Author Topic: Case Study: Help Young Couple Form Investment Strategy  (Read 2787 times)

MJD

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Case Study: Help Young Couple Form Investment Strategy
« on: May 24, 2017, 12:23:15 PM »
Life Situation:

Hi Folks, I’ve read the forum for a while but posting for the first time hoping you all can help me with our investment strategy! My wife and I are 28 years old (married, filing jointly) and have spent the last couple of years aggressively paying off our student loans (105k). We are finally debt free and looking to begin investing our money, now that it’s not going towards debt (FINALLY!).

We live in a HCOL area, and recognize that some of our monthly expenses are on the high side. We each own our cars (~150k miles on each), and we are looking to buy a house and start a family in the near future (within a year). We are pretty frugal but don’t have a specific investment strategy. The amount of information out there can be overwhelming so hoping to collect some information specific to our situation. I’m not necessarily looking for areas to cut monthly spending (although, feel free to offer suggestions!). I’m more so looking for some answers to some specific questions regarding investing strategies.

Monthly Gross Salary/Wages: $14k

Monthly Taxes:
Federal: $2228
State/City: $803
Soc Sec: $840
Medicare: $196
TOTAL: $4,067

Monthly Take-Home Pay (Gross - Taxes - Health/Vision/Dental/Life Insurance): $9,600

Monthly Investments: 
Roth IRA: $300
403 (b): $100
Roth 401K: $1188
Employer Match on Roth 401k: $243
TOTAL: $1,831

Monthly Expenses:
Rent + Parking: $1480
Home/Rent Insurance: $9
Sling TV: $20
Car Insurance: $121
Car Maintenance, Registration, etc.: $150
Charitable contributions: $20
Clothing/Shoes: $100
Dentist: $10
Dining (Lunch/Dinner/Etc.): $270
Gifts (not charitable contributions): $100
Dry Cleaning: $8
Electricity: $56
Entertainment: $165
Fuel/Public Transport: $230
Groceries: $356
Hair Care: $12
Miscellaneous: $100
Phone (cell): $100
Gym Memberships: $189
Travel/Vacation: $300
TOTAL: $3,795

Monthly Leftover (Take Home – Current Investments – Expenses): $3,974

Current Balances:
Checking Account: $5,000
Money Market Savings: $25,000
Roth 401k: $47,000
Roth IRA and 403(b): In my wife’s name, not sure on total, but assume around $10,000 combined

Specific Question(s):

1.   I’d like to open a Vanguard account and begin investing in a few index funds. What is your recommended asset allocation? Ideally, we’d like to retire by age 50. I’m assuming some mix of domestic and international stock + bonds? Any specific funds to target?
2.   Should we put all of our leftover money into our Vanguard account each month?
3.   Related to #2, we are looking to buy a house, which will cost us 250k-300k in our market. Is it worth saving up 20% for a down payment, or is 5% + PMI and investing, a better strategy? Similarly, do you recommend saving up our down payment money in our Money Market account (with our emergency stash) or invest it until we’re ready to buy and then pull it out?
4.   How frequently do you recommend adding money to our Vanguard funds? I’ve seen suggestions vary on this.
5.   Any other suggestions? Should we be putting more into my wife’s Roth IRA or my 401k?

Thank you in advance for any advice, it’s greatly appreciated!
MJD

ysette9

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Re: Case Study: Help Young Couple Form Investment Strategy
« Reply #1 on: May 24, 2017, 12:56:16 PM »
Quote
1.   I’d like to open a Vanguard account and begin investing in a few index funds. What is your recommended asset allocation? Ideally, we’d like to retire by age 50. I’m assuming some mix of domestic and international stock + bonds? Any specific funds to target?
2.   Should we put all of our leftover money into our Vanguard account each month?
3.   Related to #2, we are looking to buy a house, which will cost us 250k-300k in our market. Is it worth saving up 20% for a down payment, or is 5% + PMI and investing, a better strategy? Similarly, do you recommend saving up our down payment money in our Money Market account (with our emergency stash) or invest it until we’re ready to buy and then pull it out?
4.   How frequently do you recommend adding money to our Vanguard funds? I’ve seen suggestions vary on this.
5.   Any other suggestions? Should we be putting more into my wife’s Roth IRA or my 401k?

Congratulations on paying off your student debt! That is a big accomplishment considering how much you had. I hope you cracked open a pleasurable bottle of wine to mark the occasion.

1. Vanguard is an excellent place to put your after-tax investments. First, check out the investment order sticky https://forum.mrmoneymustache.com/investor-alley/investment-order/ to make sure you have your other bases covered first. You likely want to max out all tax-advantaged space prior to opening up a taxable account.
Personally I like the simple mix of total international stock (VTIAX), total domestic stock (VTSAX), and the mirror total bond funds. We are comfortable with volatility and the increased growth that gives statistically over time, so our target AA is around 5-10% bonds. Of the stocks, our target is 40% international, 60% domestic. That is just one data point though. YOu can go over to the Bogleheads wiki to read up on the three-fund portfolio and other lazy portfolio. Stocks for growth and longevity are important, but so is your ability to sleep peacefully at night and ride through any inevitable stock market downturn without pulling money out. Only you can decide what allocation is right for you. I wouldn't stress too much on getting the "right" portfolio mix because there really isn't one. If you have 5% bonds or 35% bonds you'll still end up successful if you invest regularly, save a good portion of your income, and stick to low-fee funds.

