Author Topic: In need of some financial advice/direction  (Read 1680 times)

Bfels

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In need of some financial advice/direction
« on: August 11, 2017, 10:31:17 AM »
I am a PE teacher/basketball coach who is 2 months away from marrying my Fiance who happens to also be a teacher/coach.  We both enjoy our work and what we do but struggle financially especially with teacher salaries in Arizona.  As much as we've tried to cut expenses we still find ourselves living the paycheck to paycheck life and struggling to save money.  Fortunately I do have a summer job commercial fishing in Alaska which helps greatly with additional income, though the pay varies greatly by the year.  For instance last year I made 6,000 in the summer compared to this year where I made 25,000.  Because it is self-employed income I will have to pay probably close to 5,000 of that money in taxes leaving me with about 20,000 that I am trying to decide the best way to use.  My fiance and I have about 7,000 in credit card debt, as well as about 25,000 on a car that we purchased before I became educated on the mustachian ways.  We have goals to purchase a house as soon as possible because we are sick of paying so much in rent every year.  And I would also like to open an investment account to supplement the 401K's that we both have at work.  So I guess my question is....with about 20,000 dollars in extra income this year what would be the most sound financial decision to make. 
I could pay off the 7,000 debt on credit first, open a Vanguard account with say 5,000 and put the remaining 8,000 or so into a down payment fund that we can hopefully continue to add to.  Or should I be looking at putting more into investing while I have the money?  Or on the flip side should I be putting more into a down payment for a house while we have the money?  I'm not even mentioning the car right now as we just continue to make the 500/month payments on it.  Thanks for listening and any help/advice would be greatly appreciated!

dcamnc

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Re: In need of some financial advice/direction
« Reply #1 on: August 11, 2017, 10:41:44 AM »
If it were me, I'd:
1. Pay off the visa, pronto, once and for all
2. Sell the car and buy a cheap one with cash
3. Keep stacking the remainder towards your down payment and/or investing goals.

Just my opinion though. I'm sure others will come forward with more advanced suggestions.

Bracken_Joy

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Re: In need of some financial advice/direction
« Reply #2 on: August 11, 2017, 10:43:36 AM »
I would highly recommend you do a case study! This will allow you to better organize your questions and numbers. Here is the link: https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/
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Goldielocks

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Re: In need of some financial advice/direction
« Reply #3 on: August 11, 2017, 10:44:06 AM »
I could pay off the 7,000 debt on credit first, open a Vanguard account with say 5,000 and put the remaining 8,000 or so into a down payment fund that we can hopefully continue to add to. 

^^
This sounds like a great plan to me.   

My preference would be to pay off the car, too, to get rid of the monthly payment.  There is NOTHING as wonderful as being free of a $500 per month payment, and if you have tight cash flow, that will help a lot emotionally.   Add the $500 per month to investments instead.   If your interest is very low on the car, maybe you are ok with it, but everyone I know that worked in Alaska Fishing used it to buy cars free and clear in the fall, and the smart ones had money left over to invest.   Aim to NEVER have a car payment again.  EVER.

 I assume here that you already have an emergency fund, or are willing to tap into your down payment savings for a true emergency.  Keep at least $1k float in your checking at all times, too.

As we have been on an upward trend for a while, any money that you want access to within the next 5-7 years should be conservatively held, IMO.   I have been burned by drops in the market before, and it is much better to earn less additional money than to lose 25% when you need it.

jlcnuke

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Re: In need of some financial advice/direction
« Reply #4 on: August 11, 2017, 10:47:14 AM »
1. Pay off credit cards.
2. Establish an emergency fund assuming you don't have one.
3. Determine if the car is really a necessity or if you could do with one that doesn't cost you $500/month. If you can do with less, then sell it and get something more affordable (preferably paying with cash, but using a loan to leverage money and investing the payoff instead would also be fine in my opinion).
4. Invest half of any remaining money.
5. Spend the other half of any remaining money on you and your fiance.

