The Finances and Debt Thread

[FiveThous]

Paid off a CC last week and will be paying offer another smaller debt over the next few weeks. Trying to get this train back on track, 8 weddings really hurt my progress in 2017.

 

[Cratylus]

Paid off a CC last week and will be paying offer another smaller debt over the next few weeks. Trying to get this train back on track, 8 weddings really hurt my progress in 2017.

Yeah, that many divorces can be a real bitch on your finances.

 

[BMAN]

While there are a few exceptions depending on your personal financial situation, the general rule of thumb for probably 99.9% of people is:

1. First, fully fund your 401(k) up to the point where your employer stops matching.
2. Next, max out a Roth IRA.
3. Next, max out your 401(k).
4. Finally, fund a traditional brokerage account.

I'd probably only be able to do 1 and 2 with my current pay

 

[Cratylus]

I'd probably only be able to do 1 and 2 with my current pay

And that's fine. I would just use that as a guide going forward. If you ever get to a point where you can make it to #3, great. If not, the same Rules #1 and #2 apply.

 

[Ob1]

Most 401(k) plans allow the investor to withdraw from the account for the purposes of a primary mortgage down payment.

Yeah but you wouldn't really want to if you don't have to. Wasting potential tax free earned interest by doing it. Makes way more sense to hold his housing money in a high interest savings bank and then use it when he needs it. Still should be maxing out his IRA first (after employer match 401k amount)

I've got an extra $8K lying around in a refund check that I'll need to use for school in the summer.

Thoughts on the best use of it for the next few months until June?

I can open up a new savings account and recoup a $150 bonus immediately. Maybe some sort of money market or mutual fund account?

I would use Ally bank or Discover bank and take the 1.25/1.35% interest rate without any risk.

 

[Ob1]

I'd probably only be able to do 1 and 2 with my current pay

still better than doing it otherwise. Always choose your IRA over your 401k AFTER you fund your 401k up to your employer match. Reason being you want to get the free money from your employer, but after that, IRA gives you way more options for funds (and thus better funds with lower fees) then a 401k will. After you max your IRA, you can go back to your 401k.

 

[TopGun]

Also, if you have an HSA, you should consider fully funding that before maxing 401k.

 

[WellYouNeednt]

Check out the big brain on @Cratylus

You a smart muthafucka!

 

[The Process God]

I have a bunch of cash in the bank that I don't know what to do with.

I have superb credit, I pay extra on my mortgage (about one extra payment a year), I contribute about 10k to my 401k each year in addition to employer contributions. I'm 29 and intend on buying a new house within the next few years as well as having a kid. Debt free except the mortgage.

Since I will need the cash relatively soon (within next few years), does it make sense to just sit on my money?

I'm thinking of at least switching to Discover online banking to get the 1.4% interest. I have a Discover credit card. Seems like a no-brainer. Anyone have experience with online banking/Discover in particular?

My goal is to max out my annual 401k within next few years (typically when I get a raise I tack on another 1-2% to the 401k, also going to start dumping some of my bonus into 401k), then open an IRA work towards maxing that out. Seems pretty par for the course.

Open up a Roth IRA immediately, and max that out each year. You have many more investment options with a Roth IRA than you do with a 401k. A Roth IRA can also have as much money as you want pulled out of it, interest gained included IRCC, for the purpose of buying a house. Then I'd put the rest of the money that you want to have access to into a mutual fund like PARWX (you could PARWX for your Roth IRA too). It's a high-performing mutual fund, but its volatility is very low compared to anything else performing nearly as well. Keep in mind that, when inflation (around 3% compounding yearly) is taken into consideration, you are actually LOSING money with a 1.4% interest rate. Even a bond can see better results than a savings account.

I'd also consider NOT paying extra money towards your house. The chances are that your mortgage falls within a 3-5% interest rate. You can pretty easily beat that even after taxes on the market.

I bank with Discover. Best customer service bar-none. I have an online checking account with them. But, again, I'd not use a savings accouint.

UPDATE: As of tonight, I now owe 0% interest on any of my credit cards. I paid off another credit card, and I now only have one more credit card on a promotional 0% interest rate to pay off before I'm credit card debt-free (minus paying off my statement each month).

