Author Topic: How do I get the snowball started?  (Read 7960 times)

PK

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How do I get the snowball started?
« on: July 25, 2013, 09:06:04 PM »
So Iíve only recently discovered the world of financial independence, and I have to admit, itís really opened my eyes to what my future could be like. Itís quite exciting, really!

However, itís also pretty intimidating, and some help getting started would be much appreciated. Iím 34, male, no children, and not married. I have $45,500 in a low interest savings account, and want to re-allocate it, but am nervous about how to do it. Iíll try to sum everything up:

Goals:
1. Have a 3 month emergency fund.
2. Begin saving for a house down payment for late 2014 Ė early 2015.
3. Set up a savings and investment strategy to attempt to reach financial independence in 11 years.

Debt:
1. None. Yay!

Assets:   
1. $45,500 in savings (earning .02% interest :-( )
2. $1,500 checking
3. $34,000 in 401(k). (I currently put away 7%, employer matches 5%... plan on upping that to 10%.)
4. $2,100 in matured E and EE series bonds. Iím worried about the taxes when I cash them out.
5. $1,700 in EE series bonds that Iíll leave alone until they mature.
6. 2004 Mazda 6 Hatchback.
7. Raleigh Misceo 2.0 that I will be purchasing this weekend to commute to work. :-)

Income:
$91,000 / year programming job, which is stable for now.

Notable Expenses / month:
Rent: $1,530 / month, including forced cable and internet. Lease expires in January and Iíll definitely be moving someplace cheaper.
Other expenses: $1,670. $1,000 is for food! Yikes!! I just finished grocery shopping at Samís Club today, and next month should be <$500. Iím working on the other expenses as well.
401(k): $530 / month.
Money put into savings account: $1,460 / month.

Right now I put away ~33.4% of my monthly take-home pay. I should be able to hit 50% or so this year, and once I move in January, make the 65% goal for an 11 year retirement plan.

So how would you recommend I allocate the $45,500 I currently have in savings? Iím thinking:

1. $5,000 in IRA.
2. $5,500 in savings, and leave $2,700 in checking.
3. What about the remaining $35,000? Would it make sense to put this in a Vanguard Total Stock Market Index Fund, and then build my house down payment with my monthly savings? What sort of account should I use for my house savings? Or would you guys recommend something else?

If you need more details, please ask. And thanks for the help!


Katnina

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Re: How do I get the snowball started?
« Reply #1 on: July 25, 2013, 10:56:09 PM »
Sounds like you are off to a good start, congrats on having no debt! 
Some questions:
How much are houses where you want to buy?  What kind of down payment would you need?  Are you sure you want a house? (I love houses but they are a TON of work to maintain). Would a condo work better for your needs?  Is buying cheaper than renting in your area, or is renting cheaper?
How exactly does your employer's 401k match work? 
When you say $5k into IRA do you mean a regular IRA or a Roth?  You are below the income max to make a full Roth contribution, FYI.

steveo

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Re: How do I get the snowball started?
« Reply #2 on: July 26, 2013, 02:28:25 AM »
You sound in a pretty good state to me. I'm 39 and I have 3 kids and my main question would be are you planning on having a family at any time and how would you handle this ?

The next question to me is should you rent or buy ? Personally I am paying off my mortgage and a key part of me moving towards FI is based on owning my house however your situation may be different. If I didn't have kids I might choose to be more mobile.

After the buy vs rent decision is made my advice is to save as much as possible into your retirement old man funds which should have some tax advantages and when there is enough there save into the best tax efficient location (maybe there is no option here) that you can draw on whenever. My take is to put say 70 or 80 into a stock index fund and the rest into a bond fund but you could move this up to say 100% in a stock index fund. I suppose you also need some cash stashed away elsewhere but this is probably less important until you are getting close to retiring.

AlmostIndependent

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Re: How do I get the snowball started?
« Reply #3 on: July 26, 2013, 02:40:44 AM »
Im a big fan of the Roth IRA. I'd stick $5500 there to start. If you want to buy a house soon you might want to leave whatever cash you plan on using for your downpayment in your savings account.

GreenGuava

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Re: How do I get the snowball started?
« Reply #4 on: July 26, 2013, 02:50:32 AM »
1. $5,000 in IRA.

