Author Topic: Yikes! Financial Advice Needed  (Read 9114 times)

sassy1234

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Yikes! Financial Advice Needed
« on: July 11, 2013, 08:03:02 AM »
Hi Everyone,

I would really use some financial advice from the MMM community. 

For the past year, I have become obsessed with getting my finances in order and heading down the path of financial freedom.  Thanks to MMM and other blogs, I have learned a lot.  I have cut back on most purchases, stop wasting food and utilities, increased my income from my day job, and started a small side business, while maintaining life balance, and most importantly, gotten my husband to jump on board! 

Recently though, I have come to a crossroad and do not know what to do next.

Current Situation:
My husband and I are 30 years old.
$38,000 student loan debt. Combination of 2.1% and 3.2% interest rates. 
$132,000 mortgage, we rent out the out of state home. $95 profit a month (Is this good enough?) 
Pay $1725 in rent a month.
Live in a very expensive Midwestern city.
Trying to start a family. 
Combined income: $154,000
$5,000 savings (hardly any, since we have been paying off student loans)
Extra income per month to go towards goals: between $5,500 and $5,000.  (61% savings rate) 

For the past year, we have gotten out of bad debt ($15,000) and paid $20,000 off our student loans.  These were our only priorities and our decisions were easy.  Great progress. 

Now, we seem to be having too many priorities and we keep changing our minds on what to focus on.  We like to focus on 1 goal or a smaller number of goals so we can see progress fast, very motivating. 

Goals:
1.   Pay off remainder student loans (this would take about 7 months).  I love the idea of being debt free, but on the other hand our rates are really low. 
2.   Create a substantial emergency fund.  Ideally, I would like to have $40,000 tucked away for a rainy day.  This is ever more important since we are trying to start a family. 
3.   Buy a second car, shreek, gasp!  I know, I know.  We live in the burbs, work in the city and are doing fine with one car, but with a baby on the way soon, this won’t work.  I have thought about every option to avoid this, but can’t make 1 car work.  We plan on spending $25,000 on a car.  Assume that I will need the car in 10 months.  I won’t buy a beater car, as safety is very important and I use the car for work and driving clients. 
4.   Start saving for retirement and investing.  We are really behind in this. 
5.   Save $100,000 to 150,000 for a house down payment.   

Originally, we were going to tackle goals 1-4 first (in that order), and then eventually buy a home in 4 to 5 years.  This is a conservative plan.  I am also wondering if I should not pay off my student loans fast since the rates are low, and just pay the min. and invest my money.

I broke down the numbers on focusing on investing, and the returns on interest are huge.  I assumed 8% return each year, but don’t know if this is the correct way to go about it.  Looking at these numbers, it makes sense to stick with the plan of paying off debt, buy a car with cash, and invest like crazy.  It will put us in a better position to buy a house and will get us to see the benefits of investing. 

   Invest $5,500 a month for the next 5 years.   
         
      Total   Interest
age         
31   1 year   66,000   $5,280
32   2 year   137,280   $10,982
33   3 year   214,262   $17,141
34   4 year   297,403   $23,792
35   5 year   387,196   $30,976





The problem:  we are now reassessing this plan since mortgage rates are going to go up mid 2015. 

We are thinking that the savings that we get with a lower mortgage interest rate will beat the interest we are paying on our student loans and even a potential car loan.  I don’t know if this is right though. 

We are considering shifting our plan to save $20,000 for an emergency, and then do nothing but save for a home.  In 10 months, we will get a car loan for a short period of time (yikes, a sin I know).  Once we buy a house (18 months from now or so), we will pay off the car loan in a few months.  Then we will increase our emergency fund and really start putting away for retirement.  We would pay off the student loans slowly since the rates are so low. 

The only thing that made us consider changing our conservative original plan, was that we heard interest rates were going to go up.  I am not an expert on this, so could use advice here.  Also, we are giving away a lot in rent and would like to stop this (moving is not an option as we have a 1 ½ year lease). 

Any thoughts and advice would be appreciated.  Life seems to be getting more complicated.  I think we are at a critical time period and each decision could bring us down a different financial path.  Maybe we are being complete idiots for wavering from our original plan? 

Thanks.

