Hi, all!
I have been working hard on getting my shit together this year and during that process I’ve been doing a lot of reading and research to prepare for the day that I will be consumer debt free for the first time in my adult life (and ready to hit the ground running as far as investments go.)
I considered posting this in Investory Alley, but after I typed it up it read as more of a case study... Let me know if I need to move it!
The assumptions we will make for this exercise:
• Zero credit card debt or car payment. Only debt is my mortgage. I have about $30k in equity
• Gross salary is $80,000/year, but $10k is an annual bonus qualified as “supplemental income.” So for this exercise we will say gross salary is $70k. I am a single female, no kids, 28 years old. Paid bi-weekly, gross paychecks are $2,688 each
• I have a 401k through my employer (with Fidelity) with a balance of $32,500 (today’s balance so hopefully this will be more by next January, but we will use today’s balance to simplify things). 100% allocated to stocks
• HSA account with $2,100 cash and $2,000 invested (again hopefully will be more but using balance as of today). Must maintain that $2,100 in cash to be eligible to invest
I have been working to minimize my monthly expenses and have worked them down to $2,400/month. That includes everything, mortgage and all. At $2,400 a month, my annual spending is under $29,000.
I’ve read the Investment Order post and am aligned with the first few steps. I already have an emergency fund that I’m comfortable with, and I’m already contributing the 6% I need to my 401k to take full advantage of my company match.
It feels like I know what I need to do next (take full advantage of tax advantaged accounts, open an IRA & begin contributing, etc.) but I can’t figure out how much I should be contributing to each of those to ensure I end up with enough take-home pay each month to cover my spending. I’m super paranoid I’m going to fuck this up and short myself somehow.
My thoughts/questions are:
1. I feel like I need to open either a Trad IRA or Roth IRA in 2019, but I don’t understand which is better for me. I know the Trad IRA offers the benefit of being tax deferred, but is it not redundant to contribute to a 401k AND a Trad IRA simultaneously? It feels like they are both accomplishing pretty much the same thing, so would it be better to skip the Trad IRA and simply bump my 401k contributions up by the $5,500 I would contribute to the Trad IRA instead?
2. If I add the $5,500 to my 401k contributions and skip the Trad IRA, my 401k contribution rate will now be 13.8% or $9,694 per year. I suppose this option makes more sense, as I could then open a Roth IRA and contribute another $5,500 of post-tax funds to the Roth. Not an option if I open the Trad IRA, since the limit is $5,500 for Trad and Roth combined, correct?
3. My employer matches 100% of the first 3% and 50% of the next 3%, or essentially 4.5. With their match, that’s an additional $3145, which means $12,839 per year. Is there a reason I should not max to $18,500? How do I know if I can afford that? Like I said, biggest fear is that I’ll set it and then after taxes my monthly take-home won’t be enough to cover my expenses. Can you tell math isn’t my strong suit?
4. I plan on maxing my HSA contributions in 2019. My employer contributes $800 annually, so my contributions will be $2,650 annually, or $101 per paycheck.
Does this sound right? If I go with the above, my savings would look like:
• PRE-TAX: 13.8% to 401k, or $9646 annually, or $371 per paycheck
• PRE-TAX: $2,650 to HSA annually, or $101 per paycheck
• POST-TAX: $5,500 to Roth IRA annually, or $458/month (should have noted that I have a side-hustle that pulls in $400/month, so my plan is to fund the Roth with side-hustle cash rather than my gross income)
What am I missing? What would you do in my situation for max benefit? Thanks in advance for any advice 😊