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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308782  
Subject: Increased means, how to prioritize? Date: 3/10/2009 4:51 PM
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Hi,

I'm mainly a lurker here, I enjoy reading because I find the analytical skills of this board to be very impressive. I find myself contemplating changing my cashflow priorities, so I was wondering if you could help me analyze my situation and decide what to do.

My wife and I (32 and 33 respectively) do manage to live below our means, at least to the extent of having a positive net worth, although we could definitely do better--food and eating out are our biggest holes in the budget.

I've recently learned that our means will be going up a bit, and I'm trying to decide what to throw this new money at. Basically, there will be about $500 extra gross available each month. Previously, any raise went first to maxing out our Roths, then to the 401k/403b. In this case the extra money would allow us to just about max out my wife's 403b as well as mine. But our housing/family situation is making me question if that is still the best plan. We managed to just about time the market perfectly on our condo purchase in Boston in 2005--buying right at the peak :(

We put 5% down, but are now are seriously under water on our house (we live on the bottom floor of a triple decker--the 2nd floor unit sold last year for 265k, my estimate below of the condo's worth may still be too high in reality). At some point in the next five years we would like to think about moving to a single family, but unless the market improves greatly it looks like we will have to bring money to the table to get out from under our loans.

We are also expecting our first child in April. My wife plans to go back to work after her maternity leave, so there will be a new expense of 330/week for daycare starting in July. My current plan is to switch 5k of my 401k contributions into my company's dependent care savings account, so at least that money will be before tax. I think we are pretty set on clothes and such for the first 6 months, but I'm sure there will also be other baby related expenses that I haven't even thought of.

So I guess in the end, I am wondering whether I should reduce our retirement investments a bit, in order to increase short term savings--for emergencies, kid expenses, and an eventual down payment on the next house. Another option would be to accelerate payment on the mortgage, but I worry about trapping money there in case of an emergency.

Anyway, on to the numbers, I hope I've got the formatting right:


Income Year Month
My Net 40320 3360
Spouse Net 29016 2418
Total 69336 5778


Assets Value Contribution Notes
House ~250000
My Roth 16000 417
My Rollover IRA 2600
My 401k 33600 1375
Spouse Roth 7875 417
Spouse Rollover 2600
Spouse 403b 11600 714
ING Savings 1800 867 Depleted Feb 2008 for 2008 Roth
Checking 1661
Emergency Cash 1300
Total ~329036



Debts 3/10/09 Amount Rate Payment Notes
1st Mortgage 226691 5.75% 1570
2nd Mortgage 44850 5.19% 194 Interest Only Payment
Wells Fargo 536 0% 268 No Fee, 0% Expires May 2009
Chase Bal Trans 4790 0% 436 No Fee, 0% Expires Jan 2010
College Loan 12760 3.50% 134
Total 289627 2602



My wife and I view credit as a tool, using reward cards and paying off the balance each month. We used a no fee 0% for 15 months offer last year, which allowed us to still max out our Roths while paying for some car repairs, medical services and home improvement. The other 0% offer was for some furniture, where we chose to take the free float and increase savings. Both of these loans are autopaid and on track to be paid before the teaser rates expire.

Our e-fund is our Roth contributions, since we can withdraw them with no penalty if an emergency were to happen. We have about 6 months worth of current expenses (~$4000/month) available in them--although I think we could stretch that by reducing expenditures.

Anyway, that's our situation in a nutshell--how would you go about deciding what to do?
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Author: Patzer Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285837 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 5:14 PM
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My wife and I (32 and 33 respectively) do manage to live below our means, at least to the extent of having a positive net worth, although we could definitely do better

. . .

I've recently learned that our means will be going up a bit, and I'm trying to decide what to throw this new money at. Basically, there will be about $500 extra gross available each month.

. . .

We are also expecting our first child in April. My wife plans to go back to work after her maternity leave, so there will be a new expense of 330/week for daycare starting in July. My current plan is to switch 5k of my 401k contributions into my company's dependent care savings account, so at least that money will be before tax. I think we are pretty set on clothes and such for the first 6 months, but I'm sure there will also be other baby related expenses that I haven't even thought of.

. . .

ING Savings 1800 867 Depleted Feb 2008 for 2008 Roth
Checking 1661
Emergency Cash 130


What jumps out at me is that after making your Roth contributions, you have $1930 of after tax cash reserves, as compared to a stated monthly net income of $5778. You may be living within your means, but your cash flow is near the edge. Life happens, and when that baby arrives you'll notice that it happens more often.

In your situation, I would devote all of your increased means to building up more of a cash reserve. Call it an e-fund, call it a freedom fund, call it a baby fund, whatever. Sock cash away so that when Murphy comes calling, you're able to pay him off.

Since the increased means are $500 per month gross, that probably only means $250 to $350 net. Compared to a known expected expense increase of $330 per week, this is pretty slender. I think you're on the right track in that you're considering means of increasing short term savings. You'll need it when the baby arrives, and you'll need it for things that you won't be able to predict in detail. That's the way life goes.

As to where the cash comes from, that's a matter of personal preference. My preferences, in order of priority, would be save the increased means; cut expenses where possible, including no more 0% purchases unless you have the cash to sit and earn interest; and only after squeezing everything possible out of the budget consider reducing retirement contributions.

Patzer

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285839 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 7:01 PM
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This part: My wife and I (32 and 33 respectively) do manage to live below our means, at least to the extent of having a positive net worth, although we could definitely do better--food and eating out are our biggest holes in the budget.

and this part: We used a no fee 0% for 15 months offer last year, which allowed us to still max out our Roths while paying for some car repairs, medical services and home improvement. The other 0% offer was for some furniture, where we chose to take the free float and increase savings. Both of these loans are autopaid and on track to be paid before the teaser rates expire.

don't really jive.

After 15 months of paydown, you still have $5326 riding on zero percent balance transfers, yet you only have $3100 in emergency cash/savings combined. This means that even after 15 months of paying down the zero percent offers, you have still spent more than $2000 of your future income, if you were to completely empty out your savings/emergency cash.

That's not living below your means. That's living about $150 a month, or $1800/year above your means. It's not a lot, but most people who got into debt trouble probably didn't start out any different than that, either.

We are also expecting our first child in April. My wife plans to go back to work after her maternity leave, so there will be a new expense of 330/week for daycare starting in July.

Does your wife have fully paid maternity leave from April through June? If not, how are you replacing her income for 3 months?

And $330/week is over $17k a year. While you can pay for $5k of that with pre-tax money that you will no longer be contributing to your 401(k), that's still $12k a year of after tax expenses you are going to be adding. And your 'increased means' is $6000 a year before taxes. Now, some of the tax implications may be resolved because of your additional dependent, etc. But even if the taxes aren't an issue, you will be at least $6k a year behind where you are currently. And that's without counting any decrease in your income from your wife's maternity leave, and without considering that you have diverted $5k a year from your retirement savings to child-care expenses.

And, as I said previously, contrary to your assertion, you appear to me to be living above your means by about $150 a month currently. Add in the extra $6k a year, or $500 a month, and you will be living above your means by almost $8k a year.

My suggestions would be:

1) Quit spending if you don't have the money in the bank - do not use 0% offers to fund expenses unless there is actually money in the bank. That means no new furniture and no home improvements, for example. Car repairs and medical expenses should be paid out of some type of contingency fund/freedom fund/whatever you want to call it - but, especially with a baby coming, you know that those types of expenses will probably increase - you need to plan for them to and have money set aside to cover those expenses.

2) Save every penny of the increased means in a non-retirement account. You need to build up your savings against the things like car repairs and medical expenses, as well as stop viewing your retirement funds as your emergency funds. It is very likely that you or your wife will have a period of unemployment during your career that will require the use of the emergency funds. It is also very likely that you and your wife will eventually want to retire. If you've spent the retirement funds on emergencies, you will have significantly less to retire on.

3) Decrease your expenses. With a baby coming, this could be difficult - there are probably baby expenses other than the daycare that you haven't considered. Additionally, there will probably be things like nights that neither of you feels like cooking, so you stop for take-out. But you can't do that - you need to find an extra $650 a month to start living AT your means.

AJ

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285840 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 7:20 PM
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Hi Patzer,

Thanks for the response. Emotionally, I see the appeal of having the large liquid pool of cash I think you're recommending. But for the goal of maximizing net worth, I'm not sure if that's the best way--that's what I'm trying to figure out :)

I do have to question something you wrote, as I don't quite understand your viewpoint. Maybe I didn't explain clearly.


