Finally! Income more than doubled - review

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Topic Author
StudentofFI
Posts: 6
Joined: Fri Apr 03, 2020 3:08 pm

Finally! Income more than doubled - review

Post by StudentofFI » Thu May 21, 2020 2:45 pm

First post but having been browsing the forum for the last 6 months or so and appreciate all the knowledge I've gained.

Our situation- Mid twenties, I have been working for the last 3 years while my spouse was in grad school. We tried to budgeted hard to stay within my income (low for two people in our area) but are definitely guilty of going over several months. I saved up a little for this before getting married because we knew it may happen during this one income period. Well, graduation has come and our income has more than doubled! We are very grateful a great, secure job was landed during these times. Also very grateful for the financial head start my spouse was given (IRA & taxable). Now its time for us to work towards our goals and prioritize some short term expenses. :sharebeer

Age - Mid twenties

Income: 55k & 85K = $140,000 total

Tax rate: 22% Fed. 6.8% State

Emergency fund: 5 months

Total Expenses: $3,400 (anticipated based on previous spending and only a tiny bit of lifestyle creep)

Debt: $19,000 student loan @ 4%

(All investments below are based on current value w/ down markets)
Roth IRA:
- $6,500

Spouse Roth IRA:
-$25,000

HSA:
- $1,300
- $1,400 employer contribution

Spouse HSA:
- $0 (just opened)
-$1,000 employer contribution

PERA public pension
-$244 monthly contribution
- payout based on some formula: number of years *1.7, 5 highest salaries averaged etc.
EX: 30 years of service will payout 51% of ones highest 5 averaged salaries.

Spouse Simple IRA:
-$0 (able to start after 3 months)
-3% employer match

Taxable:
-$24,000

Short Term expenses/goals:
- Pay off student loan
- Buy a 3-5 yr old new-used vehicle, to replace a 16 yr old one, still running well and safe but its only a matter of time.
- House, 2-3 year time frame. I could wait 3, spouse prefers 2..

I like the general idea of the 50/30/20 budget to start. I made some scratch notes basing it off take home, but see some people base it off gross?
Anticipated monthly take home: $8,500
40% - $3,400 total expenses
40% - $3,400 student loan, car down payment. House down payment at some point
20% - $1,700 retirement savings

I think most important thing is to start 20% towards retirement and not delay that any longer. Order: Max HSA's, simple IRA 3% match, remaining to Roth IRA's.. do I include my personal pension contribution in this? I had seen some don't since it's only guaranteed if the program is still around...

I put 40% to tackle student loan and car, house etc. not exactly sure how to break this down further. All towards the loan? Maybe some will suggest a 40/30/30 budget instead. Since interest and payments are in forbearance with loans, I was going to lump any loan money in our money market until this fall when forbearance will probably be lifted. MM rates are measly right now but figured it's something? Our taxable account will probably come into play for a house. We bounced around the idea of dropping to a 3 month EF and using it towards the loan also, since we have two incomes now.

Hopefully this didn't get too long. I appreciate any and all advice/guidance. Thank you!

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White Coat Investor
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Re: Finally! Income more than doubled - review

Post by White Coat Investor » Thu May 21, 2020 3:06 pm

I would count pension contributions toward my savings rate.

I wouldn't have a car loan. You make $140K. You can save up a $5K car in one month, a $10K car in two, a $15K car in three etc.

I'd pay off the student loans too using the money in the taxable account.

Then you're simply dividing the money between retirement investments and a house down payment. That's pretty simple.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

tashnewbie
Posts: 195
Joined: Thu Apr 23, 2020 12:44 pm

Re: Finally! Income more than doubled - review

Post by tashnewbie » Thu May 21, 2020 3:14 pm

Welcome!

You seem to be off to a great start, because you're thinking about this stuff, and I'm sure you'll do very well.

FYI, your wife will not be able to contribute directly to a Roth IRA without running into the aggregation rule/pro rata taxes, because of the SIMPLE IRA. I didn't run the numbers, but it may be worth it to still do annual Roth contributions, but you would owe taxes on the percentage of all of her IRAs that are pre-tax. You'll have to figure that out.

Best wishes.

wilked
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Joined: Thu Mar 24, 2011 1:50 pm

Re: Finally! Income more than doubled - review

Post by wilked » Thu May 21, 2020 3:19 pm

Focus on paying off student debt

Then save for a lightly used car, pay cash

Then focus on maxing retirement savings

Then start saving for a house.

