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I am a new investor. 25 years old.

Have maxed out my Roth IRA for the past 2 years (currently at 10k) and am planning to continue to do so for the foreseeable future. My ROTH is with Vanguard, and I am investing in the 2050 Target Retirement fund (VFIFX).

I do not have a 401k, as I am working freelance.

My only debt are 3 student loans, all at fixed interest rates:

Loan 1: $7600 @ 4.875%
Loan 2: $5900 @ 6.8%
Loan 3: $3700 @ 5.00%

I pay $160 on each loan monthly, for a total of $480.

My income is $25,000 a year - or approximately $2,000 per month.

---------------------------

With that said, I am looking to invest more money. I am aware I am socking away 20% of my annual income in the ROTH. Coupled with my student loan payments, its approximately $900 monthly (though in actuality I pay the ROTH payments in a lump sum at the beginning of the year), or 45% of my monthly income. After my rent each month ($350), this 45% jumps to 62.5% of my monthly income.

I now have $750 left over each month that I deposit into my checking account.

I have approximately $8000 in my checking account that I consider my "emergency fund", though I also live off of it. (It hasn't dipped below $7,000 in over a year.)

----------------------------

I would like to contribute an additional $200 (or so) monthly to another Vanguard index fund, while continuing my ROTH contribution.

I know I have very little to work with. Am I jumping the gun on wanting to invest beyond my ROTH? Do I simply not have enough income to work with? I am aware that whatever I invest in outside of my ROTH is subject to taxes, and I have to be mindful of any transaction fees associated with any of the Vanguard funds I decide to invest in.

As far as possible investments, I am seeking something long-term high risk/high reward. Specifically, I was considering the Vanguard VFSVX fund, which is comprised of international small-mid cap stocks. It costs $3,000 to open and has 0.75% purchase and redemption fees. My plan was to basically throw the extra money in here and forget about it. Is this insane?

I suppose I am trying to start investing more as early as possible. Would it be wiser to forget additional investments until I save up more money and my loans are paid off (at least 4 years)?

Sorry for the long winded post...

Looking for suggestions and advice. Help me out...what should I do?

Thank you!
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First, pay off your student loans.

Then, think about investing further.

Donna
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I also would suggest you give some consideration to paying additional on the loans probably starting with the one with the highest interest rate. That is like a sure 6.8% on your money which at this point isn't a bad return.
If you insist on investing I would suggest a total stock market fund in a taxable account. With Vanguard this fund has a $3000 minimum I believe. If this gives you a too high allocation to equities in your total investments you might consider changing the Roth from the 2050 fund to something like the 2030 fund.

Bob
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Thank you Donna and Bob for your insight. I suppose my only concern about paying off loans and investing later is my fear of losing time for the investments to grow. Since messing around with compound interest calculators it seems that every day I don't invest now will be a huge regret in the future. And Bob thank you for the recommendation. regarding the total stock market fund.
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I'd definitely pay-off the 6.8% loan before I put additional money in the stock market.

intercst
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es, you are sooooooo young. You need to concentrate on paying off those student loans. I agree that you should concentrate on paying the highest-interest loan first, and then on down. Right now, you are paying $480.00 per month on those loans, a fairly large sum considering your income. Just think what you could do with that additional $480 per month.

Donna
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Since messing around with compound interest calculators it seems that every day I don't invest now will be a huge regret in the future. And Bob thank you for the recommendation. regarding the total stock market fund.



you need a calculator that takes into account the expensive loans..

(>:

... i agree with pay off the loans with the extra you'd invest .. then a taxable account --with index funds, the taxes shouldn't be significant

or you might do a traditional IRA since you don't/won't have a 401(k)




just don't do what i did at 25 (all 'extra' money went to playing blackjack)
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Thanks everyone! It seems as if cooler heads prevailed. I will be focusing on paying down my debt before investing beyond the ROTH IRA (which I am going to continue maxing out if it kills me.)

I didn't know one could have a Roth and a traditional IRA simultaneously. Pardon my naivete.

Once my loans are paid off, or at least the 6.8%, and I decide I want to invest more, is a Traditional IRA what I should be looking at?

My rudimentary understanding now tells me that my ROTH is maxed, so that basket is full. My only choice from here is to invest in something (like an index fund) without any sort of tax sheltered container or to invest within a traditional IRA. The obvious benefit being my income tax deduction on the contributions.

Is this logical or has my train of thought taken a little detour?
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Now I'm realizing I must be wrong.

The $5000 a year contribution limit is for ROTH + Traditional combined right? I couldn't do $5k in each?

If this is the case then what I said in my prior post is erroneous.

I thought I was onto something...dang!
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es3190 writes,

I didn't know one could have a Roth and a traditional IRA simultaneously. Pardon my naivete.

