2009 budget / savings

**jIM_Ohio** · 01-05-2009, 03:55 PM

I'd like to see whole picture more.

If you have no retirement account, I would start one. 401k, Roth IRA or similar. Without knowing income, I could not suggest which one is best tax wise.

You want 15% of gross pay going to retirement accounts. Is 4k 15% of your gross per month? If 4k is 25% or 50%, I would put 15% towards retirement (in 401k, IRA or similar) and put the remainder towards the 4.125% SL.

In addition I would lock in the 3% interest on the EF (ladder some CDs or similar), so you know the EF is doing better than SL #2 and SL #3.

What is the expected payoff of
a) SL#1
b) HELOC
c) Mortgage
When is projected retirement date? How much is currently saved?

**pearlieq** · 01-05-2009, 05:33 PM

That would be my first question too--what are your investments? Does you budget surplus come after maxing out IRAs and employer-sponsored plans or a SIMPLE?

**JinCO** · 01-05-2009, 06:35 PM

My wife and I both contribute the maximum amount allowed to our 401K programs. We do not have any other investments at this time. Our 401K investments are currently worth about $110K. Our 401K saving represents about 12% of gross income. The $4K equates to about 17%. At current payoff amounts, SL1 would be paid off in 17 years, mortgage in 22, and HELOC in 8. I don't have a target for retirement age at this time. We are currently both 32, so retirement seems like a long way out at this point.

I thought about laddering CDs after reading about it in this forum but it seems like a hassle at this point since online savings accounts are paying about the same rate.

**jIM_Ohio** · 01-06-2009, 02:37 AM

JinCO-
good info.

Consider Roth IRAs for the 4k.
If you choose, you could put the 4k in a Roth in a savings account of some sort. I would go more aggressive (maybe 60-40 or 80-20) based on your age.
If you needed to withdraw the 4k, you could do so without penalty at any time. You could not withdraw your earnings until age 59.5.

You are a couple years younger than wife and I, and have about 10k less than we do invested, and it appears you contribute more than we do (you contribute 30k pre-tax, we contribute about 16k pre tax and 10k post tax).

Retirement before age 60 is a realistic possibility. You may want to go thru a retirement calculator... I don't know your expenses or other issues (kids?) to say for sure.

**JinCO** · 01-06-2009, 07:45 AM

jIM – thanks for the response. I was under the impression that Roth IRAs have income limitations and that we did not qualify. Would a traditional IRA be a good option? The $4K is per month.

**jIM_Ohio** · 01-06-2009, 07:59 AM

Originally posted by JinCO View Post

jIM – thanks for the response. I was under the impression that Roth IRAs have income limitations and that we did not qualify. Would a traditional IRA be a good option? The $4K is per month.

I did not see income listed on this thread.

Depending on stuff I would either consider a traditional IRA (no deduction) or a taxable account into a moderate risk mutual fund (I like PRPFX, others might like RPSIX or Vanguard Wellesley). Wellesley and RPSIX will have higher tax implications year over year. You can find tax managed equivalents (T Rowe Price has a tax managed balanced fund with muni bonds).

Stuff would include whether you think retiring at age 53-58 is a reasonable goal. The earlier you retire, the less likely I would recomend using a traditional IRA (if you retire at 59.5 or older, use the traditional IRA).

**noppenbd** · 01-06-2009, 08:08 AM

At 6.25%, I would definitely look into refinancing that first. If you have to pay down the HELOC to get under the jumbo limits it might be worth it. If refinancing is not an option I would set up a schedule to pay off the HELOC on a 3 year schedule. My guess is prime rate will probably stay low this year and start to go up in 2010.

**Well Spent** · 01-06-2009, 08:40 AM

I'd put the $3-4k towards your debts. The HELOC is a high amount and at a variable interest so I'd target that.

**jIM_Ohio** · 01-06-2009, 08:51 AM

I just saw 4k per MONTH and not 4k per year.

I would invest around $1000 per month (keep some of the savings liquid) and then look to pay down HELOC over 2 years so you might be able to refinance at end of 2010 (6.25% is a high rate right now).

**JinCO** · 01-06-2009, 10:39 AM

Thanks for the advice. I agree, the HELOC needs to be a priority. Would it make sense to invest the $4K into a conservative fund (PRPFX for example)and then use the money to pay down the HELOC once rates start to climb. The rate is 2.99% now and I receive a tax benifit on the interest.

I haven't looked into refinancing yet, but would also like to pursue that option. We are at about 10% equity in our home...not sure if we need 20% to be approved.

**pearlieq** · 01-06-2009, 11:17 AM

Originally posted by JinCO View Post

I was under the impression that Roth IRAs have income limitations and that we did not qualify. Would a traditional IRA be a good option? The $4K is per month.

You might want to consider a non-deducatable IRA for at least 2009. Right now there is an income ceiling for the Roth IRA, but starting in 2010 and continuing until the law is changed there will be no income limit on rolling over an non-deductable IRA into a ROTH. You'll have to pay taxes on whatever gains (if any) you earn before you roll it over, but then it's subject to all the tax advantages of a ROTH.

We're in a similar position as you, and I know it can be overwhelming to figure out what to do. I would strongly recommend setting aside $800 - $1000 and finding a fee-only financial planner to do a comprehensive financial plan for you. It's a big help to have someone look everything over and help synthesize it into a "big-picture" plan.

If it helps, we chose to pay off the student loans over the last two years. The interest rate was low, but it wasn't deductable so we paid it off.

Once that was accomplished, I beefed up our emergency fund to 6 months. This year, I'm planning on splitting the excess money between extending the EF to 12 months, beefing up our car replacement fund, some home improvements, a couple of vacations, and possibly a taxable investment account.

Good luck with whatever you decide!

**jIM_Ohio** · 01-06-2009, 11:33 AM

jinCO-You are in a similar spot as wife and me. We each do not have 20% equity on money borrowed.

I would pay down the HELOC (regardless of the rate) so you could refinance the 1st if you find the right deal. I doubt most banks will work with you until you have 20% equity or a 1st mortgage only.
**If you find a bank willing to refinance, please let me know** I have a 5.75% first and 7.5% second. Our second will be paid off within 8 years (assuming we stay employed).

If you use a conservative mutual fund to invest in, the risk you run (if you pay off the mortgage) is what the fund did right after rates shot up. Because you are dealing with a variable rate loan, I would just pay down the debt and not invest. If I did invest, I would go slightly less volatile than PRPFX (think muni bonds) so I have stabilty of principal. Or do $1000 PRPFX, $1000 muni bonds and $2000 to debt to spread the risk out.

Pealieq's advice on conversion ceilings being lifted is something to consider. Because of your tax bracket, I would not advise that unless I knew more about your income, if it will increase and other parts of your financial situation.

I would advise your priorities should be
1) save 15% of gross for retirement
1a) minimize debt you take on
1b) pay off the debt you have (except 1st mortgage)
2) liquidity (make sure you have access to money in short and mid term)

2009 budget / savings