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Hi everyone,

I'm been trying to take better care of my financial life over the past year or so, having decided to settle permanently in the US (I'm from England originally) and I'm looking for some input and suggestions on how I can improve my current approach - or just reassurance that I'm doing OK :) I also have some specific questions highlighted below.

You can read some of my previous posts here http://boards.fool.com/new-to-us-banking-system-cont-2883213... which give some background, but no need, I'll lay it all out now.

I'm 33, living with my boyfriend in a rented apartment we're very happy in, in San Francisco. No plans to buy as rent is so cheap here compared to purchase prices, and neither of us are particularly fussed about home ownership.
I have a good job that pays well in terms of both salary and (barring a double-dip recession) bonuses. Right now I am paying 13% of my salary and bonuses into a 401K, of which 5% is going to Roth and the rest regular. My employer also contributes a further 6%. I am not eligible for an IRA. Is there anything else I should be doing for retirement, or any changes I should make?

I am saving around 1/3 of my net pay (1/3 goes to rent and bills, 1/3 to groceries, clothes, entertainment etc) as I am technically debt free, but would like to repay my mother a ~$28K "gift" that she gave me to help me through graduate school (I got my MBA so feel I should be able to repay her sensible investment in me).

I have $10K in an ING Sharebuilder account in short-term bond ETFs (expect ~4% return) set aside to pay back my mum, and have also been trying to learn a bit about stock investing and put my toe in the water with two purchases a month ago (APOL and SMSC - both bumped >5% on earnings announcements recently so I'm doing well/ really lucky so far). I also have ~$5000 set aside in an account that pays 1.3% with smartypig, and save $1500 per month to that, with the plan of paying back my mother early next year with that plus my annual bonus (paid in Jan) and the other savings mentioned.

I have $1000 in an emergency fund, $1500 saved up for a long trip home to the UK with my boyfriend this summer (flights and hotels paid for with airmiles and Starwood points respectively - one upside of the travel required by my job) and $1000 saved for a trip to his parents at Christmas plus gifts etc for his (large) family. I also now have a decent credit rating and have three US credit cards - a United and a Starwood used for work travel expenses and a Capital One cashback for everyday, all paid in full every month. I still have a UK one too, paid from a UK bank account I keep open with a few hundred pounds in in case I need to go back for a while at any point (if mum was sick etc).

I have not told my mum that I intend to pay her back - I want to wait until I have the full amount and just pay it into her bank as a fait accompli, as she may be offended and try and talk me out of it. There is also a good chance she decides to give it right back and persuade me to use it for a wedding or down payment, but if so I want it to be her money again first, and hope she'll at least take a bit to enjoy herself with.

Given all this, I feel that I should maybe have a more solid emergency fund, to cover the 6 months living expenses often mentioned here. However, as long as my mum doesn't know I intend to pay her back I can always use that money if something awful happens. Does that sound OK, or is there a better way I should think about my emergency fund and investments?

Additional questions: my mum lent me 15K pounds sterling - I'm in a real quandry as to whether I should pay her back in the value of the dollars then (at exchange around 1.9) or now (around 1.6). Not to mention whether I should repay her interest, and at what rate! Current plan is to pay back the higher amount, which may confuse/insult her more, but I'll get there faster if I decide to just pay back 15K in today's sterling. Any thoughts there?


Sorry, this has ended up a bit more of a ramble than I intended. Does anyone have any thoughts, or are there any other details you need from me?

Ali
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<<Additional questions: my mum lent me 15K pounds sterling - I'm in a real quandry as to whether I should pay her back in the value of the dollars then (at exchange around 1.9) or now (around 1.6). Not to mention whether I should repay her interest, and at what rate! Current plan is to pay back the higher amount, which may confuse/insult her more, but I'll get there faster if I decide to just pay back 15K in today's sterling. Any thoughts there? >>


Personally, I think loans from parents and family are debts of honor that should be paid back in good faith as soon as possible. I'd add a modest interest rate of 6% per year or 1/2% per month. You got paid in pounds --- I'd repay that in pounds.

