Author Topic: Case Study: Where to go from here?  (Read 3221 times)

Popinjay

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Case Study: Where to go from here?
« on: October 31, 2014, 08:44:41 AM »
After 15 years of having credit card debt I'm finally in a position to pay it off. I want to start putting excess money to work.

Income: Salary - 84k base with quarterly commissions, about 105k yearly, $4600 a month after deductions and 401k not including comissions.

Current Expenses: ~$2000 monthly

Assets: $38,000 cash, $134,000 savings, $140,000 house
Savings: $131,000 Fidelity 401k, $2400 HSA
Allocation   Investment   Current Balance ($)   Shares or Units   NAV   Change   Tier   Asset Class   Category
95.19%   AGGRESSIVE LS $124,073.43   32,742.937   $3.82   $0.02   TIER 1 - LIFE CYCLE FUNDS   Blended Fund Investments*   Tier 1 - Life Strategy
4.53%   TARGET DATE - 2040 $5,584.84   415.009   $13.73   $0.04   TIER 1 - LIFE CYCLE FUNDS   Blended Fund Investments*   Tier 1 - Target Date
0.42%   INTEREST INCOME FUND $620.19   105.149   $5.99   $0.00   TIER 2 - CORE FUNDS   Bond Investments   Bonds

Liabilities: House: $101,000 mortgage,  5.0% interest rate,  $1024 monthly payments
Credit card debt: $25,000. zero percent until March
No car payments

I have $38,000 cash with $25,000 credit card debt that is zero percent interest until March. I really want to pay this off right now but I want to make sure itís the smart thing to do. My credit is really good so I was able to get 0 percent balance transfers after paying the 2 or 3 percent fees.

My job is not stable and I feel like I could get laid off any time. My company typically offers 30 day notice plus 6 month severance. I would like to keep cash on hand for six months of expenses. I estimate that to be $12,000 but that is very conservative because my wife works as well. I do feel like I could get another job after 2 or 3 months of searching but I think it would pay around $75,000. Getting laid off would be a worst case scenario but with the cash I have and my severance I would be OK for at least a year and a half.

My goal:
I would like work to be an option as soon as possible. I probably will not stop working but I would like to "retire" as early as possible.

My questions:
I should just pay off this credit card debt now right?
My company matches 100% up to 6% for my 401k. Right now I am putting just 6% to my 401k. Should I increase it?
I'm also putting 1% into a Roth 401k through Fidelity as well. I have no idea why I'm doing this or how its different from my 401k. What should I do with this?
Should I start a separate Roth IRA?
Should I change how my 401k is allocated?
Should I work on paying off my house? Should I refinance?
What should I do with my excess money each month? I estimate that will be at least $2700.

jesstach

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Re: Case Study: Where to go from here?
« Reply #1 on: October 31, 2014, 09:45:34 AM »
Congrats on keeping your expenses low compared to your income! You are in a great position. I'm re-ordering your questions a little, hope this helps!

My company matches 100% up to 6% for my 401k. Right now I am putting just 6% to my 401k. Should I increase it?

You are in a position where you could contribute the max of $17,500 per year. Does the 6% include commissions or is it only base? You would want to contribute $1,458.33 per month in order to max it out. Use a paycheck calculator (http://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators/salary-paycheck-calculator.aspx) to see what your paycheck will be if you max it out. You will pay less taxes, so the difference will be less than you think.

Since you have an extra $2,700 a month, I would increase your 401k contribution to that amount from now until Dec 31st to put as much in your 401k as possible for 2014. Then, you can lower your contribution to $1,458.33 per month to evenly contribute during 2015.

I'm also putting 1% into a Roth 401k through Fidelity as well. I have no idea why I'm doing this or how its different from my 401k. What should I do with this?
Here is some info on Roth 401k: http://en.wikipedia.org/wiki/Roth_401%28k%29
Basically, your regular 401k is pre-tax contributions and you are not taxed until you withdraw in retirement. With the Roth 401k, you contribute post-tax and then you're not taxed when you withdraw. It makes sense to do the Roth 401k if you expect your tax bracket to be higher during retirement than it is now. I suspect that is not the case since your income is high now. Your contributions for both the traditional 401k and Roth 401k cannot exceed a total of $17,500 per year. So I would recommend maxing out the traditional 401k instead.

Should I start a separate Roth IRA?
After maxing out the 401k, I would put $5,500 in Roth IRA. You will pay tax now, but have the benefit of tax-free withdrawals at retirement. You have until April 15, 2015 to contribute $5,500 that will count towards 2014 tax year.

I should just pay off this credit card debt now right?

Since it's 0% interest until March, and you already have the cash to pay it, I would focus on putting as much in the tax advantaged accounts (401k and IRA) before March. As long as you know - THIS HAS TO BE PAID BY MARCH. You didn't say the reason for the credit card debt, but my advice would be to make sure you don't get into the position of having credit card debt again. In March, use $25k of your $38k to pay off the debt.

