a question at the back of my mind as I am reading.

The general idea is that when the market is down it is a good buying opportunity. If you have set up automatic investments (basically taking money out of each paycheck and automatically investing it in your index fund) then times when the market is down are the best of times for you because that is when you will make your return when the market goes back up.

Sounds good, so basically my timing is poor unless I can rack up enough cash quickly.

 

[No. 16]

Good question. Hopefully the book is telling you to have your liquid savings and invest based on your risk tolerance. The market is going to do some wacky #### so shouldn't be into things that are more volatile than you can handle.

Are things like IRAs and 401ks still considered low risk investments?

 

[Worm]

Good question. Hopefully the book is telling you to have your liquid savings and invest based on your risk tolerance. The market is going to do some wacky #### so shouldn't be into things that are more volatile than you can handle.

Are things like IRAs and 401ks still considered low risk investments?

You can be as risk averse as you want within each of them. Just depends on your asset allocation.

 

[Chadstroma]

I'm am reading through the Boglehead's book, still only 60 pages in, but I was wondering what type of impact has the recent recession and stock market crash has on the advice/information in this book? The answer maybe there when I finish the book, but it is a question at the back of my mind as I am reading.

The general idea is that when the market is down it is a good buying opportunity. If you have set up automatic investments (basically taking money out of each paycheck and automatically investing it in your index fund) then times when the market is down are the best of times for you because that is when you will make your return when the market goes back up.

Sounds good, so basically my timing is poor unless I can rack up enough cash quickly.

No, I would say your timing is good because you are thinking/starting on this young. What is WAY more powerful than timing the market (which trust me, you are never going to do well so don't try it) is the power of time. What you can do is set up a small investment account as you start towards your liquid savings emergency account.... so, let's say that each paycheck you have $100 of cash you can stash away. Do something like putting $90 automatically into a savings account and the $10 towards an index fund investment account. Your priority right now is to get that liquid emergency account up and running but that does not mean you can't start putting money away in a long term investment account.

 

[Chadstroma]

Good question. Hopefully the book is telling you to have your liquid savings and invest based on your risk tolerance. The market is going to do some wacky #### so shouldn't be into things that are more volatile than you can handle.

Are things like IRAs and 401ks still considered low risk investments?

IRA and 401ks are really all about taxation and not about investment. It is what you invest the money in within those tax vehicles that would make it low risk or not. Being young, there is no reason why you could not take on high risk and you certainly do not need to look at low risk for long term investing (like bonds for example). However, how much you emotionally can handle is important. If you are going to freak out because your account takes a big dip, then that is something you have to take into account. An index fund is going to be about 'middle' risk as they are stocks but they are also diversified by many stocks.

 

[Dr. No]

the huge advantage with 401k and roths is this:

401k - no taxation until you start drawing from it at retirement. So you get to take $1000 pre-tax and invest for years and never pay taxes until you're using it as your income.

this sure beats getting paid $1000, getting it taxed down to $750, then trying to invest whilst paying MORE taxes on gains.

Roth IRA - takes post-tax money, but then after invested you never pay taxes on it again (well, except sales tax, etc)

so after you get paid, you jam it in that and can invest to your hearts content and if it goes up you don't have to pay taxes on those gains.

The advantages are so huge from a tax perspective that you really shouldn't invest outside one of these vehicles unless you've maxed them both, or are not eligible for a Roth IRA

 

[Chadstroma]

the huge advantage with 401k and roths is this:401k - no taxation until you start drawing from it at retirement. So you get to take $1000 pre-tax and invest for years and never pay taxes until you're using it as your income.this sure beats getting paid $1000, getting it taxed down to $750, then trying to invest whilst paying MORE taxes on gains.Roth IRA - takes post-tax money, but then after invested you never pay taxes on it again (well, except sales tax, etc)so after you get paid, you jam it in that and can invest to your hearts content and if it goes up you don't have to pay taxes on those gains.The advantages are so huge from a tax perspective that you really shouldn't invest outside one of these vehicles unless you've maxed them both, or are not eligible for a Roth IRA

Or if you are investing long term but not retirement.

 

[iamsmilin]

You're 26 and making good money, you shouldn't be spending any of your money on hookers...just dates!

 

[sports_fan]

I'm am reading through the Boglehead's book, still only 60 pages in, but I was wondering what type of impact has the recent recession and stock market crash has on the advice/information in this book?

