Author Topic: Updated Case Study: Progress and a new strategy  (Read 2507 times)

latearriving

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Updated Case Study: Progress and a new strategy
« on: October 19, 2018, 10:36:03 AM »
Hi everyone,

Here's where I started about 15 months ago:

https://forum.mrmoneymustache.com/case-studies/case-study-nearly-35-moderate-debt-practically-no-savings/msg1617616/#msg1617616

I'm happy to report that here's where I'm at now:

Credit card debt: $0
Emergency fund: $5,000
401k: Have been contributing between 5-10%; balance is up to $8,200
Monthly expenses: holding steady at $1,975-2,000 per month

Overall, it's felt great to be free of credit card debt, build an okay EF, and ensure I'm prioritizing 401k contributions. On the downside, I haven't touched my student loan ($41,000) other than paying about $50 above the monthly minimum, so this is still an area of concern. However, bigger picture: after searching for a new job for the last several months, I received an excellent offer that will increase my salary from $53,000 to $78,000. I'm not eligible for a bonus this year, but will be in 2019. The target bonus would be somewhere around $10,000. I have a week off before my new job starts on 10/29. Until then, I'm trying to game plan and devise a strategy that will allow me to speed up my financial rebuild.

In terms of income planning for the new job, based on my math, I should be netting about $3,700 per month after taxes, benefit deductions, commuter expenses, and a projected 8% 401k deduction. That leaves me with somewhere around $1,700 to throw at additional savings, retirement needs, and debt. In thinking about ways to allocate this, I thought I might spend my first few months allocating $1,000 to my EF until it reaches $10,000. I'd use an additional $450 for Traditional IRA contributions and continue doing that year round. The extra would go towards my loan. After I hit $10,000 in the EF, I could potentially throw that $1,000 per month at the student loan. The other option would be to go 50/50 on paying down the loan and increasing my 401k contribution. The one variable is added monthly expenses, specifically housing. I'm currently only spending $700 per month on rent (girlfriend and I pay $1,400 per month which we split evenly). With the new job, my girlfriend is already mentioning that she'd like me to contribute more, as her income is relatively low. She's asked that I increase my share to $900. If I do so, I'd still have ~$1,500 after expenses. The other consideration, of course, is possibly moving to another place or closer to my new job, where rents will be higher. I'd like to keep my rent down for as long as possible, but understand that it may not be entirely possible. Still, would be curious to know what you think is a realistic jump in rent that would still allow me to be in good position. More importantly, what would be your updated strategy for savings, retirement, and student loan debt? I want to hit the ground running and not squander the opportunity in front of me.

Few other details of importance:

- new company's 401k plan matches 50% up to 6%
- contributes 2.5% of bi-weekly base salary into a pension plan
- in addition to bonus, typically makes an additional yearly 1-4% contribution into 401k at same time bonus is paid out

« Last Edit: October 19, 2018, 10:47:10 AM by latearriving »

GettingClose

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Re: Updated Case Study: Progress and a new strategy
« Reply #1 on: October 19, 2018, 10:50:04 AM »
No suggestions/advice, but it's great that you posted this follow-up.  So encouraging to see people turn their financial lives around!  Admire your ability to resist lifestyle creep.  It does sound reasonable to contribute more toward the rent and get your emergency fund built up to perhaps $12k (so you have 6 months of expenses). 

At 7.25%, that student loan sounds like a priority.

Good luck!

Watchmaker

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Re: Updated Case Study: Progress and a new strategy
« Reply #2 on: October 19, 2018, 11:04:04 AM »
Congratulations on the new job!

Is your student loan still at 7.25%? Any chance of reducing that?

I wouldn't split the money until you've filled the e-fund. So, first ~3 months it all goes into the e-fund. Then I'd start directing money however you choose. Depending on your assumptions about market returns, I suspect the math would tell you to focus on investing and not the debt. But paying off the debt has the advantage of being low risk returns, which the market is not.

Personally, I wouldn't want to still have student loan debt in my forties, so I would focus on paying that off over the next 2-3 years.

Paying a larger share of rent sounds reasonable.




Laura33

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Re: Updated Case Study: Progress and a new strategy
« Reply #3 on: October 19, 2018, 11:18:18 AM »
First, the student loan interest rate is definitely high enough that you can't really go wrong prioritizing that.  Can you refinance?

