Author Topic: New Marriage, New House - Where to go from here?  (Read 877 times)

merl

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New Marriage, New House - Where to go from here?
« on: August 11, 2017, 11:32:12 AM »
Hey Everyone!

Just started reading MMM a month or two ago and it has been really eye opening!  Thanks for all of the contributors on here, I'm learning a lot (but still have so much to grasp).  Appreciate you taking the time to take a look at my situation!

Life situation:  DW (age 30) and I (age 32) recently got married back in April, and we will be closing on a townhouse next week (yeah, may or may not have been the best decision from a pure financial perspective, but it sets us up well for family in the coming several years, something that is very important for us).  We have some things we need to pay off, but I think we have the means to do it, just need to figure out priority and how aggressively we work at it.  We live in a major midwest metro area.  Kids are on the horizon, probably 2 years out or so.

IRS Filing status:  No idea yet.  We've obviously been filing single for our entire lives, so not sure on the implications yet come tax time now that were married.

Gross Salary / Wages:    Me: 120k/year salary.  Her: 95k/year salary.  Both of us receive yearly bonuses (that aren't going away any time soon) to the tune of 15k or so combined.  In total, somewhere around 215-230k/year.

Taxes:  I just found I've put in 3 exemptions on my return, so I think that skews it a bit:

Federal: me: $1512/mo  Her: $1270/mo

SS: me: 560/mo Her: 459/mo

Medicare: 130 Her: 107

State: 420/mo Her: 256/mo

Retirement Funds: Me 4% (with 4% company match)   Her: 10% (her employer contributes 3% regardless of what we put in).

Health Insurance:  Me covered 100% by employer, Her $~250/mo for Medical/Dental/Vision PPO

Misc: I pay $100/mo pretax for my transit (I take the train to work).  This is actually more than I need so I just cancelled contributions to it (I have $400 in my account right now that I need to burn through, then will start contributing like $75).

Net Pay: Me: $3014 Bi-weekly or $6530/mo.  Her $2000+2450 /mo (she gets a permanent bonus on one paycheck of $750). 

Total net pay: $~11,000/mo


ASSETS:

Bank accounts: $10k emergency fund, 10k in Savings for 20k total liquid assets

401k Info:

Me: 33k, Her, 10k (just started putting money in hers).  Both of our websites say its divided evenly between 401k and Roth IRA...but I'm still figuring this portion out, more questions below.

We have one car with 85k miles that we should be able to get good use out of for quite some time (2010 model year).  We own the car outright, paid off a few years ago.   No plans to get a 2nd car any time soon.


Now onto the expenses!

New House:
Purchase Price: $492,000
Equity: $73,800 (15%)
Loan: $418,200 @ 3.99% locked for 30 years, no fees for extra payments or early pay off.

Monthly payment (including taxes and everything else): $2850

Credit Card Debt: $0

Now the kicker, Student Loans:

Me:  Just paid off my final student loan payment last month, so I'm good.

Her:

1: $3280, 3.25%
2: $6000, 3.25%
3: $13,700, 8.875%
4: $9000, 3.25%
5: $14,100, 4.25%
6: $3000, 5.35%
7: $1100, 6.55%
8: $1100, 1.03%
9: $1500, 4.55%
10: $3300, 5.25%
11: $3300, 5.50%
12: $1400, 6.5%

Grand total: $60,780 @ average of 4.80%
Average monthly payment:  ~$900


Day to day expenses:

Utilities: Honestly we don't know what this will be.  Guessing $150 or so.  We'll see once we move into our new place.
Groceries: $500 (this hurts us, need to get this down)
Restaurants/Bars/Lunch@work/etc: $750  This one I know a facepunch is coming, and something we've been working on.  Our existing house (rental) has a TERRIBLE kitchen that is A. tiny and B. poorly designed.  Hoping once we get something with a little more space we'll be much more keen on cooking more and eating out much, much less.  We've talked about it and its a goal for us.
Fitness Membership: $75.  This will probably be either going away or replaced with something cheaper soon.
Streaming Services (Spotify, Netflix, Audible): $40 (this will probably go down to $25 as I will probably cancel Audible for now).
Gas/Parking/Misc Transportation: $200 (I'm ballparking.  Her family lives out of town (3hr drive) and we visit them relatively often.)
Various shopping (Here comes  another facepunch): $300-500.  Example of this, last month I had to buy a suit for her grandmothers funeral.  This is a column that has been killing us, but is definitely trending downward.  I've historically been an Amazon addict, but looking in my history, for the month of July I spent 30 bucks (on DW's coffee supply).  Much less than normal, and trying to keep it that way.
Car Insurance: $100/mo
Internet: Currently $0, probably going to be ~$70 or so.  Need a decent plan for my work.



