Author Topic: Want to take advantage of our 20's  (Read 4105 times)

tacomike

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Want to take advantage of our 20's
« on: April 26, 2018, 12:01:59 PM »
Life Situation: Married filing jointly in Tennessee (no state income), wife and I are both 23

Gross Salary/Wages: $70,500
My income - $36,000 ($2,074 monthly)
Wife Income - $34,500 ($1,763 monthly)

Notes:
- I am expecting a 10-15% raise in the next couple months.
- I receive about $10,000 bonus annually, paid out quarterly. I did not factor this into my salary above.

Total monthly take home- $3,837

Pre-tax deductions:
My 401k - $450 per month
Wife 401k - $450 per month
Medical Insurance (combined) - ~$200 per month

Adjusted Gross Income: $~49,000

Expenses (monthly):
Rent - $1,200
Utilities - ~$65
Wifi - $30
Groceries - $300
Eating out - $100
Gas - $150
Cell phones - $30
Haircuts: $15
Car Insurance - $40
Entertainment - $100
Misc - $200 (stuff for our home, cleaning supplies, etc. We don't always use this, but just thought I should show it here)

Total Expenses: $2,030 monthly

Assets:
Savings Account (emergency fund) - $10,000
Checking Account - $1,500
My 401k - $3k
Wife 401k - $2k
2 beater cars (paid off)

Total Assets: ~$16.5k

Liabilities:
None (yet...)

Specific Question(s):
- My wife and I would like to buy a house in the next 5 years. We live in a relatively moderate COL area, and would like to look (for reference) around the $250k range. How should we save for this, just keep growing a traditional savings account and keep funneling money towards it? We would ideally like to have a 20-30% down payment .
- I will need a new car soon, as I am still rocking a '99 Nissan Maxima with no power steering for the past year (she's still kickin'). I'll ride it till it dies though. Definitely want to stay under $9k here (pay in cash obviously), and hopefully i\I can ride out another year or so.
- I obviously want to maximize retirement savings in our 20's with the little expenses we have now, while balancing the house savings, and car savings. What's the best way to go about this according to our situation? Open two Roth IRA's?
- This month marks the first month we aren't paying off any large debts or have any huge costs, so looking to really get off to the races here.

General Notes:
- Right now we live off of one income, and put the other directly into the savings account of $10,000. That was all adding up to what it currently is as our completed Emergency Fund. That savings now needs to go somewhere else, or the traditional savings account will just keep growing and growing.
- We are both savers by nature, and avoid debt like the plague. We always pay of our CC's, and paid off $10k student loans in the first year of marriage.
- Saving for a house and car are our top priorities

Lady SA

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Re: Want to take advantage of our 20's
« Reply #1 on: April 26, 2018, 02:45:45 PM »
Have you thought deeply about the reason why you want a house so soon? An article for your consideration: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

I would suggest really thinking through why you want a house so badly, so soon. A house is not an investment, it is a consumable that you buy to store your stuff and sleep in. If you are interested in FIRE, or FI, it really sucks all your momentum to tie up significant assets early in your accumulation phase into an asset that basically only tracks with inflation.

Instead, I suggest you focus on saving in solid investment vehicles as early as possible. The Rule of 72 states that investments in the stock market will DOUBLE every 10 years even if you don't add a single additional penny. The earlier you start, the more doublings you get. So if, by 30, you save $200k and stop saving completely, at 40 you will have $400k, and 50 you will have $800k, and at 60 you will have $1.6 million. BUT, if you buy a house and therefore delay accumulating stocks, and only accumulate ~$100k by 30--a mere $100k difference. But, that one move leaves you with $800k LESS that you would have if you had focused on stocks first.

That is just an example. But basically, time in the market is most important. Because you say you want to take advantage of the decade of your 20s, that means you should buckle down, minimize your expenses (your 20s are generally the cheapest, most flexible decade of your life, so take advantage!), and invest as much as you can. Later, when you reach a solid number, you can scale back and then focus on spending/saving for other things like a house. But take care of your retirement first!

