Author Topic: New to FI, what debts should go first  (Read 1396 times)

pizzaman

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New to FI, what debts should go first
« on: August 30, 2017, 09:18:32 AM »
Hello fellow forum readers. I am new to Mustachianism, and am wondering what direction to take. I currently have about $2,000-$3000 extra income each month. I am curious if I should pay off debts, save, or invest.
I have a pension that is matched by my employer, as does my spouse.
Here is my outlook
Category   Monthly   Comments   Annual      
Salary/Wages for earner #1   $4,500       $54,000       
Salary/Wages for earner #2   $3,800       $45,600              
FICA base salary/wages   $8,300.00       $99,600       
pension contribution   $500       $6,000       
Life/LTD Insurance   $65       $780       
Subtotal 2   $7,735       $92,820       
               
Other ordinary income (e.g., tIRA distribution)   $3,000       $36,000       
Rental income   $1,375       $16,500       
Rental taxable income   $1,375       $16,500       
               
Federal Total Income (for IRS tax)   $12,575.00       $150,900       
                
Federal tax   $2,693    2017 rates, S, stand. ded., 1 exempt.   $32,322              
Soc. Sec. tax   $508.40    Assumes 2 earners paying   $6,101       
Medicare tax   $118.90       $1,427       
Total income taxes   $3,321       $39,849.35       
               
Monthly Average Expenses:               
Mortgage   $2,609    Input to Itemized Deductions   $31,308       
Cable TV   $45       $540       
Car Insurance   $125       $1,500       
Car Maintenance, Registration, etc.   $15       $180       
Childcare   $500    Input to Child and Dependent Care credit   $6,000       
Dining (Lunch/Dinner/Etc.)   $100       $1,200       
Electricity   $150       $1,800       
Fuel/Public Transport   $100       $1,200       
Gas/Oil for heating   $50       $600       
Groceries   $200       $2,400       
Hair Care   $20       $240       
Internet   $50       $600       
Pets   $20       $240       
Phone (cell)   $80       $960       
Phone (landline)   $60       $720       
Non-mortgage total   $1,515       $18,180       
               
Loans:               
Student Loan   $200       $2,400       
student loan   $379       $4,548       
car loan   $430       $5,160       
car loan   $477       $5,724       
   0      0      
               
Total Expense   $5,610       $67,320       
               
Total to invest   $3,179       $38,151       
Summary:                
"Gross" income   $12,675.00       $152,100       
Income taxes   $3,321       $39,849       
After-tax income   $9,354       $112,251       
               
our debts are as follows.
Home/business mortgage $380,000 4% 20 year
Car loan 1.99% $12,000
Car Loan 3.29% $19,000
student loan 6.5% $4,300   (I plan on paying off this first as it is small and easy to do)
student loan 6.5% $25,000

We just paid off our credit card debt and are looking to move forward. Should we save up an emergency fund? I think we should take care of the student loans, then work on the car loans, while keeping a credit card as an emergency fund. On the plus side, our business may be paying out more soon and we will have a large windfall of 10-20k. I am just looking for some advice on what steps to take. Save or pay off debt would seem to me the first options. when debt is down, then work on investments. Or do I invest now, to lower taxable income.   
« Last Edit: August 31, 2017, 08:10:11 AM by pizzaman »

marielle

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Re: New to FI, what debts should go first
« Reply #1 on: August 30, 2017, 09:27:54 AM »

pizzaman

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Re: New to FI, what debts should go first
« Reply #2 on: August 30, 2017, 09:32:51 AM »
I will do that thanks.

MDM

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Re: New to FI, what debts should go first
« Reply #3 on: August 30, 2017, 09:45:23 AM »
It would help more if you posted a full case study:

https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/
+1

Whether you choose to post or not, filling out the spreadsheet suggested there may lead to worthwhile discussions between you (OP and spouse).

See also Investment Order.

CU Tiger

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Re: New to FI, what debts should go first
« Reply #4 on: August 30, 2017, 08:56:09 PM »
I hate being in debt, and have a high need for security. I would get $2000-5000 in an EF, and then hit that debt with hair on fire intensity. However I would make sure if there were tax benefits or matching funds to get through investing, I would grab those first!

We paid off a car, a HELOC, and our mortgage in about 14 years, while investing 20-25% of our income, so it is not an either/or question. You can save and invest while also paying off debt at an accelerated rate.

