Financial Picture and Investments

[Eagle]

Financial Picture and Investments - Eagle

Hi! I’m a 31 year old male. I got an MBA in 2009. I currently have a pretty decent job with potential for growth. Wife is a stay at home mom. We have two kiddos a 21 month old and a 3 week old.

1. Income and Expenses
A. Income is about 63.8k - Take home is about $3300 after taxes, health/dental insurance, 8% in 401k (4% match, this is the max), and 2% in Roth IRA.
B. Expenses are about $3300 a month between mortgage, utilities, groceries, cell phones, internet, gas, charity, etc.

2. Assets
C. We have about 35k in our checking/savings accounts.
D. Both vehicles (2007 Civic 10k and 2004 Sienna 8k) are paid off.

3. Debts
E. About 4.9k (original purchase was about 8k in October 2013) left in furniture we bought at 0% interest for 60 months. The payments about $90 a month and we’ve been paying $250 each month so we should be able to pay this off in less than 20 more months.
F. About 105k left on our mortgage at 4.625% interest. We pay every two weeks $500 and also pay $100 extra per month on the house towards the principle. The house was valued at 135K last year.
G. NO Credit Card debt.

4. Investments
H. We currently have a Fidelity account mutual fund investment that has roughly 69k.
J. I have a 401k with about 58.2k.
I. I have a Roth IRA with about 1.5k in it.

5. Additional funds…
K. Our income tax return will be about $2500-$3500 or so this year. What would you recommend we do with the money?

What can we do to improve our finances and investment portfolio? Suggestions?

Thanks in advance.

[autoxer]

It looks like you are an excellent saver, but are avoiding the tax advantaged accounts. You can reduce your current and future tax liability by putting more into the 401k and Roth. You can also fund an IRA under your wife's name in addition to your own.

Regarding your investments, did you plan your asset allocation and do you rebalance it? Do you know what the expense ratios are on your investments?

[snafu]

You've not mentioned location, do you live in a high cost of living location or do you choose to match spending with take home income? If you're willing to list budget categories and sums spent, mortgage sum owed & interest rate etc. it may reveal possible savings/reduction targets.
Your vehicles are older, what sum is a 'set aside' for repairs given your spending matched to income figures?

What are your current 401K holdings, fees and MERs? ROTH details? What is your risk tolerance?
How secure is your employment? How much do you feel is adequate for a serious Emergency Fund?
There is an old fashioned investment allocation formula of age minus 100. The larger figure for Equity subdivided 2/3 domestic, 1/3 international. The remainder some type of Income products. [I suggest these be short term given Federal Reserve Chairman Yellen's comments today]

[lorraineb]

Is there a particular reason you're trying to pay off the 0% furniture loan so quickly? My advice would be to put the $250 into a bank account that earns interest and pay the lowest amount ($90). Then pay off the entire loan before interest is charged. This way you earn interest on the money instead of the company.

[Eagle]

You've not mentioned location, do you live in a high cost of living location or do you choose to match spending with take home income? If you're willing to list budget categories and sums spent, mortgage sum owed & interest rate etc. it may reveal possible savings/reduction targets.

We live in Texas which is probably considered a lower cost of living than many places in the U.S.

As I mentioned we owe about 105k on the home mortgage at 4.625%. The house is valued at 135k last year. The payments are about $892 a month and we pay $1000 on it.

Here's a snapshot of our expenses. The only thing I think that is blaring at me that we can work on is our cell phone plan. The other item that could be cut is reducing the furniture payment as suggested by Lorraineb.

Budget
1. Charity $327
2. Savings $140
3. Fixed Expenses
3a. Internet $45
3b. Cell Phone $225 (4 cell phones, 1 for wife w/ data, 1 for me w/ data, 1 for parents who pay $15 a month for cell line, 1 for sister who pays $50 a month for cell and data plan, that leaves us paying $160. I’m probably going to need to inform family that we can’t pay that much anymore or drop the $30 for unlimited family text plan.)
3c. Netflix $8.65
3d. Compassion International child $45
3e. Gym Membership $71
3f. Ashley Furniture GE account $250
3g. Mortgage $1000
3h. Energy $192
3i. Water $71
4. Entertainment $20
5. Husband Allowance $30
6. Wife allowance $30
7. Groceries $600
8. Eating Out $100
9. Gas $100
10. Car Repairs (as needed)
11. Misc (as needed)
12. Diapers & Baby $80
13. Purchases (as needed from Savings Act)
14. Shopping/Vacation (as needed from Savings Act)

What do you think?

