How to best allocate savings

[hopefulfirefly]

I'm hoping I could get some advice. In June, my dh & I will have significant debt paid off (student loans and $$ my mom loaned me to buy my first house before I was married). We've only been married a year and a half and this is the first time we've had this kind of excess money. Once all our bills are paid and we have set aside our spending money for the month, we will have $2,680.00 left. We were thinking about allocating it accordingly:

$1000 Emergency Fund
$400 Baby Money (dh & I will be starting a family via surrogacy at the begining of 2011).
$830 Roth IRA ($415 each into our IRA)
$200 Extra Mortgage Payment
$150 Vacation
$100 Christmas

I was wondering if this should be altered in any way? Should we put more into EF and less onto the mortgage payment? Less into our IRA and more into the mortgage? If it matters, I'm 25 and dh is 33. We own our home, $129,000 mortgage. I put 10% into 401K and dh puts 12%. Thanks for looking & offering advice

[noppenbd]

What is the mortgage interest rate?

What is your present income/tax situation (AGI, taxable income, deductions)?

Any other debt (cars?)

[jIM_Ohio]

You are thinking about this backwards.

You calculated expenses then "save the rest". You need to save first.

20% of gross pay per month/per year. 15% to retirement accounts, 5% to short term expenses (which would be EF and surrogacy in your case).

If you don't save first, it is possible you will spend all of your money.

[TBH]

Do you have any emergency fund savings currently? That will help us figure out if you should throw everything possible at your EF.

[kork13]

Originally Posted by jIM_Ohio

You are thinking about this backwards. ... 20% of gross pay per month/per year. ... You calculated expenses then "save the rest". You need to save first.

Jim, I don't think this really is a problem in her case... They're doing 10-12% straight to 401k, maxing 2 IRA's, and still saving an additional $2k/mo. Unless they make well more than $150k/yr (impossible, as their IRA contributions aren't restricted), it appears that they are saving well above 20% as it is. And by setting this plan down, that's exactly what they are doing--so long as it's kept to, this is essentially equivalent to "saving first".


Your plan seems to be just fine, at least without knowing the specifics of what your income, expenses, and current savings are. Once your EF is funded to the level you want (6mo, up to 9 or even 12mo of expenses), then shift the EF savings toward the mortgage.

Given that you're saving for stuff like vacations and Christmas, one way you might check to see if you're saving the right amount is to decide what you expect/want to spend on each thing, and divide it by 12. Say you expect to spend $3000 on vacations in a year... $3000/12mo=$250/mo to savings. Same with the surrogacy--take the expected cost, divide that figure by the number of months from now to then, and that will give you how much you should save each month.

[zetta]

I would increase your 401k to 15% before putting extra money toward the mortgage. You're missing out on a tax break if you leave it at 10%.

Is the baby money for general baby stuff (furniture, diapers, etc.) or is it to cover the cost of IVF/surrogacy? If the former, I think $400/mo is fine. If the latter, how much do you have saved already? $400/mo may not be enough to cover it within 2 years.

IVF runs around $15k for the first cycle, and can run $3k - $15k for additional cycles, depending on whether you have extra embryos to freeze or have to start from scratch each time. If you are using a paid surrogate, I think the fees can be somewhere in the neighborhood of $25-$50k. (But would be free if you've got a generous friend or relative who's willing to be the surrogate.)

[jIM_Ohio]

Originally Posted by kork13

Jim, I don't think this really is a problem in her case... They're doing 10-12% straight to 401k, maxing 2 IRA's, and still saving an additional $2k/mo. Unless they make well more than $150k/yr (impossible, as their IRA contributions aren't restricted), it appears that they are saving well above 20% as it is. And by setting this plan down, that's exactly what they are doing--so long as it's kept to, this is essentially equivalent to "saving first".


Your plan seems to be just fine, at least without knowing the specifics of what your income, expenses, and current savings are. Once your EF is funded to the level you want (6mo, up to 9 or even 12mo of expenses), then shift the EF savings toward the mortgage.

Given that you're saving for stuff like vacations and Christmas, one way you might check to see if you're saving the right amount is to decide what you expect/want to spend on each thing, and divide it by 12. Say you expect to spend $3000 on vacations in a year... $3000/12mo=$250/mo to savings. Same with the surrogacy--take the expected cost, divide that figure by the number of months from now to then, and that will give you how much you should save each month.

I missed last sentence of original post.

I would still start with
20% of gross to savings
15% to IRA+401k
5% to savings/short term

If its broken down that way it makes sense...

Overall OP does not appear to be in bad spot... I would suggest looking at all retirement funds as a percentage of gross income (I know IRA max is $5000, but what % of income is the $5000?).