Any deliberate reason for being in less than this year's maximum?  Your income is fine for it.  Why not put in $5500 for 2013?

And have you decided what you're going to invest it in, fund-wise?  If your 401(k) is lacking in any asset class, this is a good way to make up for that.

2. $5,500 in savings, and leave $2,700 in checking.

I wouldn't be comfortable with this little in liquid, but that's your call, not mine.


3. What about the remaining $35,000? Would it make sense to put this in a Vanguard Total Stock Market Index Fund, and then build my house down payment with my monthly savings? What sort of account should I use for my house savings? Or would you guys recommend something else?

What's your goal for the money?  If this is towards a down payment on a house in the next two years, stocks are an inappropriate investment vehicle for this time horizon.

Is it towards retirement?  Have you decided if you want to treat your tax-advantaged and taxable accounts as one large portfolio or separately?  Reasonable people disagree about whether or not to do this, regardless of desired retirement age.

In fact, depending on how much you need for the down payment, you might want to put the $35,000 in a higher-yield savings account and/or CD (depending what rates you can get - I haven't looked lately) and add to it (if savings account) until it's enough for that purpose.  Then you can start investing the additional money each month in something for your 'stash.

BTW, is the current 401(k) your only retirement savings, or do you have old 401(k)s and/or IRAs?

aj_yooper

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Re: How do I get the snowball started?
« Reply #5 on: July 26, 2013, 05:36:34 AM »
Welcome to the Forum!

You are in an excellent position for your MMM journey!  No debt, good job, savings, goals, and a strong desire to become more frugal.

Bogleheads is an excellent site for personal finance and investing.  The personal finance site pertinent here is regarding emergency funds:  http://www.bogleheads.org/wiki/Bogleheadsģ_personal_finance_planning_start-up_kit  They suggest the following:

"For instance, a multi-tiered emergency fund could consist of:
Three months of expenses in cash (bank account or money market fund)
The next three months of expenses in CDs with the option to cash them in for three months of interest
The next three months of expenses in a short-term Treasury bond fund. Selling these would risk incurring some loss of principal due to interest rate changes, but since the odds of needing to rely on your emergency fund for more than six months are slim, some would consider this an acceptable compromise. [footnotes 2]"

IMO, your 3 month EF goal is too low so think about that.  I would keep a double or triple of your monthly expenses in your checking account, then your bonds, plus other $$ to reach your EF goal amount.  If your car will need replacement in a few years or so, it is prudent to put the money aside each month to plan for that expense.

You are getting the 401k employer match so, according to Bogleheads http://www.bogleheads.org/wiki/Bogleheadsģ_investing_start-up_kit, the next step would be developing your investment plan or policy.  A written statement is very helpful; put it in the top of a spreadsheet that you use to track your goals and investments.  Part of that plan/policy is to determine what your asset allocation (AA) will be for all of your invested money.  This depends on your tolerance of risk and desire for reward in your investing, or risk/reward profile.  The AA of say 70% equities and 30% (70/30) bonds would then be used to determine what funds to use in each investment vehicle.  Bonds generally should be in tax sheltered vehicles, like a 401k or Roth, rather than in a taxable account. 

Since you are working towards ER, many here would say you need to set up and  send $5,500 to a Roth IRA, preferably in Vanguard, as it is cheaper and has more index choices than most firms.  In your 401k, it is important to keep your fund expense ratios (ERs)  as low as possible as this seriously affects your investment performance.  You are investing your hard earned and saved money so avoid thinking of this as 'playing the stock market' and such.  Nobody consistently beats the market so you buy the markets instead, e.g. index of Total Stock Market, Large Cap, Small Cap, Value, REITS, etc.  Bogleheads has straightforward fund choice recommendations that would be very good to consider. 

Purchasing a house/condo will encumber you so carefully consider if this is what is in your best interest.  For me, it is, but your situation is different.   If you do want to buy, compute your expected down payment and closing costs and set up a savings goal with the money probably at your bank.  You could portion this out of your current savings.

Then, I would max out my 401k contributions and a HSA, if your company has one.  If there are no other tax sheltered vehicles to use, you are ready to set up a taxable investment account. 

Bogleheads is very good; I also like the book by Andrew Tobisa, The Only Investment Guide You'll Ever Need

I hope this helps. 




