Author Topic: Savings advice, 401(k), and investment  (Read 4717 times)

DangleStash

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Savings advice, 401(k), and investment
« on: September 03, 2014, 08:12:59 AM »
Hi Mustachians,

Over the past 6 months I've made some changes to my spending, living situation, and career.  I took a new, better job, moved cross-country to be close to family, and am laying out my financial footprint for my future.  I'm looking for advice and opinions on a few scenarios I'll post below.

Currently:
-I live at home, and pay $0 in rent, breakfast/dinner/utilities/cellphone included.  Yes it's awesome.
-I am $900 away from being done with student loans (5% rate)
-$6k balance @ 0% on credit card, rate good until 6/2015 - driven by paying down student loans at an unsustainable rate, but made sense based on interest rate.  I expect to fully pay off this card in the next 3 months, and have $0 in interest.  Also this does not have a large impact on my credit utilization %.
-After car/food/expenses I have ~$2k/mo that I can save, plus a $50k inheritance coming sometime in the next year (probate now).

My goal is to purchase a multi-family residence and live in one unit while renting the other 1-2 out.  This plan may change, as the market in the Boston area has exploded recently and rents have not caught up to property prices yet.  Once I have a down payment saved (goal is $100k + $30k buffer), I will reassess market and plan.

Scenario 1:
401(k) - 6% contribution, raising to 8% in January, to max out company match (3% and 4% respectively)
remainder of savings in 0.87% savings account, or possibly an index fund.

Scenario 2:
401(k) - max out $17,500 contribution
remainder of savings into same savings account or index fund

Scenario 3:
Pay off vehicle faster (non-mustachian but non-negotiable, plan to keep it indefinitely) - $22k @2.9%
max out 401(k) or just 6%/8% for company match
remainder of savings into savings account or index fund

I take my bonus/tax refunds and have applied them directly to student loans in the past, however now they will go toward my down payment fund.

Scenario 1 is what I'm currently doing, but both scenario 2 and 3 are appealing.  I am planning to max out my 401(k) in 2015, but am hung on the decision of paying off vehicle vs. down payment.  Financially it makes sense to pay it off, but the interest over the life of the loan is a few weeks of work, whereas paying it off early would delay my home purchase by ~8 months. 

Thanks!

Bateaux

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Re: Savings advice, 401(k), and investment
« Reply #1 on: September 03, 2014, 08:48:02 AM »
Pay off credit card.  Fund 401k to get max company match.  Max out Roth IRA.  Live with family.  If car expense includes debt attack that debt.  Any scratch left pour more funds into 401k.  Once all debt is paid open money market or savings account to save down payment on real estate while still living at home. 

DangleStash

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Re: Savings advice, 401(k), and investment
« Reply #2 on: September 03, 2014, 09:51:55 AM »
Thanks for the suggestion - I'll find a way to max out a Roth IRA this year.

Cheddar Stacker

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Re: Savings advice, 401(k), and investment
« Reply #3 on: September 03, 2014, 11:47:32 AM »
What tax bracket are you in? 15% or below go Roth, 25% or above max the 401K and/or go Traditional IRA.

Here's what I would do:
1) Contribute enough to get the full 401K match - I can't tell if you're doing this based on the description.
2) Get rid of the SL this month.
3) Since you don't plan to get rid of the car, pay the 2.9% loan slowly but only if you plan to invest heavily, otherwise there's no sense in paying 2.9% interest while earning 0.87% interest.
4) Tax bracket is important now - if > 15% max your 401K. If < 16% max a Roth IRA.
5) Invest everything else into a post tax brokerage account in low cost stock index funds and let the market decide when you will move out of that sweet, sweet living situation.

Beric01

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Re: Savings advice, 401(k), and investment
« Reply #4 on: September 03, 2014, 11:55:07 AM »
What tax bracket are you in? 15% or below go Roth, 25% or above max the 401K and/or go Traditional IRA.

This would be true, except that there's income limits under which you cannot deduct contributions, which are actually fairly low. I would love to contribute to a traditional IRA, but due to income limits, can only do a Roth IRA.

Cheddar Stacker

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Re: Savings advice, 401(k), and investment
« Reply #5 on: September 03, 2014, 11:57:59 AM »
What tax bracket are you in? 15% or below go Roth, 25% or above max the 401K and/or go Traditional IRA.

This would be true, except that there's income limits under which you cannot deduct contributions, which are actually fairly low. I would love to contribute to a traditional IRA, but due to income limits, can only do a Roth IRA.

