Takin the Next Step

[jIM_Ohio]

Annual Gross - 41600
Annual Net Income - 30160
Annual Expenses -13116 (fixes set bills incl. gas and food)
Monthly Net Income - 2320
Monthly Expenses - 1562
Monthly Left Over - 758

And this doens't count the two extra "free" checks i get each year.

Good information

can you document what you do with the $750 per month you have left over?

$758 is 32% of your gross income.
Is it all saved?
Is some of it invested short term?
Is some of it invested long term?


Here is what I will suggest:
Put $250 per month into a Roth IRA for you
Put $250 per month into a Roth IRA for spouse
**eventual goal is to max out each at $500 per month, but based on your income, I would not think that goal is reasonable ($5000 max per person per year)
Put $100 per month into short term savings account (think motorcycle fund or vacation fund)
Put $200 per month into a savings account (emergency fund)

Reality- the $300 per month for savings can be directed to same account, but only consider 1/3 or less of that money available for expenses like a motorcycle. Leave 3 months expenses in that account at all times for emergencies.

If you were to get a motorcycle, try to pay cash for it, or at minimum not disrupt the $250 per month to IRAs or $200 per month to savings.

3 months expenses for you is $5000
based on my outline above, you will have
a) $5000 in roth contributions after 10 months
b) $3000 in savings contributions after 10 months
c) $5000 in savings after 16 months

The Roth contributions can be withdrawn in a true emergency at any time without a penalty or tax (earnings cannot be withdawn however without penalty until retirement age).

Others here will tell you to save the $750 for 5 months prior to starting Roths... I prefer hands off budgeting- you are here now, can set up the 3 accounts needed NOW, fund all 3 accounts NOW and within 16 months be in a comfortable spot (plus those 2 extra paychecks per year make you probably reach $5000 mark in savings account much sooner than 16 months, probably closer to 9-10 months).

If you have questions on the Roth, or questions on the savings or anything else, post them here. Above you posted this

I'd say all these are great thoughts....And awesome goals...as far as learning the basics of investing goes, where do i start. What do i read, who do i ask. I took economics in HS, but when ur 16-17 years old, economics and finance is the least of your worries. CD's ROTHs, Stocks, ESOP, i'm so lost half the time.

And 6 months Income on both incomes...that'll take me years to save.


Some times its so overwhelming.

The basics of saving is simple
SPEND LESS THAN YOU EARN
you are doing this well already. You save 32% of your gross income
I save about 27% of my own, so in theory you might be better than me (tongue in cheek).

The next issue is knowing how to manage that 32%. Here are some questions for you to get started:

1) If you invested $5000 in something, and it was worth $2500 a year later, would you...
a) buy more of what you already bought?
b) sell the investment at a loss?
c) buy something else?
d) do nothing?

there is not a right answer, only answer what you would do...

do you know what a savings account is?
do you know what a money market account is?
do you know what a bond is?
do you know what a stock is?
do you know what a mutual fund is?

Do you have a mortgage?
Do you understand interest rates and rates of return?

If you can handle numbers, learning to invest is "simple", managing investments is the challenge. The basics for those of us which work for a living is spend less than we earn, and set aside a fixed amount every paycheck. That fixed amount will put some money in short term savings, some in long term savings, and over time the rates of return will be used to justify the decisions we make as we progress through life.

[Payn_it>>>]

i like all this. My company just presented me with a 401k. i haven't been eligable untill this month. What do you think of that, or should i go with the above plan instead.

What compaines would you suggest i go with for the ROTH, or MM accounts?

[jIM_Ohio]

i like all this. My company just presented me with a 401k. i haven't been eligable untill this month. What do you think of that, or should i go with the above plan instead.

What compaines would you suggest i go with for the ROTH, or MM accounts?

Please look above and answer the questions... if you know answer to each, prove it, if you do not know, I will help close what you misunderstood.

401k is a good move

In my suggestion you put $6000 annually into a Roth IRA
If you used a 401k, you would want to put in about $6900 into 401k to be "equal".

If you do not know why $6900 into 401k= $6000 into a Roth, you need to be asking more questions.

I do not want to "tell you" what to do, only guide you to many FAQ a newbie needs to start asking.

Does the 401k have a match?
Are the choices in the 401k reasonable?

What is your annual tax return like?


I would urge you to stop posting one question at a time, because you might react to each question differently depending on the order you present the questions.

For example this thread started with you asking about a motorcycle and it has migrated to a discussion of how to run a personal savings plan and now is about whether you should use a 401k.

You need to make sure you have a decent understanding of the following before you make ANY decisions:

do you know what a savings account is?
do you know what a money market account is?
do you know what a bond is?
do you know what a stock is?
do you know what a mutual fund is?
do you know what a tax bracket is?
does being married lower your taxes?
how do state taxes affect income taxes?
how do sales taxes affect income taxes?
how do property taxes affect income taxes?


