Case Study: New Mustachian - How to move forward?

[mmm_kne]

Hello Mustachians,

I have been reading MMM for a while, but am kind of stuck on where to begin. My husband and I have been trying to live within our means, but I would like to amp up our savings rate, start investing, and jump on the wagon to FI ASAP! Although we are 'doing it right' by our parents' standards and our friends are amazed that we have bought a house/never blow money on travel or going out for drinks, I have a nagging feeling that we are in over our heads and want to address it before we get in any deeper. I thought I’d post our numbers here to get opinions on the best path forward for our situation.

Life Situation:
2 adults no dependents, both late 20s, recently married (will file jointly this year), living in  MetroWest area outside of Boston. I am a public school teacher and he works for a private company.

Income Information:
Our gross salaries: Mine 64,000, His 69,000, Total: 133,000 annually before tax & deductions

Husband contributes max of 10% to 401k (company matches 50%), and government deducts 11% before tax for my pension.
With insurance (800/mo) and tax deductions (~25%), our net take home pay is approx $7,000 per month.

Current Liabilities:
Mortgage:  Bought house in July for $365k, current equity $45k. 3.75% 30 year, Paying $1900/mo including all taxes and fees. We are planning to pay off in 15 years instead of the full 30, if we can swing it. That would only take an extra $10k per year.

Car Loans: Mine 270/mo, I owe $8k on this with 2 years remaining, planning to drive it until it dies or trade in for bigger, older, less expensive “family car” to eliminate car payment. His 370/mo, owe $15k on this. It is a truck and he will drive it until it dies.

Student loan: $15k in deferment. I can get $5k loan forgiveness in 1 year.

Monthly Expenses:
Food: $600
Gas & Tolls: $200 - I commute 1 hour to work :(
Auto Insurance: $250
Utilities/TV/Phone: $400. We recently cut cable and are stuck in a Verizon 150/mo plan until next year.

Savings:
Currently we have $23K in savings and are putting away between $2k - $3k per month, average 40% savings rate.  No investments.

Where to begin? Should we invest the small savings we have? Or should I focus on getting a job closer to home? Cost of living in our area is high, I just KNOW that we have too many debts, and I am feeling stuck. Help!

[thedayisbrave]

What are the interest rates on your car loans and student loans?

[mmm_kne]

Car loans 2.9 ($8k remaining) and 2.5% ($15K remaining), student loan 3.1%.

[erae]

My husband and I are in our early 30's and similar situation: high earners working to lay the foundation for our accumulation years. It's kind of a slog once all the pieces are in place and you're just executing your plan (read: working) for 5-15 years. 

Those interest rates are low enough that they're not worth slowing your investments to pay off your debt early. You're on a solid path - could you draw up a 5-year month by month calendar that will show how your investments will grow each month and when each debt will be paid off to keep you motivated? My husband and I have projected investment milestones for each year and know how our savings rates will accelerate as we shake off each debt/monthly obligation.

We can always trim $50 here or there off monthly expenses (cell phone bill, groceries) and that definitely helps, but the big wins for folks in our situation seem to be in maximizing pay to shave off a few years to FIRE.

[Bracken_Joy]

Welcome to the forums!

Wait, you auto insurance is $250 PER MONTH? If so, that is insane. Accidents on record or something? Shop around and look into that. It doesn't have to be at renewal time- rumor has it you can switch insurance any time, even if you've paid in advance, and your old company is required to reimburse.

As for order, I will share the oft-cited MDM's "investing order". Note: the 10 year treasury yield is currently 1.72%. So steps 2 and 7 are 6.72% and 4.72%, respectively.

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial

[pbkmaine]

Curious as to why you bought a house one hour from your job.


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[mmm_kne]

Wait, you auto insurance is $250 PER MONTH? If so, that is insane. Accidents on record or something? Shop around and look into that. It doesn't have to be at renewal time- rumor has it you can switch insurance any time, even if you've paid in advance, and your old company is required to reimburse.

Bracken_Joy, my auto insurance is so high because I moved from a different country and got my driver's license at age 23 - apparently, that makes me a "high risk" driver (I disagree..). I am told that my rate will drop significantly after having had my license for some time.

 

Curious as to why you bought a house one hour from your job.

pbkmaine, the house we bought is 15m from my husband's job, and he is on track to climb the management ladder in that company relatively quickly. We decided to prioritize staying close to his job, because as a teacher I can realistically get a job anywhere but he works in a pretty specialized industry and opportunities would be limited for him outside of this particular area.

[Bracken_Joy]

Ugh, sorry to hear about the auto insurance. So ideally, you would have a job where you didn't even *need* a car of your own, and be a one car family.

Sounds like the distance to work is a huge problem. What steps can you take to find a job closer to home?

[mmm_kne]

What steps can you take to find a job closer to home?

