Author Topic: Case study. First post. Any suggestions  (Read 5148 times)

themagicman

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Case study. First post. Any suggestions
« on: November 02, 2014, 07:31:58 PM »
I found Mr money mustache's blog a couple of months ago and have been reading through it and the forums. This is my first post and I was hoping that you all could give me a few suggestions about my expenses and our financial plan. Thanks for any help!

My wife and I are both 24 and have been married about a year. We live in a medium cost area (metro atlanta). We do not have any children but will probably have one in about 3 years and the wife will probably end up staying home with the kid.

My take home monthly pay    $5,200
Wife take home pay               $1,500
Total                                      $6,700

Food                           $275
Gas                           $150
Wife Misc                   $60
My Misc                   $35
Entertainment           $15
Household Items   $40
Misc                           $50
Escrow                   $250
House payment           $595
Electricity                   $65
Water                   $25
Natural Gas           $45
Trash                   $19
Car Insurance           $92
Cable/Internet           $43
Cell Phone                   $43
Car Payment             $270
Health Insurance      $210
Life Insurance           $25
Vacation                   $315
Irregular-Misc           $50
Gifts                           $40
Total                         $2,712

With the leftover money we are currently maxing out both of our IRA's (I go back and forth on roth vs traditional and usually switch it each year) and our HSA.

My employer does not match 401k but puts in 3% in no matter what. Currently I am only putting 7% in it.

After all that we are throwing the rest at paying down our mortgage. We owe about $70k left on the home (It is worth about $200k) and our mortgage rate is only 2.5% for the next 5 years (It is a 5/5 ARM with a 2% increase max every 5 years) We know that mathematically it does not make sense to be paying down the mortgage so aggressively but we like the the fact of getting rid of that expense (Especially when the wife stays home with the kids) If we continue at the rate we are currently paying it off, we have about 2.5-3 years left until it is paid off.

We have about $20k in cash (Including emergency fund) and about $40k in retirement.

I was hoping that you all good help me with a few things.

1. Should we be maxing out the 401k before we make any additional pay down on the house?
2. Would you recommend roth or traditional IRA for us?
3. Do you see any expenses that we should cut or adjust?
4. Any additional suggestions or advice that you might have?

Thank you!
« Last Edit: November 02, 2014, 07:50:43 PM by themagicman »

La Bibliotecaria Feroz

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Re: Case study. First post. Any suggestions
« Reply #1 on: November 02, 2014, 07:46:47 PM »
Your wife's take-home pay does not appear to be important to your monthly budget, frankly, so I see no urgency in paying off that mortgage. It's not like you won't be able to make ends meet without her salary! Max out the 401(k) instead.

Why do you have a car payment? Unless that's a bizarrely low interest rate, that's what I would be trying to knock out.

themagicman

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Re: Case study. First post. Any suggestions
« Reply #2 on: November 02, 2014, 07:58:10 PM »
Thanks for the suggestion! Would you still pay the house off in 5 years (Before the interest rate my adjust up) or would you just pay it in 30 years? (The most it can go up is 7.5%)

Also, the car payment is from a lease (Don't kill me ha) It is for a nissan leaf. The reason we got this is for the tax credit for our state and the savings on gas. After the tax credit it is practically free for us. We didn't want to buy because we did not know how the electric car technology would go. I had a paid off car but sold it and got the leaf and put the money towards the house pay down.

SailAway

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Re: Case study. First post. Any suggestions
« Reply #3 on: November 02, 2014, 08:04:42 PM »
Wow, I think you're doing great! I would definitely max your 401k, especially with a 2.5% mortgage rate.

thedayisbrave

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Re: Case study. First post. Any suggestions
« Reply #4 on: November 02, 2014, 08:13:15 PM »
You're doing great.  But it makes NO SENSE financially speaking to be paying down your mortgage at that KILLER rate.  Max your retirement accounts first -- that is tax advantaged space you can't get back.  Then feel free to pay down if you have extra money left over that you don't know what to do with. 

horsepoor

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Re: Case study. First post. Any suggestions
« Reply #5 on: November 02, 2014, 09:29:52 PM »
I'd max the 401(k) and refi the mortgage since rates are still low.  You could probably go with a fixed 5 10 or 15 year since your balance is low.  I agree that it doesn't make sense to pay it off early.  All the money you're throwing at it in lieu of contributing to pre-tax retirement is costing you at your marginal tax rate (probably 25%), plus any gains that beat your mortgage interest rate. 

Your budget looks great.  If you haven't already, maybe check around on car insurance and/or increase your deductibles.  $92 seems a bit high.  Vacations are also a tad high, but totally within your budget, so no face punches on that one.

surfhb

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Re: Case study. First post. Any suggestions
« Reply #6 on: November 02, 2014, 11:21:24 PM »
If you can get 17.5k in on the 401k and 5.5k each in a ROTH, you'd be pretty
Bad ass

I agree with you though....if your home payoff is only 3 years away, just do it.   Piece of mind is worth a dollar amount in my book.   The extra money being lost is negligible.... You'll be FI in your 30s at this rate. You're young.....really young!     My head was so far up my ass at your age.   I commend you :)

Good work!

1. At this point, I would
2. ROTH
3. No
4. No
« Last Edit: November 02, 2014, 11:34:05 PM by surfhb »

RichMoose

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Re: Case study. First post. Any suggestions
« Reply #7 on: November 02, 2014, 11:53:19 PM »
You are clearly doing fantastic financially, combining high take-home pay with low expenses. I would focus first on maxing all your tax advantaged accounts: 401(k), IRA, HSA, etc. You should read the MadFientist blog to help you out with retirement accounts, reducing taxes, etc. Traditional is probably the way to go with you income levels, especially if early retirement is your goal. You can always start a MadFientist-style Roth conversion ladder at that time. http://www.madfientist.com/traditional-ira-vs-roth-ira/

Any extra money, I would dump on your mortgage and pay that baby down. Great piece of mind and guaranteed return. It's probably one of the most satisfying financial achievements you can make from a psychological perspective.