It's the most potent way to notify your family that you are a responsible adult.



Seattle Pioneer
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I'm in a real quandry as to whether I should pay her back in the value of the dollars then (at exchange around 1.9) or now (around 1.6).

I would pay her in her local currency. The loan wasn't meant to be currency speculation.
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Right now I am paying 13% of my salary and bonuses into a 401K, of which 5% is going to Roth and the rest regular.

If the 13% is not maxing out the IRA ($16,500 this year) and you are happy with the choices available and expenses for the 401(k) plan, you should increase in order to get to the max.

I am not eligible for an IRA.

Why do you think you aren't eligible for an IRA? Nearly everyone who has US source 'compensation' (see IRS pub 590 www.irs.gov/pub/irs-pdf/p590.pdf for the definition, but it's basically taxable income from employment) is eligible to contribute to an IRA. Depending on your income, filing status and eligibility for an employer sponsored retirement plan is what changes the tax treatment for the IRA (IRS pub 590 also has the limits for each set of circumstances):

- Deductible IRA - lowest caps
- Roth IRA - higher caps than deductible
- Non-deductible IRA - anyone who doesn't meet the caps for either of the above IRAs

In your case, with (presumably) no other IRAs, you can do a 'back-door' Roth IRA, since the income caps on Roth conversions were lifted. You would make your $5000 contribution to a non-deductible IRA, and then turn around the next day and convert to a Roth IRA. Since your contribution is non-deductible, the only additional taxes you would owe would be on any gains you made in the single day that it took you to convert.

I have $10K in an ING Sharebuilder account in short-term bond ETFs (expect ~4% return) set aside to pay back my mum

If it were me, because of the potential loss of principal from bond ETFs (even short term), this would not be a place that I was keeping money I wanted to use in the next year or two. Yes, no risk often means less gain, but it also means the money will there when you want to pay it back to your Mum.

I have $1000 in an emergency fund

With the living expenses in SF, I would look at increasing this substantially (to at least 3 months of expenses) before I started investing significantly in accounts other than retirement accounts where you have to use the opportunity or lose it. Even then, I would split money 50/50 between investing/e-fund saving until the e-fund was at least 6 months of expenses, and preferably 12.

Given all this, I feel that I should maybe have a more solid emergency fund, to cover the 6 months living expenses often mentioned here. However, as long as my mum doesn't know I intend to pay her back I can always use that money if something awful happens. Does that sound OK, or is there a better way I should think about my emergency fund and investments?

To me, the money that you are intending to pay back is 'consumer debt', so I would say that the $1000 e-fund is okay until after that is paid back. You also have some other accounts that could bolster your e-fund a bit. However, as already mentioned, I wouldn't put any more into a taxable investing account until you have built your e-fund (outside of the 'Mum payback fund') to at least 3 months of expenses.

Additional questions: my mum lent me 15K pounds sterling - I'm in a real quandry as to whether I should pay her back in the value of the dollars then (at exchange around 1.9) or now (around 1.6). Not to mention whether I should repay her interest, and at what rate! Current plan is to pay back the higher amount, which may confuse/insult her more, but I'll get there faster if I decide to just pay back 15K in today's sterling. Any thoughts there?

I would pay back £15k, no matter what the exchange rate is at the time (higher or lower). Interest payment depends on your relationship with Mum. Since it seems from what you write as though Mum intended the money as a gift, I probably wouldn't put any interest with the initial payment to her, although I might figure out how much interest would have accrued at a rate like 4% (or whatever you think is fair - I don't know what interest she might have been earning on the money if she had kept it instead) and offer to pay that to her, too, or, if she preferred, make a donation in Mum's name to her favorite charity for that amount.

AJ
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I'm been trying to take better care of my financial life over the past year or so, having decided to settle permanently in the US (I'm from England originally) and I'm looking for some input and suggestions on how I can improve my current approach - or just reassurance that I'm doing OK :)

You've come to the right place to get a variety of mostly fiscally conservative opinions.