I will stay with my current school this year, and in the spring I will be looking for a new job closer to home. When I move from my current district, I will take a pay cut of at least $10k (city pays better than anywhere else), but that is just par for the couse. I am taking on extra things (management courses, master's degree will be done in ~2 months, additional certifications within the year) so that when the time is right I will be very attractive to potential employers. Maybe the lost $ will be balanced out with reduced transport prices and and quality of life improvement!

[Bracken_Joy]

What steps can you take to find a job closer to home?

I will stay with my current school this year, and in the spring I will be looking for a new job closer to home. When I move from my current district, I will take a pay cut of at least $10k (city pays better than anywhere else), but that is just par for the couse. I am taking on extra things (management courses, master's degree will be done in ~2 months, additional certifications within the year) so that when the time is right I will be very attractive to potential employers. Maybe the lost $ will be balanced out with reduced transport prices and and quality of life improvement!

I think running the numbers on this is a good idea =) Pick a theoretical in-district school you might get, and look at how the numbers play. Maybe run the best and wort case scenario within the district you'll hope for next year? Personally, I always prefer to work with actual estimates rather than guessing =)

As for squeezing more from your budget, it's currently lacking in a lot of detail. Do you track your expenses? That's step one in many senses. http://www.halfbanked.com/2016/09/everything-learned-tracking-spending-year/

And:

Tracking expenses is, in my opinion, the best way to get a handle on your finances. You absolutely, positively cannot make informed decisions about your money if you don’t know how you’re spending it. Sounds harsh, but without a holistic picture of how much you spend every month, there’s no way to set savings, debt repayment, or investment goals. It’s a frugal must, folks. No excuses.

From: http://www.frugalwoods.com/category/monthly-expense-reports/

[Sylly]

Two things jumped out at me:

You say your husband contributes max of 10% to 401k. Maybe I'm misunderstanding what you mean  here, but can't he contribute more? His 10% doesn't reach the cap, and you say you're still putting away more to savings every month.

$600/month of groceries for 2 adults seem high to me. We do around 300/mo for 2 adults. That is unless you eat exclusively organic, then I don't know what's normal for that and other people can chime in.

[Goldy]

If you are serious about FIRE I would recommend you start a Roth IRA at Vanguard and get it fully funded in the next few months.  Right now you can contribute $5,500 per person per year and you can make those contributions for 2016 right up to April 15th of 2017.  My next step would be to fully max the husbands 401k which would require increasing the contribution to about 26% or another 1k per month (750 after the tax deduction).  Given that you have a surplus of 2-3k per month I don't see those two investments impacting you much.

Paying 800/mo for insurance is rediculious.  Unless you have some pretty serious medical conditions I'd think long and hard about getting a cheaper plan that comes with a HSA.  Mine costs us 80/mo and the company gives us about 2k towards the HSA. 

[mmm_kne]

You say your husband contributes max of 10% to 401k. Maybe I'm misunderstanding what you mean  here, but can't he contribute more? ...

$600/month of groceries for 2 adults seem high to me. We do around 300/mo for 2 adults. That is unless you eat exclusively organic, then I don't know what's normal for that and other people can chime in.

We do eat a lot of organic food and also do a lot of buying/cooking for extended family, so it's just the two of us most of the time but then 1-2x per week it's 10+ people. I'm sure we can cut costs here though!

I will ask about the 401k. I do the budgets but that part is unclear.. Money is being wasted if it is sitting in a savings account instead of being matched by his employer.

If you are serious about FIRE I would recommend you start a Roth IRA at Vanguard and get it fully funded in the next few months.  Right now you can contribute $5,500 per person per year and you can make those contributions for 2016 right up to April 15th of 2017.  My next step would be to fully max the husbands 401k which would require increasing the contribution to about 26% or another 1k per month (750 after the tax deduction).  Given that you have a surplus of 2-3k per month I don't see those two investments impacting you much.

Paying 800/mo for insurance is rediculious.  Unless you have some pretty serious medical conditions I'd think long and hard about getting a cheaper plan that comes with a HSA.  Mine costs us 80/mo and the company gives us about 2k towards the HSA. 

Thanks for this advice. Since we are just starting out, there are a lot of things I haven't looked into yet and this gives me a great place to start. Do you use the HSA $? We are both young and (knock on wood) no medical issues at all and thought that wouldn't necessarily be the best way to go. Thoughts?

[boarder42]

You say your husband contributes max of 10% to 401k. Maybe I'm misunderstanding what you mean  here, but can't he contribute more? ...

$600/month of groceries for 2 adults seem high to me. We do around 300/mo for 2 adults. That is unless you eat exclusively organic, then I don't know what's normal for that and other people can chime in.

