Advice for overall finacial plan

[doxie]

Hello all. I am new to this forum, but I was happy to find it because I've been looking for a good place to bounce ideas off of. I would like to share my overall financial picture, and see what suggestions people have for any changes I might need to make. Here goes:

We have 2 incomes, no kids. Current pretax (403(b) and thrift savings plan) retirement savings is at about 8% per year.

I just opened up 2 Roth IRA's for $3000 each with Vanguard, in the target 2030 fund.

We have have $30K in emergency fund in a CD which matures in 2 months.

$302K on a first mortgage @ 5.25%, $55K on a second @ 7%. The second has a balloon payment due in 5 years, I am currently making payments large enough to where it will be paid off in time.

Student Loans: Me: $9300 @ 5.75%, Partner: $8000 @ 4.875%, $11,000 @ 2.48%

$5500 on a car loan @ 6% (1 year left @ $443/month).

Thoughts for this year:

I want to max out the Roth's this year. I was planning on adding as much as I could from "new" savings, but much of it will probably come from the existing emergency fund.

I will receive a $3000 raise in November. I am thinking about putting all of this toward my TSP. That would bring us to about 11% of our money to retirement savings, on the way to a goal of 15%.


Questions:

Any sense in taking $5K out of the EF to pay off the car loan now? It doesn't seem like it would save a ton of money (maybe $150). On the other hand, I would still be comfortable with a $25K emergency fund, and could be putting the payments toward building it back up over the next year.

When the car is paid off, I would like to start contributing some or most of that money to our Roth's. I'm starting to think about accelerating payments on the student loan that is at 5.75%. I've never considered that before, thinking student loans weren't "bad" debt, but I guess paying down any debt isn't a bad thing.

Umm, I guess that's all for now. I feel like I have a bunch more, but it's a lot to think of all at once. Thanks to anyone who read this far, and I appreciate any suggestions!

[maat55]

Welcome to the forum.

I would go ahead and payoff the car. But you need to keep in mind that another car will have to be purchases eventually, you might as well establish a car fund.

I would likely payoff the 5.75 SL with your EF as well and take those extra payment funds to snowball the next highest interest rate SL. I would allow a slow death to the third SL.

[disneysteve]

Welcome. Can you fill in a few blanks for us? What is your annual household income? I'm guessing it is about 100K since you said putting the $3,000 raise into retirement would boost your savings rate from 8% to 11% so 3K would be 3% of income.

What are your necessary monthly expenses? You say you have a 30K emergency fund. How many months of expenses does that represent?

Also, you say your 30K EF is in a CD. Is that all in one CD? If so, I'd consider breaking that up so that some money is in a liquid account for immediate access and the rest is in laddered CDs so that part of the money comes due every 30 days or so. It isn't a great idea to lock up your entire EF into one CD. If you need the money in an emergency, you are stuck cashing in the CD early and paying the penalty.

[jIM_Ohio]

Make sure to include Roth contributions into the savings rate... if TSP is 8% and 403b is 8%, then you have 8% going in pre-tax. But you also have 3k going into 2 different Roths, so that is an addition 6k of savings you need to "add" to the total.

I just opened up 2 Roth IRA's for $3000 each with Vanguard, in the target 2030 fund.

We have 2 incomes, no kids. Current pretax (403(b) and thrift savings plan) retirement savings is at about 8% per year.

I hope I don't assume too much, so I will remind you if one of you makes 60k per year and puts 4% into 403b and one of you makes 40k and puts 4% into TSP, that is 100k with a 4k savings rate... don't add the percentages together (we see that mistake here from time to time).

Best to add all income
then add all retirement contributions as a dollar amount
then divide them
and that is the savings rate...

We have have $30K in emergency fund in a CD which matures in 2 months.

Why is the entire emergency fund in one CD?

My suggestion we be to open about 6 CDs, with 5k each, and make then each 6 months duration... one CD maturing each month... unless you know something I don't (like a potential need for all 30k coming up soon).


I would NOT tap the emergency fund to pay down debt or fund the Roth's. You have I am guessing about 6 months of an emergency fund in place, and I see little reason to compromise that.

However if you could paint me a picture where you tap 8k of the emergency fund, then repay it back over a short time (say 6 months) that makes sense.

Student Loans: Me: $9300 @ 5.75%, Partner: $8000 @ 4.875%, $11,000 @ 2.48%

However if you removing 19k from emergency fund puts you below 3 months expenses, and that savings would not be replaced for 1-2 years, I would try a different plan first.

