Author Topic: Optimal Allocation of Discretionary Income (~$2.3K/month)  (Read 5060 times)

zurich78

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Optimal Allocation of Discretionary Income (~$2.3K/month)
« on: April 11, 2014, 08:59:56 AM »
I'm 35 and only just made it my goal to focus on saving for the future.  So I'm a bit of a late bloomer relative to some on here, but, as the saying goes, better late than never.  After paying for mortgage, bills, and general cost of living expenses (food, gas), I have about $2,300 per month of discretionary income that I'd like to allocate for saving.  Based on the details below (and I can supply more if needed), I'd like to hear some of your ideas on the best way to allocate that money.  I'll lay out what my current plan is, but I really don't know if I'm doing the right thing.

Cost to Live (Mortgage, Bills, Living):  $3.5K/month (I live in Southern California where house prices are very high, thus the high cost of living for me).
401K contribution:  I'm currently funding to the match
Retirement:  In total, I have about $125K in retirement accounts (401K/Roth).  One thing to note, is that I exceed the maximum income for Roth IRA contribution so I do not fund a traditional IRA -- this allows me to backdoor in to my Roth.
Car Payment:  None.  I have a 2012 Jeep Grand Cherokee that is paid off
CC Debt:  None.  I pay off my balances each month.
Emergency Fund:  $9K
General Liquid Savings:  $0

Right now, it scares me that I have a limited emergency fund first (only about 3 months) and no other liquid savings (I used to have a savings, I put that all in to my house when I bought it 3 years ago for down payment so that's why I'm starting over).  So here is how I am currently prioritizing the $2,300 of leftover income I have each month.

Current Savings Plan
Emergency Fund:  $1,600 (~70%)
Roth IRA:  $450 (~20%)
General Savings (for home repairs, other unexpected costs):  $250 (~10%)

My plan is to get to a 6-month emergency fund first which is in my Ally Bank high yield savings account.  At current rate, I'll have my 6 month emergency fund by the end of the year.  Once I get there, I'll probably bump up my general savings but then I'm not sure what to do with the rest.  So I guess my questions are, am I doing the right thing by aggressively saving for my 6-month emergency fund or should I be allocating differently and then separately, once I have funded my emergency fund, then what would be the best thing to do?

athomeintheworld

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #1 on: April 11, 2014, 09:40:13 AM »
Is your job relatively stable?  Also you don't say much about your family situation - single/married/kids, other responsibilities etc? Personally I think if you have 9k in an emergency fund and have >2k left over every month I would redirect the excess to something other than continuing to bulk up your emergency money.  Remember that even with "good" rates on this you are essentially losing money every year due to inflation.

If you want more specific information I suggest listing out all of your expenses, income, debts, assets etc - you will get more meaningful answers.

samburger

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #2 on: April 11, 2014, 09:59:17 AM »
So I guess my questions are, am I doing the right thing by aggressively saving for my 6-month emergency fund or should I be allocating differently and then separately, once I have funded my emergency fund, then what would be the best thing to do?

This is a matter of taste. If you feel uncomfortable having less than 6 months living expenses--even if your discomfort is irrational--then go ahead and aggressively get that emergency fund where you want it. Or, if you feel secure in your job and you think it's unlikely you'll need the e fund any time soon, pull back and get that money into an index fund.

Ten years from now, your portfolio will look the same whether it took your 3 or 12 months to fund your emergency fund.

zurich78

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #3 on: April 11, 2014, 12:44:24 PM »
Is your job relatively stable?  Also you don't say much about your family situation - single/married/kids, other responsibilities etc? Personally I think if you have 9k in an emergency fund and have >2k left over every month I would redirect the excess to something other than continuing to bulk up your emergency money.  Remember that even with "good" rates on this you are essentially losing money every year due to inflation.

If you want more specific information I suggest listing out all of your expenses, income, debts, assets etc - you will get more meaningful answers.

Thanks for the reply.  Yes, my job is relatively stable and even if I were to lose my job, I'd feel pretty comfortable being able to find a new job.  Likely not at the same rate of pay, but certainly enough to get by until I'd find one that could replace my current level of compensation.

I guess the reason that I am so aggressively trying to bulk up my emergency fund is that many of the resources I have read suggested that people build up a 6-8 month emergency fund before placing money in to investments or other vehicles that can't easily be accessed without penalties.

