My Personal Finance Plan

[mikeyKay]

Alright, after reading this board for a bit, and reading some books and other sources of information I have formulated my personal finance plan. Before I pull the trigger and open the accounts mentioned below, I am looking for a little assurance that I'm on the right track.

Background:
23 years of age
Make 65k/year at a “stable” job
Made 157k in poker tourney
Anticipate making 30k this year from poker.
Presently maxing out contribution to 401k

I will put $60k into a tax-free vanguard money market account for taxes this year. I am in the middle of relocating and I will talk to a CPA, or gambling tax specialist once I am settled, and figure out if I can (and should) file as a professional gambler this year. I am unsure if I am allowed to file as a professional because I have a regular job, and I’m not sure about what kind of problems may come along with it (I know its not good to swap back and forth from pro to non-pro year to year). I have refrained from making quarterly payments because I think it may screw up my filing status for this year(???). I will make my quartley payments once I have that info. Anyone have any advice/info on this?

Investment plan
After paying off student loans, leaving enough money in my poker account and bank account, I can comfortably invest $60k. This money will primarily be used for a down payment on a house somewhere in the next 3-5 years. I want to invest this money in a vanguard mutual fund account with the following distribution:

25% VBIIX Vanguard Interm-Term Bond Index
25% VGTSX Vanguard Total Intl Stock Index
25% NAESX Vanguard Small Cap Index
25% VFINX Vanguard 500 Index

I am somewhat worried that this distribution is too risky and not diversified enough. Since I anticipate investing this money somewhat short term, I wonder if it should be distributed in a less volatile fashion.

Let me know what you think, and thanks for the help.

-mike

[wadea]

This distribution is definitely NOT too risky, assuming you are willing and able to keep it invested for 5 years. Through these funds you will be invested in upwards of 1000 individual companies PLUS 25% bonds. IMO, this is actually quite conservative.

If you are leaning more towards the 3 year timeline, then you may want to largely avoid the stock market completely. To me, the important thing to remember is that - although this seems like a fortune now - you are young and can earn this money back should you end up on the bad side of a 1000:1 chance of disaster. It will only FEEL devastating, but you will recover. More likely, your returns on riskier investments will make you rich. I say go for the glory and LAG it up.

-w.a.

[Big TR]

Just one suggestion, you might not want to pay off those student loans. The interest rate is pretty low. Unless you have a pressing need to not have any debt, I'd say take the money you would have used to pay off the loans and invest it.

[mwgr5]

You might want fund an emergecy fund of 3-6 months living expenses if you have not already. Also, why hold the total market index and the 500 index. This seems like alot of overlap. The total market index is mostly large cap weighted. Also, I would suggest investing in the vanguard tax managed small cap fund instead of the small cap index.

[mikeyKay]

[ QUOTE ]
You might want fund an emergecy fund of 3-6 months living expenses if you have not already. Also, why hold the total market index and the 500 index. This seems like alot of overlap. The total market index is mostly large cap weighted. Also, I would suggest investing in the vanguard tax managed small cap fund instead of the small cap index.

[/ QUOTE ]

I will have the 3-6 month emergency money in my bank account, so thats squared away.

The total index you speak of in my OP is the total international fund, not the total US fund, so there is no overlap between the 500 fund and "total" fund.

Thanks for the tax managed small cap fund suggestion, I'll take a look at it. Any reason in particular why you like it more than the index?

-mike

[mikeyKay]

[ QUOTE ]
Just one suggestion, you might not want to pay off those student loans. The interest rate is pretty low. Unless you have a pressing need to not have any debt, I'd say take the money you would have used to pay off the loans and invest it.

[/ QUOTE ]

I made a post about 2 weeks ago about paying my student loan off VS investing (im too lazy to search for it and link it right now). After I looked at some numbers it appeared to me that investing instead of paying off the loan would only give me a marginal overlay with an increased amount of risk.

-mike

[Misfire]

[ QUOTE ]
I made a post about 2 weeks ago about paying my student loan off VS investing (im too lazy to search for it and link it right now). After I looked at some numbers it appeared to me that investing instead of paying off the loan would only give me a marginal overlay with an increased amount of risk.

[/ QUOTE ]

You are wise beyond your years.

[Sniper]

[ QUOTE ]
[ QUOTE ]
Just one suggestion, you might not want to pay off those student loans. The interest rate is pretty low. Unless you have a pressing need to not have any debt, I'd say take the money you would have used to pay off the loans and invest it.

[/ QUOTE ]

I made a post about 2 weeks ago about paying my student loan off VS investing (im too lazy to search for it and link it right now). After I looked at some numbers it appeared to me that investing instead of paying off the loan would only give me a marginal overlay with an increased amount of risk.

-mike

[/ QUOTE ]

Link to that thread

[Big TR]

I read your other post. It basically boils down to whether you want to take the risk or bank the 5.3%.

Historical stock market returns have ranged from 10-11%. Obviously there is some risk, but as poker players we teach ourselves to take play the advantage when we see it. You said you weren’t sure that looking at the percentages was the correct way to go about analyzing your situation. This is the only way to look at the situation. You have the possibility to earn higher returns through investing the 18k in the market. You have a 14 year window to smooth out your risk. I see no reason other than personal happiness in having no debt to pay this off.

Look at it this way. If you could lock into a Monthly CD that paid 5.4%, you would put your $18k into that CD and take out $150 each month from the principal. You would be better off at the end of 14 years. Obviously, for this amount of money it would not be worth the effort, but what about 11%?

I believe another thing you aren't taking into account is the future value of that $150 monthly payment you will be making. Twelve years from now that $150 monthly payment you are making today will be only ~$105/month in current value dollars assuming 3% inflation.

Finally, student loan debt with monthly payments is a good way to help build your credit rating, helping you get lower rates on your mortgage when you buy that first place.

[sprmario]

my student loan is fixed for 20 years at 2.85%, so I've made the decision to just never pay it off early.

I think your allocation is totally fine for a 3 to 5 year horizon. You might want to invest your small cap in the small cap value fund instead of just the straight small cap, but other than that you have a great plan.

I wish I had been more forward thinking when I was 23.