For reference, I am only 3 years older than you. Someone here on this forum gave me this same advice a few years ago when I was eager to save for a house, and DH and I are very, very glad we took it. We are planning on renting for at least another 5-7 years, and shoveling money at our investments. Then once we hit 30, we can scale back working, have kids and spend a lot of time with them, and just cover bills while maybe saving for a house, while our investments grow in the background. Then one day, we will wake up with FI money, and maybe we will have a house by then, maybe not. But saving this aggressively during our 20s in stocks specifically is setting us up for a much more relaxed life, because we get the luxury of an entire extra doubling that most people even on this forum didn't.

Anyway, your 20s are a time to maximize income (your incomes look low for a MCOL area) and minimizing expenses, and investing in the stock market as aggressively and early as possible.
Unless you have a very strong need for owning a house, I would avoid it like the plague. Unless you are planning on house-hacking, houses carry a LOT of costs and lost opportunity (downpayment goes into the static house instead of growing your investment portfolio and working for you), and renting is often not as bad a deal as american culture likes to say. I'd poke around and see if there were better rental deals out there, but in your position I really would consider holding off buying until your 30s.
« Last Edit: April 26, 2018, 02:48:36 PM by Lady SA »

Lady SA

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Re: Want to take advantage of our 20's
« Reply #2 on: April 26, 2018, 03:22:16 PM »
Also, while I'm on a roll, A few other bits of advice that may or may not be applicable (and sorry if I'm almost entirely ignoring your OP), mostly because I am in the same season of life and this is what has really worked for us:


--Hold off on lifestyle inflation. Keep your life as simple and streamlined as possible during your 20s. You may be used to the lifestyle that your parents provided: owning a nice house in a nice neighborhood, nice cars, pets, etc etc. But you also need to consider that it took 20-30 years for your parents to get to that point, and you shouldn't unconsciously expect to match that lifestyle right in the beginning of your adulting career. Be ok with feeling a bit deprived, because that's natural when you are first starting out!

--Drive your beater to the ground, but have a backup plan in place once it starts really declining. Only buy used cars. Try to be a single-car family and embrace a bit of inconvenience sometimes.

--Avoid getting pets!! They are both a money and time suck, and it is just better to avoid adding that line item to your budget right now. Wait until you are more settled before adding a pet to the family. This is related to keeping your life as simple as possible. this also allows you to go on trips, even spontaneously, without having to worry about what to do with the pets.

--Hold off on significant expenditures until after you have your retirement "doubling" goal amount set away. This is primarily directed at down payments, but also expensive cars. You simply can't afford it yet, even if it "feels" like you can in your monthly budget.

--By renting, you are purchasing the ability to be flexible in case of emergencies or better opportunities, and avoiding the opportunity cost outlay of a huge downpayment. You are not throwing money away. Plus, someone will come handle your broken toilet when you are at work, and you can blissfully come home to a working toilet. There are many ways you can lower your rental cost (roommates, downsizing, different area of town, etc)

--Buying a house comes with a lot of unexpected costs. Suddenly you have insurance, lawn mowers, snowblowers, furniture to fill it, landscaping equipment, tools, etc that you now suddenly need to buy too. Not to mention the ongoing, unrelenting maintenance costs and mortgage.

--I was recently given some advice: interview outside your company once a year. Sounds crazy, right? But doing this ensures that you are on the lookout for better and better opportunities, and you always have a sense of what you are worth, and it gives you really good interview practice without the "omg I need a job" pressure. The biggest salary jumps will generally come from moving companies. Don't be too loyal to your current company, and look out for your own interests above all--a company wont do it for you.

tacomike

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Re: Want to take advantage of our 20's
« Reply #3 on: April 26, 2018, 03:28:54 PM »
This is a great point, and thanks for sharing. I would agree that 30 or early 30's is a good number to shoot for to really start settling down with a house and kids. I guess we are not really "in a rush," but rather the house is our next big financial goal. So the 5 year timeline is rough, and just to give an estimate. Thanks for giving the advice on all the work that comes with a house...

Also the pet advice is golden! Having advice from someone in a similar life stage is very helpful.