For example, pay off the car

$5500 on a car loan @ 6% (1 year left @ $443/month).

Then immediately direct the $443/mo payment back to EF and within 12 months you have restored 1 months expenses...


I agree with maat on this point

you need to keep in mind that another car will have to be purchases eventually, you might as well establish a car fund.

So when the $443 is directed back at EF, just keep that money going to savings so when you need the next car, you pay cash, and still have the $443/mo of cash flow available to you.

$443/mo is about $5200/year... that is A LOT of car. If you have two cars its not as much... some simplistic math...

$5200/year car budget times 10 years is $52,000
do you each drive $26,000 cars? If you do not (and most people don't), reverse that math for the car budget (if you each drive $20,000 cars and the cars last 12 years, then its $20k+$20k=40k/12=$3333 per year, which is just under $300/mo

So my suggestion would be put the $443 back into savings (1 year)
then $443 until you have $20,000 saved for next car (just under 4 years) then drop the car budget down to $300/mo as steady state.

As you see savings approach $50k cash, you will probably approach investing differently... you might want a portion of the emergency fund to return more than savings accounts provide. This is normal, and look for moderate mutual funds to boost return- muni bond funds, or a fund like Wellesly, spectrum income (RPSIX) or Permanent Portfolio (PRPFX) all come to mind. I own both spectrum income and Permanent Portfolio right now.

Questions:

Any sense in taking $5K out of the EF to pay off the car loan now? It doesn't seem like it would save a ton of money (maybe $150). On the other hand, I would still be comfortable with a $25K emergency fund, and could be putting the payments toward building it back up over the next year.

When the car is paid off, I would like to start contributing some or most of that money to our Roth's. I'm starting to think about accelerating payments on the student loan that is at 5.75%. I've never considered that before, thinking student loans weren't "bad" debt, but I guess paying down any debt isn't a bad thing.

Umm, I guess that's all for now. I feel like I have a bunch more, but it's a lot to think of all at once. Thanks to anyone who read this far, and I appreciate any suggestions!

Yes on paying off car with savings
If you can have retirement to 15% and pay down student loans, I think that is best. You stated a goal of getting retirement to 15%... which is more important, being debt free, or hitting 15% savings rate?

The $443/mo going back to EF should be included with the savings rate, even if money is not included for retirement.

[doxie]

I appreciate the replies thus far. Let me clarify a couple of things.

My EF is in a CD, but it is called a liquid CD. You can add to it 5 times, and withdraw once. The withdrawal can be any amount, up to and including the full amount, with no penalties. I exercised the withdrawal this week to open our Roth's, but it matures in July, so I'm comfortable with that. When it matures, I will either dump it into another liquid CD, or put it into a money market, which has a similar rate right now. I agree, I would never tie up my emergency money into something I can't access without penalty.

I think our bare bones monthly expenses are about $5K, so the $30 should last about 6 months.

Jim, when I said our savings rate I used the method you describe, not just adding the percentages together. I'm actually at 10% and partner is at 5%, but that comes out to about 8% in our case. One thing I did not include in the savings rate is my employer match in my TSP, which is 5% of my income. Does one usually include that amount? I mean, it is money I'm saving I guess. Or is it money I'm earning, that I should add to my income? Hmmm...

Steve, income is around $165K yearly now. The math seems fuzzy because I didn't mention that we are also increasing my partner's contributions later this year by a little bit.

Ok, I'm going to look into paying off the car and using the payment money to build the EF back to 30K. It would take about a year. I like the idea of the car fund, so I may just keep the payments going into the same account until we need another car (which will be as long as I can hold my partner off from insisting on having a newer/better one).

Let me just get some reassurance on something. My EF needs to stay in something safe, like savings/money market/liquid CD right? It gets hard sometimes to have it sitting there when it's only earning 1.x%. But I guess I need to look a the whole picture, which is that I have other money which is diversified it stocks/bonds etc. in my TSP/IRA/Roth IRA. Jim, it sounds like you are saying when my EF gets substantially above the 6 month mark I can start to look at other funds/options for investing. I think I just need a reminder to cool my heels and wait until that time comes.

Ok, you've given me some things to think about, I'm sure I will have more questions after I mull it some more. Keep the suggestions coming

[doxie]

Oh, I just felt the need to touch on a couple other things.

Make sure to include Roth contributions into the savings rate... if TSP is 8% and 403b is 8%, then you have 8% going in pre-tax. But you also have 3k going into 2 different Roths, so that is an addition 6k of savings you need to "add" to the total.

