27 year old newly weds looking for advice

[rizzmo]

Hello-

I just recently starting visiting this site and think it is awesome. I am looking for advice on savings, investing, and some other stuff. I started making great money in 2005, but I lost a lot of money in a business I started (savings + 2005 salary), that business is now closed and debts cleared up. Also previous to 2005 I was making 80% less than I am now. Here is how my current situation looks:


Investments:
-Ameritrade account: $17,000 (self)
-Ameritrade account: $9,500(wife)
-Roth IRA $3,700 (wife)
-410k: $11,700 (wife)

Debt:
-Sears Credit Card: $2,500 (self) 0% interest Paying $500/month
-Car Payment: $6,000 (wife) 4.4% interest Paying $310/month
-Student Loans: $60,000 (wife) currently deferred for next 4 years
-Future Student Loans: additional $50,000 (wife) over next 4 years for her doctorate

Savings:
-Savings Account: $300 (wife)
-Savings Account: $1,000 (self)

Income:
-Self: Gross $70,000(salary) + $50,000(overtime) + $10,000(call pay). My overtime is steady month to month, so I figure my monthly gross at 10,800. After the tax man visits it looks more like $7,560/month.
-Wife: Gross $23,400(salary), $1,600/month after taxes.

Home:
-Currently Renting

Car:
-2006 Chevy Aveo (self) owned
-2007 Toyota Matrix (wife) car loan

Monthly Budget:

Rent: $950
Cell Phones: $160 (work reimburses 100%)
Vonage: $70 (work reimburses 50%)
Food: $500
Natural Gas: $40
Electric: $120
Car Insurance: $70 (self)
Car Insurance: $60 (wife)
Netflix: $18
Gym: $50
Dish Network: $50
Gas: $600
Internet: $40
Sears Credit Card: $500
Toyota Matrix: $310

Total: $3,343

I have a 401k plan through work that matches 6%, but currently I don't participate. My wife recently changed jobs and her employer does not offer a 401k plan. My wife's income should increase approximately $10,000 in 2008. My income will increase $10,000 + 4% of base salary for 2008, after which I am only eligible for a 4%/year raise.

Currently, I have no college education (err well 6 credits). My employer will pay 100% of tuition cost for schooling up to a BA. They will reimburse 50% of master or doctorate if in a related field. Problem for me is that I am only able to attend night classes due to the time restrictions of my job. This means max class load I can take is 2 classes per semester (so 3 years from now I will only have my AA), and would result in about $1000/month reduction in overtime earnings.

Having college paid for is a great deal, but when time line is taken into account vs. loss of income ... does it make sense? Should we pay off her loans, before they are due or invest?


I looking for advice on how we could save better, or invest better ... or just any advice you could give.

Thanks

[Broken Arrow]

Welcome. Just a some random thoughts:

* Any of the student loans unsubsidized? If so, what is/are the interest rate?

* Your income is great, but your taxes are way high. To me, tax efficiency would be a high priority.

* Planning on having kids?

* Do you really need Vonage (or a landline at all)?

* Food seems a little high for 2 people. Do you guys cook at home? Then again, both of you work and go to school....

* How important is the gym membership to you?

* The Sears credit card is very high on the monthly. Is it because you're trying to pay that off as soon as possible? If so, that's fine.

* Why haven't you participated in your 401k yet? Employer matching as well as tax advantage.

* Both of you should also be maxing your Roth IRAs as much as possible (especially if you believe that your own income will increase later on).

* I would definitely look into the college education, especially with your employer being so generous. It's one of those things in life that you can take with you, no matter where you are and what you do.

The overtime might seem enticing now, but if I was in your shoes, I would ask myself just how much longer I would like to work overtime, or perhaps, how secure is your job in the first place? Would you like to see yourself doing that 10 years from now? 20?

