Intro/My situation

[campsdeloscamps]

Hello, 

I've been following this board off and on for several years and thought I'd finally introduce myself.  I am 35 years old, married with a five year old, and own a home in Chicago.  I am self-employed and did quite well last year (2015) and am now finding myself having a nice "problem" in that I finally have some extra money to try and invest.  The problem, however, is that I have no guaranteed income and can make $150k one year and $40k the next depending on how my business goes.  As a result I have always been afraid to place my money anywhere that is not liquid and it is simply sitting in a savings account.  Here's a general overview of my financial situation:

-roughly 100k in savings
-own a home in Chicago valued around 400k, owe 280k on it
-20k in student loan debt
-my wife makes roughly 65k/year and our family is covered by her insurance
-several years ago when i first became self employed i took a 401k from my employer and rolled it into an IRA that is now valued around 25k
-my wife has a 401k and pension through her employer valued at roughly 160k last i checked.

To be honest I'm really happy that I'm able to even be here asking about this.  I had a very strong year in 2015 and one year ago I was debating taking from my IRA just to pay the mortgage.  Because I have so recently been in that situation I have a really hard time with the idea of putting all my money into retirement plans.  I'm also a horrible hypochondriac (totally different story) and am convinced that there is no way on earth that I will live to retirement age anyway, so I'm sure that contributes to my reluctance.   

I'd really love to hear and and would appreciate any advice.  I'm considering meeting with a financial advisor but it seems to me as though he/she will simply try to sell me life insurance and tell me to contribute more to a retirement plan.  Anyway, let me have it.  Thanks!

[dandarc]

It all starts with understanding your expenses.  Suggest logging every penny that goes out.  Then you can determine the extent that the hills and valleys of your income are causing problems.

[dandarc]

And the worry about not being able to touch "retirement" funds until "retirement age" is unfounded.

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

[GrowingTheGreen]

Stay away from the financial advisor for now. You can totally handle this on your own if you do your homework.

If I were in your position, I would do this:
1) Create a budget. You really can't skip this step. You won't be able to figure out step 2 without it.
2) Emergency Fund. Since your income can vary wildly, I'd look at 6-8 months of real living expenses. You'll know what this is after you complete the previous step.  Open up a savings account at Ally and put it there.
3) Open and max a Roth IRA
4) Open and fund a SEP 401k since you are self employed.  Call Vanguard. They'll walk you through it.
5) Pay off the house or save outside of retirement accounts depending on your FI/retirement goals.

For all investments above, invest in low-cost index funds. Vanguard is a fan favorite.

[former player]

Congratulations on your successful year.

As said by others, the first step to taking charge of your finances is to understand your spending.  How much did your household spend in each month of 2015?  What did you spend it on? If you could live off your wife's steady income that would be great, but from what you say I'm guessing that your annual expenses are somewhere north of that plus your lower earnings of $40k, taken after tax.

Once you understand how much you are spending, you need an emergency fund which covers these bare bones expenses for a number of months you feel comfortable with - six months seems pretty common around here, although given family responsibilities plus a fair high spend rate plus a wildly variable income you could look at increasing that.

Next thing: you have debts.  You have a mortgage and student loans you have told us about.  Any you haven't told us about?  Now, what you do about those debts depends a bit on the interest rates you are paying on them.  Anything over 4% and your best and most certain return on investment is to use your spare cash to pay them off.  Under that and many people here will say you get a better return by sticking it in index funds, and that this is particularly the case to the extent that you can put it in tax-advantaged accounts.  While I see the logic of that, I do think you may be in a different position because of the variability in your income.  It will be much easier to survive a future lean year if you don't have any student loan payments to find and your mortgage is low.  So I would suggest getting rid of the student loan altogether (won't that feel good?) and maybe paying down some of the mortgage as well.

[frugaldrummer]

Put away12 mos of actual living expenses minus what your wife takes home from her job into a liquid emergency fund.  Given your mindset you will sleep better at night. (Your existing 100k in savings is probably already much higher than you need for this.)  This would be enough to carry you through a year of zero earnings on your part.  (For example, if your monthly expenses are $7,000, and your wife's take-home if you weren't working would be $4,000, the you only need $3,000 x 12 = $36,000 in emergency savings to cover 12 months of no income on your part.)

Take advantage of all possible tax-advantaged savings to reduce your tax bill in a high-earning year like this (a SEP-IRA would probably be your best bet.)  Check with an accountant to make sure you have made the appropriate estimated tax payments on your income.

Pay off that student loan debt to get rid of the monthly payments (makes it easier to get by in a low-earning year.)  Same for any car loans not mentioned.  The more you can reduce your monthly payments, the less it takes to get through a down period.

[skuzuker28]

I'd pay off that student loan without hesitation.  Reigning in your expenses would also help reduce the anxiety associated with your variable income.

Sounds like your income varies quite a bit.  I'd recommend sitting down with a competent, tax-planning CPA in your area.  There are ways to defer income from year to year, which can moderate your tax burden and allow more for investing, while remaining more accessible than in a retirement plan.  At the very least make sure you are structured correctly from a tax perspective.

[jengod]

1. Pay off student loan.

2. Max out tax-protected retirement accounts.

3. Use any remaining funds to pay extra on mortgage.

The above suggestions are the Dave Ramsey plan, which emphasizes simplicity and zero debt.

Good luck whatever you do and Congrats on having extra money.


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