So I guess what I'm looking for is, where do we go from here?  My plan right now is:

1. Pay off all Student Loans.  May not be the wisest from a pure dollars and cents perspective, but I hate being shackled with monthly payments, and would love to just get rid of them.  If we buckle down I'm hoping we can get them all paid off by this time next year at the latest.
2. After that, Raise 401k/Roth to maximums.  Maybe we should do this immediately?  I also need to figure out that Roth business, because I thought I read that our incomes were too high for this, but I don't know.  Could use some advise here.
3. If we get to 80% LTV, then PMI goes away, which is coming in at around $70/mo.  Not sure if its worth it to throw in some extra cash to get there quickly just to get rid of it.
4. Open a taxable investment account and get to saving.  My goal for FIRE is 45-50, and I think we can probably make it happen, but I'd also like to pay off house in there too.  Still trying to figure out how aggressively to pay down house vs invest in the market.  Seems like investing is a wiser choice, but at the same time it would be nice to have the peace of mind of very low monthly payments (just taxes + utilities + spending), especially if at some point one of us wants to leave the workforce (probably due to kids).
5. ????

Okay, I feel like that was all over the place, and I probably missed quite a few things, so please ask questions, and let me know your thoughts on how to approach this.

Thanks all!
« Last Edit: August 11, 2017, 11:56:37 AM by merl »

nouveauRiche

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Re: New Marriage, New House - Where to go from here?
« Reply #1 on: August 11, 2017, 11:46:29 AM »
Hi merl.  You'll doubtless get some great advice from others shortly. 

I would just say that you've got a lot in your favor.  You've got a pretty high income and relatively low fixed expenses.  Paying off the student loans is a great first step.  I would focus on the highest interest loans first.  You can't really lose as you'll have a guaranteed return (the elimination of the interest).

I would also say that your savings (retirement & non) are kinda low, relative to your income.  I would bump up your retirement contributions sooner rather than later.  You will barely feel it.

Best of luck!

merl

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Re: New Marriage, New House - Where to go from here?
« Reply #2 on: August 11, 2017, 11:52:32 AM »
Thanks for the response!  Yeah, our contributions are a bit low right now.  One thing skewing that is the increases in our salaries.  Last year at this time I was making $95k (I was bumped up to 110k in June and now 120k about a week ago) and she was at $75k (gets decent bumps roughly 3 times a year), so we've seen significant raises/promotions in our jobs as of late.  Between that, my student loans finishing up, and getting everything with the wedding done with (that cost us a lot, but was definitely worth it), we're ready to strap in for the FIRE madness!

Novik

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Re: New Marriage, New House - Where to go from here?
« Reply #3 on: August 11, 2017, 12:53:01 PM »
Seconding nouveauRiche that overall you're in a good position.

Overall:
  • Track you expenses religiously for at least the rest of the year, so you have a baseline and can set a budget that doesn't forget certain items (ie. vacation savings, new clothes on occassion, meds etc).
  • Start whittling down variable categories (sounds like you already have a plan for this, which is good, since your total food costs are WILD)
  • Increase your investments!  (I won't comment on specifics as I'm not in the US)
  • Kill the loans!
  • Minor improvements to make: check if you can combine health insurances for cheaper, check if your withholding is optimized, and if you use credit cards check that they are working for you value/rewards/cashback wise.

