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Becoming Financially Independent, what do I need to plan for?
Old 12-16-2012, 03:36 AM   #1
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Becoming Financially Independent, what do I need to plan for?

Hello again,

Ventured to the site a few years ago when I was dreaming of F.I.R.E. and then came back with an update a few months ago. Now that I have a clearer picture of my future, looking for the advice again.

Here is my intro thread for history: Intro

Here is my current status:

Credit cards: $15,000
Other charge accounts: $6,700
Student loans: $23,000
Car loan: $23,000
Mortgage: $154,000

I am receiving $1600 a month in VA payments. I just finished the second semester of school and will be starting a contracting job in Jan, heading overseas in Feb/Mar. I will be making appx $25k a month, before taxes.

The first things I am planning on is paying all the debt down (Credit/Charge, Car loan and Student Loans). Then I am going to start paying down on the house.

What other things should I cover while doing this?

I know I want to start some 529 college accounts for my kids (14, 9, 4).
Max out 401k.
Don't think I will be able to contribute to IRA's due to income limits.
Start savings/mutual funds/money market accounts.

The company will be overseas as long as there is a US presence, and I can stay as long as I like, given I am doing a satisfactory job in the position. Plan is 2-3 years, then re-evaluate situation.

Our monthly utility bills (phone/internet/cable, cell, water, electric, propane) are about $700 a month. With the $1600 a month coming in, I can siphon off a few hundred a month off savings (should have $300-$400k) and live comfortably. I can pick up a full time job at $50k a year anytime if needed (friends business, not sure if i want to call that favor in though).

I know this is still planning out like I will be working for 2-3 years and that is not guaranteed, but planning like that since that is the plan.

What other things do I need to account for?

I am going to work with a USAA Financial consultant once I start making the money, just trying to get some other advice so I can know some stuff going into it.

Thanks all,

DTB
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Old 12-16-2012, 05:05 AM   #2
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I'd pay off high interest debt, let mortgage ride. You can fund a traditional IRA. If you have a retirement plan, it is with after tax dollars, if no plan, with pretax dollars. You would not be able top do a Roth IRA directly, but can do a back door conversion (Google it). You can also put money into an after tax account and stock it with an index fund that doesn't kick off much in taxable dividends or capital gains, so until you sell it, it appreciates relatively tax free.
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Old 12-16-2012, 09:13 AM   #3
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Once you start having income, work on paying off the higher interest debt first (I'm guessing credit cards, other charge accounts, car loan). Consider refinance of mortgage if your interest rate is a lot higher then current rates. If school loans are low interest just pay on schedule, otherwise include in higher interest debt.

Save/invest regularly in 401k - initially at least enough to capture any employer match.

Save an emergency fund of at least 3-9 months of take home pay.

While you are a ways away from this if I had to do it over one thing I would consider is after-tax 401k contributions.

I would skip the 529 as at your income level you'll have enough to pay for college between cash flow and taxable savings.

If you've done the above and maxed out the 401k, then you can consider 529.
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Old 12-16-2012, 09:21 AM   #4
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What about life assurance, LTCI, etc?

Quote:
Originally Posted by delsolkm14

What other things do I need to account for?

Thanks all,

DTB
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Old 12-16-2012, 09:27 AM   #5
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and more importantly, disability income insurance.
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Old 12-16-2012, 12:36 PM   #6
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thanks for the advice so far. I will look into the back door Roth IRA idea.

I plan on putting around 10% in the 401k, they don't match, but I do want some in there for down the road.

I will not have this income level for long term, it's going to be a short time, 2-3 years, hence why I want to put the money in the 529 now while I do have this level of income coming it. We are not planning on changing our lifestyle due to the increase in income, maybe a little more nicer stuff, but not going crazy. This windfall of a job is to set us up for down the road, not live like kings now and blow it.
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Old 12-16-2012, 12:38 PM   #7
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What about life assurance, LTCI, etc?

I will look in to that stuff as well, thanks.
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Old 12-16-2012, 02:42 PM   #8
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Quote:
Originally Posted by delsolkm14 View Post
The first things I am planning on is paying all the debt down (Credit/Charge, Car loan and Student Loans). Then I am going to start paying down on the house.
What other things should I cover while doing this?
I know I want to start some 529 college accounts for my kids (14, 9, 4).
Max out 401k.
Don't think I will be able to contribute to IRA's due to income limits.
Start savings/mutual funds/money market accounts.
I know this is still planning out like I will be working for 2-3 years and that is not guaranteed, but planning like that since that is the plan.
I am going to work with a USAA Financial consultant once I start making the money, just trying to get some other advice so I can know some stuff going into it.
You're getting good advice here. Once you feel that you have a handle on it, why not call the USAA advisor now? You'll come away from a USAA conversation with either (1) more questions for us or (2) confirmation of your plan. They can also help you educate yourself on tax planning and asset allocation.

You might want to give yourself a head start on that planning instead of waiting until the money rolls in... and instead of waiting until you're a dozen time zones away.