Thanks for the input there! It helps a lot.

talltexan

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Re: Want to take advantage of our 20's
« Reply #4 on: April 26, 2018, 04:56:20 PM »
This is a great point, and thanks for sharing. I would agree that 30 or early 30's is a good number to shoot for to really start settling down with a house and kids. I guess we are not really "in a rush," but rather the house is our next big financial goal. So the 5 year timeline is rough, and just to give an estimate. Thanks for giving the advice on all the work that comes with a house...

Also the pet advice is golden! Having advice from someone in a similar life stage is very helpful.

Thanks for the input there! It helps a lot.

Other people are coming in against the house. I don't think buying a house is a problem if you're sure you will stay in it for five years. But the $250,000 price point for your incomes is really high. Even with a robust down payment, you're still talking mortgage payments of $1,100 on a 30-year, which will indeed delay the investment plan you need to be on.


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BookLoverL

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Re: Want to take advantage of our 20's
« Reply #5 on: April 27, 2018, 02:41:48 AM »
FWIW, 5 years is the time to retirement under the typical ERE savings percentage with a high income. But you might not want to go that frugal, I guess.

BookLoverL

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Re: Want to take advantage of our 20's
« Reply #6 on: April 27, 2018, 02:45:14 AM »
Oops, I meant to post that on the other thread about people in their 20s... Ignore me.

charis

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Re: Want to take advantage of our 20's
« Reply #7 on: April 27, 2018, 08:28:12 AM »
This is a great point, and thanks for sharing. I would agree that 30 or early 30's is a good number to shoot for to really start settling down with a house and kids. I guess we are not really "in a rush," but rather the house is our next big financial goal. So the 5 year timeline is rough, and just to give an estimate. Thanks for giving the advice on all the work that comes with a house...

Also the pet advice is golden! Having advice from someone in a similar life stage is very helpful.

Thanks for the input there! It helps a lot.

Other people are coming in against the house. I don't think buying a house is a problem if you're sure you will stay in it for five years. But the $250,000 price point for your incomes is really high. Even with a robust down payment, you're still talking mortgage payments of $1,100 on a 30-year, which will indeed delay the investment plan you need to be on.


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+1

A 250K house on your salaries is not a good idea.  What if one of you lost a job or couldn't work?  It seems like borrowing trouble.

Broadway2019

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Re: Want to take advantage of our 20's
« Reply #8 on: April 27, 2018, 12:26:44 PM »
I have a different view on the house. Right now, you are paying $1200 to someone else. Why not look for cheaper house and create some equity. I realize houses can decline but they also go up too.

I owned a house since I was 24. I bought a starter home from $195,000 with no money down (GASP!). I sold last year and made $60k after paying realtors. In addition, the mortgage was cheaper than rent in the area. Also, it was newer so literally spent no money on repairs during the time I owned it.

tomorrowsomewherenew

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Re: Want to take advantage of our 20's
« Reply #9 on: April 29, 2018, 07:50:21 AM »
I'm 32, and we're on our second house. I'm going to tell you to not buy a house until it's absolutely necessary. I don't really think the payment is going to be the problem. What is the problem is the renovations and maintenance it's going to need. You're looking at a roof-$10k, bathroom reno-$5-10k, kitchen reno-$10k, new carpet, $5k. It adds up. Everything in that house will need to be replaced eventually, probably some of it when you move in. Save your money and keep paying rent!

civil4life

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Re: Want to take advantage of our 20's
« Reply #10 on: April 30, 2018, 09:25:50 AM »
Some random thoughts.

First if you have not done so check out the Investment Order post https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.            
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.            
8. Invest in a taxable account and/or fund a 529 with any extra. 

I struck out the EF and the debt related ones since those do not apply. 
         
I believe your income is still low enough to get the tax advantage of a traditional IRA.  The less money you are giving to the tax man the better. 

Same with you are just a bit short of maxing out your 401ks. 

Additionally consider your companies 401k.  If there are not good options or high costs the IRAs would be better.

I believe both 401k and IRA have options for removing the money penalty free for first time home buyers. I would not necessarily recommend that just noting it as an option.

One thing you will need to consider is that your will be potentially reaching FIRE very young in your early 30s.  You will not have access to the 401k and IRAs until 59.5 years old.  You will definitely want to diversify your savings.

