What would you do if you were me?

[MoneyTard]

Just curious what different courses of action people would do if in my place?

Dh - 30yrs old
me - 35yrs old
2 kids - 4 and 1

60k spread across 4 run-of-the-mill bank accounts.
me - 35k in 401k
dh - 11k in 401k

Debts
car - 7k
house - ~130k

combined yearly income ~120k before taxes

no other accounts, no other debts.

We're going to be openning roth iras this week and putting in max contribution for 2006. What would u do with the other 50k in the bank?

[creditcardfree]

Seems like some of that $60K should be earmarked as an emergency fund and put into a money market account earning the best rate possible. Most people say 3-6 months of expenses.

I would get as much money above this amount into iras...roth or traditional, which ever you qualify for based on your income. Max out both 2006 and 2007 if possible.

I personally would also pay off the car. Put money in 529's for the kids college and leave it to grow since there is plenty of time...always time to add money later.

For the future...you should be putting 15% or more into your 401k accounts and start paying down the house. With your income you could probably do this in a few years! Wouldn't that be nice!!

[PrincessPerky]

pay off the car and some of the house.....

Leave a cushion/EF of at least one month and up to 6 normal expenses though with 120K a year, you could be spending 10K a month....needing all that 60K...If this is the case, I would keep 30K (put the difference between roth and 50 on car, then house) and spend the next couple months reducing spending. till the car and house is paid off.

Reducing (should you need it-though that 60K had to come from somewhere) and how low is up to you really. You can live comfortably on 35K (we do) or on more, or even less. So long as you are not going into debt for food, and are comfortable with the direction and timing of your savings you don't have to live like .......well like anyone......

[anonymous_saver]

First things first, open up a high interest savings account with Emigrant, HSBC, ING or the like. Personally, my favorite is Emigrant. I would then set aside 6 months of an emergency fund (lets say this is $4,000 - for example purposes). That would be $24,000 of the $60,000. Then I would pay off the car with one check. That would leave you with $29,000 left. I would then contribute up the max in Roth IRA's for both of you for 2006 & 2007 (this would be $4,000 * 4 = $16,000 total). This would leave you with $13,000 left. Depending on your goals, I would either pay this towards your house debt, or maybe make a big repair that you have always wanted to do to your house - maybe new energy efficient appliances, or whatever you'd like! Another thing you could do is put it in 529 funds for your children if that is a goal of yours.

Second, I would definitely increase your 401(k) contributions. Make sure you at least put in up to your employers match each year, and the full amount in a Roth IRA each year. I would say a good goal for the two of you would be to do up to the yearly max in both your 401(k)'s and Roth IRA's. This would be $15,000 in the 401(k)'s each year, and $4,000 in the Roth IRA's, although these amounts increase in the upcoming years. $19,000 a year for both of you currently. I really don't think this is saving too much, especially if you want to live in a somewhat similar lifestyle when you retire.

What do you think?

[jIM_Ohio]

Originally Posted by MoneyTard

Just curious what different courses of action people would do if in my place?

Dh - 30yrs old
me - 35yrs old
2 kids - 4 and 1

60k spread across 4 run-of-the-mill bank accounts.
me - 35k in 401k
dh - 11k in 401k

Debts
car - 7k
house - ~130k

combined yearly income ~120k before taxes

no other accounts, no other debts.

We're going to be openning roth iras this week and putting in max contribution for 2006. What would u do with the other 50k in the bank?

120k income, but no monthly/ yearly budget (expenses) which MAY change my advice.

If you earn 120k between the two of you, and you have "only" 46k in the 401k/ Roth accounts now, by my "simple" calculations you want around 218k growing for retirement about now (436k by age 44).

I would set a mid term goal of 460k in 401k's/ IRAs by age 44. This will keep you on track for a retirement income of 120k. I'm guessing at the income level (120k) and retirement age (68), if you make more, or plan to retire earlier, the target (218k/436k) numbers go up.

I'd figure out what 1 months expenses are. I'd put 1 month expenses in cash in a savings account. I'd take 3 more months expenses and open a 1,2 and 3 month CD. When each CD matures, roll it into another 3 month CD. This would be 4 months expenses in cash. If you lose a job, you'll have a 4 month cushion of income.

Assuming there is around 10-25k left over, I would look to put some of it towards retirement or college funds. I would make sure your retirement is adequately funded prior to opening college accounts. You also don't mention insurance, do you have enough life insurance and disability insurance?

Your situation is NOT bad. You can turn a good corner if you can organize a few things and take a multidimensional solution (retirement, emergency fund, kids education).

[disneysteve]

Originally Posted by MoneyTard

60k spread across 4 run-of-the-mill bank accounts.

