MM Question (Update)

yodapup · June 2016

Hello! First post but I've been lurking for quite a while. We finally finished our debt snowball (minus our mortgage) buy selling our extra vehicle and I would like some advice on what to do next. We only have about $5k in our emergency fund and I would like to increase that to about $15k. But we also want to start saving for a basement and possibly kitchen remodel. Both remodels can technically wait but I am impatient.

We have about an extra $500/ month to put towards savings/ goals. What would be the best way to "spend" that extra $500?

Update: We just got notified that my husbands VA benefits went through and are getting a back pay deposit of $10k! This will bring us halfway to our 6 month emergency fund of $30k! I cannot believe it!

als1982 · June 2016

We need more information. Here are my initial questions:

How old are you? What are you currently putting toward retirement? How much do you have saved for retirement?

Do you have kids or plan to have kids? Do you want to pay for their college education(s)?

How stable are your jobs? Can you live on just one income or does it take two to pay the bills?

yodapup · June 2016

Thanks for the response. I'm almost 30, H is 30. I am a SAHM and MH puts 15% in his 401k (I don't know many details on that). He was military for 9 years and has $40k in his TSP prior to going civilian. We have 2 kids under the age of 3 and we put $100 into each of their 429 plans per month. MH has a very stable job with the electric company in CO. They are union.

brij2006 · June 2016

Have you followed Dave Ramsey at all? He recommends in 7 steps, very similarly to what you have already done.

We follow his plan, and it sounds like you are pretty closely, so I would say to get the $15k in the emergency fund first. Then start saving for the remodel.

The reason being, if you have the $15k in the emergency fund and there's a job loss, the money is there to support your family. If you only have $5k in the emergency fund and there's a job loss but a remodeled kitchen and basement, that won't give you any cash in hand to pay your bills.

yodapup · June 2016

brij2006 said:

Have you followed Dave Ramsey at all? He recommends in 7 steps, very similarly to what you have already done.

We follow his plan, and it sounds like you are pretty closely, so I would say to get the $15k in the emergency fund first. Then start saving for the remodel.

The reason being, if you have the $15k in the emergency fund and there's a job loss, the money is there to support your family. If you only have $5k in the emergency fund and there's a job loss but a remodeled kitchen and basement, that won't give you any cash in hand to pay your bills.

Thank you, that makes a lot of sense. I do sorta follow Dave Ramsey, I got the basic idea of the snowball debt payoff from him. I just wasn't sure where house improvements fall into the plan.

brij2006 · June 2016

yodapup said:

brij2006 said:

Have you followed Dave Ramsey at all? He recommends in 7 steps, very similarly to what you have already done.

We follow his plan, and it sounds like you are pretty closely, so I would say to get the $15k in the emergency fund first. Then start saving for the remodel.

The reason being, if you have the $15k in the emergency fund and there's a job loss, the money is there to support your family. If you only have $5k in the emergency fund and there's a job loss but a remodeled kitchen and basement, that won't give you any cash in hand to pay your bills.

Thank you, that makes a lot of sense. I do sorta follow Dave Ramsey, I got the basic idea of the snowball debt payoff from him. I just wasn't sure where house improvements fall into the plan.

If you listen to his show, he will sometimes talk about baby step 3b. That's where you have your fully funded emergency fund, but you don't start the 15% toward retirement until you knock out a couple of things you're saving for. That's where many people start saving up for a down payment on a house, replace a beater car, or do a needed remodel.
Since you guys are already doing the 15% and plugging away at childs' college fund, once you get the $15k in the emergency fund, you are essentially on bs5 (awesome job, by the way!). So I would just keep going with your snowball and extra cash and build that emergency fund as quickly as possible, then focus on saving up and paying cash for the remodel.