The answer maybe there when I finish the book, but it is a question at the back of my mind as I am reading.

The general idea is that when the market is down it is a good buying opportunity. If you have set up automatic investments (basically taking money out of each paycheck and automatically investing it in your index fund) then times when the market is down are the best of times for you because that is when you will make your return when the market goes back up.

Sounds good, so basically my timing is poor unless I can rack up enough cash quickly.

No, I would say your timing is good because you are thinking/starting on this young. What is WAY more powerful than timing the market (which trust me, you are never going to do well so don't try it) is the power of time. What you can do is set up a small investment account as you start towards your liquid savings emergency account.... so, let's say that each paycheck you have $100 of cash you can stash away. Do something like putting $90 automatically into a savings account and the $10 towards an index fund investment account. Your priority right now is to get that liquid emergency account up and running but that does not mean you can't start putting money away in a long term investment account.

I think you're almost to their chapter on asset allocation. They'll touch on the importance of a developing an asset allocation plan which best suits you and on rebalancing (semiannually or annually) to realign your portfolio with you target allocation rates. Rebalancing at regular intervals instills the discipline necessary to buy low and sell high and is necessary to capture the full benefits of diversification. When rebalancing, you're taking resources out of investments which have done well (sell high) and adding them to those which have done poorly (buy low). Buying low and selling high is easier said than done. Many investors lack the discipline to do it.A great book on this is The Intelligent Asset Allocator by William Bernstein. This is a really, really good book, but it's a bit more advanced than what you're reading now.

 

[Grahamburn]

You're 26 and making good money, you shouldn't be spending any of your money on hookers...just dates!

I'd love to have all the money I've spent on dates that didn't end in sex invested in something else. I'd be well on my way to a nice retirement.

 

[ConstruxBoy]

Quick question for investment gurus here: Is there any cost benefit to starting a Roth or Traditional IRA with the fund company as opposed to the broker? I know I can get more selection from putting it into TD Ameritrade than Vanguard, but if I'm OK choosing Vanguard funds, are there less fees buying a Vanguard fund through Vanguard?

 

[NewlyRetired]

Lots of good advice in here. I was in a similar position to you at your age. I followed the steps below which led me to an early retirement. These obviously won't fit you 100% but read through them and understand the general gist.

1) Track all of your expenses over a 6 month period. You don't necessarily have to know exactly where the money is being spent but you need to know how much is being spent. You can use something like Quicken or a simple spread sheet. The key is to track everything.

2) Build up small emergency fund - Put 1-2 months worth of expenses into a safe, liquid vehicle (ie money market).

3) Pay down all high interest debt (ie credit cards.). It is not recommended to do any investing with significant credit card debt. Depending on the interest rate, you could very well pay more in interest than you could make investing.

4) Build up full emergency fund - Put 6-9 months worth of expenses into a safe, liquid vehicle (ie money market). If you are less likely to be out of work for a long time, then you can shoot for the low end (6 months), if you are more likely to be out of work for a long period of time (or are the sole bread winner), shoot for the higher monthly time frame (9 months).

5) Invest in your companies 401K/403B up to the point where you can get the full company match. If your company does not match, move on to step 6 before you invest in a 401k (assuming your company offers one).

6) If you qualify for a Roth IRA, fund it for the legal limit. If you don't qualify for a Roth, move on to step 7.

7) Max out 401k to the legal limit (assuming your company offers one).

8) If you don't qualify for a Roth, max out a traditional IRA to the legal limit

9) If you have kids and if you are saving roughly 20% of your gross yearly income towards retirement, then you can start to feel ok about investing in a 529 plan or a Coverdell plan (which ever one better suits your situation). Note that if you will be getting a pension, the 20% number can drop lower. This is a very rough rule of thumb.

10) Invest in non tax shelter items (Mutual funds, bonds etc). This is as simple as setting up a brokerage account at Fidelity or Schwab

For more conservative investors, you can also pay down your house mortgage, which you could factor in any time after step 4 above. Simply look at your interest rate on your mortgage and then determine if you feel you can get a better guaranteed return by investing.

Eventually go back to step 1 and figure out not only how much you are spending but where you are spending. This will allow you to make better choices and be more nimble down the years as life changes come into play. It will also allow you to have a better model to track your retirement needs.

 

[NewlyRetired]

You're 26 and making good money, you shouldn't be spending any of your money on hookers...just dates!

