Author Topic: Reader Case Study - Help Me Make The Right Moves [Part 2]  (Read 4009 times)

HairyUpperLip

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Reader Case Study - Help Me Make The Right Moves [Part 2]
« on: October 13, 2014, 11:28:57 AM »
Made a major update imo. Maxed out the 401k. Decided not to do the HSA this year. 11/17/2014
Small update on 10/30/2014 - thanks.

Hello -

First, I apologize for making a second case study, but I've personally learned a lot since I made that one and I've also gotten a much more solid number on my expenses and salary.

Second - Thank you to everyone that posts and helps. It's an amazing community here for sure.

Topic Title: Reader Case Study - Reader Case Study - Help Me Make The Right Moves [Part 2]

Background Info:
I work from home and my wife is a SAHM. Wife and I are both 30 years old. Our baby is 14 months. Currently live with my parents and we give them money that covers our share of groceries and anything else. Job seems to be pretty stable with a good company.

Income:

Paid bi-monthly.
Regular Pay = $4,020.83
Minus taxes - (-937.91) = 3082.92
Minus 401k (-201.04) = 2881.88
Dental, Medical, Vision (-264.30) = 2617.58

Actual Take Home Pay = 2617.58
Actual Monthly Take Home Pay = 5235.16




Current Expenses:

Monthly Bills
400 - "Rent"
120 - Cell Phones - 2 iPhones on AT&T family plan. Unlimited Data and minutes.
97 - Car Insurance - Full coverage with State Farm. Shopped around, but no real significant savings.
x  - Car Insurance - most basic coverage with Progressive on hobby car. Paid in full for 6 months.
93 - Storage Unit
10 - Netflix
755 - Total Monthly Bills

Monthly Spending
150 - Gasoline
100 - Entertainment
100 - Car Hobby.
350 - Total Monthly Spending

Baby Spending
100 - Baby's saving account
100 - Checking account used only for baby items
250 - Total Monthly Baby Spending

Grand Total = 1355 on Monthly Expenses
Like most people there is always something that seems to pop up, but never anything more than a few hundred bucks.

Expected ER expenses:
Not really sure at this point. :-/

Assets:
Liquid Assets
Savings Account - $2600
(checking account amounts not included)

Other Assets
Wife 401k - $10,836
Wife 401k - $ 1,412
My 401k -  $  2,826
Stocks -     $ 2,218
Total -    $17,292

Grand Total For Assets = $ 19,892

Liabilities: Amount - rate - description
We have no loans, payments, mortgage, etc. We are "debt free".

Money Allocations:

This is how I deposit my paycheck...

$2617 -
$50 Baby's Savings -
$50 Baby's Checking -
$50 Car Hobby Account -
$1767 Savings Account -
$700 Checking Account = $0

This means I have about $1400 a month to use and our expenses are roughly $1355ish a month.

Goals:
Buy a house in the $145-160k range. Achieve FI through a small portfolio of rental homes (2-3) and utilizing Index Funds. I feel like this combination should pretty easily create a monthly cashflow of at least $3500 a month in about 10-15 years. I'm okay with working another 12-15 years regardless if I hit FI early.


Questions/Comments:
1. We are hoping to buy a house. My 401k does a 100% match on first 3%, and 50% on next 3%. I'm doing 6% for now. Should I increase this percentage or leave it as is so I can stack cash for the house down payment?
Done. Increased 401k to 20%.

2a. As soon as I get the savings account back up to $3,000 I'm thinking we should go ahead and dump the entire thing into Vanguard Index Funds. I realize this would be all of our savings, but I feel like we need to get that ball rolling. Seeing my 401k and personal stock picks perform well has really made me think I should do this sooner than later, even if it holds us back a month or 2 from getting a house. Thoughts?

2b. Once step up, I'm thinking we should put at least $500 a month towards this fund. Once we have a house, I would like to increase it to at least $1,000 a month. Open to thoughts on this as well?

