Another "How Am I Doing?" question

[optimist]

Lately I've been feeling that my financial situation is in need of some tweaking. I would really appreciate it if someone could critique my budget and perhaps make some useful suggestions on how it can be improved.

I'm 35, with a stable job that brings about $6000/mo in income. In addition, I have a rental condo, on which I currently break roughly even (after factoring in principal payments, taxes, insurance, HOA and repairs).

I have about $35K in my emergency fund, to which I contribute $500/month.
$130K in retirement, to which I contribute 8%, and my employer - another 5%.
$20K in other investments, to which I contribute $450/mo, and $25K in my son's prepaid college fund, to which I'm contributing another $250/mo.
In addition, with my latest raise I've started putting extra $200/mo towards my rental condo's principal balance to accumulate more equity (currently at about $60K)

What bothers me is that I still, 10 years after graduation, have $25K in student loans, at 3%.
I also feel that perhaps at my age I ought to be further along with my savings and net worth.
Having said that, I don't really feel that I'm spending all that much. My transportation expenses are almost non-existent since I take public transportation and my car has been paid off for years. My food, clothing, entertainment and travel expenses together are around 18% of my gross income. Most of my income is spent on the taxes (16% of gross), mortgage and utilities (15% of gross), child care & activities (6%), insurance of various types (5%), and rental expenses (12%). I'm also repaying the $50K loan I took to refinance my rental to get a lower interest rate (another 6%) - got 4 more years to go on that.

So to summarize - I feel that despite living a fairly frugal lifestyle and trying to do the right thing wiht my money, I'm not further along with my finances.

What do you think?

[bjl584]

I'd say that you are right on track and are doing quite well.

One thing, your EF if now fully funded and is sitting at 6 months worth of monthly income. Shift that $500 someplace else. Someplace like your SL since they seem to be bothering you. Or split it and put $250 toward the loans and $250 toward saving and investing.

[disneysteve]

In addition, I have a rental condo, on which I currently break roughly even (after factoring in principal payments, taxes, insurance, HOA and repairs).

I have about $35K in my emergency fund, to which I contribute $500/month.
$130K in retirement, to which I contribute 8%, and my employer - another 5%.
$20K in other investments, to which I contribute $450/mo, and $25K in my son's prepaid college fund, to which I'm contributing another $250/mo.
In addition, with my latest raise I've started putting extra $200/mo towards my rental condo's principal balance to accumulate more equity (currently at about $60K)

What bothers me is that I still, 10 years after graduation, have $25K in student loans, at 3%.
What do you think?

I think you've done some things out of order and need to reevaluate your priorities. Some of these things may not be changeable at this point but some are.

I wouldn't have bought an investment property before paying off my student loans, so I think that threw things out of whack.
I wouldn't be saving for my kid's college fund while still paying off my own education and undersaving for retirement. 8% is not enough for you to be saving there.

So let's see how to fix this.

1. What are your monthly expenses? That will tell us how much you need to have in your emergency fund. Since your monthly income is 6K, you already have about 6 months of income in there which means a lot more than 6 months of expenses. I'd stop adding to that. Send the $500/month to the student loan instead.
2. Stop prepaying the condo mortgage. Put that money to your student loans instead.
3. Stop funding your kid's college fund. Put that money to your student loans instead.
4. Increase your retirement savings to 15% of income or as close as you can while still doing 2 and 3 above.
5. What are the "other investments" for? If they are for a specific goal, what is it? If it is not for a specific goal but rather just general savings, stop adding to it. Send that money toward retirement instead if you need to do that to get to the 15% figure.

Let's start with that for now.

[optimist]

I think you've done some things out of order and need to reevaluate your priorities. Some of these things may not be changeable at this point but some are.

I wouldn't have bought an investment property before paying off my student loans, so I think that threw things out of whack.
I wouldn't be saving for my kid's college fund while still paying off my own education and undersaving for retirement. 8% is not enough for you to be saving there.

So let's see how to fix this.

1. What are your monthly expenses? That will tell us how much you need to have in your emergency fund. Since your monthly income is 6K, you already have about 6 months of income in there which means a lot more than 6 months of expenses. I'd stop adding to that. Send the $500/month to the student loan instead.
2. Stop prepaying the condo mortgage. Put that money to your student loans instead.
3. Stop funding your kid's college fund. Put that money to your student loans instead.
4. Increase your retirement savings to 15% of income or as close as you can while still doing 2 and 3 above.
5. What are the "other investments" for? If they are for a specific goal, what is it? If it is not for a specific goal but rather just general savings, stop adding to it. Send that money toward retirement instead if you need to do that to get to the 15% figure.

