Author Topic: Case Study - FI with some Part Time work  (Read 6916 times)

Zoot

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Re: Case Study - FI with some Part Time work
« Reply #100 on: July 07, 2018, 06:08:27 PM »
I wish there was some other way I could express my gratitude but this truly has been an eye opening and life changing experience for both my wife and I. We are truly grateful to you and everyone that has taken the time and patience to help me figure this out, and in such a short amount of time. I know there's still a lot to learn but not that the trains rolling we don't have to rush and can really take it all in. We truly are grateful.

Expressing gratitude is difficult, because the words just can't bear the weight of the meaning sometimes.  But the best way I have found to put the gratitude into action is to help others in the way that I was helped--and in situations where I have been the give-ER, it is so wonderful to see the give-EE turn around and help someone else in the same way; the words "thank you" are important, but when I see similar kindness being expressed, I know that the gift has TRULY been received.  :)

Regarding allowances and W-4 adjustments:  try using a paycheck calculator (one I use often is here) and play with various scenarios to see how it would affect your take-home and other factors.  You might also find a good tax planning spreadsheet helpful; I made myself a homegrown one and used it for years, and then discovered that I had been FAR outclassed by the one here--and it's FREE!  :)  That will let you plug in numbers in an experimental fashion, and allow you to see what the impact of your choices will be.

You're doing GREAT--keep it up!  :)

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #101 on: July 07, 2018, 06:32:53 PM »
I wish there was some other way I could express my gratitude but this truly has been an eye opening and life changing experience for both my wife and I. We are truly grateful to you and everyone that has taken the time and patience to help me figure this out, and in such a short amount of time. I know there's still a lot to learn but not that the trains rolling we don't have to rush and can really take it all in. We truly are grateful.

Expressing gratitude is difficult, because the words just can't bear the weight of the meaning sometimes.  But the best way I have found to put the gratitude into action is to help others in the way that I was helped--and in situations where I have been the give-ER, it is so wonderful to see the give-EE turn around and help someone else in the same way; the words "thank you" are important, but when I see similar kindness being expressed, I know that the gift has TRULY been received.  :)

Regarding allowances and W-4 adjustments:  try using a paycheck calculator (one I use often is here) and play with various scenarios to see how it would affect your take-home and other factors.  You might also find a good tax planning spreadsheet helpful; I made myself a homegrown one and used it for years, and then discovered that I had been FAR outclassed by the one here--and it's FREE!  :)  That will let you plug in numbers in an experimental fashion, and allow you to see what the impact of your choices will be.

You're doing GREAT--keep it up!  :)

Thank you, I plan to pitch and help people as I become more knowledgable and comfortable with the topic. I joined the health profession because I enjoy helping people 🤗. An exciting journey!

Finances_With_Purpose

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Re: Case Study - FI with some Part Time work
« Reply #102 on: July 07, 2018, 09:09:14 PM »
That's a good plan itself.  Take it slow.  One thing at a time.  Just pick one thing, do that, then come back later for the next thing. 

This thread will be here whenever you need it.

I'm going to do just that :-)  I'm going to follow the order of investment plan and just go through it each step so here we go:

0. Establish an emergency fund to your satisfaction

- We have been doing that for quite some time and currently have enough to tide us over should we EVER both lose our jobs at the same time again for at least 3 months.  We will continue to add a little to it with some of the extra funds we make on the side to cover ourselves.  We're going to see what kind of savings accounts that accrue interesting our bank offers, to help it along, if that's possible.  We're in a State Employees Federal Credit Union as my Father and Brother are state employees.

1. Contribute to your 401k up to any company match - Our company has no match...

- This is pretty much where my confusion and frustration begin so I'm glad it's the next step...  I setup our 401k literally 10 min. before posting this reply.  I currently have it setup at 6% weekly contribution.  Based on my information provided would I be better served only putting in a small percentage (if so any suggestions?) or maxing it out at $18,500?

- As a side note, I currently have my 401k investments setup at roughly 33% split between Columbia Small, Mid and Large Index A to help diversify it.  Those are by far the lowest in terms of fees (0.45% for all 3) and cover the stock market as recommended.

- Having a slightly better understanding of tax brackets after some reading, I think i understand why maxing tIRA x2 (Wife and I) is better and not 401K but still invest enough in the 401K to bring us down to next tax bracket when filing as Married Jointly.  So if I'm correct, I would want to bring our gross income from $96,111 currently to under $77,401 for the tax break?  If so, then I would really only want to invest a little over $7700 to make up the difference with the tIRA x2 and stop there as the fees in my 401k are poor in comparison to tIRA's.

Is this basically what everyone has been talking about in regards to taking advantage of taxed differed investing?

I see from the whole thread here that you're taking in a lot at once.  Good for you.
 
And don't fret; you don't need to learn all this at once, or really, all of it at all.  You can take a path many others have already tread and be well on your way without optimizing every specific item. 

First, on something you've been asking about: your car is expensive relative to your income (paging @Ben Kurtz for the full breakdown on that, as he's always on point re: cars).  One car alone is 20% of your take-home income.  You can substantially improve that.  Cars are sinkholes of cash, since the more you buy, the more they cost to insure, and the more they depreciate/lose value.  The cheaper/more reliable you can get, the better. 

On that point, you can start thinking now about the next vehicle and saving a little for it so that you don't end up right back at the finances department taking some crappy deal because you're utilizing a lot of credit and interest rates are currently on the rise (we're on track for four increases this year).  You can put a little per month aside now, then use that to buy and only buy what you can afford.  Americans waste more money on cars than probably anything else. 

