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Author: Slev13 Two stars, 250 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76395  
Subject: dual incomes, now what? Date: 8/20/2007 7:30 PM
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Well the day is finally here... No more college bills, my wife is done with grad school and has a job! I'd be curious to get some advice on how to plan financially now that we have dual incomes. Here's a snapshot of us:

I've been out of school myself for about 4 years now. I make a fairly decent income as an engineer. We are both 25. For the last couple of years we have lived comfortably off of just my income while my wife was in school. We managed to get out of college with only 1 quarters worth of tuition in student loans. We currently contribute 10% of my income to my 401k, and $450/month to a taxable sharebuilder account. Last year we did not make any IRA contributions (bad, I know), but we have in the past.

With my wife now working, I am estimating we'll have an additional 30k/year post-tax money to figure out what to do with if we don't make any changes to our investments. Obviously we are going to start contributing to IRAs again, so that will take care of $8k this year, and $10k next year... but that still leaves a substantial amount of money left over that we never had before.

We have a short term goal of upgrading from our current townhouse to a single family house. We hope to do that in the next two years. We are in the Seattle area, so housing is fairly expensive. We're sitting on a nice little profit on our current townhouse we bought 2 years ago.

We do have an emergency fund of about $18k in online savings accounts.

We have no debt other than 1 quarters worth of grad school loans and our mortgage.

While I know the "smart" thing to do in the long run is completely exhaust all tax friendly investment vehicles, part of me doesn't want nearly all of our money tied up in retirement accounts that we can't touch without penalty until we're 60. That's a long ways away and we'll hopefully be retired long before that :)

Any thoughts?
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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58937 of 76395
Subject: Re: dual incomes, now what? Date: 8/20/2007 7:55 PM
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While I know the "smart" thing to do in the long run is completely exhaust all tax friendly investment vehicles, part of me doesn't want nearly all of our money tied up in retirement accounts that we can't touch without penalty until we're 60. That's a long ways away and we'll hopefully be retired long before that :)

Any thoughts?


Open an account with Vanguard, pick about three or four of their funds, and then invest in each one every month. Buy and hold.

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Author: KlangFool One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58938 of 76395
Subject: Re: dual incomes, now what? Date: 8/20/2007 8:30 PM
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1) Assuming that you are making decent money, you are up in the 25% to 28% tax bracket. Both of you should maxed up your 401K contribution. At that tax rate, even contributing to the max will not reduce your take home pay that much.

2) Most likely you will change job before 60. Then, you can rollover your 401K to IRA. The, in some years, you will earn less money. At that time, you can do a IRA to Roth IRA conversion. 5 years from that conversion, you can take the principal out penalty free. This can heppen before you are 60.

KlangFool

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58939 of 76395
Subject: Re: dual incomes, now what? Date: 8/20/2007 8:33 PM
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Any thoughts?


A couple.

First, if you've been living fine on your paycheck all this time plus paying for school, I'd strongly recommend you continue to live on one paycheck, and that it be the smaller of the two. That gives you flexibility in a host of ways. It means that if someone loses a job, your lifestyle won't suffer, just your savings. It means that someone can take a chance and switch careers without missing a beat. It means that you can save for a whole host of things, some of which you haven't even thought of.

With all you will be able to save, I would max out the pre-tax accounts, but I would also put the remaining chunk in a taxable account. This can be used for a downpayment on a home, to fund college for kids when you have them, or to retire sooner. There is nothing quite so freeing as having a significant nest egg so that you're not tied to a job and so that you have money for emergencies or unplanned expenses as they come up.

This is exactly the plan that DH and I have followed for the last 25 years or so. It has allowed him to change careers twice with the last one putting him sort of in semi-retirement since he works for himself now doing what he wants to do in retirement and works when he wants to. It means that we were able to throw lots of money at fertility treatments that gave us the twins, and that we will be able to offer the kids tuition for the full 4 years at the college of their choice when they go in 2 years. And it means that we can retire sometime before 60, and probably really close to 55 when they get out of school.

