Early 30's- what can I do to improve my personal financial management?

[Tweety]

I'm in my early 30s and make a nice living (mid six figures), although my cost of living is fairly high, and I live in an environment where the temptations to spend are pretty significant. I have done well income wise, and I expect to continue to do even better, but I have not done a particularly great job managing my finances.

I have been maxing out my 401k since I was about 25, so that is one positive. And I have saved some money (about 450k or so), so that is also good.

The negatives seem to be the following:

(1) I do not own a home, so I am not getting the tax advantages therein

(2) I have a lot of my money (about 135-150k) in straight cash. The rest is in stocks.

(3) I probably spend a lot more than I should. Even though I do not live beyond my means, I spend a lot on vacations, restaurants, etc, that should be pared down.

My wife and I just had our first child (baby girl, 3 weeks old).

What are some general things I should be doing differently with my money? Any general or specific comments would be appreciated. I know there is ample room for improvement.

One note- I will be buying a place, but where I live (NYC), the cost of moving in and out of real estate (closing costs, legal fees, moving costs, dealing with co-op boards, etc) is so high and such a pain that we don't want to buy something until we can afford what we really want. Hopefully that will be in 2008. That is the reason why I am still renting.

[Vrindavan]

you can put some money in funds, and renting instead of buying is not a bad decision

[Pokeraddict]

Do you not have any money in an IRA? You and your wife can each put $4000 post tax income into a Roth IRA each year. At 59 1/2 you can withdraw all of the money (including capital gains) tax free. It is the biggest steal of a tax shelter ever designed for people in our age group.

Having all that money is cash is not a great idea IMO. You are making good money. You need to invest that money. You can stand to make much bigger risks in your early 30's. I would not give you the same advice at 55 but take a chance. You obviously have a decent cushion to do so and don't have a problem buying stocks.

[ThankgodforRB]

I think if he's making mid-six figures he's no longer eligible to contribute to a Roth IRA. No?

I'm actually interested in this scenario as well as my situation resembles this to a degree.

[Pokeraddict]

I guess I misunderstand mid 6 figures. I assumed 150k not 500k. I guess you are right though, not sure why I assumed 150k.

[DespotInExile]

[ QUOTE ]
I think if he's making mid-six figures he's no longer eligible to contribute to a Roth IRA. No?

I'm actually interested in this scenario as well as my situation resembles this to a degree.

[/ QUOTE ]

1. Although you cannot contribute to a Roth IRA, you can contribute to a non-deductible IRA, and then, if you wish, in 2010, you can do a qualified conversion into a Roth. Or you can leave it in the regular IRA, which makes sense particularly if you expect your tax bracket to be lower at retirement.

2. The NY 529 run by Vanguard is a no-brainer. Make a $10k deduction each year, it's a guaranteed return and it is deductible against city taxes also. (You probably need the deductions if you're not an owner.)

3. I'm a big fan of variable annuities for children if you can afford it, and feel so inclined to make a generous gift for your child's future.

4. The Coverdell ESA is not a huge shelter, but it allows you to salt away $2000 per year, with Roth-like benefits, if the money is used for education (primary or secondary). There are income limitations with the Coverdell ESA, however there is a legal work-around, where you gift the money to your child in a UGMA account, then have the child self-fund the Coverdell. Google this if you're interested.

5. Small point, but having a child allows you to take a small amount ($1700) of capital gains each year at your child's cap gain rate if you exercise the sale through a UGMA account. Not a huge saving, but worth doing. Be conscious of transaction costs, however, and make sure your trading costs dont get too big.

6. If you're in the city, look into the triple tax free MMF for your cash. If you're making mid-six figures, you'll have a pre-tax equivalent yield of 6.3% or so, which is better than you'll get at HSBC etc. Beware AMT recapture; if you're subject to AMT, go to the Fidelity NY MMF instead of the higher yielding Vanguard MMFs.

7. We're renters also, despite our ability to afford a lot of house. We just dont think it is favorable to buy right now. Also, as a new parent, you need to think ahead to what your needs will be for the second/third children, as well as school district considerations. All this weighs in favor of renting, particularly if you see yourself in Westchester or LI in 5 years.

That's it off the top of my head. Our situation is similar to yours, except with more income.

[Tweety]

[ QUOTE ]
[ QUOTE ]
I think if he's making mid-six figures he's no longer eligible to contribute to a Roth IRA. No?

I'm actually interested in this scenario as well as my situation resembles this to a degree.

[/ QUOTE ]

1. Although you cannot contribute to a Roth IRA, you can contribute to a non-deductible IRA, and then, if you wish, in 2010, you can do a qualified conversion into a Roth. Or you can leave it in the regular IRA, which makes sense particularly if you expect your tax bracket to be lower at retirement.

2. The NY 529 run by Vanguard is a no-brainer. Make a $10k deduction each year, it's a guaranteed return and it is deductible against city taxes also. (You probably need the deductions if you're not an owner.)

3. I'm a big fan of variable annuities for children if you can afford it, and feel so inclined to make a generous gift for your child's future.

