Author Topic: Advice needed for new member  (Read 4898 times)

tmbrown

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Advice needed for new member
« on: April 09, 2015, 12:55:06 PM »
Hi Everybody,

This is my first post for this community. I'm a 29 y/o with a live-in girlfriend.

This is my Financial Profile

Income: $5,100 / mo (after taxes, insurance, and 5% 401k deduction)

Debt:
Car Loan: $11,600 balance (271/mo), 3.34% APR

Savings rate: ~$2,000 / mo

Assets:
401k: $8,300
about 1k emergency fund

Currently, I'm saving 5% into a Traditional 401k, which has a 80% employer match on that contribution. Right now I'm covering most of the household expenses while my gf is going through college debt free, so when she graduates my savings rate should go up substantially.

Recently, I've been going all out on a student loan that had about a 9K balance with an interest rate of around 8%. That was an easy decision. My more difficult decision involves whether I should pay off my car loan now, save for a house down payment, or increase my 401k contributions. I'm thinking about temporarily choosing the latter two options, and paying the car off once I get a house. The reason I'm leaning towards focusing on the down payment now is because my lease is up this November, and I do not want to sign another 12 month lease (and the short term rates are extremely expensive). By that time, I should be able to knock out my car loan in a few months.

Do I need a facepunch for thinking about keeping the car loan for about another year? The rate is low, and I am tricking myself into thinking the short term lease option is significant enough (about an increase of 250/mo) into offsetting most of the opportunity cost of keeping the loan.
« Last Edit: April 09, 2015, 01:12:11 PM by tmbrown »

Valhalla

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Re: Advice needed for new member
« Reply #1 on: April 09, 2015, 01:06:28 PM »
Yes, you deserve a face punch for that car.  Sell that car and buy a car for cash that you can drive. 

The only time I ever had a loan for a car was when I was already making 6 figures, needed the cash to buy a house, got a zero percent loan on a used car.  As soon as I got cash I paid the car loan off in full.

Right now my daily driver is worth $5k, about half of your car's loan (and I LOVE my car!).  I make 6 figures, have 1MM net worth, and drive something that is worth half of what you drive. Think about that and let it sink in.

GizmoTX

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Re: Advice needed for new member
« Reply #2 on: April 09, 2015, 01:17:57 PM »
OP: You're going to somehow save a down payment by November, add still more debt by buying a house, and THEN you're going to pay off your car loan? Meanwhile you are subsidizing your GF. Is there a wedding in there too?

Yes, you should eliminate the car loan & maximize your retirement funds. Buying a house should happen when you are debt free with substantial savings & know you won't be moving for at least 5 years.

nereo

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Re: Advice needed for new member
« Reply #3 on: April 09, 2015, 01:54:22 PM »
You have a take-home pay of $5k/month *after* taxes, insurance and your 401(k) contributions and a total savings of about $2000/month - does that $2k include what you contributed to your 401(k) or not? Either way your take-home pay is extremely good.

Here's what I would do. 
1) max out your 401(k)
2) fully fund a tIRA

the interest rate on the car isn't egregious, but why do you have a loan in the first place?  What was your purchase price if the loan is still $11.6k?

Whether to buy a house or not is an entirely new thread.  Too many factors (how long will you be there, what's the rent/buy equation like in your area) to make a sound judgement, but generally you want a down payment of at least 20% to avoid the dreaded "PMI".

here's a good calculator to get you started on whether you even should consider buying a home in your area:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=2&abt=0002&abg=0



robbyho

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Re: Advice needed for new member
« Reply #4 on: April 09, 2015, 02:08:00 PM »
I'm not as far along as many of the FIRE people here, and I've made a lot of dumb mistakes, so take my advice with a grain of salt. I think whenever your debt APR is less than what your investments APY, it is worth having the debt because you're making more on the investments than if you just paid it off and had no debt.

However...how much is your car actually worth? Can you sell it and get something less expensive and make out on the deal? Does it get great MPG and have good long term reliability?

If you are buying a home soon, the rates are low and so are the prices (in my area at least), so it might make sense to get on that.

Otherwise, max the 401K and tIRA.

GetSmart

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Re: Advice needed for new member
« Reply #5 on: April 09, 2015, 02:11:45 PM »
A little more info: is the 9k student loan paid off in full?
When is the gf graduating? Any job prospects in sight?  Just bcs she's graduating doesn't mean she'll immediately be hired - but let's hope so!

