Looking for advice on next steps

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runner262
Posts: 4
Joined: Mon May 21, 2018 9:52 am

Looking for advice on next steps

Post by runner262 » Sun Jun 03, 2018 10:07 am

Hi Folks,

This is my first post here but I've been referring to this site frequently on the road to going debt free along with my wife. We currently hit this milestone last month and I am now looking for suggestions regarding our next steps.

Here is a little back story and current financial situation. Sorry if the post gets a bit long.

When we first met about four years ago we had around $20K in combined credit card debt and another $40K in student loan debt. Being a new couple, we still kept finances separate but we worked together on laying out a plan to help us chip away at our debt over the years through marriage. During this period, we still made it a priority to put money towards our 401K but we neglected any type of after tax savings. I'm not saying everything we did was perfect but the system we put in place worked for us and got us to where we wanted to be.

In addition to our recently paid off student loan debt, I just received a promotion at work and my wife accepted a new job that allows her to work exclusively from home and with an increase in salary (win/win for her!). Despite these positive changes, we find ourselves struggling to determine how to start allocating our monthly savings since we are planning on some major expenses down the line and we want to make sure we are financially prepared for these. This includes saving at least 20% for a home (looking in the high 300s/low 400s), starting a family, and most likely new car payments (we do not want new cars but both of ours are at 170,000 miles so just being realistic. Our plan is to drive them for as long as we can). I love the idea of finally being able to max out our 401Ks but I'm not sure that is the smartest move due to the major expenses we see coming down the line and our lack of any emergency fund, non-retirement savings, etc.

Some additional info:

Me - 34 y/o; 100K salary (10% bonus)
Wife - 29 y/o; 70K salary (5% bonus)

Current retirement assets:
401K
Prudential: $118K - 100% Vanguard Extended Market Index Admiral (Mid CapStock - Blend)
Fidelity: $58K (my old employer; open to suggestions on what to do with this)
84.04% FID Freedom 2050K (FNSBX)
4.32% FID Freedom 2015K (FSNLX)
4.17% FID Freedom 2010K (FSNKX)
3.89% FID Freedom 2005K (FSNJX)
3.59% FID Freedom INC K (FNSHX)
Voya: $33K - 100% 2473 Vanguard Target Retirement 2055 Fund

New annual Contributions
10% towards my 401K (7% matching)
15% towards wife 401K (3% matching)

HSA - $3K

We currently have zero in after tax savings.

Current monthly rent is $1825. We both love our current place and there is room to grow when we have kids so there is no urgent rush to leave except for putting these payments towards a mortgage instead.

We've been working on putting together a budget for the next 12 months (based on a previous years Quicken data) and I believe we should be able to put away at least $3.5-4K a month in after tax savings with no change to our 401K contribution (and maxing out my HSA). We admittedly have some expensive hobbies (we're into running/triathlons and do destination races) and prefer to eat organics foods (so our grocery bill has been consistently on the high end) but we are focused on bringing these costs down so I'm hoping we can save even more when it's all said and done.

I would love to hear any thoughts or suggestions given our current financial situation and goals. I think with the lack of emergency savings it makes sense to focus on building that up first along with savings towards our future house purchase. I believe we can still hold off for another year or two without getting new cars but I think we would look into a car that offers a 0% interest loan rate so we can just pay that when the time comes instead of having to save for it.

Thank you all in advance for your help! I'm happy to provide any additional information that I may have missed that could be beneficial for your responses.
Last edited by runner262 on Sun Jun 03, 2018 10:58 am, edited 2 times in total.

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Sandtrap
Posts: 5104
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Looking for advice on next steps

Post by Sandtrap » Sun Jun 03, 2018 10:25 am

Welcome.
Great job getting to where you are and asking great questions.

1. Build up Emergency Fund to 6 months expenses. (high yield accounts, cd ladder, etc)
2. Concurrently save for home down payment. (high yield accounts, cd ladder, etc)
3. Cut expenses. (what expensive hobbies?)
4. List funds you have and what is available at Fidelity, Voya, Prudential (fund names, tickers, expense rations, percentage of total, overall allocation)
This format: edit original post.
Portfolio Review Format
https://www.bogleheads.org/forum/viewt ... =1&t=6212


Read.
GETTING STARTED
https://www.bogleheads.org/wiki/Getting_started

aloha
j :D

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FiveK
Posts: 5152
Joined: Sun Mar 16, 2014 2:43 pm

Re: Looking for advice on next steps

Post by FiveK » Sun Jun 03, 2018 11:44 pm

The Investment Order post should reinforce some of your thoughts and Sandtrap's suggestions, and perhaps add a few ideas.

