On Tue, 6 Feb 2007 13:32:12 -0600, joshbilsky[at]gmail.com wrote:


- quote -

One of the problems with trying to get ahead while in debt is the
impact of taxes and inflation on our savings. As it is in almost
every instance, net-net the saver is upside down and prolonging the
agony.

All of these short cuts and fancy ideas remind me of the way Texans
describe Eastern dudes who come to Texas and try to act like
Westerners: All hat and no cattle. <grin


-HW "Skip" Weldon
Columbia, SC

On Feb 4, 10:53 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:

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Being in the situation right now personally, I agree with you. I have
3% fixed school loans with a few more payments dropping it to 2%. I'm
in no hurry to pay off this debt when I have MMA making 5.25%. Now,
keep in mind, I still pay extra on this loan and I would advise the OP
to do the same as much as possible. But there are advantages of
keeping the money liquid maybe most of which are psychological in
nature knowing that the money is available if needed. The OP does not
mention a mortgage, car loan, credit card debt etc. Assuming he has
very little of these expenses, if any at all, he would be a position
to be more aggressive in his repayment strategy. It really depends on
what his long term plans are. If he is getting married, buying a
house, and a new car all around the same time, I would think that he
would be better suited to make his payments on the school loan and
keep enough money liquid so that he could cover these expenses.

I would hope that if he hasn't already, consolidate to a low fixed
rate. Yes, the payment schedule will be longer, but he can still make
additional payments on the principal so that he will pay the loan off
sooner. Obviously being debt free might help a bit on future rates of
return, but we're talking school debt not 25% credit card debt. I
don't think that the OP's school debt would preclude him from getting
a good rate on a mortgage or car loan.

JB

On Feb 4, 6:38 am, jamessa...[at]yahoo.com wrote:
- quote -

Hi James,
There is probably a great deal of good investing advice here.It
isn't often a good idea to put the cart before the horse.
What do you do for a living?How long do you see yourself doing it?Do
you like it?What are your higher aspirations?Are you an aggressive
investor?Where do you want to be in 10?,20?,30? years?At your stage
you need to ask and answer a myriad of ?s.If you ask a thousand
people,you will get 1,000 or more viewpoints,most of which don't take
into the equation the most important element,you.I wish I could
suggest 1 good book on the subject,I can't,but the work in finding
your own path,and your own(Custom),advice is a big part of the
pleasure of the journey.I personally like Real Estate,it allows a
level of hands on control that I like.I suggest as a starting
point,Kiyosaki's books,and there is alot to learn from playing his
game"Cashflow",if you find Real Estate,to be your cup of tea,be
careful there are more charlatans
teaching how to invest in R.E. courses by a factor of 100 to 1,or
worse.But a great deal of all investment advice in all areas is
bogus.You must be an "Educated Consumer"in all parts of your life.Good
luck and have fun.dale

On Feb 5, 4:28 am, "jIM" <noreplysoc...[at]hotmail.com> wrote:
- quote -

Before doing anything, the OP should build up 3 months of expenses as
a cash reserve in a money market fund or CD. I might spring for 6
(having been unemployed that long in my life).

I really don't see the need to feed the 401k before the student debt
is discharged, given his employer's position. Even IRA I think it is
marginal.

A lot does depend on the student loan rate and the timing of a house
purchase (which at age 21, I would suggest is at least 2-3 years out).

On Feb 4, 10:44 pm, "Andrew Koenig" <a...[at]acm.org> wrote:
- quote -

I'm leery of using historic volatility and returns to predict the
future.

Global equities I suspect will perform around the SP500, on the basis
of the PE that world markets are currently trading at, balanced
against the fact the US tends to have better governance.

Put it another way, the best forecasts for 30 year returns of asset
classes that I have seen are:

- bonds: take the yield to maturity (nominal bonds)
- TIPS: take the real yield
- equities: take one over the normalised current year PE (as a real
return)

The normalised bit is the tricky bit. Robert Shiller does it by
taking a 10 year moving average, which I think has merit as an
approach.

Nothing about the current prices of bonds makes me want to own them--
4.5% in a world of 2.5% inflation doesn't seem like a lot of risk
premium. The scenario in which I am wrong (deflation) is also bad
news for stocks (earnings will fall), so I am undiversified against
that risk. I typically hold 10-20% cash, though, so that is some
measure of protection.

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:b7idneZxKOuwN1vYnZ2dnUVZ_sKunZ2d[at]comcast.com...

