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 Post subject: What to do with spare money?
PostPosted: Sun Oct 14, 2012 7:04 pm 

Joined: Sun Oct 14, 2012 7:02 pm
Posts: 3
Hi, I'm a 25yo. No family, take home is $60000 after 20% investment in traditional TSP. Currently maxing out ROTH IRA at $6000. Investing $12000/yr in lending club. Paying student loans at $6000/yr. So leaves me with $36000/yr or 3000/month. Living expenses are $1800 which leaves me with $1200/month. Is there anything else I can invest in after TSP, IRA roth, and lending club?


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 Post subject: Re: What to do with spare money?
PostPosted: Sun Oct 14, 2012 9:54 pm 

Joined: Sun Sep 30, 2012 7:17 pm
Posts: 4
Hey,
You've got a great start to your investing there. With no family commitments on your money, you have a great opportunity to really set yourself up for the future. And you've obviously done your homework with your budgeting.
What concerns me is that you have given over responsibility for your investments to other parties. Once you have invested in your TSP and lending club, am I right in assuming that someone else decides where this money goes and what dividends or interest you receive?
My suggestion for your $1200/month is to put this in an investment that you control. Do a bit of research on the share market or investment properties. There are heaps of books on these. Figure out what investment platforms you are interested in, and give them a go. You'll make more money from your own investing (if you put in the time to learn) than if someone else is always getting a cut (admin/brokerage fees).

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 Post subject: Re: What to do with spare money?
PostPosted: Mon Oct 15, 2012 12:19 am 

Joined: Wed May 30, 2012 11:56 am
Posts: 134
FYI - The maximum IRA contribution for someone your age is $5,000, it's only $6000 for people over a certain age (52? I forget, it's older than I am :D).

You can put extra to your student loans and invest in your future by freeing up the income in the years to come. You can also go to someplace like Vanguard or Fidelity and open up a regular taxable account where you have a variety of investment types like mutual funds, ETFs, plain ol' stock, etc. If you don't have an emergency fund already I would recommend saving up some cash first. And finally, what about some fun?


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 Post subject: Re: What to do with spare money?
PostPosted: Mon Oct 15, 2012 3:06 am 
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This is unclear: are you contributing the max to the TSP? At only 2.5 basis points, those are the best funds you'll ever have the opportunity to buy.

If your student loan interest rate is 5-8% I would accelerate payments now (maybe even before investing). Even if it's only 2-3%, paying it off early would be better than earning <1% on cash sitting in the bank, so this would be OK if you are somewhat uncomfortable about putting more money at risk in the markets.

What is the deal with the "lending club?"

Tim


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 Post subject: Re: What to do with spare money?
PostPosted: Mon Oct 15, 2012 6:50 am 
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Personally I would stop with the lending club. It is difficult to get risk information but I suspect that they are not great investments on a risk-adjusted basis.

I would first max out your TSP then open an account with Vanguard or T. Rowe Price and put any extra money in index funds in there. Paying off student loans is also a great idea.


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 Post subject: Re: What to do with spare money?
PostPosted: Mon Oct 15, 2012 7:38 am 

Joined: Mon Nov 01, 2010 5:15 pm
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DoingHomework wrote:
Personally I would stop with the lending club. It is difficult to get risk information but I suspect that they are not great investments on a risk-adjusted basis.

I couldn't agree more. No matter what spin you put on Lending Club type of arrangements, at the end of the day most of the people borrowing that way are not very credit worthy. If they can't walk into a bank & get a loan why would you want to loan them money over the internet with little or no due diligence?

If you wanna gamble, go to Vegas!


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 Post subject: Re: What to do with spare money?
PostPosted: Mon Oct 15, 2012 12:54 pm 
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I just got a chance to look up the Lending Club. So you are:

1. investing about 1/3 of your savings in, essentially, junk bonds
2. investing in a product, more specifically, with barely five years of history
3. paying at least 1% in fees, and up to 30% if the loans go to a collection agency
4. doing this with a 25% tax drag

This is insane. Junk bonds have a level of risk similar to stocks, but with very limited upside in comparison due to the nature of fixed-income. This is why all researchers (even people on the fringe like Taleb and Zvi Bodie) conclude that you should take your risk with equities and use fixed-income to keep the rest of your money safe.