I also interviewed for my promotion at a location in North Seattle. I didn't end up getting it, but I'm fairly certain it's because they have another position for me they want me to take. From what my boss told me, they told her that they were blown away by me. I'm guessing I didn't get it despite being the best candidate is because there's either a better position or position closer to my house. They said I'd know in a few days where it will be.

Btw, question: I have about $5,800 in debt on a promotional balance transfer. Since I don't really need fantastic credit at this moment, I was thinking about actually only paying the minimum balance and putting as much as I can into a Roth IRA. Since Roth IRAs allow you to pull out whatever you've contributed at any moment, I thought I'd wait until a few weeks before my promotional rate was over, and then pull out whatever I needed to pay off the credit card. However, I'd likely have accrued hundreds of dollars (maybe even over $1k if we have another bull year) in interest just from not having paid off the card early. What are peoples' thoughts on this?

 

[The Process God]

While there are a few exceptions depending on your personal financial situation, the general rule of thumb for probably 99.9% of people is:

1. First, fully fund your 401(k) up to the point where your employer stops matching.
2. Next, max out a Roth IRA.
3. Next, max out your 401(k).
4. Finally, fund a traditional brokerage account.

To break this down so people understand why this is the best:

1. Fully funding 401k up to company match is most important because the company match is usually 100% for at least a few % and sometimes 50% for a few more %. An intstant 50-100% return on your money, especially when you consider 30-40 years of compounding interest if you're young, is a no-brainer.

2. Maxing out a Roth IRA next makes most sense because it is a more flexible account for multiple reasons. The first one is that you can pull out your contributions at any moment, whereas a 401k is locked in until retirement. The second one is that a Roth IRA has tens of thousands of investment options from which to choose, whereas a 401k usually only has a few dozen in most cases. This gives you more control and, most likely, more profit in the long run.

3. Maxing out your 401k next makes most sense because, although it doesn't have the amount of investment options that a Roth IRA does, nor can you pull out your contributions at any time, it is still more advantageous tax-wise than a money market account since you only get taxed once on the money, whereas a money market account is taxed at many more instances.

4. Finally, a money market account is the final option because, even though it is taxed, it is going to give you the best returns over a savings account. If you go with a mutual fund, find one that has great returns, acceptable volatility, and low turnover of its investment options unless its turnover rate is worth it.

 

[TopGun]

Btw, question: I have about $5,800 in debt on a promotional balance transfer. Since I don't really need fantastic credit at this moment, I was thinking about actually only paying the minimum balance and putting as much as I can into a Roth IRA. Since Roth IRAs allow you to pull out whatever you've contributed at any moment, I thought I'd wait until a few weeks before my promotional rate was over, and then pull out whatever I needed to pay off the credit card. However, I'd likely have accrued hundreds of dollars (maybe even over $1k if we have another bull year) in interest just from not having paid off the card early. What are peoples' thoughts on this?

If the market goes down 20% or more prior to your promotional rate ending, will you have enough money from other sources to be able to pay off the debt before the interest rate balloons to >20%?

 

[Kouki]

Responding to those who said more information would be helpful...

I make ~100k/year, my wife makes ~60k. Before taxes.

Mortgage is ~1050 a month, I pay 1150.

I contribute 10% to 401k with a total company match of 4% (100% of first 3% and 50% of next 2%).

Working on saving more money, I've set up my bank accounts such that I should never have to touch my savings, so I will be saving about $1400 a month. I put a bit of a buffer in my checking that should hopefully cover vacations, home upkeep, etc etc. Last year I only managed to save like 7k, though after a couple thou in medical expenses and another couple thou in vacations.

I have ~66k in my 401k and I'm actually invested 100% in the S&P 500 based on advice from a coworker. Maybe that is too risky even though I'm only 29?

I also have a 401k from an old job that has a little over 2k in it.

I only contribute $50/month to my HSA. Before last year my annual medical expenses were near zero so I never really bothered with it - the tax savings weren't worth bothering with the card. Then in the last few years I've had a few thousand in expenses. Blah. I should probably up this. I need another 1500 in it before I can invest it. Maybe at bonus time I will make a one-time contribution, and then start putting in more money. My wife is on my plan, too...and since we plan on having kids soon, yeah, I should get this going.

I have a bit over 30k in the bank. I bank with Huntington (was with FirstMerit). Only CC is Discover.

I also use Acorns contribute $5/week, round every purchase up a dollar, invested in "high risk" category. I know it's not the best considering it costs like a buck a month, but it's easy and kind of fun.