[Eagle]

It looks like you are an excellent saver, but are avoiding the tax advantaged accounts. You can reduce your current and future tax liability by putting more into the 401k and Roth. You can also fund an IRA under your wife's name in addition to your own.

Regarding your investments, did you plan your asset allocation and do you rebalance it? Do you know what the expense ratios are on your investments?

I guess it wasn't clear re: 401k. I put in 8% and my employer matches 4% for a total of 12%.

I also contribute 2% towards a Roth IRA. Yes, we've considered opening a Roth IRA for my wife as well. I believe the max contribution is 5k per person?

So we save about 14% of my income up front. We are also paying off the house early (a little over $100 a month). And then there's the furniture payment at 0%. Once that is knocked out we can consider further investment into 401k and Roth IRA.

Not sure what you mean by rebalance our asset allocation... But we did plan our original asset allocation. I'll have to check what the ratios are on the investments and get back to you.

Also, see the budget snapshot in the previous post. What do you think?

[Eagle]

Is there a particular reason you're trying to pay off the 0% furniture loan so quickly? My advice would be to put the $250 into a bank account that earns interest and pay the lowest amount ($90). Then pay off the entire loan before interest is charged. This way you earn interest on the money instead of the company.

This is something we've considered. The issue is we really would like to be debt free besides our mortgage. So we may talk over this option.

[lorraineb]

This is something we've considered. The issue is we really would like to be debt free besides our mortgage. So we may talk over this option.

This is just my opinion and you need to do what you need to do to pay down your debt (I also think people are crazy to pay of lowest debt first rather than highest interest via Dave Ramsey), but if you have the money set aside in an account specifically to pay off that debt, and that debt isn't getting larger, then I would consider yourself debt free. It's semantics. The difference is that you're earning the interest and not the company. I think that people get too focused on one thing sometimes (debt free) when the real goal is to become financially savvy. Sometimes literally being debt free isn't financially savvy.

[mholl95]

Hi Eagle

Overall, it looks like you really have your act together. Congrats! But what I do myself and suggest to others is to establish and follow a broad financial philosophy and plan that includes measurable goals and milestones that you can track. Then, the smaller items will take care of themselves

Here's what I mean. First up is your big picture plan.

1. Calculate the amount of money needed at retirement age. That's an important number that will drive how much you should be saving/investing annually.

2. Determine your debt-to-income ratio and housing payment-to-income ratio. As you've experienced from buying your home, the lender probably required your debt-to-income ratio to be less than 36% and your housing payment-to-income ratio to be less than 28%. If they didn't discuss these areas with you, no worries, just keep them in mind.

What I would suggest is that you pick percentages for yourself that are even more stringent than what a mortgage lender would require. For example, shoot for 32% of 30%. By following these kind of percentages, you'll avoid problems with debt, and be able to quickly determine when you're getting into the debt danger zone.

3. Plan for your kid's education. I see that you have two little ones. Are you anticipating that they will attend college? If so, now would be a good time to investigate 529 college savings plans.

4. Protect your family. Your wife and kids will need financial protection should something unfortunate happen to you. Investigate a term life insurance policy.

I might have forgotten something, but that's the kind of big picture stuff that will allow you to sleep peacefully at night if handled properly.

Second up are the detailed financial strategies. Here's are some examples.

1. Create an investment portfolio that matches your age, risk tolerance, and that will address possible emergencies. One day I'm going to write a paper on my thoughts about emergency funds because I think most people get them wrong, but this post is already getting long.

So as far as investments, I would personally maximize the heck out of a Roth. But you should also have some money in investments (such as mutual funds) that are not in accounts (such as 401ks) where you would have to pay a tax penalty if you needed to gain fast access to that money in an emergency.

Since you're still young, your risk tolerance is probably high. So things like stock mutual funds would be good.

