Author Topic: Case Study: 29yrs old, paying off debt, wants to save for a home  (Read 6421 times)

GW

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Hello fellow Mustachians. Here's a breakdown of where I'm at. I'm 29 and want to save for a down payment on a house and a likely wedding in the near future, however the student loan debt is a huge pain in my side and I can't help the urge to pay that off before doing anything else. Any suggestions?

Current income
- $54,000 from employer
- $7,000 from side business
= $61,000

Savings
- $1,000 Emergency Fund - Savings Account
- $46,898 Traditional IRA
- $633 in new employer 401K with a 3.5% match at the end of the year (my contribution is 6%)
= $48,531

Total debt
- $32,639 4 Student Loans left (Down from $62,000)

Monthly Expenses
- $700 rent
- $132 car insurance - Car is paid off and I work from home, rarely drive
- $200 includes internet and utilities
- $300 groceries
- $200 going out
= $1532 each month
 

Should I slow the retirement contribution down to zero and go after the debt? Stay the course I'm currently on, saving and paying debt? Should I slow the debt repayment and ramp up the saving?




Grid

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #1 on: June 20, 2014, 09:49:58 AM »
First, the interest rates on the student loans are important and will determine in what order you are going to pay them down.  It also determines if investing will give you the money to pay them off with less of your hard-earned income.  Simply following the advice of the forum here recently, I would suggest you max out 401k contributions for the year (reduces your tax burden).

Also, correct if wrong, but I calculate 61k/12months is
$5083 monthly take-home
-1532 monthly expenses
is $3551 discretionary money.

Assuming this is tax-free, I would suggest putting it towards the debt, simply because having it hang over your head and tie up some time each month is bothersome.  I don't have the self-control of some people around here, and regardless of interest rate, practically all extra money I had after college went to student loans.  Others will offer better insight, but will need interest rates on those loans to offer the right advice.  $32,639/3551 = 9 months and a week to pay your way out of debt.

House and wedding?  Perhaps worry about that later.  I think I speak for many others here at least when I say to keep the spending for the wedding reasonable.  A wedding costs as much as the marriage license if you let it.  Good luck!

hexdexorex

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #2 on: June 20, 2014, 10:12:55 AM »
Can you cut car insurance down? GF and I have 2 cars and pay 670 a year combined (one car with collision one without). Your savings rate is pretty high otherwise.

The student loan burden all depends on the interest rate....if its over 6% I would pay down quickly...under that I wouldn't delay life events....

I would def get a house before the wedding though. Also most of this depends on her savings/income as well..

rocksinmyhead

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #3 on: June 20, 2014, 10:26:47 AM »
I would NOT drop 401k contributions to zero if you're getting a match! That's insane. Think of it this way, if the highest rate on your student loans is 6.8% (that's what my highest were, yuck) then paying down SL debt is like a guaranteed 6.8% return on your money. (Actually I think it's slightly different than 6.8%, but it's close and for me it's easier to just think of it like that.) Assuming your employer 401k match is a 100% match on the first 3.5% of income you contribute (I wasn't totally clear on whether this is the case), that's a guaranteed ONE HUNDRED PERCENT return on that money! Not gonna get that anywhere else. I fucking hate student loan debt and can't wait to be rid of mine, but I still contributed enough to my 401k to get the full employer match the whole time I've been trying to pay down the loans.

My plan with my loans was to start putting money towards other goals (also a wedding and a downpayment, coincidentally) once I got to where my highest interest rate loan was <5%. Honestly I just kind of picked an arbitrary rate that I felt comfortable with. What actually ended up happening, though, was that I got on a fucking roll with SL repayment and decided to just keep on going. Now I am down to <$1k on a 2.9% variable rate loan (started with $70k spread out among many loans), it's gonna be paid off within the next few weeks and then saving for the big goals is going to go so much more quickly!! I can't wait.

