Author Topic: What to do with $1000 a month (Now with Case Study)  (Read 3206 times)

cantgrowamoustache:(

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What to do with $1000 a month (Now with Case Study)
« on: December 29, 2015, 09:35:28 AM »
Hello everyone, started reading this blog a few months ago while I was looking for information to help me abandon my debt-dependent lifestyle. At the worst of it about 3 years ago I had $25k in cc debt, and probably $40k in car loans (both of my cars and my motorcycle were financed). I lived paycheck to paycheck, relying on the credit card to pay for anything I "needed" when the money ran out.

Today I am debt free with an income surplus of about $1000 monthly. I currently contribute about $600/month to my TSP account (I'm military) and I am wondering what to do with the rest. I thought about upping that contribution, but I want to buy a house in the next couple years and want to save up as much money as possible for that.

I am 27, married and combined we have about $35k in retirement accounts, and $5k in cash. I would like to continue to build up the 5k emergency fund, I don't ever want to have to use a cc again, but besides that, what should I be doing with my money?

Thanks!

Edit below:

Salaries: $5,793

Rent - $975 (16.8%)
Beauty Shop - $60
Netflix - $9
Car Insurance - $63
Car Maintenance/Registration - $40
Clothing/Shoes - $60
Dining - $90
Entertainment - $90
Fuel - $90
Gifts - $20
Groceries - $475 (8.1%)
Hair Care - $25
Household - $240
Internet - $44
Life Insurance - 34
Cell Phone - $104
Travel/Vacation - $300
Wine/Beer/Tobacco - $50 (quit smoking, yay me!)
Misc. - $144 (2.5% :p)+144


Roth 401k Contributions - $590
Savings Account - $1180


Total Expenditures - $4,683


I know this doesn't quite add up, but I used pre-tax salaries, between the 2 of us we are paying about $1000 a month in taxes, social security, medicare, etc... We both have our tax withholding set at single rate with 0 exemptions, this is a throwback to my pre-MMM days when I couldn't trust myself with money, and I needed that extra couple grand every year to put towards my credit card. Typing that out, I see how stupid it was. Live and Learn.

« Last Edit: December 29, 2015, 04:39:08 PM by cantgrowamoustache:( »

svndezafrohman

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Re: What to do with $1000 a month
« Reply #1 on: December 29, 2015, 11:02:08 AM »
If I were you, I would reconsider buying a house.
Google "Why not to buy a house" and see all the pros and cons of homeownership.
You say you are military, so does this mean you will be forced to relocate every few years?
If so, another big reason to reconsider homeownership.

For that extra grand you have, i would just buy an index fund in vanguard, VTSAX, and keep funding that.

cantgrowamoustache:(

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Re: What to do with $1000 a month
« Reply #2 on: December 29, 2015, 11:46:49 AM »
If I were you, I would reconsider buying a house.
Google "Why not to buy a house" and see all the pros and cons of homeownership.
You say you are military, so does this mean you will be forced to relocate every few years?
If so, another big reason to reconsider homeownership.

For that extra grand you have, i would just buy an index fund in vanguard, VTSAX, and keep funding that.

I'm hoping to get stationed where I plan to retire. If that doesn't happen, then I wont buy a house, I understand that buying a house isn't always better. If I don't get the assignment I want I will postpone the purchase.

mxt0133

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Re: What to do with $1000 a month
« Reply #3 on: December 29, 2015, 12:18:20 PM »
My recommendation would be to take your MMM training to the next level before you "do anything with that money."  I know a lot of people will advise putting it in an index fund and for them that is appropriate, but if you are not comfortable with the ups and downs of the stock market then the worse thing that can happen is it starts to go down and you pull your money out, locking in your losses.

It seems like you just got your spending under control, so the next steps would be to focus on your next goal, if it's saving for a house then create goals that will get you to a specific amount by a given date.  Work on optimizing your expenses to help you achieve your goal.  Learn as much as you can, increase your income and decrease your spending.  Take your time, it's not a race. 


gecko10x

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Re: What to do with $1000 a month
« Reply #4 on: December 29, 2015, 12:29:50 PM »
Assuming "$5k in cash" is all you have in cash, I would suggest increasing that significantly, either just as a larger lump sum, or in the form of targeted savings. I suggest saving for the following:
- Next car
- Car maintenance
- Medical expenses
- Other large replacement (computer, cell phones, appliance, etc.)
- Kids?
- Job loss?
- House?

