General Advice, Here's My Story

[takeback]

I've been reading and posting for a few weeks here now, thanks for the advice so far.
I am not sure if this is the right thread for this kind of question but here goes anyway...looking for some general pointers as to where to direct my personal finance goals for the coming year.

I'm in my mid 30s, married with two kids ages 4 and 5, with a stable medical career.

-We've been in our home for 5 yrs now, one mortgage as well as a family loan that I am paying back, now in yr 5 of 10.
~500/mo payment car payment
-consolidated student loans

-Emergency fund which would cover 2-3 months

-Retirement: 403b which I fund to about 6%, and separate percentage based contribution from my employer in a different account

-529 plan for each kid for about 3 yrs now, set to purchase 2 yrs of tuition

I recently opened a high yield online savings acct and will probably start maintaining the bulk of my savings there instead of the measly return I get from the savings at my checking institution

I never carry consumer credit debt

MY PLANS

I just got a 15-20% raise this yr which should get me to ~175-180k this yr.
-Increase total retirement savings to 10%, splitting contributions between the 403 and a Roth
-Increase 529 plan to get 4 yrs paid for each child
-buff up emergency fund a bit
-keep the minimum necessary balance in my checking-linked savings acct and put the rest in the higher yield online acct
-of the big liabilities- home w/family loan, student loans and car, the family loan is the highest rate at 5% and I plan to pay that down hopefully in 3 yrs instead of 5.
-which brings me to the final question- is there any role for non-IRA stock/MF investing at this point or is that too aggressive at this point? I have a LOT to learn about this aspect of investing but also want to take advantage of the additional income this year.

I really appreciate any advice here about what the best places to allocate this extra money this yr. I see myself as conservative on risk but I think that stems from not having experience with stock investing; as my knowledge grew, surely so would my confidence in how to minimize risk appropriately.

Thanks again for any input.

[disneysteve]

What is the balance on the car loan and what is the car's current value?
What is the balance on the student loans?
What is the balance on the mortgage and personal loan?

The first thing that jumps out at me is that you seem to be putting college savings ahead of retirement savings and debt repayment which I think is backwards. You have a substantial income but are only putting 6% toward retirement and plan to increase that but only to 10%. I'd suggest upping it to 15% even if that means cutting back on college savings. Retirement always comes first. You also need to be aggressively attacking the debt, though. With your income, that shouldn't be a problem.

[snafu]

If your highest debt rate is 5%, I suggest taking 1/2 of your increase to begin an automatic, dollar cost averaging [DCA] investment plan with a low cost Index Mutual Fund via a provider like Vanguard [often mentioned here]. Yes, the daily net asset value will move up and down but over 5 years you will have learned about investments and amassed a significant sum if you also automatically re-invested dividends and a portion of income increases. Once you are comfortable and understand the machinations of the stock and bond markets, you can easily make changes and build a portfolio.

[takeback]

What is the balance on the car loan and what is the car's current value? Just purchased in October. 30k
What is the balance on the student loans? 43k
What is the balance on the mortgage and personal loan? 300k

The first thing that jumps out at me is that you seem to be putting college savings ahead of retirement savings and debt repayment which I think is backwards. You have a substantial income but are only putting 6% toward retirement and plan to increase that but only to 10%. I'd suggest upping it to 15% even if that means cutting back on college savings. Retirement always comes first. You also need to be aggressively attacking the debt, though. With your income, that shouldn't be a problem.

So the recommendation for priority is retirement > debt >>> college savings?

Also I think you guys mentioned on the other thread to fully fund the Roth to 5k and put the remainder in my 403b?

Also at my salary wouldn't 15% bring me over the total annual allowable of $16,500?
AND is that total for 403 PLUS Roth or is it 16,500 for the 403 and 5000 for the roth?

(tons of questions)

[disneysteve]

So the recommendation for priority is retirement > debt >>> college savings?

Also I think you guys mentioned on the other thread to fully fund the Roth to 5k and put the remainder in my 403b?

I would definitely put retirement and debt before college savings though we could debate the order of those two items. Some go with repaying all debt first. Others take a more balanced approach and do some of each.