Anyway, what I did (and what I would recommend) is set up a spreadsheet and calculate out how different ways of allocating your money work out. Like, if you contribute 3.5% to 401k and throw everything else at loans, how long will it take you to pay them off, and how much longer after that to save up what you want for a wedding/house? Does that timeline work for you? If not, can you tweak your budget to throw a little more at them, and how much will that shorten your timeline? That whole process definitely helped me. (Also, this board convinced me that since I definitely plan on being in a lower tax bracket in retirement, I should actually max out my 401k before paying extra on loans, so I started doing that at the beginning of this year... may or may not make sense for you.)

Can you cut car insurance down? GF and I have 2 cars and pay 670 a year combined (one car with collision one without). Your savings rate is pretty high otherwise.

The student loan burden all depends on the interest rate....if its over 6% I would pay down quickly...under that I wouldn't delay life events....

I would def get a house before the wedding though. Also most of this depends on her savings/income as well..

What? Why?!?? I guess there are a lot of personal opinions and emotions tied up in this but I feel the EXACT opposite (definitely want to get married before buying a house).

hexdexorex

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #4 on: June 20, 2014, 10:42:52 AM »
Ha I guess it depends on the person / priorities. I see a house as a investment/financial decision and a marriage as a party. :)

Thegoblinchief

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #5 on: June 20, 2014, 11:05:58 AM »
Groceries and going out are both high.

Whether buying a house makes sense depends both on your location and life plans. Use the rent vs buy calculator at the NY Times site. Obviously no one knows the future, but if you think you might change jobs or cities in the next 10 years, hold off on buying. Otherwise you can't amortize the transaction costs over a long enough period.

GW

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #6 on: June 20, 2014, 11:55:25 AM »
What? Why?!?? I guess there are a lot of personal opinions and emotions tied up in this but I feel the EXACT opposite (definitely want to get married before buying a house).

I agree, I would get married before buying the house, but I definitely want to have money socked away for the down payment. My g/f is on the side of a low key/budget wedding so that shouldn't be very expensive.

Groceries and going out are both high.

I know those are high and will except and verbal lashing as reinforcement of that :)


rocksinmyhead

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #7 on: June 20, 2014, 05:10:10 PM »
Ha I guess it depends on the person / priorities. I see a house as a investment/financial decision and a marriage as a party. :)

I definitely see your point. I see a wedding as a party, and a marriage as laying the groundwork for a shared future (and in a way, its own investment/financial decision... not to sound like a gold digger or hugely unromantic, but if you and your spouse don't share financial values that is gonna be a huge bummer down the road, ya know?)

Fatmouse

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #8 on: June 21, 2014, 01:56:30 PM »
There are not a lot of details in this case study to work with.  The car insurance seems too high, the groceries and going out budget have some fat.  The rent is unclear, that seems high if the poster shares the apartment, but not high for solo occupancy (depending on the city.)

But the poster seems to already have a high savings rate, so really the question is how to prioritize competing savings goals.

I think poster is having morale issues with socking a bunch into retirement accounts that cannot be touched for 30+ years, plus being in the 20th mile of the marathon on the student loan repayment.  Result is blowing more money than optimal on socializing to try to feel less demoralized.

I say attack the student loans with renewed vigor.  You don't say the interest rate, but many student loans are 6.8% or higher.  This is worth all of your focus right now.

Once the loans are gone, there will be a perfect window for a little wedding spending.  Weddings are famously overdone by non-Mustachians, but I am getting married very soon, and I can say that our simple wedding bands and the honeymoon trip we have booked are a source of great joy to me.

If you plan to get married before it is feasible to kill the loans even with heroic effort, the choices do get tougher.  So tough, it is hard to advise without more info.

Good luck!


boarder42

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #9 on: June 23, 2014, 06:21:58 AM »
too much on car insurance thats 30% more than i pay on 2 cars.  Too much on groceries - including alcohol my wife and i are around 200-300 for 2 people.  Too much on going out.  what are you wasting 200 a month on.  You have 32k in student loans you should be paying those off as fast as you can while still cont. to your retirement assuming rates are under 5% if over then ditch the retirement cont.

GW

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #10 on: June 23, 2014, 09:34:43 AM »
The student loan interest rates range from 3.41% - 4.81%.

The $200 a month for going out is high for someone with debt... I'm tightening the belt there, but it usually includes: restaurant and drinks, tickets to an event, or a round of golf...

