Author Topic: Not doing great, Not doing terrible, but looking for advice  (Read 1555 times)

john6221

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Not doing great, Not doing terrible, but looking for advice
« on: November 21, 2020, 01:59:30 PM »
I'm 38, MFJ, with 2 young kids (in daycare) in a large city in the Midwest. I can't say that I've always been as frugal as I could be. Lifestyle definitely got inflated a bit. And I definitely engaged in some pandemic impulse buying. But, I've steeled myself and I'm back to my resolve.  My spouse is on board, so there's no issue there.  I have a very specific question regarding payback of debts, and whether my plan makes sense. I don't really follow Dave Ramsey but I am going to use the "snowball" method to take care of my consumer debt and make me breathe a little easier each month.

Gross Income: $13000/mo

Assets:
$600k in 401k/Roth
$290k primary residence
$51k emergency fund (cash)

Liabilities:
$165k mortgage ($1300/mo, 3.375%)
$21k car loan ($468/mo, 1.9%)
$19k solar loan ($180/mo, 2.5%)
$9.6k student loan ($120/mo, 5.8%)
$4.5k student loan ($176/mo, 1.25%)
$2.9k HVAC loan ($195/mo, 0%)
$1.2k medical debt ($77/mo, 0% payment plan from hospital)

So, yeah, some consumer-sucka debt, but at least no credit card debt.  But sure, some face punches are probably warranted. I could be doing better, and I've resolved myself to do better.

What I'm wondering, specifically, is:
-Should I reduce my 401k contributions to the lowest to get the match (6%) and throw the rest at my debt? This would free up an extra ~$600/month
-The first one that I plan to attack is the HVAC loan, because it's small and will give me a mental boost, and it frees up a large monthly payment. Then I was planning on going after the 5.8% student loan. Is that reasonable?
-I got the solar installed this year. We plan on living in our house forever, and the federal + local credits offset a large chunk of the cost. It will cover ~95% of our energy usage, when averaged out over the year. So, I'm expecting about a $5k tax credit when I file my taxes in 2021. Originally I was going to throw this right into the solar loan, but I wonder if it would be smarter to use it to wipe out one of the smaller loans. Thoughts?

Thanks for any advice.


« Last Edit: November 21, 2020, 02:03:38 PM by john6221 »

Freedomin5

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #1 on: November 21, 2020, 03:15:23 PM »
How much are you currently throwing at your debt? With a $13K gross monthly income not living in a HCOL, Iím guessing that $5-7k per month should be available for debt and savings?

Mathematically you should target the loan with the highest interest rate so the student loan. Psychologically it makes sense to target the ones with the smallest amount.

Also, your car loan is the one with the highest payment. In the future, donít buy a car you canít afford to pay cash for. In your situation, I would consider selling the car and buying something cheaper and saving myself $468/month. Youíve made a lot of lifestyle decisions (large purchases) that have locked you into various payments and expenses. Make a resolve not to buy anything big (even if the interest rate is low) until youíve knocked out all of the current debts except for mortgage.

meandmyfamily

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #2 on: November 21, 2020, 03:49:03 PM »
I would use your cash to immediately pay off the 4 smallest loans.  I wouldn't change your 401k.  The others 2 loans have a very low interest rate.  I would consider selling the car maybe then I would track every single expense for the next 60 days.  Then post a detailed case study.

kpd905

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #3 on: November 21, 2020, 06:51:22 PM »
I'd pay off the 5.8% student loan with your current cash and let the rest ride. 

I'd also be interested in a detailed case study to see your expenses, because we are also in a large city in the midwest, with two kids in daycare, and almost the exact same income and asset level as you.

cincystache

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #4 on: November 21, 2020, 07:02:03 PM »
Do this:

-pay off everything but the car right now. You'll still have 14k in cash left.

-Get rid of that stupid car payment. Sell the car and buy something for no more than 1 month's salary or 13,000. You're probably underwater on it but use some of that 14k in cash laying around to cover the difference and to pay for your new (used) car. Now you have an extra 1,216 in cash flow every month to rebuild your e-fund.

-Rebuild your emergency fund to 6 months of expenses using all that extra cash flow and anything else you can spare from that massive income.

- Last, and MOST IMPORTANT. Stop buying shit you can't afford. You make a ton of money, have the patience and discipline to save up and buy stuff with cash.


The above is what Grandpa Dave would essentially tell you and he's right IMO

You are crushing it on the asset/income side so don't stop saving into your 401k. Once you mop up this debt mess and cure your proclivity for car loans you'll be millionaires probably inside of 5 years. Congrats, enjoy your family and live a simple financial life so you can focus on more important things.

Mustache ride

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #5 on: November 21, 2020, 07:41:42 PM »
I'd pay off the 5.8% student loan with your current cash and let the rest ride. 

I'd also be interested in a detailed case study to see your expenses, because we are also in a large city in the midwest, with two kids in daycare, and almost the exact same income and asset level as you.

I agree with kpd. The only thing in my opinion that would be considered stupid spending is the car, but you make a good income and some people like their cars, so I get it. The solar is obviously quite a large expense, but that will (hopefully) be offset with lower bills.

zolotiyeruki

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #6 on: November 22, 2020, 05:37:19 PM »
Do this:

-pay off everything but the car right now. You'll still have 14k in cash left.

-Get rid of that stupid car payment. Sell the car and buy something for no more than 1 month's salary or 13,000. You're probably underwater on it but use some of that 14k in cash laying around to cover the difference and to pay for your new (used) car. Now you have an extra 1,216 in cash flow every month to rebuild your e-fund.