With that said, on to your questions/comments.  Good going on the emergency fund!  We like having a good bit on hand as a buffer for hard times or emergencies, but that's something where reasonable people differ, and your amount sounds reasonable.  It's easier to have less on hand if you have more than one job (less risk/loss from job loss), more flex in expenses, and so on.

Now, for your big question: debt pay-off versus investing.  There's no simple or correct answer in your situation.  Realize, too, that money is psychological.  I highly recommend the Dave Ramsey course for that reason - he nails that part well.  That's why, for instance, many folks (including me) recommend paying off the smallest debt first in most cases: to see the reward and encourage faster debt pay down.  It works. 

In your case, I would strongly prioritize debt before much 401k/investing, though I would - for all the reasons you want to - invest a little already.  You have about $75k coming in, but you still have $100k in student loans, $45k in a mortgage, $26k in car debt, for an amount north of $150k of debt (= > 2x income). 

You may well qualify for the mortgage-interest deduction the more you pay down on interest.  Also, read the IRS rules, since you could count capitalized interest towards that, too, at least when I did it.  (YMMV; I'm not a tax guy.)  So there's all the more incentive to pay those down now.

You get a guaranteed 6.5% return on every penny you pay on that one bad student loan.  I'd pay that thing off first, and fast.  Then you'll really feel the progress.  That's almost as good as the historical stock market return, and as many have pointed out, we're at all-time-high valuations, so, while I don't recommend market timing, I also am not naive enough to think that every dollar put in today will receive a high return over the next decade or so. 

Paying off those debts will bring you much greater stability, and you're guaranteed to lose 6.5% per year on the big one, not counting the compounding on the others.

I would play with some compound interest calculators, or see the free debt spreadsheet I used and link to here (I think) to see just how much you'll have to pay before you have those debts paid off.  You can tailor it to your specific debts and payments, and it does all the math for you - so that you can count the cost of your decisions.

Don't let it get you down, get motivated, and come out swinging.  You've got lots of upwards opportunity. 

In your situation, there's no way I would max my tax-deferred accounts because you get a tax write-off on the student-loan interest now (though not quite as valuable) plus you'll have to repay those debts no matter what. 

What I would do is invest a little so you can see it working for you and get used to automating it.  And, more importantly, I would - and others, including @Dicey have pointed out - see about a refi on your home.  If you can get a mortgage rate of 4.5% right now (hurry b/c rates are going up), you could save 2% on that big bad loan.  So, by paying no extra money today, you might be able to wipe out up to $1k/more of interest per year.  That's one easy way to maximize. 

But again, YMMV - see your terms, conditions, and situation; we don't know enough to tell you whether it's absolutely a good idea.  Finally, I second everything @Laura33 said - she's always on point.

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #103 on: July 08, 2018, 04:40:45 AM »
That's a good plan itself.  Take it slow.  One thing at a time.  Just pick one thing, do that, then come back later for the next thing. 

This thread will be here whenever you need it.

I'm going to do just that :-)  I'm going to follow the order of investment plan and just go through it each step so here we go:

0. Establish an emergency fund to your satisfaction

- We have been doing that for quite some time and currently have enough to tide us over should we EVER both lose our jobs at the same time again for at least 3 months.  We will continue to add a little to it with some of the extra funds we make on the side to cover ourselves.  We're going to see what kind of savings accounts that accrue interesting our bank offers, to help it along, if that's possible.  We're in a State Employees Federal Credit Union as my Father and Brother are state employees.

1. Contribute to your 401k up to any company match - Our company has no match...

- This is pretty much where my confusion and frustration begin so I'm glad it's the next step...  I setup our 401k literally 10 min. before posting this reply.  I currently have it setup at 6% weekly contribution.  Based on my information provided would I be better served only putting in a small percentage (if so any suggestions?) or maxing it out at $18,500?

- As a side note, I currently have my 401k investments setup at roughly 33% split between Columbia Small, Mid and Large Index A to help diversify it.  Those are by far the lowest in terms of fees (0.45% for all 3) and cover the stock market as recommended.

- Having a slightly better understanding of tax brackets after some reading, I think i understand why maxing tIRA x2 (Wife and I) is better and not 401K but still invest enough in the 401K to bring us down to next tax bracket when filing as Married Jointly.  So if I'm correct, I would want to bring our gross income from $96,111 currently to under $77,401 for the tax break?  If so, then I would really only want to invest a little over $7700 to make up the difference with the tIRA x2 and stop there as the fees in my 401k are poor in comparison to tIRA's.

Is this basically what everyone has been talking about in regards to taking advantage of taxed differed investing?

I see from the whole thread here that you're taking in a lot at once.  Good for you.
 
And don't fret; you don't need to learn all this at once, or really, all of it at all.  You can take a path many others have already tread and be well on your way without optimizing every specific item. 

First, on something you've been asking about: your car is expensive relative to your income (paging @Ben Kurtz for the full breakdown on that, as he's always on point re: cars).  One car alone is 20% of your take-home income.  You can substantially improve that.  Cars are sinkholes of cash, since the more you buy, the more they cost to insure, and the more they depreciate/lose value.  The cheaper/more reliable you can get, the better. 

