Author Topic: CASE STUDY: Best debt payment, investing, and savings strategy  (Read 1930 times)

Peteflor

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CASE STUDY: Best debt payment, investing, and savings strategy
« on: November 16, 2015, 10:16:51 AM »
Hello Mustacians!
My name is Pete and I am 31 years old. I have been reading MMMís blog and advice from posters to try and improve my financial situation. I have been out of school for 2 Ĺ years. I went back to school for an Engineering degree which has help increase my earning power, but at the cost of debt. I graduated from University in May 2013 and have been working fulltime for my company since September 2013. I am currently in graduate school (thanks to company tuition reimbursement!), with a graduate date in December 2016. My plan is to transfer to another facility within my company, likely Boulder CO.
This month I hit a financial milestone of clearing all credit card debt on interest bearing accounts. Going back to school, plus poor spending habits during that time has hurt my net worth. I would like some advice on how I should be balancing debt repayment, retirement planning, and saving for a house (would like to purchase in the next 2-5 years, closer to 2 if possible)
Here are my current finances:
Income:
Gross pay:       $2788.46 (bi-weekly), $72,500 annual
Health Incentive:    $19.24 (bi-weekly), $500 annual
Total:         $2807.70

Before-Tax Deductions:
401k:         $167.31 (6% to receive employer 100% match)
Medical:      $46.83
Dentist:         $10.50
Total:         $224.64

Taxes:
Fed Withholding:   $423.62
Fed Med/EE:      $39.89
Fed OASDI/EE      $170.58
CT Withholding:      $44.01      (I live in CT but work in MA)
MA Withholding:   $129.11
Total:         $807.21

After-Tax Deductions:
PFA:         $1.21
LTD:         $13.19
Supp Life EE:      $3.10
Total:         $17.50

Take-home pay:
   Total:         $1758.30

Expenses:
Auto Insurance:      $75 (monthly)
Gas:         $140 (monthly)
Groceries:      $300 (approximately per month)
Rent:         $510 (I rent a 1 Bedroom with my girlfriend)
Student Loans:      $334.69 (monthly)
CC:         $95 (monthly minimum)
Electric:         $100-200 (electric is higher in Winter due to heat)
Hulu:         $11.99
Netflix:         $7.99
   Total         $1624.67  (assuming electric of $150)

Assets:
Cash:
Checking Account:   $254.74  (I used this account for paying bills and accessing cash)
Savings Account:   $4559.65 @0.025% Interest (used for emergency money)
   Total         $4814.39

Retirement:
   401k:      $18834.11
   Total:         $18834.11
   
Investments:
   GE Stock   $723.84 (24 shares @$30.16 per share)   
   MDT Stock   $1361.10 (18.071 shares @$75.32 per share)
   Total:         $2187.94

2008 Altima:      $8437 Blue-Book Value no loan on vehicle
   Total         $8437.00
 
Total Assets:         $34273.44

Liabilities:
I have been working on paying off credit card debt that I accumulated during school and while I was looking for work. I recently transferred my balances across 3 accounts to take advantage of 0% interest until December 2016 (I plan to make regular payments to have a $0 balance at the end to avoid interest)

CC1:         $1927.10 @0%APR until 12/31/16
CC2:         $4590.00 @0% APR until 12/31/16
CC3:         $1975.00 @0% APR until 12/31/16
   Total:         $8492.10

Federal Student Loans:
*My subsidized loans have a 0% Fixed Rate when they are in deferment while I am in graduate school. I do not have minimum payments during this time.

FSL1:         $5044.89 @0% Fixed Rate in deferment. 3.4% in repayment
FSL2:         $4695.66 @6.8% Fixed Rate in deferment
FSL3:         $5059.29 @3.4% Fixed Rate in deferment. 3.4% in repayment
FSL4:         $7646.66 @6.8% Fixed Rate in deferment
FSL5:         $5079.65 @0% Fixed Rate in deferment. 4.5% in repayment
FSL6:         $8107.44 @6.8% Fixed Rate in defermentí
   Total:         $35663.59

Private Student Loan:
ECSI:         $70,931.40 @5.7% Fixed Rate Interest only payment of $334.96 per month
   Total:         $70931.40

Total Liabilities:         $11597.09         

Net Worth:         $80813.65 :(

I appreciate you all taking the time to look this over, and welcome any and all advice! A couple of specific questions I have:
My company has a stock purchase program where I can purchase 2-10% of my pay check towards at 85% value. The stock is MDT if this helps answer the question

Should I be working to pay off the student loans or investing?

