Where to start with around $40k?

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jgs9455
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Where to start with around $40k?

Postby jgs9455 » Fri May 04, 2007 2:30 pm

I recently came into some money, around $40k. It's currently in a high interest checking account @ 5.05%

All my credit cards are paid off and always paid off every month.

I have 10k in student loans, but the interest rate is 5.325% & the interest is tax deductible. I also have a 10k car loan, but the interest rate is only 3.99%. Only a couple years left to pay on each.

Should I pay off the above debt or invest it?
I am thinking of using some of this money eventually as a down payment on a house.

I was going to use some of it to fully fund a Roth IRA for this year. (I'm 30 and I fund my 401k at 6% + max 3% match. It is set to increase 1% every year and anually rebalance.)

Reading multiple money blogs and this forum, I think I want to invest the rest at Vanguard, Fidelity, or Zecco.

I know Vanguard recently lowered it's fees and I could go with their Index Mutual Funds. Or that there are Fidelity Spartan funds. Or should I purchase Vanguard ETFs at Zecco? Which would be better for me?

I know people can't give official advice, but I'm looking for a couple smart suggestions. Thanks. :?:

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jer
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Postby jer » Fri May 04, 2007 4:55 pm

If you itemize tax deductions, the student loan is pretty much a wash. No pressing need to pay it off early, but no huge reason not to if it bothers you for some reason, or if you don't want to make the payments any more. If you don't itemize, it's a negative, but not a big one.

Don't bother paying off the car loan early. You'll be tying up 10k in cash in your car, and the return is too low to be worth it.

I'd go with a couple of index funds for the bulk of it. I prefer ETFs to mutual funds, but there are arguments on both sides of that one.

And, frankly, you're young enough that you should take some of that money and put it in something riskier with greater reward potential. You can still handle a loss without worrying about decimating your retirement. Find something attractive that looks like it could give you high returns. If your $40k is after-tax, take $5-7k and speculate.

Finally, take about $2000 off the top and go buy something you want, or take a vacation, or whatever it is that you're tempted to do with all that money. If you just do it, and set a reasonable limit, you won't be overly tempted to go blow the whole $40k over time, with the inevitable "hey, I have all this money, why am I living like I don't?" feeling.

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Postby plonkee » Sat May 05, 2007 4:39 am

When do you intend to buy a house? If its within the next 5 years, I'd leave that sum in savings. I'd be tempted to do the same if its within the next 10 years.

I also second the suggestion to spend a small portion on something frivolous - like a vacation, or something that you've always wanted. It'll keep you on track much better.
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Postby consultantjournal » Sat May 05, 2007 2:08 pm

Do you have any retirement savings or an emergency fund yet? If not, put 1/2 in retirement savings, 1/4 in an emergency fund, and the rest into savings for a downpayment. (And treat yourself to a vacation, if you can afford it.)
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Postby jdroth » Sun May 06, 2007 11:19 am

Good advice here so far. My own inclination would be:

* Set aside some amount ($5,000?) in an emergency fund, if you don't already have one.
* If either of the loans feels like a burden to you, pay off some or all of it. As far as debt goes, yours is fairly innocuous.
* Do you have some medium-term financial goals? Purchasing a house? Taking a trip? If so, put a portion of the money into something like a CD or a high-yield savings account.
* Fully fund your Roth IRA. Index funds are good, but like jer suggested, you might consider something a little riskier.
* Do take a small portion and have some fun with it!

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Postby jgs9455 » Tue May 08, 2007 3:57 pm

Thanks for the input everyone.

Jer and JD -
What might you suggest as something riskier than index funds? Did you mean speculating and picking my own stocks?

I might do that at a later time with some fun money, but I want to use this money as a basis to get me started.
There are some specific stocks I would like to hold, and I also like high dividend stocks (Dogs of the Dow).
I'll go with Sharebuilder for those or Zecco - but I read bad things about Zecco and I know Sharebuilder can be expensive.

I have a emergency fund setup but I might add to it.

The loans don't burden me at all right now. I like knowing I could pay them off, but instead I'm making higher returns than what I'm paying through investing. And it gets me started investing sooner than later.

My 401k retirement account is funded at 9% and increasing, but I'm also going to open a Roth IRA.

I'm thinking of going with Vanguard over Fidelity. That way I can have my Roth IRA and my taxable account at the same place.
I know Fidelity's expense ratios can be lower, but I heard that some of their funds fees cause them to operate as a loss leader and they could increase them at any time. I've been reading up on Vanguard under Bogleheads and at diehards.org

I don't want to "blow" any of the money on a vacation, as right now I'm keeping to the adage of living WAY BELOW my means.
Thanks again!

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Postby MossySF » Tue May 08, 2007 6:09 pm

jgs9455 wrote:What might you suggest as something riskier than index funds? Did you mean speculating and picking my own stocks?


They probably meant stocks -- whether index funds or not -- are riskier than bonds/money market and with your time horizon, you should be in stocks.