3. Storage Unit - We moved from cross country to my parents to have the baby. This is storing a lot of our stuff like kitchen supplies, bed, etc. I sold what I could - couch, dining table, etc. To make room in the garage and house for us, I'm also storing a little bit of my parents things in here as well. Once we move, there will be no need to keep the storage unit. We looked into getting a shed and such built, to provide my parents with permanent storage solutions, but it was really damn expensive honestly.

4. I know I'm missing out on the ROTH benefits right now. I should have enough before filing taxes to max out 2 ROTH IRA's for the wife and I. If we do this, it would obviously impact our ability to get a house sooner... Should I delay this until we have a house or is it better to get it done?

5. Feel free to criticize anything you would like, ask for more information, or provide general insight. Thank you again to everyone in advance.

6. The paid in full policy expires in 1/2015. I paid around $106 for 6 months and will pay a $30 or 35 fee to cancel it early. So when it's up, I will begin to shop for again for new rates and one that has both cars. I did check about adding the hobby car to State Farm but it was just too expensive.

7. Should we roll over the wife's smaller 401k to something else? I feel like it's not doing much. Wasn't really sure what my options are here though - hoping someone knowledgeable can chime in.
« Last Edit: November 17, 2014, 08:14:40 AM by HairyUpperLip »

TexasStash

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #1 on: October 13, 2014, 12:52:32 PM »
Interesting case study. I can relate a bit. Although the details are a little different, we're in a similar stage of life, near 30 and a kid on the way for us. We've been fortunate enough to buy our own house already (some homeowners might see this as not so fortunate :) but we like it).

If you feel your job is pretty stable, I wouldn't put any more in the savings account once you reach 3 months of expenses (which seems pretty soon for you). I would do some relatively simple investing in index funds beyond that point. But I would advise against dumping the savings account into index funds unless they're well diversified. Don't want to have to tap that for a sudden emergency right when the stock market is down.

I have a 100% match in my 401k up to 6%, so consequently I'm in for 6% to my own 401k. I would personally say keep the 6% for your situation and add in a little Roth contribution as budgets allow.

I'm a big fan of simplification, and it seems like you have a lot of checking and savings accounts. This increases management and potentially stress if any of the balances gets low on a regular basis. I personally would try to simplify there. I personally opened an additional checking account to separate out some of my expenses, but it didn't end up being worth the hassle, so I closed it. Seems like you could do 1 checking, 1 high-yield savings, and the rest in investments however you want to spread them out.

I'm not sure what account type your baby savings account is in, but if you're going to have "baby savings", I think it should be something like "baby index fund" or "baby college fund" rather than in a traditional savings account. Presuming the baby won't need that savings for a long time, and any emergencies would come out of general family savings, so might as well maximize return on that one.

Can't really say much about the monthly expenses. Under $1400 per month seems pretty Mustachian to me (and significantly less than us). But if you haven't already, I would definitely consider whether the car hobby is worth a bit of a delay on your path to financial independence. I have a gadget addiction, and this is a constant struggle for me in the same way. But even $100-$150 a month can add up (plus compounding).

Something else to think about is whether a 401k rollover makes sense. Would depend on the fees of the existing 401k vs the new IRA and the fund choices. Someone far more knowledgeable than me could help out on that one. Another way to simplify, give yourself more fund choices and possibly lower fees.

Only question is what about food/utilities? Are those included in the "rent" you pay?

I know life insurance doesn't seem very Mustachian, but it might be worthwhile for a one income situation. Would be relatively cheap for a 20 year term policy. I have a 30 year, $500k policy for under 50 bucks a month, and that seems like overkill.

All the best!

HairyUpperLip

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #2 on: October 13, 2014, 01:19:28 PM »
All the best!

Wow, did you sign up just to post here? :) Welcome to the forum either way, it's a great community here.

Interesting case study. I can relate a bit. Although the details are a little different, we're in a similar stage of life, near 30 and a kid on the way for us. We've been fortunate enough to buy our own house already (some homeowners might see this as not so fortunate :) but we like it).

Congrats, I love my baby. She's amazing. :)

If you feel your job is pretty stable, I wouldn't put any more in the savings account once you reach 3 months of expenses (which seems pretty soon for you). I would do some relatively simple investing in index funds beyond that point. But I would advise against dumping the savings account into index funds unless they're well diversified. Don't want to have to tap that for a sudden emergency right when the stock market is down.