One thing to keep in mind though. I tried to always weigh the options. For us, our mortgage had $53k left on it when we were done funding BS3. I want a new kitchen soooo bad. However, I figured that if we saved up $10k to do a kitchen remodel, that was $10k less we would owe on the house if we put it toward that instead.
Needless to say, we have a paid for house and I still have a 1970's kitchen. Oh well. The paid for house gives me greater joy that a white and black kitchen with stainless steel appliances would.

LillibetteV · June 2016

I agree with PP - save it up in the emergency fund until you have the $15k and then start saving for the remodel. Great job on killing the debt!!

yodapup · June 2016

Thank you everyone! I took a lot of advice from you guys over the past couple of years so I give you ladies a bunch of the credit. Otherwise I'd still be paying min payments on debt and still probably have 4 different forms of debt too.

als1982 · June 2016

Since you only have one spouse working, I would definitely fully fund your emergency fund before saving for home improvements.

And you should definitely find out about your 401k. I find it concerning that you don't know he balance.

yodapup · June 2016

als1982 said:

Since you only have one spouse working, I would definitely fully fund your emergency fund before saving for home improvements.

And you should definitely find out about your 401k. I find it concerning that you don't know he balance.

So is fully funding 3 months or 6? I can't remember. Also, MH knows what the balance is but I don't recall. We are thinking about combining his TSP with his 401k but haven't looked much into it.

als1982 · June 2016

yodapup said:

als1982 said:

Since you only have one spouse working, I would definitely fully fund your emergency fund before saving for home improvements.

And you should definitely find out about your 401k. I find it concerning that you don't know he balance.

So is fully funding 3 months or 6? I can't remember. Also, MH knows what the balance is but I don't recall. We are thinking about combining his TSP with his 401k but haven't looked much into it.

Considering you have kids, I would do 6 months. You could look into laddered short term CDs though to make more in interest than you would with a traditional savings account.

hoffse · June 2016

yodapup said:

als1982 said:

Since you only have one spouse working, I would definitely fully fund your emergency fund before saving for home improvements.

And you should definitely find out about your 401k. I find it concerning that you don't know he balance.

So is fully funding 3 months or 6? I can't remember. Also, MH knows what the balance is but I don't recall. We are thinking about combining his TSP with his 401k but haven't looked much into it.

With only one of you working, I would fund 6 months.

If you can afford the taxes, I would roll the TSP into a Roth IRA. You guys are so young that I would want that money in a Roth-designated account so it can grow tax-free for 30+ years before you tap into it.

Regardless, get it out of the TSP. The fees are low, but my understanding is they have really limited investment options.

jtmh2012 · June 2016

hoffse said:

yodapup said:

als1982 said:

Since you only have one spouse working, I would definitely fully fund your emergency fund before saving for home improvements.

And you should definitely find out about your 401k. I find it concerning that you don't know he balance.

So is fully funding 3 months or 6? I can't remember. Also, MH knows what the balance is but I don't recall. We are thinking about combining his TSP with his 401k but haven't looked much into it.

With only one of you working, I would fund 6 months.

If you can afford the taxes, I would roll the TSP into a Roth IRA. You guys are so young that I would want that money in a Roth-designated account so it can grow tax-free for 30+ years before you tap into it.

Regardless, get it out of the TSP. The fees are low, but my understanding is they have really limited investment options.

And another thought. If you roll it and consolidate it, that's one less account that you have to keep up with.

yodapup · June 2016

So all the investing options are hard to wrap my head around lol, but I just looked on our bank's website and they have free financial advising services so I am going to give them a call! My first thought was to open a MMA through my bank but as I understand a Roth IRA would be good too.

LillibetteV · June 2016

I would do at least 6 months for a single income family with kids - honestly I'd personally shoot for a year.

We keep 3 months, but we're dual income no kids so that's 3 months of expenses if we both suddenly lost our jobs at the exact same time and didn't qualify for unemployment - highly unlikely. Realistically we could make do with just one salary if we had to (but it would suck) so we feel more comfortable keeping only 3 months liquid and investing the rest.

short+sassy · June 2016

Welcome and congrats on paying off your debt, other than the mortgage!

