New to MMM

[ForeverLearning]

All I can say is Wow!? I found this site yesterday & our lives have forever changed:)
Has anyone ever felt overwhelmed at first? It's so much to learn about 401k, Roth, Mutual Funds......It's SO many financial websites trying to explain how to make the right decisions for your financial future. Sometimes I feel more confused after reading the sites.
However, I understand if we take the time to invest in learning all we can on this subject now, we are really investing in ourselves for the future.

BUT, where do I start? I read a post yesterday to start with reading the book 'The Millionaire Next Door", so I started reading the E book this morning-currently on pg. 71.

I really know nothing about where to put savings besides our savings acct. Hubby & I both grew up in homes where our parents lived check to check, in debt to their eyeballs, and absolutely no savings & we both just knew that was not the way we wanted to live in our marriage. But, we are not here to use our upbringing as an excuse, we can't change past financial decisions we have made but going forward we WILL change our future decisions.

Anyway, a little about our financial background:
We have done missionary work on & off for the last 5 years, so our income for some years were ridiculously low. One tax advisor even looked at us & said how did you all survive on that:-0 She didn't realize that we lived in the middle of no where so we really didn't feel like we were missing that much.
So here goes, our income:
2014- $17k
2015-$11k
Moved to a big city:
2016-$128k

Only issue we had in Jan. 2016 is what do we do with all this $. So, April 2016 we purchase a condo for $108k, we put down $25k & just put a extra $4600 a month to mortgage. BoA said we will be done paying off the condo in April 2017. Also, hubby's company has a 5% match on 401k so Fidelity said we should at least put that amount in his 401k. So that's what we did......

My question is once we pay off the condo what should we now do with the $4600? If hubby gets a raise we think we can raise it to $5k a month. I'm pretty sure I understand the $18k rule for 401k, so we will do that for 2017. Have you ever looked back & said I wish I would have known sooner.......We don't just don't want to say that going forward.

Hubby & I even discussed paying for me to take a class at the local community college to understand all this financial terminology. Or would it be more cost effective at this point to just pay a Financial Advisor to explain all this to us. I may be wrong but the latter just seem like the easy way out.

I'm ashamed to say that we are 41 & 39 and do not have much of a retirement fund. One good thing is that we do not have any other debt, except when the condo is paid off our HOA is $185 a month. Also, dh's employer currently pays for internet & cell phone bill, so we do not have a lot of monthly expenses. We have $22k in savings & that's about it.

So give it to us straight, do you think we can retire in the next 7-10 years? We feel we would be very comfortable living off $20k a year. We were even thinking of saving for 2.5 years & purchase another condo with cash & rent that one out & having a steady income. Rent in SouthPark Charlotte is anywhere from $1100-$1250 for a older 1bdrm condo. Is that a smart decision or just focus on putting $ in a 401k/IRAs?

Thank you all for reading. We also appreciate everyone sharing their experiences in these forums, it is truly life changing.

 



 

[Gronnie]

Check out "The Simple Path to Wealth" by JL Collins. Great little guidebook for a beginner with great, simple advice.

[Gronnie]

In regards to if you can retire in 7-10 years, that is just a function of how much you can save per year and how much your yearly expenses will be in retirement. Once you have 25x expenses (some would argue for a bit more), you can retire.

[mizzourah2006]

If you spend enough time here and on related sites the terminology will start to make sense. You could just pick one topic a week and spend a couple days researching that topic. Even if you decide to go with a financial advisor you will still want to understand what he/she is referring to so I think the education portion is important. Also I believe there are a few courses on Coursera that refer to basic finance and personal finance that you can audit for free from the comfort of your home. If your goal is knowledge then I think the internet can supply tons of it. If the goal is recognition for your knowledge than a course at your CC makes more sense.

