Five Questions- Retirement Funds, Savings Bonds and Budgeting

Five-questions
Table of Contents  
  1. Question One
  2. Question Two
  3. Question Three
  4. Question Four
  5. Question Five

The guys tackle five great listener questions today. For full answers listen to the episode below.

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Question One

Longtime listener, quick question. I currently put about 25% of my income toward my betterment retirement fund. I rent now but eventually would like to buy a house within the next 10 years. Should I go 15% retirement and 10% home? I would create a new betterment account rather than keeping all in one. Let me know what you’d do.

If you are able to save 25% of your income then you are definitely on the right track! The split of the savings really depends on your situation, the percent is arbitrary. What is really important is if x% is enough to reach your retirement and other goals.

Taking into consideration how much you make, what kind of raises you can expect in the future and how much of a down payment you’ll need to purchase a home, will help you figure out if 10% over 10 years will be enough for the kind of home you would like to buy. You also need to figure out if saving 15% a year is enough for the retirement your looking for.

Question Two

Hi Guys- I’m 26, in sales (salary plus bonuses) and also work at a restaurant every Saturday. My salary is $42,000, and my bonuses usually total $5,000 per year. Serving money obviously fluctuates, but let’s say its $130.00 a week on average. (520/mo ~ $6/yr) = total $53k

I have $3,300 in credit card debt and paying that off is my immediate financial goal. I’ve tightened my budget and am using the money i’m saving there plus my serving money to pay that off. Basically, i’m throwing every extra dollar I have at that debt.

My question is what should I do when I pay that off. I have 19k in federal student loan debt, but I have friends and co-workers who say thats “not bad debt” and I should start saving for a house/investing my money instead of putting all my resources into paying that off as quick as possible.

Any thoughts or suggestions will be greatly appreciated. Thanks again guys.

We get this question a lot and most of the the time the answer is pay off your student loan debts after you you have suitable emergency fund in savings. You can’t wipe out your bank all accounts to pay off your debt. Leave yourself some breathing room and make sure you have some money saved up for any unaccepted bills or situations.

Also depending on your debt interest rate, it might be ok to start investing. If you have a low rate (3.8%) putting a little into the market is ok. If you have a high interest rate (7%+) the 19k in loans will become 21, 22, 23k if not paid down quickly. The market average is 7% so if your loans are 7% or higher mathematically it’s a better choice to pay off debt first and fast. The freedom you feel when it’s all gone will be worth it.

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Question Three

I am 31 years old and married. My wife and I make about 80k per year combined and live in Colorado. I contribute to my employers 401k up to match each year. I have an online high yield emergency fund account with about 10k saved. We only keep about 5k in our checking account to pay off the credit cards and mortgage payments each month.

Here’s where it gets interesting: When I was a child I inherited a large amount of money, around 250k which was set aside until I was 18. Since then it has been in a portfolio of mutual funds actively managed by a financial advisor. The returns have been a meager 4% since 2004. This is where I’m concerned after hearing about the awesome returns you guys have been getting through betterment and vanguard.

My financial advisor seems to be making a lot of money off me in quarterly fees (about 2500 per year) with very minimal returns compared to what I could be doing with betterment and vanguard.

So my question is, what you would you guys do with the 250k? I always thought I wasn’t financially capable of actively managing that amount of money on my own, thus the need for a professional financial advisor. I would say my financial goals are similar to Andrew’s. My wife and I would like to have a kid in maybe 2 or 3 years, pay off our mortgage, save for retirement, and eventually start college funds for our kids as well.

Whoa! This guys is stealing all your money! Putting your money anywhere else would be better. Although you will have to pay some taxes on this money, being you only made a measly 4% in gains over the last 12 years your not in a bad position. If you don’t move it you will lose so much more. It comes down to the opportunity cost of moving it. You can’t predict the future of the market but you are a long term investor so it doesn’t matter.

The cheapest way to invest this would be in Vanguard but if your not confident there are plenty of robo advisors to help you out and there are perks if your investing a large sum of money. Betterment is our personal favorite robo advisor based on their fees and their investing methodology.

Question Four

Hey Guys- So I have been listening to your podcast for several months now and I have been getting into investing a paying debt as a recent college graduate. I haven’t listened to all of your podcasts but I don’t believe that you guys have ever touched on Savings Bonds (Probably because they are now outdated as an investment). My grandfather always gave me money for my birthday and christmas with the stipulation that I had to buy a savings bond with it. He based the majority of his retirement plan on savings bonds and at one time they were probably a decent investment.

My understanding is that they are a piece of paper that you buy at 1/2 the face value. So I paid $25 for a $50 savings bond and in a number of years, they “mature” to face value and if you hold them for longer periods they renew and keep maturing to 2 and 3 times the face value but max out after 30 years. At one point in history per what my grandfather always told me, they doubled in value every 7 years which is a pretty decent investment. However, I believe that they highest interest yielding bond that I hold now was from the day I was born and it is gaining 4% and was finally mature when I went to college. so 18 years later.

So I went to an online calculator and input all of my bonds to see what they are worth now and I have nearly 2k value in 30 bonds. The highest interest earning bond is 4% with the lowest at 0.7% (there is a spreadsheet attached). I would like to use some of this money to invest in betterment as I just recently started using betterment to save for graduate school in 4 years. My plan was to cash out all of the bonds earning less than 3% which would be around $1,300. Or possibly cash out all of the bonds and invest it all in betterment.

For many years, Savings Bonds were an easy simple way for people to save money for the future. I’m sure you’ve all gotten some of these from of your grandparents at some point in your life. They weren’t a terrible investment but now these bonds carry a fixed rate for the first 20 years, set at the time of purchase so not really a good investment.

If you have some and they are at maturity we suggest you sell them and then take the money and invest it in the market. It’s not as simple as you might think to cash these in so take a look at the Treasury Departments Guide to Cashing Bonds.

Question Five

Hey dudes- I am an actor and therefor my income is pretty irregular. Through teaching gigs I make exactly enough for living expenses with maybe 100-200 a month to save. When acting gigs come up though- at the end of the month, I find myself with sometimes an extra 1000 to save, sometimes 10,000 and sometimes….0

Could you help me set up a savings plan to account for irregularity? Right now I have 10,000 in a Wells Fargo Mutual Fund and 1,500 in a savings account

Dudes- thank you so so much!

Having an irregular income can get really tough when it comes to spending, budgeting and saving. It is important to map out all of your expenses and figure out how long you think it will be before you make the next meaningful about of money. A good rule of thumb is to try to have three months worth of living expenses saved up before choosing to put any money into an investment.

Each month there are going to be mandatory expenses like food, rent, utilizes regardless if you made $10,000 or nothing at all so it is important to have enough to cover those expenses for as long as it might take for you to find other gig. Also your debt is an expense and needs to paid as well. Having the freedom of making your own schedule and working on your own terms is amazing but you need to be prepared to do what ever it takes to survive.

 

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