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