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Cwadda

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Re: In need of some financial advice/direction
« Reply #5 on: August 11, 2017, 10:49:31 AM »
I would highly recommend you do a case study! This will allow you to better organize your questions and numbers. Here is the link: https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

This. Making a case study will help other posters lead you to the best advice.

Bfels

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Re: In need of some financial advice/direction
« Reply #6 on: August 11, 2017, 11:28:23 AM »
Thanks for the response.  I will look into creating the case study.  I have reservations about selling the car because it is an upside down loan I would still prob be 7-10K in debt after I sold the car, but I guess I should probably look more to the long term benefits of saving the 500 a month.  Are my worries about having bad timing with investing and buying a house in the current markets valid?  I know that's probably a conversation for another thread where there's lots of information on that but I worry that I'll be putting money in at the wrong time. 

VoteCthulu

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Re: In need of some financial advice/direction
« Reply #7 on: August 11, 2017, 11:32:25 AM »
5. Spend the other half of any remaining money on you and your fiance.
I've never understood why people set aside money to essentially throw away. If you're not FI, shouldn't every expenditure have to pass the "If I read about someone else buying this would I want to give them a face punch" test?

That's not to say you can't budget for entertainment (you should!), but why plan to waste a windfall that could speed you to your goals?

Goldielocks

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Re: In need of some financial advice/direction
« Reply #8 on: August 11, 2017, 12:00:24 PM »
Are my worries about having bad timing with investing and buying a house in the current markets valid? 

Yes, this risk always exists and it is hard to predict just when a down slide occurs, and there is tremendous growth just before the downfall, too, so doubly hard to just "sit it out".

Eliminate the bad timing with investing risk by holding for the long term, and putting money you want access to in 5 years into conservative / fixed income or cash type investments.

Buy a house when it, and the cost, make sense for YOU.  Be prepared to stay there for more than 7 years helps.

StudentEngineer

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Re: In need of some financial advice/direction
« Reply #9 on: August 11, 2017, 12:08:04 PM »
Thanks for the response.  I will look into creating the case study.  I have reservations about selling the car because it is an upside down loan I would still prob be 7-10K in debt after I sold the car, but I guess I should probably look more to the long term benefits of saving the 500 a month.  Are my worries about having bad timing with investing and buying a house in the current markets valid?  I know that's probably a conversation for another thread where there's lots of information on that but I worry that I'll be putting money in at the wrong time.

I think you should run the numbers on keeping the car versus selling it and getting a more efficient and cheaper vehicle.  You could very well come ahead in the long run by cutting your losses right now and making the transition to a different vehicle.

There is a bunch of talk regarding timing and I suggest you dive into that when you're ready.  Some food for thought, Vanguard did a study and came up with investing right now is better than investing later, the majority of the time. https://investor.vanguard.com/investing/online-trading/invest-lump-sum?lang=en (not the study but similar).

I second the notion that you should do a case study.
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Laura33

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Re: In need of some financial advice/direction
« Reply #10 on: August 11, 2017, 01:57:54 PM »
I am a PE teacher/basketball coach who is 2 months away from marrying my Fiance who happens to also be a teacher/coach.  We both enjoy our work and what we do but struggle financially especially with teacher salaries in Arizona.  As much as we've tried to cut expenses we still find ourselves living the paycheck to paycheck life and struggling to save money.  Fortunately I do have a summer job commercial fishing in Alaska which helps greatly with additional income, though the pay varies greatly by the year.  For instance last year I made 6,000 in the summer compared to this year where I made 25,000.  Because it is self-employed income I will have to pay probably close to 5,000 of that money in taxes leaving me with about 20,000 that I am trying to decide the best way to use.  My fiance and I have about 7,000 in credit card debt, as well as about 25,000 on a car that we purchased before I became educated on the mustachian ways.  We have goals to purchase a house as soon as possible because we are sick of paying so much in rent every year.  And I would also like to open an investment account to supplement the 401K's that we both have at work.  So I guess my question is....with about 20,000 dollars in extra income this year what would be the most sound financial decision to make. 
I could pay off the 7,000 debt on credit first, open a Vanguard account with say 5,000 and put the remaining 8,000 or so into a down payment fund that we can hopefully continue to add to.  Or should I be looking at putting more into investing while I have the money?  Or on the flip side should I be putting more into a down payment for a house while we have the money?  I'm not even mentioning the car right now as we just continue to make the 500/month payments on it.  Thanks for listening and any help/advice would be greatly appreciated!