I think you can handle your finances without USAA's help, but if you feel you need some advice and support then it's far better than going to Ameriprise or FirstCommand. In addition, USAA is much more user-friendly for overseas veterans & contractors.
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Old 12-23-2012, 08:38 AM   #9
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My parents (father retired military) used a USAA CFP a few years ago. My parents did all the work plugging in all the info and got a nice computer printout, that was about the extent of the value they paid $1,000 annually to get.

I reviewed the "plan" provided to them, if you could call it that, and it was quite lacking. Self education will be your best friend.

Their USAA CFP paid no attention to their debts, nor savings rate. He did not care that they had bond funds in taxable accounts at 28% federal and 7% state tax rates. He did not advise my dad to get rid of whole life insurance policies with death benefits of only $3500 where the premiums were $400 annually. My father has owned the policies so long he has paid more in premiums than the death benefit. Their CFP also picked some pretty awful 403b options with Fidelity when there were the Fidelity Spartan funds available. He also allowed them to keep their biggest holdings, USAA fixed annuities WITHIN traditional IRA's, no reason to have tax deferred in tax deferred. My parents also paid annually for phone calls from this guy.

These are just a few examples. I wouldn't waste money on a financial plan from them or anyone.

Read The Bogleheads Guide to Investing by Larimore, and All About Asset Allocation by Rick Ferri. Understanding what's in those two will put you well on your way. If you like those I can recommend more.

Also can't recommend enough the Bogleheads wiki. http://www.bogleheads.org/wiki/Main_Page
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Old 12-23-2012, 08:45 AM   #10
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I guess I'll add that the only life insurance you should buy is term, you can check competitive rates at http://term4sale.com/ RUN from anyone that tries to sell you cash value, whole life, universal life, fixed indexed life, etc especially when they find out what your income is going to be. They will just see commission dollar signs.

Also, when you look for an insurance agent, find a CLU, Chartered Life Underwriter, that has access to many companies and can give you choices. For my wife's long term disability policy we had 4 choices of companies and the benefits really varied between them.
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Old 12-23-2012, 02:34 PM   #11
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I guess I'll add that the only life insurance you should buy is term, you can check competitive rates at Term4Sale - Instant Term Life Insurance Comparisons RUN from anyone that tries to sell you cash value, whole life, universal life, fixed indexed life, etc especially when they find out what your income is going to be. They will just see commission dollar signs.

Also, when you look for an insurance agent, find a CLU, Chartered Life Underwriter, that has access to many companies and can give you choices. For my wife's long term disability policy we had 4 choices of companies and the benefits really varied between them.

Thanks for all your advice. I am going to look into those books you recommended.

I will be careful with the USAA CFP, but have had good success with USAA, so hope your parents issues were an isolated instance, but will keep it in mind when it comes time to make the decision.

I already have $300,000 in term life insurance and $50,000 in universal life insurance I got about 6 years ago to supplement the SGLI insurance I had in the military. I may try to increase term life up some, or get a second policy since I am heading overseas again, just in case something were to happen to me.
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Old 12-23-2012, 03:27 PM   #12
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My parents love USAA overall as well, and I still use them for insurance. However, their funds are expensive and I don't feel the cost is warranted. Remember, they are still a company that looks at their bottom line.

I would seriously consider canceling the variable life insurance. Divide out your annual premium by $50,000 and see how many years it will take for you to pay your death benefit. For instance, my $500,000 term policy is $480 annually. That's .09% of the cost of the death benefit annually, it would take a long time to pay that. A variable life however, costs much more, lets say your $50,000 policy costs $1500 annually or $125 monthly. That's 3% annually and you would pay your benefit without compound interest in ~33 years. The insurance company takes your premiums, lumps them in with everyone else's and invests in the same stock and bond market that you and I do. The $50,000 IMHO is not enough to cover anything anyway, what's $50,000 buy 40 years from now? By then your portfolio should be quite large, eliminating the need for income replacement (life insurance) altogether.

PS- I wish I could make $400k for 2-3 years. Done properly you would almost be done working.
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Old 12-23-2012, 11:02 PM   #13
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For my $300,000 policy, I pay $34.89 a month, $418.68 a year. That is .13% according to your math I think.

For my $50,000 policy, I pay $21.00 a month, $252 a year. That is .5% according to your math I think.

I am looking forward to making some good money for once and having the ability to pay all my debt off and not worry if I have enough in my account to buy groceries or this or that. Hoping this will help me change my life around and get to be F.I.

DTB
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Old 03-08-2013, 01:51 AM   #14
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Well, here it is March and I am only about a week away from heading overseas. The position I ended up taking is only going to pay about $15k a month, not the $25k a month I was planning on. Still a good amount of money, but not what I was thinking originally.

I picked up an additional $400k in life insurance from the VA for $40 a month and have pretty good life insurance through work, so if something happens to me, my family will have over $1M from all my policies.

Plan is first couple paychecks it to put about 25% into a savings account and use 10-15% for bills and living and use the rest to pay down the CC/Charge cards, starting with the highest interest ones first.

Employer is matching 6% on my 401k, so I am contributing that now, might raise it to 10% once I start getting the good money coming in. Plan on also doing some catch up contributions to IRAs for me and the wife for last year too. Will also do this years as well, but that can come down the road a couple months.