[FireHiker]

Welcome! I'm not very prolific here, but I wanted to chime in that "Your Money or Your Life" (borrowed from the library of course, e-book was available at mine) is a great starter book too. It sounds like you're in pretty good shape and you'll get much better advice from other, more experienced folks here than I am so I won't bother much, beyond max out 401K and Roth and then get yourself a Vanguard account. :)

[Gunny]

Welcome.  You are E in good company.  Take some time to review the forums and MMM's blog  posts.  There's lots to learn, but it's not rocket science.  Budget your money, figure out your yearly expenses, cut them if necessary, and figure out a yearly spend amount.  Then work from there by building your stash in Roth IRAs and taxable accounts using Vanguard Index funds.  As soon as you hit 25 times annual expenses, join us in early retirement. 

[sol]

Depending on the mortgage rate on your condo, it probably makes more sense to put your surplus income into investments instead of into the mortgage. 

Do you owe any income taxes on that $128k of income?  Because you can contribute up to $18k per year into your husband's 401k, and that's tax free money.  That means you reduce your taxable income by $18k/year.  The invested funds then grow tax free, and if you keep reading this site you'll learn how to get them back out of your 401k tax free as well, well before typical retirement age.  The $18k/year limit expires and resets every year, so if you don't put $18k in this year you never get that tax-advantaged space back.  For people who are just starting out and trying to understand, I think one of the most important things to do is to not let that annual contribution space expire.  Use it or lose it!

After that, I'd recommend you both open a Roth IRA at Vanguard.  The contribution limit is only $5500/year per person, and you can only contribute as much as you have in earned income.  That means if you personally have no earned income, you can't contribute using your husband's paycheck.  The Roth IRA is a great deal for virtually everyone, because even though you have to make contributions with after-tax dollars (so no up front tax savings like you get with the 401k), the contributions grow tax free and then come out tax free at any age, and the earnings on your contributions come out tax free once you reach retirement age.  This is a sweet deal, and like the 401k it is a per calendar year benefit that you lose if you don't contribute in any given year.  Don't let it slip away.

After you have those two things taken care of, you can start thinking about what sorts of investments you want to hold in your 401k and in your Roth.  For now, the important thing is to just start packing them full regardless of what you're actually buying in there.

[ForeverLearning]

Thank you everyone! Wow you all are giving me just what I need to understand in simple terms. It just seems so much clearer the way you all are explaining it. Ok, so I have bookmarked the 2 books & Coursera website.

Sol,
Yes we will owe income tax on the $128k. So I signed into Fidelity:
DATA AS OF 11/02/2016
Current Balance $11,633.18
Vested Balance  $11,633.18

Thank you for explaining not letting the annual contribution space expire, so by December 31 we will make sure we even it out to the $18k limit. We should also be able to swing the $5500 for my husband's earned income before Dec. 31. I did not realize we couldn't have one for me since I do not receive earned income. I really appreciate you explaining this.

Also, we have a 5/1 ARM at 3.0% with our mortgage.

I hope you all don't mind me asking: Do most of you do your own taxes on a website like Turbotax or a online tax vendor & just plug in your numbers? Or when dealing with Uncle Sam, esp. with 401k & Roths, do you prefer to go to places like H&R block since they may be more familiar with pre/post tax contribution limits?

Thank you again everyone!   

[sol]

we will make sure we even it out to the $18k limit.

Keep in mind that's $18k of money that he contributes, not counting the 5% match from his employer.  Especially if the market goes up during the year, it's very possible to end up with a final account balance well above $18k.

Also, we have a 5/1 ARM at 3.0% with our mortgage.

With a 3% rate locked in for 5 years, I definitely wouldn't pay off your mortgage in less than 5 years.  If the rate goes up after the 5 year rate lock expires, you can always pay it off in full at that point with money from taxable savings.

And speaking of taxable savings, the general recommendation for most people who are already contributing the maximum amount to their 401ks and Roth IRAs is to put any excess funds into a taxable brokerage account (usually at Vanguard, because the fees are so low) in which you can hold mutual funds.  This confers no obvious tax benefit (but some non-obvious ones), but it does allow your money to benefit from being invested while still being 100% accessible to you at any time.  You can liquidate your brokerage account on 48 hours notice at any point, so if you suddenly need money for a new car or a house repair or something, it is available to you.  The down side is that sometimes it will lose value when the market crashes, so there may temporarily be less money in it than you have contributed to it.