I would liquidate your investments at the Lending Club, come up with a more conventional asset allocation (common stocks and investment-grade bonds) for your whole portfolio, and implement it in a low-cost, tax efficient manner.

By the way, I'm reminded of something written on the BadMoneyAdvice blog a few years ago about p2p lending (after the author failed to get any return on his investment)...

Quote:
What could we have possibly been thinking? Granted, it is pretty clear that in the middle of the last decade those professional loan officers did not do a very good job. But they screwed up by being too permissive, not by missing out on opportunities to lend to our trustworthy and wholesome peers.

Tim


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 Post subject: Re: What to do with spare money?
PostPosted: Mon Oct 15, 2012 1:13 pm 
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timwalsh300 wrote:
I just got a chance to look up the Lending Club. So you are:

1. investing about 1/3 of your savings in, essentially, junk bonds
2. investing in a product, more specifically, with barely five years of history
3. paying at least 1% in fees, and up to 30% if the loans go to a collection agency
4. doing this with a 25% tax drag

This is insane. Junk bonds have a level of risk similar to stocks, but with very limited upside in comparison due to the nature of fixed-income. This is why all researchers (even people on the fringe like Taleb and Zvi Bodie) conclude that you should take your risk with equities and use fixed-income to keep the rest of your money safe.


But the money is NOT invested in junk bonds! The difference between a lending club and a junk bond is like the difference between being investing in your neighbor's lemonade stand vs buying stock in a company when it was against the ropes. The long term prospects for an established company are way better than the lemonade stand for many reasons.

I have some money in a junk bond fund (although we say "high yield" is mixed company). But it is nowhere near 25% and no one should have that much at risk in something like that. Junk bonds can be pretty attractive. They have a similar risk profile to stocks because they generally have the same exposure as the common stock. That means that the company pays a yield that is consistent with the cost of capital for equity funding, i. e., about the same return as stocks. But many junk bonds actually are in line in front of the common shareholders in the even of bankruptcy.

None of that applies here so I'd say that p2p lending is FAR riskier than junk bonds.

I do agree with points 2 and 3. I'm not sure about the 25% tax drag. How is that different than any other investment? Do you mean because of the qualified dividend exclusion?

In any case, I agree with your point that lending clubs are a bad idea.


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 Post subject: Re: What to do with spare money?
PostPosted: Mon Oct 15, 2012 5:22 pm 

Joined: Fri Jun 25, 2010 3:06 pm
Posts: 81
Pay off all debt including the student loan. It's the best guaranteed return available.


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 Post subject: Re: What to do with spare money?
PostPosted: Mon Oct 15, 2012 5:27 pm 
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DoingHomework wrote:
I'm not sure about the 25% tax drag. How is that different than any other investment? Do you mean because of the qualified dividend exclusion?


I'm assuming that he takes the risk on junk-grade debt in lieu of stocks with the expectation that it will drive the total return of his portfolio (as opposed to buying investment-grade debt to minimize portfolio downside). With the current tax rates on capital gains and qualified dividends, the advantages of holding stocks are obvious. If tax laws goes into effect as written for 2013, and qualified dividends go away, stocks will continue to be more tax efficient. If they return 8% annualized, only 25% of that would be from dividends taxed as ordinary income, and 75% would be taxed at the lower capital gains rate. If Lending Club returns 8%, 100% of that would be taxed as ordinary income. So Lending Club must significantly outperform stocks to be an equally effective driver of portfolio growth after taxes.

