Author Topic: Case Study: Fiance received 100k. Direction needed.  (Read 4775 times)

Rudema

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Case Study: Fiance received 100k. Direction needed.
« on: April 20, 2015, 09:54:47 AM »
Hello!

My fiance received 100k from a law suit. We would like direction as to how to go about spending this money wisely. I am 27 and she is 24. We are getting married September 2015 and the entire wedding and honeymoon is being paid for by her father. We don't have any kids now and I'm sure we'll have one sometime in the horizon. We plan on having 2 at some point.

Income:
My job - $3500-3800/month take home depending on overtime PRETAX
Side Business: As of now ~$1,200/month PRETAX. It's still growing so this number will go up. Does not include gas, material expenses...
Fiance - I'm guessing with tips (hairdresser) she makes ~25k/year.
Total - ~75-80k/year pre tax combined income including business. As of now, I'm keeping business and personal income seperate so that actual yearly take home for us is ~67k.

Expenses: per month
Rent (heat included) - $680
Auto payments - Both cars are paid for.
Auto Insurance - Guessing $480 for both of us every 6 months. We pay in advance.
Gas - My side business makes me drive a lot but it's a tax writ off. Guessing $240/month for both of us.
Utilities/Internet - $80
Cell phones - $147 (looking to switch in July)
Student loans - $127 for me. Fiance has no debt.
Groceries - $320
Entertainment - We don't go out much. Less than $100
Cat Rabbit Supplies - Maybe $40
Health Insurance - Already taken out of my total monthly take home.

Assets/Libailities:
I have $11,500 in savings. I'm assuming fiance has maybe 2k.
Both of our cars are paid for. I have a paid off 2009 Corolla. Her father bought her a brand new Kia Forte with a 20 year warranty. I advised against it. Oh well.
I have 8k in my 401k. I currently put in 7% with a 3% match. My fiance has no retirement plan as of yet.
Student loans - I have 8k at 4.75% and 9k at 2.75%. She has no debt.

This is just a quick overview of our current situation. We're looking to buy a home summer 2016. With the 100k and the amount we'll have saved by then, we would have a very nice down payment.
How much should be put down? Pay a lot or just 20% and take out a 15 year loan?
We want a home where we will stay for a long time...not looking for starter home. What can we afford?
I'd want her to start a retirement fund as well, Vanguard Roth IRA?
Should I start a Roth IRA on top of my 401k? I cannot max out either due to our current finances.
Should we pay off the 4.25% student loans and keep the 2.75%?
Anything else we're missing?

We're just looking for direction how to make the most of this blessing. Thanks!



 
« Last Edit: April 20, 2015, 10:02:51 AM by Rudema »

RunHappy

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #1 on: April 20, 2015, 10:04:05 AM »
Off the top of my head,  I would say:

Pay off your student loans (if your finance doesn't mind), hopefully this would allow you to max out your 401k

Your fiance should open an IRA and max it out

The rest should be invested

I personally would not move up the purchase of a house, just because of the windfall but there may be other ideas.


Murse

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #2 on: April 20, 2015, 10:25:19 AM »
I disagree, "we" do not do anything with this money. It is not "our" money until "we" are married. None of it should be spent on you or your student loans until then. If she wants to put the money aside until you come back from the honeymoon for your loans, that is okay. So assuming everything works out, here would be my vote,

Today list- max out her Tira, possibly put aside a down payment (my vote would be "only" 20%,) max out her 401k if she has one.

With whatever is left over she can either decide to put aside 8k for that 4.75% loan (let the <3% loan ride out with minimum payments.) and enough for you two to live on for the last 3 months of the year (after your wedding) while your entire paycheck goes into your 401k. After your married also use it to max out your Tira.

so basically I would keep it all in a bank account until the end of the year, other then her tax deferred accounts, then yours only after the wedding. Then if you want to be super badass keep living on it at the beginning of next year while you both use your pay checks to max out your retirement accounts again. Be careful not to buy more house then you would of if you had not gotten this money.

nobody123

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #3 on: April 20, 2015, 10:30:06 AM »
It looks like you have a lot of assumptions in your notes.  How do you not know how much your fiancée makes when you're getting married in 5 months?  The first thing I would do is sit down and have the money talk where you get hard numbers for your income / expenses and make a budget.  At this point, it's her money, and she may have already spent the $100K in her head.  You need to get on the same page as to what your financial goals are.  I would put the money in an online bank account earning 1%, get through the wedding, then figure out what to do with it.

Was the lawsuit from a personal injury where she may need the funds for physical therapy, etc.?  If so, I would earmark it for that.