Laura 

cdub

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Re: Yikes! Financial Advice Needed
« Reply #1 on: July 11, 2013, 08:11:43 AM »

3.   Buy a second car, shreek, gasp!  I know, I know.  We live in the burbs, work in the city and are doing fine with one car, but with a baby on the way soon, this won’t work.  I have thought about every option to avoid this, but can’t make 1 car work.  We plan on spending $25,000 on a car.  Assume that I will need the car in 10 months.  I won’t buy a beater car, as safety is very important and I use the car for work and driving clients. 

Well I can help you with this.... you can buy a perfectly great car for WAY less than $25k... You just need to buy certified used, say a 2010, and not care about all of the bells and whistles that lets face it - we don't need.

We just bought a 2010 certified used Honda Odyssey (which is WAY overkill for your situation I presume but we have 3 kids) for only $17k in cash. We got the LX model (the base model) which our brother in law is giving us a hard time because GOSH we actually have to shut the sliding doors ourselves - imagine that. When did we get so lazy that we need automatic doors?

A smaller hatchback with would be perfectly fine for starting a family could EASILY be bought Certified Used (not a beater) for easily in the low teens.


matchewed

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Re: Yikes! Financial Advice Needed
« Reply #2 on: July 11, 2013, 09:46:45 AM »
You have a skewed view as to the value of a new vehicle compared to a used vehicle. You seem to consider anything used as being a beater and that is not the case.

Secondly willingly putting yourself into 25k debt on a vehicle that will be worth <10k by the time you pay it off is a terrible financial move. I highly encourage you to actually take your "I know yikes" sentiment and act on it by not making that decision. Buy a used car that is not a beater for much less money.

I'm not a landlord by any means but $95 profit a month on a rental sounds kinda bad. But I don't know much about that stuff. Is it possible to sell that house to get money for your next house?

StarswirlTheMustached

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Re: Yikes! Financial Advice Needed
« Reply #3 on: July 11, 2013, 09:51:02 AM »

3.   Buy a second car, shreek, gasp!  I know, I know.  We live in the burbs, work in the city and are doing fine with one car, but with a baby on the way soon, this won’t work.  I have thought about every option to avoid this, but can’t make 1 car work.  We plan on spending $25,000 on a car.  Assume that I will need the car in 10 months.  I won’t buy a beater car, as safety is very important and I use the car for work and driving clients. 

Well I can help you with this.... you can buy a perfectly great car for WAY less than $25k... You just need to buy certified used, say a 2010, and not care about all of the bells and whistles that lets face it - we don't need.

We just bought a 2010 certified used Honda Odyssey (which is WAY overkill for your situation I presume but we have 3 kids) for only $17k in cash. We got the LX model (the base model) which our brother in law is giving us a hard time because GOSH we actually have to shut the sliding doors ourselves - imagine that. When did we get so lazy that we need automatic doors?

A smaller hatchback with would be perfectly fine for starting a family could EASILY be bought Certified Used (not a beater) for easily in the low teens.



Yeah, there's a big difference between a beater and a low-end-new vehicle (or nearly new) 25000$ car. As for safety, do you know how many accidents are do to mechanical failure? The overwhelming majority are due to driver error. You can get the jankiest beater, and as long as you keep up with the maintenance, especially with the breaks, that's not an issue. IF it's full of rust holes, that might be a safety issue... but shop around. If the body is good, there are 20-year-old Volvos that, if they haven't rusted out, will serve you much better in an accident than a lot of modern econoboxes. So much for safety. Come up with a better reason, or don't spend over 10k.

As for the debt, I would personally pay it off. It's debt, debt is bad. Once it's gone you can start funnelling those payments into savings. Besides, it sounds like you want to build up an emergency fund. If you're tempted to do that with the money, nowhere it's easy to grab in an emergency is going to pay you 3.2% interest!

As for buying a house, reasses where you're at with the housing market closer to when your lease comes up. It doesn't make sense to shop around, now. That said, however, when you are going for a house, I'd sell the out-of-state rental for as much as possible and apply it as downpayment. You'll save a lot more than 95$/mo interest, and that's seems really marginal for a rental unless you're very, very conservative in budgeting for repair costs. One bad hailstorm and you could be in the red for years.

MakingSenseofCents

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Re: Yikes! Financial Advice Needed
« Reply #4 on: July 11, 2013, 10:27:41 AM »
I actually had the same amount of loans as you did when I graduated with my MBA, exactly $38K. I just finished paying them off this week, but I did have much higher rates (most were at 6.8%).

sassy1234

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Re: Yikes! Financial Advice Needed
« Reply #5 on: July 11, 2013, 10:45:46 AM »
Hi,

Thanks for everyone thoughts thus far. 