On that point, you can start thinking now about the next vehicle and saving a little for it so that you don't end up right back at the finances department taking some crappy deal because you're utilizing a lot of credit and interest rates are currently on the rise (we're on track for four increases this year).  You can put a little per month aside now, then use that to buy and only buy what you can afford.  Americans waste more money on cars than probably anything else. 

With that said, on to your questions/comments.  Good going on the emergency fund!  We like having a good bit on hand as a buffer for hard times or emergencies, but that's something where reasonable people differ, and your amount sounds reasonable.  It's easier to have less on hand if you have more than one job (less risk/loss from job loss), more flex in expenses, and so on.

Now, for your big question: debt pay-off versus investing.  There's no simple or correct answer in your situation.  Realize, too, that money is psychological.  I highly recommend the Dave Ramsey course for that reason - he nails that part well.  That's why, for instance, many folks (including me) recommend paying off the smallest debt first in most cases: to see the reward and encourage faster debt pay down.  It works. 

In your case, I would strongly prioritize debt before much 401k/investing, though I would - for all the reasons you want to - invest a little already.  You have about $75k coming in, but you still have $100k in student loans, $45k in a mortgage, $26k in car debt, for an amount north of $150k of debt (= > 2x income). 

You may well qualify for the mortgage-interest deduction the more you pay down on interest.  Also, read the IRS rules, since you could count capitalized interest towards that, too, at least when I did it.  (YMMV; I'm not a tax guy.)  So there's all the more incentive to pay those down now.

You get a guaranteed 6.5% return on every penny you pay on that one bad student loan.  I'd pay that thing off first, and fast.  Then you'll really feel the progress.  That's almost as good as the historical stock market return, and as many have pointed out, we're at all-time-high valuations, so, while I don't recommend market timing, I also am not naive enough to think that every dollar put in today will receive a high return over the next decade or so. 

Paying off those debts will bring you much greater stability, and you're guaranteed to lose 6.5% per year on the big one, not counting the compounding on the others.

I would play with some compound interest calculators, or see the free debt spreadsheet I used and link to here (I think) to see just how much you'll have to pay before you have those debts paid off.  You can tailor it to your specific debts and payments, and it does all the math for you - so that you can count the cost of your decisions.

Don't let it get you down, get motivated, and come out swinging.  You've got lots of upwards opportunity. 

In your situation, there's no way I would max my tax-deferred accounts because you get a tax write-off on the student-loan interest now (though not quite as valuable) plus you'll have to repay those debts no matter what. 

What I would do is invest a little so you can see it working for you and get used to automating it.  And, more importantly, I would - and others, including @Dicey have pointed out - see about a refi on your home.  If you can get a mortgage rate of 4.5% right now (hurry b/c rates are going up), you could save 2% on that big bad loan.  So, by paying no extra money today, you might be able to wipe out up to $1k/more of interest per year.  That's one easy way to maximize. 

But again, YMMV - see your terms, conditions, and situation; we don't know enough to tell you whether it's absolutely a good idea.  Finally, I second everything @Laura33 said - she's always on point.

Our original plan before even discovering this forum and blog after paying off our smaller debt was to go to town on pay of our SL's and the Car.  We weren't worried about the house because we have no intentions in staying in it forever.  In fact the sooner we get out of it the happier and less insane I become.  Our saving was for covering us in case of job loss and for putting a down payment on a new house that would be around the same monthly payment as ours either with or before our deposit.  Fixing it up is not a problem for me so I'm ok with a fixer upper.

Honestly, I'd feel more comfortable going the pay it down route first then investing so we can really learn what we're doing and not look like an ass like I did on the investor forums...LoL  Rightly so though as I have no idea what I'm doing in that regard.  Nobody was mean or rude just honest.  They were still very helpful so I'll have a direction when we're ready to go all in on the investment train.  In the meantime though,  paying down some of the debt would give us both greater piece of mind.  It may increase our FI by a couple years but I never planned to stop working even after we became FI as I enjoy it too much.

Both our 401k's are set up so we'll invest in that but keep it on lower end so at least it's going.  My IRA is setup but I'm not sure what I'm doing honestly so it's just sitting there.  My wife has an account from when she was a teacher years ago she just remembered so instead of taking from our saving to start her's we're going to transfer that into an IRA for her.  As for the taxable account, I'm holding off on it til we have a better grasp on what we're doing.  I don't like wasting or losing money.  I still feel guilty about the car we bought but it made my wife happy so I've accepted it none the less.

I have learned a lot and understand the path, right now it's mostly choosing one that works for us that's the hard part...LoL  Feel like I'm going backwards again.  I know I'm not but sometimes...eh

Either way it's all good and we have a plan and that's exciting!

Peachtea

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Re: Case Study - FI with some Part Time work
« Reply #104 on: July 08, 2018, 08:56:12 AM »
Do either you or your wife work for a non-profit (or government)? You mentioned health profession and a lot of hospitals are non-profits. If either of you have 10 years at a non profit and direct government loans, check out the temporary expanded PLSF program below that lets you count payments made on the graduated or extended payment plans towards the 120 payments for forgiveness. PLSF 10 year forgiveness has no tax consequences compared to the normal 20 year forgiveness program where you then owe taxes on whatís forgiven.

https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/temporary-expanded-public-service-loan-forgiveness?utm_content=&utm_medium=email&utm_name=&utm_source=govdelivery&utm_term=

I think what some people are pointing out about your wifeís 6% SL is that itís close enough to the average return on investments to consider knocking it out before or at the same time as investing. I wouldnít lump your 3% SL or especially the low interest car loan in this same category. I think at your age you definitely should prioritize investing over those, because you need time for compound interest to work itís magic. If you canít clear the 6% SL in less than two years, I would personally do 50/50 investment/6% loan. And even if it was less than two years, I would at least max out both IRAs while working on demolishing the 6% loan. Then once the 6% loan was gone, max out both 401ks (in addition to already maxing the IRAs). Then I would decide if I felt more comfortable wiping out my remaining SL/ car debt before investing in a taxable account.

