The Last "what should I do with my money?" Thread (hopefully)

thebrofessor's picture
Rank: The Pro | banana points 26,752

Since I became active in WSO several weeks ago, I've noticed a few threads on "I have this much money, what should I do with it?" And the amounts have ranged from $2,000 to $20mm, and to put it bluntly I'm tired of people giving stock tips to strangers when they have no business doing so. Now, astute investors like @heister will definitely give you some great ideas and share experiences on how he's invested his money, but if you ask for stock tips before you've gotten basic personal finance right, you've got it backwards. In this thread, I'll attempt to answer that question on a 30,000 foot level and entertain questions in the comments.

So you know my background, in late 20s, partner in a practice (one of the big 3 wirehouses: MS/ML/UBS) in the southeast with around 500mm AUM, responsibilities are marketing, AM, and general financial planning. I am client facing. I say this because there are several people I know who are help desk people at Vanguard in places like Charlotte who say they're financial advisors just because they have their Series 7 and answer questions about what a 12b-1 fee is. Not to knock that job, but I think it's important you know what I do, for whatever that's worth.

No matter how much money you have, you need to learn basic personal finance habits. Whether we're talking $5k you got as a graduation present, $100k you got as your Associate bonus, or $20mm you got because your friend's startup of which you were a shareholder went public and became the next Angie's List, you need to do some basic things first (in this order):

1. Rainy Day Fund:

This is a pile of cash (not literally, use a bank/brokerage account) that exists solely for emergencies and unexpected expenses over and above what you can take care of from your paycheck. Things like hospital bills, insurance deductibles, major car repairs, speeding tickets, etc. Ideally this should be at least 6 months' salary (not just living expenses, salary), but you'll occasionally hear 3-6 months of expenses. The reason I say salary is because most quality jobs take a while to find (especially if you have to move), so if you can essentially be "paid" for 6 months if you found yourself in Morgan Stanley's commodity business that got sold, you don't have to settle for a lesser job just because your savings account has run dry. Also, if you got laid off and have to go through interviews, you're going to want a new suit, make sure you have the cash to clean up your wardrobe

2. credit/debt:

I could write an entire thread on how to get good credit, what to look for in mortgages, credit cards, etc., but honestly a lot of the incremental benefits you get from one provider to the other are moot. If you don't mind debt, pay down/off your higher interest rate stuff if you have the extra money. Otherwise, keep the minimum payments going. I personally recommend not carrying a balance on credit cards, which may not always be the optimal money decision, but it's a great habit to get into (use it like a charge card, not a loan). If you hate debt, pay it down/off as much as will help you sleep at night.

3. Retirement Savings:

Max it out, period. If you have the salary, max this out even if your company doesn't match. Again, while you may be able to get better returns if you trade pork butt futures, the fact that 401k plans are automatic, passive savings plans (you don't have to make the decision to save each paycheck) make them effective vehicles for the average person. I'm a fan of Roth personally, but it depends on the person. I won't get into the weeds of that here, though. This also includes any on the side savings that's specifically for your retirement, be it revocable trusts, IRAs, etc. Won't get into the weeds of finding out how much you need to save, because this number varies from person to person, but if you truly save the most you possibly can and invest along the way, you'll be fine.

4. Other goal savings:

this includes vacation, weddings, college, etc. The reason I say take care of retirement first is I'm a big believer in taking care of #1 first. You can elope in a courthouse, you can skip vacation, you can borrow for college, you cannot borrow for retirement. After your retirement savings are taken care of, it's time for other things, and the priorities will vary from one person to the other. When you're in your 20s, it may be wedding, then vacation. When in your 60s, it may be vacation, then college/wedding for grandkids. Whatever the case may be, determine where these goals rank in priority, how far away they are, what the dollar amounts will be, and how much you're willing to dedicate to this goal.

5. Non-financial stuff:

This includes things like POA (power of attorney), HCPOA (health care POA), Living Will, will, trust, life insurance, disability insurance, IRA beneficiaries, etc. It's a good exercise to review all of this stuff every 1-2 years or every time there's a death/divorce/marriage in your immediate family. The last thing you want is to die with all of your money going to an ex and have your kids/new spouse be screwed. When you get HCPOA/living will, carry a little card with you in your wallet or in your car that indicates who those people are (wherever you keep your health insurance card) so if something does happen, the hospital can take instructions from somebody. Some firms will even give you an electronic version of this so the hospital can view it right there. Point being, get all of this stuff set up however it works best for your personal situation, and review it on a regular basis (again, every 2 years is fine less a major event in your family).