I never said that I would not buy used.  I actually plan on buying used with cash.  I prefer to buy cars with low milage, that will last long, and as I mentioned, I am required to have a professional car as I drive business clients for my job. 

Paying off the student loan now does make sense, but I do get a lot of mixed messages.  I read a lot online saying that if your loan rates are less than 4%, you are better off investing. 

ChiStache

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Re: Yikes! Financial Advice Needed
« Reply #6 on: July 11, 2013, 11:23:01 AM »
Can you explain why having a baby will necessitate a second car? I'm honestly curious.

zarfus

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Re: Yikes! Financial Advice Needed
« Reply #7 on: July 11, 2013, 11:32:01 AM »
Paying off the student loan now does make sense, but I do get a lot of mixed messages.  I read a lot online saying that if your loan rates are less than 4%, you are better off investing.

This is why personal finance is not always logical, but also emotional.  It is illogical to pay down a low% loan when you can (quite easily) take that money and earn more back than you would be paying.  That doesn't make the decision easy though; that financial freedom by being out of debt could have much more value to you.

The reason you read it a lot online is because it's easy advice... 7 > 4. done.  Couple that with the idea that those same people writing it online are assuming (and maybe not even realizing alternatives) that you'll be working until you're 55+.

So this is something you will have to decide on your own, as it sounds like you can see the consequences of getting out of debt early vs investing early (with compounding interest...that's powerful).  Bust out excel spreadsheets and start thinking long term.

Here's what I would do with 5k of 'free' money per month and your listed goals: (I'm assuming you're not pregnant yet = 'trying to start a family')

1) Figure out the house price you want to spend in the location you want to live.  Think long term. Make your new down payment goal 20% of that price, no more.  I would get a house as soon as possible while market/interest rates are down/low.  If your house prices are really high, begin to evaluate consequences of a lower percentage DP. You can save 60k in one year, for a 300k house. Around me (also midwest), that's a very nice house in a very nice neighborhood.
2a) If you meet this DP amount before you're pregnant, go buy a house!
3a) Cut your efund goal in half, 20k emergency is plenty IMO, especially with a high income like yours.
4a) Once efund is met, begin investing or paying off loans..or some happy median :)
5a) If you become pregnant at any point during 3/4a, figure out how much you would need for another car. Think 10k used. Save for this much, as well as handle any other baby expenses during your 9 months.  When you have enough for this, return to 3/4a.

2b) If you do not meet your DP amount before you're pregnant, evaluate consequences of a lower percentage DP based on how much you have saved.
3b) If you don't have a house at this point, use your savings to perform 5a. If you do have a house at this point, start saving so you can perform 5a :) Then do 3a, 4a.

My first post, go easy.

sassy1234

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Re: Yikes! Financial Advice Needed
« Reply #8 on: July 11, 2013, 12:25:17 PM »
ChiStache:  regarding your question, in order to get to work and manage picking up and dropping off a kid at childcare (9am to 3pm), it is not possible in our situation to do it in 1 car.  If we did, my husband and I would be in the car a insane amount of time, both have to get into work late and leave early, and we would not be able to maintain our side business.  I am sure you can understand that everyone's situation is different. 

zarfus: Thank you for your thoughtful response.  I really appreciate it!  You give a balanced perspective. 

Some comments:  we have a lease that ends in 1 1/2 years, right when interest rates are suppose to increase.  So we have more time to save for a down payment.  Also, we live in Chicago and plan on buying a house priced $450,000 to $550,000. Very expensive to be in one of the best public schools systems, but it beats paying for private edu. for our planned 2-3 kids. 

Thanks.

Simple Abundant Living

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Re: Yikes! Financial Advice Needed
« Reply #9 on: July 11, 2013, 12:35:47 PM »
My question is whether having 1-3 kids will affect your plans to work?  Will you go part-time?  Want to stay home with them?   You may not even know how you will feel about this until they put that baby in your arms.  I would avoid unnecessary debt to give yourself options.

I also agree that you can get a reliable, professional car, for less than $25K.  I also think your rent for the burbs seems high for two people.  Maybe you got the house before the kids?  Maybe look to downsize your home until you actually outgrow it, instead of planning to outgrow it.

