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I have been parusing (sp) this board for a while now. I am truly impressed by the way you all have managed to exit the rat race early. Hey, there's another term you could use to tell people what you do for a living, "I won the rat race". Anyway, back to the subject. I am at the early stages of investing. I'm 25, and started a 401k about 18 months ago. My wife is 24, and started about 2 years ago with her 401k. Though I am started already with the 401k's, it still seems so early to start planning my employment exit. But, I realize early is better. So, what I am interested in is some advice from all of you job-independent (hey, there's another possible term) Fools. In particular I would like to know how you started investing, your plans, your style, what you made priority such as debt vs. investing. We just bought a house a month ago, so we have a 30 year mortgage at 7.875%. My wife's car is paid for, but I have roughly 3 years on mine (not sure of the rate, around 9% I think). I don't have a great paying job, but I think the experience could be very profitable for my future. At this point, we can't save a lot, maybe $500-600 a month. We also want to start a family within the next couple of years. I'd like to start saving $1,000-2,000 a year to invest, but I'm not totally decided considering our future. I'm also not sure where I want to start (FF4, index fund, or dive right in to picking stocks myself). Sorry to make this so long, but I really would like to hear from everyone, and their life strategies/experiences.

Doug
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Your greatest weapon is TIME. Save early & save often & save alot if you can. You have 20 years to figure out how to invest what you have saved effectively. The value of a dollar put away at age 24 is enormous compared to the value of $2 put away at age 30 and so forth.

TheBadger
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No. of Recommendations: 5
You are fortunate to be thinking of this so early. If I had made wiser (more Foolish) decisions when I was your age I would be retired well before my current target of age 46.

My advice:

Live within but preferably below your means. Enjoy life, but don't spend wastefully.

Save as much in the tax deferred plans as you can. When you can go beyond your 401k, start a Roth IRA.

Get the maximum company contribution that you can by matching your own contributions if necessary.

Go for Growth. Forget any Wise advice to put anything in low risk options until you are within one or two years of early retirement. You can always work another year or two if the market is down when you've reached your target, but low risk investing will not compensate for the lost opportunity of not being in the market as fully as possible for as long as possible.

Have a mix of investment strategies as soon as you can afford it. Index funds are good in 401(k), disciplined stock strategies are favored for IRAs and long-term-buy-and-hold (LTBH) such as Rule Maker/Breaker is good in taxable accounts.

Factor your retirement plans into your other lifestyle decisions. Having kids early has advantages and disadvantages when compared to having them later in life or not at all. Buy cars that don't drive your taxes and insurance rates up. Buy quality for items that have to last and quantity for consumables. Don't sacrifice quality of life now for a subsistence level early retirement. You want to have a good quality of life always. Making informed decisions will help.

4goneFool
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Doug, 20 years goes by fast. It seems like yesterday I had the same questions. I had just gotten married, graduated,(VERY BROKE) and gone to work. I knew one thing from watching my parrents, I wanted to be free by age 45. Well, I had a plan, it involved saving, investing and letting compounding work for you. PAY YOUR FUTURE FIRST! Yes, that means every month, no matter what breaks, who gets sick, what you see you want, you have to save it and invest it and NEVER EVER touch it. Thats right, not ever.

How much? That depends on you and the Mrs. Some people think their rich a $40,000 a year others poor at $200,000. Absolutley enjoy yours lives everyday (you may not be alive in 20 years) . You might check out the Living below your means message board. Hey, they are cheap, but you can get ideas about squeezing a buck. Every thing you buy/invest in is just like the seat next to you on an airplane. One guy is paying $1000 the next guy $150. They both get the same service.
Driving a Mercedes vs a Honda over the span of your life can be as much as a million dollars difference.
Think about what things cost in your time not dollars.
Stay out of debt! If you can't pay cash for it, wait till you can. You may find that the acticipation is more satisfying the the actual purchase.
Sorry, if I sound like your dad, but you did ask.

