Case Study - How Can We Improve Our "Future Selves"?

[Rekon]

Here are our details.

Income:

Wife (PI Paralegal) = $26,000/yr*

    *Last week, my wife had a second interview at a big firm and it sounded very promising - so this number should increase to ~40k.

Myself (Operations Manager) = $58,000/yr

    Also, I do freelance web design – I make approx. $700-$1,500 here and there.  I’m not factoring this into the Sub Total as this is not consistent yet. 

Sub Total (net) $3,300 + $2,200 = $5,500/mo

Current expenses:

•   Rent $1,500 (2 bedroom apartment in Los Angeles County) my wife and I work in opposite directions but this apartment is 10 miles away from each job.
•   Gasoline $150-$200
•   Internet $40
•   2 Cell Phones $90
•   Pharmacy $50 – Allergy & Asthma meds for me
•   Utilities $60
•   Auto Payment $270
•   Auto Insurance $120
•   Groceries $400
•   Restaurants $200 (this varies but $200 is the max)

Sub Total =$2,930/mo

Savings:

We are able to save $2,570/mo

Assets:

•   401k:  $32,000  6% + 3% company match = 9%
•   Company Sharematch: $750*

    *I just joined the program, $3k is the annual max.  I contribute $250 a month.  It’s a 2 for 1 share deal.  However, there is a 3 year hold minimum (from the day you bought the shares) to get free shares.  Company is large, financially sound, and stable - so it makes sense.   

•   780/750 Credit Scores - I consider this an asset :)

Liabilities:

•   2013 Acura ILX – Lease w/ 17 months remaining - $270 a month

    Note:  This car is shared among both of us.  I usually ride my road bike to work.   

    Yes, I know leasing this car was stupid – I’m planning on buying a used compact car with cash (e.g., civic, prius) once this lease is up.

•   No credit card or student loan debt :) 


I am 27, my wife is 25… How can we improve our “future selves”?  Are we doing OK for our age? 

We live in Los Angeles and house prices at $500k are the norm.  Does it make sense to save for 20% and buy a home?  Or continue renting?  I would like to have a child by the age of 30 – so 3 years from now.     

[mozar]

A good rule of thumb is to multiply your income by 3 to see what you can afford. Currently you can afford a house of 252k. You need to double your income and save 100k for a down payment. Your doing great for your age, but not so great for LA, and not so great if you don't increase your income over the years. How long have you been at your job? If you are ready for the next job you can negotiate a 15-20% raise. A two bedroom rental is plenty for you, your spouse, and a kid, so I say rent.

[thecornercat]

Try giving yourself a challenge to reduce your grocery budget by $50 next month. See what happens. If it's easy, go for an additional $50. I'd say, try to bring it down to $300/mo if you can, for two people, especially if you are eating out that much.

[Rekon]

A good rule of thumb is to multiply your income by 3 to see what you can afford. Currently you can afford a house of 252k. You need to double your income and save 100k for a down payment. Your doing great for your age, but not so great for LA, and not so great if you don't increase your income over the years. How long have you been at your job? If you are ready for the next job you can negotiate a 15-20% raise. A two bedroom rental is plenty for you, your spouse, and a kid, so I say rent.

I've been at my job for 5 years.  3% raises are the norm.  However, I've gotten four 10% raises since i've been here.  My responsibilities at work have grown significantly in 2014 - so I can negotiate a decent raise soon. 

Thanks renting seems to make sense.  But I would really like to own a house someday.

[Rekon]

Anyone else want to share their input?

[Rekon]

Bump * took me a while to detail everything out... :/

[Spondulix]

You're doing awesome - you're saving almost 50 percent!!!

$1500/month for a 2 BR in LA is really cheap. My guess is you're in a neighborhood that also has homes for under $500k, so it could be very doable to buy a home if you like the area. LA has this reputation for being outrageous for buying, but it's a totally different situation buying in Santa Monica or Bel Air than it is somewhere like the San Fernando or San Gabriel valleys. Last time I checked, home prices per square foot were about the same where I live (a decent part of SFV) as Seattle or parts of Denver. It's the nature of metropolitan city living.