I hope you all don't mind me asking: Do most of you do your own taxes on a website like Turbotax

We do our own taxes, using TaxAct.  It's a free service for filing federal returns, but I think they charge a fee to file your state return if you have one.  We live in a state with no income tax, so we don't worry about it. 

If your tax return is a 1040EZ, definitely don't hire a professional.  Your average middle school kid can fill out that form.  The other 1040 forms aren't that hard, you just have to wait for each of your investment accounts to send you a dividend statement before you file each year, because the dividends count as additional income that has to be reported.  The 401k reporting is super simple, it's a single number to fill in right off of your W-2.  You don't have to report the Roth at all, because it is funded with after-tax money.

The general consensus around here seems to be that anyone who has been reading the forums for more than a few months probably knows more about tax preparation than the average seasonal employee at H&R Block.  You can always ask us for help if you have any questions.  There will be a bunch of active forum threads about taxes starting in about February.

[bacchi]

Even if one spouse doesn't make any earned income, the working spouse can contribute to the non-working spouse's spousal IRA.

https://investor.vanguard.com/ira/spousal-ira

Spousal IRAs

If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the formula in IRS Publication 590-A.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

The end result is that you can both contribute $5500 to a Roth IRA.

[sol]

Even if one spouse doesn't make any earned income, the working spouse can contribute to the non-working spouse's spousal IRA.

Sweet.  We both work, so I didn't know this was an option. 

See, there are benefits to the hive mind.  None of us can personally know everything, but we get pretty close when we all work together.

[ForeverLearning]

Ok great! Thank you both. You all really got me thinking.....

Ok Sol, so am I understanding this correctly? This is our mortgage payment:

Principal:$148.27
Interest: $216.00
Escrow (taxes and insurance):  $132.76
Total amount due: $497.03

It burns me up that the bank is getting more in interest a month than we are paying on the principal. So that's why we wanted to pay it off in a year when we saw this breakdown.
The balance is $25,813.34.
Based on the explanation you provided, it makes since at this point to put that extra $ we were putting to the principal to the 401k & then the Roths. I will run the numbers tomorrow & see if we can pull off meeting the 18k limit in the 401k & then the Roths by Dec. 31. Even if we have to pull from the Money Market acct, it's ok since we are making less than 1% in interest with that acct. We were trying to stick with the Money Market because of the free checks but what sense does that make if we could have been putting that $ in a retirement fund the whole time.

TAXES:
Yes, I will definitely keep my eyes open in February for further information. I will also look into TaxAct.

Sol & Bacchi,
It seems most in the forums go with Vanguard, are their fees pretty reasonable? I was thinking of checking with Fidelity, since that's who dh's employee uses, to see what fees they would charge us to get Roths through them. Right now, they are charging us $3.75 a month for a recording fee for the 401k. Only thing that concerns me is if dh in the future ever leaves this company, would Fidelity charge us some crazy monthly fee. Maybe it's wiser to keep Roths separate from work....
I'm even thinking that we have been with our bank for 19 years & they are constantly offering us to talk to a Merrill Lynch Advisor and pay them $6.95 a month fee to trade.

I know it's getting late for everyone...Thank you again & have a good night.

[Lucky Girl]

Welcome to the forum!

Sol is giving you great advice, so I'll just second everything he said (plus invest in the spousal IRA, of course!).

On Vanguard vs Fidelity--it may be good for you to do the research, but I have accounts in both and for me Vanguard is much better for several reasons.  First, they do NOT charge the account fee that Fidelity does, so long as you sign up for e-delivery of information instead of mail.  They get all their expenses covered through the expense ratios, and once you have $10k invested in the fund your expense ratios are the lowest in the business (I pay .05 expense ratio on my index funds).  The only reason I still have a Fidelity account is because it is an old 401(k) from a former employer and I haven't rolled it over to Vanguard yet.

Also, yes, I do our taxes using Turbo Tax.  Ours have been quite complicated in some years, but Turbo tax has all the info you need.  I haven't tried TaxAct.

