A Financial Checklist for your New Job


 

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Congratulations on getting your first job.   I know that college was a lot of late hours, then the whole job search was exhausting.  You probably thought sometimes that you would never land a job – yet here you are.

You’re probably interested in finding out things like where the cafeteria is and where you can get office supplies, but there are a few other things that you should add to your checklist from the personal finance realm.  Do these things now and your life will be so much better in the future:

  1.  Start a savings account and build it up to $9,000 as quickly as you can.  Having this savings account will make sure that you have the money needed to take care of things like car breakdowns and your portion of medical emergencies.  If you don’t have some cash sitting around, you’ll need to go into debt, which is not a good thing because you’ll be spending money on interest.
  2. Open a 401k and put enough of your paycheck in to get the full company match.  Retirement may seem like a long way off, but it also requires a lot of money (like millions of dollars).  While it’s hard to save up that much money in a few years, if you put money into stocks now you’ll only need to actually save up a small portion.  Money you put away between now and age 35 will make a much bigger difference than money you put away between 45 and 65.  Plus, if you don’t get the full company match, you’re leaving money on the table.
  3. Open a Roth IRA and start putting in $250 per paycheck.  You’ll have more control over money you put in an IRA than you will in a 401k since the investment options will be almost limitless.  Your 401k investment options are chosen by your company, which may include high fee mutual funds and even worse, company stock.  You’ll want to put away about 15% of your paycheck anyway, so contribute as much as you can (currently $5500 per year) to a Roth IRA.  If you still aren’t saving 15%, increase your 401k contribution.
  4. Get term life insurance.  If you have anyone depending on your paycheck, you’ll need term insurance to provide for them should something happen to you.  For about $300 per year you can get a half million dollars or more in 15-year fixed term insurance.  That is about how long you’ll need before you’ve saved up enough if you follow the advice in this post.
  5. Pay off your student loans.  Before you go shopping for a new car or a home, get those student loans out fo the way.  Just keep living like you are still a student for a couple of years and you’ll probably knock them out of the way.  You can then save for a home without the constant burden.
  6. Get a good used car.  For about $5,000 you can get a vehicle that will reliably take you to work and back, or wherever else you want to go, for the next five years.  You may pay $1,000 per year for repairs and maintenance, but that beats paying $4,000 per year or more for depreciation, plus another $500 per year in interest.  One of the best moves you can make is to buy used.  Move up in car, getting a little newer model every four or five years if you wish.
  7. Save up 20% for a home.  If you put down less than 20% on your home, you’ll end up paying mortgage insurance.  This is extra money you pay out that protects the loan company in the event that you default but does nothing for you.  Plus, putting more down means hundreds of thousands of dollars saved in interest over the life of the loan.  It may take longer to get into a home, but some things are worth the wait.
  8. Get health insurance.  A major cause of bankruptcy is unexpected medical bills.  Be sure to sign up for health insurance for you and your family.
  9. Open a mutual fund account and start sending in money regularly.  You’ll want to gain financial freedom, which means that you have enough money invested, generating income, that you won’t need to rely on your job to pay the bills.  The way you get there is to invest regularly.  It will take 15-20 years, but if you put away a couple of hundred dollars per month into stock mutual funds, you’ll get there.

Your investing questions are wanted. Please leave a comment and let me know what you think.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

To Sell or Not to Sell


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About two years ago, my broker called me up to do a portfolio analysis.  At the conclusion, he decided that I was doing well, but was concentrated in the area of Consumer Discretionary too much.  (This makes sense since I look for companies with steady growth.  Restaurants and retail stores, which are within the Consumer Discretionary sector, and that have a good product line and management team, can create steady earnings growth by just adding more locations.  Other business areas cannot.)  He suggested I add to my holdings in the energy sector, e.g., oil.

I was actually buying some oil stocks in another account.  I was looking for a hedge against inflation (if inflation takes off, oil prices and other things you dig up out of the ground would probably increase in price as well), plus I wanted to diversify into more sectors, just as my broker was advising.  I continued buying more shares in different types of companies linked to the oil boom.  The ones I bought were Ensco Plc (ESV), Greenbriar (GBX), and Oasis Petroleum (OAS).

Of course as you probably know, this was right near the peak of the oil market.  As oil prices fell into the twenties, all three of the stocks fell by at least 75%.  Ensco went from $60 down to $8, Greenbriar went from $75 down to $22, and Oasis went from about $54 down to $4.  Of those three, I sold completely out of one, cut one position back, and bought more of the third one.  Here’s why:

I sold completely out of Oasis Petroleum.  The reason isn’t that they lost more than 90% of their value.  It is because their business had fundamentally changed.  Oasis uses fracking to get oil out of hard-to-reach places in North Dakota.  They were doing great when oil was more than $100 per barrel, but when oil prices dropped they were forced to shut down wells because it cost more for them to get oil out of the ground than they could sell it for on the markets.  I also feel like the OPEC nations have learned that they need to keep oil prices below a certain mark – maybe $50 to $80 per barrel – or frackers will reopen and start to move the US towards oil independence.  Without people buying oil from them, the OPEC nations have no other real industry to keep the rulers dressed in gold and pay for the lavish palaces, so they are not likely to make the same mistake again.  Maybe they’ll let prices rise for a while, get all of the North Dakota wells running again, and then drop the price of oil again to cause a lot more people to lose their money and swear off the oil business.  In any case, I don’t expect Oasis’ business model to be profitable anytime soon.