Mozar's calculation (income x3) was using your current income and not accounting for your wife's potential raise. That alone would put you at around $300k for a home, and that's just today, and not your income in 3 years. Another calculation is the percentage of your income - lenders generally want mortgage to be less than 30% of your income, but in LA you can find lenders who approve for closer to 40% (whether or not you want to do that is another discussion)

Using my own home as a comparison... It's 1700 sq feet, was move in ready and is in a decent neighborhood (mile up is a bit rough, mile down is mansions - typical of LA). It was $400k, 20% down (80k we saved over 3 years), 4.8% interest, and the monthly payment was $1750. Earthquake insurance and homeowners was another $150/month and property tax about $350/month. Our income at the time was probably closer to 100k combined, and we were 32 and 29. That was coming from a rent payment of $1500, but because we had been saving at a very high rate (probably 40% or more) it wasn't a huge adjustment - money just shifted to house vs savings. I refinanced a couple years ago at 3.8% for a monthly mortgage of $1400.

I am 110% glad we bought. It's not just about an investment, but also a life choice. For us, it wasn't about online calculators or what the bank said we could afford, but rather if we could pay our expenses on one salary. PMI would have been $200/month down the drain, so that dictated our maximum purchase price. We also cut costs by having a friend live in our spare bedroom for a couple years, and put his rent towards extra principal payments. A lot of homes have converted garages, which works great for a renter if the garage is separate from the house (not always legal, but it's common and cuts costs)

Additionally, if you are still doing the side gig, you can itemize a number of your house expenses on your taxes (square footage of your work room, corresponding percentage of your utilities and repairs). Are you currently itemizing expenses for your business on your taxes?

[surfhb]

You're doing good right now but I'd keep saving and forget the home for now.    Home prices don't go up forever and were almost back to the bubble prices in 2005.   You'll be house poor at your current income level

Ever Consider a rental property in a lower cost of living area in the country?   Portland area or New Mexico are places I'm looking to buy eventually.   At the rate you're going and if your wife doubles her salary, you can be sitting pretty with a rental somewhere and a sizable stash :)

I live in Huntington Beach btw

[Spondulix]

Timing the home market is like timing the stock market - you never know where is peak and where is bottom. Home prices only matter when it comes time to buying and selling. If you stay in long enough, the odds are in your favor.

Buying a home (that you intend to live in) isn't a quick in and out job, either. I visited over 100 properties because I needed specific features - that took months. It took even longer to get an accepted offer - even with great credit and a preapproval, we were bidding against all-cash buyers! Interested in a foreclosure or short sale house? You need 6 months to a year. At $1500/month, that's $13k wasted in rent a year that could have been paying down a mortgage. So there is a point where financially it makes sense to buy, regardless of the market. Plus, for OP, there could be additional factors in a couple years - I wouldn't want to be dealing with flights of stairs with an infant or toddler or noisy neighbors if I could afford a house!

IMO being Mustacian isn't about saving as much as possible by being as sacrificing as possible. It's about making smart financial decisions given your individual circumstances.

[HairyUpperLip]

Bump * took me a while to detail everything out... :/

It's a positive thing, no news is good news.

The worst thing (to me) is the car lease, but you already want to get rid of it so you already know. :)

As for your rent, $1500/mo --- may I ask where you find this rent in LA?
I'm in Atlanta and would love to relocate but I couldn't find any 2BR/1BA for less than $2300 or so. I was looking mostly near LAX, Marina Del Ray areas near Culver City/Westchester.


Savings:

We are able to save $2,570/mo


Were you keeping this money? Maybe people can offer my advice on how to manage the savings. I know you are looking for a house, so I'm going to assume it's all in cash (savings account)?