As for other information about me.  I'm single, with no kids and no prospect of marriage any time soon =)  I've pretty much listed all of my responsibilities in my original post.  I have a $400K mortgage @ 4.125% which comes out to about $1,900 per month, with $550 in property taxes and insurance each month so my housing alone is $2,450.  My house is worth about $575K.  I added on an additional $1K/mo to cover all of my bills (mobile/utilities/cable/auto insurance/food/gas/etc).  I have no debts other than mortgage, my car is worth about $25K but is fully paid off, I really have no responsibilities other than a mortgage payment =)
« Last Edit: April 11, 2014, 12:51:35 PM by zurich78 »

zurich78

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #4 on: April 11, 2014, 12:55:31 PM »
So I guess my questions are, am I doing the right thing by aggressively saving for my 6-month emergency fund or should I be allocating differently and then separately, once I have funded my emergency fund, then what would be the best thing to do?

This is a matter of taste. If you feel uncomfortable having less than 6 months living expenses--even if your discomfort is irrational--then go ahead and aggressively get that emergency fund where you want it. Or, if you feel secure in your job and you think it's unlikely you'll need the e fund any time soon, pull back and get that money into an index fund.

Ten years from now, your portfolio will look the same whether it took your 3 or 12 months to fund your emergency fund.

Yeah, some good points.  I guess I would feel VERY comfortable at 6 months of living expenses and moderately comfortable at 3 months.   Alright, so let me rephrase the question slightly.

Assuming you had your emergency fund fully funded, but had no other investments or liquid savings, had $125K in retirement (at 35) and are funding to the match only -- what would you do with $2,300 of extra money each month?

4alpacas

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #5 on: April 11, 2014, 03:17:51 PM »
So I guess my questions are, am I doing the right thing by aggressively saving for my 6-month emergency fund or should I be allocating differently and then separately, once I have funded my emergency fund, then what would be the best thing to do?

This is a matter of taste. If you feel uncomfortable having less than 6 months living expenses--even if your discomfort is irrational--then go ahead and aggressively get that emergency fund where you want it. Or, if you feel secure in your job and you think it's unlikely you'll need the e fund any time soon, pull back and get that money into an index fund.

Ten years from now, your portfolio will look the same whether it took your 3 or 12 months to fund your emergency fund.

Yeah, some good points.  I guess I would feel VERY comfortable at 6 months of living expenses and moderately comfortable at 3 months.   Alright, so let me rephrase the question slightly.

Assuming you had your emergency fund fully funded, but had no other investments or liquid savings, had $125K in retirement (at 35) and are funding to the match only -- what would you do with $2,300 of extra money each month?
Since I don't know your exact situation, I'll give you what I did when I saw a surplus in my budget. 

I would max out my 401k, and I would max out my backdoor Roth IRA.  The leftover money would be dedicated to 1) getting a sizeable emergency fund and 2) a taxable investment account. 


Thegoblinchief

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #6 on: April 11, 2014, 05:59:24 PM »
Any reason you only fund your 401k to the match? Investment options not great? If the investments are okay to good, you're taking an unnecessarily large tad haircut.

zurich78

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #7 on: April 12, 2014, 10:00:40 AM »
So I guess my questions are, am I doing the right thing by aggressively saving for my 6-month emergency fund or should I be allocating differently and then separately, once I have funded my emergency fund, then what would be the best thing to do?

This is a matter of taste. If you feel uncomfortable having less than 6 months living expenses--even if your discomfort is irrational--then go ahead and aggressively get that emergency fund where you want it. Or, if you feel secure in your job and you think it's unlikely you'll need the e fund any time soon, pull back and get that money into an index fund.

Ten years from now, your portfolio will look the same whether it took your 3 or 12 months to fund your emergency fund.

Yeah, some good points.  I guess I would feel VERY comfortable at 6 months of living expenses and moderately comfortable at 3 months.   Alright, so let me rephrase the question slightly.

Assuming you had your emergency fund fully funded, but had no other investments or liquid savings, had $125K in retirement (at 35) and are funding to the match only -- what would you do with $2,300 of extra money each month?
Since I don't know your exact situation, I'll give you what I did when I saw a surplus in my budget. 

I would max out my 401k, and I would max out my backdoor Roth IRA.  The leftover money would be dedicated to 1) getting a sizeable emergency fund and 2) a taxable investment account.

