Author Topic: (Optimization) Got first real raise... and it's gone. How do I pay for this?  (Read 3465 times)

neophyte

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I just got my first real raise ever! YAY!  At the same time, my dentist reached into my mouth and laid claim to the first year and a half of it. BOO! (Lifestyle inflation? Please -- I am getting a CROWN folks!  It's what all the cool kids are into. I'm gonna have a royal tooth in my mouth!)

So I have an optimization problem: What's the best way to pay for this?  For the first step it's going on a rewards card, but what next?

I have enough in my savings to cover it. It'll leave my savings account with about 2 months expenses, which a little lower buffer than I like.
I have enough in my HSA to cover about 50% of it, but I just got enough in there to start investing it this month. (Eventful month)

I think my options are:
1. Pay from savings account. S-l-o-w-l-y rebuild my buffer and don't worry about it unless there are any more unexpected expenses this year. Save receipts and invest the HSA.
2. Pay from savings account. Decrease my 403b contribution to rebuild my savings more quickly. Save receipts and invest the HSA.
3. Pay from savings and don't worry about it. Save receipts. Throw the extra money from raise in the HSA and/or 403b.
4. Pay from HSA and savings. Withdraw from HSA as I make contributions until the bill is covered.
5. ???


In case it's helpful here's what current paychecks look like (paid weekly):

Insurance and Uncle Sam    $120
HSA contribution                 $75
403b contribution                $182
take home                          $275 (<- About $30 more than before)

Typical monthly expenses   ~$900 +/- $50
My Roth IRA is maxed.

Thanks Mustachians!

MDM

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1. Pay from savings account. S-l-o-w-l-y rebuild my buffer and don't worry about it unless there are any more unexpected expenses this year. Save receipts and invest the HSA.
^That one.

You had a (minor) emergency.  That's what an emergency fund is for.  Now rebuild it from your excess cash flow.  Good plan!

Mother Fussbudget

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+1 for option 1. 

Instead of cutting back on your savings plan, think about ways you can create new cash to rebuild your emergency fund more quickly.  Think CraigsList/Ebay/Side-Gigs.  You might also consider breaking out your bike for May (Bike Month).

Sounds like you have your plan in order.  Stick to your guns, and HAVE FUN - find some different (i.e. 'FREE') ways to treat yourself ROYALLY this weekend, your majesty. 

(Regal Cinemas has a 'Crown Club'... and they have $1.50-to-$3.50 cinemas across the country... go see a movie?) ;-)

dsmexpat

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You know you're hugely overpaying taxes based on your income, right? That you need to modify your withholding and probably stop contributing to that ROTH because we're gonna need to play with our AGI.

I don't know your filing status but you need to be trying to offset the Saver's Credit (non refundable) against your tax obligation. If we assume you're single and earning around 26k then you need to be balancing the see-saw of deferring income against receiving taxes back until your tax obligation is 0.

Work out how much taxes you'd owe on 2015 right now and work out what your AGI would need to be to get a saver's credit for exactly that amount. Defer taxes using a tIRA to reduce your AGI, therefore increasing your credit but also decreasing taxes owed this year. There will be a sweet spot for your AGI which leaves you paying roughly $1000 in taxes and then getting all of it back as a Saver's Credit for a total tax of 0. Find it.

neophyte

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Ok, so it looks like I'll stick with #1 then. (And I've got some yard work and hiking planned for this weekend ;) )

About taxes, yeah, it does seem like a lot, doesn't it? But only $18.50 is federal income tax. The rest is local, state, FICA, and health insurance, and there's not much I can do about those. (And state and local I always end up owing a little) I do need to optimize the saver's credit, but I think I'm close.
« Last Edit: May 01, 2015, 07:52:36 PM by neophyte »

MDM

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I do need to optimize the saver's credit, but I think I'm close.
^Yes!

Despite being in a low marginal bracket now, putting some money into a traditional IRA (e.g., to ensure your AGI is <$18K) could make a large difference in the Saver's Credit.

E.g., see these web pages that will help evaluate some "what if?" options:
http://www.paycheckcity.com/calculator/salary/ or
http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx or
https://turbotax.intuit.com/tax-tools/calculators/taxcaster/,
or you could also use the spreadsheet linked in the case study sticky to evaluate your options.

It would be a shame to miss the saver's credit cutoff by a few $.  If you are trying to cut it close, do ensure that you are using 2015 tables with whatever tool(s) you choose.