FrugalSpendthrift

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Re: CASE STUDY: Best debt payment, investing, and savings strategy
« Reply #1 on: November 16, 2015, 11:20:48 AM »
Take-home pay:
   Total:         $1758.30

Expenses:
   Total         $1624.67  (assuming electric of $150)

Is the take home pay # bi-weekly and the expense # monthly?

I would like some advice on how I should be balancing debt repayment, retirement planning, and saving for a house (would like to purchase in the next 2-5 years, closer to 2 if possible)
It only makes sense to invest, when your investment earns more than the interest you are paying on your debts.  With student loan debt at 5.7% and 6.8%, you aren't likely to find a safe short term investment that can beat that.  Buying a house isn't exactly going to help your net worth, so you might want to put that goal on hold until you get the debt under control.

Is there a minimum holding period for the company stock purchase program?  If you buy at a discount, you might want to sell as soon as they are eligible and put that towards debt reduction.

Peteflor

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Re: CASE STUDY: Best debt payment, investing, and savings strategy
« Reply #2 on: November 16, 2015, 11:47:10 AM »
Take-home pay:
   Total:         $1758.30

Expenses:
   Total         $1624.67  (assuming electric of $150)

Is the take home pay # bi-weekly and the expense # monthly?

I would like some advice on how I should be balancing debt repayment, retirement planning, and saving for a house (would like to purchase in the next 2-5 years, closer to 2 if possible)
It only makes sense to invest, when your investment earns more than the interest you are paying on your debts.  With student loan debt at 5.7% and 6.8%, you aren't likely to find a safe short term investment that can beat that.  Buying a house isn't exactly going to help your net worth, so you might want to put that goal on hold until you get the debt under control.

Is there a minimum holding period for the company stock purchase program?  If you buy at a discount, you might want to sell as soon as they are eligible and put that towards debt reduction.

Hi FrugalSpendThrift,

I listed the take home pay as bi-weekly, and the expenses as monthly. Should I adjust this for readability?

For the employee stock purchase there is a 24 month minimum holding period.

Thank you for taking the time to help!

Best Regards,
Pete

Axecleaver

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Re: CASE STUDY: Best debt payment, investing, and savings strategy
« Reply #3 on: November 16, 2015, 12:01:44 PM »
SPP plans are great when there's a significant discount. But, with a two year hold period, anything could happen. I would recommend you contribute to this and sell it in month #24, as soon as you're allowed to. Then you can use the money you make to pay down your student loan debt. Figure out how much you need to pay off the CC debt before the interest activates, then contribute the rest to the SPP. In two years, you can have a steady stream of SPP sales to pour into debt payoff.

An 85% buy-in is a great return, as long as the stock is stable or increasing. That's a 17.6% ROI on your money (15/85 = 17.6%). But you do have the added risk of tying up a portion of your income for two years,  and you still have to pay taxes on the money you make that goes to an SPP.

It looks like you made a mistake in calculating liabilities, I get a total of ($115,087.90). That's a lot, but you can repay it as your career evolves, so long as you keep your standard of living the same as your income increases. You're saving $1900 a month right now. Pay off the CC's first to eliminate them before the interest rates kick in next year. If you put half of that in SPP, and half to CC repayment, that will take 10 months. Then get to work on your student loans in order of interest rate. Good luck!

FrugalSpendthrift

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Re: CASE STUDY: Best debt payment, investing, and savings strategy
« Reply #4 on: November 16, 2015, 12:04:20 PM »
Hi FrugalSpendThrift,

I listed the take home pay as bi-weekly, and the expenses as monthly. Should I adjust this for readability?

For the employee stock purchase there is a 24 month minimum holding period.

Thank you for taking the time to help!

Best Regards,
Pete
I was just trying to understand the cash flow, so you have about $45k/year coming in and $20k/year going out.  The remaining $25k/year could put quite a dent in your debt.

With a 24 month holding period, I don't think I would invest too heavily in company stock.