2. Know your FICO credit score. Make sure that your score is at least 725 and shoot for 740+. This way you're assured to get the best rates on loans, credit cards, etc.

Okay, I'll stop there because that's probably more than you wanted to know..lol. I could go on, but if I said something that isn't clear, just ask. My main point is to first establish some measurable high level objectives and philosophies, and then allow other strategies to flow from them. Cheers, Michael

[BMEPhDinCO]

Sounds like you've done pretty well, lots of thought going into your choices!

Some of my ideas:

1. I think you've hit it on the phones, too much! I've been using a third party carrier system for the last two months and I love it so far - plus, it saves me $50 a month! See what you can do about reducing that, or at least reducing the family part.

2. I'd go for maxing out both yours and your wife's ROTHIRAs - that's $11k per year. That way you have a balance of tax and tax free investments. Then maybe put something into savings for new cars, house, kid accounts, etc.

[Eagle]

This is just my opinion and you need to do what you need to do to pay down your debt (I also think people are crazy to pay of lowest debt first rather than highest interest via Dave Ramsey), but if you have the money set aside in an account specifically to pay off that debt, and that debt isn't getting larger, then I would consider yourself debt free. It's semantics. The difference is that you're earning the interest and not the company. I think that people get too focused on one thing sometimes (debt free) when the real goal is to become financially savvy. Sometimes literally being debt free isn't financially savvy.

Yeah I see what you mean about semantics... We could pay off the account today if we wanted to...

What do you mean that being debt free isn't financially savvy? Curious

[Eagle]

Sounds like you've done pretty well, lots of thought going into your choices!

Some of my ideas:

1. I think you've hit it on the phones, too much! I've been using a third party carrier system for the last two months and I love it so far - plus, it saves me $50 a month! See what you can do about reducing that, or at least reducing the family part.

2. I'd go for maxing out both yours and your wife's ROTHIRAs - that's $11k per year. That way you have a balance of tax and tax free investments. Then maybe put something into savings for new cars, house, kid accounts, etc.

Will check into options on the cell phones

2. Assets
C. We have about 35k in our checking/savings accounts.

We actually have about 36k in our checking/savings accounts.
*We have about $25.6k in our Emergency Fund.
*3.25k is set aside for the deductibles and co-insurance for baby girl born Feb 2014.
*There is $830 in our Checking Account. We have already incurred expense of about 1.2k on our credit cards this month.
*We have about $1160 saved for medical expenses.
*We have about $565 saved for our vehicle insurances. (about $500-600 every 6 months. Just paid 6 mo in Feb)
*We have $1110 saved up for son’s college fund. We need to determine what we’re going to do with this money this year.
*We have $1075 saved up towards little girl’s college fund. We need to determine what we’re going to do with this money this year.
*We have $950 saved up towards a new van.
*We have $700 saved up towards vehicle repairs. (We potentially have another $3k worth of repairs/maintenance. I got a quote last year) that needs to be done on the Toyota Sienna Van.
*We have $675 saved up towards Wife’s teeth expenses in the future.
*We have $50 saved up towards our next purchase. Just bought a new fridge for $1400 that pretty much zeroed out this account.

[Eagle]

Hi Eagle

Overall, it looks like you really have your act together. Congrats! But what I do myself and suggest to others is to establish and follow a broad financial philosophy and plan that includes measurable goals and milestones that you can track. Then, the smaller items will take care of themselves

Here's what I mean. First up is your big picture plan.

1. Calculate the amount of money needed at retirement age. That's an important number that will drive how much you should be saving/investing annually.

2. Determine your debt-to-income ratio and housing payment-to-income ratio. As you've experienced from buying your home, the lender probably required your debt-to-income ratio to be less than 36% and your housing payment-to-income ratio to be less than 28%. If they didn't discuss these areas with you, no worries, just keep them in mind.

What I would suggest is that you pick percentages for yourself that are even more stringent than what a mortgage lender would require. For example, shoot for 32% of 30%. By following these kind of percentages, you'll avoid problems with debt, and be able to quickly determine when you're getting into the debt danger zone.

3. Plan for your kid's education. I see that you have two little ones. Are you anticipating that they will attend college? If so, now would be a good time to investigate 529 college savings plans.

