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Want to have a million dollars by age X? [Personal Finance] Thread

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Posts

  • PantsBPantsB Registered User regular
    edited April 2010
    Dibs wrote: »
    Question about investing (semi-posed before on H&A):

    I'm about to graduate with an MSc and have accrued ~$25000 in student debt (through OSAP, an Ontario-government run thing up in Canada). Should I pay off the entirety of this debt before setting up some investments? At which point should I start investing / stop putting all my disposable income towards paying off the debt? Opinions? Advice?

    Largely depends on the interest rate of the loan. You want to pay some off regularly because it helps establish credit, but if interest rates are less than what you'd get investing its often more beneficial to only make small monthly (~100) payments.

    11793-1.png
    Spoiler:
  • SavantSavant Registered User regular
    edited April 2010
    Thanatos wrote: »
    When you talk about an 8% average return, that's actually fairly conservative; it assumes you have a very high risk profile when you're young, with a much higher return until you turn about 40-45, and slowly reduce your risk until at about 60 or so you're probably only pulling in 3-4% per year.

    Maybe sometime in the past, and maybe sometime in the future, but right now I think that is an optimistic number for someone in the US.

    Also, it really depends upon what sort of interest calculation you are using there. Let's take the S&P 500 over the span of 2 decades, starting at the end of 1989 and ending at the end of 2009. It closed at 353.40 on December 29, 1989 and closed at 1115.10 on December 31, 2009. That is an appreciation ratio of 3.1553, and at an annualized interest rate that comes out to about 5.91% APY. This doesn't take into account dividends or inflation, but gives a bit of a snapshot of the return.

    Or, if you want to cherry pick a bit and have the calculations go from today where the stock market has been rebounding a ton, the S&P 500 was at 344.74 on April 16th, 1990 and closed at 1,211.67 today. That gives you about 6.487% APY.

    That's a decent rate of return on the long haul, but it was risky over the short term. And by risky, it means you either could have made a much higher return in the short term if you timed the markets right, or outright lost a bunch of money if you timed them wrong.

    So sure, I think you could get over 8%, but that's not a conservative estimate for a run of the mill investor. That's an estimate that depends on someone knowing what they are doing, having a decently high risk tolerance, and having some luck. You can definitely make a few points under that decently safely by incorporating bonds, CDs, and dividend yielding stocks, but you'll still have to expose yourself to some risk (such as interest rate risk) and/or accept reduced liquidity (you take a penalty for getting out of a CD before maturity) to make much of anything in the current environment.

  • Eggplant WizardEggplant Wizard Registered User regular
    edited April 2010
    This is near and dear to my heart. I think I'm already doing things right with respect to retirement savings, but my dad died last year and I inherited some money. I have no idea what to do with it.

    Hello
  • SavantSavant Registered User regular
    edited April 2010
    PantsB wrote: »
    Dibs wrote: »
    Question about investing (semi-posed before on H&A):

    I'm about to graduate with an MSc and have accrued ~$25000 in student debt (through OSAP, an Ontario-government run thing up in Canada). Should I pay off the entirety of this debt before setting up some investments? At which point should I start investing / stop putting all my disposable income towards paying off the debt? Opinions? Advice?

    Largely depends on the interest rate of the loan. You want to pay some off regularly because it helps establish credit, but if interest rates are less than what you'd get investing its often more beneficial to only make small monthly (~100) payments.

    To expand on that, it might be a good idea sock away just a little bit beyond that even if the math works out such that is in his favor currently to pay off the bulk of the student loan instead of investing. That would simply be as a rainy day fund if something goes wrong or he really wants to buy something unexpectedly in a few months or so. I'm going to take a stab in the dark and guess that the interest rate on the student loan is going to probably be more forgiving than most other sorts of loans he would need to get down the line to cover if something comes up.

    Those details probably depend upon the specific circumstances beyond that though.

  • ThanatosThanatos Registered User regular
    edited April 2010
    Savant wrote: »
    Thanatos wrote: »
    When you talk about an 8% average return, that's actually fairly conservative; it assumes you have a very high risk profile when you're young, with a much higher return until you turn about 40-45, and slowly reduce your risk until at about 60 or so you're probably only pulling in 3-4% per year.

    Maybe sometime in the past, and maybe sometime in the future, but right now I think that is an optimistic number for someone in the US.

    Also, it really depends upon what sort of interest calculation you are using there. Let's take the S&P 500 over the span of 2 decades, starting at the end of 1989 and ending at the end of 2009. It closed at 353.40 on December 29, 1989 and closed at 1115.10 on December 31, 2009. That is an appreciation ratio of 3.1553, and at an annualized interest rate that comes out to about 5.91% APY. This doesn't take into account dividends or inflation, but gives a bit of a snapshot of the return.

    Or, if you want to cherry pick a bit and have the calculations go from today where the stock market has been rebounding a ton, the S&P 500 was at 344.74 on April 16th, 1990 and closed at 1,211.67 today. That gives you about 6.487% APY.

