Reader Profile: JW

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is FMF reader JW. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I'm a single 28 year old male living in California.  I was born and raised in Texas and only moved to California 1 year ago.  I graduated with a Business Managment degree in May 2008.  I worked lower paying jobs for 2 years before landing the much better job I currently have in December 2010.  I was very fortunate to have frugal parents teach me the value of money.  I became interested in money while in college and started reading personal finance and investing books.  Rich Dad, Poor Dad was my first read and sparked my interest even more.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

Between my scholarship and parents helping me out I was able to attend college without any loans.  After college I made enough money to support myself and save a little but really couldn't get ahead.  My current job pays very well but at the expense of me being on call 24/7 which can lead to tons of hours and makes it difficult to plan things.  During my first year (2011) I made just over 100k.  This past year (2012) I made about 170k.  That growth trend won't continue and I anticipate making a similar income in 2013.

I don't have any debt but I also don't really have any assets.  My company pays for my vehicle, insurance, and gas.  I don't own a car and I rent an apartment.  I was contributing to a Roth IRA for 2010 and 2011 but my income exceeded the limit for 2012 so I'm unable to contribute.  I contribute about 8-10% of my paycheck to my 401k and my employer matches 4%.

Currently I have:

• 30k in 401k
• 12k in Roth IRA
• 10k in an emergency fund
• 10k in a discount brokerage
• 60k set aside in cash DOING NOTHING!

I haven't made time to volunteer like I'd like to but do donate a decent amount to charity

What are the current financial issues you're facing (saving, paying off debt, etc.)?
 
My biggest issue is where to invest my money.  I HATE that it's just sitting there but I don't want to rush into something and make a bad investment.  I really want to invest in real estate but I feel overwhelmed as it's such a big decision.  I've never even bought a house for myself so buying one for investment seems daunting.  I also like the idea of buying a business (maybe a franchise) but fear that will require more time than I have available.

The 10k I have in a discount brokerage I intend to invest selling covered calls.  I've had good returns doing that in the past it's just somewhat hard to manage with my job because I may easily be out of town and without internet access when I really need it.

What are your plans for the future (retire early, build your career, etc.)?
 
I want to retire early!  Comfortably of course, but I would love to have that freedom.  I love business(or the idea of it at least) and think running my own company would be nice.  I know it takes a lot of hard work but the goal would be to just be the owner so my presence isn't required.  I want to acquire as many passive(or minimal effort) assets as possible.  I would like to transition to a Monday through Friday job at my company only working 40 hours a week in the next couple years.  This will lower my income to around 100k but should provide me more happiness through free time and stability.  It should also give me the opportunity to focus more on investing and with the lower income I could start funding my Roth again.  I ultimately want to start a family and think working 24/7 is not the best choice for doing so.

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
 
Try not to buy things you don't need and never buy things you can't afford.  My dad was very conscious about buying/signing up for anything that requires a monthy payment.  Use credit cards wisely for your benefit.  I got my first credit card when I was 18 and now have 7 different ones.  I've never paid a dime in interest by paying any balance off in full each month.  (Even when I made $7-$10/hr during school, or my first job out of college paying $13/hr)  7 cards is a lot and certainly not necessary but I have 785-800 credit scores and have never had a loan in my name. 
 
Don't invest in something without doing you due diligence.  I foolishly "invested" in season tickets during the summer of 2011 to 2 different sports teams.  I was making good money and I love sports.  Throughout my life when I wanted to go to a sporting event it always seemed that tickets sold for a decent amount above face value.  Well what I failed to realize was that's often not the case and only for the more popular opponents(which I had been buying tickets for throughout my life).  I thought at the VERY WORST I'll break even and I'll probably make a decent return, ESPECIALLY if they go to the playoffs.  WRONG!!  Most of my tickets wouldn't sell at all or if they did it was for face value which when you factor in the commission it's a loss.  I think the net loss was 50% of my investment and I never got to enjoy one of the games myself.  A few friends and family members were able to attend but overall it was a terrible decision.  Lesson learned.