My biggest recommendations would be to stay focused on keeping expenses low and reducing your tax bill.

Travis

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Re: Case study. First post. Any suggestions
« Reply #8 on: November 03, 2014, 03:00:54 AM »
You definitely seem on track with things and I can't say much more than the others have, though I'm curious why you have so many "miscellaneous" items in your budget. It's $200 worth.  That's a lot of money going towards things you may or may not be keeping good track of.

Monkey Uncle

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Re: Case study. First post. Any suggestions
« Reply #9 on: November 03, 2014, 03:57:05 AM »
First of all, my hat's off to your 60% savings rate!  Wish I could do that well.

I'd focus on paying down the mortgage by the time you reach the 5-yr adjustment point.  If I read your OP correctly, the rate might go up to as much as 5.5% at that point.  Although your investments should be making more than that, that's getting a little high for my comfort level.  Also, I'm wondering if you're going to feel the urge to upsize once your family starts growing.  No telling what rates will be if/when you want to trade up, so having as much equity as possible in your current house will minimize the amount you have to finance on house #2.  Yes, strictly by the numbers, it would make sense to max out the 401k before paying down the mortgage, because you'd make an immediate 15-25% from the tax savings, and you should be averaging a 7-10% annual return thereafter.  But unless you can work out some sort of tax free 401k-to-Roth IRA ladder when you retire (and assuming that option still exists when your retire), you're going to have to pay a good chunk of that tax savings back eventually.  And the average annual return is a guesstimate, not a guarantee.  So, as another poster pointed out, the decision really comes down to whether you want the piece of mind that comes with having your house paid off.

Also, I'd look into how much it would cost you to get out of that car lease.  I don't know the terms of your lease, but generally leases are a bad idea because you end up paying a large chunk of the purchase price and have no equity in the vehicle at the end.

But all of this is just fiddling around the edges.  You clearly have your act together, and you seem to be on track to reach FI at a ridiculously young age.
« Last Edit: November 03, 2014, 04:34:41 AM by Monkey Uncle »

lpep

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Re: Case study. First post. Any suggestions
« Reply #10 on: November 03, 2014, 04:46:06 AM »
I want to be you!

themagicman

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Re: Case study. First post. Any suggestions
« Reply #11 on: November 03, 2014, 10:56:07 AM »
Thank you for everyones responses/suggestions/kind words!

So it looks like the general consensus is to max out my 401k before paying down the house. I think I will max it out (as well as the IRA's and HSA) and then throw the rest of our money towards the house. This would change the house payoff rate to about 5 years.

I'd max the 401(k) and refi the mortgage since rates are still low.  You could probably go with a fixed 5 10 or 15 year since your balance is low.  I agree that it doesn't make sense to pay it off early.  All the money you're throwing at it in lieu of contributing to pre-tax retirement is costing you at your marginal tax rate (probably 25%), plus any gains that beat your mortgage interest rate. 

Your budget looks great.  If you haven't already, maybe check around on car insurance and/or increase your deductibles.  $92 seems a bit high.  Vacations are also a tad high, but totally within your budget, so no face punches on that one.

Unfortunately, I cannot refi. My current mortgage paid all my closing costs and in return I have to keep the mortgage for 3 years (At about 10 months now) or I will have to pay it all back (About $5K) 

Thanks, I will look into car insurance again! Last I checked GEICO was the cheapest for us but it could have changed since about a year ago. Our deductibles are at $1,000 each. I am hoping our premiums go down once we are 25!

You are clearly doing fantastic financially, combining high take-home pay with low expenses. I would focus first on maxing all your tax advantaged accounts: 401(k), IRA, HSA, etc. You should read the MadFientist blog to help you out with retirement accounts, reducing taxes, etc. Traditional is probably the way to go with you income levels, especially if early retirement is your goal. You can always start a MadFientist-style Roth conversion ladder at that time. http://www.madfientist.com/traditional-ira-vs-roth-ira/


Thanks! I will definitely check him out as well!

You definitely seem on track with things and I can't say much more than the others have, though I'm curious why you have so many "miscellaneous" items in your budget. It's $200 worth.  That's a lot of money going towards things you may or may not be keeping good track of.

The misc categories for my wife and I are are personal spending "blow" money, where we go out to eat for lunch or she gets her nails done or new clothes.
The other misc category is for everything that I do not think fits into another category. Like if we bought a new DVD player for the house or something. This is usually pretty small

Do you think this is too much to allocate for these? do you think there is a more efficient  way to budget for it?

I want to be you!

Haha! Thank you!

Any other suggestions? Thanks!

Goldielocks

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Re: Case study. First post. Any suggestions
« Reply #12 on: November 03, 2014, 12:49:57 PM »
With your breakdown, I think you should be writing the advice!  Way to go.

The main feedback I have is that you will want a substantial savings / investment fund from 26 yrs to 36 yrs old, that you can access without hitting a 401k and 10% withdrawl penalty.  Roth is a good choice, or any other investments that you could draw upon to support any opportunities that arise, be it mortgage, children, real estate mogul, starting your own business,  medical, etc.   These do not need to be highly liquid, as you are obviously a planner, but having access to funds over a 2 year window gives you lots of freedom and choices.