[terran]

On Vanguard vs Fidelity--it may be good for you to do the research, but I have accounts in both and for me Vanguard is much better for several reasons.  First, they do NOT charge the account fee that Fidelity does, so long as you sign up for e-delivery of information instead of mail.

What account fees are you paying at fidelity? I have an IRA, Solo 401k and a brokerage account with them and haven't paid any fees. My wife's IRA is with vanguard. That said, if it weren't for the advantages of the solo 401k over the vanguard option I would probably just have vanguard, and I would recommend vanguard for most people because it's hard to make a wrong choice with them while Fidelity offers some options that aren't great (among others that are very competitive with vanguard).

[J_Stache]

Ok Sol, so am I understanding this correctly? This is our mortgage payment:

Principal:$148.27
Interest: $216.00
Escrow (taxes and insurance):  $132.76
Total amount due: $497.03

It burns me up that the bank is getting more in interest a month than we are paying on the principal. So that's why we wanted to pay it off in a year when we saw this breakdown.
The balance is $25,813.34.

That doesn't sound right.  The interest payment should reflect the Outstanding Balance ($25,813.34) times the interest rate per period (3%/12)=.0025.  Interest portion should be $64.53 next month (25813.34*.0025) and the remaining payment (excluding escrow) will go to principal. 

What you state above reflects the first months payment of the loan and doesn't account for the extra $4600 payments you were making.  If you only make the ~$364.27 monthly payment that is required of you, you'll pay off the mortgage in 78 months. An extra $200 per month brings that to 48 months.

Since you said you wanted to better understand finance (and were considering taking a class), your homework this week is read up on Loan Amortization.  If you have Excel (or Google Sheets) you can play around with the formulas PMT, FV, and NPER, to be able to calculate on your own.

[Spitfire]

Lot's of good advice in here. To address your question about retiring in 7-10 years, based on those numbers you absolutely can. Living off 20k a year with the 4% rule means you need 500k. If you have $5k extra a month for investing, that's 60k a year to invest. Even with no growth at all it would take under 9 years to get there. Good luck on your journey!

[katstache92]

Welcome to the forums!

When I first started here and wasn't sure about a lot of the terms I focused on reading the backlog of MMM's posts on the website and reading forum threads that seemed interesting.  You pick up a lot along the way.  There doesn't need to be a mad rush to learn and understand everything right away, just make sure you start saving appropriately now and figure out the finer details later.

Also, yes, I do our taxes using Turbo Tax.  Ours have been quite complicated in some years, but Turbo tax has all the info you need.  I haven't tried TaxAct.

I've used both Turbo Tax and Tax Act.  I started with Turbo Tax for a few years and then switched to Tax Act because it was cheaper.  If you haven't done your own taxes before, I would probably recommend Turbo Tax, it guides you through things a little more elegantly than Tax Act does.  If I had tried to do my taxes on my own for the first time with Tax Act, I might have balked.  I'm sure other people think the opposite.

There might be free versions online you can try first to see what you like best.  I did that once with both HR Block and Tax Act to compare when I wanted to switch from Turbo Tax.  Ah, the reason I switched from Turbo Tax is because I think they got rid of the investments portion on the personal option.  I can't really remember anymore and they might have added it back in after the uproar, it seems to change from year to year.  Geez, I thought I was giving a simple answer and it got really complicated, sorry about that.

The balance is $25,813.34.

That doesn't sound right.

Maybe the balance is around $55k?  Seems to be about right with the down payment plus the $4,600 per month.  Might just have been a typo?

[J_Stache]

Maybe the balance is around $55k?  Seems to be about right with the down payment plus the $4,600 per month.  Might just have been a typo?

Yup.  Missed the purchase date, but that makes more sense knowing an April 2016 purchase date.  At this point the interest and principal payments have basically swapped.  ~220 to principal and ~146 toward interest.  At this point $700 extra per month should pay the loan off a few months before the 5/1 adjusts.

[ForeverLearning]

Good morning Everyone. Thank you for the warm welcome!

MORTGAGE:
I did some digging & I must apologize that I failed to mention last night that in August we took $25k from our savings & put it towards the principal. I have attached a screen shot of what I'm seeing.
Looking back, that probably was not the brightest decision. We could have at least taken $11k & open 2 Roths with Vanguard & then put the rest to the principal. I will definitely eat that bad decision.
Going forward brighter decisions. Please let me know if you cannot see the attachment.