You may get a better response on how to save/invest by posting in the Investment forum.  I would just keep it simple.  Say you have x amount per month that you are looking to invest/save towards future home with 5-10 time horizon.  What are my best options for doing this?  You can always give them the link to the case study for additional information.

It is awesome that you are getting yourself on the path so early.  Just for reference I am in my early 30s.  I have always been a saver so I am not in a bad position, but had I found MMM a bit earlier I would have made a few different choices.  Buying new/newer car, possibly not buying my home, lifestyle inflation.  I am hoping to FIRE in 6ish years.

travelawyer

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Re: Want to take advantage of our 20's
« Reply #11 on: April 30, 2018, 12:32:26 PM »
I feel like everyone is ignoring your actual question, and just telling you not to buy a house!  There's valid points made, but if you do in fact want to buy a house, I would suggest that you invest the amount that you are saving for a house (including your current emergency fund).  When you are ready to buy the house, 5 or however many years down the road, you can redeem your investments.  I think people get caught up in bucketing "savings" and "emergency fund" and "retirement money" when as long as it's accessible it's all the same.  Mutual funds and ETFs are required to redeem your money within 7 days (usually you get it in 3) so there's no reason why you have to keep it in a special "savings" account, as you could be missing out on 5 years of market returns.  Then in 5 years you can reevaluate whether you still want the house or not.

That leaves the question of whether you should be contributing more to tax-advantaged retirement accounts.  I'm going to go against the grain of the responses here and say no.  If you do have an HSA option on your medical insurance, I would contribute to that, as HSAs are entirely tax-free.  But your taxable income is already low, and could increase over time, so I would say put some money aside in taxable accounts right now, so you have it for the car and house if that's how you decide to spend it.  You can reevaluate in a few years and consider opening IRAs then, once you've established a larger stash of taxed money. 

But I second not getting a pet! So much freedom!  So much costs savings! #petfreeforlyfe
« Last Edit: April 30, 2018, 12:34:27 PM by travelawyer »

gatortator

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Re: Want to take advantage of our 20's
« Reply #12 on: May 02, 2018, 10:15:15 AM »
Life Situation: Married filing jointly in Tennessee (no state income), wife and I are both 23

Gross Salary/Wages: $70,500
My income - $36,000 ($2,074 monthly)
Wife Income - $34,500 ($1,763 monthly)

....

Specific Question(s):
- My wife and I would like to buy a house in the next 5 years. We live in a relatively moderate COL area, and would like to look (for reference) around the $250k range. How should we save for this, just keep growing a traditional savings account and keep funneling money towards it? We would ideally like to have a 20-30% down payment .
-


I am not a hard core member of the club here,  but the following housing rule has added so much flexibility into my life and really increased my happiness/contentment....

If you want a house, feel free to buy a house-- BUT

use only one income to determine how much house you can afford-- and use the lowest income.  Make your mortgage no more than 3x that person's salary.  For you all,  that would be mean

max mortgage (30year)--  34.5k x 3= $ 103, 500.   

For a 250k house then, you will need to come up with a 146.5k down payment.  That's means a large amount of your next worth will be invested in your house. 

For a more "traditional" 20% downpayment.  Max house value would be $129, 375 with a $25,875 downpayment/ $103.5k mortgage.

Why this rule?  You will have such greater flexibility in your life for multiple reasons:

1-  smaller house-- less time/energy/money for upkeep.  More time for what you want to do, not have to do.
2- smaller stress--  less time/energy wasted on how you can afford it.  Someone loses a job- no problem!  Someone wants to cut back hours- no problem!  Have kids and one stays at home-- no problem!  You already have these contingencies covered.
3-  greater flexibility-  at this price,  it will be starter home. If you need to relocate,  it will be easier to sell to a bigger audience.

So yes save for a house if you want it-- savings accounts are at ~1.5%, I think Vanguard money market is at 1.7% (not as protected as savings).  My bank has a promotional CDs of 2-3%-- that may work for you too if you better know your timeline.


