Our budget and left over cash. Guidance Requested.

[kilboy]

Hello All,

I am 24 and my wife is 23. We curently make 8,650 a month after taxes (we hope/plan on making 10,000/month in 1 year) and we spend 3,900/month on all expenses and toys and fun.

We're left with 4,750 at the end of the month, not including bonuses I get about 6 months out of the year (1,500) or random stuff.

18,000 - emergency fund
28,500 - savings/checking - me
3,000 - retirement - me
15,500 - savings/checking - wife
7,000 - retirement - wife


19k Car loan
149k House
No other debt


I need some guidance on what to do with the money we don't use at the end of the month. I am thinking we put 5k each into 2 Roth IRAs, then put the rest into different Higher Risk S&P 500 Index funds. We leave 1k in each of our savings accounts too. i also want to put the 18k into a CD.

Keep in mind that my employer will put an additional 10% of my salary each year into a 401k, without me even matching. starting in 6 months.

So bottom line is, I did not grow up with this kind of money and it may not be a lot for some but it's a lot for me. I'm just not used to having so much extra money to invest with. Should i invest all the 4,750 in funds and stuff like that because my 5k limit is reached and we already have a 6 month emergency fund?

Goal? Be rich enough to take our parents in when they'e old, pay for kids college, maybe start a business in the future.

++ One more thing, I don't really understand the 5k limit on IRAs and the 16.5k limit on retirement funds as whole? So...5k into IRA the rest into 401k? I don't understand this 16.5k limit.


Thank you all in advance

[bjl584]

I think that you make too much to have a ROTH.

Other options would be to increase the contributions to your employer sponsored plans and to open a taxable brokerage account.

But before you do that, ask yourself what your goals are going forward. Pay off debt? Children? Moving? Etc.?

What's your reasoning behind putting 18K into a CD? If that is your EF, then I wouldn't put all of the 18K into a CD, or at least into a single CD. You need to keep that money liquid and available without taking a penalty on it should you need it.

[kilboy]

Goals: Be rich enough to take our parents in when they'e old, pay for kids college, maybe start a business in the future. We don't have debt other than car and loan, and if we move im going to rent it. We do have one child on the way, but after researching we dont think it will increase our costs by too much.

I was thinking of putting the 18k EF into a CD because i thought it was pretty liquid.

So if i cant do the IRA then just put everything in 401k up to the limit then everything else into Mutual Funds and Index Funds? I just hate seeing that horrible savings interest rate.

[StepRightUp]

What are the interest rates of the car loan and mortgage?

It seems to me that you have enough savings to wipe out the car loan in one fell swoop. Just take it from your checking/savings account. That is, unless it's at an especially low rate.

It appears you have a sufficient emergency fund so I wouldn't add to or subtract from that.

After that, I would ensure I was saving 20% of my income (15% to retirement through your employer's plan and/or a Roth if you qualify, 5% to vacation/car replacement/etc).

Then I would strongly consider making additional monthly payments on the mortgage depending on the interest rate.

It appears that you have an income that would allow you to all of the above.

Congratulations!

[jpg7n16]

Originally Posted by kilboy

19k Car loan
149k House
No other debt

What's the interest rate on the car loan and on the house?

If car is anything 5% or higher, I'd pay it off today. You have too much in cash anyways.

++ One more thing, I don't really understand the 5k limit on IRAs and the 16.5k limit on retirement funds as whole? So...5k into IRA the rest into 401k? I don't understand this 16.5k limit.

There are federal limits of how much money you can shelter from taxes in certain accounts each year. Otherwise a person who made $10million this year, could defer taxes on $9.9 million and live on the $100k. The government's gotta get their money somehow!

So the IRS set up maximum amounts that can be contributed to retirement accounts, and deferred compensation arrangements (401k).

