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 Post subject: Need some financial advice
PostPosted: Thu Aug 23, 2012 9:12 am 

Joined: Thu Aug 23, 2012 9:07 am
Posts: 6
Hello everyone - wanted to get some personal finance advice from you guys. I earn decent money but have absolutely no idea what I should do with it and where I should invest it. I am getting married next year in Jan and want to get serious about what I should do with my money and plan for the future.

I am almost 30, IT professional, earn around 95K, live in Mid Michigan. My company doesn't offer a 401 service, but I am planning to start my IRA soon. The only debt I have is on a car I bought last year (took a loan of around 15K out of which 6.5K is left at 1% rate of interest) which I want to finish off before I get married, so in another 4-5 months. I have around 9K cash in my bank account which is shouting to be invested somewhere, but I want to do that only after I build a cushion of 13-14K cash and pledge not to touch it unless there is a medical emergency or I get laid off.

As for my savings - well, I have invested all my savings on a condo I bought in India (I am an Indian national, working here in the US). The condo cost me around 130K and I have already paid off 100K in 3.5 years. Since the day I started working after finishing grad school, I made a mission to save, save and save and not spend money on flashy cars, frequent vacations etc. and invested my savings in a house. The housing market in India is pretty good and the cost of my condo has already gone up by 10% in the last 3 years. Right now, I am in the "save as much" mode and want to pay off the 30K in the next 2-2.5 years (doable by the calculations I did).

Once the house is paid off, I should have some extra money which I should invest and plan for the future. What should be my short term and long term strategies? The reason I increased my monthly payment was because I wanted to be debt free before I get married (I pay around 1800 for my car every month where the monthly installment is $500). On the other hand, since the interest rate is so low, do you guys think I should keep on paying extra or should I cut it down and invest the rest in an IRA?

As for my would be wife, she is planning to go to b-school next fall, so we will be live only on my income for those 2 years. But once she graduates, we anticipate she will get a pretty decent job and should make 70K or so easily.

Am I screwing it up somewhere? Any advice you can give me? Cheers!


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 11:38 am 

Joined: Thu Dec 30, 2010 4:59 pm
Posts: 62
Location: San Diego, CA
jay22 wrote:
Am I screwing it up somewhere? Any advice you can give me? Cheers!


You are doing very well. I assume you have a good reason for the condo in India even though you are currently living in Michigan.

jay22 wrote:
Once the house is paid off, I should have some extra money which I should invest and plan for the future. What should be my short term and long term strategies? The reason I increased my monthly payment was because I wanted to be debt free before I get married (I pay around 1800 for my car every month where the monthly installment is $500). On the other hand, since the interest rate is so low, do you guys think I should keep on paying extra or should I cut it down and invest the rest in an IRA?


I don't see a good reason to pay off the car early at 1% interest. I would take the $1,300 and build up the the 13-14k cash cushion you talked about. Then start the IRA.

jay22 wrote:
As for my would be wife, she is planning to go to b-school next fall, so we will be live only on my income for those 2 years. But once she graduates, we anticipate she will get a pretty decent job and should make 70K or so easily.


How long does your future wife plan to work? Indefinably? 10 years? Until you have kids? Depending on your time frame you might reevaluate your plans.

To facilitate discussion I'll provide this: http://imgur.com/JR4QE.

Hypothetical #1: If it costs 30k a year for b-school and you get about 5k in tax breaks during that time. Then she starts earning 70k during on year 3 which is taxed at 25% when added to your income.

Hypothetical #2: She starts working right away and can find a job making 40k a year. It's still added to your income and taxed at 25%.

Comparing these two hypothetical options it is not until year 7 until the addition income has paid for the expense of more education.

Obviously this is a very simple example and ignores many variables but it's just an illustration to get you thinking about your time frame.


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 12:03 pm 

Joined: Thu Aug 23, 2012 9:07 am
Posts: 6
Thanks a lot for your reply. As for buying the condo, I see it as an investment. The real estate market in India is pretty good and based on my experience, should certainly give pretty good returns after years. Also, if (and that's a big if), I return back to India, I want to have a house without worrying about rent/mortgage. Those two were the main reasons I bought it.

I am getting concerned these days since I have put all my savings in the condo I bought and don't have anything planned for my retirement. Do you recommend starting a IRA only after I have the emergency fun saved, or should I lower my car payments (my next scheduled payment is in 4/13, so I can even stop the payments for 3-4 months and put the funds somewhere else).

