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[GhaleonEB]

Stay the course during this volatility. Hate to say it but if it continues to swing downward it becomes a great buying opportunity.

I've been thinking lately of funneling more of my money into paying off my mortgage. The interest on the loan is only 5% but I have an additional PMI payment on top of it for $160 a month. I've got years before I can get to a point where the payment disappears, so I was looking to start popping in more cash on a regular basis to try and get there faster. I just hate having to flush that money down the toilet. The last few months I've put $100 extra into the principle but I am debating on ramping that up.

I know it's the most illiquid place I can put my money but it is nice to see that mortgage note come down faster as well as the knowledge that 1) Every dollar I put in now becomes approximately $3 in savings through the life of the loan (70 months into the mortgage) and 2) I would have the house paid off at around 50 years old.

Ultimately the goal is to buy off my freedom from corporate america, so I get that maybe this isn't the wisest move.

It might be helpful to think of your mortgage payment as a fixed return component of your investments. Just as a bond gives you a fixed return over a certain time horizon, so does an early payment of principal to your loan (the % of your home loan). So you can look at it both from the perspective of how long it will take to pay off the loan, as well as what % of your investments do you want going toward a fixed return vs. equities.

I don't hold any bonds, but the monthly amount I put into paying down the mortgage early is similar to what is commonly suggested as being a good bond to equity ratio (~20-30%). I keep an amortization schedule of my mortgage that adjusts every month as I enter the next payment, to show the new payoff date. It's useful for running scenarios ("how much would tossing a few thousand at it now help?") and planning.

 

[TangoAlphaLima]

It might be helpful to think of your mortgage payment as a fixed return component of your investments. Just as a bond gives you a fixed return over a certain time horizon, so does an early payment of principal to your loan (the % of your home loan). So you can look at it both from the perspective of how long it will take to pay off the loan, as well as what % of your investments do you want going toward a fixed return vs. equities.

I don't hold any bonds, but the monthly amount I put into paying down the mortgage early is similar to what is commonly suggested as being a good bond to equity ratio (~20-30%). I keep an amortization schedule of my mortgage that adjusts every month as I enter the next payment, to show the new payoff date. It's useful for running scenarios ("how much would tossing a few thousand at it now help?") and planning.

Do you think there's much advantage to paying down the mortgage early incrementally like that? Obviously if you're paying PMI, there's an advantage, as you can get out of PMI once you've got enough equity. But if I'm looking to pay off my non-PMI home early, wouldn't it make more sense to make non-retirement investments that grow, then just pay off the mortgage principal at one time once your investments get high enough?

Obviously there's more risk with investing, but there's also the potential for greater benefit. Let's say you can pay off your home in 6 years by throwing an additional $1k towards principal each month, but instead of doing that, you invest the $1k in mutual funds that return an average of 9% a year. After 6 years of investing, that monthly contribution is worth $98k, with contributions of only $72k, a $26k difference. Alternatively, using that same scenario, you could have paid off the home in only 5 years after your investments had grown to $78k (even after paying capital gains taxes on it, you'd walk away with a couple grand in your pocket extra).

I'm not quite yet in a financial position to be able to start saving money to pay off my mortgage early, but when I am, I think I'll be going the investment route.

 

[Husker86]

Imagine the predicament I'm in where I can, if I choose, pay no principal on my home; just my interest and of course property taxes/insurance.

I've been making payments that would work out to a standard 30 year loan schedule (and my interest rate is 3.75%), but I frequently have to argue with myself over whether or not I should invest that.

 

[RumblingRosco]

-

 

[Chris R]

Vanguard doesn't offer Admiral Shares on the targeted retirement funds from what I could see. Maybe one day I'll spend hours and hours doing my research to move my money into funds that do, but for now the expense ratio is low enough and the returns are high enough that I'm not worried.

 

[Randolph Freelander]

Vanguard doesn't offer Admiral Shares on the targeted retirement funds from what I could see. Maybe one day I'll spend hours and hours doing my research to move my money into funds that do, but for now the expense ratio is low enough and the returns are high enough that I'm not worried.

Vanguard appears to be pretty good about showing you the precise breakdown of what's in their target funds, so if you're so inclined, you can replicate those breakdowns using the admiral funds and achieve lower costs (though their costs aren't terrible in the target funds), or you could alter the mix to be more or less aggressive in certain areas while still using their composition as a guide, checking in every year or so to see how their blend is evolving.

Just as an example, the composition of the target 2035 fund is the following:

57.90%	Vanguard Total Stock Market Index Fund Investor Shares
25.00%	Vanguard Total International Stock Index Fund Investor Shares
13.60%	Vanguard Total Bond Market II Index Fund Investor Shares
3.50%	Vanguard Total International Bond Index Fund Investor Shares

And the 2045 fund:

63.00%	Vanguard Total Stock Market Index Fund Investor Shares
27.10%	Vanguard Total International Stock Index Fund Investor Shares
7.80%	Vanguard Total Bond Market II Index Fund Investor Shares
2.10%	Vanguard Total International Bond Index Fund Investor Shares

 

[GhaleonEB]

Do you think there's much advantage to paying down the mortgage early incrementally like that? Obviously if you're paying PMI, there's an advantage, as you can get out of PMI once you've got enough equity. But if I'm looking to pay off my non-PMI home early, wouldn't it make more sense to make non-retirement investments that grow, then just pay off the mortgage principal at one time once your investments get high enough?

