Author Topic: Case Study- Guidance Needed!  (Read 4303 times)

Frugaltobe

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Case Study- Guidance Needed!
« on: February 25, 2015, 10:50:03 AM »
Just read through the case study stickie and am redoing this. Stupid tapatalk practically hides stickies and i didn't see it. Wife and I are both 25. No kids. Married less than two years and will probably have 1 kid by 30 and plan on having 2 total.
Income-
My Job- 44k-50k+ year depending on OT (hasnt ever been below 6,000 per year) avg 3846 per mo PRETAX
Wife- 2015 will be her first full time year and should be around 30-31k  avg 2583 per mo PRETAX
total 74-80k or 6429 per mo

Expenses per month
Mortgage 686 Prin/Int/Tax/Ins/PMI
Auto Payments 800 (facepunch) 2 loans both at 2.92%
Auto Insurance - 151 for 3 cars
Gas- 200 per month for the last 3 months but that involved a lot of traveling  for holidays and should be about 125-150 per month
Utilities- Winter 250/month Summer 125/month
Cable/Internet 86/month (This is going to be cut to internet only next month and we will add HULU back)
Cell Phone 66/month (her phone is still on parents plan)
Student loans- 167/mo avg of 5.39%
Groceries- 550/month It's a lot for 2 people but we eat lots of meat and fresh vegetables (we are going to be doing a garden this year to help with this)
Entertainment 100/mo (we are cutting it back to this compared to we just spent whatever we wanted before)
Health Ins- 185/mo for both of us Pre-tax
Life Ins-80 month  40/pretax and 40 aftertax
Home supplies 100-200 month
Doggie- 50-75 month
Total- 3778 month taking the highside of the variable expense

Assets And Liablities
House 79k owed on 90k house almost 1 year into 15 year mortgage at 3.125%
Cars 40k owed on 40k for two cars 2011 Ford Edge and 2014 Focus ST, own two other classic cars outright valued at around 9000 total
401k 6000 me 2000 wife (i get 3%match and she gets 4%)
Roth IRA 24k (setup for wife by her father and we have not started contributing to it yet but will be eventually)
Cash 4k
Student loans 10,800 at 5.39% avg left
Net Worth of about 32k without vehicles

We really need a direction to go with our finances. I have been paying extra on the mortgage instead of student loans. Am trying to sell one car with a payment and i will drive one of our other two paid off vehicles (68 ford pickup and 92 mustang GT) until I can pay cash for a decent used car. We just started pulling out our set monthly cash purchase "allowance" and it worked really well last month. Once we run out of cash for the month we don't buy things. This includes gas, groceries, eating out, entertainment, gifts for whatever, travel, etc. I think we need to kill the Student loans first. Hopefully by then we will be down to 1 car loan and thats where we need direction from there.

« Last Edit: February 26, 2015, 04:38:46 PM by Frugaltobe »

frugaliknowit

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Re: Guidance Needed!
« Reply #1 on: February 25, 2015, 11:06:59 AM »
Your best risk adjusted rate of return is knocking out the student loans (even if you are able to write off the interest), so knock that out first.  You might even consider forgoing some of the 15% 401k contributions (if unmatched) until it is paid off (5.39% or after tax 4.58% risk free is great...).  Then focus on the car loans, building appropriate emergency funds, then build wealth.

Frugaltobe

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Re: Guidance Needed!
« Reply #2 on: February 25, 2015, 03:44:39 PM »
Should clarify that the 600 we saved last month was on top of our normal 400 a month contributions to savings. After my student loans are done, should we really throw much above the minimum at the 1 car payment being 2.9%?  Would it be better to throw extra on the mortgage? Or start funding more to retirement or investments? I have no plans to RE maybe around 55-60 but we will probably have a baby before we are 30 so would like to be in a position where wife can stay at home if she wants by then.

zolotiyeruki

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Re: Guidance Needed!
« Reply #3 on: February 26, 2015, 09:03:55 AM »
Agreed with fruglaiknowit on the student loans.  Knock those out ASAP.  Also, with <10% equity on your home, do you have PMI?  That's probably next on your priority list.  After that, max out your 401(k)s.

Once you're past that, in my mind it's a tossup.  Mathematically, you'd be better off maxing out retirement savings and paying the normal amounts on your car loan and mortgage, but there's also the emotional wins from getting out of debt. It's up to you to decide which is more important.

You've mentioned how much you make ($75-80k), but not how much you have available each year to contribute toward debt and retirement savings.  Can you share a bit more about that?

Frugaltobe

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Re: Case Study- Guidance Needed!
« Reply #4 on: February 26, 2015, 04:40:54 PM »
OP has been updated with Case study breakdown.

zolotiyeruki

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Re: Case Study- Guidance Needed!
« Reply #5 on: February 26, 2015, 07:42:01 PM »
OP has been updated with Case study breakdown.
Thanks!  For simplicity's sake, let's assume you're making $80k.  FICA/SS taxes will take $6k, federal income taxes will take another $8k or so, and state income taxes could be anywhere from 0 to another $6k, depending on where you live.  Let's call it $3k for state income taxes.  That puts your take-home pay at about $63k, with a monthly take-home of $5,250.

