by Hope
I didn’t realize my last post on delaying my student loan payment until January would spark a debate on the anticipated student loan forgiveness promised by Biden. To be honest, that anticipated program has not even crossed my thoughts. If it’s offered, will I take advantage of it, yes. Am I planning on that? Not at all.
I am planning to pay off all my student loans. They are mine, I did take them out.
That being said, I have been working on my 2021 budget for months now. Being very thorough, setting realistic goals, and taking into consideration my 5-year plan. And then everything changed in the last month with this new job…
But my financial goals aren’t really changing…they are just being expedited.
2021 Financial Goals
Here are my overarching goals in priority order for 2021:
- Pay off smaller of my student loans in January 2021 as soon as I know the pay schedule and take-home pay. Anticipate this will happen on either January 15th or 30th, not sure when I will get my first new paycheck.
- Max out my ROTH IRA contributions from self-employment income – yes, that means, I plan to make at least $6,000 in profit in 2021 from my existing freelance business. At this point, my plan is to essentially turn off “pay” from my freelance business to myself in mid-January. Then allow that income to just accumulate in my *new* interest-earning business account. My “business” expenses will continue to be paid from this account. And I will revisit every quarter/6 months to determine if there is a reason to pull “income” from it and put it toward something else. but for now, it will just maintain itself.
- Pay off my car – pre-new job, this would have taken all year and was my main and really only debt pay off goal for the new year. But with the new job, current projections indicate I will pay it off by August. Balance as of 1/1/2021 will be $14,931.76.
- Contribute some % of my new income towards a new 401K. My new company does not do matching, but they do profit-sharing, and I’m not sure how that works. But I do not qualify until I have 500 hours in. But I will begin contributing immediately to my new 401K, just not certain of the percentage yet at the time of this writing. I have done the math at 13%, 7%, and 3% and I could conservatively do any of those. I am leaning toward the 7% to start and then working my way up.
- Pay at least $307 every month towards my larger student loan, whether the new Cares Act extends the deferment or not. And once my car (#3) is paid off, those funds will go towards this loan. (Anticipating paying $800 every two weeks toward car loan beginning in February.)
- Add another $10,000 in my existing EF which equals out to $833 saved per month.
- Save $5,000 for a family trip…not planned, but dreaming, that would be $416 saved per month.
- Save $15,000 toward future housing, whatever that may be, that would be $1,250 saved per month.
I would love to pay off all debt in 2021, but I am also keenly aware that I need to balance my savings with my debt payoffs. So what do you think of my plan?
Hope is a creative, solutions-focused business manager helping clients grow their business and work more efficiently by leveraging expertise in project management, digital marketing, & tech solutions. She’s recently become an empty nester as her 5 foster/adoptive kids have spread their wings. She lives with her 5 dogs in a small town in NE Georgia and prefers the mountains to the beaches any day. She struggles with the travel bug and is doing her best to help each of her kids as their finish schooling and become independent (but it’s hard!) She has run her own consulting company for almost twenty years! Hope began sharing her journey with the BAD community in the Spring of 2015 and feels like she has finally in a place to really focus on making wise financial decisions.
Modify #2…. Max out your 2020 IRA, not just 2021! If you don’t have enough to cover maxing both your 2020 and 2021 IRA’s, I would use some of the housing savings or emergency fund savings to max it out. You can always withdraw your contributions to a Roth IRA for any reason, without penalty. Also, you can withdraw your contributions and gains without penalty if you use them towards your first home purchase. It’s a great place for your housing money, since you don’t have any plans to need the money yet. If you don’t end up using it, it’s in the account growing tax free for your retirement. You can find a low risk fund to get some minimal growth. It’s a win win.
I did see that comment, I will have to consider this.
As far as the housing monies go, I thought I could only contribute $6,000 a year to a ROTH IRA? Wouldn’t putting my housing money there be an issue?
Agree with Angie, make sure you max out the Roth for 2020. You do have that 4 month window where you can overlap your contributions.
Your max is $6000/yr until you hit 50, and then you can contribute $7000. So no, you can’t contribute more than that.
If you are under 59.5, you can withdraw up to 10,000 early from your Roth, for a first time home purchase. If you’ve already bought a house in the past, this is moot. Penalty-free does not necessarily mean tax-free. If your Roth is under 5 years old when you do this, the gains are subject to tax.
The market gains on the money in your Roth are probably (hopefully) going to be at a higher percentage than a high-yield savings account. Historically, gains on a Roth are about 7%/yr, while the current interest rate on high-yield savings accounts are about .5%. So your contributions to a Roth are going to grow faster.
If, in 5 years, you take that 10K withdrawal for a home purchase, less of that money is going to be your contributions, and more gains than if you did it from a high yield savings.
And like Angie said, you can withdraw your contributions (the 6000 you put in) at any time without penalty. It’s the gains where you are penalized for withdrawing early unless you are using them for a qualified withdrawal like a first-time home purchase.
So I would take some of that money earmarked for housing and using it to make sure that you max out your 2020 Roth. It’s going to grow faster, and you can withdraw. The deadline for your 2020 Roth contributions is April 15, 2021, so you could simply take your “housing” savings from your paycheck and contribute them after your start your new job. You’re already planning on saving $5000 for housing in that time frame, so you should be able to max out your 2020 contributions easily if you put it in the Roth.