We haven't thought about that far, but I would say she plans to work after graduating for as long as she can. Starting a family is not anywhere near, so career is the main focus right now. Though she will have a student loan after she graduates, we will have a double income and I think we can pay it off fairly quickly (specially since my condo would be paid off by then). Any particular Roth IRA you'd recommend? I have reading a lot about Fidelity and Vangaurd, but can't make up my mind.


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 12:29 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
what is the balance left on the car? If you can make a couple more payments and knock it out, I'd just do that. But, if you have years to go, I'd tone it down a bit.

You have until 4/15 of next year to contribute to an IRA. You are most likely getting hammered in taxes being single. I would contribute to a deductible IRA ($5k). But, I would save up the money and build a cash cushion and then contribute to the trad IRA based on which one of these occurs first:

1) You have your desired cash cushion +$5k
2) April 15th, 2013 arrives.

I would think about converting the traditional IRA to a Roth IRA once married and with a student under my belt.

_________________
Bichon Frise

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


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 12:35 pm 

Joined: Thu Aug 23, 2012 9:07 am
Posts: 6
Bichon Frise wrote:
what is the balance left on the car? If you can make a couple more payments and knock it out, I'd just do that. But, if you have years to go, I'd tone it down a bit.

You have until 4/15 of next year to contribute to an IRA. You are most likely getting hammered in taxes being single. I would contribute to a deductible IRA ($5k). But, I would save up the money and build a cash cushion and then contribute to the trad IRA based on which one of these occurs first:

1) You have your desired cash cushion +$5k
2) April 15th, 2013 arrives.

I would think about converting the traditional IRA to a Roth IRA once married and with a student under my belt.



Thanks. I have around 6.5K left on the car, so I don't think I can knock it off soon (well, I could, but it would take 1.5 paychecks :P), so you would recommend save it towards the emergency account and then start the IRA? I am pretty certain I will be able to have a cash cushion + $5K before Apr 15, 2013.

Also, I should be looking at a traditional IRA and not the Roth one? My wife won't start school before fall'2013, so what you're saying is that I should just start a traditional IRA now and convert it into a roth once my wife starts school? Thanks a lot!


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 1:30 pm 

Joined: Thu Dec 30, 2010 4:59 pm
Posts: 62
Location: San Diego, CA
jay22 wrote:
I have reading a lot about Fidelity and Vangaurd, but can't make up my mind.


I use vanguard and highly recommend it. The general consensus around here is that a Roth IRA is preferred to a traditional IRA.

Bichon Frise wrote:
I would think about converting the traditional IRA to a Roth IRA once married and with a student under my belt.


How much would this most likely save? $300?

If 5k was saved for both 2012 and 2013, then rolled over to a Roth in 2014. Being single and making 95k puts him in the 28% tax bracket. Being married and making 95k, even with significant deductions would still probably put them in the 25% bracket right? So that's a difference of 3%. 3% of 10k is $300. Or am I missing something?


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 2:31 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
they only thing you would be missing is $300. Or upwards of $1300 if there are enough deductions. if you're offering contributions of $300, I will be more than happy to accept it.

very little work for a 15 minute phone call and a little paperwork (form 8606, 3 lines need to be filled out). And perhaps, he works his way down into the next (15%) tax bracket. Lots of people here brag about making a faux $100k and paying no tax. Of course, they are doing so by the fruit of their loins, but there are a lot of credits for education.

I certainly don't get excited about roth contributions in the 28%+ tax bracket, do you? What's up with the slobbering love affair and Roth IRA's?

To the OP, there advantages and disadvantages of contributing directly to a ROTH IRA and by conversion. Thru conversion, you will most likely save some money, but you loose the ability to withdraw the money penalty free for 5 years. So, there are some tradeoffs (which I would happily trade from what I know about your financial position).

_________________
Bichon Frise

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


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 2:51 pm 

Joined: Thu Aug 23, 2012 9:07 am
Posts: 6
tdelamater wrote:
I use vanguard and highly recommend it. The general consensus around here is that a Roth IRA is preferred to a traditional IRA.


Thanks, I am leaning towards vanguard as well. I am just concerned about their customer service as I have reading it's not at par with Fidelity's. Do you think that's the case? I am sure I will have lot of questions once I dive into it, so want to make sure that I get decent customer service once I open the account.


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 2:55 pm 

Joined: Thu Aug 23, 2012 9:07 am
Posts: 6
Bichon Frise wrote:
they only thing you would be missing is $300. Or upwards of $1300 if there are enough deductions. if you're offering contributions of $300, I will be more than happy to accept it.

very little work for a 15 minute phone call and a little paperwork (form 8606, 3 lines need to be filled out). And perhaps, he works his way down into the next (15%) tax bracket. Lots of people here brag about making a faux $100k and paying no tax. Of course, they are doing so by the fruit of their loins, but there are a lot of credits for education.


