Reader Case Study - Allocation Confirmation

[kroozin]

First off, I'm so glad I discovered this site, it's opening my eyes to things I'd never even considered before. Thank you for all you guys do, and I look forward to cooperating on these forums for a long time to come :)

OK, on to my case:

Life Situation: Single, no dependents, 32 year old male

Gross Salary/Wages: $77,500 - $6,456.34/mo

Individual amounts of each Pre-tax deductions  - $50/mo to my HSA, $75.20/mo to health insurance

Rental Income: I rent out a room in my house for $700/mo

Adjusted Gross Income: $7,031.14

Taxes: Federal: $901.50/mo, Social Security: $392.66/mo, Medicare: $91.82/mo

Total Net Income: $5,647.16

Current expenses: I started tracking my spending mid last year using Mint, but didn't start getting serious about budgeting and saving until February. Therefore I'm going to post my tracked spending since I've been focusing on it (I spent over $1,000 in January on dining out, it was eye opening to say the least), with a few notes:

Mortgage: $307.17 principal + $727.85 interest + $147.50 PMI = $1,182.52/mo
House Tax and Insurance: $78.83 Insurance + $109.11 Tax = $187.94/mo
Total Home = $1,370.46

Utilities (Heat, Water, TV, Electric, Internet): ~$310/mo

Car Lease: $209/mo (Lease ends next July)
Car Insurance: $115.50/mo

Gym: $44/mo

Debts: $1,069.59/mo (Explained further below)

Dining Out/Alcohol: $232.12
Groceries: $215.17 (I included pet supplies in this)

Transportation (Gas): $60

Travel: This is hard to quantify. I just started budgeting and have a few trips planned this year. One of the trips is to London and between everything I'm budgeting ~$3,000 for the 4 trips total. This strikes me as "punch in the face" material, but it's an unusual travel year for me, I've never been to Europe, and a group of friends are going so I don't want to miss it. I'm going to do my absolute best to make it as cheap as possible though!

UPDATE: We've decided to postpone the London trip, 2 of my trips will actually net me a profit, and the third will cost me about $350 total, so this is much less of a concern for me now!

Disability Insurance: $85.08/mo (Through Northwestern, coverage would pay $3,599/mo)

Misc: $220 (this included a new tire this month to replace a flat)

Total Expenses: $3,930.92


Assets:
Roth IRA: $19,704.13 - This is currently through Northwestern, although I'm learning I should probably move this.
SIMPLE IRA: $2,529.35 - This is from a previous job and is through Fidelity. I haven't contributed to this in years (Full disclosure, I just re-discovered that this exists after stumbling on this blog and starting to dig - embarrassing!)
House: According to Zillow, my home is worth $240,000. However, I bought it last July for $217,500 so I doubt this figure's accuracy.

Total Assets: $262,233.48


Liabilities:
Bank loan: $1,907 balance @ 8.74% - This should be paid off this month when I get my tax return
Credit Card - $5,570 balance @ 0% - I did a free balance transfer for this debt and am paying $550/mo to pay it down when that rate expires in December
Mortgage - $211,431.79 balance @ 4.125%
Student Loans - $46,506 @ 4.37%

Total Liabilities: $265,414.79

Specific Question(s): So obviously this is only based on a monthly basis, and yearly expenses may sneak up on me that I haven't considered. But since I'm just getting started, this is the best I can do at the moment, and I mostly wanted to go through this as an exercise for myself and to get myself on the right track.

That said, feel free to bring on the face punches if there's something obvious I'm missing! Based on what I've read so far, and the information I found in this investment order thread: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153, here is what I THINK I should do. Let me know if I'm understanding correctly please :)

Plan of action:

• Pay off my Bank Loan with my tax return as planned. Put that fire out!
• Move my ROTH IRA off of Northwestern and onto Fidelity with my other IRA
• Start saving up more of an Emergency Fund. I currently keep this in a basic savings account. Should I store this elsewhere?
• Save up about $5,000 to purchase a used car in July when my lease expires
• Consider postponing/canceling the London trip: Update: Postponed!
• Pay off my PMI ASAP

After those two funds are set up, I'm not entirely sure the best course of action. Following the Investment order thread, my company doesn't offer a 401k (downside of working at a small company, but I love my job), I don't have any other debts with >8% interest, so the next step is maxing out my HSA.

My first inclination was to pay down my mortgage to 80% so I could remove the $147.50/mo PMI payment, or perhaps pay down my student loans, but maybe those amounts are low enough that it makes more sense to max the HSA/IRAs first?