I didn't include the $3K at this time because all I did was move it from one account to another, I didn't technically "save" it. If I start adding to it with new money, I will definitely include that amount.

... which is more important, being debt free, or hitting 15% savings rate?

I think that is what it boils down to, what is more important to me. Right now increasing savings feels more important than paying down my student loans or 1st mortgage. Clearing out the car loan and 2nd mortgage feel are almost as high as my savings rate. That's how I feel right now anyway.

[jIM_Ohio]

I think that is what it boils down to, what is more important to me. Right now increasing savings feels more important than paying down my student loans or 1st mortgage. Clearing out the car loan and 2nd mortgage feel are almost as high as my savings rate. That's how I feel right now anyway.

This is normal IMO
or I am not normal

My savings rate is about 25%
we also put some additional to second mortgage
and when car is paid off in 2010 more is going to savings and second mortgage

when I had student loan debt I paid a moderate amount more to it, but increased savings more than paying down the student loans or the house.

[disneysteve]

Current pretax (403(b) and thrift savings plan) retirement savings is at about 8% per year.

I just opened up 2 Roth IRA's for $3000 each with Vanguard, in the target 2030 fund.

We have have $30K in emergency fund in a CD which matures in 2 months.

I will receive a $3000 raise in November. I am thinking about putting all of this toward my TSP. That would bring us to about 11% of our money to retirement savings

I think our bare bones monthly expenses are about $5K, so the $30 should last about 6 months.

Steve, income is around $165K yearly now. The math seems fuzzy because I didn't mention that we are also increasing my partner's contributions later this year by a little bit.

If you earn 165K, $3,000 represents 1.8% of your income.

You currently contribute 8% of income to retirement. That would be $13,200.
11% would be $18,150.
Adding $3,000 will only take you to $16,200 or 9.8%.
You need another $1,950 to get to 11%, so if that's what your partner is adding, that works.

Personally, I wouldn't pull money out of a 6-month EF to pay down debt. With an income as large as yours, you should be able to pay down debt just fine out of current income. You owe $25,800 not counting the house. You should be able to knock that out in a couple of years or less. If you can't, I'd take a good hard look at your spending. I'll bet there is a lot of fat that could be trimmed, at least temporarily, until the debt is gone. You say your basic expenses are 60K/year. Where is the rest of the money going?

[jIM_Ohio]

If you earn 165K, $3,000 represents 1.8% of your income.

You currently contribute 8% of income to retirement. That would be $13,200.
11% would be $18,150.
Adding $3,000 will only take you to $16,200 or 9.8%.
You need another $1,950 to get to 11%, so if that's what your partner is adding, that works.

Personally, I wouldn't pull money out of a 6-month EF to pay down debt. With an income as large as yours, you should be able to pay down debt just fine out of current income. You owe $25,800 not counting the house. You should be able to knock that out in a couple of years or less. If you can't, I'd take a good hard look at your spending. I'll bet there is a lot of fat that could be trimmed, at least temporarily, until the debt is gone. You say your basic expenses are 60K/year. Where is the rest of the money going?

I agree with steve... on 165k income, a 30k emergency fund is really not that much... and getting savings rate to 15% with such a high income should be the priority (the more you make, the tougher 15% will be to attain).

My suggestion on 165k income would be this
pay yourself 20% first... this is $33,000 per year, or just under $3000 per month.
Put 15% ($25,000 of the $33,000) into 403b/TSP or IRAs. For example 10k per year into IRAs and 23k into work plans.

If the 10k Roth appears too steep, put all 10k into TSP/403b... because it is pre-tax it will save you around 25%-28% in taxes (you need to earn $12,500 to put $10,000 into a Roth; you need to earn $10,000 to put $10,000 into a 403b because of taxes).

Put 5% ($8,000 of the $33,000) into short term savings, debt repayment, or vacations/new cars. I support using the EF to pay off the car (still) and direct the car payment back to savings... include this $440/mo as part of the $8000/year total. Once the EF is back to 3-6 months expenses the 5% criteria still exists, how you direct the money may change (debt repayment vs savings). The car fund I suggested earlier is part of the 5%. 5% is "short term savings", could also be phrased "non retirement savings"

This implies you live on 80% of what you earn (this will appear a lot less than 80% because taxes also come out of this 80%).

Focus on spending... the best ways to keep spending down is avoid financing things, and only spend what you have in the bank at present time.

If you live on 80% or less of income, and save 20% or more of income, this single factor is the biggest reason for financial success or failure.