In addition, do you have life insurance? (perhaps that is covered by military?)

tomorrowsomewherenew

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Re: What to do with $1000 a month
« Reply #5 on: December 29, 2015, 12:44:00 PM »
Military family here!

I agree you should not buy a house unless it is where you are planning to retire...as in, this is your last duty station before you get out. Other than that, you should have a small emergency fund--not as large as civilians need, as you have a guaranteed paycheck for at least a while.

I would be funneling as much of that cash into the TSP as I could possibly manage. What pay grade are you? Our income isn't high enough that we would benefit from doing all Traditional, but I figure out how much we are going to make each year and put enough in Traditional to pay $0 in taxes, and the rest goes into Roth. I hope that makes sense!

cantgrowamoustache:(

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Re: What to do with $1000 a month
« Reply #6 on: December 29, 2015, 01:45:17 PM »
My recommendation would be to take your MMM training to the next level before you "do anything with that money."  I know a lot of people will advise putting it in an index fund and for them that is appropriate, but if you are not comfortable with the ups and downs of the stock market then the worse thing that can happen is it starts to go down and you pull your money out, locking in your losses.

It seems like you just got your spending under control, so the next steps would be to focus on your next goal, if it's saving for a house then create goals that will get you to a specific amount by a given date.  Work on optimizing your expenses to help you achieve your goal.  Learn as much as you can, increase your income and decrease your spending.  Take your time, it's not a race.

I understand the risks of keeping money in the stock market, and if I had more liquid cash on hand, I think I would be comfortable with it. I have thought about buying a $1000 1 year CD every month (starting when I am comfortable with my savings) to get myself used to not having immediate access to my money.

I understand about setting goals, unfortunately the "date" I buy a house could be as far as 12 years away, whether it happens sooner or not is not up to me.

Assuming "$5k in cash" is all you have in cash, I would suggest increasing that significantly, either just as a larger lump sum, or in the form of targeted savings. I suggest saving for the following:
- Next car
- Car maintenance
- Medical expenses
- Other large replacement (computer, cell phones, appliance, etc.)
- Kids?
- Job loss?
- House?

In addition, do you have life insurance? (perhaps that is covered by military?)

Actually right now I am looking to downsize my car, after I sell it and buy what I want, I should have about 8-10k in cash to pad my nest egg.
We dont have any kids right now, but do want to in the not-too-distant future.
I don't want to say i am not worried about job loss at all, but being in the military, it is what I would consider extremely stable.
I rent a house on post, so I have no extra housing costs (no bills, trash, renters insurance, etc...) it is all rolled into 1 monthly price.
We don't have any medical expenses, insurance covers pretty much everything.
car repairs and appliances and such is stuff that would come out of the 5k, I don't imagine I would need to spend it all faster than I could replenish it.

Military family here!

I agree you should not buy a house unless it is where you are planning to retire...as in, this is your last duty station before you get out. Other than that, you should have a small emergency fund--not as large as civilians need, as you have a guaranteed paycheck for at least a while.

I would be funneling as much of that cash into the TSP as I could possibly manage. What pay grade are you? Our income isn't high enough that we would benefit from doing all Traditional, but I figure out how much we are going to make each year and put enough in Traditional to pay $0 in taxes, and the rest goes into Roth. I hope that makes sense!
Hey! someone that "gets" me!

I can't guarantee it will be my last duty station, but even If it isn't I would move back there when I retire.

I am an E5, just hit 8 years TIS, but I have a warrant package in right now. I was at 18% roth tsp, but I am going to bump it up to 20 or 21% since I just got my TIS raise this month. I do 100% of my contributions as roth. I have never worried about taxes before, just looked forward to getting my refund. I just got married too, so I really have no clue what our taxes are going to be like. I guess this is something I could look into. Also, my wife is extremely investment-risk adverse, she would be most comfortable if I kept all of our cash in a savings account or under the mattress, that is a battle I fight from time to time.


What would you guys be recommending for an "emergency fund" and does this really need to be separate from my "savings account". Bearing in mind that I am military, and my job is extremely stable, and we don't rely on my wife's income to pay any of our bills? I've never been debt free before, so figuring out what to do with cash is kind of a "first world problem" for me.

cantgrowamoustache:(

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Re: What to do with $1000 a month
« Reply #7 on: December 29, 2015, 04:38:54 PM »
I have edited my original post with my income and expenses from the case study spreadsheet.

robartsd

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Re: What to do with $1000 a month (Now with Case Study)
« Reply #8 on: December 29, 2015, 05:04:05 PM »
You should start to figure out how your current situation works out tax wise and look into traditional (pre-tax) retirement savings. Most retirement account rules allow you to access the funds to purchase a house - that combined with the uncertainty of when you'll buy the house leads me to recommend maximizing retirement accounts rather than saving for a house in ordinary savings accounts.

