need help analyzing my finances

**lovcom** · 06-18-2010, 04:00 PM

1. Stop being paid W2 with the agency. Incorporate and have them pay you as a true contractor, and out of their accounts-payable. You're missing out too many goodies being a W-2 worker.

2. STOP leasing cars....huge mistake a lot of people make. It is one of the worse things one can do financially.

3. DON'T invest in the stock market, nor bonds, nor mutual funds....it is gambling. Instead, save a down payment and buy a 1-2 bedroom condo preferably in a senior only complex, and rent it out. Buy another one every 2-3 years until you're 55. Now is the time because (1) purchase prices are down, (2) interest rates are down, and (3) the demographic you'll be renting to is growing and growing, and lastly (3) rental rates are either stable or go up, and never go down in most markets.

4. Pay off your student loans in the biggest monthly payments you can but FIRST, save up a 9 month emergency fund, then kill that loan ASAP.

5. You already have a good start, and this proves you're smart....but you can do better....go the real-estate rental route, as it is the best way to get rich in ANY MARKET....don't flip properties however as this only works in a very good market...flipping is not the way to go.

6. Try to live on 1/3 of your combined take home pays.

I wish I was smart as you at 28....good luck!!

**jpg7n16** · 06-18-2010, 10:41 PM

Originally posted by mosil View Post

So what should I start off with?
I'm thinking I need to beef up my savings for that rainy day, and also definitely get started in investing (which I know nothing about!)How much should I put away in savings? Where can I go to get started in investing?
Also, I can't put money in Roth anymore because I anticipate to phase out.. what are my other options for retirement?
How hard will it be for us to get a loan for the house, since we don't have a long work history, and not that much money saved up?

Reading this forum is helping me out a lot, but also making me nervous! I really want us to restart in the right direction.
Sorry for the long post, and thank you for helping me out!

Step #1: Get on a prioritzed budget. For you this means, imagine you could only pay one thing this month, what would it be? Probably house or essential food. Write that down. Then if I could only pay 2 things, what would the 2nd one be? Write that down. Keep going until you have more things listed than money you could possibly make in a month. Include things like, "Retirement savings" "savings for a new car" "debt payments - required" "debt payments - extra"

Then turn your budget into a prioritized list and make sure the top items (housing, food, utilities) get paid before the items at the bottom of the list (designer shoes, fancy dinners, various wants).

Step #2: Don't freak out over your past

You're starting from here whether you like it or not, so make the best of it. Find your goals for your finances and work towards acheiving them. Starting at 28 is no real obstacle. You'll be fine.

Step #3: Once you get married, get adequate life insurance for each of you. And get a lawyer to set up a will.

Step #4: Attack and eliminate any debt that's charging you over 5% interest

Step #5: Build up to 6 months of living expenses. Your income is erratic, so you need the max. And you should never have over 6 months (unless your company is beginning to lay people off). Using your budget, see how much you normally spend and base it off that.

Step #6: Begin investing for your future. Since your income is so high, a 401k is a really good benefit for each of you to postpone taxes on $16,500 each. You can lower your combined taxable income by $33k (saving you current year taxes of about $10k). And stocks are not as terrible as the poster above makes them seem. There is a difference between gambling and investing.

Read The Intelligent Investor to find out the truth of investing in stocks/bonds/mutual funds. Warren Buffett and Bill Gates are the richest men in the world because of stocks - not real estate.

Step #7: Try to save between 15 and 20% for retirement. 15k/month * 12 = 180k/yr + 72k/yr = 252k combined

252k * .15 = $37.8k
252k * .20 = $50.4k

$33k can come from the 401k contributions. Leaving you between 5-18k to save somewhere.

Since your income would exclude you from both Roth and Tax-Deductible IRA's - your only retirement option would be a traditional non-deductible IRA. No tax deduction, but lets it grow tax deferred - and is taxed when withdrawn. That could do 5k each (10k total)

For the last 8k you'd have to use a taxable brokerage account. I'd highly recommend that for your non-retirement brokerage account - look into a municipal bond fund. They generate tax free interest, which would be really beneficial to you. Also consider growth stock mutual funds that pay little to no dividends. Because all the growth wouldn't be taxed until the investment is sold, non dividend paying growth mutual funds are usually similar to a tax deferred IRA.