You need to beef up your EF first - 3-6 months minimum expenses - that's 9k to 18k - yikes - that alone will take you the rest of the year at 2k/month savings. (not counting gf potential income).

Buying a house can be a long process - it doesn't happen overnight.  Make sure your finances are in order first.  Find out what a bank will qualify you for - find out what they will need to go through with a loan.  There are a lot of hoops to jump through.  Try qualifying on one income - that will reduce the max limit that you can buy into. Take 20% of that amount - that's your savings goal.  Do not pay PMI!  No one is getting a loan these days without 20% down as I hear it - plus it's much better for your own sanity.  And then there are closing costs - depending on your location - another 2k-5k? IDK - find out as much as you can.  And then there are repairs, furniture, new paint, etc, etc.  It could take you another 2 years before you're ready for that - sorry to burst any bubbles. 

And you should know if you're going to stay in the same place for at least 5 to 10 years before thinking about buying a house.  I know it seems like right now the rent sucks, but read up - there's a lot to learn about owning a house.

I have a different take on cars - but only if you're going to keep it for 20 years.  You've already lost value on it - so why not just pay it down fast and keep it in perfect running condition for the next 20?  I think that saves more in the long run - but I'm sure many here will think otherwise.  But remember, the car loan will count against you (and any other debt - keep the CC's at $0) when you're qualifying for the mortgage.

Good luck!

JLee

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Re: Advice needed for new member
« Reply #6 on: April 09, 2015, 02:21:56 PM »
A little more info: is the 9k student loan paid off in full?
When is the gf graduating? Any job prospects in sight?  Just bcs she's graduating doesn't mean she'll immediately be hired - but let's hope so!

You need to beef up your EF first - 3-6 months minimum expenses - that's 9k to 18k - yikes - that alone will take you the rest of the year at 2k/month savings. (not counting gf potential income).

Buying a house can be a long process - it doesn't happen overnight.  Make sure your finances are in order first.  Find out what a bank will qualify you for - find out what they will need to go through with a loan.  There are a lot of hoops to jump through.  Try qualifying on one income - that will reduce the max limit that you can buy into. Take 20% of that amount - that's your savings goal.  Do not pay PMI!  No one is getting a loan these days without 20% down as I hear it - plus it's much better for your own sanity.  And then there are closing costs - depending on your location - another 2k-5k? IDK - find out as much as you can.  And then there are repairs, furniture, new paint, etc, etc.  It could take you another 2 years before you're ready for that - sorry to burst any bubbles. 

And you should know if you're going to stay in the same place for at least 5 to 10 years before thinking about buying a house.  I know it seems like right now the rent sucks, but read up - there's a lot to learn about owning a house.

I have a different take on cars - but only if you're going to keep it for 20 years.  You've already lost value on it - so why not just pay it down fast and keep it in perfect running condition for the next 20?  I think that saves more in the long run - but I'm sure many here will think otherwise.  But remember, the car loan will count against you (and any other debt - keep the CC's at $0) when you're qualifying for the mortgage.

Good luck!

At $60k take-home pay (90k/yr?), an $11k car loan isn't going to mean much at all to a mortgage company.

Also re: the bolded portion, I don't believe that to be the case unless something has changed drastically since 2013.

Valhalla

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Re: Advice needed for new member
« Reply #7 on: April 09, 2015, 03:10:24 PM »


At $60k take-home pay (90k/yr?), an $11k car loan isn't going to mean much at all to a mortgage company.

Also re: the bolded portion, I don't believe that to be the case unless something has changed drastically since 2013.
The OP originally had something like $2,500 in take home pay, and edited after my post to $5,100.

I agree the $11k car loan isn't going to mean much given the new info.  He needs to beef up the 401k and max out IRA as well.

tmbrown

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Re: Advice needed for new member
« Reply #8 on: April 09, 2015, 03:38:55 PM »
You have a take-home pay of $5k/month *after* taxes, insurance and your 401(k) contributions and a total savings of about $2000/month - does that $2k include what you contributed to your 401(k) or not? Either way your take-home pay is extremely good.

Here's what I would do. 
1) max out your 401(k)
2) fully fund a tIRA

the interest rate on the car isn't egregious, but why do you have a loan in the first place?  What was your purchase price if the loan is still $11.6k?