Also, J_stache you are right, looking more closely at our statements, more of our payments are now  going to principal than interest. I admit I must get more knowledgeable with the loan amortization process. I think deep in the back of my mind I was thinking the quicker we pay this off the less I have to try to figure it out.

TAXES:
Great Advice Katstache92. I will research both Turbo Tax & Tax Act, at least I have a few months to figure it out.

RETIREMENT:
Spitfire, that is SO exciting. Thank you for the early retirement explanation. I am trying to make sure I grasp the basics before taking all this to dh. I know this may sound strange but I am actually enjoying all of this, it's exciting to take on a new project.

If anyone else have any advice or suggestions please feel free to let me know:)

[sol]

I am trying to make sure I grasp the basics before taking all this to dh.

I think that the easiest way to explain it to a new person is to skip all discussion of income and investments and just break down the savings vs spending:

If you could save half of your income for retirement, then each year that you work provides one year of retirement savings, because you've spent half and saved an equivalent half.  If you could save 90% for retirement, then each year that you work provides 9 years of retirement savings, because you've saved nine times what you spend.  This is the power of high savings rates.

In reality it's even better than that, because you're investing your savings in income generating assets, so they compound over time.  Historically, the stock market has doubled in value roughly every eight years.

I remember being where you are.  There is a certain sense of excitement in realizing you can actually retire in just a few short years, if you can just control your expenses.  The trap that most people fall into is increasing spending with income.  If you only save 10% for retirement, it takes you 9 years to save up one year of expenses for retirement, and you basically never get there.

Many of us here are on the short path to a financially viable retirement, and then after that is achieved we evaluate whether or not it makes sense to continue working longer in order to enable additional spending, for example on charitable giving.  But first you have to save up roughly 25x your annual expenses, in order to even have the ability to entertain such decisions.

[ForeverLearning]

Thank you Sol!

Have you ever thought about teaching? You have a really nice & simplified way of explaining all this. I really appreciate it. Everyone on here does a great job.

Going forward:
Nov/Dec '16
1. Max out 401k
2. Open 2 Vanguard Roths

Jan '17
1. Figure out what we can live on.
2. Figure out the % that we can save for 2017.

Feb. '17
1. Personally do our taxes for 2016.

[aceyou]

Welcome.  You are in for a few exciting years, it's a lot of fun to figure all this out and watch life improve.  Here are some great websites to speed up your learning:

Jim Collins:  http://jlcollinsnh.com/stock-series/
   Why will you go there - He has a stock series that step by step explains investing in easily understandable terms.  It will take a few days to go through the series, and when you do, you will feel like something very complicated has suddenly become incredibly simple.  I linked you right to his stock series.  (He also has a book The Simple Path To Wealth, that you will want to buy, because it's that awesome)

The Millionaire Educator: http://www.millionaireeducator.com/
    Why will you go there - Ed Mills is a teacher who has steadily amassed a million dollars by contributing to 403B's, 457's, and Roth IRA's.  He does this to basically never pay income taxes and it's completely legal.  He is amazingly efficient at making sure every possible dollar gets funneled to his investment buckets.  Although he has geared it to teachers, his information completely applies to anyone who has access to a Roth IRA or 401K. 

So, Jim Collins will teach you what to invest in, and Ed Mills will teach you how to use Roth IRA's and 401K's as buckets to do it in a very efficient way. 

Websites of people who have already FIRED, just so you can see the variations people have for how they chose to spend their time after FIRE: 
Go Curry Cracker (travel oriented)
Frugalwoods (homesteading oriented)
Afford Anything (real estate oriented)

Podcasts that will help build your financial IQ for times you are driving, making dinner, or out and about:
Radical Personal Finance (once you go over the basics with the other websites, this will get into the cool nitty gritty of things)
Mad Fientist (lots of interviews with people who have FIRE'd"
Freakonomics (not really related to FIRE, I just really like it)

Books worth reading:
The Simple Path To Wealth
The Millionaire Next Door
Your Money or Your Life

[ForeverLearning]

Thank you Aceyou. I really appreciate you taking the time to post those links. I'm bookmarking the links to my list.