Obviously there's more risk with investing, but there's also the potential for greater benefit. Let's say you can pay off your home in 6 years by throwing an additional $1k towards principal each month, but instead of doing that, you invest the $1k in mutual funds that return an average of 9% a year. After 6 years of investing, that monthly contribution is worth $98k, with contributions of only $72k, a $26k difference. Alternatively, using that same scenario, you could have paid off the home in only 5 years after your investments had grown to $78k (even after paying capital gains taxes on it, you'd walk away with a couple grand in your pocket extra).

I'm not quite yet in a financial position to be able to start saving money to pay off my mortgage early, but when I am, I think I'll be going the investment route.

I've read of this strategy and there's probably a lot of merit to it. I've seen some argue that a "home pay off fund" is the way to go, and when it's large enough to pay off the mortgage + cover capital gains taxes, then it's time to do so. To be honest I've played around with the numbers and couldn't come to a conclusion about whether it was best for my situation. A lot depends on your time horizon and interest rate. That said I last looked into it five years ago or so. I'm trying to pay off the mortgage in ~10 years, and my interest rate is a bit under 5%.

Looking at rolling 10-year returns of the S&P500 (the best proxy of the market I can find quickly) it looks like the market is generally over 5% returns for that time horizon, only dropping well below during periods of severe recession. So even factoring in capital gains, it might make sense to go the lump sum route.

Despite this, I'm still uneasy about the lack of certainty. I really like knowing that when I put in X amount on the mortgage, I have pulled in the payoff date by guaranteed amount and cut the total interest I'll pay by a fixed amount. But the math and historical trend does seem to point to invest --> grow --> lump sum payment being more effective, most of the time.

Dunno, this is good food for thought. I'm going to do more research and stew on it for a while. Anyone else have some insight here?

 

[TangoAlphaLima]

I've read of this strategy and there's probably a lot of merit to it. I've seen some argue that a "home pay off fund" is the way to go, and when it's large enough to pay off the mortgage + cover capital gains taxes, then it's time to do so. To be honest I've played around with the numbers and couldn't come to a conclusion about whether it was best for my situation. A lot depends on your time horizon and interest rate. That said I last looked into it five years ago or so. I'm trying to pay off the mortgage in ~10 years, and my interest rate is a bit under 5%.

Looking at rolling 10-year returns of the S&P500 (the best proxy of the market I can find quickly) it looks like the market is generally over 5% returns for that time horizon, only dropping well below during periods of severe recession. So even factoring in capital gains, it might make sense to go the lump sum route.

Despite this, I'm still uneasy about the lack of certainty. I really like knowing that when I put in X amount on the mortgage, I have pulled in the payoff date by guaranteed amount and cut the total interest I'll pay by a fixed amount. But the math and historical trend does seem to point to invest --> grow --> lump sum payment being more effective, most of the time.

Dunno, this is good food for thought. I'm going to do more research and stew on it for a while. Anyone else have some insight here?

It's definitely something to think about. I listen to a lot of Dave Ramsey, and although his advice generally makes sense from a psychology and emotional standpoint, it's often not the best mathematical advice. And this is displayed with his Baby Step #6, which suggests you should funnel more money above your mortgage payment to paying off your home principal. He does this while also suggesting that you can make 12% returns investing in good growth mutual funds. It has always seemed at odds to me, given that you don't actually get any monetary benefit when you pay extra towards the principal unless you have PMI; a lump sum payment after the entire principal amount has been accumulated does the same thing.

But again, maybe it's more of psychology driven feature of his advice than anything. Personally, I don't think I need that psychology portion of it, I'll just keep a separate mutual fund investment or two and considering that my "principal payment" fund.

But, on the other hand, although I'd love to pay off my home early, I'm not sure if I will. I've got 12.5 years left on a 15 year fixed at 3%. When I have extra money, I'll probably just funnel it to maxing out retirement accounts and saving more for the 529 plans for my kids. I question whether paying off a home mortgage is worth the peace of mind when you could have significant tax savings through those other investment vehicles. (And to clarify, Dave Ramsey does have retirement as Baby Step #4, with college savings as Baby Step #5, but he only suggests 10-15% savings for retirement, and doesn't give a recommendation on college savings.)

 

[PflargBlarg]

Is there an explanation of why it's good to build up money and then pay off mortgage in a lump sum (my mortgage terms don't allow this anyway)? Wouldn't it make more sense to just stick out the entire length of the mortgage and put everything extra into investments instead?

My mortgage rate is only 3.09%. I'm fairly confident that my investments will outpace that significantly on average. It seems like throwing away money to put anything extra into the mortgage.

Is it just a psychological thing?

 

[TangoAlphaLima]

Is there an explanation of why it's good to build up money and then pay off mortgage in a lump sum (my mortgage terms don't allow this anyway)? Wouldn't it make more sense to just stick out the entire length of the mortgage and put everything extra into investments instead?

My mortgage rate is only 3.09%. I'm fairly confident that my investments will outpace that significantly on average. It seems like throwing away money to put anything extra into the mortgage.

Is it just a psychological thing?

No, you have a valid point. Given how low mortgage rates have been, keeping money you have to pay off a house in solid investments is going to benefit you more.

The ultimate question has to do with risk. Had you been sitting on $150k of investments before the market crashed with $100k left on your mortgage, then watched as your $150k dropped down to $75k, you probably would have regretted the decision to not pay off your home earlier. Granted, your investments would have increased in value back up to $150k again, but not for years.

But like I said, I may not even pay off my home early. I think it's probably wisest to max out retirement savings, where short and long term swings in the market are totally inconsequential, because you can't touch that money for another 30 or 40 years.

 

[GhaleonEB]

Is there an explanation of why it's good to build up money and then pay off mortgage in a lump sum (my mortgage terms don't allow this anyway)? Wouldn't it make more sense to just stick out the entire length of the mortgage and put everything extra into investments instead?