You can have both, but you're still limited to a $5,000 total annual contribution, however you want to split it between a Roth and traditional IRA.

intercst
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There are a few other considerations here. Is the interest on your student loans deductible ? If you are disabled, are they canceled ? Do you qualify for the saver's credit for your Roth contributions What are your other expenses ? Have you done a financial plan ? What does your career path look like?

I don't think it's as simple as pay off your loans and invest.
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I suppose my only concern about paying off loans and investing later is my fear of losing time for the investments to grow. Since messing around with compound interest calculators it seems that every day I don't invest now will be a huge regret in the future.

Right now, paying interest is working against you. Any money you put into investments you are essentially borrowing at a 6.8% rate. So you need to subtract that from the 'return' you are planning on getting.

I would suggest that you change the way that you are making payments on your student loans, assuming that the $160 each is not the minimum paymnet on each loan - I would suggest that you pay the minimum payments on the 4.875% and 5% loans, and pay the rest of the $480 toward the 6.8% loan. So if your minimum payments on the 4.875% and 5% loans total, say, $200, pay $280 on the 6.8% loan. Paying off the highest interest rate first will cost you the least in interest.

In addition to getting some/all of your student loans paid off before investing in taxable accounts, I would strongly suggest starting to build an emergency fund. Especially as a self-employed freelancer, you really need to have at least 6 months living expenses in a liquid account that doesn't have the risk of principal loss. When you are starting out, counting on 'investments' to pull you out of an emergency is risky - what if you lose a client, or they don't pay, at the same time that the stock market drops 10% - 20%? (See recent stock market action for confirmation that it can happen.) Your negative return on having to sell stock that's down will cost you more than if you had put that money in a bank accout at 1% interest and let it sit there, not earning 'market returns'. So, once you get at least the 6.8% loan paid off, my recommendation would be to save at least $1000 in a 'starter' emergency fund, then split your extra cash flow 50/50 between savings and investing.

As far as what to invest in - Vanguard has one fund that I am aware of that has a $1000 minimum - the STAR fund - if you want to get started earlier than it takes you to save up $3000. It's a stock/bond mixture. Additionally, you should check to see if Vanguard will start you with an investment account with less than $3000 if you commit to automatic monthly investments. They used to do this, not sure if they still do.

AJ
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The $5000 a year contribution limit is for ROTH + Traditional combined right? I couldn't do $5k in each?

Yes, the $5000 a year is total, and you can't so $5k each in a Roth and a Traditional IRA in one year.

However, as a freelancer, you may want to look into a solo 401(k). You can contribute as both the 'employer' and the 'employee'. The employee contributions can be contributed as either Roth or pre-tax, up to $16,500 per year (currently - increases with inflation). Employer contributions allowed are a little more complex to calculate, but in general, you can contribute up to 25% of your business' net profit, and employer plus employee contributions cannot be more than $49,000. Employer contributions must be pre-tax. With total compensation of $25k right now, you won't have to worry immediately about the limits, but the 401(k) does allow you to contribute more than an IRA.

AJ
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Answering before having read the thread, so this may be a repeat (or not).....

I do not have a 401k, as I am working freelance.

My only debt are 3 student loans, all at fixed interest rates:

Loan 1: $7600 @ 4.875%
Loan 2: $5900 @ 6.8%
Loan 3: $3700 @ 5.00%

I would like to contribute an additional $200 (or so) monthly


You have an emergency fund, which is very good.

After that, I'd start paying down the loans. Starting with the highest rate first.

My reasoning is two-fold. One, no debt is good, IMHO. Eventually, debt limits your options in your career and life. Two, paying off debt is a "guranteed" return. Investing, even in a sure thing, is not. Look at your highest loan rate, its pretty much at the historical average return of the S&P500. If someone offered you that as a guranteed return for the next 5 years you'd probably take it.

Pay off debt then worry about investing.

JLC
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Your numbers don't make sense to me. Health insurance ? Est. Taxes ? Rent? Transportation ? Food ?
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Thanks to everyone for the continued advice.

I am going to look into the personal 401k plan. Thank you for the tip.

@reallyalldone:

My rent was included in the monthly figure above. After my ROTH, loans, and rent, I am left with $750 each month.

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Taxes: Approx. $140 per month. (after my business expenses I've been paying about $1600 a year)
Health Insurance: None.
Transportation: Free, and occasional subway, say $20 per month.
Food: Approx. $240 month

These costs total to $400.

$750 - $400 leaves me with approx. $350 month.

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Pretty meager, though after the aforementioned advice I am going to work on directing as much of this "extra" money as possible my loans (while still trying to enjoy life.)

I now realize I am definitely not in any shape to invest further.

Does anyone feel that starting and maxing out my ROTH was a poor decision?
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@reallyalldone

Is the interest on your student loans deductible ?
Yes.