    That's a decent rate of return on the long haul, but it was risky over the short term. And by risky, it means you either could have made a much higher return in the short term if you timed the markets right, or outright lost a bunch of money if you timed them wrong.

    So sure, I think you could get over 8%, but that's not a conservative estimate for a run of the mill investor. That's an estimate that depends on someone knowing what they are doing, having a decently high risk tolerance, and having some luck. You can definitely make a few points under that decently safely by incorporating bonds, CDs, and dividend yielding stocks, but you'll still have to expose yourself to some risk (such as interest rate risk) and/or accept reduced liquidity (you take a penalty for getting out of a CD before maturity) to make much of anything in the current environment.
    The S&P 500 is actually fairly conservative.

    There is no 20-year period where any reasonably well-diversified investment has beaten a small-cap portfolio. The returns on that are considerably higher.

  • lu tzelu tze Registered User
    edited April 2010
    All this stuff seems to be a rehash of the Motley Fool stuff, is it by the same guys?

    World's best janitor
  • DibsDibs Registered User regular
    edited April 2010
    Both points make perfect sense. The rainy day fund being very important and I've had that stressed to me before.

    Thanks guys.

  • VeritasVRVeritasVR Registered User regular
    edited April 2010
    Honest question: why is it assumed that inflation is ~3.1% average per year? I thought our current inflation is low (maybe even in deflation) because we're in a period of low economic growth and interest rates are like zero?

    Maybe if inflation jumps to like 5% in the next decade it would eventually even out to 3.1%, but these past few years has been killing the average.

    Of course, low inflation I would assume means "you're not getting any richer by stocks/savings" either.

    CoH_infantry.jpg
    Let 'em eat fucking pineapples!
  • SavantSavant Registered User regular
    edited April 2010
    Thanatos wrote: »
    Savant wrote: »
    Thanatos wrote: »
    When you talk about an 8% average return, that's actually fairly conservative; it assumes you have a very high risk profile when you're young, with a much higher return until you turn about 40-45, and slowly reduce your risk until at about 60 or so you're probably only pulling in 3-4% per year.

    Maybe sometime in the past, and maybe sometime in the future, but right now I think that is an optimistic number for someone in the US.

    Also, it really depends upon what sort of interest calculation you are using there. Let's take the S&P 500 over the span of 2 decades, starting at the end of 1989 and ending at the end of 2009. It closed at 353.40 on December 29, 1989 and closed at 1115.10 on December 31, 2009. That is an appreciation ratio of 3.1553, and at an annualized interest rate that comes out to about 5.91% APY. This doesn't take into account dividends or inflation, but gives a bit of a snapshot of the return.

    Or, if you want to cherry pick a bit and have the calculations go from today where the stock market has been rebounding a ton, the S&P 500 was at 344.74 on April 16th, 1990 and closed at 1,211.67 today. That gives you about 6.487% APY.

    That's a decent rate of return on the long haul, but it was risky over the short term. And by risky, it means you either could have made a much higher return in the short term if you timed the markets right, or outright lost a bunch of money if you timed them wrong.

    So sure, I think you could get over 8%, but that's not a conservative estimate for a run of the mill investor. That's an estimate that depends on someone knowing what they are doing, having a decently high risk tolerance, and having some luck. You can definitely make a few points under that decently safely by incorporating bonds, CDs, and dividend yielding stocks, but you'll still have to expose yourself to some risk (such as interest rate risk) and/or accept reduced liquidity (you take a penalty for getting out of a CD before maturity) to make much of anything in the current environment.
    The S&P 500 is actually fairly conservative.

    There is no 20-year period where any reasonably well-diversified investment has beaten a small-cap portfolio. The returns on that are considerably higher.

    I'm thinking that your definition of the term conservative in investing varies quite a bit from mine.

    Here's the numbers for the Russel 2000 index over a similar timeframe, which is targeted at small-caps.

    On April 16, 1990 the Russel 2000 index closed at 162.52, and today it closed at 724.21. That gives an annualized rate of return of about 7.758%. A bit short of 8%, but pretty close.

    Usually the small caps tend to be more growth stocks than value stocks though, so we'd need to take into account dividend yield for a fairer picture than simply the index levels.

    And anyways, we have to keep in mind that this is looking backwards over a very long timeframe not taking into account changes in inflation devaluing the dollar somewhat. Past behavior of good returns doesn't necessitate future behavior of good returns, which should be drilled into the mind of anyone caught by the continuing real estate implosion of the past few years.

  • YodaTunaYodaTuna Registered User regular
    edited April 2010
    What's the benefit of being a millionaire when I'm 65?

    Don't get me wrong, I put a good deal of money into my 401k and a high yield savings account. But I would rather spend some money now, instead of waiting until I'm 65 and too old to do anything awesome with the money.

