need advice on saving/investing

[deca]

We are finally "ahead" after many many years of being behind. Since being behind was all we knew, we kind of don't know what to do now. I have consulted some books and websites, but nothing I've found seems quite relevant to our situation. We don't need to "get out of debt." We already own our home, have appropriate life insurance, and decent, paid-off cars, so the "starting-out" types of books for young couples aren't quite right either. On the other hand, we don't have mad amounts of money to start throwing into investing.

What we currently have is $5000 sitting in an emigrantdirect savings account, and the ability to save between $1-2K per month out of current earnings (which are variable). I am currently saving 9% of my salary in a 401k (there's a 4% employer match to the 5% I put in). DH is self-employed and has very little retirement saved up (at age 45!) so we need to figure out something about that. He has an IRA that we have recently begun putting money into, about 20% of whatever we have available for savings in a given month.

We have student loans at 3.25%, and have been advised not to pay a penny ahead on them, ever, as we are basically coming out ahead between inflation, the tax deduction, and what we could otherwise earn in interest. Other than these loans and the mortgage, no other debt.

I'm really excited about where we are right now, since it's better off than we've ever been. On the other hand, I'll read a profile of a couple in Money magazine in their mid-30s, that has an income of like $150K and a net worth of half a mill already, and I think, crap. How do we get from HERE to THERE? The first step, saving up a few months' living expenses, was easy enough to understand, but I don't know what the next step is.

[Ima saver]

Well, I would put as much into your IRA's as allowed each year. (I reccommend a roth IRA)
Then I would save enough to open a mutual fund. I like Vanguard Index 500. You need $3000 to start the mutual fund.
I would also have about 6 months of earnings in an emergency fund.

[creditcardfree]

I agree with Ima on the Roths and emergency fund. Once you max everything out in those areas, you either save for new cars, furniture, vacations, ect so that you don't have to borrow for those. Also, could use any extra to pay down mortgage debt and student loans.

Any kids you need to help through college?

[disneysteve]

Welcome. Sounds like you are all set to move forward. You mentioned Money magazine and I think that's a great reference, so get yourself a subscription if you haven't already.

Are you getting the fully company match on your 401K? If not, up your contribution until you are.

Next, fully fund a Roth for you ($4,000/year currently). As for your husband, since he is self-employed he has some options beyond the usual. There is a SEP-IRA that I believe has higher contribution limits than a regular IRA/Roth so I'd look into that. At 45 with "very little" saved, he really needs to start socking money away as soon as possible.

You didn't state your income, but I'm guessing that the 5K in Emigrant is not an adequate emergency fund - 3 to 6 months of living expenses, so work on beefing up that amount.

[deca]

Originally Posted by disneysteve

Welcome. Sounds like you are all set to move forward. You mentioned Money magazine and I think that's a great reference, so get yourself a subscription if you haven't already.

I get it from the library...there's a table in the lobby where people drop off magazines for other people to take. There are always recent copies of Money to pick up.

Are you getting the fully company match on your 401K? If not, up your contribution until you are.

I'm getting the full match my employer offers, but my understanding is that I could still contribute more on my own up to 15% of my income. I will get a raise in July so I was planning to up my contribution at that point, where I wouldn't "notice" it so much. I guess that would also be a good time to start funding my IRA. Or should we keep working on the emergency fund first? Or is funding DH's IRA the top priority? See, this is where my head starts spinning.

You didn't state your income, but I'm guessing that the 5K in Emigrant is not an adequate emergency fund - 3 to 6 months of living expenses, so work on beefing up that amount.

My understanding on the rule of thumb about 3-6 months living expenses is that it's just that, expenses, right? Not 3-6 months income. Our expenses are very low. Very modest house payment, cars paid off, etc. I would feel better about getting that emergency fund up to a minimum of $10K though. Should be just a matter of a few months.