4. Protect your family. Your wife and kids will need financial protection should something unfortunate happen to you. Investigate a term life insurance policy.

I might have forgotten something, but that's the kind of big picture stuff that will allow you to sleep peacefully at night if handled properly.

Second up are the detailed financial strategies. Here's are some examples.

1. Create an investment portfolio that matches your age, risk tolerance, and that will address possible emergencies. One day I'm going to write a paper on my thoughts about emergency funds because I think most people get them wrong, but this post is already getting long.

So as far as investments, I would personally maximize the heck out of a Roth. But you should also have some money in investments (such as mutual funds) that are not in accounts (such as 401ks) where you would have to pay a tax penalty if you needed to gain fast access to that money in an emergency.

Since you're still young, your risk tolerance is probably high. So things like stock mutual funds would be good.

2. Know your FICO credit score. Make sure that your score is at least 725 and shoot for 740+. This way you're assured to get the best rates on loans, credit cards, etc.

Okay, I'll stop there because that's probably more than you wanted to know..lol. I could go on, but if I said something that isn't clear, just ask. My main point is to first establish some measurable high level objectives and philosophies, and then allow other strategies to flow from them. Cheers, Michael

Very good suggestions and thoughts! Thanks Michael! My thoughts below…


First: Big Picture

1. How much is enough? Any resources you'd recommend to check out on this subject?
2. Our debt is hovering at 110k. My income is about 63.8k. So that is roughly 2-1 on debt-to-income ratio. Housing payment is 892. Monthly net income is about $3300 (doesn’t include the 401k at 8% with a 4% match and Roth IRA at 2% I can stop contributing to in a pinch). So that is about 27% housing payment-to-income ratio. We have about 8 months or more (if we were to cut it down to bare minimum I think we could do between 2500 and 2800 a month) in our E-fund so we do have a cushion.
3. We have 2 accounts saved up for them with a little over 1k each. We need to start investing the money. Not to keen on 529 college savings plans. What if the kids don’t want to go to college? Why do you like them?
4. Yes I just signed up for a 1 million term life insurance policy. Wife has a 500k and each of the kids have a 50k…

Second: Detailed financial strategies.

1. “Create an investment portfolio that matches your age, risk tolerance, and that will address possible emergencies.” Interesting… Is there a website you would suggest?

“One day I'm going to write a paper on my thoughts about emergency funds because I think most people get them wrong, but this post is already getting long.” That sounds interesting. Want to start a new thread?

I’d prefer at this stage to get the free money with a 401k match… I really only have about 10% (8% 401k with 4% match and 2% in Roth IRA) of my income I can save towards retirement comfortably right now. Or at least that is how we see things. We do have an investment with Fidelity (listed in the OP 69k item 4H) we could cash out in an emergency. However, that is what our E-fund and insurance policies are for.

2. My FICO score is bordering at 800. It fluxuates between 780 and 805 in the 3 credit bureaus. I’ve worked very hard to build up my credit. My wife has little to no credit at this time. Any suggestions?

Thanks for all the input Michael!

[iliketosavemoney]

Savings on cellphone bill

Hi Eagle,

As someone mentioned before, going with a third party can save you a lot on your cellphone bill.

If you need to stay with one of the bigger services, AT&T has the new family value plan which gives you unlimited talk and text plus sharing of 10GB of data for $160 a month for 4 lines.

[autoxer]

Not sure what you mean by rebalance our asset allocation... But we did plan our original asset allocation. I'll have to check what the ratios are on the investments and get back to you.

Rebalancing is a tactic to help you buy low and sell high. If one asset class outperforms another, then your asset allocation will shift away the desired balance, so you sell some of the shares that performed well and buy some of the under performing shares to get back to your desired asset allocation.

If this isn't something you want to do periodically, then you can see if your plan offers 'target year' or 'life cycle' funds, that will automatically rebalance and shift your asset allocation based on how many years until you retire.

The expense ratio is how much of the fund they are using to cover their operating costs. If you have $58,200.00 invested with an expense ratio of .67%, then you are paying $390/year in fees. If you invested $58,200.00 in a fund with an expense ratio of .17%, then you would pay $99/year in fees.