What jumps out at me is that after making your Roth contributions, you have $1930 of after tax cash reserves, as compared to a stated monthly net income of $5778. You may be living within your means, but your cash flow is near the edge. Life happens, and when that baby arrives you'll notice that it happens more often.
...
As to where the cash comes from, that's a matter of personal preference. My preferences, in order of priority, would be save the increased means; cut expenses where possible, including no more 0% purchases unless you have the cash to sit and earn interest; and only after squeezing everything possible out of the budget consider reducing retirement contributions.


Minor quibble: you dropped a zero off the emergency cash, so make it $3100 in non-Roth savings, growing at 867/month. But I don't understand why you are ignoring our e-fund in our Roth acocunts? The money from the balance transfer _is_ sitting and earning interest, in a Roth IRA.

Is there some problem I'm unaware of with keeping an e-fund in a Roth? My logic for it was that contributions can be withdrawn without penalty but that one can never regain a missed year of contributions. So when I had the choice of making the contribution for 2008 or keeping the money at ING I didn't see any reason not to put it in the Roth. If there's no emergency, the money grows tax free. If there is an emergency, all I lose is a past year's ability to contribute, which I wouldn't have had anyway if I didn't contribute, right? Am I missing something? Is it that you think it's not enough? How much should it be? The $24k should be able to carry us for 6 months right now if we lost both jobs at once: income post savings deductions is 5778 minus 1701 equals 4077/month. That is with current expenses, pre-baby, but it's also growing at $800/month and includes things we could cut if the situation required it.

Your point about squeezing the budget is well taken, I would like us to do better with that as well. I just did the tax return, so it was easy to calculate that last year we saved 27% of our gross income; with the baby it may be hard to better that this year--and hopefully this time not see the 401k contributions just disappear into the market...I just keep repeating "dollar cost average" to myself, but I digress.

However, the amount to save is not quite what I'm trying to figure out right now--what I'm trying to think about is: given a pool of money (no matter how much) for savings (401k, Roth, ING, Mortgage, etc), what is the best allocation between those vehicles if the goal is maximizing net worth?

Wow, sorry if this is so scrolly and I hope I'm writing clearly. Just writing it out is helping me to think through the logic, so thanks!

Chris

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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: 285841 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 7:23 PM
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Our e-fund is our Roth contributions, since we can withdraw them with no penalty if an emergency were to happen. We have about 6 months worth of current expenses (~$4000/month) available in them--although I think we could stretch that by reducing expenditures.



I have a philosophy that says that once I put money into a retirement account, it is to be used for retirement. Period. If your entire efund is actually your Roth IRA contributions, then I would suggest that you use your new funds to go into a real efund which is a cash account that is somewhere safe and liquid. The last thing you're going to want to do is tap your Roth for emergency funds because you cannot put that money back.

I agree with the others that you still seem to be stretching a bit. I would strive to cut the budget back to the point that you live on one paycheck. Even if you don't get to that level, you'll still be ahead and you can put all of that into savings for your efund first, and then a house second.

I also live in MA, so I understand about things like the cost of housing and childcare, but with some management of your expenses, you will find yourself in a better place.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285842 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 7:30 PM
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why you are ignoring our e-fund in our Roth acocunts? The money from the balance transfer _is_ sitting and earning interest, in a Roth IRA.

Is there some problem I'm unaware of with keeping an e-fund in a Roth? My logic for it was that contributions can be withdrawn without penalty but that one can never regain a missed year of contributions. So when I had the choice of making the contribution for 2008 or keeping the money at ING I didn't see any reason not to put it in the Roth. If there's no emergency, the money grows tax free. If there is an emergency, all I lose is a past year's ability to contribute, which I wouldn't have had anyway if I didn't contribute, right? Am I missing something? Is it that you think it's not enough? How much should it be?


Well, the problem as I see it is: During the next 25 - 35 years of your working lives, at least one, if not both, you and DW will likely be unemployed at least once for a significant period of time, and will need to use the Roth money as an e-fund. Once you take the money out, you cannot put it back in, and therefore, it will not be there for retirement.

While using the Roth money as a 'back-up' e-fund in case you are to the point that you would end up being homeless, or using it as an 'interim' e-fund until you get an e-fund built up outside of your retirement accounts can be a good strategy, it's not a good strategy for the long term.

It simply comes down to: You can't spend the same dollar in two different places. You have to decide if the dollars that you are putting away are for your retirement or for emergencies. Long term, they can't be both.

If an emergency never happens, then maybe you will have a little more for retirement than you planned. But if an emergency happens, and ends up devastating your retirement funds, how will you retire? Especially since you are now reducing your pre-tax retirement contributions by $5k a year to partially fund child-care expenses.

AJ

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285843 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 7:45 PM
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Hi AJ,

Thanks for the response, your insights on this board make you one of my favorite posters here.


After 15 months of paydown, you still have $5326 riding on zero percent balance transfers, yet you only have $3100 in emergency cash/savings combined. This means that even after 15 months of paying down the zero percent offers, you have still spent more than $2000 of your future income, if you were to completely empty out your savings/emergency cash.


Wait, why aren't you counting the Roth contributions as emergency cash? You and Patzer are freaking me out a little here--I thought I explained that the Roths ARE our e-fund? That money is sitting in cash, it's just in an account that happens to have the Roth label on it. Please tell me I haven't misunderstood the rules of Roth contributions! My understanding was that contributions could be withdrawn penalty and tax free. The vast majority of our Roth accounts are contributions, since the money market funds they are in have been paying a pittance. I thought I was doing something smart by making contributions in 2007 and 2008, and now this year trying to not only make contributions but also build a taxable savings fund at ING...

Are you guys saying if I had the 24k sitting at ING, but no Roth IRA, that would be better in some way?

And there hasn't been 15 months of paydown--I think I may have confused you by reporting the current balances, not the starting ones--sorry! The Wells Fargo furniture loan was originally 3354, 0% through May 2009. We have paid off $2818 since buying the furniture last April and will finish paying it off on April 27. We could have paid cash--but used that money for 2007 Roth contributions instead. The balance transfer was for $6312 for 15 months at 0% in October 2008. It's now at 4790, and we are paying 436/month, which will pay it off just before the teaser rate expires in January. Again, we could have paid cash, but we took advantage of the free 0% and put the money into savings instead (first at ING, then rolled into the Roths as a 2008 contribution).

Is that more clear, or am I truly off my rocker, as you guys are making me fear? Is the disconnect that I view the Roth not as a retirement vehicle solely, but as a "potential retirement vehicle/emergency fund."

As for my "assertion" that we're living below our means, I'm really confused--we put $33000 into our 401ks or Roth IRAs last year--how is that not living below our means???


Does your wife have fully paid maternity leave from April through June? If not, how are you replacing her income for 3 months?


She does, thankfully.

Chris

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285844 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 7:56 PM
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Well, the problem as I see it is: During the next 25 - 35 years of your working lives, at least one, if not both, you and DW will likely be unemployed at least once for a significant period of time, and will need to use the Roth money as an e-fund. Once you take the money out, you cannot put it back in, and therefore, it will not be there for retirement.


But the money never would have been there at all otherwise, wouldn't it...I am really having a disconnect here. If our situation in 2007 was that we could afford to "save" $8000, and only $8000, why would we choose not to put it into the Roth, since the alternative is making no contribution at all?

I get the message that saving more would be better, truly I do. But I really don't understand not making a Roth contribution in favor of keeping the money in a taxable account. Of course it would be best to do both--but we just don't have the means at the moment to max out both 401ks and the Roths.

As for what I hope to retire on--my plan is to retire on the 401k money, with the hope that I'll also have Roth money to use.

Thanks for the discussion, I think I will follow through with saving the money in a taxable account rather than upping the wife's 403b contributions further or paying more on the mortgage--that's the way I was leaning coming into this.

Chris

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285845 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 7:58 PM
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Wait, why aren't you counting the Roth contributions as emergency cash? You and Patzer are freaking me out a little here--I thought I explained that the Roths ARE our e-fund?

If they're your e-fund, then they aren't for your retirement. If that's how you view them, then why are you bothering to fund your Roths?

And there hasn't been 15 months of paydown--I think I may have confused you by reporting the current balances, not the starting ones--sorry! The Wells Fargo furniture loan was originally 3354, 0% through May 2009. We have paid off $2818 since buying the furniture last April and will finish paying it off on April 27.

Well, in a way, that makes it even worse.

You have $5326 in 0% debt that was incurred within the last 10 months. You have $3100 in savings/emergency cash. Subtracting the $3100 from the $5326 means you have spent $2226 more in the last 10 months than you have brought in.

