Windfall advice

[Tacopwr]

Hello All,

I am a sub-30 year old in Michigan and recently received a substantial raise. I also came across a windfall and I wanted to see what you think of my plan. I want to start saving more outside of my 401K, but not sure where to park the money. 

WINDFALL: $30,000 ish

First step is a $4,000 Emergency Fund in a high interest savings.

So with the remaining $26,000, I assumed I should pay off the Sled and Car, leaving about $18,000 to invest somewhere. Can I put $6000 in a Traditional IRA and then next year start adding to that with contributions from my paycheck? That would leave $12,000 that I don't know what to do with other than Index funds and REITs in a normal brokerage account. Any ideas?



INCOME: $49,000/yr


DEBT:

Car $5824 @ 3.2%   Mazda5 6-Speed manual. 31 mpg hwy and tows my boat at 21 mpg.
Snowmobile $2200 @ 5.8%   My 1985 Yamaha blew up, so last year I treated myself to a 2006 SkiDoo 600SDI

Chase Credit Card $2400 @ 0% (paying off by November for zero interest. $550/month)
Paypal Credit Card $600 @ 0% (also paying off by November for zero interest $100/month)

Visa $1200 @ 9% (This fluctuates as my spending has been weird lately with car and bike repairs. Should be back to zero in a month or two)


401K:

$6800 right now, started contributing 24% ($11,760/yr) last pay period to get additional 6% match.
Will max to $19000/yr once my debt is paid.



MONTHLY EXPENSES: $2231 until debt payoff. Sorted below

My GF and I love powersports, so we spend a LOT of time outdoors in summer and winter.

Gas $150 This includes Boating and Snowmobiling (I bike to work)
Car insurance $106  Full coverage, will downgrade to PLPD once car is paid off.

Car payment $205 Minimum until CC paid off
Sled Payment $133 Minimum until CC paid off

Rent/Utilities $542 We use 5-10 KWH per day on average, depending on the season.

Groceries/Phone/Spotify/FunMoney $345

[actonyourown]

You are lacking info, such as location (is the snowmobile for pleasure or to travel around in winter?). Also, you are almost 30 so spend a moment to assess where you are in life. What are your priorities? From there:

Having an emergency fund is good so nothing wrong there.

Pay off all of your debts. You will save yourself almost $1000 in payments per month. You can now max your 401k.

Put $6,000 in Roth IRA. When January 1 comes around, put another $6,000 in.

Have fun with the remainder or save it, but no more vehicles (approx $1776)

[Tacopwr]

I guess some more info would be helpful.

My goal is to save roughly $400k by the time I am around 40. So about 11 years or so.

I’ll make the decision to retire or do whatever at that point. I like my job, and they really work hard to retain employees. One having been there 45 years!

I guess putting that $12,000 in a Roth makes sense. I do plan on opening a Traditional IRA after I start maxing  my 401k because I plan on staying in a low income tax bracket after 40.

I guess I’ll use whatever is left in the budget every month to trickle into the Roth and then use that money to stretch me the 5 years between Conversions.

[Dicey]

Grammar police reporting for duty:

www.finra.org
Definition: Windfall gain (or windfall profit) is an unexpected gain in income which could be due to winning a lottery, unforeseen inheritance or shortage of supply. Windfall gains are transitory in nature.

[MDM]

See Investment Order.

How does that seem to you?

[Tacopwr]

Lol Dicey you got me! I prolly should have googled the spelling first.

Wow MDM that link is hella detailed. Thank you!

[actonyourown]

Lol Dicey you got me! I prolly should have googled the spelling first.

Wow MDM that link is hella detailed. Thank you!

Yes the investment order is good, however, this is not a normal situation.  I also think you need to provide more information because:

• Do you plan to propose to your gf? If yes, then soon?
• Do you plan on having kids in the next decade, or are they not for you?
• Do you plan on owning a home in the next few years, or will you rent long-term?

These questions are what I was thinking of and the investment order does not consider them if you are going to need money for a ring, wedding, or a down payment on a house.  You literally are holding one or both of those things right now.  If you decide to pay off all of your debt, you can literally do the investment order from there, I just see an issue with your middle income and owing a lot of debt, even if it is 0% interest because things happen and you might wish you paid things off earlier.  If you are going to pay it back at 0% interest anyway, then what is the difference?

I'm as well almost 30 so these are considerations I make when I am deciding whether to follow the investment order or because I have other priorities.

Also, will you owe taxes on that windfall?  If so, then you might want to hold back a portion of it come tax time.

All in all, I still think with the limited info, your best option is to pay off all the debts, and follow the investment order as far as you can.

[MDM]

All in all, I still think with the limited info, your best option is to pay off all the debts, and follow the investment order as far as you can.

