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Financial Advice

Stunt

Stunt

Diamond Member
Ok, I know I am asking Anandtech for advice, but what the hell. I'll give you my financial situation and I'd appreciate the advice...thanks in advance.

Status, single
Income, $60,000 /yr
Rent, $650 /mo (utilities inc)
Car, $287 /mo
Current savings (after all living exp), $1,500 /mo

All my savings thus far have been put on my car loan; $7,000 left on the car.
I have been getting 5% pay increases every 5-6months.
I hate paying rent (sunk cost).
Car interest rate is 3.9%.
Intend on living in this city for 1-2 years.
Housing costs are $150-$250k for a reasonable sized home.

Do I:
a) pay down car, start investing on stock market.
b) buy a house, sell in a couple years (save rent)

I just turned 23, so I am very new at this asset allocation thing. Going out an getting a mortgage is a big thing, but can i afford it and would it be worth it compared to the investments, etc.
 
Renting is NOT always a "sunk cost." People almost mechanically suggest, "go buy a house!", but that's not always the right decision, especially for someone young like yourself where you likely have no idea where you'll be in 10 years.

Depending on where you live, you're looking at modest equity potential over the course of a few years on a house. If the cost difference between renting and buying allows you to take those additional funds and invest them, you'll likely come out ahead. It all depends on how long you plan to stay in the same place. If you really want to sell in a couple of years buying would, in most markets, be a horrible decision.

I'm 3 years older than you, and I had to go through many of the same decisions. Pay down your debts, increase your savings as much as possible and put invest it. If you want to know what to invest in that's an entirely different thread.
 
The house sounds like a good idea. The interest is deductible in the US, iirc. I'd say split whatever beyond that between savings/investing and paying down your car faster.
 
Originally posted by: Ameesh
buy a house its one of the best investments you can make provided you live in the right area
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The housing market has been doing well here, but it's not a growing city and doesn't have a whole lot to offer new people. I am quite torn as I don't know the area as much as i should, but I also hate paying rent and would like to get in on housing price growth.

I guess housing isn't always the best investment.
 
Originally posted by: Descartes
Renting is NOT always a "sunk cost." People almost mechanically suggest, "go buy a house!", but that's not always the right decision, especially for someone young like yourself where you likely have no idea where you'll be in 10 years.

Depending on where you live, you're looking at modest equity potential over the course of a few years on a house. If the cost difference between renting and buying allows you to take those additional funds and invest them, you'll likely come out ahead. It all depends on how long you plan to stay in the same place. If you really want to sell in a couple of years buying would, in most markets, be a horrible decision.

I'm 3 years older than you, and I had to go through many of the same decisions. Pay down your debts, increase your savings as much as possible and put invest it. If you want to know what to invest in that's an entirely different thread.
Click to expand...

Thanks for the response...feel free to go into investment strategies here 😀
I study it quite closely; kinda torn between focus value/growth investing and redistrobuted diversified ETFs.
 
1) Save 3-6 months' worth of living expenses in a savings account, money market account, or other safe, liquid account.

2) Pay down all debt, with the possible exceptions of mortgage, car, and student loans

3) THEN start worrying about homeownership, investing, etc.

We don't know enough about your plans to evaluate homeownership. Are you single or married? Is that likely to change in the near future? How long would you live there? If you're only going to live there 1-2 years as you said, you're very likely to lose money on the house. It costs a lot of money to get into a house, and it costs a lot of money to sell a house.
 
pay off your car first anything that has interest attached to it isn;t something you want to have to pay for too long, then you want to build up 6 months-2 years of float in investment grade bonds.

after that you can worry about buying a house or investments.
 

The interest in your car is low pay it off slow
A house costs way more in Xtra utilities and property tax which you will find add up to almost a mortgage and all the things you 'need ' lawnmowers shovels tools since you are planning on moving stay put in the apt . Every time you buy and sell usually there are other fees lawyers fees, surveyers certificates, bank assements.
Try to build as much as you can in downpayment to avoid CMHC fees if you can get to 25% you will avoid all of the CHMC but you do get breaks in the fees at 10% 15% etc.
Invertments
Start dollar cost averaging in equities Mutal funds, RRSP based if your pension plan sucks non-RRSP mutuals if you have a good pension plan. I like low MER .5% index funds
Stay away from stuff like life insurance and xtra car insurance, consider disablitiy insurance if your company doesn't offer it


 
I wouldn't buy a house right now, houses are going to tank in price inthe next couple years (especially in overheated markets). In my area, we had 14 newly built homes put up for foreclosure in the last month (as opposed to 5 in all of last year), POP goes the bubble.