If you spend 90% of your income, you are closer to living paycheck to paycheck than you are actually saving anything substantial...

Examples I use to prove this would be the following:
If you save 5% and spend 95% every 19 years you save 1 years expenses (5%*19=95%)
If you save 10% and spend 90%, every 9 years you save 1 years expenses (10%*9=90%)
If you save 20% and spend 80% every 4 years you save 1 years expenses (20%*4=80%)
If you save 25% and spend 75% every 3 years you save 1 years expenses (25%*3=75%)
If you save 33% and spend 66% every 2 years you save 1 years expenses
if you save 50% and spend 50% every 1 year you save 1 year of expenses

How quickly you amass 1 year of expenses will be relative wealth (If I have 5 years expenses in the bank and you only have 2 years expenses in your bank... that means (to me) that I have more money than you, even if you earn 50k more than I do per year).

[GregOlney]

Hello all. I am new to this forum, but I was happy to find it because I've been looking for a good place to bounce ideas off of. I would like to share my overall financial picture, and see what suggestions people have for any changes I might need to make. Here goes:

We have 2 incomes, no kids. Current pretax (403(b) and thrift savings plan) retirement savings is at about 8% per year.

I just opened up 2 Roth IRA's for $3000 each with Vanguard, in the target 2030 fund.

We have have $30K in emergency fund in a CD which matures in 2 months.

$302K on a first mortgage @ 5.25%, $55K on a second @ 7%. The second has a balloon payment due in 5 years, I am currently making payments large enough to where it will be paid off in time.

Student Loans: Me: $9300 @ 5.75%, Partner: $8000 @ 4.875%, $11,000 @ 2.48%

$5500 on a car loan @ 6% (1 year left @ $443/month).

Thoughts for this year:

I want to max out the Roth's this year. I was planning on adding as much as I could from "new" savings, but much of it will probably come from the existing emergency fund.

I will receive a $3000 raise in November. I am thinking about putting all of this toward my TSP. That would bring us to about 11% of our money to retirement savings, on the way to a goal of 15%.


Questions:

Any sense in taking $5K out of the EF to pay off the car loan now? It doesn't seem like it would save a ton of money (maybe $150). On the other hand, I would still be comfortable with a $25K emergency fund, and could be putting the payments toward building it back up over the next year.

When the car is paid off, I would like to start contributing some or most of that money to our Roth's. I'm starting to think about accelerating payments on the student loan that is at 5.75%. I've never considered that before, thinking student loans weren't "bad" debt, but I guess paying down any debt isn't a bad thing.

Umm, I guess that's all for now. I feel like I have a bunch more, but it's a lot to think of all at once. Thanks to anyone who read this far, and I appreciate any suggestions!

The government is increasing the ability to contribute into your investments this year which is good.

[disneysteve]

The government is increasing the ability to contribute into your investments this year which is good.

Which investments are you referring to? Roth/IRA and 401k contribution limits have not changed for 2010. I wish they would increase the Roth limit. $5,000/year is lousy for the 50% of Americans who don't have a 401k plan at work, like me. The 401k folks can put away $16,500 but I'm stuck with the $5,000 limit.

[maat55]

Which investments are you referring to? Roth/IRA and 401k contribution limits have not changed for 2010. I wish they would increase the Roth limit. $5,000/year is lousy for the 50% of Americans who don't have a 401k plan at work, like me. The 401k folks can put away $16,500 but I'm stuck with the $5,000 limit.

The Fair Tax, no limits, no unfairness, no tax returns.

[jpg7n16]

...I think that is what it boils down to, what is more important to me. Right now increasing savings feels more important than paying down my student loans or 1st mortgage. Clearing out the car loan and 2nd mortgage feel are almost as high as my savings rate. That's how I feel right now anyway.

Why are the car loan and 2nd mortgage so special to you?

Why do you want them gone more than your other debt?

[jIM_Ohio]

My EF is in a CD, but it is called a liquid CD. You can add to it 5 times, and withdraw once. The withdrawal can be any amount, up to and including the full amount, with no penalties. I exercised the withdrawal this week to open our Roth's, but it matures in July, so I'm comfortable with that. When it matures, I will either dump it into another liquid CD, or put it into a money market, which has a similar rate right now. I agree, I would never tie up my emergency money into something I can't access without penalty.

I missed a few points... so more added
If you had 6 CDs of 5k each, you could tap into EF 30 times and withdraw 6 times... lowering risk and fees paid if fees were ever going to be paid.

