Need some help making a money decison

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TheRedHare
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Need some help making a money decison

Postby TheRedHare » Tue Jan 10, 2017 8:59 pm

Hi, so I just started with ERE as well as my first real job. I'm currently working as a low level IT guy (Full time temp is what they call it- for about a year contract). I'm making $13/ hour and work 37.5 hours a week. My current expenses are $510 for rent and groceries which I'm gonna try to budget around $50 a month, but I'm thinking my total monthly expenses will be about $600. Here is what I've crunched out number wise, please correct me if I'm wrong.

Income: $13*37.5 hours= $487.50 - 20% taxes (I'm not quite sure about this)= $390 after tax. This gives me about $1,677 a month (4.3 * 390).

Expenses: Budget $600/month. $1,677 - $600 = $1,077

So I'm guessing that within a year I should make $12,924 Or about a 63% savings rate. Talk about slave wage :/

My other question is that
I've currently got $29,164 in student loans at a 4.3% interest rate.
I'll start my payments in about 5 months for 120 months at $300 a month which would total out to about $35,992
Should I put my saved up money into a savings account or some other form of investment account with a decent interest rate and have that interest pay for the loan payments, or should I just pay off the student loan as fast as possible?

Thanks!!!

jacob
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Re: Need some help making a money decison

Postby jacob » Tue Jan 10, 2017 9:09 pm

Get your hands on a 1040 or 1040EZ (try both) and fill it out by hand or spreadsheet. Your taxrate is likely much below 20%, quite possibly 0% (ex SS). The key here is to figure out whether your student loans have value as deductions.

Otherwise it comes down to deciding whether to channel some funds into investments which are likely to see poor returns for the near future relative to 4.3% but still good for the learning experience (of losing money) vs paying the loans (ugh!) off .. vs how much you expect to earn 3+ years from now.

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Chris
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Re: Need some help making a money decison

Postby Chris » Tue Jan 10, 2017 10:26 pm

I agree with Jacob: your federal tax rate is likely way below 20%:

$ 20k wages - $1800 loan interest - std. deduction - exemption will get you down under $10k in taxable income.

Since you're on a contract, are you a contractor or a regular employee? Sort that out, because it will matter for taxes.

As far as where to put your savings, paying off the loan is a guaranteed 4.3%. But I will say that at your income level, you'd be eligible for the Retirement Savings Contribution Credit (page 2 of the 1040). Put $1k in a Roth IRA, and get a $100 tax credit. Pretty cool. What you do what that $1k once it's in the IRA is a different story, but hey, you effectively get 10% just for the deposit.

Felipe
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Re: Need some help making a money decison

Postby Felipe » Wed Jan 11, 2017 5:36 am

+1 to tax efficiency
13$/hr X2k hrs/yr=26k/yr

Here's some ideas to look into for your 1040 and see if you can get even less taxable income:
You'll likely get a standard deduction and exemption of around 10k total so 16k is taxable.
HSA deduction if in HDHP
Student loan interest deduction
Retirement Savings Contribution- max out your Roth while you're still in that bracket if you can since you'll get the extra tax benefit as well
Earned Income Tax Credit
Obama Care subsidies
American Opportunity or Lifetime learning if you're still in school

Another idea that may help:
Check if there's any local government programs that give savings match as your income may qualify you.

On your question-can you get 4.3% return guaranteed from any other investments? I personally think you should hit the debt hard once you have some an emergency fund built up.

7Wannabe5
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Re: Need some help making a money decison

Postby 7Wannabe5 » Wed Jan 11, 2017 12:45 pm

If he claims 1 exemption, his total bi-weekly withholding will be approximately $167 for Federal/SS/Medicare plus whatever state/local applies, so his take-home will be approximately ($808 minus state/local withholding) every two weeks, therefore less than 82% of his gross earnings. So, his strategy might also want to take into consideration the likelihood that he will ever receive SS/Medicare benefits. This is particularly true if his employment status as contract worker gives him options available to any self-employed individual. IOW, if he does not believe that he will ever draw SS benefits then he will immediately make 7.65% if other-employed, or 15.3% if self-employed, by use of any strategy that will serve to reduce his gross income subject to SS/Medicare withholding.

