Author Topic: How to allocate savings & any general thoughts  (Read 1053 times)

Haku

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How to allocate savings & any general thoughts
« on: August 08, 2018, 10:30:37 AM »
Life Situation: Married, DW and I are both 32 with no dependents and do not plan on having children. 

Gross Salary/Wages: $130,000 combined salary which includes expected bonuses. Historically our income was about half of what it currently is up until 2016.

Accounts:
Checking/Savings - $6,500
Brokerage - $9,000
401k (mine) - $80,000 - contributing $1,500 + $200 company match monthly
401k (hers) - $10,000 - contributing $400 monthly
traditional IRA (hers) - $7,000
Roth IRA (hers) - $15,000 - contributing $150 monthly
HSA - $1,000 - contributing $100 monthly

Liabilities:

Mortgage - Owe $149,000 on $177,000 original loan amount. 3.65% interest rate. Current home value is approximately $250,000
Cars - We both have vehicles that are newish and paid off. Currently 45k and 30k miles, combined value of both vehicles is around $30,000.

Monthly Expenses:
Mortgage - $1,050 - P&I: $810   T&I:  $240
Utilities/Cable/Trash - $270
Cars - $250
Car Insurance - $180
Groceries - $550
Dining Out - $100
Pets - $300 (this shouldn't be as high going forward, we got a puppy so the past year included quite a few vet appointments and vaccines)
Vacation - $100
Household - $230
Entertainment - $100
Gym Membership - $100
Gifts/Clothes/Misc Spending - $75

Total Expenses: $3,305

Take Home Pay: $5,900

Rounding down, we have about $2,500 extra we are bringing home each month to put towards additional savings.  I am trying to figure out what is the best way to allocate how to invest the extra $2,500 every month. For tax purposes, on our current path we are hovering right at the bottom of the 22% tax bracket. 

Ideally I would like us to be FIRE in 10 years, DW seems to think this is a pipe dream even after explaining a potential strategy for getting there.  She tends to be doom and gloom about everything, is very risk averse and likes to have direct access to our money.  She is reluctant to increase her 401k contribution as she doesn't like to not have access to it.

My thought for FIRE would be to have around $1mil in savings accounts with our house paid off.

1.  What would you suggest for allocating our current savings?
2.  Any recommendations, suggestions, overall thoughts are welcome. Feel free to throw the face punches.
« Last Edit: August 08, 2018, 04:04:52 PM by Haku »

ginjaninja

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Re: How to allocate savings & any general thoughts
« Reply #1 on: August 08, 2018, 11:14:49 AM »
I think that the only face punch is the cars.  But you probably knew that already by posting here!

I would say that you should be maxing out the HSA.  That is tax free money forever to use on medical expenses.  This is only a few thousand of the dollars that you have here.

With 401k is there any way to put the rest into a Roth401k?  You can still access the principal in an emergency without penalties. 

Maybe you could discuss with your wife about how much liquid money she wants to have direct access to, get your taxable brokerage and savings to that point, then up the 401k?  I know this might not be the perfect solution but sometimes emotions need to be considered in situations like this.  You could also look at the tax savings in $100 increments to present to your wife if you contributed more to the 401k and see if that would sway her opinion.

Overall, I think that you both are doing pretty well

RWD

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Re: How to allocate savings & any general thoughts
« Reply #2 on: August 08, 2018, 11:19:48 AM »
Are those your actual expenses or estimates? I ask because several categories are quite high but the sum total is low so it feels like it's missing some items.

Does Utilities include your phone bill?
What is "Cars"? Does it include registration, gas, maintenance/repairs, etc.?
Your car insurance seems a bit high. It's about 75% more than ours and we have two recent model sports cars.
Groceries are double what we're spending.
Dining expense is double or triple ours.
What is "Household"? Supplies like paper towels, cleaning supplies, etc.? Does it include maintenance/repairs on the house? Furniture?
We don't have a gym membership so I'm not sure if $100/month is reasonable

For a whole picture it seems reasonable, with a few areas that could easily be optimized.

As for where to direct your spare cash, check out the Investment Order post. With your current savings rate you should be roughly on track for FI in 10 years.

jsap819

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Re: How to allocate savings & any general thoughts
« Reply #3 on: August 08, 2018, 11:23:43 AM »
Someone more knowledgeable will chime in. But just some quick calculation, you'd need close to $1 mil to live on 4% SWR. If you're trying to FIRE in 10 years, with what you have now minus the value of your home and cars, you'd need to save over $50k a year for the next 10 years growing at 7%. Max tax deferred space for both of you, roth IRA, HSA and everything else into taxable. You can cut some expenses like gym membership and groceries but I say you guys are doing fairly well already. If your current lifestyle suits you, I wouldn't really change much. Good luck!

Haku

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Re: How to allocate savings & any general thoughts
« Reply #4 on: August 08, 2018, 03:17:30 PM »
I think that the only face punch is the cars.  But you probably knew that already by posting here!

I would say that you should be maxing out the HSA.  That is tax free money forever to use on medical expenses.  This is only a few thousand of the dollars that you have here.