Jim, when I said our savings rate I used the method you describe, not just adding the percentages together. I'm actually at 10% and partner is at 5%, but that comes out to about 8% in our case. One thing I did not include in the savings rate is my employer match in my TSP, which is 5% of my income. Does one usually include that amount? I mean, it is money I'm saving I guess. Or is it money I'm earning, that I should add to my income? Hmmm...

I missed this when replying before... and was reason for extra response.
The match will be a small portion of savings rate if the savings rate is between 10-20%. For example I contribute 11% to my 401k, and believe I get 3% of that back. The 10k we put to Roths is about 9% of gross income and wife also has about 8% into her 401k with about 2% match.

Our overall savings rate is about 25%, that includes the match. Without the match it might be 20%.

Here is how I calculate this (year over year), remember that companies change 401k match rules in times like these, so its possible you see savings rate lower when using this method.

Each year I calculate the contributions to 401k, Roth and Rollover IRAs, as well as one taxable investment in PRPFX (Permanent Portfolio). Meaning I had a table with all contributions for a given year. For the 401k I look at a statement and find contributions- this number has included the match every time I look (usually Dec 31/Jan 1 timeframe). I know it has the match, because the 401k contributions on my W-2 are lower than the number on my spreadsheet. Because my spreadsheet does IRR calculations, I need to know all contributions, not just my own, to get a good IRR of the investments in my retirement plans.

I then compare the total contribution amount against gross income and calculate IRR.

so the match is included when I compare, so the match is included when I calculate.
It is my suggestion shoot for 15% without the match, and anything above 15% is excellent. I suggest this so you are spending no more than 85% of gross pay (and are spending less than you earn).

Let me just get some reassurance on something. My EF needs to stay in something safe, like savings/money market/liquid CD right? It gets hard sometimes to have it sitting there when it's only earning 1.x%. But I guess I need to look a the whole picture, which is that I have other money which is diversified it stocks/bonds etc. in my TSP/IRA/Roth IRA. Jim, it sounds like you are saying when my EF gets substantially above the 6 month mark I can start to look at other funds/options for investing. I think I just need a reminder to cool my heels and wait until that time comes.

Ok, you've given me some things to think about, I'm sure I will have more questions after I mull it some more. Keep the suggestions coming

For every person, the size of the EF, how it's invested, how liquid it is, and how one views it will depend. Here are the factors and how I see them influencing the problem:

1) 3 months expenses, minimum. Goal #1 should be to hit 3 months expenses. Some people need more than 3 months.
2) 3 months is not enough... some people may take the additional 3 months above the minimum, and put principal at risk. These people probably have stable jobs and less volatile expenses. Point is the 3 month minimum might be too little for a conservative financial type even if everything looks good.

If expenses are volatile, you want a higher emergency fund. This could be seasonal (maybe a certain time of year your expenses double or triple, best to have larger emergency fund in a situation like this.

3) If you have volatile employment and or volatile income (temp worker, contract employeee, seasonal work, sales) go for a higher emergency fund- probably 6-12 months expenses. The most common situation here is a commission based salesman. Income one month might be half what it was previous month type (we see this on the board all the time- probably about 1X per month).

4) Self employed or really conservative. 24 months expenses.


So summary is this, everyone "needs" 3 months expenses, beyond that its about risks and covering the risks to ones comfort level.

If a person is self employed, I suggest a minimum of 24 months expenses in taxable accounts, and then apply some logic to the problem.

1) 6 months expenses cash
2) 6 months expenses in nearly cash- if out of work for a year, you need this money
3) the other 12 months can be in a moderate risk investment
moderate to me is PRPFX. moderate to others might be savings bonds. How one defines moderate is as much a gray area as is this really an EF?

If person is conservative financially, I would apply similar logic-
can they stomach investing 75% of retirement accounts in equities?
If no, can they add 3 months expenses to EF?
after they do that can they stomach 75% of retirement accounts in equities?
If no, can they cadd 3 months expenses to EF?

I would repeat above logic, and by time EF was at 24 months expenses, I believe they could justify retirement allocation to between 60-75% equities. The main issue to me is making sure retirement account is growing faster than inflation, and if they want (need?) 24 months of expenses in cash to justify risks taken somewhere else, that makes sense to me.

[TBH]

The OP's emergency fund seems low to me. My household income is half of the OP's, and I have $30K in my EF.

Of course, I need a bigger EF than some people, as Jim points out, because I'm self employed. $30K actually feels too low to me--I'd like to see my EF at $50K but every time it creeps above $30K I have an emergency.