
Need advice with financial planning.
I have been debating about posting this for a while now, since it involves posting ballpark numbers about my current financial status (and doing that gives me sweaty palms), and I decided to do it today asking you folks for advice.
My current financial status is not bad and I have nothing to complain about. I just want to improve it and make it better, given that I have to start planning for a house at some point. Some backstory, I was a grad student till August of last year (technically only graduated this May), but I started working from October 1st. As a grad student, I used to get 2K a month for my stipend, which worked out well enough for me to live nicely, although it did not allow for too many savings and such.
I did have some CC debt and money that I borrowed from my father-in-law. I say did, because currently, I have no CC debt, having paid off everything. The only debt that remains is paying my father-in-law, which I continue to do right now. So, onto my current financial state:
Monthly Wages: approx 6000 USD after taxes and deductions
Monthly Expenses (everything bundled into this): 2500 USD
Monthly FIL Loan: 1000 USD (have 4000 USD remaining, should be paid off by September)
Off-shore Investments: 1000 USD (commodities, stable markets, for the next three months)
US Investments: 1000 USD (ETFs, Cryptocurrencies)
Roth IRA: 2500 USD
Grad Life 457(b): 8000 USD
Current Retirement Acct from work (no employer contribution and will not be for another year): 3000 USD
Current Crypto Investments (for the long haul): 2000 USD
Current ETFs: 600 USD
So there it is. That is my current financial picture and I would like some help planning for the future, especially putting money away for a downpayment on a home and such. Some observations:
1. FIL loan will end in 4 months, including June.
2. Off-shore investments will end in 3 months, including June.
Both these will hopefully free up another 2000 USD a month to put aside for things.
The questions I have (and the questions I know people are going to ask me) are this:
1. Income replacement fund: Can I treat my grad-life 457(b) as my income replacement fund? I never touched it for the entirety of my Ph.D life and after, thus allowing it to accumulate up to 8K. I am allowed to withdraw, roll it over, do whatever I want with it, except that if I choose to withdraw, I immediately lose 30% of it to taxes. Question is, do I consider that approx 5750 USD towards my income replacement fund, since I am still in the process of saving up for it? The ETFs are meant for this, but they will take time to build up. I contribute 300-500 USD a month towards them.
2. How do I plan for a downpayment towards a home? How much do I put in there? I don't know where I will be, what house I will buy, but I want to get started, so any advice in this regard will be helpful.
3. Any other investment/retirement/financial growth advice is most welcome.
P.S: I get paid at the end of the month, so June's paycheck has not yet come in. I am budgeted for June entirely. My credit cards are being used solely to pay for stuff that has been budgeted for, so no float there. I would consider myself on a pseudo-paycheck to paycheck cycle. I say that only because I have the means to budget into the next month, but for the time being, I am choosing to send that money elsewhere into investments.
P.P.S: If the question arises as to why I am choosing off-shore investments, there are some good reasons of the financial advisor I am dealing with and the portfolio they maintain. I am guaranteed good returns on them, albeit after a 3-year holding period. My judgment is that it is worth the risk at this point and over that time frame, I expect the returns to average out. My annualized rate of return could be anywhere between 20-30% over 3 years, which is much more than I can expect from any high yield savings account here.
nolesrule , Superbone , dakinemaui , WordTenor --> your thoughts and advice? For the most part of the years I have been YNABing, your words have helped, so I will take whatever you got now too. :)
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First of all, you’re starting early, so that’s great. Your monthly wages versus expenses is very good.
How much are you paying for your investment advisor? Is he getting a percentage of assets under management? Depending how interested you’re in it, you might think about managing it yourself. It’s actually quite easy.
Read A Simple Path to Wealth by JL Collins. I would also recommend Retire Before Mom and Dad by Rob Berger.
No, don’t treat your 457(b) as an income replacement fund. Roll it over into a retirement plan. Speaking of which, how good is your work retirement plan? How does it compare to your Roth IRA? What brokerage are you using? These questions help determine which account to roll over the 457(b) into. Don’t sleep on funding retirement. That’s going to be your biggest nest egg at the end of it all. Time in the market is paramount.
How far off for the home purchase? Determines whether you can invest these funds or not. Since you don’t know where you’ll be purchasing or how much you’ll need, figure out how much you can put away monthly and still fund your other priorities. You should probably fund at the minimum a 3 month Income Replacement fund before you even start saving for a house.
Since you get paid at the end of the month, use that pay to fund next month. Makes budgeting a whole lot easier when you can do it all at once.
