Author Topic: Case Study-- Beginner mustachian figuring out where to put money....  (Read 2725 times)

milofilo

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I am completely new to MMM and the idea of financial independence so please be gentle!

Life Situation: Single, 0 dependents, 27 year old in Chicago. Spent 20s traveling and just learned IRAs existed this past year (cringe). Work as a UX designer -- 8 months on job so my salary is below average for my career and I expect my salary to increase significantly over the next 10 years. Luckily I have always been somewhat frugal. Spent past 2 years backpacking living in the woods around $600 / month but I got soft with my plush new job and have been spending more than I should. Just learned about financial independence and am super excited / dedicated to reigning in and getting frugal.

Gross Salary/Wages: 60,000.

Pre-tax deductions:
Dental/health: 70/month
Roth 401k: 2500/month (have already contributed almost $6000 this year).
HSA: $20/month (has $52 right now).
Transit: $30/month. (I bike to work year round, but keep some on card for rain/snow etc)

Other Ordinary Income: make small amount of side money from freelance work and selling art (maybe 1000-2000 per year)

Taxes: Federal, state/local, and FICA: roughly $1200/month total.
Federal: $650/month,
SS: $300/month,
medicare: $70/month,
State: $175/month

Current expenses: I have mint but it's hard to tell since I share expenses with boyfriend and I tend to do the buying and he does the reimbursing. I also purchase expensive things for parents and am reimbursed to get credit card points, have some travel expenses for work, and do same with education-- I pay for tuition and my company reimburses.
My best guess is I actually spend about $1000--1500 / month. I know there is room for improvement here.
Rent/utilities are 500.
Restaurants: $100/month
Phone: $35/month
Groceries: $150/month
Shopping/other: $200 ???
travel: $200

Assets: 21,666 invested, Just less than 10kcash in an account that gets 2.5% interest.
Roth 401k currently has 13,798 and have already contributed almost $6000 this year.
Roth IRA has 7,369, have not contributed this year. Those are both set to 10 risk factor on wealthfront.
I also have $499 in regular brokerage set to 5.

Liabilities: No loans!! :)

Specific Question(s):
1. Should I be contributing to roth or regular IRAs and 401ks? What are my limits for each?
2. How much cash should I keep in a bank account compared to investing?
3. Once I max out my IRA and 401k for the year, where/how should I invest the rest of my non-cash money?
4. I am frantically listening to podcasts and reading blogs, but are there other things I should look into doing immediately to save money?
5. My boyfriend currently is in school going into debt so can't contribute to retirement accounts... Would it be worth it to give him money for his IRA/401k?

Thank you so much for your time and help with this! I really appreciate it.
« Last Edit: March 26, 2016, 07:23:42 PM by milofilo »

Vanguards and Lentils

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Re: Case Study-- Beginner mustachian figuring out where to put money....
« Reply #1 on: March 26, 2016, 08:12:16 PM »
Regarding whether your boyfriend can contribute to an IRA, I looked into this for myself while I was still in school, and it seems the IRS says you can contribute if you earn "taxable compensation", which you can read about here:

https://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs

Felicity

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Re: Case Study-- Beginner mustachian figuring out where to put money....
« Reply #2 on: March 26, 2016, 08:48:24 PM »
Welcome! You're already off to a fantastic start.

For Mint/tracking spending, you might want to categorize reimbursable expenses as "Hide from budgets and trends." It is important to figure out where that $200/mo of "shopping/other" is going! You can also split charges into multiple categories, etc, to categorize all your spending appropriately.
You also might like the Bogleheads wiki https://www.bogleheads.org/wiki/Getting_started - I found this site really useful for getting my plans together.


Specific Question(s):
1. Should I be contributing to roth or regular IRAs and 401ks? What are my limits for each?
The Roth vs. Traditional really comes down to two things - (A) What you expect your tax rate to be in retirement. If you expect lower taxes, a traditional would be better. If you expect higher taxes, a Roth would be better. If you expect the same tax rate, it's a wash. Most people on these forums are expecting lower tax rates, so traditional accounts would be my initial suggestion, without knowing more about your goals.  (B) Flexibility - Roth accounts can have contributions taken out before age 59 1/2 without penalty (contributions only, not gains). Because of this, they could be used as emergency accounts, or as the first accounts you draw down on in early retirement.

The limits are $5,500 /year for IRAs and $18,000 for 401ks

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2. How much cash should I keep in a bank account compared to investing?
This really depends on your risk tolerance, as well as more specific life factors - how stable is your job/income, for example. Even if your job is very stable, you might want to keep at least a few months living expenses on hand. $10k seems more than enough.

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3. Once I max out my IRA and 401k for the year, where/how should I invest the rest of my non-cash money?
HSA, for sure http://www.madfientist.com/ultimate-retirement-account/

Then you would start taxable accounts, at Vanguard or other institutions.

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4. I am frantically listening to podcasts and reading blogs, but are there other things I should look into doing immediately to save money?
Definitely try to get a better grasp of the spending with Mint, so you can see what makes the most sense to cut out. You could possibly lower phone costs http://www.techmeshugana.com/, you could lower restaurant spending if you wanted, and you should at least figure out where exactly that $200/mo shopping/other is going.

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5. My boyfriend currently is in school going into debt so can't contribute to retirement accounts... Would it be worth it to give him money for his IRA/401k?
Supermatthew is absolutely right - the boyfriend would need taxable compensation to contribute to an IRA. That said...you might not want to do that, even if you could.

milofilo

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Re: Case Study-- Beginner mustachian figuring out where to put money....
« Reply #3 on: March 27, 2016, 04:54:43 AM »
Thanks so much!!! I had no idea about the HSA. I will look into increasing the contribution and switching to a traditional IRA and 401k. I know I do need to better figure out where my money is going... I also had gotten quite lazy about being frugal given my income (compared to previous year income of 7000).

nessness

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Re: Case Study-- Beginner mustachian figuring out where to put money....
« Reply #4 on: March 27, 2016, 05:47:45 AM »
Do you get an employer match on your 401k? You're currently on pace to max your 401k before the end of the year, and if you do so you likely won't get employer contributions for the rest of the year, so you should reduce your contributions so that you can contribute at least enough to get the match all year.

milofilo

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Re: Case Study-- Beginner mustachian figuring out where to put money....
« Reply #5 on: March 27, 2016, 11:39:57 AM »
Yes I do get employer match.. But I am confused. I thought the match was just a percentage (between 3-5% depending on YTD amount) of what I put in? Wouldn't it be the same match amount then whether it's in a few months or over the year?

Eurotexan

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Re: Case Study-- Beginner mustachian figuring out where to put money....
« Reply #6 on: March 27, 2016, 12:18:59 PM »
Regarding the 401K match it depends on your company's specific plan. Some companies match against the total you contribute per year, others (and in my experience most plans) contribute on a paycheck basis. That means that if you max your contributions earlier on in the year then you forgo the company match for those remaining paychecks where you can no longer contribute. It's important you check as it's not too late to change your contributions.

milofilo

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Re: Case Study-- Beginner mustachian figuring out where to put money....
« Reply #7 on: March 27, 2016, 12:43:21 PM »
Great, thanks for the heads up on this! I will look into it. From my paycheck it looks like I have contributed 7500 and they have done 600 YTD, which doesn't make much sense to me.