I'd love to have all the money I've spent on dates that didn't end in sex invested in something else. I'd be well on my way to a nice retirement.

I call that marriage

 

[Dr. No]

newly retired

I agree with that plan entirely.

questions:

1) you can't do a 401k AND a traditional IRA and a roth ira though, correct? I fund my 401k and my wife's to the max, and max our roth iras, but i didn't consider traditional ira.

2) how early was "early retirement" to you? I'd sure like to quit between 55 and 60.

3) are you living more frugally in retirement, at the same level as your working days, or larger?

4) did you retire early because you wanted to, or because your expected lifespan (via family history, health, etc), meant that living past 70 wasn't realistic anyway?

 

[Harry Manback]

I'm turning to the FBGs to help educate me regarding personal finance and planning. Thanks to my parents hard work and selflessness I was lucky enough to graduate from college without any loans. They live a comfy life, but as immigrants to the US I feel that they did not learn how to make their money work for them when they were younger. So hopefully you guys can help me out with some advice, recommend some books, and/or blogs for me. I tried wading through the web, but as many of you may know there are thousands of personal finance books. It's a bit overwhelming as a complete n00b to 401ks, Roth IRAs, mutual funds, stocks, portfolios, etc. There's just so much out there it. Hopefully, you guys can point me in the right direction. Here's a little bit more info about me to help out:- 26 years old, single, and lives in CA.- Current job/1st job out of college is per diem in my career field - so no benefits. Looking to land a full-time gig as I gain more experience.- No debt at all. College was paid for with my parent's help and working as a waiter, still driving around my first car from HS (100k + miles) which is paid off, and no credit card debit (well 2k on a card with 0% APR for 9 months - planning to pay it off by then). I find these are the 3 main debts that most college graduates have. So basically the things I "have" to pay for are only insurance (car and medical) and rent. So I should have a decent amount to save.I plan on getting married, having kids, owning a home, and blah blah blah. You know the drill. I will put effort educating myself, but again I just don't know where to start. I've read that saving 20% of your paycheck is a good start and I plan on doing that, but there has to be better ways to make your money work for you rather than sitting in a savings account. Also, this is going to be my first year making big bucks, so what steps should I take to make sure I can keep as much of my money as possible for myself rather than Uncle Sam?Thanks for the help.

You just described me, only a year younger and stuck in MA.

 

[Steve Tasker]

questions:

1) you can't do a 401k AND a traditional IRA and a roth ira though, correct? I fund my 401k and my wife's to the max, and max our roth iras, but i didn't consider traditional ira.

Per IRS Pub. 590:

You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan.

 

[NewlyRetired]

newly retired

I agree with that plan entirely.

questions:

1) you can't do a 401k AND a traditional IRA and a roth ira though, correct? I fund my 401k and my wife's to the max, and max our roth iras, but i didn't consider traditional ira.

2) how early was "early retirement" to you? I'd sure like to quit between 55 and 60.

3) are you living more frugally in retirement, at the same level as your working days, or larger?

4) did you retire early because you wanted to, or because your expected lifespan (via family history, health, etc), meant that living past 70 wasn't realistic anyway?

1) That is correct. You can not have all 3. You can have a 401k and a trad. or a 401k and a roth. The steps I listed may not have been clear but they were trying to show only invest in X if you don't qualify for Y. I did not mean it to mean you can invest in all 3. Read through the steps again, you should see some IF statements in there.

2) I got out last August at 42. Wife got out about a year before me also at 42.

3) Our plan was to retire only if we could live the identical life style. We only have 6 months of tracking info but so far we are on track. Please note though that due to medical insurance we are actually spending more now in retirement than we did when working(the medical insurance was obviously factored into the plan).

Also note that we do not have large expenses at all. We have owned our house since we were 30. We have only one child who is not very expensive and my wife is VERY frugal in her spending and in general may be the lowest maintenance woman on the planet.

We also plan to SIGNIFICANTLY downsize our home in a few years once daughter is off to college. This will serve to add some cash injection but much more importantly we expect it will significantly lower our expenses. Our home (via taxes) dominates our expenses right now (outside of medical insurance).

In general we were able to retire more because of our low expenses than having a huge nest egg (although having both is obviously what we shot for).

If you want to start tracking for early retirement, there are a TON of great tools out there to get started. I would recommend starting with http://www.firecalc.com/ It is very configurable, runs a great monte carlo simulation and can give you a feel for how to better control your expenses to meet your goals.