In my personal opinion, I would say that it makes a lot of sense. HOWEVER, that is only MY opinion. If it somehow doesn't make sense to you-- deep down and being completely honest with yourself-- then you won't be motivated enough to make good grades and possibly finish the degree in the first place. In which case, it would be a waste of time.

If you're not sure, I would say keep working overtime until you're tired of not having your own free time, not having the ability to do anything else with your life, and just tired in general... especially once you have kids. (Yes, I am being snide. But in the end, it's for your overall benefit.)

[jIM_Ohio]

Investments:
-Ameritrade account: $17,000 (self)
-Ameritrade account: $9,500(wife)
-Roth IRA $3,700 (wife)
-410k: $11,700 (wife)

you have started investing, that is a good thing, more on this later.

Debt:
-Sears Credit Card: $2,500 (self) 0% interest Paying $500/month
-Car Payment: $6,000 (wife) 4.4% interest Paying $310/month
-Student Loans: $60,000 (wife) currently deferred for next 4 years
-Future Student Loans: additional $50,000 (wife) over next 4 years for her doctorate.

You have high liquid income right now. I would pay off the debt sooner rather than later. Maybe even pay cash for the doctorate.

Savings:
-Savings Account: $300 (wife)
-Savings Account: $1,000 (self)

I would get this balance up to two months expenses, minimum (7k).

Income:
-Self: Gross $70,000(salary) + $50,000(overtime) + $10,000(call pay). My overtime is steady month to month, so I figure my monthly gross at 10,800. After the tax man visits it looks more like $7,560/month.
-Wife: Gross $23,400(salary), $1,600/month after taxes.

$9100/month is significant.

Home:
-Currently Renting

Car:
-2006 Chevy Aveo (self) owned
-2007 Toyota Matrix (wife) car loan

no issues/ no comment

Monthly Budget:

Rent: $950
Cell Phones: $160 (work reimburses 100%)
Vonage: $70 (work reimburses 50%)
Food: $500
Natural Gas: $40
Electric: $120
Car Insurance: $70 (self)
Car Insurance: $60 (wife)
Netflix: $18
Gym: $50
Dish Network: $50
Gas: $600
Internet: $40
Sears Credit Card: $500
Toyota Matrix: $310

Total: $3,343

You have $9100 in take home income and expenses of $3300. Where does other $5800 go?

I have a 401k plan through work that matches 6%, but currently I don't participate. My wife recently changed jobs and her employer does not offer a 401k plan. My wife's income should increase approximately $10,000 in 2008. My income will increase $10,000 + 4% of base salary for 2008, after which I am only eligible for a 4%/year raise.

6% of your pay should go into 401k to get the match. This will reduce the $5800 some, but it appears to me you can affored to do this without issue.

Currently, I have no college education (err well 6 credits). My employer will pay 100% of tuition cost for schooling up to a BA. They will reimburse 50% of master or doctorate if in a related field. Problem for me is that I am only able to attend night classes due to the time restrictions of my job. This means max class load I can take is 2 classes per semester (so 3 years from now I will only have my AA), and would result in about $1000/month reduction in overtime earnings.

You have high disposable income now. Investing in yourself (education) is a good thing, but a degree is not needed. If this is a Union job, or factory job, no reason to think this is a bad way to make a living.

Having college paid for is a great deal, but when time line is taken into account vs. loss of income ... does it make sense? Should we pay off her loans, before they are due or invest?

Both (see below)

I looking for advice on how we could save better, or invest better ... or just any advice you could give.

Thanks

My advice would be:

Invest at least 10% of the gross pay (if you make $120k per year combined, you should be looking to invest 12k per year). 6% of your income to 401k, 4k to Roth IRA in 2007, 5k to Roth IRA in 2008. Limits are per spouse, so 8k for 2007 and 10k for 2008 makes sense. But get the 401k match before maxing out Roths.

I would also pay down the debt. No reason to leave 50 or 60k accumulating interest. You can save $$ in long run paying these off. I might suggest sending around 6k per year (500 per month) to these now. Gets a 10 year pay off plan started.