Now not all indexes are created equal. Some indexes tracking different market segments can certainly have more volatility but with higher longterm returns than other indexes. How specifically you should divide up your money, more reading at Bogleheads will give you a better feel. I personally like the analysis in this post and have been tilting my portfolio in roughly this fashion since late last year.

http://diehards.org/forum/viewtopic.php?t=1962&sid=5fea624863658189a337627910d424aa

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Postby squished18 » Wed May 09, 2007 6:39 am

"Rule No.1 is never lose money. Rule No.2 is never forget rule number one." - Warren Buffett

That's all I can add.

squished

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Postby JerichoHill » Wed May 09, 2007 9:13 am

There's no reason to speculate and gamble on the stock market with your money just for the chance at higher returns given that you're not an expert in that field. You'd just be playing the sucker to the sharks around you.

A 40K Downpayment is 20% of a 200K house. Nice. Here' my plan, assuming you're going to buy a home

20K DownPayment remains in high yield account, until you want to buy.
15K goes towards stock savings -Roth Fund points to: WilShire Index, Contrarian, European Fund, and ETFS
3K gets added to your emergency fund

Blow 2K.
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Postby jer » Wed May 09, 2007 12:57 pm

jgs9455 wrote:Jer and JD -
What might you suggest as something riskier than index funds? Did you mean speculating and picking my own stocks?


Picking your own individual stocks, unless you have an idea of what you're doing, could be a recipe for disaster. If you do know of something that you think is likely to give good returns, go for it, but if you don't, it's probably best not to try. Most people can't do that arbitrarily, even professionals, and when I say to take on more risk, I don't mean to be silly. :)

But there are funds that aren't designed to be as "safe" or diversified as, say, an S&P 500 index fund. Those can give much better returns, though with greater risk. One example, and I'm not necessarily recommending it: I own a bunch of shares in FXI, an index fund tracking large-cap Chinese companies listed on the Hong Kong exchange. The returns are very high. It's also a bit of a roller coaster -- it goes up or down 1-2% on any given day, and sometimes more. On the other hand, I've got more profit (unrealized, as yet) on that one investment this year than all of my other investments combined. It's a good idea to get a bit of background on something like this -- in this case, it's important to realize that while China's economy is blazing, the market is in a bubble, and the whole thing could blow up at any moment.

So that's the kind of thing I mean. Picking individual companies, unless it's something that you know well, is like a monkey throwing darts at a list of stocks. But if it's something you know, there's no reason not to put some small amount into them at this point. Just realize that the market -- in the US and most of the world -- is in a crazy bubble right now. More reminiscent of 1929 than 2000, really. So take care.


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Postby JerichoHill » Thu May 10, 2007 10:23 am

JER,

The Hong Kong stock market is bubblicious right now. I'd take your gains and run, doubts are now appearing in your newest issue of the economist, ya heard it hear first.
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Postby jer » Thu May 10, 2007 11:43 am

JerichoHill wrote:The Hong Kong stock market is bubblicious right now.


Yeah, I know. Unfortunately, the US market is bubbling just as badly, and I'm not keen on putting anything there. I keep wondering when the time will come to retreat to cash and bonds -- my finger is on the trigger, but despite the bloodbath that's going on today, I haven't pulled it yet.

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Postby JerichoHill » Thu May 10, 2007 1:58 pm

I'd argue the US market is teetering on recession, but its not as bubblicious as China's market right now. I think you're fine right now, but I recommend divesting before the olympics conclude.
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Postby MossySF » Fri May 11, 2007 11:29 am

jer wrote:
JerichoHill wrote:The Hong Kong stock market is bubblicious right now.


Yeah, I know. Unfortunately, the US market is bubbling just as badly, and I'm not keen on putting anything there. I keep wondering when the time will come to retreat to cash and bonds -- my finger is on the trigger, but despite the bloodbath that's going on today, I haven't pulled it yet.


Bloodbath yesterday, 2X rebound today. After seeing the drops yesterday, I put in limit buy orders for next month's schedule but the market open jumped right over most of those limits.

Bubbles can lead to even bigger bubbles which can lead to humongous bubbles which can lead to bubbles that encompass the entire universe. The inverse is also true. You never know when the uptrends or downtrends will reverse themselves. The moral of the story: decide your % beforehand and stick to them. When one segment bubbles over, you take periodic corrections to reduce that % and grab some profit. When a segment drops, take periodic corrects to refill and buy at lower prices.

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Postby jer » Fri May 11, 2007 12:19 pm

MossySF wrote:Bubbles can lead to even bigger bubbles which can lead to humongous bubbles which can lead to bubbles that encompass the entire universe. The inverse is also true. You never know when the uptrends or downtrends will reverse themselves. The moral of the story: decide your % beforehand and stick to them. When one segment bubbles over, you take periodic corrections to reduce that % and grab some profit. When a segment drops, take periodic corrects to refill and buy at lower prices.


I've got stop orders in on everything just in case. This bubble is scary, but I'm still in -- I'm not putting any more money into US equities but I'm not ready to dump the index funds yet either. I have to admit that I was a bit shaken yesterday, though.


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