4) I hated my job. I only stayed in it because it paid a lot of money. We have been planning for early retirement since our early 20's. Our retirement plan is set for us dieing in early our 90's. Since I am relatively young, I also plan on getting a part time job (low pay, low stress type) in a few years.

 

[Dr. No]

Thanks for that NewlyRetired.

Seems like the anatomy for financial freedom in lieu of absolutely CRUSHING it (making 1/2 million a year or more) is:

1) very frugal living.... no keeping up with the jones disease, modest house, non-luxury vehicles

2) low number of children. 1 in your case... 2 or more and I think you'd have a tough time getting out of work

3) good enough job that you can definitely afford to keep yourself comfortable and sock significant amount away... obviously even with a ultra frugal lifestyle, if you're making 25-50k a year, you're not retiring early.

4) starting EARLY

42 wow... I won't be able to do that unless i can convince my wife to live on a 1 bedroom cabin on my parents farm and not have any children... and be willing to off myself/her if either of us get a serious illness.

the problem with being retired at 42 though is that no one your age is going to be also retired.

problem for me is that my prime earning years will be 45-60 because people prefer going to older dentists and spend more money with older dentists than younger ones.

 

[NewlyRetired]

Thanks for that NewlyRetired.Seems like the anatomy for financial freedom in lieu of absolutely CRUSHING it (making 1/2 million a year or more) is:1) very frugal living.... no keeping up with the jones disease, modest house, non-luxury vehicles2) low number of children. 1 in your case... 2 or more and I think you'd have a tough time getting out of work3) good enough job that you can definitely afford to keep yourself comfortable and sock significant amount away... obviously even with a ultra frugal lifestyle, if you're making 25-50k a year, you're not retiring early.4) starting EARLY42 wow... I won't be able to do that unless i can convince my wife to live on a 1 bedroom cabin on my parents farm and not have any children... and be willing to off myself/her if either of us get a serious illness.the problem with being retired at 42 though is that no one your age is going to be also retired.problem for me is that my prime earning years will be 45-60 because people prefer going to older dentists and spend more money with older dentists than younger ones.

Good comments:1) We certainly were not crushing it but we both made a very nice living. That coupled with the fact that we lived frugally made for a nice combo. We also got a bit lucky in that we purchased our house in 1995 when the market crashed so we were able to pay it off very quickly. By paying it off in the late 90's/early 2000's, we also missed much of the dot com bubble which was also lucky. 2) Low number of children is key. If I had only 2, college alone would say I would have to keep working 5 more years. If I had more than 2.... oi, I don't know how people do it Also having only 1 allowed my wife to work from home so that we never needed day care.3) yeah. Which is another thing people mention on here that I did not understand when I was young (but thankfully my parents did). There is no better investment than investing in yourself. I was "lucky" in that I was guided towards engineering. I put that in "" only because I did not enjoy the field that much at all.4) Seriously, this is actually one of the most important items. Even before we met, my wife did almost the same things I did. We both went co op in college which allowed us to enter the work force with great jobs and plenty of cash. We also both made huge sacrifices to live at home in our 20's before we got married. This allowed us to save much more money than most people our age and allowed for a nice down payment on a home which we were able to pay off pretty early. Once we got the home behind us, it was just a matter of saving saving saving and riding out the ugly waves of the market.No there are not a lot of people retired my age and I am not having the best of luck trying to get the old guys playing cards at the local rec center to play hoop with me But for me this is really just a rest period in my life to be honest. I am going to decompress for a few years and completely enjoy my daughter before she gets to the age that she does not want to be seen with me. Hopefully I can find a quiet job some where in a few years.If you ever want more details or guidance on how to plan send me a PM. I planned for almost 15 years in increasing levels of detail. I almost feel lost now that I don't check my portfolio every 3 minutes (bonds are boring )

 

[Dr. No]

newly retired:

interesting comments.

I agree that "luck" is a component as well. if you had a lot of money invested in the late 90's and knew to pull it out before the dot com bubble crashed, you made a fortune.. same with the housing bubble, etc.

I was surprised that you don't watch your portfolio and are invested in bonds.

I kind of figured the idea would be to build a big enough portfolio and be a competent enough investor that you would monitor your accounts and have enough of a nest egg that profits and returns from your investments would fuel your lifestyle.