[ysette9]

Why would you cancel your disability insurance? You are FI yet so at this point your biggest asset is your ability to generate income. You would be in quite a pickle if you got hurt and were not able to work.

I’d recommend looking at other areas to cut.

[ysette9]

On a second read here, can you talk about your debt and how you got into that position? You seem to have a good cash-flow setup so something must have changed recently or you had a big life event that led to the debt. You should make sure that going forward you aren’t borrowing money at 8% on a personal loan so that you can give Uncle Sam a 0% loan vis your taxes.

[kroozin]

Thanks for the response!

So my thought on canceling the disability insurance was that I could put better use to that $85/mo to save for the possibility of being out of work (hence the EF focus). Plus my job is all done on a laptop so the chances of not being able to work is pretty small. It would provide $3,599/mo if I were to need it though, so maybe it's still worth it for now.

As for the debt position, there are a few things at play here. One was my wedding ~6 years ago that we paid WAY too much for and were foolish about taking out loans. Another was an attempt at a business that failed. The final big expense was my divorce about a year ago. But for the most part, until recently I've just been really irresponsible with my spending, like the $1,000 I spent on dining out in January, for example. All of those sum up to the debt position I'm in, which is why I'm trying to turn my cash flow around now and get myself in a better position.

As for the tax return, I discovered recently that my accountant messed up last year. We sold our house as part of the divorce and paid capital gains tax since we'd only lived there for about a year, but it turns out divorce is an exemption. So I filed a correction and I should be getting about a $1,600 refund for last year. This year I'm about correct, getting a refund of just $50.

[Montecarlo]

I definitely think you are in hair on fire debt crisis now.  London + three other trips for 3K seems pretty frugal to me.  Why not consider just doing London only?  I agree that opportunities to go on a trip with your besties is pretty rare and it's okay to take the trip.

You need to find 45K to get rid of the worst debt problems - credit card, personal loan, and mortgage PMI.  I used the purchase price on the house.  I don't know if the lenders are required to use the most recent appraisal or not, if your county does annual appraisals.
You take home about 67K?  If you go full on badass you can have it done by next St. Patrick's day. 

Congrats on getting someone to pay almost all your mortgage interest!

[Montecarlo]

How close do you live to work?

[ysette9]

I think cancelling disability insurance would be penny wise and pound foolish. Your net worth isn’t even up to zero yet so the only thing you have going for you is your ability to earn future money. You don’t need to lose an arm to be unable to work. A skiing accident or falling off a bike without a helmet could leave you with a concussion. I know people who have developed autoimmune disorders that led to chronic fatigue and the inability to work. Car accidents, eat something funny, get bitten by a tick, etc etc. Sure, increase your deductibles on your car and homeowner insurance, eat generic brand food, travel hack, and all sorts of other things to save money, but definitely make sure you are insured against catastrophic loss.

[Dee18]

I think you have a serious debt issue, due to buying what you want whether or not you can really afford it, such as house, trip to London, and leased car.  You put almost nothing down when you bought your house so you are paying $875/month in interest and PMI.  You have credit card debt equal to a month’s net income, plus a bank loan.  Your utilities seem high...is there cable in there?  (Although I realize that could be necessary to attract a roommate.)  Does your employer have a retirement plan with matching? 

You are right to pay off the bank loan immediately.  In addition to saving up for a car, you should pay off the credit card debt before taking the trip to London.  Do not borrow to travel.  If you want to be financially independent the first thing you need to do is resist the “my friends are doing it/buying it so I should too” temptation.

The fact that you would keep cable and give up disability insurance is a red flag.  As others have pointed out, your potential earnings are the best asset you have.  You could shop around for disability.

You are smart to have a paying roommate and you could get out of debt (and out of PMI) if you buckle down for a year.

[ItsALongStory]

If you want to be financially independent the first thing you need to do is resist the “my friends are doing it/buying it so I should too” temptation.

This is one of the key messages so far, if you do the same as your buddies you should expect the same outcome. Around these parts that means retirement at 65.

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[kroozin]

Lots of responses since I went to bed last night! Let me try and get through everything:

London + three other trips for 3K seems pretty frugal to me.  Why not consider just doing London only?  I agree that opportunities to go on a trip with your besties is pretty rare and it's okay to take the trip.

So some context on the trips: Most of them are nearby trips within driving distance and are for events for a competitive game I create content for. Each of those trips actually guarantee prizes that I can resell for more than the cost of the trip itself, so those are easier to justify. The hard sell is obviously the London trip. I've done research and I can do flights for ~$700 and lodging for ~$300 (doing an airbnb with 5 of us splitting). I'm having a very tough time saying no to this one since it's some of my best friends, we've been trying to plan this trip for years, and I'm not sure if it'll ever happen again, but more on this below.

