Author Topic: Very Junior Mustache Needs Advice!  (Read 2298 times)

LikeAHawlk

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Very Junior Mustache Needs Advice!
« on: July 29, 2013, 08:45:15 AM »
Hi all! I'm hoping I can get some advice/answers to a few questions I have about what to do with the small 'stache that we've pulled together. I've spent the last two weeks reading tons of old posts on the MMM blog, trying to learn exactly what my husband and I need to do to get the snowball going. We've got the frugal lifestyle part down, as well as knowing how to save and actively doing so - it's just what to do with that savings, and how much is going to be enough for our goals, that we get a little confused about.

We both currently have "traditional" 9 to 5, Monday-through-Friday office jobs. Our goal is to be able to grow our 'stache to the point where we can quit those jobs and switch to work that generates enough income to cover our small living expenses. Specifically, we want to be able to have the freedom to move around as much as we want (the ideal would be teaching abroad, and coming back to the US for a few months between teaching contracts). In other words, the goal isn't total early retirement, it's putting enough away now that in ten, fifteen years we can switch to something we find fun and fulfilling, but doesn't necessarily pay enough to allow for both covering living expenses AND contributing to a retirement account. We're looking for the freedom to pick up jobs that might not pay a whole lot but enable us to do things we love. Those jobs that don't pay much would cover current expenses, so that we wouldn't have to use the 'stache for income, but at the same time we also wouldn't be able to contribute very much to it during this period of doing low-income-is-okay-because-this-is-fun work. We need to grow it enough in these next 10-15 years so that it can continue to quietly grow enough to provide for us when we WOULD need the 'stache for income in our 50s or 60s. I hope all that makes sense!

So this is where we need some advice.. 1. where is the best place to invest our current 'stache while we're still heavily contributing to it? I feel like I understand the broad picture - invest in mutual funds and index funds - but is that all I need to know and do? Are there more specifics and details I should know and understand? And 2. based on our goals - which include continuing to work after 10-15 years of serious 'stache building which will allow us to make enough to cover current living expenses but probably not enough to also keep up with serious 'stache-building - how much do we need before we can safely quit our traditional 9 to 5 jobs with all their benefits like employer matching into retirement accounts? I read MMM's blog post "The Shockingly Simple Math to Early Retirement," and I can see and understand how much one would need for early retirement where all their income comes exclusively from what the 'stache's returns provide. But our goals are slightly different, so I am assuming we would need slightly less in the 'stache (because of the whole not-really-retiring part). And this is where I'm a little scared, because I don't know at what point we could safely jump ship from the traditional work-til-you're-nearly-dead life and to the do-fun-but-less-stable-stuff-for-a-living life.

I'll share some of our financial details to give a better idea of what we've got going on for anyone interested in answering what turned into a really lengthy question/plea for advice (sorry!):

I am currently 23, my husband is 26. Together we make about $70,000 annually pre-tax - yearly take-home pay is about $60,000 (breaks down to about $4200 per month).
We bank with a credit union. We currently have ~$3000 in our checking account (which pays .05% interest on funds over $2500) and we have $20,000 in a high-yield savings account (pays 1.5% interest). We pooled all of our non-retirement savings into this account so that it would bear the most interest for us - that chunk of change represents our emergency savings of about $13,000 and our "short-term" savings (stuff like trips and big unexpected or one-time purchases) of $7,000.
We each just opened a Roth IRA account. They currently hold a total of $1000 - we just opened these this month, so we have yet to buy into anything here. We will be contributing $100 to each account per month ($200/month total).
We also each have retirement accounts through our employers; both are Simple Plan IRAs and have ~$3000 each in them. We have not bought into anything here yet, either, but have been contributing 5% each with an employer match of 3%.
My husband also has a 401k from a previous employer with about $14,000. This is on a "life cycle plan" where as the account ages, the funds are automatically reinvested from higher-risk/potentially higher growth into things that are more risk-adverse. Essentially it's on autopilot and seems to have worked pretty well so far, but we have been told we should roll the funds from this account into a Roth IRA.
He also has stocks from the same employer that he is planning on selling soon. He has about $600 worth of dividends and the stocks are valued at $8000. Our current plan is to pay off his car once everything is cashed out (the loan as a balance of $3000), reallocate the $300/month car payment into savings, and save/invest most of what will be left over (~$5000).

So to conclude, we currently save about 20% of our take-home income through retirement accounts and a high-yield savings account with our credit union. Once we pay off my husband's car, we'll be saving about 28%. I've looked at our budget and I believe we can easily save ~$100 extra per month right now, which would bring us to saving about 30%. Now we've just gotta figure out what to DO with this little 'stache!

Thank you all who take the time to read all this and provide opinions and feedback! I can't tell you how much I appreciate it. Looking forward to getting your advice and words of wisdom :)

Rebecca Stapler

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Re: Very Junior Mustache Needs Advice!
« Reply #1 on: July 29, 2013, 09:00:32 AM »
I got a lot out of Andrew Tobias's The Only Investment Guide You'll Ever Need. It helped me come to informed conclusions about my investments. In the end, those informed conclusions all led me to Vanguard's index funds because of the very low expense ratio and, because they're index funds, they grow with the market. I looked at the type of "life cycle plan" funds that your spouse's 401k is invested in (I think what you're referring to are also called "Target Date" funds), and I didn't think that they provided the value I wanted -- the expense ratios were higher than I wanted and the allocations were too conservative for my taste. When I rolled over a small pension (just under $2k), I needed to find a Vanguard fund with a low $$ entry point, which happened to be a target date fund, and I did invest in that but it wouldn't have been my first choice.

This is a FIRE calculator with an amazing graph that shows you all the possible scenarios for your money, given historical scenarios, and can give you a general idea of when you can retire. It takes into account your spending levels, which is key. http://www.firecalc.com/ To tailor it to your circumstances, you have to follow along on the tabs at the top to adjust for spending, investment allocation, etc.

As for the $$ sitting in savings, and even your E Fund, I would move it to a Roth IRA -- as long as your E Fund is truly for emergencies (and not emergencies like a co-pay at the hospital or repairs on your car: You can budget for those; emergencies like job loss that can't be mitigated by slashing expenses, etc.). You can withdraw Roth principal without penalty.

LikeAHawlk

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Re: Very Junior Mustache Needs Advice!
« Reply #2 on: July 29, 2013, 12:32:29 PM »
Stan, thank you so much for the suggestions and resources. I will look into that book and I'm definitely going to play around with that calculator. And yes, our emergency fund is for true emergencies. It's our "last resort" fund that we will only go to if there is no other way to pay for something, if we somehow BOTH lost our jobs tomorrow, etc. I think that's a good idea to move it into a Roth IRA - since we started our emergency fund we've never had anything so big come up that we couldn't pay for it with money we had on hand, especially as our budget includes a little bit of wiggle room for those types of things. Thanks again for the advice!

bo_knows

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Re: Very Junior Mustache Needs Advice!
« Reply #3 on: July 29, 2013, 03:17:31 PM »
FWIW, the calculator www.cfiresim.com can also model the transition from higher-paying jobs to lower-paying ones, and what effect it would have on your overall portfolio success.  This might be a good way to look at a good "long term picture" including both phases, of you plan.