Let's start with that for now.

Thanks for such a detailed response. I didn't actually buy the condo as an investment property. It was my primary residence until an increase in family size caused us to buy a townhouse. Renting out the condo, which is in a good location, made more sense than selling it. I consider it a long-term investment.

My basic monthly expenses, including the rental, are about $5K. I figured I'd stop putting money in the EF when I get to $40K, which would give me 8-months worth of expenses.

Do you really think I'm underfunding my retirement? Between my employer and I we contribute just about the max allowed ($16K per annum) into the 401K. If I were to increase my contributions any further, I would start loosing the employer match. I am not eligible to open a Roth. In addition, my empoloyer is providing a small pension, which the employer funds, up to 30% of my final salary, which is currently vested at about 5% of my annual income.

My "other investments" do not have a specific purpose. I just thought it would be nice to have some extra $$ for things such as home improvements, a new car (eventually), etc. Right now I feel that I should perhaps liquidate them as soon as I've accumulated enough to pay off the student loans in their entirety. What do you think?

[disneysteve]

I didn't actually buy the condo as an investment property. It was my primary residence until an increase in family size caused us to buy a townhouse. Renting out the condo, which is in a good location, made more sense than selling it.

I had a feeling that might be the case.

My basic monthly expenses, including the rental, are about $5K.

Unless you have reason to believe that your job is particularly unstable, I think 6 months is plenty. I'd stop adding to the EF in order to take care of some bigger priorities.

Do you really think I'm underfunding my retirement? Between my employer and I we contribute just about the max allowed ($16K per annum) into the 401K. If I were to increase my contributions any further, I would start loosing the employer match. I am not eligible to open a Roth. In addition, my empoloyer is providing a small pension, which the employer funds, up to 30% of my final salary, which is currently vested at about 5% of my annual income.

Why would you lose the company match if you increased your contributions? The annual limit, which is $17,000, doesn't count the company match. That's the max you personally can contribute. Any match is above and beyond that amount.

And why are you not eligible for a Roth? Your income isn't high enough to make you ineligible.

[optimist]

Why would you lose the company match if you increased your contributions? The annual limit, which is $17,000, doesn't count the company match. That's the max you personally can contribute. Any match is above and beyond that amount.

And why are you not eligible for a Roth? Your income isn't high enough to make you ineligible.

I make over $111,000, which is the current max you can make to open a Roth. $6K is just the take-home, after taxes, retirement contribution, and insurance.

I didn't realize though that $17K does not include the company match. In that case, I could increase my contributions by up to another 5%. Do you think that's really necessary, though, given the employer match and the possible pension? This is one area where I never felt I was under-saving.

[disneysteve]

I didn't realize though that $17K does not include the company match. In that case, I could increase my contributions by up to another 5%. Do you think that's really necessary, though, given the employer match and the possible pension? This is one area where I never felt I was under-saving.

Standard advice is to save 15% of gross for retirement not including company match. You are saving 8%. I'm honestly not sure how to factor in the pension to that planning.

You could do a couple of things. You could open a traditional IRA. There is no income limit for that (only a limit to be able to deduct the contributions). You could also do taxable investing but personally earmark the funds for retirement if needed. That's actually what I do since my only tax-advantaged account is a Roth and $5,000/year just isn't nearly enough to be saving. But I wouldn't do that before maxing the 401k.

[skydivingchic]

You are still eligable for Roth contributions. First, the income limits are based on your modified adjusted gross income. The big adjustment to your income to get to your MAGI is 401k contributions. So, if you make $111k and contribute the max to your 401k ($17k), your MAGI is $94k (or less depending on other adjustments). Second, the 2012 limit for single filers is $110 for the full $5k. Over $110k to $125k, you can only contribute partially.

Yes, you are undersaving for retirement. You should not count the employer match in what you are contributing. I personally wouldn't even consider the pension. Those are quickly going the way of the do-do bird and there is absolutely no guarantee it will be there when you retire.

[disneysteve]

I personally wouldn't even consider the pension. Those are quickly going the way of the do-do bird and there is absolutely no guarantee it will be there when you retire.

Good point. The pension could disappear long before retirement. Do your own saving and if you get the pension, it will be a nice bonus. If not, you won't suffer as a result.

[optimist]

This is turning out to be vefy informative. So would you recommend I use the $20K in my "other investments" and excess EF to pay off the student loans, and then use that money to increase my retirement contributions?