I absolutely LOVED how you correlated the relationship between Jim Collins & Ed Mills in regard to the investment advice they offer.

I'm sure many of you have heard of the saying 'Pay It Forward'. Each time I read the sound & logical advice provided here, I feel you all are paying it forward. Many of you know a wealth of knowledge on this subject and you choose to share that knowledge with others.
No one is forced to turn on their computer, no one is forced to come on this website, & no one is forced to share their knowledge but each time you share even a small piece of advice you are changing lives for that person going forward.

It's amazing it's not so much about the $ but it's the peace of mind we have each day & for that you cannot put a price on that. My hope is in the future that I too can help someone & pay it forward.

I know I just said a lot but I think you get what I'm trying to say, I hope:)

[sol]

It seems most in the forums go with Vanguard, are their fees pretty reasonable? I was thinking of checking with Fidelity

Once you start accumulating assets, you can do a little tweaking around the edges by adjusting your asset allocation (how much of each investment type you own, like stocks vs bonds) and your expense ratio (how much of your money the account managers siphon off from your assets).

A mutual fund is a collection of individual investments, usually targeted to represent an asset class.   VTSMX, for example, is a Vanguard mutual fund designed to mimic the entire US stock market.  Different mutual funds have different expense ratios, regardless of what asset class they represent.  Fidelity's equivalent total stock market fund is FSTMX and it has an expense ratio of .09%, which means for every ten thousand dollars you have invested in it, Fidelity will take $9 from you every year.  Comparing expense ratios between the funds you might buy is one way to minimize the expenses of investing.

But expense ratio isn't everything.  Some funds have high minimum purchase amounts, like you need $5k on day one in order to buy into the fund.  Some of them have high contribution minimums, like you can only add money in $1000 increments.  Some of them charge additional fees upon redemption.  Some of them charge a fixed annual fee for sending you a prospectus, on top of the expense ratio.  In general, lots of people here like Vanguard because their overall fee structure is lower across most of their products, though there are certainly specific options where Fidelity is cheaper.  In the case of VTSMX vs FSTMX, Vanguard costs an extra .07%/year of invested assets, but Fidelity charges a 0.5% redemption fee upon sale.

The other reason people here like Vanguard is that it's an investor-owned company.  It does not need to make a profit for its money managers, so that money is turned into lower expenses.  Every other investment firm that I've ever heard of is first and foremost a business that wants to get rich by making you poor, and Vanguard theoretically bucks that trend.

[aceyou]

Thank you Aceyou. I really appreciate you taking the time to post those links. I'm bookmarking the links to my list.

I absolutely LOVED how you correlated the relationship between Jim Collins & Ed Mills in regard to the investment advice they offer.

I'm sure many of you have heard of the saying 'Pay It Forward'. Each time I read the sound & logical advice provided here, I feel you all are paying it forward. Many of you know a wealth of knowledge on this subject and you choose to share that knowledge with others.
No one is forced to turn on their computer, no one is forced to come on this website, & no one is forced to share their knowledge but each time you share even a small piece of advice you are changing lives for that person going forward.

It's amazing it's not so much about the $ but it's the peace of mind we have each day & for that you cannot put a price on that. My hope is in the future that I too can help someone & pay it forward.

I know I just said a lot but I think you get what I'm trying to say, I hope:)

No problem.  It's a great community.

[ForeverLearning]

Aceyou, it definitely is a great community!

Sol, once again you did a great job explaining the difference between Vanguard-VTSMX & Fidelity-FSTMX. It's quite interesting that I spoke with a rep. from Fidelity yesterday afternoon about maxing out our 401k to the $18k & then open 2 index funds with $11k, and I explicitly asked her three times 'will our recording fees increase?' and each time she said 'absolutely no increase in fees.' I was ecstatic, but after reading your comment from yesterday, I realized she wasn't forthcoming with the redemption fee. I guess they have to make there $ somehow. But, it was really cute, at the end of the call she stated 'it's really refreshing to speak to someone that understands how 401k/index funds works.'  So I read MMM forums for 3 days & now I'm a Pro :-0
I don't want anyone to think I'm knocking Fidelity, they actually have great customer service, but for those of us new to this we really need to be able to make a informed decision.