[disneysteve]

Originally Posted by deca

I'm getting the full match my employer offers, but my understanding is that I could still contribute more on my own up to 15% of my income. I will get a raise in July so I was planning to up my contribution at that point, where I wouldn't "notice" it so much. I guess that would also be a good time to start funding my IRA. Or should we keep working on the emergency fund first? Or is funding DH's IRA the top priority? See, this is where my head starts spinning.

Don't increase your 401K contributions. Just put in enough to get the maximum match. Then switch to funding your and your husband's Roths. The advantages of the Roths is that you have far more control over how the money is invested and the withdrawals are tax-free in retirement. Once the Roths are fully-funded, if you still have additional funds available for retirement savings, then you can go back to the 401K.

My understanding on the rule of thumb about 3-6 months living expenses is that it's just that, expenses, right? Not 3-6 months income.

Correct, expenses, not income. In other words, the amount of money you would need to get you through 6 months with no money coming in. This may even be lower than your actual expenses currently since there may be things you could cut out temporarily if necessary.

[Tree0164]

Congratulations! Hubby and I are sort of near your place. We are debt-free except for mortgage and a few car payments left. So I understand your excitement!!

I would focus on increasing your emergency a little more. Atleast 6 months of income. You should be there in a few months if you have an extra $1-$2k of current income that you can put into savings.

I would contribute to a Roth for you. You can do automatic deducation for that.

As for your husband, have him set a SEP-IRA which is for self employeed individuals.

Good luck!

[deca]

Originally Posted by disneysteve

This may even be lower than your actual expenses currently since there may be things you could cut out temporarily if necessary.

Right, that's what I was thinking. Student loans can be deferred, we could temporarily cut out some hobby-type expenses, etc. We could "get by" on about $1200/month, but we'd be a lot more comfortable at say $2000. So getting that fund up to 10K seems very reasonable to me.

I will look at the SEP-IRA for DH.

I just remembered I think I have a Roth account already, I think it is still open but with a 0 balance. I had a retirement account with a former employer I rolled over into the Roth, then cashed it out to make the down payment on our house a few years ago. But I think the account is still open and I could start contributing to it again anytime I want. It's at TIAA-CREF. Is there a "good" place to have your accounts set up with? I hear a lot about Vanguard. DH wants to go with USAA because we have our insurance with them already. Currently DH's IRA is at our credit union. I don't know if it's a Roth or traditional. It's not a SEP-IRA, it's just whatever the credit union set him up with when he left his last employer and needed to roll his retirement savings out somewhere.

[disneysteve]

Originally Posted by deca

I just remembered I think I have a Roth account already, I think it is still open but with a 0 balance.

DH wants to go with USAA because we have our insurance with them already.

Currently DH's IRA is at our credit union. I don't know if it's a Roth or traditional. It's not a SEP-IRA, it's just whatever the credit union set him up with when he left his last employer and needed to roll his retirement savings out somewhere.

I would think if you totally cashed out a Roth, that would close the account, but I'm not sure.

I don't know much about USAA and what funds they offer, so I can't comment on that. Vanguard is one of the industry leaders - great index funds, very low expenses, excellent customer service - never a bad choice.

Your husband's IRA sounds like it's a rollover, so it would not be a Roth.

[kv968]

Originally Posted by deca

I just remembered I think I have a Roth account already, I think it is still open but with a 0 balance. I had a retirement account with a former employer I rolled over into the Roth, then cashed it out to make the down payment on our house a few years ago. But I think the account is still open and I could start contributing to it again anytime I want. It's at TIAA-CREF. Is there a "good" place to have your accounts set up with? I hear a lot about Vanguard. DH wants to go with USAA because we have our insurance with them already. Currently DH's IRA is at our credit union. I don't know if it's a Roth or traditional. It's not a SEP-IRA, it's just whatever the credit union set him up with when he left his last employer and needed to roll his retirement savings out somewhere.

