Author Topic: Just Starting Out and Need Advice  (Read 2157 times)

tllewis4

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Just Starting Out and Need Advice
« on: April 28, 2015, 08:41:04 AM »
Hey Everyone,

I posted on here a couple of days ago about the pros and cons of paying off my mortgage and got some great responses and have also been reading through a bunch of other posts for the past few weeks. So now I'd like to give a big picture of where I'm at and also ask for some advice for the future. 

I graduated and got married in July. We had about 15k between us starting off and about 25k in debt. We bought a house in October for $169k and put 5% down. The down payment and closing costs along with buying everything to start a new home (I would do things differently looking back, but that's neither here nor there) ate up most of our savings. I know people debate on the benefits of home ownership on here, but it was the right decision for us. I HATED living in an apartment as I'd never done it before (lived with parents during college to save money) and since we were living in a fancy apartment close to downtown Charlotte, we reduced our monthly spend by $400. I also see this property as a good rental property if we were to move because it's less than a 10 min drive to downtown and in an up and coming neighborhood. I took a little bit higher interest rate (4.875%) to avoid PMI, and plan to refinance if the rates are still low once we get to 80% LTV. We currently have about 5K in cash, down to 15k in debt which I plan on paying off by the December if everything goes as planned.

The wife and I currently have a gross income of about 91k. This will increase steadily (avg 10% every year) for a while depending on where I'm working, but I'm a CPA doing IT Audit so thankfully the job prospects are good.

After tracking spending the first 3 months of the year (which were ridiculous), I thankfully found this site and got down to business in making a real budget. Thankfully I'm not super materialistic and already pretty practical (both cars are paid off, reluctant to purchase new clothing, take lunch every day and eat out rarely, etc...), so making a much tighter budget wasn't that difficult. I just wasn't paying much attention to how much we were spending each month.

I've gotten it down to these expenses every month:

Groceries: $275 - $300
Insurance (Home/Car) - ~$75 (I pay in 6 month chunks)
Gas - $80-$100 (depending on my client, the wife and I carpool a lot and our commute is only about 10-15 min)
Utilities (Water, Trash, Power, Gas, Alarm, and Internet) - ~$250-$300
Gym - $50 per month
Misc - ~ $300-$400
(This includes occasional eating out, clothing and supplies, home maintenance, travel, and gifts. I have these broken down into their own categories in my budget but this works as well for my purposes here. I created these categories to be more of an average. Some months will be way under and some will be over depending on travel, necessary purchases, etc... )
Tithes - Roughly $750 right now
Mortgage - $1250 (minimum pmt is about $1000)

Total - ~$2850 -$3000

Current take home pay is roughly $5500 after all deductions.

I currently am only contributing 6% of my income every month to my 401k just to get the employer match and my wife is not eligible to start in her employer's 401k program until August.

The plan is to pay off the $15000 in student loans (interest rates vary from 4-6%) by the end of the year by paying about $2k per month towards them. My biggest question is what is the best plan of attack after we pay off the loans?

With raises this year, we will be around 6K take home by the end of the year which will leave us 3K every month for saving. Should we max out both of 401k contributions starting in January? This wouldn't leave us much wiggle room to build an emergency fund or anything like that. But my thought was to max them out for the next 3 years, which would put us at about 130K including our employer matches, then let it grow for the next 30 years, since I'll be 30 at the end of the 3 years. After that, reduce my contributions to the point of getting the employer match and put everything else in index funds. Also, how could I incorporate paying down the mortgage more quickly into all of this? I know a lot of it comes down to personal preference but I'd like to pay the mortgage off in 10 years or so.  Just trying to find the right balance!

Thanks in advance for the help!

velocistar237

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Re: Just Starting Out and Need Advice
« Reply #1 on: April 28, 2015, 09:39:09 AM »
In general, I recommend maxing out 401k's and Traditional IRAs (as much as you qualify), then split the remaining savings between taxable investments and loan payment as you see fit. With loans, you get the loan rate, but with pre-tax savings, you get the marginal tax rate, more or less. You get even more with employer match.

Even if your wife can't start contributing to her 401k until August, she still should have the full $18K limit for the year. Consider having her put a major chunk of each paycheck into her 401k between when she qualifies and the end of 2015. She can then lower her contributions at the start of 2016 to max out for the year with equal pay period contributions.

Don't miss out on pre-tax opportunities just so you can build an emergency fund. Between a credit card, HELOC, and penalized 401k withdrawals, you should be covered for emergencies.

Chrissy

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Re: Just Starting Out and Need Advice
« Reply #2 on: April 28, 2015, 09:53:28 AM »
Your mortgage rate is still pretty low.  I would not pay it down.  It's not about personal preference, it's about math:  extra money would make more in the market.

Year One:  Pay down debt.

Year Two:  Of the $3,000/mo for savings, put $1,500 into your employers' retirement accounts (focusing on the one with the best match).  Put the other $1,500/mo into your emergency fund, and, in 12 months, you'll have $18,000 which is 6 months of expenses.

Year Three:  Put the $1,500 that was previously going to your EF, plus any raises, into your employer retirement plans until they are maxed at $18,000/yr/ea.  At this point, you will have more money available than you can put into those accounts, so, you and the missus will each open a traditional IRA (tIRA) and put up to $5,500 into each one.  If you still have extra money, put it into a taxable account.

Why wouldn't you want to completely max your employers' plans?