My mortgage rate is only 3.09%. I'm fairly confident that my investments will outpace that significantly on average. It seems like throwing away money to put anything extra into the mortgage.

Is it just a psychological thing?

It's partly phychology: some people (myself included) don't like debt of any kind; I'd take a lot of comfort in knowing my monthly costs were dramatically lower (would worry less about losing my job, or changing jobs, for example). It's also a function of your interest rate. If I had your interest rate, I'd be putting a lot less (if any) into paying off the mortgage early, as the gap between other investments and the return on paying it off early would be very large. But ~5% is high enough that I want out from under it earlier.

 

[kaskade]

Thank you for this post. I'm trying to figure out how to start investing some money. I'm starting an internship in the summer which will most likely lead to a job in the fall if all goes well. I really have no debt besides my car. And, If I get the job I'll probably just pay it down quickly. This specific employer matches the first 3% of my income I believe so I'd obviously do that. So I'd max out my IRA with the 5500 a year.

Also, with the IRA, if I use Vanguard which I most likely will do you have to pick one fund? Or can I pick say 5 and invest 1,100 into each for example?

Then say, all my finances are set, budget, emergency fund. Would it be advisable to invest any extra money into a fund, even if it's a small amount, say a few thousand a year?

This is all a lot to digest but I can see liking it. Seems like a game where you can actually win.

 

[Wellington]

I am with Ghaleon on this one. My interest rate is 5% so it's not really killer but it's not the rates we have seen here. My objective is to eliminate all of my "overhead" for living and the amount I pay for my mortgage is far and away my largest chunk. Maybe I'll pay down harder until I can be rid of the PMI and then save up and pay in a lump sum.

 

[maks]

Take a look at your mortgage deduction on this years taxes....for me its significant so i like keeping the mortgage

My plan is to keep this tax advantage and build up my retirement/investments now so i can enjoy bigger compounding effects on it later.

 

[maks]

Share price shouldn't be a concern with these funds. You want VINIX, and if you're trying to follow a total market approach, then this fund will be your biggest piece of the pie. For example, if we applied Vanguard's total market ratios to your domestic 80%, then it would look like 58% VINIX, 15% VMCIX, and 7% VSCIX. You can tilt towards mid and small caps if you'd like, but the larger point is that the large cap blend fund is something you want to be a part of your mix, and likely a significant part of it.

Thanks so much, this makes sense to me. I always wanted VINIX, the share price spooked me haha. I'm prioritizing as follows...

1) Fund my 401k to 6% so i can get 3% employer match
2) Fund my 2014 Roth IRA with a $5500 lump sum
3) Fund my 2015 Roth IRA on a monthly basis up to $5500 limit (will do this from now on)
4) Company stock at 10% of paycheck (I have a 15% ESPP)
5) Max my 401k to the 18k limit. This site helped me figure out if i can afford it http://www.paycheckcity.com/calculator/401k/

63% VINIX
15% VMCIX
07% VSCIX
15% VTSNX (dropped it by 5%)

I got my budget figured out if I follow above plan. It will be tough but I have more than 6 months reserves so I'll be ok. I won't have money for other investments though and I'm thinking of funding my Roth with Vanguard as well. Is this too much Vanguard?

 

[Darren870]

Is there an explanation of why it's good to build up money and then pay off mortgage in a lump sum (my mortgage terms don't allow this anyway)? Wouldn't it make more sense to just stick out the entire length of the mortgage and put everything extra into investments instead?

My mortgage rate is only 3.09%. I'm fairly confident that my investments will outpace that significantly on average. It seems like throwing away money to put anything extra into the mortgage.

Is it just a psychological thing?

I think its a case by case basis. What you are saying make perfect sense though and I would probably be putting my money into investments over extra repayments. Especially with a mortgage rate that low.

I'm in Australia though and rates aren't that low. They are at an all time low right now and mine is 4.44% (Variable). We have an option to put money into a linked savings account of sorts. So money in that account is taken off the value of the loan then the interest is calculated. In short, its getting 4.44% interest, or whatever the loan % is.

We decide to put out money in there for a few reasons:
-We hate debt, and that is our only debt.
-4.44% is a good rate of return. More towards the principle is better.
-In Australia, you can't write off your interest (on your actual home) so no benefit to having a mortgage
-The cash in there isn't actually into the mortgage. So we can take it out and use it at any time for any reason with no risk to us.

 

[Randolph Freelander]

I got my budget figured out if I follow above plan. It will be tough but I have more than 6 months reserves so I'll be ok. I won't have money for other investments though and I'm thinking of funding my Roth with Vanguard as well. Is this too much Vanguard?

No, you're fine. If anything happens to Vanguard, your assets are generally safe.

 

[Piecake]

Thank you for this post. I'm trying to figure out how to start investing some money. I'm starting an internship in the summer which will most likely lead to a job in the fall if all goes well. I really have no debt besides my car. And, If I get the job I'll probably just pay it down quickly. This specific employer matches the first 3% of my income I believe so I'd obviously do that. So I'd max out my IRA with the 5500 a year.

Also, with the IRA, if I use Vanguard which I most likely will do you have to pick one fund? Or can I pick say 5 and invest 1,100 into each for example?

Then say, all my finances are set, budget, emergency fund. Would it be advisable to invest any extra money into a fund, even if it's a small amount, say a few thousand a year?

This is all a lot to digest but I can see liking it. Seems like a game where you can actually win.

There are minimums with mutual funds, and since the minimum is 3k you can only invest in one fund this year. You can put multiple funds in a Roth IRA because you can have up to three funds (due to minimums) in the second year.

