The Finances and Debt Thread

[TopGun]

I have ~66k in my 401k and I'm actually invested 100% in the S&P 500 based on advice from a coworker. Maybe that is too risky even though I'm only 29?

Nothing wrong with having 100% equities at 29, as long as you don't panic and sell off when the market drops. I would probably suggest moving 15%-30% into foreign equities to add some diversification.

I only contribute $50/month to my HSA. Before last year my annual medical expenses were near zero so I never really bothered with it - the tax savings weren't worth bothering with the card. Then in the last few years I've had a few thousand in expenses. Blah. I should probably up this. I need another 1500 in it before I can invest it. Maybe at bonus time I will make a one-time contribution, and then start putting in more money. My wife is on my plan, too...and since we plan on having kids soon, yeah, I should get this going.

So if you have the ability, you should try and use your HSA as an additional retirement account. Contribute the max (this is tax-free), watch it grow (also tax-free), withdraw money during retirement (also potentially tax-free). You have to be organized to do this, keeping receipts for medical bills until you withdraw that amount from the HSA, but there is not time limit between when you incur the expense and when you deduct the money from your HSA. I got Lasik surgery a couple years ago, paid out of pocket rather than HSA, but I'll be able to deduct that cost from my HSA whenever I want to even 40 years from now.

Regarding an IRA...I looked into this last year but I get confused easily. Fidelity offers an "IRA". But apparently there is a difference between Roth IRA, IRA, Roth Basic, etc. Can someone explain that to me like I'm 5?

Traditional IRA is funded with pre-tax money, withdrawals are taxed. Roth IRA is funded with post-tax money, withdrawals are tax-free. You make too much to contribute to pre-tax IRA, so you should do a Roth IRA.

 

[TopGun]

3) Going back to the IRA, I will ELI5. A Traditional IRA is not taxed upon contribution, but will be taxed when you eventually take the money out in retirement. A Roth IRA will be taxed when you put it in, but will not be taxed upon withdrawal. A lot of really smart people are split on what to do. Some suggest it is always better to contribute to a Roth when you can (up to salary of 130ish k single, 190ishk filing jointly), some suggest to hedge and contribute to both. I personally think it makes sense to contribute to a ROTH at your age and income, because I find it highly unlike that the tax rate will go down when you are getting ready to retire. If we the assumption that the tax rate will stay the same or rise for your income level or you go up in income and are in a higher tax bracket, then it makes a lot of sense to pay taxes NOW so that you can lock in your lower tax bracket. IF however, you believe that upon retirement you will have a much lower income or the tax level will substantially decrease, it makes sense to contribute to a traditional IRA and pay the taxes later.

So most people naturally are in a lower tax bracket during retirement, primarily because they are (hopefully) no longer earning wages and instead use investment returns to fund their lifestyle, which leads to lower taxable income.

6) Roll over your old 401k into an IRA. Same reason as before. You will have much more control over it and there is no reason you should be subsidizing your old employers 401k plan.

The only possible issue with this is if you would like to do tax-free backdoor Roth contributions once your income exceeds the Roth IRA contribution limits. Since you other 401k is small I don't think it would be an issue, and would roll it as well.

8) If you and your wife are making 160k before taxes then you are still bringing in well over 6 figures after taxes... Do you know how much you save in a year? I think at your income levels you should be able to easily max out your IRA and 401k and HSA in a year (18.5k + 5.5k + 3.45k = ~27,450 of over 110,000). If you can't then you may need to think about how you are spending and look into budgeting.

Agreed 100%

 

[Ob1]

So most people naturally are in a lower tax bracket during retirement, primarily because they are (hopefully) no longer earning wages and instead use investment returns to fund their lifestyle, which leads to lower taxable income.

That is the assumption now. But we don't know what the tax rates will be in 2060 when he's ready to retire. Also, if he stays consistent with his savings and investment, there is a real chance that he saves more than 4 million, which at a safe 3.5% withdrawal rate would put him in at worst the same tax bracket as he is in today.


