Extra $$ - Where to put it?

[LNE2032]

Argh, spent 30 minutes typing this up and lost most of it. Trying again! Been lurking awhile and thought I'd finally post. :)

Living situation: Both 36, married filing jointly, two kids ages 7 and 4.

Gross Salary/Wages: Husband gross $62,000, I gross $108,000 (total gross 170,000). Annual bonus potential of $20K for me, but will not include. Please note that our income has been increasing a bit over the last few years, we have not always had this high income. Our monthly income after deductions is about $6,900 + $1,000 from my side hustles (see “other ordinary income below”).

Other Ordinary Income: I have two side hustles – one makes $12K a year, the other $45K a year. I’ve been pulling $1,000/month over to the ‘personal’ side (we recently maxed our 401k accounts so this is/was a safety net)

Total gross income: $227k

Individual amounts of each Pre-tax deductions: Maxing both our 401ks to $18,500, total $37,000. Also max dependent care account for $5,000 pre-tax. HSA $1,500.

Qualified Dividends & Long Term Capital Gains: None.

Rental Income, Actual Expenses, and Depreciation: None.

Taxes: All standard stuff. I’m in TX so no state income tax. We plan to stay in TX forevvvvvver.

Expenses:
Natural Gas: $75
Electric: $75
Cell: $150 (wanting to go Google FI later this year when contract is up)
Fuel: $75
Car insurance: $130
Internet and HBO: $70
Water: $120
Food: $1000 (yikes)
Childcare: $1375 - $416 DCA reimbursement = $959
Mortgage: PT - $1,782; TI - $650
Misc/Fun: $620

Saving “Expenses”:
Emergency Fund: $1275 (been beefing this up as my company was just bought out – lots of unknowns with current job right now…no major worries about replacing it, however, just may take a few months)
College: $400

Total monthly expenses: $7,385

Approximate monthly dollars remaining per month: $515 + assume $1,500 from side hustles [this could be more after taxes and expenses, still figuring this out. This is in addition to the $1K I've been porting over] = $2,015

Expected ER expenses: We figure our normal, comfortable spend is around $55k, to leave us plenty of $ for travel and healthcare. This assumes the house is paid off.

Assets:
Total 401k: $227k
Total Roth IRA: $22k
SEP IRA: $2K
529: $18k (does this count, here?)
Taxable: $5k
Cash/Emergency: $40k
House: $400k
Car 1: $10K (paid off)
Car 2: $10k (paid off)
Total Assets: $734k

Liabilities:
House: -$299k at 3.75% fixed, 20 years left

Total Liabilities: $299K

Net worth about $435K

Question: My side hustles have scaled over the past year, and I need to figure out a plan on where to put any extra money. I’m estimating about $1,500 now extra each month, however, it could be more than that. My expenses are hit and miss over the year, so I just don’t have a good feel on that yet and I’m trying to grow the business at the same time. Also, I don't expect the side hustles to last forever, but definitely over the next five years.

We want to FIRE at age 50, so 14 years to go. Hubby is open to working longer if needed. I'd be OK with teaching part-time at the college level, but I'd like out of the corporate world.

We hope to pay off what’s remaining on the house (if we haven’t sooner – we do pay biweekly and while there is 20 years left on the mortgage, it should be paid off somewhere in year 17).

I’d like guidance on where I should start funneling this extra money. I need to look into converting my SEP IRA to a solo 401K, so I know that’s a tax-deferred vehicle I could use…but we don’t have hardly anything in taxable accounts, and will need money there to fund our lifestyle before we are “of age” to withdraw without penalty. Should I move a bunch into taxable accounts?

Any other comments on how we are doing or how to be better at life (ha), I’ll take, too!

Any guidance appreciated!

[Ben Kurtz]

For additional savings not in a retirement account, just open an account at Vanguard and invest in VTSAX and VWLUX, 80/20 or 60/40 or whatever your preferred stock/bond asset allocation is across your existing portfolio.

More on asset allocation ratios: https://forum.mrmoneymustache.com/investor-alley/the-ideal-portfolio/

But don't worry too much about having cash "locked up" in retirement accounts. There are number of ways to get money out for early retirement while avoiding penalties: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

General investment ordering advice: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

[Phoenix_Fire]

You're only contributing $1500 to your HSA, that should get maxed.  $3,450 for individual or $6,850 for couples.  That should be your first target. 