I would delay school for you. I would look to do the following in the mean time:

1. Save enough for 2 months expenses in savings
2. get retirement accounts up to given milestone (implying you are behind now, don't go back to school until your current earning power has been established for retirement). My blog suggests ways to find milestones.
3. Live on less than you earn. You need $3300 each month for expenses. The 6k extra per month suggests you can save and still live a good life.
4. of the 6k extra, $500 to pay off student loans, $500 to pay other debt, 2k into investments and 1800/mo as disposable income makes sense to me.

[Tree0164]

Here is what I would do

1) Pay off the Sears credit card and the car loan with your investments.
2) Cash flow the -doctorate. if you live frugally you can do this
3) Save for retirement-sign up for the match atleast

Also you need to consider while I am all for education-does your wife really need a doctorate and will her salary be a good return on investment?

[rizzmo]

Thanks for the quick responses everyone. I was hoping to have a plan in place for 2008 and now it seems I have a good start.

[Scanner]

I agree with JimOhio - carefully weigh the benefit of a college education.

I can't think of too many courses of study that would lead to starting pay of $70,000, let alone the overtime pay you get.

And I would look to finance only a partial amount of your wife's graduate education. Sure. . .take advantage of any subsidized loans (cheap money) but I would avoid the unsubsidized loans (interest will capitalize while in school).

[jasanderson]

I am curious what you do to have such a great income at your age. That's awesome. I think you should MAXimize your retirements and investments right now before you decide to have children. The expense of having children is pretty significant and you would be best to put all your spare income into investments like your 401K to insure you have a good income when you retire. You will have 30+ years for it to grow and compound so take advantage of that 6% match. Not a lot of companies do this. Once you have children you will be wanting to look into putting money in college funds and then you can back off the retirement with comfort knowing you have invested a lot now. This should also help your taxes.

I'm not sure how expensive real estate is where you live but with your income and and no children now would be a time to consider saving for a down payment on the house you will want one day. If you can save at least 20% you should qualify for a loan easily and with the bottom dropping out of the market right now you should be able to find a pretty good deal.

[jIM_Ohio]

I am curious what you do to have such a great income at your age. That's awesome. I think you should MAXimize your retirements and investments right now before you decide to have children. The expense of having children is pretty significant and you would be best to put all your spare income into investments like your 401K to insure you have a good income when you retire. You will have 30+ years for it to grow and compound so take advantage of that 6% match. Not a lot of companies do this. Once you have children you will be wanting to look into putting money in college funds and then you can back off the retirement with comfort knowing you have invested a lot now. This should also help your taxes.

I'm not sure how expensive real estate is where you live but with your income and and no children now would be a time to consider saving for a down payment on the house you will want one day. If you can save at least 20% you should qualify for a loan easily and with the bottom dropping out of the market right now you should be able to find a pretty good deal.

I will second this GREAT advice. Investing is a matter of investing a given amount of money, getting a return, over a period of time. The biggest multiplier is TIME. The more time you have the money invested, the easier it is to accumulate money.

My wife and I are having twins (first two kids) in June. I am 34 yo, been married 5 years. We already have 165k invested, and it's obvious to me this 165k will be the primary means of retirement for us.

Some basic compounding math.

Two people, both aged 25 right now. Person A invests 5k per year from age 25-34 then stops, person B invests 5k per year from ages 35-54.

Person A invests 50k (5k over 10 years) assuming 10% returns and having money invested for 30 years (age 55), suggests they will have $590,000 (nearly 12X amount invested).

Person B invests 100k (5k over 20 years), assuming same 10% return, money was only invested 20 years (age 55), suggested they will have $315,000 (nearly 3X amount invested).

