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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ncornilsen on August 21, 2013, 05:09:12 PM

Title: Quick check of financial direction
Post by: ncornilsen on August 21, 2013, 05:09:12 PM
My goals: Be debt free, then maximize growth of stash. Retire to self employment in 10-12 years.
Location: Portland OR
Income: 70K Base, Average ~19% bonuses quarterly.
Rental income from two rooms in house: 825 per month.
Total yearly is ~92000
My bonus in October will be ~1300, then I get another in January of a similar amount.
On Jan 1, I will convert ~7781 employee stock purchase contributions into stock in PCP. I will either purchase at $182/share (less a 15% discount) or at the current market rate IF LOWER THAN 183, also less a 15% discount. That means at worst, I get a 15% return on the 7781. At current market price, I'll make ~38 return.

Motorcycle: $140/month. It's worth 5200,I owe 4400.
Fuel: ~90 a month
Insurances:  71/month on car, 34 on sportbike, 12 on dualsport
582/month contributed to employee stock purchase. (10% income contribution max)
7% 401K contributuion. Company matchs 1/2 up to 5%.
Car: I defer $40 a month in maintenance costs to a high interest savings account.
Groceries: $220 a month
Discretionary: $400 (eating out, motorcycle parts, dating, etc)
student loans: 56/month, but have been throwing 800/month from rent at them.
Mortgage: 1331/month, including insurance and taxes.
$300 a month in utilities
$176/month for health insurance.

$1170 in student loans
$Motorcycle 1: Worth 3K, owe nothing
Motorcycle 2: Worth 5200, owe 4400
Car: Worth $3500, owe nothing
House: Worth 223K, owe 191K
Credit card: 0% card until sept 2014, $9200 balance. I've been using it to build a bathroom addition on my house. It will probably be run up to 11,000 by the end of it.

Here's my plan:
-Use my next rent check and some extra paycheck money to kill the student loan for good.
-All extra money I have will go to creating and maxing a (Roth?) IRA to reduce my tax liability for this year.
-After the first, all additional money will go to paying off the motorcycle, which will be finished by using the tax return to end it.
-The sale of my employee stock, and any other money I have will go to killing the credit card balance before it goes to the 11% typical rate.
Debt free by April 2014 (except mortgage). Begin regular contributions to index fund.

Am I missing any obvious ways to maximize my returns? Perhaps I ought to kill off that motorcycle loan before doing the IRA?  I'm trying to sell the motorcycle, so hopefully it'll just go away anyway.
Title: Re: Quick check of financial direction
Post by: Eric on August 21, 2013, 05:27:45 PM
Here's my plan:

-All extra money I have will go to creating and maxing a (Roth?) IRA to reduce my tax liability for this year.

If you're looking to reduce your tax liability, you'll need traditional IRA contributions.  A Roth is post tax and any contributions would have no effect on your tax bill.
Title: Re: Quick check of financial direction
Post by: seattlecyclone on August 21, 2013, 05:53:37 PM
If you think you can pay off the motorcycle and max out an IRA before April 15th, might as well pay off the motorcycle first to save some money on interest.

Eric is right that only traditional IRA contributions (not Roth contributions) have an effect on your current tax rates. Unfortunately your income is probably too high for you to be eligible for an IRA deduction on your taxes (assuming you're single...if you're married you're probably still eligible for at least a partial deduction). However, you're only contributing 7% to a 401(k). Consider increasing that percentage to reduce your taxable income.
Title: Re: Quick check of financial direction
Post by: ncornilsen on August 21, 2013, 11:38:05 PM
Well, I'm not sure I could max the Roth, pay off the motorcycle, and pay off the house addition credit amount by april 15th...  I could do it if I pushed out the repayment of the addition credit 'till later. I do have until september of 2014 before the interest goes to 11%, I suppose.
Title: Re: Quick check of financial direction
Post by: seattlecyclone on August 22, 2013, 12:11:48 AM
I only mention April 15th because that's the deadline for IRA contributions. You have to do it by then or you've missed out for the 2013 tax year. The motorcycle should be paid off as soon as possible because that's a loan that is accruing interest, but you have to balance that with the Roth deadline. If you need to keep a balance on the motorcycle loan for an extra month or two in order to meet that deadline, you may find that's a reasonable trade-off.