Whether to buy a house or not is an entirely new thread.  Too many factors (how long will you be there, what's the rent/buy equation like in your area) to make a sound judgement, but generally you want a down payment of at least 20% to avoid the dreaded "PMI".

here's a good calculator to get you started on whether you even should consider buying a home in your area:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=2&abt=0002&abg=0

Thank you all for your replies! I really appreciate it.

I think you made a good point regarding housing being a whole different thread. I should add that in my area owning does compare favorably with renting, even when looking at 15 yr mortgages. Also, I would be moving closer to work, although not a bikable distance (because my job, while great, is not located in a city I think it would be prudent in. That sucks, but its invaluable experience. Think of the job as me getting my masters degree while getting paid well for it.) I was planning on getting the dreaded PMI since the required rate was recently reduced so thanks for talking me out of that.

But I guess if we eliminate the down payment, the choice is between eliminating the 11k car debt @3.4% or maximizing my retirement contributions.

There's a couple other questions. Regarding the gf, a wedding is in the future and she does have job prospects. Coming out of school, her worst case option is still going to significantly increase my (our) savings rate.

The car was bought slightly used. A 2012 Passat that gets 30mpg. Its reliable, efficient with low miles. I'm planning on paying this off, and keeping it until the wheels fall off, which should be a very long time.

The student loan is paid off completely as of last month.

tmbrown

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Re: Advice needed for new member
« Reply #9 on: April 09, 2015, 03:40:31 PM »


At $60k take-home pay (90k/yr?), an $11k car loan isn't going to mean much at all to a mortgage company.

Also re: the bolded portion, I don't believe that to be the case unless something has changed drastically since 2013.
The OP originally had something like $2,500 in take home pay, and edited after my post to $5,100.

I agree the $11k car loan isn't going to mean much given the new info.  He needs to beef up the 401k and max out IRA as well.

Sorry about that. I was thinking per check vs per month. Thanks for your posts!

JLee

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Re: Advice needed for new member
« Reply #10 on: April 09, 2015, 03:44:00 PM »
I would maximize retirement before paying off a 3.4% loan, but some here will disagree.

I don't particularly enjoy having a car payment, but my car note is even less than my mortgage rate so I would rather pile money into 401k and ESP than maximize car payoff. Full coverage insurance is inexpensive for me so there isn't a huge financial incentive to be able to drop it.

nereo

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Re: Advice needed for new member
« Reply #11 on: April 09, 2015, 04:11:18 PM »
I would maximize retirement before paying off a 3.4% loan, but some here will disagree.

I absolutely agree.   Max out tax advantaged accounts before addressing a 3.x% car loan.

Driving the VW until the wheels fall off is the next best thing to having bought a cheaper car to begin with. You can get 35mpg on a Passat easy if you drive carefully.

Valhalla

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Re: Advice needed for new member
« Reply #12 on: April 09, 2015, 04:11:47 PM »
I would maximize retirement before paying off a 3.4% loan, but some here will disagree.

I don't particularly enjoy having a car payment, but my car note is even less than my mortgage rate so I would rather pile money into 401k and ESP than maximize car payoff. Full coverage insurance is inexpensive for me so there isn't a huge financial incentive to be able to drop it.
I think this would be a great read:  http://www.mrmoneymustache.com/2011/11/28/new-cars-and-auto-financing-stupid-or-sensible/

A lot of people fall into the trap of over-buying a car because of low interest rates, etc... and forget that they're buying a depreciating item which will do great financial damage to their future.

I'm a bit surprised that more people don't understand this topic on this board...and I'm fairly new to MMM.

JLee

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Re: Advice needed for new member
« Reply #13 on: April 09, 2015, 04:18:58 PM »
I would maximize retirement before paying off a 3.4% loan, but some here will disagree.

I don't particularly enjoy having a car payment, but my car note is even less than my mortgage rate so I would rather pile money into 401k and ESP than maximize car payoff. Full coverage insurance is inexpensive for me so there isn't a huge financial incentive to be able to drop it.
I think this would be a great read:  http://www.mrmoneymustache.com/2011/11/28/new-cars-and-auto-financing-stupid-or-sensible/

A lot of people fall into the trap of over-buying a car because of low interest rates, etc... and forget that they're buying a depreciating item which will do great financial damage to their future.

I'm a bit surprised that more people don't understand this topic on this board...and I'm fairly new to MMM.