[sol]

So I read MMM forums for 3 days & now I'm a Pro :-0

Imagine how much you'll know in another year.

[robartsd]

Every other investment firm that I've ever heard of is first and foremost a business that wants to get rich by making you poor, and Vanguard theoretically bucks that trend.

While there may in fact be some investing firms that really are trying to get wealthy at the expense of their clients; the majority of major firms are looking to turn a healthy profit while helping their clients build wealth.

[JumpInTheFIRE]

Aceyou, it definitely is a great community!

Sol, once again you did a great job explaining the difference between Vanguard-VTSMX & Fidelity-FSTMX. It's quite interesting that I spoke with a rep. from Fidelity yesterday afternoon about maxing out our 401k to the $18k & then open 2 index funds with $11k, and I explicitly asked her three times 'will our recording fees increase?' and each time she said 'absolutely no increase in fees.' I was ecstatic, but after reading your comment from yesterday, I realized she wasn't forthcoming with the redemption fee. I guess they have to make there $ somehow. But, it was really cute, at the end of the call she stated 'it's really refreshing to speak to someone that understands how 401k/index funds works.'  So I read MMM forums for 3 days & now I'm a Pro :-0
I don't want anyone to think I'm knocking Fidelity, they actually have great customer service, but for those of us new to this we really need to be able to make a informed decision.

Just to be clear, the redemption fee on FSTMX only happens if you sell the shares within 90 days of buying them.  It's to discourage fund turnover, because turnover costs money and they want to keep the expense ratio down.  Vanguard does something similar but IIRC they lock you out of buying shares if you recently sold shares.  This generally isn't a problem for buy and hold investors.  As far as expense ratio goes, if you are with Vanguard, Fidelity or Schwab and you are investing in index funds you will keep costs low.  Invest in the whole market and you will get better returns that many professional money managers.

[ForeverLearning]

Hi JumpInTheFire,

I really appreciate you expounding on the redemption fee. You did a excellent job explaining that as well:)

Every time I sign in, I find another gem.

[aceyou]

Ok so I'm trying to wrap my head around putting $ in investments vs. paying off our mortgage. The advice makes perfect sense to not pay off the mortgage with 3% vs. putting that same $ in 401k/Index Funds. Understand for the last 8 months we have been gung ho for paying off our mortgage & now I'm trying to retrain my thinking, so I had to put it down on paper this am:
(Please tell me if I'm following the logic behind it.)

Option #1
Mortgage paid off in 6 months
(Interest we are paying: $70 x 6 months= $420)
*Advantage: Deed in hand
*Disadvantage: Not able to deduct the IRS amounts: $18k-401k & $5500(2)-Index Funds from Taxable Income.

Hypothetically:
$129,500- Taxable Income
-$12,600- Standard Deeduction
-$ 6,000- $ we put in 401k for 2016/this amount does not include employee match
_________
$110,900   TAXABLE INCOME

$75,300 x 15%= $11,295
$35,600 x 25%= $8,900
Total taxes to Uncle Sam: $20,195 (That's ALOT of $$$$)
(I thought the whole taxable income was taxed at 25% but the IRS site does a nice job breaking it down.)


Option #2
Max 401k to $18k
Roth IRA- $11k

$129,500- Taxable Income
-$12,600- Standard Deduction
-$18,000- 401k
-$11,000- Roth IRA
___________
87,900   TAXABLE INCOME

$75,300 x 15%= $11,295
$12,600 x 25%= $$3,150

Total taxes to Uncle Sam: $14,445 (That's still a lot of $ but not $20,195)

2016 Taxes: Option 1: $20,195         -        Option 2:  $14,445=  $5,750

So am I understanding this correctly that if we max 401k/roths vs. paying off mortgage we are really saving $5,750? What am I missing? We are not talking about a few hundreds we are talking about thousands saved by doing option 2. I feel like I'm missing something because why in the world would someone pay off their mortgage & miss out on all this $$$ if their % is low.