TrulyStashin

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Re: How do I get the snowball started?
« Reply #6 on: July 26, 2013, 08:10:08 AM »
At the very least, move your savings to Ally Bank or other higher-yielding institution.  Ally is currently paying .84% for savings. 

And if you go to Bankrate, you can find information comparing the rates paid by a long list of banks/ savings & loans/ credit unions. 

You can definitely do better than .02%!

PK

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Re: How do I get the snowball started?
« Reply #7 on: July 26, 2013, 09:00:42 PM »
Wow, thanks for the responses guys. I'll definitely be making some tweaks / changes based on your replies. The biggest thing seems to be that instead of prioritizing investing, I need to focus a bit more on maxing retirement, creating an emergency fund, make a plan for my house funds (I expect to buy for another 12-24 months, so that will be part of the plan), and THEN start throwing the rest into investing.

Oh, and I intend to put the full $5,500 into the IRA. $5,000 was a mistake on my part. I still haven't decided the flavor of IRA yet, though.

As to your questions...

How much are houses where you want to buy?  What kind of down payment would you need?  Are you sure you want a house? (I love houses but they are a TON of work to maintain). Would a condo work better for your needs?  Is buying cheaper than renting in your area, or is renting cheaper?
How exactly does your employer's 401k match work? 
When you say $5k into IRA do you mean a regular IRA or a Roth?  You are below the income max to make a full Roth contribution, FYI.

I donít plan on buying for another 12-24 months, as I still need to figure out if Iím going to follow my dream and move to a mountain area or stay here to support relatives. I plan on renting until I figure that out. Up until recently, it was much cheaper to rent because housing prices are somewhat high and didnít drop as much as the rest of the country. I'm guessing 20% down on a $150,000-$250,000 house as an initial goal, so thatíll be $30,000-$50,000 set aside in, most likely, 18 or so months. Condos donít interest me as much because they are very hard to sell around here.

As for 401(k), theyíll match the first 5% of our salary with 10%. So basically theyíll match the first $4,550 of my 401(k) with $455.

You sound in a pretty good state to me. I'm 39 and I have 3 kids and my main question would be are you planning on having a family at any time and how would you handle this ?

The next question to me is should you rent or buy ?

I'd like to have a family, but I have to meet someone first. At least I know to look for someone who enjoys coupon and bargain hunting! But really, thatís the wild card.

I agree with owning a house being a key to FI, but Iím not ready to tackle that at 100%. Iím starting to see the value in putting serious effort into building a down payment fund, though.

And thanks for the advice! I like the idea of maxing out my IRA, and Iíll definitely up my 401(k). An 80-20 type of split makes sense to me, although Iíll likely tweak it a bit.

Im a big fan of the Roth IRA. I'd stick $5500 there to start. If you want to buy a house soon you might want to leave whatever cash you plan on using for your downpayment in your savings account.

*nods*
If I plan on finding a place in 12-18 months, and can put ~$1,000 dollars to the $30,000-$50,000 down payment  fund each month, Iíd want to look at $15,000 as a minimum starting point.

And have you decided what you're going to invest it in, fund-wise?  If your 401(k) is lacking in any asset class, this is a good way to make up for that.

Not yet, but you make a good point.

Is it towards retirement?  Have you decided if you want to treat your tax-advantaged and taxable accounts as one large portfolio or separately?  Reasonable people disagree about whether or not to do this, regardless of desired retirement age.

In fact, depending on how much you need for the down payment, you might want to put the $35,000 in a higher-yield savings account and/or CD (depending what rates you can get - I haven't looked lately) and add to it (if savings account) until it's enough for that purpose.  Then you can start investing the additional money each month in something for your 'stash.

BTW, is the current 401(k) your only retirement savings, or do you have old 401(k)s and/or IRAs?

My current 401(k) is my only pure retirement at the moment.

Yeah, Iím planning on putting a bit more in savings, and may add more to it until I get close to 6 months emergency fund. It just seems like such a high dollar amount with such little return.

As for my current $35,000, I initially wanted the bulk of it to go towards the Ďstash to work towards the 11 year plan, with a smaller percentage of it going towards the house fund. You guys are making a good case though, and seem to agree with each other, so Iím definitely rethinking that strategy. Iíve been so hyper cautious for so long I think the pendulum has swung a bit too far to the other end.