How close do you live to work?

I currently live 9 miles from work.

I think cancelling disability insurance would be penny wise and pound foolish. Your net worth isn’t even up to zero yet so the only thing you have going for you is your ability to earn future money.

I can see your point, and it makes sense to me. My initial thought was that when I explained to friends/family that I had it, they thought it was just another sleazy insurance thing and that I should get rid of it. But when you put it that way, it makes a lot of sense. I'll keep it and I'll update my original post to reflect that. Thank you for the advice!

I think you have a serious debt issue, due to buying what you want whether or not you can really afford it, such as house, trip to London, and leased car.  You put almost nothing down when you bought your house so you are paying $875/month in interest and PMI.  You have credit card debt equal to a month’s net income, plus a bank loan.  Your utilities seem high...is there cable in there?  (Although I realize that could be necessary to attract a roommate.)  Does your employer have a retirement plan with matching?

I agree on the debt issue for sure. The house made sense at the time because the mortgage was less than rent, and the car was a foolish purchase I made before finding MMM that I plan on rectifying as soon as possible.

For utilities, I don't have cable, here's a quick breakdown of my utilities from last month:

• Heat - $92
• Internet - $50
• Hulu - $13.10
• Water: $33.33
• Electric: $102.69
  
• Total: $291.12

Sadly my employer doesn't have a retirement plan at all, nevermind one with matching. I've been trying to convince them to do something for years now, but they have <50 employees so they're not obligated to and they've been resistant thus far.

You are right to pay off the bank loan immediately.  In addition to saving up for a car, you should pay off the credit card debt before taking the trip to London.  Do not borrow to travel.  If you want to be financially independent the first thing you need to do is resist the “my friends are doing it/buying it so I should too” temptation.

My only counter here would be that I have the credit card debt at a 0% rate now with set payments to pay it off before interest kicks back in. My plan was to pay for the trip not using another debt, but by saving. That said, your point about giving into the temptation of the trip is a good one, I'm just having a particularly hard time with this one given how rare the opportunity is. I'll have to think hard on this, and I appreciate your honesty. Heck, maybe I can convince them to push it back a year or something when I'm in a better place financially.

You are smart to have a paying roommate and you could get out of debt (and out of PMI) if you buckle down for a year.

This intrigues me. A couple people have said I could be out of debt in a year if I buckle down, but I'm having difficulty seeing it. Some quick math:

To get out of PMI using the original house value, I need to pay down another $37,400.
Bank loan is gone this month, so I won't count that
Credit cards have $5,500 remaining @ 0%

Total to repay is $42,900 which comes out to $3,575/mo. If you add the $550/mo that I'm paying to the credit card atm, I have a surplus of $2,266.24 to put towards debt each month. That means I need to somehow find another $1,308.76 each month to have the debt (minus Student Loans) and PMI gone in the next year, and I'm struggling to see how that's possible.

Thank you again to all these detailed responses, there are a lot of great points here that really make me think!

[kroozin]

Update! I've been thinking about this all day yesterday and today, and I finally decided to explain my situation to my friends to see what they thought. Reached out with the possibility of postponing until I'm in a better place financially....and they all agreed! In fact, they told me that they wanted to postpone it anyway for various reasons (financial and otherwise).

So with that out of the way, I can now fully focus on getting rid of this debt ASAP. Of my remaining 3 trips, 2 of them will actually give me a net profit (exclusive prizes at the events I'm going to that I can sell), while the third is a weekend trip that is very cheap.

Thanks to everyone here for making me really reflect on that. Now I just need to figure out how quickly I can get that PMI gone :)

[ysette9]

Wow, that is cool! I am impressed with you.

[FIREsigns]

I'll address utilities:  your water and electric seem high for two people. I think you can knock $10/month off the water, and probably cut the electric by 50%.

Water: Shorter showers, never leave water running (even while brushing teeth or shaving!), aerators installed on all faucets, low-cost shower heads, dishwasher turned on only when full and use the power saver features, be miserly if you have an irrigation system (or, better yet, then it off), toilet flushes not necessary for pee only, add a liter-sized plastic bottle (weighted with stones and then filled to brim with water and capped) to the water tanks of the toilets to save one liter per flush, fix all leaking faucets (easy DIY).

