A 4 year plan...Would it work?

[Jonny]

I have a question for you guys that know a thing or two about stocks.

I was thinking of getting my money into some low to medium risk stocks to pay college off. I have no prior experience in the market, but am successful at poker and don't expect to get rich fast or anything.

Lets say I will need roughly 60K to pay off undergrad, and assume I get a subsidized loan that I have 6 years to pay off.

Say I invest $5K to start, and buy $500-$1000 of stock/mutual funds every month, on average. I will easily be able to get this from poker, mabye even more. I will barely have any expenses in college, since I will be receiving a loan.

Say I spend $500 a month on random expenses, I could easily bank 1500.

I guess my question is this: With a subsidized loan (where I pay 0% interest), would it be more beneficial to take the ~10% compounding of the stock market or try to pay off college on the fly?

This would assume I would pay off all 60K when I have to start paying interest on the loan.

Lastly, is it more profitable to use ameritrade to save on commission (since I will constantly be dumping money into more stock), or better to leave it up to an expert?

<font color="red">What it boils down to is, do you think it is possible to make this money ($60K) in 4-5 years by holding some established stocks and putting in roughly $1K a month, starting with roughly $5K? </font>

Thanks in advace for any replies.

[shummie]

1k per month = 12k per year. 12k x 5 years = 60k.

You don't even have to put your money into stocks. Maybe you are over-analyzing this.

If you have Excel, here is a variation on a spreadsheet I use to plan out savings. (I tried to asci-art it but the spacing was all whack)

savings.xls (http://www.strangerstudios.com/savings.xls)


EPM = Expected Principle end of Month

.008 or .8% earned interest per month = about 10% for the year. You can raise or lower this depending on how optimistic your are.

Basically the first row is the month. The second row is your expected principle at the end of that month (due to earnings on your investment). The third row is the amount of money you are investing.

I usualy set the spreadsheet up for yearly views. So row 1 is a year, row 2 is x*1.1 or so, and row 3 is amount invested per year. If you do this for 12k per year and 10% interest, you would have 61k after 4 years. If you do 16k the first year and 12k for 3 years, you will have 67k.

You could also just do the interest calculation or lookup a good savings/interest calculator online... But I like seeing everything out in a table.

Hope this helps.

I hate posting in the Stock Market forum cause I'm always scared someone is going to call me out on how wrong my analysis/advice is. At least in the probability forum no one expects you to know advanced math. /images/graemlins/shocked.gif The people are actually pretty nice here though.

- Jason

[Jonny]

Thanks Jason, I'll definately be looking into that spreadsheet. Really I just wanted to know if it would even be worth it to enter the stock market game.

[shummie]

If you are planning on saving money to pay for your school loans, why not keep that money in stocks while your interest rate is 0, right? Sounds simple.

However, if it would bug you if you lost money on your investment or if you think that you would become obsessed with checking your stocks every fifteen minutes (that's me), then it might be better to find a safer, more sane investment option. CDs, bonds, etc.

As for the question "Is it worth it to get into the stock game?" Even if you don't invest your school loan money, it's definately a good idea to start investing as early as possible. Invest for your "retirement". Set aside money that you will not touch for any reason. Don't buy a car with it, don't buy a home with it. Just let it build and build. In twenty years, compound interest will have done its thing and you may have enough money in there to give you tons of options in your later years.

Find all those charts that show how many millions you would have when your 50 if you saved a bit of money when you were 20. Find a chart showing how much money you would have if you invested 10k in Microsoft in 1990. Etc, etc...

Also, consider not paying back your college loans right away. I just got out of college last May and got myself a decent job. My intention was always to pay back my student loans as fast as possible because I hate having debt. I planned on paying my monthly payments and like an additional 10k per year on top. However, even though my loans aren't interest free anymore, they still have relatively low rates (2.x and 4.x, etc.). If I can make more than a 4.x% return on my investments, it is wiser for me to invest my money rather than pay back my college loans quicker.

Play with the spreadsheet a bit. 60k in loans is probably about a $500 monthly loan payment. That's 6k per year. Make two charts. One where you payback you loan right away and save 12k per year for 20 years after that. The other one, you start with a 60k principle and put in only 6k for 11 years (loan term) and 12k for the remaining 9 years. This will show you how much long term money you are paying in order to pay off your loan right away. These numbers may be off a bit (or a lot). Check you loan interest rates and figure out exactly how much interest you will be paying over the lifetime of your loan. In any case, the point is that it might be smarter to invest now and pay off your student loans slower.