I've kind of been swayed by the forums that I don't need a huge EF anymore. I've got a few credit cards that all have pretty high limits. I use them for as much as I can to collect the rewards. You are correct though, having a few months in savings is a very low amount for us currently. The savings account is the primary pool for collecting extra funds right now.

I have a 100% match in my 401k up to 6%, so consequently I'm in for 6% to my own 401k. I would personally say keep the 6% for your situation and add in a little Roth contribution as budgets allow.

I'm a big fan of simplification, and it seems like you have a lot of checking and savings accounts. This increases management and potentially stress if any of the balances gets low on a regular basis. I personally would try to simplify there. I personally opened an additional checking account to separate out some of my expenses, but it didn't end up being worth the hassle, so I closed it. Seems like you could do 1 checking, 1 high-yield savings, and the rest in investments however you want to spread them out.

Ahh, it seems worse than it is....


Main Checking = Ally - joint for the wife and I
Car Checking = Small local bank, I've had an account here since I was a kid and the people are nice. I try to even do all my Ally ATM withdrawals from here to help them $3 at a time. ;)
Baby Checking = Local credit union, really just maintaining this relationship for when we do purchase a house. They tend to offer lower rates.



I'm not sure what account type your baby savings account is in, but if you're going to have "baby savings", I think it should be something like "baby index fund" or "baby college fund" rather than in a traditional savings account. Presuming the baby won't need that savings for a long time, and any emergencies would come out of general family savings, so might as well maximize return on that one.

I looked into the 529 stuff, but I don't know that my kid will want to go to college yet. I don't like the idea of the money being tied to something so specific. I guess I could open a normal Index fund, but I do want the funds to be as safe as possible since they aren't for me. All gift money goes in here too. The balance is over $5k currently, so maybe I should look into better options..

Can't really say much about the monthly expenses. Under $1400 per month seems pretty Mustachian to me (and significantly less than us). But if you haven't already, I would definitely consider whether the car hobby is worth a bit of a delay on your path to financial independence. I have a gadget addiction, and this is a constant struggle for me in the same way. But even $100-$150 a month can add up (plus compounding).

Something else to think about is whether a 401k rollover makes sense. Would depend on the fees of the existing 401k vs the new IRA and the fund choices. Someone far more knowledgeable than me could help out on that one. Another way to simplify, give yourself more fund choices and possibly lower fees.

Ahh shit, meant to post that in the questions actually! Thanks man!

Only question is what about food/utilities? Are those included in the "rent" you pay?

yes, it's included in the rent I pay. Sometimes I grab stuff people ask for or my wife gets some things for the baby but they are minimal amounts. My budget was just adjusted so I may have to tweak it a little. I'm trying to run it very hard on the savings side.

I know life insurance doesn't seem very Mustachian, but it might be worthwhile for a one income situation. Would be relatively cheap for a 20 year term policy. I have a 30 year, $500k policy for under 50 bucks a month, and that seems like overkill.

Hmm, I may consider looking into this. I think my wife gets like 1.5x my salary or something simple that from my job.

TexasStash

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #3 on: October 13, 2014, 03:51:36 PM »
Caught me! I've stalked the forums silently for a while, so I'm not necessarily new to the topics, but I figured why not jump in since I'm currently working through figuring out my own financial systems (improving them) as well.

Thanks! We're pretty excited ourselves.

I'm also coming to find I don't think I need a big emergency fund. Ours is much larger than necessary right now primarily because we're planning to replace one of our cars soon, so haven't wanted to shift that money into investing and then have to shift it back out. And I'm kind of indecisive at times. But there are far worse problems than having too much in savings :).

Completely fair point about the 529. There are other valuable options besides college, depending on the person.

As far as index/savings, just keep in mind the time horizon. If baby won't need this money any sooner than 5 years, you have a LOT of data on your side that says that index fund investing is pretty safe over that time horizon. Savings accounts are safe in the short term, not so much in the long term with inflation. If you're worried about 100% stocks, go with a balanced fund (60% stocks, 40% bonds) that is a little safer than 100% stocks but has higher historical returns than savings alone. Just means you'll have to manage the risk as you get closer to redeeming it by gradually moving the money into safer options.

