What would you do? I need help!

[coreys]

Originally Posted by jIM_Ohio

Is the high income likely to continue for forseeable future?

yes

I did not see you add the expenses in your response to Steve- what are the budgeted monthly expenses?

see post 14

Pay off SL before Home equity- at this income you want every deduction possible.

No deduction for SL interest at out income bracket--actually they cap it at an income of like 130k


Max the 401k

We are doing that

Make sure you SAVE 20-30 percent of your new income. If you save 30 percent (83k per year), it would be OK to spend 20k or so (10 percent) on vacations or other short term wants

20-30 % seems high? Or am I just being a wimp??

Once you are saving the 30 percent... then pay down debts. You probably want to find someone to do your taxes and give you specific tax advice- keeping the mortgage will lower your tax bill.

Yes, I need to find a good cpa.

It might cost you 400k in interest, but it could save you 600k in taxes. Have an accountant or tax professional run the numbers for you.

Thanks for the info Jim. Anything else you money mavericks would suggest??.

[disneysteve]

Originally Posted by coreys

20-30 % seems high? Or am I just being a wimp??.

Until 6 months ago, you were living on 45K. You now have over 250K coming in. Surely, your expenses didn't go up 6-fold overnight like your income did. You've got a great gift right now. Don't blow it.

If you start saving 30% right now, that's 75K to savings, leaving you 175K to live on (and I'm not even counting the 25K bonus). If you were living on 45K, you can certainly live very, very nicely on 175K. The biggest mistake people make is elevating their lifestyles to match their incomes. This is particularly true of doctors and other professionals who see a rapid rise in income when they finish training and get real jobs. Just because you are earning all of that money does not mean you need to find a way to spend it all.

[jIM_Ohio]

Originally Posted by coreys

Thanks for the info Jim. Anything else you money mavericks would suggest??.

Post 14 shows $8988 or something similar, but did not include gas. This suggests to me you really have no budget which tracks your expenses.

I for one would feel better giving advice if you knew EXACTLY how you were spending your money. Controlling expenses will have a larger impact on your situation than any savings advice I give, any tax advice a CPA could give, or other advice any other poster here will offer.

Know your spending, control your spending. $9k per month in expenses is HIGH. Probably in top 20 percent of all USA households, dare I guess top 10 percent? You are spending more than 100k per year.

I normally advise 15/5. 15 percent to retirement and 5 percent to short term savings.
I am going to suggest you do 20/10 because of the recent rise in income.

20 percent ($1800/mo) to accounts marked for retirement. 401k is only going to be around 7 percent, 13 percent of your income will be going to a taxable retirement account.

10 percent $900/mo) to accounts marked for short term financial needs. Use this to get 6 months expenses in savings.

Take all debt payments like SL and 2nd mortgage and round them up to nearest $100. Paying $620 for something- round it to $700 (to get rid of the debt). This applies to all debts except the 1st mortgage.

Finance nothing from this point forward- this way you are not going to spend more than you earn. If you cannot pay cash for the new car, WAIT. The 10 percent ($900/mo) will have 10k set aside within 12 months. If you really want something which costs 40k, then either set aside 900 for 48 months or set aside $3600 for 12 months. You have the money if you have the discipline.

From a tax standpoint you may want to consider a larger house if the tax works out. Wait 18 months to make this decision.

Look at your tax liability this year. Look at it again in 2010 when you do 2009 taxes. If it costs you $800k to save $900k in taxes over 30 years, only you can decide if that makes sense to you (I am only guessing at numbers of 800k and 900k). Be prepared to see 10k-40k type tax bills over 30 years while you have this level of income.

[disneysteve]

Originally Posted by jIM_Ohio

Know your spending, control your spending. $9k per month in expenses is HIGH.

I agree. You are now spending more in 5 months than you were grossing in annual income just 6 months ago. What happened? I suspect what happened is that you suddenly had this huge income and went about trying to figure out how to spend it all. That delayed gratification thing kicked in and you may have gone a bit overboard. I'm a physician myself, so I know all about it. Rein in it now before it's too late.