Best of luck.
PAY YOUSELF FIRST!

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Interesting. You sound almost identical to my position 5 years ago.

In addition to what other folks have said, do think about killing off that car loan sooner rather than later. In effect you're getting a 9% tax-free return on investment. Basically I'd put any savings other than the 401(k) into the car and some kind of cash emergency fund if you don't have one already. Spend the time until you pay off the car reading about investing and so forth. Once you've paid off the car and built up some kind of resonable emergency fund put any long term savings into, say 50% index fund and 50% hand-picked stocks until if/when you beat the market yourself over, say, a 3 year period. The idea here is to give yourself enough room to learn without risking everything. You should also have short term savings in something boring (CD/short term bond fund/whatever) so you can do things like save for trips, cars, etc. which you should pay cash for from now on.

In terms of life experiences, I'd suggest reading old postings here and also check out the living below your means board. There are all kinds of interesting stories there.

Doug
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As TheBadger said, time is your greatest weapon. Don't skip out on life now, but also try to put away as much as you comfortably can now.

Each person has thier own comfort levels. I love my 10 year old car, and couldn't think of a single reason for getting a newer car when my sister accused me of hoarding my money because I haven't bought a new car yet. For some having a new car is important, for others having a big house is key. Some need to go on lots of vacations, while others feel getting rid of the bonds of working for someone is important. (these aren't mutually exclusive, but the fewer expensive frills does make retiring early much easier)

As far as what method to save/invest, if your employeer matchs up to a certain % that you put in your 401k, you should hit that mark first. After that it depends on what you are comfortable with. I presented an excel sheet to a group recently showing that a 401k or Roth had the same net value, and still beat out investing completely on your own even with a 10% penalty for early withdrawl (a couple of assumptions were made, I believe I said constant return, input, and inflation rates). But I continue to only put in up to the company matching rate in my 401k, and then invest the rest on my own. I could have just as much control in a self-run Roth, but I just feel better with it the way I do it (and it helps a lot that I've had outstanding returns during the 25 months I've invested on my own).

For someone just starting, I would recommend 75+% in an index fund and/or FF4. Pick stocks with the rest and see how you do....it will also let you feel more in touch with your savings.

Best of luck! You should do great starting this early. I think I might have to put that "I won the rat race" on a shirt.....something to wear when I break it to my boss that I'm leaving and not heading off to another employeer, all at the tender age of 24 :)

4aapl

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My biggest advice is: keep your expenses as low as you can.

If you find your discretionary income doubling over the next few years, resist the urge to splurge---invest as much as you can as early as you can. The sacrifice you make now will be apparent before you know it!

With regard to the 401(k), I contributed the maximum allowed, although the company-matching maximum may be more reasonable early on. My 401(k) consisted of a single mutual fund, the Vanguard 500 Index Fund.

If you still have money left over, I would invest it in a Roth IRA, again through a S&P 500 mutual fund. The beauty of the Roth is that you can get at your contributions if you ever need to, and all the earnings are tax free once you reach 59 1/2.



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...but I have roughly 3 years on mine [my car] (not sure of the rate, around 9% I think

Doug,

After re-reading your message, I agree with dwade (yet another Doug) that paying off your car loan, and certainly any credit card balances, should come before investing in your retirement.

Trying to retire early with debt overhead (with the possible exception of a home mortgage, although even that's controversial) will be very difficult.

Doug
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Here are a few things that have worked for me;

1) Stay out of debt as much as possible.

2) See if you can have an automatic depost from your paycheck done to a seperate account from your checking account. Do not get an ATM card for this account. Years ago, before ATMs, I had money automatically deposited to a credit union that was across town. It was not open on Saturday and I could just barely make it there and back during my lunch hour. Inconvience pays. I only dipped into it a few times in the three years it took to save up to buy a house.

3) Don't be afraid to have a higher deductable on your car insurance. Get the numbers then figure out how much you will have by the time you are 65 if you invest the difference. You will be amazed even after you subtract out a reasonable number fender benders that you have to pay extra for.

