Our budget and left over cash. Guidance Requested.

[kilboy]

Hello All,

I am 24 and my wife is 23. We curently make 8,650 a month after taxes (we hope/plan on making 10,000/month in 1 year) and we spend 3,900/month on all expenses and toys and fun.

We're left with 4,750 at the end of the month, not including bonuses I get about 6 months out of the year (1,500) or random stuff.

18,000 - emergency fund
28,500 - savings/checking - me
3,000 - retirement - me
15,500 - savings/checking - wife
7,000 - retirement - wife


19k Car loan
149k House
No other debt


I need some guidance on what to do with the money we don't use at the end of the month. I am thinking we put 5k each into 2 Roth IRAs, then put the rest into different Higher Risk S&P 500 Index funds. We leave 1k in each of our savings accounts too. i also want to put the 18k into a CD.

Keep in mind that my employer will put an additional 10% of my salary each year into a 401k, without me even matching. starting in 6 months.

So bottom line is, I did not grow up with this kind of money and it may not be a lot for some but it's a lot for me. I'm just not used to having so much extra money to invest with. Should i invest all the 4,750 in funds and stuff like that because my 5k limit is reached and we already have a 6 month emergency fund?

Goal? Be rich enough to take our parents in when they'e old, pay for kids college, maybe start a business in the future.

++ One more thing, I don't really understand the 5k limit on IRAs and the 16.5k limit on retirement funds as whole? So...5k into IRA the rest into 401k? I don't understand this 16.5k limit.


Thank you all in advance

[bjl584]

I think that you make too much to have a ROTH.

Other options would be to increase the contributions to your employer sponsored plans and to open a taxable brokerage account.

But before you do that, ask yourself what your goals are going forward. Pay off debt? Children? Moving? Etc.?

What's your reasoning behind putting 18K into a CD? If that is your EF, then I wouldn't put all of the 18K into a CD, or at least into a single CD. You need to keep that money liquid and available without taking a penalty on it should you need it.

[kilboy]

Goals: Be rich enough to take our parents in when they'e old, pay for kids college, maybe start a business in the future. We don't have debt other than car and loan, and if we move im going to rent it. We do have one child on the way, but after researching we dont think it will increase our costs by too much.

I was thinking of putting the 18k EF into a CD because i thought it was pretty liquid.

So if i cant do the IRA then just put everything in 401k up to the limit then everything else into Mutual Funds and Index Funds? I just hate seeing that horrible savings interest rate.

[StepRightUp]

What are the interest rates of the car loan and mortgage?

It seems to me that you have enough savings to wipe out the car loan in one fell swoop. Just take it from your checking/savings account. That is, unless it's at an especially low rate.

It appears you have a sufficient emergency fund so I wouldn't add to or subtract from that.

After that, I would ensure I was saving 20% of my income (15% to retirement through your employer's plan and/or a Roth if you qualify, 5% to vacation/car replacement/etc).

Then I would strongly consider making additional monthly payments on the mortgage depending on the interest rate.

It appears that you have an income that would allow you to all of the above.

Congratulations!

[jpg7n16]

19k Car loan
149k House
No other debt

What's the interest rate on the car loan and on the house?

If car is anything 5% or higher, I'd pay it off today. You have too much in cash anyways.

++ One more thing, I don't really understand the 5k limit on IRAs and the 16.5k limit on retirement funds as whole? So...5k into IRA the rest into 401k? I don't understand this 16.5k limit.

There are federal limits of how much money you can shelter from taxes in certain accounts each year. Otherwise a person who made $10million this year, could defer taxes on $9.9 million and live on the $100k. The government's gotta get their money somehow!

So the IRS set up maximum amounts that can be contributed to retirement accounts, and deferred compensation arrangements (401k).

For each taxpayer whose employer offered a 401k, you can contribute up to $16,500/year to the 401k, regardless of income. (For you and your wife, that would be 16.5k each for 33k for the year)

Each taxpayer can then additionally contribute up to $5000 to an Individual Retirement Account (IRA) for the year ($6000 if you're over 50). There are income restrictions as to which account you'd qualify for. In other words, if your income is too high you may not qualify for all the forms of IRAs.

As improved from a standard brokerage account (which is not deductible, is taxed on certain items while it grows-- like interest, sales, dividends -- and is taxed on final sale)... there are 3 types of personal IRAs:

• Traditional Non-deductible (available to anyone regardless of income) -- not deductible today, grows tax free, taxed on withdrawl
• Traditional Deductible (restricted by income, since covered at work must have less than 89-109k) -- deductible today, grows tax free, taxed on withdrawl
• Roth (restricted by income, must have less than $169-179k) -- not deductible today, grows tax free, not taxed on withdraw past age 59 1/2

See income limits here:
2011 Roth IRA Income Limits
2011 IRA Income Limits | 2010 Maximum Roth IRA and Traditional AGI Limit

Now you could do $2500 to a traditional and $2500 to a Roth, or $4000/1000 or all $5000 only to one type. (each, so for you and your wife, you have a combined $10k of potential IRA money)


If you meet all the criteria for all accounts, that would be $16.5k + 16.5k + 5k + 5k = $43k total put in retirement accounts for the year.

[kilboy]

Autoloan: 4.9
Homeloan: 6

So paying off the car would be better than 19k into an Index fund?

Im trying to figure out how mch to put in my 401k and how much to invest in index funds that i can cash in whenever i want.

