Author Topic: Case Study: Goal is savings rate up and tax liability down  (Read 707 times)

engineermom21

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Case Study: Goal is savings rate up and tax liability down
« on: September 13, 2017, 02:56:57 PM »
Hey everyone.  Iíve been wanting to post my own case study for a while now, just to get some perspective on it, see where we can improve, get another set of eyes on it, the usual.
We are a one-income household (my spouse is a stay at home parent) in the southern US.  We also have two young kids and a dog.  I'd like to increase our savings rate while also maximizing our tax savings for this year.

Monthly Income:
My salary = $6431
Military Benefits = $517
Rental Income = $1150
TOTAL = $8098

Monthly Expenses:
Mortgage + HOA fees on our house = $1107
Mortgage + HOA fees on rental house = $950
Internet = $80
Security System = $45
Electric Bill = $200 (monthly average)
Water and Sewer Bills = $120 (monthly average)
Trash = $16
Cell Phones = $17
Netflix/Plex = $15
Auto Insurance = $196
Gas = $200
Health Insurance Premiums = $302
Preschool = $160
Gymnastics = $50
Fun Money for spouse and me = $200
Misc Expenses = $150
Groceries/Diapers = $470
Restaurants/Entertainment = $200
Pet care costs = $100
TOTAL = $4568

Monthly Investments/Savings:
HSA contributions = $400
Car Maintenance = $75
Kid #1 College Fund = $300
Kid #2 College Fund = $300
Vehicle Taxes = $100
Christmas = $50
401K = $1138
Rental Savings = $200
Home Improvements = $200
Vacation Fund = $50
TOTAL = $2813

If you add up the numbers, youíll notice that we have more leftover thatís not accounted for.  Right now we are putting that into growing our emergency fund to 6 months worth of expenses, and after thatís complete it will go into maxing out my 401K and potentially IRAs for both of us.


Investment Account/Asset Information:
My work 401K = $14,650
Old work 401K rolled into IRA = $35,463
Roth IRA = $5,745
HSA = $5,745
Misc. checking and savings accounts = $47,600
Our Home Value = $284,000 ($180,500 left on mortgage)
Rental Home Value = $129,000 ($99,300 left on mortgage)

I realize we have way too much sitting in cash, though some of those accounts are funded throughout the year so that when annual expenses come up (vehicle taxes, termite bonds, holiday expenses, etc.) we already have the money set aside. Our emergency fund and kidís college funds make the up the majority of the cash, so I really need to figure out a better option for holding those.

OK, I think thatís everything.  The biggest thing I am looking for is advice on what you think we might be able to cut out expense wise (I keep trying to figure out where I can cull more, but weíve knocked out so many things that Iím stuck now) and best options for storing our e-fund and college funds.  Iíd like to be able to max out 401Ks and IRAs this year, with extra going into index funds. 

Please give me all of your wonderful Mustachian advice Ė good or bad Ė I can take it :)

EastCoastBestCoast

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #1 on: September 13, 2017, 03:37:36 PM »
$100/mo for one dog seems rather high.  He must eat a lot!

Car insurance is ridiculous, shop that around. 
« Last Edit: September 13, 2017, 03:39:35 PM by EastCoastBestCoast »

engineermom21

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #2 on: September 13, 2017, 04:00:59 PM »
$100/mo for one dog seems rather high.  He must eat a lot!

Car insurance is ridiculous, shop that around.

The $100 includes food, pet insurance, and pet medicine (she is an older dog...).  We don't usually use the full $100 each month - that's just what I have set aside in the budget.  Anything extra goes towards e-fund at the end of the month.  And the car insurance is for two cars and a motorcycle.  Just wanted to add that clarification.  I do shop around every time our policy is up for renewal, though, and our rates are the cheapest.

MDM

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #3 on: September 13, 2017, 09:07:31 PM »
Monthly Expenses: ... TOTAL = $4568

...growing our emergency fund to 6 months worth of expenses....

Misc. checking and savings accounts = $47,600

The biggest thing I am looking for is advice on ... storing our e-fund and college funds.  Iíd like to be able to max out 401Ks and IRAs this year, with extra going into index funds. 
Six months of emergency expenses appears to be <$30K.  Appears your e-fund is all grown up.

See Investment Order - that may address several questions.  Good luck!

Laura33

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #4 on: September 14, 2017, 06:19:17 AM »
. . . .  Car insurance is ridiculous, shop that around.

. . . .  And the car insurance is for two cars and a motorcycle.  Just wanted to add that clarification.  I do shop around every time our policy is up for renewal, though, and our rates are the cheapest.