Also.. on the children thing... its an interesting comment. It seems like the more a nation evolves, the more likely that the successful people gravitate towards making "me first" choices (nothing wrong with that) and what ultimately happens is that the people smart enough and with proper funding to produce children that would have all the advantages in life to improve their odds at being productive, self-sustaining citizens are the people having the least number of children.

Its happened in europe where birth rates are poor, its happened in australia, and its starting to happen here.

There's no shortage of births in the low income, can't support their children segment of the population... but i see more and more people like yourself and my sister (an MD married to an MD who are having no children) that are choosing money and lifestyle and travel over children. And the only bummer is that it seems like the pathway for anti-darwinism where fittest don't actually survive.

Will society actually go the way of the movie Idiocracy over time? I guess ultimately I won't live to find out, so its fine

 

[siffoin]

Let's talk about some of the real nitty gritty. Guessing what I'll say won't be popular...and I'm just rambling from the top of my head.

#1: Not only is it possible, but it is likely, that the path to retirement used today will be very very different for you 40-50 years from now. You don't live in your grandfathers world...nor do you live in your father's world. You'll be paying into Social Security your entire life...you will never get one penny from it. 401k plans, IRA etc fine. Use them to your advantage while you can. But if you are going to count on those as your nest egg you better damn well become one hell of a great market timer. There are bull markets and there are bear markets. You better plan on retiring a the peak of a massive bull run. Timing the market 3months out is a difficult endeavor...timing 40 years out is tough. Let's say you've grown that next egg to $10m in the year 2050 in a massive bull run...only to see 50% of that portfolio disappear in a matter of weeks because you get unlucky as that bull turns to a vicious bear. Everyone thinks it can't happen to them. History tends to prove otherwise.

#2: How much will you need to retire? If you need $5m today to retire comfortably. In the year 2050 you'll probably need $20m...and that is in today's dollars...not taking into account inflation. We have about 6Billion people on the planet today. In 2050 there will be 9 billion. Every billion we add are not a cumulative force on the finite resources of the planet...they are compounding exponentially. The mere forces of supply and demand will insure that EVERYTHING is exponentially more expensive tomorrow than it is today. Every single aspect of your life (everything you do, everything you buy, everywhere you go) will be in direct competition against someone else far more than we see today. There will be no such thing as any casual use of any resource.

#3: If you work for someone else your life is at least 2x harder. If you work for someone else at least 50% of all your labor goes into the profits for someone besides yourself. You really need to figure out a way to reverse that equation. If you can make 50% off someone elses' labor you'll need only 2 people to equal yourself....now imagine if you can get 100 people working for YOU.

#4: You need to not only live frugally...you need to develop skills of self-sufficiency. Let's take the basics. Can/do you cook for yourself? Can/do you clean for yourself? Do you do your own yard labor? Have you ever grown anything in your life? In a pinch could you mend your own clothes? Do you know how to hunt/fish? Do you live in a place with access to a self-sufficient life? Humans progress when they maximize 2 things- cooperation combined with self-sufficiency. We are overly reliant on other people to do the simplest of things.

#5: In this day and age you need to consider capital preservation ABOVE capital appreciation.

#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW. This is a huge risk...so do your homework...then re-do it again. Your ability to correctly predict that future will go very far in determining your ability to retire.

#7: Getting real about retirement. Realize for most of human history (like 99.9%) people didn't "retire". You worked until you died. It's possible in your lifetime we revert back to that historical norm.

#8: Probably the most important financial decision you will ever make is in the choosing of your spouse. Don't just pick one because she has a great rack or can #### like a pron star. Your spouse needs to be the kind of a person you WANT in a foxhole when the SHTF. A bad investment decision can be made up in a matter of months. A bad spousal decision will take DECADES to overcome- if ever. Let me make this 100% clear. THE SINGLE MOST IMPORTANT FINANCIAL DECISION YOU WILL EVER MAKE IS IN THE CHOOSING YOUR SPOUSE.

#9: There are flocks of black swans circling overhead in every aspect of humanity. All it takes is one and every every aspect of life that you know can change. I could list 500 potential global threats that would dramatically impact the way we currently live. Again all it will take is 1. Odds of one impacting your life before retirement...I'd put at 99.99999999%. How prepared are you to live in that world?

