Need financial inspiration

Saving & investing, frugality & simple living. They're all part of the wealth equation.
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DenjinLee
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Re: Need financial inspiration

Postby DenjinLee » Thu Aug 09, 2012 11:51 am

Bichon Frise wrote:I would NOT reduce my emergency savings, if that is what you are asking. A $1000 may get you out of a bind, but probably won't get you out of 2 in a row. We all sleep differently, and I carry more cash than most people make in a year (probably more than they make in 2 years). I could not sleep with a $1000 being my fall back. YMMV.

eliminating the car debt seems reasonable through throwing excess cash at it. It is a long and uphill battle, so don't expect it to be done by the end of the year. Also, your decisions have been made, and there are no mulligans in this case. So, you should look at YOUR (meaning you and your wife's) goals and figure out what makes sense. Perhaps, eliminating the debt ASAP suits you best, perhaps throwing an $100/mo at each loan and maxing out your 401k makes sense. Je ne sais pas...that is for you to decide.

I would not pay anymore than you have to for the house. Again, you get to decide...


Thanks for the reply Bichon. My wife and I are still working it out, but we are making progress.

This month has been interesting to say the least. I've been managing my finances very well. I've been carrying cash which has definitely reduced the amount that I spend per month. We only spend about $40 at the grocery store per week now and we don't spend money to go out and eat anywhere. In addition I got my bonus this month and I put $2358.50 towards the car payment. 858.50 is two monthly payments plus 1500.00 which I asked to be put toward principal only.

new balance will be $18,117.06. Reading the DR book has been helpful as any extra monies I get will go to the car payment. I get another check midway through the month so i'll be sending money from that to the car as well. I'm waiting on this life insurance check for anywhere between $1600 - $2000 too.

End of year 10K here I come. :)

DenjinLee
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Re: Need financial inspiration

Postby DenjinLee » Sat Aug 25, 2012 7:54 am

Time to update again.

I paid another 1630.00 towards the first car payment and its now at 16,487.06. Still on track to reach my goal of bringing down the total to 10K by the end of the year. I've decided that I'm going to pull out part of my 401K to pay it off. I have two 401K investments that I can no longer add to. One at 25K and the other at 16K. Nothings been added to the 16K account since 2007. After taxes are taken out i'll be getting back about 11K. I'm well aware of the penalties that are with this, but i'm totally fine with that.

Since my fiscal year review is coming up soon, i'll be talking with my boss to see if I can renegotiate my salary. Going to shoot for 20K more in my yearly salary. If I get it then I stand to get at least 1K more in my check after tax monthly. Which will be great news to really pay down that other car. My objective is to have that other car paid off by June 2013.

Afterwards I'll do what I can to build my EF. Right now it's sitting at 5K. Gonna shoot for 20K in savings. In addition, I plan to refinance my home. So far i'm at 7.25% for the interest. I haven't decided if i'm going to go with a 15 year which should keep me around the same amount monthly or if i'm going to go with another 30 year. The latter will bring my monthly payment down allowing me to make a bigger extra payment each month.

dontgopoor
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Re: Need financial inspiration

Postby dontgopoor » Sun Aug 26, 2012 5:55 am

I always felt better with a 30-year loan conventional loan, at the best interest rate I could find, versus a 15. A 30y loan allowed me to make larger payments when possible. But the 15 did not allow me to make smaller payments. The interest rate difference was small enough for me to value the safety cushion. Turns out I did not need it but it was there.

Also, I'm not sure that paying the penalty on the early withdrawal of the 401k is worth the goal you are trying to achieve. Do the math and I think you'll feel different.
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Bichon Frise
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Re: Need financial inspiration

Postby Bichon Frise » Sun Aug 26, 2012 7:42 am

i like to track my networth. If you were to exchange, dollar for dollar, some 401k savings for your car debt, it would have NO impact on your networth. But since you can't exchange dollar for dollar, it is actually worse because of the taxes and penalties, your networth will go down.

