Financial plan feedback

**Jon991** · 05-31-2012, 07:28 AM

I would not spend $27,000 on a car if you are making debt payments. Pay off all your debt first (minus mortgage) and continue save more money. Then, instead of spending #27,000 on a car, start making extra mortgage payments to pay off your house. You can get a reliable car/truck/suv for less than $8,000. (I paid less than $3,000 for a 4 door Altima with 80K miles. Been driving it 4 years now with zero issues (knock on wood).

It just does not make sense spending $27,000 on a vehicle when you currently $15,590 in debt.

Everything else you are planning is good.

**MonkeyMama** · 05-31-2012, 07:40 AM

You'll probably get a lot of comments on the car - but I will jump in. No way do you have the means to spend $27,000 on a vehicle. {I've got 2 kids, have not spend more than $10k-ish on a car. Both our cars were bought low mileaged and are extremely reliable. When poorer we bought MUCH older/cheaper cars. A tip - buy used from a friend or a relative who is ready to change cars. Would not be forever, but until you get on better footing. Save cash up for your next car purchase. The reason is twofold. When you pay cash, you REALLY think about the cost and if it is worth it. It's more than just math and interest}.

What are the investments for? Can you move that money over to a ROTH? Do you have a goal in mind for the investments?

Retirement seems very behind. Are you really saving $2,000 per month? Difference between expenses and income? IF so, that is very good!

You may want to consider 401k for tax advantage. Sounds like you could be taxed very heavily - high income. A ROTH is always nice in that you can invest anywhere and have more options and flexibility, but the 401k tax break might really mean a lot more to you at this point.

I'd make retirement your #1 priority, though if I were in your shoes I would spend a few months bumping up the emergency fund and paying off the student loan and car loan. (It's just easier to not have all those bills and payments). I don't think taking care of that first makes any difference in the grand scheme of things - if it just takes a few months. Then you have $2k per month (+ more) to throw at retirement, longer-term savings (repairs, etc. you mentioned) and towards your next car purchase.

**bjl584** · 05-31-2012, 08:25 AM

I've heard that a good rule of thumb is that any debt that is over 5% interest rate should take presidence.

Here is my car comment. A $27K car represents about 35% of your annual income. I'd consider cutting the car shopping to a price of half of that.

I think that you are a little behind on retirement for your age. I'd take a look at ways to bump up your savings rate.

Other than that, I would save up to fully fund the EF before trying to pay off the SL's or Mortgage. The car, yes, I'd get that paid off ASAP while saving up the 22K in the EF.

**bethasaver** · 05-31-2012, 08:28 AM

For the car, I'd be financing about $16,000 after I sell my current vehicle as down payment (which I'll own outright by then) + a little extra from the overtime I work every month. I want to invest in a vehicle I'll have for a long time, and something I want. I can get a loan for about 3 or 3.5% through my work's credit union so payments would be only about $100 more than I'm paying now. Seems pretty reasonable to me- I'd like to get rid of this thing before winter (spins tires in the snow even with good tires) and don't want to buy something I don't like (again) and don't feel safe in and that has costly repairs. I have considered keeping my car through 1 more winter (but I really don't want to!) sorry just a little whiny voice. I'm also getting a raise in November, about $115 a month extra.

Maybe it's just me but debt at 4% or under I'm pretty comfortable with.

The investments are a 529 plan for the kids and a little in ETFs that I play around with.

I am saving $2,000 a month. I just paid off one of my student loans with a big chunk, and it's only been within the last few months that income exceeds expenses by $2,000 so I'm socking this all away into savings (for example I'll transfer $1,000 to savings on 6/15 and again on 6/22). I just got done being sued in February, so for a year and a half I was paying a lawyer monthly.

So, Jon are you saying we should utilize my husband's work 401k even without the match as opposed to a Roth? Or both? Or, me put extra in the 403b from my work even without the match (my Fidelity plan isn't doing very well through work).

Thanks for the comments, some more detail on how I should beef up retirement would be helpful.

**MonkeyMama** · 05-31-2012, 09:18 AM

Do you know what your tax rate is? Taxable income?

You can put up to $17k per year into a 401k. Per person. If your tax rate is 25%: If you put $17k into a 401k and save $4250 in taxes, you can either use the tax savings to fund a ROTH, or it's just like coming up with $13k cash to increase your retirement by $17k. Either way is good and probably doable.

Which 401k to fund just depends on your options. If your only option is crappy/expensive investments, than the ROTH could be much better for you. Maybe one 401k is better than the other. If taxes are on the low side, the ROTH will be better. I can't guage from info given - I'd guess 25% tax bracket - not sure if you pay state taxes though.