If you want to avoid minimums, you can always invest in ETFs. Those have the same 'stuff' in them as mutual funds, they are just bought and sold in a different way. ETFs are bought and sold like a stock, so that is why you can just buy 1 share if you want.

Every little bit counts. I would play around with an investment calculator and find out.

http://www.daveramsey.com/article/investing-calculator/lifeandmoney_investing/#/entry_form

A few thousand in your early 20s is a lot of money when you are 65

I think its a case by case basis. What you are saying make perfect sense though and I would probably be putting my money into investments over extra repayments. Especially with a mortgage rate that low.

I'm in Australia though and rates aren't that low. They are at an all time low right now and mine is 4.44% (Variable). We have an option to put money into a linked savings account of sorts. So money in that account is taken off the value of the loan then the interest is calculated. In short, its getting 4.44% interest, or whatever the loan % is.

We decide to put out money in there for a few reasons:
-We hate debt, and that is our only debt.
-4.44% is a good rate of return. More towards the principle is better.
-In Australia, you can't write off your interest (on your actual home) so no benefit to having a mortgage
-The cash in there isn't actually into the mortgage. So we can take it out and use it at any time for any reason with no risk to us.

How come you went with a variable mortgage? Those always seemed very dangerous to me.

No, your'e fine. If anything happens to Vanguard, your assets are generally safe.

Vanguard is the last investment firm I would expect to go under as well since they are just so conservative.

 

[TangoAlphaLima]

How come you went with a variable mortgage? Those always seemed very dangerous to me.

Some countries don't have fixed rate mortgages. I know that's the case with Canada, and I assume it's the case for Australia as well.

 

[Piecake]

Some countries don't have fixed rate mortgages. I know that's the case with Canada, and I assume it's the case for Australia as well.

Yikes. That makes me even more wary about Canada's future economic situation. A bloated and expensive housing market, excess worldwide oil supply, and everyone on variable mortgages? That doesnt sound good.

 

[Darren870]

How come you went with a variable mortgage? Those always seemed very dangerous to me.

You can't get more then 3-5 year fixed mortgages in Australia. Usually fixed rates are .5-1% more also. I knew the interest rate was likely going to be lowered (just was by .25%) so it wouldn't have made sense to get a fixed rate at the time. Its also suppose to go down again, or so they say!

I'm American, I wish we had the same home loans here as we do in the US. If it could have gotten 30 year fixed and write off my mortgage I would be laughing all the way to the bank!

Yikes. That makes me even more wary about Canada's future economic situation. A bloated and expensive housing market, excess worldwide oil supply, and everyone on variable mortgages? That doesnt sound good.

Yea, it was similar in the UK also. The AUS housing market is crazy high! My missus found her old statements from 7 years ago and she had a 9% interest rate! Crazy!

 

[Kurt Angle]

Thanks so much, this makes sense to me. I always wanted VINIX, the share price spooked me haha.

fbiox is $250+, large-mid growth. 44% growth last 3 years. prices shouldnt scare you those funds are totally worth it

making a killing on motherfucking biotech, selling it all and buying a bimmer in the summer before hilary kills the economy #Yolo

Spoiler

not

 

[simplayer]

Some countries don't have fixed rate mortgages. I know that's the case with Canada, and I assume it's the case for Australia as well.

Not really sure how variable rate mortgages are set up in the US, but in Canada you have fixed term mortgages. So over a term (which you decide), you have a fixed rate. For example, you can have a 30 year mortgage and a 5 year term. So for every term, you renegotiate your rate.

 

[Fatalah]

Every time I see this thread appear, I get full of anxiety and avoid it.

Well, here I am jumping in with two feet. Hi guys.

I've been carrying a 401k from my previous job for 5 years now. I know rolling it over to an IRA is the best thing to do. (Mint keeps reminding me about saving $5k in this year's in taxes too) How do I go about doing this?

 

[Piecake]

Every time I see this thread appear, I get full of anxiety and avoid it.

Well, here I am jumping in with two feet. Hi guys.

I've been carrying a 401k from my previous job for 5 years now. I know rolling it over to an IRA is the best thing to do. (Mint keeps reminding me about saving $5k in this year's in taxes too) How do I go about doing this?

https://investor.vanguard.com/401k-rollover/

You can either call the number on the page for help and questions or start doing it online

Or go to another online broker if you prefer.

Once you do it you will feel a whole lot better!

 

[Randolph Freelander]

Oh, I suppose I could warn you fine folks... I topped off my Roth for the year today. Divest accordingly.

 

[Fatalah]

https://investor.vanguard.com/401k-rollover/

You can either call the number on the page for help and questions or start doing it online

Or go to another online broker if you prefer.

Once you do it you will feel a whole lot better!

Thanks Piecake.

 

[TangoAlphaLima]

Not really sure how variable rate mortgages are set up in the US, but in Canada you have fixed term mortgages. So over a term (which you decide), you have a fixed rate. For example, you can have a 30 year mortgage and a 5 year term. So for every term, you renegotiate your rate.

Oh yeah, I got it a little wrong, didn't I? Well, the general proposition is mostly the same, Canada doesn't have long-term fixed rate mortgages like the U.S. does.

 

[Darren870]

Not really sure how variable rate mortgages are set up in the US, but in Canada you have fixed term mortgages. So over a term (which you decide), you have a fixed rate. For example, you can have a 30 year mortgage and a 5 year term. So for every term, you renegotiate your rate.

Yea, its similar here in Australia, but is much more expensive then a variable. So it isn't something you would do unless you knew interest rates were going up in the near future.

In the US though you can get a 30 year fixed! And with interest rates so low you can get a rate that will never go up over the whole period of the loan. Never had to renegotiate and can keep it as low as you can get it.