I concur with the others. With only one of you working and little ones, I'd focus on a fully funded, 6-month e-fund first.

Are you or your husband handy? Or could learn to be handy? Maybe you all could DIY some of the simpler jobs for the basement and/or kitchen.

I know with kitchens there are a lot of inexpensive ways to spruce it up in the meantime. Paint or stain the cabinets. New hardware. New sink and/or faucet. Fresh paint for the kitchen walls.

Do you need new floors for the kitchen or basement? There's a fairly new product on the market that are basically "wood-look" tiles. They are AMAZING and look just like hard woods. But with the durability, lower cost, and easier installation of tiles. They usually run around $2-$3/ square foot for the product...but if you shop around you can also find them for as low as $1/ sq ft.

brij2006 · June 2016

yodapup said:

So all the investing options are hard to wrap my head around lol, but I just looked on our bank's website and they have free financial advising services so I am going to give them a call! My first thought was to open a MMA through my bank but as I understand a Roth IRA would be good too.

I would actually recommend you go to Dave Ramsey's website and on the right hand side there's a list of Endorsed Local Providers. Click on the one for investing and they can help you figure out what the best thing is to do.

Unfortunately, a bank financial advisor may not steer you in the direction you are hoping to go. They do offer products and services, however, they're usually with low returns and in less favorable/high fee'd accounts.

cbee817 · June 2016

LillibetteV said:

I would do at least 6 months for a single income family with kids - honestly I'd personally shoot for a year.

We have 2 kids (one in day care full time) and both work. We have 9+ months of expenses set aside. DH makes about 1/3 of our total income, so if I lost my job, we would need the extra savings. Congrats on paying off your debt aside from your mortgage- that's amazing!

LillibetteV · June 2016

yodapup said:

So all the investing options are hard to wrap my head around lol, but I just looked on our bank's website and they have free financial advising services so I am going to give them a call! My first thought was to open a MMA through my bank but as I understand a Roth IRA would be good too.

Before you do ANYTHING I would recommend watching John Oliver's recent piece on retirement accounts. If you use an adviser you want them to be a fiduciary. However most people don't need an adviser, stick your cash in index funds and let them work their magic. Fees for managed accounts are huge and the usually don't perform as well!

If you take some time to read up on investing you'll realize that it's not that hard and it's not that scary.

hoffse · June 2016

yodapup said:

So all the investing options are hard to wrap my head around lol, but I just looked on our bank's website and they have free financial advising services so I am going to give them a call! My first thought was to open a MMA through my bank but as I understand a Roth IRA would be good too.

Money market accounts (I assume that's what you mean by MMA?) aren't the same as retirement accounts and don't have nearly the same tax advantages.

If you invest in a money market fund you will likely receive dividend income, which is taxed at ordinary income rates. When you sell a fund you might have gains, which will be taxed at capital gains rates if you hold it long enough (over 1 year). If you DON'T hold it long enough then you are taxed at ordinary income rates. When Hillary gets elected, she wants to extend the holding period to something like 6 years to get capital gains treatment, so be prepared.

Ordinary income rates are generally a lot higher than capital gains rates.

There are tax-exempt money market funds, but the returns are generally pretty low.

With a Roth IRA you invest after-tax money - meaning money that comes to you in your paycheck - and then it grows tax-free. You can invest in anything you want, and the dividends and gain are still tax-free. It's such a good deal that the IRS caps how much you can invest in a Roth account each year.

Here's an illustration. Let's say you invest $10,000 in a money market account when you are 30. You never touch it or invest another penny. If you average 7% growth over 30 years, that account will be worth $76,000 when you are 60. If you wanted to take the money out, you would owe about $9,900 in capital gains taxes. So now you have lost nearly $10K to taxes.

If you had put that money into a Roth IRA, you would take out the entire $76,000 and owe no tax. Over the course of an entire career, this can be a HUGE difference.