That's living an average of $223 a month above your means, rather than the $150 that I previously estimated.

Are you guys saying if I had the 24k sitting at ING, but no Roth IRA, that would be better in some way?

No, but you need to decide - is the money for retirement, or is it for your emergency savings? Because eventually, it has to be for one or the other. You need both.

AJ

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Author: Minxie Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285846 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:08 PM
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My wife plans to go back to work after her maternity leave, so there will be a new expense of 330/week for daycare starting in July.

Is this an estimate or did you decide on a daycare already? $330/week seems rather high, even for an infant; it works out to about $17k/year. Have you all considered your wife being a SAHP for the first year or so? It may be more cost-effective in the long run.

Minxie

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285847 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:10 PM
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If they're your e-fund, then they aren't for your retirement. If that's how you view them, then why are you bothering to fund your Roths?


I don't know how to be more clear about this: as I said in my first post, we regard the Roths as an e-fund. And they have the added feature that if we don't average $10000/year in emergency spending we get a bonus for retirement. I don't believe I ever said the money was for retirement and retirement alone.

As for why to fund it, why wouldn't I? That's the question I've been asking repeatedly: if I don't have the capacity max out my 401k, my roth, and have an after tax account e-fund all at once, why would I want to miss out on a year of Roth contributions? I see only upside in that I have the potential for bonus retirement savings--the only downside I've seen pointed out is the potential loss of a year's contribution. But that year would have been lost anyway if I never made the contribution in the first place...

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285848 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:13 PM
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Is this an estimate or did you decide on a daycare already? $330/week seems rather high, even for an infant; it works out to about $17k/year. Have you all considered your wife being a SAHP for the first year or so? It may be more cost-effective in the long run.


In Boston that is actually on the cheap end, through a YMCA. We did our research, most places were much more expensive. We discussed SAHP, but we don't believe it makes sense for us.

Chris

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285849 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:15 PM
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Sorry, I realized I forgot to answer this question:

As for my "assertion" that we're living below our means, I'm really confused--we put $33000 into our 401ks or Roth IRAs last year--how is that not living below our means???

Because saving for your retirement is one of the expenses that you are supposed to be providing for with your income. While not everyone does this, in today's world of few and far between pensions and limited Social Security, part of the expectation is that you will save now to be able to spend later when you don't have an income. You need to look at the savings as an expense that is needed to provide your income in the future, unless, of course, you are willing to continue working until the day you die, in order to provide that income.

As I mentioned in my last post, over the last 10 months, you have acquired a net of $2226 more in debt than you have in spendable savings/emergency cash (without withdrawing from the Roths), so you have spent future income. Spending future income is also known as living above your means.

AJ

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285850 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:19 PM
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>> You need to look at the savings as an expense that is needed to provide your income in the future, unless, of course, you are willing to continue working until the day you die, in order to provide that income. <<

Or you have a very secure job with a generous, taxpayer-backed pension. (Wish I had one of those.)

Though I do agree with you in general, there are at least partial exceptions.

#29

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285851 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:20 PM
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I gotta say, this has been an interesting discussion for me--apparently the way I think about money if very different from the way other people do. I'm still trying to wrap my head around some of what has been said--it's making me question assumptions, that's for sure.

I still really don't get the statement that we're "living above our means." I posted every debt and every asset we have. How do we have a positive net worth after taking a $49k hit on our house if we're living over our means?

Is it that people don't count retirement savings at all when you refer to your means? I'd say I'd be surprised if that were the case, but at this point I'm wondering if anyone thinks about money like I do...

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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: 285852 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:21 PM
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I don't know how to be more clear about this: as I said in my first post, we regard the Roths as an e-fund. And they have the added feature that if we don't average $10000/year in emergency spending we get a bonus for retirement. I don't believe I ever said the money was for retirement and retirement alone.


Let's try this from a different angle. You started out saying you wanted to maximize your net worth, but if you're using your Roth funds for a emergency fund and keeping all of that in cash, which is definitely where efunds should be, then where are your investments that are going to grow more such that you grow your net worth? This money can't be both.

And you're talking about finding money to buy another house, but you're not able to fund both your retirement and your efund, so why would you add another savings goal at this point?

You're running on a shoestring if your plan is to always have your efund just be your Roth, and that sure sounds like your plan.

As for why to fund it, why wouldn't I? That's the question I've been asking repeatedly: if I don't have the capacity max out my 401k, my roth, and have an after tax account e-fund all at once, why would I want to miss out on a year of Roth contributions? I see only upside in that I have the potential for bonus retirement savings--the only downside I've seen pointed out is the potential loss of a year's contribution. But that year would have been lost anyway if I never made the contribution in the first place...


It's not bad to do this and temporarily view the Roth as your efund, but then perhaps you shouldn't be buying furniture you couldn't afford. I realize that you'll have it paid off on the 0% loan within the promotional timeframe, but the fact is that you did spend money you did not have. If you're going to do this sort of thing, then I would recommend you only do it when you already have the cash for the purchase set aside, and not until then. And furniture is something that can really wait a very long time or be bought 2nd hand, so there were other options.

I think the message you're hearing is that you need to rethink your viewpoint on some of these things so that you don't end up in a place that's not anywhere near where you wanted to be.

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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: 285853 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:22 PM
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In Boston that is actually on the cheap end, through a YMCA. We did our research, most places were much more expensive. We discussed SAHP, but we don't believe it makes sense for us.

I'll vouch for this one. I thought his $330/week estimate seemed very reasonable for one baby as I'm in the same area.

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285854 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 8:37 PM
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It's not bad to do this and temporarily view the Roth as your efund,


I agree with that actually; although I didn't state it explicitly, it's the reason why the table I posted had contributions to both the Roths and ING for 2009. In 2008 we could only afford to do one or the other. The eventual plan was to do both a Roth and an after tax savings fund, starting this year due to increased means (there was an earlier salary bump, other than the one I mentioned.)

What I'm hearing is basically save more for retirement--that's what all this seems to come down to in the end: with the Roths being potentially depleted if there was an emergency you guys are saying our 401k aren't enough for retirement. I don't necessarily disagree, but it does raise the question of what is the right amount--we put 20% of our gross into the 401k/403b last year, plus got an additional 4% as a company match. We have a 30 year time horizon--how much is enough then?

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285855 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 9:54 PM
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Okay, you wanted analysis, here's some analysis.

I don't know how to be more clear about this: as I said in my first post, we regard the Roths as an e-fund. And they have the added feature that if we don't average $10000/year in emergency spending we get a bonus for retirement. I don't believe I ever said the money was for retirement and retirement alone.

Okay, so if the Roth money is 'bonus' money for retirement and you aren't counting on it for retirement, then you are are planning on living on your 401(k)/403(b) money and Social Security, right?

Do you really think that's going to be enough?

You said that you saved 27% of your income last year, which was $33k. That means that your gross income last year was in the $120k range.

You spent about 7.65% of that on SS/Medicare tax that you "shouldn't" have to pay if you aren't working (although taxes due to means testing may replace some/all of this expense). You saved 27%, which you won't have to do in retirement. You also spent about $21k (17.5%) on mortgages, which, hopefully, you won't have in retirement.

So, all told, your non-mortgage 'living' expenses were about 48% of your income, or about $58k. The current average SS retired worker is receiving about $14k a year in today's dollars, according to this: http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/ So, assuming that SS would provide you (as a couple) with $28k, that means that you need to be able to provide $30k a year in living expenses in today's dollars. (Since the Roth is 'bonus' money, so most/all of your money will be coming from pre-tax accounts, I'm going to assume that taxes will be paid at a similar effective rate as you are paying today.)

Assuming that you will retire when you are 65, and live to 95 (a 30 year retirement) and you want to use a 'safe' withdrawal rate of 4% from your savings, to fund that annual $30k in today's dollars, you will need $750k in today's dollars. Assuming a 3% inflation rate between now and when you are 65, that will mean that you need about $2 million in future dollars. Note - this assumes that you don't want to retire early. To retire 5 years earlier and fund a 35 year retirement, you would probably need to go with closer to a 3% 'safe' withdrawal rate, which would mean that you would need about $2.1 million in 27 years.

So right now, not counting the 'bonus' Roths, you have about $50k in retirement savings. You project that you will be able to fund $20k toward your 401(k)/403(b) after the baby is born, since you will be diverting $5k from your 401(k) and you have $6k in additional income. I'm still not getting where the extra $6k for childcare expenses is going to come from. But let's split the difference and call it $17k in funding. And I'll assume that you can increase the amount that you contribute by the 3% inflation rate each year.

