At 27, what can/should I be doing differently?

[DidIBreakIt?!]

I’m wondering if anyone can provide some advice as to whether I’m on the right track for my goals and if not, what and how I can do better. This past year I finally landed a job that allows me to throw a decent amount of money into both retirement and outside savings. My main goals right now are:

Buy a house within next 2 years
   Be able to put 20% or $40k down on the house
Be able to stay at home with kids (aka temporarily retire) in about 5 years
Continue to invest in retirement and hopefully be able to work a non-standard (aka not a 40 hour week desk job) when I do return to work. Basically, have the money to be more flexible in my career choice.

I am 27 and I currently live with my boyfriend and we would be buying the house together. However, I would like to focus on this plan as if his money is not factored into any of these goals. That way, the money he can contribute is extra and we are ahead of my original plans. I currently do not have any debt and my savings are as follows:

$6,100 - Savings accounts and CD’s coming due in less than a year at Ally
$3,500 – H.S.A
$3,500 - VFINX fund through Vanguard
$12,400 – vested portion of Roth 401k through employer
$25,500 Current assets

My employer only lets me max out at 25% of my salary for my Roth and traditional 401k. At my current salary, that is a max of $16,875 a year. I have maxed out and do 7% to traditional and 18% to Roth (as you can see, I just started maxing out). I put the majority toward Roth, because I would rather pay the taxes now then later on in life. If this is completely stupid, I would be open to reconsider, but that is my personal preference at the moment. The majority of my retirement investments are in index funds. I put $200 a month toward HSA; ER contributes $40 a month. I plan to have about $600 a month left over to contribute to a savings vehicle. My monthly expenses are $1,600, which I could cut down on if I had to, by about $200-$300 a month. I also anticipate receiving anywhere from a 7-10% bonus paid each spring, so conservatively an additional $4,000.
Am I sending my money to the right places? Should I focus on building up house savings or throw that money into the VFINX fund as it hopefully will produce higher yields? Should I even be putting my money in VFINX fund or are there other options that would be a better idea? Any suggestions, insight, punches in the face, are welcome.

[Jags4186]

1) Don't buy a house with a boyfriend.  Buy a house with a husband.  Unless of course YOU buy the house and the boyfriend pays you rent or vice versa.

2) I recommend maxing a Roth IRA and maxing a Traditional 401k.  Some people will tell you all traditional, some will tell you all Roth.  I think it's good to have eggs in both baskets.  Especially since you can withdraw Roth contributions at any time...  Many MMMs will use a HELOC as their emergency fund.  We non-property owners don't have that luxury.

3) Other than that it comes down to the same mantra repeated over and over again.  How much are you spending?  What is your savings rate?  Do you plan on staying in the same location for X years (Real Estate has heavy transaction costs so its not worth buying you think you're going to move in < 5 years).

[DidIBreakIt?!]

Jags - thanks for the input. Yes, agreed I won't be buying a house with a boyfriend. That's why I didn't want to factor any of his income into this. By the time I'm ready for the house, we will either be married or it will be in my name and we will work out a rent situation. I also plan on staying in the house for 5+ years. When you say maxing both the Roth and the Traditional, I guess I get a little confused. Since both are through my ER, in total the max I'm allowed is $17,500 during 2014 correct? So a 50/50 split between the 2 is what you're suggesting?

As far as spending and saving, my savings rate is currently 40%. I could definitely cut down on some spending and increase that rate. I guess I was trying to look at the situation as a "if nothing else changed" scenario.

[Cromacster]

When you say maxing both the Roth and the Traditional, I guess I get a little confused. Since both are through my ER, in total the max I'm allowed is $17,500 during 2014 correct? So a 50/50 split between the 2 is what you're suggesting?

He is saying with your employer plan go 100% traditional.  In addition to that open a Roth IRA (which is different from a Roth 401k).  You can contribute up to 5,500/yr in a Roth IRA.

I put the majority toward Roth, because I would rather pay the taxes now then later on in life.

There has been quite a bit of debate on here about this.  If it's done right you will be better off paying your taxes later on in life.  Most people on here will suggest deferring as much of your taxes as you can, especially while you are young.  The Madfientist did a good writeup on the topic.

http://www.madfientist.com/traditional-ira-vs-roth-ira/

[not_a_trex]

My employer only lets me max out at 25% of my salary for my Roth and traditional 401k.