That’s all I’ve got for now. Keep asking questions. You are off to a great start.
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I'll leave the investment angle to others that are more qualified, but I will say that a lot of this stuff is iterative since all the demands on your money can't exceed your income. By making plans for every dollar -- including retirement contributions, house downpayment, income replacement, etc -- you will develop an understanding of your inner relative priorities. You've been doing this long enough to know that sometimes all you can do is make estimates (aka guesses).
On the house topic, pull up Zillow and look at what "suitable" houses are going for in the area(s) you might want to buy. Family (prospective family) or hobbies might influence both size and location. Estimate a timeline, figure 20% down, and there's your monthly contributions computed. (Also check if your income can support the subsequent payments, also include estimates for property taxes and insurance.) Budget that and see if you're OK with the effect that level of savings has on all the other things. If that's not OK, you gotta shift scope or timeline so more important things get funded. This you already know, but hopefully just hearing it again will help.
One very important thing on the house: this will not be your last. It is a stepping stone. Choose wisely and it both supports your immediate needs and equity builds (hopefully accelerated via appreciation), making your next step easier.
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LoaferDude said:
I am forever reminding myself that just because I have home buying power of X USD, does not mean I NEED a home that is in the ballpark of X USD.This is very smart and the downfall of a lot of people. The less expensive house you buy under your home buying power, the more flexible you are to increase wealth and just be more flexible in general. You don't want to be what they call, house poor.
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LoaferDude said:
My work retirement plan is alright, not too great. Problem is that I am in academia and my employer does not contribute to this retirement plan until I have two years under my belt. This is all and good, in any case, since they for the most part have decided to pause all employer contributions through this fiscal year 2020-21 due to COVID's financial hits. That is the better way to do things without cutting jobs. It does not affect me because they weren't paying for mine anyway, so. Now coming to the difference between my ROTH IRA and 457(b), the 457(b) is definitely more stable. The Roth lost a lot of money in the market drop recently, but since the 457(b) is for state employees, the investment was predominantly in stable money markets, so it was not affected at all. That is the reason I am hesitant to roll it over into something without fully understanding the implications in terms of the portfolio.This is actually not what I meant. When I asked how good they are, I meant how good are the investment options? Are there a lot of investment choices? Do they have low expense ratios? Do they have target date funds? These are the important things to know. Whether they're stable of not is something else entirely. Since you're just starting out, you shouldn't be worrying about stability. In fact, you should mostly be in stock funds which are the most volatile (and have the greatest returns). You have a long horizon in front of you. If you read nothing else, read A Simple Path to Wealth. It's an easy and fun read. If you have decent options in your work retirement fund, you most likely want to rollover your 475(b) into this fund. It's a lot easier to rebalance when the funds are in one account.
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You've got some real sound thinking here with respect to income/expense ratio, and about your home purchase. Re: the month to month, if you're paid at the end of the month and use it to budget the next month, you're buffered, as it were. I'd build up your income replacement fund, but I wouldn't worry about doing any more than budgeting June's paycheck into July. (End of month whole month paycheck is the standard for academe, so I'm speaking from my own practice as well as best practice.)
That you have an "investment advisor" who is suggesting offshore funds and not balking at the fact that you've got a significant portion of your net worth tied up in crypto is a red flag for me the size of Texas. Crypto is for fun. It's not there yet in terms of an investment; it's too risky. It should be the part of your portfolio you play with, while the rest is invested more conservatively. With your total, I wouldn't hold more than about 800 (5%) in crypto, and I wouldn't even do that until I had a solid income replacement fund. You'll also need to be saving for home emergencies, since that's a priority for you.
However, conservatively, as @Superbone pointed out, doesn't mean "stable." One rule of thumb espoused by many financial advisors is that you should carry your age in bonds. A less conservative model is your age minus 10. So if you are 30, you have 80 percent equities and 20 percent bonds. And you want to think about that balance across all your accounts--it might be that you have one account where the equities funds are crappy and the bond funds are great so you put the entirety of your bond investing in that one account. I'm agreed with @Superbone that you should roll over the 457(b). You *should* be able to do a Roth conversion on it. Pay cash for the taxes on that conversion. Once you've done that, I would hold your income replacement fund in cash, not in equities of any sort. Keep it in a HYSA, a money market fund, or I-Bonds.