I am also a bit surprised that more people don't understand that some people have accepted the financial impact of certain decisions they have made because it is worth it to them.  MMM might be happy bicycling 1500 miles through Mexico. I do not have the time, because I still have to work most of the year.

I am not your normal car buyer, though - so for most people, I understand the sentiment.  Most people here would be itching to facepunch me for owning a car that I drive a couple times a month. Some people have kids, pets, other expensive choices or hobbies - I have cars. :) Sure, I could knock the loan out very quickly if I wanted to - and then lose a guaranteed 33% employer stock match in the interim. I don't make what the OP does, so my tax impact is not as substantial (doing ESP instead of maxing 401k).

Regardless, I would be curious to see a spreadsheet showing the overall cost of paying the loan at 3.4% while investing in tax-deferred accounts (likely 28% tax in this case), vs paying the vehicle off and delaying investments until that was complete.
« Last Edit: April 09, 2015, 04:22:36 PM by JLee »

nereo

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Re: Advice needed for new member
« Reply #14 on: April 09, 2015, 04:41:48 PM »
traveling and won't do the spreadsheet on a tablet, but the math is pretty simple in your case. If you aggressively paid off the loan it would divert all your excess cash to the loans for the remainder of 2015.  Tax deferred would net a tax savings of (0.28 x $11,700). Impossible to say what your gain would be having it grow tax free, but upon withdraw it will almost certainly be taxed in a lower bracket.  The expense is the interest paid on the loan, which is not much here (<$350 in year 1)

Valhalla

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Re: Advice needed for new member
« Reply #15 on: April 09, 2015, 04:53:51 PM »
...

Regardless, I would be curious to see a spreadsheet showing the overall cost of paying the loan at 3.4% while investing in tax-deferred accounts (likely 28% tax in this case), vs paying the vehicle off and delaying investments until that was complete.
don't forget to factor the depreciation over time as well.  The depreciation will outweigh any other math calculations, including the ridiculous 3.4% auto loan that you justify. 

It's your life, if you want to pay that steep penalty for a car, go for it.

I am also not your normal car buyer. While my DD is only worth $5k, I also have a rare collectible vehicle that I use maybe 3-4 times a year?  I paid cash for that vehicle, and it's appreciating due to its rarity, not depreciating.  The fact I can do this is because I didn't make dumb financial decisions to finance rapidly depreciating new vehicles in my life time.

It's a bit crazy, but my auto collection is worth $100k, yet it depreciates far less than most people's new cars, because the used vehicles are all done with depreciation for the most part, while one vehicle is appreciating.  I enjoy my autos far more than most people with their "brand new" cars.
« Last Edit: April 09, 2015, 04:57:30 PM by Valhalla »

JLee

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Re: Advice needed for new member
« Reply #16 on: April 09, 2015, 05:03:40 PM »
...

Regardless, I would be curious to see a spreadsheet showing the overall cost of paying the loan at 3.4% while investing in tax-deferred accounts (likely 28% tax in this case), vs paying the vehicle off and delaying investments until that was complete.
don't forget to factor the depreciation over time as well.  The depreciation will outweigh any other math calculations, including the ridiculous 3.4% auto loan that you justify. 

It's your life, if you want to pay that steep penalty for a car, go for it.

Since you are more interested in standing on your soapbox while preaching your superiority to everyone else, I will do you a favor and provide the information you did not bother to read from my post.

'98 Toyota Corolla, paid $3k, drove for a few years and gifted to a family member
'86 Toyota MR2, paid $1k, drove for 3 years, sold for $1500
'98 Toyota Tacoma, paid $5k, drove for 3 years, frame rusted out and Toyota bought it back for $12,194.50
'91 Toyota MR2 Turbo, paid $7k, spent a lot on, still have 6.5 years later (this is my toy, 260k+ miles).
'91 Toyota MR2 Turbo w/blown motor, paid $1k, didn't have time for the project, sold for $1200
'05 Toyota Tundra, bought 3 years old with 36k for $15,995, sold 3 years later for $13k (could have had $15,500 but I made a bad call on the sale, thought I could get more at the time as book was $19k)
'04 Subaru Forester XT, paid $7394, was a toy for ~18 months (performance parts installed which added some to the cost), sold for $8200
'02 Suzuki SV650, paid $500 (needed significant motor work, which I did myself, and paint, done by a buddy for a fair price), sold a couple of years later for $2100
'91 Toyota MR2 project, paid $1500, didn't have time for the project, sold for $1500 (after finding $150 Toyota shop manuals inside..score!!)
'04 Cadillac CTS-V, paid $12k, drove for 2.5 years, sold for $13k
'99 Tacoma, paid $4500, drove for 2.5 years, sold for $5500. 282k miles.
'97 Lexus LX450, my trail/expedition rig, paid $7200, drove for a year, sold for $7500. 213k miles.