If your current 401k has good options, and will allow it, rolling the old 401k into the current one will simplify things and it worth doing.

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gunn_show
Posts: 1451
Joined: Wed Jun 06, 2007 3:02 pm

Re: Looking for advice on next steps

Post by gunn_show » Mon Jun 04, 2018 12:04 pm

Sandtrap laid out a pretty solid plan, I would follow that. The zero after-tax savings is the biggest concern. Also, why not maxing 401k for each, if you have so much surplus cash monthly. Same with HSA. These are prime pre-tax saving vehicles. With $170-200k in total income you should be maxing all of those, IMHO. The sooner you get the big ball of wax rolling the better (savings + compound interest = rapid growth in NW). And remember, maxing 401k doesn't cost you dollar for dollar loss, because you are saving your tax bracket on each dollar. So it may cost you only 70 cents to save every pre-tax dollar.

Other thoughts

Curious why rent is so high ($1825) vs. what it costs to buy a house (300-400k)? That seems incongruent to me. Maybe I'm wrong. Or maybe you have a lot more rental house today than you need, and would buy in an equivalent purchase.

Wife will be working from home, congrats. I do as well, love it, game changer in work and life, and also lowers some expenses with no commute, work outfits, eating lunch out, etc. I bought a "new car" last year. 2007 Lexus SUV with 175000 miles. I drive maybe 3000mi per year due to working from home. I have a kid. It's a very safe and reliable Lexus/Toyota that will last over 300k miles if taken care of properly. Why would your wife need a new car again? To work from home? It will depreciate daily while sitting in the driveway. Seems you want to fall into debt / payments trap again "just for the sake of new cars" .. I would rethink this idea. This is 2018 not 1908. Cars are far more reliable nowadays. YMMV. At worst, consider setting alerts on craigslist for 3-5 year old off-lease Japanese luxury cars that have taken 50% of the hit already. I don't find much value in buying new cars anymore, and admittedly I am a car nut and would head to the nearest Porsche dealer tomorrow if I was filthy rich. New cars also come with much higher insurance premiums, gas, maintenance, and so forth. I have a pair of 2007 Lexus with very high BI/PD limits and no comp/collision coverage, makes my insurance dirt cheap. If, for the first time in my 20+ year driving career, I hit someone (at-fault accident by me) and total either of these cars, if the repair cost is too high, I scrap it and hit c-list and buy another one for $10k and move on. That's the beauty of this model...

You are young and doing VERY well on income and with your goals, be proud of that. Wait a few years on new cars and buying a house. You don't need a new whip at 30yo and to own a home this young, those days will come soon enough based on your earnings path. Focus on creating a big EF and start growing a house fund, and maxing all pre-tax savings accounts.
"The best life hack of all is to just put the work in and never give up." Bas Rutten

runner262
Posts: 4
Joined: Mon May 21, 2018 9:52 am

Re: Looking for advice on next steps

Post by runner262 » Mon Jun 04, 2018 2:32 pm

Thank you for the responses so far. Much appreciated. I'll take a look at the links that have been suggested for additional thoughts and ideas.