If you are disabled, are they canceled ?
Yes.

Do you qualify for the saver's credit for your Roth contributions?
No idea what this is. Will look into it.

What are your other expenses ?
See previous post.

Have you done a financial plan ?
Other than the information I have provided in this thread, no.

What does your career path look like?
I am confident that I will be able to maintain my $25k/year income. Increasing my yearly salary is doubtful unless I can figure something else out on the side.
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At $25K/yr income you don't pay much (if any) income tax. Don't put money into a regular IRA, it's no benefit to you.

A target fund is an okay default idea for somebody that doesn't know anything about investing and intends to keep it that way. It's not a *bad* idea, just an *inferior* idea. It's an okay way to start while you are ramping up your knowledge.

The problem with your loans is you have high required payment compared to your income. The interest rate isn't all that high, so I'd mainly be concerned from the payment/income ratio. First thing I'd do is pay off the LOWEST BALANCE loan, to get that payment off your back -- forget the traditional idea of paying off the highest interest rate loan first. Your problem is the payment, not the interest. You didn't say what the payments are, just what you are paying. Pay the minimum on loans 1 & 2 and put the remaining of the $480 to #3. Then work on the next one with the lowest balance.

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You don't need mutual funds. You can do what they do, but cheaper, on your own.

How much work & effort are you willing to do on your investing? How much time are you willing to devote to it EVERY MONTH? If none, then funds are the right thing.

Diversifying is vitally important. Diversify amoung several asset classes. With a little bit more work, you can add trend-following to improve your risk-adjusted returns.

If you willing to do a few hours now and no more than 5 minutes a month thereafter, then start with this paper: "The ultimate buy-and-hold strategy"
http://www.merriman.com/bestofmerriman/ultimatebuyandholdstr...

If a few hours now and 30 minutes a month, RELIABLY EACH AND EVERY MONTH, then start with this paper: http://ssrn.com/abstract=962461
Also, a summary of the asset classes is here: http://www.mebanefaber.com/2008/09/17/yawn/

Another variant can be found in the Guyton/Klinger paper(s). I don't have a link, you'll have to google it.

Another good paper is: http://optimalmomentum.com/OptimalMomentum.pdf

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You do not need mutual funds or Fidelity or Vanguard at all. I invested for 20+ years before I opened an account at Fidelity.

You can do all the above cheaply at a discount broker. Just2trade commissions are only $2.50. Zecco & Optionshouse are also cheap.
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Does anyone feel that starting and maxing out my ROTH was a poor decision?

No! The most difficult thing for most young people to do is just getting started. Even if you do nothing for the next 35 years, you'll be in good shape. You've seen the compound interest calculators -- so you know this.
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At $25K/yr income you don't pay much (if any) income tax.

He's self-employed so that makes a difference.

Don't put money into a regular IRA, it's no benefit to you.

He could use a SEP - still no benefit ?

He also has NO HEALTH INSURANCE.
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Before you invest any further, pay off ALL your student loans. Why do you wish to keep paying interest rates which are, more than likely, above what you will receive from your investments? In addition, you would be freeing up $480.00 per month which can be added to place into investments.

I think you are taking the cart before the horse.

You must look ahead. I know you are only 22. Look ahead to the day when you might wish to purchase a home, get married, have children.

Donna
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reallyalldone writes,

He also has NO HEALTH INSURANCE.

He also has very little in the way of assets and health insurance is really more of a bankruptcy insurance protection.

Depending on the monthly health insurance premium and the number of loopholes in the policy that could still cause bankruptcy if he gets sick, I could see holding off on the health insurance until I had more financial assets to protect.

intercst
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Depending on the monthly health insurance premium and the number of loopholes in the policy that could still cause bankruptcy if he gets sick, I could see holding off on the health insurance until I had more financial assets to protect.

Speaking from a bit of experience, health insurance can also determine both choice of treatment and speed of access to that treatment. It may also show that you are insurable in the future. At that age, health insurance with about a $2500 annual deductible is under $200/month.
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reallyalldone writes,

Depending on the monthly health insurance premium and the number of loopholes in the policy that could still cause bankruptcy if he gets sick, I could see holding off on the health insurance until I had more financial assets to protect.

Speaking from a bit of experience, health insurance can also determine both choice of treatment and speed of access to that treatment. It may also show that you are insurable in the future. At that age, health insurance with about a $2500 annual deductible is under $200/month.

</snip>


That's correct. A $2,400 health insurance premium and a $2,500 deductible is almost 20% of a $25,000/yr income. I'd certainly look closely at an expenditure of that magnitude. I agree that having insurance might give you access to better care -- but at what price?

intercst
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That's correct. A $2,400 health insurance premium and a $2,500 deductible is almost 20% of a $25,000/yr income. I'd certainly look closely at an expenditure of that magnitude. I agree that having insurance might give you access to better care -- but at what price?

