Reader Case Study: Newbie, wondering where to go from here

[golfer44]

Hi Folks, I'm a 26 year old single guy looking for some guidance. I'm hoping to gather some inspiration and motivation to get my savings plans on track. I've been pretty sloppy with spending lately, and I think I need to re-prioritize. Thanks in advance!

I'm buying a house in the near future (closing soon!) and am wondering where to go from there. I've only become (somewhat) serious about saving in the past 2 years.

Income: Salaried, $68,000/year pre tax.

Savings: $14,000/year to cash savings, $6,800/year to 401k, $5500/year to Roth IRA. (average over past 24 months).

Current expenses: $600 rent, soon to be $750 mortgage + $150 utilities, and I eat out too much.

Assets: $34,000 cash (saving for house), $13,000 Roth IRA, $15,000 company sponsored 401k.

Debts: $0 (soon to be 100k mortgage), car is paid off

Specific Question(s): The home I'm hopefully buying is a very reasonable starter home in a working class neighborhood and I'm hoping to get a roommate and share the cost. I feel that I could be saving much more money with more rigid budgeting, but that's obviously on me and I'll do my best to research more budgeting tips.

My main question is, what more can I be doing to ensure financial freedom in the future? I'm trying to put away money in my 401k (10%) and IRA (maxing out). I love real estate and can see myself investing more in this - but how much? Should all my effort be put into buying houses? Obviously diversification is hugely important and I'm very interested in investing ("The Investors Manifesto" is on my Amazon wishlist!), but real estate is where my heart is at. With my savings rate, where would you be targeting your energy if you were me?

Thank you sincerely for all advice.

[Zamboni]

Welcome!

Roommate is an excellent idea.  Roommates even better.  Don't forget to share expenses like insurance and taxes and wear and tear on carpets and appliances by being sure to charge the roommates adequate rent.  Don't tell them you are doing it that way, just do it.  Just splitting the mortgage payment is not adequate imho, and give them a fair deal given the local market rates but not a ridiculously awesome deal just because you are a nice guy.  Splitting the utilities separately is probably a good idea in case one of them likes to take 45 minute hot showers with the window open in the middle of winter.  Put all of the rent you get from roommates into your "real estate" investment account.  Before you know it you'll be buying a second piece of property.

I would suggest putting more into your 401k.  This compounds tax free, and money in retirement accounts also can be used as assets to help secure financing on real estate (you'll still need to save down payment and unit maintenance money post tax in a separate account.)  When I made similar income to yours in my 20's I put in 15%, which was the max my employer would allow (the IRS max $$$ allowed was higher, but the rules are the rules and HR gets to decide who can contribute and how much.)

Good luck!

[CDP45]

Yea I'd max the 401k first, because that lowers your taxable income a lot combined with the standard exemption, plus more money compounding also. Roommates have worked out really well for me, I always lived with girls before I got married because they are cleaner, but you got to have a good sense if their boyfriends will be spending the night all the time or if they go to his place, the latter typically not because young men live like savages and don't mind it. Oh the worst is like 3+ dudes! rough. Never ever ever bang your roommates. I never crossed that line so I don't know the possible consequences but I thought it was good advice. Don't live with a couple either. Live with young preferably college educated people. I saved so much in rent, lived in sweet brand new townhouses with granite everywhere and a hot tub. DO change the hot tub water frequently. Get the deposit and let the check clear before you give them keys or let them move in, at least 1 months worth. Financial samurai has a good post on being a landlord, I bet there is good stuff on this site. Congrats on the house! Welcome to home upkeep :(

[golfer44]

Thanks for the help and advice. I will be upping my 401k contribution, and the roommate advice is duly noted!

[golfer44]

Ok folks, small update!

Hopefully making some good progress here, here's what I've done:

-Upped 401k contribution to 22% (should be about 16,000-16,500 next year plus a 3% employer match). I'll be talking to HR about how to hit 17,500 with my variable income and not go over.
-Purchased $3,000 in VTSMX (this puts my investment allocation at about 92 stocks (30% of those int'l) and 8 bonds, but still have a lot of cash, trying to find a good place for this) with a monthly investment of $500. Once I figure out a good place for my cash I'd like to increase my bonds to 15% of my investments.


I reorganized my budget to a hopefully manageable and mustachian level of saving about 55% of my pre-tax income, putting away $3,166 every month:
$1,246 401k (plus 170/month employer match)
$458.33 Roth IRA
$500 VTSMX
$500 to-be-determined fund (any ideas..? add it to VTSMX?)
$462 general savings (future house down payments, etc, to build back a comfortable cash savings on top of 10k in emergency funds)

[_JT]

If you think you want to get into real estate, there are a handful of great free guides over on biggerpockets.com. Read through a few of them, and if you still think you want that, I'd start saving your cash for an investment property. Between 10k and 20k will give you a lot of options to purchase yourself a good cash flowing rental.

[CDP45]

Now get out there and find a wife! That's really the best key to a great financial future.