Author Topic: Reader Case Study - How to make my money work harder?  (Read 4774 times)

mrF

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Reader Case Study - How to make my money work harder?
« on: June 05, 2014, 08:01:43 PM »
Income: I work for a software company, and earn $3308 a month after taxes and my contribution for health care. That works out to almost $39700/yr after taxes.

age:33

goal: Ultimately, to not be worried about money.  I think that FU money or SWAMI come closest.

Current expenses:
Internet - $66/month
Electric - $40/month
Rent - $770/month (this ends after July 1).
Cell Phone- $92/month
Fuel - $140/month
Oil change - $40/every 3-4 months or ~ $15/month
Food - $320/month
Gym Membership - $44/month  (employer reimburses up to $360/yr for gym activities)
Medical Expenses - $80/month
Cleaning, laundry, other small recurring expenses - $70/month
Car insurance - $60/month

Total out: 1697/month

Assets:
Stocks: about 83K:
74K in a brokerage account. 
Allocation: Mixed between mutual funds and some specific stocks and ETFs (APPL, AMZN, PBW, VTI, ACM, VDSI).   APPL and AMZN are the only ones that have provided good returns.  I keep thinking that I should rebalance this (AMZN makes up about 30-40%  of the account, and I've already earned something like 2300% return (on the half I didn't sell off 6 years ago!)
 
8.7K in an IRA, just holding mutual funds.

Checking and Savings Accounts (less any credit card debt for the month): $31560

Liabilities:
Student Loans - $232/month at 3% interest.  Around $38K remaining.
No credit card debt - paid in full every month.
No car payments
Mortgage including Property Tax + Insurance : $494/month.  ($80K mortgage, 4.375% interest) (this begins in July).

There will be one month where I'm paying rent and a mortgage.  Skipping forward to August, my total out (including loans) will be at least $1659/month.   I'm not factoring in Gas or Water, since I don't know those #s yet.

I also signed up for our company's ESPP (15% discount, 6 month term) last month, so I will have 10% of my pay being withheld for 6 months.  My intention is to sell these stocks, collect the difference (minus taxes and fees), and roll this into a 401K (which is matched up to.. $3000, I believe).

Anticipated Expenses:
I just purchased my first house, and it needs some significant deferred maintenance attended to.  I expect that it will be at least $6000 total but might be higher, not including the cost of moving in(which should be low, it's only a mile away and I don't own much stuff!)

I will be working towards a certification in a software that our company has started using.  They are covering the cost of exam and some travel, but I do want to do some outside study.  I view this as a small investment with a high potential return.

My Question:  I'm interested in working out some ways to make my money work harder for me.   What could I be doing differently to put my money to work in a productive and useful fashion?   

I picked up a Chase Sapphire Card and an Amex Blue Preferred, to try and capture a bit of rewards on the expenses I already have (such as food) as well as the incipient home expenses.   

Signing up for the ESPP was exciting, and I think I have the cash on hand that I won't feel the 10% being withheld. 

However, I think more could be done and I'm hoping some of you have some good ideas!

« Last Edit: June 06, 2014, 08:37:40 PM by mrF »

Mutton Chop

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Re: Reader Case Study - How to make my money work harder?
« Reply #1 on: June 05, 2014, 09:29:16 PM »
How old are you?
What are you ultimate objectives?

Personally speaking I prefer low cost eft's to single stocks.

MDM

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Re: Reader Case Study - How to make my money work harder?
« Reply #2 on: June 05, 2014, 09:56:37 PM »
Appears you have done and are doing well.  Of course, if one would always pick individual stocks that do as well as AMZN, who needs a day job?  But back to reality...:

You do have plenty in cash, so using that to fund new home capital improvements should work well.

Good plan on the ESPP itself.  Not sure about the "...and roll this into a 401K" part - will your employer allow you to do that?