And btw the reason I suggest maxing your IRAs first (before contributing to your 401ks) is because your 401k investment options are not as good (cheap) as your Vanguard IRAs, and since you donít get matching so there is no benefit in your 401k over your IRA. (But later the 401k even with your options is better than a taxable account due to the tax benefits.)

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #105 on: July 08, 2018, 09:21:33 AM »
If we focused on paying down her SL and the car we could bang them both out in 2 yrs based on our incomes and expenses. That would just leave mine and the mortgage for loans we owed on still.  I feel comfortable with the process and understand the reasoning and numbers but honestly have no bloody clue what I'm doing with investing outside the 401k as that was simple as options were limited.  I logged into Vanguard and started looking at stuff and felt immediately overwhelmed by the staggering amount of info that meant absolutely nothing to me other than add more money to your account and buy and sell.  Outside of that it's a crap shoot for me.  That's mainly why we're thinking paying off her SL ASAP vs heavy investing because we know how to do that and it's easy and would give us time to learn about investing in the stock market and what it all means. Plus as helpful as the forums are and everyone's advice is. Sometimes sitting down and talking with a person verse spaced out responses makes keeping things focused and easier to grasp for me.  Slight learning disability 😁.  Biggest reason I still call ppl instead of texting.

As for non for profit, neither of us work for one. I used to years ago when I a trainer getting into the field but not anymore.

Bracken_Joy

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Re: Case Study - FI with some Part Time work
« Reply #106 on: July 08, 2018, 09:22:45 AM »
Peachtea is spot on here. Dave Ramsey, as recommended, leans way harder anti-debt, even when the math makes no sense to do so. I would really, really recommend you not heavily pursue debt paydown since you have a late start. Don't let fear about investing keep you from doing so, it's vital. You have not looked foolish at any point in all this. It's clear you're here to learn, and you are doing so quickly compared to many people. Don't worry about looking silly with questions or anything, please. I really worry about the decision to step back from investing and go the emotionally safe route of low interest debt paydown.

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #107 on: July 08, 2018, 09:39:39 AM »
Peachtea is spot on here. Dave Ramsey, as recommended, leans way harder anti-debt, even when the math makes no sense to do so. I would really, really recommend you not heavily pursue debt paydown since you have a late start. Don't let fear about investing keep you from doing so, it's vital. You have not looked foolish at any point in all this. It's clear you're here to learn, and you are doing so quickly compared to many people. Don't worry about looking silly with questions or anything, please. I really worry about the decision to step back from investing and go the emotionally safe route of low interest debt paydown.

I'm nervous but my wife is terrified about something happening and all our money is tied up in investments. She also hasn't been on her learning any of this with me. I can't blame her though between losing the house, losing our jobs, maxing credit cards to survive during that, etc. To finally only have those major ones left to pay off and knowing we could finally do so in a reasonable time is hard to walk away from.

Right now we have our 401ks set at 10% for both of us.  Mine is setup for 15% small, 5% mid and 80% large.  Hers is setup for 100% large with Columbia.  As for our IRA's I'm the only one to open one so far and I have $1000 sitting the account in what looks like VFMXX which I think they put you in automatically when you make an account with an IRA. After that I'm at a loss as to what to do next. 

I can understand the person you mentioned saying pay off debt because that in and of itself can feel like FI because you owe nobody anything other than your monthly bills. For me especially that's HUGE because I hate owning anyone anything be it favors or debt.

I don't need convincing to do either way. I'm on board for all of this but I need to learn more. My wife needs the convincing and understanding now and that's going to be a slow process. She's smart as a whip but hesitant about money after all we've been through. She'll pick all this up 10x faster than I did.

Bracken_Joy

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Re: Case Study - FI with some Part Time work
« Reply #108 on: July 08, 2018, 09:55:37 AM »
Peachtea is spot on here. Dave Ramsey, as recommended, leans way harder anti-debt, even when the math makes no sense to do so. I would really, really recommend you not heavily pursue debt paydown since you have a late start. Don't let fear about investing keep you from doing so, it's vital. You have not looked foolish at any point in all this. It's clear you're here to learn, and you are doing so quickly compared to many people. Don't worry about looking silly with questions or anything, please. I really worry about the decision to step back from investing and go the emotionally safe route of low interest debt paydown.

I'm nervous but my wife is terrified about something happening and all our money is tied up in investments. She also hasn't been on her learning any of this with me. I can't blame her though between losing the house, losing our jobs, maxing credit cards to survive during that, etc. To finally only have those major ones left to pay off and knowing we could finally do so in a reasonable time is hard to walk away from.

Right now we have our 401ks set at 10% for both of us.  Mine is setup for 15% small, 5% mid and 80% large.  Hers is setup for 100% large with Columbia.  As for our IRA's I'm the only one to open one so far and I have $1000 sitting the account in what looks like VFMXX which I think they put you in automatically when you make an account with an IRA. After that I'm at a loss as to what to do next. 