Step #8: Try to get the cheapest house possible. Your inlaws may be footing the down payment (wow) but you two will be paying the mortgage every month. Don't get more than 25% of your monthly income in mortgage payments. For you that would be less than a $5k mortgage payment.

**swanson719** · 06-19-2010, 07:27 AM

I'm a huge fan of Dave Ramsey's My Total Money Makeover. I would get that and read it.

I would first start out with a budget. True costs vs income. Be realistic. Make every penny work for you, so you know where you spend your money. Yes, get TERM life insurance. Never buy whole life, it sounds good, but you pay a lot more for money you can't get to. With whole life, when you die, the insurance agency pays you the policy amount, but keeps your "savings" that's built into the plan. With term, you pay much less and get the same payout on death. Get a will, but wait until after you're married.

Second, see if you can take the car back on the lease. If it's comparable in price to get out of the lease as opposed to keeping it for the next 18 months or so, keep the car. If it's not, then get out of the lease. Never, ever, lease cars. It's like paying rent to live in a mobile home park. You just don't do it. If you can get out of the lease, or when the lease is up, buy a cheap used car that you can pay cash for, something under $3,500. This is just a car to get you around until you get your finances straightened out and on autopilot after you're married. It's not for more than 2-3 years.

Stop saving and investing for a little while and pay off the student loans. It shouldn't take you more than 9 months to get rid of the student loans if you throw all your disposable income at them. $20,000 will get you through a rainy day between now and then. Missing out on 9 months of investing isn't going to kill you financially.

You didn't mention if your fiancee has any debt, so I imagine he doesn't. Are your inlaws putting up to $500,000 down, or up to $100,000 (20%) down on a $500,000 house? Either way, I would definitely be more concerned with living within your means than I would be with the quality of house. JPG mentioned 25% of your monthly income in mortgage payments. That should be 25% of your monthly NET income, and no longer than a 15 year mortgage.

When a bank figures out your ability to get a mortgage, they look at a few things. You're debt to income ratio is the biggie, and your downpayment and credit rating determine your interest. If your combined income is $252,000 then your net is probably around $166,000, or $13,860 a month since you will be in the 33% tax bracket.

If your only debt payment is $400 a month, your DTI (debt to income) is 2%. You will usually be allowed a maximum of 40%, so a mortgage of $5,266 on a 30 yr note. DO NOT take more than $3,450 on a 15 year note or there is a good chance you will learn what it means to be house poor.

Because you have such a high income, you both will need to be very diligent about itemizing your taxes. Buy a book or two about how to itemize, the do's and dont's, etc, ask on this site, or maybe even make an appointment with an hourly paid tax pro who can help walk you through the steps. Anytime you do anything financially, make sure whoever helps you is paid by the hour. You make a boatload of cash, so the commission guys will be coming at you like vultures. Avoid them. Hourly people are almost always better for you, and have your best interest at heart because they get paid the same regardless of what product you end up getting. Commission people have a financial incentive to coerce you into buying their product.

About a year from now, you should have your student loans paid off, be in a house and settled. Once the student loans are paid off, start building the rainy day fund. You will want 6 months of household expenses, or, in you're case, because you have unpredictable income, probably somewhere in the $50,000 to $75,000 range in a money market mutual fund. You cannot lose money in these types of funds. They only pay about 1% or 2%, but it's liquid money you cannot lose. Since you already have $20,000 saved, it should take you about 9 months to finish that off. Basically, just switch from putting all your extra cash at the stafford loan to putting it all into savings until you hit a comfortable number.

So you're looking at saving for retirement at age 30. 401(k) first, completely max. Make an appointment with someone at Fidelity or Vanguard and tell them you want to invest in funds that make over 10% annualized over the life of the fund, and you're only interested in funds that are at least 15 years old, and you DO NOT want gold. Gold is a hedge, not an investment. It's so high right now because the market is going through a huge tremor and people want safety. Gold is safety, so everyone is jumping onto that ship. The first ones off will make a killing, the last ones stuck on it will lose more than they would had they stayed in the market.