Should I work on paying off my house? Should I refinance? What should I do with my excess money each month? I estimate that will be at least $2700.

I would put your excess money to work in this order:
1) max out 401k
2) max out Roth IRA
3) pay remaining extra towards the mortgage
4) once mortgage is paid off, invest in taxable accounts (like Vanguard index fund)

You could debate paying off the mortgage at 5% vs. investing extra cash. Paying off the mortgage early is a guaranteed 5% return, while there's always uncertainty with stocks. Of course, you could do both too (like put 50% of extra cash towards mortgage and 50% towards stocks).
« Last Edit: October 31, 2014, 09:48:13 AM by jesstach »

Popinjay

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Re: Case Study: Where to go from here?
« Reply #2 on: October 31, 2014, 11:33:43 AM »
Thanks!

One thing I forgot to mention is that I am 32 years old. One of my concerns with putting all my money into my 401k is that I won't be able to access it if I decide to retire around 45~50. Is that a valid concern?

I suppose that maxing out my 401k and Roth IRA shouldn't hurt too much. I take home around 32k and both of those would only take away 23k. So that would leave me with 9k + commissions. The 6% of my 401k does include commissions. So far I've only put $9010 into my 401k this year.

Thanks for explaining the Roth 401k. I will stop putting the money in there and add it to my 401k.

I've thought about it for a bit and I think I'm going to open a Roth IRA for my wife first and put $5500 in it. She currently does not have any retirement accounts. 

My credit card debit has no good reason. Just poor decisions!

Thanks again for taking the time to respond!

snshijuptr

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Re: Case Study: Where to go from here?
« Reply #3 on: October 31, 2014, 11:46:20 AM »
Look into the Roth Pipeline to access cash early (or just know that until you are 5 years from retirement, you are good to keep putting it in 401k).

You posted your expenses, but because we don't know how you got the debt, I would say:

1) Max out 401k Match
2) Figure out your TRUE annual expenses (think about those annual or every few years things like memberships, premiums, and cars and set money aside every month)
3) Set aside a 3 month EF in Savings (take from your credit card money, but set this money aside, mentally or physically)
4) Pay off that credit card debt with any money you have left (you are NOT earning enough in your Savings to chance this). If you set too much aside for the EF, then you have until March to pay this shit down. Come March, steal from your EF if you have to [yes this is all an emotional game]
5) Once the EF is in place and the credit card is gone, you can now think about maxing out retirement. Make sure you keep up saving for those other annual or semi-annual expenses. This could be tomorrow or after March, depending on what your TRUE expenses are.

Popinjay

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Re: Case Study: Where to go from here?
« Reply #4 on: October 31, 2014, 02:36:33 PM »
Thanks snshijuptr.

I just maxed out my 401k at 80% for the next couple months.

I do need to spend some time on my real expenses.

I already have enough money right now for 6 months EF and to pay off my credit card debt.

My credit card debt came mostly from spending more than I had. There was also a wedding, honey moon and the two cars I bought thrown in there.

mxt0133

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Re: Case Study: Where to go from here?
« Reply #5 on: October 31, 2014, 02:59:34 PM »
I've thought about it for a bit and I think I'm going to open a Roth IRA for my wife first and put $5500 in it. She currently does not have any retirement accounts. 

If your wife does not have 401k program at her job, then she can contribute to a traditional IRA and will be tax deductible, which would seem better than a Roth IRA in your situation.  Same rational as maxing out your 401k first then contributing to a Roth IRA for your-self.  Your spouse can only contribute a maximum of $5500 between a traditional IRA and Roth IRA, so you can't max out both.

Since you mentioned you don't feel like your job is stable, you should really think about what the appropriate amount you should have as an emergency fund.  Then focus on eliminating debt and then minimizing taxable income.

Retired To Win

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Re: Case Study: Where to go from here?
« Reply #6 on: November 01, 2014, 09:42:20 PM »
When I paid off my credit card debt, I did it over a targeted period of a few years, serially rolling the outstanding balances to zero-percent offers that kept coming my way regularly.  Factoring in the balance transfer fees, that means that I carried the credit card debt at 2-3% annual interest until it was finally paid off.

You could consider doing the same thing, choosing a target pay-off date (for example, by the time you are 35) and making payments accordingly.  Why do it that way?  Well, I did it that way in order to preserve my financial options and liquidity, and in order to be able to direct some of my surplus cash into investments even while I was knocking down the credit card debt.  This gave me a good sense of control.

A lot of it will depend on where your head is at.

Good luck.

Spondulix

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Re: Case Study: Where to go from here?
« Reply #7 on: November 02, 2014, 01:08:51 AM »
If you're considering refinancing, keep in mind that it's harder to get approval when you're out of work. So it might be worth looking into if your credit is good enough (and you can get the rate down a whole percent)

To get the closing costs down, get a good faith estimate from a local credit union (some will do it online), as they tend to have lower fees. You can use that to negotiate closing costs with whatever company you decide to go with.