I am a pharmacist currently working 2 jobs with gross income around 200K. I have a family with 3 kids and a wife , and my wife stopped working since last year because we have baby. Currently my financial status is as followed:
1. Debt: student loan : 50K left. Mortgage 380K left
2. Assets: House with Zillow value at 800K. 401K : 50K.
What would you do if you are in my shoes. Stock and housing market are at all time high now...Should I leverage out and buy more properties and rent out? Or just try to pay off as much debt as possible?
Hello UGAZ,
STEP ONE - BEFORE INVESTING:
- Save up 3 months of spendings in High Yield Saving Account or No-penalty CD.
- Pay off debts that is over 6%.
- Refinance your high interest student loans.
- Insure yourself especially if you have dependents.
- Term Life Insurance
- Disability Insurance
- Umbrella Insurance
STEP TWO - LAY OUT A GAME PLAN FOR INVESTING:
- How much money do you need for retirement? Take a look at your monthly spending. Your retirement spending will likely be less compared to what you are spending now. At retirement, student loans and mortgages will be paid off. There are multiple retirement calculator out there but most over calculate what you will need.
- IN GENERAL SAVE 20% OF YOUR INCOME. If you want to retire early, try saving 30%.
- AVOID LIFESTYLE INFLATION
STEP THREE - WHERE TO PARK YOUR INVESTMENT:
- Now, everyone goal is different but a sample plan could be:
- PICK THE RIGHT CUSTODIAN COMPANY FOR YOUR INVESTMENT, DEFAULT SHOULD ALWAYS BE VANGUARD.
- Max out your 401K (easy)
- Max out your HSA (easy)
- Max out BACKDOOR ROTH IRA (small amount of effort, you can learn about this later)
- PUT THE REST INTO A TAXABLE INVESTMENT ACCOUNT (easy)
STEP FOUR - IMPLEMENT YOUR PLAN:
From 1926 to 2017, if you allocated your funds in 60% Stock and 40% Bond, you will earned 8.8% average annual return.
Vanguard has an excellent page showing several asset allocation model’s risk and returns
here. Age based asset allocation is a smart way to be more efficient. To determine the percentage of stocks in your portfolio, use the following formula:
100 – your current age = % stock
Let’s say you are 40, that would be 60% Stock and 40% Bond. Now, if you don’t want to deal with allocation and rebalancing, I would simply pick a target retirement date funds such as Vanguard Target Retirement Fund, also known as Life Cycle Funds. The fund automatically adjust the stock percentage as you age.
- Use Vanguard Target Retirement Fund or other Life Cycle Funds for all your accounts. (No effort).
- Or use an age based asset allocation and pick your own funds. (Some effort + possible more gain)
Now let us take a closer look at how you can organize your funds. Certain types of funds are very tax inefficient, those belong in a tax efficient account. In general:
- 401K = US Bond Index Fund + US Stock Index Fund
- Roth IRA & HSA = High Yield Dividend Funds + Real Estate Investment Trusts (REIT)
- Taxable = International Stock Index + Municipal Bonds
Usually 401k and HSA have very limited offering in funds. But usually they will have an index stock or index bond that you can select from.
Now, let say you need to save $50,000 a year. You decided to go with 70% Stock and 30% Bond asset allocation. You could divide up your portfolio like so:
- 401K = $18,500 + $6,500 Match = $25,000
- US BOND INDEX 15K
- US STOCK INDEX 10K
- BACKDOOR ROTH IRAS = $5,500 you + $5,500 wife = $11,000
- REIT 5.5K
- HIGH YIELD DIVIDEND US STOCK INDEX 5.5K
- HSA = $6,900
- TAXABLE INVESTMENT ACCOUNT = $7,100
- INTERNATIONAL STOCK INDEX 7K
Once you have your plan implemented, the most important thing is to stick with your plan! DO NOT CHANGE YOUR PLAN NO MATTER HOW THE MARKET BEHAVES! This is probably the hardest part for most new investors. When the market fall, most investor panic and sells. What you do is stay the course and keep on investing and rebalancing to make sure you are at the 70/30 ratio. Every time you rebalance, you are actually taking advantage of the ups and downs of each asset class.
STEP FIVE - SAVE FOR YOUR CHILDREN
This is another topic we can go into later. But in general, save for your retirement first then use the left over for your kids. Default, you could put $500 per month per kid into a target date fund in a 529 account. (each state is different, research on different state 529, Utah suppose to be pretty good).