The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: spaghetti1awk on July 29, 2020, 08:51:17 AM
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Hi all- I'm new here, new to trying this managing money intentionally thing, and have an investment question. I have read the investment order advice above and will provide here a bit of background (I know I could post a full case study, but it looks like a lot of work to do it right, and I'm not quite there yet with recording and tracking!):
55K income
no debt
renting 1950/mo
76K in 401K investing currently 7.5% (matched at 100%), e-mail in to HR to increase contribution
no Roth
90K cash (20k of which in 1.5% 1yr cd)
single with three kids and required to not do high deductible Health Insurance, so no HSA
I have more money in cash than I'd like right now, but I don't know where to put it (50K has come as a lump sum recently) and I have another lump sum of 68K arriving this week. I live in a moderately HCOL location (median house price 500K), and would like to own again, but the numbers suggest renting. Because I'd like to own again, I feel like I should keep cash for down payment, but I don't know!
It seems like I could up my 401K contribution to max, replacing income with some of this cash through the end of the year, open and fully fund Roth, then put rest of cash somewhere?
Going forward beyond this year I think I can either fully fund 401K or I can hit match, fund Roth, and come back for another 2K/year or so (will work on figuring out more exactly my budget), but I'm mostly wondering what to do with the current 100K or so (combined) inheritance. Thank you so much for any advice you can and are willing to give (with the limited information I've provided!).
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You would likely have very low tax burden right now ($55k income, 3 kids). Given that - fully funding Roth should come before funding 401k. If course, if you max both - that would be the best.
With $55k income, you CAN NOT carry a 500k house. Nothing good will ever come out of it.
Even if you saved up the full $500k somehow, paid cash, and avoided mortgage altogether - the carrying cost of such a house (taxes/insurance/maintenance) alone will put an unreasonable amount of stress on your $55k income level.
Maybe you can find some fixer upper or such < 200k, and fix it up while living in it? Perhaps you can consider moving to a LCOL area?
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Building on ctuser 1, some companies offer a Roth 401k option, which seems like a good option for you.
Definitely agree that 500k median home price suggestions renting is better.
Here are two related resources on investing that have worked great for us, especially during the recent volatility!
https://www.amazon.com/MONEY-Master-Game-Financial-Freedom/dp/1476757860/ref=sr_1_3?crid=12IIFBJPZXDBN&keywords=money+master+the+game+book+by+tony+robbins&qid=1579708022&s=books&sprefix=money+mas%2Cstripbooks%2C140&sr=1-3
https://seekingalpha.com/article/3350735-duplicating-the-all-weather-fund-using-low-cost-etfs (There are cheaper ETF options than the blogpost suggests at Schwab)
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You would likely have very low tax burden right now ($55k income, 3 kids). Given that - fully funding Roth should come before funding 401k. If course, if you max both - that would be the best.
With $55k income, you CAN NOT carry a 500k house. Nothing good will ever come out of it.
Even if you saved up the full $500k somehow, paid cash, and avoided mortgage altogether - the carrying cost of such a house (taxes/insurance/maintenance) alone will put an unreasonable amount of stress on your $55k income level.
Maybe you can find some fixer upper or such < 200k, and fix it up while living in it? Perhaps you can consider moving to a LCOL area?
Thanks for the clarification on Roth over more 401k contribution. I will start there.
Also thank you for the fixer and moving to LCOL ideas. Job is tied very much to location, and parenting plan requires staying here at least for 5 more years, but a possibility for retirement for sure. Cursory glances suggest fixers for 3bd run 350-400 (and go pending in less than a week!), but I'll keep looking.
I appreciate your thoughtfulness.
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Building on ctuser 1, some companies offer a Roth 401k option, which seems like a good option for you.
Definitely agree that 500k median home price suggestions renting is better.