[LivingAlmostLarge]

Guys the $9k/month includes $3500/month credit card payments! Yikes though.

So they aren't spending necessarily that much but they did spend a lot before. Wow, $3500/month in CC.

[minnie1928]

Maybe I missed this, but if you are concerned about adding to the 401k balance up to the limit, why not also make contributions to an IRA? You mention limits (I'm unsure of them) but if you are a SAHM then you have no income, so it shouldn't matter.

Also, consider upping your life insurance. If something happens to you, your husband will need help with your child (daycare/nanny) and around the house. Also, your child is very young so this assistance could be needed for quite some time.

[disneysteve]

Originally Posted by LivingAlmostLarge

Guys the $9k/month includes $3500/month credit card payments! Yikes though.

So they aren't spending necessarily that much but they did spend a lot before. Wow, $3500/month in CC.

Oops. Sorry about that. And LAL, the CC balance is only $6,000. They are paying $3,500 to get it paid off. It will be gone in 2 months.

So your actual expenses are a lot lower. My apologies.

[jIM_Ohio]

The budget listed did NOT include all expenses... so we really don't know what the total expenses per month are.

[LivingAlmostLarge]

True. I think it's still pretty high but a huge chunk could be debt repayment.

[JinCO]

Originally Posted by disneysteve

Until 6 months ago, you were living on 45K. You now have over 250K coming in. Surely, your expenses didn't go up 6-fold overnight like your income did. You've got a great gift right now. Don't blow it.

If you start saving 30% right now, that's 75K to savings, leaving you 175K to live on (and I'm not even counting the 25K bonus). If you were living on 45K, you can certainly live very, very nicely on 175K. The biggest mistake people make is elevating their lifestyles to match their incomes. This is particularly true of doctors and other professionals who see a rapid rise in income when they finish training and get real jobs. Just because you are earning all of that money does not mean you need to find a way to spend it all.

Steve - you also need to consider taxes in your calculation. We make a bit more than the poster and our tax bill is about $60K for Federal and State. This will likely increase under Obama.

In terms of how much to save, you should be able to count debt payment acceleration towards your totals. For example we are only saving about $40K per year, but we are overpaying out student loan debt and HELOC by about $30K per year.

[disneysteve]

Originally Posted by JinCO

Steve - you also need to consider taxes in your calculation. We make a bit more than the poster and our tax bill is about $60K for Federal and State.

True. I didn't count that. So if OP makes 275 and pays 60K in taxes, that leaves 215K compared to 45K minus taxes 6 months ago. Still 5 times as much income or so. Should leave plenty for savings. I agree that accelerated debt repayment counts as savings since it is reducing the total interest that will be paid and once the debt is cleared, that money can be invested.

[creditcardfree]

Even though your income phases you out of SL interest for tax purposes, you can still take a deduction on the home equity loan. Get rid of student loans firstbefore HEL...since there is zero tax incentive in your situation.

Even though you make a great income, it is still important to know where all of your dollars are going. Make sure you start keeping track of all your expenses. That way you can make a concious choice about whether that expense is worth hanging onto in lieu of debt payoff.

[coreys]

Thanks everyone for contributing to my post. I got some really good information from you and I will keep you posted as we make progress. Here are some of my take aways from your responses:

1-Track expenses to get a REAL budget-thanks Jim!
2-Pay off CC Balance
3-Start saving (Im going to put away 3330 per month (this will be 40k a yr)
I will re-evalute this figure every 6 months
4-Pay down student loan debt
5-Increase life insurance policy on hubby

Wish me luck!

[creditcardfree]

Good luck! Every step forward counts, even if you need to revise later.

[Like2Plan]

Originally Posted by creditcardfree

Even though your income phases you out of SL interest for tax purposes, you can still take a deduction on the home equity loan. Get rid of student loans firstbefore HEL...since there is zero tax incentive in your situation.