- quote -

Yes, he could find a better use for the money than paying off the college
loan if the interest on it is low and CDs earn, and continue to earn, quite
a bit more. And, yes, it is a good idea to have an emergency fund, but being
without one for a while is not new, since he had none while in college. My
suggestion of living on the cheap is no doubt exaggerated, but still it
could be a very good plan to do without some expensive items for a while and
hopefully pay off the debt quickly, build up an emergency fund, and invest
in a 401k and Roth all at the same time, or at least get a good start on all
of them.

- quote -

Having been in this situation "recently", my advice is pay off the
loans.

$800/month for 10 years (most government subsidized loans I am aware
of have 10 year repayment periods). If we assume the standard
repayment of 10 years, this is a significant portion of his take gross
pay (1/5=20% of gross pay).

If we assume this is an average person age 22, the next 10 years is a
long time. Probably go through 1 car, possibly get married, buy at
least one house (I bought two houses in my first 8 years out of
school). Some of these things involve credit checks, debt ratios and
being out of debt would help the cause relative to "rates of return"
for other places to put $$.

There could be "more optimum" solutions- I was paying off debt while
investing (I was aggressive about the debt payoff... I did not open my
IRA until most student loans were paid off.). My peragative is that
10 years is a LONG time for a college graduate and being debt free
gives choices and flexibility when it comes to paying for a car,
house, wedding or other significant financial purchase/ decision.

Don wrote:
- quote -

Do we not care what interest rate/term are for the student loans?
If the loans are 3% fixed, is he not better off just putting the money
in CDs earning 5%? We know he's not in itemized deduction territory, but
since he's just getting started, don't you first recommend the emergency
fund/cash build up? In other threads I've suggested that an emergency
fund wasn't needed, so long as some source of money was available,
either a 401(k) loan, equity loan, margin loan, etc. The OP has none of
that. 20% credit card debt should be aggressively attacked. Low interest
student debt, I wouldn't be so fast.
I hope OP will answer what he rates/terms are, as well as his longer
term housing intent is.
JOE

<jamessalks[at]yahoo.com> wrote in message
news:1170569606.395717.26460[at]h3g2000cwc.googlegroups.com...

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Get rid of that student load debt soon, and don't take on any more debt!
That plan will get you ahead faster than any decision you could possibly
make about which mutual fund to buy or what asset allocation to make.

I like to think of whatever time it takes to pay off college loans as part
of college itself. In other words, in the first year or two you are out of
college into your first job, live essentially the way you lived in college.
Live in a cheap room or apartment in a part of town where the rents are low.
Eat modest sensible food. Keep on with the kind of entertainment you enjoyed
in school, and don't indulge in any new found extravagances or luxuries.
Save as much as you can, and pay off those loans. 50% would be a suitable
figure. Then, after a year or two or three you can finally "graduate" from
college and get on with a more satisfying lifestyle. But continue to save
and invest (to a lesser degree than 50%, of course) even then.

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:CdWdncKO1u2KplvYnZ2dnUVZ_qOpnZ2d[at]comcast.com...

- quote -

This is not quite correct:

It was the S&P 500 index that had 11.1% with STD of 17.2%

The 50%/50% mix is 50% fixed income and 50% globally diversified equities,
which did indeed return 11.0% with STD of 8.4%

100% globally diversified equities returned 14.1% with STD of 16.7%, so
substantially higher returns than the S&P with slightly less volatility.

Ya pays yer money and ya takes yer choice.

On Feb 4, 4:27 pm, "John A. Weeks III" <j...[at]johnweeks.com> wrote:
- quote -

Add to that.

I think the OP at age 21 can afford to be 100% in equities:

70% domestic. 30% international. If possible, a Total Market Index
Fund for the domestic (I don't think such a thing exists for
international-- you are confined to the large caps).

I don't want to get any fancier than that. Small cap, growth, value
are all factors that come in and out of favour, a total market index
fund will even out over all these factors. And I don't have a
particular bone that emerging markets are going to better than
developed markets over time, because historically, I don't think they
have. Economics does not govern stock returns.

My suggested international stock allocation is a guess about how
important, in the long run, international economies will be to an
American consumer.

I don't think bonds are particularly attractive at this time, and I
certainly wouldn't suggest a 21 year old have more than 20% of his/her
portfolio in bonds. (if they do, a medium term, US bond fund,
preferrably index).

A lot depends on what funds are available in the 401k, and what they
cost (MER and TER in mgmt and total expense ratios).

Andrew Koenig wrote:

- quote -

What I found most interesting was
http://www.fundadvice.com/articles/b...llocation.html

where a chart was offered, showing returns for different fixed/equity
mixes from 1970-2005.

100% stocks were 11.1% with STD of 17.2%
but
50%/50% mix was 11.0% with STD of 8.4%

The lower STD gave a worse 5 yr return of 9.7%. Worse 3 yr return for
mix was -4.1% vs stocks only -40.9%.
I've spent so much time analyzing stock returns, I haven't given as much
thought to the fixed side. Kind of took it for granted.