Here are two related resources on investing that have worked great for us, especially during the recent volatility!
https://www.amazon.com/MONEY-Master-Game-Financial-Freedom/dp/1476757860/ref=sr_1_3?crid=12IIFBJPZXDBN&keywords=money+master+the+game+book+by+tony+robbins&qid=1579708022&s=books&sprefix=money+mas%2Cstripbooks%2C140&sr=1-3
https://seekingalpha.com/article/3350735-duplicating-the-all-weather-fund-using-low-cost-etfs (There are cheaper ETF options than the blogpost suggests at Schwab)
Thank you for the links to additional resources! I will enjoy reading through them this evening. (And will research this Roth401k you speak of)
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Just one more point I wanted to mention:
Roth is better than 401k when your tax burden is low. However, if you have a 401k match through your employer that may change the equation.
Do you have an employer match for 401k? if so how much?
e.g. if you had a 50% match up to 6% of your pay (just as a fictitious example) , then your saving order should be:
1. 401k up to match.
2. roth up to max
3. 401k up to max.
If you have access to Roth 401k like spaghetti1awk mentioned, that will also change things.
The investment order thread is a much more detailed (may sometimes be too detailed when you are starting out) resource on this topic:
https://forum.mrmoneymustache.com/investor-alley/investment-order/
If you find out more about your 401k match and if you have Roth 401k, and post here, then I'm sure the community would be happy to help figure out the best plan for you. I know I will take a stab. :-)
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90K cash (20k of which in 1.5% 1yr cd)
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I have more money in cash than I'd like right now, but I don't know where to put it (50K has come as a lump sum recently) and I have another lump sum of 68K arriving this week. I live in a moderately HCOL location (median house price 500K), and would like to own again, but the numbers suggest renting. Because I'd like to own again, I feel like I should keep cash for down payment, but I don't know!
Are you sure a $500k house is affordable on a $55k salary?
Use an online "mortgage affordability calculator" and check if you can afford to buy a house. If you can't, the house price is what it is, and your salary is what it is. Are either one likely to change any time soon?
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e.g. if you had a 50% match up to 6% of your pay (just as a fictitious example) , then your saving order should be:
1. 401k up to match.
2. roth up to max
3. 401k up to max.
@ctuser1 slam dunked that one. With the incoming slug of cash, so long as your emergency needs are met, maxing out both 401k and Roth this year is probably a good plan. Maybe you can even do that for two years, holding the necessary cash in short term time deposits in the interim.
If you have to ask [where] to invest, the answer is you need to be indexing at minimum until you can qualify other options independently. Maybe thereafter as well.
Case study *is* a lot of work. But is probably worth a few hours over a couple of weekends to pull together. Recommend you give it a go.
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Just one more point I wanted to mention:
Roth is better than 401k when your tax burden is low. However, if you have a 401k match through your employer that may change the equation.
Do you have an employer match for 401k? if so how much?
e.g. if you had a 50% match up to 6% of your pay (just as a fictitious example) , then your saving order should be:
1. 401k up to match.
2. roth up to max
3. 401k up to max.
If you have access to Roth 401k like spaghetti1awk mentioned, that will also change things.
The investment order thread is a much more detailed (may sometimes be too detailed when you are starting out) resource on this topic:
https://forum.mrmoneymustache.com/investor-alley/investment-order/
If you find out more about your 401k match and if you have Roth 401k, and post here, then I'm sure the community would be happy to help figure out the best plan for you. I know I will take a stab. :-)
Thanks for writing with some thoughts! To try to answer your questions...
Currently investing 7.5% in 401k. Employer matches 100% up to 7.5%.
No Roth 401k option.
Based on your advice and that of others in the thread, it sounds like since my tax liability is low now, I should next turn to Roth and then come back to 401k and get to max for this year (and maybe next as well, using this cash).
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90K cash (20k of which in 1.5% 1yr cd)
...
I have more money in cash than I'd like right now, but I don't know where to put it (50K has come as a lump sum recently) and I have another lump sum of 68K arriving this week. I live in a moderately HCOL location (median house price 500K), and would like to own again, but the numbers suggest renting. Because I'd like to own again, I feel like I should keep cash for down payment, but I don't know!
Are you sure a $500k house is affordable on a $55k salary?
Use an online "mortgage affordability calculator" and check if you can afford to buy a house. If you can't, the house price is what it is, and your salary is what it is. Are either one likely to change any time soon?