Regardless, I think you can be considerably more tax efficient. Move the ETFs to a ROTH. Don't invest outside ROTH unless you have a clear goal. Even inside the ROTH it is easy to tap down the road, well before retirement. Maybe not something to think about in current situation, but for the long run it is better to invest in ROTHs than pay taxes on investment income you have no clear goal for. Good savers can utilize ROTHs in this manner without hurting retirement.

**feh** · 05-31-2012, 09:29 AM

Originally posted by bethasaver View Post

For the car, I'd be financing about $16,000 after I sell my current vehicle as down payment (which I'll own outright by then) + a little extra from the overtime I work every month. I want to invest in a vehicle I'll have for a long time, and something I want.

Bolded text is the key. It's a want, not a need.

I agree with everybody else. Given your financial situation, that's way too much to be spending on a car.

**green_goblin12** · 05-31-2012, 09:32 AM

Doesn't matter what the rate on the car loan is, it's the fact that it costs $27,000. You can't afford that. Well, you can probably, but it doesn't make sense. You make good money. Where is it all going? You should be saving more and wipe out the current car note and student loans in a few months time. I'd pay off the HELOC too ASAP.

People think of low interest rates the same way as tax deductions on mortgages. It's not free money. It's a great deal, but it is still all money YOU OWE to someone.

**bethasaver** · 05-31-2012, 09:49 AM

Ok, ok point taken on the car. So what can I afford for a car? What's the formula for that? Can I afford a $27,000 car when SL and HELOC are paid off and I have a $9,000 or more down payment?

Green- Where is it all going? Well it's only been pretty recently that income is what it is now, and as I mentioned I was being sued for a year and a half so it was going to my lawyer. I also paid off another student loan in full which was a higher interest rate. I did only have a few grand in savings, I've bumped that up quickly.

Monkey- tax rate is 25% and I pay IL state taxes. I'm not sure how to figure out which is better: hubby's 401k, my 403b or Roth. What are the criteria? I just checked my fidelity account for my 403b and it says that my personal rate of return is 14.9% for last 2 year period. I can def cash out the ETFs and put elsewhere- it's only about $400 that I've used as a way to get familiar with investing in ETFs (has actually done pretty well, I'm up about 14%).

Also what takes priority, paying HELOC or funding retirement or combo of both?

Thanks, everyone- this is much appreciated.

**Petunia 100** · 05-31-2012, 09:49 AM

Originally posted by bethasaver View Post

For the car, I'd be financing about $16,000 after I sell my current vehicle as down payment (which I'll own outright by then) + a little extra from the overtime I work every month. I want to invest in a vehicle I'll have for a long time, and something I want. I can get a loan for about 3 or 3.5% through my work's credit union so payments would be only about $100 more than I'm paying now. Seems pretty reasonable to me- I'd like to get rid of this thing before winter (spins tires in the snow even with good tires) and don't want to buy something I don't like (again) and don't feel safe in and that has costly repairs. I have considered keeping my car through 1 more winter (but I really don't want to!) sorry just a little whiny voice. I'm also getting a raise in November, about $115 a month extra.

A car is not an investment. Try to get out of the habit of thinking of costs in terms of monthly payments. Always consider the total cost. If you need a car which drives better in the snow, then sell your car and buy one. But choose one you can afford. 27k for a depreciating asset (NOT an investment) is a lot of money on your income, especially considering you are carrying consumer debt, are behind on retirement savings, and have young children.

Originally posted by bethasaver View Post

The investments are a 529 plan for the kids and a little in ETFs that I play around with.

Instead of funding 529 plans and taxable accounts, start maxing Roths for yourself and dh. The contributions (not earnings) are available to you at any time for any reason with no penalty. If you choose, you can tap them for your children's college expenses. Once the Roths are maxed for the year, if you still have money to invest, then consider 529s and/or taxable accounts. But always max the Roths first.

Originally posted by bethasaver View Post

I am saving $2,000 a month.

That's awesome!

**jpg7n16** · 05-31-2012, 10:33 AM

Originally posted by bethasaver View Post

Goals: (in order of priority?)
1. Have 22,000 of emergency savings not to be touched

2. Pay off car by Sept and get new used car in November. My current vehicle sucks in the snow and I live in Chicago and have 2 kids. I plan to sell my car on autotrader and get about $9,000 and then get a used vehicle for about $27,000.

3. Put $$ in Roth IRA before end of year (husband hasn't been at job long enough to get any match, I have mine maxed at 6% of pay with match)

4. Put extra toward student loan

5. Start savings account for things such as home improvement, vacation etc.

So, how am I doing? How are my goals, any suggestions? Thanks for reading

-Beth

Well the ideas behind your goals are very good (pay off debt, save for retirement, save towards other expenses, etc.) but your methods are off on a few.

