Early 30s with Money: Now what?!

[srla]

My husband and I are in our early 30s and at a crossroads with what to do with our finances. I believe we need to hire a financial advisor and he believes we need to just keep doing what we’re doing (blind saving). We’re in good shape but we agree that we don’t know what we don’t know.

Below is a general summary of our finances. Does anyone have guidance or tips on how we can better steward our finances to prepare for the future? Or things you’d do (with your current knowledge) if you were in your early 30s with these finances?

Background: We have stable “essential” jobs (if you will), one child with hope of another, living in California with no intent to move.

Financial Summary
(average values, rounded for ease of discussion)

Monthly income: $9,000

Monthly expenses: $7,000 ($4000 in mortgage, remaining towards us, 1 child, 1 live-in grandparent)

Debts:
1) Mortgage with $500,000 remaining. 30y fixed at 3.75%. Paying additional $600 per month (26 years remaining).
2) Car with $5000 remaining. 5y, zero interest.

Retirement: Maxing out 401K contributions only.

Savings: $270,000 in a traditional savings earning 1%.

...That’s it!

 

[sokor]

@srla In a way, you are both wrong. Your situation is not complicated enough to justify a financial advisor, but you also shouldn't just be dumping money into a savings account.

1. Take some of that 270k and use it to max you and your husband's IRAs for 2019 and 2020 (24k total)
2. Take the remainder of the $270k and set aside a reasonable emergency fund. (Likely $42k-$56k, 6-8 months of your expenses. Put that in a HYSA or in a money market fund. Either will do better than 1%.
3. Make sure you are maxing your 401ks to the full $19.5k - it sounds like you are, but sometimes when people say that they are maxing their 401ks they mean to the employer match, not to the legal maximum.
4. Decide if you should set up a 529 for your child and the potential child. This would reduce your tax liability and would shelter money for later school expenses
5. Pick a date by which you want all of the remaining money in the market - it could be today, or it could be in a year, depending on your risk tolerance. I would then just set up an automatic transaction to invest the right amount in every month. That way you don't have to worry about getting in at the right time or if the market is up or down.

Someone else recommended a Simple Path to Wealth, but I would recommend just reading his blog posts. VTSAX and chill is a really good way to go and it would ensure that your money is working for you.

 

[maryannobryandysart]

@sokor I have nothing to add, this response is perfect...

 

[methodized]

@sokor Didn't the deadline to contribute to a Roth IRA for 2019 happen in April?

 

[ravnen]

@methodized Contribution deadline was extended with filing deadline - July 15

 

[methodized]

@ravnen Great to know. Thank you!

 

[okfine]

@methodized Further to the above, if you lack confidence/time/willpower to manage the IRAs on your own; you can avoid the traditional wrap fee planning and elect for robo planners such as betterment / wealthfront / Vanguard Digital Advisor ($1.50 per 1000/managed) or hybrid (Managed Based upon algorithmic goal allocation / human advisor to meet + discuss goals annually) planners thru fund companies like Vanguard ($3.00 per 1000/managed) / Fidelity / Schwab. Particularly for the IRAs + Additional Brokerage cash, you would be looking at relatively minimal costs for additional tax sheltered out of sight and mind savings.

You don’t need to worry about management on the 529 plan / they typically have built in strategies similar to your employer plan.

270k Total
-24k = 2Year IRA Contributions for you and spouse
-26k = Taxable Joint Brokerage
-54k = 6 mo HYSA emergency fund
-30k = 529 contributions for you and spouse (annual gift tax exclusion for year - can gift then spread up to 5yrs contributions at one time if interested)
136k = free and clear for taxable investing

My 2 cents - If you took an additional 26K (~16% net cash) and put in a joint taxable account to marry with your IRAs for hybrid management, you would be looking at ~$75/annually in management fees. The remaining $136k you could use for :
1. Maxing out 529 to $150k in lump sum
- No Tax Deduction for contribution but tax free growth if used for educational distributions!!!
2. further diversification via real estate/alternatives/further
3. supplementing the emergency rainy day savings
4. Paying off the car loan

 

[stmarien]

@methodized The deadline for 2019 contributions to an IRA is July 15th this year. https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers#iras

 

[srla]

@sokor

1. We haven’t contributed to our IRA because we make too much money. Right?...isn’t there a max earning for those? I’m hitting the edge of my knowledge on this here
2. Do typical banks like Chase offer HYSA? I intend to look but I figured I’d ask to see if there was a better option you’d suggest.
3. Yes, we are putting in the full $19.5k.
4. We do have a 529. Hear mix reviews about whether schools actually provide financial aid if we have that vs a HYSA. Thoughts?
5. Thank you!! I’ll look into the resources listed too.

 

[sokor]

@srla

1. There isn’t an income limit for contributing to IRAs. For traditional IRAs, the income tax deduction phases out, and for Roth IRAs, you can’t do normal contributions anymore at a certain income limit. However, you can do a back door contribution by contributing to a normal IRA and then “rolling it over” into your Roth IRA. The IRS knows about this loophole, and brokerages like vanguard have buttons to support this.
2. Chase doesn’t really offer HYSA’s. You can shop around for the best rate, but it looks like Goldman, Citi, Synchrony, and Amex all have competitive rates this month. I personally go the money market route (using VMMXX) so I don’t have to shop around for the best rate.
3. Awesome.
4. 529s are typically considered for Financial Aid purposes. But so is the equity in your home, certain retirement accounts, and anything in a taxable brokerage account. You’re not really going to qualify for tons of more financial aid by not contributing to a 529.
5. No problem.

 

[resjudicata]

@srla You could also check out the book the Simple Path to Wealth. It really helped me.