With 401k is there any way to put the rest into a Roth401k?  You can still access the principal in an emergency without penalties. 

Maybe you could discuss with your wife about how much liquid money she wants to have direct access to, get your taxable brokerage and savings to that point, then up the 401k?  I know this might not be the perfect solution but sometimes emotions need to be considered in situations like this.  You could also look at the tax savings in $100 increments to present to your wife if you contributed more to the 401k and see if that would sway her opinion.

Overall, I think that you both are doing pretty well

Yes I know the car situation is frowned upon by the mustachian community, but I also would rather buy a newish vehicle and drive it for 10 years than to buy cheaper cars and have to replace them more often.  Both of our old cars were about a year old when we bought them with low miles (~20k miles) and have lasted us for around 10 years, we felt like they were good investments.

We just switched to a high-deductible insurance plan this year so it is the first year for us to contribute to our HSA plan. I am thinking about making a one time payment into my HSA account towards the end of the year to hit the max contributions for this year and will probably up my payroll deduction contributions to max for next year.

For the 401k, I would rather do the traditional to keep us out of the 22% tax bracket.  I am currently maxing out mine, and DW shuts down at the talk about 401ks, so I don't think I would be able to talk her into doing a Roth contribution.  It would be easier for me to convince her to make roth IRA contributions over 401k.

You are right on point with saying emotions need to be taken into consideration.  DW has a very different view on money than myself and it is frustrating to try and reason things out with her, she avoids having serious discussions about money which I believe is because she is uncomfortable having money.  As she points out, she grew up poor and they never had any money, so she doesn't know how to handle having excess money and is afraid of losing it.  It took me almost 10 years to convince her to start contributing to her IRA and 401k.  I think I have tried to use the tax savings approach to getting her to increase her 401k contribution, but I will try again, especially since I do not want to be in the 22% bracket and we are right on the edge.

Thank you for your response.

Haku

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Re: How to allocate savings & any general thoughts
« Reply #5 on: August 08, 2018, 03:46:25 PM »
Are those your actual expenses or estimates? I ask because several categories are quite high but the sum total is low so it feels like it's missing some items.

Does Utilities include your phone bill?
What is "Cars"? Does it include registration, gas, maintenance/repairs, etc.?
Your car insurance seems a bit high. It's about 75% more than ours and we have two recent model sports cars.
Groceries are double what we're spending.
Dining expense is double or triple ours.
What is "Household"? Supplies like paper towels, cleaning supplies, etc.? Does it include maintenance/repairs on the house? Furniture?
We don't have a gym membership so I'm not sure if $100/month is reasonable

For a whole picture it seems reasonable, with a few areas that could easily be optimized.

As for where to direct your spare cash, check out the Investment Order post. With your current savings rate you should be roughly on track for FI in 10 years.

Yes, these are my actual expenses averaged since the beginning of this year.  I started tracking expenses at the beginning of 2017, but our budget has shifted quite a bit since last year so I did not include them in the average.  Some categories may seem high because I may not categorize things the same as others do.

Utilities does not include my phone bill, I do not have a phone bill.

Cars includes everything that I spend to own my car excluding insurance, gas/maintenance/taxes/registration/fees.

Hard to know exactly why our insurance is higher than yours, I would assume it is because we probably have more coverage than you do, but I can not say for sure.  You may also have discounts that we do not apply for and coverage may just be cheaper based on where you live.  We do have higher coverage than is necessary, DW is hesitant to drop some coverage for the moment because they are new to us and she worries about being in a collision.  I know we are paying too much for insurance, I am hoping that I can convince her to drop some coverage.

Do you have any suggestions on what you do to keep your grocery bill that low for 2 people?  We are working on lowering our grocery budget, we were spending upwards of $700 per month during 2017, so we have dropped that by $150 per month this year.  If it was up to me I would eat rice and beans everyday, sadly DW does not share that thought, she enjoys lots of variety in what she eats.  I should also note that this does include some general household items such as detergent and cleaning supplies, basically anything I purchase at a grocery store.

Dining out budget could always be lower, it is a completely unnecessary expense, however I don't think we are taking it to excess.  Sometimes bad planning or unforeseen events make it necessary.

Household is for home expenses, such as garden/lawn supplies, furniture/decorations, repairs/maintenance.  We just purchased our house at the end of 2016 and have had to furnish some rooms which we have been doing slowly.

Gym membership is one of the things I am unwilling to cut.  It is for a climbing gym and there are no other options available around here so it is either this or nothing and climbing is my one passion.

Thanks for your response.

CalBal

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Re: How to allocate savings & any general thoughts
« Reply #6 on: August 08, 2018, 04:50:47 PM »
Hi Haku,

I don't have any specific suggestions for your budget right now. (Although I will say your groceries does seem quite high - I just hit $100 last month for one person. Groceries for me is ONLY food, cleaning supplies and laundry and personal care items and pet food are all separate - yet even still if I added ALL those things it would average out to less than $200/mo. (It helps me to see them separated out.) You can definitely do better than what you are doing unless maybe you live in a VHCOL area. I don't only eat rice and beans every day, I have a fairly large variety and I like good food.)