#10: What if nothing happens. What if the future is all bunny rabbits, butterfly's and rose petals. So you become a frugal, self-sufficient person capitalizing on the labor efforts of others; significantly outpacing inflation on your investments, while at the same time preserving capital with hard assets; you work at a job you love so much that you want to do it until you die; you marry someone who is your life-long partner a teammate; and you've passed down all of those qualities to another generation who may have their own set of hardships to face.

 

[NewlyRetired]

I was surprised that you don't watch your portfolio and are invested in bonds.I kind of figured the idea would be to build a big enough portfolio and be a competent enough investor that you would monitor your accounts and have enough of a nest egg that profits and returns from your investments would fuel your lifestyle.

I may have misled you a bit. Let me present some facts to help you understand our process.1) I managed all of our money right up until I retired. I followed advice of a financial radio show I listened to since I got married and generally had 95% of all investments in mutual funds, spread across value and growth.2) When I came close to retirement I realized I needed to switch some of my non retirement portfolio over to bonds so that I could have the income we needed cover our needs. 3) I quickly realized that I had neither the acumen nor the portfolio size needed to get into the type of bonds I wanted. Some of the better bonds require a HUGE influx of cash to buy into it so you really need to be grouped with others who have similar goals and low risk needs.4) So I went to the financial adviser I had been taking advice from for 15 years (see #1) which got me to the point of retirement and I worked with her to start managing my portfolio. She completely revamped the portfolio so that we could have the income we needed today and still have the portfolio grow slowly in the future. In simple terms, our non retirement portfolio is now spread across bonds and balanced funds such that a simple ladder was created to facilitate a constant flow of cash at very low risk. The retirement portfolio continues to be invested in mutual funds but in a more intelligent balance than I was doing.This format allows us to endure a sharp market down swing by making sure we still generate our income but can still grow should the market go up. In general our downswings will be much smaller and our upswings will be smaller as well.5) I still look at my portfolio approx. every two weeks when I do an update of Quicken. It is just not every 5 minutes any more I use to look at it constantly to see how much closer I was getting to my goals. Now that I have achieved my goal and my money is being managed by someone 10 times better at this stuff than I am, I have a lot less need to watch it constantly.Great comments about the kids. That is some heady stuff that I am not really intelligent enough to comment on. Interestingly we decided on 1 kid not because of finances, but because we kind of realized that parenting was not really going to be our strong suit. When we got married we wanted 3 kids. Once we had our first we laughed and said, yup this is it.

 

[NewlyRetired]

#8: Probably the most important financial decision you will ever make is in the choosing of your spouse. Don't just pick one because she has a great rack or can #### like a pron star. Your spouse needs to be the kind of a person you WANT in a foxhole when the SHTF. A bad investment decision can be made up in a matter of months. A bad spousal decision will take DECADES to overcome- if ever. Let me make this 100% clear. THE SINGLE MOST IMPORTANT FINANCIAL DECISION YOU WILL EVER MAKE IS IN THE CHOOSING YOUR SPOUSE.

This is very very true. I would never be any where near retirement if it wasn't for my wife. I see some of my poor buddies slaving away every day, only to see their wives not working and spending like it is going out of style "but our kids HAVE to have this". It is so painful to watch.On the other hand, very few males (myself included) were intelligent enough to realize this in our 20's. Girls understand this concept from birth. Guys are not encouraged to think that way. Thankfully I got lucky.

 

[NewlyRetired]

Let's talk about some of the real nitty gritty. Guessing what I'll say won't be popular...and I'm just rambling from the top of my head.

You'll be paying into Social Security your entire life...you will never get one penny from it.

very very very sad to see this myth still being propagated. It is sadly one of the least understood and most repeated myths in personal finance today.There are a ton of simple ways that Social Security can be fixed. If you really think you are going to get $0 from something that would be so easy to alter I have to say you are greatly mistaken.

There are numerous reports that detail that all they need to so is simply increase the retirement age slightly and decrease the payout ever so slightly and the program would be solvent for another 80 years. And if they start investigating removing the income cap from social security then that will add a ton more funds to the program

Everyone always lumps social security in with medicare. Medicare is the program that is going to be very difficult to fix. Social Security can and will be fixed rather simply in the coming years.

 

[NewlyRetired]

#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW.

This is good stuff.