  • SavantSavant Registered User regular
    edited April 2010
    VeritasVR wrote: »
    Honest question: why is it assumed that inflation is ~3.1% average per year? I thought our current inflation is low (maybe even in deflation) because we're in a period of low economic growth and interest rates are like zero?

    Maybe if inflation jumps to like 5% in the next decade it would eventually even out to 3.1%, but these past few years has been killing the average.

    Of course, low inflation I would assume means "you're not getting any richer by stocks/savings" either.

    We're sort of in the twilight zone in terms of inflation/deflation right now, such that there's a lot of arguing about which will prevail. The economy has been in the shitter and unemployment is extremely high, which reduces aggregate demand. Plus, with the widespread defaults and foreclosures, there have been very credible fears of debt based deflation. The US monetary system is currently based fundamentally on debt (as opposed to being backed by precious metals like gold like it used be), and with a cycle of defaults and contraction of credit the money supply actually decreases.

    On the flip side, since we have a fiat currency, that means that the Federal Reserve can run the printing press and flood the system with dollars, which it has been effectively trying to do in the face of the crisis. Additionally, the federal government has implemented fiscal stimulus and been cutting taxes like mad, which has greatly expanded the sovereign debt of the US, which combined with the whole fiat currency thing leads to concerns that we may try to use the printing press to get out of the hole. This could be very inflationary, and at the extremes of this you have countries like Zimbabwe and the Weimar Republic of Germany pre-WWII, with hyperinflation making it so the currency isn't worth the paper it is printed on.

    The goldbugs and many people on the right wing of the political spectrum tend to be far more worried about the inflation side of the problem rather than the deflationary pressures. And it's possible to effectively have deflation in some sectors of the economy while inflation in others. For example, real estate values could continue to plummet, but oil and energy costs could possibly skyrocket independently.

    So long story short, a lot of the inflation numbers you mention are backwards looking, and no one knows for certain how things will shake out in the coming years. It's anyone's guess.

  • SavantSavant Registered User regular
    edited April 2010
    YodaTuna wrote: »
    What's the benefit of being a millionaire when I'm 65?

    Don't get me wrong, I put a good deal of money into my 401k and a high yield savings account. But I would rather spend some money now, instead of waiting until I'm 65 and too old to do anything awesome with the money.

    The main thing is being able to live off of interest and/or dividends, and maintain a decently high quality of life indefinitely. If you get 5% interest a year on a million dollars, that gives you income of $50k a year without having to lift a finger.

    It really depends upon how much you trust Social Security being in good shape and still around, and how much you want to live it up when you're old.

  • ImprovoloneImprovolone Registered User regular
    edited April 2010
    I just signed up for Mint.

    ...woo-hoo?

    Voice actor for hire. My time is free if your project is!
  • HaukyHauky Registered User regular
    edited April 2010
    I'm 26 and making ~$45k a year. My only debt at this point is student loans that I anticipate paying off in the next 12-18 months. I'm currently contributing 8% of my salary into a Roth IRA (with the company matching 2% to make it an even 10), which works out to around $3600 a year, not including the matching funds.

    Having paid my car off back in February, I have several hundred extra bucks a month free, and I'm also hopefully looking at a promotion and a fairly significant raise coming my way. Should I be looking into other investments (stocks, CDs, lotto tickets?), or just start dumping more into my IRA?

    Edit: I should mention that the 2% matching is the max my company does--a quarter of our contribution, where our contribution is <= 8%--which is why I stopped there originally.

    bobross.png
  • travathiantravathian Registered User regular
    edited April 2010
    Savant wrote: »
    YodaTuna wrote: »
    What's the benefit of being a millionaire when I'm 65?

    Don't get me wrong, I put a good deal of money into my 401k and a high yield savings account. But I would rather spend some money now, instead of waiting until I'm 65 and too old to do anything awesome with the money.

    The main thing is being able to live off of interest and/or dividends, and maintain a decently high quality of life indefinitely.

    You won't live indefinitely, so what is the point in having enough money to survive indefinitely? Average life expectancy is 78 in the US right now, and will probably be mid-80's by the time most of these kids are creeping up there, but the retirement age will likely be 70+. So you have a million dollars to spend over the next 13 years. And? I'd rather enjoy my 20's-50's by spending a good chunk of that money than live like a pauper only to retire and live like a king for a decade when my body has gone to shit.

    Oh, and the 3 types of people in the OP, lol, talk about comparing apples to bowling balls. Sorry, but most of that advice is utter tripe. The most worthwhile is to pay off your high interest debt asap, and keep an emergency fund. The main reason to keep an emergency fund is to avoid racking up high interest debt when bad things happen.

  • YodaTunaYodaTuna Registered User regular
    edited April 2010
    travathian wrote: »

    Oh, and the 3 types of people in the OP, lol, talk about comparing apples to bowling balls. Sorry, but most of that advice is utter tripe. The most worthwhile is to pay off your high interest debt asap, and keep an emergency fund. The main reason to keep an emergency fund is to avoid racking up high interest debt when bad things happen.

