"SHOW ME THE MONEY" VIEWS on HOW to make MONEY GR

[Partial]

My parents are now encouraging me to put 20% of my paycheck (72k salary) into a 401k to avoid paying taxes on such a big amount without any deductions.

How do you feel about this?

Great advice. That's what I've always done. This is why they say the first few financial moves you make are no brainers. It's because the goverment is going to subsidize your savings. Once you do the math, the logic becomes pretty compelling.

And then make sure you have enough saved to fully fund your Roth for the year. $5K of after tax dollars.

I thought the limit was 4k?

See, if I do both of these, I won't have any cash for a down payment on any sort of property. What should I do?

14.5k into 401k + 4k for roth = 20k, so very little disposable income to save up for a home.

[Scott Campbell]

I get that part. It's all about balancing out buying a property eventually, either a condo or a house sooner rather than later.

With that said, it clearly is a good time to invest, but with the crashes on 2001 and 2009 did you guys still come out way ahead investing over the past 12 years or so?

Any time period that includes 98 and 99 is going to look pretty sweet.

I don't know that now is any better time to invest than any other time. P, your critical success factor is not timing. It's discipline.

[Partial]

I get that part. It's all about balancing out buying a property eventually, either a condo or a house sooner rather than later.

With that said, it clearly is a good time to invest, but with the crashes on 2001 and 2009 did you guys still come out way ahead investing over the past 12 years or so?

Any time period that includes 98 and 99 is going to look pretty sweet.

I don't know that now is any better time to invest than any other time. P, your critical success factor is not timing. It's discipline.

I don't know what that means. I would probably invest in some sort of set and forget it thing as I don't follow the market very closely.

I've been debating for awhile about purchasing Apple stock. They're growing and growing but there stock is uber expensive right now and one has to wonder how much they can keep up their growth.

[Scott Campbell]

My parents are now encouraging me to put 20% of my paycheck (72k salary) into a 401k to avoid paying taxes on such a big amount without any deductions.

How do you feel about this?

Great advice. That's what I've always done. This is why they say the first few financial moves you make are no brainers. It's because the goverment is going to subsidize your savings. Once you do the math, the logic becomes pretty compelling.

And then make sure you have enough saved to fully fund your Roth for the year. $5K of after tax dollars.

I thought the limit was 4k?

See, if I do both of these, I won't have any cash for a down payment on any sort of property. What should I do?

They moved it up to $5K this year. $6K for old farts like Harlan.

[Partial]

My parents are now encouraging me to put 20% of my paycheck (72k salary) into a 401k to avoid paying taxes on such a big amount without any deductions.

How do you feel about this?

Great advice. That's what I've always done. This is why they say the first few financial moves you make are no brainers. It's because the goverment is going to subsidize your savings. Once you do the math, the logic becomes pretty compelling.

And then make sure you have enough saved to fully fund your Roth for the year. $5K of after tax dollars.

I thought the limit was 4k?

See, if I do both of these, I won't have any cash for a down payment on any sort of property. What should I do?

They moved it up to $5K this year. $6K for old farts like Harlan.

With home prices and that 8 grand credit, would you do this over buying an 80ish k condo (to get the 8k back)

[Scott Campbell]

I get that part. It's all about balancing out buying a property eventually, either a condo or a house sooner rather than later.

With that said, it clearly is a good time to invest, but with the crashes on 2001 and 2009 did you guys still come out way ahead investing over the past 12 years or so?

Any time period that includes 98 and 99 is going to look pretty sweet.

I don't know that now is any better time to invest than any other time. P, your critical success factor is not timing. It's discipline.

I don't know what that means.

Discipline - it means that what you invest in isn't nearly as important as the discipline to save.

[Scott Campbell]

My parents are now encouraging me to put 20% of my paycheck (72k salary) into a 401k to avoid paying taxes on such a big amount without any deductions.

How do you feel about this?

Great advice. That's what I've always done. This is why they say the first few financial moves you make are no brainers. It's because the goverment is going to subsidize your savings. Once you do the math, the logic becomes pretty compelling.