I'm just an idiot I suppose but I have strongly encouraged my sons who are in a similar situation to pay for health insurance. Then again one had a friend who had testicular cancer when they were seniors in college and they have both gotten to see the devastation of serious illness up close and personal over the past couple of years.

Neither of them has come near the deductible. I think it's called insurance for a reason, though.
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reallyalldone writes,

I'm just an idiot I suppose but I have strongly encouraged my sons who are in a similar situation to pay for health insurance. Then again one had a friend who had testicular cancer when they were seniors in college and they have both gotten to see the devastation of serious illness up close and personal over the past couple of years.

</snip>


You're making my point for me.

Someone with $8,000 in assets who gets testicular cancer is going to be bankrupt at the end of his treatment whether he has health insurance or not.

intercst
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Someone with $8,000 in assets who gets testicular cancer is going to be bankrupt at the end of his treatment whether he has health insurance or not.


I disagree. Perhaps with an indemnity plan, someone in this case would end up not being able to afford their portion of the health expenses and have to declare bankruptcy, but with other types of plans such as HMO's and I think PPO's, this is not the case.

There's a reason that I won't get an indemnity plan for our health insurance, and it is because when I had my kids some 20 years ago, if we had had an indemnity plan, we would have been looking at significant expenses out of our pocket, but we had an HMO, and so there was no cost to us other than insurance premiums for the twins' hospital care. As one came in at around $150k, and the other one well exceeded $750k, we are not talking chump change.

I have given my kids the same advice as reallyalldone. Health insurance is an absolute necessity for them, and that comes right up there with food and housing. In fact, back in the days when I had the kids and my employer, like most others, was having layoffs left and right, DH and I decided that if push came to shove and we had to choose, we would pay medical premiums before we'd pay the mortgage. That was because we had limited liability in the case of the mortgage and would only face foreclosure, but we'd face bankruptcy and the chance that we couldn't access necessary medical care in a timely fashion without health insurance.

Even for someone with limited income, I'd put that health insurance at the top of the list.
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2gifts writes,

I disagree. Perhaps with an indemnity plan, someone in this case would end up not being able to afford their portion of the health expenses and have to declare bankruptcy, but with other types of plans such as HMO's and I think PPO's, this is not the case.

</snip>


I have a PPO with a $2,500 annual deductible and the only reason the annual out-of-pocket limit dropped from $15,000 to $6,000 is because of Obamacare. Presumably, someone with cancer won't be working full-time (if at all). That should clean out the $2,000 he has left.

intercst
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Presumably, someone with cancer won't be working full-time (if at all).

I have several coworkers working full-time while being treated for cancer.
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PSUEngineer writes,

<<<Presumably, someone with cancer won't be working full-time (if at all).>>>

I have several coworkers working full-time while being treated for cancer.

</snip>


They didn't need time off to go to chemo or radiation therapy? Were they getting it on nights and weekends?

The OP is self-employed making $25,000/year. It's not like he has sick days he can use to avoid losing income.

intercst
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Someone with $8,000 in assets who gets testicular cancer is going to be bankrupt at the end of his treatment whether he has health insurance or not.

If he has health insurance, he'll be able to get treatment and probably be still be alive to file bankruptcy. Without health insurance he'll be dead.
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<butting in>

Presumably, someone with cancer won't be working full-time (if at all)

. . . . .

They didn't need time off to go to chemo or radiation therapy? Were they getting it on nights and weekends?


I had cancer and I worked full-time. I got to work early and left when I needed to go to the hospital.

Cancer and chemo and radiation affect different people in different ways. It is not possible to generalize about them. Some people go through everything and emerge feeling weak, but otherwise all right. Others are down flat from the start.

Not all health insurance works the same, either. The most expensive year I had was in 2001. It included chemo, surgery, radiation, MRIs, biopsies, more bloodwork than I want to think about (today we're only taking 7 vials of blood!)and lots of pharmaceuticals. My out-of-pocket expenses were $300.00. And that included co=pays and parking.

I believe that people should have health insurance. It can be a lifesaver, because someone with health insurance is more likely to go to a doctor when symptoms crop up, and it's possible to treat a disease at an earlier stage.

Nancy
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Thanks everyone for the advice. I didn't anticipate this turning into a debate about the merits of health insurance, though I fully understand its importance.

My main takeaways from this thread are to pay off my loans before any further investing, and to seriously consider health insurance (which will be a lot easier to do once my loans are paid off and the health insurance isn't eating up 25+% of my monthly income...)

Thanks again for the help, and will be back to post once these loans are paid off in a few years...!

I'll be lurking!
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