My situation, better late than never

[billchrz]

Hey everyone, I'm pretty new to the forum and the knowledge I gained from here is already more than I learned in my 30 years of life. So here is my situation.

I'm 30 years old and recently married (late last year). My current income is $73k with a raise to $78k coming in March. My bonus should be about $8750 before taxes, also paid out in March. My wife doesn't work right now but she is collecting disability taking home about $1000/mo.

Mortgage - Currently owe 227000 @6.75 (closing on our refi at 5.375 next week)
CC Debt - $8500 @ 14.65%
Car loan - $11000 @ 6.99% on wife's Ford Escape, my truck is paid off
401k - $18000
Savings - $3000

I will be getting $8000 back from our tax refund (withholdings have been adjusted for 2008)

I plan on paying off the CC debt with the tax refund and using some of my bonus money for a new refridgerator (ours is on it's last legs).

After the CC is paid off is our next step to save more for an emergency fund, open Roth IRAs for both of us, pay down the car loan, or pay down the mortgage until 80%LTV to remove PMI?

Thanks for the help!

[jIM_Ohio]

You are not in a bad spot. A little late coming to the game compared to some, but we have seen much worse situations posted here.

Welcome and I wish you much success! I'd wish you luck, but the man upstairs has more control over that than me.

Here is what I would do:

1) Get about 10% of your income going to 401k or Roth's. Make sure you get at least the match from the 401k, and make sure at least 10% of what you make gets set aside for retirement.

2) I would create a household budget based on new take home income (10% less, because you did #1).

3) I would use the bonus to pay off the cc. If you can scrounge some more money, pay the whole thing off.

3a) with the extra money in budget from paying off the cc (guessing a payment of around $150-$350/month??), I would do the following:

Put 1/3 of payment into cash account each month (this is emergency fund- add this to current savings)
Put 1/3 of payment into paying down car
Put 1/3 of payment into a moderate mutual fund. This is the anti PMI fund.

4) You will have a month without a mortgage payment when you refinance. Take the entire mortgage payment you save (see budget in #2 above) and open an "anti PMI fund". What you are looking for is a mutual fund which can generate an after tax return of around 6-8%. A 40-60 fund like Vanguard Wellington or Wellesley would make sense here. A bond fund like T Rowe Price Spectrum Income (RPSIX) also makes sense. A moderate allocation fund like Permanent Portfolio PRPFX would also work. I own T Rowe Spectrum Income and Permanent Portfolio. Spectrum Income is in my IRA and Permanent Portfolio is my mortgage paydown fund.

The "anti PMI fund" serves 3 purposes
1) it supplements your emergency fund
2) when you get enough in the fund to payoff 20% of house, do it
3) it can cover your mortgage payments for you if you lose a job

I suggest investing as opposed to paying down mortgage because
a) PMI will stay on until you have 20% equity. The ammortization schedule you get at closing will probably have PMI on payment until you are at 22% equity.
b) if you pay down mortgage to 20% yourself, you can call bank, tell them what you are doing and get PMI waived sooner- probably.
c) if b) does not work, you can use the investment to assist with another refinance, and get 20% down payment needed to avoid PMI
d) My guess- you would have 20% equity on current ammortization schedule in around 9-12 years. By investing and setting aside some money, my guess is you ave enough for 20% in about 4-7 years.

When you cash out the investment, my suggestion is to keep investing the PMI payment even after you get 20% equity.

[billchrz]

Wow...Thanks for that great response!

Currently 11% of my gross salary is going into the 401k (2% mine and 9% company). Basically my employer will contribute 9% of annual salary if the employee contributes 2%. Should I put an additional 8% into the Roth's for a total of 10%?

[red92s]

my employer will contribute 9% of annual salary if the employee contributes 2%.

Wow . . . that's about the best employer "matching" I've seen for a 401k. Can't ask for much more than a 450% contribution!

[jIM_Ohio]

Wow...Thanks for that great response!

Currently 11% of my gross salary is going into the 401k (2% mine and 9% company). Basically my employer will contribute 9% of annual salary if the employee contributes 2%. Should I put an additional 8% into the Roth's for a total of 10%?

YES- you need to set aside 10% of your income.

This will give you some benefits

a) it will teach you to live on less than you earn
b) in a crunch (high medical bill for example) you could stop 10% contributions without disrupting budget/ EF.
c) you will save considerably on taxes if you put the 10% into the 401k.

I would only put the whole 10% into 401k (point c above) if the 401k had good funds.

78k salary
suggests you should set aside $7800 per year.
2% of 78k is $1560 now
I would contribute $5000 to a n IRA for you
I would up 401k to 4% ($3120).

You will not see take home pay drop by a full 2% if you add more to the 401k because the money going into 401k is pre tax.

A few points-
1) make an attempt to set aside 10% of any bonuses you receive. Open an IRA for spouse, for example, with 10% of any bonus.
2) make an attempt to increase 401k contribution by 1% per year (bank a portion of the raises you receive)
3) The yearly 401k max is $15,500. As you approach this limit, you will need to rethink some other issues.

A few questions
1) what is 401k invested in now?
2) how large is your tax return?
3) do you itemize deductions (and deduct mortgage interest)?

[billchrz]

Wow . . . that's about the best employer "matching" I've seen for a 401k. Can't ask for much more than a 450% contribution!

Yes...the benefits at this company are absolutely outstanding. They were voted the best company to work for in NJ 3 out of the last 4 years.

[Joan.of.the.Arch]

Incredible employer match on the 401-k! I've never heard of such a thing!

[billchrz]

A few questions
1) what is 401k invested in now?
2) how large is your tax return?
3) do you itemize deductions (and deduct mortgage interest)?