Electric: replace bulbs with LEDs (upfront investment with good ROI), put any electric-powered appliance/clock/tech items on surge protectors (and then them off whenever not using items), unplug all chargers when not in use, reduce use of outdoor lighting and turn off all outdoor lights during daylight, turn off room lights whenever rooms are unpopulated. Don't dry your dishes with the dishwasher's heater (use air-dry), line dry your clothes as much as possible. If your hot water heater is electric (or even if it's not!), turn the heater gauge to "vacation" whenever you're away for more than a day, never use hot water to wash clothes (disconnect the hose so you're not tempted)---I've used cold water only for 30 years and clothes are perfectly clean!

Remember: MMM says millionaires are made $10 bucks at a time.

As an HR Director, let me strongly "ditto" the posters who say to keep your disability insurance. At your age and for the next 20+ years, you have a 40+% chance of being disabled for six months or more. Surprising, right!? Given that you pay the premiums, any benefit will be tax-free to you.

[ItsALongStory]

Very cool to see you take action, so many people ask for advice but don't do anything with it so kudos to you.

As far as the car, I would suggest saving up and buying it cash for no more than what is absolutely necessary. I recently listened to a podcast about the true cost of car ownership and it was absolutely mind boggling even if the assumptions were fudged a bit for a more dramatic effect/$$ impact. I believe it was a ChooseFI podcast, might be worth a listen and go with the 10 year old 5k car option they outline.

You have a roommate already but is there a way to rent out an additional room? Can you sell some of your stuff that you never use anymore like books, unused exercise equipment (or start using it and stop the gym membership), no need to become a minimalist but most people have way more stuff than they can realistically use often enough to justify owning it.

On the debt side i would focus more on SLs vs getting the PMI gone, it's annoying to have to pay it but it's not a huge dollar value either. Are you even sure that you could get PMI waived as soon as you hit 80% or would it require a (potentially costly) refinance? Check the Ts and Cs of your mortgage, not all are created equal.

Keep up the good work, you are making meaningful changes and forming new, more money conscious habits.

[kroozin]

@FIREsigns thank you for those detailed recommendations! I think my electric was unusually high this month for a few reasons, one of which was running a de-humidifier 24/7 for the past 2-3 weeks since my basement flooded a few weeks ago. Luckily it's dried out since then so that should no longer be an issue. Either way there are still some really interesting tips in there. a liter sized bottle in the toilet tanks? I never would have even thought of something like that! I'll definitely be putting some of these into practice, although I don't think I'm quite committed enough for all of them (I don't like the idea of not flushing pee, for example haha).

I believe it was a ChooseFI podcast, might be worth a listen and go with the 10 year old 5k car option they outline.

I was just looking for some podcasts to listen to, so I'll definitely check this out. My current plan is to save up $5k and buy something used when my lease expires next July, so that sounds right in line with what you're suggesting.

You have a roommate already but is there a way to rent out an additional room?

This is an interesting point, because I'd been pondering it lately. My current roommate is actually one of my best friends from college who moved to my city. He brought with him 2 dogs and a cat, which in addition to my cat means we now have 2 people, 2 dogs, and 2 cats in my house. I have a third (much smaller) bedroom, but I worry about 1) Bringing in another person I don't know with my friend and me already there, and 2) The house getting a little too crowded. I'm not totally opposed to the idea, but I need to think about it carefully.

Can you sell some of your stuff that you never use anymore like books, unused exercise equipment (or start using it and stop the gym membership), no need to become a minimalist but most people have way more stuff than they can realistically use often enough to justify owning it.

I've actually already started doing this! Over the past few days I've been going around my house finding things to get rid of. So far I've collected a bunch of old games/promos that just collect dust, an old XBox 360, and an old TV stand. None of which I use, and I'm trying to sell them.

On the debt side i would focus more on SLs vs getting the PMI gone, it's annoying to have to pay it but it's not a huge dollar value either.

This is super interesting to me, as it's the very next step for me to figure out now that I'm getting everything under control. According to the often-linked-to "Investment Order" thread, I should be maxing my HSA and 401K/IRA before I pay off either debt to maximize return, but that's a tough one to swallow.

Paying down my mortgage I could get rid of my PMI in just over a year, based on my math. That would free up $147.50/mo that I'm paying into nothingness, but doesn't help my monthly expenses much.

Paying down my Student Loans, if my math is correct, I could wipe out by August of next year, which would free up $519 of monthly expenses, but may not be the most efficient use since my rate is only 4.37%

Third option is to ignore those debts and invest (401k/IRA/Vanguard). Seems based on that thread these are the highest yield, but it also goes against the "Your debt is an emergency" mentality.

I'm not sure which way to go!

