The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: AceStache on March 12, 2015, 07:18:43 AM
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Just starting here, so I’d enjoy input from every person who’d like to give their opinion, and I will admit my problems up front. I accepted a job at the beginning of the year with a 33 mile drive each way. In addition, the transmission on my 2001 Honda Accord started going, and I recently purchased a 2015 Honda Civic. I can’t change the past, so I accept those faults and am starting from there.
I’m 37 years old and started the new job this year making $65,000. When starting the job, I rolled over my old 401k amount of $80,000 to a Vanguard IRA. Several years ago I had purchased the 2001 Accord for $5,000 cash, but the transmission was going. I traded it in on the 2015 Civic for a price of $19,800 at 0.9% interest. Because I have great credit, I was able to get the low finance charge. I know financing a car is a cardinal sin, but because of the low rate I decided not to put money down and instead used the money to pay off my student loans. So, I at least feel good that is taken care of. Here is a snapshot:
Mortgage: $100,000 at 2%
Home equity line: $10,800 at 3.25% variable (tax deductible)
Car: $19,800 at 0.9%
Credit card: $0 (two mortgage loans and car loan are my only debts)
Savings: $1,600
Most of my working life I have contributed 12% to 401k. I’m curious to know how you’d all proceed from here.
A. – Limit my 401k contributions to only company match and pay off debts first (home equity and car), and if so, do you start with home equity at higher interest rate, or car at lower rate but no tax deduction?
B. – Limit 401k contributions to company match, then fund an IRA (Roth or traditional?), then after that go back to stuffing 401k and only pay the minimum on both debts because the rates are low?
C. Some other combination?
Here is another little wrinkle to throw in, because what is life without wrinkles being thrown in? I’m considering selling my house and moving in a year. I am in Michigan now, but am considering moving to Washington state. Or, if I totally fall in love with this job, just staying in Michigan and moving closer to it. The reason I throw that in is because that may be a factor on how much priority the home equity loan gets, because the value of my home has dropped to the point I’d likely get slightly less than what I owe. I’d also like to start saving something for a down payment for when I move, even though I am fine with renting for a bit while saving up for it.
Soooo…I want to pay off those two debts, I want to fund my retirement, and I want to save some liquid funds for the move. What are your thoughts? Thank you for taking the time for me!
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I'm not sure what your other expenses are and what amount you are willing to spend/save, but my take has always been this: If you don't pay your 'future self' first, you won't ever have what you want when you want it. The worst thing that happens if you fund your retirement too much, too early, is that you have lots of options later... So not really that bad.
My experience has been there are always distractions and 'bumps along the road'. I know my nature is to get excited by shiny things and new ideas, so I'll quickly spend a lot on a new hobby. I always can justify it at the time. Only with the lens of time, do I see that I may have made more prudent financial and value decisions along the way... So now I just 'set it and forget it' in regards to saving.
I've made a habit of maxing my retirement savings first (401K, Roth) before I consider other bills. I also utilize my companies SIP (buy company stock) as a 'long-term savings' account. In this way I have a lump-sum ready for my next car, my daughter's college expenses, a new roof for the house, or a fun vacation.
At 2% for the home mortgage, and .9% for the car, it doesn't really pay to rush those down. (it does feel good though) My advice would be to prioritize the retirement tax shelters first, and build some additional savings for a move, etc before focusing on the two debts. Once those three buckets are full, then I'd have to think about investing in taxable accounts or paying down the debt. Unfortunately, this is a personal/emotional choice. History would tell you to do one thing, but human nature may tell you to do another.
My $.02
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I'd also prioritize the tax-deferred accounts. Max the 401K and an IRA. When making your traditional / roth decision, keep in mind you're potential move is from a state with an income tax to a state with no personal income tax. Depends on what you expect income and expense wise, but if you make that move, you'll for sure be paying less state income tax, so that's a nudge towards traditional.