I have a good job that pays well in terms of both salary and (barring a double-dip recession) bonuses. Right now I am paying 13% of my salary and bonuses into a 401K, of which 5% is going to Roth and the rest regular. My employer also contributes a further 6%. I am not eligible for an IRA. Is there anything else I should be doing for retirement, or any changes I should make?

That's a good start for your age. It would be possible to put more toward retirement, but I don't think that advisable for your situation, given the other issues you talk about. See previous replies on IRA eligibility.

I have $10K in an ING Sharebuilder account in short-term bond ETFs (expect ~4% return) set aside to pay back my mum, and have also been trying to learn a bit about stock investing and put my toe in the water

This is less conservative than I would recommend, for couple of reasons:

1. Money set aside to repay loans should not be invested in anything with risk of loss. With interest rates at historic lows, bonds have a noticeable risk of loss. (Bond values decline as interest rates rise and vice versa, and there's not much room for interest rates to fall.) Bond *funds* have a higher risk of loss than individual bonds, because you don't have the fall back option of holding to maturity.

2. Investing without having a solid base of working capital means that investment losses really hurt.

That having been said, you have to start investing some time, and most people learn what they're doing by reading some and acting some. If you were situated differently, your approach to learning how to invest would be fine.

I have $1000 in an emergency fund, $1500 saved up for a long trip home to the UK with my boyfriend this summer (flights and hotels paid for with airmiles and Starwood points respectively - one upside of the travel required by my job) and $1000 saved for a trip to his parents at Christmas plus gifts etc for his (large) family. I also now have a decent credit rating and have three US credit cards - a United and a Starwood used for work travel expenses and a Capital One cashback for everyday, all paid in full every month. I still have a UK one too, paid from a UK bank account I keep open with a few hundred pounds in in case I need to go back for a while at any point (if mum was sick etc).

Good news: The cards are paid in full. Keep this up, it's a good habit.

The bad news: Your emergency fund is woefully inadequate. $1000 isn't a real emergency fund, it's an "I forgot to budget for car repairs" fund. Compare the $1000 you have for emergencies to $1500 saved for a trip to the UK. What if the emergency turns out to be a need travel to the UK on short notice due to something unforeseen happening in your family?

Given all this, I feel that I should maybe have a more solid emergency fund, to cover the 6 months living expenses often mentioned here. However, as long as my mum doesn't know I intend to pay her back I can always use that money if something awful happens. Does that sound OK, or is there a better way I should think about my emergency fund and investments?

Your thinking is sound in wanting a more substantial emergency fund. Your thinking is muddled on the loan from your mum. The money from your mum is, according to various things you've said, a) invested in a bond fund, b) a backup to your emergency fund, or c) reserved to pay back your mum. That's two jobs too many for the same money. If the purpose is b) or c), it shouldn't be in bond funds. It should be in the best yielding low risk money market fund or CD ladder you can find.

I would first, put the money from your mum somewhere safe (bond funds are not safe) designated as an emergency fund. Second, determine how big that emergency fund needs to be. Third, take money over and above that emergency fund and put it somewhere safe designated to pay back your mum.

Additional questions: my mum lent me 15K pounds sterling - I'm in a real quandry as to whether I should pay her back in the value of the dollars then (at exchange around 1.9) or now (around 1.6). Not to mention whether I should repay her interest, and at what rate!

She loaned you money in pounds sterling, you pay her back in pounds sterling. Any loss or gain from currency speculation should stay on your side of the pond. I like SeatttlePioneer's idea of paying interest, but some families have a convention that family loans are interest free. Think about what what the custom is in your family, and conform with that. If there is no family custom that you are aware of, think in terms of paying interest.

Patzer
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Hi all, and thank so much for the great advice and suggestions!

I have another question/ clarification about my retirement investments. Well, three questions actually:

*I believe I cannot invest in an IRA because my AGI is above that listed as the cap here http://en.wikipedia.org/wiki/401(k)_IRA_matrix - am I misunderstanding? In particular I'd like to hear more about aj485's suggestion about a "back-door Roth", and whether that is an option for me?

