Happy Independence Day!
I am taking advantage of the holiday to catch up on my financial decisions. I ran across this site in some searches, and I was hoping you guys could answer some questions for me.
Background: age 21, single, Texas (no state income tax), debt free, just started with the FAA under the AT pay plan 6/11/07 (current salary: 18k, starting Aug. 1 40k, max over the next 2 years: 54k), eligible to retire at age 45, 6/2031
I use a credit card for almost all of my expenses and pay it off in full (30-60 day grace period accumulating 5% interest in a MMA) each month
Current holdings: $66000 in a taxable investment portfolio that I had created in March; it is performing well and I am happy with its diversity. My strategy is low-cost ETF’s, buy and hold. I also established a Roth IRA which I maxed out for 2006 and 2007 (5500 due to limited earned income in 2006). Finally, I have $40,000 in a MMA which is currently earning about 5.3%.
My questions/concerns:
I am very serious about stuffing away as much for retirement as early as possible to take advantage of the compounding effects. My goal is 20% pre-tax income. I am trying to decide if the TSP is the most efficient investment vehicle for my first year. I will not get ANY matching contributions until June 2008. I realize the fees with the TSP are fairly low, but I would like the flexibility to pick my stocks/ETF’s rather than being stuck with the limited selections offered with the TSP. I was thinking about putting the money I would normally put in the TSP into a traditional IRA. Can I max. contributions to both a traditional and a Roth in the same year? If not, is there any other pre-tax contribution vehicle I should consider or is the TSP really the best choice even without the match?
Once I get the match, I’ll certainly go up to at least 5% TSP. I will be able to start making 2008 IRA contributions in January (I’m guessing that’s right). I would normally plan on maxing the IRA’s (withdrawals from the MMA) Jan. 1 and paying the MMA back over the year. Assuming the 40k above though, I’ll be putting about 8,000 for the year in retirement accounts. ~1,000 of that has to go to the TSP (5% for last half the year). The rest can go to the Roth, TSP, or IRA (if I open one based on above). Any advice on where to send it?
My financial advisor recommended I put SHY (Lehman Bros. 1-3 year treasury bonds) in the Roth. I don’t understand why I am putting such a low yield investment in the Roth. Yes, it is consistent, but it seems like I would want something with a higher return to accumulate tax free. Any thoughts? He said it was for tax efficiency. One of my biggest concerns is that I am getting dividends every month that I just have to let sit in my account (for a year) until I can make my next contribution to avoid paying another transaction fee. Money in the cash account is only earning .5%. I have Scottrade, so it will cost $7 to sell and $7 to buy something else. I was planning on waiting until January when I put in 2008 contributions to sell and buy something else in one transaction, but for $7, I might as well do it now. I think the gamble that new investment could earn that $7 back by Jan. is a good one. I haven’t really looked at what I would want in the Roth, though. I was thinking a Brazil/Mexico, type international ETF (maybe ILF).
Buying a truck: I’ve got a nice car, which I bought with cash used about 2 years ago. I’d like a truck (used around $17,000) in addition sometime in the next year or so. I was planning on paying for it out of the MMA. Any other recommendations on putting my money to work more efficiently than paying cash on it?
Buying a house: I’m going to rent an apartment for a few months, if not a year or two, mainly to get a feel for the area, but with the tax-savings of a mortgage, the freedoms of a home (tooling on the racecar in the garage), etc, I am very seriously considering purchasing a house shortly. Houston real estate is fairly affordable. I have seen homes similar to what I would like in the $120-160,000 range. I plan on paying for the closing costs and down payment with the money market (thus why it is not invested in the stock market currently). Between that and the truck, the MMA will probably be considerably smaller. Is there any other avenues I should consider other than a 30-year fixed mortgage with a 10% down payment? Explain your reasoning. If I know I will only be in the house for a few years, I was thinking maybe a 5/1 ARM might work well, but I have just scratched the surface in the fine print of these things. If the 5/1 is a cheaper interest rate than the 30, and I know I’ll be selling in less than 5, is it the smart move? I know some people borrow from their TSP’s, and there is also provisions for first time home buyers to withdraw funds from IRA’s penalty free. Does anyone have arguments for or against doing so?
Finally, to me using a credit card and paying off in full with the grace period is like free money, because you earn interest on the money you would use to pay for the purchase in the MMA. There’s also the 1% cashback. I’m looking into cards that have 2-5% on grocery and gas purchases. I might try to split and use both. Do you guys have any other “free money” tricks that are fairly easy to enact?
I know that’s a lot of ground to cover, and many circumstances will probably change before everything is enacted, but I like to operate with a working plan that I will mold and change as necessary to accommodate the life events (marriage, family, promotion/location change)
I am taking advantage of the holiday to catch up on my financial decisions. I ran across this site in some searches, and I was hoping you guys could answer some questions for me.