2. See the investment order sticky for help with this. I'd say the answer is "yes" after maxing out all tax-advantaged space first.

3. I think the general consensus is that avoiding PMI is a good thing, so save for that 20% down. If you are buying in the next couple of years, treat that money as cash or close to it, don't invest it, unless you choose something really conservative like a short-term bond fund.
Note: I say this but I didn't actually follow this advice for our last purchase. Because we were renting with nothing pushing us to buy by a specific date, we chose to keep our money invested. Instead we told ourselves that we would buy when simultaneously we found something we liked and the stock market wasn't down. Our reasoning was that because we could continue renting somewhat indefinitely, if the stock market dipped, then we would just put off our house purchase plans for a while. This probably is not the case for most people. We got lucky and things worked out for us. We could have also have found a house we liked a lot that coincided with a market dip and left us bummed about missing out.

4. Personally I invest weekly because I am paid weekly. Most people probably invest at least monthly. The idea is to invest it as soon as you have it available to invest, whatever time period that ends up being. The expression goes "time in the market is more important that market timing" so get invested right away.

5. Probably. Again, see the investment order sticky.

MDM

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Re: Case Study: Help Young Couple Form Investment Strategy
« Reply #2 on: May 24, 2017, 01:00:57 PM »
1.   I’d like to open a Vanguard account and begin investing in a few index funds. What is your recommended asset allocation? Ideally, we’d like to retire by age 50. I’m assuming some mix of domestic and international stock + bonds? Any specific funds to target?
2.   Should we put all of our leftover money into our Vanguard account each month?
3.   Related to #2, we are looking to buy a house, which will cost us 250k-300k in our market. Is it worth saving up 20% for a down payment, or is 5% + PMI and investing, a better strategy? Similarly, do you recommend saving up our down payment money in our Money Market account (with our emergency stash) or invest it until we’re ready to buy and then pull it out?
4.   How frequently do you recommend adding money to our Vanguard funds? I’ve seen suggestions vary on this.
5.   Any other suggestions? Should we be putting more into my wife’s Roth IRA or my 401k?
MJD, welcome to the forum.

1) See Tax-efficient fund placement - Bogleheads, noting the links in "Determination of your asset allocation (% stocks / % bonds), which sets your portfolio's level of acceptable risk, is the single most influential decision you can make on your portfolio's performance. Only consider taxes after you have configured your total portfolio."  See also Three-fund portfolio - Bogleheads.

2 & 3) See Investment Order, including the part about "It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end."  If you really, really want the house, going low risk (e.g., online savings account) on your down payment amount is reasonable.  PMI can get expensive, so waiting until you have 20% is also reasonable.  No hard and fast rules in this area, though.

4) If you can do it via payroll deduction, why not?

5) Based on $168K/yr gross, I'd guess your marginal saving rate is at least 25%.  What does the marginal rate chart in the case study spreadsheet tell you?  If it is at least 25%, traditional accounts are likely to be better.

I see ysette9 has already covered most of this. :)
At least you know at least 2 people are giving similar advice....

MJD

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Re: Case Study: Help Young Couple Form Investment Strategy
« Reply #3 on: May 24, 2017, 01:21:24 PM »
Thank you ysette9 and MDM! I appreciate the help. We definitely celebrated after getting rid of the student debt; talk about a monthly burden. Now that it's gone, I just want to make sure we're investing our money intelligently.

I will definitely review the suggested links.

zolotiyeruki

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Re: Case Study: Help Young Couple Form Investment Strategy
« Reply #4 on: May 25, 2017, 01:40:59 PM »
Congrats on getting rid of the student loans!  That's a lot of quick progress!

The "investment order" sticky is a good resource.  At your income levels, you *definitely* want to maximize your pre-tax contributions.  WRT asset allocation, I'm lazy, so I just stick it all in VTSAX and don't worry about it.  A downpayment for you would be $50-60k, and at the rate you're (not) spending, you could save that up in a year.

I'd invest as soon as the money is available to invest.  That way, I'm not tempted to spend it :)  ....and it has more time in the market, which is super important.

MJD

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Re: Case Study: Help Young Couple Form Investment Strategy
« Reply #5 on: May 26, 2017, 11:47:38 AM »
Thanks, zolotiyeruki. That's the goal; to begin investing ASAP so we can get that money working. I'm thinking we will maximize pre-tax contributions and then find a ratio of savings vs. investing that works for us. I appreciate the help.