 

[Makai]

Certainly, you should do what you feel is best with your money. With that said, I highly encourage you to tally up all your essential bills each month, add a buffer on top of that (say, 10% more at least), and then multiply that monthly amount by 6. Whatever number you get is what you need to live for 6 months without making substantial life changes (such as selling your car/house). If you lost your job tomorrow, would you have the money available to survive for those 6 months? If the answer is "no," then I'd highly encourage you to save up until the answer is a "yes."

Everyone is vulnerable to losing their job, having a massive disaster destroy their home (even with insurance, it might take weeks or months for you to see any of that money), or having some other unexpected thing occur to you. It seems a bit backwards to me to save for your future retirement (20, 30, 40, or 50+ years down the road) but not have enough saved for your next 6 months.

Not trying to bash you by any means, I am just concerned and really, really want to encourage you to save up several months of cash on-hand in an easily accessible savings account.

I was very scared of losing my job when I started it and put everything into my savings account. I started investing only after my credit limit jumped from $300 to $5000. This is a comfortable buffer for me and I will be happy to pay the 7.75% APR if I need to rely on it for living expenses. But you are right, and I will be saving more anyway because I am near the limits of my Roth contributions.

 

[PflargBlarg]

Yea, its similar here in Australia, but is much more expensive then a variable. So it isn't something you would do unless you knew interest rates were going up in the near future.

In the US though you can get a 30 year fixed! And with interest rates so low you can get a rate that will never go up over the whole period of the loan. Never had to renegotiate and can keep it as low as you can get it.

Wow, I did not know that you could fix the rate for the whole 30 years in the states. That's pretty incredible.

I'm in Canada, so yeah, the 3.09% is for a 5 year term on a 30 year mortgage and then it will be renegotiated. Jesus, I wish I could stick with that for the whole 30 years.

 

[TangoAlphaLima]

Wow, I did not know that you could fix the rate for the whole 30 years in the states. That's pretty incredible.

I'm in Canada, so yeah, the 3.09% is for a 5 year term on a 30 year mortgage and then it will be renegotiated. Jesus, I wish I could stick with that for the whole 30 years.

Screw 30 years, some people are getting 50 year mortgages these days! It's dumb, but people do it.

 

[Darren870]

Wow, I did not know that you could fix the rate for the whole 30 years in the states. That's pretty incredible.

I'm in Canada, so yeah, the 3.09% is for a 5 year term on a 30 year mortgage and then it will be renegotiated. Jesus, I wish I could stick with that for the whole 30 years.

Yea, but every country has different products. While a 30 year fixed would be nice you still pay a crazy amount in interest. Right now we triple our mortgage payments and expect to be out of the loan in 10 years. The money for us isn't locked into the house though so we can always get to it if we need to in case of emergencies. Just one of the products they offer in Australia and not in the US.

 

[Nelo Ice]

So I posted in here before but now I'm making a little bit more money and have access to CCs so I'm getting them rewards. I'm still barely scraping by and even though I have savings they're dwindling. Though the reason I'm scraping by is so I can lessen the burden on my savings. The cost of living here in California is absurd so it's one of the reasons I'm struggling. I've done so much reading on how to save but it doesn't help when it feels like I'm the only one in the household trying to manage finances and budget accordingly. And hell my sister thinks I'm crazy for wanting to save for retirement. For reference I'm 24 turning 25 this year and she's 31.

I've been budgeting my ass off and have finally started to make use of YNAB to keep everything under control. Also I did end up opening a Scwhab Roth IRA but I got a notice it's going to close since I haven't used it nor did I ever get to confirming my identity so I could even access it.

I'm working on getting a career/ actual high income paying job through learning programming on my own. But in the meantime I'm trying to make a decent wage at a restaurant job and hopefully moving up to server so I can get the lion's share of tips rather than the minuscule % I'm getting now.

Now from my last post, I was told I should just continue to budget until I can get 3-6 months of expenses saved before I start investing. Anyway my question is should I just continue on that track or should I try to open another Roth IRA or stop my Schwab from closing?.

I also have some extra money in a savings account but it's not much and I don't consider it as spending money. I'm about to switch banks to a credit union too so I'm thinking I'll just put that savings money back into the new savings account though it would make it easier to budget if I had it in my checking.

Sigh its a struggle trying to balance enjoying my youth now while still having an eye towards the future. The one solace I do have is I that have no debt to my name. So if/when I get a career job with good income, I'll finally be able to invest while still enjoying my youth.

 

[Wellington]

So I posted in here before but now I'm making a little bit more money and have access to CCs so I'm getting them rewards. I'm still barely scraping by and even though I have savings they're dwindling. Though the reason I'm scraping by is so I can lessen the burden on my savings. The cost of living here in California is absurd so it's one of the reasons I'm struggling. I've done so much reading on how to save but it doesn't help when it feels like I'm the only one in the household trying to manage finances and budget accordingly. And hell my sister thinks I'm crazy for wanting to save for retirement. For reference I'm 24 turning 25 this year and she's 31.

I've been budgeting my ass off and have finally started to make use of YNAB to keep everything under control. Also I did end up opening a Scwhab Roth IRA but I got a notice it's going to close since I haven't used it nor did I ever get to confirming my identity so I could even access it.

I'm working on getting a career/ actual high income paying job through learning programming on my own. But in the meantime I'm trying to make a decent wage at a restaurant job and hopefully moving up to server so I can get the lion's share of tips rather than the minuscule % I'm getting now.

Now from my last post, I was told I should just continue to budget until I can get 3-6 months of expenses saved before I start investing. Anyway my question is should I just continue on that track or should I try to open another Roth IRA or stop my Schwab from closing?.