If your goal is to purely become debt free and nothing more, than the 401k move is appropriate. But, I suspect you have some longer term goals you are working towards as well, which probably make the 401k early withdrawal inappropriate in the grand scheme of things. YMMV.
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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

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Eagle
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Re: Need financial inspiration

Postby Eagle » Tue Aug 28, 2012 6:46 am

Keep paying those debts off DenjinLee! Good job!

I agree with dontgopoor a 30 year not is best. Just pay it off in 15 or less.

CecilyC is burning through her mortgage check her story out: viewtopic.php?f=11&t=4234

Bichon has a good point about net worth. I also don't think cashing in the 401k would be worth it in the long run. Instead, cut your expenses and live fruggally. You'll get the debt all knocked down. Remember, this isn't a sprint it's a marathon.

Keep up the good work! Communication with your spouse is key.
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stannius
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Re: Need financial inspiration

Postby stannius » Tue Aug 28, 2012 2:35 pm

Bichon Frise wrote:i like to track my networth. If you were to exchange, dollar for dollar, some 401k savings for your car debt, it would have NO impact on your networth. But since you can't exchange dollar for dollar, it is actually worse because of the taxes and penalties, your networth will go down.


Penalties do make your net worth go down, for sure. Taxes don't really - that means is that you aren't accounting for the balance of the 401(k) properly. Sooner or later most of the dollars in there will be taxed. (That said, I track "raw" numbers for pre-tax retirement accounts. But I wouldn't make a decision based on that number.)

Bichon Frise
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Re: Need financial inspiration

Postby Bichon Frise » Tue Aug 28, 2012 8:25 pm

stannius wrote:
Bichon Frise wrote:i like to track my networth. If you were to exchange, dollar for dollar, some 401k savings for your car debt, it would have NO impact on your networth. But since you can't exchange dollar for dollar, it is actually worse because of the taxes and penalties, your networth will go down.


Penalties do make your net worth go down, for sure. Taxes don't really - that means is that you aren't accounting for the balance of the 401(k) properly. Sooner or later most of the dollars in there will be taxed. (That said, I track "raw" numbers for pre-tax retirement accounts. But I wouldn't make a decision based on that number.)


a couple comments:

1) Do our "taxes" remain constant throughout time?
2) Is there value in having tax deferred growth? And how do you account for that?

For a long time I've thought about a "normalized" networth number. But, how do you do that? For instance, say there are three people: Person A has 90% of their networth in their home, Person B has 90% in "pre-tax" funds and Person C has 90% in "after-tax"/Roth type funds. So, who is "richer"? We know what the real estate bulls would say and those with a "slobbering love affair with Roth's", but the perceived value for each person is rooted in one's assumptions about the future. So, until we can get all of our tea leaves to align...we'll continue to debate who is richer.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

bpgui
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Re: Need financial inspiration

Postby bpgui » Tue Aug 28, 2012 8:35 pm

Bichon Frise wrote:1) Do our "taxes" remain constant throughout time?
2) Is there value in having tax deferred growth? And how do you account for that?

1 - No, you have to estimate just like you have to estimate your future returns
2 - All other things being equal, there is no difference between being taxed now or being taxed later. Of course, all other things are rarely equal. Changes in tax rates, treatment of dividends and capital gains in non deferred accounts, etc. muddy the comparison.
For a long time I've thought about a "normalized" networth number. But, how do you do that?
Estimate your future tax rate and discount your pretax funds by that percentage.
For instance, say there are three people: Person A has 90% of their networth in their home, Person B has 90% in "pre-tax" funds and Person C has 90% in "after-tax"/Roth type funds. So, who is "richer"?

We need to know how much each has. If they all have the same absolute value, the person with the "after-tax" funds is richer than the person with the pre-tax funds, because they lose nothing to taxes.

DoingHomework
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Re: Need financial inspiration

Postby DoingHomework » Tue Aug 28, 2012 8:51 pm

bpgui wrote:
For instance, say there are three people: Person A has 90% of their networth in their home, Person B has 90% in "pre-tax" funds and Person C has 90% in "after-tax"/Roth type funds. So, who is "richer"?

We need to know how much each has. If they all have the same absolute value, the person with the "after-tax" funds is richer than the person with the pre-tax funds, because they lose nothing to taxes.


You have to estimate "value recovery."