Very true, but OP never mentioned an income amount. Also, this makes maxing out the 401K that much more important since there are no income restrictions and it will lower your AGI possibly allowing you (or OP) to also make a deductible T.IRA contribution.

Beric01

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Re: Savings advice, 401(k), and investment
« Reply #6 on: September 03, 2014, 12:01:45 PM »
What tax bracket are you in? 15% or below go Roth, 25% or above max the 401K and/or go Traditional IRA.

This would be true, except that there's income limits under which you cannot deduct contributions, which are actually fairly low. I would love to contribute to a traditional IRA, but due to income limits, can only do a Roth IRA.

Very true, but OP never mentioned an income amount. Also, this makes maxing out the 401K that much more important since there are no income restrictions and it will lower your AGI possibly allowing you (or OP) to also make a deductible T.IRA contribution.

Actually a really good point - thanks! I'll look into my own scenario more closely.

Cheddar Stacker

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Re: Savings advice, 401(k), and investment
« Reply #7 on: September 03, 2014, 12:28:34 PM »
What tax bracket are you in? 15% or below go Roth, 25% or above max the 401K and/or go Traditional IRA.

This would be true, except that there's income limits under which you cannot deduct contributions, which are actually fairly low. I would love to contribute to a traditional IRA, but due to income limits, can only do a Roth IRA.

Very true, but OP never mentioned an income amount. Also, this makes maxing out the 401K that much more important since there are no income restrictions and it will lower your AGI possibly allowing you (or OP) to also make a deductible T.IRA contribution.

Actually a really good point - thanks! I'll look into my own scenario more closely.

More discussion on the topic here if you're interested Beric01.

DangleStash

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Re: Savings advice, 401(k), and investment
« Reply #8 on: September 03, 2014, 02:33:53 PM »
Thanks Cheddar.

1 - I am maxing out my employer match right now and plan to do so in the future for 401k
2 - Will be done Friday
3 - All/most savings will be invested, so I'll keep making payments as is.  I'll probably play around in excel a bit and see if I can achieve much benefit by overpaying ~100/mo to end the loan faster
4 - I'm solidly in the 25% bracket
5 - That's the goal!

Question though:

Remainder 2014:
should I put as much money as possible toward my 401k or Roth IRA?
OR
should I do as much toward my 401k then max out Roth IRA by April 2015?

2015:
Max out 401k $17.5k
Traditional IRA, Roth, or both with the remainder pre-investing?

Cheddar Stacker

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Re: Savings advice, 401(k), and investment
« Reply #9 on: September 03, 2014, 02:45:10 PM »
Given the 25% tax bracket I would advise all tax advantaged contributions should go traditional, not Roth if at all possible. 25% is just too much of a hit, so take advantage of as much Traditional space as possible.

Max your 401K in 2014 and 2015 and beyond. If that and other adjustments can get you down to the T.IRA contribution level for a deduction I would do that next. If you can't deduct a T.IRA make a Roth IRA contribution. Since the 401K has to be in by 12/31 and the IRA has to be in by 4/15, make the 401K a priority.

There will be a benefit to paying down the car loan early, but there will also be an opportunity cost. If you plan to invest all extra funds into either 401K, T.IRA, Roth IRA, or taxable investments, anything extra you pay on the car note will take away some of your investing capital. This will cost you whatever the market returns for the remainder of your car loan.

DangleStash

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Re: Savings advice, 401(k), and investment
« Reply #10 on: September 03, 2014, 02:51:53 PM »
Yeah that's kind of my thought too.

Now on the $6k card balance - I have 0% through 6/15.  I'm thinking it may be in my best interest to push that into Jan, then dump as much as I possibly can into my 401k this year.  My job is very stable, bonus would more than cover that balance alone, and this would bring down my AGI more in 2014.

Thoughts?  I know MMM doesn't like debt, but in this case I feel like I can make the debt work for me at $0 cost.

Cheddar Stacker

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Re: Savings advice, 401(k), and investment
« Reply #11 on: September 03, 2014, 03:00:05 PM »
Yeah that's kind of my thought too.

Now on the $6k card balance - I have 0% through 6/15.  I'm thinking it may be in my best interest to push that into Jan, then dump as much as I possibly can into my 401k this year.  My job is very stable, bonus would more than cover that balance alone, and this would bring down my AGI more in 2014.

Thoughts?  I know MMM doesn't like debt, but in this case I feel like I can make the debt work for me at $0 cost.

+1. I wouldn't push it too close to the end of that intro rate, but take advantage at least until you fill all your 2014 tax advantaged accounts.