Doing pre-tax deductions into your 401k plan would be worthwhile.  One can debate the relative merits of 401k vs. Roth, but for your situation I'd lean toward putting the max $5500 into a Roth and then "as much as you can" into the 401k.

Based on numbers in your OP, guesses at gross income, state tax, etc., you might be able to put ~$900/mo into the 401k and be cash flow neutral once you are past renting.  Is that at all close to what your numbers say?

MrChubbles

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Re: Reader Case Study - How to make my money work harder?
« Reply #3 on: June 05, 2014, 11:35:17 PM »
Unless you are running a taxi service ( lots of starts and stops ),your oil changes need to be no more frequent than the manufacturer's recommended interval, which is likely to be 6000 miles, so you can save half right there.

Obviously, you might consider going to a cheaper cellphone plan..or will your company pay for a cellphone?

Cleaning & Laundry: once you own a place, look for used washing m/c and dryer. If your weather permits, line dry the clothes, to save on electricity for the dryer.
We bought a new washing m/c for huge money, BUT we have a cat and three dogs, so the washing m/c is in near constant use and there is a load of technology in a washing m/c, so I wanted to know it hadn't been used to wash bricks and broken glass. There is bugger all technology in a dryer and we only use it when the weather does not permit line drying, so we bought an old dryer on Craig's list for practically nothing: we don't care if the dryer and washing m/c don't match.

ESPP with 15% discount is a good deal, I did the same thing when I worked for a company that offered that: it's the equivalent of a 1.5% pay raise :-)

How do you feel about renting out a room for a while? I wouldn't do it now, but I did for the first couple of years after buying my first apartment.

fishingman88

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Re: Reader Case Study - How to make my money work harder?
« Reply #4 on: June 06, 2014, 04:16:19 AM »
Knowing age will definitely help for this case study. 

One major question I have for you:

1) Why is your IRA only 8.7K?  Just curious because you should be taking advantage of the tax deduction from your contributions. 
2) What are your goals? i.e. Desired retirement age?
3) Why are you holding onto so much cash in savings/checking accounts and not investing it?


mrF

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Re: Reader Case Study - How to make my money work harder?
« Reply #5 on: June 06, 2014, 11:21:59 AM »
thanks and acknowledgement to all who have responded thus far.  some very thought provoking contributions.

I've updated my post with requested info, and will make a more substantial reply this evening.

mrF

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Re: Reader Case Study - How to make my money work harder?
« Reply #6 on: June 06, 2014, 08:37:08 PM »
OK.  Now that I'm on something with a proper keyboard.. ;-)

I went ahead and updated my first post to include age and objective.

Debt Destroyer,

My stock purchasing days are actually fairly far back in the days (ca. 2007).   At the time, I had a fairly good amount of cash available to invest and I was actually hoping to put it towards a good down payment on a house.   So, much of my investments (ETFs, Stocks, and Mutual Funds) actually came from this period of time.   Most have not really done much, with the exception of AAPL and AMZN which have skyrocketed, and PBW and VDSI which significantly lost value in 2008 and never really came back.

Other than selling off some stocks to take a loss to offset some uncovered tax liabilities back in 2010 (bad idea.. ), I haven't really done anything with these.

MDM,

AMZN was sold with the proceeds of my selling of Pfizer shares my grandfather had given me.   I think in the long run, I did better, but it would have been nice to hold those through the Viagra years.  :-)

I think my understanding of how IRAs and 401Ks function may be slightly deficient.   It's been almost a decade since I read stuff on investing, and at the time I wasn't concerned with tax implications.   I guess I assumed I could use the proceeds from my ESPP to fund my 401K.  Now that you mention it, though, I could see where perhaps that wouldn't be the best way to go about it.   

I know the ESPP has specific tax implications of its own, as well.   I'm not 100% clear on those, so I assume the actual return assuming the minimal gain is closer to 10% than 15%.  Anyone have a spreadsheet? 