This response makes me feel pretty good since this is exactly what I was thinking of doing (I'm actually doing the backdoor Roth IRA, I just didn't mention it in case folks thought there'd be a better use of that ~$450/month or so I put away).

I don't know exactly what a taxable investment account is, so I'm going to have to research that.  Really appreciate that tip.

So what are your thoughts then, on just having a general savings account in addition to my EF?  For instance, my EF is really, in my view, more for ensuring that if I lose my job,  I can live for X months using that money.  But what about having an additional savings for unexpected expenses?  For instance, a major car repair, or, a major home repair?

Do you (or anyone else who wishes to reply) pay for those things from your EF which you continually fund?  Or do you stop funding your EF and fund a general savings from which you'd cover those unexpected expenses that can pop up?  I know in the grand scheme of things it's all the same whether you have it in one account or two, but if you only build a 6 month emergency, invest everything else, then have an expense that costs you 2 months, then you'd only have a 4 month emergency fund. 

So is the idea that you build a MINIMUM of a 6 month emergency and then continue to fund that one account over time (so that maybe one day it becomes a 15-month emergency fund if you never need to pull from it), or do you pick a number, say 6/8/12 month, build up your EF to that amount, then stop contributing to it and put the rest of your leftover money in to investments?

zurich78

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #8 on: April 12, 2014, 10:05:22 AM »
Any reason you only fund your 401k to the match? Investment options not great? If the investments are okay to good, you're taking an unnecessarily large tad haircut.

Well, I THOUGHT, that I was capped at $17.5K.  Since my employer matches over 100% (around 125% if bonus payouts are strong) it just worked out that if I contribute to the match, it gets pretty close to the $17.5K cap.  But after all these years, I found out last night reading some article, that the cap only counts for MY own contributions.  So I can just set my contributions to target $17.5K cap and any other matching I get is just gravy apparently so you can have more than $17.5K in contributions as long as you don't personally contribute more than $17.5K.  Do you guys know if this is true?

I wish I had paid more attention in my 20s to a lot of these things.

trugrit03

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #9 on: April 12, 2014, 10:16:56 AM »
Any reason you only fund your 401k to the match? Investment options not great? If the investments are okay to good, you're taking an unnecessarily large tad haircut.

Well, I THOUGHT, that I was capped at $17.5K.  Since my employer matches over 100% (around 125% if bonus payouts are strong) it just worked out that if I contribute to the match, it gets pretty close to the $17.5K cap.  But after all these years, I found out last night reading some article, that the cap only counts for MY own contributions.  So I can just set my contributions to target $17.5K cap and any other matching I get is just gravy apparently so you can have more than $17.5K in contributions as long as you don't personally contribute more than $17.5K.  Do you guys know if this is true?

I wish I had paid more attention in my 20s to a lot of these things.

Yes, this is true. The $17,500 maximum is maximum salary deferral, meaning the maximum YOU as the employee can contribute. This is referred to as the 402(g) limit. The maximum amount that you and your employer can contribute TOTAL is $52,000 in 2014. The IRS increases these numbers every few years.

Edited to give you the source link:
http://www.irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014
« Last Edit: April 12, 2014, 10:19:49 AM by trugrit03 »

samburger

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #10 on: April 12, 2014, 10:43:44 AM »
So what are your thoughts then, on just having a general savings account in addition to my EF?  For instance, my EF is really, in my view, more for ensuring that if I lose my job,  I can live for X months using that money.  But what about having an additional savings for unexpected expenses?  For instance, a major car repair, or, a major home repair?

Do you (or anyone else who wishes to reply) pay for those things from your EF which you continually fund?  ...

I pay for those things from my EF. I keep about 10k laying around, which can get us through at least 6 months without ANY income (and we have two incomes!). So if, say, a $1500 car repair bill pops up, I'll take it out of the EF and replace that cash with the next paycheck.

I do it this way 50% because of the opportunity cost of keeping too much cash around (every dollar I don't invest is a dollar that isn't working!) and 50% for simplicity.

zurich78

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #11 on: April 13, 2014, 08:46:13 AM »
Any reason you only fund your 401k to the match? Investment options not great? If the investments are okay to good, you're taking an unnecessarily large tad haircut.