    I wouldn't say the advice is tripe. I'd say it's good advice if your only goal in life is to retire with a lot of money.

  • ImprovoloneImprovolone Registered User regular
    edited April 2010
    travathian wrote: »
    Savant wrote: »
    YodaTuna wrote: »
    What's the benefit of being a millionaire when I'm 65?

    Don't get me wrong, I put a good deal of money into my 401k and a high yield savings account. But I would rather spend some money now, instead of waiting until I'm 65 and too old to do anything awesome with the money.

    The main thing is being able to live off of interest and/or dividends, and maintain a decently high quality of life indefinitely.

    You won't live indefinitely, so what is the point in having enough money to survive indefinitely? Average life expectancy is 78 in the US right now, and will probably be mid-80's by the time most of these kids are creeping up there, but the retirement age will likely be 70+. So you have a million dollars to spend over the next 13 years. And? I'd rather enjoy my 20's-50's by spending a good chunk of that money than live like a pauper only to retire and live like a king for a decade when my body has gone to shit.

    Thanks to my grandparents I don't have any debt. They gave me a good start. My son is shaping up to have a similar start.

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  • SageinaRageSageinaRage Registered User regular
    edited April 2010
    I have saved up a decent amount, and kind of want to start investing, but applying to law school means I kind of want to keep it all liquid while I don't have any income for a while (at least potentially).

    I have some investments, but it's only about 1.5k. My 401k is pretty decent size though, even after the crash.

  • QuidQuid The Fifth Horseman Registered User regular
    edited April 2010
    travathian wrote: »
    You won't live indefinitely, so what is the point in having enough money to survive indefinitely? Average life expectancy is 78 in the US right now, and will probably be mid-80's by the time most of these kids are creeping up there, but the retirement age will likely be 70+. So you have a million dollars to spend over the next 13 years. And? I'd rather enjoy my 20's-50's by spending a good chunk of that money than live like a pauper only to retire and live like a king for a decade when my body has gone to shit.

    Living like a pauper isn't required to set aside money for retirement. Furthermore, I'd rather put in a little extra effort when I'm young, energetic, and fully capable of being productive rather than getting up with creaking bones to go to work.

    Speaking of, I have no idea what my life and health are going to be like when I'm 70+. I'd rather have a million bucks and change set aside just in case rather than plan on being perfectly capable of supporting myself until one day I suddenly keel over.

  • PerpetualPerpetual Registered User
    edited April 2010
    PantsB wrote: »
    First you are missing the point. "Only" 25K income in 1975 was the equivalent of a $120,000 income today. In 1975 dollars, putting 600 away a month is the equivalent of putting $1500 a month.

    I read the example in the OP, then I read the rest of the thread. And I think it is you who is missing the point. Even after the OP explained it to you.

    The person in question was not making 25k in 1975. So why are you even saying "he was making $120,000 in today's dollars"? He says he has never made more than 25k per year. So, likely, in 1975 he was making 5-6k a year, then it gradually moved up and he now makes a little less than 25k a year. What is so hard to understand about this?

    The example may be simplistic but it is not overly so. It gets the point across pretty nicely.
    I don't mean this to sound condescending, but how old are you? Real life comes with expenses. My household income is 6 figures. I save more than 600 a month, but I then have to spend it on things - my wedding in the fall, home repairs and renovation, kids someday, a car when my current one dies, etc. The idea that anyone can manage a 33% post-tax savings rate with a 25K income for any non-trivial amount of time is ... naive at best.

    Yeah, you do sound condescending as hell, and it's pretty disgusting.

    I'm 32 years old. I work in the gym business. It's not a lucrative career by any means. I'm doing pretty well personally, but I know some people who make 25-30k. That's in California by the way. Some of these people are able to save as much as 30% of their income month after month. Sure, they live very frugally - at that income level, they have to in order to save that much - but they are making it.

    So yeah. Nothing "naive" about it. If you find it naive maybe there is something wrong with the way you spend your money, and as a result the whole concept appears so naive to you.

  • PerpetualPerpetual Registered User
    edited April 2010
    YodaTuna wrote: »
    What's the benefit of being a millionaire when I'm 65?

    Don't get me wrong, I put a good deal of money into my 401k and a high yield savings account. But I would rather spend some money now, instead of waiting until I'm 65 and too old to do anything awesome with the money.

    I think this is a false dichotomy.

  • Phoenix-DPhoenix-D Registered User regular
    edited April 2010
    Perpetual wrote: »
    YodaTuna wrote: »
    What's the benefit of being a millionaire when I'm 65?

    Don't get me wrong, I put a good deal of money into my 401k and a high yield savings account. But I would rather spend some money now, instead of waiting until I'm 65 and too old to do anything awesome with the money.

    I think this is a false dichotomy.

    Your post above would seem to contradict that.