JOE

"Andrew Koenig" <ark[at]acm.org> wrote in message
news:Lpnxh.14320$Xq6.9486[at]bgtnsc04-news.ops.worldnet.att.net...

- quote -

I didn't know whether it would be appropriate to do so, so I didn't.
However, since you asked, and since I have no financial relationship
whatever (the extent of my relationship is that I've read a bunch of
articles on his site, asked a few questions by email, and gotten answers)
with Merriman:

Briefly, his website has lots of articles that appear to be based on common
sense backed up by data. He is authorized to offer DFA funds, so part of
his pitch is that the DFA funds are good enough that it is worth paying him
for access to them. If you're not willing to do so, he advocates Vanguard
based on its low expense ratios and the overall utility of index funds, but
points out that Vanguard has no small-cap international fund that is open to
new investors and does not do as good a job of DFA at accessing some other
asset categories such as domestic micro-cap or deep value.

His asset-allocation recommendations appear pretty standard, with two
interesting exceptions:

1) He generally recommends that the equity portion of your portfolio should
be 50% international, including emerging markets (I think he says 30%
international if you don't include emerging markets). He says that 30 years
of data show that the 50/50 split has the least long-term volatility.

2) He avoids mid-cap stocks entirely, on the basis that they tend to behave
somewhat like small-cap and somewhat like large-cap. His view is that
you're better off buying the extremes and rebalancing between them in the
hope of reducing the correlation between you asset categories.

So his basic recommendations for equities, as I understand them, are equal
parts of

large-cap
large-cap value
small-cap
small-cap value
REIT (this is a very recent addition to his recommendations)
international large-cap
international large-cap value
international small-cap
international small-cap value
emerging markets

His claim is that a 60-40 mix of this equity allocation and
intermediate-term bonds has given a long-term return slightly better than
having 100% in the S&P 500, and with much less volatility.

He has lists of recommendations for how to approximate this asset mix for
various fund families.

Please don't take the foregoing as advice from me! If you're curious about
what he has to say, read it for yourself and make up your own mind.

On Feb 4, 6:38 am, jamessa...[at]yahoo.com wrote:
- quote -

Goal #1 to financial freedom is to live "below your means". I define
this as saving 10% of gross income. The 25% your employer is "giving"
you, verify if there are "any strings attached", and then use this as
your primary savings plan. Are you sure it's a 25% contribution and
not a 25% match?

Goal #2 would be to stay out of debt. If the rates on the student
loans are variable, pay these off quickly. Beware of consolidation
offers which reduce payment by 75%, but increase term of loan (from 10
years to 20 or 30). $800/month is a reasonable payment, consider
paying more (even an extra $25 to $100 month will decrease the overall
payment period from 1-5 years).

As for what to invest 401k in, go through some financial planning
calculators to determine how much risk you are willing to take. These
calculators will suggest a mix of equities and bonds (such as 100%
equity, 80-20, 60-40), then also suggest how much domestic equity vs
international equity (a possibility might be 45% domestic large cap
equity, 15% domestic mid cap, 15% domestic small cap, 15%
international large cap, 10% international small cap).

**What I suggested for the allocation is similar to my own, no
guarantee yours would match mine.**

Once you find your allocation, look these up in your 401k, see what is
available.

Use a Roth IRA for any "personal" retirement contributions. If your
401k is short a particular type of fund (such as it's missing an
international small cap and a domestic mid cap fund), then start the
Roth IRA in those asset classes, and expand from there as needed.

<jamessalks[at]yahoo.com> wrote in message
news:1170569606.395717.26460[at]h3g2000cwc.googlegroups.com...

- quote -

Cool! What choices do you have about how to invest it?

- quote -

What's the interest rate on the student loan?

- quote -

Are these alternatives mutually exclusive?

As a rule of thumb, I'd suggest socking away as much tax-deferred money
(401(k) and IRA, Roth or not) as you can afford. How much you save may well
determine whether you can retire at 50 or at 75.

Meanwhile, I'd like to suggest you check out www.fundadvice.com. That's a
website run by a Seattle-area financial manager named Paul Merriman. I am
*not* a customer of his, and have no financial relationship with him. I am
mentioning his website only because I think it contains lots of free
information and advice that I have personally found useful. Like all free
advice, it may or may not be worth what you paid for it--but you can form
your own opinions about it.


======================================= MODERATOR'S COMMENT:
How about giving us some examples of Paul Merriman's advice?