4) Every time you get a raise, have half of the raise amount automatically put into an IRA or 401(k). I have done this and it is works great because you will never miss the money. If you average only a 4% raise each year then after 10 years you will be saving 20% of your income!

5) Live a lifestyle below what you think you can afford. There will always be unexpected expenses.

Greg

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I thank you all for the advice you've been giving. I really haven't decided when I want to become independent. I don't think I'll ever make enough to do it before 40 like some here, but I do want to quit early. To add to my info, I am contributing the max for my 401k to get my employers match. And, I have also been checking out the LBYM board lately, a lot of good stuff there. I don't think we'll have a problem in that department, since I have always been sort of a tightwad with my money. I always have a hard time making decisions when spending more than like $20. I sometimes find it hard to part with money. I would like to pay off my car, but after buying our house, and doing some remodeling, we don't have much money left. This leads my to another question. We have planned on adding extra to our house payments. But after reading some posts about paying off my car, I'm not sure. Which do you think is best, to pay extra on the house, or pay extra on the car first? And while I'm at it, I have a banking question. We bank with National City, and would like to get an checking account with interest. I would really like to get one of those accounts that are all rolled into one with checking, money market, and stocks. But the lowest minimum I've seen is $10,000 which we don't have at the moment. Any advice on this area, or is there a board here that would be a good place to ask? Thanks again.

Doug
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dhewie asks:
Which do you think is best, to pay extra on the house, or pay extra on the car first?

If it were me, I'd pay off the car first. This satisfies both methods usually quoted on the LBYM board: 1) pay off the higher rate loan first, or 2) pay off the smaller sized one, so you have the satisfaction of knowing you completely paid off a loan.

I would really like to get one of those accounts that are all rolled into one with checking, money market, and stocks. But the lowest minimum I've seen is $10,000 which we don't have at the moment.

Don't sweat it yet. Until you pay off the car loan, and then save a 3-6 month emergency stash, I would think that a simple interest-bearing checking account and passbook savings account are sufficient. You have plenty of time to worry about better returns once you put together enough capital to make it worth your while.

Bob H, aka Blues
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Doug,

After re-reading your message, I agree with dwade (yet another Doug) [...]

Doug


Clearly some of you guys are going to have to change your names. :-)

Doug
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This leads my to another question. We have planned on adding extra to our house payments. But after reading some posts about paying off my car, I'm not sure. Which do you think is best, to pay extra on the house, or pay extra on the car first?

To add to the previous answer, I want to mention that people show these impressive numbers where you add $10 to a house loan 30 years later you've saved $500 (or whatever, I'm just making up numbers). What you're seeing is just compounding at work -- paying off a house early is the only real compounding most people will ever see outside of any work-related retirement accounts. You won't get the same level of compounding in the car, of course, but the assumption here is that once the car's paid off the money saved goes into investments that will compound for a long time. If your plan was to spend it on strippers, never mind. :)

The exception would be if you're paying PMI. Depending on how much the fee is, and how close you are to having 20% equity, it may be worth paying the house down to the 20% equity level.

On the combined account issue -- yep, if you have an account at a reasonably service oriented broker you don't need a checking/savings account. Schwab has a nice account for this. But you'll pay for that service with $30 trades and so forth. It may make more sense just to have a checking/savings account at a bank and go for a deep discount broker with $5-$8 trades and just do your stock trading there. It really isn't a big deal to move money around. Even the most bare bones brokers have some kind of check-writing ability (although there may be a $500 minimum so you keep the bank account for the small stuff).

There is a discount broker board if you're curious but the industry is changing so fast I pretty much wouldn't worry about it. By the time you check the first few items off on your list there will be a different set of brokers around.

Doug
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Any advice on this area, or is there a board here that would be a good place to ask?

Start here:

http://www.fool.com/money/banking/banking.htm

Most of your how do I bank questions will be answered including some that can help you save more money now.

