Author Topic: Case Study - maximize savings/investment after SL paid off  (Read 1548 times)

uppy

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Case Study - maximize savings/investment after SL paid off
« on: September 30, 2016, 09:18:23 AM »
I've been posting individual questions around the forums with random ideas and thoughts, so I thought I would do a case study and ask specifically what I'm looking for to hear new ideas.

Life Situation: Single living with longtime domestic partner, 32 (me) and 28, no dependents. We live in a pretty affordable locale, renting, with roommate. Partner and I have separate finances. I have been at my job for 2 years, would love to transition out of it but nothing really forthcoming.

Assets: Truck worth ~$10K according to KBB and Edmunds (for work), about $1K in savings (emergency fund), and about $4K in a 403b. I get a match up to 3% so I am contributing this right now. No other IRA as anything left over goes to SL. I'm fully vested after about 1 more year.

Liabilities: Truck loan of ~$8K at 2.49%, and remaining SL debt of around $5K at 5.5%.

Annual Income   $42,100.00      
Take-home Pay (including 403b contributions + 3% match)   $36,900.00      
         
Total Spending September 2015 - September 2016   $35,300.00      
Average Spending Per Month   $2,700.00   (~$300 over budget)   
         
Total Spent on SL Debt   $12,600.00   34.15%   of take-home pay
Average Spent on Loans Per Month   $1,050.00   (didn't start paying $1,200 until a few months back)   
         
Total Spending Minus Loan Payments   $22,700.00   61.52%   of take-home pay
         
Net Income September 2015 - September 2016   $1,600.00   4.34%   of take-home pay
         
Projected Annual Net Income with No Loan Payment   $14,200.00   (assuming no investment)   
         
Years to reach $100K at Projected Net Income   7   (assuming no investment)   
         
Total "Savings" Rate (including SL payments)   38.48%      
         
Current Net Worth   ~$4,000.00      
         
MONTHLY BUDGET         
SL Payment   $1,200.00   ($253 min)   
Rent + utilities   $448.00      
Other   $200.00      
Car payment   $183.00      
Food   $150.00      
Gas   $150.00      
Fun   $75.00      
   $2,406.00   per month   
   $28,872.00   per year   

         
   $6,428.00   over budget for 2015-2016   

By "Savings Rate" I mean that everything currently going towards loans will theoretically be saved/invested starting 3 months from now. Previously I thought this was closer to 50% but running the numbers this way it's more like 40%.

Calculators I've run say I'm looking at age 50+ to FI if nothing changes.

The over-budget line is probably from car repairs and unexpected vet bills for our dog.

Should I open an IRA separate from my 403b?
Should I throw all $1,200/month currently going to SL into index funds once paid off?
Should I save enough cash-on-hand to invest in real estate and generate rental income?
Other ideas for generating more income/saving/investing more effectively?

You guys are awesome!

*edited to reduce the wall of text...
« Last Edit: September 30, 2016, 09:38:27 AM by uppy »

Mother Fussbudget

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Re: Case Study - maximize savings/investment after SL paid off
« Reply #1 on: September 30, 2016, 03:23:52 PM »
Welcome, and thanks for posting your case study. 

For 'Investment order' - the order to invest in things - I've copied the recommendations from "Case Study spreadsheet" (copied below).

I'm guessing $448 for 'Rent + Utilities' includes cell phone plan - an area where most people can save lots of money every month.  Not sure how much you're paying - I'll guess $120/month.  Pay off your phones, and switch to Airvoice Wireless on their $10/month 250 talk & text plan (or Republic Wireless) for each line in your house.  If you have 2 phones, $20/month.  You'll probably spend more than that the first month - just add another $10 to the fund, and use it until you need to refill. Savings:  $100/month.  Or, go with Airvoice's 'Unlimited' $30/month plan... still saves $60/month.


(from the "Case Study Spreadsheet")
Here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   
   
It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.   
If you are renting, you may not be throwing away as much on rent as you might think.  See   
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ for some thoughts.
   
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b -
   due to penalty-free access to 457 funds at retirement, even if younger than 59 1/2.
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   
   
Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),   
   putting money into that business might come somewhere before, in parallel with, or after step 5.
   
See http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html for some data on historical returns.   

uppy

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Re: Case Study - maximize savings/investment after SL paid off
« Reply #2 on: October 01, 2016, 03:50:33 PM »
I'm guessing $448 for 'Rent + Utilities' includes cell phone plan - an area where most people can save lots of money every month.  Not sure how much you're paying - I'll guess $120/month.  Pay off your phones, and switch to Airvoice Wireless on their $10/month 250 talk & text plan (or Republic Wireless) for each line in your house.  If you have 2 phones, $20/month.  You'll probably spend more than that the first month - just add another $10 to the fund, and use it until you need to refill. Savings:  $100/month.  Or, go with Airvoice's 'Unlimited' $30/month plan... still saves $60/month.

Thanks for those tips, Mother Fussbudget!

The $448 does include cell phone and it is a Republic Wireless $25/month plan. My partner has the $10/month plan but I need the data for on-the-go navigation for work. The phones are cheap $100 deals that we bought upfront. Actually, they are 1st generation Moto G. I have dropped mine in a bucket of gas, multiple toilets, and down several flights of stairs with no case except a flimsy rubber condom-like thing. Not even a crack in the glass. In fact, now whenever it gets dirty I literally wash it under running water because I know it doesn't hurt it! I'd love to see someone do that with their $500 iPhone :)

However, I am having trouble deciphering from your post whether you think I should open a separate IRA and/or Roth IRA in addition to my 403b -- or even max it out before I contribute max to 403b?

Also sounds like I should do this before paying off my auto loan @ 2.9%?

Mother Fussbudget

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Re: Case Study - maximize savings/investment after SL paid off
« Reply #3 on: October 01, 2016, 07:17:58 PM »
Thanks for those tips, Mother Fussbudget!

The $448 does include cell phone and it is a Republic Wireless $25/month plan. My partner has the $10/month plan but I need the data for on-the-go navigation for work. The phones are cheap $100 deals that we bought upfront. Actually, they are 1st generation Moto G. I have dropped mine in a bucket of gas, multiple toilets, and down several flights of stairs with no case except a flimsy rubber condom-like thing. Not even a crack in the glass. In fact, now whenever it gets dirty I literally wash it under running water because I know it doesn't hurt it! I'd love to see someone do that with their $500 iPhone :)

However, I am having trouble deciphering from your post whether you think I should open a separate IRA and/or Roth IRA in addition to my 403b -- or even max it out before I contribute max to 403b?

Also sounds like I should do this before paying off my auto loan @ 2.9%?
Yes,  do BOTH.
And yes, before paying off the auto loan.

The 403b and t/ROTH IRA are two different buckets available for tax deferred savings.  Do BOTH if you can do it.  Both types of accounts add to your retirement savings AND reduce taxable income.  403b annual contribution limits are generally $18K, and IRA limit = $5.5K for investors under 50 years of age - higher if you're over 50 ('catch up' contributions). 

In my case, I'm over 50, so I contribute the max 'catch up' contribution to my 401k during the year.  At tax time, I generally make a $6,500 IRA contribution between January-and-April for the prior tax year.  By then I usually know my total AGI for the year, and decide whether to leave it in the T-IRA, or to immediately 'convert' to my Roth (if my income is low enough).