What would make you choose the Roth IRA over the 401K in terms of prioritizing funding?

MrChubbles
Re: Oil Changes.   Almost all of my driving is City Driving with a ton of starts and stops.  However, I have been trying to follow the 3000 mile advisory sticker in an effort to keep my ~200K 2003 toyota running properly.  I'd love to learn that I don't need to do this as often - I go to my mechanic for them and it's not the easy in-out experience of a fast place (on the bright side, he doesn't do things like leave hoses unhooked).

I've started looking into a cheaper plan.   I think a lot of it is inertia of having been with big red for so long.   

The new place actually has a (old and crusty) washer and dryer setup.  I haven't used them yet, but hopefully they are in good form.   Right now, I actually find that it's more effective for me to pay for Wash and Fold service than to do my own using the coin-op machines in my building (the cost is ~$1.50 more total, and I get to avoid doing laundry).   With just one person, laundry is a once a week thing.

Renting out a room would be a possibility, although ideally my girlfriend will move in within the next year.   That would be great, as it would lower costs dramatically for both of us as well as enable us to spend a bit more time together (due to our schedules, we don't get to see each other other than weekend time).

FishingMan88

1. The IRA is low b/c it's been a long time since I put anything into it.   See answer #3 for more on this.
2. Main goal is to not be worrying about money.  I like my gig (it's still pretty new to me), but I'd love to have the flexibility to pursue something else if I felt driven to do so.   FU Money, SWAMI, FI.. those probably are closest.   I haven't thought much about retirement age.
3. So, with the cash thing, I think it's a product of my childhood as well as my 20s.   I spent my early adult years trying to make a life as a classical musician (and not very profitably or successfully).  I was constantly anxious and worried about money and having enough liquidity for covering costs and emergencies, since income was sporadic and unreliable.   

Towards the end of that period, I went through a divorce that left me with even less $$ and an attorney's bill.  More anxiety around money.

I've actually only been working full time in my new career for about 24 months, and one of my first goals when I started working was to put together a healthy emergency fund - something substantial enough to cover my living needs for at least 6 months.   I still worry about what would happen if I lost my job and whether I would be hired elsewhere - and if I'd have enough to be okay during the time between. 

One of the things I've observed is that a lot of my goals seem to be defensive in nature.   In social psychology, one would say that I have a prevention-focused mindset - I'm trying to preserve a sense of safety and mitigate or eliminate sources of anxiety.   I'm trying to balance that and get a bit more promotion-focused - coming up with things I'm working towards and goals I'd like to achieve, beyond just feeling more financially safe.

blahblah,

That's just me eating all that food.  And believe it or not, I don't eat out very frequently!   I think it's a consequence of my quasi-paleo vegetarian diet.  I eat a lot of greek yogurt.

I do need the gym - even with the house, there isn't really a viable space for the weights that I need (low basement ceiling, no garage, inadequate joists).   I should mention that my employers actually do provide a stipend for fitness, which offsets a significant portion of this.  I'll edit my post.

I addressed the whole large checking savings matter above, so I'd refer you to that.  Basically, I'm still trying to come to terms with actually having a steady income. 

Thanks for pointing out the credit card issue.   I'm not intending to churn these cards, as I think they actually offer some very nice perks.  Especially with my high grocery bill, the AmEx blue preferred provides a nice cash back on that.   The Chase Sapphire looks like it is also pretty good, though I will have to re-assess next spring to see if I want to continue with it.  Prior to this, I only held one CC for the past 10 years or so: a visa rewards card with 1% cash back.   Not so rewarding.  It's good to be aware of the CC age issue, though.   

I agree about the money in the checking/savings accounts.  It's not doing anything, and really that's one of the main things I'm trying to figure out - what to do with that money, as well as the money that makes up the difference between my living costs and my income.   At first with the house, I will be putting a good chunk into improvements and repairs, but there will still be a large portion left over.   

