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Help me figure out my personal finances

Discussion in 'Business, Careers & Education' started by throwaway2014, Mar 5, 2014.

  1. throwaway2014

    throwaway2014 New Member

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    Good evening gentlemen,

    I've read posts from a lot of like-minded folks around here and decided to create a new account to get some personal finance advice. Although I also work with a financial planner, I am curious to see everyone's opinion.

    In short, I'm in my late 20's, living and working in Chicago. I have about $85-90k in cash and am unsure about how to best invest it. To give some context, I have an additional $35k or so in my retirement accounts and about $20k in a taxable trading account.

    Should I a) buy a place to live in an stop renting; b) move more into stocks; or c) keep holding cash?

    Although option a) is most enticing to me, I might have an opportunity to move up in my career in the next year or so, and therefore I'm not really sure whether I should pick up a mortgage right now.

    Thanks for your thoughts, I'll hang up and listen now.
     
  2. Skatenc123

    Skatenc123 Well-Known Member

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    Just from what I did personally I bought a condo for 180ish put 40k down. Stayed there for two years and decided I wanted something bigger. Bought a tow home. And am renting out the condo for 1200$ month. Covers the remaining mortgage and puts cash in my pocket
     
  3. Douglas

    Douglas Well-Known Member

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    Buy a place, and up your 401K contribution.
     
  4. archetypal_yuppie

    archetypal_yuppie Well-Known Member

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    DO NOT buy a place unless you think it is very likely that you will live there for at least 5 years.
     
  5. GreenFrog

    GreenFrog Well-Known Member

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    I'm thinking about buying real estate in the next city I end up in and I highly doubt I'll stay in that one city for more than five years. That being said, I still think buying real estate right now has a decent chance of serving as a good investment.

    Why the 5 year requirement? If you're in a large city with lot's of growth, couldn't a property-owner still be able to indirectly manage said property through third parties? I definitely see where you're coming from, but just trying to play Devil's advocate, as I'm potentially on the other side.
     
  6. archetypal_yuppie

    archetypal_yuppie Well-Known Member

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    < 5 years: transactions costs destroy the economics.

    Illiquidity = huge headache if you move.

    Direction of house prices is speculative.

    Renting out a property is a job with uncertain economics and headaches.
     
  7. Douglas

    Douglas Well-Known Member

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    I respectfully disagree. Transaction costs suck, but to the extent that your mortgage payments are paying down principal, you're putting money in your own pocket (agreed, somewhat speculatively) as opposed to your landlord's (no speculation about that: it's outflow). (Note: considering the alternative is stock investments or cash, remember direction of stock prices are also speculative.) To the extent that your mortgage payments are paying interest, you gain access to America's great middle class entitlement, the MID.

    And I'll say it again - presuming you have access to one, you should up your 401K contribution as it appears you are saving plenty for the shorter-term. The tax advantage is enormous.
     
  8. archetypal_yuppie

    archetypal_yuppie Well-Known Member

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    I redisagree.

    Broker commissions
    Maintenance & repairs
    Property taxes (poof mortgage interest deduction)
    Insurance
    Mortgage PMTs (1st 5 years = mostly interest, not principal, so there goes the "in your pocket" argument)
    Transaction costs
    Illiquidity
    Exposure to house prices
    Exposure to wear & tear

    Everything depends on cap rates (ratio of home price to rent). Market forces ensure that you are roughly breakeven in the long haul in most markets. In the short haul, owners get killed on transaction costs and illiquidity.
     
  9. Douglas

    Douglas Well-Known Member

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    you know, you're right. I forgot you don't pay for property taxes, or maintenance and upkeep, when you're paying rent.
     
    Last edited: Mar 10, 2014
  10. GreenFrog

    GreenFrog Well-Known Member

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    Texas property taxes blow. I guess the state has to get revenue from somewhere..
     
  11. MrG

    MrG Well-Known Member

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    I'm a landlord with a managed property in a market that gives me very low vacancy rates, and it still sucks.

    If you're going to make property investment your job (or side job), being a landlord can be lucrative, but being an "accidental" landlord (which is what you're talking about here) is awful.

    Yes, it'll be awesome in a few years when I get a fat check made of equity created while someone else was paying the mortgage, but I'm still not convinced it's worth the headaches. It's also taxable income, which means I'm going to get a haircut when the time comes.

    So, yeah, I'll second the five-year "rule." When we bought, we thought for sure we'd be in the house for five or six years and then upgrade, but circumstances changed a few years in, and now we're stuck under the house for awhile until we can sell it. You can make it work as a landlord if you absolutely have to, but I don't recommend going into homeownership viewing that as an attractive alternative.
     
    Last edited: Mar 11, 2014
  12. GreenFrog

    GreenFrog Well-Known Member

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    What are the headaches and suckages that you speak of? My gut feeling is that when you sell your property after a few years, you will not have regretted being a landowner of said property!
     
  13. SidewinderX

    SidewinderX Well-Known Member

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    I'd move some of your cash into more lucrative investments.