Don't take on debt for new consumption while you're still paying for your past consumption.  And what are you doing for an EF and retirement savings?  You need to have your past consumption paid for and your future needs covered before you can afford to take on any more debt for current wants; IMO, if you can't afford a house while still saving for your future needs, you can't afford a house. 

Once you have the loans gone and an EF and retirement savings covered, it's your choice whether to focus on the downpayment or post-tax investments, depending on your priorities.  If you decide to save for a downpayment, don't forget the "shit we will need once we find a house" fund as well.* 

*Note: no one actually knows the specific shit before the house is bought, but there is always, always shit; your job is to be ready for it so you don't run up the CCs again because it's just the perfect house except for that godawful dirty carpet that just has to be replaced before we move in. . . . 
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PDXTabs

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Re: In need of some financial advice/direction
« Reply #11 on: August 11, 2017, 03:15:25 PM »
I'm not a tax expert, but you should be able to put 25% of your earnings into a SEP-IRA (lowering your FICA and income tax) while still having enough left over to pay off the credit cards.
« Last Edit: August 11, 2017, 03:17:27 PM by PDXTabs »

jlcnuke

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Re: In need of some financial advice/direction
« Reply #12 on: August 11, 2017, 04:25:33 PM »
5. Spend the other half of any remaining money on you and your fiance.
I've never understood why people set aside money to essentially throw away. If you're not FI, shouldn't every expenditure have to pass the "If I read about someone else buying this would I want to give them a face punch" test?

That's not to say you can't budget for entertainment (you should!), but why plan to waste a windfall that could speed you to your goals?
Pretty much everyone sets aside money to throw away, you included. My opinion is that earnings increase for most, and when earnings or good fortune smiles upon people they should always use part of that for spending on increasing their quality of life (responsibly) after using some for advancing long-term goals. I could have left my quality of life at "ramen 7 meals a week and other similar cuisine for the rest of my meals and rent just a bedroom and been retired by now. I'm certain my happiness would be lesser in such a situation however, so I choose to always enjoy some of the proceeds of my hard work.

There's more to life than just trying to stop working and I think it's important to remember that.

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VoteCthulu

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Re: In need of some financial advice/direction
« Reply #13 on: August 11, 2017, 04:54:58 PM »
5. Spend the other half of any remaining money on you and your fiance.
I've never understood why people set aside money to essentially throw away. If you're not FI, shouldn't every expenditure have to pass the "If I read about someone else buying this would I want to give them a face punch" test?

That's not to say you can't budget for entertainment (you should!), but why plan to waste a windfall that could speed you to your goals?
Pretty much everyone sets aside money to throw away, you included. My opinion is that earnings increase for most, and when earnings or good fortune smiles upon people they should always use part of that for spending on increasing their quality of life (responsibly) after using some for advancing long-term goals. I could have left my quality of life at "ramen 7 meals a week and other similar cuisine for the rest of my meals and rent just a bedroom and been retired by now. I'm certain my happiness would be lesser in such a situation however, so I choose to always enjoy some of the proceeds of my hard work.

There's more to life than just trying to stop working and I think it's important to remember that.
Perhaps we're just confusing terminology, then. I'm not saying anyone shouldn't spend money on things that improve their life. If sports is really important to you and you gladly push back FIRE for a few years to enjoy season tickets, etc. then that's great.

What I don't understand is the idea that getting $10k+ I didn't expect justifies throwing some portion of it away on junk I wouldn't normally buy without considering what the best use for it is (which is very likely saving it, otherwise I would have reduced my savings and bought it inside my budget if it was that important to me).

ysette9

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Re: In need of some financial advice/direction
« Reply #14 on: August 11, 2017, 05:22:29 PM »
Quote
We have goals to purchase a house as soon as possible because we are sick of paying so much in rent every year.