Inevitable

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Re: Yikes! Financial Advice Needed
« Reply #10 on: July 11, 2013, 12:43:16 PM »
Check out the Kia Soul.  It's a great car and you can get one for far less than $25k (brand new).

My wife's Kia cost $18,500, but it was before we started trying to save money so it has a sun roof, the sound package, and so on :-D

ChiStache

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Re: Yikes! Financial Advice Needed
« Reply #11 on: July 11, 2013, 12:45:00 PM »
Maybe I'm missing something. It looks like you only have $5,000 in assets? Maybe you have some equity in the out-of-state home, but I don't see a reference to that.

If my understanding is correct, you have NEGATIVE net worth. And you are planning to buy a half million dollar home and a $25,000 car!? Seriously, I must be missing something, because that would warrant a serious face punch.

mpbaker22

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Re: Yikes! Financial Advice Needed
« Reply #12 on: July 11, 2013, 12:47:35 PM »
Would you mind sharing what city this is?  I can't imagine imagine justifiable costs that high in any midwestern city.

Inevitable

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Re: Yikes! Financial Advice Needed
« Reply #13 on: July 11, 2013, 12:49:53 PM »
I assume she's going to say Chicago, because that city is outrageous.

brand new stash

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Re: Yikes! Financial Advice Needed
« Reply #14 on: July 11, 2013, 12:50:52 PM »
You are trying to start a family, and say you need the second car for drop off and pick up at daycare.  But then you say you need it in 10 months. 

I take from the "trying" that you are not currently pregnant.  So even if you get pregnant today, and most people don't get pregnant the first month trying, the kid won't be born for 9 months, and you are likely to take 12 weeks maternity leave before daycare starts....which would be 12 months from today.   

You have $5000ish a month.  If you apply that to the student loans you could have them paid off in 7 months.   Then put the month into an emergency fund until the kid is born...giving you a $10K emergency fund if you get pregnant immediately, but more if you don't get pregnant immediately.  Then after the kid is born, put the $5000 a month for the three months of maternity leave into a car fund, and get a $15K used car when you go back to work.

sassy1234

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Re: Yikes! Financial Advice Needed
« Reply #15 on: July 11, 2013, 01:14:16 PM »
No net worth, that is correct.  To give more history, over the past 5 years, we have paid off $70,000 in student loans, and our high income is completely new, started making a lot of money this year.  Prior to that, we had a combined income of $75,000. 

Yes, we live in Chicago.  A $400,000 in great suburbs is a shack. 

Thanks for the car suggestions. 

Marmot

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Re: Yikes! Financial Advice Needed
« Reply #16 on: July 11, 2013, 01:19:45 PM »
Sassy, I would recommend that you double check your student loans to make sure that the interest rate did not double a couple weeks ago.

ChiStache

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Re: Yikes! Financial Advice Needed
« Reply #17 on: July 11, 2013, 01:25:40 PM »
You have an excellent income and an very good savings rate = well done!
Here’s my advice:

1. Max 401ks and Roth IRAs for you and your spouse to catch up on your retirement savings
2. Save for a house with any remaining savings (you’ll need a 100,000 in cash for a down payment)
3. Do whatever you need to do to resist a 2-car lifestyle.  Yes, Chicago is an expensive city, but one of the major off-sets is the great public transportation! Figure out a way that one of you can utilize it. Move if you have to, break your lease if you have to. Optimize.

Good luck!

Eric

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Re: Yikes! Financial Advice Needed
« Reply #18 on: July 11, 2013, 01:28:37 PM »
So you currently have a car?  And you use that car to drive clients around in?  Why wouldn't you just use that car as yours and have your husband drive a $5000 car.  Then you'll have an extra $20K available to add towards $100K down payment you're going to have to come up with to buy that house.


Eric

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Re: Yikes! Financial Advice Needed
« Reply #19 on: July 11, 2013, 01:33:47 PM »
The problem:  we are now reassessing this plan since mortgage rates are going to go up mid 2015. 

How did you come to this conclusion?  Is there a published schedule somewhere?  Or are you talking about an ARM on your other home?

Rebecca Stapler

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Re: Yikes! Financial Advice Needed
« Reply #20 on: July 11, 2013, 01:42:28 PM »
It is great that the new, high income is new and you haven't yet suffered any lifestyle inflation. Awesome!