Why the rush to buy a house? At your age I would value mobility and career over home ownership

sycamore
Posts: 459
Joined: Tue May 08, 2018 12:06 pm

Re: Finally! Income more than doubled - review

Post by sycamore » Thu May 21, 2020 3:26 pm

You're in great starting shape; congrats on graduating and getting the income bump!

Your overall approach sound good. Whether you do 50/30/20 or 40/40/20 doesn't matter much - allow it to fluctuate as time goes by and needs require it. Being able to save 20% or more and keep expenses within your means is the main thing.

As far as a car payment goes, there are some dealers offering a 0% loan now. That might make it more tempting to get a new one instead of a 3-5 year old one. Growing up, I always thought I'd buy used cars (like my parents did) but when the time came I decided I'd feel better buying new one -- I didn't want to deal with the off-chance of getting a clunker in a used-car. Of course maintaining the cars as long as possible has helped keep ownership costs down.

I would double check your choice of Roth over Traditional IRA is better for you. Traditional IRA would allow you to
defer paying income tax at your marginal rate of 22% + 6.8%. Obviously a guess as to what your rates will be when you withdraw from the IRA 30+ years from now but the conventional wisdom is that rates would likely be lower.

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Watty
Posts: 19346
Joined: Wed Oct 10, 2007 3:55 pm

Re: Finally! Income more than doubled - review

Post by Watty » Thu May 21, 2020 6:48 pm

A couple of question;

1) How expensive of a house are your looking at buying?

2) What are your plans for kids? If you are likely to have kids then you may want to budget so you would be OK on one income if you have to. A potential issue is that if you have a kid with even minor and temporary health issues then daycare may not be a possible or good option.

3) Do you need two cars? Do you already have one that will be OK? What general type of car are you thinking of buying? How long are your commutes?

StudentofFI wrote:
Thu May 21, 2020 2:45 pm
- Buy a 3-5 yr old new-used vehicle, to replace a 16 yr old one, still running well and safe but its only a matter of time.
I agree that replacing a 16 year old car makes sense and since it is still running well it should sell for a non-trivial amount.

It would be good to keep an open mind about buying a new car and then decide when you know the details of what your options are.

Desirable cars like Hondas and Toyotos don't depreciate fast enough to make a used one look like a good deal to me. I buy them new then keep them for about 10 years then sell them even if they are not having issues. Unless I get unlucky I may be able to go 10 years without having much, if any, non-routine maintenance while having a very reliable car.

When looking at cars read the specifications very carefully since they have added a lot of the new advanced safety features like automatic braking in the last few years. In 2018 Toyota made a lot of the advanced safety features standard equipment in all of their cars. That can mean that a 2017 and a 2018 model may look about the same but have very different features when you dig into it.
StudentofFI wrote:
Thu May 21, 2020 2:45 pm
- House, 2-3 year time frame. I could wait 3, spouse prefers 2..
I am not sure what the current rules are for PMI since they have changes but if you can get rid of it after a few years it may not be the end of the world. There are also other low down payment loans that may be available. You would want to get the rest of your situation more solid but if interest rates are still low a year from now than buying sooner rather than later could make sense to get the low interest rate.

That assumes that you live in an area where housing is reasonable and you can get a nice home for maybe $300K or less.

Topic Author
StudentofFI
Posts: 6
Joined: Fri Apr 03, 2020 3:08 pm

Re: Finally! Income more than doubled - review

Post by StudentofFI » Sat May 23, 2020 9:06 am

White Coat Investor wrote:
Thu May 21, 2020 3:06 pm
I would count pension contributions toward my savings rate.

I wouldn't have a car loan. You make $140K. You can save up a $5K car in one month, a $10K car in two, a $15K car in three etc.

I'd pay off the student loans too using the money in the taxable account.