Thank you for pointing out that either my salary or home prices would need to be different for home ownership going forward (which I agree with!).
To respond more directly, I think I "can" afford it, but I certainly can't afford it as well as fully fund retirement contributions (which from my continued reading on this site suggests may be more important). Motivation for owning a home is stability, certainty of keeping kids in current school district, and history of making money from historic home ownership (market appreciation and DIY renovation). My salary is set to increase this next year (by 20%), (and typically continues to at a rate of 2-4% a year), and I'm hoping that I can find something substantially lower than median price, creatively, somehow.
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e.g. if you had a 50% match up to 6% of your pay (just as a fictitious example) , then your saving order should be:
1. 401k up to match.
2. roth up to max
3. 401k up to max.
@ctuser1 slam dunked that one. With the incoming slug of cash, so long as your emergency needs are met, maxing out both 401k and Roth this year is probably a good plan. Maybe you can even do that for two years, holding the necessary cash in short term time deposits in the interim.
If you have to ask [where] to invest, the answer is you need to be indexing at minimum until you can qualify other options independently. Maybe thereafter as well.
Case study *is* a lot of work. But is probably worth a few hours over a couple of weekends to pull together. Recommend you give it a go.
Thank you for the recommendation(s). I will get started on the case study in the coming month.
I'm not entirely certain what the words you mention above mean: "indexing at a minimum until you can qualify other options independently." If you have time, could you direct me to where I can read to understand that better?
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I'm not entirely certain what the words you mention above mean: "indexing at ... If you have time, could you direct me to where I can read to understand that better?
You might try the Bogleheads forum. I'm sure they have a sticky thread about the merits of index investing. Indexing is what they do there. But basically buy broadly diversified funds, etfs, etc, rather than picking individual companies to invest it. Beating the market average is actually quite challenging.
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+1 on indexing.
For your roth account, open one at one of the three places (Vanguard, Fidelity, Schwab), and invest the money in a low cost index fund. Once/if you decide which one you want to use (Vanguard/Fidelity/Schwab) - I am sure this community will be able to recommend specific Index funds you should buy.
You could also try Bogleheads forum, which is even better for investment questions.
For 401k, your choices are likely limited. So you need to find out the list and their expense ratios, post here (or bogleheads) and I am sure people will chime in with the best option.
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I'm not entirely certain what the words you mention above mean: "indexing at ... If you have time, could you direct me to where I can read to understand that better?
You might try the Bogleheads forum. I'm sure they have a sticky thread about the merits of index investing. Indexing is what they do there. But basically buy broadly diversified funds, etfs, etc, rather than picking individual companies to invest it. Beating the market average is actually quite challenging.
Oh, dear. I'd start with JL Collins first. Here's a link: https://jlcollinsnh.com/stock-series/
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Job is tied very much to location, and parenting plan requires staying here at least for 5 more years, but a possibility for retirement for sure. Cursory glances suggest fixers for 3bd run 350-400 (and go pending in less than a week!), but I'll keep looking.
The benefit of living in a HCOL location is a higher salary. Period. If you do not have a plausible plan to pull in six figures within a couple of years (e.g. about to graduate law school or learning Python linux scripting at night), you are up against a root problem of high expenses and not-high salary. If you'd like to accumulate wealth and own a home, you're swimming against a strong current in this lifestyle configuration. In fact, homes could be appreciating faster than you can save money for them!
This was not your question, but it is 100x more important than which retirement account you fund first or which index fund you buy. In this big picture context, the job and school district you like are actually holding you back.
In my city, you might earn 20% less per year, but you could also buy a house that "needs updating" in a great school district for maybe $130k or something fancy for $175k. Then, even with the lower income, you would be saving more for retirement each and every year. Or if you were really serious about saving, you'd live in a 2BR apartment with a pool for $600/month, saving over $16k per year in rent alone. But hey, the cost of ownership here is about the same as renting, so who cares? There are places like this all over the country and they all beat being unable to save in a HCOL area.