Some people can't stand debt - it keeps them awake at night.  Some people don't mind debt at all, and can use it appropriately.  And some people don't mind debt but use it irresponsibly. :)

In any case, it might be worthwhile to treat a 9% debt differently than a 3.2% debt (let alone a 0% debt).

[SwordGuy]

It looks like you've been consistently spending more than you're making.   Is that why you have so much CC debt for your income?


If so, paying off debt won't do you much good if you just spend back to the same level of debt.   

Are you sure that won't be a problem?

Also, what can you do to increase your income?   An extra $10k a year would be a big deal to your FIRE plans.

[Tacopwr]

It looks like you've been consistently spending more than you're making.   Is that why you have so much CC debt for your income?


If so, paying off debt won't do you much good if you just spend back to the same level of debt.   

Are you sure that won't be a problem?

Also, what can you do to increase your income?   An extra $10k a year would be a big deal to your FIRE plans.

I am still recovering from Pre-FIRE money mismanagement as well as a 6 month unemployment stint a couple years ago.
My net worth was -$40,000 a couple years ago. I have been working super hard and now my net worth is around $6000 before this windfall.

I used to Uber but after two years of Fare reductions, it just doesn’t make any financial sense to continue doing it. I could get another part time job, but honestly I enjoy my free time and feel that I have a decent work/life balance at the moment.

MDM

Debt has kept me up at night and I have made it a personal goal to be debt free by the end of next year. With my current budget I have been on target to do just that. This windfall will just complete that goal about 15 months early.

Actonyourown

I do not plan on proposing or having kids any time soon.
Buying a house would only happen if some crazy opportunity came up to get a job and house in a nicer place than I currently live. While cost of living is quite low where I am, we spend our weekends traveling an hour to three hours away to get to the places we enjoy.

This windfall will be tax-free, thankfully.

[actonyourown]

Then I think you have answered your own question. Pay off the debt, invest in your Roth IRA for 2 years. Don't accumulate more debt in the process, make sure you have more savings besides your emergency fund.

Your expenses will be approximately $1143/month if I am counting that correctly. Your $4,000 would be just over 3 months of expenses. Follow the Investment Order from there.

[gwhunter]

While I know this isn't a case study thread per se I can't help make a comment on the snowmobile.  If you say you are driving 1-3 hours to ride, I'm assuming you live in the LP.  Based on my experiences it never works out that the cost of ownership is less than the cost of renting.  (This assumes you don't ride EVERY weekend)  My father did the whole "buy two 700's, an enclosed trailer, whole nine yards"...  Spent over 15K.  Because we lived just south of Flint (and owned family property near Cadillac) we rode them maybe 4 times per year.  But that was only on the years with good snow.  Now that I am back living in Michigan, I can remember in the last couple of years not being able to ride at all on most weekends.  (My first year back, for the "Shiver on the River" we took a boat to saginaw instead of a shanty)  All of this is to say, the cost-benefit analysis of the whole "owning" a sled didn't really work out for us.  At $250/sled for a rental we could have spent a couple of grand a year renting and still come out ahead after all the other costs (reduced mpg pulling the trailer, maintenance on the sleds & trailer, etc.)

But, if like you said in your OP, you do outdoor stuff every weekend it might make sense to own one.  But not if you have to finance it to purchase it.  Remember, your debt is an emergency.  :) 

[Tacopwr]

While I know this isn't a case study thread per se I can't help make a comment on the snowmobile.  If you say you are driving 1-3 hours to ride, I'm assuming you live in the LP.  Based on my experiences it never works out that the cost of ownership is less than the cost of renting.  (This assumes you don't ride EVERY weekend)  My father did the whole "buy two 700's, an enclosed trailer, whole nine yards"...  Spent over 15K.  Because we lived just south of Flint (and owned family property near Cadillac) we rode them maybe 4 times per year.  But that was only on the years with good snow.  Now that I am back living in Michigan, I can remember in the last couple of years not being able to ride at all on most weekends.  (My first year back, for the "Shiver on the River" we took a boat to saginaw instead of a shanty)  All of this is to say, the cost-benefit analysis of the whole "owning" a sled didn't really work out for us.  At $250/sled for a rental we could have spent a couple of grand a year renting and still come out ahead after all the other costs (reduced mpg pulling the trailer, maintenance on the sleds & trailer, etc.)

But, if like you said in your OP, you do outdoor stuff every weekend it might make sense to own one.  But not if you have to finance it to purchase it.  Remember, your debt is an emergency.  :)

Thanks for the input!

Yes we do ride every weekend once the snow falls, usually 100-200 miles a weekend. The sleds are kept at my dad's house (where we sleep as well) near Gaylord, so I don't have to worry about storage fees or Hotels. I have an old trailer as well if for some reason we need to remove them or we want to chase the snow in the UP.