MDM

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Re: Reader Case Study - How to make my money work harder?
« Reply #7 on: June 06, 2014, 09:37:32 PM »
I think my understanding of how IRAs and 401Ks function may be slightly deficient.   It's been almost a decade since I read stuff on investing, and at the time I wasn't concerned with tax implications.   I guess I assumed I could use the proceeds from my ESPP to fund my 401K.  Now that you mention it, though, I could see where perhaps that wouldn't be the best way to go about it.   
The concern is not so much whether it would be the best way to go, as much as whether it is even allowable.  In "most" (I think it is "all" but am allowing for some exceptions) companies the 401k withholding happens as paychecks are issued.  Once you take possession of the delivered pay, you can't say "just kidding - take this back and credit it to my 401k account".

Quote
I know the ESPP has specific tax implications of its own, as well.   I'm not 100% clear on those, so I assume the actual return assuming the minimal gain is closer to 10% than 15%.  Anyone have a spreadsheet? 
Think of ESPP gains exactly the same as any other paycheck you receive from work - because (other than some withholding details) that's the way the IRS will view them.  So your net gain after fed/state/SS/Med may be closer to 10%, but no different than any normal paycheck amount.

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What would make you choose the Roth IRA over the 401K in terms of prioritizing funding?
Appears (taxable income ~$29000?) you are in the 15% marginal tax bracket.  True, that is a "gray" bracket - 10% or less would "definitely" be Roth then 401k and 25% or more would "definitely" be 401k then tIRA (IMO) - so it's more a guess than a certainty.  In other words, I'm guessing that you'll be in a higher bracket at retirement so lock in the tax free distribution at low marginal tax rate now.  Really your call.

mrF

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Re: Reader Case Study - How to make my money work harder?
« Reply #8 on: June 08, 2014, 09:47:28 PM »
Thanks for the further explanation, MDM.  Very helpful!

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The concern is not so much whether it would be the best way to go, as much as whether it is even allowable.  In "most" (I think it is "all" but am allowing for some exceptions) companies the 401k withholding happens as paychecks are issued.  Once you take possession of the delivered pay, you can't say "just kidding - take this back and credit it to my 401k account".

So basically, 401K is typically funded from the paycheck.   I don't know why I thought it was possible to fund beyond a consistent withholding.

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Appears (taxable income ~$29000?) you are in the 15% marginal tax bracket.  True, that is a "gray" bracket - 10% or less would "definitely" be Roth then 401k and 25% or more would "definitely" be 401k then tIRA (IMO) - so it's more a guess than a certainty.  In other words, I'm guessing that you'll be in a higher bracket at retirement so lock in the tax free distribution at low marginal tax rate now.  Really your call.

My pre-tax income is up to 55800, now.  I think that puts me closer to the 25% tax rate.  It sounds like the 401K might be the priority?

MDM

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Re: Reader Case Study - How to make my money work harder?
« Reply #9 on: June 08, 2014, 10:26:48 PM »
So basically, 401K is typically funded from the paycheck.   I don't know why I thought it was possible to fund beyond a consistent withholding.
Yes, "typically" - but you might as well check with your company's payroll/HR department to verify for your situation.

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My pre-tax income is up to 55800, now.  I think that puts me closer to the 25% tax rate.  It sounds like the 401K might be the priority?
"Taxable Income" = "Pre-tax income" minus "all the pre-tax deductions, e.g. FSA, 401k, etc." minus "Exemptions" minus "Deductions". 
E.g., with $50,905 gross pay, $960 to a healthcare FSA, $10,860 to 401k, $3,950 single exemption (2014 rate), and $6,200 standard deduction:
Taxable Income = $50,905 - $960 - $10,860 - $3,950 - $6,200 = $29,115.

It's the Taxable Income that defines your marginal tax rate.  See http://www.cffpinfo.com/pdfs/2014_Annual_Limits.pdf for a good summary of many tax-related limits and rates.