If that's not the case, and if she agrees that it is "our" money and not hers, I would suggest:
1.  Set up an emergency fund of 3-6 months of your take home (depending on your comfort level) (6 x $6200 = $37200)
2.  Knock out your student loans.  I know the interest rate is low on half of it, and you may be writing off the interest, but getting rid of them would give you peace of mind. ($17000)
3.  Use a small amount of your other savings to open up ROTHs for both of you at Vanguard.  Once the accounts are open, it's easy to set up automatic transfers into them.  Make those a part of your monthly budget.
4.  The remaining $45800 from the lawsuit would let you put 20% down on a $229K house.  Only you can say if that level of house is what you two are looking for.  What you can "afford" is a personal judgment that your budget will help you answer.  A $183K mortgage for 30 years would be around $866/month plus property taxes.

You are not going to be upset with the results of doing #1-3 now, and it leaves you plenty of options for later (house, improvements to house, big chunk for retirement, travel before kids, college fund for kids, etc.).

Scandium

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #4 on: April 20, 2015, 11:10:39 AM »
Use it to pay for your own wedding. It feels better and your FIL won't be able to hold that over you later.

Rudema

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #5 on: April 20, 2015, 11:18:29 AM »
Let me first say I know it's not "my" money. I'm on the same page as you guys as I wouldn't let her use it for my benefit until we're married (Sept 2015). So we can look past that aspect.

The money is not from personal injury. It's from a law suit I do not wish to get into.

Our wedding is and honeymoon is 100% paid for by her father.

We talked about what we wanted to do with the money. We also talked about her own finances but she's at work as I write this and I can't quite remember the exact amount. Of course, we will talk about this once we decide what to do.

So if I were to open a ROTH, do I only put in what my employer matches on my 401k and the rest into the ROTH? She does not have a 401k at her work, at least they don't contribute.

We talked about knocking out at least the 4.75% loan and letting the lower % ride. That may change though.

Nobody123, you say to have 37k liquid? I feel like that is a lot of money to have liquid. Correct me if I'm wrong.

Thanks for the input so far.
 

Chrissy

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #6 on: April 20, 2015, 11:50:18 AM »
House.  It used to be that the maximum mortgage people were though to be able to afford was 3x their annual income, which is $225,000 for you.  Then, 20% down was the standard, or ~$50,000 down with that size mortgage.  That's ~$275,000 for a house, MAX.  A 30-year loan on a $225,000 mortgage would mean a payment of $1,000-$1,100/mo if you get a good rate, which is 25% of your take-home pay, which is thought to be the max you should spend on rent/mortgage.

Honestly, I would aim for around $250,000 in your case, if you decide a house is the way to go.  No reason to have a 15-yr mortgage, since you can always pay off a 30-yr mortgage early, and, if something happens, the payment on a 30-yr is more manageable.

Now, can you find your "forever" house for that amount?  If not, I suggest renting until your income allows you to afford something more expensive.

Yes, ROTH IRAs for you both.  You can only put $5,500/person per year into a ROTH IRA.  Yes, Vanguard for you both.  Is she considered freelance, or does she get a W-2 from her salon?  If she's freelance, she might be able to put money into one of these plans:  http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/

House:  $50,000
SL:  $8,000
ROTH her:  $5,500
ROTH you:  $5,500

That leaves $31,000 that should be invested in a taxable account in her name at Vanguard.  Slowly funnel these funds over the next 2-3 years into first HER retirement accounts, then yours.  If applicable, you could max out your 401k by living off this money instead of your paycheque, but I would only suggest this if it's impossible for her to put money into a SEP/SIMPLE ira or Solo 401k.
 


charis

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #7 on: April 20, 2015, 12:23:42 PM »
House.  It used to be that the maximum mortgage people were though to be able to afford was 3x their annual income, which is $225,000 for you.  Then, 20% down was the standard, or ~$50,000 down with that size mortgage.  That's ~$275,000 for a house, MAX.  A 30-year loan on a $225,000 mortgage would mean a payment of $1,000-$1,100/mo if you get a good rate, which is 25% of your take-home pay, which is thought to be the max you should spend on rent/mortgage.

Honestly, I would aim for around $250,000 in your case, if you decide a house is the way to go.  No reason to have a 15-yr mortgage, since you can always pay off a 30-yr mortgage early, and, if something happens, the payment on a 30-yr is more manageable.

Now, can you find your "forever" house for that amount?  If not, I suggest renting until your income allows you to afford something more expensive.

Um, what?  They should not be buying a $250K house on that income.

But yes, get a 30 year mortgage with a 20% down payment.  Just pay off the student loans.  Keep an EF you feel comfortable with and invest the rest.

nobody123

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #8 on: April 20, 2015, 12:32:58 PM »
An emergency fund is there to buy you time to figure out what to do / how to pay for whatever unexpected life event happened.  The emergency fund amount is a personal preference, and also depends on what you consider an "emergency".  In my case, the only reason we'd touch our emergency fund is for a job loss or catastrophic medical issue.  We budget for car / house repairs and other pricey recurring expenses.  My wife is a SAHM, so we prefer to have 6+ months liquid (savings account, CDs) in case I lose my job so we can keep life as "normal" as possible for the kids while I find a new job.  I don't want to put it in the market and risk it losing tons of value, because a market crash is likely to coincide with a layoff at my company.  I know I am forgoing a lot of potential market returns, but we've got a pretty solid amount in our retirement accounts, so we're willing to sacrifice some return for the certainty of the amount available on any given day.  When we were DINKs, our EF was only about 3 months of take home, because we were young, invincible, and only responsible for ourselves.