 

[jeaninmt]

@resjudicata Doesn't that book basically just say invest all of your money into VTSAX and keep it there?

 

[clintmurphy72]

@jeaninmt Yes. I’d recommend VTWAX rather than relying solely upon the continued returns of the US market though.

I like his blog post series as it’s a bit more succinct if memory serves.

 

[sujiro]

@srla Ouch, that mortgage payment is rough! VHCOL area?

 

[marianna26]

@srla XYPlanningNetowork is planners aimed at helping younger people, you can check there for a couple and just go to a free intro session to see what they have to say. Does not mean you have to use one. Both you and your husband have to be on the same page for this for it to work, otherwise it’s like trying to goto couples therapy when one person was in there against there will.

 

[smb7777777]

@srla Check out the /r/fire and /r/fatfire subs for ideas. You two are in a great place to start and have built a great foundation but arent using your money to good effect to build a better future.

As others have posted make sure that 401ks, IRAs have max contributed for last year and this year. The tax advantages of those make more sense than any other step you can take to start out.

After setting up your emergency fund the remainder of that money needs to move into a vehicle to work for you and not get destroyed by inflation.

Some ideas off the top of my head:

1. real estate (not for every one)
2. stock market index fund outside of tax advantaged account(impossible to time the market but things are... weird right now)
3. pay off/down existing low interest debt(not a great return but lowers your money going out once debts are paid off and guarantees the low rate of return)

I also don’t think you need a financial advisor really, but if you do decide to go see one MAKE SURE THEY ARE A FIDUCIARY. Good luck!

 

[yytg12]

@srla A financial advisor sounds helpful. If I was your financial advisor (I am not one FYI) I would first ask what your financial goals are and then consider the following investment vehicles:

IRAs especially if you want to increase the amount of retirement contributions

HSA if you have any health expenses (hint, you will in the future)

529 if you plan to have kids

Pour the rest into Taxable brokerage accounts

You can split your money into your long mid and short term goals and adjust the investment allocation from there. For example, money you plan to use in 20+ years can probably tolerate the risk of an 90/10 stock bond split, where if you wanted to start a business in 5 years consider saving that portion in a 30/70 stock/bond split. There is certainly no 'one way'.

Keep in mind on Reddit personal finance will often given blanket advice surrounding finances.

 

[saintvron]

@srla I don't think you need a financial planner. Those people are money pits for most people and are really only helpful if you are unable or unwilling to spend a bit of time learning basic financial planning skills yourself.

Note: I'm assuming the income values you gave in your post are post tax. I think almost all of your potential future problems would be solved by maxing 401(k) contributions (which you're already doing; good job!) and IRA contributions as well as saving 3-6 months expenses in an emergency fund.

If that is not feasible given your current $7K/month in expenses, reevaluate why you're spending $3,000/month in extra expenses over the mortgage. That seems very high. Most people should be able to get by on $1,500/month on the high end, especially if it is only you two, with no kids. The only way I can think that you're spending that much excess is if you're doing one or more of the following.

• If you're eating out alot, but don't have time to cook during the week, consider meal prepping on Sundays and only going out/getting takeout once or twice per week. You can make 7 days worth of food in 1.5 hrs for 1/6 the cost of going out to eat. It will also improve your cooking skills. This can also be alot of fun to do with your partner!
• If you're both getting $5 coffees each day, purchase a quality coffee maker and your favorite coffee, just in a bag already ground. $5/day for each of you 5 days/week is over $2,600/yr down the drain. I've found that with quality coffee and a quality coffee maker there is no noticeable difference between shop coffee and this coffee, and a cup of homemade coffee costs maybe $1/cup and that's with very expensive coffee and very expensive coffee machine. The best part about this is that you can still go to your coffee shop and get cups every now and then to try out different/new brews that they might get. Another fun activity that also helps save money!
• Try spending less of fashion if that's a portion of it. I know some people really like shopping, but spending more than ~$100/month on clothes per person is excessive imo. Especially if you already have enough clothes to last for awhile. (I know this is subjective, sry).
• Try being very honest with yourself and think about anything else that you might be spending more than you need to each month. I'm not saying that you should never eat out or never go to coffee shops, but try to do those things in a more responsible way that allows you to reach the above goals. I think quarantine is a good time to do the above things because we've all already learned that we can adjust to almost any circumstance successfully. This is just another set of things to adjust to, but these adjustments will benefit you greatly over the course of your financial life!

Once you reach the above goals, I would suggest holding off on resuming those habits you broke and instead maybe use the savings to do things like go on vacation, pursue hobbies, or develop skills. I've found that vacations and hobbies are much much more rewarding than going to a restaurant/coffee shop/clothes store. Imo, experiences are more satisfying than simple consumption, but that is subjective, so consider your own situation and preferences first.

If you're planning on kids perhaps consider a 529 plan, or just another brokerage account earmarked for the college expenses of your future children. Note that tuition prices may very likely double over the next 20 yrs. The federal government could make college free, freeing you from that financial burden. It's a guessing game at this point, but it's worth thinking about.

You're very very far ahead of most people, so be proud of that! All you guys need to do is some slight optimizations and you'll be set for life.

 

[srla]

@saintvron Thank you for the encouragement! I added to my original post that the remaining $3k covers expenses for four people (us, our toddler, our elderly family member). That said, we eat out maybe 4 meals a month, we’re 100% kureg-made coffee drinkers, and I can’t recall the last time we bought clothes...all toddler clothes are handed down. We’ve seen maybe a $150-200 difference during quarantine due to less gas and fewer meals out.

Just found this site that states the average cost of living (not including rent/mortgage) in LA is $3700: https://www.numbeo.com/cost-of-living/in/Los-Angeles

 

[thebaconincident]

@srla r/financialindependence r/bogglehead