Person B invested more money, but started 10 years late. The additional amount does not catch up to amount of other person unless they get

a) 15% return for 20 year period
b) invests $9300/year for 20 years ($186,000 total invested)
c) chooses to start earlier in life

the variable we have most control over is c)- invest earlier
a) requires more risk than the stock market provides (implying a 15% return is not a reasonable for stock investments)
b) a person has some control over... but to not invest anything, then suddenly come up with $9300 to invest is quite difficult.

Compounding requires time, I would invest as young as possible and let compounding work for you.

[flavor]

Save, save, save as much as you can NOW before your first child arrives.
You're both young, employed with high incomes, and you should easily be able to save monthly, and paying off your debts gradually. Please sign up for the 401, at least for the employer match, you probably won't miss that in your check, and believe me, later you'll be greatful you did. Also, start putting away money to accumulate 20% for a downpayment of some kind of a property. The cheepest and smallest home in a great neighborhood would be a good start.

[rizzmo]

Update

Just wanted to post an update on the progress made after all the great advice we received. I put the changes in bold.

Investments:
Ameritrade Account: $26,500 (joint)
Roth IRA: $3,700 (wife)
410k: $11,700 (wife)

Debt:
-Sears Credit Card: $0 (paid off in February)
-Car Payment: $0 (paid off in February)
-Unsubsidized Student Loans: $24,000 interest rate 6.8% (no monthly payments for 5 more years)
-Subsidized Student Loans: $20,000 not sure the interest rate (no monthly payments for 5 more years)
-Doctorate for wife will be paid in cash and starting fall 2009

Savings:
-Checking Account Float: $1,000 (joint)
-Emergency Fund: $0 (will have up to $10k by end of year)

Income:
-Self: Gross $80,000(salary) + $30,000(overtime) + $10,000(call pay). This is a correction from the last post.
Self monthly net: $6,300
Wife monthly net: $1,600
Total monthly net: $7,900

Home:
-Currently Renting

Car:
-2006 Chevy Aveo (self) owned
-2007 Toyota Matrix (wife) owned

Monthly Budget:
Rent: $950
Cell Phones: $160 (work reimburses 100%)
Vonage: $70 (work reimburses 50%) working on eliminating the need for this bill
Entertainment: $ 200 (movies, events, and sit down dining with friends)
Groceries: $300
Fast Food: $200 (Any place to eat that tipping isn’t required)
Utilities: $320 (water/garbage/sewer/gas/electric/dish/Netflix/internet)
Car & Renters Insurance: $150
Auto & Gas: $500 (maybe less, wife is working from home more often now)
Discretionary Spending: $250
Non-Discretionary Spending: $150 (vet, bank fee, ticket)

Total: $3,250

I will start contributing to my 401k plan up to my employer match of 6%. I can enroll in March.

I have decided to take advantage of my employer paying for my tuition and will working towards an AS degree. I will be taking online classes and my job responsibilities are such that I can work on the curriculum during work without it being a conflict of interest. Also by taking courses online I won’t see a reduction in overtime earnings!!!

Going forward our plan is as follows:
1. Pay off Unsubsidized Student Loans
2. Build up Emergency Fund
3. Max contributions to IRA’s (because of income we don’t qualify for Roth IRA and get no tax break for IRA contributions)
4. Max 401k contributions
5. Resume investing in taxable accounts

This plan makes sense to me, but I would appreciate any input or comments. Thanks everyone.

[aida2003]

Rizzmo,

I think your current financial situation is wonderful! Like others, I'm also curious what you do to earn such a great salary and without any education. You're not a starting mob, are you? Just kidding .

Anyway, having said 'wonderful situation' doesn't mean that you should ignore advice from other people and start accumulating 'stuff' (you know, guys love 'toys' like many women love clothes/shoes).

You don't have E-fund or savings. After 401k investments, taxable (?) investments, I'd strongly advise accumulating some cash ( though these days saving accounts don't offer good interest, still do it. Still better than under a mattress). You're going to pay for your wife's education in cash, you said, so start saving little by little now.