You have a few assumptions in your post that might need to be addressed before figuring out your next move:
1) $25k for a car is astronomically high. We got a fabulous, 4 year old, very reliable and comfortable Prius for $12,500. It fits a ton of stuff in the back and can fit 3 carseats across the back seat (if we ever needed that).
2) Do not buy your new-to-you car until you actually need it, e.g., after you're pregnant and you know how many kids you have baking in there. Just saying' ...
3) Renting is not throwing money away. When you "own" a home with a mortgage, you are in fact dumping lots of money into something that's not giving you equity -- taxes, insurance, interest, and regular maintenance. In such a HCOLA as yours, I'd be willing to bet that it will take a long time for home ownership to be less expensive than renting. Check out this calculator if you don't believe me: http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0
4) Interest rates are not necessarily set to go up in 1.5 years. There's no set date for them to go up. It's conjecture when and how much they will go up. Yes, it can be informed conjecture, but it's not a definite. That said, I do think interest rates will go up. In fact, they did so very recently ... but buying a home before you're financially ready just because interest rates might go up is not the best reason to get into that kind of a commitment.

With all of those assumptions addressed, here are my thoughts and you can take them or leave them ;)
1) Your student loan rates are really low! I hate SLs and want to vaporize them, but at that rate with such a low principal, and your ability to vaporize them in 7 months if push came to shove, I say let them ride. Keep paying according to your repayment plan.
2) It's a good idea to have a healthy E Fund in preparation for your baby. Once s/he is in the picture, the stakes get higher. Draw up a "what if" budget or two -- how much would you need if one of you got laid off or both of you -- and multiply that by how many months of expenses you want in your E Fund. That's what your E Fund should be: It's whatever amount makes you comfortable, but based on a realistic picture of your needs.
3) Contribute to retirement accounts. Given your income, I can't say one way or another which vehicle is best for you but if you do choose Roth IRAs (which I'm not sure you can or should), consider the principal in those account part of your E Fund. You really don't want to access it, but if it's an emergency then you know it's there.
4) Invest the rest according to your own comfort level -- diversify it if you think you'll buy a house in 1.5 years. You could probably pick some conservative funds that will beat your SL rate, and more aggressive places for the "extra" that you don't have a timeline for using. (e.g., if you lost a big chunk of it, you wouldn't be out of luck with buying a home).

rtrnow

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Re: Yikes! Financial Advice Needed
« Reply #21 on: July 11, 2013, 01:50:41 PM »
Sassy, I would recommend that you double check your student loans to make sure that the interest rate did not double a couple weeks ago.

My understanding is that the new interest rate only pertains to new loans and not existing. So it shouldn't effect anyone since we all know how to go to school without debt now. :)

Rebecca Stapler

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Re: Yikes! Financial Advice Needed
« Reply #22 on: July 11, 2013, 01:52:16 PM »
Sassy, I would recommend that you double check your student loans to make sure that the interest rate did not double a couple weeks ago.

My understanding is that the new interest rate only pertains to new loans and not existing. So it shouldn't effect anyone since we all know how to go to school without debt now. :)

That's my understanding as well. I think the OP is locked in to those low rates.

sassy1234

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Re: Yikes! Financial Advice Needed
« Reply #23 on: July 11, 2013, 02:04:17 PM »
I am picking up on 1 strong theme here:  I will start looking for way less expensive cars.  Thanks for the punch in the neck.  (note: I prefer neck punching as opposed to face punching, much more entertaining)

I am getting a mix of opinions on if I should stay conservative (pay off loans, save, invest, then buy a house), or the buying a house sooner path.  Probably more people are leaning towards the conservative path.  This is where the personal part of finance comes into play. 

I lean towards the conservative path, but my husband worries about giving rent away and increased rates (Bernanke has said that they might go up mid 2015, but nobody really knows). 

Keep the thoughts coming.  This is very helpful.  My husband and I will have a lot of things to discuss this weekend.  Thanks MMM community. 

Rebecca Stapler

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Re: Yikes! Financial Advice Needed
« Reply #24 on: July 11, 2013, 02:09:57 PM »
I am picking up on 1 strong theme here:  I will start looking for way less expensive cars.  Thanks for the punch in the neck.  (note: I prefer neck punching as opposed to face punching, much more entertaining)

::thumbs up::

I am getting a mix of opinions on if I should stay conservative (pay off loans, save, invest, then buy a house), or the buying a house sooner path.  Probably more people are leaning towards the conservative path.  This is where the personal part of finance comes into play. 