Background: age 21, single, Texas (no state income tax), debt free, just started with the FAA under the AT pay plan 6/11/07 (current salary: 18k, starting Aug. 1 40k, max over the next 2 years: 54k), eligible to retire at age 45, 6/2031
I use a credit card for almost all of my expenses and pay it off in full (30-60 day grace period accumulating 5% interest in a MMA) each month
Current holdings: $66000 in a taxable investment portfolio that I had created in March; it is performing well and I am happy with its diversity. My strategy is low-cost ETF’s, buy and hold. I also established a Roth IRA which I maxed out for 2006 and 2007 (5500 due to limited earned income in 2006). Finally, I have $40,000 in a MMA which is currently earning about 5.3%.
My questions/concerns:
I am very serious about stuffing away as much for retirement as early as possible to take advantage of the compounding effects. My goal is 20% pre-tax income. I am trying to decide if the TSP is the most efficient investment vehicle for my first year. I will not get ANY matching contributions until June 2008. I realize the fees with the TSP are fairly low, but I would like the flexibility to pick my stocks/ETF’s rather than being stuck with the limited selections offered with the TSP. I was thinking about putting the money I would normally put in the TSP into a traditional IRA. Can I max. contributions to both a traditional and a Roth in the same year? If not, is there any other pre-tax contribution vehicle I should consider or is the TSP really the best choice even without the match?
Once I get the match, I’ll certainly go up to at least 5% TSP. I will be able to start making 2008 IRA contributions in January (I’m guessing that’s right). I would normally plan on maxing the IRA’s (withdrawals from the MMA) Jan. 1 and paying the MMA back over the year. Assuming the 40k above though, I’ll be putting about 8,000 for the year in retirement accounts. ~1,000 of that has to go to the TSP (5% for last half the year). The rest can go to the Roth, TSP, or IRA (if I open one based on above). Any advice on where to send it?
My financial advisor recommended I put SHY (Lehman Bros. 1-3 year treasury bonds) in the Roth. I don’t understand why I am putting such a low yield investment in the Roth. Yes, it is consistent, but it seems like I would want something with a higher return to accumulate tax free. Any thoughts? He said it was for tax efficiency. One of my biggest concerns is that I am getting dividends every month that I just have to let sit in my account (for a year) until I can make my next contribution to avoid paying another transaction fee. Money in the cash account is only earning .5%. I have Scottrade, so it will cost $7 to sell and $7 to buy something else. I was planning on waiting until January when I put in 2008 contributions to sell and buy something else in one transaction, but for $7, I might as well do it now. I think the gamble that new investment could earn that $7 back by Jan. is a good one. I haven’t really looked at what I would want in the Roth, though. I was thinking a Brazil/Mexico, type international ETF (maybe ILF).
Buying a truck: I’ve got a nice car, which I bought with cash used about 2 years ago. I’d like a truck (used around $17,000) in addition sometime in the next year or so. I was planning on paying for it out of the MMA. Any other recommendations on putting my money to work more efficiently than paying cash on it?
Buying a house: I’m going to rent an apartment for a few months, if not a year or two, mainly to get a feel for the area, but with the tax-savings of a mortgage, the freedoms of a home (tooling on the racecar in the garage), etc, I am very seriously considering purchasing a house shortly. Houston real estate is fairly affordable. I have seen homes similar to what I would like in the $120-160,000 range. I plan on paying for the closing costs and down payment with the money market (thus why it is not invested in the stock market currently). Between that and the truck, the MMA will probably be considerably smaller. Is there any other avenues I should consider other than a 30-year fixed mortgage with a 10% down payment? Explain your reasoning. If I know I will only be in the house for a few years, I was thinking maybe a 5/1 ARM might work well, but I have just scratched the surface in the fine print of these things. If the 5/1 is a cheaper interest rate than the 30, and I know I’ll be selling in less than 5, is it the smart move? I know some people borrow from their TSP’s, and there is also provisions for first time home buyers to withdraw funds from IRA’s penalty free. Does anyone have arguments for or against doing so?
Finally, to me using a credit card and paying off in full with the grace period is like free money, because you earn interest on the money you would use to pay for the purchase in the MMA. There’s also the 1% cashback. I’m looking into cards that have 2-5% on grocery and gas purchases. I might try to split and use both. Do you guys have any other “free money” tricks that are fairly easy to enact?
I know that’s a lot of ground to cover, and many circumstances will probably change before everything is enacted, but I like to operate with a working plan that I will mold and change as necessary to accommodate the life events (marriage, family, promotion/location change)
Keep up the good work.