[Montecarlo]

Purchase price of house: 217,500
80%: 174,000
Balance: 211,400
Amount to get rid of PMI: 37,400
Annual PMI: 1,770
PMI "interest rate" = 1,770/37,400 = 4.73%


That rate goes up with every mortgage payment.  Your next payment will be $310 in pricipal.  So you PMI "interest rate" will be 1,770 / (37,400 - 310) = 4.77%.  Won't be linear for obvious reasons.  So if you put extra $ on the students loans, you get 4 3/8% back immediately.  If you put it on the mortgage, you get 4 1/8% back immediately, AND are closer to getting that PMI windfall.  I would lean toward the mortgage over the student loans.

[kroozin]

That rate goes up with every mortgage payment.  Your next payment will be $310 in pricipal.  So you PMI "interest rate" will be 1,770 / (37,400 - 310) = 4.77%.  Won't be linear for obvious reasons.

Woah, putting it this way really hit home to me. I just plugged the numbers in assuming I applied my surplus to the mortgage every month until the PMI was gone, and the numbers are eye opening (I think I attached the image correctly)

It seems to me that the most sensical thing to do is save for a used car, pay off the PMI, and then start investing. Thanks for your help!

[Montecarlo]

Nice!  Just remember though, it's not a real interest rate - it does behave fundamentally differently.  But treating it like one can help understand the current cost of carrying that payment as compared to other debts or investment opportunities.

And for the love for all that is good in this world, please format your %s in excel as %s instead of multiplying by 100!

[Montecarlo]

Since you clearly know your way around a spreadsheet, here's your next assignment.  There's a definite downside to looking at PMI as an interest cost.  This assignment will get you around that downside.

Map out one scenario, where you put extra $$ toward your student loan until it's paid off, and then towards the mortgage until LTV < 0.8

Map out second scenario, where you put extra $$ toward your mortgage until LTV < 0.8, then student loan until it's paid off.

Remember to adjust the amortization tables, since your principal/interest should change as your balance drops.

Which one is faster?

Take the faster scenario, and take the extra $$ and invest it at a reasonable return until you get to the same month/year as the slower scenario.  Compare your net worth for that scenario, compared to the networth for the slower scenario.

[kroozin]

Ooo I like the challenge! I made an attempt at this, but there's a very high likelyhood I did something very wrong. Here were my results:

Paying mortgage to LTV < 0.8, followed by Student Loans:

Reach LTV < 0.8 by August 2020
Student Loans paid off by February 2022

Paying Student Loans, followed by paying Mortgage to < 0.8

Student Loans paid off October 2020
Reach LTV < 0.8 by August 2021

Student loans finishes first. I then have 6 months (September 2021 through February 2022) to invest the $2906/mo (now with the $559 originally going to student loans and $147 originally going to PMI), assuming a 7% APR = $17,709.71 saved.

PMI first: Mortgage Balance = $164,580.03, Student Loan Balance = $0, Saved/Invested = $0. Net Worth = $217,500 - $164,580 = $52,920

Student Loans first: Mortgage Balance = $171,385.53, Student Loan Balance = $0, Saved/Invested = $17,709.71. Net Worth = $217,500 - $171,385.53 + $17,709.71 = $63,822.18

So it seems like, unless I did my math wrong, paying off the student loans actually turns out better?? This is surprising to me, and my brain is jumbled from trying to track it all haha

[Montecarlo]

Yeah I would have expected the opposite, but that's why we go through the exercise.

Actually, I think you probably have a math error.  Shoot me your spreadsheet and I'll look.

[kroozin]

OK I definitely did something wrong the first time. I just finished giving it another shot and here are the results (full disclosure, I stole templates that others made for these calculations...I'm pretty good with spreadsheets, but A) This was easier, and B) I'm not fully fluent in the math yet).

Plan with Student Loans first: https://docs.google.com/spreadsheets/d/1kE3nqeYoy4W3PKXdla8Zg8cxMWCs3T0lK_nSbKbn8Aw/edit?usp=sharing
This time my math lead me to completing both goals on August 2021

Plan with paying mortgage first: https://docs.google.com/spreadsheets/d/1oQWvCve2nezpCqln87DpTHRaLMY_x1kkXsFlpMcTOWA/edit?usp=sharing
This time my math dead me to completing both goals on September 2021

Only a month apart this time, unless I've (again) made an error somewhere.

EDIT: I'm realizing now that I didn't include any contributions to my Roth or Simple IRA's in these calculations. I imagine I should be contributing something to these in the 2.5ish years it'll take to get to this point. Sounds like I need to run a third scenario where I pay down the debt a little slower while also contributing to these plans....man this gets confusing quickly!