I haven't looked too many places, but a few sled rentals I found were over $300 a weekend, and they were a quite a drive from where we stay. So renting just doesn't make sense for us. Also the only rental sleds I have seen up close were wrapped up in a tree. lol They get totally destroyed.

[Tacopwr]

Ok so I got a an idea. Feel free to tear this apart if it doesn't make sense.

So after paying all debt and emergency fund, I should have around $14,000 left.

Can I open a Traditional IRA with Vanguard and contribute $6,000 from my remaining 2019 paychecks? That would be about $600 or so a paycheck.

I will also be able to adjust my 401K contributions to $730 a paycheck this coming November.

Obviously that large of a hit to my paycheck would be felt, but I can use the $14,000 savings for any shortfalls in my budget. Then in 2020, change the Traditional IRA contribution to $230 a paycheck to hit $6000 max over the year.

I can then put the remaining funds in a Taxable account.

Is this too much effort to reduce my taxable income?

[erutio]

Money is fungible, so with regards to the traditional IRA, it doesn't matter if it's coming from your paycheck or from your windfall cash.  Either way, you should max you tIRA this year and the next.   If would be easier from a math perspective and better from investing time perspective to just lump sum the $6000 into the tIRA right now. 
Calculate the need contributions per paycheck to max out your 401k for the year, and live off your paycheck.  See if you can live off your paycheck with full 401k deductions. 

[MDM]

Is this too much effort to reduce my taxable income?

If the traditional IRA would save you 22%, "probably not".  If 12%, "yes, a Roth IRA might be better."

[Dicey]

Ok so I got a an idea. Feel free to tear this apart if it doesn't make sense.

So after paying all debt and emergency fund, I should have around $14,000 left.

Can I open a Traditional IRA with Vanguard and contribute $6,000 from my remaining 2019 paychecks? That would be about $600 or so a paycheck.

I will also be able to adjust my 401K contributions to $730 a paycheck this coming November.

Obviously that large of a hit to my paycheck would be felt, but I can use the $14,000 savings for any shortfalls in my budget. Then in 2020, change the Traditional IRA contribution to $230 a paycheck to hit $6000 max over the year.

I can then put the remaining funds in a Taxable account.

Is this too much effort to reduce my taxable income?

We are expecting a large infusion of cash next month. Only about half of it will be untaxed. DH typically contributes 10% to his 401k, because he has a defined benefit pension and we're FI (I'm RE). He just adjusted his withholdings to 65% for the rest of the year. We'll use some of the new cash to bridge any gaps this creates. My answer is "Yes!". It's a bit counterintuitive, but worth it in both cases.

[Tacopwr]

Thanks for the advice everyone!

[Tacopwr]

Small update:

Windfall came and went. The check was in my hands for 11 minutes before it was deposited in the bank. lol


I did make a few adjustments due to opportunities that appeared recently.

All debt has been paid off! My unbury.me account is closed!

Car insurance dropped by half as I switched to PLPD coverage. That saves about 60 a month, but I paid the 6 months in full and saved even more.

For the emergency fund, I decided against creating an account at a separate bank for a sub-inflation savings account. I instead threw my emergency $4000 into VTI in my taxable brokerage.
I figure if I need that emergency money immediately, I have over $15,000 worth of credit spread through normal credit cards and store credit cards, some of which are 0% interest for 6 months to 18 months from purchase. I would then have a lot of time to sell shares to pay off that credit.


I also used this opportunity to start mild credit card churning. I signed up for a BoA Cash Rewards card for the delicious $200 sign up bonus. I use this card for everything including my bills, and set it to auto pay off every month. In a couple months after my bonus comes through, I will look around at the latest deals to see if anything else compares and had a nice bonus. I will stay under the 5/24 rule.


The other opportunity I came across was a different boat. I know it's not that Mustachian, but boats are life in my family. This time of year all the great deals pop up as people don't want to pay to winterize and store their boats, so they offload them cheap. I found a boat that maintains everything I love about my current boat, but provides more protection from wind and waves, and holds 7 people comfortably. It's in rough shape but after a good pressure washing and a few replacement parts, she is a badass vessel. I haggled the price down and paid cash of course!
Thankfully I can store both boats for free and do my own maintenance so costs are in control.
I have listed my old boat on Craigslist but don't expect any bites until spring. I will offload it then and we will have double the boat for only a couple thousand dollars of investment (I paid less than half of what similar boats are listed for).

My 401k enrollment allows changes starting October 1st. I have already set my contributions to 97% of my gross paycheck, leaving just enough for my healthcare, vision, and dental costs.

Starting January of 2020, I will adjust those contributions to max my tIRA by April, or in 7 paychecks. I currently have about $12,000 left to live off of until next spring, and I am feeling significantly less stressed about money and my future.

Thanks for all the advice everyone.