For the loans, here would be my order to crush them in:

The ugly, all high interest - pay these off by throwing as much as possible at the highest interest loan.
3: $13,700, 8.875%
7: $1100, 6.55%
12: $1400, 6.5%
11: $3300, 5.50%
6: $3000, 5.35%
10: $3300, 5.25%

The not great: higher balances, but once you're here I'd reduce payoff amounts somewhat and focus more on investments
9: $1500, 4.55%
5: $14,100, 4.25%
1: $3280, 3.25%
2: $6000, 3.25%
4: $9000, 3.25%

Only pay this one if you really want to kill it, since it's small with a low, low rate:
8: $1100, 1.03%

Other people might recommend trying to refinance the higher interest loans instead, or leaning more towards keeping alive/crushing the middle group. You have flexibility - this is just my recommendation.
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Laura33

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Re: New Marriage, New House - Where to go from here?
« Reply #4 on: August 11, 2017, 01:19:09 PM »
So on the Roth/regular 401(k) issue:  I am guessing that both of your employers offer a Roth 401(k) (which is not subject to the same income limits as investing in a regular Roth IRA on your own).  But even when the employer offers a Roth 401(k) option, the employer's match is always into a regular 401(k).  So that is probably why you see some of your funds in a regular 401(k) and some in a Roth.

In terms of priorities:  I think you should take a close look at your tax situation before you decide your final priorities.  First, you are going to have a big marriage penalty and be in a high tax bracket given your combined income.  Because of that, you want to be investing in a regular, pre-tax 401(k) instead of a Roth 401(k).  In a regular 401(k), every dollar you invest gets taken off of the top of your taxable income -- so if your combined income next year is $230K, and you both max out your Roth 401(k)s ($18K each), the income that is reported on your tax form is $230K; OTOH, if you put that same $18K each into a traditional 401(k), the income that is reported on your tax forms is $194K.  That is a lot less tax to pay -- I am not a math geek, but I just plugged $230K vs. $194K into an online calculator, and it told me that at least in my area, maxing out the traditional 401(k) would mean paying $12K less in federal income taxes [I did not try to account for mortgage interest or other deductions or state/local tax rates].  And that, of course, frees up more money that you can throw at the loans.

So the first thing I would suggest is to get TurboTax or something similar and calculate what your taxes would be with and without maxing a traditional 401(k), assuming your state/local tax rates, your mortgage interest, your new married status, etc.  That will tell you the difference between throwing your "extra" money into the 401(k)s or the loans (because the loan interest is not deductible at your incomes, so putting the money toward the loans is the same for tax purposes as putting it toward a Roth or spending it).  So for example, assume that your budget gave you $3K/month, above your minimum loan payments, to either invest or to pay toward the loans.  Run three different options in the tax software:

A:  Throw all $36K into maxing out your Roth 401(k)s; make minimum payments on loans.  Result:  $36K in retirement savings, no loan paydown.
B:  Throw all $36K into maxing out both of your traditional 401(k)s.  TurboTax says that means you pay @$14K less in federal and state taxes, so you throw that at your loans.  Result: $36K in retirement savings,* $14K loan paydown.
C:  Keep contributing to the match in a traditional 401(k) (so @$14K), put the remaining $22K to the loans.  TurboTax says that means you pay (say) $5K less taxes; add that $5K toward the loans.  Result:  $14K in retirement savings, $27K loan payoff.     

YMMV -- this is just an example, and you can choose whatever split you are comfortable with.  But just remember as you are doing this math: those 401(k) limits are annual -- if you don't max out your $18K apiece this year, you can't contribute "extra" next year to make up for it.  Personally, I'd rather get $36K invested and still have more than five figures of "extra" money to throw at the student loans (you could almost get that entire 8.8% loan done immediately) -- but that is really your choice after running the numbers.

Finally, do you have an emergency fund?  You don't list any cash assets or other investment accounts.  You will have unexpected housing costs once you move in, and you need an EF in case anything goes wrong with the jobs. 

I think that's enough to get started -- I'm good with you prioritizing the loans, that's a personal choice (except that 1% one, but that balance is so low who really cares?).  So to summarize:

1.  Get an EF if you don't have one already.
2.  Max out your traditional 401(k).
3.  Use the tax savings and anything else you can get from your budget to throw at the loans.
4.  Once the loans are paid off and the EF is set at a comfortable level, then you can worry about other investment options.  I am guessing your income is going to be too high to allow you to directly contribute to a deductible IRA or a Roth IRA, so you could consider a backdoor Roth (invest in a traditional nondeductible IRA, immediately roll over to Roth, pay taxes only on the gains between the original investment and the rollover).  Otherwise, just open a brokerage account at Vanguard and set up periodic investments in either VTSMX or a target-date fund.