4goneFool
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<<<The exception would be if you're paying PMI. Depending on how much the fee is, and how close you are to having 20% equity, it may be worth paying the house down to the 20% equity level.>>>

We are paying PMI of about $42 a month. I'm not really worried about it though. We bought a VERY cosmetically challenged house. The guy at the mortgage company said we could drop PMI if we get the house re-appraised. It was appraised at $81,000, and the appraiser told the guy at the mortgage company that it would increase to high 80's low 90's with some cosmetics. So, needless to say, hopefully we can get a new appraisal in a year or so, and drop the PMI.

And about the bank thing, I am interested in the online banks. Anyone here use them? What do you think about them? Pros, cons, let me have it.

Douglas (Is that better?)
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And about the bank thing, I am interested in the online banks. Anyone here use them? What do you think about them? Pros, cons, let me have it.

Been with CompuBank since September. Love 'em. Love their customer service.

Try surfing on over to the Online Banking board. Lots of useful info there.

phantomdiver
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On the combined account issue -- yep, if you have an account at a reasonably service oriented broker you don't need a checking/savings account. Schwab has a nice account for this. But you'll pay for that service with $30 trades and so forth.

I use TD Waterhouse. $12 trades. Checking, ATM, check card, no fees.

-Jason
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dhewie said,

hopefully we can get a new appraisal in a year or so, and drop the PMI.

The problem with an appraisal is that you usually have to pay several hundred dollars for it. Check with the mortgage company again. Some of them accept a real estate agent's opinion of value, which you can usually get for free. Then if your balance is less than 80% of their opinion, the mortgage company should drop your PMI for a nominal fee.

Douglas (Is that better?)

Much better :)
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I have been reading the Doug to Doug to Doug, etc post and I must say it is a challenge to follow who is giving the advice. I just hope it's not required to be named Doug to retire early :)

Here is my take on paying down the car loan or paying extra on the house. That car loan rate seems pretty high, plus the interest is not tax deductable. At least the house interest is. Personally I hate paying interest on a depreciating asset such as a car. My vote is pay off that car.

On another note, several people responded about making sure you have an emergency fund. I couldn't agree more. It would be very unfortunate to have a good long term retirement plan get fowled up as a result of a major unexpected event.

My family is proof of that. We had our first son and he was born with a significant health problem. It lead us to temporarily move to be near the hospital and we kept our house and rented another place. It was more than our house. Everything worked out great, but because we planned well our standard of living was minimally impacted and our investments and retirement plan stayed on track. There was enough stress in our life waiting for our son to have a heart transplant. If we had been under stress from money issues it would have made the situation worse.

Fool on!

JDW
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I just hope it's not required to be named Doug to retire early :)

OK, this is getting way off topic but what the heck.

When I was in high school some guy named Doug moved into the area. I was a senior and he was a junior. Well, I really didn't want to deal with having two Dougs around, and I knew that one of us would end up with a nickname, and I didn't want it to be me. So when I met him during his first week or so I walked him around and introduced him to everybody as Phil. He protested a little but not too much, and everybody figured he was the one that was kidding -- saying his name was the same as mine. So the whole year everybody called him Phil.

The last week or so before graduation I started calling him Doug, which confused the heck out of everybody. But by the end of the week I'd gotten everybody to call him Doug again. So no damage done. :)

Doug
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Well, I wouldn't really want to be called Phil. How about Hewie? My last name is Hewitt, so a common nickname for our family is Hewie. Or you could use the nickname my wife gave me, Sweetpea :)

Doug, Hewie (The guy who wrote the original post)
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dhewie (aka Doug),

Kudos to you for thinking ahead while time is on your side!

You've gotten lots of great advice from folks. I'll add two other sources of very solid counsel, particularly for someone your age:
- Rich Dad, Poor Dad by Robert Kiyosaki
- Wealthy Barber (1998 Edition) by David Chilton

Fool on!
messerb


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