 

[slow hand slow plan]

You should stop buying vehicles... It sounds like you are one paycheck away from issues.

[Tacopwr]

I appreciate the advice Slow Hand. We aren't purchasing any vehicles for the foreseeable future. In fact, the boat will be sold here soon and we expect everything else to last another ten years at least.

Gotta make the life you want and then retire. lol
I like to think that we are just about there.

[EscapedApe]

My advice would be to pay off your VISA debt at 9% first. Then pay off the car. Any reainder would go into taxable or retirement accounts.

And if I were you, I'd sell off that SkiDoo and boat and put that money into retirement/taxable accounts as above. But they're your recreational preferences, so if you think it's worth it then it's up to you.

[Tacopwr]

I think if I sold the sled and boat, I would gain 100 lbs and become a professional masturbator. lol

Gotta build the life you want and then retire, amirite?


As an update, I have kept spending under control. Averaging just over $1400/month so far. I unexpectedly lost my cat and spent a bunch of money on a motion sensing camera, and an animal trap. Then once I got her back, I spent a ton at the Vet to get her all patched up after her two week sabbatical. Totally worth it, obviously.

I have spent $0 on gas since September 21st! That will change tomorrow as I have a long trip planned to go up north and perform pre-season maintenance on my snowmobile trailer and sleds.

I received my first $0 paycheck today as every cent goes to FICA, then my 401K. My Traditional IRA has $3000 and its all in VTSAX. I kept $3000 in my savings account until January just in case I screwed up and didn't keep enough liquidity. In January the remaining $3000 goes into the Trad IRA and my contributions get changed to max the $25,000 through the year.

On a fun note, it seems I have bought at the top and I have been in the red every day since buying VTSAX and VTI. Gotta love it. lol

Every day I remind myself,
"TIME IN THE MARKET BEATS THE TIMING THE MARKET. DO NOT YOLO ON OTM OPTIONS!"

[Tacopwr]

End of the year update!

Things have gone pretty well.

THE GOOD:

My last non-paycheck of the year is next week, so my 401K balance will be around $21,000 plus my end of the year match should get pretty close to $22,000.

Credit card churning has gone wonderfully. I pulled in $500 of cash bonuses so far from three cards. Cash back rewards is somewhere around $100.

THE BAD:

My home-built computer from 2008 finally died. Not that it was capable of anything other than watching youtube videos at this point.

I put my solid state drive from that into my partner's 2011 Macbook pro to keep that alive for a bit longer. It's quite snappy now! However, it is two operating systems behind now and cannot run high stress tasks like video editing. We keep this in the living room for streaming movies to the TV occasionally, working on documents and the occasional large web form.

SOOOOOO I broke down and bought a new computer. 2019 iMac 27" base model from the clearance section of the Apple website. It comes with a godawful magnetic drive, so I ponied up another $290 for a 1TB SSD kit from iFixit.
I was pretty scared to disassemble a 27" glass and glue computer before I even turned it on, but the process was fairly simple and nothing broke!

Price of 27"iMac with 1TB SSD from Apple = $2,436.94

Price I paid, clearance plus drive kit = $1,911.38

SAVINGS = $525.56


I expect this machine to last at least 10 years, so I don't feel terrible about paying so much. Plus the screen is AMAZING! I've tested a few video edits and it is a monster, chewing through 1080p footage like butter. I'm really excited to use this tool to its full potential.


GOALS FOR NEXT YEAR

I reduced my 401k contributions starting in January to just 15% of my gross income. This works out to about $288 a paycheck. The reason for this is I really enjoyed having a large Cash 'Stache.
I also would like the ability to purchase a house or vacation cabin if my partner and I can finally figure out where we want to live. Obviously cash on hand is needed for that.

My goal is to save over $5,000 post-tax within 6 paychecks. That would bring my liquid assets back up to about $9000-$10,000.


INVESTMENTS

My taxable account has been doing well (+10%) thanks to the Fed's ridiculous infusions of cash. The recession can wait. lol
I have made the decision to ride this bull train and added Margin. Gonna stick to using just 25% of it for the first year or so and see how it goes. The interest was paid for in a few days. lol

My Vanguard Traditional IRA still only has $3,000 of contributions. I may try to add another $3,000 by April, but I probably won't get to that point. The only advantage would be lowering my taxable earnings a little bit, and I think the opportunity cost of that money may be too great. Time will tell.


CLOSING THOUGHTS

This has been an excellent experiment. Staying disciplined to not blow all the money was a workout. I stayed close to my budget and didn't go crazy.

My frugality muscles feel stronger and I am more likely to succeed with my financial goals in the future. If I save up a huge 'Stache and decide to take a sabbatical, I am confident that I can keep a budget and survive without a consistent paycheck.

I'd like to say thank-you to everyone! This forum is such an awesome community. Bring on 2020!