 

[Dr. No]

Let's talk about some of the real nitty gritty. Guessing what I'll say won't be popular...and I'm just rambling from the top of my head.#1: Not only is it possible, but it is likely, that the path to retirement used today will be very very different for you 40-50 years from now. You don't live in your grandfathers world...nor do you live in your father's world. You'll be paying into Social Security your entire life...you will never get one penny from it. 401k plans, IRA etc fine. Use them to your advantage while you can. But if you are going to count on those as your nest egg you better damn well become one hell of a great market timer. There are bull markets and there are bear markets. You better plan on retiring a the peak of a massive bull run. Timing the market 3months out is a difficult endeavor...timing 40 years out is tough. Let's say you've grown that next egg to $10m in the year 2050 in a massive bull run...only to see 50% of that portfolio disappear in a matter of weeks because you get unlucky as that bull turns to a vicious bear. Everyone thinks it can't happen to them. History tends to prove otherwise.#2: How much will you need to retire? If you need $5m today to retire comfortably. In the year 2050 you'll probably need $20m...and that is in today's dollars...not taking into account inflation. We have about 6Billion people on the planet today. In 2050 there will be 9 billion. Every billion we add are not a cumulative force on the finite resources of the planet...they are compounding exponentially. The mere forces of supply and demand will insure that EVERYTHING is exponentially more expensive tomorrow than it is today. Every single aspect of your life (everything you do, everything you buy, everywhere you go) will be in direct competition against someone else far more than we see today. There will be no such thing as any casual use of any resource.#3: If you work for someone else your life is at least 2x harder. If you work for someone else at least 50% of all your labor goes into the profits for someone besides yourself. You really need to figure out a way to reverse that equation. If you can make 50% off someone elses' labor you'll need only 2 people to equal yourself....now imagine if you can get 100 people working for YOU.#4: You need to not only live frugally...you need to develop skills of self-sufficiency. Let's take the basics. Can/do you cook for yourself? Can/do you clean for yourself? Do you do your own yard labor? Have you ever grown anything in your life? In a pinch could you mend your own clothes? Do you know how to hunt/fish? Do you live in a place with access to a self-sufficient life? Humans progress when they maximize 2 things- cooperation combined with self-sufficiency. We are overly reliant on other people to do the simplest of things.#5: In this day and age you need to consider capital preservation ABOVE capital appreciation.#6: Your investments need to have a minimum capability of 15% annual return (probably closer to 20%). You need to be able to look into the future and determine where growth is going to be and jump in NOW. This is a huge risk...so do your homework...then re-do it again. Your ability to correctly predict that future will go very far in determining your ability to retire.#7: Getting real about retirement. Realize for most of human history (like 99.9%) people didn't "retire". You worked until you died. It's possible in your lifetime we revert back to that historical norm.#8: Probably the most important financial decision you will ever make is in the choosing of your spouse. Don't just pick one because she has a great rack or can #### like a pron star. Your spouse needs to be the kind of a person you WANT in a foxhole when the SHTF. A bad investment decision can be made up in a matter of months. A bad spousal decision will take DECADES to overcome- if ever. Let me make this 100% clear. THE SINGLE MOST IMPORTANT FINANCIAL DECISION YOU WILL EVER MAKE IS IN THE CHOOSING YOUR SPOUSE.#9: There are flocks of black swans circling overhead in every aspect of humanity. All it takes is one and every every aspect of life that you know can change. I could list 500 potential global threats that would dramatically impact the way we currently live. Again all it will take is 1. Odds of one impacting your life before retirement...I'd put at 99.99999999%. How prepared are you to live in that world?#10: What if nothing happens. What if the future is all bunny rabbits, butterfly's and rose petals. So you become a frugal, self-sufficient person capitalizing on the labor efforts of others; significantly outpacing inflation on your investments, while at the same time preserving capital with hard assets; you work at a job you love so much that you want to do it until you die; you marry someone who is your life-long partner a teammate; and you've passed down all of those qualities to another generation who may have their own set of hardships to face.

this sounds like the GordonGekko alias.I agree with #3, 4, 8.Hopefully if SHTF i'll have enough money saved to either move to costa rica or somewhere else where SNHTF or i guess if worst comes to worst you can always go the Duerson route.This is pretty much the opposite of the "i believe in america still" that Buffet wrote just this week in his letter to BH stock owners.YOu might be right.. i'm hoping you're exaggerating a lot.. but i do agree that the idea of retirement is going to become something for the wealthy/frugal and not the average in the near future.