Stabilizing Cash Flows

This month begins my attempt at stabilizing my cash flows. Now that I'm moved out, and I have an idea what the increase in food and utility costs are, I've reworked my budget so that no longer is my excuse "It'll get better when its not a 'special' month."

In terms of costs, I have increased rent costs of $1175 (not he full $1275, since I was paying my parents a nominal $100 a month), increased food costs of $125, and obviously new utility costs of $120.

This obviously puts a dampener on my ability to save up money.

Maybe I'll have to increase my gambling trips... :-)

401(k) Contribution

Recently I was thinking about my 401(k). Since this is my first job, this is the first time I have ever had to make this decision: How much should I contribute? How much can I contribute?

The answer to the first is tough. The answer to the second was a quick web search.

So alright, its a limit of $15,500, which is more than 20% of my annual income, and therefore obviously way too high to consider.

Doing a little research, I found that my employer will match up 2 for 1 ($2 for every $1 I contribute), up to 3% of my annual income, making that the very minimum that I should contribute, since an employer match is essentially a free and instant return on your investment.

Contributing above that has only a tax benefit, as 401(k) contributions are pre-tax. While this portion of income is taken out of taxable income this year, when retirement comes around, the money you take out is still taxed at your income tax bracket then.

For many, this makes sense, since by retirement they will be in a lower tax bracket than their working years. However, in my line of work, 60 is when I would reach the prime of my career, and so the reverse would be true for me. Therefor, paying taxes now is better than doing so later.

Thus, I have decided to contribute only enough to pick up the free money and leave it at that.

Savings Calculator

In one of my first posts (Some Realism), I talked about my million dollar goal, and then the sobering realism that 8 years may not be enough to reach that goal. I realized though that is would be helpful to give to the world that calculator. You can download in here (32K).

The Excel sheet attempts to forecast a regular mutual fund or IRA account, assuming annual contributions that are a percentage of your salary and bonus. It also assumes your salary will increase every year, and that you will receive a promotion every 3 years. After your 6th promotion, I decided to make the promotion every 6 years.

You will need to customize a few variables to yourself. Of note are your starting/current salary, what your annual bonus is as a percentage of salary, and what percent of your salary and bonus you want to save. For more advanced users, you can also manipulate your
annual salary increase, salary increase due to promotion, and investment returns.

The sheet keeps a running total for the next 45 years, and where the "Net" figure goes from red to green is the first year you achieve a $1 million.

Prosper.com - Read the new American gamble

After reading about Prosper.com, I am very intrigued by their concept. Their business concept is to match up borrowers and lenders, and make a small fee when they get together, a total of about 2%. To make up for this fee, the average loan gets about 7.5% APR, which is just about 2% over what banks are willing to pay you for your money.

However, consider that a CD or savings account at a bank are essentially riskless, whereas this site has no real guarantees. They have available loan data to download. I obtained it and ran a quick analysis of the loans. I discovered quickly that there is no correlation between credit rating, loan interest rate, borrowed amount to the likelihood of getting your money back.

Edit:
After considering it further, I realized that although there are no direct correlations, a 3% default rate still meant that 97% of all loans were being paid back at a pretty nice return. Given a good diversification of loans, this could actually be a worthwhile investment, although the money you put in will have to money you are willing to part with for 3 years.

Some Realism

One of the best features of being a finance guy is knowing how to run some basic Excel functions and obtain some interesting information from them. For instance, after I set my goal, I ran a "this is real life" test on my goal.

To begin, I have a fairly high base salary for someone of my work experience (zero years, zero months), so I have a slight edge (with the same assumptions, someone making half as much can reach the goal 4 years later). But working with that, I added a few more variables into the mix. I considered that I would save 10% of my base salary, pre-tax, and 50% of my bonus annually. This savings would go into a stock market account with an average return of 10%, which is about the norm.

Next, I considered that bonuses would average about 10% of my base salary. My base salary would be augmented annually at about 3.5%, and every three years, instead of a inflationary increase, I would receive a promotion, adding 12.5% more to my salary.

After all these considerations, my realistic liquid assets would only be $187,317.65, of which $119,289.45 is savings, and the rest market returns after 8 years. So clearly, I would only be 18.73% of the way to my $1 million goal by age 30.

For fun, I allowed some adjustments for different variables to see what would allow me to obtain the $1 million value. Two outrageous methods are either to save 78% of my base salary or hope for average market returns of 49%.

It is going to be a tough road ahead.

Starting Networth

Student Loans
How we dread paying for that! Well, that's the price I pay for the two sheepskins that will be hanging up in my office cubicle.

I currently owe $35,218.78 at an average APR of 5.83%. To pay it off in 10 years, I have to pay $432.17 monthly. There's one big hit to getting to my goal.

Credit Cards
Ever since I got into MBA school, credit card companies have bombarded me with offers. I've taken up some of them, because frankly, getting free money for 12 months is always a good deal, if you know you can pay them back in 12 months.

I currently on average owe about $1700 to them, with about $1100 not accruing interest.

Savings
My bank account these days look a lot better than they used to, thanks in part to a nice summer internship where I worked a lot, and spent very little of the pay checks. That number comes to: $3,011.02.

Investments
As a finance guy, the one thing I always have to believe in the stock market as a good way to invest my money. Currently, my account has $4,778.79.

Overall
Add it all up, and I'm at -$29,128.97 or -2.91% of the way there.