The HEL may or may not be deductible at their income level which is most likely subject to AMT. (It depends on what the money was used for. )


The second kind of mortgage interest is called home equity indebtedness. For tax purposes, this is any kind of borrowing against your residence that is not used to acquire, build, or substantially improve that particular residence. Home equity indebtedness includes the typical "home equity line of credit," as well as the cash-out portion of a cash-out refinance, to the extent that the additional borrowing is not used to substantially improve the home. Interest on up to $100,000 of home equity indebtedness is deductible. When a taxpayer becomes subject to the AMT, however, home equity indebtedness deductions must be added back to income. They are not deductible at all for AMT taxpayers.
link to source.
(I will look up the IRS reference later on....)

[coreys]

Originally Posted by Like2Plan

The HEL may or may not be deductible at their income level which is most likely subject to AMT. (It depends on what the money was used for. )


The second kind of mortgage interest is called home equity indebtedness. For tax purposes, this is any kind of borrowing against your residence that is not used to acquire, build, or substantially improve that particular residence. Home equity indebtedness includes the typical "home equity line of credit," as well as the cash-out portion of a cash-out refinance, to the extent that the additional borrowing is not used to substantially improve the home. Interest on up to $100,000 of home equity indebtedness is deductible. When a taxpayer becomes subject to the AMT, however, home equity indebtedness deductions must be added back to income. They are not deductible at all for AMT taxpayers.
link to source.
(I will look up the IRS reference later on....)

That is news to me. We owe 60k on the 2nd mortgage so I think we should be ok?? Right?

[jIM_Ohio]

Originally Posted by coreys

That is news to me. We owe 60k on the 2nd mortgage so I think we should be ok?? Right?

If the house value secures all the debt, then it is 100% deductable.

If your house was worth 300k and you had 400k in loans against it, the interest on the 100k the house did not secure would NOT be deductable.

[Like2Plan]

Originally Posted by jIM_Ohio

If the house value secures all the debt, then it is 100% deductable.

If your house was worth 300k and you had 400k in loans against it, the interest on the 100k the house did not secure would NOT be deductable.

Jim,
The home value is not the key test here. It is what you used the loan money for. If you borrowed money against your home and used it to buy a car for example, it would not be deductible interest when you calculate the AMT.
The key test is if the money borrowed has to be used to "acquire, build, or substantially improve that particular residence."
As you know, there are different rules for AMT and this is just another area where they sock it to ya when you reach a certain income level.
Alternative Minimum Tax (AMT) Assistant for Individuals

Topic 556 - Alternative Minimum Tax

Instructions for form 6251 (see page 2)

form 6251 Alternate Minimum Tax for Individuals

[Like2Plan]

Originally Posted by coreys

That is news to me. We owe 60k on the 2nd mortgage so I think we should be ok?? Right?

coreys,
Just to clarify, this is for the AMT calculation. If you used the proceeds of the loan to acquire, build, or substantially improve that particular residence, then it should be deductible even under AMT.

[Like2Plan]

Originally Posted by coreys

As far as 401k --we are contributing the max that my dh employer will match--currently 6%, they match 3%. My concern is the 401k annual contribution limits, which will be $16,500 for 2009. What happens to the amount over that?? I don't know but I don't want to be paying some kind of tax penalty for this.

I wanted to go into more detail about this.
You should be contributing the maximum allowed by the IRS. If your DH's income is 225,00 and he contributes 6%, that only comes out to 13,500 ( The 16,500 IRS limit applies to your DH's contributions only). Do they take out 401K contributions from his bonus? (My employer does not, but I know each employer has different rules).

There is another aspect that you need to find out about. Most of the 401k plans I have heard about will not give you a match on your contributions after you max out. What does this mean? If you reach 16,500 in November for example, his employer will not take out any more contributions for the remainder of the year (and no contributions= no match).

Some key things to look at: how is your DH paid? Is it monthly or every 2 weeks? If he is paid every 2 weeks, once every 12 years there is an extra pay day (27 instead of 26). If you have calculated his contributions based on 26 instead of 27 he will max out in pay period 26 and not get the employer match in pay period 27.
Does your DH get a raise every year? Do you have a percentage deducted from his pay or is it a set amount. If it is a percentage, then you need to look at adjusting it when he get a pay increase so you don't max out early.