Notice I didn't talk about investing here? That was on purpose, too many people lose the forest through the trees here. The thing is, although I'm decidedly a value guy and firmly believe that over long periods of time value stocks outperform, picking all of the best stocks will not help you pay for groceries if you get laid off (especially deep value!). Once you have the above right, you're ready to get into the weeds and either interview people to help you out or embark on your own and become educated about what to do with your investments. I imagine I'll get specific investing questions in the comments, so I'd rather not write a dissertation on that here.

Also, I always think rules of thumb are helpful, and even though these are not going to work for everyone and nor will everyone agree with them, here are a few I enjoy (some are overly conservative, FYI)

5 Rules of Thumb

1. Save 10-20% of what you make, put half of that savings towards cash (assuming #1 above is taken care of) and half towards investments. Once your cash hoard exceeds your "other goals" and emergency fund needs, invest that money

2. Never buy a house that's more than 2x your annual household gross income (your income + spouse, gross of taxes, multiplied by 2. So if you're both analysts making 100k, don't buy anything more expensive than a 400k house)

3. Never have non-mortgage debt be over 20% of your budget (cars, student loans, furniture loans, etc.)

4. Take your annual spending, divide by 4%, that's the amount of money you need to retire with your current lifestyle, in today's dollars. Obviously that will change if your lifestyle changes and it doesn't take inflation into account, but still a good exercise

5. And my personal least favorite: your allocation to stocks should be 100-minus your age. I personally do not like this as this greatly depends upon risk tolerance and overall level of wealth, but it will help prevent you from blowing yourself up in the stock market even though it will lower your long term return. I hesitated adding this but I felt it was worth mention.

If you have any questions, feel free to ask here or PM me.

Mod Note (Andy): #TBT Throwback Thursday - this was originally posted on 5/16/14. To see all of our top content from the past, click here.

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Comments (108)

May 14, 2014

Awesome. I know nothing about personal finance so I appreciate threads like these. Concerning rent: do you follow the 3x gross income rule? I guess you may not deal with renters as much as homeowners but I am curious.

May 14, 2014

I personally do not follow that rule but it's not a bad starting point. if you have things like car payments, student loans, etc., I'd work backwards. you can adjust the size of your apartment when you're looking for a place to live, you can't re-negotiate your car loan or student loan (not easily anyway). another thing to keep in mind is to add in things like HOA, landscaping, etc., any fixed costs will have to be budgeted for. you can consume less water, but it's hard to adjust your habits to pay a lower HOA. hope this helps

May 14, 2014

Nice. Great post!

May 14, 2014

It's quite amazing how Dave Ramsey makes so much money by telling people to do pretty much the same exact things...

May 14, 2014

amen. he's a great public speaker, but so you know, I don't make my money telling people basic personal finance things like this, and since we don't work with a lot of trust fund babies, most of our clients already knew a lot of what I mentioned here, which is why they're wealthy.

this isn't rocket science people, but I will say the hardest thing about personal finance is finding out whom to believe. so many bad apples out there and so many people who act like they know what they're talking about. granted, none of you know me from Adam, but I think it's important for everyone to have the basics down.

May 15, 2014

How does your group make $? Assume you charge a fixed % on AUM, or maybe some sort of fee scale with breaks for larger clients? Approximately how much do you charge?

Do you mostly recommend the products that your bank sponsors (ex. MS/ML/UBS U.S. Equity Fund)? Or do you engage in individual security selection, recommend a wide suite of non-bank related funds, etc.?

May 14, 2014

I don't think you mentioned this (I read through your post carefully, but I may have missed it), but one think I would recommend is contributing to an HSA (Health Savings Account). If you are young (as most of the readership on WSO is), it makes sense to be enrolled in a high deductible health plan since you are unlikely to have frequent medical needs. Obviously, everyone has a different personal situation, but generally speaking, younger people have less health issues.

