Money Management Update – The Day After Closing on Our House

by David Ning · 14 comments

Starting next month, the plan to allocate my income will drastically change.

Trying to land a loan has been an unnecessarily cumbersome process, but now that we are through jumping over all the hurdles, I can concentrate on figuring out how I will continue to allocate my income to build wealth. For a while now, the plan was simple: stick everything other than retirement account contributions in an online savings account in order to save for a down payment. As our short term need for money essentially vanished after buying our first home though, it’s time for an re-evaluation. Here’s what we came up with. Please take a look and give some comments or ask questions.

My Irregular Income

With a business income that can fluctuate wildly from month to month, the plan is actually not as precise as I would have liked. However, the world still rotates with or without you and having a plan to adjust in the future is better than no plan at all, so here goes.

Emma and I intend to allocate 50% of my income towards a taxable investment account, where we will invest in stocks and bonds for long term growth. As to the rest of the funds, 10% will go towards retirement accounts, while the rest (40%) will be transferred to high yield savings to help rebuild our emergency fund, prepare to pay business taxes as well as pay bills.

This is rough, I know, but as we are unsure of how much a newborn is actually going to cost every month plus the addition of the expenses of the house, this will do for now.

Emma’s Income

For now, apart from her 13% contribution to her 401k, her salary will be put in high yield savings plus pay for some of our living expenses. Seems boring compared to my side of things, but in personal finance, boring is often a good thing.

Wrapping Up

Other minor changes include:

  • Funding Schedule – I used to transfer money into my retirement account on the first business day of the month, so I can invest the next day. From now on, apart from having a buffer to pay for unexpected bills, I will transfer my income to the various accounts the same day the deposits are available at my checking account. This way, I’m not losing on average half a month of interest on everything that comes in. (This one is still up for debate. Half an interest seems to be worth the effort, but it does make managing this more cumbersome. What do you think?)
  • Simplifying Our Financial Picture – Over the years, Emma and I have opened way too many accounts, be it savings, IRAs or investment accounts. We are going to cancel all of them and keep just the bare minimum.
  • Be an Ignorant Investor in Regards to Short Term Fluctuation – As soon as the funds are available to invest, I will buy the securities (be it an ETF, index fund, stocks or others) right away. While short term price fluctuates and timing can make a big difference, getting it right is essentially a part time job and I’m not in need, nor do I want, more work. If it goes up 5% the next day, great. If it drops, I won’t sweat it. Over time, this will even out. My time is better served figuring out how I can increase my income to contribute more.

As I mentioned, this plan needs continual adjustments as we get a better handle of our expenses down the road. What do you think so far? Anything in particular that jumps out at you, and any suggestions of how the plan needs to change for the better?

Your suggestions are appreciated. I have a thick skin, so fire away 🙂

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{ read the comments below or add one }

  • WR says:

    I recently went through a simplification exercise as well. At one time I had 6 bank accounts at 4 different banks and credit unions. 2 brokerage accounts and 4 Retirement Brokerage accounts. I also have separate 529 plans for the kids.

    With so many accounts it was difficult to get a picture of my asset allocation at any given time (yes, even with good financial software). I did quite a bit of research and have consolidated many of my investments into 2 places. Vanguard and T. Rowe Price are by far the best shops for the way I invest. I am a hands-off/ long haul investor. I rebalance very infrequently (usually when there is very good news or very bad news in the markets. The fearful/greedy – greedy/fearful thing.)

    I was going to go with Vanguard alone but I do like a little “Financial Institution Diversity”. I believe both of these organizations are rock solid, conservative and will be around forever but I do realize people felt the same about Lehman Brothers.

    Both of these companies offer no-load, extremely low cost Stock Index funds, Bond Index funds and REIT funds. I am most heavily invested in the following:

    Vanguard:
    VGSIX – This is a REIT Index fund (Tracks the MSCI US REIT Index)

    T. Rowe Price:
    PEXMX – Extended Equity Market Index (Tracks the S&P Completion index)
    PRTAX – Tax Free Income

    My asset allocation is 70/30 stocks/bonds but I tend to shift it to be bond heavy when the financial pundits spew good news and sunshine as they are doing now.

    I love Burton Malkiel’s “The Elements of Investing” and have used the principles in that book and “A Random Walk Guide to Investing” to form most of my investment philosophy. So far so good…

    Best of luck to you.

    -WR

    • MoneyNing says:

      Thanks for sharing how you invest. I will probably be sticking with ETFs because their tax treatment is more predictable at year end and it gives me more flexibility with where to hold my money. Plus, with some of the brokers, buying shares is either REALLY cheap, or something even free.

      • WR says:

        Probably a sensible choice. It depends on your situation.

        Vanguard has Admiral shares ($100,000 going in or $50,000 with a 10 year history at Vanguard). I compared my Admiral funds w/ ETFs and decided to stay. YMMV

        At their heart, ETFs are just index funds which are traded as stocks. In that sense, they are similar to closed-end mutual funds that happen to be index funds.