Second, though, I would run some tax estimates on the effect of increasing your 401(k) or tIRA contributions.  A few things worth noting:  as long as you are single and covered by a retirement plan at work, you can deduct a tIRA only until your MAGI reaches $63K (for 2018).  With your raise and bonus, you may exceed this threshold in coming years, so you may want to prioritize taking advantage of the tIRA option now while you still have it.  In addition, even if/when your salary would push you over that threshold, contributing more to your 401(k) may reduce your MAGI so you would still be eligible to deduct your tIRA contributions.  And then you are probably in the 22% bracket now and may go up to the 24% in a few years, so every pre-tax dollar you can put away will "save" you $0.22-24 in federal taxes.  Basically, you want to run your tax numbers so you understand the pros and cons of putting more or less into your 401(k) and tIRA.

I mention this because the thing about the 401(k) and tIRA contributions is that they are on an annual basis.  If you don't contribute the maximum one year, you can't "make it up" in later years -- and indeed, at a certain income level, you lose the ability to contribute to a tIRA entirely.  So my own inclination would be to tell you to spend the last couple of months of this year throwing everything you can at your tax-deferred accounts, because once January 1 hits, you can never make up those contributions again -- and then adjust for 2019 to find the right balance of loan paydown and IRA/401(k) investment.  But, again, that is a personal preference; like I said above, with a 7%+ loan rate, you can't go too far wrong paying that off first if you can't refinance.

Also, what are the chances you get fired in the first month or two of the new job?  Unless you have an official "probationary" period, I think you can let the EF slide a bit while you throw that new income at your investments or loans -- you've basically got 2-3 months of expenses covered already, which is a great starting point.

latearriving

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Re: Updated Case Study: Progress and a new strategy
« Reply #4 on: October 21, 2018, 12:04:15 PM »
Thanks for the kind words and encouragement.

I ran a few more numbers and looked at Turbo Tax's Taxcaster tool to get some more ideas. For the remainder of 2018 and 2019, I think a reasonable option might be to go with 11% for the 401k and contribute $200 per month to a tIRA. My MAGI won't exceed $63,000 this year, so all tIRA contributions for the remainder of 2018 are going to be deductible.

The 2019 would look like this:

Gross salary: $78,000
401k contributions $8,580
Pre-tax deductions (health, dental, vision, and commuter cost): $5,780
MAGI: $63,640

That gets me very close to the $63K MAGI. I could bump up 401k contributions during a few months to stay below that. The ~$2,500 in tIRA contributions would give me an added boost in retirement savings. Also, I'm still going to receive the $2,500 student loan interest deduction, at least for 2019. Beyond that is uncertain because I will become eligible for the company's annual bonus in 2020. At that point, I probably reevaluate, up the 401k contributions, and maybe think about contributing to a Roth.

In terms of the student loan, yes, I'm still at 7.25%. I ran a SoFi quote and came up with these options:

Fixed:                   

5 year: $862.86/5.409%
7 year: $664.94/6.099%
10 year: $505.25/5.999%

Variable:
5 year: $857.25/5.139%
7 year: $659.09/5.829%
10 year: $499.12/5.729%

What would be the potential advantages/disadvantages for fixed vs. variable? One thought I had is that I could start with the 10 year variable just to lock in a lower rate than I'm currently paying. However, I'd add an additional $500-600 to each monthly payment consistently. Final thought to consider is the impact of projected bonuses. I obviously can't guarantee that I'll get a $10K+ bonus every year or even that I'll still be in the same job, but the potential is there to both get an increase in base pay and receive the bonus. If that happens, I could direct all of the after-tax payout to the loan to accelerate the payoff. That realistically puts me on a path to paying it off in 2-3 years max.
« Last Edit: October 21, 2018, 12:12:00 PM by latearriving »

SwordGuy

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Re: Updated Case Study: Progress and a new strategy
« Reply #5 on: October 21, 2018, 08:45:12 PM »
First of all, congrats.  You're on the right track!

If you refinance, I would not go for the variable interest loans, especially given how close they are to the fixed rates.   For example, the 10 year variable loan saves you $6 a month if rates don't go up.  If they go up (and they will), you'll be worse off.  I wouldn't take on extra risk for $6 a month.

I think you're working up the right plan.   And definitely hammer those student loans with everything you can after you fund the 401k, etc.