We do eat a lot of organic food and also do a lot of buying/cooking for extended family, so it's just the two of us most of the time but then 1-2x per week it's 10+ people. I'm sure we can cut costs here though!

I will ask about the 401k. I do the budgets but that part is unclear.. Money is being wasted if it is sitting in a savings account instead of being matched by his employer.

If you are serious about FIRE I would recommend you start a Roth IRA at Vanguard and get it fully funded in the next few months.  Right now you can contribute $5,500 per person per year and you can make those contributions for 2016 right up to April 15th of 2017.  My next step would be to fully max the husbands 401k which would require increasing the contribution to about 26% or another 1k per month (750 after the tax deduction).  Given that you have a surplus of 2-3k per month I don't see those two investments impacting you much.

Paying 800/mo for insurance is rediculious.  Unless you have some pretty serious medical conditions I'd think long and hard about getting a cheaper plan that comes with a HSA.  Mine costs us 80/mo and the company gives us about 2k towards the HSA. 

Thanks for this advice. Since we are just starting out, there are a lot of things I haven't looked into yet and this gives me a great place to start. Do you use the HSA $? We are both young and (knock on wood) no medical issues at all and thought that wouldn't necessarily be the best way to go. Thoughts?

an HSA is the only triple tax free account ... tax free in (bypasses FICA if you can salary deduct) then you can invest the money and all those gains are tax free coming out if used for medical.  worst case you never use it for medical and at 59.5 it is treated just like a Traditional IRA and you can withdraw the money for anything and just pay regular income taxes on it.  But you will have some medical expenses possibly even have children in the future and this account is awesome for that.  Open enrollment should be coming up in most places and i'd look to switch to an HDHP with an HSA if its available.

[terratek]

Your situation is similar to mine except your house payment is double mine.  We only owe on one car, but the payment is similar to both of yours combined.  I'm guessing you have around 500 to 1500 per month in extra income if you don't splurge on something.  FWIW 600/month is not that unreasonable for groceries in my opinion.  We spend about that much with two adults and one toddler, but the toddler's expense is truly minimal. Really just results in less wasted left overs.   

If it were me, I'd save part of the surplus to max out at least one Roth IRA and then the other to invest in real estate (buy and hold rental properties). I might split it 35/65 or 50/50.  If RE is not your thing, substitute that portion into a non-tax deferred account.  That way if you have accumulated enough money to retire before you are 59 1/2, or if you are laid off, or something else comes up you'll have some money to withdraw without penalties. 

[boarder42]

Your situation is similar to mine except your house payment is double mine.  We only owe on one car, but the payment is similar to both of yours combined.  I'm guessing you have around 500 to 1500 per month in extra income if you don't splurge on something.  FWIW 600/month is not that unreasonable for groceries in my opinion.  We spend about that much with two adults and one toddler, but the toddler's expense is truly minimal. Really just results in less wasted left overs.   

If it were me, I'd save part of the surplus to max out at least one Roth IRA and then the other to invest in real estate (buy and hold rental properties). I might split it 35/65 or 50/50.  If RE is not your thing, substitute that portion into a non-tax deferred account.  That way if you have accumulated enough money to retire before you are 59 1/2, or if you are laid off, or something else comes up you'll have some money to withdraw without penalties.

money in tax deffered accounts is accessible prior to 59.5 this is a very common misconception.  in fact even paying the 10% penalty is often better than saving in taxable accounts.

[Eurotexan]

Wait, you auto insurance is $250 PER MONTH? If so, that is insane. Accidents on record or something? Shop around and look into that. It doesn't have to be at renewal time- rumor has it you can switch insurance any time, even if you've paid in advance, and your old company is required to reimburse.

Bracken_Joy, my auto insurance is so high because I moved from a different country and got my driver's license at age 23 - apparently, that makes me a "high risk" driver (I disagree..). I am told that my rate will drop significantly after having had my license for some time.

 

Curious as to why you bought a house one hour from your job.

pbkmaine, the house we bought is 15m from my husband's job, and he is on track to climb the management ladder in that company relatively quickly. We decided to prioritize staying close to his job, because as a teacher I can realistically get a job anywhere but he works in a pretty specialized industry and opportunities would be limited for him outside of this particular area.

There might be a way to avoid this. I had the same problem when I moved from the UK years ago. Some insurance companies rate you on the age you got your US drivers license and they are more expensive for that reason. Others rate you on the year you got your drivers license and it's not US specific. You might want to get some quotes online and see if this makes a difference.

[Goldy]

You say your husband contributes max of 10% to 401k. Maybe I'm misunderstanding what you mean  here, but can't he contribute more? ...

$600/month of groceries for 2 adults seem high to me. We do around 300/mo for 2 adults. That is unless you eat exclusively organic, then I don't know what's normal for that and other people can chime in.