  • PerpetualPerpetual Registered User
    edited April 2010
    Phoenix-D wrote: »
    Perpetual wrote: »
    YodaTuna wrote: »
    What's the benefit of being a millionaire when I'm 65?

    Don't get me wrong, I put a good deal of money into my 401k and a high yield savings account. But I would rather spend some money now, instead of waiting until I'm 65 and too old to do anything awesome with the money.

    I think this is a false dichotomy.

    Your post above would seem to contradict that.

    For someone making 25k, sure.

  • RedTideRedTide Registered User regular
    edited April 2010
    I just turned 26 and I've been in the workforce for about 3.5 years. At work we have a setup with Metlife thats like a 401k (money from your paycheck goes in untaxed, lowering your taxable income that year, but tax is paid at the end) but its not called that.

    Assuming that it works the same way as a 401k, how would I know if I'm "ahead" of the game or not?

  • PerpetualPerpetual Registered User
    edited April 2010
    Calculate your net worth then compare it to people in your age group.

  • PantsBPantsB Registered User regular
    edited April 2010
    Perpetual wrote: »
    PantsB wrote: »
    First you are missing the point. "Only" 25K income in 1975 was the equivalent of a $120,000 income today. In 1975 dollars, putting 600 away a month is the equivalent of putting $1500 a month.

    I read the example in the OP, then I read the rest of the thread. And I think it is you who is missing the point. Even after the OP explained it to you.

    The person in question was not making 25k in 1975. So why are you even saying "he was making $120,000 in today's dollars"? He says he has never made more than 25k per year. So, likely, in 1975 he was making 5-6k a year, then it gradually moved up and he now makes a little less than 25k a year. What is so hard to understand about this?

    The example may be simplistic but it is not overly so. It gets the point across pretty nicely.
    The example explicitly tries to make the point that putting aside 600 a month every month since the mid 1970s is manageable for someone making only 25k, implying this is a small amount of money. Neither point is true. In 1975, 25K would have been in the top 1% of household incomes. A total sum of 1.5 million dollars in 2005 would be worth approximately the same as 410K in 1975. Total contributions would be about 200K over 30 years.

    If a person put aside 600 a month today given the rate of return assumptions, they'd get 1.5 million in 30 years, but it would be worth far less than 1.5 million is now.
    I don't mean this to sound condescending, but how old are you? Real life comes with expenses. My household income is 6 figures. I save more than 600 a month, but I then have to spend it on things - my wedding in the fall, home repairs and renovation, kids someday, a car when my current one dies, etc. The idea that anyone can manage a 33% post-tax savings rate with a 25K income for any non-trivial amount of time is ... naive at best.

    Yeah, you do sound condescending as hell, and it's pretty disgusting.

    I'm 32 years old. I work in the gym business. It's not a lucrative career by any means. I'm doing pretty well personally, but I know some people who make 25-30k. That's in California by the way. Some of these people are able to save as much as 30% of their income month after month. Sure, they live very frugally - at that income level, they have to in order to save that much - but they are making it.

    So yeah. Nothing "naive" about it. If you find it naive maybe there is something wrong with the way you spend your money, and as a result the whole concept appears so naive to you.

    Yeah I kinda think you're making stuff up. I doubt you know the savings rate of your friends who earn 25-30K a year but maybe its a point of discussion. Saving 30% of total income in California on a 25K income would be a personal savings rate of approximately 38% since that statistic measures post-tax income. It would leave less than 1000 dollars per month for living expenses. If you meant 30% post-tax income, its still only ~1160 a month in expenses. Possible? Yes, although you have to at the poverty threshold (equivalent of 120% poverty threshold and the California cost of living) Does it make any sense whatsoever? No

    11793-1.png
    Spoiler:
  • SavantSavant Registered User regular
    edited April 2010
    Hauky wrote: »
    I'm 26 and making ~$45k a year. My only debt at this point is student loans that I anticipate paying off in the next 12-18 months. I'm currently contributing 8% of my salary into a Roth IRA (with the company matching 2% to make it an even 10), which works out to around $3600 a year, not including the matching funds.

    Having paid my car off back in February, I have several hundred extra bucks a month free, and I'm also hopefully looking at a promotion and a fairly significant raise coming my way. Should I be looking into other investments (stocks, CDs, lotto tickets?), or just start dumping more into my IRA?

    Edit: I should mention that the 2% matching is the max my company does--a quarter of our contribution, where our contribution is <= 8%--which is why I stopped there originally.

    It depends heavily on what you want to accomplish with your money, and what sort of timeframe you are looking at. First thing is probably to have a bit stored up for a rainy day fund, like mentioned before, in case something unexpected comes up.