Tim


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 Post subject: Re: What to do with spare money?
PostPosted: Tue Oct 16, 2012 10:55 pm 

Joined: Sun Oct 14, 2012 7:02 pm
Posts: 3
timwalsh300 wrote:
This is unclear: are you contributing the max to the TSP? At only 2.5 basis points, those are the best funds you'll ever have the opportunity to bu
Tim


I am contributing 20% of my salary to TSP. Half or $500/month is allocated to C fund (medium and large companies) and half is allocated to I fund (international)

My IRA roth is with Vanguard. Half is allocated to 2045 target fund and half is allocated to international stock.

I know I have a lot of international, but my risk tolerance is 10/10. I'm not in position to buy real estate now, so what else should I invest in.


Last edited by superflunker87 on Tue Oct 16, 2012 11:03 pm, edited 1 time in total.

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 Post subject: Re: What to do with spare money?
PostPosted: Tue Oct 16, 2012 10:58 pm 

Joined: Sun Oct 14, 2012 7:02 pm
Posts: 3
DoingHomework wrote:
Personally I would stop with the lending club. It is difficult to get risk information but I suspect that they are not great investments on a risk-adjusted basis.

I would first max out your TSP then open an account with Vanguard or T. Rowe Price and put any extra money in index funds in there. Paying off student loans is also a great idea.


How do taxes from profits of index funds work if they are outside of a Roth? What books should I read to learn more? I will stop putting any more money into lending club.


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 Post subject: Re: What to do with spare money?
PostPosted: Wed Oct 17, 2012 7:34 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 818
Re:taxes

Mutual funds are based on their assets and the value changes each day. Most delve out some form a dividend. If outside of a tax sheltered account, you will receive a form from the mutual fund company each year, usually before the end of Jan, and can "claim" the prize for the IRS. When you sell, you will need to know how much you bought initially and along the way (money in) and the money you received when you sold. The difference is what you owe taxes on(aka capital gains). Depending on how long you hold the investments will determine the tax rate. Capital gains is not taxed until you "cash out" and therefore is more tax efficient than dividends, which are paid at least annually, usually quarterly, but can be more frequent than that.

You may also want to read up on the wash sale rules. The Boglehead's investing book covers all this.

Re: Junk bonds

The latest new trick is to take junkier junk and be able to repay investors in-kind. In other words, the guy makes off with your money and replaces with crappier junk.

Re: Lending club

I don't think it is that bad. I do believe, it takes A LOT of time picking loans, researching etc. It should be pointed out that we are in a recovery (my opinion) and returns are much higher than if there were another crash, in which case, I would predict you would take a bath (just like the rest of us). In essence, market risk.

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 Post subject: Re: What to do with spare money?
PostPosted: Wed Oct 17, 2012 9:20 am 
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You still didn't tell us the interest rates on your student loans. Unless the rates are 2-3%, I think paying them off early is your best investment opportunity.

Beyond that, pouring money into TSP and Vanguard index funds like you've been doing is great; keep going. If 20% of your salary doesn't fill up the TSP, contribute more. After that, buy more Vanguard index funds in a taxable account. This is better than investing in real estate, in my opinion.

Nothing is necessarily wrong with holding almost 100% stocks (and 50% foreign), but if you didn't get to experience 2008-2009 you should read some market history and take some time to reflect on your chosen level of risk.

Tim


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 Post subject: Re: What to do with spare money?
PostPosted: Wed Oct 17, 2012 10:24 am 
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superflunker87 wrote:
How do taxes from profits of index funds work if they are outside of a Roth? What books should I read to learn more? I will stop putting any more money into lending club.


This is assuming you are a US person paying US taxes...

An individual will owe income taxes on income earned from index funds. There are two sources of income from index funds: the fund can distribute dividends or you can make (or lose) money from trading. You report this income on you tax returns every year based on what is reported to you on a 1099 form you will receive in early February every year.

Generally speaking the dividend distributions will be "qualified" for a low tax rate (currently 10-15%) while the capital gains will also be subject to a tax rate of 10-15%. But these rates are part of the "Bush tax cuts" that expire in December of this year and current have not been extended. So basically no one knows what the tax rates will be in just a few weeks!


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