I also have some extra money in a savings account but it's not much and I don't consider it as spending money. I'm about to switch banks to a credit union too so I'm thinking I'll just put that savings money back into the new savings account though it would make it easier to budget if I had it in my checking.

Sigh its a struggle trying to balance enjoying my youth now while still having an eye towards the future. The one solace I do have is I that have no debt to my name. So if/when I get a career job with good income, I'll finally be able to invest while still enjoying my youth.

Can you clarify the bolded? That will kind of determine the answer.

Take a look at the below:

http://money.cnn.com/retirement/guide/IRA_Roth.moneymag/index5.htm

You can take money out of your Roth IRA anytime you want. However, you need to be careful how much you withdraw or you may get stuck with a penalty. In order to make "qualified distributions" in retirement, you must be at least 59½ years old, and at least five years must have passed since you first began contributing.

You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you'll be penalized for withdrawing any investment earnings before age 59 ½, unless it's for a qualifying reason. Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after the conversion.

Not sure whether the money will be counted as contributions or earnings? Well, the IRS views withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and finally, investment earnings. For example, let's say your IRA has $100,000 in it, $50,000 of which are contributions and $50,000 of which are investment earnings. If you withdraw $60,000, the IRS will consider $50,000 of that to be contributions and $10,000 to be earnings. So any penalty would apply only to the $10,000.

Personally I would contribute the money to a Roth and if you need it, it's a short transaction window (3 days max) away from being back in your account.

 

[Nelo Ice]

Can you clarify the bolded? That will kind of determine the answer.

Take a look at the below:

http://money.cnn.com/retirement/guide/IRA_Roth.moneymag/index5.htm



Personally I would contribute the money to a Roth and if you need it, it's a short transaction window (3 days max) away from being back in your account.

Well thanks to my mom getting the paperwork done before she passed, we've had extra money. It's close to being used up so though I'm basically doing what I can to help out and ensure the savings list until my sister graduates in hopefully May to become a nurse. So far I think that may happen and we may be ok if my sister can get a job while working her way to RN.

Otherwise as far as I'm concerned that money isn't there. I only use what I make to get groceries for the house and gas. Basically my budget is in it's own world while the savings take care of the mainly the rent. Then I chip in and pay for what bills I can afford to, so less money is taken out of the savings.

Did that help? And sorry for the late reply, didn't see a new post in my subs for this thread so haven't checked it. How much money should I contribute to the Scwhab or another Roth? I don't want to get into too many details but I might be able to swing 1k if needed. Otherwise what would be a good amount?.

edit: just remembered to I'm also waiting on my tax return. Of course sad thing is I don't even know how to file it and my aunt does it every year for me.

 

[Piecake]

Well thanks to my mom getting the paperwork done before she passed, we've had extra money. It's close to being used up so though I'm basically doing what I can to help out and ensure the savings list until my sister graduates in hopefully May to become a nurse. So far I think that may happen and we may be ok if my sister can get a job while working her way to RN.

Otherwise as far as I'm concerned that money isn't there. I only use what I make to get groceries for the house and gas. Basically my budget is in it's own world while the savings take care of the mainly the rent. Then I chip in and pay for what bills I can afford to, so less money is taken out of the savings.

Did that help? And sorry for the late reply, didn't see a new post in my subs for this thread so haven't checked it. How much money should I contribute to the Scwhab or another Roth? I don't want to get into too many details but I might be able to swing 1k if needed. Otherwise what would be a good amount?.

edit: just remembered to I'm also waiting on my tax return. Of course sad thing is I don't even know how to file it and my aunt does it every year for me.

Any amount you can save is always beneficial and, obviously, the more you can invest the better. A couple hundred bucks might not sound like much, but it actually ends up being a pretty significant amount after 35 years of compound interest. If you invest about 250 bucks a year for the next 35 years and get an average of 7% interest, you will have about 37k in 35 years. That is a lot better than nothing. 1k a year is about 159k. The earlier you start investing the better.

As for filing taxes, I would use Turbo Tax freedom edition. You can file federal and state taxes for free if you make less than 31k. Turbo tax is pretty easy to use on your own as well since they walk you through all of the steps.

 

[Sydle]

Is there any reason I would keep an annuity my dad set up for me when I was 8? I know they're not growth instruments and the money could be used more effectively elsewhere, but I also know that my dad is going to be deeply offended if I take the money he put in there and invest it elsewhere, which is why I haven't touched it.

I'm 33 now and he asked me the other day if I was going to start putting money in it and I told him I had other financial priorities maxing out my 401K and IRA for the year, as well as putting more into savings, but I'm thinking I just need to take the $10K in there and invest into something for growth since I'm still kind of young.

I don't need someone to tell me the annuity was a bad investment idea on his part (he had good intentions) or delaying this conversation with him was equally terrible. Is there any reason at all to keep it?

 

[Makai]

How confident are you guys that US stocks will continue to grow over the long term? I'm getting in at the peak of this graph, but...for all I know, the next few decades of American stocks will look like Japan. Maybe I should get some international stocks?

 

[Nelo Ice]

Any amount you can save is always beneficial and, obviously, the more you can invest the better. A couple hundred bucks might not sound like much, but it actually ends up being a pretty significant amount after 35 years of compound interest. If you invest about 250 bucks a year for the next 35 years and get an average of 7% interest, you will have about 37k in 35 years. That is a lot better than nothing. 1k a year is about 159k. The earlier you start investing the better.

As for filing taxes, I would use Turbo Tax freedom edition. You can file federal and state taxes for free if you make less than 31k. Turbo tax is pretty easy to use on your own as well since they walk you through all of the steps.

Alright I'll deposit whatever is in my savings account into an roth IRA thanks for the help.