    For other investments, the IRA is structured for storing money and investments towards retirement in a tax friendly way. The taxation effects depend upon whether you have a traditional IRA or Roth IRA. With traditional IRAs, you don't pay tax up front, but instead pay income tax on when you withdraw from it at or slightly before retirement. If you withdraw from it before you are 59.5 years old, then you get penalized, and you have to start withdrawing minimum distributions by 70.5 years old. Roth IRAs are slightly different, in that you pay income taxes on what you put in up front, but the most earnings on it are essentially tax free. You can withdraw some of the principal out of a Roth IRA without penalty early on, but will be penalized for withdrawing earnings early. Also, there are limitations on how much you can put into an IRA each year (so if you have extra to save you have to put that somewhere else), and if your income is too high you can't contribute to a Roth IRA.

    The money in your IRA is going to be invested in something, and there are some limitations as to where the money goes. So depending upon how yours is set up, you're paying into stocks, bonds, mutual funds, or something else with your contributions into your IRA.

    If you want to invest money elsewhere, then it strongly depends upon your timeframe, tolerance for risk, and sophistication as to what you should get. If you have no tolerance for risk and want to be able to access the entirety of your money at almost any moment, then you are going to be stuck with a bank savings account. You will get piddly in terms of interest however, in exchange for the FDIC covering you up to $100,000. So you'll be fine even if the bank goes under, as long as the US government doesn't fall apart too.

    If you want very little risk and are willing to not have immediate access to the full value your money, then you'll want to look into Certificates of Deposits (aka CDs) from banks, or short term US Treasuries. With bank CDs, they have a set time until maturity, and you can't withdraw your money from them unless you take a penalty until maturity. Most of these will be covered under FDIC (check to make sure up front) like savings accounts are. The rates on CDs are dependent on the timeframe, and usually longer times to maturity fetch higher rates. Short term US Treasuries are bonds that are very liquid, and you can trade them on the market pretty easily, but their prices can fluctuate with changes in interest rates. The price a Treasury bond and the interest rate on it are linked to each other inversely, such that if interest rates go up the price of the bond will go down such that it's return to maturity is at the market determined rate. Short term bonds they fluctuate much less than long term bonds in the face of the same magnitude of a change in interest rates, and you can wait until maturity to get your money back, as they pay the par value on the maturity date.

    Riskier from there are longer term US Treasuries, corporate bonds, municipal bonds, and foreign bonds. Long term Treasuries most of the time (but not always) have a higher yield than short term Treasuries, but they are much more exposed to fluctuations in interest rates changing their market value, and can be negatively impacted by inflation. You can still wait until maturity on long term US Treasury bonds, and unless the US government defaults and refuses to honor its debt, you'll get the par value back. It'll just take longer than a short term bond to do that. With corporate and municipal bonds, you have an increased risk of default, as if you have a bond in a company or municipality that goes bankrupt, you could lose some or all of your money depending upon what happens in the bankruptcy proceedings. The advantage is that corporate bonds typically have a higher yield on the same timeframe due to this risk, and municipal bonds often have beneficial tax consequences and can give you tax free income. The bonds will have risk rating, varying from investment grade to junk. With junk bonds the rates are higher, but you are taking your life into your own hands because they have been rated at a higher risk of default.

    Foreign bonds are often (but not always) denominated in a foreign currency, like the Yen, Euro, etc. These expose you to exchange rate risk additionally, as you can gain or lose above and beyond the return on the bonds if the foreign currency becomes stronger or weaker relative to the domestic currency. Don't presume that you can ignore the risk of default with these either, as governments can default too. Greece is the current events example of a government where there is fear of a default on sovereign debt.

    Then there's stocks, where you get to own pieces of publicly traded companies. The benefit of stocks is that you can have capital gains if the company becomes worth more down the line then what you buy it for, and companies can elect to pay a portion of their earnings out to stockholders as dividends. However, depending upon the stock, their price can fluctuate a lot. Read that again: their price can fluctuate a lot. If you buy a stock in a company, you are exposing yourself to risk with the health of the company in addition to the mass hysteria of the stock market. The stock market is a special mixture of advanced algorithmic strategies, manipulation by powerful institutions, pure idiocy, and human emotion. On a very long term the returns have been pretty good, but depending upon what you invest in there is a wide variety of different risks you are exposing yourself to. I'd only recommend jumping at most with money that you can afford to lose in the short term, and only in specific stocks or combinations of stock that you research and understand very well. One of the big upsides of stocks is long term capital gains, where if you hold a stock for a long period of time and sell it for a profit, those gains are taxed at a lower rate than your standard income tax rate. If you want to cash out fast be prepared to take a loss or be fully taxed on your gains.