Well, I THOUGHT, that I was capped at $17.5K.  Since my employer matches over 100% (around 125% if bonus payouts are strong) it just worked out that if I contribute to the match, it gets pretty close to the $17.5K cap.  But after all these years, I found out last night reading some article, that the cap only counts for MY own contributions.  So I can just set my contributions to target $17.5K cap and any other matching I get is just gravy apparently so you can have more than $17.5K in contributions as long as you don't personally contribute more than $17.5K.  Do you guys know if this is true?

I wish I had paid more attention in my 20s to a lot of these things.

Yes, this is true. The $17,500 maximum is maximum salary deferral, meaning the maximum YOU as the employee can contribute. This is referred to as the 402(g) limit. The maximum amount that you and your employer can contribute TOTAL is $52,000 in 2014. The IRS increases these numbers every few years.

Edited to give you the source link:
http://www.irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014

Awesome.  Thanks so much for that!

4alpacas

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #12 on: April 14, 2014, 09:54:58 AM »
So I guess my questions are, am I doing the right thing by aggressively saving for my 6-month emergency fund or should I be allocating differently and then separately, once I have funded my emergency fund, then what would be the best thing to do?

This is a matter of taste. If you feel uncomfortable having less than 6 months living expenses--even if your discomfort is irrational--then go ahead and aggressively get that emergency fund where you want it. Or, if you feel secure in your job and you think it's unlikely you'll need the e fund any time soon, pull back and get that money into an index fund.

Ten years from now, your portfolio will look the same whether it took your 3 or 12 months to fund your emergency fund.

Yeah, some good points.  I guess I would feel VERY comfortable at 6 months of living expenses and moderately comfortable at 3 months.   Alright, so let me rephrase the question slightly.

Assuming you had your emergency fund fully funded, but had no other investments or liquid savings, had $125K in retirement (at 35) and are funding to the match only -- what would you do with $2,300 of extra money each month?
Since I don't know your exact situation, I'll give you what I did when I saw a surplus in my budget. 

I would max out my 401k, and I would max out my backdoor Roth IRA.  The leftover money would be dedicated to 1) getting a sizeable emergency fund and 2) a taxable investment account.

This response makes me feel pretty good since this is exactly what I was thinking of doing (I'm actually doing the backdoor Roth IRA, I just didn't mention it in case folks thought there'd be a better use of that ~$450/month or so I put away).

I don't know exactly what a taxable investment account is, so I'm going to have to research that.  Really appreciate that tip.

So what are your thoughts then, on just having a general savings account in addition to my EF?  For instance, my EF is really, in my view, more for ensuring that if I lose my job,  I can live for X months using that money.  But what about having an additional savings for unexpected expenses?  For instance, a major car repair, or, a major home repair?

Do you (or anyone else who wishes to reply) pay for those things from your EF which you continually fund?  Or do you stop funding your EF and fund a general savings from which you'd cover those unexpected expenses that can pop up?  I know in the grand scheme of things it's all the same whether you have it in one account or two, but if you only build a 6 month emergency, invest everything else, then have an expense that costs you 2 months, then you'd only have a 4 month emergency fund. 

So is the idea that you build a MINIMUM of a 6 month emergency and then continue to fund that one account over time (so that maybe one day it becomes a 15-month emergency fund if you never need to pull from it), or do you pick a number, say 6/8/12 month, build up your EF to that amount, then stop contributing to it and put the rest of your leftover money in to investments?

I use my EF to fund any big emergency expenses (not just job loss).  If I have to spend money from my EF, I try to cut back the next month to make up for it (or for a few months after).  I don't have a set amount that my EF covers (like 6/12 months), but it's an amount that I feel comfortable with (and is probably higher than most people here would recommend).  I use my EF as a catch-all...any big expense.  Since I rent, I don't feel like my EF needs to be as big as when I owned my own place.  I also feel more confident now that I'm married (two jobs, two employers). 

I do have savings accounts for other delayed spending (like travel, personal care, entertainment, etc.) because I budget for the items every month.  I spend in spurts. 

As for taxable investment accounts, I use index funds.  I really liked this post: http://jlcollinsnh.com/2013/02/05/stocks-part-xv-index-funds-are-really-just-for-lazy-people-right/
Most of my investing 'strategy' is to put money and not touch it.  There are people that are much more knowledgeable than me, but I opt to have a streamlined process (minimize fees and hassle). 

zurich78

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Re: Optimal Allocation of Discretionary Income (~$2.3K/month)
« Reply #13 on: April 15, 2014, 08:12:36 PM »
So I guess my questions are, am I doing the right thing by aggressively saving for my 6-month emergency fund or should I be allocating differently and then separately, once I have funded my emergency fund, then what would be the best thing to do?