[ItsALongStory]

Confusing perhaps but it's cool to see you enjoy the research. That's what we are all trying to re-learn to a certain extent, the curiousness that we had as kids and just run through scenarios vs doing what we have historically be told is the right approach.

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[Montecarlo]

OK I definitely did something wrong the first time. I just finished giving it another shot and here are the results (full disclosure, I stole templates that others made for these calculations...I'm pretty good with spreadsheets, but A) This was easier, and B) I'm not fully fluent in the math yet).

Plan with Student Loans first: https://docs.google.com/spreadsheets/d/1kE3nqeYoy4W3PKXdla8Zg8cxMWCs3T0lK_nSbKbn8Aw/edit?usp=sharing
This time my math lead me to completing both goals on August 2021

Plan with paying mortgage first: https://docs.google.com/spreadsheets/d/1oQWvCve2nezpCqln87DpTHRaLMY_x1kkXsFlpMcTOWA/edit?usp=sharing
This time my math dead me to completing both goals on September 2021

Only a month apart this time, unless I've (again) made an error somewhere.

EDIT: I'm realizing now that I didn't include any contributions to my Roth or Simple IRA's in these calculations. I imagine I should be contributing something to these in the 2.5ish years it'll take to get to this point. Sounds like I need to run a third scenario where I pay down the debt a little slower while also contributing to these plans....man this gets confusing quickly!

Nice.  Your mortgage sheet looks right to me.  Not sure about the student loans.  Particularly this part of the formula for reducing the balance:


IF( AND($C$6="Annual",$C$4="Monthly"),$C9-($B10-(($C9*($A$6/12)))) ...

If the interest compounds annually, then why add it in every month?  It may be simpler to just add a column for interest accrued like the mortgage sheet.


I like your approach of trying out different scenarios.  It will work out well for you!  Just don't get overwhelmed trying to find the perfect plan.  Find a good plan, go with it, and test out new ideas as they pop into your head.

[kroozin]

Nice.  Your mortgage sheet looks right to me.  Not sure about the student loans.  Particularly this part of the formula for reducing the balance:


IF( AND($C$6="Annual",$C$4="Monthly"),$C9-($B10-(($C9*($A$6/12)))) ...

If the interest compounds annually, then why add it in every month?  It may be simpler to just add a column for interest accrued like the mortgage sheet.

This seemed weird to me too, but I couldn't get the mortgage sheet template to match what's actually happened in my payments so far on my student loan. In fact, now that I dig deeper into my student loan, no pattern seems to make any sense as to the amount applied to interest/principal. It's quite bizarre (I've attached a screen shot). The payment varies by a few cents sometimes, but the amount applied to principal seems to jump up and down.

[Montecarlo]

You sure you don't have a variable rate loan?

[kroozin]

You sure you don't have a variable rate loan?

Positive. It even explicitly says on my rate information page that my rate is fixed for the duration of the loan. It's a refinance through LendKey, so I emailed them today to get more details. I also called my mortgage lender today to figure out what the exact situation would been for me to remove PMI from my mortgage, since I used an FHA loan. Lots of moving parts, but it's slowly coming together. I can't thank you enough for all your help!

Update: My SL lender got back to me. They calculate interest daily, so some months (like February) show less interest than others. So confusing, but at least I can get a more accurate read on it now. I've been toying with the different methods today and assuming I refinance to get out of my PMI at 80% LTV, that seems to be the better route, although it's a pretty minimal difference.

Confusing perhaps but it's cool to see you enjoy the research. That's what we are all trying to re-learn to a certain extent, the curiousness that we had as kids and just run through scenarios vs doing what we have historically be told is the right approach.

For sure! It's amazing how little I knew about all of this and yet how important it is at the same time. I now understand why people are constantly calling for more personal finance classes in high school. I can't imagine where I'd be right now if I had known all of this so many years ago.

[Montecarlo]

Update: My SL lender got back to me. They calculate interest daily, so some months (like February) show less interest than others. So confusing, but at least I can get a more accurate read on it now. I've been toying with the different methods today and assuming I refinance to get out of my PMI at 80% LTV, that seems to be the better route, although it's a pretty minimal difference.

I'm sure I'm being dense, but your interest went up from May (31 days) to June (30 days).  Even if you account for weekends and holidays I don't see the pattern.  Measuring mid-month to mid-month doesn't seem to resolve the pattern either.

[Montecarlo]

This math is roughly close but some wild outliers.

https://www.dropbox.com/s/ndfy8gohh23w8t7/student%20loan%20mystery.xlsx?dl=0

Either way, if evens out to the same APR/APY, safe to just do a normal calculation in your scenarios.