For example, A will recover about 93% of the value after selling their home (assuming 7% commission), assuming no mortgage and American tax free gain on sale. B will recover about 70% on average. C will recover 100%. The basic concept here is simply to convert everything to spendable dollars for comparison. I would say that C is richer in most cases. I think bp said pretty much the same thing.

Personally I think adjustments have to be made for liquidity and risk as well but those end up being subjective.

Bichon Frise
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Re: Need financial inspiration

Postby Bichon Frise » Wed Aug 29, 2012 7:18 am

bpgui wrote:
Bichon Frise wrote:2) Is there value in having tax deferred growth? And how do you account for that?

2 - All other things being equal, there is no difference between being taxed now or being taxed later. Of course, all other things are rarely equal. Changes in tax rates, treatment of dividends and capital gains in non deferred accounts, etc. muddy the comparison.


are you sure we are talking about the same thing here? Since the discussion above was about eventually having to pay taxes, and we were discussing cashing in a 401k, my point is there is some value in the 401k growth, vs growth outside of the 401k, specifically, in a taxable account.

I understand that we all have to make assumptions about the future, the point is, if we were to all normalize our networth number, those don't only measure how well we are saving, it also takes into account how "good" our assumptions are. And I don't think that is the point of a networth number (especially since everyone has at least 2 opinions about the future). I think it is a yardstick about how well we are saving. And I personally hate to see the number decrease, which was the overall assertion made at the beginning.

BTW, in the last 3 years, I have sold 2 homes and bought 2 homes. I have never paid any fees, commissions or taxes of any kind.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

bpgui
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Re: Need financial inspiration

Postby bpgui » Wed Aug 29, 2012 4:11 pm

Bichon Frise wrote:are you sure we are talking about the same thing here? Since the discussion above was about eventually having to pay taxes, and we were discussing cashing in a 401k, my point is there is some value in the 401k growth, vs growth outside of the 401k, specifically, in a taxable account.

Yes, we're talking about the same thing. Assuming everything else was equal, there isn't any difference. i.e. assuming a 25% rate $1,000 pretax is $750 after tax. If it doubles, you have $2,000 in the pretax account and $1,500 in the after tax account. Pay the tax on the pretax account, and you are left with $1,500.

Now, of course, not everything is equal, the after tax account would still be subject to capital gains taxes, and if it is earning dividends or interest tax on those.

BTW, in the last 3 years, I have sold 2 homes and bought 2 homes. I have never paid any fees, commissions or taxes of any kind.
Your state/county/city doesn't have any transfer taxes? Or property taxes? Nor did you have to pay for title insurance for the buyer? No closing costs, appraisal fees, etc. on your loans (maybe you paid cash)? No fees for document preparation/processing? Must be nice. Pray tell, how did you accomplish that?

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Re: Need financial inspiration

Postby Bichon Frise » Wed Aug 29, 2012 9:00 pm

bpgui wrote:
Bichon Frise wrote:are you sure we are talking about the same thing here? Since the discussion above was about eventually having to pay taxes, and we were discussing cashing in a 401k, my point is there is some value in the 401k growth, vs growth outside of the 401k, specifically, in a taxable account.

Yes, we're talking about the same thing. Assuming everything else was equal, there isn't any difference. i.e. assuming a 25% rate $1,000 pretax is $750 after tax. If it doubles, you have $2,000 in the pretax account and $1,500 in the after tax account. Pay the tax on the pretax account, and you are left with $1,500.

Now, of course, not everything is equal, the after tax account would still be subject to capital gains taxes, and if it is earning dividends or interest tax on those.



My original assertion, posed in the form a question, is there's value in the tax deferred growth over money invested in vehicles not offering that. Regardless of how you want to slice and dice it and based on the end result, if you were to invest $10k today, do you agree or disagree that there is greater value in the growth of that $10k in tax deferred growth or being subject to taxes along the way (under current the current laws)? If you think they are the same or there is greater value to be subject to taxes along the way, I would be curious to what your thoughts are on the advantages of a 401k is vs a taxable account (if there are any)?

bpgui wrote:
BTW, in the last 3 years, I have sold 2 homes and bought 2 homes. I have never paid any fees, commissions or taxes of any kind.
Your state/county/city doesn't have any transfer taxes? Or property taxes? Nor did you have to pay for title insurance for the buyer? No closing costs, appraisal fees, etc. on your loans (maybe you paid cash)? No fees for document preparation/processing? Must be nice. Pray tell, how did you accomplish that?