And then make sure you have enough saved to fully fund your Roth for the year. $5K of after tax dollars.

I thought the limit was 4k?

See, if I do both of these, I won't have any cash for a down payment on any sort of property. What should I do?

They moved it up to $5K this year. $6K for old farts like Harlan.

With home prices and that 8 grand credit, would you do this over buying an 80ish k condo (to get the 8k back)

I've done really well on my homes, but nothing has impacted me more than that Roth. Yeah, the new buyer tax credit makes that pretty compelling too.

Uncle Sam is going to make you very wealthy if you keep taking him up on his offers.

[Scott Campbell]

My parents are now encouraging me to put 20% of my paycheck (72k salary) into a 401k to avoid paying taxes on such a big amount without any deductions.

How do you feel about this?

Great advice. That's what I've always done. This is why they say the first few financial moves you make are no brainers. It's because the goverment is going to subsidize your savings. Once you do the math, the logic becomes pretty compelling.

And then make sure you have enough saved to fully fund your Roth for the year. $5K of after tax dollars.

I thought the limit was 4k?

See, if I do both of these, I won't have any cash for a down payment on any sort of property. What should I do?

They moved it up to $5K this year. $6K for old farts like Harlan.

With home prices and that 8 grand credit, would you do this over buying an 80ish k condo (to get the 8k back)

In your shoes I'd be angling to pull off all 3. Not sure if that is practical for you.

[retailguy]

Partial,

I'll probably be in the minority view here, and that's fine with me. First off, get yourself a good financial guy to help you. (one that you're willing to pay for advice) A CPA type. No one on an internet forum can completely advise you because we don't have all the details of your life. So, any advice we give is automatically tainted by what we did. Those decisions might be great for us and only "ok" for you.

Scott's general advice is spot on. The more you save now, the less you'll need to save later. Also, as an early 20's single guy, you've got more disposable income now then you'll probably ever have.

Max out the 401K and then if you have the discipline to save an additional $5k in a Roth, you'll be very weathly very early in your adult life.

I'm not a fan of condo's for "investment purposes". Never have been, never will be. We talked about a condo for you to "live in", I figured for more than 5 years. I certainly don't think you should buy a condo to get an 8k check. Some condos appreciate, depending on location, but most don't and some can be damn hard to sell. Again, I don't know what your plans are. Are you staying in the area where you live? Do you want to get married? Do you like your new job and intend to stay for a long time? All these factors are relevant. Buying a home is not just a monetary exercise. Trying to "invest" in a home on a "short term basis" is very risky and rarely successful, not even considering the current market conditions.

It is rarely a good idea to buy something because of the "gov't check" you'll get. If you're going to do it anyways, it can become a good deal, but if you're doing it because of the govt check it probably isn't.

You know I believe in 20% down, so you know where I'm at related to purchasing a home, but aside from that, when you get married, will you really want to live in an 80K condo? You'll need to sell at that point and if it's within 5 years it's very doubtful you'll make much money. The 401k and Roth are safer investments for you at this point.

Don't let someone talk to you about "tax savings" either. What difference does it make if Bank of America has your cash (through interest payments) or the IRS has your cash? (through taxes), you don't have your cash so there really isn't any difference.

Again, if you're planning to stay indefinitely in the home/area, this discussion is different. Where you're at in your life, it's relevant.

Good luck.

[Partial]

The difference in BOA having my money is eventually I will get it back.

Due to recession the company doesn't match on the 401k, but I can still put as much in as I want.

I've got 72k of income, live in a basement, and have next to nothing in expenses right now. I'm putting my entire paycheck towards debt so I'm basically out of that.

What would you do, RG, given that I intend to get a place of my own (I'm comfortable getting a 300-400ish studio - as a matter of fact this sounds ideal outside of a condo as I don't like throwing money away).

[retailguy]

The difference in BOA having my money is eventually I will get it back.

Due to recession the company doesn't match on the 401k, but I can still put as much in as I want.

I've got 72k of income, live in a basement, and have next to nothing in expenses right now. I'm putting my entire paycheck towards debt so I'm basically out of that.