I think I could figure out some more deductions but I just needed to see it on paper to wrap my mind around this logic.  Please tell me if I'm doing something wrong.

Thank you as always.

The forum is split on whether to pay off mortgage or invest more.  So don't listen to me or anyone else, do what feels right for you:)  On paper, investing into the 401K is the better move pretty much every time.  But there's an undeniable psychological feeling of awesomeness to have zero debt in the world.  I have personally chosen to do a middle option.  I refinanced 18 months ago to a 15 year note at 3 1/8%.  That way most of my payment goes to principal, but I can still invest a lot right now. 

I'm not going to spend too much time with the math, but yeah, the tax breaks from putting things into the 401k's are huge.  Plus, there's never a better time to start filling up your investment buckets than NOW because of the value of compounding interest.  Sure, you could invest more heavily once the house is all paid off, but you'd lose some of the time value of that money. 

One thing I'd suggest you consider is creating a priority list for all extra money above your basic living expenses.  That way as you earn more money, get a windfall, whatever, it's already predetermined where it'll go...takes some the emotion out of it.  Here's mine below. 

my yearly priority list for money beyond basic living expenses:
1.  Roth IRAs 11k total
2.  Both 403b's 36k...so 47k/year total
3.  Both 457's 36k...so 83k/year total
4.  Pay extra on mortgage till gone
5.  Solar roof/powerwall/electric vehicle to get energy neutral
6.  Buy a boat maybe?...we live 2 miles from Lake Michigan:)

This year I made it through step 2 (and paid of 30k of other debt that needed to die).  With that debt gone, I believe I can almost make it to the end of step 3 next year.  Within 3-4 years I want to be making extra payments on the mortgage for step 4.  Within 8 or 9 years I want to be badass enough to make it to steps 5&6...that's my carrot. 

The point is, making this list has helped put me at peace about not paying extra on the mortgage right away...I WILL do it, but not until my investments exceed 83k per year. 

[ForeverLearning]

Thank you again Aceyou! Your post has a more balanced view than how I was thinking in my previous post. I really appreciate you sharing your priority list & why such a list is SO important.

Congratulations on accomplishing step #2 & paying off over $30k this year. That is huge!

I've been pondering over my post from yesterday & do realize that every individual must do what's best for their circumstances. I even edited my post because I do understand that it's a individual choice & going forward I am accountable for my own financial decisions:-)

As I mentioned in my earlier post, I am really enjoying this site & do appreciate learning from everyone.

[FI@2022Jem]

Hello,
I am not expert and hopefully someone else will chime in but I've noticed an error in your calculations.  Roth IRA's are a great savings vehicle but DO NOT reduce your taxable income.  You put after tax money into Roth's.  In order to reduce your taxable income by $11,000 you would need to open traditional IRA's.  For our family we use traditional IRA's to reduce our tax burden while we are in a higher income bracket and the plan is to switch back to Roth's when we are working less (I plan to reduce hours to part-time hopefully in the next couple years) and therefore have less of a need for the upfront tax savings.
Good luck!

[ForeverLearning]

Hi FI@2022Jem.
You are absolutely correct! I've been reading the Tax Thread for MMM & I even googled your reply to make sure I had the correct understanding. You are doing great for being a newbie. I was saying Roths when it should have been traditional IRA's.

I'm from the South & we have a term we like to say when you or someone else messes up, we say 'that's jacked up.' Well, I'm deleting that whole post with that question because I really 'jacked up that whole post.' I messed up on the names of the IRAs, did not include exemptions, the list goes on & on.

Anyway, I'm realizing as a newbie, that most of my questions have already been someone else's question so that means it's already been answered somewhere in this Forum.

Soooooo, right now I am just going under a rock & just READ:)


Hi FIR_at_45.
Thank you as well. You are absolutely correct about 'reading every MMM post & some of them a FEW times.' I'm going to add the stock series & podcasts to my list that you recommended.

I wish you both well on our path of Financial Freedom & Understanding.