If youre only staying in a home for 1-2 years, the closing costs, realtors commision, loan fees, etc.. are going to eat up whatever profit you may or may not make in the sale.

FOr the next couple years, I'd live in as modest a place you can be comfortable in, and invest the rest (OIl and metals have done well this year but are liekly done with their major growth, foreign markets especially Brazil, Russia, India, and China (The BRIC) still hold promise). Then after the bubble has popped, take the money you saved and move into someone foreclosed house for 60% of the cost it is currently 🙂
 
Originally posted by: Descartes
Renting is NOT always a "sunk cost." People almost mechanically suggest, "go buy a house!", but that's not always the right decision, especially for someone young like yourself where you likely have no idea where you'll be in 10 years.

Depending on where you live, you're looking at modest equity potential over the course of a few years on a house. If the cost difference between renting and buying allows you to take those additional funds and invest them, you'll likely come out ahead. It all depends on how long you plan to stay in the same place. If you really want to sell in a couple of years buying would, in most markets, be a horrible decision.

I'm 3 years older than you, and I had to go through many of the same decisions. Pay down your debts, increase your savings as much as possible and put invest it. If you want to know what to invest in that's an entirely different thread.
Click to expand...

There are 100 ways to invest. This method is popular for people in their 20s. They think they should pay off all debt and invest what's left. I say this is a bad idea. The car interest rate is 3.9%, which is the best rate he is going to get anywhere. I say pay the bare minimum on this. Do not pay this off! If you got a good deal on your car, then you will not be upside down on the loan even paying the minimum, so there is no reason to pay it off.

On the other hand, if you take a solid diversified investing approach, you could easily make average 10% a year on your money at moderate risk levels, which is perfect for your age. For example, the Vanguard 500 Index, Vanguard International, and Vanguard IPS funds would give you approx a 13% yield over 10 years, making the difference between the car loan and the investment 9%. Compounded annually, the overall gain is much higher than 9% simple every year.

As far as renting vs buying, Descartes has a good view. Don't buy a house unless you want the responsibility of owning, fixing, etc.. At your age, I would find a very moderately priced appartment in a respectable, but not extravegant, part of town. Keep your bills down and save for a house payment in a few years. There is nothing wrong with having a shelter expense, and while owning a home has certain advantages, it's not really your best investment vehicle (unless you live on one of the coasts where RE prices are soaring).

For example, by the time you calculate interest expense, owning a home has a moderate return. This is ok since you are also paying for shelter, but don't think of owning a home as your best investment potential because it is not. Another way to go is rental or investment real estate. Buy a property with little down, rent it out, and you build equity without having to live in the home. Basically after all PITI, rental properties should yield you around 10% a year, and have an added advantage. Once the loan is payed off, you have an investment yielding a resisudal monthly income and the overall yield jumps up considerably. You could move into this home in a few years having a lot of equity, or sell it and take the gain.

Just some ideas. PM if you want more information.
 
take your time to pay off the loan. the market interest rate is higher than your car loan.

what about retirement plan? does your firm match contribute to IRA? start a ROTH IRA?
 
Here is what you do.

Dont worry about paying off your car. Human nature says that one said car is paid off, you will want another one probably with a higher payment/rate.

A first house is a duplex. The rent you can charge may offset the mortgage payments enough that you only pay taxes/insurance/etc. Then you have a house, someone else is building equity for you and if taxes/insurance/etc is less than what you are paying now, throw the extra money onto the mortgage to build equity faster. You then can either sell the house to fund the downpayment of your "dream" house, if it appreicates. If the house doesnt apreicate at least 5% (historical annual return on real estate) then you could rent it out and use it as a quality stream of income.

With your savings, MAX out Roth IRA contributions for 2 years. Reason being, after 5 years with a Roth you are able to withdrawl principle and interest TAX FREE up to 10k for a purchace of your first house. You should be able to get 7-10 percent in a five year investment if its diversified. Boom, 2k that you get in free earnings. You could throw that towards your down payment as well, and maybe get a nicer house.






 
ou don't mention credit card debt, but pay that down if you have any.

Dufman's suggestion about a duplex sounds really excellent.

Real estate in a great location.

Even if you move in a couple of years, you can wait to decide at that time whether to sell out or continue holding it as a rental.
 
Pay off all debt ASAP and make that a way of life. Start to hate and abhor debt and do everything to stay away from it.