What would you do, RG, given that I intend to get a place of my own (I'm comfortable getting a 300-400ish studio - as a matter of fact this sounds ideal outside of a condo as I don't like throwing money away).

Run an amortization schedule and see how much of that money goes to interest and how much goes to principal. In the early years, and for short term deals I maintain that you typically DO NOT get your money back. If you run an amortization schedule for the full 30 years, you typically pay double in interest and principal than what you paid for a house. Do you think you get that money back on sale? Not typically. You get some appreciation, but double? Doubtful in most cases. Interest is really the same thing as rent, or mostly anyhow in the early years. There is definitely a significant portion of that interest payment that you don't get back, nor should you expect to get back. Yes, there is a small principal component, but, really it's insignificant in the short term.

Are you talkin about a rental studio or some type of a purchased apartment? Truthfully, you need to understand your resale market. Milwaukee is not New York. What is the marketability of a property like that? If you can't sell it, what is the value of your investment?

You probably don't want another roommate, but honestly a nice two bedroom apartment for a year or two with an adult roommate might be what I'd advise. You make enough money that you don't have to live in a basement. You could just rent a one bedroom aparment too, that'd be a little more expensive but you'd have peace and quiet.

I worked with a guy, who lived in a small one bedroom apartment for 10 years. Took a transfer to Houston about 2 years ago and paid $150k cash for a home... He showed discipline and sacrifice for a long period of time, invested well, and now will never make a house payment.

You think he "wasted" his rent money by helping pay for someone elses apartment building? Perspective. Gotta keep what you're doing in perspective.

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So you would rent something very cheap? That's something I'm considering. I won't rent something that will cost more than 500 total. 400 a month for the whole package (heat, internet, tv, etc) would be ideal.

[Scott Campbell]

I'm 98% on board with RG, but with a couple of additional points.

It's a good idea to get some pro help. I'm just an internet hack. While I don't think you need professional advice to know that you need to sock away as much as you can in your 401K and Roth, my advice on how to invest it once it's there would be much more suspect.

I agree in general with RG on condos. Unless you're talking about a high rise in NYC or Maui, houses usually do better. And if you're thinking about buying for just a couple of years, I'd rent instead. Transaction costs will wipe out $8K pretty quickly.

I'd love to see the math on the 401K vs. the Roth to see which should get priority. I have a feeling that it might be mixed, as you want some taxable income in retirement. I've never had to choose between them as I've fully funded both when I've qualified. The Roth is somewhat of a hedge against higher future income tax rates, and offers some protection from the increasing deficit spending going on right now.

I don't differentiate much between Uncle Sams new home tax credits and the tax advantages of the 401K/Roths. They're all government subsidies that significantly inflate your rate of return. It's just that the investment vehicles are different. I get the feeling that RG is not comfortable with the idea of a home as an investment. I understand that logic. And recent history is definitely on his side.

I think your parents were spot on. But you don't have to stop there.

[Scott Campbell]

So you would rent something very cheap? That's something I'm considering. I won't rent something that will cost more than 500 total. 400 a month for the whole package (heat, internet, tv, etc) would be ideal.

By all means, live frugally.


Your on pace to earn more than $5M of income in your lifetime. That's a decent sized business in itself, and worthy of some management effort. Here's what your managing.

Income. (self explanitory)
Burn Rate. ($$$ you consume/spend each month)
Savings Rate. (Income - Burn Rate = Savings Rate)
Return on Investment. (Growth of your savings)


You're young. Return on investment means almost nothing to you now, because you have little or no net worth to invest. 4% vs. 12% ROI? Who cares. The difference is chump change at this point in your life. So your critical success factor for right now is Burn Rate. Minimize that, and you'll maximize savings. Over time, your net worth will grow as you sock more and more away. Your critical success factor will shift as your net worth grows, placing more and more emphasis on Return on Investment, and less and less on the other things listed. Eventually you'll arrive at a point where Return on Investment can easily cover your Burn Rate. And then you won't need to work anymore - unless you really want to.