Frankly, if you're making $90k per year, you should be able to pay off the motorcycle and save the max in an IRA between now and April. You should be able to do it with ease. If it's difficult for you, you have other areas of your budget that could use a trim.

The house addition card doesn't accrue interest until next September, so I would make minimum payments until August, save the rest in a savings account that pays you more than 0% interest, and pay off the loan right around the last interest-free minute.
Title: Re: Quick check of financial direction
Post by: ncornilsen on August 27, 2013, 04:33:58 PM
So, I've done some analysis of my budget, because you're right  - a single man making $95K should be able to save alot more than I do.  I'm going to post the details of my budget, maybe you can help my identify some areas to trim some fat. 

I split the bills into First Half of Month and Second half of Month bills to help even the cashflow.

Note: Trash paid every other month, and all my car/motorcycle insurances and car maint expenses are stashed away in a Smarty Pig account 'till the yearly premium is due or I need to repair something.  My gas bill is between 15 a month and 140 a month, depending on how cold it is, so it averages at 70.  It sits in a dedicated 'fixed costs' account that builds and empties to absorb these seasonal differences.

Semi-monthly take home: (base pay) $1949
Rental Monthly Income: $800 (Net)

I've put together a cash-flow plan that goes to Feb of 2014, which estimates expenses, and incomes. With about $13,000 I'll recieve at the end of jan from bonuses, stock sales, and tax returns, I'll be able to pay off the motorcycle, student loans, and nearly the whole house project card.  But what you're saying is max the IRA first, invest the rest, and pay it off at the last minute, correct?

Anyone see much fat to trim from my budget?
Title: Re: Quick check of financial direction
Post by: ncornilsen on August 28, 2013, 09:52:30 AM
Thanks, good input.
the motorcycle that has the loan against it is for sale. It's worth about 5K and I owe 4400 on it, I'm considering taking a loss on the thing just to free up the cashflow. ($175/month!)  The other one - I won't sell that. Whatever the delay in FI it causes is worth it.  It's pretty cheap entertainment - load up a small tent, sleeping bag and some MRE's, ride out to the wilderness, camp\fish\hike for the weekend on trails few people know exist... )

The car... I need it, since I drive for work all the time (Reembursed) and use it to haul the bike to the woods all the time. It's a 2000 civic, so it's fairly mustachian anyway, and I owe nothing on it, it costs 75 a month to insure. Perhaps I ought to lose full coverage, but at this point, I don't have enough cash on hand to replace it if I were to wreck it. I think it only made a 10 a month difference anyway.

The utilities thing is a good idea.  I wrapped it into one fixed cost since I didn't want to deal with it, but they aren't exactly utility consumption conscious. I'll do the numbers on it.

I contribute 10% of my gross to the stock purchase program, but they take after-tax dollars.  Given the almost-gauranteed 15% return, I'd rather keep this maxed (10% is the limit), and sell the stock immediately after getting control of it... then invest that money in a Vangaurd account. So far I've been 'investing' it in student loans. (which were 7%)  I know past results are no gaurantee of future earnings, but the stock purchase program has earned me 35% or more each year, partially due to the discount, partially due to stock price appreciation.  It's hard not to max that out!

So, I'm trying to decide if I get the best returns by maxing the 401K or the ESPP. Here's my assumptions and here's what I found.
I have 1434 pre-tax dollars availble to allocate between the 401K and ESPP. (once my student loans and motorcycle are paid off.) This does not include bonuses.
My marginal tax rate is 25%.
My time horizon is one year out. The reason for this is as follows: If I invest in the 401k, one year from now it will be in an index fund or something like that. If I invest in the ESPP program, at the end of 1 year, I'll sell the stock and put it into a similar investment vehicle as the 401K, but likely through vangard. Therefore, after year one, the two will behave somewhat equally.

To determine the most profitable outcome, I assumed a 28% return after one year from the ESPP investment, (this is based on a 5 year performance of the particular stock, less capital gains taxes, plus the discount I get to buy the stock at.). For the 401K, I assumed a 12% return after the year. This is estimated based on a 7% average return for stocks as a whole, and a 5% reduction in marginal tax rate when I withdraw the money at retirement. I'm not sure this is a good model, that's why I'm posting the details. Please pick it apart :)

It appears that, at the end of year 1, I'll be $700 richer if I max out my 401K and contribute what's left to the ESPP.