Are you sure that it's not 25% of your paycheck? The difference is subtle. If it's of your paycheck you may be able to contribute your bonus towards your 401k.

I put the majority toward Roth, because I would rather pay the taxes now then later on in life. If this is completely stupid, I would be open to reconsider, but that is my personal preference at the moment.

It's going to depend on what your tax rate is now and what your tax rate will be in the future. I think that most people here would agree that if you're in the 25% tax bracket or higher now it's better to go traditional. 10% or lower go Roth. 15%...eh, you could argue either way.

The majority of my retirement investments are in index funds. I put $200 a month toward HSA; ER contributes $40 a month.

Are you investing the money you put into an HSA? If you aren't I suggest you look at what funds are available to you. I don't know what an ER is. Are/will you be contributing to an IRA?

Am I sending my money to the right places? Should I focus on building up house savings or throw that money into the VFINX fund as it hopefully will produce higher yields? Should I even be putting my money in VFINX fund or are there other options that would be a better idea? Any suggestions, insight, punches in the face, are welcome.

It depends on what funds are available to you. If you have access to VTSMX/VTSAX I would contribute money there instead of VFINX. VTSAX basically performs as well as VFINX, but the expenses are lower. If you have significant gains in VFINX I would just leave it there and contribute to another fund in the future. What do you want your asset allocation to look like?

[DidIBreakIt?!]

Thanks for the suggestions. I read the article by Mad Fientist, and also the article he wrote on HSA's. I went ahead and upped my HSA contribution to $300 a paycheck, and will max it out next year. I also changed my 401k Roth and 401k Traditional mix so that the majority of my contribution is now going toward 401k Traditional. Since I'm maxed out at work, I will use the bonus and tax refund to fund a Roth IRA, most likely at Vanguard.

As far as house savings go, I need to cut down on my expenses so I can have more to contribute to the VFINX fund at Vanguard. This is where I'm still torn. Contribute to VFINX (or something similar @ Vanguard) or put the money in a high yield savings account. Realistically I will want to be able to utilize this money in about 18-24 months.

[nereo]

As far as house savings go, I need to cut down on my expenses so I can have more to contribute to the VFINX fund at Vanguard. This is where I'm still torn. Contribute to VFINX (or something similar @ Vanguard) or put the money in a high yield savings account. Realistically I will want to be able to utilize this money in about 18-24 months.

My advice here is that you put any money you will need within the next 18-24 months in a high yield (ha! ha! ha!) savings account or other 'liquid' investment.  I laugh because savings accounts these days are anything but 'high yield'.
If, however, you won't absolutely need that money in 18-24 months I'd plug it into your VFINX.  For example, it doesn't sound like you must buy a home in two years... just that you want to.  If in two years the market has taken a dive you can wait a year or two for the inevitable recovery.  In short, if you are able to be patient then put it in the market.  If you are certain you are going to need it, then don't risk it and keep it in the savings account.

Other thoughts:  You are 27 with no debt and some savings.  That's a good place to be!  Right now socking away as much money as you can will make the biggest difference on when you can become FI.  From your post, it sounds like FI is what you are shooting for (ability to work something other than a 9-5, taking time off to stay home with kids, taking the job you want instead of the job you need). 

[DidIBreakIt?!]

Nereo, I agree with the "high yield savings" term. I try not to laugh when I type it because it really is sad how low yields are. Which is why I cringe when thinking of putting all of my savings there. I am comfortable having about 3 month's of living expenses sitting in there, but would really like to try to put the majority of savings into another vehicle. You are correct; I don't NEED to purchase a home in 2 years, just was the planned timeline for now. Thanks for the input, I will probably reallocate the mix to put a larger chunk into VFINX and continue to contribute a smaller percentage to the savings account.

[Jags4186]

DidIBreakIt,

It's great how much your saving.  I would say if buying a house is a priority you need to figure out how much your after tax income is and decide if its enough to save for a house.

You currently make $67,500 a year.  I don't know if you get a bonus or not.