What about saving money for other miscellaneous needs, like home improvements, car, etc? Should I use my current EF contributions to do that? Basically, just keep increasing the EF, so it can be used for those other purposes as well as true emergencies?

[DebtFree&Broke]

This is turning out to be vefy informative. So would you recommend I use the $20K in my "other investments" and excess EF to pay off the student loans, and then use that money to increase my retirement contributions?

What about saving money for other miscellaneous needs, like home improvements, car, etc? Should I use my current EF contributions to do that? Basically, just keep increasing the EF, so it can be used for those other purposes as well as true emergencies?

Yes, take the $20k and get your student loan down to $5,000. I would even take that $5,000 out of your emergency fund and be rid of the loan tomorrow.

I would keep your emergency fund separate from your home improvement and car savings. Unless you don't feel stable in your job 6 months is plenty for an EF (for now). When you have your mortgages paid off then go back and start adding to your EF again.

So pay off student loan, increase retirement contributions and payoff your mortgages. That's my advice.

[disneysteve]

This is turning out to be vefy informative. So would you recommend I use the $20K in my "other investments" and excess EF to pay off the student loans, and then use that money to increase my retirement contributions?

I think that might be a little tricky. It depends on where that money is now. The EF money is probably in a high yield savings account or money market so no tax implications to using that - go ahead. What about the other investments? If you can get to them without triggering a taxable event, I'd consider it. If you have to sell stocks or bonds or mutual funds, maybe not. In that case, just stop adding to those accounts and redirect that money to the loans.

What about saving money for other miscellaneous needs, like home improvements, car, etc? Should I use my current EF contributions to do that? Basically, just keep increasing the EF, so it can be used for those other purposes as well as true emergencies?

This depends on you and how disciplined and organized you are.

My EF is not its own separate account. It is blended with other moneys. We can handle that. Others can't. If you are okay combining funds with different purposes, that's fine. If you are the type that needs to keep them separate, keep them separate.

A general savings rule is 15% for retirement and 5% for other needs, so 20% total. So think of it as 3 piles of money. Pile 1 is your EF of 6 months worth of expenses. Pile 2 is 15% of gross income for retirement. Pile 3 if 5% of gross income for other needs like a car, home repair, vacation, etc. Once Pile 1 is "full" you can stop adding to it. Piles 2 and 3 continue to get added to regularly until you retire.

[sblatner]

I just want to add that I think you are doing fabulous. You have more saved then most 35 year olds. I agree with the changes people are saying...pay off the student loan just to get it off your back (but don't cash in the investments if there will be tax implications - you can refocus funds towards your SL and pay off sooner without cashing in the investments), increase your retirement, pay off mortgages and keep saving. Congratulations!

[optimist]

I think that might be a little tricky. It depends on where that money is now. The EF money is probably in a high yield savings account or money market so no tax implications to using that - go ahead. What about the other investments? If you can get to them without triggering a taxable event, I'd consider it. If you have to sell stocks or bonds or mutual funds, maybe not. In that case, just stop adding to those accounts and redirect that money to the loans.


This depends on you and how disciplined and organized you are.

My EF is not its own separate account. It is blended with other moneys. We can handle that. Others can't. If you are okay combining funds with different purposes, that's fine. If you are the type that needs to keep them separate, keep them separate.

A general savings rule is 15% for retirement and 5% for other needs, so 20% total. So think of it as 3 piles of money. Pile 1 is your EF of 6 months worth of expenses. Pile 2 is 15% of gross income for retirement. Pile 3 if 5% of gross income for other needs like a car, home repair, vacation, etc. Once Pile 1 is "full" you can stop adding to it. Piles 2 and 3 continue to get added to regularly until you retire.

You are right about the EF - it's in high yield savings. The "other" money is in mutual funds, but they won't generate enough gains (unfortunately) to have significant tax implications. So I'll just wait until they are doing well enough to cash out.

I like your three-pile rule. It's very logical and makes a lot of sense. 5% of gross doesn't seem like enough, though, to cover all the large but necessary routine expenditures. Home repairs alone can cost a small fortune! I think I'd probably keep it at 10%.

Thanks again for all your help. It's really great to get such thoughtful and competent advice!

[optimist]

I just want to add that I think you are doing fabulous. You have more saved then most 35 year olds. I agree with the changes people are saying...pay off the student loan just to get it off your back (but don't cash in the investments if there will be tax implications - you can refocus funds towards your SL and pay off sooner without cashing in the investments), increase your retirement, pay off mortgages and keep saving. Congratulations!

Thanks! This is really good to hear.