When investing, the #1 thing is spend less than you earn
after that a broad array of issues come up- having an emergency fund, using an IRA, selecting an investment in the IRA, managing rates of return on different investments, the risks you take, paying income taxes, lowering the taxes you pay.

All of the issues above are two fold
1) you need to be capable of making decisions on each one independent of the others
2) you need to understand the impact one decision has on the others. For example a 401k vs Roth IRA has a tax decision you need to make (possibly) which affects you you get taxed (or not) now and at age 59.5.

So to make a good decision, you need to know the basics of how the income taxes get calculated. I am not asking you if my home office can be deducted as a business expenses, but I am asking if you can figure out what tax bracket you are in (I know, but need to see if you know) and from there I can explain the $6900 vs $6000 issue and the various ways investors deal with the problems of "predicting" the future of various aspects of the tax code.

[am_vanquish]

I usually suggest contributing to a 401k only if your employer provides a match. Otherwise, keep to the Roth IRA accounts, which offer better investment choices, lower expenses, and are mobile (unlike the 401k).

If you do receive a match on the 401k, contribute only the amount needed to max out the match, then put the rest in the Roth IRA.

Also note that the 401k plan may also offer a Traditional 401k and a Roth 401k ... if so, stick with the Roth 401k. The difference (for both 401k's and IRA's) is that Roth contributions are taxed now, Traditional contributions are taxed later. With general logic that you'll be in a higher tax bracket later in your life, you'd prefer to pay taxes now (Roth) rather than later (Traditional). There's also Roth advantages for taxes on earnings & withdrawal capabilities.

[zetta]

Does your employer match some of the 401k contributions? If so, put money up to the match in the 401k before doing the ROTH.

[Payn_it>>>]

ya know i don't know off the top of my head, and my plan is at home...i'll go ask the HR lady. She know's whats up when it comes to the company plans.

i read some where about roll over ROTH IRA's .....is that what you're talking about? earning money in the 401k; taking advantage of my company's matching of my funds the rolling it into a ROTH later?

[jIM_Ohio]

Roth means pay taxes now, pay no taxes on qualified withdraws
this is same for 401k or IRA (Roth 401k or Roth IRA)

Traditional means probably do not pay taxes now, pay taxes on qualified withdraws. This is same for 401k or IRA. If you see no prefix when reading, it is a traditional IRA or Traditional 401k.

Rollover means money moved from a 401k to an IRA
a rollover IRA carries a special designation (meaning it will always be labeled rollover) unless you add more money to the rollover as an IRA contribution.

Which then leads to more questions you need to ask...
do you know what a contribution is?
do you know what a distribution is?
do you know what a tax is?
do you know what a penalty is?

A match is a percentage of your contribution your company contributes as a bonus. For example half of first 6% (you put in 2%, they give you 1%, you put in 4%, company puts in 2%, you put in 6%, company contributes 3%, you put in 7%, company capped at 50% of first 6% which is 3%).

Match is free money, and it beats the tax savings or costs of the 401k/ Roth decision.

I do not advise just blindly choosing Roth, you need to know your tax bracket to know if that decision makes sense for you.

[Payn_it>>>]

My company matches .25 cents on the dollar up to 6%. So, if i put in 6% of my pay, that'd be $96 dollars a check. 25 cents on the dollar would be $24 so that's 120 a check and $3,120 a year.

So then, how does the interest work, how does it grow, what's it bassed on?

[jIM_Ohio]

My company matches .25 cents on the dollar up to 6%. So, if i put in 6% of my pay, that'd be $96 dollars a check. 25 cents on the dollar would be $24 so that's 120 a check and $3,120 a year.

So then, how does the interest work, how does it grow, what's it bassed on?

so 6% in gets you 1.25% from company

6% for you is $2496 per year
1.25% for you is $520 per year
Annual Gross - 41600

my advice to you is put 6% into your 401k
take the match with it (free money)
put another $100/mo into a Roth for you
put $250 into Roth for spouse

you have not answered my other questions... you need to focus on all issues at same time right now, not isolate them one at a time.

I still have no idea how much taxes you understand, and no idea where other points of your financial life is at. You asked how a 401k works, and it was explained before...

money goes in (contributions) pre tax (no taxes paid except SS and medicare)
money comes out (distrubutions) with taxes taken out of distributions

How the 401k gets interest depends on if you pick stocks, bonds, money markets or another investment- and you did not answer those questions yet.

[Payn_it>>>]

I only know enough to file my taxes....i know if i put money into an account pre tax that it has to be taxed when i take it out. What i meant by "how a 401k works" is how does it grow. you say stocks, bonds, mm. whats wise? i know very little about any. all i know is if i don't spend all my money i'll have some later. As fas as my money "growing" or "working for me" i'm new. I've never had the money to invest.

[jIM_Ohio]

I only know enough to file my taxes....i know if i put money into an account pre tax that it has to be taxed when i take it out. What i meant by "how a 401k works" is how does it grow. you say stocks, bonds, mm. whats wise? i know very little about any. all i know is if i don't spend all my money i'll have some later. As fas as my money "growing" or "working for me" i'm new. I've never had the money to invest.