In 32 years, if everything goes right, and you don't increase your living expenses, you don't have long periods of unemployment where you have to stop making retirement contributions to your 401(k)/403(b), I project that at an 7% rate of return (4% real rate of return above a 3% inflation rate), you will have about $2.5 million, which should be enough.

But, you said you wanted to move to a single family home - that would be increasing your expenses - insurance will be more, property taxes will be more, maintenance will be more because you have more space to maintain, etc. So, are you going to be able to do that, and continue contributing to your 401(k)/403(b)? And if you want to move to a different house, and yet, still have the mortgage paid off by the time you retire, you will have to pay the mortgage down more aggressively than you are doing now. Even if you stay in your current home, that interest only loan isn't going to stay interest only forever, again increasing your expenses.

You probably want to pay for college for your child - how are you going to save for that and still keep saving for your retirement, as well as paying for child-care/other expenses? Because even as child-care expenses go down because the child is going to school, other expenses go up - there's the soccer team and the field trips and school books/fees and the fund-raisers that you have to support and the spring break trips and the car insurance (not to mention the car) when they're 16, etc. So that $17k a year that starts out as just child-care expenses is going to continue by morphing into other expenses, which won't allow you to divert a lot toward the college savings. So you are probably locked into paying that $17k (adjusted for inflation) for at least the next 22 years or so. And if you have more than one child (since you said "our first child" - I'm guessing there is at least a 2nd child in the plans), that will lengthen the time and increase the expenses.

And I'm assuming that you will want to replace a car or two before you retire? Because I don't see any savings for that, nor any room in your budget for car payments - which would mean you will be increasing your expenses again.

With typical raises each year, you might be able to eke out enough to pay for the increased expenses to increase your lifestyle and still keep contributing to your retirement accounts. Or not. So, I don't see a lot of opportunity for you to increase your savings much beyond the 3% inflation of your contribution, and I suspect that you may struggle with even that increase some years.

And then if you miss a couple of years of contributions, because of unemployment, you are further decreasing your chance of making it to $2 million by the time you are 65, much less $2.1 million by the time you are 60.

If you add the $24k in the Roths into the equation, and have them actually invested in something that will provide a 4% real return, rather than a CD that loses money to inflation, you will be up to about $2.8 million by the time you are 65 - that provides a much better cushion for life to happen.

So, while it's okay, as I said before, to consider your Roth as an 'interim' emergency fund until you can build an emergency fund outside of retirement accounts, long-term, you will be more likely to achieve your goals if you have a separate emergency fund.

AJ

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285856 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 9:56 PM
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Or you have a very secure job with a generous, taxpayer-backed pension.

How secure do you really think those taxpayer-backed pensions are, with the rate at which the local, state and federal governments are spending money at this point?

AJ

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285857 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 9:59 PM
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I still really don't get the statement that we're "living above our means." I posted every debt and every asset we have. How do we have a positive net worth after taking a $49k hit on our house if we're living over our means?

Living above your means isn't a net worth thing. It's a cash flow thing.

When you bought the furniture - you spent future earnings. You can't say 'we had money in the bank, it was just in the Roths' because the Roths are your emergency fund. And furniture isn't an emergency.

By spending future earnings, you are living above your means.

AJ

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Author: determinedmom Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285858 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/10/2009 11:16 PM
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In Boston that is actually on the cheap end, through a YMCA. We did our research, most places were much more expensive. We discussed SAHP, but we don't believe it makes sense for us.


Wow...this is one of those times that I'm really glad I live where I live. Child care (not to mention homes) is much, much less expensive here.

The part that I see you glossing over actually is just how you expect to pay that 17k expense for child care. And, as a parent of 3 children, I can tell you that raising kids is expensive and you will ahve much bigger increases to your budget than you likely anticipate. The reality is that your extra 6k a year is going to pay for child care but then how will you pay it.

BTW, the disconnect you are seeing here is how many here would see living within your means and what you consider living within your means.

Of course, if you can't fund both a Roth and an e-fund it is better to fund a Roth and potentially use it as an e-fund. What you are missing is that I think that many would think you should be shooting for both contributing to a 401(k) and a Roth, plus saving for a separate e-fund! And if you can't do that then borrowing something to buy furniture or for a BT or whatever is living above your means. Now, I have done a lot of that so I can understand it but there you have it.

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Author: HornedToad10 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285859 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 12:51 AM
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Personally I think you are doing a great job, but I agree that the way you are accounting for emergency/retirement funds is confusing.

Ideally would be also funding a separate emergency fund. Second choice, IMO, would be lowering your 401k somewhat, continue funding your Roth and investing the Roth in equities, and using the money from increased LBYM and amount that was going to the 401k as a separate emergency fund.

I do agree with the others and think it is very important to have an actual emergency fund that can be accessed in savings that's not part of your retirement. Otherwise you are either pulling from retirement, or keeping too much of the Roth account in cash equivalents.

But overall, I think you are doing great, and just keep savings and especially plan for the expenses of your first kid...

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285860 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 6:39 AM
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Living above your means isn't a net worth thing. It's a cash flow thing.

When you bought the furniture - you spent future earnings. You can't say 'we had money in the bank, it was just in the Roths' because the Roths are your emergency fund. And furniture isn't an emergency.

By spending future earnings, you are living above your means.


Well, the money is spent at this point, I can't go back and change that. Going forward, do you recommend I pull back the money I contributed and pay off the 0% debt?

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285861 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 6:47 AM
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Okay, you wanted analysis, here's some analysis.

Thanks, I do appreciate it.

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285862 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 7:21 AM
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The part that I see you glossing over actually is just how you expect to pay that 17k expense for child care. And, as a parent of 3 children, I can tell you that raising kids is expensive and you will ahve much bigger increases to your budget than you likely anticipate. The reality is that your extra 6k a year is going to pay for child care but then how will you pay it.

Well, my plan WAS this: The child care expense starts the end of July, if the child comes on time and my wife takes her planned 3 months of leave. So the cost for 2009 will be 7000, 5000 of which I plan to pay pretax. That leaves 2000 I need to cover. After April I will no longer be paying 268/month for the 0% Wells Fargo, so I planned to use that money to cover the rest (268*8 months equals 2144).

Looking to 2010, I'll be finished paying the other 0% loan (436/month), so that will add 5000/year to the cash available to pay for child care, for a total of 5000+3216+5000=13216, leaving 3284 or 274/month additional to cover, so if our means stay the same it will mean changing the 2010 ING contribution from 867/month to 593/month. I haven't figured out the tax implications of the kid yet, we may get some help from that as well. That's assuming the cost stays static at 330/week, I believe it drops a bit after the child is 15 months old.

From what I read here, I'm considering changing the plan. I could pay off the 0% loans right now by pulling from the Roths, and by stopping the 2009 Roth contributions I could put an additional 1538 (436+268+834) into ING monthly until July, then pay the child care out of that cashflow while still maintaining our 401k contributions at the current rate. Moving the money from the interest bearing Roth to pay off the 0% loan doesn't seem right to me though...

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Author: ckollmann One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285863 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 7:30 AM
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Assets Value Contribution Notes
House ~250000
My Roth 16000 417
My Rollover IRA 2600
My 401k 33600 1375
Spouse Roth 7875 417
Spouse Rollover 2600
Spouse 403b 11600 714
ING Savings 1800 867 Depleted Feb 2008 for 2008 Roth
Checking 1661
Emergency Cash 1300
Total ~329036


OH, I just caught an error in my posting. That ING Savings fund was depleted in Feb 2009, last month, not 2008. It had grown to 10k in 2008 before I moved it over to the Roth. Sorry for the mistake, especially if it changes any of the analysis...

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285864 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 8:57 AM
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Well, the money is spent at this point, I can't go back and change that. Going forward, do you recommend I pull back the money I contributed and pay off the 0% debt?

No. You have defined the Roths as your emergency fund. Debt to buy furniture, do home improvement, etc. is not an emergency.

You need to look at cutting back on other expenses in order to pay off the debt you incurred, while still finding money to fund your Roth and start an after-tax e-fund. You said that eating out was an expense that you spend too much on. Start by cutting back on that.

AJ

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285865 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 8:59 AM
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From what I read here, I'm considering changing the plan. I could pay off the 0% loans right now by pulling from the Roths, and by stopping the 2009 Roth contributions I could put an additional 1538 (436+268+834) into ING monthly until July, then pay the child care out of that cashflow while still maintaining our 401k contributions at the current rate. Moving the money from the interest bearing Roth to pay off the 0% loan doesn't seem right to me though...

