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I received an offer from a firm taking me from 85K (my current salary) to $130k, base pay (bonuses range from $10-30). I have a two-year-old son and another one on the way. I will be living with my in-laws with no rent obligations. The payment is that they will get to hang out with our adorable baby(ies). Free baby sitting means more opportunities to take my wife on dates, which really has been lacking in our three years of marriage so far. I hope to change that.

What I have been doing up until this point -

I am very grateful for the free rent and want to make the most of it while I can. Before this, half of my salary would go to my rent ($2,600!). I save at least $100 each month for savings, which has amassed to about $2k (this is primarily emergency fund/college savings for kids) in a 2.25% saving account. I also have investment fund with about $25,000, which mostly consists of $20K worth of Schwab's Dividend ETF. But really, I have been living paycheck-to-paycheck because of my painfully high rent and the costs of a family.

My current plan for the future -

Now that I will be able to save much more of my income and with a greater income, I plan to (1) put $2,000 each month into my savings/college fund account with my saving account, and (2) put $1,000 each month into Stocks, (3) max out my firm's 401k (firm contributes 1% of income). I also have a profit sharing plan with the firm, but that doesn't vest until 5-6 years (I don't exactly understand how this is different than a 401k, could I use these profits for kids colleges?). Part of me doesn't want to max out my 401(k). Maybe I am not thinking this through, but I just don't like the idea of enjoying my money when I am probably too old to enjoy it. I also don't plan on retiring soon.

Also I am very fortunate in that I have no debt.

My goal is to stay with the in-laws for two years, and then hope to own a home of my own. I really am a novice in personal finance, so suggestions from the guru's here would really help me out. Especially with another baby on the way.

First, you may want to read this: http://www.top-law-schools.com/forums/v ... 3&t=272809

Second, you might be better off posting on a website like Bogleheads. This seems to be completely personal finance related and not really law/career related.

Third, we need to know a lot more. Does your spouse work? If so, how much does she make? Where are you located? What's your local tax rate? How long do you expect to be at this job?

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I think I can only make one general comment about the limited info you posted -- you need to understand tax-advantaged accounts better.

By investing in stocks, you are taking post-tax income and investing it, and when you take it out, you are going to have to pay tax again (on the gains). So basically, if every dollar was 100 soldiers, 25 soldiers are getting killed right away (via tax), only 75 soldiers are getting invested, and then when those 75 soldiers grow, they will be shot again (taxed) on the way out. Your financial army is getting smoked.

Conversely, when you contribute to a 401(k), you do not pay tax going in, and your investments compound on pre-tax money. So all 100 of your dollar soldiers are working for 20, 25, 30 years. The difference between 100 soldiers working for you and 75 is exponential over a long period of time. And then the gains are free -- so you only have to pay income tax coming out. And, theoretically, your tax bracket should almost certainly be lower in retirement, so you are saving the difference between your current bracket and your retirement tax bracket.

Similarly, and especially since you seem to prefer post-tax investing, you should also be at least thinking about a Roth IRA. This is post tax (so only 75 soldiers), but the gains are tax free once you are 59.5 (so your soldiers don't get shot on the way out).

Perhaps most importantly, if you have a HDHP at work, you NEED an HSA (health savings account). These are theoretically supposed to only be used for health-related expenses, but A LOT of people use these as retirement vehicles so they can fund medical expenses. And the power of these accounts is that they are pre-tax going in (100 soldiers) and pre-tax coming out (no getting shot at when they come out) -- a huge, huge, huge win when it comes to taxes.

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To put some numbers on this, assuming you are the only income earner and making $130,000 per year, you are paying about $16,000 in federal income tax by not using tax-advantaged accounts.

However, if you maxed 401(k) and HSA, then you'd pay about $11,000 in federal income tax. That's $5,000 less to the government, which is always good. And then you could then take that $5,000 difference and invest it in a Roth, and you will have tax free earnings on that.

Then, after all of that, you'll have invested $31,000; your take home pay would be $80,000/year ($6,700/month), and you'll be able to use all of that on other expenses (saving for college, food, etc.) because you would have already taken care of your investing in a very tax efficient manner.

AVBucks4239 wrote:First, you may want to read this: http://www.top-law-schools.com/forums/v ... 3&t=272809

Second, you might be better off posting on a website like Bogleheads. This seems to be completely personal finance related and not really law/career related.

Third, we need to know a lot more. Does your spouse work? If so, how much does she make? Where are you located? What's your local tax rate? How long do you expect to be at this job?

--

I think I can only make one general comment about the limited info you posted -- you need to understand tax-advantaged accounts better.

By investing in stocks, you are taking post-tax income and investing it, and when you take it out, you are going to have to pay tax again (on the gains). So basically, if every dollar was 100 soldiers, 25 soldiers are getting killed right away (via tax), only 75 soldiers are getting invested, and then when those 75 soldiers grow, they will be shot again (taxed) on the way out. Your financial army is getting smoked.

Conversely, when you contribute to a 401(k), you do not pay tax going in, and your investments compound on pre-tax money. So all 100 of your dollar soldiers are working for 20, 25, 30 years. The difference between 100 soldiers working for you and 75 is exponential over a long period of time. And then the gains are free -- so you only have to pay income tax coming out. And, theoretically, your tax bracket should almost certainly be lower in retirement, so you are saving the difference between your current bracket and your retirement tax bracket.

Similarly, and especially since you seem to prefer post-tax investing, you should also be at least thinking about a Roth IRA. This is post tax (so only 75 soldiers), but the gains are tax free once you are 59.5 (so your soldiers don't get shot on the way out).

Perhaps most importantly, if you have a HDHP at work, you NEED an HSA (health savings account). These are theoretically supposed to only be used for health-related expenses, but A LOT of people use these as retirement vehicles so they can fund medical expenses. And the power of these accounts is that they are pre-tax going in (100 soldiers) and pre-tax coming out (no getting shot at when they come out) -- a huge, huge, huge win when it comes to taxes.

---

To put some numbers on this, assuming you are the only income earner and making $130,000 per year, you are paying about $16,000 in federal income tax by not using tax-advantaged accounts.

However, if you maxed 401(k) and HSA, then you'd pay about $11,000 in federal income tax. That's $5,000 less to the government, which is always good. And then you could then take that $5,000 difference and invest it in a Roth, and you will have tax free earnings on that.

Then, after all of that, you'll have invested $31,000; your take home pay would be $80,000/year ($6,700/month), and you'll be able to use all of that on other expenses (saving for college, food, etc.) because you would have already taken care of your investing in a very tax efficient manner.

This guy gets it.