As an automotive enthusiast, I find my "depreciation" to be acceptable in exchange for enjoying a hobby that I love.

Presenting your point is fine - I understand. However, in the process, don't completely disregard the information provided by the person with which you are having a discussion.

Valhalla

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Re: Advice needed for new member
« Reply #17 on: April 09, 2015, 05:06:03 PM »
..
Presenting your point is fine - I understand. However, in the process, don't completely disregard the information provided by the person with which you are having a discussion.
I'm missing something. Why do you need an auto loan at 3.4% if you're buying such used vehicles??

Something doesn't add up.

Like Dave Ramsey illustrates, it's usually dumb to borrow money to invest. I'm glad you're not borrowing money on depreciating cars, but what is the auto loan for 3.4% for?  Auto loans are usually only for newer cars. Something is missing.

You're taking this advice unusually personally.  I'm just repeating sound financial advice from financial gurus far wiser than me and have benefited from them. It seems this bothers you clearly, something does not make sense at all here.

We are on a financial freedom website, right? 

« Last Edit: April 09, 2015, 05:07:54 PM by Valhalla »

JLee

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Re: Advice needed for new member
« Reply #18 on: April 09, 2015, 05:11:25 PM »
..
Presenting your point is fine - I understand. However, in the process, don't completely disregard the information provided by the person with which you are having a discussion.
I'm missing something. Why do you need an auto loan at 3.4% if you're buying such used vehicles??

Something doesn't add up.

Like Dave Ramsey illustrates, it's usually dumb to borrow money to invest. I'm glad you're not borrowing money on depreciating cars, but what is the auto loan for 3.4% for?  Auto loans are usually only for newer cars. Something is missing.

My current vehicle had not been purchased at the time of the previous post. It is financed with a purchase price ~$5k under market value (2007 Lexus GX470 purchased in January, about 17k remaining on the loan). I am well aware that it is not the "best" financial route, however I am also not nearly as interested in early retirement as many people here and I have decided that the tradeoff is worth it to me.

Mustachianism is not only about retiring early, but is also about knowing where your money goes and spending with that in mind. Am I saying it's the MMM way to go? Absolutely not! However, I recognize and am willing to accept the tradeoff.

Valhalla

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Re: Advice needed for new member
« Reply #19 on: April 09, 2015, 05:14:27 PM »

My current vehicle had not been purchased at the time of the previous post. It is financed with a purchase price ~$5k under market value (2007 Lexus GX470 purchased in January, about 17k remaining on the loan). I am well aware that it is not the "best" financial route, however I am also not nearly as interested in early retirement as many people here and I have decided that the tradeoff is worth it to me.

Mustachianism is not only about retiring early, but is also about knowing where your money goes and spending with that in mind. Am I saying it's the MMM way to go? Absolutely not! However, I recognize and am willing to accept the tradeoff.
Thank you for acknowledging that this is not the best financial route. 

Then we are in full and violent agreement.

JLee

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Re: Advice needed for new member
« Reply #20 on: April 09, 2015, 05:18:27 PM »

My current vehicle had not been purchased at the time of the previous post. It is financed with a purchase price ~$5k under market value (2007 Lexus GX470 purchased in January, about 17k remaining on the loan). I am well aware that it is not the "best" financial route, however I am also not nearly as interested in early retirement as many people here and I have decided that the tradeoff is worth it to me.

Mustachianism is not only about retiring early, but is also about knowing where your money goes and spending with that in mind. Am I saying it's the MMM way to go? Absolutely not! However, I recognize and am willing to accept the tradeoff.
Thank you for acknowledging that this is not the best financial route. 

Then we are in full and violent agreement.
I myself am curious how my mindset will change over time - I had always been violently opposed to bicycling to work, but now I am planning on it once I return to the US (I will be working from home in Canada for the summer). I may yet change my mind on the vehicle and land a 4Runner/etc for the cost of the profit to be made on the vehicle I recently purchased, but I am not yet to the point where I could do that without regret.  So far, I have no regrets with vehicle sales and I would like to keep it that way. :)