I cut back on shares of Ensco.  Ensco rents deep-water drilling rigs used in the Gulf and elsewhere.  As the oil prices dropped, so did demand for their rentals, but I expect that business to recover and be profitable again in the future, so I wanted to maintain some shares.  I sold a few shares to take the loss to offset some gains I’d made, but still hold a position, waiting for the recovery.  To simply sell out would have been “locking the barn doors after the horses had been stolen,” so to speak.  There is room for recovery at some point in the future.

I actually bought more shares of Greenbriar.  Greenbriar makes railcars, including tanker cars of a new design needed to meet regulatory requirements.  Because their business extends beyond oil transportation, I expect the company to do just fine even with the lower oil prices.  They’ll just sell more of other types of rail cars if oil prices remain low since lower oil prices will lead to higher economic activity, which means that more businesses  will be shipping more things.

So when a stock drops, focus on the business rather than the stock price movements.  Some of the best opportunities come right after a big drop.  Also, if you add to the number of shares you have, you’ll be ahead when the stock recovers rather than just breaking even.  Don’t expect to buy at the bottom, however – that is really difficult to do – but just know that you are getting more shares at a better price than you could in the past.

Sometimes, however, the business has changed and you just need to sell out and lick your wounds.  Not every pick you make will pan out.  You just need to know when to give up and go on, rather than waiting for a recovery that may never come.  This does provide an opportunity, however, to cut back on some of your big winners that have grown to the point where it would be devastating to your portfolio if something were to happen.  Maybe you’re thinking of selling, but don’t want to pay the large tax burden that would result if you did.  You can deduct and losses you have against capital gains that you make, so it is a good tax strategy to pair losses with capital gains and reduce your risk if a stock has grown to become too large a portion of your portfolio.

Your investing questions are wanted. Please leave a comment and let me know what you think.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Start an IRA Today (If Not Sooner)


Clingdome2How would you like to retire a millionaire?  Well, if you’re a teen working a summer job and you put $1000 away into an IRA (Individual Retirement Account) today, you have a shot at reaching that goal even if you do nothing else.  That’s if you earn a 15% return between now and about 50 years later when you’re ready to retire.  If you earn only 12%, you’ll only end up with about $300,000, but still that’s not bad for a $1000 investment.

Now I know that $1,000 is a lot of money when you’re working for $7.25 per hour, especially after taxes are taken out and you factor in expenses like gas to get to work, so you really only earn about $6.00 per hour.  Still, that 170 hours worth of income you give up now could help set you up for retirement.  And it doesn’t even need to be your $1000.  As long as you earn at least $1000 from working, your parents or a nice uncle could give you another $1,000 to invest while you spend the $1,000 you earned.  Maybe you can work out a deal with your parents where they match your contribution, so you actually only need to contribute the earnings from about 80 hours ($500) yourself.

So what is an IRA?

An IRA is an account included in the tax code where contributions are allowed to grow either tax deferred – where you take the money out and then pay taxes, or tax-free – where you pay no taxes.  This means that your money will be able to compound without taxes being taken out all of the time as you go.  The more money you have to earn interest on, the faster your money grows.  If you use a traditional IRA, you don’t pay taxes on the money you contribute, which means Uncle Sam will be putting something like $100 of the $10000 you are investing in for you.  Whatever money you pull out when you retire, however, will be taxed at that point, so your Uncle Sam will take back about $200,000 of your $1 M.  If you do a Roth IRA, you’ll need to pay all of the taxes now, meaning you’ll need to come up with the full $1,000, but when you pull it out the money is all yours.

How do I setup an IRA?

The easiest way with $1,000 is to go to Vanguard, open an IRA (it takes about 15 minutes online), and buy into their Vanguard Target Retirement 2060 Fund.  I choose this fund because it has only a $1,000 minimum investment and because it has mainly stocks, which is what you want for the next 40 years or so.  You then just have your parents send in a check for you or transfer money from a bank account and you’re an investor.  Simple.

What do I do then?

Well, you don’t need to do anything, really, at least for while.  Once you reach the account minimums for Vanguard’s other funds, which currently are at $3,000, you should switch to the Vanguard Total Stock Market Index Fund because that will increase your returns over time since you’ll then get rid of the bonds that are in the 2060 fund and be invested in all stocks.  It will take you until about 2039 to reach that point, however, if you only invest the original $1,000.  (Compounding starts slowly and then accelerates at the end.)

I would rather you become a regular investor, sending in $50 whenever you can through college.  Once you’re working a regular job, see if you can contribute the maximum ($5,500 per year, plus another $5,500 into a spouse’s IRA if you get married).  Also get into the 401k plan at work if there is one.  While $1 M may seem like a lot today, the truth is you’ll need like $10M or $20 M by the time you’re ready to retire since $1 M won’t buy what it does today.  If you invest regularly through your twenties, however, you’ll have it easily.  In fact, if you do a good job of sending in money between 16 and 35, you really won’t need to contribute at all after you reach about 40 since you’ll already be set.

The other thing to do is something not to do:  Do not touch the money for any reason until retirement.  If you take the money out early, you’ll pay extra fines and taxes.  Plus, you’ll be undermining yourself.  Right when you were going to start earning really money from your investments, you’ll take it out.  If you try to start over in your forties or fifties, it will be much more difficult.

What if I wait?

I know, money is tight and you’re busy doing other things.  If you wait until you’re 25 to start investing, however, that $1,000 will only make you $300,000 ($100,000 at a 12% rate-of-return).  Wait until your 40, and it will only net you $33,000.  That means you’ll need to work a lot harder and sacrifice a lot more to retire comfortably.  The other choice would be to retire uncomfortably and be scrounging for food and heat.

So see if you can set aside $1,000 and a half hour to start an account.  Maybe take one extra hours or spend some time with friends doing things that don’t cost money.  Your future self will thank you.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.