This is a matter of taste. If you feel uncomfortable having less than 6 months living expenses--even if your discomfort is irrational--then go ahead and aggressively get that emergency fund where you want it. Or, if you feel secure in your job and you think it's unlikely you'll need the e fund any time soon, pull back and get that money into an index fund.

Ten years from now, your portfolio will look the same whether it took your 3 or 12 months to fund your emergency fund.

Yeah, some good points.  I guess I would feel VERY comfortable at 6 months of living expenses and moderately comfortable at 3 months.   Alright, so let me rephrase the question slightly.

Assuming you had your emergency fund fully funded, but had no other investments or liquid savings, had $125K in retirement (at 35) and are funding to the match only -- what would you do with $2,300 of extra money each month?
Since I don't know your exact situation, I'll give you what I did when I saw a surplus in my budget. 

I would max out my 401k, and I would max out my backdoor Roth IRA.  The leftover money would be dedicated to 1) getting a sizeable emergency fund and 2) a taxable investment account.

This response makes me feel pretty good since this is exactly what I was thinking of doing (I'm actually doing the backdoor Roth IRA, I just didn't mention it in case folks thought there'd be a better use of that ~$450/month or so I put away).

I don't know exactly what a taxable investment account is, so I'm going to have to research that.  Really appreciate that tip.

So what are your thoughts then, on just having a general savings account in addition to my EF?  For instance, my EF is really, in my view, more for ensuring that if I lose my job,  I can live for X months using that money.  But what about having an additional savings for unexpected expenses?  For instance, a major car repair, or, a major home repair?

Do you (or anyone else who wishes to reply) pay for those things from your EF which you continually fund?  Or do you stop funding your EF and fund a general savings from which you'd cover those unexpected expenses that can pop up?  I know in the grand scheme of things it's all the same whether you have it in one account or two, but if you only build a 6 month emergency, invest everything else, then have an expense that costs you 2 months, then you'd only have a 4 month emergency fund. 

So is the idea that you build a MINIMUM of a 6 month emergency and then continue to fund that one account over time (so that maybe one day it becomes a 15-month emergency fund if you never need to pull from it), or do you pick a number, say 6/8/12 month, build up your EF to that amount, then stop contributing to it and put the rest of your leftover money in to investments?

I use my EF to fund any big emergency expenses (not just job loss).  If I have to spend money from my EF, I try to cut back the next month to make up for it (or for a few months after).  I don't have a set amount that my EF covers (like 6/12 months), but it's an amount that I feel comfortable with (and is probably higher than most people here would recommend).  I use my EF as a catch-all...any big expense.  Since I rent, I don't feel like my EF needs to be as big as when I owned my own place.  I also feel more confident now that I'm married (two jobs, two employers). 

I do have savings accounts for other delayed spending (like travel, personal care, entertainment, etc.) because I budget for the items every month.  I spend in spurts. 

As for taxable investment accounts, I use index funds.  I really liked this post: http://jlcollinsnh.com/2013/02/05/stocks-part-xv-index-funds-are-really-just-for-lazy-people-right/
Most of my investing 'strategy' is to put money and not touch it.  There are people that are much more knowledgeable than me, but I opt to have a streamlined process (minimize fees and hassle).

Ok, thanks!  This is going to be a really newbie question but ... regarding taxable investment accounts, how do you fund them?  Do you fund them with post tax dollars you're getting from your paychecks?  And how do they work then?  You only pay taxes when you withdraw gains, but not your contributions or do you get double taxed on withdrawals?

For instance, let's say I invest $10K of post tax dollars in mutual funds into a taxable investment account.  And in 5 years, it's gone up and down for no net gain (account is still $10K let's say).  For whatever reason, I have to pull $5K out of that account ... I don't have to pay taxes or capital gains on that do I?

Also, does the fact that it is called a taxable investment account mean I can write off my contributions if they're made with post tax dollars (and then pay taxes on withdrawals in the future), or does

And one last question.  If I have a taxable investment account that has seen some gains, and after a year or so I rebalance it, are there tax implications on those gains or no as long as I don't withdraw?