I can understand the person you mentioned saying pay off debt because that in and of itself can feel like FI because you owe nobody anything other than your monthly bills. For me especially that's HUGE because I hate owning anyone anything be it favors or debt.

I don't need convincing to do either way. I'm on board for all of this but I need to learn more. My wife needs the convincing and understanding now and that's going to be a slow process. She's smart as a whip but hesitant about money after all we've been through. She'll pick all this up 10x faster than I did.

That's fair, spouse comfort can't be discounted. I had just worried about what felt like a "turn on a dime" post. I don't want you to get overwhelmed and say 'to hell with it all' as a result!

As for what to do with the IRA- exact same logic applies as the 401k. A broad index fund will expose you to the market as a whole. With all you've read now, I'm assuming you have buy-in for the idea that you don't need to try to beat the market, just meet it? That's why most of us recommend the total market index fund. Is the concern that you need a $3k buy-in for VTSMX? And what to do until you get that $3k in there? Vanguard Target Funds have a $1k minimum buy in. They're a higher expense ratio, but it's better than it setting in money market in the meantime (which is what the settling fund is, where all your money is now). So I'd say in the meantime, put that $1k into a retirement target date fund. When you get to $3k in there, you can sell it and buy VTSMX. Does that work/make sense/any concerns?

You mentioned doing better with conversation rather than reading. Sorry I've shared so many text based links then =) There are some really good resources with podcasts and youtube videos too. Definitely look into them! Here's a fun one to get you started (strong language, be warned): https://youtu.be/gvZSpET11ZY  Good podcasts... let's see, Mr Money Mustache was on the Tim Ferriss Podcast and a lot of people liked that one. Here's a link to that one: https://tim.blog/2017/02/13/mr-money-mustache/ The MadFIentist podcast is recommended fairly often, although I've only listened to one episode, so I have no recommendations there. Oh, here's a list of recommended ones someone put together: https://fidoughhub.com/podcasts/

Those might be a good option too, because then your wife can learn along side you with a lower buy-in than reading a blog series or reading a book.

Through all this remember: don't make perfect the enemy of good. Just start moving forward, and as you learn more, you can correct course if you need to.

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #109 on: July 08, 2018, 09:58:18 AM »
As a follow up, we have talked to the bank about refinancing the house and a HELOC and we don't have enough equity nor is the house worth enough they said because we live in a slum pretty much. Gloversville is ranked like the 8th most depressed city in the entire US.  It's really sad... I'm just glad we got lucky and ended up with really good neighbors.  So that leaves us with either paying it down / off now or later. The other loans I have no problem sitting on because the interest is so low.

Bracken_Joy

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Re: Case Study - FI with some Part Time work
« Reply #110 on: July 08, 2018, 10:01:57 AM »
As a follow up, we have talked to the bank about refinancing the house and a HELOC and we don't have enough equity nor is the house worth enough they said because we live in a slum pretty much. Gloversville is ranked like the 8th most depressed city in the entire US.  It's really sad... I'm just glad we got lucky and ended up with really good neighbors.  So that leaves us with either paying it down / off now or later. The other loans I have no problem sitting on because the interest is so low.

3.75% is a low interest rate. I don't see any reason whatsoever to pay that down more aggressively. Am I missing something with your considerations there?

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #111 on: July 08, 2018, 10:06:14 AM »
@Bracken_Joy

Definitely not a turn on a dime post like you think. More of a wife going into panic and I'm covering my ass post :-)

The links were fine, some explained things better than others. The videos will help with my wife as I can explain it to her as it goes along. Right now I think the safest course, not my choice but happy wife happy life, is take the rest of this year and invest slowly and figure it out. Pay down her loan some, not off entirely, and see what happens. If she sees some results I think she'll be more likely on board for an all in with investing. Like I said, if it adds another yr or two to my work life no biggy. I had already reserved myself years ago with retirement in the grave. Anything sooner than that is a bonus :-)

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #112 on: July 08, 2018, 10:07:43 AM »
As a follow up, we have talked to the bank about refinancing the house and a HELOC and we don't have enough equity nor is the house worth enough they said because we live in a slum pretty much. Gloversville is ranked like the 8th most depressed city in the entire US.  It's really sad... I'm just glad we got lucky and ended up with really good neighbors.  So that leaves us with either paying it down / off now or later. The other loans I have no problem sitting on because the interest is so low.

3.75% is a low interest rate. I don't see any reason whatsoever to pay that down more aggressively. Am I missing something with your considerations there?


Not the house, it was for paying down the SL. Refi the house to deal with her SL. Couple ppl suggested it.

Peachtea

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Re: Case Study - FI with some Part Time work
« Reply #113 on: July 08, 2018, 05:18:24 PM »
Thereís nothing wrong with taking baby steps as your learn, and you guys have already done a lot in a short time, so congrats! The reason everyone is pushing you to invest in retirement accounts NOW even if you donít quite understand everything is because: 1) you need time for compound interest to work 2) it doesnít matter if you choose suboptimal 401k and IRA investments now, literally anything you pick will be better than doing nothing while you figure things out and 3) itís very easy to change retirement investments later as you learn more and fine tune a strategy your comfortable with because there are no tax consequences if you later switch your picks in you 401k and IRAs.