When you go in to talk to a broker, make sure they are paid by the hour, not on commission. Don't pay a "load" - a percentage of your investments to the broker. You need to invest a minimum of 15%, but it's much better to invest 25% of your GROSS. So somewhere in the $63,000 a year range would be ideal, but a minimum of $38,000. Don't look at what are called "target date" funds - not a good deal. After your 401K is maxed, you should be looking to invest another $30K. JPG is spot on with the non-dividend paying funds. However, don't exclude dividend funds completely. Many dividend funds have "DRIP" programs - dividend re-investment programs. These have the same benefits JPG mentioned.

Congrats on getting married and good luck!

**buildmybudget** · 06-19-2010, 08:19 AM

Like everyone else has suggested, you need to find the best way to maximize your income and minimize your expenses. The only way to reach your financial goals though is to be able to see where you are headed financially. You need to be able to see how much extra income you have each month, how long it will take you to pay off your debts, how much you can allocate to savings thereafter and so on.

Use a pencil and paper and map out your monthly income and expenses and take into account the periodic expenses that will pop up in the next year. Work backwards to figure out how much you can save each month towards your debts or down payment on a house and then implement the plan. The key to reaching your goals is to be able to see where you are headed financially.

Do you have a budget and cash flow projection? In tough situations like this, the best solution is a cash forecast that shows you exactly where you are headed...so you can see whether your goals are plausible and if you will run into any trouble spots. Create a budget that shows you this and you'll be empowered to make better decisions.

**lovcom** · 06-19-2010, 09:19 AM

jpg7n16,

Bill Gates did not get rich in the stock market....he got rich by creating his company: MicroSoft. MicroSoft made him rich. Warren Buffet got rich building up companies too. The $$ they made in the stock market is inconsequential.

MOST rich people did it with real-estate. Those in the know understand this. Those that don't are the ones that lost half or more of the value of their 401k plans.

A smart R/E investor makes money before the bubble, during the bubble and after the bubble...it's just a matter of changing strategies. The stock market is gambling just like Vegas.

**disneysteve** · 06-19-2010, 09:39 AM

Originally posted by lovcom View Post

ill Gates did not get rich in the stock market....he got rich by creating his company: MicroSoft. MicroSoft made him rich. Warren Buffet got rich building up companies too. The $$ they made in the stock market is inconsequential.

MOST rich people did it with real-estate.

You are correct about Bill Gates and Warren Buffet. I'm not sure if you are correct about most people getting rich in real estate. I would think that more people made their money through their own businesses. Bill Gates, Sam Walton, Steve Jobs, Rockefeller, Carnegie and many other big names got rich by starting successful companies. Real estate is certainly a big factor but I tend to think businesses account for more wealth generation.

**lovcom** · 06-19-2010, 09:46 AM

Originally posted by disneysteve View Post

You are correct about Bill Gates and Warren Buffet. I'm not sure if you are correct about most people getting rich in real estate. I would think that more people made their money through their own businesses. Bill Gates, Sam Walton, Steve Jobs, Rockefeller, Carnegie and many other big names got rich by starting successful companies. Real estate is certainly a big factor but I tend to think businesses account for more wealth generation.

I would say that people are more likely to get rich in this order:

1. Maintain, and grow a business.

2. Real-Estate (Walmart has a ton of real-estate, for example).

3. Stock Market (which is legalized gambling)

They stopped making land eons ago, and it is tangible, and like matter cannot be destroyed. A fire or earthqack can level the building but it can be rebuilt, and the land is still there.

There are strategies for getting rich in R/E for up, down and stable markets. Those that lost their rear-ends in R/E did it for reasons that had little to do with R/E and everything to do with bad timing, bad buy decisions, or getting into to something that was way over their financial heads.

No don't get me wrong, I too have $$ in the stock market, but it is not serious $$, and I do it because I love to game it and for the entertainment it provides, but for serious growth I never rely on this. My Apple Computer stock has done amazingly well, but this is an exception and not the rule.