Do you want to own a house? If so, start saving for a downpayment. You'll need at least 10% of a house price (or 20% if you don't want to pay PMI).

My final thought at the moment would be: are you sure you both don't qualify for RothIRA? I could be wrong, but I thought RothIRA limits for joint filers phase out after AGI reaches $160K. If I'm right, that's another reason why it's good for you both to increase your 401k investments, because your taxable income will drop.

Save and invest. If you don't know much about investing, why don't you open an account with Vanguard like VTSMX fund and start there. Then after you learn more about investing and are more confident, you can start/switch to other funds.

[anonymous_saver]

Since your monthly expenses add up to $3,250, when you take home $7,900, that leaves you with $4,650 extra each month. Is this correct?

Instead of just putting up to your employers' 6% match into your 401(k), I would instead suggest doing the maximum amount allowed by the IRS $15,500 instead. You have a lot of extra money each month, and have a good income. You would still be able to build a decent emergency fund as you want. Also your wife and you should both put the max into a Roth IRA for 2007, 2008, etc. I highly prefer Vanguard.

What kind of funds do you currently have your retirement savings in?

What is that Ameritrade Account for? You should really keep your retirement savings in non-taxable accounts such as 401(k)'s and Roth IRA's only. When you max these accounts up and have extra, only then should you have taxable accounts. You are missing out on tax benefits when you have money in the taxable accounts instead of retirement accounts.

Your $200/month on fast food freaked me out. Particuarly, when you spend $300/month on groceries. Do you end up throwing a lot of food at the end of the month? Okay, I know this isn't a eating healthy board, but this sounds like an extreme amount to be buying fastfood. If you both spent $100/month, and at approx. $5 per time going out, that is 20 days a month of fast food! Is there any way to carve this down? Make lunches at home and bring to work? This would be good for you health-wise and financial-wise.

Is saving for a down payment one of your goals as well?

I agree that paying down that unsubsized school loan is important to do soon.

[rizzmo]

aida2003,

Thanks for the response!

I want to start by saying what I do for a living is legal. I am not at liberty to say anymore in open forum as some members here are my co-workers of mine earning far less for, what is in their eyes, the same job. They don't know my handle or that I use this site.

Guys do like toys, I just paid off my LCD TV that I have wanted for years ... my last TV was 8yrs old and started show all red intermittently. Seriously though we have everything we want/need and both of us are very intent on saving.

We don't have an E-fund because we paid of my new car in 10 months and her new car in 9 months. Reliable transportation is a requirement for my job and my wife drives over 150 miles a day to work when she has to go in. The reason for delaying the E-fund saving is my job is very secure and there isn't an expense that we can think of that we couldn’t just put on a credit card and pay in full the next month. That being said I still have an E-fund down as a high priority, just not ahead of interest accruing debt, and I plan on getting 10k in a high yield money market by the end of the year.

We want to own a house, eventually. This is last on the list as we are not sure we want to stay here.

On my original post I referred to my, at the time fiancé, as my wife to avoid questions about mixing finances and bill splits. Now, she is my legal wife (married in Jan 2008) and we will have to look at how that impacts our limits for ROTH and IRA. I will be speaking with my accountant later this month about this, when we do our last separate filing and plan for next year.

I am not entirely sold on the idea of investing in funds (except in the case or retirement accounts) and prefer to pick individual stocks for taxable, non-retirement accounts.

[rizzmo]

Anonymous_saver,

Yes, at a minimum after expenses we have $4,650 left over.

I have considered putting in the maximum 401k contribution. This would lower our AGI to a level where we might be able to participate in a ROTH or at the very least get a tax break for standard IRA accounts. I will give this some serious thought.

Currently, I don’t have any savings strictly for retirement.

The Ameritrade account is for supplemental income. I understand that I miss the tax benefits, however even after taxes I do better picking my own stocks then investing through a fund. I have stop contributing to this account until I get a retirement vehicle setup.