1) 25% American Funds Grth Fund
25% American Funds EuroPacfic Grth
20% Schwab S&P 500 index
10% Royce Opportunity Inv
10% Goldman Sach Mid Cap Value
10% Company Stock

2) My tax return was $8500
3) Yes I itemize and deduct interest, property taxes, donations, and school payments

Again, I appreciate your help

[jIM_Ohio]

1) 25% American Funds Grth Fund
25% American Funds EuroPacfic Grth
20% Schwab S&P 500 index
10% Royce Opportunity Inv
10% Goldman Sach Mid Cap Value
10% Company Stock

2) My tax return was $8500
3) Yes I itemize and deduct interest, property taxes, donations, and school payments

Again, I appreciate your help

25% American Funds Grth Fund
20% Schwab S&P 500 index

these are about the same type of investments. Is there a large value fund to choose from?

Is this 401k plan administered by Paychex? This looks similar to my wife's 401k...

2) My tax return was $8500

I would change your exemptions so you take home around another $500 per month. Take this money and immediatey fund a Roth for your wife. You will still get $2500 back from taxes, but more money will be working for you sooner.

I would add the $2500 each year to the anti pmi fund from tax return until PMI is removed. I give you 4 years of adding $2500, plus adding in 1/3 of cc payment before PMI is removed.

[billchrz]

The 401k is manage through Charles Schwab. Here are the funds that we can invest in.

Large Company
American Funds Grth Fund of Amer R4
DWS Dreman High Return Equity S
Schwab S&P 500 Index Sel 0
Thornburg Value I

Small/Mid Co.
Baron Small Cap
Goldman Sachs Mid Cap Value A
Rainier Small/Mid Cap Equity
Royce Opportunity Inv

Intl/Global
American Funds EuroPacific Gr

Bonds
Franklin U.S. Government Secs
Wells Fargo Advantage Tot Return Bo

Balanced
Schwab Mng Ret. Trust 2010 Cl II
Schwab Mng Ret. Trust 2020 Cl II
Schwab Mng Ret. Trust 2030 Cl II
Schwab Mng Ret. Trust 2040 Cl II
Schwab Mng Ret. Trust 2050 Cl II
Schwab Mng Ret. Trust Income Cl II

Capital Preservation
Schwab Value Advantage Money

[jIM_Ohio]

The 401k is manage through Charles Schwab. Here are the funds that we can invest in.

Large Company
American Funds Grth Fund of Amer R4
DWS Dreman High Return Equity S
Schwab S&P 500 Index Sel 0
Thornburg Value I

Small/Mid Co.
Baron Small Cap
Goldman Sachs Mid Cap Value A
Rainier Small/Mid Cap Equity
Royce Opportunity Inv

Intl/Global
American Funds EuroPacific Gr

Bonds
Franklin U.S. Government Secs
Wells Fargo Advantage Tot Return Bo

Balanced
Schwab Mng Ret. Trust 2010 Cl II
Schwab Mng Ret. Trust 2020 Cl II
Schwab Mng Ret. Trust 2030 Cl II
Schwab Mng Ret. Trust 2040 Cl II
Schwab Mng Ret. Trust 2050 Cl II
Schwab Mng Ret. Trust Income Cl II

Capital Preservation
Schwab Value Advantage Money

Here are the ones I would consider (based on your age):

Large Company
American Funds Grth Fund of Amer R4
DWS Dreman High Return Equity S
Schwab S&P 500 Index Sel 0
Thornburg Value I

Small/Mid Co.
Baron Small Cap
Goldman Sachs Mid Cap Value A
Rainier Small/Mid Cap Equity
Royce Opportunity Inv

Intl/Global
American Funds EuroPacific Gr

Here are the ones in your plan I have owned at one point or another:

American Funds Grth Fund of Amer R4
Baron Small Cap
American Funds EuroPacific Gr

My advice is stick with what you are doing selection wise, for NOW. Read up on asset allocation and then make other decisions on this later.

Your current allocation is OK, but could probably get optimized a little more.

[anonymous_saver]

Instead of uping your 401(k) contribution up to 10%, I would put the money into a Roth IRA instead. You then have access to all mutual funds available and also have the flexibility of it being not connected to your employer and also you get the lovely tax benefits.

I would keep putting up to your employers match and then put the full amount allowed for both you and your wife into Roth IRA's. That would be $5,000 for each of you for 2008.

Then when you get your other debts/emergency fund stuff figured out, then up your 401(k) contributions. A lot of people like to increase them when pay increases come around. For example, each year at the time of your pay increase, you could up your contribution up by 1%.

Good luck.

[maat55]

You should look at exchanging your growth fund over to the Capital World Growth and Income Fund in your fund group. I made this switch last year. The New World Fund looks good also.

[billchrz]

Here is an update to my situation.

Mortgage - Currently owe 227000 @5.375 (PMI removed on refi WHOOHOO!)
CC Debt - $0 @ 14.65% (That felt so good)
Car loan - $10000 @ 6.99% on wife's Ford Escape, my truck is paid off
401k - $21000
EF - $7000

I moved my 401k allocations to 90% Schwab 2050 Target fund, 10% company stock and changed my contribution to 5%

Opened up a T Rowe Price Spectrum Income (RPSIX) as a mortgage paydown fund. I am automatically transferring $300/mo into this fund on the day my mortgage is due.

Opened a Roth IRA - T Rowe Price 2040 Target retirement fund and automatically transfer $350/mo into the fund (will max out Roth with Stimulus check and monthly transfers)

Purchased new refrigerator with cash!

[jIM_Ohio]

Let me know how the spectrum income fund goes in a taxable account. Good progress thus far.