Use this tool to do the math on places like Kansas City, Indianapolis, Knoxville, Des Moines, Omaha, Mobil, Greenville, etc.
https://www.nerdwallet.com/cost-of-living-calculator (https://www.nerdwallet.com/cost-of-living-calculator)
If, for example, you currently live in Denver and moved down the road to Oklahoma City, you could replace the lifestyle of your $55k salary with only $41,640 AND easily afford a home.
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Thank you @ChpBstrd for your ideas of other places to live where a smaller income goes much further as well as the link to the COL calculator!
At this time, leaving my town is a non-negotiable for me, even if it precludes me from home ownership. I love absolutely everything about my job, and would have no desire to leave it or this location where the job is located any time soon, even if sticking with it all slows my official retirement indefinitely. Even if I didn't have any financial reason to work, I would choose this job here. The inability to do this job in any other city and the legal need to stay to keep custody of my kids are just additional reasons to stay.
I feel very fortunate to have such joy in my work, and to have it provide as well as it does for me and my kids!
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Hi all-
Just wanted to write a thank you for all the helpful advice the other day. Here is what I took away and plan to do...
Use inheritance to fully fund my 401K through work as well as a Roth IRA this year and set aside cash to do the same for next year.
Invest remaining cash in a broad index fund through Vanguard or Fidelity. (My 401K is at Fidelity in a Target Retirement fund)
In future years, fund up to the match at my employer (7.5%), then fund Roth, then come back to 401k with all that I can up to the max.
I am grateful for your willingness to offer advice!
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90K cash (20k of which in 1.5% 1yr cd)
...
I have more money in cash than I'd like right now, but I don't know where to put it (50K has come as a lump sum recently) and I have another lump sum of 68K arriving this week. I live in a moderately HCOL location (median house price 500K), and would like to own again, but the numbers suggest renting. Because I'd like to own again, I feel like I should keep cash for down payment, but I don't know!
Are you sure a $500k house is affordable on a $55k salary?
Use an online "mortgage affordability calculator" and check if you can afford to buy a house. If you can't, the house price is what it is, and your salary is what it is. Are either one likely to change any time soon?
Thank you for pointing out that either my salary or home prices would need to be different for home ownership going forward (which I agree with!).
To respond more directly, I think I "can" afford it, but I certainly can't afford it as well as fully fund retirement contributions (which from my continued reading on this site suggests may be more important). Motivation for owning a home is stability, certainty of keeping kids in current school district, and history of making money from historic home ownership (market appreciation and DIY renovation). My salary is set to increase this next year (by 20%), (and typically continues to at a rate of 2-4% a year), and I'm hoping that I can find something substantially lower than median price, creatively, somehow.
School district has a large impact on real estate prices. When I plug the next year salary you mention ($66,000) and a 20% down payment of $80,000... Zillow says a $400,000 home could be in reach - but I assumed $0/month other debts, which is probably an under estimate. Zillow may also be a useful place to browse home prices in your area, and see if you can spot anything affordable in your school district.
There's also a follow up situation: if you can't afford a home, investing the cash is better. If you can afford a home, and plan to buy next year, keeping a down payment in cash is a good idea.
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@spaghetti1awk ,
I would like to second @Dicey 's recommendation for JLCollinsNH's stock series. I think that's the best reference for people who are new to investing and managing their finances. He does a great job of focusing on simple clear explanations. Sure, if you become very knowledgeable you might quibble around the edges of his recommendations, but he'll get you a long way towards market literacy. I also like this post of his:
https://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
While I don't have much in the way of new advice, I wanted to say that it looks like you're already doing a pretty good job given that you're, "new to trying this managing money intentionally thing" as you put it. You have a good but modest income, live in a HCOL area, have 3 kids, and yet you have zero debt, substantial savings, and are looking for and taking helpful advice. Give yourself a pat on the back - you're starting from a good position and are setting your future self (and your kids) up for an even better situation in the future.
I do think a more detailed case study would be helpful in the future, but it appears you aren't in a hair-on-fire situation so it can wait a bit for you to pull together the information in the case study template.
