28 & Bankrupt.....Budget Setting Questions

[jasdavis09]

Ok So like so many other people in the US here we are starting over. We are ok with where we are today so long as my wife and I learn from our mistakes and dont find ourselves repeating them. In 2004 we bought a House at the time we bought it property values where still gonig up 10-20% per year. Or at least that is what we where told. We kept our house for three years making our mortage and tax payment's on time each month. late 2007 we ran in to trouble with our job's and our income changed leading to the begining of our finacial trouble's. Needles to say we lost our home a car and have filed for a chapter 7 bk that should be complete verry soon.

All of our problems came form living a artificial life style we spent every penny we had trying to keep it going. We have came to our senses and want to make better choices this time.

We have ben playing with diffrent budgets trying to find the one that fits us best. I found one online that we like and belive we can stick to for the long run. It's the 60% budget. All of our bills inc taxes have to fit into a 60% guide line. Right now we are at 77% of our total gross income going towards all of our bills. Our first goal is to find a way to get to 70% and trim even more once we get there. Is anyone heard of this budget before? Also since we no longer own a home what should we be claiming on our taxes we are maried with one child living in CA our total gross income is $7900.00 per month.

In case you are wondering the other 40% of our money is getting devided into 4 accounts. Acc 1 is a long term savings account with Morgan Stanley, acc number 2 is a retierment account with Morgan Stanley, acc 3 is a savings account with a local credit union. Last but not least is our fun money account with our credit union.

Thank you for your time and your help.

[Caoineag]

Haven't heard of the 60% budget but have heard of the 50/20/30 budget. 50% needs, 20% savings and 30% wants. Can't help you with the CA tax.

[GREENBACK]

I saw something like this at MSN money but I think it was called the 60% solution. I don't know if that's the same thing.

[disneysteve]

I think 40% to savings is extreme and, probably, unnecessary. I would also suggest Elizabeth Warren's 50/20/30 plan.

I'd also want to know more about the accounts with Morgan Stanley. Aren't they a full-service brokerage? Full-service means lots of fees and expenses to do things that you can do far cheaper on your own. I'd get all the money away from there and invest it in low cost, no load mutual funds with a company like Vanguard or T. Rowe Price or Fidelity.

[jasdavis09]

Thank you for yor input. Where can I find more information on the 50/20/30? As far as the Morgan Stanley account I know this is going to sound bad......I'm not sure about there fees. We signed up with them because of the agent. I know I know not the right reason to do so. We will be meeting with him next month to disscuss a roth Ira. I will make sure we talk about the fees. If they are out of line we will switch. What kind of fees does T. Rowe Price and Fidelity chrage? Are there services the same?

[disneysteve]

Originally Posted by jasdavis09

Thank you for yor input. Where can I find more information on the 50/20/30?

That comes from Elizabeth Warren's book called "All Your Worth: The Ultimate Lifetime Money Plan."

As far as the Morgan Stanley account I know this is going to sound bad......I'm not sure about there fees. We signed up with them because of the agent. I know I know not the right reason to do so. We will be meeting with him next month to disscuss a roth Ira. I will make sure we talk about the fees. If they are out of line we will switch. What kind of fees does T. Rowe Price and Fidelity chrage? Are there services the same?

And how do you suppose that agent generates his salary? By getting people to invest with him and paying fees and commissions for his services. DO NOT open a ROTH or any other account with him. Open you ROTH with either a discount brokerage like Scottrade or e-trade if you want to buy individual stocks or ETFs, or with a no load mutual fund company like Vanguard if you want mutual funds.

How do fees compare? Morgan Stanley's S&P 500 Index Fund has an expense ratio of 0.65% vs. Vanguard's S&P fund which charges 0.15%. So Morgan charges MORE THAN FOUR TIMES AS MUCH for essentially the same investment.

[jasdavis09]

The thing I liked most about what our agent at Morgan Stanley did was he set up a money market acount that we make monthly payments into. Once the account reaches a pre set dollar amount it buys shares of a fund. Can this same set up be duplicated at a company like Scottrade?

Thank you for all of your help!

[My English Castle]

Lots of discount brokerages offer the same service.
That Morgan Stanley CEO testifying in front of Congress today would make me swear off them.

[jasdavis09]

Good point. We where or should I say are so financialy blind that we faild to see these problems. Thank you for your input. We are meeting with our credit union next week they have a full time financial planner that can help us. We are going to open two Roth IRA's one for me and one for my wife. We will also be talking about a 5 year saving's plan so we can buy a house agian down the road.....The right way next time.

Thank you agian for all of your input.

[disneysteve]

Originally Posted by jasdavis09

We are meeting with our credit union next week they have a full time financial planner that can help us. We are going to open two Roth IRA's one for me and one for my wife.

WHY?

How much will the financial planner charge you for his services? I'd be willing to bet that the CU doesn't offer any investments that are appropriate for your Roth accounts.