We do eat a lot of organic food and also do a lot of buying/cooking for extended family, so it's just the two of us most of the time but then 1-2x per week it's 10+ people. I'm sure we can cut costs here though!

I will ask about the 401k. I do the budgets but that part is unclear.. Money is being wasted if it is sitting in a savings account instead of being matched by his employer.

If you are serious about FIRE I would recommend you start a Roth IRA at Vanguard and get it fully funded in the next few months.  Right now you can contribute $5,500 per person per year and you can make those contributions for 2016 right up to April 15th of 2017.  My next step would be to fully max the husbands 401k which would require increasing the contribution to about 26% or another 1k per month (750 after the tax deduction).  Given that you have a surplus of 2-3k per month I don't see those two investments impacting you much.

Paying 800/mo for insurance is rediculious.  Unless you have some pretty serious medical conditions I'd think long and hard about getting a cheaper plan that comes with a HSA.  Mine costs us 80/mo and the company gives us about 2k towards the HSA. 

Thanks for this advice. Since we are just starting out, there are a lot of things I haven't looked into yet and this gives me a great place to start. Do you use the HSA $? We are both young and (knock on wood) no medical issues at all and thought that wouldn't necessarily be the best way to go. Thoughts?

We do use the HSA to pay for medical things when they come up but overall the HSA just keeps growing and as the other poster outlined you can take the money out after 59.5 for non medical expenses.  It's a very good use of some extra money.

The HSA gives me a good bit of piece of mind because we no longer need to budget for medical emergencies in our EF.  Similarly, there is so much in the HSA now that I could have a few years of maximum costs without ever touching my non HSA money. 

[incognito]

Looking at your situation, probably the first thing I would do is make a plan to eliminate those car payments. Either focus all of your monthly savings onto the cars and pay them off quickly, or sell them so you can pay off the loans and then buy different vehicles with cash.

No car payments = $640/mo off of your monthly expenses. By getting rid of the car payments, you've essentially paid for your monthly food budget and then some.

Additionally, if you don't have loans on the vehicles, you won't have to carry comprehensive insurance on them, which would probably cut your monthly auto insurance bill in half.

[JG in Hangzhou]

 We are planning to pay off in 15 years instead of the full 30, if we can swing it. That would only take an extra $10k per year.

I suggest you go all in and fix the payment so it's a 15 year.   If you can re-fi it without paying a fee, do it, you might get a lower rate too.   

Car Loans: Mine 270/mo, I owe $8k on this with 2 years remaining, planning to drive it until it dies or trade in for bigger, older, less expensive “family car” to eliminate car payment. His 370/mo, owe $15k on this. It is a truck and he will drive it until it dies.

Definitely pay these off as soon as possible.  In one fell swoop if you can.  Next time buy you car for cash.  Usually, you can negotiate a lower price when you do. 

Currently we have $23K in savings and are putting away between $2k - $3k per month, average 40% savings rate.  No investments.

Overall, I think you are on the right path.  The key is getting the loans paid down as fast as you can while keeping a cash safety net, in case something comes up.  I used to keep 10-15K in cash, but over time as I saw less unplanned emergencies or needs, I dropped this to 5-10K.  Once the loans are clear, I'd put the rest of the money into taxable investments.   Your husband is already maxing the match in his 401K, I personally don't recommend he put any more than that in, as it can limit your ability later to put the money to use outside the market. 

When my wife and I were working, we threw money into our retirement accounts and didn't think much about the future need or timing of getting it out.  In hind sight I might of put less into my 401K if I had.  In any case, the last step is to start putting some of the left over into a stock index fund.  We messed around with CDs, individual stocks, mutual funds, bond trading markets, trying to flip new condos, and a lot of other schemes, but in the end, it really just comes down to getting the money into the market, long term and out of your hands, so you don't feel like spending it.  You don't need to invest in any get rich quick schemes.  People will tempt you with them.   I live in China and my rich neighbors are always chatting about some new investment that has guaranteed 30% yearly return, but when you ask them who will be holding the money, sometimes they don't even know.  They are rich enough to lose some and win some.  I like a slow, steady climb.  It's not as exciting, but the feeling of satisfaction lasts a lot longer.

Lastly, once the car loans are gone and the money is going into the market, I highly recommend you make yourself an Excel worksheet that tracks your invested money, your loan status (house and school), and your retirement accounts.   Updating this every 2 to 3 months, will give you a feeling of going in the right direction.  Also you may notice that the 401K accounts lag your taxable investments (I did).  Especially if the choices are limited.  The company sponsored funds are often horrible.  My accounts had a serious acceleration each time I left a company and was able to roll the 401k into an IRA where I could choose a low fee market index fund. 

[boarder42]

dont pay down the car loans invest the money there is no reason to pay down sub 3% debt.

you dont need an excel sheet to track everything either personal capital works great for investment growth and over all expenses.