The general rule of thumb is to max out your tax-advantaged retirement accounts first, and then move to investing in other things that aren't as tax-advantaged. The only time I would break this rule is if you have a low expectation of reaching normal retirement age (health, etc.) or if you want to retire very early.

**Not legal/tax advice.

vlagrl35 · June 2016

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

brij2006 · June 2016

vlagrl35 said:

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

Same. We didn't contribute to retirement nor kids' college funds until all debt (except mortgage) was paid off and we had a fully funded emergency fund. But we have vowed that this is the way we live our life now. Our credit scores are at zero and we will never ever take out debt again. So we knew it was a means to an end for us and we would be getting to retirement and college investing sooner if we took those couple of years to pay everything off.

smerka · June 2016

Hoffse -correct me if I'm wrong, but wouldn't they owe about $10,000 in taxes now assuming a 25% tax bracket? My advice would be to convert the TSP to a Rollover IRA (acts like a traditional IRA just a different label). You could then recharacterize the money a bit at a time and pay less up front in taxes. For example if you get a $1,000 tax refund now, you could put enough money in to incur a $1,000 (~$4,000 moved) in tax and keep doing that for ten years. The key with all of this is to make sure your IRA servicer takes possession of the money from the TSP. Do not have them make the check out to you. You will still get a tax form (1099-R) but the codes on that make your tax liability go away. Not legal/tax advice

LillibetteV · June 2016

vlagrl35 said:

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

Were you passing up an employer match though? That would be my main concern with this approach.

jtmh2012 · June 2016

LillibetteV said:

vlagrl35 said:

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

Were you passing up an employer match though? That would be my main concern with this approach.

You're also giving up time. The more time you have to save, the more you get to save. The more employer matching you get, and more time to dividends to accumulate.

"It turns out that making up for lost time isn’t easy. In fact, according to Financial Engines, someone who saves 6% of a $36,000 salary (that grows by 1.5% a year) starting at age 25 will have close to $500,000 by age 65, assuming a 3% employer matching contribution and a 5% annual return. But to reach the same target, someone who starts saving at 35 has to contribute 12% a year. For someone who starts at 40, the magic number is 16.5%."
http://www.marketwatch.com/story/delaying-retirement-saving-can-cost-you-a-lot-2015-04-14

hoffse · June 2016

smerka said:

Hoffse -correct me if I'm wrong, but wouldn't they owe about $10,000 in taxes now assuming a 25% tax bracket? My advice would be to convert the TSP to a Rollover IRA (acts like a traditional IRA just a different label). You could then recharacterize the money a bit at a time and pay less up front in taxes. For example if you get a $1,000 tax refund now, you could put enough money in to incur a $1,000 (~$4,000 moved) in tax and keep doing that for ten years. The key with all of this is to make sure your IRA servicer takes possession of the money from the TSP. Do not have them make the check out to you. You will still get a tax form (1099-R) but the codes on that make your tax liability go away. Not legal/tax advice

Yeah if they rolled over the whole thing that's exactly what would happen. The TSP was funded with pre-tax dollars and Roth accounts are funded with after tax dollars. Whether they do it all at once or a little bit at a time doesn't make a huge mathematical difference, because they are paying the same tax regardless (unless they have a year where their tax bracket randomly goes down). I just think it's important to get that money to a Roth-designated account as quickly as they can afford to do it because they are young and should use that time to their advantage. It definitely might take a few years though.

In my description above I was responding to her comment that she might just open a money market account. I was trying to help her see the tax difference between a money market account and a Roth account for investing their money going forward. You can't really put TSP money into a money market account without incurring a huge penalty, so that's what I figured she was talking about.

Although now that I think about it... maybe she was saying they would just send the TSP money to a money market account? OP, if that's what you were talking about, don't do it. You guys will incur a huge penalty. Money market accounts aren't designated retirement accounts like 401(k)s or IRAs.

EDIT: Again, not tax/legal advice.