[Hector]

Max out your 401k and IRA.
Start paying home and auto loan - Its not guaranteed that one will make more than 5% by investing in index, but it is sure that you will save that much by paying auto and home loans faster.

About limit on IRA and 401k. Its all separate.
You can fund upto 16500 including company match in 401k and 5000 in IRA.
You wife can fund upto 16500 including company match in 401k and 5000 in IRA.

[jpg7n16]

Autoloan: 4.9
Homeloan: 6

So paying off the car would be better than 19k into an Index fund?

In my personal opinion - no. At just under 5%, and a very long time horizon, I would personally rather add any extra dollars to investments, rather than pay down debt. I have a very high risk tolerance, so it's okay for me to do that.

I just know most people prefer to get out of debt. And would rather take a guaranteed 5%, than take risk for an expected 8%. I'm perfectly okay with that risk - are you?


Once debt starts getting up to 7-8%+ it doesn't make sense to me anymore to take the risk of market returns. My personal cutoff is somewhere around 5-6%.


Have you considered attempting to refi the home?? I've seen people get rates in the low 4's...

[kilboy]

i have thought of refinancing. i am currently thinking about getting a 15 yr mortgage and then rent my house. it will add a few grand to my loan but im going to have someone else pay off most of it anyway.

im a veteran so i am able to get a 4.25 right now... i think i may do that.

[Phineas]

I am saving money on monthly basis to buy a commercial real estate property which considered good investment. Or i have in my mind to invest in through insurance policy and get enough money for the future.

[kork13]

My (note: PERSONAL) recommendations would be:

You have $44k total in ready cash, not including your EF. Use $19k to pay off the car. Open Roth IRA's TODAY for both you and your wife, and fully fund them both with $5k each for 2010 (you have until April 18 to do this) and 2011 (total: $20k). This should leave you with $5k to spread between your checking/savings accounts.

From there, you have $4750/mo available for savings. Start saving $1375/mo in your 401k (enough to max it out). Set aside a nominal amount ($150-250/mo) for short-term savings, which will serve to cover months with higher-than-average expenditures. Do you already have children? If so, open a 529 account in one of their names. If no kids yet, open it in your's or your wife's name, which can later be transferred to a child, and later between children. Perhaps send $500/mo into the 529 plan, or whatever amount you like. Just keep in mind, you're limited to only $13,000/yr per recipient by gift tax laws.

Beyond that (with the remaining ~$2500/mo), open up a standard investment account and start building up your non-retirement assets. An S&P 500 fund is a good place to start, at least for now. You'll eventually want to determine an optimal investment plan for your family's situation, risk tolerances, and goals. You'll likely eventually find yourself investing in few different mutual funds: S&P 500 (large company stocks), some mix of short-/mid-/long-term bonds, international stocks, small-/mid-size company stocks, perhaps a couple sector funds, and so on. All of that comes with time/experience, research, and your personal preferences/tolerances.

For the EF, I would discourage going into CDs right now. You can do just as well (or better) by putting that money into online savings accounts, many of which are still earning above 1% without you having to lock up your money for 1-2 (or more) years. Also, as I mentioned above, I think you should pay off the car loan and be done with it. At 5%, it's a toss-up over which direction is smarter, so I would go with the guaranteed smart choice of paying it off. And you should *absolutely* look at refinancing, especially if you can get a 4.25-5% refi, which will effectively be even lower (>4%) after the tax deductions.

You make a strong income, and have the ability to save a significant portion of it. These two facts will enable you to be very secure financially, as long as you make careful, smart decisions with your money. Best of luck, and keep asking questions!

[Hector]

Set aside a nominal amount ($150-250/mo) for short-term savings, which will serve to cover months with higher-than-average expenditures.

When will person enjoy the life? By saving $250/month, a couple could save $3000/year. Forget about other things, but if OP is interested in traveling, $3000 might not be enough in taking even one international trip a year.

I am a frugal, but there is more to live for than just being frugal when one has resources. It doesn't make sense to me that someone is saving 150-250/month for short term savings who is left with 4700/month after regular expense.

[Slug]

My (note: PERSONAL) recommendations would be:

Open Roth IRA's TODAY for both you and your wife, and fully fund them both with $5k each for 2010 (you have until April 18 to do this) and 2011 (total: $20k).

This is a definite ^

And let me emphasize that you only have 11 days to fund those 2010 Roth's. Do that now. Do that first. You can open it online easy at numerous brokerages. I have mine at TD Ameritrade. They offer 100 no transaction fee ETF's that would be a great place for your retirement funds as you're starting out.

[kork13]

I am a frugal, but there is more to live for than just being frugal when one has resources. It doesn't make sense to me that someone is saving 150-250/month for short term savings who is left with 4700/month after regular expense.

I totally agree. However, based on what OP stated in the first post (quoted below), I assumed he's already got travel/vacations/other various fun taken care of to his satisfaction. For sure, if it's not already happening, I would absolutely set aside at least $300-$500/mo specifically for travel, vacations, etc. that they'd like. I only intended the $200-ish I stated above as a backup for larger expenses in a given month, or to supplement his EF over time. Honestly, he's in a great spot, so he has the option to adjust the amounts he's saving to fit whatever his goals are.

we spend 3,900/month on all expenses and toys and fun.

[jerrycates]

Try to live the life of a frugal person and you shall have a least a bit of not worrying about being too broke. Being broke is just not funny. I do not see it funny ever!