I lean towards the conservative path, but my husband worries about giving rent away and increased rates (Bernanke has said that they might go up mid 2015, but nobody really knows). 
 

Bernanke opening his mouth raised rates 2 weeks ago! So you're right -- no one knows what will happen in 2015. Two things that might help the housing discussion stay rational are: (1) estimate how much you would be financing for a home (pick a home in a town where you want your child to grow up, not a town you want just for a few years) and play out different scenarios with different interest rates (2) estimate how much of that is going towards non-equity items like interest, taxes, insurance, and regular maintenance and compare it to what you're paying in rent.

cdub

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Re: Yikes! Financial Advice Needed
« Reply #25 on: July 11, 2013, 02:16:05 PM »
I lean towards the conservative path, but my husband worries about giving rent away and increased rates (Bernanke has said that they might go up mid 2015, but nobody really knows). 


If the interest rates go up it could theoretically drive home prices down.... I've always believed that it was the cheap and easy loans that really made houses so expensive. If the loans get pricier than home prices may come back towards reality.

mpbaker22

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Re: Yikes! Financial Advice Needed
« Reply #26 on: July 11, 2013, 02:45:44 PM »
No net worth, that is correct.  To give more history, over the past 5 years, we have paid off $70,000 in student loans, and our high income is completely new, started making a lot of money this year.  Prior to that, we had a combined income of $75,000. 

Yes, we live in Chicago.  A $400,000 in great suburbs is a shack. 

Thanks for the car suggestions.

At $400,000 you'd be better off moving 15 miles away and getting a house for $200,000 in one of Chicago's many decent, but average, suburbs.  There are plenty of pickings southwest of the city or very far north.

simonsez

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Re: Yikes! Financial Advice Needed
« Reply #27 on: July 11, 2013, 03:03:45 PM »
Ideally, I would like to have $40,000 tucked away for a rainy day.

Wow, 40k for a rainy day.......Yeah, I'd say when that rainy day comes you will make it through!
We would pay off the student loans slowly since the rates are so low. 

Yep.  I personally would try to switch to the longest repayment plan possible and pay minimums for as long as I could while using other monies for 2nd car, house down payment, children, and investing (in no particular order necessarily).  HOWEVER, the entire theme of your post leads me to believe you are somewhat risk averse.  i.e. emotions in finances are important to you which is totally fine.  Always do what works for you.  If my diagnosis is correct, at least pay back your loans in proper order (the higher % one first).  I know you don't like the debt hanging over but dollars are fungible so you might as well optimize them.  The idea of the loan for the car leaves a sour taste but I can see where the idea comes from.  Maybe you could pay the higher interest rate loan back more quickly and use the money that would be otherwise paying down the lower rate loan for increased savings on the 2nd car (without impacting funds set aside for your house down payment).  Borrowing money (for the car) with the line-of-thinking so you can get a better "deal" on borrowing this other amount of money (the mortgage) seems strange to me when you have the potential means already to only borrow for the house and pay cash for the vehicle.  YMMV.

The only thing that made us consider changing our conservative original plan, was that we heard interest rates were going to go up. 
Do you mean mortgage rates?  They already are/have.  It is not uncommon to see rates nearing 5%.

http://www.usatoday.com/story/money/personalfinance/2013/07/11/mortgage-rates-7-11/2508307/
Nat'l avg is up more than a % in past 2 months alone.

sassy1234

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Re: Yikes! Financial Advice Needed
« Reply #28 on: July 12, 2013, 08:47:38 AM »
Interesting that I posted this yesterday.  There was a CNN news story discussing the rise of rates to 4.51%.  That is pretty high compared to the past year. 

I am thinking I am going to stay with my conservative plan.

Thanks everyone. 

Mortgage rates reach highest level in 2 years
http://money.cnn.com/2013/07/11/real_estate/mortgage-rate-rise/index.html?iid=HP_River

Marmot

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Re: Yikes! Financial Advice Needed
« Reply #29 on: July 12, 2013, 08:53:04 AM »
Yes, we live in Chicago.  A $400,000 in great suburbs is a shack. 