LillibetteV · June 2016

jtmh2012 said:

LillibetteV said:

vlagrl35 said:

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

Were you passing up an employer match though? That would be my main concern with this approach.

You're also giving up time. The more time you have to save, the more you get to save. The more employer matching you get, and more time to dividends to accumulate.
"It turns out that making up for lost time isn’t easy. In fact, according to Financial Engines, someone who saves 6% of a $36,000 salary (that grows by 1.5% a year) starting at age 25 will have close to $500,000 by age 65, assuming a 3% employer matching contribution and a 5% annual return. But to reach the same target, someone who starts saving at 35 has to contribute 12% a year. For someone who starts at 40, the magic number is 16.5%."
http://www.marketwatch.com/story/delaying-retirement-saving-can-cost-you-a-lot-2015-04-14

Also so true! I started when I was 22 and I thank my mom for making me do that all of the time. I switched jobs last year and I won't be eligible for our 401k until this October (rawr). While it's super frustrating to not be able to contribute for this long I've been saving extra in our other accounts and am reminding myself that with such an early start skipping a year in my early 30s isn't going to break my retirement.

hoffse · June 2016

jtmh2012 said:

LillibetteV said:

vlagrl35 said:

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

Were you passing up an employer match though? That would be my main concern with this approach.

You're also giving up time. The more time you have to save, the more you get to save. The more employer matching you get, and more time to dividends to accumulate.
"It turns out that making up for lost time isn’t easy. In fact, according to Financial Engines, someone who saves 6% of a $36,000 salary (that grows by 1.5% a year) starting at age 25 will have close to $500,000 by age 65, assuming a 3% employer matching contribution and a 5% annual return. But to reach the same target, someone who starts saving at 35 has to contribute 12% a year. For someone who starts at 40, the magic number is 16.5%."
http://www.marketwatch.com/story/delaying-retirement-saving-can-cost-you-a-lot-2015-04-14

***************SIB**********************
I think @vlagirl and her husband are self-employed so probably don't have a match. But for those of us who are not self-employed, YES. This is huge.

Also, can we talk about vesting schedules? One of my favorite coworkers just announced he was leaving after working here for 2 years. We actually get a 7% outright employer contribution. You don't have to contribute anything to receive it - but it's on a 4-year vesting schedule. FFS suck it up for a couple more years and let that money vest! At his salary he's getting about $9K - $10K/year in employer contributions, and he's going to leave half of that money on the table!

OK so maybe I'm pouting about the fact that he's leaving. But still.

smetter04 · June 2016

hoffse said:

jtmh2012 said:

LillibetteV said:

vlagrl35 said:

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

Were you passing up an employer match though? That would be my main concern with this approach.

You're also giving up time. The more time you have to save, the more you get to save. The more employer matching you get, and more time to dividends to accumulate.
"It turns out that making up for lost time isn’t easy. In fact, according to Financial Engines, someone who saves 6% of a $36,000 salary (that grows by 1.5% a year) starting at age 25 will have close to $500,000 by age 65, assuming a 3% employer matching contribution and a 5% annual return. But to reach the same target, someone who starts saving at 35 has to contribute 12% a year. For someone who starts at 40, the magic number is 16.5%."
http://www.marketwatch.com/story/delaying-retirement-saving-can-cost-you-a-lot-2015-04-14

***************SIB**********************
I think @vlagirl and her husband are self-employed so probably don't have a match. But for those of us who are not self-employed, YES. This is huge.

Also, can we talk about vesting schedules? One of my favorite coworkers just announced he was leaving after working here for 2 years. We actually get a 7% outright employer contribution. You don't have to contribute anything to receive it - but it's on a 4-year vesting schedule. FFS suck it up for a couple more years and let that money vest! At his salary he's getting about $9K - $10K/year in employer contributions, and he's going to leave half of that money on the table!

OK so maybe I'm pouting about the fact that he's leaving. But still.