That 1.5x life insurance from work is a nice benefit. If you did go the life insurance route, that might let you get away with a $250k policy which might not be more than $20 per month if your medical tests come back fine.

Thegoblinchief

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #4 on: October 13, 2014, 09:55:26 PM »
Decide what the priority is. Is it buying a house to give you space? (Assuming your market actually supports buying versus renting.) Is it building your NW as fast as possible? Is it....?

You have excellent cashflow but your savings priorities are all over the place.

Personally, give your taxes, I'd increase the 401(k) all the way to the max unless there are no good fund options available. Even after doing this you will have plenty of free cashflow to pool a house downpayment or whatever it is you seek as #1.

MDM

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #5 on: October 13, 2014, 11:29:27 PM »
Personally, give your taxes, I'd increase the 401(k) all the way to the max unless there are no good fund options available. Even after doing this you will have plenty of free cashflow to pool a house downpayment or whatever it is you seek as #1.

+1

That, plus $5500 for you and $5500 for your wife into Roth IRAs, and you would still have ~$2,000/mo in free cash flow to invest as you see fit.  Really up to you (and your parents' good will) whether you put that toward a house down payment or keep your current arrangement.  And you may be overstating your tax bill in the OP, unless you are getting hit with ~10% in state + local taxes.

You could roll over the small 401k if you are bored but it probably doesn't matter much.  Check the investment options and fees: if you are getting institutional fee rates in the 401k it may be best to leave it alone.

In short, maximize your tax advantaged investments now, enjoy the baby and keep up the good work. 

HairyUpperLip

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #6 on: October 14, 2014, 06:57:41 AM »

Decide what the priority is. Is it buying a house to give you space? (Assuming your market actually supports buying versus renting.) Is it building your NW as fast as possible? Is it....?

Atlanta area. I do believe the market makes more sense to buy than rent here. Yeah, we are eager to get our own place and have our own home. Building my NW is super important and goes hand in hand with building my FI realities imo. I don't personally like the idea of adding liabilities (cars, personal residence) into NW calculations.

You have excellent cashflow but your savings priorities are all over the place.

This is true. I'm very aware they are all over the place. I guess that's the negative to being a "clean slate". I've read so much here and on many finance blogs so the information is all great, but it's hard to pick the most ideal path. Was kind of hoping to get most of my input on the what to do next strategy.

Personally, give your taxes, I'd increase the 401(k) all the way to the max unless there are no good fund options available. Even after doing this you will have plenty of free cashflow to pool a house downpayment or whatever it is you seek as #1.

My salary is 96.5 per year. So I'd need to do 19% to max it out. I think that would bring my net pay to around $2000 or so. Definitely not that bad. I had previously discussed this with the wife and I believe we will make the change in the new year. For now, I do want to stack up a little extra cash before I make the change.

Thanks for your input man, I appreciate it.


HairyUpperLip

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #7 on: October 14, 2014, 07:00:45 AM »
That, plus $5500 for you and $5500 for your wife into Roth IRAs, and you would still have ~$2,000/mo in free cash flow to invest as you see fit.  Really up to you (and your parents' good will) whether you put that toward a house down payment or keep your current arrangement.  And you may be overstating your tax bill in the OP, unless you are getting hit with ~10% in state + local taxes.

Here is the break down per my paycheck -
Pay = 4020
Fed = 455
MED =  54
OASDI = 232.90
GA = 195
Total = 937.91

Let me know if that seems incorrect somehow? I file as Married jointly and do 0 allowances. I'm not tax smart at all. :-/



You could roll over the small 401k if you are bored but it probably doesn't matter much.  Check the investment options and fees: if you are getting institutional fee rates in the 401k it may be best to leave it alone.

Was thinking it'd be nice to just take both of her 401k's (both at Fidelity) and see if there was any benefit into rolling it all over to Vanguard.

In short, maximize your tax advantaged investments now, enjoy the baby and keep up the good work.