I use T Rowe Price for my IRA and would recommend either them or Vanguard for your IRA. Although TIAA-CREF and USAA could be decent options also. My rule of thumb when deciding which fund family to open an account with is which company's funds would you most want to own. Since you'd have an account with them you won't pay any transaction fees when purchasing them.

For example, if you were to open an account with USAA but liked a lot of Vanguard's funds, you'd have to pay a transaction fee using USAA's brokerage service in order to buy those funds. You could use USAA's funds without paying transaction fees and they do offer some no-transaction fee funds from different companies but T Rowe, Vanguard and Fidelity most likely aren't included in that list.

Basically, look at the funds the company itself has to offer and then make your decision from there. I'd also look at the account maintenance fees the company's charge but the funds a company has would be the driving force in making my decision of which to choose.

[scfr]

First of all, you are really on the right track and you WILL "get there from here" if you stay focused. I know it seems like you still have a long way to go, but those couples you read about in Money magazine did not get there overnight!

Once you have enough of an EF that you feel comfortable that you can weather any setbacks (and since your DH is self-employed this may be a higher amount than it would be if you both were salaried employeees --- it might even be as much as a year's expenses), then focus on setting up a tax-deferred retirement plan for the self-employed for your husband. The amount you can sock away tax-deferred is pretty hefty and your choices are basically unlimited (unlike your employer's 401K where you have a limited number of choices).

Vanguard has a Small Businesses Service Department that is extremely helpful: 800-662-2003. They will do a great job explaining your options to you.

[deca]

Originally Posted by scfr

Once you have enough of an EF that you feel comfortable that you can weather any setbacks (and since your DH is self-employed this may be a higher amount than it would be if you both were salaried employeees --- it might even be as much as a year's expenses)

I'm not sure about this part -- we can actually get by on my income alone, so I don't feel that we are more vulnerable by DH being self-employed. I feel we are less vulnerable -- he can't get laid off, as he did from his last job.

[Ima saver]

I agree with Steve. You don't need to put anymore into your 401 than your company matches. Take the rest and open Roth Ira's for yourself and your family. When those are fully funded ($4000 each), then you can work on a sep ira for your husband.

I would then open a mutual fund at Vanguard with your next $3000 savings. I have had a small mutual fund with USSA and it has not grown at all. (It is for my granddaughter)

[Ima saver]

I mean to say for your husband, not your family. sorry!

[disneysteve]

Originally Posted by Ima saver

I would then open a mutual fund at Vanguard with your next $3000 savings. I have had a small mutual fund with USSA and it has not grown at all.

Ima - I would want to know what type of fund you have with USAA and how it has performed relative to it's peers in the same asset class. Just because it hasn't grown doesn't automatically make it a bad fund, though if it is, you should consider moving the money elsewhere. However, if it is just invested in an investment class that hasn't performed well lately, it might be perfectly appropriate to leave it there.

[kv968]

Originally Posted by Ima saver

I would then open a mutual fund at Vanguard with your next $3000 savings.

I take it you are suggesting opening a taxable mutual fund at Vanguard AFTER maxing out the SEP-IRA and 401k? If not, I'd suggest to the OP that she does max those out first before opening a taxable account if it's all to be used for retirement.

[jIM_Ohio]

Originally Posted by deca

I get it from the library...there's a table in the lobby where people drop off magazines for other people to take. There are always recent copies of Money to pick up.



I'm getting the full match my employer offers, but my understanding is that I could still contribute more on my own up to 15% of my income. I will get a raise in July so I was planning to up my contribution at that point, where I wouldn't "notice" it so much. I guess that would also be a good time to start funding my IRA. Or should we keep working on the emergency fund first? Or is funding DH's IRA the top priority? See, this is where my head starts spinning.



My understanding on the rule of thumb about 3-6 months living expenses is that it's just that, expenses, right? Not 3-6 months income. Our expenses are very low. Very modest house payment, cars paid off, etc. I would feel better about getting that emergency fund up to a minimum of $10K though. Should be just a matter of a few months.