That gives you about $1500/mo surplus without changing spending.  That's a nice situation to be in.  That means your student loans are gone in 8 months.  Once you sell one of the cars, you'll have another $400/mo, so you could be out of your SL's by 6 months.

Once you hit that point, you have $1900/mo, or $22,800/year.  Here's what I'd do:
1) Max out the Roth IRAs (2x$5,500/year), to get a head start on your Roth ladder.
2) Put the rest in 401(k)s
3) Pay off mortgage and car loans at the normal rate.

You're both young, so your earnings will likely increase going forward, which would raise your effective tax rate.  As it does you'll want to shift your contributions more toward the 401k/tIRA accounts.  If you choose to have kids, that'll significantly decrease your taxable income, so you'll be able to contribute more to Roth at that point again.

You need a facepunch on your food budget.  We feed our family of 8(!) on about $900/mo, and our kids eat stupefying quantities of produce, and meat of some sort is part of most meals.

Frugaltobe

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Re: Case Study- Guidance Needed!
« Reply #6 on: February 26, 2015, 07:48:35 PM »
Haha I know and we really don't do extravagant either.  We use the slow cooker clean eating  set on family sized on emeals for everything. This way we always have left overs for lunch. We are going to try Aldi this weekend and see how much we can drop compared to fresh thyme. The breakdown you did is really helpful I really appreciate the help from everyone.

justajane

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Re: Case Study- Guidance Needed!
« Reply #7 on: February 28, 2015, 07:43:17 PM »
Don't prepay the mortgage. No, really - don't. Ignore its interest rate, even though it is pretty low. You have to live somewhere, and that loan isn't going anywhere anytime soon. You have a small mortgage to begin with. Just pay the minimum every month.

Kill those student loans and then the cars. It doesn't make sense to prepay a mortgage when you have car loans. Zero sense. Ignore the interest rates. You pay more in car payments than you do to live in your home. That's insane. A car is a depreciating "asset." A house is somewhere you will be for a long time. Once those car loans are gone, then you can prepay the mortgage, if you so desire. I personally wouldn't prepay that mortgage ever. I would take the money your paid off cars free up and throw it into your retirement or an investment account. You are so young and all that hard work in your twenties will pay off big time down the line. Time is in your favor. 

FWIW, your utilities seem high to me. What's the square footage of your home? It also goes without saying that two people can eat for less than $500 a month, but I'm sure you already knew that.

Retired To Win

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Re: Case Study- Guidance Needed!
« Reply #8 on: February 28, 2015, 08:41:57 PM »
... Expenses per month
Groceries- 550/month It's a lot for 2 people but we eat lots of meat and fresh vegetables (we are going to be doing a garden this year to help with this)
Home supplies 100-200 month
Doggie- 50-75 month
...


You've listed $750 or more per month for groceries, home supplies and doggie stuff.

We're also 2 adults that eat lots of meat and fresh vegetables.  We've got 2 dogs and 2 cats.  Our monthly total for all 3 expense categories combined is $450 or less.

That's a $300 per month difference between you 2 and your pet(s) and we 2 and our pets.  So, it would seem to me, you've got some room for further savings there.

Good luck.

Frugaltobe

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Re: Case Study- Guidance Needed!
« Reply #9 on: March 01, 2015, 05:51:35 AM »
Thanks guys. House is about 1500 Sq ft. Two stories built in 46. In the winter the gas bill has been able 100 and the electric 100 (I leave the hvac fan on all the time as it really helps keeping it comfortable and that drives this up by quite a bit.) And water sewage is 40 or below

feelingroovy

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Re: Case Study- Guidance Needed!
« Reply #10 on: March 01, 2015, 07:36:39 AM »
Congrats on your progress so far, especially buying such an inexpensive house.  That will help you a lot in your goals.

If your #1 priority is to make sure your wife can stay home with kids in a few years, then I would say your two joint focuses are to reduce expenses to your salary and sock as much into retirement accounts now that you can.  This is my suggestion.

1. Pay off the student loan. (Caveat, don't decrease retirement savings to do it). 

2. Once that's done, maximize your 401k and IRAs.  Depending on your tax situation, you may want to stick with traditional, but there really isn't a bad choice there.  I'm 44, and DH and I saved a lot into retirement in our 20s before kids, though not as much as we could have.  In our 30s we had some lean years (by choice) where we had small kids and started a business.  Having had those retirement accounts growing all those years will make it possible for us to retire at about 49-50. 

3. It seems that the one remaining car loan should be done before you have kids and the rate is low.  But I would question keeping either newish car.  If you have two backups in your classic cars, why do you need a new one?  Sell both and drive your backups until you can save up enough for replacement used cars.  You'll have $800/mo to save.  Or at least do it one at a time.