We're going to be opening roth iras this week and putting in max contribution for 2006. What would u do with the other 50k in the bank?

There will be 44K remaining because you will put $8,000 in for 2006 and $8,000 in for 2007. With an annual income of 120K, that's probably about what you need for your emergency fund. Others have already given good advice as to what to do with that.

[zetta]

In order of priority:
1. $15k (guessing) 3 months expenses in emergency fund in a high-interest money market
2. $8k in 2006 ROTH
3. $8k in 2007 ROTH
4. $7k pay off car (if the interest rate is <2% and the payments aren't hurting your cash flow I might consider keeping the car loan)
5. $20k in 529 funds, split between the kids 60/40 or 70/30
6. $12k remainder in index mutual fund (this is liquid enough to be a backup emergency fund)

In your tax bracket I probably wouldn't try to pay off the house early, and if you think you will move before you retire I definitely would not put extra money toward the house -- here's a couple calculators to help you decide:
Prepay vs. Invest
Invest vs. Payoff

Going forward, I'd want to see the following line items in your monthly budget:
1. next car fund
2. ROTH contribution
3. increased 401k contribution
4. 529 contribution
5. add to mutual fund

The amounts would depend on your personal priorities.

[jIM_Ohio]

Originally Posted by zetta

In order of priority:
1. $15k (guessing) 3 months expenses in emergency fund in a high-interest money market
2. $8k in 2006 ROTH
3. $8k in 2007 ROTH
4. $7k pay off car (if the interest rate is <2% and the payments aren't hurting your cash flow I might consider keeping the car loan)
5. $20k in 529 funds, split between the kids 60/40 or 70/30
6. $12k remainder in index mutual fund (this is liquid enough to be a backup emergency fund)

Going forward, I'd want to see the following line items in your monthly budget:
1. next car fund
2. ROTH contribution
3. increased 401k contribution
4. 529 contribution
5. add to mutual fund

I cannot disagree. I think for a good financial plan, 1-5 should NOT be either/or. Especially #2 and #3. Retirement savings are "behind".

[MoneyTard]

Thanks for your perspectives!

Dh and I just openned our separate roth's tonight with T.Rowe Price. I chose the 2035 and he 2040 retirement funds. Until we know better what we're doing, we'll leave it this way. we put in 4k each for 2006.

I'll be paying our car in full in the next few days as well.

I can't answer what our expenses are exactly. We don't have the full picture there. But after a quick look at a couple, we pay $1500 for mortgage which includes escrow for property taxes and insurance, about $600 utilities including phones cells cable lawncare, $230 for the car. $400 daycare. this is all monthly. we also pay ~$900 every 6 months for auto insurance.

so that's about 3k per month (cuz i'm rounding and i'm probably leaving something out)

I'm not sure how much we spend on food, clothes, gadgets, eating out, whatever else.

monthly income (take home) is 5k. Hubby has another 600/mth going to an account he's had since before we met.

[disneysteve]

Originally Posted by MoneyTard

Hubby has another 600/mth going to an account he's had since before we met.

What is that exactly? What type of account? What is it earning and what is its intended use?

[jIM_Ohio]

Originally Posted by MoneyTard

Thanks for your perspectives!

Dh and I just openned our separate roth's tonight with T.Rowe Price. I chose the 2035 and he 2040 retirement funds. Until we know better what we're doing, we'll leave it this way. we put in 4k each for 2006.

I'll be paying our car in full in the next few days as well.

I can't answer what our expenses are exactly. We don't have the full picture there. But after a quick look at a couple, we pay $1500 for mortgage which includes escrow for property taxes and insurance, about $600 utilities including phones cells cable lawncare, $230 for the car. $400 daycare. this is all monthly. we also pay ~$900 every 6 months for auto insurance.

so that's about 3k per month (cuz i'm rounding and i'm probably leaving something out)

I'm not sure how much we spend on food, clothes, gadgets, eating out, whatever else.

monthly income (take home) is 5k. Hubby has another 600/mth going to an account he's had since before we met.

This is GREAT info, even if aproximate.

3k expenses (include full car insurance payment in this) into savings
3k expenses into a 1 month, 2 month and 3 month CD (exlude one time charges like car insurance from this). Roll each into a 3 month CD when they mature. Assume this is $13000 of 50k.

With the 37k left you suggested you are paying off car (7k) leaves you at 30k? IMO you need to mark this money for retirement because based on your income level you'll either need to SCALE BACK in retirement, or ramp up savings considerably.

What is the $600 to another account funding? I might suggest directing this to an IRA or tax efficient investment for retirement as well.