If your wife feels more comfortable with the 401k than IRA, then stick with that for now and revisit in say 6 months when you are both caught up on reading info and have decided on a plan. Although, I suggest upping it to at least 15% each for now. Remember thatís pretax, so $14,000 to the 401k is the equivalent to only $11,000 from your pay (if you est 20% total taxes as an ex.). What you picked for both 401ks are good. Hers is mimicking the S&P500 and it sounds like yours is mimicking a total stock market fund. People may debate which is better, but honestly both are great choices. You could do better on costs with your Vanguard IRA. The target retirement funds mentioned have .15 cost, if you get to $3000 the VTSMX total stock market is .14, and once your account is at $10,000 the VTSAX total stock is .04. So you can see how this is better than your 401k .45 cost. Itís really the cost vs the fund brand that makes the vanguard IRA better.

I get being more comfortable with the concept of paying debt vs investing. Up your 401k to 15% and then throw the rest at the 6% SL. Read whatever you can and encourage your wife to read this thread and the simple path to wealth with you. With how quick youíre absorbing the info, within six months I bet you guys will have agreed on a more permanent strategy.

But DO NOT pay extra on the car in those six months because it doesnít make mathematical sense. You should fully understand why it makes no sense before you decide whether to pay it off early or not. Maybe six months from now you will say, this is stupid maths but it will relieve a lot of emotional anxiety so weíre going to do it anyways. Fair enough, itís your money and your life. You seem to understand that buying that expensive of a car on your guys salary was stupid. Youíre keeping it for now due to matrimonial peace. Cool, no problem, thatís important. But, based on what you wrote, it seems like you guys think paying it off will somehow negate that poor choice. It doesnít erase the bad decision, it makes it worse by stealing even more from your future finances. (There are soooo many case studies where people are like I bought this stupid car, buts itís paid off now, and I wonít make as much as I paid for it if I sell it, and really the difference between this carís sale value and the cheapest acceptable car to us is not so much that itís worth the hassle, blah blah blah. Paying off the car quickly, besides costing more over the long run, will just let you go to stage two of bad car excuses.) And if in six months youíre going to be paying down debt when you should otherwise (maths speaking) be investing, then paying off your 3.5% SL after hers makes more sense than paying off the 1.9% car loan.

In terms of helping your wife get comfortable with investing, Iím sure reading materials together will work wonders. But in the meanwhile consider this, the only way for normal people (no inheritance or start up company now worth millions) to retire comfortably (have more than SS) is to invest. You guys are behind and need to catch up just to retire, let alone be FI or retire early. You can invest in the market or you can invest in real estate (be landlords) and either has a learning curve (although I think the market has less of a curve than real estate and requires less cash to get started). And you can point out that your very healthy emergency fund is what will get your though potential job loss or unexpected expenses between now and FI, regardless of what the market is doing.

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #114 on: July 09, 2018, 05:33:50 AM »
Well my wife has been reading "The Boglehead Guide to Investing" and has already caught up to me in all of this and done a complete 180 since yesterday when were discuss past financial scares, losing house etc. She's now suggesting skipping our 401k (1% max to keep them active) and front loading out IRA's because the rates are better and less hands in the cookie jar as she put it. Follow that up with paying off her SL ASAP. Once that's done sink every red cent into investing we can spare.  I punched in some numbers and we can be done with her SL in max 2 yrs, baring any financial issues like house blowing up, and still be FI in 10 yrs after that.  The calculators said sooner but I'm realistic and know my wife is nowhere near the minimalist I am, stubborn on the other hand yes...lol

@Peachtea. Thank you for the wonderful advice. You writing what I've been saying pretty much made the difference, including her reading that book. 

So we're finally on the same page and have a direction. We'll see what happens over the next 6 months and I'll keep you posted. I'm sure I'll be back with investment advice...lol. Although I've gotten plenty already to get us started so...bonus!!!

Have a great day everyone!!! Off to doc appt, I came down with strep throat during all this. What a way to end your vacation eh? LoL oh well, shit happens 😎.

KEEP IT HARD! ~PanterA

Laura33

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Re: Case Study - FI with some Part Time work
« Reply #115 on: July 11, 2018, 08:50:31 AM »
So, I would suggest a slight tinkering -- I am going to focus on 2019, for 2018 you should see what you can manage:

1.  Max out your tIRAs.  Set up an automatic transfer into your IRAs as of January 1 so you don't have to think about it.  VTSMX or the equivalent -- set it and forget it.

2.  Max out your 401(k)s.  Both of you.  You have sufficient cash on-hand to cover you through an emergency.  Trust that safety net and your ability to hustle. 

3.  Throw everything else at the 6% SLs, and refi if you can to a lower interest rate. 

4.  Once the SLs are paid off, begin throwing that money into a taxable account (also in VTSAX or the like).  As discussed above, the Roth pipeline requires you to have @5 years expenses saved and accessible.  If you can get the loans paid off in a few years and then build your regular post-tax account, this will give you the cash you need to do that.

5.  Drive the car into the ground.  If your wife wants to keep it a few years, that is the same period in which you will eat the most depreciation.  You have chosen a car that should last 15-20 years, so your new goal is to keep that puppy healthy and running as long as possible to get the best value out of the expense. 

I cannot express strongly enough how important #1 and 2 are, especially at your age.  Yes, your loan rates are likely comparable to what the market will do over the next few years, or perhaps even better.  But as I posted earlier, you pay those loans with post-tax income, so you will have to make $130-150 or more just to pay off $100 of loans.  I would suggest doing a rough cut at your taxes both ways:  what do you pay in federal and state taxes if you don't invest in the 401(k)?  (Remember, the great state of NY also gets a @6.5% cut).  And how much more money do you have in your pocket if you do max those out?  That extra money is all cash that you can throw at the student loans!  You literally get more out of each dollar you make. 