Then you're simply dividing the money between retirement investments and a house down payment. That's pretty simple.
Thanks! Appreciate the simplistic approach, this is all new and a little easy to over think. I do like the idea of no car loan or a minimal one. Funny coincidence you commented, I was just telling my spouse about your podcast, she is wearing a white coat now also.. DVM though, not humans :wink:

Topic Author
StudentofFI
Posts: 6
Joined: Fri Apr 03, 2020 3:08 pm

Re: Finally! Income more than doubled - review

Post by StudentofFI » Sat May 23, 2020 9:09 am

tashnewbie wrote:
Thu May 21, 2020 3:14 pm
FYI, your wife will not be able to contribute directly to a Roth IRA without running into the aggregation rule/pro rata taxes, because of the SIMPLE IRA. I didn't run the numbers, but it may be worth it to still do annual Roth contributions, but you would owe taxes on the percentage of all of her IRAs that are pre-tax. You'll have to figure that out.

Best wishes.
Thanks for the advice, I am not familiar with that but will dig into it before contributing. Maybe the wiki talks about it.

tashnewbie
Posts: 195
Joined: Thu Apr 23, 2020 12:44 pm

Re: Finally! Income more than doubled - review

Post by tashnewbie » Sat May 23, 2020 9:15 am

StudentofFI wrote:
Sat May 23, 2020 9:09 am
tashnewbie wrote:
Thu May 21, 2020 3:14 pm
FYI, your wife will not be able to contribute directly to a Roth IRA without running into the aggregation rule/pro rata taxes, because of the SIMPLE IRA. I didn't run the numbers, but it may be worth it to still do annual Roth contributions, but you would owe taxes on the percentage of all of her IRAs that are pre-tax. You'll have to figure that out.

Best wishes.
Thanks for the advice, I am not familiar with that but will dig into it before contributing. Maybe the wiki talks about it.
Yes, the wiki discusses it.

Topic Author
StudentofFI
Posts: 6
Joined: Fri Apr 03, 2020 3:08 pm

Re: Finally! Income more than doubled - review

Post by StudentofFI » Sat May 23, 2020 9:22 am

sycamore wrote:
Thu May 21, 2020 3:26 pm
You're in great starting shape; congrats on graduating and getting the income bump!

Your overall approach sound good. Whether you do 50/30/20 or 40/40/20 doesn't matter much - allow it to fluctuate as time goes by and needs require it. Being able to save 20% or more and keep expenses within your means is the main thing.

As far as a car payment goes, there are some dealers offering a 0% loan now. That might make it more tempting to get a new one instead of a 3-5 year old one. Growing up, I always thought I'd buy used cars (like my parents did) but when the time came I decided I'd feel better buying new one -- I didn't want to deal with the off-chance of getting a clunker in a used-car. Of course maintaining the cars as long as possible has helped keep ownership costs down.

I would double check your choice of Roth over Traditional IRA is better for you. Traditional IRA would allow you to
defer paying income tax at your marginal rate of 22% + 6.8%. Obviously a guess as to what your rates will be when you withdraw from the IRA 30+ years from now but the conventional wisdom is that rates would likely be lower.
Thank you for the insight and suggestions. It gives some good things to think about. We will have to look over the Roth vs Traditional options.. Rates should be lower, who knows how much taxes will rise over 30 years though..

Topic Author
StudentofFI
Posts: 6
Joined: Fri Apr 03, 2020 3:08 pm

Re: Finally! Income more than doubled - review

Post by StudentofFI » Sat May 23, 2020 9:37 am

Watty wrote:
Thu May 21, 2020 6:48 pm
A couple of question;

1) How expensive of a house are your looking at buying?

2) What are your plans for kids? If you are likely to have kids then you may want to budget so you would be OK on one income if you have to. A potential issue is that if you have a kid with even minor and temporary health issues then daycare may not be a possible or good option.

3) Do you need two cars? Do you already have one that will be OK? What general type of car are you thinking of buying? How long are your commutes?
StudentofFI wrote:
Thu May 21, 2020 2:45 pm
- Buy a 3-5 yr old new-used vehicle, to replace a 16 yr old one, still running well and safe but its only a matter of time.
I agree that replacing a 16 year old car makes sense and since it is still running well it should sell for a non-trivial amount.

It would be good to keep an open mind about buying a new car and then decide when you know the details of what your options are.

Desirable cars like Hondas and Toyotos don't depreciate fast enough to make a used one look like a good deal to me. I buy them new then keep them for about 10 years then sell them even if they are not having issues. Unless I get unlucky I may be able to go 10 years without having much, if any, non-routine maintenance while having a very reliable car.