Comments

[My Financial Independence Journey]

If you want to retire early, then you need to start channeling your money into income producing assets. Skip making 401K and IRA contributions that aren't matched. Then pick one or two income producing asset classes and start working from there.

For me, I invest primarily in dividend growth stocks to build my passive income stream. I've been considering real estate as well, but the high prices here are keeping me away for now.

Owning your own business is not a passive endeavor. I would not recommend becoming an entrepreneur unless you're really passionate about your business.

You make a boat load of money, so the more expenses that you can shave down, the faster you can get to early retirement.

[retirebyforty]

You did a great job so far at saving money, but you need to invest that 60k. Perhaps you can buy a house and then rent out the spare rooms. That's a great introduction to being a landlord. If you don't want roommates, then maybe a duplex?

You can also look at REITs if you're not quite ready to become a home owner. I like dividend stocks too. Good luck!

[Glen @ Monster Piggy Bank]

Try not to buy things you don't need and never buy things you can't afford. - That is some of the best advice I have heard for a while.

Don't worry to much about that 60K doing nothing - It is more than I have :p

[T]

Wow, I'm really curious what you do for a living.

[JP]

Put that 60k into a rental property or into a low-fee index fund.

[Paul]

You may regret cutting your income so much. While you're still young and don't have family, you should put those hours in and keep cashing in.

[Luis]

Do not, and I repeat DO NOT invest your 60k in the stock market at this time, period! This includes low fee index funds, Vanguard ETFs, etc. You are better off letting that money sit DOING NOTHING versus losing it in an ill-timed environment. The stock market is bullish, this month's peak has been the highest since before the crash in 2008.

http://www.usnews.com/news/blogs/rick-newman/2013/02/08/why-the-dow-cant-stay-above-14000

If you feel comfortable where you are and foresee yourself living in California for many years to come, then I'd recommend that you buy a home and get out of renting as soon as possible. This, I believe, is the only inflation hedge and smart money move to do with the extra money you have sitting in cash.

What are your expenses? 10k may not be enough emergency. How would you feel about the 10k if you didn't have the 60k? Not very comfortable, I presume. Up that emergency fund in a blink of an eye.

Wait to the future before you invest in the stock market again and in the meantime, reduce your retirement to matching, reduce your work hours and start thinking about a future life partner, it is the secret to life's happiness.

[Luis]

The idea that you cannot fund a Roth is incorrect. Federal law regarding IRA investments have changed in the last few years in that high income earners can now do what's called a "backdoor" Roth. What you do is open a non-deductible IRA (traditional) for this year, 2012. Then in 2013 you take the amount you have in traditional IRA and convert into a Roth IRA.

https://personal.vanguard.com/us/insights/taxcenter/planning/is-a-roth-conversion-right?WT.srch=1

[SR]

Good job saving money and being intentional with your life. I suggest you up your emergency fund to 6 months of expenses. Then, if you plan to buy a home in the next few years begin saving for the down payment. If you do not intend to buy a home, then I would being investing in good diversified growth stock mutual funds with low costs. I would ignore the chicken little comment from above and simply dollar cost average into a good fund. To do this you need to set an automatic $1000 - $2000 month to automatically draft into your selected fund. This prevents you from buying "at the peak" and acknowledges that no one can "time the market".

Finally, just a comment about the back door Roth IRA noted above: Only our Federal Government would do something so stupid. Really just change the rule so that everyone regardless of income can directly contribute to a Roth IRA.

Good Luck!

[Joe]

JW excellent job - as others have mentioned do a non-deuctibale IRA and convert it into a Roth - with your 401 K I believe you can put in $17,000 per year +/-, then do a HSA, lastly look at Whole life insurance. All of these products let your investments grow with out taxes. regarding the stock market - ALWAYS dollar cost average.

good luck

[JTS]

As others have mentioned, you have done very well on living within your means thus far and saving a good chunk of change. As has already been suggested, I would pad your "emergency funds" a bit more and then invest the remainder.