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May 14, 2014

this is a great idea, and most BB's have HSAs in their plans, but not everyone. it wasn't my intention to get into the weeds and recommend specific account structures, investments, etc., more of a "principles of personal finance" type thing.

you are absolutely correct however, and for those of you who don't know what an HSA is, think of it as an IRA for healthcare expenses. unlike some spending accounts, you keep the money, can invest it, and the growth is tax free and so are the withdrawals if used for qualifying expenses (healthcare). many big firms offer HSAs as part of their benefit packages, see your HR person for more.

as to your point about HDHPs, I agree there as well, and for other readers, high deductible is preferable if you don't intend to use the service as much because the premium is lower. vice versa if you have the intention of being a frequent consumer (e.g. asthma, HBP, etc.). same applies for things like car insurance. if you drive 2 miles to work a day, no need to have a high deductible, but if you're travelling out of town 4 days a week in your car, you'll get fender benders more frequently than others, might make sense to have a lower deductible and higher premium.

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May 14, 2014

That house advice is terrible. Are you claiming a couple making 400k a year should buy an 800k house? You should by the most expensive house you can that is a good investment. Homes usually over 1.5 million are too risky and do not sell as well. 1M - 1.4 is the money range. A couple pulling in 400k is definitely in the range for this sort of home.

May 14, 2014
mike97345:

That house advice is terrible. Are you claiming a couple making 400k a year should buy an 800k house? You should by the most expensive house you can that is a good investment. Homes usually over 1.5 million are too risky and do not sell as well. 1M - 1.4 is the money range. A couple pulling in 400k is definitely in the range for this sort of home.

you are assuming that everyone views their primary residence as an investment, which I can tell you from experience is incorrect. my rule of thumb of 2x annual gross household income is based on living below your means. certainly 400k of income can afford the mortgage on a 1.4mm home, but my point is to become financially independent, you should live below your means so you can save more. technically speaking, you are correct that homes above 2x are affordable, but it is not prudent, and I would never recommend to a client what you are describing.

May 15, 2014

Isn't the housing rule: no more than 28% of your income should be spent on housing?

May 16, 2014
thebrofessor:

you are assuming that everyone views their primary residence as an investment, which I can tell you from experience is incorrect. my rule of thumb of 2x annual gross household income is based on living below your means. certainly 400k of income can afford the mortgage on a 1.4mm home, but my point is to become financially independent, you should live below your means so you can save more.

I always told myself I'd buy a commercial property before I'd buy myself a home to live in, or at least a du/tri/four-plex to live in while letting the rental income from the others pay off/down the debt service. What do you think of this? I know it's going to vary from situation to situation but as a general principle would you think it's a good idea?

Huge believer in living below your means to build wealth.

May 14, 2014

This is all great advice, assuming you are okay never exceeding the upper middle class. I don't define class status exclusively by net worth, income brackets, or any real "hard" number basis. I would say guy A would be in the upper middle class if he made a million dollars a year and spent 950K of it every year while not achieving any progress towards a truly economic freedom path. I would say guy B would be in the upper class if he made 300k a year at a job and 300k a year off of income derived from investments. Why? He can quit his job tomorrow and replace 100% of his working income. This will free up his time and allow him to do what ever he wants.

Time is what makes you truly wealthy. It takes money to buy time. Therefore money is a component of wealth, but nothing more than a component.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

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May 14, 2014

spot on, I'm not writing for the 0.01%, because quite frankly, they have this stuff down already. the real benefit of something like this is for younger monkeys who get caught up in what stock to buy 5 shares of, instead of basic principles.

May 14, 2014

lol @Anonymous Monkeyin the room"

"That dude is so haole, he don't even have any breath left."

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May 14, 2014

Thank you for writing this up. It's a good list.

My only qualm: The 4% rule actually does take inflation into account. The idea is that the return on your nest egg will be about 7% and inflation will be 3%. 7-3 gives you 4 percent of the principal to spend annually.

May 14, 2014

this is helpful but you forgot to mention that 80% of your net worth should be invested in gold bullion. anything else would be reckless imho.

May 14, 2014

I personally don't care for gold, but I'm not about to get into an argument about gold on the internet.

other monkeys, never, ever, ever, ever invest 80% of your money in any one single thing unless you're an entrepreneur putting money back into your business.

May 17, 2014
thebrofessor:

I personally don't care for gold, but I'm not about to get into an argument about gold on the internet.

other monkeys, never, ever, ever, ever invest 80% of your money in any one single thing unless you're an entrepreneur putting money back into your business.

Even then that's a bad idea generally. Good post though - thanks

May 14, 2014

Fair enough. Houses in the 900k-1.4M range in LA, Orange County, Boston, and the Bay Area saw a huge appreciation over the last few months. There really is no better investment.