We are working on trying to cut down eating fast food by switching to home cooked meals … though this is a bit of a challenge for me do to my job. I started taking instant oatmeal to work for breakfast and we are learning to cook some meals at home. This is a slow process for me as it has been habit for the majority of my life (I’m 130lbs and 5’10”, and in great health), but I’m working on it!

Down payment for a house is one of our last goals for a variety of reasons, but when we do buy a house it will be under 1 year gross and put a good deal more than 20% down.

Yeah, the unsubsidized loans need to go ASAP.

Thanks for the input!

[jIM_Ohio]

aida2003,

Thanks for the response!

I want to start by saying what I do for a living is legal. I am not at liberty to say anymore in open forum as some members here are my co-workers of mine earning far less for, what is in their eyes, the same job. They don't know my handle or that I use this site.

Guys do like toys, I just paid off my LCD TV that I have wanted for years ... my last TV was 8yrs old and started show all red intermittently. Seriously though we have everything we want/need and both of us are very intent on saving.

We don't have an E-fund because we paid of my new car in 10 months and her new car in 9 months. Reliable transportation is a requirement for my job and my wife drives over 150 miles a day to work when she has to go in. The reason for delaying the E-fund saving is my job is very secure and there isn't an expense that we can think of that we couldn’t just put on a credit card and pay in full the next month. That being said I still have an E-fund down as a high priority, just not ahead of interest accruing debt, and I plan on getting 10k in a high yield money market by the end of the year.

We want to own a house, eventually. This is last on the list as we are not sure we want to stay here.

On my original post I referred to my, at the time fiancé, as my wife to avoid questions about mixing finances and bill splits. Now, she is my legal wife (married in Jan 2008) and we will have to look at how that impacts our limits for ROTH and IRA. I will be speaking with my accountant later this month about this, when we do our last separate filing and plan for next year.

I am not entirely sold on the idea of investing in funds (except in the case or retirement accounts) and prefer to pick individual stocks for taxable, non-retirement accounts.

I think you need to "rethink" the priorities on the goals. All the goals were good, I think you will be further ahead in 2-3-4-5 years if you reprioritize. With the $4600 of disposable income per month, a simple lesson in compound interest and taxes should be considered. Here is my list of priorities with impact being seen as most significant in 3-5 years.

1) I would contribute more to 401k, putting in $1200 per month will decrease tax bill considerably. it might also make you eligible for a Roth by lowering AGI. I would make this a priority #1. It's possible with $4600 of extra income, a $1200 deposit pre tax into 401k only lowers the $4600 by $1000 (so you save $200 more than you do now, for example).

2) I like the logic of paying off debt before creating emergency fund. I would consider putting 1k per month into EF.

3) I would pay down student loans with around an 8% overpayment per month. If no payment is being made, I would at least pay off the unsubsized loans, as they are accuring interest right now. 20k/60months=$333/month. I would also look into what minimum payment on subsidized would be, if the subsidized payment (in 5 years) is higher than $333, consider increasing this amount (in budget) so when the unsubsidized are paid off, you can start paying down subsidized 5 years later without changing the budget.

4) I would look into IRA eligibility. If not eligible for a Roth, do the max to 401k and leave this be. If the 401k contributions make you eligible for a Roth, I would do Roth. If the 401k does not lower AGI enough, go onto #5.

5) Decide a reasonable timeframe to get a house. Invest "what you have left" for the house. Open a taxable brokerage account and invest in this for the house. A guideline (my own) would be allocation of 10% to bonds for every year under 10 you plan on needing the money (so if you need the money in 3 years, 70% bonds, 4 years is 60% bonds).


If you are 4 years from house purchase, put 40% into equities and 60% into bonds. In one year, sell 1/4 of the equity position to bonds (so portfolio is then 30-70). Then year two, sell another 25% (so portfolio is now 20-80). By year 4 you should have original amount in bonds, with a little left in equities still growing.