You can get a decent sized house in evanston, oak park, glenview, wilmette, elmhurst etc. I would not consider a 4 bed 2-3bath 2k sqrft house a "shack". I do not know how you can find much better suburb than those... (please don't say lake forest.... =P) Main thing to be aware of is the property taxes though. In those areas, it wills run you ~8-10k per year for the average $400,000 house. That being said, I do not think you are going too overboard for at 450-500k. Just try to have at least 20% saved to put down so you don't have to pay mortgage insurance, and also have your 6 month emergency fund and all of your non-student loan debt paid off.

ketchup

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Re: Yikes! Financial Advice Needed
« Reply #30 on: July 12, 2013, 09:12:24 AM »
Yes, we live in Chicago.  A $400,000 in great suburbs is a shack. 

You can get a decent sized house in evanston, oak park, glenview, wilmette, elmhurst etc. I would not consider a 4 bed 2-3bath 2k sqrft house a "shack". I do not know how you can find much better suburb than those... (please don't say lake forest.... =P) Main thing to be aware of is the property taxes though. In those areas, it wills run you ~8-10k per year for the average $400,000 house. That being said, I do not think you are going too overboard for at 450-500k. Just try to have at least 20% saved to put down so you don't have to pay mortgage insurance, and also have your 6 month emergency fund and all of your non-student loan debt paid off.
This.  I would plan for even more in taxes though; my parents live in Batavia and pay about 8k on a house worth probably a bit more than half that 400k figure.

The farther you move from Chicago, the exponentially cheaper everything gets.  My roommates and I live in Aurora near Oswego and pay $1600 a month rent to live in what I consider a ridiculously luxurious townhouse (3 bedroom, 2 bathroom, super spacious, two-car garage PLUS two off-street parking spots right next to our garage).  The little 500sqft house I bought in Montgomery last year was all of $18,500.  Way nicer houses in way nicer areas nearby can be had for $150,000.

And yes, cheaper cars.  But you've already been bashed over the head with that one.

mpbaker22

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Re: Yikes! Financial Advice Needed
« Reply #31 on: July 12, 2013, 09:42:55 AM »
I'm not aware of any job location in Chicago that doesn't have a decent 3-4 bedroom house within a 10 miles radius, for under $250,000.  I guess we have different financial views, but I just don't see how anyone can justify half a mil on a house.  I'm just trying to offer advice, so you don't saddle yourself with way more debt/stationary assets, than you need.

Sweet Betsy

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Re: Yikes! Financial Advice Needed
« Reply #32 on: July 12, 2013, 10:58:42 AM »
In your situation...here is what I'd do:
If you aren't already contributing to your companies' 401Ks up to the match, start today!

1)Until you actually confirm that you are pregnant keep throwing all extra money at your student loans.  It took us 9 months for our first one to even get pregnant.  If that is the case for you, you'd have your student loans paid off and a good amount saved for a car before you even get pregnant.
2)As soon as you confirm that you are pregnant, go down to minimum payments on everything and sock away as much money as you can into an emergency fund.  This will give you a buffer in case anything unplanned happens during the pregnancy. For instance if you are on bed rest or either of you faces a layoff during this time.   
3)Once baby comes and you are about to go back to work...buy a reasonably priced 2nd car.  I concur that $25,000 is pretty high, I think you can shave $10,000 off the price and still get a nice used car. 
4)Now that you are back to work and everything is going swimmingly....if your student loans aren't yet paid off take care of them with any excess emergency fund or cash flow.  Once you don't have a car payment or student loans...put everything else into your house down payment fund.  I agree with many that if interest rates climb substantially higher in the next few years, then housing prices are going to go down (or at least not go up appreciably).  In the end it will all be a wash.

Good luck!


aj_yooper

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Re: Yikes! Financial Advice Needed
« Reply #33 on: July 12, 2013, 12:30:03 PM »
Hi Everyone,

I would really use some financial advice from the MMM community. 

For the past year, I have become obsessed with getting my finances in order and heading down the path of financial freedom.  Thanks to MMM and other blogs, I have learned a lot.  I have cut back on most purchases, stop wasting food and utilities, increased my income from my day job, and started a small side business, while maintaining life balance, and most importantly, gotten my husband to jump on board! 

Recently though, I have come to a crossroad and do not know what to do next.