In article <1170593238.954102.75120[at]v45g2000cwv.googlegroups.com> ,
darkness39[at]yahoo.com wrote:

- quote -

I concur. I would make sure that the 401K money is diversified
so you don't end up with company stock or some other Enron
scenario. Beyond that, I'd maybe invest $100 a month somewhere
else in a Roth or the company 401K (if you are allowed to do so).
Then focus on burning up that debt.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

jamessalks[at]yahoo.com wrote:

- quote -

Congratulations, you're off to a good start.
First, what are the 401(k) choices? How does that $13.5K get invested?
Does the company choose the fund or are you allowed to move it (within
the 401(k) of course.) If it's in company stock, you should be careful
to diversify it out to the other choices as soon as you are permitted.
Your next investment option should be $4000 toward the Roth IRA, as we
don't know, and can't know, what rate you'll be in when you need to
withdraw money either for an emergency, or at retirement.

Next, what are your goals? $800 for the rent alone is great, but you
also cover power and internet, wow. (my utilities average $600/month, ack!)

If you plan to stay put, and no short term plans for marriage, it seems
to me that you can whack that loan to zero in 2 years. You do not have
any other deductions, so your loan's rate of interest is the rate you
are paying. If it's 6%, that's a great return on your money (i.e.
'getting 6%' by paying down 6% loan) but if any is sub 3%, just save
money in a good money market fund. If you are ever able to owe at one
rate but earn more in a CD or money market, **and** you are disciplined,
I'd rather see you with $30,000 at 5%, owing $30,000 at 3%, than zeroing
both out.

But back to the house. It sounds like you may be in a smallish
apartment. If your goal is to buy a house, saving toward that while
still owing some of that student debt is ok. $40,000 is a great down
payment. A $200K 30yr mortgage at 6% is $1200/month, which is easily
affordable to you. Tough to give a single answer without knowing your
goals. For that matter, if you'd save 25% of the 54K, which is possible,
you could be on a path to retire in less than 20 years, if that appeals
to you.

The world is your oyster.
JOE

What are the interest rates and lengths of the student
loans?

What happens to this roughly $14k of the company's profits
earmarked for you if it is not put into a 401(k) plan?

When, if ever, do you plan to buy a house? Do you plan to
get married within, say, ten years? No need for a car? Or do
you have a good one, owned outright, already?

One thing with which you should become familiar immediately
is the investment vehicle "Roth IRA." You can google, as a
good start.

Congrats on the good-paying job and asking good questions
about your finances so early in your life.

On Feb 4, 11:38 am, jamessa...[at]yahoo.com wrote:
- quote -

If I understand your situation correctly, ie that your company will be
putting $13,500 a year into your 401k without you doing anything?

Then I would be tempted to put very little or nothing into my 401k,
invest my 401k in a couple of good equity index funds, and concentrate
on paying down my debts. The key is high diversification and low
cost, via equity index funds.

My reasoning being the debts cost you (6%?), so 6% / (1 - personal
marginal tax rate) in terms of pre tax income. Hard to beat that
*guaranteed* return from paying down debt.

And from a portfolio perspective, paying down debt (after you have set
aside 3 months of living expenses in a money market fund) is the
equivalent of holding cash (ie very low risk) but at a safe guaranteed
return (as above). So you total risk portfolio is very low.

Basically I see your portfolio choice right now as having exactly 2
assets (plus 3 months of living expenses): a risky long term asset
(equity index fund) and a cheap asset (paying down debt) which has a
fixed return. Your choice is to optimise between the two, and your
employer has made it easy for your (if I understand your situation
right).

In the future, you may wish to buy a home. I am a big fan of same
under US tax law, *but* believe that in most US property markets, now
is absolutely not the right time. Houses are by any measure as
expensive as they have ever been in US history in most markets (rental
yield, price to average income) and I do not believe that will be
sustained. I don't think the time will be right for at least 12
months, and possibly much longer (depending on where you live, etc.).

At which point, paying off low interest student debt to take on
mortgage debt may not be such a clever idea, and you will in any case
need to have saved a 10% deposit.

But right now, when the world is your oyster and you are on your first
job, becoming debt free but with significant 401k savings would be a
good thing.

I am a 25 year old male that recently graduated from college and have
landed a job that pays $54,000 per year. I am single and do not tend
to spend a lot of money. The company that I will be working for will
put 25% of my yearly earnings into a 401(k) plan. To clarify, this
money will not be coming out of my paycheck... it is taken out of the
company's yearly profits and issued as, essentially, an employee
pension.

As a first-time investor, I was wondering what you more experienced
people would advise as a good investment schedule. I have
approximately $48,000 in student load debts, and pay $800 per month on
rent, power, and internet.

Should I max out my 401(k), or invest in mutual funds and/or index
funds and/or a Roth IRA?