    Then there are mutual funds and ETFs, which serve as a combined investment position. Mutual funds can invoke all sorts of different strategies and invest in a wide variety of different securities, it depends upon what they are aimed at. Some of the simple ones try to track an index (like the S&P 500 or Dow Jones Industrial Average) or specific sectors of the economy (like Energy, Financials, or Healthcare stocks). There are also funds that deal with bonds, or foreign investing. Many funds are run by a manager and can be a bit black box, and the tax consequences of them can be rather complicated as there can be taxes on the internal trading in a fund. ETFs are similar to mutual funds, but typically aren't managed nearly as much and can be traded like a stock (they have ticker symbols and you buy shares of them). ETFs can represent a wide variety of different things, like mixtures of stocks, bonds, foreign assets, whatever. ETFs are a bit simpler to deal with in terms of buying and selling and in terms of tax consequences than mutual funds, but you aren't going to have your hand held much with ETFs. Be sure you know what you are getting into up front with an ETF or mutual fund as they can be set up to have extremely strange strategies and properties not geared towards a long term conservative investor. Another trade off with ETFs and mutual funds is that they will have operating costs, and they will take a bit off the top in expenses. They can take this as a percentage off the top in an expense ratio, or with loads, so be careful as this cost will vary between different funds.

    Another class of investments is commodities, like oil, gold, bushels of corn, etc. Precious metals like gold are a good hedge if you think the financial system could fall apart, or if there is going to be a lot of inflation. There are financial instruments set up to track a variety of commodities, or you could go out and buy physical commodities like gold or silver coins or bars if you so desire. The prices on these will be determined by supply and demand, how much people are willing to buy and sell them for. No guarantees in any direction.

    Then there's derivatives...but those are a bit advanced. Some are straightforward, like call or put options. Call options let you buy an underlying asset at a specific strike price within a time frame until a specified date, however you are never forced to exercise this right. Put options are like call options except they let you sell the underlying asset at their strike price. There are other more complicated derivatives, but you start playing with fire when you deal with them. Just to understand how risky they can get, derivatives were one of central elements of the financial meltdown. Just ask the smoldering corpse that is AIG what can go wrong with derivatives.

    Whatever you do, DO NOT PUT ALL YOUR EGGS INTO ONE BASKET! You want to diversify at least somewhat. So don't buy all of your stock in just one company, or just buy Greek bonds. With the ultra safe stuff you won't need to diversify quite as much as with the riskier stuff, but if you are going to wade out more in the pool you don't want to be exposed entirely to the inherent risk of the particular investment vehicle you are working with. A big motivation for the more straightforward ETFs and mutual funds is that they provide diversification by allocating their funds amongst different assets.

    TLDR - With investing, Buyer Beware! Know what you are getting into before you get into it, and make sure you are prepared for and accept the risks that you will expose yourself to.

  • PerpetualPerpetual Registered User
    edited April 2010
    PantsB wrote: »
    Yeah I kinda think you're making stuff up. I doubt you know the savings rate of your friends who earn 25-30K a year but maybe its a point of discussion. Saving 30% of total income in California on a 25K income would be a personal savings rate of approximately 38% since that statistic measures post-tax income. It would leave less than 1000 dollars per month for living expenses. If you meant 30% post-tax income, its still only ~1160 a month in expenses. Possible? Yes, although you have to at the poverty threshold (equivalent of 120% poverty threshold and the California cost of living) Does it make any sense whatsoever? No

    Post-tax.

    I can't comment on how much sense it makes. I'm not one of them. I only see them at work. They seem to be doing fine to me. None of them are starving. In fact most are weightlifters so they have to eat a lot.

    Maybe they are selling drugs on the side. D:

    As an aside, about the example in the OP, we don't know which state the person lives in. So if he lives in a state with a very low cost of living then the numbers given are very reasonable, and possible.

  • Pi-r8Pi-r8 Registered User regular
    edited April 2010
    "a million dollars" doesn't really have the bang that it used to. You're really not like, rich for life, if you can save up a million dollars. If you think that you can just live off the interest, well, you can, but inflation is basically always going to be higher than whatever you get in interest. Stock dividends are higher, but then you're exposed to more risk. If you're planning to retire at 65, never have any income at all, and live comfortably for the rest of your life, without every worrying about going broke, you really need a LOT of money to do that.

  • His CorkinessHis Corkiness Registered User
    edited April 2010
    Pi-r8 wrote: »
    If you think that you can just live off the interest, well, you can, but inflation is basically always going to be higher than whatever you get in interest.
    It might be different in the US, but this isn't true in Australia. I was getting 6% pa in 2007 when inflation was 3.8%, and even now I'm getting 4.25%. It's not much of a margin, but it's certainly not a loss.

  • VeritasVRVeritasVR Registered User regular
    edited April 2010
    Pi-r8 wrote: »
    "a million dollars" doesn't really have the bang that it used to. You're really not like, rich for life, if you can save up a million dollars. If you think that you can just live off the interest, well, you can, but inflation is basically always going to be higher than whatever you get in interest. Stock dividends are higher, but then you're exposed to more risk. If you're planning to retire at 65, never have any income at all, and live comfortably for the rest of your life, without every worrying about going broke, you really need a LOT of money to do that.

    Or a pension, which pays $X for the rest of your life.

    Government (federal/state) job pensions are pretty omgwtf awesome, and military pensions can start after only 20 years of active duty. How would you like to retire in your 40s?