*Yes, that $36K in the Roth is post-tax, while you still have to pay taxes when you withdraw from a regular 401(k).  However, you are in a high tax bracket now, and it is likely you will be in a lower one in retirement, which means the regular 401(k) still makes more sense -- especially when you leverage those tax savings now for either debt paydown or other investment, instead of just using it to inflate your lifestyle.
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Novik

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Re: New Marriage, New House - Where to go from here?
« Reply #5 on: August 11, 2017, 01:24:51 PM »
But just remember as you are doing this math: those 401(k) limits are annual -- if you don't max out your $18K apiece this year, you can't contribute "extra" next year to make up for it.  Personally, I'd rather get $36K invested and still have more than five figures of "extra" money to throw at the student loans (you could almost get that entire 8.8% loan done immediately) -- but that is really your choice after running the numbers.

Props to Laura for the detailed breakdown of US retirement account things. I want to chime in and support the above - in Canada you get 18% not 18k and it does carry forward, so details like this don't come to my mind, but it does mean you should probably try and max it out this year if you can.
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Lady SA

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Re: New Marriage, New House - Where to go from here?
« Reply #6 on: August 11, 2017, 01:38:49 PM »
I about died at that 8.8% loan. Ouch! At her income level, she could absolutely refinance that one loan for much, much lower (around 4-5%) and save a bit on interest. It also looks like her largest loan, too, so I would consider refinancing with Earnest or SoFi.
I have a similar income to your wife and refinanced a few loans with Earnest (they offered a lower rate than Sofi). You can find a link in my sig.

Other than that, I agree with everyone above, I don't see much in the way of an emergency fund. Do you have one? Did you not list it? Usually, a sum of about 3-6 months worth of expenses is sufficient. That's priority #1.

Then since you're already hitting the employer match, then I would hammer at your loans. Youve got a few low interest rate ones (~3%) which you could consider keeping around and investing instead, but that depends entirely on your personal risk/debt tolerance. From a purely mathematical perspective it often makes more sense to invest than pay off low-interest loans.
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!

Novik

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Re: New Marriage, New House - Where to go from here?
« Reply #7 on: August 11, 2017, 02:12:06 PM »
ASSETS:

Bank accounts: $10k emergency fund, 10k in Savings for 20k total liquid assets

Not sure why this is being missed, but FYI to other posters that merl does mention having an emergency fund and liquid savings.
Over-thinking, over-planning and over-committing, aka my 2017 goals: Procrastinating my way to FIRE
If you're a dual American/Canadian citizen living in Canada and investing in index funds outside an RRSP, please PM me!

merl

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Re: New Marriage, New House - Where to go from here?
« Reply #8 on: August 11, 2017, 02:13:10 PM »
Thanks everyone for the information!

Laura33, that is great advice with the traditional 401k, and the Roth makes sense (somewhat).  Definitely understand getting into a lower tax bracket, so I think that is probably what we should do.

My emergency fund line got kind of squished in the middle:

Bank accounts: $10k emergency fund, 10k in Savings for 20k total liquid assets

We've been saving a lot for the downpayment on the house, so now that its done we can start putting those funds towards something else.  Probably going to up the EF to 20k or so.

Yeah, refinancing could be an option, but honestly I might just try and throw cash at that 8.8% one and get it paid off in a month or two.
« Last Edit: August 11, 2017, 02:32:50 PM by merl »

merl

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Re: New Marriage, New House - Where to go from here?
« Reply #9 on: August 11, 2017, 02:33:53 PM »
Hey Laura33,

You mentioned the Student Loan tax breaks a little bit.  Wouldn't this be different depending if we were filing jointly or separately?  Or do both filing statuses get changed because were married?

OkieM

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Re: New Marriage, New House - Where to go from here?
« Reply #10 on: August 11, 2017, 03:09:29 PM »
I wouldn't bother with refinancing student loans since you can pay the high interest ones off in a few months. It really doesn't take long even if you up your retirement account contributions.

