What now?

[dividend]

OK, serious question for the new boards. Hit me with your collective wisdom.

I'm exiting 2010 in a great financial place. I'm completely debt free (thanks to my grandmother leaving me a little money ), I've got a $10k-ish EF, ~22k in my IRAs, and 4 year old paid off car. I got my bachelor's degree in December, I make $30/hour on a contract, and expect to convert to full time at ~$67k in the next 3-4 months. I'll be 30 in April.

I've spent many years working towards the "next" milestone - paid off credit card debt, paid off the car, finished college, built an EF, and now, paid off student loans, and it's like I don't know what to do now without some obvious next target. I've got a ridiculously comprehensive budget - I'm automatically funding my Roth each month to max it, I'm setting aside money for all irregular expenses, including planning to pay cash for my next car in 8 or so years, and I'm giving myself 10% of my gross pay in play money. (I'll be signing up for my company's 401k when they hire me on.) I live with DBF, and pay for our groceries, cell phones, and some cash that adds up to what I could rent a cheap apartment for. The mortgage is all him, since we're not married. I've still got like $1k leftover each month. What do I do with it besides just stick it in a savings account?

[Deleted]

If I were you and had EVERYTHING accounted for and still $1,000 left over each month I would go for an investment in a mutual fund at Vanguard....sure the gains might be taxable but its way better than anything you could get in a CD or money market fund obviously.

Another possibility might be a 529 if you plan to have kids someday?

Some here might suggest real estate but don't know what your risk tolerance is.

You could always donate more to charity.

Could save up for whatever your 'dream' is and make it happen.

Your in a good place, enjoy it.

[The J]

If you have some short term spending coming up (vacations or something else), I'd put money into savings for that. Otherwise, I'd stick the money into a taxable investment account.

[HoneyBBQ]

Does that amount include maxing your 401? I think the limit for next year is 16.5k.

Is your DBF's house a permanent house or will you be buying a new one together in a few years? A down payment is something you could save for.

What about wedding expenses?

You could save extra $ in non-retirement accounts.

You could also bump up your play money amount. If you are saving well and funding retirement accounts well, why not spend what you have extra?

[TrixAre4Kids]

If it were me, I'd be saving most of that extra cash earmarked for a house down-payment, or early mortgage payoff.
I understand you don't have a mortgage now, but at some point you probably will. And paid off house = early retirement at 50 or 55.

[cronewitch]

Go for the taxable investment account I would put in the 10K efund too since you don't seem to be in much risk of emergencies. Since you aren't married or even engaged never tell DBF how much you have just quietly keep saving.

Make sure you fully understand your income tax situation. Does your contract work give you a paycheck or a contractor check. If you aren't an employee who will get a W2 you might have a huge tax bill if you didn't pay enough estimated taxes

[phil5185]

What cronewitch said - definitely a taxable investment fund (and add the $10k PLUS the new-car money.

The folks of your generation are focusing well on the 401k and Roths, but they are overlooking the old fashioned investment account. You need 3 catagories of investments - pretax (401k), posttax(Roth), and taxable. The taxable account is your pre 59 1/2 non-govt wealth - it's a fallback EF available in a couple days, your car money, house down payment, rental house or small business, early retirement, general wealth building. The fund grows tax-deferred, and it is taxed at the lower 15% capitakl gains rate when/if you sell some. (We use the SP500 Index).

IMO you are doing a great job of focusing on your goals - OTOH, I don't entirely agree with your goal. 'Debt-free' isn't such a good plan if it comes at the expense of building your wealth.

But the answer is simple - make new goals. Decide what you want your net worth to be each decade and plan how to do it. It's probably about $45k now (depending on the car), maybe $250,000 at 40, $1,000,000 at 50, and so on?

[dividend]

The term "taxable investments" is a little intimidating to me. Maybe because I never thought I'd actually be at a point to think about wealth building as opposed to eliminating debt and saving. I have Prudential guy who handles my IRAs. He took very good care of my grandmother's finances for many years, so I started my first one with him based on trust and familiarity. I have the Roth, and I have a regular IRA that's served as a rollover for various 401k's as I've moved jobs. Should I just talk to him about taxable investments? Or should I mix it up and go someplace like Vanguard? What is the first step here?

Is there any reason NOT to max my 401k when I get hired on, and just "set and forget" that and the Roth? I hear that the match on the 401k here is good, does that count towards the max?

Also, I have the option to buy my grandmother's house from my mom. My brother is renting it right now from her for just under what the mortgage would be, and would continue to do so. I have excellent credit, it's appraised at $90k, which, with $5k down is ~$500/month PITI. It's walking distance to a hospital/medical school, and close to several shopping/bar districts, so it would be easy to rent probably (other houses on that street rent to med students). Is that a terrible idea?

Appreciating the input so far. And yeah, phil, when I redid my net worth spreadsheet, I'm worth about $44k. Not bad for my age, I guess.

[Urban Chicago]

Looks like you're covering most of your basics. If you need new goals, I'd be saying:
1. House downpayment (your grandmother's or any other).
2. Eventual new car.
3. Wedding (if not to this guy, maybe another one?)
4. If you want kids, how about saving for a year or so off work after the baby is born?

[phil5185]

I have Prudential guy who handles my IRAs. He took very good care of my grandmother's finances for many years, so I started my first one with him based on trust and familarity.

when I redid my net worth spreadsheet, I'm worth about $44k. Not bad for my age, I guess.

Not bad at all, it beats having the negative $50k due to student loans that we often see doesn't it?

A caution about the trusted family banker/insurance guy - sometimes it works out well, but sadly it often works out well only for the salesman. I would go to a no-load fund company, Fidelity and Vanguard are the two main providers - call the 800 number and they will take care of it.