[kroozin]

Thank you for the kind words, FWP! I've been reading and researching quite a bit in the past few weeks and I'm excited finally be on the right path now. In just the past week I've had a friend ask me to join them on another trip and another friend try to convince me to buy an XBox One on a "good deal" for $200. Me from a month ago would have jumped on that "bargain" but now I look at it and think, "Man I really don't even have that $200, and I don't really need an XBox...pass!"

Of course I haven't been perfect either. I went out on a date last night and ended up spending $50 on overpriced drinks and food, and while I've made this far less frequent now, I'm having trouble avoiding it completely. But hey, one step at a time, I feel like I'm on the right path :)

[kroozin]

UPDATE: Got my tax correction from 2017 today. Bank loan is officially wiped out, and the remainder went to my Student Loans. So excited! Wiping out a loan in one fell swoop like that feels AWESOME!

After running the numbers a bunch of times, and seeing that the long term differences are pretty small, I've decided to focus on my student loans next (after maxing my HSA and IRA) because 1) It'll feel great when they're gone, and 2) The large increase in monthly cash flow will be nice to have. Here's to being all-but-mortgage debt free by the end of 2020!

[ysette9]

Nice update.
Keep up the good work!

[kroozin]

Update! I need some advice. I've just come into a decently sized windfall, and I'm trying to determine how to best allocate it. Quick update on my situation since the initial post, as I've been sticking to the plan and making solid progress.

Bank loan is gone. Student loans are down to $44,247. I'm now maxing out my HSA and a Traditional IRA, both of which are vested in Vanguard Index funds. It's nothing crazy but I've made a decent amount of progress to set up the system in the last few months and I'm excited about it.

A recent event at work has resulted in an unexpected windfall in the form of a low five-figure bonus, and I'm trying to decide what to do with it.

A family member suggested investing some in renovating my kitchen to improve the home value (likely staying for at least 3-5 years) but as old and run-down as my kitchen is (from the 60s, cabinets are old, counter top is sagging a bit), it's functional and I'm not sure that's the wisest way to spend the money.

My first thought was to dump most or all of it into my student loans (4.37% interest rate) - which would cut about 7 months off my payment schedule. That isn't "sexy" or exciting, but it may be the more sensible option.

Another option I thought of was to hold onto it and aggressively save more so I can put a downpayment on a rental investment, but generally prices around here for decent properties range from $160k for a condo to $250k for a 3 bedroom house, which means I'd need an additional $20-30k for a downpayment, which I wouldn't have for a few years.

Any and all thoughts are welcome, I'm in no rush to make a decision, but I figured Mustachians would have some good insights!

[ysette9]

Personally I would put the windfall towards your loans. You are right that it isn’t as sexy as some other options, but I think it is important to get your plate clear and then get on a path to sexier stuff. A kitchen remodel is a good idea once you’ve cleared your debt and have saved up enough to pay for one. Investing in real estate is an option that certainly isn’t required to reach FI. It also requires time and hard work on your part to educate yourself in advance to know how to spot a good deal and how to manage properties properly. Do you would need to do your homework first before deciding even whether that is the right path to take. I’m lazy and don’t want to put in the effort, so I just stick to index investing.

[ItsALongStory]

I would use it as a way to max tax advantaged savings for the year. Max out that Roth, increase 401k and spend this windfall during periods of little w2 income.

If you are already doing that I would probably just put it in investments since the loan rate is relatively low anyway. Putting it on the loan is a decent option as well, the math isn't that black and white imo.

Sent from my Pixel 2 XL using Tapatalk

[kroozin]

Definitely an interesting point. Although I should say that the bonus is coming through Payroll and therefore already has taxes taken out. The low five-figure amount I was referencing was the post-tax amount. With that in mind (although I could be misunderstanding this) it may not be as beneficial to put it in a 401k.

I'm doing some more research but I'm currently leaning towards putting some of it into stock in my company (the bonus is from a company acquisition) and the rest towards my loans, but keeping all my options open.

Appreciate the advice from both you and ysette!

I would use it as a way to max tax advantaged savings for the year. Max out that Roth, increase 401k and spend this windfall during periods of little w2 income.

If you are already doing that I would probably just put it in investments since the loan rate is relatively low anyway. Putting it on the loan is a decent option as well, the math isn't that black and white imo.