I wouldn't do it. You may also want to read through old posts to get the leanings of this board and then decide what the advice you've received is worth. You are taking a risk that you may have to use money in a retirement account for emergencies but I don't think it's that much of a tragedy at your age. I've advised my kids to do the same thing. It's tough to save for everything at the same time and if it can't happen, take the opportunity to max out the best retirement options you have.

Other than being able to brag about paying off loans, there is no reason to pay off money you have borrowed at 0%, IMHO.

It can be amazing how much you can save after the kids go off on their own :)

rad

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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: 285866 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 9:08 AM
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Well, my plan WAS this: The child care expense starts the end of July, if the child comes on time and my wife takes her planned 3 months of leave. So the cost for 2009 will be 7000, 5000 of which I plan to pay pretax. That leaves 2000 I need to cover. After April I will no longer be paying 268/month for the 0% Wells Fargo, so I planned to use that money to cover the rest (268*8 months equals 2144).


This is actually a nice example of why not spending any money, no matter if it is a 0% loan or not, unless you already have it in the bank is a good idea. Had you already had the money for the furniture, you would have been able to do the 0% loan, but instead of making your payments from your cashflow, you'd be making those same payments from your savings account where the money was sitting earmarked for this expense. That would have given you this money now for savings so that you'd have a bigger efund prior to the baby's arrival, and it would ensure you'd have the money in your budget when childcare expenses kick in.

I highly recommend that you reconsider spending money ahead of earning it again, and use this as a nice example on why you want to adjust that particular behavior.

From what I read here, I'm considering changing the plan. I could pay off the 0% loans right now by pulling from the Roths, and by stopping the 2009 Roth contributions I could put an additional 1538 (436+268+834) into ING monthly until July, then pay the child care out of that cashflow while still maintaining our 401k contributions at the current rate. Moving the money from the interest bearing Roth to pay off the 0% loan doesn't seem right to me though...


I wouldn't pay off this loan from the Roth, and it has nothing to do with the fact that the money is earning interest. It has everything to do with the fact that your new furniture is not an emergency, and I am disappointed that you'd even consider this as an alternative given we've just had a thread where virtually everyone is saying the Roth should not be the efund. An emergency is something like losing a job or some sort of medical expense. It is not new furniture, or even car repairs for that matter. Such things should be part of the budget, and that's the part I think you're still missing.

I also think you're missing the part on savings which should include maxing out retirement savings plus savings in a taxable account for things like the efund, retirement [I don't happen to believe that just maxing out retirement accounts is enough to fund retirement], vacations, car repairs and/or replacement, house repairs, kids college etc.

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285867 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 11:08 AM
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You may also want to read through old posts to get the leanings of this board and then decide what the advice you've received is worth.

I've been following this board for a long time. I'm surprised at some of the responses.

If the OP had not opened the Roth and had the money in savings at ING. Would the responses been to start a Roth, since they are maxing out there 401K/403b? It seems like the OP was putting a big chunk into the 401k/403b. A bigger percent than many. I don't remember answers like that.

take the opportunity to max out the best retirement options you have.


Well now I'm wishing I hadn't used Rad's post for the response. It seems that Rad's answer to my question above would be to fund the Roth.

I agree that the furniture was not an emergency and the purchase should have been planned differently, but I understand the logic behind using the Roth for a secondary emergency fund if you just consider the contributions not the interest/gains.

I confess, I hadn't thought of using a Roth like the OP is, but I don't think it's a bad idea as a kinda super emergency fund. I say that because some people forgo the Roth in favor of an emergency fund and then have no emergency. Once they don't make the contribution they loose the opportunity to do it for that year.


So if one were to set priorities......

1. Minimal living expenses (Including set asides for repairs etc)
2. Emergency Fund
3. Retirement fund (all available)
4. Freedom fund (furniture, vacations, non-emergency stuff)
5. Increase living expenses

FWIW, This thread has made me think about stuff I hadn't considered before.

Jean

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285868 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 11:40 AM
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So if one were to set priorities......

1. Minimal living expenses (Including set asides for repairs etc)
2. Emergency Fund
3. Retirement fund (all available)
4. Freedom fund (furniture, vacations, non-emergency stuff)
5. Increase living expenses


Are you saying what you would do or what the other person should do ?

rad

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285869 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 11:45 AM
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Are you saying what you would do or what the other person should do ?


That was meant to be a question. Is it a good order of priorities? I'm thinking it is. Would other people have a different list?

1. Minimal living expenses (Including set asides for repairs etc)
2. Emergency Fund
3. Retirement fund (all available)
4. Freedom fund (furniture, vacations, non-emergency stuff)
5. Increase living expenses

I don't tell people what they should do. I tell them what I would do if I were in their place, but it's not my decision.

Jean

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285870 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 12:15 PM
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I'm sorry for taking:

So if one were to set priorities......

to be proscriptive. Instead of "one", you meant "I" ?

So these would be your priorities:

1. Minimal living expenses (Including set asides for repairs etc)
2. Emergency Fund
3. Retirement fund (all available)
4. Freedom fund (furniture, vacations, non-emergency stuff)
5. Increase living expenses


You would pass up the Roth contribution opportunity to fund an emergency account ? Every year ?

rad

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Author: progmtl Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285871 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 12:30 PM
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This is an interesting thread. I am also surprised a bit at the board reaction in this case, as I think ckollmann is actually doing pretty well.

So as far as things you can improve, I think others have addressed those areas nicely, including making a very clear distinction between efund and retirement savings (at least mentally), not spending money before you have it (even at 0% interest), and finding ways to cut the budget to try to fund all of your priority items independently.

On the bright side, for people in their very early thirties living in an expensive location, I would say you guys are doing well - certainly a lot better than average. Your overall savings rate is good, and with future raises hopefully will improve.

With a baby coming right now I would be absolutely HOARDING cash. There is the possibility of unforeseen expenses looming in your future, including baby/medical expenses that you cannot predict. For the first year of my daughter's life she had allergic reactions to many foods and I was forced to feed her a very expensive formula which cost us $450/month. That is one small example of many potential expenses.

I would think VERY carefully about moving up to more expensive housing, however, and all the things you would have to sacrifice to do so (note that you can move into larger housing without increasing expenses if you change location, perhaps moving out of the city).

You definitely have a good attitude and are wise to be planning ahead. Good luck!

-progmtl.

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285872 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 12:35 PM
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I'm sorry for taking:

So if one were to set priorities......

to be proscriptive. Instead of "one", you meant "I" ?

So these would be your priorities:

1. Minimal living expenses (Including set asides for repairs etc)
2. Emergency Fund
3. Retirement fund (all available)
4. Freedom fund (furniture, vacations, non-emergency stuff)
5. Increase living expenses

You would pass up the Roth contribution opportunity to fund an emergency account ? Every year ?

rad


I said I didn't word it well. I was trying to ask how others would prioritize.

Well, if I didn't have enough funds to fund an emergency fund and a Roth and used the emergency funds every year, then yes I would replenish the emergency fund first. However, once the emergency fund was funded I would maybe split the funds between the emergency fund (if I thought the emergency fund needed bigger) and fund the Roth. BUT after reading the OP's method I might consider using the Roth as an emergency fund.

So what would be on your list?

Jean

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Author: pachouly Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285873 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 1:01 PM
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First of all, kudos to you for saving so aggressively, whatever savings vehicle you chose.

My own two cents -- it may have been appropriate for you and your wife to leverage a Roth as an eFund in the past. It may no longer be so appropriate as the likelihood of unexpected expenses will increase with your family changes and your risk tolerance may also be reduced. Should you decide to continue to use a Roth as your eFund, I'd recommend at least beefing up your easily accessible savings (eFund/freedom fund) to a few months because it is more likely you'll need them and you probably don't want to get into a habit of pulling from the Roth every time you need money; that should be in case of a real emergency. It looks like you are currently contributing aggressively to your ING savings, so I'd continue that and at the end of the year and then determine what you can contribute to a Roth based on your situation and risk tolerance at that point.

Another thought -- even if Roth contribution withdrawals are penalty-free now, doesn't mean they will always be so...

As an aside.. Excel is your friend for planning/budgeting. We're also expecting our first child this spring and I've spent quite a bit of time trying to figure out budget changes, tax changes, etc. Also, paycheckcity.com can help with estimating/figuring out exemptions and different paycheck scenarios to help you with your planning.