It's not about how much car you can afford. If you wanted to use all $2,000 to finance a car, you could technically afford an absurdly ridiculous car. It's more about how much car do you truly need?

Just because YOUR $9k car sucks in the snow, does not mean that ALL $9k cars suck in the snow. There are a lot of great used cars in the $10-15k range. Why are you starting in the upper $20k's?? Have you considered that the extra $12-17k you are planning to spend could knock out 2-3 of your other goals by itself? (22k EF, pay off car, pay off SLs = $12,490)

Also, I would reprioritize your retirement savings - moving it up on your list. By age 30 we'd hope that you had 1-1.5 times your salary saved away (retirement + cash + investments). You currently have less than 1/2 a year's salary. So you're already behind the ball, and you're only saving 6%. That's honestly not enough to get you where you want to go.

Please run through this caclulator (takes less than 5 mins):
AARP Retirement Calculator - How to Retire, Plan for Retirement, What Is Retirement? - AARP

I entered what you told us here so far, and got that to retire by 65, you need to save 12.4% of your income today, or at current savings levels - you'll need to work til age 75.

So here's how I'd restructure your goal list, based on what you're looking to do:
1. Pay off car and SL debt immediately
2. Build back EF to $22k
3. Increase retirement savings to 10-15% ; (15-20% preferrable)
4. Budget an amount each month for upcoming expenses (home repairs, etc.) and set this money aside
5. Upgrade car to $15k MAX car able to handle the snow, $10k preferrable

**phantom** · 05-31-2012, 10:36 AM

Originally posted by bethasaver View Post

Ok, ok point taken on the car. So what can I afford for a car? What's the formula for that? Can I afford a $27,000 car when SL and HELOC are paid off and I have a $9,000 or more down payment?

With $9,000 in hand, I'd say you can afford a $9,000 car.

My formula for how much car I can afford is pretty simple, I look at how much cash I can spare, and that's my number.

I currently drive an '04 Jeep Liberty that goes great in the snow, and Kelly Blue Book says it's currently worth about $9,000. So, I can assure you there are vehicles out there that can handle snow and are in the range that you could pay cash for them.

I suggest shopping around and finding out what exactly you can get for $9,000. Also, look and see what you could get for $12,000 or $19,000. Then run the numbers on financing the extra $3,000 or $10,000 to see how much more you would really pay, and ask yourself if the more expensive car is really worth that much more to you.

What you "can afford" is a tricky thing. If you really wanted to, I think it's very likely that you could manage to make the payments on a $27,000 car. But, you'd have to make sacrifices elsewhere. You mention vacations as one of your goals. Think of how many more awesome vacations you could take if you spent $20,000 or more less than you were planning on a new car.

**jpg7n16** · 05-31-2012, 10:46 AM

Originally posted by bethasaver View Post

Monkey- tax rate is 25% and I pay IL state taxes. I'm not sure how to figure out which is better: hubby's 401k, my 403b or Roth. What are the criteria?

You should do a combination of all 3. You want to get all employer match that you can, but you also want to have some Roth money to add flexibility to your withdrawals in retirement.

If it's all 401k/403b money, all your retirement withdrawals will be taxable.
If it's all Roth money, you waste your standard deductions in retirement, and miss out on free money today (empl match) - as well as miss out on tax savings today.

How are you investing the funds you're saving?

Also what takes priority, paying HELOC or funding retirement or combo of both?

At your interest rate, IMO retirement easily takes priority.

**woodie96** · 05-31-2012, 11:17 AM

Not to beat a dead horse about the car....But if you add up your HELOC, SLs, and Car loan as of now, they total LESS than the 16K you are looking at adding to the equation with the new-to-you car.
Lots of great reliable vehicles out there in the 10- 15K range.
JMHO....

**MonkeyMama** · 05-31-2012, 11:21 AM

What are your investing choices in the 401ks? What kinds of fees? That would be my criteria. If you don't have a lot of choice, and the fees are high, forget the tax break and just fund the ROTHS. (After match of course, but it sounded like you were getting all matching already).

At 25% tax rate, you are probably saving $250 for every $1000 you add to your 401k. There will be difference of opinion on what is better - 401 or ROTH - but don't stress too much about it. I'd say it's basically a coin flip.

If your ETFs are doing well, definitely move them to a ROTH. Then the gains will be tax-free. I would also invest kids' college in a ROTH before a 529 plan, as suggested. Anyway, a ROTH is just an account designation. You may be able to just change the label of your account to ROTH without having to sell - keep it where it is. Talk to the financial institution to see your options. You may have to sell and re-buy ETFs, but can keep where it is?

I don't see why the HELOC Would be a priority at this point. You have the cash to pay it off in a worst case scenario. Other than that, I think I'd ignore it for now. But don't add to it.

Financial plan feedback