Thank you and I appreciate you taking the time to respond.

TexasStash

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #8 on: October 14, 2014, 09:54:00 AM »
I'm a big proponent of Vanguard, so I would support rolling over to Vanguard from Fidelity. Just take the time to look at the fees in the event you're getting a good deal at Fidelity and want to stay.

Though as I think about it more, your balance on the rollover 401ks is not big yet and Vanguard typically has very good fee structures so you should be in a good position whichever way you go.

Thegoblinchief

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #9 on: October 14, 2014, 10:48:48 AM »
If she has access to Spartan funds through her Fidelity 401(k), those are very competitive with Vanguard. I personally find their web interface a bit easier to use than Vanguard, but YMMV. I have an IRA with Vanguard but my wife's 401(k) is with Fidelity and she's in various Spartan products.

I personally would prioritize moving out on your own. I hate imposing on family. I don't know much about Atlanta except for the fact that it's a real hodgepodge of tax and school districts. Keep in mind that renting is still a good idea if you don't have a very good expectation of staying AT LEAST 5 years. Otherwise the transaction costs of RE are hard to amortize long enough.

MDM

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #10 on: October 14, 2014, 12:03:11 PM »
Here is the break down per my paycheck -
Pay = 4020
Fed = 455
MED =  54
OASDI = 232.90
GA = 195
Total = 937.91

Let me know if that seems incorrect somehow? I file as Married jointly and do 0 allowances. I'm not tax smart at all. :-/


That's fine if you like giving Uncle Sam an interest-free loan of your money until he repays it when you file in 2015.  But if you would prefer to get it when you earn it, change your W-4 to have more exemptions and thus less withholding.  See http://forum.mrmoneymustache.com/ask-a-mustachian/taxes-exemption-questions/msg397577/#msg397577.

You can also download the spreadsheet referenced in http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/msg274228/#new.  The table below comes from that tool.  I had adjusted the state withholding to match the "monthly take home" in the OP. 

Your latest post confirms that the state tax is much lower than 10%, and instead you are giving too much to the IRS in each paycheck.  So your annual cash flow is even better - you just have to file a new W-4 and take advantage of it!


CategoryMonthly amt.CommentsAnnual
Salary/Wages$8,0420$96,500
Pretax Health Ins.$529Includes dental & vision$6,343
FICA base salary/wages$7,5130$90,157
401(k) / 403(b) / 457(b) / etc.$402Room to increase?$4,825
Income subject to IRS tax$7,1110$85,332
Federal tax$6052014 rates, stand. ded., 3 exemptions$7,255
State/City tax$697Guess, using 0.098 * Fed. AGI$8,363
Soc. Sec.$466Assumes 1 earner paying$5,590
Medicare$1090$1,307
Total income taxes$1,8760$22,515
Income before other expenses  $5,2350$62,817

HairyUpperLip

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #11 on: October 30, 2014, 12:16:23 PM »
Good news! Just did the increase on my 401k to 20%. This should allow me to max out $18k next year. I had previously decided to wait until Jan to make this update, but decided fugg it let's do it.

Will update after I get my adjusted paycheck. I feel like my check should only be "couple hundred" or so less which isn't bad at all.

My next goal is to see if I can lower my health insurance costs in the next year.

Still not sure how I feel about the exemptions and I've heard the interest free loan comments before, but I'd rather get $1,000 or so back then pay $1,000 or so. I'll think about this one a little more. Like I said to you already, I'm not really tax smart so I have some reservations here still.

rujancified

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Re: Reader Case Study - Help Me Make The Right Moves [Part 2]
« Reply #12 on: October 30, 2014, 01:08:06 PM »
Re: Taxes. Your situation is SO straightforward. Two dependents, one income, no house. Find your last pay stub and get thee to irs.gov: http://www.irs.gov/Individuals/IRS-Withholding-Calculator. You can do it!

Congrats on maxing! When I shifted to maxing, I waffled for awhile and kept saying "next year" or "next raise." Then I ran the calculator and saw how little it would affect my take home pay and just pulled the trigger one afternoon.