Look again at @MoseyingAlong's post:  maxing everything out would cut your federal taxes to around $2500!  Skip the 401(k)s, though, and your taxable income pops up to $61K, which a quick web calculator says means $7K in federal taxes (plus whatever additional you'd pay in NY State tax -- what's that, around $2K difference?).  So you can invest $37K and still have @$6500 to throw at your student loans!*

For your DW's fears, I suggest looking at the real downside risks.  The reality is that throwing all your cash at the student loans is actually more risky until the loans are completely paid off and you have built up a taxable account.  Once you decide to write a check to the loan company, you can never get the money back if you need it later -- it's gone.  OTOH, with a 401(k), you can frequently take a loan from the account, or even withdraw the money and just pay the taxes/penalty.  So if one of you needs a $50K surgery, your 401(k) can provide that cash, but your paid-down student loan cannot.  In addition, most employers let you change your 401(k) contribution very frequently -- so if the shit hits the fan, you just stop your automatic payments and at least have access to that extra cash each month again, which together with your EF may be enough to get you buy.

Anyway, let me join in the congrats on the huge progress you've made so far -- really great job in a very short period of time.  Just don't let your fears lead you to making decisions that lose you money and are actually more risk in the short-term.

*Yes, the loans are deductible -- you get up to $2500/yr in interest deductions.  But, (a) that is an incentive not to pay them off, because you lose the deductions as your interest paid drops below that threshold, and (b) it is largely meaningless, because you're going to take the $24K standard deduction anyway.

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #116 on: July 12, 2018, 03:43:35 AM »
@Laura33  So still max out 401k even though the fees are bad and our company doesn't match?  Is my SL worth paying down as well with the low interest rate or just hers?

My wife is past her fears it's just deciding the financial plan now in terms of how to invest. Our budget is all set.

Thanks for the great advice. What you suggested about 401k and needing money for some reason didn't click until that post...lol. Information finally starting to all process.
« Last Edit: July 12, 2018, 04:24:09 AM by Silverback761 »

kpd905

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Re: Case Study - FI with some Part Time work
« Reply #117 on: July 12, 2018, 04:19:49 AM »

*Yes, the loans are deductible -- you get up to $2500/yr in interest deductions.  But, (a) that is an incentive not to pay them off, because you lose the deductions as your interest paid drops below that threshold, and (b) it is largely meaningless, because you're going to take the $24K standard deduction anyway.

The student loan interest can be deducted even if you take the standard deduction.

Bracken_Joy

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Re: Case Study - FI with some Part Time work
« Reply #118 on: July 12, 2018, 07:49:47 AM »
@Laura33  So still max out 401k even though the fees are bad and our company doesn't match?  Is my SL worth paying down as well with the low interest rate or just hers?

My wife is past her fears it's just deciding the financial plan now in terms of how to invest. Our budget is all set.

Thanks for the great advice. What you suggested about 401k and needing money for some reason didn't click until that post...lol. Information finally starting to all process.

Not Laura, but:
The fees are nothing compared to the tax benefits. Still max the 401k's. Plus, you can roll it into an IRA once you retire and invest it in lower fee options then.

Just her loans, not yours. The interest rate doesn't make it worth paying yours off above the minimums, and you need to get money in the market (through maxing all tax advantaged options to start).

Laura33

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Re: Case Study - FI with some Part Time work
« Reply #119 on: July 12, 2018, 08:06:13 AM »

*Yes, the loans are deductible -- you get up to $2500/yr in interest deductions.  But, (a) that is an incentive not to pay them off, because you lose the deductions as your interest paid drops below that threshold, and (b) it is largely meaningless, because you're going to take the $24K standard deduction anyway.

The student loan interest can be deducted even if you take the standard deduction.

Really?  That's pretty cool (the whole thing postdates my SLs by a couple of decades, so I don't know the details).  So @Silverback761, when you do the math on the loan payoff options, remember to take that tax deduction into account, i.e., it's great to pay the loans down until you get to the max $2500 deduction, but all of the payoff beyond that will also be losing you some of the deduction (doesn't mean you shouldn't do it -- I still would at your wife's interest rates -- but it does change the math somewhat).

And yes, you should still invest in your 401(k).  Obviously, 0.45% is higher than 0.04%, but usually when people talk about "high fees" in a 401(k), they're referring to funds with 1.5-3% expense ratios, or 5% loads, or whatever.  0.45% is still not bad in the grand scheme of things.  Basically, the difference between 0.45% and 0.04% is significant enough that it makes a tax-deductible IRA a better choice than the tax-deductible 401(k) if you don't have enough income to max out both.  But if the question is to invest in a 401(k) (with its tax deduction and tax-deferred growth), or to invest in a taxable account instead (where you initially invest post-tax dollars and then pay taxes on dividends/capital gains every year to boot), the 401(k) is clearly the better choice unless the expenses are a lot higher than 0.45%. 

But if you are worried about it, do the math:  how much will you save in tax deductions and tax-deferred growth taking the 0.45% fund, vs. how much will you lose in returns by paying 0.45% instead of 0.04%? 

ETA:  I see @Bracken_Joy just said what I did, but a lot more succinctly.

