Reader Case Study – Pay off Debt or Start Investing?

[lindsayk]

Life Situation: Single 33yr old F. No dependents

Gross Salary/Wages: $2736 month

Pre-tax deductions: $0 (current employer pays all health insurance costs and at this current time im not contributing to any 401k/Roth/IRA)

Other Ordinary Income: I own a portrait photography business that I do on the side. Gross it makes around $15,000-$18,000 each year and after taxes and expenses I end up around $5000-$8,000. I also started doing some photo retouching for a company but its not consistent and I have no idea how much work they will have for me over time. I made $180 for one batch recently for about 4hrs of work.

Qualified Dividends & Long Term Capital Gains: none

Rental Income, Actual Expenses, and Depreciation: none

Adjusted Gross Income: After taxes I bring home $2152 month from my day job. The photo gig is not consistent for me to determine on a monthly basis.

Taxes: I don’t know what this is asking? I gross $2736 a month and after taxes bring home $2152.

Current expenses:
Rent: $300mo. (living with a friend in her house-don’t have a lease but don’t see any reason why this situation would be changing for atleast a year maybe more)
Utilities: $120mo. (I split water, electric, cable & internet with roommate)
Car Insurance: $51mo.
Life Insurance: $12mo.
Cell Phone: $115mo.
Spotify Subscription: $10mo.
Netflix: $8mo.
Prescriptions: $20mo.
Gas: $50mo. (this is what I include in my budget-sometimes its enough and other times I go over)
Annual License Plate Sticker Renewal: $9mo.
Food/Groceries: $150mo.
Therapy: $80mo.
Total Expenses: $925mo.

Assets: I have about $2100 in a Simple IRA but am not contributing to it at this time. I have $800 in my savings acct at this time. (Recently had $5000 but paid off $4000 credit card and closed the card).

Liabilities:
Student Loan #1 - $4955 balance remaining (payment is $222mo.) Interest Rate 3.25%
Student Loan #2 - $5987 balance remaining (payment is $120mo.) Interest Rate 3.25%
Car Loan - $5040 balance remaining (payment is $151mo.) Interest Rate 6.24% (Car is a 2007 Honda with 82,000 miles on it)
Total Debt: $15,982

Specific Question(s): I have a couple of questions. My current goal is to be FI and not so much RE. I dont like my current job. Im bored out of my mind but its stable, consistent, and safe. My sanity and happiness is lacking but its paying my bills and leaving breathing room that I have not had in the past few years. Im recently divorced in the past 2yrs and had high vet bills with my dog that I had to put down in January :(. I also recently just got out of an expense $800mo. rent and moved in with a friend. Soooo, now that I have that "extra" wiggle room in my paychecks and my side business money Im not sure what I should focus on. I know the sooner you can start investing the better as compound interest is awesome...but that feels so long term...especially with hating my job. My current train of thought is "just stick this out for a year and throw everything at the debt and get rid of that and save up $2000-$3000 in savings for emergencies and evaluate the job at that time and then I could afford to do something different that i would like better even if its less money. I think im mostly struggling with disliking my job so much right now. I want to wake up and not dread where im going or what im doing all day for 5 days a week. And im not really sure right now what would make me happy work wise. So any advice or wisdom or words of encouragement anyone has would be much appreciated. Thanks :)

[Mother Fussbudget]

See the 'Investment Order' tab in the 'Case Study' spreadsheet:  https://drive.google.com/file/d/0Bxe0EgraZFRBT2pGYjBEbG1qYlk/edit

I can answer a couple of your questions, and you can 'edit' your post (above) to update these items:
  Adjusted Gross Income - this should be the total annual earnings.  A good estimate is to use the number from your 2015 1040 tax return. 
  Taxes:  again, annually - how much did you pay last year from your tax form? 

I would pay off that 6.24% car loan first.  In general, payoff any loan over 4% first; then start saving/investing; then pay off loans lower than 4%, then max out pre-tax/tax-advantaged savings opportunities.  With a photography business, look into setting up a solo 401K to save even more in a tax-advantaged way.