Some hints- if you send 2k more to T Rowe (1k for 2007 for you and husband), the 5k balance will waive the $10 yearly fee they charge for IRA custodian. I invest with T Rowe myself, and $10 is $10.

The $230 you spent on car payment, my suggestion would be to send that $230 into a high yield savings account ($2800/year). In 5-7 years, you have enough for a new car (CASH).

[disneysteve]

Originally Posted by jIM_Ohio

3k expenses (include full car insurance payment in this) into savings
3k expenses into a 1 month, 2 month and 3 month CD (exlude one time charges like car insurance from this). Roll each into a 3 month CD when they mature.

Jim - I understand the reasoning behind laddering CDs but does it really make sense given the current interest rate situation? 3-month CDs are paying about the same as high yield MMAs. Why give up the flexibility and liquidity if you aren't getting anything extra in the deal?

[MoneyTard]

hubby uses the 600/mth to pay his credit card (which i end up paying in full every month anyway because he only pays a coupld hundred at a time), he buys his "toys" (video games, cigarettes), pays auto ins from there, and who knows what else. The amount he has in this account is not significant. it's around 2k. He only keeps it around because it's his and his dad's joint credit union account.

we don't have life insurance although we want to get it.

[disneysteve]

Originally Posted by MoneyTard

we don't have life insurance although we want to get it.

You don't want to get it. YOU NEED TO HAVE IT!

Also, do you have up to date wills and health care proxies?

[jIM_Ohio]

Originally Posted by disneysteve

Jim - I understand the reasoning behind laddering CDs but does it really make sense given the current interest rate situation? 3-month CDs are paying about the same as high yield MMAs. Why give up the flexibility and liquidity if you aren't getting anything extra in the deal?

I like the illiquidity of liquid funds. CDs tie the money up for 30 days, so any "emergency" has a 30 day waiting period, or penalty to get the money. Forced discipline, more or less.

[disneysteve]

Originally Posted by jIM_Ohio

CDs tie the money up for 30 days, so any "emergency" has a 30 day waiting period, or penalty to get the money. Forced discipline, more or less.

That makes sense depending on the individual. Personally, I don't have a problem controlling my spending, so I don't feel the need to put the money where I can't get to it. But I understand that others need that "forced discipline." As always, no one plan works for everyone.

[MonkeyMama]

Do you both have 401ks now???

I just wanted to say the max 401k contribution is $15.5k each now for 2007. The benefit of this is that this reduces your taxable income considerably. If you both contributed the max the taxes saved should be equivalent to $8k or a full ROTH contribution for the following year. If you already contribute significantly it won't make a huge difference. But frankly $5k home take home means either you are already putting a lot in or you are getting slammed with taxes. Maybe both.

Just FYI.

I am so impressed with all the advice I think I am going to make a similar post. Just curious what all the opinions are out there.

[jIM_Ohio]

Originally Posted by disneysteve

That makes sense depending on the individual. Personally, I don't have a problem controlling my spending, so I don't feel the need to put the money where I can't get to it. But I understand that others need that "forced discipline." As always, no one plan works for everyone.

A person could chase yield with EF. At this point in time money markets do yield more, but there is no guarantee that trend will continue for 1 month, 1 year or 1 decade.

We agree the EF should be in cash (money markets, CDs, regular savings account). Savings will give lowest interest rates of the 3, CDs and money markets may move in and out to which one has a higher yield.

[disneysteve]

Originally Posted by jIM_Ohio

A person could chase yield with EF. At this point in time money markets do yield more, but there is no guarantee that trend will continue for 1 month, 1 year or 1 decade.

We agree the EF should be in cash (money markets, CDs, regular savings account). Savings will give lowest interest rates of the 3, CDs and money markets may move in and out to which one has a higher yield.

I agree with you. In fact, I've got part of my EF in a 9-month CD right now. I chose 9 months because when I took it out, that seemed to be the sweet spot on interest rates - shorter was less, longer was less. And just the other day, I put my mom in a 10-month CD because that was the highest rate I could find. I've got other more liquid accounts for more immediate needs so that I could cover everything until the CD came due.

[jIM_Ohio]

One thing I am trying to figure out is how to transition from a triple "months income" CD ladder to a triple "year's income" CD ladder.

When in retirement, 3 years income needs to be in CDs. Because this is not taxed (only the interest), I can see advantages to a large withdraw from a 401k (capping 25% bracket for example), then stashing in "3 years worth of CD's"... then being able to cash out 401k to 15% bracket the next 3 years. (Lower taxes)... then repeating (large, followed by 3 smaller withdraw years).

Issue is getting the 3 years income in CDs to begin with.