In hindsight (which is never particularly useful except as a lesson to others), borrowing 30K for a car when you were 43K in debt with student loans isn't something I would have recommended, also keeping in mind that you are under-saving for retirement, too. So overall, I think priorities need some adjusting. I doubt I would ever recommend spending 30K on a car period. For future reference, the rule of thumb is to not borrow more than you can repay with a 3-year loan and a payment no more than 10% of your monthly take-home. If you need to draw it out for 5 years, you are spending too much.

On the good side, your house debt of 300K is very reasonable given your income so good going there. Even today, many people continue to spend way too much on their homes so it is good that you didn't.

[takeback]

I HEAR you, trust me. The car was very much a "peace of mind" thing than a financial calculation. We needed to replace a car and with a young family we went for a safe and reliable purchase (toyota sienna). I have never owned a new car in my life until now. I've read Dave Ramsey's book, I had all the correct arguments in my head against buying a new car....and did it anyway. I made the decision after the recent raise went through, partially wanted to feel safe that my wife and kids were in a safe new car with no maintenance worries for the next yrs. Gut purchase. I know!

Also following up on my own question earlier about the max for 403 + Roth... I can contribute 10k to the roth as a married couple filing jointly so my total retirement contributions can total 26,500, correct?

[disneysteve]

reliable purchase

Lots of people fall victim to this line of thinking. Guess what. A 2 or 3 year-old Sienna would have been just as safe and reliable. Heck, our 2000 Sienna is safe and reliable (we bought it used in September 2002). Lesson learned hopefully. Enjoy the new car and drive it for 10+ years. Once the 5-year loan is repaid, start saving to buy the next one for cash or with only a small, short loan.

Also following up on my own question earlier about the max for 403 + Roth... I can contribute 10k to the roth as a married couple filing jointly so my total retirement contributions can total 26,500, correct?

Yes, you can fund a 403b and a Roth for each of you if your income allows. I seem to think the Roth income limit starts phasing out somewhere around 170K so you might run into a problem there. Look online for the 2011 contribution rules.

[bjl584]

Since you already bought the car, just make sure you keep it. Someone told me once that if you must finance a car, then you should drive it for twice as long as it takes you to pay it off. So if you finance for 6 years, then you need to drive it for a total of 12 years for the car to pay for itself. Decent rule of thumb to follow. This obviously doesn't work if you paid cash for your car or if you pay it off in a very short period of time. But for the average consumer with a 5 to 6 year car loan, it works fairly well.

[snafu]

Out of curiosity, if you planned to buy a reliable 1-2 y/o vehicle, how did you end up at the new car section of the dealership? Did you buy that particular car because the salesman convinced you a new car was safer/required no maintenance. Did you know the insurance differential between new and 2 y/o in your region?

When making a major purchase, it's important to remember the salesman doesn't care so much about your family and portfolio but is toting his commission and bonus. I don't mean to sound snippy but to point out that you may wish to enhance your sales resistance for future large purchases by preparing a criteria of requirements. Know what you want, why you want it[safe,reliable,maintenance free], and what you are willing to pay for it first.

[disneysteve]

you may wish to enhance your sales resistance for future large purchases by preparing a criteria of requirements. Know what you want, why you want it[safe,reliable,maintenance free], and what you are willing to pay for it first.

Another good thing to do today is shop online. We essentially bought our 2000 Sienna online. I searched the used car inventory of every Toyota dealer within 25 miles of our home. I found a van that looked promising and called the dealer to confirm that they still had it. We drove right over and checked it out, took a test drive and drove it home that day. Not only that, but we saved $2,000 in the process because the price advertised online was $2,000 less than the tag price on the lot. After we negotiated everything, I said, "How come it was $2,000 cheaper online?" and they knocked 2K off the deal.

[jpg7n16]

So the recommendation for priority is retirement > debt >>> college savings?

I'm assuming 'family loan' means you borrowed from family, is that correct? Or are you renaming a 2nd mortgage as a 'family loan'?

For your situation here's how I would prioritize:

1) Establish 6mo EF (married w/ kids)
2) Pay off family debt (not because of interest rate, but because it's family)
3) Retirement (since you're a high income earner, I'd start with the tax deductible 403b)
4) College savings
5) Low interest debt elimination (< 5%)

which brings me to the final question- is there any role for non-IRA stock/MF investing at this point or is that too aggressive at this point? I have a LOT to learn about this aspect of investing but also want to take advantage of the additional income this year.