Assuming you're going to FIRST aside a 3-6 month emergency fund, and work forward from there.... 

The investment order I recommend:
1) Max out your 401K contribution to get the dual benefit of saving pre-tax dollars, and reducing taxable income.  At a minimum, contribute to your 401K plan to get your employer match - that's FREE money.
2) Max out your HSA account (must have a HDHP to have an HSA account).  http://www.madfientist.com/ultimate-retirement-account/
3) Max out a T-IRA or ROTH IRA contribution.  A tax-advantaged $5,500/year saving bucket above and beyond the 401K/Roth401K.
4) Invest in a taxable account.  You can always invest in a taxable account. Purchase low fee ETF's >> Total Stock Market Fund / Total Bond Market Fund, and/or REIT's if you want a real-estate component to your investment portfolio but don't want to be a landlord (http://www.mrmoneymustache.com/2011/08/15/become-a-lazy-landlord-with-reits/)  No one tells you that commissions can be waived when buying ETF's in a brokerage account at that company.  Example:  in a Vanguard brokerage account, you can buy Vanguard mutual funds with no commission (true of all account types:  taxable, IRA, Roth, custodial, etc).  Same for Fidelity Funds in a Fidelity brokerage account. 

Also... setup your investments to DRIP - Dividend Re-Investment Program.  Each stock trading company lets you re-invest dividends into the stock that generates dividends.  In
most cases, you'll have to manually specify you want dividend reinvestment for each holding in your account. 

Keep up the good work, and all the best!

[Kiwi Mustache]

You will love the feeling of getting out of debt.

It creates freedom, choices and just a weight off your shoulders. Even though the interests rates are low, paying off debt for me isn't always about the pure financials, it's about sleeping well, less stress and more choices in life.

I vote pay off the debt.

[FIPurpose]

Since you're looking for FI and not necessarily RE, I would suggest putting money in a Roth instead of a traditional tax advantaged account. At your current income level your taxes are already low, you have a long time horizon, and I bet your income will increase over the next decade. Though definitely pay off that car first. That should only take you a few months and you'll be well on your way.

[MDM]

I can answer a couple of your questions, and you can 'edit' your post (above) to update these items:
  Adjusted Gross Income - this should be the total annual earnings.  A good estimate is to use the number from your 2015 1040 tax return. 
  Taxes:  again, annually - how much did you pay last year from your tax form?

Thanks!  Took the words right off my finger tips. :)

To emphasize the taxes part: it's what you have to pay, not what you are having withheld.  People often withhold incorrect amounts, which can lead to incorrect investment decisions.

[newelljack]

As a fellow-debt-payer-offer, I agree that the feeling is almost as important as the money. But if you are paying 3.25% and your employer will match a greater percentage than that PLUS the pre-tax money aspect...well, math.

Did anyone else notice that 10% of her expenses are for a cell phone plan?

[Mother Fussbudget]

Since you're looking for FI and not necessarily RE, I would suggest putting money in a Roth instead of a traditional tax advantaged account. At your current income level your taxes are already low, you have a long time horizon, and I bet your income will increase over the next decade. Though definitely pay off that car first. That should only take you a few months and you'll be well on your way.

Totally agree on using a ROTH... tax-advantaged accounts are a vital part of FI whether you're thinking about RE or not.

Did anyone else notice that 10% of her expenses are for a cell phone plan?

Yes.  Lindsayk should consider purchasing a phone for cash (or paying off existing phone), and switching to a lower priced plan, AND using wi-fi whenever possible.  I was on the $10/month 250/$10 Airvoice Wireless metered plan for over a year.  The first month, I used $15 of voice/text, and nearly $0 of data (using wifi almost exclusively). The next month, around $8, and it stayed around $8 for the next 15 months (banking the difference).  In July'16, I switched to the $30/mo 'unlimited' voice/text + 1GB data plan.  Treating cellular data usage like 'silver bullets', and leaving cellular data turned 'off' most of the time was an eye opener.  I tried that, and found I actually did just fine using wifi at home, the office, and 'third places' (Starbucks, library, grocery store, etc). 
Lindsayk:  consider doing something similar.