The $700 a month in rent is for a shared house with my roommate in Denver, CO. Rental market here is ridiculously high... And I work from home so I need room for a dedicated workplace.

I have started to shop around for new car insurance.. Seems everyone agrees that it is too high.

Thank you for all the responses!


Jags4186

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #11 on: June 23, 2014, 09:58:05 AM »
GW, is the $61000 income gross or take home? 


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surfhb

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #12 on: June 23, 2014, 10:06:40 AM »
Hmmm.    I don't see that $500 a month for groceries and going out to be that much.    You're a single guy in Denver for God sakes.    Sound pretty frugal to me :)

Tackle that debt and you'll be fine
« Last Edit: June 23, 2014, 10:09:17 AM by surfhb »

Chrissy

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #13 on: June 23, 2014, 10:46:20 AM »
Your loan rates are low, and you already have a hefty chunk in retirement accounts.  Good for you.  I vote temporarily "slow the debt repayment and ramp up the saving," minimum payments on the student loans, contribute to the 401K only enough to get the full match, put the rest aside for the wedding.

Once you've saved enough for the wedding, attack the student loan debt.  A mortgage will probably have a similar interest rate to your student loans, but since the SLs are bothering you so much now, I can't see you being comfortable adding a mortgage on top of them.

surfhb

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #14 on: June 23, 2014, 10:59:18 AM »
Your loan rates are low, and you already have a hefty chunk in retirement accounts.  Good for you.  I vote temporarily "slow the debt repayment and ramp up the saving," minimum payments on the student loans, contribute to the 401K only enough to get the full match, put the rest aside for the wedding.

Once you've saved enough for the wedding, attack the student loan debt.  A mortgage will probably have a similar interest rate to your student loans, but since the SLs are bothering you so much now, I can't see you being comfortable adding a mortgage on top of them.

Interesting!   Not saying your advice is bad, but saving for a wedding celebration before retirement savings and tackling debt?    That's what I love about this forum :).   
« Last Edit: June 23, 2014, 11:01:51 AM by surfhb »

GW

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #15 on: June 23, 2014, 11:20:38 AM »
GW, is the $61000 income gross or take home? 

The 54,000 is gross form the employer, the $7000/year for the side business is take home.

Chrissy

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #16 on: June 23, 2014, 11:26:25 AM »
surfhb:  "saving for a wedding celebration before retirement savings and tackling debt?" No!  This guy can do it all!

I'm suggesting GW still tackle debt, just at the minimum payment, and still save 7% for retirement:  3.5% GW/3.5% employer.  At 29, he has almost $48,000 in retirement, and has paid his student loan by 50% already.  He wants a wedding and a house in the "near future".  He's been responsible, so can't he have at least one of those things?  I picked the one that doesn't get him further into debt.

The g/f even wants a budget wedding, so I say go for it.  Life is meant to be lived.

darkadams00

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Re: Case Study: 29yrs old, paying off debt, wants to save for a home
« Reply #17 on: June 23, 2014, 12:23:06 PM »
Traditionalist here re the wedding and the house, mainly because I think grandma and grandpa had that part figured out correctly. I don't want house purchasing suggestions from someone who could leave me hanging at the altar, but I don't want to ignore the other person who might be living in that house in short order either. Solution: Get married first. If you had owned the house for a while and then the future missus came into your life, then that's different because your housing decision would have been made based on your financial situation with the previous set of inputs in hand, i.e. no fiancee in sight. But with both events directly in front of you, a more inclusive decision can be made at a more appropriate time. You have an entire life to be a homeowner. Patience is a virtue, you know.

Financially, I would do these two sequentially with the "same funds." Trim any fat from your existing expenditures (food/insurance are both a bit high). Establish how much you can save monthly--at least the 7% for retirement, x% additional for your debt, and y% for your wedding budget. After you're married, the y% previously used for the wedding savings can be shifted over to saving for the house. Or you could shift the y% back into retirement/debt and use the additional savings possible with the new wife's income to handle all of the savings for the house once you've established the budget changes due to being a married couple instead of a single guy. Financially, I wouldn't want to lose investment returns or pay additional debt interest because I tied up significant funds to do both of these at the same time.