Watchmaker

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Re: Updated Case Study: Progress and a new strategy
« Reply #6 on: October 22, 2018, 08:52:33 AM »
I agree with SwordGuy that there isn't a big enough difference between the fixed and variable rates to justify the extra risk of the variable rate.

I don't understand why the 7 year rate is higher than the 10 year rate, are you sure you've got those the right way around?

Either way, refinancing to the 10 year fixed (but hopefully paying it off quicker than that) sounds like a good plan.

Kayad

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Re: Updated Case Study: Progress and a new strategy
« Reply #7 on: October 27, 2018, 03:48:32 AM »
Thanks for the kind words and encouragement.

I ran a few more numbers and looked at Turbo Tax's Taxcaster tool to get some more ideas. For the remainder of 2018 and 2019, I think a reasonable option might be to go with 11% for the 401k and contribute $200 per month to a tIRA. My MAGI won't exceed $63,000 this year, so all tIRA contributions for the remainder of 2018 are going to be deductible.

The 2019 would look like this:

Gross salary: $78,000
401k contributions $8,580
Pre-tax deductions (health, dental, vision, and commuter cost): $5,780
MAGI: $63,640

That gets me very close to the $63K MAGI. I could bump up 401k contributions during a few months to stay below that. The ~$2,500 in tIRA contributions would give me an added boost in retirement savings. Also, I'm still going to receive the $2,500 student loan interest deduction, at least for 2019. Beyond that is uncertain because I will become eligible for the company's annual bonus in 2020. At that point, I probably reevaluate, up the 401k contributions, and maybe think about contributing to a Roth.

In terms of the student loan, yes, I'm still at 7.25%. I ran a SoFi quote and came up with these options:

Fixed:                   

5 year: $862.86/5.409%
7 year: $664.94/6.099%
10 year: $505.25/5.999%

Variable:
5 year: $857.25/5.139%
7 year: $659.09/5.829%
10 year: $499.12/5.729%

What would be the potential advantages/disadvantages for fixed vs. variable? One thought I had is that I could start with the 10 year variable just to lock in a lower rate than I'm currently paying. However, I'd add an additional $500-600 to each monthly payment consistently. Final thought to consider is the impact of projected bonuses. I obviously can't guarantee that I'll get a $10K+ bonus every year or even that I'll still be in the same job, but the potential is there to both get an increase in base pay and receive the bonus. If that happens, I could direct all of the after-tax payout to the loan to accelerate the payoff. That realistically puts me on a path to paying it off in 2-3 years max.

First, congratulations on the new job and killing the credit card debt.  That is inspiring!

Two thoughts for you:  You need to prioritize getting your full 401k match over t ira contributions-see investment order post. That is free money.  So you need to contribute 12% minimum for full match.  Really, I canít see why you need to complicate things by splitting tax deferred savings between t ira and 401k. (Maybe if your 401k fees or investment options are bad?).

Next, definitely shop around on the student loan refinance.  There are 3 or 4 companies in that space.  Seems like most people report that Earnest gives them the best rate. 

ShoulderThingThatGoesUp

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Re: Updated Case Study: Progress and a new strategy
« Reply #8 on: October 27, 2018, 04:44:40 AM »
$10,000 seems like an oversized EF when you donít have a house and you have debt at 7.25%.

freya

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Re: Updated Case Study: Progress and a new strategy
« Reply #9 on: October 30, 2018, 10:12:57 PM »
Agree - with a large 7+% debt, I personally would limit 401K contributions to the 6% needed to get the company match in full, forget the tIRA, and limit the e-fund to your minimum comfort level in order to pay it down as fast as possible.  With your credit cards now freed up, you have lots of wiggle room if you lost that new job.

Definitely refinance if you can.   Either way, you should be done with that student loan in about 3 years if you keep up the excellent work!

Dragonswan

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Re: Updated Case Study: Progress and a new strategy
« Reply #10 on: November 06, 2018, 06:53:19 AM »
So your new job will pay you $25K a year more than the old job.  You are used to living at the old salary.  So I would for 2019 max out the 401k, which will be $19K.  Then put $5K in your IRA.  You'll never miss it and thank yourself later.  This strategy basically keeps your taxable salary the same while painlessly accelerating your retirement. 

Split the difference with your girlfriend and up your contribution by $100/month.  After all that, throw the extra at your student loans.  Your emergency fund is fine for now (as another poster pointed out you don't own property and could juggle things a bit  and/or get a new job before you hit critical mass).