*I think the 13% of my salary that I am paying into a 401k plus the 6% my employer pays in is above the $16,500 cap. Roth by itself is not, but Roth plus the after-tax equivalent of the rest is. Should I reduce the amount I am putting in?

*Related question on 401k - What happens if I go over the limit? Will they just not take the money, or will I have horrible complicated tax problems?

As for the other questions, here is where I am now:

* I have decided to pay my mum back in sterling, but to add "interest" of a nice weekend away for the two of us sometime when I am visiting home, which will probably come out to a rate of ~1% interest pa (for her half!), but I know will make her happier than extra cash

* I will also be reallocating my various funds - I'll pull the money out of bonds and put it in high-interest savings for a mum-repayment fund and a real emergency fund (target 6 months expenses). I'll keep my two small share investments, they did OK but I think they are still undervalued given potential earnings growth, and I quite like how much I'm learning about stock investment (especially my tendency to check prices daily which I know I will have to curb before I invest serious money).

Thanks again everyone!

Ali
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*I believe I cannot invest in an IRA because my AGI is above that listed as the cap here http://en.wikipedia.org/wiki/401(k)_IRA_matrix - am I misunderstanding? In particular I'd like to hear more about aj485's suggestion about a "back-door Roth", and whether that is an option for me?

Yes, it is likely an option. Please consult IRS Pub 590 (instead of Wikipedia) as previouly suggested, in particular about non-deductible IRAs, which does not seem to be covered well in the article you refererenced. The back-door IRA is - You contribute to a non-deductible IRA, and the next day, you convert to a Roth IRA. This works without having to pay additional taxes (other than on any gain for the day) only for those who do not have any other IRAs with pre-tax money in them.

*I think the 13% of my salary that I am paying into a 401k plus the 6% my employer pays in is above the $16,500 cap. Roth by itself is not, but Roth plus the after-tax equivalent of the rest is. Should I reduce the amount I am putting in?

Your contribution (do not count your employer's contributions) is allowed to be $16,500. So, the question is - is the 13% of your income that you are contributing at least $16,500? If not, you are not maxing out your 401(k).

*Related question on 401k - What happens if I go over the limit? Will they just not take the money, or will I have horrible complicated tax problems?

The first thing to do is to find out if your plan allows after tax contributions (different from Roth contributions) or not. Here's an article that explains the differences in pre-tax, Roth and after-tax contributions to a 401(k). http://www.money-zine.com/Financial-Planning/Retirement/Comp...

If your plan allows after-tax contributions, then any 'overage' will likely be put into that category - you will pay taxes on it now, but you *may* (depending on your plan's rules) be able to withdraw the money sooner and with fewer restrictions.

If your plan does not allow after-tax contributions, your contributions will be capped at the $16,500 limit, possibly before the end of the year. What happens to the match at that point is (again) dependent on your plans rules.

AJ
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Yes, it is likely an option. Please consult IRS Pub 590 (instead of Wikipedia) as previouly suggested, in particular about non-deductible IRAs, which does not seem to be covered well in the article you refererenced. The back-door IRA is - You contribute to a non-deductible IRA, and the next day, you convert to a Roth IRA. This works without having to pay additional taxes (other than on any gain for the day) only for those who do not have any other IRAs with pre-tax money in them.

aj, I had a question--I did this this calendar year, but the original IRA was for 2010, converted to a Roth in 2011. Can I do this again for 2011, contribute to a nondeductable traditional IRA, and convert it in the 2011 calendar year, or do I have to wait until 2012?


Thanks,
Booa
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aj, I had a question--I did this this calendar year, but the original IRA was for 2010, converted to a Roth in 2011. Can I do this again for 2011, contribute to a nondeductable traditional IRA, and convert it in the 2011 calendar year, or do I have to wait until 2012?

You don't have to wait until 2012 to convert your 2011 contribution. You can do the conversion as soon as you want (and your administrator allows) after you make the contribution.

AJ
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Thanks, AJ. :-) I'm so lucky, having access to you and joel and all the many, many smart people at the Fool boards. Yay!


--Booa
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