Bogleheads is an excellent site for personal finance and investing. 

Oh, thanks for the link! That seems like some pretty good advice on savings, too.

Bonds generally should be in tax sheltered vehicles, like a 401k or Roth, rather than in a taxable account.

The bonds were received as a gift when I was very, very young, and only began to mature in late 2011. However, what you said makes a lot of sense. Iíll definitely check the website out and put some thought into developing a plan.

I hope this helps.

Itís been extremely helpful, so thank you. Itís one thing to read these generalized strategies, but itís been extremely enlightening hearing them applied to my situation. Iíll be commenting on more of the ideas in your post once Iíve had a chance to digest it all and incorporate them.

You can definitely do better than .02%!

Agreed! Thanks for the suggestions.

meadow lark

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Re: How do I get the snowball started?
« Reply #8 on: July 26, 2013, 09:38:10 PM »
Just a contrarian comment - I choose not to have anywhere near that large of an emergency fund as people are suggesting.  A 9 month emergency fund?  No way.  I probably should add more to my emergency fund, but I should say I have a very stable job, I am married to someone with a very stable job, we could live on just one income, etc.

PK

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Re: How do I get the snowball started?
« Reply #9 on: July 27, 2013, 04:43:31 PM »
Just a contrarian comment - I choose not to have anywhere near that large of an emergency fund as people are suggesting.  A 9 month emergency fund?  No way.  I probably should add more to my emergency fund, but I should say I have a very stable job, I am married to someone with a very stable job, we could live on just one income, etc.

9 months seems high to me, and I doubt I'll go that far right now. But it would take me 4 months to get out of my current lease. After that, I can make changes to cut my expenses down to a tiny portion of what they are now. The downside to being single, though, is that I'm the only one I can count on to provide a safety-net, so I get the reasoning behind having more than a 2-3 month emergency fund.

oldtoyota

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Re: How do I get the snowball started?
« Reply #10 on: July 27, 2013, 09:12:24 PM »
Lots of good comments have already been made. My question is how does one person spend that much on food? Does that include restaurants?

oldtoyota

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Re: How do I get the snowball started?
« Reply #11 on: July 27, 2013, 09:14:51 PM »
One more thing. I recently got pre-approved for a mortgage and the agent told me I should have liquid cash in a "seasoned" fund to pay the down payment. He defined "seasoned" as money that had been in the account for two months at least. I am not an expert in this area, so please verify this is the case with the company you choose to use. You might also want to ask around in the real estate part of this forum.




PK

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Re: How do I get the snowball started?
« Reply #12 on: July 27, 2013, 09:44:10 PM »
Lots of good comments have already been made. My question is how does one person spend that much on food? Does that include restaurants?

Some great comments, indeed!

And $1,000 consists ENTIRELY of eating out, both via fast food and restaurants. It's pretty easy to hit $10 a meal, $30 a day.

One more thing. I recently got pre-approved for a mortgage and the agent told me I should have liquid cash in a "seasoned" fund to pay the down payment. He defined "seasoned" as money that had been in the account for two months at least. I am not an expert in this area, so please verify this is the case with the company you choose to use. You might also want to ask around in the real estate part of this forum.

Interesting. I'll definitely keep it in mind. Right now, I'm thinking that I will open an account just for the house, and another one for the emergency fund. So hopefully that will work for meeting any "seasoned" account requirements.




AlmostIndependent

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Re: How do I get the snowball started?
« Reply #13 on: July 27, 2013, 10:48:15 PM »
One more thing. I recently got pre-approved for a mortgage and the agent told me I should have liquid cash in a "seasoned" fund to pay the down payment. He defined "seasoned" as money that had been in the account for two months at least. I am not an expert in this area, so please verify this is the case with the company you choose to use. You might also want to ask around in the real estate part of this forum.

You can use money that has been there for less than 2 months. If you have any large deposits they will ask you to show where they came from. They're just trying to prevent people using loaned money for down payments. If you get a chunk of money from someone they might ask for a letter from that person staying that its a gift or whatever the situation is. No big deal, just something to be aware of.

Hotstreak

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Re: How do I get the snowball started?
« Reply #14 on: July 27, 2013, 11:11:42 PM »
Interesting. I'll definitely keep it in mind. Right now, I'm thinking that I will open an account just for the house, and another one for the emergency fund. So hopefully that will work for meeting any "seasoned" account requirements.

