They say a mark of greatness is to gather advice from those wiser, older, or more successful than himself. So that is exactly what I did. I laid all my cards out on the table, I let myself be vulnerable. Why? Because I needed it. Couple of conclusions.
1. Retirement – Stop paying the 1.9% automobile loan off early and max out retirement. Now. Stop. Do Not Pass Go. Do it now. Plus I need to lower my tax burden. I don’t consider myself super wealthy, but I shouldn’t be able to buy a new car each year with what I pay in taxes.
2. My commute is out of control and draining me of my life force. Getting to work early has made things a lot better. About 35 minutes in and 40 coming home. Previously it took me about 45 minutes and an hour. Best case 6 hours of commuting each week, worse case almost *9* hours a week. In an automobile stopping and going. 300-450 hours a year. When I think about it that way, it kinda makes me sick. The alternative however is paying roughly $400-$600 per month in rent, plus $500 ish in moving expenses, $500 in pet deposit, an extra $10-$15 monthly in pet fees.
I really looked at a bunch of different options. The safer neighborhoods generally cost a lot more. Areas close to work are in old buildings with some issues, such as leaks, poor sound deadening, crime, growing homeless situation, difficult to find parking. Rent is up for renewal now at $880/mo. Close to work would be around $1400/month. $16,800 a year to rent a 1br or studio apartment with 0 equity? No thanks. The newer complexes near me seem to have poor parking too and are a target for thieves.
SUV on Blocks March 2019
SUV on Blocks March 2019
3. Stop eating out as much. I said $400/mo dining out (including activities) and another $400/mo for groceries. I cut back quite a bit the last few weeks but it still wasn’t easy. Kinda felt down being cramped inside the apartment. I’m realizing getting out and going to nice places every once in a while is something I enjoy and will shift things around here and there in order to cover it. When I do go out now I’m more prone to go to $ or $$ restaurants, never $$$. Coupons or happy hours are a plus too. If someone else is going to drive or I will be there a while, pregaming is always an option.
I almost always bring my lunch with me to work now. Salad, some protein, some carbohydrates. When I do have lunch with coworkers, friends, etc. I have 0 guilt.
4. Car overhead – Overall it costs me an estimated $1000/mo to drive. That’s kind of insane, even with my decent salary. So I’m hacking that too. More Costco fill-ups, pay for gas with cash back cards. Skip tollways when it will save me less than 5 minutes on a commute. Just today I dropped $271 on a transmission fluid change, and an oil change. Car accelerates / decelerates much more smoothly. Hope the preventative maintenance works out in my favor. Still have a warranty for 5 more years.
The best thing for me to do now is save on the things that don’t matter, automate my investments, focus on traveling a bit more.
On one of MMM Forums I came across the Investment Order, I thought it would be helpful too anyone reading this post.
“This ordering is appropriate for investors in the US.
In the lists below, thinking “first your governmental 457 (if you have one), then your 401k/403b/SIMPLE/etc.” wherever “401k” appears is likely correct –
unless your governmental 457 fund options are significantly worse than those in the 401k/403b –
due to penalty-free access to governmental 457 funds at retirement, even if younger than 59 1/2.
Non-governmental 457b plans have deficiencies, including the inability to roll the balance into an IRA.
“Max _____” means “contribute up to the maximum allowed for _____, subject to your ability to pay day-to-day expenses.”
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).
Current 10-year Treasury note yield is ~3%. See
0. Establish an emergency fund to your satisfaction
1. Contribute to your 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.
3. Max Health Savings Account (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if
– 401k fees are lower than available in an IRA, or
– you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
– your earn too much for an IRA deduction and prefer traditional to Roth, then
swap #4 and #5)
6. Fund a mega backdoor Roth if applicable.
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.
8. Invest in a taxable account and/or fund a 529 with any extra.
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise.
For those willing to expend a little more energy than it takes to flip a coin, consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
If current > predicted, use traditional. Otherwise use Roth.
See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
See Traditional versus Roth – Bogleheads for even more details and exceptions. State tax (or lack thereof) should also be considered.
The ‘Calculations’ tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k. In a 401k there are no income-based limits for deductions or contributions.
6. Applicability depends on the rules for the specific 401k. See Mega Backdoor Roth IRA.
7. Again, take the risk-free return if high enough. Note that embedded in “high enough” is the assumption that your alternative is “all stocks” or a “fund of funds”
(e.g., target retirement date) that provides a blend of stock and bond returns. If you wish to consider separate bond funds, compare the yield on a fund
with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.
8. Because taxable earnings will still help your FI journey. If your own retirement is in good shape, and you choose to provide significant help for children’s college costs,
a 529 plan may be appropriate. Similar to “put on your own oxygen mask before assisting others,” do consider funding your own retirement before funding 529 plans for children’s college costs.
Speaking of things to do first, see Getting started – Bogleheads if this is all new. Working through that post and the links therein is also a good refresher, even if personal finance isn’t completely new to you.
The emergency fund is your “no risk” money. You might consider one of these online banks:
It is up to you whether to consider “saving for a house down payment” as a “day to day expense”, vs. lumping the down payment savings in with “taxable investments” at the end.
If you are renting, you may not be throwing away as much on rent as you might think. See
for some thoughts.
For those concerned about “locking up” money in retirement accounts until age 59.5, see How to withdraw funds from your IRA and 401k without penalty before age 59.5.
If your 401k options are poor (i.e., high fund fees) you can check
for some thoughts on “how high is too high?”
The MAGI calculation for Roth IRA purposes is https://www.irs.gov/publications/p590a#en_US_2018_publink1000230985
Then see Retirement Topics IRA Contribution Limits | Internal Revenue Service.
The MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a#en_US_2018_publink1000230489.
Then see IRA Deduction Limits | Internal Revenue Service
If one can swing the cash flow, getting in and out of an ESPP is ~”free money”. But if one has to make a choice between deferring income in a 401k vs. taking the income and using it for an ESPP, it isn’t the same. The benefits of employee stock purchase plans (ESPPs) relative to other opportunities is highly dependent on tax rates, because ESPP benefits all occur in taxable accounts.
– For someone paying 12% tax on ordinary income, and 0% on dividends and capital gains, ESPPs can be very favorable, perhaps competing with high interest rate loans in step 2.
– For someone paying 22% tax on ordinary income, and 15% on dividends and capital gains, ESPPs are not as favorable, perhaps coming between steps 6 and 7.
Priorities above apply when income is primarily through W-2 earnings. For those running their own businesses (e.g., rental property owner, small business owner, etc.),
putting money into that business might come somewhere before, in parallel with, or after step 5.
Why it is likely better to invest instead of paying a low interest rate mortgage early, if you have a long time until the mortgage is due:
*Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Estimate any guaranteed income. E.g., pension you can’t defer in return for higher payments when you do start, rentals, etc.
2) Take current traditional balance and predict value at retirement (e.g., with Excel’s FV function) using a conservative real return, maybe 3% or so. Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel’s FV function) using a conservative real return, maybe 3% or so. Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today’s dollars) if needed from step 4a.
5) Calculate marginal rate on withdrawals from traditional accounts using today’s tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year’s contribution
7) Repeat steps 1-6 every year until retirement
The steps above may look complicated at first, but you don’t need great precision. The answer will either be “obvious” or “difficult to choose”. If the latter, it likely won’t make much difference which you pick anyway.
Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income
Also, if you pick traditional and that ends up being wrong it will be because you have “too much money” – not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have “too little money” – that can be a real problem.
Thus using traditional is a “safer” choice.”