The best thing about maintaining a meager burn rate is that you don't get conditioned to needing more to live on. That can become a heavy burden, especially in a crappy economy.

[Scott Campbell]

If you run an amortization schedule for the full 30 years, you typically pay double in interest and principal than what you paid for a house.

I know it was an old discussion, but I thought pretty much everyone in this thread agreed that 30 years is a horrid term, and that 15 is what people need to be shooting for.

[retailguy]

If you run an amortization schedule for the full 30 years, you typically pay double in interest and principal than what you paid for a house.

I know it was an old discussion, but I thought pretty much everyone in this thread agreed that 30 years is a horrid term, and that 15 is what people need to be shooting for.

Absolutely. But that takes long term discipline and he isn't there yet. Plus, in the early years he should maximize those "extra dollars" into the 401K and the Roth. House should be 3rd priority at this stage.... until his wife comes along and priorities change.

Partial - more later. swamped at work today.

[retailguy]

In looking at this again, with what I know, I think in the short term your money is safer and has more opportunity to grow in your 401K and the Roth, if you invest it wisely.

I like real estate and see that our latest correction may have undervalued things (in some areas), but have always been bearish on condos as an investment and am especially there right now. Are there areas where condos are flourishing? Perhaps. That's where you need to educate yourself about your particular market. For me, if home values are down, which they are in most areas of the country, I'd look at putting my money there first, as they are more desirable and more likely to bounce back in value sooner. (I still see four or five years of realatively flat market, (this is my opinion))

You mentioned Apple stock earlier. I have never, in 15 years of tax work, have ever recommended that my clients buy "single stocks", other than situations where 401k's match in company stock.

Single stocks typically have too much risk for your retirement funds. My advice, without knowing your situation, is to find a good performing mutual fund with at least a 15 year track record of solid returns and put your money there. If thats tech, fine. Make sure you know something about the fund, and the companies that comprise the fund, and that you understand the business. Don't blindly put your money there because joe somebody at work suggested it. Either do the research or find a professional. Use the one that your parents use. Someone who has a track record of success with someone close to you, that won't rip you off by having you move your money every six months to glean a commission off your investments.

A $400 place would be ideal, provided you are comfortable living there. You have a great income for your age. You don't have to live in a dump or live like a hermit. Spend as little as feasible and invest the rest. The sacrifice you make now will seem small 15 years from now, and will pay you many times the dividends in those retirement funds.

Start a small savings account for a house, when you get 1k or 2k, use a money market fund, or a short term CD if you can find one to earn a little interest, even above what you're saving for retirement. When the time is right to buy, you'll know, but just because Obama is tossing around 8k doesn't make it the "right time". As Scott indicated, closing costs, and other things would eat up that money quickly in the event you had to sell. If you buy a "cheap" condo now, you will have to sell it when life circumstances hit, and then, some well meaning soul will tell you to rent it out, and then you'll compound the mess.

Sounds like your parents are advising you well, I've seen nothing at all in their advice that I would find troubling. I'd follow it if I were you.

[Scott Campbell]

You mentioned Apple stock earlier. I have never, in 15 years of tax work, have ever recommended that my clients buy "single stocks", other than situations where 401k's match in company stock.

How bout an ESPP plan where the employer sells to you at a discount?

[retailguy]

You mentioned Apple stock earlier. I have never, in 15 years of tax work, have ever recommended that my clients buy "single stocks", other than situations where 401k's match in company stock.

How bout an ESPP plan where the employer sells to you at a discount?

That'd work, too. How long do you have to keep it?

My point is, and was, if it makes sense. Most of the time it is just blind homerism and underperforms a solid mutual fund.

[Scott Campbell]

You mentioned Apple stock earlier. I have never, in 15 years of tax work, have ever recommended that my clients buy "single stocks", other than situations where 401k's match in company stock.

How bout an ESPP plan where the employer sells to you at a discount?

That'd work, too. How long do you have to keep it?

My point is, and was, if it makes sense. Most of the time it is just blind homerism and underperforms a solid mutual fund.

You could flip it the day they bought the shares and just pocket the 15% discount.