Ok that's a starting point... this next post will be long, make sure you address any questions together so nothing is left behind...

I am also very numbers intensive. If you do not know where a number came from you need to ask. Do not assume I know what I am talking about, the goal is you understand the whole thing.


Start with tax return, based on what you provided me already, I assume the following

gross income is Annual Gross - 41600
I assume you file as "married filing jointly"
the tax bracket for this can be found here

Reference Room
for 2010

on that chart look for this table

Married Filing Jointly
Qualifying Widow(er)
Taxable income is over But not over The tax is Plus Of the amount over

and then look at these 3 rows

$0 16,750 $0.00 10% $0
16,750 68,000 1,675.00 15% 16,750
68,000 137,300 9,362.50 25% 68,000

what this tells you is the following

the first $16750 you earn is taxed at 10% (which means you owe $1675 in taxes on that money.
The next money you earn up to $68,000 is taxed at 15%. Meaning you owe

41600-16750=24850
24850*15%=3725.50

Your total tax liability is $3725.50+$1675=$5402.

That is not really your "tax", but I need that $5402 number for this 401k calculation:

when you put 6% into 401k, it lowers the 41600 we started with from being taxed...

so you would put 6% into 401k ($2496)
so $39,104 of that gross is now getting taxed.

so the new 401k tax liability is

39104-16750=3353
3353+1675=5028

By putting $2496 in your 401k, you lowered your taxes paid by almost $400 ($30+ per month).
You should be able to to put $70 per month into your Roth IRA and still be "even" on your current budget.

For example
I suggested before you put $250/month into Roth ($3000/year)
6% into 401k is $2496 which is $208/month
so we know $42 is available anyway
the tax savings is another $30/month
so $72/month can go into your Roth


Go back to tax return

the term you want to watch every year is ADJUSTED GROSS INCOME
AGI
no matter what form you use, you want to find that number.

If your AGI approaches 68000 (68000 is in the 15% bracket, 68001 is in the 25% bracket), you want to lower AGI and stay in 15% bracket as long as reasonable.

To give you an idea, I am married, wife and I combine to gross well north of 120k, and we have not been in the 25% bracket yet (8 years married in august). We have enough deductions from 401ks, HSAs and mortgage interest to not have our money taken away by the tax man. Our 120k gross pay has about 55k of deductions right now which lower AGI into 15% bracket.

If you are in 15% tax bracket, the Roth accounts are your friend.
The match beats the Roth in 15% bracket
but the Roth tax break in retirement is quite good, with some key assumptions

1) Tax breaks now are better than promises later (401k is now, Roth is later). If you put all eggs in Roth basket, its possible a politician pisses you off in 20-50 years and taxes the Roth.
2) I am confident the USA will always have a tiered tax system. We will have tax brackets. The amounts for each bracket (the 68k I used above) change every year. The percentages (10% bracket-15% bracket-25% bracket) change about 1-2X per decade. But the tiered system is something I am confident will exist, so I play percentages.
3) Percentages. 75% of the US population is in 15% tax bracket or lower. That means 75% of the US population has either 68k or less income married, or 34k or less income single. Think about that... That 75% is a rough estimate, but a significant majority of people are making 68k or less in USA.
4) It is easy to have retirement income be in a higher bracket than when working. If this is your case, the Roth again is a good bet to help you. In my case I expect that to be true... if I gross 120k and invest about 30k per year, that 30k is going to easily supply my wife and I with close to 60-70k per year in income. 70k would be in 25% bracket, so taking some of that 70k tax free keeps my 401k withdraws in 15% tax bracket and helps me keep more of my money.
5) Its best to spread money around (some tax sheltered, some tax free, some taxable) so you can take advantage of certain tax laws. Even if you do not know the tax laws now, having money spread around will help.


Next issue is what to select in 401k, what to select in Roth IRAs and similar.

I need to know some things...

1) If you invested $2500 in 2010 and it was worth $1250 on Jan 1 2011, what would you do?
a) buy more
b) buy something else
c) stop investing
d) sell everything
e) nothing


2) Is it better to have $1000 earning 8% interest or $10,000 earning 2% interest?

3) What are your personal thoughts on retirement? What age? What is retirement like?

4) What are your thoughts on carrying debt? Is all debt bad? Can you handle a mortgage which is 4X your annual income?

5) What are your thoughts on taxes? Are all taxes bad?

6) What is important to you?
a) having lots of money "on paper"- meaning being able to read bank account statements, and mortgage documents knowing what money and asset is worth what?
b) having lots of things which others see (clothes, car, house, toys)
c) living life and not caring about money?
d) removing all debt from your name, everything else is gravy?

[arthurb999]

I'd invest up to the match then get out of debt 1st.

Do not finance the motorcycle. Never finance anything you KNOW will go down in value.

What are your plan about buying a house?