**jpg7n16** · 06-19-2010, 01:13 PM

Originally posted by lovcom View Post

jpg7n16,

Bill Gates did not get rich in the stock market....he got rich by creating his company: MicroSoft. MicroSoft made him rich. Warren Buffet got rich building up companies too. The $$ they made in the stock market is inconsequential.

Like I said Bill Gates and Warren Buffet got rich on stocks.

Investing 101: A share of stock is a share of ownership in a business.

And Warren Buffett is well known for the passive approach to management. He does very little (if any) of the management of his firms. He buys stock (aka ownership of business) in companies with "able management" and let's them build the company. In essence, he just buys companies and lets them run. Like buying stocks (aka shares in a business) and letting it run - in say... a 401k or brokerage account.

And there are multiple multiple people who have substantial investments in stocks/bonds and get really rich that way.

MOST rich people did it with real-estate. Those in the know understand this. Those that don't are the ones that lost half or more of the value of their 401k plans.

Yeah that's just not true. Real estate has its risks just like any other investment endeavor. Don't believe me?

Links of interest:

Advisory Committee on Economic Inclusion (ComE-IN) | FDIC.gov

http://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf

Advisory Committee on Economic Inclusion Meeting Information

Google
Google

You do notice that senior housing facilities are being sold at foreclosure at 40% off market value, which means that someone who invested in senior housing has lost 40% of their purchase price, right?

A smart R/E investor makes money before the bubble, during the bubble and after the bubble...it's just a matter of changing strategies.

Likewise, an Intelligent Investor (see book above) makes money in stocks (aka businesses) before, during and after bubbles - it's a matter of the right strategy - see book for details.

The stock market is gambling just like Vegas.

Again this is not true. You clearly don't understand what a stock is. It's not a couple letters with a number that randomly goes up and down, it is ownership in a business.

Gambling: in order for me to win, you have to lose
Investing: we both win by creating more and more value to the customer through successful operation of the business, thereby increasing the value of my investment and your company

I would say that people are more likely to get rich in this order:

1. Maintain, and grow a business.

2. Real-Estate (Walmart has a ton of real-estate, for example).

3. Stock Market (which is legalized gambling)

You do realize those are all essentially the same thing right?

1. Maintain and grow your own business
2. Grow a rental real estate business
3. Buy ownership of someone else's business (stocks)

Wal-Mart is not a great company because it owns real estate. It is a great company because it provides customers with products they need at low prices. Without the merchandise on the shelves, the real estate is meaningless.

By investing solely in real estate - you are investing in a business that's sole purpose is the rental and management of housing facilities. (and you are clearly blind to the risks of this area of business)

Bill Gates invested in a business that provides software. Buffett invests in multiple businesses (Soda, candy, insurance, etc.). And I too am investing in multiple businesses.

**disneysteve** · 06-19-2010, 07:15 PM

Originally posted by jpg7n16 View Post

Gambling: in order for me to win, you have to lose

This isn't quite true although it is in a way. Every single game in a casino is rigged in the house's favor. The house will never lose in the grand scheme of things, though individuals will win from time to time.

By investing solely in real estate - you are investing in a business that's sole purpose is the rental and management of housing facilities.

This is a very important point which lovcom seems to be missing. There is nothing wrong with investing in real estate but investing only in real estate is an example of putting all of your eggs in one basket. That is never a good idea regardless of what the basket happens to be. I invest in stocks from a wide variety of companies, bonds from a wide variety of companies and government entities, a wide assortment of real estate holdings through a REIT (not just the one or two or three properties I might be able to own and manage on my own) and even some precious metals and other commodities. That's called diversification. Will I ever get filthy rich doing this? Probably not. But I'm certain I will accumulate plenty of money to maintain a comfortable lifestyle for the rest of my life and leave a nice inheritance behind.

**mosil** · 06-23-2010, 03:50 PM

Thank you so much for all the GREAT advice and suggestions!

I feel like there is some hope..!

**jIM_Ohio** · 06-23-2010, 06:52 PM

Originally posted by mosil View Post

Sorry in advance for the long rant...

I am embarassed to admit, but at 28 years old, I'm finally seeing the value of saving and investing. I only started working 2 years ago (college, then grad school before then), so I only really started to make money then. Even so, I spent my money unwisely, buying designer shoes and the like. I totally regret my spending habits. Now that I'm getting married in July, I feel like I have to be more responsible and start managing my money better.