I certainly don't get excited about roth contributions in the 28%+ tax bracket, do you? What's up with the slobbering love affair and Roth IRA's?

To the OP, there advantages and disadvantages of contributing directly to a ROTH IRA and by conversion. Thru conversion, you will most likely save some money, but you loose the ability to withdraw the money penalty free for 5 years. So, there are some tradeoffs (which I would happily trade from what I know about your financial position).

Can you explain that both those points, please? Looks like I am paying a heck lot of tax then, lol. You think Roth IRAs is not a good investment vehicle?

I don't think there will be a need to touch that money within 5 years, so I guess starting with a traditional one and converting it to a Roth would be a good strategy?


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 4:29 pm 

Joined: Thu Dec 30, 2010 4:59 pm
Posts: 62
Location: San Diego, CA
jay22 wrote:
Thanks, I am leaning towards vanguard as well. I am just concerned about their customer service as I have reading it's not at par with Fidelity's. Do you think that's the case? I am sure I will have lot of questions once I dive into it, so want to make sure that I get decent customer service once I open the account.


No experience with Fidelity so I can't really comment. Vanguards customer service has been ok.


Bichon Frise wrote:
they only thing you would be missing is $300. Or upwards of $1300 if there are enough deductions. if you're offering contributions of $300, I will be more than happy to accept it.


heh. $300 isn't nothing. I think it's good advice, just was curious if there were bigger benefits.

Bichon Frise wrote:
I certainly don't get excited about roth contributions in the 28%+ tax bracket, do you? What's up with the slobbering love affair and Roth IRA's?


Slobbering love affair.. that's a great line!

Why I like Roth IRA's:

  • It is my belief that taxes will be higher in the future (macro reasons such as the nation debt).
  • You have to put your tax savings from a traditional IRA into a taxable account.
  • A Roth IRA currently has benefits when passed on through your estate (The funds can be withdrawn up to 5 years after the owners death without paying income taxes on earnings)

Is a Roth IRA for everyone? No. If you're 50 years old plan on retiring in 15 years. You have 500k in a traditional IRA or 401k it wouldn't make sense to pay a ton of taxes during your peak earning years. But for someone young and starting an account I think a Roth IRA is a good option.

Personally I hedge my bets (regarding what will my tax rate will be in retirement) by putting some money in my tax deductible 401k and some money in my Roth IRA.


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 5:55 pm 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1609
Location: Seattle, WA
tdelamater wrote:
Bichon Frise wrote:
I certainly don't get excited about roth contributions in the 28%+ tax bracket, do you? What's up with the slobbering love affair and Roth IRA's?


Slobbering love affair.. that's a great line!

Personally I hedge my bets (regarding what will my tax rate will be in retirement) by putting some money in my tax deductible 401k and some money in my Roth IRA.


I agree with Bichon... Love the phrasing. I disagree that there's a general consensus around here that Roths are preferred to traditional IRA's, or at least, I opt out of that consensus. It depends.

I would put myself in a contingent behind a general consensus of hedging your bets, as above - some in pre-tax and some in tax-free Roth.

That said... don't let confusion dissuade you, OP or anyone else. Pick one or the other and trust that it's probably a difference of something like $300 in the end... better to lose maybe $300 to the slightly suboptimal choice, than to never get around to saving for retirement and eating cat food!


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 Post subject: Re: Need some financial advice
PostPosted: Thu Aug 23, 2012 9:08 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
jay22 wrote:
Bichon Frise wrote:
they only thing you would be missing is $300. Or upwards of $1300 if there are enough deductions. if you're offering contributions of $300, I will be more than happy to accept it.

very little work for a 15 minute phone call and a little paperwork (form 8606, 3 lines need to be filled out). And perhaps, he works his way down into the next (15%) tax bracket. Lots of people here brag about making a faux $100k and paying no tax. Of course, they are doing so by the fruit of their loins, but there are a lot of credits for education.


I certainly don't get excited about roth contributions in the 28%+ tax bracket, do you? What's up with the slobbering love affair and Roth IRA's?

To the OP, there advantages and disadvantages of contributing directly to a ROTH IRA and by conversion. Thru conversion, you will most likely save some money, but you loose the ability to withdraw the money penalty free for 5 years. So, there are some tradeoffs (which I would happily trade from what I know about your financial position).

Can you explain that both those points, please? Looks like I am paying a heck lot of tax then, lol. You think Roth IRAs is not a good investment vehicle?

