Walt Arnett and his fiancee, Beth, plan to wed in fall 2016.
Walt Arnett, 34, of Lexington, Kentucky, won Bankrate.com’s Grand Prize Money Makeover award of $10,000 for the 4th quarter of 2015. Originally from West Virginia, Walt attended college in Kentucky and has lived there ever since. He is an information technology professional in the health care sector, having worked in IT since graduating from college 12 years ago. He’s been with his current employer since 2008.
Walt is at a point in life that many can identify with. Recently engaged to his fiancee, Beth, he is a homeowner, has student loan debt, a reasonable emergency savings cushion, and a good jump-start on retirement savings through his workplace 401(k) and a Roth IRA he started in 2014.
Walt and Beth are planning a wedding for fall 2016. He feels like he’s doing OK financially right now, but with the years ahead likely involving children, a bigger home and a new car, Walt sought some advice before waiting any longer.
Walt wants to be “a little more hands-on” with his finances, acknowledging he has a habit of setting everything on auto-pay and not looking at it regularly. And he’s looking for help with his financial goal-setting. He wonders if he is doing his best to save and whether he should pay off debt before ramping up his savings. And he wants to be better educated about investing so he can do it in a smart way.
Walt bought a starter home in 2012 but expects to move to a bigger house within the next 5 years. He has a 2006 Toyota that he owns free and clear, and plans to drive it “until the wheels come off.” Realistically, he admits a car purchase is likely within the next 3 years.
But those big-ticket purchases are still a few years away. More immediate is the wedding, with expenses currently budgeted at $24,000.
Walt doesn’t track his spending or use a budget, but he does contribute to his 401(k) plan and puts $600 per month into savings. While feeling a bit overwhelmed by the need to save and indecision about where to put it, his savings discipline is underscored by a fear of going into debt.
He lists his financial objectives as getting help with budgeting, setting financial priorities and paying for upcoming large expenses.
Walt’s debts include federal student loans and a mortgage. His student loan balance is just under $19,000 with 8 years remaining, at a low fixed rate of 4.25%. He owes about $102,000 on his 30-year mortgage, which has a fixed rate of 3.875%. The expected move-up home purchase a few years away is likely in the neighborhood of $225,000 or more.
Walt thinks his credit score is 780 but notes that it’s just an estimate, as he hasn’t looked it up in the past couple of years. With myBankrate, Walt can view his credit report and get his credit score monthly to make sure he’s positioned for the very best mortgage terms when the time comes.
He has an emergency savings account of $9,500 earning a reasonable 0.75% return. Truthfully, he could switch accounts and increase that return by a quarter percentage point or more. He adds to this savings with every paycheck and typically deposits an additional $600 per month.
Check out Bankrate’s savings rates for the highest yields.
But how much savings is enough? It’s hard to tell because he doesn’t track his monthly spending or use a budget. Also, those monthly expenses may change after the wedding. He has a good savings discipline and is on the right path with his emergency savings. However, the wedding expenses could set this back in a big way. His existing $9,500 balance, coupled with the $10,000 contest winnings and an additional $6,000 he’s on pace to have saved by the wedding date, tallies to $25,500. But if the wedding expenses come in at $24,000 as projected, then Walt and his new bride will start their lives together with just $1,500 in emergency savings.
|Money Makeover award||$10,000|
|401(k) account balance||$62,000|
|Current total assets||$232,640|
|Current total liabilities||$120,796|
|Current net worth||$111,844|
For retirement, Walt has $62,000 in his employer’s 401(k) plan, to which he is contributing 5% in order to maximize the generous employer match of 10%. Although he wondered if his choice of a target retirement fund was “too simple,” it is actually a fine selection, so no adjustment to the 401(k) allocation is needed.
He opened a Roth IRA in 2014 with a $5,000 contribution, but hasn’t made any contributions for this year. The holdings are 35% in a 2040 target retirement fund, 35% in a 2045 target retirement fund and 30% in an international stock fund. The holdings are each from different fund families and the IRA is held at a brokerage account. While the brokerage offers no-transaction-fee mutual funds, a list of such funds is not apparent and it is unclear which of his funds may or may not be on the list. Walt believes he paid the $6.95 brokerage commission when purchasing each fund.
- Budget for short- and long-term expenses.
- Tweak investment allocation.
- Minimize investment expenses.
- Increase savings.
Steps to take right now
Walt should begin tracking his expenses with the goal of developing a monthly budget. Not only will this help in targeting how much emergency savings is needed, it will also facilitate saving money for other big-ticket or longer-range goals. One recommendation that surely won’t be popular is to rein in the prospective wedding costs, or at least the portion they’ll be absorbing. Wiping out nearly all of their emergency cushion on the wedding puts them in a precarious position as they start the next chapter of their lives. Walt’s current pace of savings is really commendable, but given the current savings balance, he’s been saving at this level only for a relatively short time.
There is some reallocation Walt may want to do with his Roth IRA. Each of the target retirement funds is 30% to 35% invested in international stocks, so further putting nearly one-third of his portfolio in an international stock fund means he is over-allocated in this area and increases the risk profile of his portfolio.
The international stock fund should be sold with the proceeds reallocated into his target retirement fund. Whether he puts his entire IRA into one target retirement date fund or straddles the time period by splitting money between 2 prospective dates is fine from an allocation standpoint, as the 2040 and 2045 funds are invested in a similar fashion. If he decides to have both the 2040 and 2045 funds, he should split the proceeds from the international stock sale evenly between the 2. However, doing this reallocation would involve paying commissions on each transaction.
For this reason, Walt should consider rolling over the Roth IRA to a low-cost mutual fund family where he can make additional investments into those mutual funds without charge. This would involve selling the international stock fund and one of the target retirement funds, biting the bullet and paying a commission on each, then rolling everything over into a new provider, where he can choose whether to split the assets between a 2040 and a 2045 fund or consolidate into one. In either case, he would pay no further commissions on purchases or sales, and would further reduce investment expenses by going with a firm offering funds with low expense ratios.
The pathway to prosperity
Walt aims to achieve financial security, which would afford him time to pursue his hobbies.
Walt has a good discipline of saving money with every paycheck, a habit definitely worth maintaining, particularly to beef up the emergency fund. For longer-term items such as the new car and new home, the savings goals probably aren’t as daunting as they appear at first glance. The existing home equity stake of $44,000 should grow further and take care of much of the down payment eventually needed for the new house. Along the same lines, his paid-off car will serve as much of the down payment on the eventual new car when he trades it in.
Walt should look to maximize his annual Roth IRA contributions. Current contribution limits are $5,500 a year. He has until April 15 to fund the prior tax year’s contribution. This should be a priority and become an annual ritual.
Walt should also aim to step up his 401(k) contributions at some point, particularly if the generous employer contribution gets scaled back or if he changes employers. By virtue of the employer contribution, he is currently saving 15% of his income in the 401(k). This is a pace worth maintaining, even if his current or future employer doesn’t contribute at the same level.
One of the questions Walt had coming into this Money Makeover was, “Do I pay debts before investing, or is that a bad idea?” It’s a goal-setting conundrum that puzzles many young folks who are just starting out. At this juncture, investing is the clear priority. All of Walt’s existing debt is at a low, fixed rate, so there is no need to accelerate repayment. However, once household finances are merged, a reprioritization of debt repayment might be in order.