For each taxpayer whose employer offered a 401k, you can contribute up to $16,500/year to the 401k, regardless of income. (For you and your wife, that would be 16.5k each for 33k for the year)

Each taxpayer can then additionally contribute up to $5000 to an Individual Retirement Account (IRA) for the year ($6000 if you're over 50). There are income restrictions as to which account you'd qualify for. In other words, if your income is too high you may not qualify for all the forms of IRAs.

As improved from a standard brokerage account (which is not deductible, is taxed on certain items while it grows-- like interest, sales, dividends -- and is taxed on final sale)... there are 3 types of personal IRAs:

• Traditional Non-deductible (available to anyone regardless of income) -- not deductible today, grows tax free, taxed on withdrawl
• Traditional Deductible (restricted by income, since covered at work must have less than 89-109k) -- deductible today, grows tax free, taxed on withdrawl
• Roth (restricted by income, must have less than $169-179k) -- not deductible today, grows tax free, not taxed on withdraw past age 59 1/2

See income limits here:
2011 Roth IRA Income Limits
2011 IRA Income Limits | 2010 Maximum Roth IRA and Traditional AGI Limit

Now you could do $2500 to a traditional and $2500 to a Roth, or $4000/1000 or all $5000 only to one type. (each, so for you and your wife, you have a combined $10k of potential IRA money)


If you meet all the criteria for all accounts, that would be $16.5k + 16.5k + 5k + 5k = $43k total put in retirement accounts for the year.

[kilboy]

Autoloan: 4.9
Homeloan: 6

So paying off the car would be better than 19k into an Index fund?

Im trying to figure out how mch to put in my 401k and how much to invest in index funds that i can cash in whenever i want.

[Hector]

Max out your 401k and IRA.
Start paying home and auto loan - Its not guaranteed that one will make more than 5% by investing in index, but it is sure that you will save that much by paying auto and home loans faster.

About limit on IRA and 401k. Its all separate.
You can fund upto 16500 including company match in 401k and 5000 in IRA.
You wife can fund upto 16500 including company match in 401k and 5000 in IRA.

[jpg7n16]

Originally Posted by kilboy

Autoloan: 4.9
Homeloan: 6

So paying off the car would be better than 19k into an Index fund?

In my personal opinion - no. At just under 5%, and a very long time horizon, I would personally rather add any extra dollars to investments, rather than pay down debt. I have a very high risk tolerance, so it's okay for me to do that.

I just know most people prefer to get out of debt. And would rather take a guaranteed 5%, than take risk for an expected 8%. I'm perfectly okay with that risk - are you?


Once debt starts getting up to 7-8%+ it doesn't make sense to me anymore to take the risk of market returns. My personal cutoff is somewhere around 5-6%.


Have you considered attempting to refi the home?? I've seen people get rates in the low 4's...

[kilboy]

i have thought of refinancing. i am currently thinking about getting a 15 yr mortgage and then rent my house. it will add a few grand to my loan but im going to have someone else pay off most of it anyway.

im a veteran so i am able to get a 4.25 right now... i think i may do that.

[Phineas]

I am saving money on monthly basis to buy a commercial real estate property which considered good investment. Or i have in my mind to invest in through insurance policy and get enough money for the future.

[kork13]

My (note: PERSONAL) recommendations would be:

You have $44k total in ready cash, not including your EF. Use $19k to pay off the car. Open Roth IRA's TODAY for both you and your wife, and fully fund them both with $5k each for 2010 (you have until April 18 to do this) and 2011 (total: $20k). This should leave you with $5k to spread between your checking/savings accounts.

From there, you have $4750/mo available for savings. Start saving $1375/mo in your 401k (enough to max it out). Set aside a nominal amount ($150-250/mo) for short-term savings, which will serve to cover months with higher-than-average expenditures. Do you already have children? If so, open a 529 account in one of their names. If no kids yet, open it in your's or your wife's name, which can later be transferred to a child, and later between children. Perhaps send $500/mo into the 529 plan, or whatever amount you like. Just keep in mind, you're limited to only $13,000/yr per recipient by gift tax laws.