 

[anonymous_abc]

How confident are you guys that US stocks will continue to grow over the long term? I'm getting in at the peak of this graph, but...for all I know, the next few decades of American stocks will look like Japan. Maybe I should get some international stocks?

You should definitely get some international stock, no matter what the US market does. You should aim for a nicely diversified portfolio. Because Winners Rotate.
As for the US market, there is no way to know what the future holds. But even if it doesn't grow for a few years you will still have dividends and incentive to buy and hold.
I personally don't pay any attention to what anyone has to say about the market crashing of going gang buster in the next year. For every expert that says one thing there is another that says the exact opposite. Just stick to your plan and ignore the noise.

 

[vpance]

How confident are you guys that US stocks will continue to grow over the long term? I'm getting in at the peak of this graph, but...for all I know, the next few decades of American stocks will look like Japan. Maybe I should get some international stocks?

Japan has been lagging for long, long time, but it will outperform US over the next few years. DXJ would be a good way to play it.

Some charts from here

 

[Sain Drevia]

What are everyone's thoughts on fund allocation? I recently maxed out my Roth IRA for both 2014/2015 (first time contributing outside of work, btw!) and rolled over a 403(b) from my previous employer into a Fidelity account, but I am not quite sure how to allocate those monies.

I am pretty sure that I want to go down the Index Fund route, and I've heard some folks talk about the large/mid/small cap percentage split but wasn't sure if there was a general rule of thumb to follow.

I did find the following fund (FSTMX) which seemingly covers the entire market, so I don't know if there is even any reason/incentive to split up my investments into L/M/S cap funds.

If it makes a difference, I don't think I want to allocate anything towards Intl. funds since they seemingly have had a rough go of it in the past few years.

Also, what would be the highest palatable expense ratio to consider when selecting funds? I've seen some funds that experienced stronger growth, but have net-expense ratios that are 0.5% as opposed to the 0.1% of, say, FSTMX. Is the difference really that significant?

 

[maks]

Did a bit more reading and modified my strategy. I wasn't actually as diversified as i had thought. I created a thread on Bogleheads to see what they think but haven't heard back yet LINK. Goal is to be 90/10 with a 3 fund total market strategy.


Current Retirement Assets
*Lump sum 2014 Roth and in my 401(k) I will Fund Transfer all of my T.Rowe 2040 (.47 e/r) to Vanguard. Allocation is...

90/10 Allocation to 3 funds
10% Total Bond Market
63% Total Stock Market (70% of stock fund)
27% Total INTL Stock Market (30% of stock fund)
*Roth - $5,500 TSM.
*401(k) - Split between TBM, TSM, TISM until 90/10 allocation (including Roth) is reached.

2015 Contributions
Total Funds $30,500
$18,000 401k (59%)
$5,500 Roth (18%)
$7,000 Taxable (23%)

90/10 Allocation to 3 funds
10% Bonds $3,050
63% Total Market $19,215 (70% of stock fund)
27% Total INTL Market $8,235 (30% of stock fund)
*401k - $3,050 TBM, $14,950 TSM
*Roth - $4,265 TSM, 1,235 TISM
*Taxable - $7,000 TISM

Question 1: Does my Current Retirement Assets plan look right? Any concern with transferring all of my TRowe 2040 to Vanguard?
Question 2: For 2015 Contributions I plan to fund 401(k) and Roth semi-monthly. Will vanguard let me fund TISM in Roth if I'm under $3,000?

 

[shadowsdarknes]

Dividends are the entire point of owning stocks, even stocks (such as growth stocks) not currently paying them. Tell me, absent dividends, what exactly do you get from stock ownership? Don't say "well, the price could increase" without providing why it would increase. (Hint: it's the expectation of future dividends.)

The entire point of owning a stock is expecting it will go up.
If a stock pays dividends a 50 cent dividend, then the share price drops by 50 cents.

 

[GhaleonEB]

What are everyone's thoughts on fund allocation? I recently maxed out my Roth IRA for both 2014/2015 (first time contributing outside of work, btw!) and rolled over a 403(b) from my previous employer into a Fidelity account, but I am not quite sure how to allocate those monies.

I am pretty sure that I want to go down the Index Fund route, and I've heard some folks talk about the large/mid/small cap percentage split but wasn't sure if there was a general rule of thumb to follow.

I did find the following fund (FSTMX) which seemingly covers the entire market, so I don't know if there is even any reason/incentive to split up my investments into L/M/S cap funds.

If it makes a difference, I don't think I want to allocate anything towards Intl. funds since they seemingly have had a rough go of it in the past few years.

Also, what would be the highest palatable expense ratio to consider when selecting funds? I've seen some funds that experienced stronger growth, but have net-expense ratios that are 0.5% as opposed to the 0.1% of, say, FSTMX. Is the difference really that significant?

A quick demonstration of the power that expense ratios can have (totally stealing Randalph's thunder here.)

This is a comparison between a lump sum $10,000 investment, growing at 8% for 30 years. One has a .1% expense ratio, the other .5%. (The expense ratio reduces the growth rate.)

Growth Rate	8%	8%
Expense Ratio	0.10%	0.50%
Net Growth Rate	7.900%	7.500%
Investment	$10,000 $10,000
Years	            30	30
		
Ending	$106,146.26 	$94,215.34 
Gain	$96,146.26 	$84,215.34 
Difference		($11,930.92)
Differnce %		-12%

The .5% expense ratio vs. the .1% costs you nearly $12k, or 12% of the return. This was a simple example, but it shows the value in choosing funds with very low expense ratios.

Generally, if you stick to index funds you should be seeing expense ratios in the <.2% range.