You currently have about 5 1/2 months of expenses covered in your emergency fund.  That covers if you lose your job, husband loses his, and both side hustles go belly up.  You can divert that $1,275 to investment accounts, unless you guys really think you need more saved up.  In which case you should evaluate why you need so much.

If you do lose your job and focus on your side hustles, would child care go down or away?  If so, that's another $11,500 you can add to your side hustle income in the way of savings.

You're spending way too much on food, but you're aware of that.  What does it look like when you break it down between groceries for home versus eating out?  And $620 a month for misc/fun seems high, over 8% of your monthly spend. 

I personally don't include my car in my net worth.  I'm not selling it, and it's not creating any income for me.  I did at first, because having a few thousand extra on my net worth was nice, but it was deceiving.  I now list it on my list of assets so I can see it's value, but it does not get included in the totals. 

I'm not sure on rules for the 529, so if you can't withdraw that yourself or take it back in anyway, I personally would treat it as my car rule above: list it, track it, but it's not included in net worth.  You should max any of your personal retirement/HSA accounts before focusing on the 529.  As someone now supporting their parents financially, I would have preferred they save for themselves as opposed to helping me with school.

Try to start adjusting your spending before your job goes away.  It will make it easier, and might feel more like a choice to you as opposed to be forced on you. 

And as a side note to losing posts, I try to type up long posts in a word document then paste them over.  If I don't do that, I try to copy the post before hitting "post" so I can paste if necessary.

[LNE2032]

But don't worry too much about having cash "locked up" in retirement accounts. There are number of ways to get money out for early retirement while avoiding penalties: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I'll review that, thanks! I haven't looked at it in awhile, but I know I need 5 years fluid at least, going from memory.

[LNE2032]

You're only contributing $1500 to your HSA, that should get maxed.  $3,450 for individual or $6,850 for couples.  That should be your first target.

Agree. I think I can add to this mid-year (I could be wrong). I should know more about my job on Monday, actually, and if all looks good will look to make this change if it's possible.

If you do lose your job and focus on your side hustles, would child care go down or away?  If so, that's another $11,500 you can add to your side hustle income in the way of savings. 

Yes, possibly. We could have the kids do something different, particularly in the summer, at a lower cost. I'd probably go full steam ahead on the side hustles, and that could be full-time if I made it so (time-wise).

You're spending way too much on food, but you're aware of that.  What does it look like when you break it down between groceries for home versus eating out?  And $620 a month for misc/fun seems high, over 8% of your monthly spend.

Yup. It's totally entertainment for us. Probably 50% is eating out. I know we need to pull back on this and we have the conversation every month about it. Definitely need to meal plan more, as we go out when we are time-strapped...which is all the time.

I'm not sure on rules for the 529, so if you can't withdraw that yourself or take it back in anyway, I personally would treat it as my car rule above: list it, track it, but it's not included in net worth.

If the kids don't use it for school, we'll pay taxes on it and pay a penalty on the earnings.

 

And as a side note to losing posts, I try to type up long posts in a word document then paste them over.  If I don't do that, I try to copy the post before hitting "post" so I can paste if necessary.

Definitely did that with round 2!

[Ben Kurtz]

I'll review that, thanks! I haven't looked at it in awhile, but I know I need 5 years fluid at least, going from memory.

The conventional wisdom is that with the Roth ladder strategy it takes 5 years to build the pipeline before you can get your money out penalty-free.

But you can start 72t SEPP payments immediately without tax penalty and without a 5 year seasoning period. Plus you have some cash already in tax and Roth which is accessible immediately. Plus it looks like you'll likely have a huge amount of home equity. So you could downsize your house or release some equity with a HELOC to cover your expenses for 5 years -- I'm normally not a fan of levering up going into an early retirement, but not dead-set against it if there is a particularly good reason. Plus you are contemplating part-time work in early retirement, which will probably cover a good portion of your living expenses, even if it does not provide enough cash flow to add substantially to your savings.

The point is, don't worry too much about asset positioning in taxable vs 401k space. Given the options available to you, max out all your tax advantaged space now, invest in taxable only after you've run out of room, and sort the rest out later.