When looking at cars read the specifications very carefully since they have added a lot of the new advanced safety features like automatic braking in the last few years. In 2018 Toyota made a lot of the advanced safety features standard equipment in all of their cars. That can mean that a 2017 and a 2018 model may look about the same but have very different features when you dig into it.
StudentofFI wrote:
Thu May 21, 2020 2:45 pm
- House, 2-3 year time frame. I could wait 3, spouse prefers 2..
I am not sure what the current rules are for PMI since they have changes but if you can get rid of it after a few years it may not be the end of the world. There are also other low down payment loans that may be available. You would want to get the rest of your situation more solid but if interest rates are still low a year from now than buying sooner rather than later could make sense to get the low interest rate.

That assumes that you live in an area where housing is reasonable and you can get a nice home for maybe $300K or less.
1. 250K range or so. Want to keep it within our means.
2. Good consideration. We don't plan on kids for several years though, we want some freedom for travel around the U.S. etc. I better not have just jinxed us..
3. Yes. Work in opposite directions and on the outskirts of a city.

Good info regarding cars. I never saw myself buying new but there is definitely some compelling reasons to buy new. We were actually mainly looking at Toyota or Honda, mid sized suv to meet our needs - road trips, car camping etc.

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geerhardusvos
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Re: Finally! Income more than doubled - review

Post by geerhardusvos » Sat May 23, 2020 10:16 am

Keep your savings rate for 10 years, and you can have a lot of financial freedom, if not financial independence. Drive old cars forever. Dont increase expenses. Get rid of debt. Stash more money into VTSAX you ever thought was possible. If you can, don’t buy the house. If you have to buy a house, buy as little house as you can in the nicest neighborhood. I wouldn’t spend more than 2X or 3X your current income on the house. If I was in your shoes I would just rent for the next 5 to 10 years and stash it all away. We saved up for a house, bought a house, made 350 K off it, and are way behind What we could have been if we had just invested while renting.

trust me, I was in your exact position eight years ago, and I wish I had invested more during the dual income years. Keep up your career learnings and networking. Enjoy life, don’t stress, and in year 2030 you can maybe have 20 to 25X your expenses invested.
:sharebeer
VTSAX and chill

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Watty
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Joined: Wed Oct 10, 2007 3:55 pm

Re: Finally! Income more than doubled - review

Post by Watty » Sat May 23, 2020 10:31 am

StudentofFI wrote:
Sat May 23, 2020 9:37 am
3. Yes. Work in opposite directions and on the outskirts of a city.
One thing to keep in mind is that at this stage of your careers is that you are likely to change jobs in the near future. If you buy a house now that would mean that you could end up with a bad commute when you change jobs.
StudentofFI wrote:
Sat May 23, 2020 9:37 am
... we want some freedom for travel around the U.S.....
Owning a home takes up a lot of time since there is always something that needs to be done. Don't underestimate just how much time it takes to take care of a house. First time homeowners are often surprised by just how much time owning a house takes even if it is in good condition.

My wife and I have an ongoing joke about how there is a secret men's only bar hidden in the back of Home Depot since I am always running up there.

There are a lot of things that you can do now when you are young and don't have kids that will be harder or impossible to do in later phases of your life. Doing things like camping or hiking with kids is still possible but it will be a lot different then.
StudentofFI wrote:
Sat May 23, 2020 9:37 am
1. 250K range or so. Want to keep it within our means.
You would want to max out all your retirement accounts first but if you can budget $25K a year towards the house you could have a paid off house by the time you are in your mid 30s.

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White Coat Investor
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Re: Finally! Income more than doubled - review

Post by White Coat Investor » Wed May 27, 2020 10:36 am

StudentofFI wrote:
Sat May 23, 2020 9:06 am
White Coat Investor wrote:
Thu May 21, 2020 3:06 pm
I would count pension contributions toward my savings rate.

I wouldn't have a car loan. You make $140K. You can save up a $5K car in one month, a $10K car in two, a $15K car in three etc.

I'd pay off the student loans too using the money in the taxable account.

Then you're simply dividing the money between retirement investments and a house down payment. That's pretty simple.
Thanks! Appreciate the simplistic approach, this is all new and a little easy to over think. I do like the idea of no car loan or a minimal one. Funny coincidence you commented, I was just telling my spouse about your podcast, she is wearing a white coat now also.. DVM though, not humans :wink:
DVMs need all the help they can get. Almost the same cost of education, but much less income.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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