What would you do? I need help!

[coreys]

Unfortunately, there's an income limit for deducting SL interest. The last I remember it was around $130k, so these folks likely don't qualify.

Still, I still think the 2nd mortgage interest rate is higher, even when adjusted for being deductable.

Thanks pearlieq. Right on.

[coreys]

Broad plan

save some for cash
pay down debt some
save more for retirement
look for tax savings as well- 401k-HSA and similar

What are your total monthly expenses?
What is your total monthly gross income?
What is your total monthly take home income?
What is your normal tax return?
How much home equity do you have?

Thanks for your reply Jim. Check out my response to Disney Steve regarding income and expenses. As far as normal tax return, I can't answer that since we are only 6 months in to making this level of income.
Equity in house 7000 owned for 1.5 yrs

We have a bonus of 25,000 gross coming to us in March that we were planning on placing into an emergency fund. Although it will probably be more the in the ballpark of 13,000 after taxes. That should get us started for savings-plus our credit card debt will be gone by then as well according to my plan.

What are your thoughts on the 401k situation regarding limits to contributing??

[skydivingchic]

Check with your DH's 401(k) administration people. At my workplace, contributions above the limit are automatically cut off. So for your situation, your husband could designate 7% of his income go to 401(k). Sometime at the end of the year, he would hit the $16500 limit and the deductions would automatically be cut off. So the last paycheck or two at the end of the year would be larger. Not all plans work like that, though. If his workplace does not provide that, you guys would have to keep an eye on the total amount contributed and cut off contributions yourself. How you do that again depends on the plan. I can easily change my contributions at any time online, but not all plans offer that type of setup.

[jIM_Ohio]

Thanks for your reply Jim. Check out my response to Disney Steve regarding income and expenses. As far as normal tax return, I can't answer that since we are only 6 months in to making this level of income.
Equity in house 7000 owned for 1.5 yrs

We have a bonus of 25,000 gross coming to us in March that we were planning on placing into an emergency fund. Although it will probably be more the in the ballpark of 13,000 after taxes. That should get us started for savings-plus our credit card debt will be gone by then as well according to my plan.

What are your thoughts on the 401k situation regarding limits to contributing??

Is the high income likely to continue for forseeable future?
I did not see you add the expenses in your response to Steve- what are the budgeted monthly expenses?

Pay off SL before Home equity- at this income you want every deduction possible.
Max the 401k
Make sure you SAVE 20-30 percent of your new income. If you save 30 percent (83k per year), it would be OK to spend 20k or so (10 percent) on vacations or other short term wants.

Once you are saving the 30 percent... then pay down debts. You probably want to find someone to do your taxes and give you specific tax advice- keeping the mortgage will lower your tax bill.

It might cost you 400k in interest, but it could save you 600k in taxes. Have an accountant or tax professional run the numbers for you.

[disneysteve]

I did not see you add the expenses in your response to Steve- what are the budgeted monthly expenses?

See post #14. It isn't complete but it's a good start.

[coreys]

Is the high income likely to continue for forseeable future?

yes

I did not see you add the expenses in your response to Steve- what are the budgeted monthly expenses?

see post 14

Pay off SL before Home equity- at this income you want every deduction possible.

No deduction for SL interest at out income bracket--actually they cap it at an income of like 130k


Max the 401k

We are doing that

Make sure you SAVE 20-30 percent of your new income. If you save 30 percent (83k per year), it would be OK to spend 20k or so (10 percent) on vacations or other short term wants

20-30 % seems high? Or am I just being a wimp??

Once you are saving the 30 percent... then pay down debts. You probably want to find someone to do your taxes and give you specific tax advice- keeping the mortgage will lower your tax bill.

Yes, I need to find a good cpa.

It might cost you 400k in interest, but it could save you 600k in taxes. Have an accountant or tax professional run the numbers for you.

Thanks for the info Jim. Anything else you money mavericks would suggest??.

[disneysteve]

20-30 % seems high? Or am I just being a wimp??.

Until 6 months ago, you were living on 45K. You now have over 250K coming in. Surely, your expenses didn't go up 6-fold overnight like your income did. You've got a great gift right now. Don't blow it.

If you start saving 30% right now, that's 75K to savings, leaving you 175K to live on (and I'm not even counting the 25K bonus). If you were living on 45K, you can certainly live very, very nicely on 175K. The biggest mistake people make is elevating their lifestyles to match their incomes. This is particularly true of doctors and other professionals who see a rapid rise in income when they finish training and get real jobs. Just because you are earning all of that money does not mean you need to find a way to spend it all.