I'm not saying you're not right. I'm just saying that there is at least an argument to be made that while he is under the Roth threshold, he should take advantage of it. He can hedge his bets in a few years when he is over the limit and is required to contribute to Traditional (unless he wants to backdoor, which it seems like he has no interest in).

 

[natedagg]

To break this down so people understand why this is the best:

1. Fully funding 401k up to company match is most important because the company match is usually 100% for at least a few % and sometimes 50% for a few more %. An intstant 50-100% return on your money, especially when you consider 30-40 years of compounding interest if you're young, is a no-brainer.

2. Maxing out a Roth IRA next makes most sense because it is a more flexible account for multiple reasons. The first one is that you can pull out your contributions at any moment, whereas a 401k is locked in until retirement. The second one is that a Roth IRA has tens of thousands of investment options from which to choose, whereas a 401k usually only has a few dozen in most cases. This gives you more control and, most likely, more profit in the long run.

3. Maxing out your 401k next makes most sense because, although it doesn't have the amount of investment options that a Roth IRA does, nor can you pull out your contributions at any time, it is still more advantageous tax-wise than a money market account since you only get taxed once on the money, whereas a money market account is taxed at many more instances.

4. Finally, a money market account is the final option because, even though it is taxed, it is going to give you the best returns over a savings account. If you go with a mutual fund, find one that has great returns, acceptable volatility, and low turnover of its investment options unless its turnover rate is worth it.

@Cratylus

There's more nuance to this. Without bogging down into too many details, I've switched 3 & 4 on your list, but not a money market account and not mutual funds. It's a question of:
1. Ultimate flexibility - Taxable accounts you can borrow against, you can flip a house, you can wash sale losses. I just don't trust the government to bring income taxes down AT ALL, so I really am not feeling 401(k)s or Traditional IRAs, besides the 401(k) match of course... What if you want to toss some $ into a startup on wefunder? What if you want to buy some crypto? These things are not easy to do (but possible) in IRAs, while in a taxable account, it's a cinch. A taxable account is like a Multi-Tool and is criminally underrated IMO...

I will also add, if you can, understand your Roth 401(k) options. Not because you should go all-in the Roth 401(k) side with your contributions, but if you can convert it when the market is down, that's a good idea. If you can, a quick e.g. - don't go in a "moderate plus portfolio" if you are mod plus; go into many different MFs that spit you out at 70/30. That way inevitably when the US takes a dive, boom, you can convert small caps. When China has a credit crisis, boom convert emerging markets, when high yield takes a tumble, boom convert it. That granularity is your ally...

If you have lots of cash, and you find this to be a risk-avoidance technique, then you don't understand inflation and the eroding of your purchasing power. It's actually empowering to understand that you cannot avoid risk, so develop a relationship with it.

And all of you homeowners should purchase the best annuity money can buy: get an energy efficiency check on your house regarding insulation. Assuming you aren't moving, you'll be paid back at a far greater return than anything else. Obviously don't do this now, but put it out to bid once you are opening your windows in Spring/Fall. That's more like when those guys will be hurting for work.

 

[The Process God]

I fucking finally got that promotion! $14k raise. This will make things much easier. I'm gonna pay off my wife's car first since she let me use its equity as a favor. Then I will probably pay off my last credit card (on a promotional apr offer, so no interest) primarily to improve my credit score. At 716 right now. I bet I will be around 760. Then I will probably max out the roth ira and refinance some student loans.

 

[TopGun]

I fucking finally got that promotion! $14k raise. This will make things much easier. I'm gonna pay off my wife's car first since she let me use its equity as a favor. Then I will probably pay off my last credit card (on a promotional apr offer, so no interest) primarily to improve my credit score. At 716 right now. I bet I will be around 760. Then I will probably max out the roth ira and refinance some student loans.

And then you can change that disgusting avatar...

Seriously though congrats and I'm happy to see things are going well.