Someone touched upon this already, but I feel I need to be really clear. Being "sick of paying so much in rent every year" is a terrible reason to buy a house. You have to spend money to put a roof over your head, whether that is renting or buying. Buying has a lot of hidden costs, including taxes, insurance, maintenance, and all of those desires that creep in for nicer furniture or little upgrades or lawn mowers or whatnot. It really adds up (we just bought a house 2 months ago and our budget for all of that nonsense is $50k). Take a spin on the NY Times' Rent vs. Buy calculator (just google it) to see if it even makes financial sense to buy.

The other thing I think you should consider, in addition to a case study, is moving out of state. If you are both teachers and plan to stay that way AND work for a state that pays little, what do you have to gain by staying put? Go find another state (preferably one that isn't so hot) that will value your skill set more. I am not a teacher and don't know anything about it, but I know I have seen other posters mention multiple times that states like Nevada pay better.
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Goldielocks

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Re: In need of some financial advice/direction
« Reply #16 on: August 12, 2017, 08:55:17 AM »

Bracken_Joy

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Re: In need of some financial advice/direction
« Reply #17 on: August 12, 2017, 09:02:45 AM »
Yep. Renting is NOT throwing away money.

http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

http://www.gocurrycracker.com/renters-for-life/

http://lifehacker.com/renting-is-throwing-money-away-is-completely-false-1747050568

http://www.forbes.com/sites/rogerma/2016/07/12/are-you-really-just-throwing-your-money-away-when-you-rent/#166311031014

Hmmm...  Anyone ever notice that some people who talk about rent as though it is throwing money away, also have leased cars or large car payments that they are fine with?

Not the poster above, I'm sure, but in general...

Hahaha, I love this observation! (And no, no leased cars here! And in fact, we DO own a home. But I fully recognized it was more of an emotional/goals choice, not a financial optimization one. I'm a firm believer you're free to make suboptimal decisions, but you need to know that they are and why you're doing it!)
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ReadySetMillionaire

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Re: In need of some financial advice/direction
« Reply #18 on: August 12, 2017, 09:51:39 AM »
I'm just going to add to the consensus that OP is absolutely insane for rushing to buy a house given everything else he/she described. 

"Paying too much in rent" is about the absolute worst excuse imaginable for justifying a house purchase.

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Bfels

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Re: In need of some financial advice/direction
« Reply #19 on: August 12, 2017, 10:57:03 AM »
Thank you for the enlightenment... As someone who just started tracking his expenses last year and just recently started reading mr money mustache I have a lot of learning to do.  And while I'm turning 30 in two months without any investments, other than 401K from work, I had thought that the best thing I could do was to buy something I could build equity in.  But after going through the different rent/buy links I obviously need to do more research and crunch the numbers more.  It seems that my sole focus should be to first eliminate the credit card debt and then look at doing what I can to eliminate the large car debt before I even entertain the idea of buying a house.  Unfortunately this route will prolong my ability to start the investment account. 

Bracken_Joy

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Re: In need of some financial advice/direction
« Reply #20 on: August 12, 2017, 11:56:17 AM »
Thank you for the enlightenment... As someone who just started tracking his expenses last year and just recently started reading mr money mustache I have a lot of learning to do.  And while I'm turning 30 in two months without any investments, other than 401K from work, I had thought that the best thing I could do was to buy something I could build equity in.  But after going through the different rent/buy links I obviously need to do more research and crunch the numbers more.  It seems that my sole focus should be to first eliminate the credit card debt and then look at doing what I can to eliminate the large car debt before I even entertain the idea of buying a house.  Unfortunately this route will prolong my ability to start the investment account.

Don't worry about falsely dividing "pay down debt" with "invest assets". Either way, they are "increase net worth". You should just look at the returns. Paying off a 7% debt is functionally IDENTICAL to getting a 7% return on an investment (tax considerations aside).

A great place to start is MDM's investing order:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153
Quote
Current 10-year Treasury note yield is ~2%.  See           
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y 
WHAT           
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, swap #4 and #5)           
6. Fund 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 with any extra.           
           