Regarding an IRA...I looked into this last year but I get confused easily. Fidelity offers an "IRA". But apparently there is a difference between Roth IRA, IRA, Roth Basic, etc. Can someone explain that to me like I'm 5?

Regarding investment options...I don't want to have to think about this too much so more options isn't necessarily desirable. I guess more options is better by default but outside of thinking about level of risk I don't really want to bother. I hate dealing with money. My wife handles the taxes.

 

[The Process God]

Responding to those who said more information would be helpful...

I make ~100k/year, my wife makes ~60k. Before taxes.

Mortgage is ~1050 a month, I pay 1150.

I contribute 10% to 401k with a total company match of 4% (100% of first 3% and 50% of next 2%).

Working on saving more money, I've set up my bank accounts such that I should never have to touch my savings, so I will be saving about $1400 a month. I put a bit of a buffer in my checking that should hopefully cover vacations, home upkeep, etc etc. Last year I only managed to save like 7k, though after a couple thou in medical expenses and another couple thou in vacations.

I have ~66k in my 401k and I'm actually invested 100% in the S&P 500 based on advice from a coworker. Maybe that is too risky even though I'm only 29?

I also have a 401k from an old job that has a little over 2k in it.

I only contribute $50/month to my HSA. Before last year my annual medical expenses were near zero so I never really bothered with it - the tax savings weren't worth bothering with the card. Then in the last few years I've had a few thousand in expenses. Blah. I should probably up this. I need another 1500 in it before I can invest it. Maybe at bonus time I will make a one-time contribution, and then start putting in more money. My wife is on my plan, too...and since we plan on having kids soon, yeah, I should get this going.

I have a bit over 30k in the bank. I bank with Huntington (was with FirstMerit). Only CC is Discover.

I also use Acorns contribute $5/week, round every purchase up a dollar, invested in "high risk" category. I know it's not the best considering it costs like a buck a month, but it's easy and kind of fun.

Regarding an IRA...I looked into this last year but I get confused easily. Fidelity offers an "IRA". But apparently there is a difference between Roth IRA, IRA, Roth Basic, etc. Can someone explain that to me like I'm 5?

Regarding investment options...I don't want to have to think about this too much so more options isn't necessarily desirable. I guess more options is better by default but outside of thinking about level of risk I don't really want to bother. I hate dealing with money. My wife handles the taxes.

A Roth IRA (or 401k) means that the money you put in is taxed on the year that you put the money in and isn't taxed when you pull it out, whereas a regular, traditional IRA or 401k is taxed each time you pull out the money and not when you put it in. For example, with a Roth IRA or 401k, if you contribute 5,500 to it in 2018, your gross income (let's say 160k) that you will be taxed on come tax time in April 2019 stays the same because you are being taxed on that money that you put into that account. With s traditional IRA or 401k, if you were to put in $5,500 into that account, your gross income come tax time would drop from $160k to $154,500. However, each time that you would pull your money out from that retirement account in the future, the total you withdrew during any given year would be totaled up and added to any other income and be considered taxable income.

And the s&p 500 is not too risky for a 29 year old. It is moderate. In fact, you could go for s mutual fund that has higher returns if you are willing to take on additional risk. Go onto fidelity.com, and use their mutual fund search tool to find a mutual fund that matches your risk level and beats the s&p 500 over the past 5 to 10 years.

 

[Ob1]

Responding to those who said more information would be helpful...

I make ~100k/year, my wife makes ~60k. Before taxes.

Mortgage is ~1050 a month, I pay 1150.

I contribute 10% to 401k with a total company match of 4% (100% of first 3% and 50% of next 2%).

Working on saving more money, I've set up my bank accounts such that I should never have to touch my savings, so I will be saving about $1400 a month. I put a bit of a buffer in my checking that should hopefully cover vacations, home upkeep, etc etc. Last year I only managed to save like 7k, though after a couple thou in medical expenses and another couple thou in vacations.

I have ~66k in my 401k and I'm actually invested 100% in the S&P 500 based on advice from a coworker. Maybe that is too risky even though I'm only 29?

I also have a 401k from an old job that has a little over 2k in it.