 

[FiveThous]

I fucking finally got that promotion! $14k raise. This will make things much easier. I'm gonna pay off my wife's car first since she let me use its equity as a favor. Then I will probably pay off my last credit card (on a promotional apr offer, so no interest) primarily to improve my credit score. At 716 right now. I bet I will be around 760. Then I will probably max out the roth ira and refinance some student loans.

Hell ya, nice work!

 

[BMAN]

So is a financial advisor worth it? We're doing my girlfriends dad a favor by giving his friends son experience since he's just starting off. He's got a more experienced guy with him so we've been talking to them for past couple months (for free at the moment). Just wondering if we should just start using them full time or is this something I can just do myself? So far all of their graphs and spreadsheets have been well made. What does everyone think?

 

[KI4MVP]

I fucking finally got that promotion! $14k raise. This will make things much easier. I'm gonna pay off my wife's car first since she let me use its equity as a favor. Then I will probably pay off my last credit card (on a promotional apr offer, so no interest) primarily to improve my credit score. At 716 right now. I bet I will be around 760. Then I will probably max out the roth ira and refinance some student loans.

it's better for your credit score to have some balance (less than 10% of the limit) on your card each month. So pay it off and use it for a few small things each month that you can pay off by the due date to keep the balance from being 0.

 

[KI4MVP]

This thread seems like the best place to post this. An example of now not to manage your money is Lisa Marie Presley. Inherited $100 million, 40 years later has $15k left.

https://www.usatoday.com/story/life...ells-wild-spending-broken-promises/375636002/

 

[BMAN]

So is a financial advisor worth it? We're doing my girlfriends dad a favor by giving his friends son experience since he's just starting off. He's got a more experienced guy with him so we've been talking to them for past couple months (for free at the moment). Just wondering if we should just start using them full time or is this something I can just do myself? So far all of their graphs and spreadsheets have been well made. What does everyone think?

I talked my girlfriend out of it.

 

[The Process God]

So February marked the third time in 13 months that my Subaru's turbo had died, so I decided I'm going to sell it. I just bought a 2006 Audi A3 3.2L Quattro S Line for $4,800, but I had to do a cash advance in order to get it. No worries though since I have the king of all cash advance cards: Kitsap Credit Union Gold Visa. 7.4% APR for both purchase and cash advances. No fee for cash advances. Cash advance limit is same as credit limit. Literally can't beat that in terms of a card that permanently has those aspects to it.

Then I am in the process of removing the lien on my Subaru so I can sell it, so that will be another 11k going onto 2 credit cards. Luckily both of those cards were offering me great promotional APR rates for 12 to 18 months- lower than the APR on my Subaru's loan. A big bonus to this is that I will have no lien holder on either of my wife's BMW or my Audi, so we can bump down to just liability and save $100 a month.

This pushes my credit card debt back up to 21k, but, this time, I will have no car loans, and my wife and I are making a lot more than the last time we were at that amount of credit card debt. 4.3k of it is 7.4% interest, 5.8k of it is 4.99% interest, and 11.1k of it is 0% interest, so I should be able to pay that off with little interest owed. Once I sell my Subaru, that amount will drop to about 14k.

Between me owing 2k in taxes, my turbo dying, buying another car, my wife's car's window breaking, and the Audi I just bought needing 2.1k in repairs, these next few months will be tight. I borrowed just enough from my credit limit to pay off my car loan, and I'm hoping that my cash flow is fast enough to keep up on these expenses without having to borrow more to pay off my one card I pay off each month. This all isn't a huge problem, per se, but it's going to be tough to see my credit score take another big hit after building it so much. After we pay off all of these cars, we will be saving $400 a month between not paying off cars and not being forced to carry full comprehensive coverage, and my credit will be better than ever.

Oh, and my company decided to forego rsises for anyone in the company due to poor sales performance last year. Sucks.

 

[TopGun]

It's good you have it figured out, but why are you buying a 12 year-old car that will have high maintenance costs? Buy a cheap Toyota instead, they'll go to 200k easy with much lower maintenance costs.