Oh and max anything that matches like the 401K. Put in enough it to get the max matching then pay down the debt. Not getting the 401K matching amount is like throwing away free money.
 
Do they have 401k's in Canada? What kind of IRA's do they have there?

(maybe something similiar?)

Also, if you do decide to buy a house for such a short period, you might want to check out ARM (adjustable rate mortgages). They start out with a "usually" low fixed rate for a few years (1, 3 or 5 IIRC) and then go variable after that. It won't matter if you're not staying very long. Also, if the housing market is declining there, it might be better to rent as losing value in a home, especially during the first few years, would be worse than renting.

I know you invest (in energy), so you know a little about it! 😉 For long term, dollar cost averaging should be fine and at your age, you've got time so go very agressive.

As for car, the interest rate is 3.9%. You can get more interest in an online bank (in Canada I don't know?) than that. Hell, 6 month US treasuries are paying at 4.9% right now. US online banks have CD's at over 5.25%. The car isn't a good investment especially considering it's depreciating value.

5% raises every 5 to 6 months don't last forever unless you're climbing the ladder too! 😉

I generally hate debt (paid off ALMOST all of mine), however, I'm following my own advice and not paying off my last car as the interest in my banking accounts are more than the interest on my car, even after paying tax on the interest).

Good luck Stunt!

Also, a huge :thumbsup: to anyone who is thinking of (and doing) these things at the age of 23! 😀 :beer:
 
-If you're happy living where you are and think you have a good thing going (read: cheap) then keep living there and paying the rent.
-If the % is low enough on that car loan then dont hurry about paying it off.

Now it those two points are true, go out and do some research on an area that's in demand in terms of housing. It sounds like you have good credit so you would probably get a decent rate on a mortgage. Now buying a house, rent it out for a price that will cover the mortgage and leave you a little something ontop. This way the house is paying for itself, it's rising in value, and you may be making something off it as well.
 
Buy something modest (condo, townhome?) and living in that for a few years and then consider turning it into a rental property once you move up to something bigger? Once you go rental with it, it's another investment vehicle assuming you can keep positive cash flow out of it and can keep tenants.

If you go the townhome/condo route you don't have to worry about any external upkeep of the place (snow removal, grass cutting, painting, roofing, ect).
 
Originally posted by: vi_edit
Buy something modest (condo, townhome?) and living in that for a few years and then consider turning it into a rental property once you move up to something bigger? Once you go rental with it, it's another investment vehicle assuming you can keep positive cash flow out of it and can keep tenants.

If you go the townhome/condo route you don't have to worry about any external upkeep of the place (snow removal, grass cutting, painting, roofing, ect).
Click to expand...
However condo or townhouse comes with strata fees that can be as much as several thousands of dollars per year (or easily $20-40K in 10 year). Roofing a simple small home cost less than $10K and it may require once ever 20 years, unless you go with tin roof that cost a bit more and doesn?t require much maintenance for 40-50 years. Kinston ON may get a couple of week per year that require snow shoving (mainly freezing rain), and exterior paint last at least 5-7 years and it may cost $3-4K for an average home. Therefore it is better to have your own home because the maintenance cost will be the same as condo/townhouse strata fees or less, and the benefit of not have to conform to the anal-retentive rules of the strata counsel more than offset any work that you have to do on your home.
 
Originally posted by: JinLien
Originally posted by: vi_edit
Buy something modest (condo, townhome?) and living in that for a few years and then consider turning it into a rental property once you move up to something bigger? Once you go rental with it, it's another investment vehicle assuming you can keep positive cash flow out of it and can keep tenants.

If you go the townhome/condo route you don't have to worry about any external upkeep of the place (snow removal, grass cutting, painting, roofing, ect).
Click to expand...
However condo or townhouse comes with strata fees that can be as much as several thousands of dollars per year (or easily $20-40K in 10 year). Roofing a simple small home cost less than $10K and it may require once ever 20 years, unless you go with tin roof that cost a bit more and doesn?t require much maintenance for 40-50 years. Kinston ON may get a couple of week per year that require snow shoving (mainly freezing rain), and exterior paint last at least 5-7 years and it may cost $3-4K for an average home. Therefore it is better to have your own home because the maintenance cost will be the same as condo/townhouse strata fees or less, and the benefit of not have to conform to the anal-retentive rules of the strata counsel more than offset any work that you have to do on your home.
Click to expand...