You are 23.  You plan to buy a house by 28-- this sounds very familiar.  I have zero clue at these ages what I would be doing in my  30s.  When work really started to drag and work/life need to be rebalanced,  we had way more options open to us because of the above rule.  We were able to greatly slow down life.

Buy a house, yes--  but give your future self the great gift of flexibility.
 

Raenia

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Re: Want to take advantage of our 20's
« Reply #13 on: May 02, 2018, 10:35:01 AM »
Specific Question(s):
- My wife and I would like to buy a house in the next 5 years. We live in a relatively moderate COL area, and would like to look (for reference) around the $250k range. How should we save for this, just keep growing a traditional savings account and keep funneling money towards it? We would ideally like to have a 20-30% down payment .
- I will need a new car soon, as I am still rocking a '99 Nissan Maxima with no power steering for the past year (she's still kickin'). I'll ride it till it dies though. Definitely want to stay under $9k here (pay in cash obviously), and hopefully i\I can ride out another year or so.
- I obviously want to maximize retirement savings in our 20's with the little expenses we have now, while balancing the house savings, and car savings. What's the best way to go about this according to our situation? Open two Roth IRA's?
- This month marks the first month we aren't paying off any large debts or have any huge costs, so looking to really get off to the races here.

1. 5 years is a long enough timeframe that you don't want that sitting in a savings account with minimal interest.  Especially since you'll have flexibility on when to buy, once the time gets closer.  Keep this money in a taxable account until you get closer to needing it.  Plus, in 4-5 years you can revisit if you're really ready to buy or want to keep waiting.  You're not locked in to the plan now :)
2. Start a sinking fund for the new (to you) car you will eventually need.  You can choose a set amount of money to put in each month based on your 9k target and an estimate of how much life your Maxima has left in her.
3. Yes, open Roth IRAs and contribute the max for each of you.  I'd also recommend increasing your 401k contributions for both of you.  The tax benefits of these accounts will be a great help, especially as you're so early in the game.
4. You're doing great so far, good luck!

Hirondelle

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Re: Want to take advantage of our 20's
« Reply #14 on: May 02, 2018, 02:02:40 PM »
You guys are off for an excellent start on the road to FIRE!

I agree that you shouldn't buy a house to soon and especially not a 250k house at your current income levels. However, you are 23 and had student loans so it sounds like you've only started your career abour 2 years ago. You're already mentioning an expected raise of 10-15% and your partner might experience the same. Sounds like within 5 years you might be well at the right income level to buy a 250k house, depending on the average pay bumps in your field.

Regarding savings; best to invest most of it while paying the least possible taxes. How much money is there left for savings after maxing out retirement accounts?

You currently already have a 10k emergency fund and you're looking at a car for <$9k. I think you could see a car breakdown as an "emergency" and take this money from your emergency fund to replenish it asap after. If you really expect your car to fall apart soon start saving a little extra in the EF so it's not completely empty after a new car purchase.

The house is rather a mid-term project and therefore I find it hard to just say "invest everything" - 5 years is a relatively short period and the market might drop (but most likely will go up). As you save quite a bunch of money each month AND can expect some raises in the next years I think it's okay to invest all the money for the next 1-2 years and once house purchase gets closer start saving money in low/no-risk places like high-interest CDs.

Your expenses are one of the lower one's I've seen here on the case studies so excellent job on that. No big items that can be optimized there.

tacomike

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Re: Want to take advantage of our 20's
« Reply #15 on: May 03, 2018, 12:41:14 PM »
Thanks for the insight! We currently save my wife's entire paycheck per month (~$1,700). I know this is too much to just be socking into a savings account for a house down payment, so what do you think would be a good course of action here?

GOFU

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Re: Want to take advantage of our 20's
« Reply #16 on: May 06, 2018, 03:42:40 PM »
For beginner broad strokes investing see: https://www.bogleheads.org/wiki/Getting_started

If you are completely new to investing I would suggest a slow read a couple times through and make sure you really understand it. It is not the be all end all, but great for beginners.

If you are able to keep saving $1,700 per month for 10 years, with a modest 5% return your stash will be in the $275k range by age 33 and momentum will be solidly behind you. If you can increase your savings as your income increases and/or are fortunate enough to realize greater return, so much the better.