Author Topic: Looking for help deciding on a cash cushion amount and with general logistics!  (Read 5480 times)

implet

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Hello Forum!

I found Mr. Mustache because my new year's resolution is to start managing my money and start progressing towards financial independence! The only thing my parents taught me about money growing up is to never ever carry a balance on a credit card, so luckily I have no real debt to speak of. The only debt I have is a car loan that has one year left (when I was fresh out of college I didn't realize that I shouldn't finance a car!).

In case it helps determining an appropriate cash cushion amount, I am currently paying way too much for rent at $1700 per month, which should be cut in half soon when my boyfriend moves in with me.  I usually spend around $100 a week for groceries for just me because I like to eat organic vegetables and high quality meat. Is there any cheaper ways you guys have found to eat high quality foods for less money?

I'm also confused about the logistics of it all. Would I have my paycheck direct deposited into my checking account and then at the end of the month manually deposit anything above $5000 (or whatever cash cushion I decide on) into my index fund?

Lastly, I am thinking about switching my bank. I have a credit card with Bank of America with a 10,000 limit that I put most purchases on every month for points and pay off in full at the end of every month. Would it hurt my credit (I just checked and all scores are over 700) to close this BoA card and open one with USAA? Is there a way to transfer a credit card to a new bank instead of closing and opening?

Thanks for any help!!!
« Last Edit: November 03, 2013, 08:03:14 PM by implet »

nolajo

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Hi Implet! Welcome onboard.

You're in awesome shape for someone who's only just now focusing on managing their money. The big caveat on all the advice you'll get here is that it depends a lot on you, your unique circumstances, and your tolerance for risk. You also need to consider what your mid-term plans are, such as purchasing a home (a huge step in adding wealth in most mustachian's journeys).

Now that that's out of the way, yes, $5000 should be more than adequate to keep on hand (most people in these parts actually keep less in cash than that, but it's a place to start) and yes, absolutely you should move the other $40k into investments. I can't pretend to know all the ins and outs of IRAs, but there are a ton of discussions on it. This one seemed to have some of the basics covered: https://forum.mrmoneymustache.com/ask-a-mustachian/don%27t-understand-limits-on-contributions-to-ira%27s-and-401k%27s-tax/msg54755/#msg54755

For the car, what sort is it and what are your plans with it? If it's efficient, dependable, and/or you're attached to it, keeping it could be a defensible position. At zero percent interest it's certainly not worth it to pay it off early. The big takeaway there is to not get into the habit of buying a new one every time the lease is up. If, however, it's a gas-guzzler that you commute in every day (btw, I didn't see gas/insurance listed), then you should replace it as soon as you can.

In terms of your credit cards, I would not cancel the BofA card. Credit scores depend, in part, upon the length of your credit. Now that does not mean you shouldn't also get a USAA card. I have one and love it and there's no particular harm to your credit when you open it - in fact any harm from them checking your score should be offset by the increase in credit available to you. This applies to any card you might open. I would also look to them for mutual funds for your investing. They tend to have fairly low-cost funds and their phone support is terrific. Vanguard is also a very popular option in these parts, so do take a look.

I hope that helps and trust me, in the past year that the forum has been up, tons of subjects have come up. There are helpful topics all over the place.

implet

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Thanks it feels good to be here!

As for buying a house, I know there are people who think renting is better than buying and vice versa so I'm a bit confused on what would be best for me. My gut says that my boyfriend and I will want to buy a house in a few years. Right now I work in DC/live near DC and it's super expensive to rent/buy. The only other medium term plans is a wedding for us! He has similar "starting stats" to me too. We've talked about it and want to be frugal with a wedding, but we also want it to be an awesome time for our guests, I'm not sure how much money that stuff costs yet though.

Thanks for the IRA reading material!

My car is a Toyota Yaris. I like it a lot because of the fuel efficiency and the convenient hatchback. I use it to drive to work, do errands, and drive 6+ hours to see my family once a month or so. Since learning about how money adds up I stopped using my car for many errands (I walk now) and want to try to ride my bike to work (8 miles each way). I've never ridden my bike on the road so that is a bit scary. I completely forgot about my insurance, I pay it automatically and it's $71 dollars a month.

Thanks for the tip about closing the BoA credit card. I still have more to learn about what helps/hurts credit ratings!

SwordGuy

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My wife and I got married on a total budget of $50, which included invitations, postage, marriage license, everything.  (That was a huge amount of money to us at the time.)   We held it in our slumlord-owned apartment.  We told people if they wanted something to eat or drink at the wedding it would be wise to bring it.

People had such a good time they begged to stay for the whole weekend.  We had a 3 day party on that $50.

That was 30 years ago this April.

It's not how much money you spend, it's who you spend the time with and how you spend that time with them that matters.

Plan to have an awesome time with your friends at your wedding.  Just don't confuse that with a huge extravaganza of stress and expense.

nolajo

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My wife and I got married on a total budget of $50, which included invitations, postage, marriage license, everything.  (That was a huge amount of money to us at the time.)   We held it in our slumlord-owned apartment.  We told people if they wanted something to eat or drink at the wedding it would be wise to bring it.

While $50 won't even buy the license in many states these days, it's true that the wedding doesn't have to be a huge expense. Again, that's something that you'll find discussed in a lot more depth in the forums. It's a popular subject and one that I have no personal experience with :).