WHY           
0. Give yourself at least enough buffer to avoid worries about bouncing checks           
1. Company match rates are likely the highest percent return you can get on your money           
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 25%; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.     
6. Applicability depends on the rules for the specific 401k           
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.
8. Because any earnings, even if taxed, will help your FI journey.

You're learning now. And I know it doesn't feel like it, but 29 is still INCREDIBLY young to get your financial house in order. You're making moves now, and that's what matters!
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ysette9

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Re: In need of some financial advice/direction
« Reply #21 on: August 12, 2017, 12:24:20 PM »
Quote
I had thought that the best thing I could do was to buy something I could build equity in. 

It is true that there is an element of "forced savings" when buying a house that is touted as the best thing since sliced bread, as you are building equity. It does not mean, however, that this is the best path to build wealth. For many people who lack self-discipline to save, it might be one of the only ways of building wealth. However, we on this forum are smarter than that, and have self-discipline to spend money that is not spent on something like a mortgage. That means that we can then look at what is the most efficient use of your extra money that you are flagging for the purpose of building your net worth.

The investment order already covers this, but the general idea is that you can put your dollars to work for you in lots of different ways. One way might be to pay down debt, in which case the return on your money is the interest rate. This is usually a great place to start if you have high interest consumer debt like credit cards or personal loans. If you have a financial house in order with an emergency fund and whatnot, you can look into investing your money. If you invest in the stock market, the long-term real gains have been on average 7%. This is a better return on your money than paying down a mortgage which usually has interest rates in the 3-5% range.

Again, this presupposes that you have the self-discipline to take that extra money and invest it instead of blowing it on nonsense. In our case we rented for 5 years and saved money that way, sticking the difference in Vanguard. We did decide to buy after carefully running the numbers and determining that it made sense long-term because we were committed to staying in this area. Bracken Joy is right that there is also an emotional element to it; it might not make perfect financial sense but one may choose to buy anyway because there is a $ value to things like being able to garden as you wish or upgrade the house or other things you can't do in a rental. Again, those decisions need to be made with eyes wide open.
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Rosy

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Re: In need of some financial advice/direction
« Reply #22 on: August 13, 2017, 02:30:50 PM »
1. Pay off the credit card - and pledge to continue to pay it off every month from now on.
Hopefully you also have a credit card with a decent interest rate, in case you ever have a month when you cannot pay it off in full.
Use a rewards card so you can use the points for gift cards or send cash to your emergency savings account.

2. Set up an EF - $1000, so that you are not forced to use your credit card for unexpected smaller expenses which you still can't pay off at the end of the month.
(you will pay with your card and then earn the rewards to send to your savings account:) It all adds up.

3. Set up an EF for at least three months of expenses - built it up slowly - peace of mind:),
or be sure to have enough liquid via credit card limits or other savings/investments.

4. You still have time and compounding interest on your side - so no matter what else you do - max out your 401K. Your future self will thank you a thousand times over. It is the ticket to FI and Fire.

5. Once all of these goals are achieved - think about your car, if the interest is low and all around it was a good purchase, you might want to keep it or not. Do the math, consider where your values lie and how you actually use your car.
Sometimes a beater is not the best option, but there certainly are a lot of nice cars to be had at 15K or below and a 10K windfall might be preferable to a choking $500 monthly payment that is keeping you from saving up for a home of your own.

6. You can't afford to consider a home until all your ducks are in a row - maxed out 401K, a healthy emergency fund, a paid off car, no debt and about a $20K cushion for unexpected home expenses. Only fools rush in:)
Never underestimate the extra cost of a home, taxes might double the year after your purchase. If you are planning a move within the next five years - don't even think about buying a home.

That fishing gig is fantastic, an extra $25K is absolutely awesome. Now be smart and look into lowering your taxes by upping your 401K or opening an IRA. That's easy - smart money in your pocket.
... and do consider a case study - who knows you might be squandering and have become blind to it. There is always room for improvement, but slashing your expenses is a great start.