Current Situation:
My husband and I are 30 years old.
$38,000 student loan debt. Combination of 2.1% and 3.2% interest rates. 
$132,000 mortgage, we rent out the out of state home. $95 profit a month (Is this good enough?) 
Pay $1725 in rent a month.
Live in a very expensive Midwestern city.
Trying to start a family. 
Combined income: $154,000
$5,000 savings (hardly any, since we have been paying off student loans)


Now, we seem to be having too many priorities and we keep changing our minds on what to focus on.  We like to focus on 1 goal or a smaller number of goals so we can see progress fast, very motivating. 

Goals:
1.   Pay off remainder student loans (this would take about 7 months).  I love the idea of being debt free, but on the other hand our rates are really low. 
2.   Create a substantial emergency fund.  Ideally, I would like to have $40,000 tucked away for a rainy day.  This is ever more important since we are trying to start a family. 
3.   Buy a second car, shreek, gasp!  I know, I know.  We live in the burbs, work in the city and are doing fine with one car, but with a baby on the way soon, this won’t work.  I have thought about every option to avoid this, but can’t make 1 car work.  We plan on spending $25,000 on a car.  Assume that I will need the car in 10 months.  I won’t buy a beater car, as safety is very important and I use the car for work and driving clients. 
4.   Start saving for retirement and investing.  We are really behind in this. 
5.   Save $100,000 to 150,000 for a house down payment.   

Originally, we were going to tackle goals 1-4 first (in that order), and then eventually buy a home in 4 to 5 years.  This is a conservative plan.  I am also wondering if I should not pay off my student loans fast since the rates are low, and just pay the min. and invest my money.

The problem:  we are now reassessing this plan since mortgage rates are going to go up mid 2015. 
 
We are considering shifting our plan to save $20,000 for an emergency, and then do nothing but save for a home.  In 10 months, we will get a car loan for a short period of time (yikes, a sin I know).  Once we buy a house (18 months from now or so), we will pay off the car loan in a few months.  Then we will increase our emergency fund and really start putting away for retirement.  We would pay off the student loans slowly since the rates are so low. 

The only thing that made us consider changing our conservative original plan, was that we heard interest rates were going to go up.  I am not an expert on this, so could use advice here.  Also, we are giving away a lot in rent and would like to stop this (moving is not an option as we have a 1 ½ year lease). 

Any thoughts and advice would be appreciated.  Life seems to be getting more complicated.  I think we are at a critical time period and each decision could bring us down a different financial path.  Maybe we are being complete idiots for wavering from our original plan? 


Good job on getting your husband on board to improving your finances, curing the $15,000 of Bad Debt, paying off a lot of student loans, and reducing expenses!  That is teamwork and a real achievement.  I am also sensing a lot of anxiety and some impulsivity so I think you and your husband need to really take pride in your teamwork and breathe deeply.  Savor your success. 

You cannot get all of your goals done by tomorrow so take your time and enjoy the ride.  Paying rent is not throwing away money; it is providing a place for you to live and make a better living than your past out of state location.  Diligently work on curbing your wants.

First, I would increase your emergency fund to a higher level than your $5k, say 2-3 times your monthly expenses.  Some of that EF could be in a Roth IRA.  Have you read Bogleheads about personal finance and investing?  If not, try these:  http://www.bogleheads.org/wiki/Paying_down_loans_versus_investing and http://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit 

From Bogleheads:  "Here is the most likely order of priority for investments versus paying off loans; it does depend on the rates, so these examples are based on typical rates which may not be accurate at any specific time.
Invest in 401(k) to get maximum employer match (rate may be over 100% in the first year)
Pay down credit cards (rate 10-30+%)
Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%)
Invest in Roth IRA, deductible IRA or decent 401(k) (rate 5% on Treasury bonds)
Pay down deductible mortgage or student loans (rate 4% after tax)
Invest in taxable account (rate 4% on municipal bonds)
Do not pay down subsidized loans as long as subsidy lasts (rate 0-3%)"

Second, I think you should evaluate whether being a landlord is sufficiently profitable for you.  Consider selling the property and putting the proceeds in your EF.  If the house is underwater, then you have more Bad Debt to cure.  Third, I am guessing that you could also tighten your household budget even further and still have fun in Chicago.  Finally, do you have employer match in 401k accounts?  If so, I would be allocating at least enough to secure any employer match money, as Bogleheads suggests. 











2527

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Re: Yikes! Financial Advice Needed
« Reply #34 on: July 13, 2013, 06:12:15 AM »
If your living expenses are low, your emergency fund can be smaller than what is usually recommended.