Of course I paid property taxes, as that is a tax one pays for owning a property, not a tax someone pays for making a transaction on a property. I paid no other taxes for selling or buying these homes. I didn't pay closing costs, title insurance, realtor fees, appraisals, surveys, fees to the title company etc. That isn't to say there weren't part of the transaction, just that I didn't pay them.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

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Re: Need financial inspiration

Postby bpgui » Thu Aug 30, 2012 3:45 am

Under current laws, there is some value to the deferral (which I've already stated), but the extent of the value depends on a variety of factors: current and future tax rate, type of investments held, etc. The main advantage, IMO, comes from being in a lower tax bracket when making withdraws than when making the contributions.

Under current laws, it is possible for the deferral to cause more taxes to be paid than would have been paid in regular taxable accounts.

Bichon Frise wrote:Of course I paid property taxes, as that is a tax one pays for owning a property, not a tax someone pays for making a transaction on a property. I paid no other taxes for selling or buying these homes. I didn't pay closing costs, title insurance, realtor fees, appraisals, surveys, fees to the title company etc. That isn't to say there weren't part of the transaction, just that I didn't pay them.

And who paid them? If you negotiated for the other party to pay all of the fees, you still effectively paid them, as the other party will take that into account in determining how much they would be willing to pay for the property, effectively lowering the purchase price you could have received.

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Re: Need financial inspiration

Postby Bichon Frise » Thu Aug 30, 2012 7:22 am

bpgui wrote:Under current laws, there is some value to the deferral (which I've already stated), but the extent of the value depends on a variety of factors: current and future tax rate, type of investments held, etc. The main advantage, IMO, comes from being in a lower tax bracket when making withdraws than when making the contributions.

Under current laws, it is possible for the deferral to cause more taxes to be paid than would have been paid in regular taxable accounts.

Bichon Frise wrote:Of course I paid property taxes, as that is a tax one pays for owning a property, not a tax someone pays for making a transaction on a property. I paid no other taxes for selling or buying these homes. I didn't pay closing costs, title insurance, realtor fees, appraisals, surveys, fees to the title company etc. That isn't to say there weren't part of the transaction, just that I didn't pay them.

And who paid them? If you negotiated for the other party to pay all of the fees, you still effectively paid them, as the other party will take that into account in determining how much they would be willing to pay for the property, effectively lowering the purchase price you could have received.


So, we have come full circle. If not that, at least this stands as an example of how difficult it would be to "normalize" one's networth. I think we generally agree on the value of tax deferred growth, but I have been hard pressed for taxable accounts to show greater future value than tax deferred. And I'm in a pretty high tax bracket today and think I'll be in a pretty low tax bracket later on. It would be interesting to see your calculations. Certainly, if there were greater future value in taxable accounts vs tax deferred, almost everyone is being duped.

I have never negotiated the fees, costs, or taxes or any other cost associated with a real estate transaction (refi's aside) into the price. So no, I have not effectively paid them. I'm not advocating this is something everyone can do, in fact probably only a small portion of the population is offered such a deal. It is mentioned merely to point out that some people don't have costs associated with buying/selling real estate, as I haven't experienced in the past. And while this deal may not always be available to me, I'll take it while it available.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

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Re: Need financial inspiration

Postby bpgui » Thu Aug 30, 2012 7:44 am

When you're in a high bracket now and will be in a lower bracket later, deferral is at its most valuable point. If you are in a low bracket now, but will be in a higher bracket later, deferral has leas value.

Two examples of deferral causing more tax: 1) You die. Your heirs pay tax on the deferred accounts. The taxable accounts get a step up in basis, and there is no tax.
2) an investment loses money. You lose the capital loss deduction in the deferred accounts.

But to answer the question on how to "normalize" net worth: simply reduce the value of the accounts by your expected tax.


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