You're going to have to consider all of your options when deciding how much money to spend, pay off loans with, save for the future. It's easier when you know that third part; a lot of people don't recognize that option. Do I get a used car now and save the extra money so I can buy a BMW in 20 years? I think so. On the flip side, do I take the bus and save enough money to buy a Ferari 20 years from now? No. Saving isn't always the answer, but it's nice to know your options.

Have fun.

[icetonez]

I've mentioned I bonds before on this forum, but I think they would be the most perfect investment for you. To start off 0 default and inflation risk, but the main reason it's so germane for you is the fact that you won't have to pay taxes on the interest you earn because it's for education! It only applies to tuition (no room and board or books). Buy or check out from the library Thau's The Bond Book, I believe it's chapter 6 that talks specifically about Ibonds.

Edit: I just checked my own copy because I knew there was some odd stipulation. The catch is that you'd have to transfer the money to a parent/guardian and have them buy the bonds for it to be tax free.

[Jonny]

I see, I'll look into bonds some.

Thanks for the replies guys.

[midas]

Johnny:

Forget the stock advice - here's some life advice.

Your location is Michigan. Are you attending U of Mich? If you are - switch to the business school, major in finance and get a B+ average or better - with those creds on your resume $60K is chump change for the job that you'll get when you graduate. If you're not at UoM, study you a$$ off, transfer then follow the same advice.

Use your poker winnings to finance important things like beer and spring breaks.

[icetonez]

Some good advice here for Jonny. I bet you could get the good education, have fun, and put your extra money to work.

Midas - I'm about to graduate with a finance degree (Towson, not exactly presitgious, but it's still a 4 year university...) and my gpa is over 3, what kind of jobs can I apply for to make 60k look like chump change? Am I just settling if I go with Prudential (really just a sales job with guaranteed salary for only 2 years (only like 25k per)

[Jonny]

Right now I'm uncertain if I will be doing business or finance or engineering. Either way though, I think I may start putting small amounts of cash into an IRA account. Poker should be able to cover all of my expenses (beer, food, etc..), plus some.

How much value is my money really losing by letting it sit in a checking account/poker account not gaining interest?

[midas]

Ice:

When I refer to $60K as chump change - I look at that sum of money compared to long-term income potential of a degree from a top-tier school whose grads can earn $50K+ right out of college. The earning gap gets wider when you compare top 20 MBA or law schools compared to lower tier schools.

I assume you Pru job is either insurance or financial product sales. While these jobs can be very lucrative for the right person, the wash-out rate is tremendously high. The jobs that pay the most out of college are in consulting or investments/finance field but are traditionally offered to the top tier school grads.

I would choose an industry that you like and one that is extremely profitable (avoid industries that are alway cutting jobs/costs - auto, telecom). Find a company that has a formal training program like GE or P&amp;G. I would also study my a$$ off for the GMAT exam to get into a top tier business school.

[eniven]

Its tough invest in the stock market for the short term (like 5 years). It is often said that the market moves in approx 5 year cycles and who really knows where it's headed. It may be risky to assume 10% per year for only 5 years. Its just like variance in poker. Over the long term (say 25-30 years or more) assuming 10% might be fine but for a term of only 5 years it could be a crapshoot.

Ameritrade is a great way to invest in stocks IF you know what you're doing. The commissions are very low. However, if you don't know what you're doing...

You might consider something a little less 'sexy' but with less risk like mutual funds or bonds. Even with mutual funds, you could easily lose money over 5 years if you pick the wrong fund or the market goes into a negative cycle.

It's really risk/reward. How much risk are you willing to accept? If you're only investing for the 5 years with the intention of removing that money from the market to pay off your loan then I would postulate that the risk is much higher than if you were investing with the long term in mind.

Good luck. Do some serious research.

[lu_hawk]

a 2 bb/100 player can lose over 10k hands. you can't expect anything over 4 years, it is too short of a time period in the market. stick to something where you principal is guaranteed.

[Maulik]

if you can complete an engineering degree, you are far better off doing that rather than anything else.

[gvibes]

[ QUOTE ]
a 2 bb/100 player can lose over 10k hands. you can't expect anything over 4 years, it is too short of a time period in the market. stick to something where you principal is guaranteed.

[/ QUOTE ]

Correct.

And engineering sucks. Then again, I switched to law, and that sucks as well.

Also, I would suggest that, well in undergrad, borrow more money and have more fun.