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May 14, 2014

So appreciation over a few months automatically means great investment for the future?

May 14, 2014

The housing market in the United States is currently in a widely varying state. Houses that cost between 100 - 650k are a poor investment. They have seen slow growth in value. Due to growing wealth inequality as well as a hidden but high form of inflation, rich individuals are buying houses with straight cash in the regions I mentioned above. Houses in Orange County, CA have gone from 1M to 1.5M over the last six months. This is due to rich individuals as well as property investors in China recognizing the inflated value of the dollar, and seeking a save haven from that devaluing. A beach home in a wealthy area near LA is a very secure investment.

There is very little risk involved in buying property in these areas, unless you are buying at the absolute top of the market, in which case, you wont make much just like everyone else.

Houses have always been a good investment. The key is to buy the shittiest house in the best neighborhood. Pockets of rich neighborhoods surrounding a poor one, make the poor one a ripe investment 10 to 15 years down the line.

It is not obvious why homes are a poor investment. Only some are, mainly the cheaper lesser neighborhoods far from high income areas.

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May 14, 2014

I completely disagree, Real estate is simply an asset class and I have seen some clients make a fortune in housing and others that have lost their ass. Without the use of leverage or the tax advantages real estate would be inferior to equities.

May 14, 2014

Great post. SB'd. Pretty much every "what should I do with my money" thread becomes an echo chamber for terrible ideas. A lot of people don't realize that sometimes it can be harder to preserve wealth than to create it. This is how you preserve it.

For #2 I personally would say NEVER carry a balance, unless you just don't mind wasting your hard earned money. Unless you have an emergency that you simply cannot find the cash for, don't carry a balance ever. Consumer debt is essentially financial cancer that is very easy to lose control of. Even those with good credit are usually paying higher interest on credit cards than the average market return.

@"mike97345" while real estate can be a good investment, putting that much money into a houseshouldn't even be on someone's radar unless they are certain that they meet all the other requirements (perhaps more) first, mainly because of illiquidity. I think it is obvious why.

"Strength does not come from physical capacity. It comes from an indomitable will."

May 14, 2014

Nice write up. The salary requirement for housing would be a little tough out here in Northern California. In my town an entry level home starts at about 800K....

May 14, 2014
sfbroker:

Nice write up. The salary requirement for housing would be a little tough out here in Northern California. In my town an entry level home starts at about 800K....

living below your means sometimes means living outside of your ideal location, which is why people working in NYC live in places like NJ and why people working in SF live in Oakland. I hear what you are saying, a friend of mine in his mid 20s who makes 6 figures has to live 45 minutes outside SF just so he can afford to have a life (vacation, restaurants, etc). alternatively, you could rent, I doubt every apartment in SF costs $5k a month.

May 14, 2014

I guess I might as well wade into this "discussion" about real estate. For the most part real estate is a long play for equity gain through marginal to okay asset appreciation. However if you are looking at your investment through the scope of how much will my asset increase in value this year you should pack your bags and just keep moving. That is a loosing game and you will never win in the long run. Could you have made great money doing this in the early 2000s in SoCal or Miami? Sure you could have, however you would have been wiped out if you didn't get out before the middle of 2007. Guess what, when one is in that kind of bull market greed trumps all reason. I don't care what kind of system you pitch me, I will never believe any of you if you say you have the discipline to heed warning sings when you are getting 5% returns every month for just holding the asset.

The point I am making is that the house you live in is the worst investment you will ever make in your entire life. It doesn't matter if you get out in 10 years with a 120% return on your investment. The opportunity costs alone could be valued more than the appreciation. However, home ownership isn't a bad thing, it is actually a great thing. You just can't look at it as an equity investment. It's just has several monetary advantages over renting however since you are directly paying for all of the equity gain derived from debt pay down you are not getting the true value out of the real estate investment.

The real estate game is one of arguably more risk than the stock equity markets. The risk manifests over a much longer period of time but it is still there. There is no such thing as a risk less return. Don't let your valuations teachers fool you, even T-bills have risk.

If someone else isn't paying for your equity, you aren't investing you are just living.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

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May 15, 2014

great thread, thanks @"thebrofessor"

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May 14, 2014

@superandy241 and @DeepLearning both of those are rules of thumb, not law. the real answer is live below your means to help you achieve financial independence. I personally feel more comfortable with a rent figure that's much lower, like 15-20% of my take home pay (rather than gross pay), but the key here is don't overextend yourself.