Your car sounds like a pretty good one to keep if you're pleased with it and content to drive it into the ground. Hatchbacks grow with you pretty well; they're insanely popular in Europe for good reason - best bang for your buck in a non-hybrid and well suited to cities and high gas prices.

As to whether you should buy, that totally depends on your market. Try out the rent vs. buy calculator here:  http://www.nytimes.com/interactive/business/buy-rent-calculator.html. There are times and places where it really doesn't make sense to buy, and if that's the case, you need to ignore the people wailing about throwing money away. You're not throwing it away, you're making a rational decision based on your situation and your market. As it is, you're spending a reasonable portion of your income on rent (by my quick calculations, it's about 25% of your budget). Halving that will certainly be nice. The only thing you might consider is being closer to you and/or the boyfriend's offices. Speaking as a bike commuter, 8 miles each way is a bit much for many people to keep up and the way our cities are designed, it often means there are some significant impediments that will further decrease your will to stick to it - narrow bridges, places with no shoulder/bike lane, etc.

implet

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Sword guy, that's awesome and inspirational! I don't think our families will be so into the idea, but I still want to make sure tons of money isn't wasted! Lots of research to do, but I'll wait till the bf pops the question.

Nolajo, that says approximately 8 years until it makes more sense to buy vs rent. I'll have to make sure that I used the correct numbers though.

I've been reading the forums for IRA discussion but am still confused whether I should dump 10k into one right now or not. Since the goal is early retirement, putting funds into a retirement account makes me nervous. I think instill qualify for Roth or I could do traditional.

unpolloloco

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Sword guy, that's awesome and inspirational! I don't think our families will be so into the idea, but I still want to make sure tons of money isn't wasted! Lots of research to do, but I'll wait till the bf pops the question.

Nolajo, that says approximately 8 years until it makes more sense to buy vs rent. I'll have to make sure that I used the correct numbers though.

I've been reading the forums for IRA discussion but am still confused whether I should dump 10k into one right now or not. Since the goal is early retirement, putting funds into a retirement account makes me nervous. I think instill qualify for Roth or I could do traditional.

Do some reading on early distributions on retirement accounts.  That is, Substantially Equal Periodic Payments from 401(k)s, traditional IRAs, and Roth IRAs and the ability to withdraw principal without penalties from Roth IRAs.  You really aren't locking money away until traditional retirement age by contributing to retirement accounts.  There are just some (easily bypassable) restrictions on how to withdraw it.

MIM

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I am in a similar situation; young enough and looking where to put my extra cash. For years, I have been automatically transferring money from my checking account to my online savings account. I have just started doing this with my investments/IRA (you can set this up with almost all online investments accounts.) This has worked out perfectly because it is all done behind the scenes. Figure out my much money you can “afford” to put away each month. I always try to go on the high end as this forces me to spend less. Plan on keeping the $5,000 in your checking account but a fixed amount would automatically be transferred into your investments each month. At that end of the month I always check my checking account to see if I can transfer any extra money. This is a reward since it means that I didn’t spend as much as predicted. Always pay YOURSELF first. The automatic transfer makes that super easy and you’ll be surprised how much money you didn’t even see yourself saving. 

implet

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Unpolloloco, reading about that makes me feel better about investing in IRAs :)  I decided to do a Roth IRA and to put the max in for 2012 and 2013.

MIM, I think I'll do that. I'll set up my direct deposit such that I'll keep around 5k in my bank account and the rest will go directly into the index fund one!

I'm going to try and set all of these things up this afternoon, wish me luck :)

AJ

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For the car, what sort is it and what are your plans with it? If it's efficient, dependable, and/or you're attached to it, keeping it could be a defensible position. At zero percent interest it's certainly not worth it to pay it off early.

This isn't always true. If your vehicle is financed, the lender will require you to have full coverage insurance with a low deductible. In our case, the extra money we were paying in high-end insurance that we didn't feel we otherwise needed added up to a pretty penny, and made it essentially a very high interest debt. Its worth doing the math on at least, for your specific circumstances.

nolajo

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For the car, what sort is it and what are your plans with it? If it's efficient, dependable, and/or you're attached to it, keeping it could be a defensible position. At zero percent interest it's certainly not worth it to pay it off early.

This isn't always true. If your vehicle is financed, the lender will require you to have full coverage insurance with a low deductible. In our case, the extra money we were paying in high-end insurance that we didn't feel we otherwise needed added up to a pretty penny, and made it essentially a very high interest debt. Its worth doing the math on at least, for your specific circumstances.

Huh. I had no idea about that as my only car was purchased from a neighbor in cash. I suppose the dealership would have a vested interest in the risk of you driving being mitigated by an insurance company. So yeah, Implet, what AJ said.

implet

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I'll call Geico today and see what my insurance would be if I pay off my car. Thanks for the tip!

frompa

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Hey, implet, sounds like you are doing great.  I encourage you to try the bike commute and forego car use as much as possible.  For about twelve years, I did a ten mile each way bike commute for years here in the hills of Pennsylvania, and the riding was generally the high point of my day.  Eight miles is totally doable.  I lived in the DC area years ago, and although I most often bicycled the streets (way before those cushy  bike lanes that now exist), I recall there was a really excellent system of bike paths around the edges of the City.  Even thirty years ago, MANY people commuted by bicycle in DC.  Ask around, I'm sure you can get help for route suggestions and other logistics. The best reason to do it is, it's really fun!   

implet

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Thanks Frompa, consider me inspired :) I might wait  two weeks or so until it warms up here! I just have to get up my nerve to ride on the road!