I agree tax savings on 401k might be better than the mortgage- depending what priorities are (I would also argue that the mortgage money might be better put into savings short term because of economy and child issues).

[creditcardfree]

Personally, I think you came up with a great plan.

[hopefulfirefly]

Thank you for your thoughts & advice thus far.

Originally Posted by noppenbd

What is the mortgage interest rate?

What is your present income/tax situation (AGI, taxable income, deductions)?

Any other debt (cars?)

6.8% interest rate. We can't refi because of the value of the home dropping.

We currently lease 2 cars (yes, I know), and both leases are up this year so we'll be buying. We possibly may need to make minor adjustments to our budget to consider the new car payments. We have no other debt.

We gross about 120K each year. I don't know what our adjusted gross is.

Do you have any emergency fund savings currently? That will help us figure out if you should throw everything possible at your EF.

We have about 25K in savings.

I would increase your 401k to 15% before putting extra money toward the mortgage. You're missing out on a tax break if you leave it at 10%.

I cannot contribute more than this amount into my 401K, my mom owns the business I work for and I am capped at this amount based upon the other employee's contributions.

[noppenbd]

I'd say you're doing well. It would be nice to avoid financing the coming vehicle purchases, but with a 6.8% mortgage, you are probably better off prepaying the mortgage over saving for the vehicles. What is the goal on your EF? You might be able to set aside some of your savings for the vehicle purchases.

It looks like your retirement contributions are around 20%, which is fantastic.

[swaymonae]

Originally Posted by hopefulfirefly

I'm hoping I could get some advice. In June, my dh & I will have significant debt paid off (student loans and $$ my mom loaned me to buy my first house before I was married). We've only been married a year and a half and this is the first time we've had this kind of excess money. Once all our bills are paid and we have set aside our spending money for the month, we will have $2,680.00 left. We were thinking about allocating it accordingly:

$1000 Emergency Fund
$400 Baby Money (dh & I will be starting a family via surrogacy at the begining of 2011).
$830 Roth IRA ($415 each into our IRA)
$200 Extra Mortgage Payment
$150 Vacation
$100 Christmas

$2,600 extra monthly? That's great!

Honestly, I think that if you already have a good amount of money set aside for emergencies, I'd concentrate highly on getting your mortgage paid off. If you pay of you house sooner, think of all the money you'd save, and think of all the extra money you'd have then. You could buy another property at a great price in this economy! Get that mortgage paid!! You're almost there!

[hopefulfirefly]

Originally Posted by swaymonae

$2,600 extra monthly? That's great!

Honestly, I think that if you already have a good amount of money set aside for emergencies, I'd concentrate highly on getting your mortgage paid off. If you pay of you house sooner, think of all the money you'd save, and think of all the extra money you'd have then. You could buy another property at a great price in this economy! Get that mortgage paid!! You're almost there!

But, this is where my concern is (and the original reason for my post). We don't have a substanial EF, because in less than 2 years we will be spending a ridiclous amount of money to try to become parents....so....I don't think should just put a majority of our money toward the mortgage because we really need to build up our EF. So, how do I determine that balance between how much to save for EF & baby making and how much to put toward the mortgage?

[swaymonae]

Originally Posted by hopefulfirefly

But, this is where my concern is (and the original reason for my post). We don't have a substanial EF, because in less than 2 years we will be spending a ridiclous amount of money to try to become parents....so....I don't think should just put a majority of our money toward the mortgage because we really need to build up our EF.

I completely understand that.. the idea of contributing $1000 to your EF every month is fantastic and I am not oppose to that in any fashion,.. All I'm saying is, instead of paying only $200 extra to your mortgage, pay $500 extra monthly. Do you really need to contribute 400/ea to your IRA? Can you do $300? Do you already have a vacation planned and need to save $150 a month for it? Why do you need $100/month savings for XMAS? Who are you buying gifts for? You're so close to having this mortgage paid off, and I think you'll find that it's a lot easier to do it now that you don't have any dependants. How nice it would be to bring a baby into the world, and to be free to do whatever you wish financially with him/her. That's just the way I see.. but I dream upon a star

Originally Posted by hopefulfirefly

So, how do I determine that balance between how much to save for EF & baby making and how much to put toward the mortgage?

How much you already have saved for your surrogacy is a pretty big factor in this and what kind of time line you're looking at.

[noppenbd]

Here's what I would do. Set aside 6 months of expenses as an emergency fund and keep it separate from the surrogacy fund. So let's say your monthly expenses (not including savings and extra principal payments) are $5K. I would temporarily stop putting extra towards the house and baby fund until you have $30K saved. You can be there in 3 months, with $1600 a month added to your $25K.