I heard the 2x annual income rule in college from a local economist, and it always made sense to me. if you abide by this rule but change it for rent (assuming 30y fixed mortgage at 5%) it ends up being about 13-15% of your gross wages as a rent payment each month. admittedly, there are VERY few people who abide by this rule, because banks will qualify you for 3x+ your annual gross wages on a mortgage and other places will allow you to spend up to 1/3 or even 2/5 of your gross wages on rent, but the point is if you do your best to abide by my suggestions, you'll be living below your means and have more money to save & invest.

just because you CAN buy it doesn't mean you SHOULD buy it.

May 15, 2014

+SB, great post. This information is spot on and summarized in this really handy infographic I came across a while back:

http://i.imgur.com/PWfvdvB.png"

Young monkeys, print this off and try to abide by it. I would argue that prior to contributing to an emergency fund you should be matching your employer's 401(k) contribution as that's free money, but then you should be focused on building your rainy day fund before contributing any more to retirement accounts.

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May 14, 2014

I've seen this argued both ways. if you think your parents could bail you out of shit hits the fan, do what @milehigh is saying. if not, I'd say rainy day fund first, then 401k once you have 1/2 of what you need.

also want to point out that the infographic says "expenses" instead of "salary." I'm a big proponent in being overly conservative, so if you have the extra money, don't stop at just 6 months of expenses, stop at 6 months of salary.

Best Response
May 15, 2014

I guess whether or not to match the 401(k) first depends a lot on the level of your company match. If you're in O&G with some crazy 15%+ match then yes, it may be a little aggressive to match. However, I'm assuming most folks here are in finance, which doesn't seem to match more than a few percent (highest I've seen is 4.5%). At these levels, I think the guaranteed 100% ROI on your employer match completely outweighs the marginal drop in the amount you can put towards your emergency fund. Consider these examples:

Emergency Fund
1st Year Analyst Salary = $70,000
Tax Rate = 35% (25% bracket + city and local)
Annual Take Home = $45,500
Emergency Fund Target = $22,750
401(k) Balance at Year End = $0

This is a basic example but you can see that after expenses in a major city, it could easily take a year or more to build up that 6 month salary war chest.

Match 5% 401(k) Employer Contribution
1st Year Analyst Salary = $70,000
Company Match = 5%
Taxable Salary = $66,500
Tax Rate = 35% (25% bracket + city and local)
Annual Take Home = $43,225
Difference in post-tax take home = $2,275 less with 401(k) match
401(k) Balance at Year End = $7,000

Compound that $7,000 over 40-45 years and the ending amount would be astonishing, all for the sake of $2,275 not going towards an emergency fund which is going to take a year or more at least to build up to the full amount anyway.

I completely understand that OP is going for the ultra-conservative, financial independence route, but I think the benefit of throwing a few percent of your pre-tax salary at the 401(k) from Day 1 far outweighs the cost.

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May 15, 2014

May you please explain more on the stock market allocation?

When you say that we should allocate 100 - age (eg: 20), what does the number 80 represent?

I know it's your least favorite rule, so I apologize for asking.

May 14, 2014

X in the 100 - age = X formula is the equities percentage of your portfolio. Equities are stocks and their derivatives. The remainder of ones portfolio should ideally consist of cash, bonds, and other investments. Now in reality this rule is not exactly followed that closely since most people are unable to realistically reach their goals with that kind of approach.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

May 14, 2014
heister:

X in the 100 - age = X formula is the equities percentage of your portfolio. Equities are stocks and their derivatives. The remainder of ones portfolio should ideally consist of cash, bonds, and other investments. Now in reality this rule is not exactly followed that closely since most people are unable to realistically reach their goals with that kind of approach.

@ActivistInvesting no apologies needed, this rule is predicated on the thought that one should get less exposure to equities as they age, because equities are more volatile and when you withdraw money from a volatile investment, you will inevitably have to sell some equities at the wrong time. all of this is moot if you have @heister money, but for the average Joe, this rule is meant to protect you from being overexposed and then selling everything at the wrong time, essentially protecting you from yourself. I have clients in their 70's with north of 75% of their assets in global equities and clients younger than 40 with less than 40%, it's more about personal circumstances, means, and personality than anything else.

