Author Topic: New to Board. Looking for Suggestions on Situation  (Read 2944 times)

slamuel

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New to Board. Looking for Suggestions on Situation
« on: September 17, 2015, 02:19:35 PM »
Hi All,

I'm pretty new to MMM, but I've been reading a lot of posts and I've learned a lot over the last two months. I'm wanting to get my shit together over the next couple of years. Overall, I've made a mix of poor decisions and good decisions. I'm looking for you guys advice on my situation and plan below.

Quick Background -
I recently quit working for a large private company and decided to do contract/consulting work as a freelancer/self-employed individual. Previously, I was making around $95K + full benefits. Being my own boss has always been something I wanted to do and I think there is a good market for my services right now. In order to set myself up correctly for the long term, I just signed a very lucrative 18 month contract with a company through the end of 2016. This sort of gets my feet wet and will allow me to build up some financial reserves until I become a true freelancer in every since of the word.

A little bit of additional background -
I'm 29 years old and going to be getting married next year. We don't plan on having children and we live in the heart of a pretty large city in the rust belt region. Below is the information for both of us (as our finances are already pretty tied - though not legally)

Total Debts:
Mortgage Loan - $125K
Credit Card Debts - $13K
Home Improvement Loan - $5.5K
Auto Loan - $8K
Student Loans - $0K

Investments -
Wealthfront SEP IRA (just opened and transferred) - $35K
Fiance's work sponsored 401K - $25K
Vanguard SEP IRA (also just opened) - $4K

Savings -
General Savings Fund - $13K

Assets -
Estimated Home Value - $180K - $200K (we bought our home three years ago in a hot area for $130K, since then no home around us has gone for less than $180K and most of them are smaller and less updated than ours).
Car #1 - 2009 Hyundai Accent - paid off
Car #2 - 2007 Honda Element - associated with auto loan above

The above is our current situation and here is the plan -

Projected Monthly Income: $17.5K - $20.5K depending on monthly billable hours
Monthly Budget - $3K (we're trying to cut our spending, we've previously been in the $5K/month range because of excess/bs spending)

I'm basically going to take the remaining $14K - $17K/month and do the following (for the next 18 months) -
- Pay off all credit card debt immediately
- Pay off all non-mortgage based loans
- Stash away an extra $20K for an emergency fund/fund for when work gets slow
- Do a mix of the following every other month:
   - Invest in Vanguard SEP IRA until I hit my limit
   - Put towards mortgage (until I can get rid of PMI)

A few questions for you experts -
- First, is our current situation that bad? I feel like we have high-credit card debt and some crappy loans, but we also have no student debt (yay scholarships!) and are extremely up on our mortgage. Interested in hearing your thoughts given our age.
- Second, does my plan of attack make sense?
- Third, once I max my Vanguard SEP IRA (projected mid-next year) and get my mortgage to the point where I don't owe PMI, what should I do? I'd prefer to keep investing actually, but I'm a bit clueless on how I can do that since I've already hit my may contribution limit for our SEP IRA.

Thanks in advance!

CowboyAndIndian

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Re: New to Board. Looking for Suggestions on Situation
« Reply #1 on: September 17, 2015, 02:36:26 PM »
Some things that I can think of
  • Create LLC for your consulting business
  • Get appropriate insurance (E&OE etc.)
  • I would suggest a bigger emergency fund. At your present rate of spending, $20k will last you 4 months, or 6 months at reduced $3k spending. Think of the max time possible without a contract, double it, and your emergency fund should cover this period.
  • Pay of the loan with the highest interest first. It may not be a credit card loan, but it most probably is.
  • I am not sure of the SEP-IRA limit, but with an 401k thru your LLC, you can stash away lot more than your individual contrib (more than double)
  • In consulting, assuming you have an LLC, you will have to pay estimated taxes, so your monthly take will not be the full amount of your billing.

I think you are in a phenomenal situation. You are lucky to have a SO who is onboard with your mustachian thinking.