I can honestly say that living like this has removed finances as a stressor for us, and we've been able to do things like pay for airfare to attend funerals and provide expensive medical things for DS when they were needed without having to worry about where the money would come from.

We've typically put our raises away, and have been able to save quite a bit of money while still having toys along the way. I think if you were to follow a path like this instead of spending both paychecks, you will find that you have a much easier financial path in life, and that the flexibility and peace of mind that accompanies it will be very welcome.

This is the advice my dad gave me when I was getting out of school, and it is what I tell my kids to do when they are on their own. I don't think you can go wrong like this.

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Author: dinkysue Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58940 of 76395
Subject: Re: dual incomes, now what? Date: 8/20/2007 9:16 PM
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Any thoughts?

Slev13,

My thoughts are that the younger generation is doing fine if there are a few more like you out there. Your plan to somehow "pay yourselves first" is the way to go. As you have noticed, there are a lot of ways to do it. There is no perfect plan since we have so many things in the future that we can't predict. I'm sure that studying some of the good ideas that you get on these boards will help. You are way ahead of the game to do something rather than to wait. I guess my main thought would be to pretend that the new income doesn't exist and to invest it. You may make some mistakes but the worst mistake would be to start spending it and increasing your standard of living in proportion to the newfound income. I have a feeling that you are going to do well and have a prosperous retirement. Good luck.

Dinkysue

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58942 of 76395
Subject: Re: dual incomes, now what? Date: 8/20/2007 10:16 PM
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...While I know the "smart" thing to do in the long run is completely exhaust all tax friendly investment vehicles, part of me doesn't want nearly all of our money tied up in retirement accounts that we can't touch without penalty until we're 60....

Not true;

http://www.retireearlyhomepage.com/wdraw59.html

In addition you can always withdrawal your Roth contributions without a penalty or taxes.

Check out the rest of that site for lots of good info.

You should try to eventually get six months income in your emergency fund. In addition you should have a car fund so that you can buy your future cars for cash.

If you are planning to buy a bigger house in a few years, then the 5% that you can get in things like CD’s actually looks pretty good right now for these funds. If things get ugly, being able to make an offer with a large down payment might allow you get a great deal.

Contentiously choosing to live below your means is the most important thing right now. In addition to allowing you to save more, it is almost guaranteed that you life and career will have to unexpected twists over the next 70 years or so. These are not all bad, I’ve know people who;
1) After years of trying, and expensive treatments, finally gave birth, to quadruplets.
2) Left a secure job to contract all over the world.
3) Relocated with a pay cut for a better quality of life.

Not having gotten used to depending on all their income allowed them to do these instead of being a wage slave.

Greg

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Author: LaughingRaven Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58943 of 76395
Subject: Re: dual incomes, now what? Date: 8/20/2007 11:00 PM
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Slev13 said:
With my wife now working, I am estimating we'll have an additional 30k/year post-tax money to figure out what to do with if we don't make any changes to our investments. Obviously we are going to start contributing to IRAs again, so that will take care of $8k this year, and $10k next year... but that still leaves a substantial amount of money left over that we never had before.

I don't have anything to add here, but I just love this question. It's not a matter of "What should I buy first?" but rather, "Where's the best place to invest our newfound wealth?" I know 40-year-olds who haven't developed this mindset yet.

As others have said, you can withdraw Roth contributions before age 59-1/2 without penalty, so I'd say max those out, then consider whether you like the options in your 401(k); if not, go for a low-churn mutual fund in a taxable account. If you keep saving like you have been, you should be financially set long before 59-1/2.

[By the way, you and the Mrs. have already discussed your financial goals, right? And she's okay with living more or less like you are now, yes? It sounds like you're both pretty smart, and you're both committed to saving, but you know, making assumptions about your partner's financial wishes is a short road to trouble.]