Yes, you probably can get things done cheaper that what an assoication fee is, but sometimes the convenience is worth the cost. You don't have to mow. You don't have to shovel. You don't have to set up contractor for outside maintenance. You don't have to landscaping. Many times things like garbage removal is included as well.

It just really comes down to the particular location in question and how much you get for your monthly association fee. Condo's & townhomes are very popular rental opportunities around the midwest US for these reasons.

But I'm not going to drag this thread any further down this road. It's worthy of it's own thread if you desire.
 
Originally posted by: Engineer
Do they have 401k's in Canada? What kind of IRA's do they have there?

(maybe something similiar?)

Also, if you do decide to buy a house for such a short period, you might want to check out ARM (adjustable rate mortgages). They start out with a "usually" low fixed rate for a few years (1, 3 or 5 IIRC) and then go variable after that. It won't matter if you're not staying very long. Also, if the housing market is declining there, it might be better to rent as losing value in a home, especially during the first few years, would be worse than renting.

I know you invest (in energy), so you know a little about it! 😉 For long term, dollar cost averaging should be fine and at your age, you've got time so go very agressive.

As for car, the interest rate is 3.9%. You can get more interest in an online bank (in Canada I don't know?) than that. Hell, 6 month US treasuries are paying at 4.9% right now. US online banks have CD's at over 5.25%. The car isn't a good investment especially considering it's depreciating value.

5% raises every 5 to 6 months don't last forever unless you're climbing the ladder too! 😉

I generally hate debt (paid off ALMOST all of mine), however, I'm following my own advice and not paying off my last car as the interest in my banking accounts are more than the interest on my car, even after paying tax on the interest).

Good luck Stunt!

Also, a huge :thumbsup: to anyone who is thinking of (and doing) these things at the age of 23! 😀 :beer:
Click to expand...
Nope! we don' have 401K, but we do have RRSP that allow up to 18% of earning income (the OP would allow a max of $10800 + $40 non penalty over contribution) some companies does match the contribution to X amount. However not many companies do so, and the one that does tend to match only a couple of thousands (nothing to sneeze at).

RRSP is a good way to save for a person that isn?t willing to do a lot of work with their money. You are allow at X% transfer to mutual funds/stock, however RRSP is count as personal income tax at 25-48% when withdraw depends on the amount and province.

As of the 1997 Taxpayer Relief Act, primary resident sale tax is at 1% of profit up to $250K for a single person and $500K for marry couple (and it is allow to be exercise every 2 years of residency of the primary home, and as often as you like in your lifetime with out penalty). The penalty is 25% capital gain tax ot the profit that is greater than the previous indicated amount ($250K or $500K). Therefore many Canadian sell their primary home before the maximum profit surpasses to avoid the capital gain tax, and then repurchase another home to flip.

Canadian don?t enjoy the mortgage tax deduction that the US have, but the 1997 TRA loop hole allow many people to make money by working on their home & flip it with out the need to pay taxes.

The above reason is one of the reason I'm working as a construction trade person because I make a little more $$$ than my previous database/network admin job, and the benefit of the tax break on flipping homes far out weigh the personal income tax.
 
Originally posted by: Engineer
Do they have 401k's in Canada? What kind of IRA's do they have there?

(maybe something similiar?)

Also, if you do decide to buy a house for such a short period, you might want to check out ARM (adjustable rate mortgages). They start out with a "usually" low fixed rate for a few years (1, 3 or 5 IIRC) and then go variable after that. It won't matter if you're not staying very long. Also, if the housing market is declining there, it might be better to rent as losing value in a home, especially during the first few years, would be worse than renting.

I know you invest (in energy), so you know a little about it! 😉 For long term, dollar cost averaging should be fine and at your age, you've got time so go very agressive.

As for car, the interest rate is 3.9%. You can get more interest in an online bank (in Canada I don't know?) than that. Hell, 6 month US treasuries are paying at 4.9% right now. US online banks have CD's at over 5.25%. The car isn't a good investment especially considering it's depreciating value.

5% raises every 5 to 6 months don't last forever unless you're climbing the ladder too! 😉

I generally hate debt (paid off ALMOST all of mine), however, I'm following my own advice and not paying off my last car as the interest in my banking accounts are more than the interest on my car, even after paying tax on the interest).

Good luck Stunt!

Also, a huge :thumbsup: to anyone who is thinking of (and doing) these things at the age of 23! 😀 :beer:
Click to expand...

Meh 😛

I was thinking of these things when I was 18 🙂

Koing
 
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