Well, as the Dixie Chicks so famously said, there's your trouble.  Three vehicles = more insurance, more registration/fees, more maintenance, etc.  And what is their current value?  If it's low enough, you can drop all but the liability insurance and cut out a big chunk of that cost.  My recommendation would be to either get rid of one vehicle or downgrade one car to real "beater" territory.*

The only other thing that seemed significantly out of whack was the water/sewer (it's literally 3x mine), but I assume that is a local thing that you have no control over.  May be worth checking for plumbing leaks, running toilets, etc., though.

I would recommend doing some back-of-the-envelope math on the tax impact of maxing out all your 401(k)/IRA options -- given the tax deductions available, it won't hurt the budget nearly as bad as the gross figures would imply.  Since you have some slack in your budget and a solid EF, this is a good opportunity to suck up that extra money before it gets frittered.

Re: college funds:  does your state give a tax deduction for 529 contributions?  We get a $10K/yr state tax deduction ($2500 each per kid x 2 kids x 2 parents), which saves us about $900 in taxes.

*And you wouldn't even have to worry about "gee, what happens if the car breaks down?" because you still have the motorcycle to provide transport to/from your job.
Laugh while you can, monkey-boy

Acastus

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #5 on: September 14, 2017, 08:37:32 AM »
I would move car and house maintenance, X-mas, taxes, vacation budgets into expenses. You spend this money, just not regularly every month. They are budgetary expenses, not savings.

Max out your HSA, too. You never pay taxes on the money, as long as it is spend on medical some day. It is like an extra IRA with better tax bennies. If you spend it on regular expenses after 59.5, it is taxed as a regular IRA. Still a win. I do this before maxing out Roth IRA or 401k.

You have almost $50k in cash, but it sounds like it is spread around. Consolidate it, or consider it all together. You have almost 10 months expenses in emergency funds if you look at it this way. Especially considering this is close to half your nest egg ( I never include home value), I think this is mission accomplished.

Goldielocks

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #6 on: September 15, 2017, 03:43:08 PM »
Two thoughts for consideration:

The rental ... $950 for mortgage + HOA versus $1150 in rent.   That is a very tight margin for vacancy, maintenance, etc, even assuming that property taxes and insurance have already been included in the $950...  I am afraid that you will have a couple months of high expenses every few years that you aren't prepared for.

Second...  with $75k in income, why are you saving over $7k per year for your kids college?   Another savings vehicle may be better.
a) if you won't have major increases in income, you will qualify for subsidies, etc.
b)  If you do have more income, in future, you can start to put $15k per year into the college funds at that time.

I can't comment on the rest of the expenses, not knowing what south US is like for family budgets.

engineermom21

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #7 on: September 18, 2017, 09:17:59 AM »
. . . .  Car insurance is ridiculous, shop that around.

. . . .  And the car insurance is for two cars and a motorcycle.  Just wanted to add that clarification.  I do shop around every time our policy is up for renewal, though, and our rates are the cheapest.

Well, as the Dixie Chicks so famously said, there's your trouble.  Three vehicles = more insurance, more registration/fees, more maintenance, etc.  And what is their current value?  If it's low enough, you can drop all but the liability insurance and cut out a big chunk of that cost.  My recommendation would be to either get rid of one vehicle or downgrade one car to real "beater" territory.*

The only other thing that seemed significantly out of whack was the water/sewer (it's literally 3x mine), but I assume that is a local thing that you have no control over.  May be worth checking for plumbing leaks, running toilets, etc., though.

I would recommend doing some back-of-the-envelope math on the tax impact of maxing out all your 401(k)/IRA options -- given the tax deductions available, it won't hurt the budget nearly as bad as the gross figures would imply.  Since you have some slack in your budget and a solid EF, this is a good opportunity to suck up that extra money before it gets frittered.

Re: college funds:  does your state give a tax deduction for 529 contributions?  We get a $10K/yr state tax deduction ($2500 each per kid x 2 kids x 2 parents), which saves us about $900 in taxes.

*And you wouldn't even have to worry about "gee, what happens if the car breaks down?" because you still have the motorcycle to provide transport to/from your job.

Yeah, we have talked about getting rid of the motorcycle, but with my husband being a SAHD, it's his one outlet for kid-free time, so to me it's worth it to keep it.  Both cars are 2013s, hence the higher premiums.  I know they will drop over time, but I guess I should re-evaluate the coverage on them and see if I can lower some of our limits.  With two kids, it would be hard for us to drop down to one car, and since we aren't in a "hair on fire" situation at all, not something I'm overly concerned about. 