If you do everything as described...

 $67,500
-$16,875 401k
-$3,300 HSA
--------------
$47,325 taxable

you don't say where you live but let's say you live in NJ like me and pay $1100/yr towards health insurance a year.

That leaves you with a take home pay of $34,421.63

$5500 into a Roth

$28,921.63 of income to figure out what to do with.

Start breaking down your expenses, figure out how much of that you can save, and that will give you the timeline of when you can buy a $200k house.  Best of luck you're doing great!

[DidIBreakIt?!]

Jags,

Thanks again for the advice. Now that my 401k and HSA are maxed out, my next step is to max out Roth, then throw everything else into house savings. I also don't account for bonus and tax refund, so that should also help. Obviously the biggest thing I can do to reach my goals faster is to cut expenses. Sadly, they mostly involve entertainment (Thurs-Sun) and that is a very non-Mustachian lifestyle!

[skunkfunk]

You mention neither income nor expenses. Without that we're just tweaking around the margins.

[DidIBreakIt?!]

Skunkfunk

I apologize, you're right. I just gave a summary of my monthly expenses and the net amount I expect to be able to put toward savings (this is after HSA, 401k contributions). Here is a more detailed breakdown. Not sure if this helps any with the investment options/choices. Currently my federal WH is about 15%.

$67,500 - Gross Income
($3,300) - HSA Contribution
($16,875) - 401k Contribution
($1,425) - Health, Dental and Vision Insurance
$45,900- Pre tax income
($13,120) - Taxes

$32,780 after tax income
($5,500) - Roth IRA contribution
($6,000) - Rent
($7,000)  - Gas, electric, cell, cable, groceries, fuel, car insurance, car maintenance
$14,280 - amount remaining to invest on an annual basis

This does not include bonus (was told it's about 7-10% of salary, or tax refund). I would anticipate those adding an additional ~$7k to my income available for investment.

[skunkfunk]

So are you standard or Roth? Says Roth 401K above, but here you subtract it from gross rather than your after tax income.

If that's standard 401K, you are close enough (maybe, but I don't think so) to the next tax bracket that the bonus may bump you from like 15% to 25%. You might be better off with a traditional IRA.

Anybody else chime in here?

[DidIBreakIt?!]

My most recent post with the breakdown is my NEW income position; I already changed it after the discussion on the forum about maxing out 401k Traditional at work, contributing 5,500 to Roth IRA outside of work, and maxing my HSA.

Did I calculate that incorrectly? Sorry for the confusion.

[skunkfunk]

My most recent post with the breakdown is my NEW income position; I already changed it after the discussion on the forum about maxing out 401k Traditional at work, contributing 5,500 to Roth IRA outside of work, and maxing my HSA.

Did I calculate that incorrectly? Sorry for the confusion.

OK. My point about the IRA stands though. If that bonus knocks you into the 25% bracket you'd probably have been better off with a traditional IRA, unless you can come up with some other deduction. Of course, this number won't be your final number on the tax sheet, for instance there's a $6400 or so standard deduction that comes off the top. So you'll have to wait til around tax time to optimize that.

[not_a_trex]

AFAIK the 25% bracket starts at $36901+. There are deductions here and there but it looks like DidIBreakIt?! is well into the 25% tax bracket.

How are you calculating taxes? Even if you multiply your pretax income by your highest tax bracket rate (25%) I'm still seeing taxes being a few thousand dollars lower.

[DidIBreakIt?!]

The taxes include federal, state (6%), and FICA amounts. For right now, I just took what my employer is currently withholidng on a per paycheck basis and annualized it over 24 paychecks. I think it will drop a little once the 100% contribution to Traditional goes into effect. (probably another paycheck or 2). However, this will be a fairly minimal change, so I'm not worried tying down to the penny at the moment.  I think starting in 2015, (which will be my first full year at this higher-paying job) it will be most advantageous for me to invest in all traditional and avoid any Roth IRAs. Although, now that I have my tax-exempt options maxed out, my focus is now more on where my taxable money should go.

[not_a_trex]

Although, now that I have my tax-exempt options maxed out, my focus is now more on where my taxable money should go.

Probably into an international or US stock index fund

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement