Reader Case Study: Newly married, no debt, where to save/what next?

[Malone]

I've been lurking for a year or two, and I feel like enough life uncertainties have passed that I can now do a case study for us. As I've learned, it's all about priorities and having a larger wedding was something that although many don't agree with, was important to both of us (face punch away, but best day of my life!) and although we didn't go into debt, we are basically starting over. We're both 24, and combined we make combined about 100-110k before tax, and we're in IL with no kids but a wiener dog. I've been at my job a little over a year, and was making 40k, and just got a pretty big raise in April with my promotion. I didn't max out my 401k due to the wedding, but contributed over the company match. Husband decided to not take his 5th year athletically, but still had some school requirements he had to knock out online, so he technically graduated in December 2014, where he was hired but not with a start date until March 2015, which was his first month working full time. We both received athletic scholarships so thankfully no student loans.

Gross Salary: Me: 52k Him: 55-60k.

Pre-tax deductions: None, we do Roth IRA/401k

Other Ordinary Income: I picked up bartending before the wedding, but will probably not continue doing this after wedding. Number not included in 52k, as it pretty much just washed out with the wedding.

My 401k Deductions, 6% about $180 a month
Husband's 401k Deductions, 30% about $1250 a month
My 10k raise that is going into our IRAs- $833/month
Monthly Retirement Savings: $2,263

Husband's Take Home Pay Post Tax/401k/Health/Dental Insurance for both of us- $1600
My Take Home Pay Post Tax/401k- $2400 (not including the 10k raise which will go into our IRAs)

Total Monthly Income: $4,000

Current Monthly expenses:
Rent (1 bedroom apt, 800 sq/ft) $1260
Pet Rent: $20
Renters Insurance: $20
Groceries: $300
Utilities: $200
Cable: $89
Phone bill: (both on my parents family plan, paying $20 a month until our plans are up)
Car Payment: None, own one 2006 Subaru Legacy
Husband's Monthly Train Ticket: $150
Gas: $80
Car Insurance/Renewal Etc: $110? (My dad takes care of these, I'm sure I'll take if over shortly)
Miscellaneous Pet (Annual Vet Bill Conservatively $1000, $200 for Heartworm/Frontline): $100
"Free" Spending Money: $100 each- includes eating out, drinks, etc.. we stopped tracking the "fun" money, i've seen mixed reviews on doing this, but the headache of arguing about what we're spending this on isn't worth it.
Travel/Weddings: We're in the wedding age, and have a lot of college teammates getting married. Very happy to attend about 3 a year. 2 people, three flights- $600. Hotels for 3 weddings- $300. Gifts for weddings/ones we don't attend $500= $116 a month

Total Monthly Spending: $2,665

Left Over $1,335
Monthly Retirement Savings: $2,263
Total Monthly Savings $3,692

Assets:

My Checking: $7,000
His Checking: $1,800
Our Joint Saving: $5,000
Chase Freedom CC: 0/3000

Total Liquid Assets $13,800

My Roth IRA- 8k
My Roth 401k (6%, 4% company match)- $7,000
His Roth IRA- 0, this will be his first year contributing, plan to do full
His Roth 401k- $4000 (started job in March 2015, contributed 30% of income)

Liabilities: None

I'm open to any advice. I'm pretty happy with our spending vs. saving, but mostly we have goals coming up we want to save for. I will be "retiring" early in about 5 years to be a SAHM, and want to make sure our savings are in order. Husband will be close to maxing out 401k, and we plan on taking my 10k "bonus" to mostly max out our IRAs for the year when combined with the excess 3.5k we have right now after the 10k go into emergency savings.

Our goal was to save up for a 10k "emergency fund", which we want to hopefully never touch so we were glad we still had that after the wedding. Since we pay off our credit card every month and only use it for rewards, I'm fine having this mostly as our short term emergency fund, but would like to keep the 10k in a somewhat liquid form and have been doing research on online money markets, and am open to any advice here.