@hoffse, I can relate to your sentiment because my employer's vesting schedule is one of the things I'm most stressed about regarding TTC. I'd like to SAH, but I'd be 100% vested at 6 years. This December I'll have 4 years, which is 60% vested, which is great but still not 100%! I feel like if I leave before 6 years I'd be throwing out money. In the end, though, H and I know this year is the right time to start TTC and although financial considerations are super important, vesting doesn't take precedence. I may also try to stay on part-time so I would still be contributing to my 401k. We'll see!

jtmh2012 · June 2016

LillibetteV said:

jtmh2012 said:

LillibetteV said:

vlagrl35 said:

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

Were you passing up an employer match though? That would be my main concern with this approach.

You're also giving up time. The more time you have to save, the more you get to save. The more employer matching you get, and more time to dividends to accumulate.
"It turns out that making up for lost time isn’t easy. In fact, according to Financial Engines, someone who saves 6% of a $36,000 salary (that grows by 1.5% a year) starting at age 25 will have close to $500,000 by age 65, assuming a 3% employer matching contribution and a 5% annual return. But to reach the same target, someone who starts saving at 35 has to contribute 12% a year. For someone who starts at 40, the magic number is 16.5%."
http://www.marketwatch.com/story/delaying-retirement-saving-can-cost-you-a-lot-2015-04-14

Also so true! I started when I was 22 and I thank my mom for making me do that all of the time. I switched jobs last year and I won't be eligible for our 401k until this October (rawr). While it's super frustrating to not be able to contribute for this long I've been saving extra in our other accounts and am reminding myself that with such an early start skipping a year in my early 30s isn't going to break my retirement.

I got lucky. My parents knew nothing about this kind of stuff. My boss at the time had the financial advisor for the school system coming by and suggested we talk to her. I'm glad I did. Otherwise, I wouldn't have any of the specialized retirement accounts I have now. I think I started when I was 22 or so. Going to make sure our son starts as soon as he has his first job.

I swear I wish there was something I could open now. But I'll probably just offer to "match" whatever he puts in when he starts working.

LillibetteV · June 2016

jtmh2012 said:

LillibetteV said:

jtmh2012 said:

LillibetteV said:

vlagrl35 said:

When we were building up our e fund we didn't put any towards retirement. Even when we were paying off our medical bill and small cc balances we didn't contribute then either. I would focus on building your e fund then home updates.

Were you passing up an employer match though? That would be my main concern with this approach.

You're also giving up time. The more time you have to save, the more you get to save. The more employer matching you get, and more time to dividends to accumulate.
"It turns out that making up for lost time isn’t easy. In fact, according to Financial Engines, someone who saves 6% of a $36,000 salary (that grows by 1.5% a year) starting at age 25 will have close to $500,000 by age 65, assuming a 3% employer matching contribution and a 5% annual return. But to reach the same target, someone who starts saving at 35 has to contribute 12% a year. For someone who starts at 40, the magic number is 16.5%."
http://www.marketwatch.com/story/delaying-retirement-saving-can-cost-you-a-lot-2015-04-14

Also so true! I started when I was 22 and I thank my mom for making me do that all of the time. I switched jobs last year and I won't be eligible for our 401k until this October (rawr). While it's super frustrating to not be able to contribute for this long I've been saving extra in our other accounts and am reminding myself that with such an early start skipping a year in my early 30s isn't going to break my retirement.

I got lucky. My parents knew nothing about this kind of stuff. My boss at the time had the financial advisor for the school system coming by and suggested we talk to her. I'm glad I did. Otherwise, I wouldn't have any of the specialized retirement accounts I have now. I think I started when I was 22 or so. Going to make sure our son starts as soon as he has his first job.
I swear I wish there was something I could open now. But I'll probably just offer to "match" whatever he puts in when he starts working.

I believe he can open an IRA even with just summer job cash - the contributions just can't exceed his annual income.

My mom is a CFO and my dad has owned his own tax prep business for over 30 years - there was no way I was not getting financial responsibility drilled into starting from a young age hahahaha

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