My reason for posting though is that from your writing, it sounds like you believe that if you hit the 22% tax bracket ALL of your income will be taxed at that level. This isn't true, it is only the income OVER that dollar value that is taxed at that rate. This is true at every rate step. So I don't think you need to worry so much about hitting that "limit"! If you already know this though, never mind, carry on! :)

RWD

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Re: How to allocate savings & any general thoughts
« Reply #7 on: August 08, 2018, 06:06:32 PM »
Hard to know exactly why our insurance is higher than yours, I would assume it is because we probably have more coverage than you do, but I can not say for sure.  You may also have discounts that we do not apply for and coverage may just be cheaper based on where you live.  We do have higher coverage than is necessary, DW is hesitant to drop some coverage for the moment because they are new to us and she worries about being in a collision.  I know we are paying too much for insurance, I am hoping that I can convince her to drop some coverage.
Our coverage is 100k/300k bodily injury, 50k property damage (same for uninsured motorist). Comprehensive and collision on both cars with $2000 deductible on the 2013 Subaru and $500 on the 2014 Porsche. We are about the same age as you. I just renewed it for $619 for six months.

Do you have any suggestions on what you do to keep your grocery bill that low for 2 people?  We are working on lowering our grocery budget, we were spending upwards of $700 per month during 2017, so we have dropped that by $150 per month this year.  If it was up to me I would eat rice and beans everyday, sadly DW does not share that thought, she enjoys lots of variety in what she eats.  I should also note that this does include some general household items such as detergent and cleaning supplies, basically anything I purchase at a grocery store.
Our grocery expense category does not include household items, only food, so that's a big difference there. I did a quick tally and it looks like we spent ~$375 in the last year on non-food grocery shopping. Plus ~$120 on Amazon for stuff that you might find in a grocery store. So that brings the total up to ~$315/month.

I don't feel like we're actively trying to scrimp on our grocery bill. We buy fruit and vegetables. Sometimes organic food. We spend more on snacks than we really need to. Before we go shopping we plan out our meals for the week so we only buy what we need. We try to buy things when they are on sale, but we don't go too far out of our way to do it. We do tend to avoid meat (other than chicken) as personal preference, so that saves us a decent amount. We like pasta and rice dishes.

Haku

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Re: How to allocate savings & any general thoughts
« Reply #8 on: August 08, 2018, 06:09:16 PM »
Hi Haku,

I don't have any specific suggestions for your budget right now. (Although I will say your groceries does seem quite high - I just hit $100 last month for one person. Groceries for me is ONLY food, cleaning supplies and laundry and personal care items and pet food are all separate - yet even still if I added ALL those things it would average out to less than $200/mo. (It helps me to see them separated out.) You can definitely do better than what you are doing unless maybe you live in a VHCOL area. I don't only eat rice and beans every day, I have a fairly large variety and I like good food.)

My reason for posting though is that from your writing, it sounds like you believe that if you hit the 22% tax bracket ALL of your income will be taxed at that level. This isn't true, it is only the income OVER that dollar value that is taxed at that rate. This is true at every rate step. So I don't think you need to worry so much about hitting that "limit"! If you already know this though, never mind, carry on! :)

I am very well aware of the tax laws and how the tax brackets work. I want to stay under the 22% bracket to receive lower tax treatment of LTCGs and qualified dividends.  I also just dislike paying higher tax rates if I can avoid it, especially if I am putting money into a Roth IRA.

CalBal

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Re: How to allocate savings & any general thoughts
« Reply #9 on: August 08, 2018, 06:49:47 PM »
I am very well aware of the tax laws and how the tax brackets work. I want to stay under the 22% bracket to receive lower tax treatment of LTCGs and qualified dividends.  I also just dislike paying higher tax rates if I can avoid it, especially if I am putting money into a Roth IRA.

Ok. Many people do not know this, which is why I mentioned it.

Finances_With_Purpose

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Re: How to allocate savings & any general thoughts
« Reply #10 on: August 08, 2018, 11:30:37 PM »
This is obvious, so you have probably already done it, but I would point out to her a few facts:

1.  You can always access all contributions to your Roth IRAs. 
2.  After you max your tax-advantaged accounts, you will begin dumping even more in the Roths, so your amount of available funds will always be increasing.
3.  (less important)  You can access 401k funds under certain limited circumstances, like a job loss.  So you could draw it down some in those circumstances if you felt the need.  (I wouldn't do it then either if I could at all avoid it, but you can cross that bridge if you come to it.) 
4.  (most important)  You save 22+% on every dollar you put in the tax-advantaged accounts (especially if there are local taxes too), plus you save another 20% tax on all your returns.  It's like saving 33% or more on every dollar (likely more - it just depends upon how long you leave it there)

I'm sure there's some sort of compromise you could make on how much in Roth versus 401k, etc.  Really, though, I might not try and give her facts - even those great ones above - but instead figure out what emotionally makes her want to have so much cash.  Maybe you can just figure out a way to get her that security - a larger emergency fund, for instance - and then invest the rest.