We are saving for another car (Goal, $10k) for when Husband's job moves from the City to suburbs next year (we are living in suburbs), and also a travel fund of 2k every year on-top of the wedding. This would leave us with about $6,000 at the end of the year for other savings. We're both in the financial field, and like Vanguard Index funds like many others here for that, or should this be going to max out my Roth 401k? Husband has no desire to retire early, so would this money be better off being invested? I kind of also think 10k is a ridiculous high number to have in an "emergency fund" type situation, but Husband had a hard time finding a job during his "first" graduation in May while he took online classes and was unemployed for a bit, so this is the number i got him down to.

Thanks so much for all your answers/advice in advance! Let me know if I'm missing anything!

[MDM]

b]Pre-tax deductions:[/b] None, we do Roth IRA/401k

Thanks so much for all your answers/advice in advance! Let me know if I'm missing anything!

Malone, welcome to the forum.

Seems you could contribute ~$10K to traditional IRAs or a 401k and get the 25% bracket savings on that money, then put the remaining ($18K + $18K + $5.5K + 5.5K - $10K = $37K) into Roths, and still have money left over - what do you think?

[Krnten]

Looks pretty good for 24!  A few questions:

Any reason you're prioritizing his savings savings over yours?  He's set to max his 401k and your bonus is funding his Roth, how come you're not also maxing your 401k?  Esp if you're going to leave the workforce in 5 years, I think it's important to build your assets too. 

Also, any reason you're keeping two checking accounts?

What about buying a home?  Is this something you want to save for too?  If so, that emergency fund can double as savings for the down payment, if that's what you want.

Money in retirement accounts is money "invested", btw.  I'd prioritize maxing out pretax savings now and maybe add taxable in a few years once you've built a good retirement nest egg for yourselves.

 

[DocCyane]

Your monthly expenses look a little lean. I don't see car insurance, health insurance, renter's insurance, pet expenses, car tags...

[Malone]

Looks pretty good for 24!  A few questions:

Any reason you're prioritizing his savings savings over yours?  He's set to max his 401k and your bonus is funding his Roth, how come you're not also maxing your 401k?  Esp if you're going to leave the workforce in 5 years, I think it's important to build your assets too. 

Also, any reason you're keeping two checking accounts?

What about buying a home?  Is this something you want to save for too?  If so, that emergency fund can double as savings for the down payment, if that's what you want.

Money in retirement accounts is money "invested", btw.  I'd prioritize maxing out pretax savings now and maybe add taxable in a few years once you've built a good retirement nest egg for yourselves.

 

1. I was originally maxing out my 401k last year, but then when we got engaged and he was unemployed, i bumped mine down until after the wedding. Definitely an option would be to max out my 401k and just not have any extra money, to save, definitely not a bad thing. I guess I never looked at it as prioritizing, rather he has more years of working ahead of him, so it makes sense to max his out?

2. My checking is actually "our" checking, and his is just his. We literally got married 5/30 and Nick had to open up his own checking account for a check he had to write to his school (my mom wrote him a letter of recommendation, so didn't want to raise questions on joint checking, and a bunch of checks were made out to his last name for the wedding, so we've been using that one to deposit the money into it this week. We'll go back to just mine once i get my name change and all that jazz.

3. I'm definitely open to buying a home! We actually were deciding between closing on a townhome/bigger wedding in January, and when the HOA fees were basically our entire rent we're paying now, we decided to rent for a bit. I've done the calculators and looks like renting is a little better deal, but definitely something we're open to in the long run as long as we both like where we're at. We both went to school in NC, and he grew up in NC- not sure if I've sold him on the IL winters just yet for permanent living.

b]Pre-tax deductions:[/b] None, we do Roth IRA/401k

Thanks so much for all your answers/advice in advance! Let me know if I'm missing anything!

Malone, welcome to the forum.

Seems you could contribute ~$10K to traditional IRAs or a 401k and get the 25% bracket savings on that money, then put the remaining ($18K + $18K + $5.5K + 5.5K - $10K = $37K) into Roths, and still have money left over - what do you think?