So, I like to think that I'm basically starting over. I need advice on what exactly I need to do to get myself started. Here are some basics about my finances...

Savings: $20,000
Checking: $2,000
Retirement: $3,000 (Roth); $6,000 (trad IRA)-- both mutual funds at Vanguard

Credit Card debt: $0 (the only thing I'm proud of!!)
Student Loans: ~$51,000 (all govt Stafford loans, paying $400/mo)
Car loan: $400/mo (lease expires in 1.5 years)

I work at my company as a "contractor", so I do not get benefits, stock options, or 401(k). Officially I work for an agency, so I guess in this regard I am a "temp", and the agency does offer 401(k), but I have not taken advantage of that (they don't match).

Technically, since I am a "temp," I work based on whatever project comes up. When the project ends, I have to look for another project. So, my income is not steady. However, I have worked every week this year so far (on the same project that has gone on for 10+ months). I need to plan my finances to accomodate my workstyle in case I am stuck for a period of time w/o work.
With that said, I currently make about $3750/week, pretax (or $15k/mo, pretax).
My fiance has a steady job, with benefits and 401k (no matching), and he makes $72,000/year. After we get married, I will be included in his health insurance plan.

My fiance comes into the marriage with almost no savings and no retirement too (I know, we're both horrible!) His parents are extremely generous enough to pay for a downpayment on our house (up to $500,000) sometime this year, and we will take on a mortgage for the rest, if possible.
We live in the San Francisco Bay Area, so houses here are very expensive.

So what should I start off with?
I'm thinking I need to beef up my savings for that rainy day, and also definitely get started in investing (which I know nothing about!)How much should I put away in savings? Where can I go to get started in investing?
Also, I can't put money in Roth anymore because I anticipate to phase out.. what are my other options for retirement?
How hard will it be for us to get a loan for the house, since we don't have a long work history, and not that much money saved up?

Reading this forum is helping me out a lot, but also making me nervous! I really want us to restart in the right direction.
Sorry for the long post, and thank you for helping me out!

I have not read other replies yet...
welcome to the site.

You are doing quite well actually. For being 2 years into working and having that much cash, plus spending less than you earn, you have the fundamentals of a good financial plan in place already. What you need is time and acquiring knowledge of investing, taxes, home ownership and marriage.

Some of it you learn as you go, some of it you can learn from others.

Basics-
1) spend less than you earn by a factor of at least 20%
meaning spend 80% save 20%. This applies to spouse and yourself
20% of 200k is 40k
20% of 72k is 14400
so your yearly savings is 54k per year

If you cannot save that amount, look to cut expenses

2) With the 20% savings, I would do the following

a) use your 401k for as much of it as you can. CA taxes plus fed taxes will eat into the savings. My suggestion is you put in $16500 into your 401k and fiance put in 16500 into his 401k. Match or no match that $33000 will save you about $11,000 in federal taxes alone. It probably will save you state taxes too.

aside: How do you have a Roth which such a high income?
b) The 401ks account for about $33,000 of the $54,000 yearly savings. I suggest putting at least
$13,000 per year into a cash account because of volatile nature of job. This is your emergency fund and represents about 5% of your gross pay (combined).

c) with the remaining 8k, I would advise to open a brokerage account or invest in muni bonds, depending on how much risk you want to take investing. Keep this investment tax efficient. No interest, no dividends... Permanent Portfolio approach might work here.

3) focus on spending less than you earn and making smart decisions
a) when lease is up, pay CASH for the next car by saving for it (do not finance cars)
b) make sure spouse follows similar logic
c) spend less than you earn
d) get a house you can afford to maintain
e) spend less than you earn
f) take affordable vacations
g) don't blow money on frivolous things
h) spend less than you earn

**jIM_Ohio** · 06-23-2010, 06:59 PM

Originally posted by jpg7n16 View Post

Step #5: Build up to 6 months of living expenses. Your income is erratic, so you need the max. And you should never have over 6 months (unless your company is beginning to lay people off). Using your budget, see how much you normally spend and base it off that.