And yes, water and sewer are crazy expensive.  Other than watching out water usage, there isn't much I can do there.  We are right outside of our town limits, so I think that factors in.  Though our old house in the city had a $30 a month water bill, which I miss dearly all the time.....

I do need to look into 529s...our state gives a deduction on the full amount, so that would definitely lower taxes for us.

Thanks for all the advice! :)

engineermom21

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #8 on: September 18, 2017, 09:19:27 AM »
I would move car and house maintenance, X-mas, taxes, vacation budgets into expenses. You spend this money, just not regularly every month. They are budgetary expenses, not savings.

Max out your HSA, too. You never pay taxes on the money, as long as it is spend on medical some day. It is like an extra IRA with better tax bennies. If you spend it on regular expenses after 59.5, it is taxed as a regular IRA. Still a win. I do this before maxing out Roth IRA or 401k.

You have almost $50k in cash, but it sounds like it is spread around. Consolidate it, or consider it all together. You have almost 10 months expenses in emergency funds if you look at it this way. Especially considering this is close to half your nest egg ( I never include home value), I think this is mission accomplished.

Yes, I am looking this week at maxing out HSA for the year.  And my spouse and I spoke over the weekend about combining all savings accounts into one, which definitely puts us at our e-fund goal.  I've always been super cautious about investing and have avoided it by keeping way more cash on hand than is necessary, but it's time to break away from that.

engineermom21

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #9 on: September 18, 2017, 09:39:32 AM »
Two thoughts for consideration:

The rental ... $950 for mortgage + HOA versus $1150 in rent.   That is a very tight margin for vacancy, maintenance, etc, even assuming that property taxes and insurance have already been included in the $950...  I am afraid that you will have a couple months of high expenses every few years that you aren't prepared for.

Second...  with $75k in income, why are you saving over $7k per year for your kids college?   Another savings vehicle may be better.
a) if you won't have major increases in income, you will qualify for subsidies, etc.
b)  If you do have more income, in future, you can start to put $15k per year into the college funds at that time.

I can't comment on the rest of the expenses, not knowing what south US is like for family budgets.

The rental became a rental out of necessity.  It was the home I purchased in grad school (in 2007, right before the market crashed...) so when we moved after having kids, instead of losing 30-40K on the house, we kept it as a rental.  The margin is slim, which is why everything we make after paying mortgage and property taxes is saved in a separate account.  We might end up selling one day when the value comes back up (if it ever does...) but for now we are OK with just having someone else pay the mortgage for us.  It was never intended to be a huge income generator or anything.

We have talked about scaling back the kid's college funds, and putting that into retirement funds instead.  They are both young (1 and 4) so we have plenty of time to figure out college funds before that time comes.

I should also add that the $75K in income is after taxes....before taxes it is closer to $100K, plus any bonus (which we don't always get...)

SuperSecretName

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #10 on: September 18, 2017, 09:53:33 AM »
rental savings and home improvement can be paid through your more than adequete efund and cash flow.  invest it instead.

"We have talked about scaling back the kid's college funds, and putting that into retirement funds instead.  They are both young (1 and 4) so we have plenty of time to figure out college funds before that time comes. "
yes.

Max 401k and open/max IRA. Given your username, hopefully you will see the logic in this, and not the emotion of lowering current savings for college. 529s are assets in FAFSA, retirement accounts are not. 

max Roth accounts first.  The contributions can be used as a backup efund if the need should arise.

529s come last after all other tax advantaged accounts.

And, a solid pat on the back.  You guys are doing great!
« Last Edit: September 18, 2017, 09:56:50 AM by SuperSecretName »

JustGettingStarted1980

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Re: Case Study: Goal is savings rate up and tax liability down
« Reply #11 on: September 18, 2017, 10:05:57 AM »
My advice, FWIT:

1. Max out your 401K, if you Max it to $18000, vs $13500, you will will save an extra $4500 per year, with a Tax Savings of >$650, AKA a 15% return right off the bat. Easy money. You can afford to do this as you have >50K in E-Fund.

2. Complete two Roth IRA's per year (total $11000). This should take preference over your 529 Plans. Again, your Efund can handle this already this year.

3. Your Rental is a wash right now. Keeping or Selling kind of sucks, but you know that already. My one concern is that if you need a huge Efund to cover emergency expenses for your rental, the DRAG OF NOT INVESTING THAT MONEY will be HUGE in the long run.

4. Consolidate all your savings/checking account into a) your daily checking, and b) an internet high interest Savings Acct like Ally or Capital One. This is all you need, really, and it makes stuff MUCH easier to track.

5. Perhaps most importantly, learn about investing!!! I highly recommend J. Collins STOCK SERIES. Just google it.

Regards,

JGS