General questions (while I'm young!)

[theguyonthecouch]

Hey all! My pop put me onto this site, and to be quite honest, I haven't browsed much yet. So, if me questions are easily answered by linking me to another thread, by all means, go for it. Let me give you my rundown.

Me - 27
Wife - 32
Monthly take home $4500
House payment $1225
Car payment $600 (financed a new used for 3 1/2 years)
No credit card debt
About $4000 in student loans
Only about 5% equity in house
401k started 7 months ago with a balance of $2500 and 10% of my income going in.
2 kids (and we're planning on no more)

Lately, my wife and I have been much more careful about our spending. From documenting where it goes, to eating leftovers instead of going out. Whaddaya know, we found an extra $1200 in our checking account after less than 3 months. We've always talked about early retirement, but this got us excited. It made us realize, that we don't have to give up much, to gain a whole lot. We are still relatively young, and I'm looking for my best course of action. Up until now, I've been claiming single and 0 on my paychecks, and have been receiving a handsome refund on the order of 3k to 3500 depending on if we are claiming my stepson that year or not. This year, that is going into savings, which is at zero right now. First off, should I change that to claiming married and one, and have that money automatically drafted into some form of investment, so that money is working for me, and not the government. My other question is, beyond a little cash on the side, what do I do with this newfound 3-400 dollars per month, that I've earned, solely by not spending money on crap! Would it best to slug most of it in a roth? How about a mutual fund? If so, which one's would be my best bet? I'm invested in mostly mutual funds, with a company stock match in my 401k, so I guess you'd say, I'm fairly risky on that end. I know, I'm not really on the road to early retirement by investing a grand total of 550-650 dollars a month, but I'd like to think it's a start. I also live in a relatively low cost of living area, and the house we are living in is one we will most likely stay in for at least 3-5 years. That is a bare minimum on that one. Any help would be greatly appreciated. Thanks!

[Arc]

Welcome aboard! I'd say your are off to a great start. Seeing the light is more than half the battle. Also if you save $600 per month for 25 years and earn 8% per year, you've got 568K at 52. As you become more knowledgable and earn more income you will most likely want to save more - and that is how you get obsessed with with ER - and once obsessed there will be no stopping you. Congratulation on your terrific start!

[SecondCor521]

Short answers b/c I'm donating plasma and am typing only w/ my right hand:

1. Reduce your w/h so you get small refund or even pay a little in April. Read up on "safe harbor" at IRS site.
2. $ should go where needed, which depends on your goals. If you want to retire early: max 401k up to employer match, then Roth for you and wife, then max rest of 401k up to govt limit, then after-tax saving.
3. If you pick a mutual fund, I would recommend a low-cost index fund, like VFINX, VTSMX or Vanguard Target Retirement funds.

Good start, though!!!

2Cor521

[bbbamI]

Congrats to you on starting out so young and thinking about retirement!

My suggestion would be to not let the tax man keep your money all year long and send it to you in a refund. Try to make it a wash at tax time. You may want to consider depositing your extra money into a money market account until you have at least 6 to 9 months of an emergency fund.

The rest....invest.

[chris2008]

In your shoes I would start building an emergency fund of 3x monthly take home, probably in low cost money market funds.
Pay yourself first. I never wait how much money is left at the end of the month but I transfer it in the beginning.
Next step would be to kill debt. My priority is to save interest payment unless I am 150% sure to make significantly more with other investments.
This will quickly free income to max out other investments.
As you are already into saving you might enjoy the ideas at www.slnet.com (forums) and www.stretcher.com as well.

[Leonidas]

I second Chris's recommendation about an emergency fund being a priority. "Stuff" that breaks (cars, furnaces, etc.) has to be repaired or replaced, and of course there are always even less pleasant events like illness and layoffs. Having the money ready to deal with such things means your first resort won't be to use the credit cards and dig yourself into a hole you've managed to avoid so far.

[Coach]

Great start! You've learned secret number 1 -- control expenses. You are on the road to early retirement.

Hopefully you've signed your last car loan.

You would enjoy reading "The Millionaire Next Door."

Welcome to the forum!

Coach

[Nords]

Welcome to the board, Guy, and to your Dad too.

You're on the right track, and the "extra" money should make a great couple of IRAs for you & spouse after funding the 401(k)s.

As for "what" to buy, you'll need to decide what asset allocation you're comfortable with. One of the classics on that subject is Bernstein's "Four Pillars" book, which should be at your local library.