I am on a 6 month contract, and can do another 6 month contract when that is completed. I may have the option for a third 6 month contract after that, depending on the situation at that time. Because I am only guaranteed 6 months at this time, I want to ensure to pay off all the debt I can and get some savings to ensure I get the best return for my time over there that I can, helping ensure my future success.

I hope I can make it the 18 months, would allow me to be almost 100% debt free, but gotta play it by ear and adjust accordingly. Here is to the best situation I can make of it.
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Old 03-08-2013, 11:06 AM   #15
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$15k a month? I'm jealous! Good luck.
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Old 03-08-2013, 11:17 AM   #16
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Quote:
Originally Posted by delsolkm14 View Post
I will not have this income level for long term, it's going to be a short time, 2-3 years, hence why I want to put the money in the 529 now while I do have this level of income coming it. We are not planning on changing our lifestyle due to the increase in income, maybe a little more nicer stuff, but not going crazy. This windfall of a job is to set us up for down the road, not live like kings now and blow it.
I've known a handful of people in a very similar situation as yours (young with a windfall job 200K+ a year international that will only last a short time). Some said the same thing I've bolded above but when they actually saw the paychecks coming in, they couldn't help themselves. New car, new house, expensive wife, etc... they could all justify why and how they spent the money. All regretted it 5-10 years later wishing they have just saved even a small percentage of it.

My advice, pay down all the loans ASAP, and before you find ways to spend the rest make sure to set aside some percentage of it towards 401K and investments that you won't touch (20-50%). Have fun with the rest and enjoy life.

Please print the quoted statement out and post it somewhere that you'll see it every single day.
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Old 03-08-2013, 03:05 PM   #17
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Originally Posted by EvrClrx311 View Post
I've known a handful of people in a very similar situation as yours (young with a windfall job 200K+ a year international that will only last a short time). Some said the same thing I've bolded above but when they actually saw the paychecks coming in, they couldn't help themselves. New car, new house, expensive wife, etc... they could all justify why and how they spent the money. All regretted it 5-10 years later wishing they have just saved even a small percentage of it.

My advice, pay down all the loans ASAP, and before you find ways to spend the rest make sure to set aside some percentage of it towards 401K and investments that you won't touch (20-50%). Have fun with the rest and enjoy life.

Please print the quoted statement out and post it somewhere that you'll see it every single day.
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Old 03-23-2013, 07:03 AM   #18
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I know a lot of people that have fallen into the trap of making more money and spending more money. I am making a conscious effort not to fall into that stereotype, at least not until I have no debt and still have extra money coming in, but even then, I am still stoked about being able to put more money into savings and letting it work for me.

Lucky for me, my wife is not a big spender and being out here, there is not a whole lot I need or can really justify spending a large amount of money on.

If you asked me 5 or 10 years ago about the same situation, I would be stoked that I have so much money to blow, but now I am looking towards security and being stable. I have a much different outlook on money and financial situations now. I wish I would have been this way many years back, I wouldn't be in this situation today and it would all be going to savings. Live and learn.

So I have decided that I am going to try and do the following: paychecks divided up 50% debt / 25% savings / 15-25% living expenses (depends on how much that gives, but won't need a whole lot). Plan is to get the unsecured debt (credit cards/charge accounts) paid off, get about 6 months of expenses saved, then add that 25% to the 50% debt payments and start paying down/off the car, student loans and the mortgage.
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Old 03-23-2013, 08:04 AM   #19
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This sounds like a good plan. Good luck.
Quote:
Originally Posted by delsolkm14 View Post

So I have decided that I am going to try and do the following: paychecks divided up 50% debt / 25% savings / 15-25% living expenses (depends on how much that gives, but won't need a whole lot). Plan is to get the unsecured debt (credit cards/charge accounts) paid off, get about 6 months of expenses saved, then add that 25% to the 50% debt payments and start paying down/off the car, student loans and the mortgage.
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Old 06-29-2013, 04:43 AM   #20
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So, here it is 3/6 months later and thought I would give an update.

Credit cards: $15,000 - $12,700
Other charge accounts: $6,700 - $5,300
Student loans: $23,000 - $22,500
Car loan: $23,000 - $19,000
Mortgage: $154,000 - $152,000


I had to pay $14k on my house to catch up on my mortgage since I had fallen a little behind on it while unemployed and in school.
I have also put $2k in savings for emergencies.
I have close to $8k in my 401k.

I started paying off the CC debt this paycheck. Paid 2 completely off and 1 almost 3/4 off. Next paycheck will pay that one off and 2 more completely off and then working on the larger accounts I have.

Still have a little ways to go to get all the CC/Charge accounts paid off, but should be done with it before summer is over.

I have a few other debts that I am paying off at the same time that will be done with in October, so after that, I will increase savings to $10k and then most the money will go towards the car/student loans/mortgage.

Not quite how I had it originally planned, but still working towards getting debt free. Then I can focus on building savings and wealth and working towards being Financially Independent.
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