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$90k cash + $68k coming soon. Your monthly mortgage payment on $350k of debt (assuming down payment of $150k) should be less than the $1950 a month you are paying in rent?
So not only is the cost less, you’re also building further equity in it.
Having a housing asset also gives you flexibility in future to draw a HELOC for investing purposes.
I don’t understand the hate for buying good housing in appreciating areas on this forum sometimes. It’s rather big blind spot. Perhaps the property taxes are excessive?
Tax free capital gains in many instances too could tip the scales in your favour.
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Use inheritance to fully fund my 401K through work as well as a Roth IRA this year and set aside cash to do the same for next year.
Yes, using excess cash for living expenses while directing wages to tax-advantaged accounts is often a great idea.
Invest remaining cash in a broad index fund through Vanguard or Fidelity. (My 401K is at Fidelity in a Target Retirement fund)
Check the expense ratio on the fund. If less than ~0.15% then it's probably fine. Also make sure the asset allocation within the target date fund matches what you want - the "target date" itself is somewhat irrelevant.
In future years, fund up to the match at my employer (7.5%), then fund Roth, then come back to 401k with all that I can up to the max.
Your choice of traditional or Roth should be based on the marginal tax rate you would save on traditional contributions now vs. the marginal tax rate you expect to pay when withdrawing from traditional accounts. See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for more. It's not the absolute tax amount that matters, it's the marginal tax rate. E.g., if the Earned Income Tax Credit applies, traditional could be better than Roth even if you owe no federal tax at all.
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Thank you @MDM for the additional thoughts. I'll be sure to look into the expense ratio on the target date fund, and read more about the marginal tax rate and that link regarding differences between traditional and roth ira.
@marty998 I appreciate your points about mortgage payment on a 350K loan. Appreciation and renovation along with capital gains exemption for primary home on my last two has played a large part in my ability to currently have savings and no debt. I think the concern is about all the other costs of home ownership (like repair, replacement, property tax, etc.). But I will continue to keep my eye on the market (thank you earlier suggestion someone regarding Zillow), and see if there's a cheaper entry point with my location constraints!
@FIRE 20/20 Thanks for the second recommendation of the JLCollinsNH site. I will spend some time there reading, as well as working on my numbers for a detailed case study. There's a lot of really thoughtful (though sometimes conflicting!) advice that many here are willing to share, and I'm happy to be able to take advantage of it!
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Just posting here with an update for the many of you kind enough to respond to my earlier question...
I've opened a Roth IRA (through Fidelity, where my work retirement lives), putting it all in FZROX total stock market index with no fees, and I will have contributed 6000 by year's end. I've increased my 403b contribution so that I will contribute the 19.5 max by years end. These contributions go into a different VIP voluntary investment program 403b. Here I don't have the option for a total stock market index, so I've placed 25% in the same target index I had my existing 403b in (VITLX, expense ratio at .09), and 75% in VIIIX, expense ratio at .02. I am continuing to contribute the 7.5% matched at 100% to my existing retirement.
I've got about 130K in cash now, will use up some of that finishing up the year with most all my income going into the retirement accounts, should end the year with about 123K.
I am continuing to look at the real estate market here, looking for a steal of a fixer or for something with a rental unit, but I'm being patient. For now the kids and I are making it work in our 2bd rental house, and I do enjoy not worrying about footing the cost of potential large repairs. I did fix a leak under the sink (just a worn gasket) and texted the landlord about it. He is waiving 50$ toward electricity and gas bills (will cover last month and this month due to solar), which is pretty exciting.
I played around with the spreadsheet for the case study, and will probably post near the beginning of the year when I can average costs over the last 6 mo of tracking.
I got the new position and raise at work this fall (which isn't really a surprise, I'd known about it since Feb), but it looks like I'll be making 66K/year with regular raises going forward.
Thank you all for your help and support getting me going on this journey with intention, making smarter decisions than I would have otherwise.
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Just remember
Thank you all for your help and support getting me going on this journey with intention, making smarter decisions than I would have otherwise.
This still goes back to you being smart and asking for help/opinions and then discerning the correct path forward for you. You did this and deserve the credit!