Everyone is different, so if you are comfortable with having a line of credit as your EF...okay. But in an emergency do you want to run up more debt?

I would pay off your debt in this order:
student loan 6.5% $4,300
student loan 6.5% $25,000
Car loan 1.99% $12,000
Car Loan 3.29% $19,000

Run a debt snowball, and it would not take you all that long with your healthy income.
There are two ways to get enough: one is to continue to accumulate more and more. The other is to desire less. - G.K. Chesterton

Playing with Fire UK

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Re: New to FI, what debts should go first
« Reply #5 on: August 31, 2017, 12:34:45 AM »
Highest after-tax interest rate first.

Then think about investing before paying off anything lower interest than a reasonable mortgage rate.

What's the story with the two car loans and commuter costs on top? Any chance you could drop to one car? Or are the pre-tax commuter costs fuel for the cars?

Are the average costs from actual spending records or an estimate or what you aspire to spend?

Raenia

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Re: New to FI, what debts should go first
« Reply #6 on: August 31, 2017, 05:47:01 AM »
Congrats on paying off the credit cards!  If you're comfortable using a credit card as your emergency fund (and confident you won't carry a balance and pay exorbitant interest on it), then skipping that step may make sense.  Personally, I would build up at least a small emergency fund first to give yourself a buffer.  I'm assuming from your comments that you are contributing to the employer pension up to the match, and that you don't have 401k/403b available?  If that's the case, set up an IRA for each of you, max that for the year, and then pay off the student loans.

Explanations found in MGM's Investment Order link above.  That post is a good rule of thumb for what to do next, skipping any steps that aren't applicable to you.

pizzaman

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Re: New to FI, what debts should go first
« Reply #7 on: August 31, 2017, 08:02:41 AM »
Highest after-tax interest rate first.

Then think about investing before paying off anything lower interest than a reasonable mortgage rate.

What's the story with the two car loans and commuter costs on top? Any chance you could drop to one car? Or are the pre-tax commuter costs fuel for the cars?

Are the average costs from actual spending records or an estimate or what you aspire to spend?

The two car loans are due to the fact that my wife and I own a restaurant as a summer job. So, our old suv broke down and we needed a new to us, large suv for getting supplies and carrying 2 kids once a week. We don't really use the SUV other than for these supply runs. We spent more than we probably should have. We got a loan at 3.29% for $19,000. The auto costs were my estimates for fuel for the month. I don't know why I put them in the pretax dollars. My mistake, I will take it out. The other car is one that we bought new before I was introduced to mustachianism. Bad mistake and still paying for it. I tried to sell the car a few times, but at this point it is a great car with a lot of life left that I lose money on if I sell. It is our commuter car as my wife and I commute together to work, only 30 miles roundtrip, so gas is not a huge expense for us and the car gets 36 mpg. The monthly spending is what my family has done when we have to. We have kept expenses that low when needed. It is a low ball for a monthly target, we usually go over, but not by much.
« Last Edit: August 31, 2017, 08:05:30 AM by pizzaman »

Finances_With_Purpose

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Re: New to FI, what debts should go first
« Reply #8 on: September 03, 2017, 11:34:47 PM »
You have credit card debt already. So save an emergency fund.  No more credit cards.  That's a non-option that'll cost you far more than it saves. 

Plus, the EF is a savings in and of itself. Once you have it, you can self-insure for all kinds of things and save cash. Plus worry less. It pays for itself honestly.  It's the bedrock of a solid financial plan.

Playing with Fire UK

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Re: New to FI, what debts should go first
« Reply #9 on: September 04, 2017, 12:05:26 AM »
If you are saving $3,000 per month, a $3,000 EF is only helping for emergency that need to be paid in cash rather than a card, or that need to paid right now rather than in a month.

It might be reasonable to pay 6% interest (effective, by keeping this in a bank account rather than paying off the loans) if this brings you significant peace, but if there is 20+% debt an emergency fund isn't worth it to me.

You have credit card debt already. So save an emergency fund.  No more credit cards.  That's a non-option that'll cost you far more than it saves. 

Plus, the EF is a savings in and of itself. Once you have it, you can self-insure for all kinds of things and save cash. Plus worry less. It pays for itself honestly.  It's the bedrock of a solid financial plan.

If someone can't be trusted with a credit card, they should head back to Dave Ramsey. This forum is for grown ups who can decide for themselves whether or not to use a credit card.