        Mutual fund share prices (NAV) are updated once per day and you can only buy or sell mutual fund shares at the NAV price regardless of that days market activity. If the market declines drastically over the course of a trading day, investors can only exit the fund at the NAV price, which is set at the close of trading. This has never been an issue for me. There are very few people who can get the news of a “permanent” drop and make the appropriate trade during the course of an average day(I’m a coach, treasurer, dad, husband, business owner and ‘aspiring’ marathon runner). This ‘advantage’ is absurd. With the right mix of bond funds and stock index funds any market deviation can be taken advantage of in a timely manner with conventional index funds. I can even log into my 401K FI and do a rebalance that will take effect the next day.

        Also to keep in mind, when you buy or sell an ETF, you pay 1/2 of the ETF fund’s bid-ask spread. Bid-ask spread is the delta between the market price for buying it and the market price for selling it. A conventional no-load mutual fund has no bid-ask spread. This may not affect you depending on your buy/sell volume.

        My biggest chunk of concern about ETFs is the difference between NAV and market price. ETFs won’t track indices as well as conventional index mutual funds. They are stocks and stocks are valued by irrational exuberance in some cases.

        Mutual Fund NAV = weighted average of all funds holdings

        ETF = Price is determined by the market. May be higher or lower that the associated tracking index.

        ETFs may not the panacea that some advocates claim them to be. Do your homework.

        In any event, you can’t go wrong with Vanguard or T Rowe Price in this arena.

        Best of luck to you.

        -WR

        • MoneyNing says:

          Thanks again for taking the time to write the thoughtful advice. I’m only sticking with large/popular ETFs, so the spread and liquidity shouldn’t be much of a problem.

          Since I will be regularly investing and periodically withdrawing from them, the difference between the NAV and market price, while exists, has a much less muted effect. This is because, if NAV is always higher than the market price, it will be higher when I buy and higher when I sell. Since I’m buying constantly, the volatility of this should even out some what.

          It seems to be that it’s the CHANGE that will effect me, rather than the fact that NAV doesn’t equal market price. I think I’m okay here.

  • Mike Piper says:

    Two thoughts:

    When investing in your taxable account, take a look at what after-tax rate of return you’d get on bond purchases, if that doesn’t exceed the rate on your mortgage, it’s probably best to work on prepayments. 🙂

    Second, you may want to look into asset location planning. (That is, tax-sheltering your tax-inefficient investments before tax-sheltering your tax-efficient investments.)

    • MoneyNing says:

      Thanks for the advice. At a less than 5% mortgage rate, I’m willing to give investing a go to see how it panes out. I’m already with a 15 year loan, so that has a built-in prepayment plan 🙂

      For the past year, I’ve been thinking more about tax sheltering with my investments. ie, the high dividend and REITs, bonds are all going to my IRAs, while the growth type investments go in a taxable account. I’m sure it definitely makes a huge difference, though I’ve never done a calculation.

  • Cd Phi says:

    I think it’s great that you and Emma are still very aggressive about your finance strategies despite having a child and paying for your house. Just curious, do you and your wife combine your income/expenses or have separate banking accounts? And which would you recommend?

    • MoneyNing says:

      We have separate checking accounts, and it eases tension somewhat when I can’t scrutinize her spending and money habits line by line I think.

      Our savings however are pretty much combined, so in a way, we have a hybrid version 🙂

      • Cd Phi says:

        I see. I like the way you combined your accounts somewhat though. I would also like to have my own checking account and we can combine other things…might prevent little fights.

  • marci357 says:

    And congrats on home ownership 🙂

    Now – get your garden in…
    Permanent edible landscaping is ALL the rage these days –
    as is “Food not Lawns.” 🙂

  • marci357 says:

    Simplify even more.
    Get your funding transfers down to one day a month or twice a month if you must,
    and just plan on transferring your funds on that day every month, rather than every time a check clears or funds clear. Looks like you are making it harder than it needs to be.
    If possible, make some of them automatic transfers – with a time cushion.

    Baby costs are extremely minimal. Just do not be suckered into all the “must haves” that are really just “keeping up with the Jones’s”…. Babies raised in old times did just fine (care wise) without all the modern day trappings. They just need a lot of love 🙂

    The new house expenses ( not the mortgage) should not be costing you much once you get the yard equipment bought. Garage sales and moving sales should get you most of that equipment. Again, do NOT be suckered into all the fancy frills that are not really needed. Put stuff on your “think about it list” for a year, or at least 2 months if you are really impatient. Usually you will either decide you don’t really need it, or it will come on sale seasonally. Patience saves money.

    • MoneyNing says:

      It does seem quite cumbersome to transfer as soon as it hits my account. Automatic transfer though will be difficult because of the fluctuations of my income.

      Noted on the baby. We already noticed that half the stuff people said we absolutely needed to buy turned out to be useless 🙂

      We’ll see about the house. We have basically no furniture so that’s number one on the list to buy.

      • marci357 says:

        You had enough furniture in the apt. to get by…. 🙂
        So… take your time and look for the sales.
        Everything is seasonal and there is no need to go into debt to get
        “Everything” at once…. Enjoy the space while you have it,
        and shop quality as well as price 🙂

        Enjoy…

        • MoneyNing says:

          Oh we have plenty of cash left over for furniture, and we will definitely take our time with this. I think it will actually be more fun than rushing everything all at once. We do however need a washer and dryer as soon as we have the keys though and measured the space. Everything else can wait.

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