If you stay disciplined things turn so fast, I saw that a few years ago with my family. In 2-3 years you can go from "man this debt is annoying and kind of stressful" to "Wow I guess I wouldn't have to work for about 10 years if I decided I don't like my job anymore and quit."

GizmoTX

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Re: New Marriage, New House - Where to go from here?
« Reply #11 on: August 11, 2017, 03:21:57 PM »
If you both max your t401k contributions, you'll lower your AGI to save FIT and allow you to contribute to Roth IRAs for the time your incomes stay where they're at. See if you can also do HSA medical insurance & fully fund it. Otherwise you are beyond the Roth income limit. Max out all your tax advantaged funds before investing in taxable ones.

As long as you both are working at different places, your emergency fund of $10k should be OK at this time. Bump this up if your fixed expenses increase or one of you stops working.

merl

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Re: New Marriage, New House - Where to go from here?
« Reply #12 on: August 11, 2017, 03:39:18 PM »
If you both max your t401k contributions, you'll lower your AGI to save FIT and allow you to contribute to Roth IRAs for the time your incomes stay where they're at. See if you can also do HSA medical insurance & fully fund it. Otherwise you are beyond the Roth income limit. Max out all your tax advantaged funds before investing in taxable ones.

As long as you both are working at different places, your emergency fund of $10k should be OK at this time. Bump this up if your fixed expenses increase or one of you stops working.

So, the HSA is something I've wondered about.  Both of our companies offer HSA accounts.  I've always gone with PPO at my current job because both the premiums and deductible are completely covered by the company, then I'm 100% covered after that.  That said, I'm 32 and in good health, so an HSA could be an option?

Also, we've talked about combining insurance into mine, but the family insurance at my job is VERY high, so we quickly changed that back.  Come December we may switch plans to a more limited PPO under my name and move us both into it, which would save us a bit of money vs her insurance.  Plus, my company will pay for our deductible regardless whether the care is for me or DW, so there are some benefits there.

Whats FIT?

merl

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Re: New Marriage, New House - Where to go from here?
« Reply #13 on: August 11, 2017, 03:42:32 PM »
So based on my calculations, I would need to set my contribution limit to basically 30% in order to hit my t401k for the year.  I have 10 paychecks left in the year.  I've contributed $5400 so far this year, so I basically need to get to 13k.

Just got paid today, go figure, so I'm going to set it to 30% and see how that impacts my paycheck next pay period.  Probably a little high, but itll feel good knowing that its another step in planning for the future!

Laura33

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Re: New Marriage, New House - Where to go from here?
« Reply #14 on: August 11, 2017, 06:26:44 PM »
Hey Laura33,

You mentioned the Student Loan tax breaks a little bit.  Wouldn't this be different depending if we were filing jointly or separately?  Or do both filing statuses get changed because were married?

Sorry, I don't know - I exhausted my knowledge with the 401(k) thing.  ;-). I do know the deductibility phases out at relatively low thresholds, so you may already be over it individually. The IRS usually has decent guidance on those sorts of questions, so the answer shouldn't be too hard to find.

I also like Gizmo's point that if you do the traditional 401(k), you may get your income down below the level that allows you to do a straight Roth IRA contribution (instead of messing with a backdoor Roth).

And congrats on ramping up the 401(k) so quick -- well done!!
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merl

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Re: New Marriage, New House - Where to go from here?
« Reply #15 on: August 12, 2017, 10:20:21 AM »
Yeah, looks like most sites say filing jointly is the way to do it.

sokoloff

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Re: New Marriage, New House - Where to go from here?
« Reply #16 on: August 13, 2017, 01:56:04 PM »
Your groceries might even want to go up, provided your groceries plus going out in total goes down.

Depending on your other access to money, you might take the $10K in savings and plow it into the 8.875% student loan. If you can close on a HELOC on your condo or have family money in the event of an emergency, you're going to make a tax-free 8.875% paying off the student loan, which is probably 16 to 50 times the amount you're making on the $10K in savings now.

In terms of how to prioritize things, I generally agree with the advice in this post:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Also, I don't want to over-think this, but you use a lot of passive language in your original post. "This is $X but will probably go down to $Y." etc. If you don't do anything, nothing will change. I note it just because it stuck out to me, nothing more.