Thank you for this! I guess until i knew exactly our tax bracket with him unemployed, i didn't think much into this and I always personally preferred Roth. I'll look into this but that does look like it would make more sense. Would there be any harm to this if i had a 7k balance in a Roth and started contributing to Traditional and split it?

[Malone]

Your monthly expenses look a little lean. I don't see car insurance, health insurance, renter's insurance, pet expenses, car tags...

Thank you!! Added a few things up top, health Insurance is on Husband's out of take home, I'm not quite sure what it is a month but will check, i think it's $220 health and dental?

Pet expenses/renters insurance are included in the rent fee, and he's a 9 lb guy so just a giant bag of food every three months is included in groceries. Added a small budget that I'm sure will flex after we live alone with him for a year.

I think i have a lot of missing expenses since I'm newly married and still need to figure out, as next month is our first month when everything "starts" as we lived rent free with my parents (very traditional folks, he lived in our guest house), and good ol' dad still pays for a lot of the miscellaneous. We used mint religiously as we planned for the wedding, and we've stopped eating out, purchased our own hair cutting materials, mooch off my sister's netflix, cut the gym, etc.. We're trying to be as independent as possible, but we know there will probably be a lot of surprise expenses. Thanks for the feedback, I just made some changes, and I'm sure there will be more when we discover hidden "real" world expenses!

[MDM]

Would there be any harm to this if i had a 7k balance in a Roth and started contributing to Traditional and split it?

No harm at all.

See tools such as https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ or the case study spreadsheet for doing quick "what if?" scenarios and the tax consequences of them.

[Malone]

Would there be any harm to this if i had a 7k balance in a Roth and started contributing to Traditional and split it?

No harm at all.

See tools such as https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ or the case study spreadsheet for doing quick "what if?" scenarios and the tax consequences of them.

I guess by "harm" I meant missing out on compounding returns faster? Thanks for the links I'll play around with both.

[MDM]

I guess by "harm" I meant missing out on compounding returns faster?

Not sure what is meant by this.

Note that for a given amount of money invested at equal returns, and given the same marginal tax rate now and in retirement, the after-withdrawal-in-retirement results of a traditional vs. Roth investment are identical.  For amount P, tax rate t, number of years n, and investment return i, we have:
  Roth          = P * (1 - t) * (1 + i)^n
  traditional = P * (1 + i)^n * (1 - t)

The answer is the same in either case*.


*There is a somewhat tricky exception.  See http://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758 if you want to go down that rabbit hole.

[Malone]

I guess by "harm" I meant missing out on compounding returns faster?

Not sure what is meant by this.

Note that for a given amount of money invested at equal returns, and given the same marginal tax rate now and in retirement, the after-withdrawal-in-retirement results of a traditional vs. Roth investment are identical.  For amount P, tax rate t, number of years n, and investment return i, we have:
  Roth          = P * (1 - t) * (1 + i)^n
  traditional = P * (1 + i)^n * (1 - t)

The answer is the same in either case*.


*There is a somewhat tricky exception.  See http://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758 if you want to go down that rabbit hole.

Totally understand all that. Unfortunately my question was actually much stupider and i just did the math to see it's the same. Basically it was getting a 5% return on two 10k investments the same long term as 5% on one 20k investment. Lets blame it on my honeymoon brain, today's our travel day back to the States.


ETA- any recommendations for online money markets/saving accounts (assuming this is where I should keep my "emergency" fund/possible eventual house down payment?

[MDM]

Totally understand all that. Unfortunately my question was actually much stupider and i just did the math to see it's the same. Basically it was getting a 5% return on two 10k investments the same long term as 5% on one 20k investment. Lets blame it on my honeymoon brain, today's our travel day back to the States.

ETA- any recommendations for online money markets/saving accounts (assuming this is where I should keep my "emergency" fund/possible eventual house down payment?

You are definitely not the first, and almost certain not to be the last, to have that impression about investment growth.  Good to see that you worked out the math behind it - until one does the math, it does "seem" as though a big stash might grow faster than a bunch of little ones.  Another good example of "do the math until you understand."

For online savings, GE Capital (at 1.05%) is worth considering.