[scfr]

It's actually not saving 40% you'd be saving, because of the account that is for fun money. That's not savings, it's just parking it until you spend it. Is it more like 30% that you would be saving (apart from the fun money fund)? If you are currently renting and trying to save up for a down payment to replace the home you lost, I'm going to swim against the tide here and say that saving 30% of your income is NOT too much. If one of your goals is homeownership and you are currently in a rental, your rent is hopefully much less than your mortgage payment will be some day.

[disneysteve]

Originally Posted by scfr

It's actually not saving 40% you'd be saving, because of the account that is for fun money. That's not savings, it's just parking it until you spend it.

Isn't that the definition of savings?

All savings will ultimately be spent. It is just a matter of when. Some of our savings will be spent when we retire in 20 years. Some will be spent when our daughter goes to college in 6 years. Some will be spent this summer on vacation. Some will be spent next week when I take my car in for service. It is all savings, though, as it is all money that wasn't spent at the time it was earned and was set aside for future needs (and wants).

[whitestripe]

i think everyone needs a budget tailored to their lifestyle. i really don't believe in any of these 'formulas' that books and other financial gurus suggest.
picture this:
a woman or man earning 300 a week, in your 60% budget, would have to be saving $120 a week and that only leaves $180 for living expenses. how does that work???
a woman or man earning 300k a year would be saving 120k but would have 180k for living expenses. i don't know about you, but that's a lot of living expenses!

[SavingCash]

Instead of going with a full-service brokerage for your IRA, look into something like E-Trade. You have to make the trades yourself, but throw your money into something simple like the E-Trade S&P 500 Index Fund. This fund has very low fees and is a no-transaction fee fund, meaning it doesn't cost you anything to buy or sell it. This index fund roughly correlates with the S&P 500 index, so you're basically "buying" a piece of the entire index.

Also, E-Trade has a high interest rate savings account that ranges from 2.5%-3.5% on your money. That's not the highest out there, but it's not too shabby.

The bottom line is that you want to keep as much of your money as possible, and to do so you'll have to stay away from the full-service brokerage houses.

[jasdavis09]

I must say that I don't mind paying some one a fee if they are going to help me in the long run. We may end up using Scott Trade or Etrade. We are not 100% sure yet. I can clearly see the benifits with both the online sources and full service company's like Morgan Stanley. With the online companys there fees may be alot less however it sounds like all the research needs to be done by us. With Morgan Stanley there is someone available to help guide us when we need the help. We also understand that they very well may not have our best intrest in mind when helping. However if we are left to manage our financial future on our own with a online source we may very well make some very costly mistakes olong the way.

[jasdavis09]

Originally Posted by whitestripe

i think everyone needs a budget tailored to their lifestyle. i really don't believe in any of these 'formulas' that books and other financial gurus suggest.
picture this:
a woman or man earning 300 a week, in your 60% budget, would have to be saving $120 a week and that only leaves $180 for living expenses. how does that work???
a woman or man earning 300k a year would be saving 120k but would have 180k for living expenses. i don't know about you, but that's a lot of living expenses!

I agree with you on both of your pionts. I must admit that I am having a hard time managing our budget to the 60% rule. Our bigest challange is that I am on commision at my job and my income changes drematicaly each month. I am trying to manage our budget from the low end of my income scale and now even that its getting hard. The way it is going at work right now I am going to be at the same income level as when I was 19.

[jIM_Ohio]

Originally Posted by jasdavis09

I agree with you on both of your pionts. I must admit that I am having a hard time managing our budget to the 60% rule. Our bigest challange is that I am on commision at my job and my income changes drematicaly each month. I am trying to manage our budget from the low end of my income scale and now even that its getting hard. The way it is going at work right now I am going to be at the same income level as when I was 19.

I would not look for a book to tell you how to budget. You just need a detailed financial plan.

Bottom line 1- spend only 80% of what you earn- regardless of income level. That means right now not much extra will be in your budget (low commissions).

As your situation restores itself (earning close to "full" commissions), you need to take some steps.

1) Establish your base budget based on only salary income. Might make sense for spouse to work part time to increase this baseline. Try as best you can to live on 80-90% of your base pay (if you spend 100% of it, things can get worse quickly).

2) Establish a savings rate- I use 20% as my recomendation. meaning spend 80% and save 20%.
Put 15% towards retirement and 5% towards short term spending/ short term financial goals. Vacations, kids college, new cars, pay down mortgage- use the 5% to what makes sense to you.

3) Make sure you have 24 months expenses in savings. I would use the 5% to build up this account. Keep 6 months savings in cash, and the other 18 months expenses in a LIQUID investment. Might be a conservative mutual fund, municipal bond fund, higher return bank account or savings bonds (TIPs). Some of this might be a tax decision, but stability of principal is important year over year. I use PRPFX for this portion of my investments.

4) as you earn commissions it is OK to increase spending, just mind the 20% rule- the first 20% of what you make goes to savings. Put 15% to retirement and 5% to short term savings. If you do not have the 24X in savings, you might choose to do 40-60 or 50-50 instead of 80-20.

Measure your financial success by your savings rate and money in the bank, not what you can spend the money on. Much of your past problems were related to spending. You need to challenge yourself to keep what you earn (not spend it).