Sent from my Pixel 2 XL using Tapatalk

[kroozin]

Quick update here. The final available amount is $10,800 to distribute. If I put this towards my Student Loans, it takes me from $44,000 to about $33,000. Given my current payments that shaves about 7 months off my payoff time from 29 months to 22 months. On the one hand the guaranteed return is nice, but then I posted my numbers into this calculator: https://studentloanhero.com/calculators/student-loan-payoff-vs-invest-calculator/

I attached an image of what it told me, and the results are pretty staggering. Unfortunately the only way to stop the payment at this point is to have my bank put a stop on it, but looking at these numbers it might be worth it, and it's making me completely re-think my decision to aggressively pay off my loans in the first place.

Since I'm already maxing out my HSA and IRA, I'm thinking it could make sense to put this all into my 401k at work (no match, sadly) and THEN start paying the loans once that's maxed for the year.

I assume there may be a fee for putting a stop on the payment, but if these numbers are accurate it certainly seems worth it. I'd love to get your thoughts, because this is a pretty big decision for me, any advice is appreciated!

[freya]

I was going to suggest something else to do with the money:  buy a used car when your lease ends.   That will free up not only the car payment, but part of the insurance cost since the used car will be cheaper to insure.  This is likely costing you more than the student loan interest you'll be saving.

But - Throwing the money at the student loans is not wrong!  Market returns are uncertain except over long time frames of 15-20 years, while your debts need to be disposed of a lot faster than that.  The math works when you're talking about a 30 year mortgage, but not for situations like yours.

In your shoes, I would pare down expenses, get rid of the student loan and the PMI, and then carry the mortgage with minimum payments and have a blast investing the resulting savings.  BTW may I suggest getting rid of the gym membership and cutting down on the dining-out bill.

[Sanitary Stache]

This is great kroozin!  I am working on posting my own case study and have also "found" previously neglected retirement savings accounts.  When I started work 10 years ago I thought that all I needed to do was save 15% of my salary (which I didn't do) and I'd retire some day.  Now I look at my 8% savings rate and 10 years worth of stagnant retirement "investments" and wish I wasn't such an idiot.

I am surprised no one has commented more on your tax situation.   I am no wizard with accounting, but it seems like your federal income tax payments are a little high considering you got a $2,000+ tax return.  Contributions to a HSA, 401k, and traditional IRA will help further reduce the amount you need to give to the Feds each paycheck.  If you can handle saving, and it seems like you can, there is no reason to receive a tax return.

For your windfall, did you get your EF to where you want it between 3 and 6 months of expenses?

[kroozin]

Quick update: First off, as of a couple days ago I officially have a positive net worth!! Granted my latest windfall sped up that timeline by a few months, but it feels amazing to have made ~$24k in progress already since i started this journey. I've decided to continue focusing on the student loan debt (and PMI thereafter) to be done with it once and for all. I've already been paying off big chunks, which has brought my minimum payment from around ~$520 to ~$380, so opening the cash flow is a big bonus in my opinion.

@freya - I totally agree on the used car idea. My current plan is to save up a few months before my lease expires (July 2020) so that I have a downpayment ready. I figure that money is better served being invested/put towards debt in the meantime, and I'll just pay the minimum for 2-3 months before then and use the rest of my savings for a car. This is the first time I've ever had a car payment and I'm fairly certain I never will again....not a big fan haha

Re: the gym membership I get around here it's probably considered an unnecessary luxury, but it's a hugely important thing to me. The gym is in my office which allows me to go during the day, and I go with a few co-workers, which means I go far more consistently and push myself far harder than I would on my own. It's completely changed my health and life since I started going and it's worth the investment for me.

@Sanitary Engineer - There's nothing worse than looking back and thinking what could have been had I woken up to all of this earlier, but at least I'm aware now and all I can do is move forward, right? :)

As for my tax situation, there were a number of things that complicated the return this year, including an amendment from a previous house sale that resulted in such a big return. That said since then I've started making IRA contributions with post-tax money, so I've adjusted my withholdings to hopefully account for that. At the same time I'm also renting out a room in my house so I'm not at all sure if my adjustments were accurate enough to account for everything.

My EF is a bit questionable to be honest. I don't have much at all in savings, but I have a large amount I can pull from my ROTH if I need it, plus my cash flow each month is pretty significant that I can handle all but the biggest of emergencies with just a month lag. Maybe relying on the ROTH isn't the best idea, but it's hard for me to justify having money just sit there in a savings account when it could be earning interest in the market :)

[BicycleB]

Congrats re positive net worth, strong cash flow, and confidence to invest rather than have both a big EF and high cash flow.

You're probably aware, but just in case:

https://forum.mrmoneymustache.com/investor-alley/investment-order/