I'd start with 6 months in the EF.  I know most folks here are against treating "found money" any differently than any other dollar you have, but in this case, I think you should.  You essentially get an instant, pain-free emergency fund.  I know it's not sexy, but just set it and forget it.  Once you settle into married life, buy the house and all of the associated stuff you need when you own a house, and get a handle on what your new level of spending will be, you can reduce the amount to whatever you're comfortable with.  For me, it would be easier to go that way than only have 3 months in the bank and then realizing you really want 6 months in there and having to fund it.  Also, as your income grows, today's 6 months in the EF might naturally reduce itself to 3 months anyway.

Given your level of income, I'd contribute enough to your 401ks to get the match, budget to completely fill both of your ROTHs every year, and contribute anything you can beyond that to your 401k (assuming the fund choices are good).  There are plenty of threads on here on getting started with retirement saving, so read and do what's best for you.


Catbert

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #9 on: April 20, 2015, 01:51:41 PM »
Be sure that you/she understands to what extent, if any, incomes taxes will be due on this settlement. Some law suit pay outs are taxable and others aren't but I don't know the particulars.

charis

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #10 on: April 20, 2015, 01:54:21 PM »
Good point.  Also, is $100K the final amount coming, after attorneys fees, etc.?

Rudema

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #11 on: April 20, 2015, 02:04:15 PM »
Good point.if  Also, is $100K the final amount coming, after attorneys fees, etc.?

100k even.

We're not looking for a 250k home. We're looking for one which we could buy and manage if we never got the 100k.

MDM

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #12 on: April 20, 2015, 02:24:12 PM »
Income:
My job - $3500-3800/month take home depending on overtime PRETAX
Side Business: As of now ~$1,200/month PRETAX. It's still growing so this number will go up. Does not include gas, material expenses...
Fiance - I'm guessing with tips (hairdresser) she makes ~25k/year.
Total - ~75-80k/year pre tax combined income including business. As of now, I'm keeping business and personal income seperate so that actual yearly take home for us is ~67k.

Expenses: per month
Rent (heat included) - $680
Auto payments - Both cars are paid for.
Auto Insurance - Guessing $480 for both of us every 6 months. We pay in advance.
Gas - My side business makes me drive a lot but it's a tax writ off. Guessing $240/month for both of us.
Utilities/Internet - $80
Cell phones - $147 (looking to switch in July)
Student loans - $127 for me. Fiance has no debt.
Groceries - $320
Entertainment - We don't go out much. Less than $100
Cat Rabbit Supplies - Maybe $40
Health Insurance - Already taken out of my total monthly take home.

Should I start a Roth IRA on top of my 401k? I cannot max out either due to our current finances.

Don't understand the bolded line.  Based on the income and expense numbers, it appears the two of you together could put $36K into 401s and $11K into traditional IRAs, getting you a $2000 Saver's Credit at tax time, and still have ~$7,500 minus states taxes left over to invest/pay loans/etc. 
I could easily have missed something, but what do you think about doing that?

Rudema

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #13 on: April 20, 2015, 03:38:46 PM »


Don't understand the bolded line.  Based on the income and expense numbers, it appears the two of you together could put $36K into 401s and $11K into traditional IRAs, getting you a $2000 Saver's Credit at tax time, and still have ~$7,500 minus states taxes left over to invest/pay loans/etc. 
I could easily have missed something, but what do you think about doing that?

You're right. That was a bit hasty for me to jump to that conclusion. It's totally doable.
« Last Edit: April 20, 2015, 03:41:44 PM by Rudema »

Chrissy

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Re: Case Study: Fiance received 100k. Direction needed.
« Reply #14 on: April 20, 2015, 08:43:27 PM »

This is just a quick overview of our current situation. We're looking to buy a home summer 2016. With the 100k and the amount we'll have saved by then, we would have a very nice down payment.
How much should be put down? Pay a lot or just 20% and take out a 15 year loan?
We want a home where we will stay for a long time...not looking for starter home. What can we afford?


With a combined income of $75k-$80k, and a 20% down-payment, you could buy and maintain a $250,000 home, having put down 20%.  You asked what you could afford, and that's what the numbers say.  However, real estate is a local affair.  Maybe in your area of the U.S., homes sell for much less than this.  If that's true, I understand your surprise at my estimates... certainly you should only pay market rate (preferably under!).  For comparison, I'm in Chicago, where small, single family homes in good neighborhoods start ~$600k, so, in my neck of the woods, $250k would be an impossibly incredible deal.

You also say you want a home you could buy and manage without the windfall, but that's not what you said in your original post (see above).  Without the payout, you have ~$13,500 for a down payment.  That's 20% of a house worth $67,500; your mortgage would be $54k at $230-$250/mo.