@heister is right though, it's very hard to build substantial wealth if you're contributing your money to fixed income during your earlier years, the magic compounding machine does not work as well for bonds as it does for equities.

May 15, 2014

I liked the allocation rule, good stuff

May 16, 2014

Good luck finding a house in Australia for 400k.

May 16, 2014

sounds like a bunch of arbitrary rules

May 16, 2014
yourboss'sboss:

sounds like a bunch of arbitrary rules

I have a feeling you don't know what arbitrary means.

Those rules that the OP posted are each rational, purposeful, and helpful. I'd go so far as to say they are common sense, but alas you represent the constituent that would make my claim a false one.

May 16, 2014

Please explain to me why I should never by a house that is more than 2X my gross income. Why is a multiple of 2 more appropriate than lets say 4 or 3 or 2.5? please provide us with the mathematical proof.

May 16, 2014

Thanks @"thebrofessor" for this thread! A few observations to add to this great discussion:

- 100 minus age rule: this originally comes from a "traditional" asset allocation model of two types of investment assets: stocks and bonds. The basic idea is that allocation to riskier/higher volatility asset classes should decline as you age, which makes sense when your aim is saving for retirement. But the underlying assumption is that the stock market is "risky" and the bond market is not, which in the current market and yield environment isn't entirely true. Replace "stocks" and "bonds" with "higher risk investments" and "cash and equivalents" and you've got a pretty good rule of thumb.

- Real estate: as another commenter mentioned this is an asset class like any other. But the difference is that it's an asset class the average individual has access to that has 1) tax preferences, 2) ability to leverage your equity 5x with fixed-rate long-term debt (lack of margin calls is crucial, e.g. no exploding payments as @"heister" references), 3) information asymmetries that can be exploited without specialized financial knowledge (you can make money from common sense), and 4) long investment horizons that can encourage smarter behavior. Personally, I think it's a little bit crazy to make your largest asset allocation to a depreciating asset with high carrying costs, illiquidity, and steep transaction fees that potentially generates no or negative cash flow, but to the extent individuals want to take on that kind of risk and don't have the ability to invest directly in funds, what other options are there to get the potential benefits of leverage? Being able to buy a (reasonably priced) house or income property with 80% LTV is like being able to buy a private business or value stocks with margin that can't be called for 30 years. That's powerful. But entry price matters - I live in an area with 25x P/rent ratios, so I rent and invest what I could be plowing into home equity elsewhere. But to each his own.

@"makecents" despite what I just said and that buying income property can be a great investment, you might want to consider the tax advantages of owning your home if you're planning to own real estate anyway. It's not just that the interest is tax deductible; selling your primary residence is exempt from capital gains tax up to the first $500k after a 5-year hold period, if memory serves. So if you want to own real estate anyway that's something to consider.

May 16, 2014

money matters?

May 19, 2014

Nice write up. I personally prefer the 120-minus your age rule as a benchmark though. I think a 22 year old fresh out of college with 40+ years of work ahead of him would be underweighted in equities at 78%.

May 14, 2014

I completely agree, which is why it's my least favorite "rule." I may have done a typo with the 100 minus age, but admittedly my "rules" are overly conservative. I personally plan to stay at least 95% equities until 50, I'm comfortable with the volatility and like them as an asset class much more than anything else.

May 14, 2014

alright guys @"yourboss'sboss" and @"fearandloathinginca" these are rules of thumb, not part of the 613 Mitzvot. if you spend 2x your annual gross income, your housing payment will be very affordable relative to what the banks will approve you for (likely closer to 3x+), and therefore you will be able to save more in the capital markets, allowing you to build wealth.

@"yourboss'sboss" if you're a prospective monkey in FI AM, you should know the math, but what the hell, I'm feeling generous:

100k income = 200k mortgage (not house, just mortgage, if you have a healthy down payment it doesn't matter)
assuming 30y @ 5%, P&I would be 1,075/mo (rounding here for everyone out there with a 12c)
if it was a 400k mortgage (4x), payment would be 2,150

now let's assume you take the savings and invest them in something earning 7% per year, say a balanced account that ends up underperforming but not too badly, that'd be exactly 1,075 per month (makes sense) for 30 years, the ending value is 1.3mm. yes, if you buy a house that's twice what I'm recommending you are potentially leaving over 1 million dollars on the table.

go right ahead and overextend yourself, just know you won't be able to retire as early as my clients.