Either way, I understand your frustration with not getting enough feedback. I felt the same way initially. When people have a lot of stupid spending it's easy for people to critique their spending but you guys are doing a pretty damn good overall so you won't get a lot of posts in your thread.

[Rekon]

Bump * took me a while to detail everything out... :/

It's a positive thing, no news is good news.

The worst thing (to me) is the car lease, but you already want to get rid of it so you already know. :)

As for your rent, $1500/mo --- may I ask where you find this rent in LA?
I'm in Atlanta and would love to relocate but I couldn't find any 2BR/1BA for less than $2300 or so. I was looking mostly near LAX, Marina Del Ray areas near Culver City/Westchester.


Savings:

We are able to save $2,570/mo


Were you keeping this money? Maybe people can offer my advice on how to manage the savings. I know you are looking for a house, so I'm going to assume it's all in cash (savings account)?


Either way, I understand your frustration with not getting enough feedback. I felt the same way initially. When people have a lot of stupid spending it's easy for people to critique their spending but you guys are doing a pretty damn good overall so you won't get a lot of posts in your thread.

Thank you for the feedback and the kind words!  I'm just keeping the savings in a Sallie Mae savings account (.80%).  Perhaps I can move it elsewhere?

I'm renting a condo in Reseda, CA.  It's in the San Fernando Valley (still LA county) and approx. 30min from the heart of LA.  In my experience, I find that there are more perks renting from a home owner vs. an apartment building.  The homeowner I rent from pays approx. $1100 in PITI (including HOA).  So, I doubt she will raise the rent in the near future.  I got really lucky finding this place.   

[HairyUpperLip]

I'm saving for a house DP also. We are keeping it in Ally Savings for 0.90%.  But I also use them for our main checking account and have been very happy with the bank itself.

Some people suggest putting it in an investment account and I've thought about it myself, but I think if I saw huge gains it'd be hard to pull out. For me it's more psychological then it is just numbers. :-/

Q- Does it make sense to save for 20% and buy a home?  Or continue renting?

How much do you have saved up already?
Are you planning on staying in California?

I think Act01 answered a lot of the house questions pretty well though.

Keep posting any questions as they come up. Good luck with everything either way man. :)

[Rekon]

I'm saving for a house DP also. We are keeping it in Ally Savings for 0.90%.  But I also use them for our main checking account and have been very happy with the bank itself.

Some people suggest putting it in an investment account and I've thought about it myself, but I think if I saw huge gains it'd be hard to pull out. For me it's more psychological then it is just numbers. :-/

Q- Does it make sense to save for 20% and buy a home?  Or continue renting?

How much do you have saved up already?
Are you planning on staying in California?

I think Act01 answered a lot of the house questions pretty well though.

Keep posting any questions as they come up. Good luck with everything either way man. :)

Thanks!!

Yes, I plan on staying in CA as the majority of our families are here.  We have roughly 23k saved.  I thought about putting the money in index funds - but it might be a little too risky.

[Spondulix]

In my experience, I find that there are more perks renting from a home owner vs. an apartment building.  The homeowner I rent from pays approx. $1100 in PITI (including HOA).  So, I doubt she will raise the rent in the near future.  I got really lucky finding this place.

Definitely true of the Valley... but you can get a lot for your buck buying in Reseda, Winnetka, or even Van Nuys (we're practically neighbors - I'm in Tarzana on the edge of Reseda :)

[Rekon]

Here's a question - what kind of car should I buy once my lease is up.  I plan on buying something under $10k cash. 

My initial thoughts are a 4 door Civic or a Prius.  Thoughts?

[HairyUpperLip]

Prius or Civic would be a good choice.

Do you have any personal preference?

I personally used an '09, I think, Prius for a couple weeks while visiting LA. I think it was an awesome car for the city. Small and easy to drive. Good on gas. Lots of traffic so it's good for idling.