Silverback761

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Re: Case Study - FI with some Part Time work
« Reply #120 on: July 12, 2018, 01:05:23 PM »
That's what u figured about my student loans but I figured safe than sorry to ask.  After the explanation and reading that section in the bogleheads book about all the fees I understand now 😎. We can definitely max out both our 401k's and tIRA's while covering our expenses and paying down her SL. Basically anything left after capping them is going at her SL at the end of each month when payment is due.

Is there an article that explains determining SL deductions. The two books I've read so far just recommended the usual paying them down and at what rate they should. I'm curious how you do the math to determine it.  Is it just on the IRS site?

Thanks both @Bracken_Joy and @Laura33 for all the help. My wife and I are excited and on track. These little details are a huge help!

Peachtea

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Re: Case Study - FI with some Part Time work
« Reply #121 on: July 15, 2018, 10:01:09 AM »
Wow, that was a quick 180! Awesome that youíre now going to max both the IRAs and 401ks.

For calculating your student loan deduction you can go on your SL service provider and look at last Decemberís statement to see how much interest you paid through last year to roughly estimate about how much youíll pay this year. Or take your June statement and x2 to estimate this years interest. Your deduction is either the amount of interest paid or $2500, whichever is less. Thatís $2500 total for all student loans. So if you pay $2500 in interest for your SL a year, then youíre not getting any additional tax benefit from your wifeís SL. And Iím pretty sure since itís an above the line deduction, it only lowers your taxable income by $2500, not your tax bill by $2500.

MDM

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Re: Case Study - FI with some Part Time work
« Reply #122 on: July 27, 2018, 12:18:23 AM »
Well my wife has been reading "The Boglehead Guide to Investing"....
Excellent reading choice!

Didn't see the word "pension" in any post so I'll assume neither of you will get one.  Thus, even in the 12% bracket, traditional appears better for you than Roth, at least until you expect ~$600K combined in your traditional accounts at retirement.

It has been ~10 days since you last visited this forum, so I won't go into more details now - just ask, however, if you do have questions.

See also the tables below, which are unlikely to be correct but should bear some resemblance to your reality.  Download the case study spreadsheet and enter your numbers if desired.

Paycheck frequency:AnnualAnnual
Paycheck ItemsEarner #1Earner #2Annual
Gross Salary/Wages
$50,000$44,611$94,611
401(k) / 403(b) / TSP / etc.$18,500$0$18,500
W-2 Box 1
$31,500$44,611$76,111
Non-paycheck incomeAnnualAnnualAnnual
Schedule C net profit$1,500$0$1,500
1040 Total Income
$33,000$44,611$77,611
Subtractions for AGIAnnualAnnualAnnual
Deductible SE tax$106
Traditional IRA$5,500$5,500$11,000
SL int. (approx.)$2,500
1040 AGI
$64,005
Payroll TaxesAnnualAnnualAnnual
Social Security$3,100$2,766$5,866
Medicare$725$647$1,372
Income Taxes
Federal tax$3,8842018, MFJ, std., 1 dep$3,884
State+local tax$2,407NY state calc'n$2,407
Self-employment Tax$2120$212
Total income taxes$13,740$13,740
Monthly
Income before other expenses$4,406$52,871
Monthly Average ExpensesComments
Mortgage$503Input to Item. Ded.$6,032
Property Tax$200Input to Item. Ded.$2,400
Home/Rent Insurance$53$635
Car Insurance$182$2,180
Dentist$57Input to Item. Ded.$680
Electricity$216$2,594
Entertainment$17$209
Groceries$455$5,460
Internet$65$780
Medical (Doctor, Hospital, etc.)$76Input to Item. Ded.$910
Miscellaneous$833$10,000
Phone (cell)$100$1,200
Water/Sewer$20$240
Non-mortgage total
$2,274$27,289
Loans
Student Loan$617$7,406
Student Loan$457$5,481
Car$433$5,191
Total Expense
$4,283$51,398
Total to invest$123$1,473
Summary:
"Gross" income$8,009$96,111
Income taxes$1,145$13,740
After-tax income$6,864$82,371
IRA+401k/403b/TSP/457$2,000$458$29,500
Living expenses$2,777$33,320
Non-mortgage loans$1,506$18,078
After-tax investable$123$1,473
Time to FI?:
Guess at time to FI13.3years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Current Savings
Projected Savings at Retirement
Taxable$146,677
Tax-deferred (e.g. trad. IRA/401k)$538,895
Total projected stash$685,572
Projected Expenses in Retirement
Non-loan, non-work expenses$27,289
Annual non-tax retirement expense$27,289
Income taxes$134
Total$27,423
Stash needed for retirement @4.0% SWR$685,572
Perfect plan!


Filing Status21=S, 2=MFJ, 3=HOH
# Dependents1
# Children for EIC1
Adult #1Adult #2
Age4048
Full-time student?00
AGI$64,005
Std. Deduct.$24,000
Act. Deduct.$24,000
Pass-thru deduct.$300
Taxable$39,705
1040 Tax$4,384
Non-refund. CTC$500
Tax after n-r credit$3,884
Net Tax$3,884
Mtg. Int. (approx.)$1,6921000000
State tax$2,407NY
Prop tax$2,400
Item. Deduct.$6,499
VersionV11.13

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Mortgage$45,5818.9$45,58193.75%
Student Loan$54,35210$54,352106.5%
Student Loan$45,91410$45,914103.625%
Car$25,9205.25$25,9205.251.9%

Dicey

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Re: Case Study - FI with some Part Time work
« Reply #123 on: July 28, 2018, 10:55:12 AM »
^^Nice work, MDM!^^