I only contribute $50/month to my HSA. Before last year my annual medical expenses were near zero so I never really bothered with it - the tax savings weren't worth bothering with the card. Then in the last few years I've had a few thousand in expenses. Blah. I should probably up this. I need another 1500 in it before I can invest it. Maybe at bonus time I will make a one-time contribution, and then start putting in more money. My wife is on my plan, too...and since we plan on having kids soon, yeah, I should get this going.

I have a bit over 30k in the bank. I bank with Huntington (was with FirstMerit). Only CC is Discover.

I also use Acorns contribute $5/week, round every purchase up a dollar, invested in "high risk" category. I know it's not the best considering it costs like a buck a month, but it's easy and kind of fun.

Regarding an IRA...I looked into this last year but I get confused easily. Fidelity offers an "IRA". But apparently there is a difference between Roth IRA, IRA, Roth Basic, etc. Can someone explain that to me like I'm 5?

Regarding investment options...I don't want to have to think about this too much so more options isn't necessarily desirable. I guess more options is better by default but outside of thinking about level of risk I don't really want to bother. I hate dealing with money. My wife handles the taxes.

My thoughts (I am corporate counsel for one of Ohio's biggest companies and sit on our retirement board but I am not a financial planner so TFWIW):

1) You are doing a great job already, so congrats. You are setting yourself up to retire comfortably. You can do better (see below) but you are still ahead of the vast majority of Americans.

2) You seem to ignore the IRA. You should take that 10% you are adding to the 401k and move it down to the company match level. Take the remaining amount that you had been putting in your 401k and put it into a ROTH IRA. If that amount is enough to max a Roth IRA with money left over, start putting it towards your 401k or HSA. I prefer the HSA, because it ultimately will give you more redemption options/can be liquidated upon retirement (only pay state income tax) but either one is fine.

3) Going back to the IRA, I will ELI5. A Traditional IRA is not taxed upon contribution, but will be taxed when you eventually take the money out in retirement. A Roth IRA will be taxed when you put it in, but will not be taxed upon withdrawal. A lot of really smart people are split on what to do. Some suggest it is always better to contribute to a Roth when you can (up to salary of 130ish k single, 190ishk filing jointly), some suggest to hedge and contribute to both. I personally think it makes sense to contribute to a ROTH at your age and income, because I find it highly unlike that the tax rate will go down when you are getting ready to retire. If we the assumption that the tax rate will stay the same or rise for your income level or you go up in income and are in a higher tax bracket, then it makes a lot of sense to pay taxes NOW so that you can lock in your lower tax bracket. IF however, you believe that upon retirement you will have a much lower income or the tax level will substantially decrease, it makes sense to contribute to a traditional IRA and pay the taxes later.

4) I strongly suggest moving your savings 30k into a high interest rate savings account. If you choose ally for the 1.25% (can get higher, but I use them and like their service) - you are looking at a difference of an extra 370$ or so a year in interest for doing nothing (compared to Huntington). That might not seem like a lot, but it's still free money. Over 30 years, that can really add up.

5) Back to the IRA. I know you said you dont want to think about investing and that's fine. But the fact is, you can mimic your 401ks investment options with their comparable much cheaper (lower fee) options without doing any work. You can also put all of your IRA in a target date fund which will be "set it and forget it". That fund will very likely have a lower fee then any of the good funds in your 401k (I'd need to know the funds and fees before saying that for sure).

6) Roll over your old 401k into an IRA. Same reason as before. You will have much more control over it and there is no reason you should be subsidizing your old employers 401k plan.

7) I see no problem being invested 100% in S&P500 at your age and in the 401k program. However, you need to start looking at all of your money/investments as a piece of the total pie. Determine what asset allocation you want and then invest based on that. I would suggest (at your age and risk tolerance) a 60-30-10 or 50-40-10 US Equity, International Equity, Bond allocation. I myself am a boglehead and believe in the 3 or 4 fund approach (the vast majority of my investments are split between Total US Equity Index, Total Intentional Equity Index, and Total Bond Index -with a few individual stocks, s&p 500, etc mixed in).

8) If you and your wife are making 160k before taxes then you are still bringing in well over 6 figures after taxes... Do you know how much you save in a year? I think at your income levels you should be able to easily max out your IRA and 401k and HSA in a year (18.5k + 5.5k + 3.45k = ~27,450 of over 110,000). If you can't then you may need to think about how you are spending and look into budgeting.

 

[Kouki]

Thanks for the responses. I'll digest it a bit (and I should probably get back to work...) and respond.