I think goals 1,2 and 5 are good. With the car and the 401k, if you are paying a high interest rate on the car then it makes sense to pay it off now. If interest rate is low, I would encourage you to just pay the minimum for now and put as much money as you can into the 401k, as soon as you have access to it. I would suggest 13% and work upwards. People often think they can keep working until they are very old and then they get sick or something and end up poor in old age. Honestly, this could easily happen to you. You have a chance now to lay a financial foundation.
How much is in your EF? You say “another $10,000.” If you have $10,000, I’d leave it alone for now.
Skip the housing savings. If you’re fine where you are, throw that $1250 at your debt. You’ll be in much better shape going forward if you don’t have your debt. It gives you so much more freedom. If you rally buckle down, you can be DONE at the end of 2021.
You have to remember in the last 5 years, I have experienced not one but two significant income losses. And each took almost a year to recover from…not happening again, so that EF is the key to that.
I think you’re scared to pay off your debt or else you’d use this opportunity to attack it. Might be worth spending some time reflecting or journaling on that.
You have a chance to be free and the income to make it happen. Instead you’re throwing it ten different directions.
It’s not that I’m scared to pay off my debt. However, I admit to being scared about this transition. So yes, I am being cautious until my new pay starts rolling in.
As for the 10 different directions…yes, I am balancing debt payoff with savings, specifically retirement savings and bolstering my EF. You have to remember in the last 5 years, I have experienced not one but two significant income losses. And each took almost a year to recover from…not happening again, so that EF is the key to that.
Agree with Walnut. Fine. Bolster the EF. But there’s no need to save for a trip or new house ($1250 per month?!?!) when you’re still dragging around debt like it’s a pet.
I’m totally in support of your stock piling some cash to bolster your emergency fund. You’ll make amazing progress if you focus on one goal at a time and devote all your resources to it. Hell, even save your 5k for a family trip right away to celebrate with your kids once it is safe to do so with Covid.
Stop splitting your money 50 ways because you aren’t accomplishing any of your goals.
Looking back at this again, I’m wondering if you would do better with a linear approach rather than trying to save or pay down 10 things at the same time. It would give you good rotating challenge goals throughout the year. It helps with making sure the highest priority is funded first. And it will give you the ability to laser focus on one specific goal at a time. I also see no need to save for housing. At this point in time you should be supercharging your 401k for the tax savings and to catchup on retirement.
Consider going in order (subject to change, but the first 3 should be your top priority)….
Contribute 13% throughout the year to 401k (or whatever the percent is to contribute the full 19,500)
Fully fund HSA (if you chose a HDHP health plan)
Fully fund 2020 IRA.
Fully fund 2021 IRA.
Add 5k to e-fund.
Pay off small student loan.
Pay off car
Pay off big student loan.
Save for family trip to celebrate all your kids adulting milestones AND being debt free!
Only then consider saving for a house with the excess. But, you’ll have to remember to start the process again in 2022. Filling your highest priority buckets first.
I had the same thought when someone pointed out my 10 different directions.
The 401K and IRA can be on going as they can come out of every check. So I would set my 401K % (and I am planning to fully fund HSA but counting that in my benefits package) and a weekly auto-transfer to my IRA.
Then with my take home pay, the amount that hits my account focus on one thing at a time. Maybe something like this as I haven’t really looked at it yet.
1. Pay off small student loan – complete in January
2. Add 5K to EF – complete in February
3. Pay off car – complete ?
4. Add 5K to EF – complete in month after car is paid off
5. Pay off large student loan – complete ?
….
Maybe, will have to look at this as a plan.
I may be in the minority but I really think one of your first investments should be to find a financial planner to figure out the tax implications and what not of your new higher salary. There is a ceiling for Roth IRAs($124,000 AGI would mean you only get reduced access while $139,000 means that technically you can’t access one)and with profit share, bonuses and a six figure salary without guidance you might find yourself at cross purposes especially if you choose to be too conservative with your 401k and instead are choosing to sock money into savings that can be accessed.
I agree. Consider meeting with a fee-only financial planner, as they are not there to sell you something specific, just to give you advice. You have lots of moving pieces (new income, savings/investments/retirement, tax implications, college for kids, debt payoff, possible home purchase), and having an overall financial plan will give you a focus. You will really need to determine what your priorities are for short-term, medium-term, and long-term. That will then be your road map to success.
She could fully fund a Roth for 2020 before April of 2021, then wait til the end of 2021 to see what her income is and if she qualifies for a Roth next year. If she maxes out her 401k that would drop her adjusted gross income by the amount she puts into it. If she is on the edge of qualifying for a Roth next year, that could get her in range. If not, she can do a backdoor Roth. I have used both of those strategies to contribute to a Roth.
If you are upping your EF I feel that could be used for moving expenses if you have to move. I don’t think you need to save for that separately right now.
Smart to be thinking of Roth and 401K. You are late getting started with this.
Hope,
Are you going to take the new company health insurance or keep what you currently have? I would recommend to include the full deductible for individuals in your plan and the family deductible in a potential savings account because life happens when we least expect it.
Yes, I plan to move to their insurance. And it will allow me to add Sea Cadet as he continues to work “part time” as a EMT and is returning to school.
I am going to max out the HSA as well which will more than cover the individual and family deductibles.