The fund you have selected is a good way to get exposure to the full market. If you want to place an emphasis on one segment or another (midcaps, for example) you could add an index that covers that segment of the market to your portfolio; this is called a tilt strategy, IIRC. I don't have a strong opinion here. I like to keep it simple, and also don't have any particular insight into what segments might do better than others in the future, and so I also use the full market index. I have read some argue for a midcap or smallcap tilt, but I wasn't persuaded by it. I think Randalph ran or pulled some numbers a few pages back when we last discussed tilts, might try looking back for that discussion.

The entire point of owning a stock is expecting it will go up.
If a stock pays dividends a 50 cent dividend, then the share price drops by 50 cents.

If the expectation is that a stock will pay a 50 cent dividend, rather than no dividend, the stock will go up. Likewise, going from 50 cents to 60 cent dividend would likewise push the stock up, as the future returns to the shareholders would increase, reflected in the stock price. All else held equal, of course. (I saw this recently with my own company stock; we increased the dividend after holding it flat for several years, and the stock popped immediately.) I have seen some arguments that a payment does decrease the value of the company in the moment the dividend is paid, but as stock prices are not based on present values but the expected future returns the company will generate, such payments are factored into the market valuation of the stock.

 

[maks]

This is a comparison between a lump sum $10,000 investment, growing at 8% for 30 years. One has a .1% expense ratio, the other .5%. (The expense ratio reduces the growth rate.)

Growth Rate	8%	8%
Expense Ratio	0.10%	0.50%
Net Growth Rate	7.900%	7.500%
Investment	$10,000 $10,000
Years	            30	30
		
Ending	$106,146.26 	$94,215.34 
Gain	$96,146.26 	$84,215.34 
Difference		($11,930.92)
Differnce %		-12%

The .5% expense ratio vs. the .1% costs you nearly $12k, or 12% of the return. This was a simple example, but it shows the value in choosing funds with very low expense ratios.

Generally, if you stick to index funds you should be seeing expense ratios in the <.2% range.

This is my situation right here. For the last 2 years i've been 100% allocated to T.Rowe 2040 Target Fund in my 401k. Its our default selection. It has an expense ratio of .47 and a bit more turnover compared to Vanguard which is also an option for me in my 401k. I've always been intrigued by the Vanguard options and didn't follow up on reading about it until recently. All my friends at work are also with T.Rowe and really don't seem to understand their fund at all.

 

[TangoAlphaLima]

The .5% expense ratio vs. the .1% costs you nearly $12k, or 12% of the return. This was a simple example, but it shows the value in choosing funds with very low expense ratios.

Generally, if you stick to index funds you should be seeing expense ratios in the <.2% range.

I generally agree with your analysis here, in that paying attention to the expense ratio can be important when comparing similar funds. I think the one caveat I would add, however, is that the expense ratio is tied into the performance of the fund. Regardless of what the difference in expense ratios is between two funds, if historical performance of one fund outpaces the other consistently, that should be the better one to own, even if it has a higher expense ratio. Past performance does not guarantee future results, though, so a significantly different expense ratio is something to consider between similar funds.

 

[GhaleonEB]

I generally agree with your analysis here, in that paying attention to the expense ratio can be important when comparing similar funds. I think the one caveat I would add, however, is that the expense ratio is tied into the performance of the fund. Regardless of what the difference in expense ratios is between two funds, if historical performance of one fund outpaces the other consistently, that should be the better one to own, even if it has a higher expense ratio. Past performance does not guarantee future results, though, so a significantly different expense ratio is something to consider between similar funds.

A fair point and one I don't disagree with. It's basically the active vs. passively managed funds debate. One of the factors on the side of index investing is the expense ratio, which actively managed funds need to overcome in order to be more attractive. They can't just out perform the market to be the better investment choice, they have to outperform the market, plus the difference of their expense ratio as compared to their appropriate market index fund. They start out sandbagged with costs.

Give the variable performance of actively managed funds (sometimes they outperform the market) and their costs (they are always more expensive than good index funds), I think it makes the most sense to minimize costs and accept as close to the market rate of return as possible. Not everyone agrees, of course.

 

[Tyreny]

Interesting. Thanks for the crash-course!

Microsoft didn't pay dividends for the longest time either, but the expectation was always that they would, and the same was true for Apple and is for other non-paying stocks.

Basically, the thought is this: if the stock does not (or will not) pay dividends, what exactly do you get for your stock ownership? What is going to drive the price up or down? Why is there a price at all? You can't reach into the till and extract money, you know. Your only means of deriving any value from your ownership is receiving a share of the profit, that's what you're paying for, and that's what the individual who buys the stock from you pays for. You might not think of it that way, but you're ultimately paying for the dividends you expect to receive.

It's been a while since I've taken a finance course, and there could certainly be other models to consider, but look into the "dividend discount model" of stock prices. The quick upshot is that the stock price today equals the net present value of the future series of dividend payments, and this holds despite the daily volatility of the market. That 35 cents that's getting paid out every quarter, if that series of payments continues forever and ever, what would you pay for it? Figure that out, and you've arrived at the value of that particular stock.

Even without a dividend there is value in owning stock. Common shares are usually what we buy and sell on the market and they usually come with voting rights and a claim on the company's earnings proportionate to the ownership. The simplest example of why this is valuable is to assume you own 100% of a non dividend paying company's shares, and the company is acquired. Boom you receive all of that cash. There are tons of other examples that are less extreme but this illustrates value not reliant on a dividend. You own a claim on the current and future cash flows of the company.

I suppose the premise is fundamentally the same however. If you never ever expected to earn cash as a return for owning a stock it would be worth $0 even if the company generated tons of cash.