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    Let 'em eat fucking pineapples!
  • ZedarZedar Registered User regular
    edited April 2010
    Ideally by the time you reach 65 you will own your own home, which means expenses would be lower than they are now. No rent/mortgage payments lowers living expenses by a fair margin. Personally I'm operating on the assumption that an aging population will mean I can't rely on having a pension by the time i hit "pension" age.

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  • enc0reenc0re Registered User regular
    edited April 2010
    I just signed up for Mint.

    ...woo-hoo?

    Woo hoo!

    What do you think? To me, it's like magic and mana from heaven rolled into one deliciously minty package.

  • CognisseurCognisseur Registered User
    edited April 2010
    Well... this thread is certainly depressing. I'm in graduate school and will be leaving when I'm 28 years old and $100,000 in debt. The odds that I'll start investing much prior to 35 seem slim...

  • sidhaethesidhaethe Registered User regular
    edited April 2010
    Yeah, I'm boggled at the living in California on 25k a year and saving $600 a month. What's their rent, $200? In which case, where are they living? Hemet or something? Sharing a place with 12 other people?

  • adytumadytum Registered User regular
    edited April 2010
    sidhaethe wrote: »
    Yeah, I'm boggled at the living in California on 25k a year and saving $600 a month. What's their rent, $200? In which case, where are they living? Hemet or something? Sharing a place with 12 other people?

    Probably living with their parents or relatives, which means they're not independent and any financial information about them is not comparable to an independent person.

    It's the same deal with where I live. I make 'okay' money but am completely independent of my parents. Most of my friends still have their parents pay for their cars, insurance, live with their parents, etc. well into their mid and late 20's.

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  • Zul the ConquerorZul the Conqueror Registered User regular
    edited April 2010
    Sweet thread, I love personal finance, because I get to pretend like I'll be rich some day. Here's my situation, for comment, and a couple of specific questions:

    Assets
    I'm 26. I make $63k a year. I have about $25k in my 401k, and another $5k in a company fund that I'll be vested in at some point if I don't leave the company. My company match on the 401k maxes out at 4% when I put in 8%, but I'm currently putting in 13% (for 17% total). I have about $2k in some stocks I was messing around with, and about $5k in checking accounts. I'm planning on getting out of those stocks, as I found out I'm not as interested in playing the market as I once thought. I own my car and my crap, but live in a rented apartment.

    Liabilities
    My parents paid off about $60k of my student loans, so I send them $450/mo (yay interest-free.) I have another $18k in student loans sitting at 4.5% interest. I currently pay $150/mo toward that loan.

    Questions
    I anticipate buying a new car at some point in the next, say, 3-8 years. I'll probably want to buy a condo or a house, though my understanding is that the financial benefits are arguable. (Especially where I am; property tax rates are about 3%!!)

    1) Should I put more of my income toward paying off my 4.5% loan, or should I save more so that I can make a bigger down payment on a car or a house?
    2) Should I lower the amount I put in my 401k in order to build more liquid savings? (I'm trying to lower my other expenses too, but for now let's assume I'm spending everything that's left.)
    3) What should I do with my liquid(ish) savings? Savings accounts and 6-month CDs get pretty depressing rates these days, but a money market account seems like it might be too risky.
    4) Related question, but more generally, should I have assets other than cash, retirement accounts, and real estate (some day)?

    EDIT: Changed my mind, it's not the end of the world for people to know how much I make...

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  • ThanatosThanatos Registered User regular
    edited April 2010
    Your income is incredibly pertinent, as it determines the actual interest rate of that 4.5% student loan, and whether or not you're better off contributing more towards that 401(k) or should be opening up a Roth IRA.

  • Zul the ConquerorZul the Conqueror Registered User regular
    edited April 2010
    I went ahead and edited my income in. I guess it doesn't really matter if people know.

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  • PantsBPantsB Registered User regular
    edited April 2010
    Pi-r8 wrote: »
    If you think that you can just live off the interest, well, you can, but inflation is basically always going to be higher than whatever you get in interest.
    It might be different in the US, but this isn't true in Australia. I was getting 6% pa in 2007 when inflation was 3.8%, and even now I'm getting 4.25%. It's not much of a margin, but it's certainly not a loss.

    Well up to 07 the interest you could get on savings accounts were still crazy high because of the completely skewed world economy. But think your example though in the long run (2 decades say): Say you had 1,000,000 and you were retiring right now at that 6% interest rate. Inflation is rarely below 2%, so lets say its steady at that rate. Now it may be that you can live on less than that interest rate but at 2% inflation, your cost of living is going to increase by 50% in that amount of time. If its 3.5% it'll double. That 60K income is now the equivalent of 30K.

    The point being, in order to keep up with interest you need enough to live off the interest with <inflation %> left in your account. So if you got 6% on a 1,000,000 account and inflation was 2% you'd have to live off 40K if you wanted to be able to maintain that indefinitely (say if you started doing this at 30). That's the kind of thing you'd need to keep in mind

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    Spoiler:
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