4. The Coverdell ESA is not a huge shelter, but it allows you to salt away $2000 per year, with Roth-like benefits, if the money is used for education (primary or secondary). There are income limitations with the Coverdell ESA, however there is a legal work-around, where you gift the money to your child in a UGMA account, then have the child self-fund the Coverdell. Google this if you're interested.

5. Small point, but having a child allows you to take a small amount ($1700) of capital gains each year at your child's cap gain rate if you exercise the sale through a UGMA account. Not a huge saving, but worth doing. Be conscious of transaction costs, however, and make sure your trading costs dont get too big.

6. If you're in the city, look into the triple tax free MMF for your cash. If you're making mid-six figures, you'll have a pre-tax equivalent yield of 6.3% or so, which is better than you'll get at HSBC etc. Beware AMT recapture; if you're subject to AMT, go to the Fidelity NY MMF instead of the higher yielding Vanguard MMFs.

7. We're renters also, despite our ability to afford a lot of house. We just dont think it is favorable to buy right now. Also, as a new parent, you need to think ahead to what your needs will be for the second/third children, as well as school district considerations. All this weighs in favor of renting, particularly if you see yourself in Westchester or LI in 5 years.

That's it off the top of my head. Our situation is similar to yours, except with more income.

[/ QUOTE ]

This is tremendous. I cannot thank you enough for this truly great post.

Do you know much about estate planning? It's actually not for me (yet), but for my parents. My father's business has boomed in the past 7-8 years, and he and my mother have gone from being nicely well off to quite rich (net worth in the $30-$40 mio range and counting).

It's awkward to talk to your parents about estate planning, because you don't want to come off as the greedy child who is only looking out for yourself, but I am concerned that they may not be doing all that they can to avoid estate taxes. They have hired a very good law firm, so maybe that is all they need, and we have had some conversations with them about this topic, but I am still concerned. Any advice on this?

[Nomad84]

[ QUOTE ]
It's awkward to talk to your parents about estate planning, because you don't want to come off as the greedy child who is only looking out for yourself, but I am concerned that they may not be doing all that they can to avoid estate taxes. They have hired a very good law firm, so maybe that is all they need, and we have had some conversations with them about this topic, but I am still concerned. Any advice on this?

[/ QUOTE ]

It may be worth looking at your own estate planning too. First, it's never a bad idea to have your own estate planning sorted out. Second, maybe more importantly, it gives you a good opening to talk about it with your parents. Ask them their advice. Ask what they did about certain things. Ask why they did it that way. This could give you a good opportunity to discuss your concerns with your parents, while at the same time reducing the awkwardness of it all.

[Statutory]

[ QUOTE ]
[ QUOTE ]
It's awkward to talk to your parents about estate planning, because you don't want to come off as the greedy child who is only looking out for yourself, but I am concerned that they may not be doing all that they can to avoid estate taxes. They have hired a very good law firm, so maybe that is all they need, and we have had some conversations with them about this topic, but I am still concerned. Any advice on this?

[/ QUOTE ]

It may be worth looking at your own estate planning too. First, it's never a bad idea to have your own estate planning sorted out. Second, maybe more importantly, it gives you a good opening to talk about it with your parents. Ask them their advice. Ask what they did about certain things. Ask why they did it that way. This could give you a good opportunity to discuss your concerns with your parents, while at the same time reducing the awkwardness of it all.

[/ QUOTE ]

this sounds like great advice to me.

[DespotInExile]

[ QUOTE ]
Do you know much about estate planning? It's actually not for me (yet), but for my parents. My father's business has boomed in the past 7-8 years, and he and my mother have gone from being nicely well off to quite rich (net worth in the $30-$40 mio range and counting).

[/ QUOTE ]

I dont know about estate tax planning for this level of money. People with this much wealth have a variety of additional ways to take advantage of estate tax problems that aren't available to smaller estates e.g., $5-10M, through things like CRUTs, establishment of charitable foundations, life insurance, gifts of assets like real estate where the minority interest discount is aggressively used, etc. A simple bypass trust that uses up the unified credit shelter isn't going to be enough.

One thing is for certain, your folks really need to be doing serious estate tax planning with this type of money, otherwise you're going to give up the majority of their estate to the federal government (and they may, even if they do plan.)

Some of the planning will undoubtedly involve your child (or other grandchildren), subject to the generation skipping transfer tax exemption. Your parents should also be taking advantage of the $12k per person/per beneficiary gifting rules--depending on how many beneficiaries they choose to help, it is possible for a couple to gift out a lot of money this way each year, which is an effective estate planning mechanism if your parents are pretty young and healthy.

One problem that entrepreneurs often face is that they are asset rich, but cash poor. In other words, they may own a nice business that spins off a good amount of cash each year, but for whatever reason, the entrepreneur prefers to put the cash back into the business rather than running it like an annuity. If your parents have light cash flow, but are asset heavy, this can be a problem from an estate tax planning point of view.

Bottom line:

1. Have the conversation
2. Seek professional advice.