I would also echo your sentiments to truly think through your future plans before acting on an investment at this point. If you plan on buying real estate, I would make sure you plan to remain in your area for a little while. Rental properties don't necessarily need to be in close proximity to you, but it definitely helps especially if you plan on maintaining it yourself.

If you go the stock/mutual fund route, I would take SR's advice and just dollar cost average into a mutual fund (or a handful of funds) so that you can avoid buying at peak. Something like Betterment has the ability to set up automatic deposits, which may be a nice feature for that purpose.

-Jon

[JayB]

You could buy some silver. It is a great way to hedge against inflation at the least. Many arguments for and against buying silver, but you might research its ratio with gold, its price and how it is affected by quantitative easing, and the industrial uses. These and other factors persuaded me into investing in some with extra money lying around.

[jim]

The $170k salary is certainly great and you have about $120k saved which is good. But we have little info on the rest of the finances and theres next to nothing on spending or expenses. Wheres all the money going? We also don't konw what part of CA that JW lives in which makes a big difference.

I wouldn't be in any rush to invest in a Roth. You have a high income and high tax brackets. Not a good time to pay taxes.

I'd vote for going ahead and doing real estate if you want, but I don't know what market you're in. If you live in SF or LA I might not touch real estate locally and I am not a fan of long distance real estate investing.

[Luis]

@ Jim

I ran some numbers, based on a certain set of assumptions of course, and came to an approximate break-even point for determining whether to invest in the Roth vs traditional IRA. Assuming you are currently in the 35% tax bracket during all of your income years, at 8% average growth, you would benefit from traditional IRA if your income tax bracket during retirement will be at 24.9% or below. Conversely, if you think your tax bracket will be 25.1% or higher during retirement then the Roth comes out on top. We can't get too specific of course, but the exercise is telling in helping to determine how much you need to reduce your tax bracket to see which financial vehicle is better than the other.

[Mike Hunt]

Hi JW,

Congratulations on securing a high income position so soon after graduation.

My advice is that whether you keep the $60K in cash or invest this in the market, this will not have much impact on your net worth at this stage in your life.

The biggest driver to growing your net worth will be to continue to earn a high salary and keep your expenses low to keep saving money. Your investment decisions will become more important once you have accumulated several hundred thousand dollars of savings... given that the market is near the historical 2007 highs I'd think that you aren't missing out on a huge run up to come, and that savings will be the primary engine of net worth creation.

You may want to think about putting in the hours needed to drive such a strong income and keep that savings rate pegged very high.

If you look up my profile, you can see I got to a very healthy net worth by using savings with a high income as a primary wealth accumulation strategy.

-Mike

[Mark]

Great job, JW. If you save 70% to 80% of your salary (which sounds like it is possible since your expenses are so low and your income so high), barring extreme events, you can most likely be financially independent within 7-10 years. At that savings rate, your rate of return actually doesn't matter that much.

I'd leave the 60K in cash alone or maybe put some of it in a short term municipal bond fund like Vanguard Limited Term Tax Exempt. Then after, maxing out the 401K, I'd take any additional savings and put it a boring but good performing mutual fund with low expenses such as Vanguard Wellington. This fund is roughly 60-65% stocks & 35%-40% bonds & cash. It has solid long term returns that match the performance of the overall stock market with lower volatility.

[Meg]

The first thing I would do is increase your 401k contributions to the maximum $17,500 for 2013. It's the best tax break you can get currently - and seeing as you live in California you need all the help there you can get. Plus you start maxing out your retirement accounts now and continue to do so each year no matter what you will never be sorry.

You'll still have plenty left over after taxes to play with. Nothing wrong with having a year's worth of expenses in cash (interest rates will go back up eventually so try not to sweat it). You'll never regret having the flexibility to quit your job, start a business, or travel anwhere at any time you choose. But as for investing I'd pour excess money into a low cost balanced index fund. It's tax smart, you won't lose money to fees and commissions, and you don't have to think about it. Oh, plus passive investing beats active management over time in every study every time. You don't have the time or capacity to day trade, and that's a loser's game anyway even if you did. Put up to 5% of your income in a brokerage account for play money if you must, but don't confuse that with your real long term investment strategy.