Beyond that (with the remaining ~$2500/mo), open up a standard investment account and start building up your non-retirement assets. An S&P 500 fund is a good place to start, at least for now. You'll eventually want to determine an optimal investment plan for your family's situation, risk tolerances, and goals. You'll likely eventually find yourself investing in few different mutual funds: S&P 500 (large company stocks), some mix of short-/mid-/long-term bonds, international stocks, small-/mid-size company stocks, perhaps a couple sector funds, and so on. All of that comes with time/experience, research, and your personal preferences/tolerances.

For the EF, I would discourage going into CDs right now. You can do just as well (or better) by putting that money into online savings accounts, many of which are still earning above 1% without you having to lock up your money for 1-2 (or more) years. Also, as I mentioned above, I think you should pay off the car loan and be done with it. At 5%, it's a toss-up over which direction is smarter, so I would go with the guaranteed smart choice of paying it off. And you should *absolutely* look at refinancing, especially if you can get a 4.25-5% refi, which will effectively be even lower (>4%) after the tax deductions.

You make a strong income, and have the ability to save a significant portion of it. These two facts will enable you to be very secure financially, as long as you make careful, smart decisions with your money. Best of luck, and keep asking questions!

[Hector]

Originally Posted by kork13

Set aside a nominal amount ($150-250/mo) for short-term savings, which will serve to cover months with higher-than-average expenditures.

When will person enjoy the life? By saving $250/month, a couple could save $3000/year. Forget about other things, but if OP is interested in traveling, $3000 might not be enough in taking even one international trip a year.

I am a frugal, but there is more to live for than just being frugal when one has resources. It doesn't make sense to me that someone is saving 150-250/month for short term savings who is left with 4700/month after regular expense.

[Slug]

Originally Posted by kork13

My (note: PERSONAL) recommendations would be:

Open Roth IRA's TODAY for both you and your wife, and fully fund them both with $5k each for 2010 (you have until April 18 to do this) and 2011 (total: $20k).

This is a definite ^

And let me emphasize that you only have 11 days to fund those 2010 Roth's. Do that now. Do that first. You can open it online easy at numerous brokerages. I have mine at TD Ameritrade. They offer 100 no transaction fee ETF's that would be a great place for your retirement funds as you're starting out.

[kork13]

Originally Posted by Hector

I am a frugal, but there is more to live for than just being frugal when one has resources. It doesn't make sense to me that someone is saving 150-250/month for short term savings who is left with 4700/month after regular expense.

I totally agree. However, based on what OP stated in the first post (quoted below), I assumed he's already got travel/vacations/other various fun taken care of to his satisfaction. For sure, if it's not already happening, I would absolutely set aside at least $300-$500/mo specifically for travel, vacations, etc. that they'd like. I only intended the $200-ish I stated above as a backup for larger expenses in a given month, or to supplement his EF over time. Honestly, he's in a great spot, so he has the option to adjust the amounts he's saving to fit whatever his goals are.

Originally Posted by kilboy

we spend 3,900/month on all expenses and toys and fun.

[jerrycates]

Try to live the life of a frugal person and you shall have a least a bit of not worrying about being too broke. Being broke is just not funny. I do not see it funny ever!

[BuckyBadger]

I just wanted to re-iterate that you may make too much to contribute fully to a Roth and might have to go with the traditional non-deductible. However, every once in a while the government decides that it needs some extra money and they let you roll that traditional non-deductible into a Roth. You have to pay on your earnings when you roll it over, but after that it's a regular Roth and you'll never have to worry about paying taxes on that money again.

We learned the hard way that we can't contribute to a Roth any more. Turbo Tax told us, actually! We had to take the money out (and whatever it earned) and then on next year's taxes we'll pay tax on the interest that we made during the short period of time it was in the Roth. From now on we'll be maxing out our traditional non-deductible IRS and twiddling our thumbs until Uncle Sam decides that he needs a little extra cash, then we'll roll it over.