Some other things to think about with your new budget if you don't already have them include:
- life insurance/long-term disability insurance
- increases in medical insurance premiums (ours will increase by $120/month)
- increased medical bills (newborns go to the doctor for A LOT of scheduled visits -- if your copay is $20-$25, that can really add up)

Also -- I noticed your second mortgage is an interest-only one? Is that going to change things anytime in the near future?

Best,

pachouly

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285876 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 4:09 PM
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So what would be on your list?

I really don't have one anymore. We have 3 kids, the last of whom graduates college in May and I flunked retirement 5 years ago and work part time as a consultant. Our priorities are pretty different than other people's. As far as what I used to do, you could probably start at the beginning of the Family Fool and LBYM boards and see how things went.

rad

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Author: yeilBagheera Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285890 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/11/2009 11:47 PM
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Fascinating discussion.

So, to answer the question in the subject line -

I'm concerned about the second mortgage and wonder if paying that down aggressively would help you be more nimble in the future.

YeilB

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285896 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/12/2009 12:50 AM
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I'm concerned about the second mortgage and wonder if paying that down aggressively would help you be more nimble in the future.

Actually, paying down the mortgage will make the OP less nimble, IMO.

Especially in an area where values are dropping, like Boston, putting the money into a savings account, rather than paying the mortgage down (but not off) provides significantly more flexibility.

I would NOT recommend paying additional on a 2nd mortgage when already upside down, and prices are continuing to drop, unless all retirement funds were fully funded, and there was a fully funded non-tax advantaged e-fund in place. At that point, maybe - although I would still recommend considering building up enough savings to pay the mortgage off, rather than down.

AJ

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Author: ncharge Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285906 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/12/2009 12:40 PM
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In addition to the increased child care costs (which your increased means won't cover), what about the other costs assoicated with raising a child? Medical visits. Formula and, later, baby food. Clothing. Initial outlay for crib, etc. Toys and books. Raising a child doesn't have to be uber-expensive, but it will cost more than just daycare.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285941 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 10:01 AM
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It can be amazing how much you can save after the kids go off on their own :)

Which is another way of saying - it's amazing how much kids can cost before they go off on their own.

AJ

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285942 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 10:11 AM
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Which is another way of saying - it's amazing how much kids can cost before they go off on their own.

I'll stand by my choice of words and assume this is your choice. I have no regrets about any money spent on my kids or the choice to have them.

rad

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285958 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 5:52 PM
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This part: My wife and I (32 and 33 respectively) do manage to live below our means, at least to the extent of having a positive net worth, although we could definitely do better--food and eating out are our biggest holes in the budget.

and this part: We used a no fee 0% for 15 months offer last year, which allowed us to still max out our Roths while paying for some car repairs, medical services and home improvement. The other 0% offer was for some furniture, where we chose to take the free float and increase savings. Both of these loans are autopaid and on track to be paid before the teaser rates expire.

------------------------------------------------------------

don't really jive.

After 15 months of paydown, you still have $5326 riding on zero percent balance transfers, yet you only have $3100 in emergency cash/savings combined. This means that even after 15 months of paying down the zero percent offers, you have still spent more than $2000 of your future income, if you were to completely empty out your savings/emergency cash.

That's not living below your means. That's living about $150 a month, or $1800/year above your means. It's not a lot, but most people who got into debt trouble probably didn't start out any different than that, either.


OK, I'm in the weird position of sort of agreeing and sort of disagreeing with you, AJ. Buying the furniture might be living above their means just in the sense that maybe they couldn't have afforded the furniture, but what is the difference between taking a 0% offer in order to improve your investment ability and taking a 0% offer to live above your means?

I guess it seems to me that if the OP had the cash for the furniture but chose to spend it instead on maxing out the 401k (or the 403b, I forget which it is) and funding their Roths, I guess to me that's starting to shade into "Things people do to smooth out their cash flow" rather than "Living above their means." Also, people who buy houses with a mortgage can be said to be living within their means, despite taking a loan to buy something.

It seems too strict to me to say you have to never take a loan to live within your means. The OP may or may not be living within their means, but I think they got jumped on way too hard for what they have been doing. Putting an efund in a Roth while you build up your efund seems okay to me, and something that folks have even been encouraged to do here in the past. It's a way to take advantage of the Roth and have an efund while you work on building up your efund outside of your retirement money. Do you always want to have your efund in your Roth? Well, no, someday you want that Roth money to be purely for retirement, but if you're 30 years away from retirement, using the efund money as kind of a placeholder in a Roth makes a lot of sense. (With some caveats, you want it in something safe, like a CD or a money market fund, until you've built up your efund outside the Roth.)

Now, maybe the OP shouldn't have bought the furniture, because he was in effect spending future dollars. But if he managed to put more money in the 401k than was spent on the furniture, then effectively he could have afforded the furniture, but chose to extend the payoff time so as to put more money towards retirement. That to me is not living above your means, that's leveraging 0% loans in your favor. The fact that none of us want to see the OP take money out of his Roth to pay off the furniture is evidence of that.

However...the OP might still be living closer to his means than he thinks, if he's not building up that efund as fast as humanly possible. There's probably some fat in his budget. I think he's done pretty well up 'til now, but can do better (and will have to, once they're paying for child care). And, the furniture may have been more than they *ought* to have bought, from a purely "you have a baby on the way, save every penny!" standpoint.

The other thing I wanted to mention is that not everyone can start out funding their retirement to the extent that they'd like. So, yeah, probably maxing out the 401ks isn't enough, and they need to save up an efund so that the Roths can be purely for retirement, but...I think OP will be able to save more in the future (once he's no longer paying for infant care) and it's good to start out doing what you can. I think putting the efund in a Roth is fine. Buying the furniture, a little eh, but the Roth thing seems fine to me (so long as the OP isn't double counting that money as both efund and retirement, it's fine.)

Save up that efund, though--right now, OP, you have lots of plans, but you don't know if your wife will be able to work or how much after the baby. A friend of mine just had horrible complications after her pregnancy, and it was a strong reminder that kids mostly poop all over your plans and then sleep adorably through the wreckage of your life. :-) They're worth it, but there's a reason they're so cute. It's life insurance. :-)

As for infant care costing $17K, yeah, that sounds about right. :-) I'm in California, and for us it was $250/week ten years ago, which is $13K a year (that my mom paid. Thank you, mom). It goes down considerably once they're 2 years old (for us, it went down to about 60% of the infant price) and when they're fully potty trained (the pup learned, um, late) it went down another 10-15%. Afterschool care for the pup at 11 years old is $115 a month. Sports and such have expenses, but I think few things are as bad as that infant care cost, in the beginning. You have to worry about college, of course, but depending on how you feel about that, your kid can get loans, pay their own way part or some, stuff like that. The first two years, the cost of infant care plus diapers plus all the other stuff kids need at first, a ten year old seems pretty cheap by comparison.

I haven't had a teenager yet, so I can't speak for that, but you get past the first two years, it gets easier. That's just my opinion, one data point, but I think OP is doing better than the reaction to him painted him as doing. (Not that there isn't room for improvement, OP!)

Okay, that probably pissed everyone off. Just my two cents.


--Booa

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285959 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 6:37 PM
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I think that usually retirement savings aren't considered in the "Are we living below our means" calculation--well, okay, let me clarify. Every month you need to put some aside for retirement, so that's one of your regular expenses that you need to cover with your income. Simply put, living within your means means that what you earn minus what you spend is a positive number, and you're covering both regular expenses, funding retirement, and putting some aside for the emergency fund (emergencies only!) and the freedom fund (the irregular but going to happen expense fund, like for car repairs and Christmas). I think AJ is interpreting it very strictly, as every single paycheck, that has to be a positive number. It's the safest definition of LBYM, to be sure.

But I think people can be LBTM and have loans, like when you have a mortgage or a car loan--those are things that are hard to save up money for all at once. Or a student loan--for a while all my income was in the form of student loans, so strictly speaking it was impossible for me to live within my means, but there were still limits I didn't want to exceed from a practical standpoint (too much month at the end of the money syndrome).

What you're doing, with the 0% loans, I don't really know how to classify that. Could the furniture have waited? Could you have bought cheap stuff as a temporary measure? (You are having a kid--I can't tell you how glad I was I had a $200 Goodwill table when my son would melt crayons into it.) Since the furniture could be a want and not a need, and you have more debt than ready cash, that's probably LAYM. Then again, are you cash-flow-positive every paycheck? Then technically you are LBYM, from what I can see. I think there are fuzzy areas. When the furniture is paid off, are you then LBYM?