Here's the areas of spending that I think you might look into further optimizing:

Beauty Shop - $60
Groceries - $475 (8.1%)
Hair Care - $25
Household - $240
Internet - $44
Cell Phone - $104
Misc. - $144
That adds up to almost $1100 a month and I think you could probably cut this by at least 50%.

Here's potential targets for these categories (less than $500/month):
DYI hair and beauty - perhaps $20/month combined.
More cooking from scratch, shopping for sales, couponing - perhaps $350/month for groceries, household, and misc.
Daley's Frugal Communications Guide - perhaps $75/month for phone and internet.

Villanelle

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Re: What to do with $1000 a month (Now with Case Study)
« Reply #9 on: December 29, 2015, 06:48:05 PM »
I'd probably mostly forget the idea of saving up for a down payment until the orders to the dream city actually pop up.  (Military family here.)  Then I'd continue dumping it in TSP.  Since you now have a lot of extra money, when the house purchase is on the horizon, if you need to you can save up for a downpayment pretty quickly when the time comes. 

If you haven't already, look around the site for posts by Nords, who is an expert on military finances and retirement.  And check out his website as well. 

Nords

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Re: What to do with $1000 a month
« Reply #10 on: January 02, 2016, 10:35:52 AM »
Welcome to the forum, CantGrow.  It looks like you're doing fine. 

I am an E5, just hit 8 years TIS, but I have a warrant package in right now. I was at 18% roth tsp, but I am going to bump it up to 20 or 21% since I just got my TIS raise this month. I do 100% of my contributions as roth. I have never worried about taxes before, just looked forward to getting my refund. I just got married too, so I really have no clue what our taxes are going to be like. I guess this is something I could look into. Also, my wife is extremely investment-risk adverse, she would be most comfortable if I kept all of our cash in a savings account or under the mattress, that is a battle I fight from time to time.
If you know roughly when you expect to buy the house then you could stash your down-payment fund in an equity index fund (>10 years) or a short-term bond fund (5-10 years) or CDs (<5 years).  Move the fund to the less-risky assets as you approach your date.  The key is not chasing yield by taking on excessive volatility risk or principal risk.  When you're finally ready to buy then the down-payment fund gives you more negotiating power for discounts, and that price reduction makes up for a whole lot of 1.2% APY CDs.

I wouldn't buy a home on active duty, even if I intended to retire there.  Living in your retirement location gives you several years to research the neighborhoods and wait patiently for bargains.  Going to open houses and home shows 1-2x/month helps you refine your criteria, and the practice pays off when you see a place because you'll quickly recognize your dream home at the right price.  Read Jane Hodges' "Rent vs Own" for a more balanced perspective on that perpetual debate.

As for your spouse, I think "risk averse" is a synonym for "volatility" and "risk of loss".  If she can teach herself to not look at the statements then you can invest in a moderately aggressive asset allocation-- because you have a military income.  So maybe she would agree to let you handle the paperwork and she only looks at the numbers once or twice per year.  If you're living on one income and regularly investing the other income, then when the market drops she can take the Buffett attitude of cheering for cheap index-fund shares on sale.

What would you guys be recommending for an "emergency fund" and does this really need to be separate from my "savings account". Bearing in mind that I am military, and my job is extremely stable, and we don't rely on my wife's income to pay any of our bills? I've never been debt free before, so figuring out what to do with cash is kind of a "first world problem" for me.
You could put enough in the emergency fund for a car repair or a no-notice plane ticket to visit family during an emergency.  With a military income (plus her income), $5K could be all you need in your emergency fund.  You'd put the immediate expense on a credit card and then pay it off out of the emergency fund or out of next month's income.  It might cause you to skip a month or two of contributions to a Roth IRA or a taxable account while you pay off the card and rebuild the emergency fund, but that's how it's supposed to work.

You could put the $5K in a savings account, or a money-market account with NFCU or PenFed.  You could put it into a three-year CD and hope that you don't have to break the CD.  You could even consider your Roth IRA contribution an emergency fund.  You're allowed to withdraw those from your account at any time for any reason with no taxes (you've already paid tax on a Roth contribution) and no penalties.  Of course withdrawing the money from the Roth means it's not compounding for you, but some workers choose to do this because it makes them think really hard about what expenses qualify for an emergency.