Felipe
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Re: Need some help making a money decison

Postby Felipe » Wed Jan 11, 2017 2:56 pm

Good point on taxes, I forget about the self employed piece.

KevinW
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Re: Need some help making a money decison

Postby KevinW » Wed Jan 11, 2017 3:31 pm

If I were you I would prioritize this way:

1. Save up some operating cash, AKA "emergency fund" in other circles. This allows you to ride out cash flow issues (rent due before paycheck clears), buy in bulk, self-insure small items (refrigerator contents), avoid financing (buy phone in cash instead of financing). I picked the figure of $10,000 out of thin air for myself, but my fixed expenses are higher than yours. Conventional wisdom is at least 6 months' expenses which would be about $3,600 based on your $600/month burn. I just leave this in a no-fee credit union checking account (I'll re-evaluate that if interest rates ever increase substantially).

2. Invest enough in a Roth IRA to take full advantage of the Retirement Savings Contributions Credit (https://www.irs.gov/retirement-plans/pl ... ers-credit) mentioned upthread. I think this is $2,000/year but I could be mistaken. The rationale is that it's a guaranteed return of 10%, 20%, or 50% depending on your taxable Adjusted Gross Income, all of which are better than the 4.3% return on prepaying student loans and the risk-adjusted returns you're likely to earn investing. If your employer offers a 401(k) match that might slot in here, but from your description I'm guessing they don't.

3. Capital investments in your household, if there's any low-hanging fruit there. For example, if you currently buy Starbucks every day, invest in coffee making equipment instead. If you buy alcohol, invest in a homebrew cider rig. Again the rationale is that these investments often (but not always, run the numbers) have better risk-adjusted ROI than security investments.

4. Pay down the student loan. 4.3% guaranteed return is good, the loan payment negatively impacts cash flow, and there is an intangible peace of mind that comes from being debt free.

5. Market investing (stock, permanent portfolio, real estate, etc.).

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TheRedHare
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Re: Need some help making a money decison

Postby TheRedHare » Thu Jan 12, 2017 8:03 pm

Invest enough in a Roth IRA to take full advantage of the Retirement Savings Contributions Credit (https://www.irs.gov/retirement-plans/pl ... ers-credit) mentioned upthread. I think this is $2,000/year but I could be mistaken. The rationale is that it's a guaranteed return of 10%, 20%, or 50% depending on your taxable Adjusted Gross Income, all of which are better than the 4.3% return on prepaying student loans and the risk-adjusted returns you're likely to earn investing. If your employer offers a 401(k) match that might slot in here, but from your description I'm guessing they don't.


Sorry, noob question here, but is that something that pays monthly (which might assist with loan payments), or is it's something given at an annual rate?
The company that I"m working with now does offer retirement benefits although I haven't signed up for any as of yet. But I'll only be there for about a year until I go elsewhere. I read that I could invest in both, but only at a certain rate.

jacob
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Re: Need some help making a money decison

Postby jacob » Thu Jan 12, 2017 8:11 pm

The credit is part of your 1040 taxes. If you make under some amount and still manage to save money in a [Roth?] IRA, the government wants to reward your sensibility once you file your taxes by giving you money, literally. This is a lump sum --- getting cash back in taxes.

Go ahead and download the forms(*) and either do it by pencil or by making a spreadsheet. What are you waiting for?

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf (read the whole thing)
https://www.irs.gov/pub/irs-pdf/f1040.pdf (do the whole thing)

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TheRedHare
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Re: Need some help making a money decison

Postby TheRedHare » Thu Jan 12, 2017 10:13 pm

What are you waiting for?


Haha, waiting for you to solve all my problems Jacob. I'm just inexperienced with taxes and investments, and I don't feel comfortable taking the next step until I understand what I'm getting into. As stated by Kevin earlier, I should probably save up some operating cash first. I haven't even finished my first week of work yet, and It'll be a while till I get my first paycheck. I am looking for part time work in order to generate extra cash flow, at least for the first year until I've manged to create a solid foundation.
After reading into the 1040EZ I think I might qualify for that one. I'll be sure to read the whole thing :D


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