I don't think there will be a need to touch that money within 5 years, so I guess starting with a traditional one and converting it to a Roth would be a good strategy?


a Roth IRA is paid with $ that have been taxed. The deal is, the contribution is is taxed (or has been taxed) and it is allowed to grow tax free and withdrawals, if done within the rules, are withdrawn "tax free."

Contrasted with a traditional IRA, which pre-tax dollars are contributed, it grows without any taxes due and withdrawals are taxed.

So, the question becomes, are your taxes lower now or in the future? And no one knows this. If your taxes are lower now than they will be in the future, a Roth makes more cents. If it is the other way around, a traditional IRA wins out. And as a couple of posters have pointed out above, having a healthy mix of both is probably wise.

I also like to point out that if your taxes are the same, it doesn't matter what you do. To a point. I personally believe that Roth funds will be "taxed" in other capacities, such as reducing your SS benefit.

how you plan to use the money also plays an important role. for example, if leaving a "legacy" to any future kids is important, a roth provides a significant advantage. There are lots of considerations.

I hope that answers your question.

_________________
Bichon Frise

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


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 Post subject: Re: Need some financial advice
PostPosted: Fri Aug 24, 2012 4:45 am 

Joined: Thu Aug 23, 2012 9:07 am
Posts: 6
Bichon Frise wrote:
jay22 wrote:
Bichon Frise wrote:
they only thing you would be missing is $300. Or upwards of $1300 if there are enough deductions. if you're offering contributions of $300, I will be more than happy to accept it.

very little work for a 15 minute phone call and a little paperwork (form 8606, 3 lines need to be filled out). And perhaps, he works his way down into the next (15%) tax bracket. Lots of people here brag about making a faux $100k and paying no tax. Of course, they are doing so by the fruit of their loins, but there are a lot of credits for education.


I certainly don't get excited about roth contributions in the 28%+ tax bracket, do you? What's up with the slobbering love affair and Roth IRA's?

To the OP, there advantages and disadvantages of contributing directly to a ROTH IRA and by conversion. Thru conversion, you will most likely save some money, but you loose the ability to withdraw the money penalty free for 5 years. So, there are some tradeoffs (which I would happily trade from what I know about your financial position).

Can you explain that both those points, please? Looks like I am paying a heck lot of tax then, lol. You think Roth IRAs is not a good investment vehicle?

I don't think there will be a need to touch that money within 5 years, so I guess starting with a traditional one and converting it to a Roth would be a good strategy?


a Roth IRA is paid with $ that have been taxed. The deal is, the contribution is is taxed (or has been taxed) and it is allowed to grow tax free and withdrawals, if done within the rules, are withdrawn "tax free."

Contrasted with a traditional IRA, which pre-tax dollars are contributed, it grows without any taxes due and withdrawals are taxed.

So, the question becomes, are your taxes lower now or in the future? And no one knows this. If your taxes are lower now than they will be in the future, a Roth makes more cents. If it is the other way around, a traditional IRA wins out. And as a couple of posters have pointed out above, having a healthy mix of both is probably wise.

I also like to point out that if your taxes are the same, it doesn't matter what you do. To a point. I personally believe that Roth funds will be "taxed" in other capacities, such as reducing your SS benefit.

how you plan to use the money also plays an important role. for example, if leaving a "legacy" to any future kids is important, a roth provides a significant advantage. There are lots of considerations.

I hope that answers your question.

Thanks, that make sense. I have been reading a lot about IRAs and feel confident of taking the plunge and invest in some index funds. I am sure I will have plenty of questions and will bother you guys once again with them. ;)

Also, do you think investing in a condo in India is a bad decision? I am very confident on the returns I will get from there, I anticipate that the price of the condo (given the location and demand) will surely go up by 20-25% or so in the next couple of years.


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 Post subject: Re: Need some financial advice
PostPosted: Sat Aug 25, 2012 3:26 pm 

Joined: Sun Mar 04, 2012 9:15 pm
Posts: 28
Not sure where you bought your condo.
10% for 3 years is below par return for India. Are you sure about the market rates now.

I am in the same boat as you. I bought mine a bit less than 2 years ago, it is already up 75%+ even if I conservatively estimate.
Fortunately I took a bank loan there even though interest rates are 10%. Today the currency has gone down 25%+ and my payment carry lot more value.

One more thing, if you ever plan to go back. Putting money in Roth IRA might not always be the best choice.

For me, I did decide against it as I plan to go back and it does not make sense to open one here when there are better opportunities around.


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