Man, I need a margarita. :-) As far as your original question, I'd be stuffing every spare dollar in a bank account that pays the best interest you can find (it will still be a tiny number) against future need, particularly with a kid on the way. Congrats on the kid, by the way. :-)


--Booa

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285960 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 7:50 PM
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OK, I'm in the weird position of sort of agreeing and sort of disagreeing with you, AJ. Buying the furniture might be living above their means just in the sense that maybe they couldn't have afforded the furniture, but what is the difference between taking a 0% offer in order to improve your investment ability and taking a 0% offer to live above your means?

There isn't really a difference, which is what my point is. You can live above your means by spending money on investments, on savings, on furniture, on food, or on any number of other things. If you don't have money in the bank or other accessible assets (other than an e-fund) to pay off a non-emergency unsecured 0% loan, you are living above your means. (Secured loans, like mortgages and car loans, are a bit different, since you could theoretically sell the asset to settle the loan, if you had to. But as those who are upside down in secured loans have seen, you may still be living above your means if you can't pay off the differential easily. So be sure you aren't living above your means when taking out a secured loan, your best bet is a large pool of accessible assets and/or a large down-payment, combined with not taking any interest only or negative amortization loans.)

Again, it's a cash flow thing. While the OP may have used some of the dollars for something to help build future wealth, like investing in a Roth before the time limit expired, the fact is that it was spending future dollars to pay for a current expense.

From a cash flow perspective, investment for retirement or saving for an e-fund is just as much of an expense as furniture or food or flat screen TVs are. They all need to be prioritized within your current cash flow and/or savings, or you are spending future dollars. When you spend future dollars, you live above your means.

The other thing I wanted to mention is that not everyone can start out funding their retirement to the extent that they'd like. So, yeah, probably maxing out the 401ks isn't enough, and they need to save up an efund so that the Roths can be purely for retirement, but...I think OP will be able to save more in the future (once he's no longer paying for infant care) and it's good to start out doing what you can. I think putting the efund in a Roth is fine. Buying the furniture, a little eh, but the Roth thing seems fine to me (so long as the OP isn't double counting that money as both efund and retirement, it's fine.)

Oh, I already said that using a Roth as an e-fund as in interim e-fund until you get another e-fund built up, or as a backup e-fund, if you run through your main e-fund and are going to be out on the street otherwise, is a reasonable first step. But there has to be a second step - which is to build up accessible assets that are in non-tax advantaged accounts. Because even if there are no penalties associated with taking money out of the tax advantaged accounts, you still lose the tax advantage on a go-forward basis, and you can't get that tax advantage back once the money's been out of the account for 60 days.

The second step was what didn't seem to be happening in this case, when you compare the amount of money in the Roths vs. the amount of money in the savings/emergency cash accounts. And the contributions to the savings account And if the OP can't find the money to fund an e-fund other than the Roths before the baby comes, what are the chances that it will be able to be funded after the baby comes? Because, as you go on to mention, babies are pretty expensive the first 2 - 3 years. So, taking that second step didn't seem likely to occur anytime soon.

AJ

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285961 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 7:56 PM
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I still really don't get the statement that we're "living above our means." I posted every debt and every asset we have. How do we have a positive net worth after taking a $49k hit on our house if we're living over our means?

-----------------------------------------------------------

Living above your means isn't a net worth thing. It's a cash flow thing.

When you bought the furniture - you spent future earnings. You can't say 'we had money in the bank, it was just in the Roths' because the Roths are your emergency fund. And furniture isn't an emergency.

By spending future earnings, you are living above your means.


But what about when you buy a house, get a student loan, or a car loan? Does that mean you're living above your means? Is it not if you're not upside-down on the loan? Is it still living above your means if you make sure that the payment isn't more than you can afford? I agree with your definition but these things are confusing me...


--Booa (though I think the furniture purchase is maybe LATM, but I'm having trouble knowing why I think that...)

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285962 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 8:14 PM
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But what about when you buy a house, get a student loan, or a car loan? Does that mean you're living above your means? Is it not if you're not upside-down on the loan? Is it still living above your means if you make sure that the payment isn't more than you can afford?

For secured loans, like mortgages and car loans - you could theoretically sell the asset to settle the loan. That may not work so well when you are upside down in the loan, so if you are upside down in the loan and you don't have the means to pay off the amount that you are upside down, I'd say, yes, you are living above your means.

For student loans - yes, students who take out student loans are living above their current means. There is an expectation that when students graduate, they will have an increased earning power to pay for the loans. But that's still spending future dollars. And, as an example, for those who are graduating into the current job market, that expectation may not be realistic, and their decision to live above their means may come back to bite them. Or as another example, those who don't actually finish their degree, but still ended up with a bunch of student loans usually find that living above their means didn't get them the return that they hoped for. And for those students who get $100k+ in loans to get a degree that qualifies them for a job that only pays $25k - $30k - I would say that they are living above both their current means and their future means.

AJ
- who has lived above her means in the past, and doesn't want to go there again - it's much less stressful not to

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285963 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 8:17 PM
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I personally wouldn't pay off the 0% loan early, particularly not if you're taking money out of the Roth to do so.


--Booa

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 285965 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 9:04 PM
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That was meant to be a question. Is it a good order of priorities? I'm thinking it is. Would other people have a different list?

1. Minimal living expenses (Including set asides for repairs etc)
2. Emergency Fund
3. Retirement fund (all available)
4. Freedom fund (furniture, vacations, non-emergency stuff)
5. Increase living expenses


I think this is sort of something I am almost always jotting down and revising, because it depends on what my goals are at the moment. I think in general it's pretty good, though I'd be more specific because some freedom fund categories (for me, anyway) come before retirement (since I don't want to have a bunch of money for retirement locked where I can't get it if my car engine blows up--knock wood). I know that's what the emergency fund is for, but really, short of unemployment, I try really, *really* hard not to touch the emergency fund. Petting my emergency fund is the only thing getting me through the day, sometimes.

Right now, I have savings goals of retirement, pup college fund, and possible a house down payment. I have debts of my school loans, DH school loans, car loan, and a CC BT that I used to pay off most of the car loan (because it was a much better interest rate). I will probably owe the IRS money, so that's a possible debt on my horizon. My efund is in good shape, so I'd rank my personal list as:

1) minimal living expenses

2) emergency fund (Done at the moment, at 6 month level)

3) minimum payments to all debts (school loans, car loan, min payment on CC BT for car loan balance)

4) freedom fund for car expenses and non-frivolous things (i.e., some minimal Christmas level of expenses, but not the whole amount I expect to spend)

5) retirement fund (a minimum level that I could live on probably and not be eating dog food)

6) freedom fund, the slightly more frivolous (car repairs I don't have to do, but that it would be good to do, particularly if it rains, and the lots of travel level)

7) retirement fund, the diva level

8) pup college fund

9) snowball the debts in order:

a) IRS
b) car
c) CC BT for car
d) DH's school loans
e) my school loans (my interest rate is lower than his)


10) a round for all my friends, the increased living expenses level

11) house down payment savings

I think overall your list was good, but I would put minimum freedom fund stuff before retirement, just so you don't end up having to put stuff on CCs and then maybe having trouble paying it off later. :-) But I think we all have our own versions of this list, whether we know it or not...


--Booa

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Author: llambe Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 286012 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/16/2009 12:30 PM
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The problem with the furniture is that OP is triple counting the money:

1-furniture
2-EF
3-retirement

That one chunk of money can't do all those things. This is a way of thinking I used to have quite often, it took using YNAB (envelope style budgeting) to open my eyes to it.

Look at it like this - what if OP said "I want to buy $2000 of furniture on my CC and I will pay it off in the next year". Or if OP said, "I want to borrow $2000 on my CC to fund my Roth?" Would you consider those LBYM? Would you advise OP to do it? No.

OP funded his Roth. He also bought furniture on a CC (that happens to be at 0%). He only thinks he had enough cash on hand to do both.

Lael

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 286017 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/16/2009 2:30 PM
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Actually, paying down the mortgage will make the OP less nimble, IMO.

Especially in an area where values are dropping, like Boston, putting the money into a savings account, rather than paying the mortgage down (but not off) provides significantly more flexibility.

I would NOT recommend paying additional on a 2nd mortgage when already upside down, and prices are continuing to drop, unless all retirement funds were fully funded, and there was a fully funded non-tax advantaged e-fund in place. At that point, maybe - although I would still recommend considering building up enough savings to pay the mortgage off, rather than down.


I agree, houses are not exactly a liquid asset. RIght now, and with a baby on the way, keeping money liquid and accessible is key.


--Booa (The voice in my head is quoting Lois McMaster Bujold, and saying, "But is Sergyar a *liquid* asset?")