Since your income would exclude you from both Roth and Tax-Deductible IRA's - your only retirement option would be a traditional non-deductible IRA. No tax deduction, but lets it grow tax deferred - and is taxed when withdrawn. That could do 5k each (10k total)

For the last 8k you'd have to use a taxable brokerage account. I'd highly recommend that for your non-retirement brokerage account - look into a municipal bond fund. They generate tax free interest, which would be really beneficial to you. Also consider growth stock mutual funds that pay little to no dividends. Because all the growth wouldn't be taxed until the investment is sold, non dividend paying growth mutual funds are usually similar to a tax deferred IRA.

Step #8: Try to get the cheapest house possible. Your inlaws may be footing the down payment (wow) but you two will be paying the mortgage every month. Don't get more than 25% of your monthly income in mortgage payments. For you that would be less than a $5k mortgage payment.

I agreed to some degree on most of post, even though my approach to solve problems would be different, the end result would look quite similar.

Two points above

1) I suggest 12-24 months expenses in the bank based on your employment. Being paid W-2 at 180k per year is better than a job which pays less but gives benefits, because your husband has benefits. You might make more if you were a true contractor, but then again, maybe not (you have lots to learn and more paperwork if you are a true contractor)

2) I suggest building savings before using traditional IRAs (for now). When you have 24 months expenses in the bank, I would reconsider.

**jIM_Ohio** · 06-23-2010, 07:05 PM

Originally posted by disneysteve View Post

You are correct about Bill Gates and Warren Buffet. I'm not sure if you are correct about most people getting rich in real estate. I would think that more people made their money through their own businesses. Bill Gates, Sam Walton, Steve Jobs, Rockefeller, Carnegie and many other big names got rich by starting successful companies. Real estate is certainly a big factor but I tend to think businesses account for more wealth generation.

What Steve said.

Microsoft is a real estate company? NO it isn't. Bill Gates and Carnegie and others make money by creating innovative products.

The stock market is a good way for the average person to make better money than a savings account.

Real estate investing requires
a) time and knowledge
b) up front capital to some degree
c) costs to maintain (taxes and facilities)
d) to access principal might require a lawyer or buyer

Stock market investing requires
a) knowledge
b) minimal start up costs
c) fees are usually not even seen by the investor
d) to access principal you need a bank account and computer or telephone (very liquid compared to real estate)

Its easier to enter stock market than real estate market. Its MUCH easier to exit stock market than real estate market.

**jIM_Ohio** · 06-23-2010, 07:11 PM

Originally posted by lovcom View Post

I would say that people are more likely to get rich in this order:

1. Maintain, and grow a business.

2. Real-Estate (Walmart has a ton of real-estate, for example).

3. Stock Market (which is legalized gambling)

They stopped making land eons ago, and it is tangible, and like matter cannot be destroyed. A fire or earthqack can level the building but it can be rebuilt, and the land is still there.

There are strategies for getting rich in R/E for up, down and stable markets. Those that lost their rear-ends in R/E did it for reasons that had little to do with R/E and everything to do with bad timing, bad buy decisions, or getting into to something that was way over their financial heads.

No don't get me wrong, I too have $$ in the stock market, but it is not serious $$, and I do it because I love to game it and for the entertainment it provides, but for serious growth I never rely on this. My Apple Computer stock has done amazingly well, but this is an exception and not the rule.

I will add one other thing to this list- probably #1, maybe #2

Most people which are wealthy are good at what they do. They are innovative, they find ways to make more money, cut costs, improve their product, make a new product and similar.

Thomas Edison invented a light bulb. More than 1000 patents were associated with this product and among these were power plants and the filament inside the light bulb.

I was discussing cars with a friend a few weeks ago. Henry Ford needed help- he invented a decent car and the process to make it cheaply, but without someone else to make gas stations the car is useless. Someone had to create the gas station and the distribution of the gas. I am sure all those people made money, Henry Ford just made more so the history books talk about him.

So #1 be good at what you do
#2 grow a business
#3a real estate
#3b stock market

Being good at what you do opens more doors than anything else.

need help analyzing my finances