Best of luck!

seattlecyclone

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Re: New to Board. Looking for Suggestions on Situation
« Reply #2 on: September 17, 2015, 02:41:02 PM »
I think you're definitely on the right track. Your income is impressive, your spending is reasonable, you have little non-mortgage debt (and will be rid of it soon), and are saving for retirement.

One thing I would ask is why you chose to go with a SEP IRA instead of a solo 401(k). Your income may be high enough that you can get the full $53k into the SEP plan, but if you have any leaner years you might be able to save more in a solo 401(k).

Gone Fishing

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Re: New to Board. Looking for Suggestions on Situation
« Reply #3 on: September 17, 2015, 02:43:02 PM »
Looks like you are on the right track.  With your proposed savings rate, your net worth should climb very quickly.

Just a few questions/thoughts:

What are the current rates on your debt? (makes a big impact on strategy). 
Call your lender and see what it takes to get rid of PMI.  Depending on your current rate and their requirements, a refi may make sense.
Is your fiancÚ maxing out her 401(k)? If not, she should be. 
Look into a backdoor ROTH for her.
While not terrible, look into replacing the Element with something better on gas. Or better yet getting rid of it entirely if you can use public transit/bike.  When you go out of town, use roof racks, a hitch or possibly a small trailer to get additional capacity out of the car for the few times of year when you need it.

I am not up to date on self employed IRA/401(k) options but I am assuming you did your homework and picked the best one for your situation.  The name of the game for most young ER bound workers is to defer as much tax as you possibly can.

Read the tax related links in my signature below. 
« Last Edit: September 17, 2015, 02:45:14 PM by So Close »

slamuel

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Re: New to Board. Looking for Suggestions on Situation
« Reply #4 on: September 21, 2015, 01:40:24 PM »
thanks for the responses. really great advice!

- I'm looking into pursuing the LLC. I'm currently insured through my current contract and will continue to look into the LLC route over the next few months.
- not sure of exact rates on the loans, I think the personal/home improvement is highest at something like 9%. Credit Card debt is highest out of everything.
- I got a quote for the PMI. I need to get the loan value down below $107K which seems pretty doable within the next several months
- My fiance is not maxing out her 401K at the moment. This is something I'll talk to her about as I think she'll be into the idea. I'll also investigate the backdoor roth option.
- We use our bikes and/or walk a good amount. I have reservations about getting rid of the element only because its basically the perfect car for our lifestyle when we need it (water proof seats, easy to clean, haul stuff, etc.). We both do triathlons and a lot of activities outside so its great to just throw everything in the back and not have to worry about ruining things. I understand this stance is a bit anti-MM, but we try to balance it all out by not driving the element unless we absolutely have to.
- I did compare the solo 401K and SEP IRA options and the SEP seemed like it was going to be best for me long term and had the highest contribution limit.
- thanks for the tax advice. I'll read into these. I'm also pocketing 30% of each paycheck to save for tax. If there is a balance when an estimated payment is due I will just put that balance towards an investment or debt payoff.
-

SunshineGirl

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Re: New to Board. Looking for Suggestions on Situation
« Reply #5 on: September 22, 2015, 10:09:24 AM »
thanks for the responses. really great advice!
 I'm also pocketing 30% of each paycheck to save for tax. If there is a balance when an estimated payment is due I will just put that balance towards an investment or debt payoff.
-

You'll be paying almost 15% for social security alone now, and with that kind of income, won't you be in a higher tax bracket than 15%? You may need to set aside more.

Easye418

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Re: New to Board. Looking for Suggestions on Situation
« Reply #6 on: September 22, 2015, 10:20:23 AM »
thanks for the responses. really great advice!
 I'm also pocketing 30% of each paycheck to save for tax. If there is a balance when an estimated payment is due I will just put that balance towards an investment or debt payoff.
-

You'll be paying almost 15% for social security alone now, and with that kind of income, won't you be in a higher tax bracket than 15%? You may need to set aside more.

I assume he is making $200-$225k a year, so he should be around 25%-33% federal tax bracket plus state tax.  Plus don't forget the additional self employment tax you pay. 

Quarterly Estimated Tax Payments... I'm sure OP understands this tho.