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Author: pachouly Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 286022 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/16/2009 2:44 PM
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--Booa (The voice in my head is quoting Lois McMaster Bujold, and saying, "But is Sergyar a *liquid* asset?")

I knew there was at least one reason that:

DrBooa is already one of your Favorite Fools

pachouly

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 286051 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/17/2009 2:56 PM
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OK, I'm in the weird position of sort of agreeing and sort of disagreeing with you, AJ. Buying the furniture might be living above their means just in the sense that maybe they couldn't have afforded the furniture, but what is the difference between taking a 0% offer in order to improve your investment ability and taking a 0% offer to live above your means?

-----------------------------------------------------------

There isn't really a difference, which is what my point is. You can live above your means by spending money on investments, on savings, on furniture, on food, or on any number of other things. If you don't have money in the bank or other accessible assets (other than an e-fund) to pay off a non-emergency unsecured 0% loan, you are living above your means. (Secured loans, like mortgages and car loans, are a bit different, since you could theoretically sell the asset to settle the loan, if you had to. But as those who are upside down in secured loans have seen, you may still be living above your means if you can't pay off the differential easily. So be sure you aren't living above your means when taking out a secured loan, your best bet is a large pool of accessible assets and/or a large down-payment, combined with not taking any interest only or negative amortization loans.)


Ah, okay, I see now. I was conflating affordable with LBYM. It seems to me you can get a loan for something for which the payments you can cover out of your cash flow without it impacting saving for retirement, efund, freedom fund, and regular expenses funding, and you didn't buy too much (whatever it is), then that's affordable, but that's not the same as LBYM. I guess if you're buying something that secures the loan, it still can be, but if you're buying something that you can't really sell to cover the whole loan, then it's just not affordable *and* LAYM.

Again, it's a cash flow thing. While the OP may have used some of the dollars for something to help build future wealth, like investing in a Roth before the time limit expired, the fact is that it was spending future dollars to pay for a current expense.

From a cash flow perspective, investment for retirement or saving for an e-fund is just as much of an expense as furniture or food or flat screen TVs are. They all need to be prioritized within your current cash flow and/or savings, or you are spending future dollars. When you spend future dollars, you live above your means.


Okay, the other issue I had was that number you calculated, the monthly amount they were living above their means. The problem is, if they manage to cut monthly expenses by that number, it doesn't matter--they're still LATM, because they still have a balance on their furniture loan. They're living above their means until the furniture loan is paid off. I have issue with subtracting the cash on hand from the furniture loan to get the amount, because that money is presumably the emergency fund, or represents the amount of cash in the Roth that's no longer emergency fund. Either way, it shouldn't be counted, unless it's really freedom fund and not emergency fund. But we all agree that furniture isn't an emergency, so the efund can't count against the furniture purchase. Right?

I guess that makes the LATM average per month number bigger, but the monthly number just bugged me. It's a valid way of looking at the amount they're LATM, since if they'd cut that much from the budget from when they'd had the furniture loan, it'd be presumably paid off now, but including the cash on hand (the $3100) in the calculation didn't jibe with what I understood you to be saying was LAYM.

The other thing I wanted to mention is that not everyone can start out funding their retirement to the extent that they'd like. So, yeah, probably maxing out the 401ks isn't enough, and they need to save up an efund so that the Roths can be purely for retirement, but...I think OP will be able to save more in the future (once he's no longer paying for infant care) and it's good to start out doing what you can. I think putting the efund in a Roth is fine. Buying the furniture, a little eh, but the Roth thing seems fine to me (so long as the OP isn't double counting that money as both efund and retirement, it's fine.)

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Oh, I already said that using a Roth as an e-fund as in interim e-fund until you get another e-fund built up, or as a backup e-fund, if you run through your main e-fund and are going to be out on the street otherwise, is a reasonable first step. But there has to be a second step - which is to build up accessible assets that are in non-tax advantaged accounts. Because even if there are no penalties associated with taking money out of the tax advantaged accounts, you still lose the tax advantage on a go-forward basis, and you can't get that tax advantage back once the money's been out of the account for 60 days.


Ah, okay. Then we're in agreement. I didn't realize the money outside the Roths (the infamous $3100) wasn't efund. I thought it was, and that they were building the efund outside of the Roths, so I was confused.

The second step was what didn't seem to be happening in this case, when you compare the amount of money in the Roths vs. the amount of money in the savings/emergency cash accounts. And the contributions to the savings account And if the OP can't find the money to fund an e-fund other than the Roths before the baby comes, what are the chances that it will be able to be funded after the baby comes? Because, as you go on to mention, babies are pretty expensive the first 2 - 3 years. So, taking that second step didn't seem likely to occur anytime soon.

I see. I think I got confused about the $827 and where it was going, and I got confused with the net worth and how it fits into LBYM. (Because it does seem like increased net worth would come from LBYM, particularly given the stock market and house value performance recently.) If the OP just changes focus to get the efund up to strength, and pays off the furniture, I think we'll call it good, yeah?

Thanks for clearing that up, AJ. I'm much less muddled now.


--Booa

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 286053 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/17/2009 3:02 PM
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But what about when you buy a house, get a student loan, or a car loan? Does that mean you're living above your means? Is it not if you're not upside-down on the loan? Is it still living above your means if you make sure that the payment isn't more than you can afford?

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For secured loans, like mortgages and car loans - you could theoretically sell the asset to settle the loan. That may not work so well when you are upside down in the loan, so if you are upside down in the loan and you don't have the means to pay off the amount that you are upside down, I'd say, yes, you are living above your means.

For student loans - yes, students who take out student loans are living above their current means. There is an expectation that when students graduate, they will have an increased earning power to pay for the loans. But that's still spending future dollars. And, as an example, for those who are graduating into the current job market, that expectation may not be realistic, and their decision to live above their means may come back to bite them. Or as another example, those who don't actually finish their degree, but still ended up with a bunch of student loans usually find that living above their means didn't get them the return that they hoped for. And for those students who get $100k+ in loans to get a degree that qualifies them for a job that only pays $25k - $30k - I would say that they are living above both their current means and their future means.


I guess that's the part that makes me sad--my student loans mean I will be living above my means for the next twenty years or so. They're at such low interest rates (I got lucky with my timing) that I'm in no rush to pay them off, but so long as I have them, regardless of what else I'm doing money-wise, I'm LAMM. Which is just depressing enough that I feel like saying "Eff it" with the rest of it and buying everyone a round. I mean, I did get increased earning power out of my degrees, and DH, too, and we probably will pay his loans off (because the interest rate is just sucky enough that I don't want it around) but there are enough things ahead of my school loans on the payoff list that it's doubtful we'll get to them.

Of course, I will still try to be cash-flow-positive every month, but it's still sort of blekky to think about. Probably why I didn't want to! :-)


--Booa

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 286060 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/17/2009 4:47 PM
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Look at it like this - what if OP said "I want to buy $2000 of furniture on my CC and I will pay it off in the next year".

I might not consider it LBYM (true), but I wouldn't necessarily advise against it (with a baby on the way, I'd advise against it, but not in every case).

Or if OP said, "I want to borrow $2000 on my CC to fund my Roth?" Would you consider those LBYM? Would you advise OP to do it? No.

You're absolutely right, I wouldn't consider it LBYM. I might advise OP to do it, though, if the loan was at 0%, fixed for the life of the loan, on a CC, or if he was getting a 0% loan for furniture *he was going to buy anyway* that was a reasonable buy for his position in life and job security, etc., and that would free up money to fund a Roth. I guess I put some retirement investing above strict LBYM.

And, really, you have to keep the secured vs. unsecured thing in mind, too. You wouldn't say "Don't buy a house until you have the money for the whole amount," right? You wouldn't tell someone with a mortgage to not save for retirement until the house was paid off, or their student loans were paid off, right? At least, I'm going to save for retirement even if it means my student loan is around a looong time--it's at 2.35% interest, and it's big enough that paying it off would severely, negatively impact saving for retirement and possibly ever buying a house.

So, I guess I'm not as gung-ho for LBYM as I thought I was. I do agree, double-counting the money is bad, but I don't think OP was doing that, actually. I think he wasn't anxious enough to build up the non-Roth efund, but hopefully he's not thinking that way anymore. He may not have been planning to put enough aside for retirement, counting the Roth as an efund, but that's a whole other issue.


--Booa

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Author: DrBooa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 286061 of 308782
Subject: Re: Increased means, how to prioritize? Date: 3/17/2009 4:51 PM
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pachouly added to your Favorite Fools list

:-) Well, it was way past time for me to do that.


--Booa

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