I would suggest doing some basic "retirement" analysis, then figure out a path to get there. Doing something will be better than doing nothing.

retirement analysis: whatever your expenses are, you will need 25X of these expenses to retire comfortably. So if you spend $40,000 each year on stuff, you will need 25X this amount ($1 M).

Whether this $1 M is in a 401k, Roth IRA or other really is not too much of a factor. My advice would be to have some in a Roth, some in a 401k, some in a taxable account... and take advantage of various tax situations in moderation.

For you... If the 401k choices are good, sending 10% to 401k is a great starting point (10% of your income... prior to match). A Roth IRA to compliment this would be a good thing. If you cannot do 10% to 401k and 4k to a Roth, get the match and open the Roth... increasing 401k to 10% when the opportunity arises. It's easier to put more into a 401k, because this money is pre-tax.

For your spouse, which is self employed, I see this situation as one which might be more problematic. Self employment to me suggests need for 12 months cash on hand. So a larger emergency fund is warranted. I would put priority on this (put this cash in laddered CDs or money market type investments). I also understand self employed people can use a SEP IRA, and this allows for more tax deductions than even a normal 401k. Consult an accountant to verify.

Some of the advice I gave is age specific and some age neutral. Depending on "how much" is saved for retirement already, your ages (the answer for age 25, 35, 45 and 55 is much much different) influence the situation more than any other single factor, IMO.

[disneysteve]

Originally Posted by jIM_Ohio

So if you spend $40,000 each year on stuff, you will need 25X this amount ($1 M).

Whether this $1 M is in a 401k, Roth IRA or other really is not too much of a factor.

Just remember to account for taxes. A balance of $1 million in a 401K is not the same as $1 million in a Roth since one account is taxable and the other is not.

[Scanner]

Yeah, those Money magazine articles and Kiplinger's articles where they feature the "Perfect Family" with the 5 BDR house, the manicured lawsn and a minor problem of "Oh, where do we put our extra $20,000 this year ?"kinda leaves you yearning to watch an old episode of Archie Bunker where he made $8.00/hour working at a loading doc, LOL. I think everyone kinda of identified with the Bunkers because that set looked almost exactly like the row home my grandparents grew up in in Philly.

I do like Kiplinger's but their journalists could do a better job of showing people with debt, struggling, healthcare, etc.

It can look deceiving when you see a 35 y.o. couple with a net worth of $500,000.

But try not to judge yourself by other people's worth. You just never know. For instance, that couple, with an illness and job loss, could not have healthcare locked down and all of the sudden, with an illness, that 500K goes down to 100K.

But the couple who makes $16/hour working for the state has great healthcare and retires that way.

Or they simply may have just done better and that's okay too.

I guess I struggle with this because my wife really gets caught up in what others have and we don't. That kind of thinking can be poison and I think that's why the Bible has 2 commandments on "covetousness."

Stick to a plan, modify it occasionally, and you'll do okay. Don't take unnecessary risks trying to get that Holy Grail.

Good luck.

[disneysteve]

Originally Posted by Scanner

Yeah, those Money magazine articles and Kiplinger's articles where they feature the "Perfect Family" with the 5 BDR house, the manicured lawsn and a minor problem of "Oh, where do we put our extra $20,000 this year ?"kinda leaves you yearning to watch an old episode of Archie Bunker where he made $8.00/hour working at a loading doc, LOL.

I guess I struggle with this because my wife really gets caught up in what others have and we don't.

To be fair, I think Money and Kiplinger's do a good job showing the other side of the coin, too. This month, for example, Money has an article on a couple that took early retirement and moved to Florida. They only had about $250,000 in savings. They planned to supplement their income by flipping houses. Needless to say, the market tanked and they are now stuck with two homes that are costing them a fortune to maintain while they are desperately trying to sell them. They are burning through their savings quickly and the man is now looking for work.

So they aren't all success stories.