The seasoning is to determine if you borrowed the money or not.  If it's borrowed, 2 months is enough time that the loan will show up on your credit report.  But if you took a loan very recently, like from a 401k or a check from relatives, the repayment on that loan has to be considered when determining whether you qualify for the loan.  You will be fine :).

oldtoyota

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Re: How do I get the snowball started?
« Reply #15 on: July 28, 2013, 08:47:15 PM »
Lots of good comments have already been made. My question is how does one person spend that much on food? Does that include restaurants?

Some great comments, indeed!

And $1,000 consists ENTIRELY of eating out, both via fast food and restaurants. It's pretty easy to hit $10 a meal, $30 a day.

One more thing. I recently got pre-approved for a mortgage and the agent told me I should have liquid cash in a "seasoned" fund to pay the down payment. He defined "seasoned" as money that had been in the account for two months at least. I am not an expert in this area, so please verify this is the case with the company you choose to use. You might also want to ask around in the real estate part of this forum.

Interesting. I'll definitely keep it in mind. Right now, I'm thinking that I will open an account just for the house, and another one for the emergency fund. So hopefully that will work for meeting any "seasoned" account requirements.

Ah, I see. For the purposes of cost reduction, you are going to have it fairly easy. Just by eating at home more, you can cut that $1,000 bill by quite a bit!


PK

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Re: How do I get the snowball started?
« Reply #16 on: July 29, 2013, 07:06:48 AM »
Ah, I see. For the purposes of cost reduction, you are going to have it fairly easy. Just by eating at home more, you can cut that $1,000 bill by quite a bit!

Indeed. What's surprising me is how much I'm enjoying the challenge so far. It's actually kind of fun to buy a bunch of cheap, bulk ingredients (beans, rice, etc), some meats (chicken, ground beef, pork, etc), and figure out ways to mix and match them in order to make the meat last for as many meals as possible.

Saturday was the first day in at least 3 years that I didn't eat out at all. Now I just gotta try to get through a day without spending anything...

AlmostIndependent

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Re: How do I get the snowball started?
« Reply #17 on: July 29, 2013, 12:36:03 PM »
Saturday was the first day in at least 3 years that I didn't eat out at all. Now I just gotta try to get through a day without spending anything...

Don't worry; it sounds daunting but once you get into it it's a lot of fun. If you don't succeed at first don't be to hard on yourself. It's a new skill, you'll probably make a few mistakes here and there. No big deal. We've all been there.

PK

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Re: How do I get the snowball started?
« Reply #18 on: July 31, 2013, 08:04:15 PM »
Okay guys, wanted to provide a quick update. Plus, a chance for you guys to smack me down a bit if I'm getting a silly in my desire to make a decision!

For simplification purposes, I'm only considering how I will allocate the $45,000 in my savings account, since getting started is my priority, since it'll inspire me to spend less and save more, and give me confidence to learn more sophisticated strategies.

Money to allocate: $45,000
Money put towards savings / month, excluding 401(k): $2,000 as long as there are no emergencies.

1. Emergency Fund: $8,100. (3-4 months worth.)
2. ROTH IRA: $5,500. I earn too much to take full advantage of the traditional IRA tax advantages.
3. House Fund: $25,000
4. Vanguard Total Stock Market Index Fund: $6,400 (A relatively small amount to get started. My strategy will get more sophisticated as I learn more.)

When it comes to the house fund, I plan on splitting it between a higher risk account and a low risk account. Namely:

1. $10,000 in a dividend fund. This is a "small" enough amount that if it goes down I can leave the money in there long enough for it to recover. I am willing to accept this risk.
2. $15,000 in either a high-yield savings account, or 1-year CD.

Sound like a decent plan to start off with, or am I missing something?

Thanks again, everyone!

Don't worry; it sounds daunting but once you get into it it's a lot of fun. If you don't succeed at first don't be to hard on yourself. It's a new skill, you'll probably make a few mistakes here and there. No big deal. We've all been there.

I now have my bike, a some key accessories, and my kitchen is filled with food. I have to pay my rent tomorrow, but Friday should be my first day in years without buying anything. Looking forward to the milestone!