--
Raven
20-something for another 16 days

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58946 of 76395
Subject: Re: dual incomes, now what? Date: 8/21/2007 7:20 AM
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Wow you sound EXACTLY like me and DH. We are both 25, engineers, and graduated three years ago. We also have only 1 student loan and the mortgage.

Here's how WE decided to allocate money.

1) Contributed enough to get 401k match.
2) Saved up for a home.
3) Maxed out Roths.
4) Maxed out 401ks.
5) Saved extra $$ in a regular high yield savings account.

I don't think there is ANYTHING wrong with putting other goals ahead of retirement. However, you need to have at least a bare minimum amount that you contribute each month. For instance, if one goal you have is to update the home and the other goal is to retire by 50, simply calculate how much you need to save each month to retire by 50 and then throw all the rest of your money at your home savings.

And, don't forget, there are ways around the 59 1/2 withdrawal rule (I believe its called rule 72t). So don't be afraid to save that money in retirement accounts.

DH and I decided that we wouldn't aggressively invest any leftover money each month. Instead, we're saving it in a regular high yield savings account. There are tons of reasons for this: we don't know if we're in our forever home and what it will take to get us in it, we don't know how our lives will change when we have kids, we don't know if we'll need to relocate for better job prospects, we don't know how our parent's retirment will affect us (will we want to move closer to them, further away?).

There are just too many unknowns out there for us to put even more cash towards retirement. And since we don't know WHEN we'll need the money (or for what), we've decided just to use it to bulk up regular savings.

We're maxing out our retirement because early retirement is what's most important to US. If you have other things that are more important, then its absolutley fine to fund them first.

Its also fine to keep the money invested outside of tax deferred accounts. But it helps if you know when you're going to need it so you can set up an appropriate investing strategy for it.

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Author: Slev13 Two stars, 250 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58951 of 76395
Subject: Re: dual incomes, now what? Date: 8/21/2007 1:25 PM
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Thanks to everyone for the thoughts and advice! It's really appreciated. We definitely plan to save the money rather than increase spending. Of course if we upgrade our house in a couple of years, that will increase spending... but overall we've been very good in the past when I've gotten raises in not increasing our standard of living, but rather increasing investments and savings.

Thanks for the tips on early withdrawal from retirement accounts. I wasn't aware of some of those rules.

To answer someone's question, my wife and I are very aligned on future goals. We both have approximately timeline for a new house and kids (bigger house, then kids), and both have similar spending and saving habits. While she's not quite as interested in the investing side of things as I am, I make sure she's up to date on all of the stocks/funds we own and accounts we have open in case anything were to happen to me.

The one thing we should have done a while ago and are just now looking into is life insurance. Does anyone have suggestions on how to estimate how much you need?

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Author: SethNC One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 58966 of 76395
Subject: Re: dual incomes, now what? Date: 8/25/2007 6:10 AM
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IMO only a minimal amount of life insurance is needed until you have kids -- perhaps enough to pay off your mortgage, but certainly not more than that. If you were to die prior to having kids, how much of a financial impact would that really have on your wife? Sure, she'd need to take a significant amount of time off, but she would still be able to earn a good living. Basically I would say have enough term life insurance to make sure she would not be forced to sell the house if you died. Usually you can just get this insurance through your employer -- for instance, my employer provides 1x my salary for free and then I pay around $3/mo to bump it up to 4x my salary which would more than cover all of our debt if I died.

Once you have kids things change. If you want to be very conservative, you should have approx 10x-12x your income in term life when you have kids. That way, if you died, your wife could invest the money wisely and should be able to make nearly your same income off that money so that your family would not have to change their lifestyle or worry about money. This amount of money would also ensure that if you and your wife both died and left the kids to a guardian of some sort, that person would have plenty of money to adjust their family to incorporate your kids -- e.g. larger house, living expenses, college expenses, etc.

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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59001 of 76395
Subject: Re: dual incomes, now what? Date: 8/28/2007 5:21 PM
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Didn't see anyone mention eFund and other savings goals.

Fuskie
Who thinks being 25, college educated and debt free is a near perfect place to be...

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