Could use a critique of my holdings/advice going forward from the gallery

[Flanmann]

Hi folks,
I was hoping you could critique my current investment holdings, and/or shed some advice going forward.

I'm 34, and I am an entertainer, so I travel from job to job, and don't have a 401K as an investment option unfortunately. I'm getting married in a few weeks, and looking to dive right into buying a house after. 75k income/year, no debts.

Here's what I have so far:
Roth IRA: appx 25k (I make sure to max this every year.)
TD Ameritrade Stock Acct: appx 20k
Savings (1.13% APY): 14k
Savings (0.9% APY): 3k
Mango Savings (6% APY): 5k, which I adjust accordingly to keep at this level.

I've left a bit more than I know I should in easily accessible savings lately, due to the need to pay various wedding bills. With the plan of buying a house within the next year, how should I adjust my current allocations of funds, or is there a new avenue I'm not using that I should get into? Any advice would be most gratefully appreciated.

 

[Matt]

Congrats! And good work on being debt free.

The hard thing to see from the above is when you started saving and the reason for this being interesting is more specifically: how much do you save every year? You mention $5.5K to Roths, but how else does your budget break down.

Overall, you are looking at a budget and cash flow problem here. The wedding is cash flow drain, and the house is a cash flow event. If you account for the actual costs of both, what does that do to your savings (existing and planned) ?

In terms of investments and asset allocation - its impossible to say from here... you might have a Roth with a Target Date Fund in it, or you might be holding all bonds, or you might have nothing but options that expire in 2 weeks. Same goes for the stock account - it could be all in money market, or it could be invested in a hot stock that your buddy told you about...?

What does all the above mean?
You need to know how much it will cost you to pay for the wedding and the house (and must remember to add in any closing costs that you might have) and then decide if your current savings can cover it. If they cannot, do you need to invest them to get a goose from the market? If you are short, and need to rely on stock performance to get to your goal (this might be happening in your TD account?) then the risk profile of that account should be addressed because it could drop significantly, meaning that your home buying dreams are crushed.

Generally speaking, with the time horizon that you have, if you are short on funds to achieve your goals it would be wiser to extend your goal horizon - rather than put 20K at risk of becoming $10K, put it into something safe, and save up the remainder over a few more months.

Questions:

• How much is the house downpayment+closing costs?
• How much money is left over after the wedding and honeymoon?
• How much are you able to save before the house downpayment time arrives?
• Do Assets after cash flow expense 1 (wedding) + serial savings = House? If they do, how tight is it?

Personally I wouldn't be as exposed to stocks (if the stock account is stocks...) as you are right now, unless you have a strong income coming in, and low living expenses (IE lots of disposable income) and additionally, I'd be worried about your job being less secure than a boring one... is there a chance of reduced income due to demand, or is your contract guaranteed?

 

[Flanmann]

Thanks for the in-depth reply, Matt. Very much appreciated. Even with the added wedding expenses, I've still been saving around $2k per month. The wedding is all covered, and while the honeymoon in Bora Bora will probably be expensive (not nearly as much thanks to learning the MS game), I should be in a strong position to house hunt. I'm looking to buy around 200-250k and am deciding between spending all $20k of my stock account and all my savings to have a 20% down payment, or going for an FHA at around 10% down. I had always bookmarked my stock account for this purpose of buying a house. It currently holds all individuals stocks. Apple is amazing because I bought in when in was $32 a share, so I've more than killed it there. 2 of my other larger holdings, MCD and XOM, have taken a bit of a dive lately, but again, I wouldn't be pulling these funds until 2nd quarter next year at the earliest. I kind of want to use this money instead of savings, because now I've learned a bit more about how to invest better with funds and such, which I've done in my Roth.

As for income risk, the big one is if either of the shows we perform in close. We each have a secondary performing job which would keep us going regardless. If our income stays the same, we should be able to bank $3-4k a month going forward until buying happens.

In terms of disposable income, we pretty much just plan trips, which again has become way cheaper thanks to the wonders of churning. I've even started stocking up on GC deals to stores that have stuff we will want to buy for our future house, so that hit won't be as big when the time comes.

