The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Yep on April 20, 2013, 07:59:18 PM
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Hi All,
Long time reader but first time poster. I’m a big fan of the community here and was hoping I’d get everyone’s take on our next steps towards financial independence. We recently hit a big milestone (non-mortgage debt free + home purchase) and our goal is definitely to reach financial independence and make sure we have an optimized plan to get there. So if you’re up for it, please read along and give your 2 cents on the good, the bad, and the ugly and how you would suggest we proceed.
About Us:
- Married to my wonderful wife with 3 great kids.
- Both in our early 30s.
- Wife stays at home and will be homeschooling the kids.
- I make around 120k plus have incentives and equity grants (around 140k with those, but they can vary up or down).
- We just bought a home (on the lower end of our range) with a 20% down payment. Mortgage + Escrow is about 1/7 of our take home pay.
- No CC, student, or auto debt (paid off everything over the last 3-5 years!).
- 6-9 month emergency fund.
- About 50k in retirement funds.
- We have a minivan (family car) and a smaller commuter car – both are paid off.
- Live about 10 miles from work.
Our main financial goal over the past 5 years has been to pay off all debt, increase income, and complete graduate school. Now that those goals are done, my primary financial concern now is that our retirement accounts aren’t much to boast about just yet. However, going from renting to owning will save us $500 a month in payments plus all of the cash we had going into paying off debt is now free to use elsewhere.
I clearly need to start investing more, but how is best to do it to minimize my time to FI? Max my 401k and then hit a Roth IRA? Start saving cash for another down payment for an investment property? Direct stock purchases…. stockpile baseball cards… something else?
If you can, feel free to case study my rear-end and play pretend. What would you do? About how far from FI am I?
Thanks in advance.
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Invest in your 401k until you reach company match (free money) first. Beyond that, conventional advice is Roth IRA next followed by 401k up to pre-tax contribution limits. Of course, that assumes you're income will be higher when you are withdrawing than it is now (true for most young workers; maybe not true for you given your income level if you plan to live off a lower income in retirement). You might be better off with a traditional IRA, if your modified adjusted gross income doesn't disqualify you. Real estate traditionally returns better than paper assets; the risk is liquidity. It really depends on your experience and comfort level. Hope that helps.
To tell how far from FI you are, we need to know your savings rate and annual expenses. Firecalc is a great resource.
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I would start by reading more of the blog. Much of the basics on what to invest in have been covered several times. The advice on the 401k and Roth IRA from Emg03063 is accurate. You really need to do some research on how you want to get to FI. The question to us is not how do you get there. The question is how do you want to get there? Do you want to be a landlord, is that reasonable in your area, or are you going to hire property managers. Are you going to start your own business? Are you going to just invest?
If any of these seem overwhelming in the short term then follow the 401k/Roth IRA advice (do some research on these as your income is high enough for you to need to know rules affecting your contribution limits), and then invest in index funds. Lots of people like Vanguard index funds.
Then understand your spending. I know you didn't bring it up but with your income and three kids make sure you know where your money is going. I'm sure you already know this information given your lack of debt but I'd make sure I've optimized my spending first (the now) rather than optimize my plan for the future (the then).
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Ditto the suggestions above. How much you need and how you get there and how long it will take to get there are all functions of your specifics, which you have not posted. Your own risk tolerance should determine where and how and how much you put need to put aside to reach financial independence. Likewise, only you can determine what seems a comfortable income for you to live on, thus defining what you need to have annually to consider yourself financially independent. These are ongoing questions that you should find useful as you go forward. Good luck.