@"fearandloathinginca" no, very few people should purchase a 1mm home. when you buy a home that big you're not just buying a mortgage payment, you buy an HOA, a landscaper, country club memberships, the whole 9 yards. all great things don't get me wrong, but there's unforseen costs when you move to a neighborhood like that, and if you're shallow enough to buy a 1mm home on 350k of household income, you're shallow enough to want to keep up with the Joneses. take a look at "The Millionaire Next Door," great book about stuff like this.

May 14, 2014

I completely agree with you. I was responding to yourboss'sboss. I was trying to show that 2x does sound prudent, whereas 3-4x gets a bit inappropriate and risky for me...

May 16, 2014

Not at all, though I don't think that it would be an egregious amount of money to spend on a house for that level of income. What I am saying is that the multiple of 2 was pulled out of thin air and is arbitrary i.e it is subject to the arbitration of the individual. Why is a multiple of 1.5 or 1.75 not used? Also these rules ignore important contextual factors such as liquid net worth. If you make 50K a year but have 5 million liquid, buying a 500k house should not be a problem.

At the end of the day it is obvious that these rules are a rough guideline. some would call it common sense @"Mr. Manager"; to me they are platitudes.

May 14, 2014

you're missing the point. none of what you're saying is untrue but it's not the point of my thread to look at every single variable and situation within the realm of possibility, they're called rules of thumb for a reason, it's not a law. best of luck in whatever you do, but try not to lose the forest through the trees (I feel like I use that a lot on WSO...).

May 16, 2014
yourboss'sboss:

Not at all, though I don't think that it would be an egregious amount of money to spend on a house for that level of income. What I am saying is that the multiple of 2 was pulled out of thin air and is arbitrary i.e it is subject to the arbitration of the individual. Why is a multiple of 1.5 or 1.75 not used? Also these rules ignore important contextual factors such as liquid net worth. If you make 50K a year but have 5 million liquid, buying a 500k house should not be a problem.

At the end of the day it is obvious that these rules are a rough guideline. some would call it common sense @Mr. Manager; to me they are platitudes.

I get what you're saying. I'm purchasing a property right now at about 4.5x my personal income because it will provide rental income for near positive cash flow ( I'll be living in the property).

Honestly, I agree that the 2x income rule is subjective. For a single 24 year old making $250k at a hedge fund, 2x might be too high in Ohio and not high enough in NY. For a married 24 year old with four kids making $35k at a lumber yard, 2x isn't nearly enough anywhere. For an average person with an average salary in an average housing market, 2x might be just right.

I'll agree that this particular rule, which represented only a small portion of the post, is probably arbitrary, but I stand by the fact that the rest are pretty common sense, or at least common. Sorry I jumped on your post like that, just thought you were trolling. You obviously had an actual, valid opinion. My bad!

Jul 5, 2014

Amazing thread !

Quick question: Is there such a think as a buy vs rent ratio ? As in House value divided by yearly rental expense

May 14, 2014

just realized I never replied here, my b. depending on your part of the country, rent can be 10-40% higher than a mortgage payment. mine's 25% higher than what a mortgage on my house would be, and I'd say that's about average. as for the argument for buying/renting, that depends so much on individual circumstances, hard to say in just one comment.

Nov 8, 2014

Cheapest expense real estate and consumer goods ETF. Read the tech charts and buy a little when they come down enough. Fidelity has the best performing ones (with low fees) if I'm not mistaken. Make sure to put the stocks you expect to deliver the most growth over the long term in a Roth IRA!

For the rest, I would take some risk with small cap bio etfs and options (spreads if you're risk averse). You should do you own research on that because it's often unpredictable. If only there were an insider/psychic service for that???

You can also lend out your money to get greater than 6% interest rate (mortgage backed pool)? I am sure there are some meetups in your area that would be happy to educate you on any of these.

Beware the scammers! People are greedy, greedy, greedy and have motives that will make you vomit:

http://seekingalpha.com/article/2642285-dont-let-g...

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Apr 21, 2016

Great post. While I believe that the book was originally written for women, I always recommend On my Own Two Feet to people with personal finance questions. The book does an excellent job at giving a broad overview of everything personal finance.

Apr 21, 2016

Great post. When you say 6 months salary for the rainy day fund, that excludes bonus, right?