So my suggestions, like others, are as follows:

max out your 401k (16,500 for each of you)
max out your IRA of some kind (5,000 for each of you)
pay off your car loan with your surplus cash
refi your mortgage to a 15 year 4.25%

That's just the easy stuff. Now you're at the point where my husband and I are. We were grad student for EVER, but now we're 30 and making $224k between the two of us. We PERSONALLY have chosen to take $1,000 per pay period (so 26,000 a year) and put it into additional long term investments. We take $500 per pay period and save it for stuff like vacations and big purchases. The rest of our money we spend.

Now, I did recently waste about and hour playing around with an online amoritization (sp?) table to see how fast we could pay off our house if we really really wanted to and put all our extra money (outside of tax advantaged retirement accounts) toward it. It was fun, but we're not going to pay it off. We're at 4.5% and our P&I payment is only about $1,500. But it's fun to see how fast you could pay off your house if that were a goal.

If you really are set and are maxing out your tax advantaged accounts AND putting aside something extra for retirement AND putting aside enough to enjoy your day to day life and have some special occassions, then your only real options are spend it on something you don't really want, save/invest it for some sort of mid term goal in the future, donate to charity, or attack your mortgage just because you can.

eta: You could also open one of those college fund accounts, but as we don't have kids, I don't know anything about them.

Good luck!

[Frugal]

I agree. If you live frugally, and learn to save as much money as you can, it will help you, even on a high salary.

[kilboy]

My wife and I both maxed out our Roth IRAs with Vanguard, 2055 fund to start.

Now im going to check on refinancing the house. I'm also going to figure out how much i put monthly into my 401k.

Which type would you all recommend? Roth 401k?

After that im going to start putting everything into funds that show good appreciation track records.

[kork13]

Originally Posted by kilboy

My wife and I both maxed out our Roth IRAs with Vanguard, 2055 fund to start.

Glad to hear it. Also, a target-date fund is a good option for starting out with--I use a similar one in my Roth IRA as well. Simple, automatic diversity.

Originally Posted by kilboy

I'm also going to figure out how much i put monthly into my 401k. Which type would you all recommend? Roth 401k?

The annual max is $16,500/yr, or $1,375/mo. If you're looking to max it out from here on out, you can subtract whatever you've contributed year-to-date, then divide the remainder by the number of months left in the year. (Ex: $3000 contributed Jan-Mar. $13,500 remains to be added over 9 months, so you want to add $1,500/mo Apr-Dec)

As for Roth 401k v. regular 401k, the simplest way to think about it is this: Do you you think you would pay more taxes on the money today or in 40 years when you start to withdraw it? As you make a higher income (and your tax bracket goes up), the regular 401k becomes more beneficial. However, if you expect taxes to be dramatically higher once you retire, the Roth can still make sense. Another option that you might consider... Some companies allow you to contribute to both. Thus, you can hedge your bets, by paying taxes now on the Roth 401k portion, and delaying taxes on the regular 401k portion.

Originally Posted by kilboy

After that im going to start putting everything into funds that show good appreciation track records.

As investment companies always say, "past performance is not an guarantee of future results." I would recommend that you first research the TYPES of investments that historically appreciate well. This way you can balance your assets, risk, and goals appropriately. Once you do that, THEN look into such things as fund expenses, management quality/stability, and yes, track records.

[kilboy]

Just an update. I want to thank everyone that helped and gave me advice. I opened an IRA for myself and another for my wife before taxes were due and maxed them out. I put them in the Vanguard Target Retirement 2055 Fund (VFFVX). I feel so blessed, we are now bringing in 10.5k a month after taxes and our monthly budget is 3,900. That is a bigger/liberal budget because I figure we're already saving 60% why not enjoy it while we can.

Since we can now save 6,000 a month, im trying to find the best place for it. How diversified should I be? I really like the Vanguard funds.