It's not a matter of being too aggressive. It's a matter of 'why save in a taxable account when you could save in a tax free or tax deferred one instead?'


Once you've maxed your 403b, and you've maxed either your traditional or Roth (whichever you decide) - you're out of tax 'sheltered' places to put your money. So if you still need to save beyond that to get to 15-20%, that is when you begin using mutual funds outside of the IRA's. Not because it's aggressive, just because you've run out of room in the IRA Always a good problem to have!

Or if a 6 month EF isn't good enough to help you feel secure. Then the 1st 6 months should be in cash, and beyond that, you should move into accessible funds held in a mutual fund of some sort. These are funds you want to be accessible, so putting them in an IRA isn't what you want to do.

[takeback]

Out of curiosity, if you planned to buy a reliable 1-2 y/o vehicle, how did you end up at the new car section of the dealership? Did you buy that particular car because the salesman convinced you a new car was safer/required no maintenance. Did you know the insurance differential between new and 2 y/o in your region?

When making a major purchase, it's important to remember the salesman doesn't care so much about your family and portfolio but is toting his commission and bonus. I don't mean to sound snippy but to point out that you may wish to enhance your sales resistance for future large purchases by preparing a criteria of requirements. Know what you want, why you want it[safe,reliable,maintenance free], and what you are willing to pay for it first.

I had planned to buy this van and one of our cars died, with prohibitive repair costs relative to its value. The only preowned vehicles in a 50 mi radius were rental vehicles with an average of 20-30k mi/yr on them- a degree of wear and tear that I was not going to assume.

I shooped three dealerships and got the price down by 3 grand, and then knocked it down further by trading in my (nearly dead) car. So there was some "sales resistance". And when we knew the regional vehicle market and what we wanted, we got a very good deal for the trim level of van that we got.

The only criticism I make of the purchase was buying new, which I have never done in 20 yrs of buying cars. With my current income jump and the desire to get my wife/kids a new car I was able to make that decision knowing this is a vehicle which has a long lifespan ahead of it and that we will drive for some time beyond its typical resale point.

[takeback]

I'm assuming 'family loan' means you borrowed from family, is that correct? Or are you renaming a 2nd mortgage as a 'family loan'?

For your situation here's how I would prioritize:

1) Establish 6mo EF (married w/ kids)
2) Pay off family debt (not because of interest rate, but because it's family)
3) Retirement (since you're a high income earner, I'd start with the tax deductible 403b)
4) College savings
5) Low interest debt elimination (< 5%)



It's not a matter of being too aggressive. It's a matter of 'why save in a taxable account when you could save in a tax free or tax deferred one instead?'


Once you've maxed your 403b, and you've maxed either your traditional or Roth (whichever you decide) - you're out of tax 'sheltered' places to put your money. So if you still need to save beyond that to get to 15-20%, that is when you begin using mutual funds outside of the IRA's. Not because it's aggressive, just because you've run out of room in the IRA Always a good problem to have!

Or if a 6 month EF isn't good enough to help you feel secure. Then the 1st 6 months should be in cash, and beyond that, you should move into accessible funds held in a mutual fund of some sort. These are funds you want to be accessible, so putting them in an IRA isn't what you want to do.

That's right a loan from family to cover the gap in the down payment and avoid PMI...not a 2nd mortgage.

Thanks for the advice.

[Scanner]

Ehhh. . .on the car issue (new vs. used), I do agree w/DS of course - always better to ride down the depreciation after 2-3 years and buy used.

That being said, if no one ever bought used, there would be no new cars ever and therefore no used cars.

If you want to buy new, and I have bought one new car in my life, just keep it for a long time and then the difference between a used purchase and a new purchase starts to diminish.

Of course, trading in every 3 years after a new purchase is the worst.

[disneysteve]

That being said, if no one ever bought used, there would be no new cars ever and therefore no used cars.

True, but that doesn't mean us financially smart people need to buy new cars. We know better. Let all of those "other" non-SA people take the hit. Then we can swoop in 2-3 years later and get the real bargains.