    I keep ~6 months of living expenses as an emergency fund in cash (savings). I keep another chunk of money as an "opportunity fund" in savings for something out of the ordinary that may come up that I may want to jump on (maybe an investment opportunity, a great deal on something I wasn't expecting to buy, helping a friend or family member if they need it, something like that). I also keep a couple thousand dollars in savings for whatever my next trip it (traveling is a prime hobby). Beyond that, I've got a 401K through work (pre-tax contributions) and a Roth IRA (post-tax contributions -- I have both basically to hedge my bets on whatever happens in the tax code between now and when I retire).

    After my cash savings are topped off (which they would be with the amount of cash you have), the rest of my non-retirement savings goes into mutual funds. I have most of it in a couple of Vanguard index stock funds -- low expense ratio, they basically track the market. Probably the "easiest" way to invest. If you invest 10K+ in a fund up front, you can get Vanguard's "Admiral" class shares, which have expense ratios next to zero (meaning that your invest money is going into the markets, not the pockets of the fund manager).
     
  14. chogall

    chogall Well-Known Member

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    Don't put anything extra into 401k besides employer matching. And nothing in IRA.

    Savings in accounts locked up for a good 45 years is not savings.
     
  15. gettoasty

    gettoasty Well-Known Member

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    ^lol what is this guy talking about. i like your out of the box thinking, but you do have to explain more and not tease us. :foo:
     
  16. otc

    otc Well-Known Member

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    Yes to 5 year rule as a minimum. Exceptions might be made if rents are absurdly high relative to purchase prices (which has been happening in some locales following the crash). If you think you might go back to school or get married/have someone move in in the next few years...its probably also too early to buy.

    Don't buy a home as investment--it is not, it is a place to live. You might get great returns on it, but keep in mind that (even before the crash), the real estate market lags the stock market over time. And you won't make proper investment decisions about your home. It might be "time to sell"...except you actually like living there, and you don't have a new place, and your kids like their school, etc.. So now you are stuck holding a poor investment for sentimental reasons (and the reverse can happen...it can be definitely *not* the right time to sell, but you just got into B-School across the country or you need room for another kid and now you are trapped ).
    I'm not saying home ownership is bad...just that you shouldn't be looking at potential returns. You should instead be looking at the value you get from it and treating any returns in excess of market as a bonus.

    To the OP--you don't have enough in your retirement accounts. Up the 401k contribution, and start an IRA (roth or trad...doesn't matter which nearly as much as just having the accounts). You can still make a 2013 contribution until april and then you can make your 2014 contribution--that eats up $11k right there (and might even get you some taxes back if you go traditional and are below the income limits).
     
    Last edited: Mar 17, 2014
  17. MrG

    MrG Well-Known Member

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    I'm posting from my phone, and the response to this requires more space than is practical on one, but I'll try to remember to come back and reply next time I'm at a computer.


    For those of us who pay income taxes, this is a profoundly stupid piece of "advice."
     
    Last edited: Mar 17, 2014
  18. otc

    otc Well-Known Member

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    Yeah, it is pretty bad advice.

    Also, in the case of a Roth IRA, you can withdraw principal without penalty. So I actually started one while I was still in college--figured I could put extra money in there even if I didn't have a lot of savings since it would still be available in a real emergency (and since there are contribution limits, every year you wait is another $X that you will never be able to deposit).

    When you are the OP and have 80+k in cash, you don't need to be worried about locking up money until retirement, and the benefits of no taxation on 35-45 years of gains are immense. Also, you can use IRAs to carry tax-heavy assets (like REITs) and to not have to worry about holding a stock/fund long enough to qualify for cap-gains.
     
    Last edited: Mar 17, 2014
  19. chogall

    chogall Well-Known Member

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    So you are willing to save $4,900 (assuming a 28% tax bracket) for $17,500 you might not get back in 45 years. Good for you. I will take my cash now and invest and save.

    Its 46.5 years of gain with the current IRA distribution age at 70.5, assuming one enters the workforce at 24. And that distribution age is going higher as well. Tax is going higher as well for investments. Its better to pay your LT cap gain at 0%/15% today then paying LT cap gain at 20% + 3.8% FU tax + all the tax increases they will impose during the next 46.5 years.

    On the other hand, if you believe tax rate will be going down and retirement age will be decreasing for the next 46.5 years, go ahead, max your IRA/401(k).

    The worst piece of advice is to max out 401k/ira on a yearly basis. The second worst advice is to withhold too much tax resulting in a tax return every year.
     
    Last edited: Mar 17, 2014
  20. otc

    otc Well-Known Member

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    First off...I doubt you are going to wait until you are 70.5 until you pull money. That is when mandatory withdrawals occur--you can start taking out interest without penalty at 59.5. Also, if you are maxing your 401k and an IRA, I highly doubt you are in the 28% marginal tax bracket--some people save that much, but not many.

    Second, you only have to pay those taxes once at withdrawal. How do you pay 15% now if you haven't yet earned the interest? What will happen with a taxable account is you will pay 15% now, 15% again when you sell the next fund 5 years form now, 15% again in 15 years, etc. and then 15% when you finally withdraw the money. You have to pay a lot of taxes on the churn. Also, if you think rates will go up...then they will go up for both taxable and non-taxable.

    I think you don't quite understand how this stuff works. In fact you are simply wrong and your advice is imprudent.
     

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