-Rebuild your emergency fund to 6 months of expenses using all that extra cash flow and anything else you can spare from that massive income.

- Last, and MOST IMPORTANT. Stop buying shit you can't afford. You make a ton of money, have the patience and discipline to save up and buy stuff with cash.


The above is what Grandpa Dave would essentially tell you and he's right IMO

You are crushing it on the asset/income side so don't stop saving into your 401k. Once you mop up this debt mess and cure your proclivity for car loans you'll be millionaires probably inside of 5 years. Congrats, enjoy your family and live a simple financial life so you can focus on more important things.
I was about to post my own response, but cincystache basically nailed it out of the park here.  Agreed 100%.  Replace the clown car with something cheaper, then wipe out those other loans.

MrThatsDifferent

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #7 on: November 22, 2020, 06:18:12 PM »
Hmmm, Iíve read enough of these to know that everyone advises people to get rid of the ďclown carĒ and few take up that advice, so I wonít suggest it in case you donít have the resolve. Instead, Iíd follow the rest of the advice and pay off all the loans with your emergency money except the car and mortgage. Thatíll give you $748/month to redirect back into your emergency account or invest. If youíre keeping the car, resolve to keep it for 10 years at least and donít buy another one that you canít buy in cash. Also, donít use the extra $748 to find something else to splurge on. Rein it in and stay focused.

SimpleCycle

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #8 on: November 23, 2020, 09:52:16 AM »
We were in a very similar situation to you two years ago - two in daycare, similar mortgage, similar income, and it both felt hard to save and also preposterous that we were spending so much money.

First, you are doing well on the income and assets side.  DO NOT reduce your 401k, you only have so much tax advantaged savings "room" each year and you don't want to forgo it.  Plus it will keep building your assets.

Second, the debt.  You're not being killed by interest rates, but the monthly payments add up to a fair chunk.  I'd pay off everything but the car and solar right now with your cash on hand.  That frees up almost $600 to rebuild your emergency fund, pay down the solar debt, or invest.

Third, the clown car.  Are you a one car family?  It's really swimming against the tide to have a small car with a family, although plenty of people do it.  Look into your options and decide if it's worth it to you to keep the car.  We have a 3 year old and 5 year old both in car seats in a Honda FIT, and it's actually roomier than say a Rav4 or other small SUV.

I'm going to guess we might be in the same city, which means two in daycare is running you $3-3.5k a month.  Assuming you are planning on public schools for your kids, your costs will go down as they become school aged, and you'll really be able to amp up the savings.  Our daughter did public pre-K last year with paid after care that ran us $375 a month, rather than the $1600/month that her daycare cost.

Finally, track track track your spending.  You should know what is going out the door and why, and make sure what you are spending on is aligned with your values.  When we started really tracking with YNAB, we discovered a lot of low hanging fruit that we could cut without really noticing an impact.  That's another place where you can free up money for saving/investing/debt paydown.

Good luck - you are in one of the hardest and most expensive phases of life right now, but some attention to where it is all going and strategically deploying your money will get you far.

ericrugiero

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #9 on: November 23, 2020, 02:50:39 PM »
Others have covered most of the key points but I'll give my opinion on what I would do. 

A $51,000 emergency fund is pretty large IMO.  I would use most of that money to pay down the debts.  At the very least, pay off the 5.8% student loan. 
The car is expensive.  You make enough money that you "can afford it".  But, is it really what you want to spend your money on?  Selling it and driving something cheaper could save you money, especially if it's a large gas guzzler and you can get something more economical.  If it's an efficient car that will be reliable long term you might be just as well off to keep it. 
Get a better handle on your monthly spending.  You can probably optimize that quite a bit. 
Stop borrowing for every little thing.  Why do you have a small medical debt?  Call them and ask for a cash discount (now and for future medical expenses).  You have a huge emergency fund, what is that for if not for HVAC and medical expenses?

What are your goals?  You are in great shape for traditional retirement with no further tweaks.  To reach FIRE, you have a good start but a ways to go.  Tightening the budget would be HUGE because you would supercharge your savings rate AND reduce the amount you need to save.  https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

john6221

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #10 on: November 23, 2020, 04:29:34 PM »
Thanks all for the advice. I will work on a detailed case study.

Generally the reason that I have the 0% debts is because I view that as free money, so why would I want to pay it off right away? Sure, it's a monthly burden. And that burden has been weighing on me more recently, so now I am motivated to take care of it.

I understand that the car is expensive. But, we are a single car family, we will drive it into the ground. Last car we had was a Subaru Legacy with 310k miles on it before it cost too much to maintain.

Again, thanks all. Here's what I'm planning:
- leave 401k contribution alone
- pay off everything except the car/solar
- use $5k solar tax credit and dump it right back into debt
- get back to tracking spending and post a detailed case study
- build back e-fund

rmorris50

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Re: Not doing great, Not doing terrible, but looking for advice
« Reply #11 on: November 23, 2020, 06:21:10 PM »
One tweak to your plan I might consider, and that is reducing your 401(k) to get just the full match, and then invest that difference in an after-tax account. Your marginal income tax rate is 22 percent and taxes are only going to go up in my opinion. The big risk here is behavioral, you donít save that difference or spend it before retirement. But if you max out pre tax accounts year over year and tax rates go up, you may very well not find yourself in a lower tax bracket in retirement like you thought. Plus youíll thank yourself if you do want to FIRE in 10-15 years. But if you think you wonít have the discipline then donít lower the 401(k) contribution.


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