I never really thought about the short term stock risk. I always looked long term with it, but I guess now it is the short term. You think I should pull it out now and put it in savings, even the ones that are down a bit at the moment from where they should be? Again, I really appreciate the detailed and thought out response from above.

 

[Matt]

Apple is amazing because I bought in when in was $32 a share, so I've more than killed it there. 2 of my other larger holdings, MCD and XOM, have taken a bit of a dive lately

So while you are excited about the AAPL being up, I'd be sad... and while you are sad about the MCD and XOM being down, I'd be happy... funny thing that?

The reason is taxes. When you cash out your AAPL stocks you're going to have to pay cap gains on the profit. It looks to me that either way (single or joint) you are probably going to be in the 25% bracket (unless the income of $75K was joint? If so, you're in luck!) Here's the single and MJF tables:



If you can find a way to be in the 15% bracket, you could get a 0% Cap Gain rate, if you are in the 25% income bracket, it will be 15% cap gains tax for stocks held over 1 year, and regular income tax levels for short term(under 1 year).

Also, I would like to suggest that

, even the ones that are down a bit at the moment from where they should be?

You don't know where they should be. I'm going to hazard a guess that your logic for where they should be is where they were before... that doesn't mean where they should be, and next week nobody knows where they will be. There are ways to price out the value of a stock, but even if you do so correctly, it doesn't mean that they will trade at that level within your horizon.

So basically, if you are as close as you are in terms of needing the downpayment money, I'd cash it out, but keep an eye on tax ramifications of doing so. DOC put up a post today for the Netspend account, you should consider getting two of these and putting $5K in each at 5%. And looking for other safe returns like this.

I've even started stocking up on GC deals to stores that have stuff we will want to buy for our future house, so that hit won't be as big when the time comes.

Check the terms on the cards - are they direct from the retailer or from a third party? What happens to you if they are drained fraudulently and a time period has elapsed?

Not to be a Debbie Downer, but think it is prudent to keep a tight eye on risks and threats to your plan because it isn't all about upside (although that exists also)

 

[Flanmann]

This table is extremely helpful. Yeah, the good/bad part of being an independently contracted performer is that while I am on the hook for self-employment tax, I have a lot more wiggle room with getting more deductions for business expenses. I usually fall into the 15% bracket at the end. This will be my first year to file as married filing jointly, which should put our income around 85k, minus deductions from that. I'm debating whether to really pull back on deductions this year, in order to make the mortgage application process easier. The tax hit would be pretty big though, so I don't know if that's worth it. Yeah, with the Exxon and McDonalds stock, they were both up 30% a year ago for me, now Exxon is in the red by a little, and McDonald's is around a 17% gain. With Apple, because the gain is so great, I'm thinking maybe to wait until 2016 to sell it in order to push the cap gains tax down the road a little longer. Good call on the Netspend, just opened one today using the conga thread. Thanks again for the great info and perspective. I really appreciate it.

 

[thepaul500]

My advice is worth what you are paying for it...and I am no sort of advisor, just a dude who spends too much money.

But have you considered spending less on a house if possible?

My wife and I (before we got married) bought a house of about the same cost (255k) 5 years ago. At the time, it stretched our budget with similar numbers to yours without a wedding for another 2 years to pay for, and if we had lost 1 income we would have been in a very bad spot making payments. While I feel no moral obligation walking away from the debt, generally speaking its not a good thing. While this is no longer the case for us thankfully, it put a huge stress on us as a couple. A bit of a lucky streak with a few post-tax stocks and a new job, but you wouldn't believe the weight that was lifted off our shoulders knowing we both could walk from our jobs at any time and be okay for a year or more without worries.

Also, the house has risen less than 1% per year. If we had paid 50k less for the house at the time...all that extra in mortgage payments would be in the market right now....grr....I refuse to calculate the numbers!

 

[Flanmann]

Yeah, I'm definitely flexible moving down on the housing cost. I live in Las Vegas, where the home prices are still fairly low, and for the same amount we currently pay in rent, we can own and have much more space. That's kind of the selling point for me. Even if the market takes a downturn again, we don't plan on moving out of the city anytime soon, so I'm okay with the risk there. There is also that male pride factor that makes me want to say, "I own this."