May 14, 2014

the theory here is based upon my experience with higher level people looking for jobs, 6 months is a reasonable time frame to expect someone to have to wait to get another comparable job. therefore, so their standard of living doesn't suffer, I recommend 6mos salary in the bank, so they can live the same as they did when that person had a job. in reality, someone who's in their 20s, not married with no kids will probably cut back expenses and not take that long to find a job, so 6mos is overkill.

regarding bonus, my figure doesn't include bonus in this case. for some people bonuses are more of an ongoing thing (quarterly, every other month), so in their case I would include it.

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Apr 21, 2016

Say you're mid 20s, have no debts, 6 months rainy day fund, sinking 18k into your 401, 5k into your IRA. What would you do with the rest? Save for an apartment/MBA?

May 14, 2014

if there is a "rest," you're in a small group of people. either you had savings from parents/grandparents, or live so modestly that your salary covers everything. either way, kudos.

I'd recommend saving for a down payment on a home or wedding. eventually you'll want to start a family I think (most people do), and you can invest this money in a balanced fund like vanguard wellington or wellesley, as opposed to your rainy day fund which will be mostly cash.

beyond that, have some fun. go to vegas, buy some new golf clubs and plan a trip to Pebble and then go taste some wine at Napa

Apr 21, 2016

Great post.

Apr 22, 2016

I see we are still arguing about the same things as we did two years ago haha

Apr 22, 2016
  1. What do you think about the principle of Wealthfront?

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May 14, 2014

I addressed robo advisors in my PWM blog (4 parts), go read that and let me know if that does/doesn't answer your question

Apr 22, 2016

Great advice overall but cannot agree with the housing point, 2x seems way too low in most urban markets.

General rule of thumb I always use is max mortgage of 3.5x combined gross. However I use this in conjunction with another rule....I am buying with somebody else and if one of us loses job the other can cover mortgages payments with relative ease from net pay.

May 14, 2014

again, 2x is a rule of thumb. if you want to be conservative and live in an urban area, guess what, you're not living in midtown manhattan or downtown SF, that's what living below your means is, you're in the suburbs or in a smaller apartment than you could probably afford. all I'm saying is that the key to wealth is your savings rate, and the lower your fixed expenses are (housing), the more you can up your savings rate.

Apr 26, 2016

what do you recommend for someone who floats alot of their work expenses and their cash flow fluctuates depending on the timing of company reimbursement? (i.e. no company credit card?)

"Even if you're on the right track, you'll get run over if you just sit there" - Will Rogers

May 14, 2014

I'd be shocked if your company took so long to reimburse you that you got charged interests on those purchases. if that is the case, talk to your manager. otherwise, no need to do anything special, just submit your expenses on time. that's what we do at my firm, never been an issue.

May 10, 2016

housing is the most expensive required expense most people have in their entire lives. Wouldn't it make sense to buy a home and get it paid off as fast as possible to diminish this expense completely?

May 14, 2014

it depends. the financial/math answer says you should put any excess cash you have towards the higher yielding investment. if your brokerage account will do 7% a year and your mortgage is at 3.5%, invest the money. from experience however, I will tell you there's a great sense of accomplishment in having debt paid off, so there's an emotional argument for paying down the mortgage.

in my opinion, the biggest mistake people make is not in paying too much towards debt vs. investing, it's one of two things: buying a house too early or buying too much house. buying early works like this: you get a job in charlotte NC at Lazard after b-school, think you'll be there forever, but you get passed over for VP. SunTrust comes calling, they'll make you VP, but you need to move to ATL, so you sell your house maybe 5y in. this is a lost money proposition in most cases, because any principal you will have paid down will have been eaten up by other expenses like HVAC, painting to get the house sold, appliances, etc. you may think: oh I'll just rent my house, consider it an investment. you'll likely have bought something in the 4-700k range, those do not rent well, period. maybe if you bought a 250k apartment downtown, but not a house in suburbia.

so what do you do? I recommend you just buy less house than you can afford (hence the 2x income rule). that way, you'll be able to add to liquid investments as well as probably pay down the debt, and even if you do have to carry 2 mortgages at once, it won't financially cripple you.

personally, I'd lock in for 30y at 3% at less house than I can afford, put as much money in other investments, and maybe only slightly pay down the mortgage. I know some people won't want to do this, but once you get to the city you think you'll stay for the next decade or so, this makes sense.