Is there any reason NOT to max my 401k when I get hired on, and just "set and forget" that and the Roth?

Depends on your income stream and your future plans - the 'qualified' plans are inaccessible until age 59 1/2 so don't box yourself in (altho I did the max $16,500 when I was a bit older). You'll need it before 59 1/2 to cover 3 or 4 house DPs, a couple job losses, a car wreck, crowns on your molars, braces on your kid's teeth, yada. The taxable account is immediately accessible, so you can 'back up the truck' on that contribution.

[dividend]

Dec 27, 2010 18:46:34 GMT -5 phil5185 said:

the 'qualified' plans are inaccessible until age 59 1/2 so don't box yourself in (altho I did the max $16,500 when I was a bit older). You'll need it before 59 1/2 to cover 3 or 4 house DPs, a couple job losses, a car wreck, crowns on your molars, braces on your kid's teeth, yada. The taxable account is immediately accessible, so you can 'back up the truck' on that contribution.

How do I decide how much to allocate to the three types of investments? The Roth is a no brainer because the limit is only $5k. But say that I'm looking at up to another $1k/month between a 401k (my company's is actually managed by Vanguard) with a match, and a taxable account.

[jkscott]

You are where I have been crawling towards. Take a breath and enjoy being debt FREEEEE.

[Wisconsin Beth]

I'd go with the investment account too. And have a serious think about your future goals. Do you want to retire early? Do you want to have a vacation place? Take exotic vacations? Generously support your favorite charities, whatever they may be? Do you think you'll be marrying your DB? Having children with him? Are you going to have to take care of elderly parents at some point? If those are in the works, start planning.

Then start to think about your DB's goals. Are they different goals than yours? Are they incompatible goals or just need a small amount of compromise to met in the middle? If you stay with him, will compromising on goals be more expensive than your own goals? If you don't know his goals, maybe start the conversation somehow.

I can honestly say that DH and I talked about goals but not how to achieve/meet those goals. I wish we had because we'd be in a different place financially now if we had. We're not in a bad place now but we could have been in a better place had we acted 4-5 years ago.

[Clifford]

Continue to live like a college student. As your income rises, keep your expenses at a minimum. Carefully (skeptically) consider any actions that will have you suffering from lifestyle inflation. Follow the other posters' suggestions about the taxable investment account. How about a goal of keeping your expenses to 20% of your new income? Read Early Retirement Extreme (or go to the website) and see if it is an approach you are interested in.

[T Skeeter]

You're at the stage where you should be thinking about retirement. In addition to the suggestions about setting aside money for a house, wedding, kids, kids college, I'd like to add a plan for early retirement to the list of uses for your money. Setting up your investment plan so you can retire at something like age 55 is a good idea. Although you don't feel like walking away from the working world now, after another 25 years of work, having the option to decide to continue working, or taking a less demanding job, or retiring completely will be mighty attractive. Planning so you have the option of an early retirement also helps if you should suddenly find that you are not able to work while you are still relatively young. It also helps you to be better prepared if you should want to spend a few years on the Mommy track while your family is young. Pinching every penny now and stashing them in investment accounts so they can grow over time will set you up to have more options later on. Options are always a good thing.

[resolution]

I would also go with the taxable investment account until the 401K becomes available. Once it becomes available, contribute at least enough to maximize the company match and then decide how much extra should go to the taxable account versus the 401K.

I would be a little cautious about buying your mom's house and renting to your bother as an investment. Perhaps it would work great but if it didn't it could make the family situation messy. How would the family react if they thought you got too good of a deal and got more than your share? What if your brother stopped paying, how long would you let him live in the house? What impact would that have on your family life? How would you handle rent increases? I think rental property could be a great investment for you as well as a good tax management tool, but not one that comes with a lot of family entanglements. If you want to buy it to help support your mom and brother that would be another story, but if you are looking at it as an investment that is when I would be cautious.

[phil5185]

Roth is a no brainer because the limit is only $5k. But say that I'm looking at up to another $1k/month between a 401k (my company's is actually managed by Vanguard) with a match, and a taxable account.

The most important thing is what product you invest in rather than which tax status account you keep it in. If you invest a total of $2500/m in an 11%/yr product for 30 yrs it adds to $6,600,000. Whether the $6.6M is split $2.2M in each of the 3 account types, or $1M, $1M, $4.6M - it is still $6.6M - altho the tax burden will be a bit different. And tax code cannot be forecast 30 yrs out, one of the tax statuses will be best but we can't know which one - so you need to spread the risk.

[phil5185]

My brother is renting it right now from her for just under what the mortgage would be, and would continue to do so.

Wow, I missed the 'rent to brother' part until I saw Kari's post, I was thinking you were buying it for yourself.

Let me repeat the First Law of Landlording. Never rent to an acquaintance, a coworker, a coworker's kid, a friend, and never ever to a relative - you need an arm's length agreement with a stranger.
Obviously everyone starts out with 'that couldn't happen in my family, we get along famously". But if you want to sit thru some very tense thankgiving dinners for the next 30 yrs, you can give it a try, LOL.

[Deleted]

Lol, Phil I was waiting for you to jump on the "rent to brother" part!

I agree with Kari and Phil. I've been a property manager on and off for 30 years and a landlord for over ten years. I just about choked when DH suggested renting one of our rental houses to his mother while we rented another. Did he have amnesia from our last experience? MIL was a good payer and her rental of our old home really helped us when we bought another. BUT she is a PITA and very demanding. Every request was not only a business decision but an emotional one. So glad that only lasted 10 months!