Regarding some of the questions so far...
gunn_show wrote:
Mon Jun 04, 2018 12:04 pm
Sandtrap laid out a pretty solid plan, I would follow that. The zero after-tax savings is the biggest concern. Also, why not maxing 401k for each, if you have so much surplus cash monthly. Same with HSA. These are prime pre-tax saving vehicles. With $170-200k in total income you should be maxing all of those, IMHO. The sooner you get the big ball of wax rolling the better (savings + compound interest = rapid growth in NW). And remember, maxing 401k doesn't cost you dollar for dollar loss, because you are saving your tax bracket on each dollar. So it may cost you only 70 cents to save every pre-tax dollar.
I completely agree with. The only reason why I posed the question of not maxing out our 401K is the fact that we have zero after-tax savings and we thought it might be worth trying to build an emergency fund first.
gunn_show wrote:
Mon Jun 04, 2018 12:04 pm
Curious why rent is so high ($1825) vs. what it costs to buy a house (300-400k)? That seems incongruent to me. Maybe I'm wrong. Or maybe you have a lot more rental house today than you need, and would buy in an equivalent purchase.
I would say it's more of the latter. We live in CT where there are pockets of HCOL. While the rent is on the higher end, I've seen much smaller and older places go for around the same, if not more monthly. You can make a fair case that we have a little more house than what we need today but we are both extremely happy with our living situation and it also gives us room to grow a family down the line without the urgent rush to find a larger house.
gunn_show wrote:
Mon Jun 04, 2018 12:04 pm
Why would your wife need a new car again? To work from home? It will depreciate daily while sitting in the driveway. Seems you want to fall into debt / payments trap again "just for the sake of new cars" .. I would rethink this idea. This is 2018 not 1908. Cars are far more reliable nowadays. YMMV. At worst, consider setting alerts on craigslist for 3-5 year old off-lease Japanese luxury cars that have taken 50% of the hit already. I don't find much value in buying new cars anymore, and admittedly I am a car nut and would head to the nearest Porsche dealer tomorrow if I was filthy rich. New cars also come with much higher insurance premiums, gas, maintenance, and so forth. I have a pair of 2007 Lexus with very high BI/PD limits and no comp/collision coverage, makes my insurance dirt cheap. If, for the first time in my 20+ year driving career, I hit someone (at-fault accident by me) and total either of these cars, if the repair cost is too high, I scrap it and hit c-list and buy another one for $10k and move on. That's the beauty of this model...
Completely agree again. Maybe you missed it but we do NOT want to get new cars. I was just throwing that out there as we are trying to be cognizant of future costs and weren't sure if we should try and build in any savings for this. I take comfort in your response though. We both have 2008 cars (Ford SUV and Acura sedan) and I personally feel we still have some good years left. Especially with the wife no longer having to drive to work. I just don't like planning for the best case scenario.

526297
Posts: 6
Joined: Sun Jun 10, 2018 4:03 pm

Re: Looking for advice on next steps

Post by 526297 » Tue Jun 12, 2018 12:54 am

Live on just one salary and save all that the other person makes. 👌

-buzz-
Posts: 94
Joined: Thu Apr 05, 2018 1:43 pm
Location: USA

Re: Looking for advice on next steps

Post by -buzz- » Tue Jun 12, 2018 5:03 pm

runner262 wrote:
Sun Jun 03, 2018 10:07 am
This is my first post here but I've been referring to this site frequently on the road to going debt free along with my wife. We currently hit this milestone last month and I am now looking for suggestions regarding our next steps.

...

Despite these positive changes, we find ourselves struggling to determine how to start allocating our monthly savings since we are planning on some major expenses down the line and we want to make sure we are financially prepared for these. This includes saving at least 20% for a home (looking in the high 300s/low 400s), starting a family, and most likely new car payments.... our lack of any emergency fund, non-retirement savings, etc.
You are on the right track. Congrats to you for being debt free!

In some ways, achieving savings goals are more difficult than paying off debt because you set the spending targets and you have to keep track of them. You need to agree as a couple how much to spend on a car, house, etc. The money gets saved over time but isn't actually gone until you spend it. You continually make prioritization decisions on whether spending on X is more important than saving for Y.

We use the budgeting tool YNAB because it allows budgeting monthly for upcoming irregular expenses and also fund categories of earmarked savings (emergency fund, house, new car). I like the savings categories because I can see my progress in different areas but still retain the simplicity of having a small number of bank accounts.

Here is the priority what I would recommend:

1) Emergency fund: Usually 3-6 months of expenses and I'd err on the 6 month side while you are driving cars approaching 200k miles and expensive repairs are a realistic concern. From your numbers, I'd guess ~$35k-40k would cover 6 months of expenses. That should take 10 months at $3.5k-$4k savings per month.

2) Replacement car: Since one of you is now working from home, I'd suggest saving up and paying cash for a one used car. Keep the better of the two existing cars and sell the other. Do your future self a favor and do not go back into debt (even on a 0% loan) for a car. If I was sitting on an emergency fund with 6 months of expenses and had a major car issue, I'd be comfortable using 1-2 months of emergency fund plus my car savings if that meant replacing a car without going into debt. At $4k per month savings, in 5 months you could fund a $20k car savings plus whatever the old car sells for. That should be plenty to buy a really nice reliable car and no payments.

3) House down payment: It would take 15-20 months to reach $60-$80k. At some point during this time, you might need to save up (or reallocate funds) for a second car if the old one becomes uneconomical to repair.

All three of your savings goals could be accomplished in 2.5-3 years or even sooner if you get pay increases and find ways to cut expenses.

Good luck.

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