At that point, all additional money goes into a combined house/baby fund. So $1600 a month into that from 3 months from now until the surrogacy bill comes. In about 2 years you should have about $35K in it. If the surrogacy costs less than that you can make a bulk payment to the mortgage at the time with whatever is left in the account. Make sure to keep these funds separate from your EF.

You might consider reducing your Roth contributions a bit if you foresee $35K not being enough. As long as you are saving 15% of income between the 401ks and the Roths you should be ok.

[jIM_Ohio]

Originally Posted by noppenbd

Here's what I would do. Set aside 6 months of expenses as an emergency fund and keep it separate from the surrogacy fund. So let's say your monthly expenses (not including savings and extra principal payments) are $5K. I would temporarily stop putting extra towards the house and baby fund until you have $30K saved. You can be there in 3 months, with $1600 a month added to your $25K.

At that point, all additional money goes into a combined house/baby fund. So $1600 a month into that from 3 months from now until the surrogacy bill comes. In about 2 years you should have about $35K in it. If the surrogacy costs less than that you can make a bulk payment to the mortgage at the time with whatever is left in the account. Make sure to keep these funds separate from your EF.

You might consider reducing your Roth contributions a bit if you foresee $35K not being enough. As long as you are saving 15% of income between the 401ks and the Roths you should be ok.

I agree with everything except dropping the Roth. People should plan for 15%+ contributions to retirement accounts, especially early in their lives where contributions will compound the most.

Worst case (to me) is that the Roth contributions delay surrogacy around 6 months. Consider Roth contributions are 10k per year and $1600/mo to savings is 1.6X that amount, so the choices being made are already cash intensive.

[noppenbd]

Originally Posted by jIM_Ohio

I agree with everything except dropping the Roth. People should plan for 15%+ contributions to retirement accounts, especially early in their lives where contributions will compound the most.

I said reduce, not drop the Roth.

They currently put 10-12% (call it 11%) of gross into 401ks. They need another 4% for 15% total. 4% of 120K is ~$5K, so they could cut the Roth contributions in half and still be at 15%. I would rather see this done than go into debt for the surrogacy. If delaying the surrogacy is an option or can be fully funded without cutting the Roth contributions, then by all means keep maxing that Roth.

[TBH]

I agree with noppenbd, except I think you should keep your Roth contributions at their current levels.

First finish funding your EF. Then put all extra cash into a short-term savings account to fund the surrogacy. When you have your baby, you can use any extra $$ in that account to pay down the mortgage. I don't think $400 per month is enough to save for the surrogacy if you want to do it in only 2 years. You'd have less than $10,000 saved at that rate (24 months times $400 per month=$9600).

[sandrark]

You've got car leases, and no plan to save for replacements that I can see.

I like noppenbd's plan - get the EF up to $30K and cap it. Move it somewhere like ING, so you can't nickle-and-dime it.

Then start a car replacement fund. $1600 per month - you should have enough to buy gently used cars as replacements for the leases within 18 months.

Then start on the IVF fund. You can have that funded in another 18 months.

I wouldn't be throwing additional money at the mortgage, on a declining asset, when you KNOW you'll need cash for IVF, cars and EF.

You can pay a lump sum against the mortgage once you've bought the used cars and paid for the IVF.

Sandi

[MonkeyMama]

Noppenbd's plan is wise. We had one year's expenses in the bank when we had kids, no problems (but dh could never find a job when we felt we needed more income). I'd say it was barely enough, and that's without getting into IVF and complications. I would save save save for the unknown. & if all goes better than expected, you have a chunk to put towards the mortgage, later. Paying off the mortgage too quickly can compromise your liquidity. HAving a "future mortgage payoff" fund is wise until you see where you are with children, etc., down the road.

I would balance that cash savings with taking advantage of tax deferred retirement savings. You could each put $16500 into your 401ks (depending on employer limits anyway). The more you put in your 401ks the more you save in income taxes. Not that you need to max out, but you may want to look at the tax ramifications. Maybe contribute to the level that your taxable income is below the 25% tax brackets, etc.

On the ROTHS, I would consider maxing them out but investing very conservatively (maybe even cash). You can pull out ROTH principal in the future, tax and penalty free, if you ever need it. But you will never get another opportunity to max out a ROTH for 2008 and 2009. Again, down the road you can decide to invest it more aggressively if you don't feel you will need to pull it back out in the interim. But this is an excellent way to kill 2 birds with one stone. I am all for putting WAY more into retirement than you really need to, if it gives you substantial tax savings.

I think your original plan is overall sound. Just, you may be able to save some more money with a little tax planning, is all.

[ukey]

Its a good plan, with short term and mid term savings and plan in place. Only thing is about your emergency funds. There will come a point when you have sufficient funds in your emergency account. Good to plan how to save the rest for long term savings/ other savings as well