 

[The Process God]

It's good you have it figured out, but why are you buying a 12 year-old car that will have high maintenance costs? Buy a cheap Toyota instead, they'll go to 200k easy with much lower maintenance costs.

I'm aware that it will have higher maintenance costs, but I enjoy this car so much that I am willing to take that on. I save meticulously in almost every other area that I'll be ok. Besides, the mechanic who looked at this car for me told me it was one of the cleanest, most well upkept Audi engines and transmissions he has ever seen, and he dislikes Audi, so it was hard for him to tell me that. I've had an "ole reliable" type car my whole life like a Toyota Camry or Honda Accord, and my dad and grandpa said "no" to this type of car when I was younger. It's time I had some fun. It can't be as bad as my Subaru having it's turbo die 3 times in a year.

 

[The Process God]

Credit Karma caught up with me paying off my car loan with a credit card and now lists me at about 27k in credit card debt. Took almost a 100-point dive in my credit score overnight.

Despite having about $7,000 in bills this past month, I somehow paid it all off. Managed to make minimum payments on all of the credit cards that are either on very low interest or no interest right now, rent, car insurance, school loans, and a $5,400 credit card statement bill for my credit card I pay everything with and always pay off on top of still saving my normal 5% Roth 401k for company match and doing my normal tithe. My bills for May are to be even worse because of a $2k tax bill, $700 in government fees for my wife's 10-year green card, and a credit card statement bill that is already over $4k and will be closer to $5k by the end of april due to having to pay another $670 to fix my Subaru's exhaust that got clogged from three turbos dying and spitting metal fragments into the catalytic converter. Depending on how long it takes for me to get my Subaru back, I might be able to delay payment on it until the next credit card statement rolls around so that I can pay that bill in June.

My bills in June should be not quite normal, but much better. My wife's windshield has a full-length crack in it, so we're replacing it in late April for $275 (would allow me to pay it off in late June). The last major repair on the Audi I recently bought that shouldn't go too long without doing is the exposed boots on the axle shafts, which is probably doing to be quite expensive (possibly over a grand). I might do that sometime in May, but I may wait a month or two just to catch up a little bit as long as my mechanic thinks it will be ok.

I know this sounds all crazy, but a lot of it is just debt moving around, and the sale of the Subaru will totally cancel out both the purchase of the Audi and all of its repairs combined, bringing me right back down to a total of $20k credit card debt as opposed to 11k in car loans and 9k in credit card debt. It just sucks that a $2k tax bill, $700 in immigration fees, and and 3 grand in car bills (just the ones on the Subaru and BMW) all came at once.

It's so crazy how much better things are now though than they were in 2015 and 2016. In 2015, I made only 16 grand for the ear to losing my job in January 2015, then getting and losing another job from may to July 2015, only to finally get a good job in October of 2015. This is where most of my credit card bills came from for today--not having a job for most of the year while moving across country to be with my wife.

Then, in 2016, I was having to support my wife, who couldn't work for the first few months of living in the US and then worked part-time for only 4 months in 2016 until 2017. Having a $1,400 rent bill each month while paying off a massive car loan, 20 grand in credit card bills, school loans, and 3 grand to an immigration lawyer while only making $46,000 between me and my wife for the year was really tough in 2016.

In 2017, both of us were working full-time (made about 69 grand total between the both of us), and we were finally able to start breaking even and being slightly in the green each month, being able to make extra payments on debt each month.

Fast forward to this year, we're set to make about $92,000 this year between us, which is nothing crazy, but it's still well above the median household income. Our rent is down to $1,025 a month and car insurance is down to just over $100 a month (down from $275 for both cars). Our lawyer has long been paid off. After the Subaru is paid off, we'll only owe $20 grand in credit card debt with no car loan debt. Looks like we've paid off almost $20k in debt since 2016, and that's going to greatly be accelerated from now on. Life really is good.