Author Topic: Understanding the steps  (Read 1687 times)

Student loan stomper

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Understanding the steps
« on: September 20, 2015, 04:35:39 PM »
Hello!
I am trying to work out our next steps after paying off student loans (should be done sometime around January) and after reading the blog and other case studies I wanted to check and see if I understand things correctly.

In the MMM plan there are there 3 basic categories to save for? Retirement when you are old, financial independence when you are young, and health expenses?

If so, here is my question, after we pay off student loans we will have about $2,500 a month to invest, neither of us have 401ks or any kind of company match, should we put this money into a combination of IRAs and open our own independent 401k/403bs or should we max out the IRAs and save separately for a house perhaps in an investment account?  I know you can use money from a Roth as a down payment but is that really advantageous?

Also, I have been maxing out my HSA for the last 5 years and have about 11k there.  Should I continue to max this out or start directing this money elsewhere?

Thanks, I am loving this forum for all the advice!!!!

nereo

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Re: Understanding the steps
« Reply #1 on: September 20, 2015, 05:17:22 PM »

In the MMM plan there are there 3 basic categories to save for? Retirement when you are old, financial independence when you are young, and health expenses?


I'm not really sure how you deduced that there are these three basic categories.  A core focus of MMM's blog and this forum is reaching financial independence (FI).  With FI you can choose to retire early (RE) or continue to work doing what you want on your own terms (sometimes jokingly referred to "Swami"s or 'satisfied-working-advanced-mustachian-indiviudal". Health expenses only marginally factor into either of these - once you have FI (or even a decent amount of savings) you can afford to have just a high-deductable health plan since you will have no problem covering a large deductable.

Quote
If so, here is my question, after we pay off student loans we will have about $2,500 a month to invest, neither of us have 401ks or any kind of company match, should we put this money into a combination of IRAs and open our own independent 401k/403bs or should we max out the IRAs and save separately for a house perhaps in an investment account?  I know you can use money from a Roth as a down payment but is that really advantageous?

All good questions, but it depends slightly on individual situations.  First, definitely fully fund your IRAs every year.  Always.  Utilize whatever tax-deferred accounts that apply to you (e.g. HSAs etc) in most cases... other than that, whether you decide to save for a down-payment for a rental property or put all your money into an low-cost index fund or _____ depends on you and your investment policy statement. 

cheers!
« Last Edit: September 21, 2015, 08:37:06 AM by nereo »

Indexer

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Re: Understanding the steps
« Reply #2 on: September 20, 2015, 07:41:59 PM »
Step 1:  What are your goals? What you want to save for changes everything. You can have multiple goals, but you will need to split savings between them.

Step 2: How far away is the goal, and how long will it last?  This determines how risky you can be and the account types you can look at.

Step 3: How much risk are you willing to take? I like the following chart for this. I always look at the worst year performance for each portfolio and imagine that happened. How would I feel? Would I be tempted to bail? Would it screw up my goal? For longer term goals you will probably be more aggressive because you have time to recover. For shorter term goals trying to get some return is good, but don't take on so much risk that you could lose it all right when you need the money.

source: https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk

Step 4: Figure out the investments/accounts you want to fill it all in.

Example 1:  1. Retirement. 2. 20 years. 3. 70% stocks/30% bonds. 4. Max out an IRA/401/etc(whatever you have available). Then if you still have money start adding to a taxable account. If you are adding to an IRA and a taxable account research tax efficient investing(aka. put stock index funds in the taxable). Investments: I would personally use Vanguard total market index funds, but do whatever fits your need.  For this you probably want to use the tax deferred instead of the Roth if you plan to retire early.

Example 2: 1. House. 2. 4 years. 3. 30% stocks/ 70% bonds. 4. Add to a taxable account(Roth is an option IF you aren't already maxing out a traditional IRA). Again I prefer low cost index funds.

Student loan stomper

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Re: Understanding the steps
« Reply #3 on: September 21, 2015, 04:55:26 PM »
Thanks I will start looking at those funds.  Our goals are to in the next 18 months to 2 years buy a house and start a family.  We would love to be RE by the time our kids are in middle school (or sooner . and have a little bit of flexibility in exploring different career tracks in the next year or so if possible.

 Both my DH's family and mine have pretty tough medical histories so I know that there is the potential for serious health issues there which is why I made that a category.  The other two just seemed to make since as I was reading what people were saying.

Thanks again for all the advice!