Re: the house purchase, if your housing market supports it, a conservative rule of thumb is 2-2.5x your income, so you'll save 40-50% of your income as a downpayment. That doesn't work everywhere, but it's a good idea. I actually kept my downpayment in a bond fund because when I saved it, I knew buying was still at least 4 years away, and I was also willing to assess my whole picture and delay buying if necessary. If you really do want to buy in 1-2 years, I would just hold it in "cash" (cash being those same vehicles at the end of the past para)
Agreed on Simple Path to Wealth. I also really was impressed with I Will Teach You to be Rich. And when you really want to go bonkers with learning about investing, Bogleheads Guide is the cream of the crop.
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LoaferDude said:
The Roth lost a lot of money in the market drop recently, but since the 457(b) is for state employees, the investment was predominantly in stable money markets, so it was not affected at all.If you are going to be invested in the market (stocks, ETFs, mutual funds), you can't flinch at the kind of drop in the market we've seen lately. Especially if you are just starting out in your career. The fact that your Roth dropped recently does not mean that it isn't "good"; it just means that the market was down. My old 401(k) wasn't "good" because there were limited investment options for me to choose from and the ones that were available had high expense ratios. Employer changed things up a bit and while the expense ratios aren't as low as I would like, they are noticeably lower and the options available have increased.
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WordTenor said:
That you have an "investment advisor" who is suggesting offshore funds and not balking at the fact that you've got a significant portion of your net worth tied up in crypto is a red flag for me the size of Texas. Crypto is for fun. It's not there yet in terms of an investment; it's too risky. It should be the part of your portfolio you play with, while the rest is invested more conservatively. With your total, I wouldn't hold more than about 800 (5%) in crypto, and I wouldn't even do that until I had a solid income replacement fund. You'll also need to be saving for home emergencies, since that's a priority for you.So glad you brought this up, WordTenor . That stuck out to me too when I read the OP last night but I forgot to mention it. Yeah, that's not investing, that's gambling. I'd say 3% of your portfolio for crypto. And, hey, I have some too! But I took out my original funds so mine is all gravy.
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WordTenor said:
That you have an "investment advisor" who is suggesting offshore funds and not balking at the fact that you've got a significant portion of your net worth tied up in crypto is a red flag for me the size of Texas. Crypto is for fun.WordTenor
This I will have to clear up a little bit and give you context. I apologize for using the term "financial advisor". He is definitely a wealth manager, but not in US. He is in my home country. He is not advising me of any investments outside of my home country. Now, the backstory to this is that my dad, who is 78 and alone back there, is also the epitome of charity, having used up all his savings to help people back home, without keeping much in the bank for himself, in case something happens.🙄 Since I was a student, I did not have any way to save for him and grow that money before this. So what I am doing (what I called the off-shore investments) is having this person invest this money in my home country. The returns I am going to get over the 3-year period are going to be enough to take care of my dad and his needs and anything I need it for in my home country. The person is in no way aware of my other investments and such. Hope that cleared up the red flag part. :)
Coming to crypto and my investment there, I am an engineer and along with one of my friends, who is big time into investing in general, we have been following the development of cryptocurrencies for some time. He has been doing it for the greater part of 7-8 years and we have developed a decent understanding and some models that work for us personally. I did not have a lot of spare money to invest in it up until this point, while his entire house down-payment was funded from his crypto investments, and they also factor in as a secondary, passive source of income, paying for a lot of monthly bills. Long story short, the models we have seem to be working out in the long run (>5 years), with the indicators that we are using. That is why I was comfortable putting that money in there, as opposed to stocks etc. I did not write this up in my initial post, since it was already getting too long. :)
The other thing was that once my FIL loan is done in the next few months, I will have 2K more to put into traditional investment portfolios like you have suggested, at which point my crypto investments will actually drop to the percentage that you have suggested. It is just that I got a head start on crypto as my long term plan as opposed to the other way around.
I am going to look into restructuring my investments like you and Superbone suggested, with rolling over my 457(b) too.
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WordTenor said:
I'm agreed with @Superbone that you should roll over the 457(b). You *should* be able to do a Roth conversion on it. Pay cash for the taxes on that conversion. Once you've done that, I would hold your income replacement fund in cash, not in equities of any sort. Keep it in a HYSA, a money market fund, or I-Bonds.WordTenor
This is where I am a little confused. The 457(b) is already in a stable money-market account. What would be the reason to convert it to an IRA and then re-invest it into a similar portfolio? My current annualized rate of return on the 457(b) is 2.01%. I don't think I can find any HYSA that comes up to that. If you could please elaborate on that, would be much appreciated.