What Happens When You Get It Right the First Time

[Adam Conrad]

Hello,

I stumbled upon this site after a late-night exploration into the "ideal budget."

I have grown up in an upper-middle class family who has gone through a divorce, and therefore very tough financial times.

Currently I am finishing up my last semester in grad school, and I've got about $30k in low-interest federal student loans and 0 high-interest/bad debt, and I'm struggling to pay rent.

In about 5 months, I'll be starting my first job, making $97,000 a year. I can taste freedom, and it pains me that it's so close, yet so far away.

I'm on here because

A. I don't want to ever be in the same rut my parents are in (and I want to support them so they never have to worry about finances again, because they sacrificed so much for me)

B. We only live once and I don't want to spend it all working for "the man."

I've read through a TON of literature in the past few months through this blog and others similar, as well as some books, and I want to be the poster child for "this is what happens when you do it right the first time."

I want to start winning from the very first paycheck, which is a mere 5 months away.

My ONLY concern with all of the advice/reading I have done is that you're living tight in your 20s...and into your 30s. I...I don't want to get sucked into that. I would rather go at it slower and ENJOY my youth while I still have it, but at the same time, my youth is when I can invest the most time/money/energy. It's a huge paradox for me...

My biggest hurdle is that I want to pursue music. My dream is to be in a good enough band that I can quit my day job, do 1 national tour and cut 1 professional CD. Obviously I wouldn't quit my job until a label had interest in us and we had a significant following, so I can still apply these principles with my day job while I do this at night, but I know that being a musician means no money, especially if that one takes a few years.

Anyway, that's sort of a secondary issue, but here's what I've gathered as my game plan for my budget when I start my job, so I'd like to hear people's diagnoses for tweaks if necessary:

This budget accomplishes the following:
1. Establishes a 3-month emergency fund immediately (in 3 months)
2. Invests 80% of savings into low-cost index funds
3. Spend the other 1/2 for rent, utilities, food and entertainment (I don't have a car or the need to pay health insurance)
4. Allocates resources to pay off the student loans, which are about $34,000 in 5-6% federal subsidized loans

So yeah, check it out and tell me what you think:

* $450 (6%) into Company 401k (highest dollar amount that they will match)
* $2500 (50%) into ING Savings
o Invest $6000 (80%) EVERY QUARTER into index funds
* $350 (4.67%) towards student loans
* $2000 (26.67%) towards rent/utilities
* $500 (6.67%) towards food/entertainment

This budget deals with after-tax income...the 401k dollars are not taxed, but the rest is the after-tax dollars (assuming 30% for total state and federal taxes + SS + medicare).

So yeah, any ideas?

[Adrian]

@ Adam - Welcome! Have you run the numbers out with a simple online calculator?

Assuming you don't already have some (a lot!) money tucked into your mattress, you are looking at a 90%+ compounded annual growth rate ...

Unless your band hits The Really Big Time (a possible, but not statistically likely outcome), will this strategy get you to your 10m27y? In my opinion, highly unlikely; you will need to invest time, energy, etc. into a business, and ramp up your investing strategy to include real-estate, direct stock investments, etc.

Does this suit your investing mindset?

If so, you have a potential winner ... if not, you need to rethink your target Number and Date ...

[Adam Conrad]

Actually I thnk it's 10m17y, but yeah I have no idea how you calculated a 90% return rate. So basically what you're saying is with a more realistic 10% return rate I'm looking at only 1.1m by the age of 40, and that's assuming I invest half of my paycheck, which I certainly won't be by then.

I actually really like the job I have right now so I don't see myself leaving for at least 3-5 years, however I am VERY interested in the stock market. To me its like a game, and its just a matter of how much you know can help predict how much you'll make. So in that avenue, I am very willing to ramp up my investments however I can. So for the next 3-5 years I certainly stand to stay employed at my current job, so it's really about what I do with the money that I bring in to help ramp up my assets...any recommendations?

[Adrian]

Read, read, read :) A book I like is Phil Town's "Rule # 1 Investing" ....

Yep, the 27 was a typo, but I used 17 years to do the calc (I put you at a starting net worth of $1,000):

http://www.investopedia.com/calculator/CAGR.aspx

[Diane]

Couple of thoughts come to mind.

Adam, before you get shocked as I did (or the chance that perhaps you don't know this), your student loan repayments will not be tax-deductible, not at the rate of income you are projecting (and you don't want to work for what they limit it to).

If you want to pursue the band, know that videos in YouTube and snippets alike, email, social media, etc., will help you get exposure that past history didn't afford those that went before you. Shakira posts videos on YouTube.

What are you studying? A recent exercise we did on 7 MITs (the companion to 7m7y.com) reviewed 4 columns of data about ourselves to see how we could combine wants and strengths. Another thing worth reading is Tim Ferriss' 4 hour work week (4hww.com) to see how you can "have it all" now and make your dreams come true.

You seem to know what your job will be in 5 months even given the economy. If the company were bought out before then (if it's not owned by a family member now), and they downsized, is it possible that you won't have a job in 5 months by relying on this one employer? Do you have a contract that promises that you will go to work for them and they will hire you for $xxx and that if they fail on their part of the contract, you will receive something? I would be surprised if any business were making those agreements, but without it, you are basically at risk. Are you sure you won't need a car? Sounds like a job in a city with good and safe transportation - both for work and for dates/entertainment. Would that be fair to say?

[Adam Conrad]

Hi Diane,

What are you trying to say about the first point...I didn't think they were tax-deductible anyway, so how should I adjust my payments?

As far as the band, I'm quite certain I've got that covered -- I'll keep my day job until record labels/whatever decide to pick us up and make us an offer for touring the country. I wouldn't even dream of quitting my job until I was guaranteed a deal.

Finally, I am getting my MS in computer science and getting a job as a software engineer for Microsoft, so I am about 99.999999% certain they will not be bought out haha. We have a contract and everything so I'm absolutely certain I'll have a job...and its in Boston and my public transportation is subsidized by the company, so I won't need to pay for any transportation costs (also, we have a company Zip Car, so if I really need a car it won't be a problem).

[Adrian]

Adam, I spent a lot of time in Boston as part of my previous business (the people who bought me out had their US H/O there) ... reminds me a lot of Melbourne, except you get snow :) I was out in the (nice) 'burbs, tho' ... Newton.

Are you doing MySpace and YouTube/Facebook, etc. to promote your band? We'd love to hear how you go on the 'getting famous' journey, and certainly wish you the best of luck with it; we can say that we were there at the (almost) beginning ...

[Josh]

Hey Adam,

Sounds good man, thats a nice budget.

If I could give you an idea, it would be to forget about seeing your job as the tool to make you rich (rich = 10mill) Your job is where you get your seed from to invest, it is a means to an end.

And if you like stocks, I'm a kindred spirit. Pick up "Market Wizards" and "Buffetology" and read Buffetology twice. Then jump in and start investing. Start with 2K, if you lose 1K, put in more to bring it back to 2K. Don't start adding more until you can turn an even 2K into 2500 and know exactly why it worked and why you can do it again with 95% certainty. Good to have you here.