[jIM_Ohio]

Thanks for the info Jim. Anything else you money mavericks would suggest??.

Post 14 shows $8988 or something similar, but did not include gas. This suggests to me you really have no budget which tracks your expenses.

I for one would feel better giving advice if you knew EXACTLY how you were spending your money. Controlling expenses will have a larger impact on your situation than any savings advice I give, any tax advice a CPA could give, or other advice any other poster here will offer.

Know your spending, control your spending. $9k per month in expenses is HIGH. Probably in top 20 percent of all USA households, dare I guess top 10 percent? You are spending more than 100k per year.

I normally advise 15/5. 15 percent to retirement and 5 percent to short term savings.
I am going to suggest you do 20/10 because of the recent rise in income.

20 percent ($1800/mo) to accounts marked for retirement. 401k is only going to be around 7 percent, 13 percent of your income will be going to a taxable retirement account.

10 percent $900/mo) to accounts marked for short term financial needs. Use this to get 6 months expenses in savings.

Take all debt payments like SL and 2nd mortgage and round them up to nearest $100. Paying $620 for something- round it to $700 (to get rid of the debt). This applies to all debts except the 1st mortgage.

Finance nothing from this point forward- this way you are not going to spend more than you earn. If you cannot pay cash for the new car, WAIT. The 10 percent ($900/mo) will have 10k set aside within 12 months. If you really want something which costs 40k, then either set aside 900 for 48 months or set aside $3600 for 12 months. You have the money if you have the discipline.

From a tax standpoint you may want to consider a larger house if the tax works out. Wait 18 months to make this decision.

Look at your tax liability this year. Look at it again in 2010 when you do 2009 taxes. If it costs you $800k to save $900k in taxes over 30 years, only you can decide if that makes sense to you (I am only guessing at numbers of 800k and 900k). Be prepared to see 10k-40k type tax bills over 30 years while you have this level of income.

[disneysteve]

Know your spending, control your spending. $9k per month in expenses is HIGH.

I agree. You are now spending more in 5 months than you were grossing in annual income just 6 months ago. What happened? I suspect what happened is that you suddenly had this huge income and went about trying to figure out how to spend it all. That delayed gratification thing kicked in and you may have gone a bit overboard. I'm a physician myself, so I know all about it. Rein in it now before it's too late.

[LivingAlmostLarge]

Guys the $9k/month includes $3500/month credit card payments! Yikes though.

So they aren't spending necessarily that much but they did spend a lot before. Wow, $3500/month in CC.

[minnie1928]

Maybe I missed this, but if you are concerned about adding to the 401k balance up to the limit, why not also make contributions to an IRA? You mention limits (I'm unsure of them) but if you are a SAHM then you have no income, so it shouldn't matter.

Also, consider upping your life insurance. If something happens to you, your husband will need help with your child (daycare/nanny) and around the house. Also, your child is very young so this assistance could be needed for quite some time.

[disneysteve]

Guys the $9k/month includes $3500/month credit card payments! Yikes though.

So they aren't spending necessarily that much but they did spend a lot before. Wow, $3500/month in CC.

Oops. Sorry about that. And LAL, the CC balance is only $6,000. They are paying $3,500 to get it paid off. It will be gone in 2 months.

So your actual expenses are a lot lower. My apologies.

[jIM_Ohio]

The budget listed did NOT include all expenses... so we really don't know what the total expenses per month are.

[LivingAlmostLarge]

True. I think it's still pretty high but a huge chunk could be debt repayment.

[JinCO]

Until 6 months ago, you were living on 45K. You now have over 250K coming in. Surely, your expenses didn't go up 6-fold overnight like your income did. You've got a great gift right now. Don't blow it.

If you start saving 30% right now, that's 75K to savings, leaving you 175K to live on (and I'm not even counting the 25K bonus). If you were living on 45K, you can certainly live very, very nicely on 175K. The biggest mistake people make is elevating their lifestyles to match their incomes. This is particularly true of doctors and other professionals who see a rapid rise in income when they finish training and get real jobs. Just because you are earning all of that money does not mean you need to find a way to spend it all.

Steve - you also need to consider taxes in your calculation. We make a bit more than the poster and our tax bill is about $60K for Federal and State. This will likely increase under Obama.

In terms of how much to save, you should be able to count debt payment acceleration towards your totals. For example we are only saving about $40K per year, but we are overpaying out student loan debt and HELOC by about $30K per year.