Few Questions

[powersln]

Hey everyone,

I'm new to MMM and I'm loving the forums so far.   I have a few questions for you guys/girls.

Background:
Age 25
Married (spouse stays home with our newborn)
Salary: $46,000.00

Assets:
Cash: $2,562.00
Employee stock purchase (15% discount): $3,019.00
401k: $7,730.00
House: $83,000.00
Car: $6,000.00

Loans:
Sallie Mae: $2,217.46 @ 2.36%
Sallie Mae: $1,495.78 @ 3.0%
Sallie Mae: $3,193.95 @ 3.75%
Mortgage: $$73,247.20 @ 3.865% ($558 monthly)

I have been loosely following Dave Ramsey's plan by keeping a $1,000 as an emergency fund and aggressively paying down debt.  However, I do break from the baby steps by investing in retirement and funding our baby's 529 plan.

Questions
1.)  Since my interests rates are low, should I start my 3-6 month emergency fund now instead of aggressively paying off the rest of the student loans?
2.) Should I liquidate the Employee Stock Purchase Plan to put toward the debt/emergency fund?   I kind of don't want to do this because I get a 15% discount on the stock and if I sell I get suspended from the program for one year.   I also realize that single stocks are risky, but it's a stable fortune 500 company.
3.) Any other tips for me?

Thanks!

[gooki]

Basically, all your loans are below 4% so as long as you either invest your savings or pay down debt you'll be just fine.

Personally I don't see much point in having a large emergency fund. A couple of grand cash, and some invested that can be cashed up in a month or less is all you probably need.

I'd happily stay in the employee stock purchase plan.

[Dicey]

You're doing incredibly well so far, congratulations!
- Continue to buy company stock at a discount, but roll it out of the plan as soon as possible into something more diversified. Don't shoot yourself in the foot by skipping a year. Do whatever's needed to get the full match if there is one beyond the discount. If you keep rolling it out, your yearly contribution will become a smaller percentage of your total portfolio and you'll gradually become more balanced. There are some less-than-obvious ways of rolling money out, so check with your plan administrator.
- Since you're reading DR, snowball your college debt. Pay off the 3.75% loan first, then the others. Don't worry too much about accelerated repayment unless those rates are adjustable.
- You will never regret having a healthy EF. 1K is but the skimpiest of nets if the shit really hits the fan. Don't forget to calculate your EF based on your net pay after all deductions, not your gross. Calculate your net spending per month and shoot for about six times that number. You will sleep better at night.
- Make sure you're not overwithholding your taxes. With a SAHW, a dependent child and mortgage interest, you may not owe all that much in taxes. If you adjust your withholdings, you can apply the difference to your loans and/or EF for faster results.

[astadt]

I like what DR has to say and also recommend you stick with your adapted plan. I do that as well, Ive just decided to hit my debt a little harder than you should as my rates are slightly higher.

After you get your matches and discounts from investing and you make your debt payment, I would consider opening a Roth IRA (you can do two for a total of $10,000 in 2012 but thats asking a lot) and contribute to your child's 529 plan.

[powersln]

Thanks for the responses.   It seems like the emergency fund is a topic of debate throughout this forum.   I most likely will shoot for something in the middle, say a 3 month EF.

[Workstoomcuh]

I feel like your position is fairly risky. 1 income and a lot of obligations. You're not going to be getting 3%+ interest in any savings account. I'd get up to 3 months of EF and then start aggresively attacking the debt. Getting rid of the obligations we'll make you more secure than having a 6 months EF.

[frugalman]

Mr. Money Mustache has talked about emergency funds several times as a waste, IF you have access to cheap emergency credit such as a home equity credit line (HECL).  If you have one, great.  If you don't, see if you can open one for no cost and a low rate.  The idea is, if an "emergency" comes up, just write a check out of the HECL, then pay it back as you can.  This way, your reserve cash can be immediately paid against your loans, thus earning 3-4 percent forever.  JMHO of course.

Personally, I keep $2,500 as my checking account target minimum balance.  Sometimes it gets lower than that.  Anything above that goes to pay down my remaining debt.

[menorman]

Hey everyone,

I'm new to MMM and I'm loving the forums so far.   I have a few questions for you guys/girls.

Background:
Age 25
Married (spouse stays home with our newborn)
Salary: $46,000.00

Assets:
Cash: $2,562.00
Employee stock purchase (15% discount): $3,019.00
401k: $7,730.00
House: $83,000.00
Car: $6,000.00

Loans:
Sallie Mae: $2,217.46 @ 2.36%
Sallie Mae: $1,495.78 @ 3.0%
Sallie Mae: $3,193.95 @ 3.75%
Mortgage: $$73,247.20 @ 3.865% ($558 monthly)

I have been loosely following Dave Ramsey's plan by keeping a $1,000 as an emergency fund and aggressively paying down debt.  However, I do break from the baby steps by investing in retirement and funding our baby's 529 plan.

Questions
1.)  Since my interests rates are low, should I start my 3-6 month emergency fund now instead of aggressively paying off the rest of the student loans?
2.) Should I liquidate the Employee Stock Purchase Plan to put toward the debt/emergency fund?   I kind of don't want to do this because I get a 15% discount on the stock and if I sell I get suspended from the program for one year.   I also realize that single stocks are risky, but it's a stable fortune 500 company.
3.) Any other tips for me?

Thanks!

I'm confused by what I've put in bold. Are you implying that you already own a house that's worth $83k and you now have a $73k loan on another (rental?) house? Or are you saying you already have $83k worth of equity into the house? If neither, then the house definitely is not an asset of $83k. You have the $10k of equity in it at most. However, don't get discouraged since you have apparently fit neatly into the mortgage green zone of 2x annual salary or less prescribed in The Millionaire Next Door. You also seem to have the car thing under control. You may just want to look into not driving to work if possible to save a bit on car expenses.

Answers
1. No, since your interest rates are low you can pay them off much easier than someone with high interest rates. Since you said you've already been aggressively attacking that front via the Dave Ramsey plan, keep at it. If you have a credit card or some other access to a decent source of funding, then keep throwing money on those debts. Seeing that your student loans are already pretty low in balance, why don't you set a goal for yourself of getting 1-2 of them paid off by end of summer and definitely finish all three by time the world ends 2013. Despite their low interest rates, paying them off still earns you more money than you'd make parking cash in an account and also has the double effect of lowering your monthly expenses which then lowers emergency fund requirement.
2. No, don't liquidate your stocks, especially if your company is a dividend payer. A 15% discount isn't bad and you may stand to gain quite substantially if/when the market drops again. Having to miss that opportunity because you got suspended from the program won't be fun. At the same time, you definitely should not add to it until you can set up positions elsewhere to balance out your portfolio. I'm sure we all remember Enron.
3. Make sure you invest in yourself and your family. Equally important, make sure your wife understands and is on board for the financial agenda. Nothing like finding out that your wife already made plans for your bonus and raise before they've even appeared. Most importantly, make sure you don't stop learning. Set a goal of reading (actual books, not just news articles and reports at work) regularly, and also read to your child starting now. Get her/him interested in and expecting to read and learn every single day. The benefits will be substantial and you'll be thankful when the school years start. TTFN.

[arebelspy]

I'm confused by what I've put in bold. Are you implying that you already own a house that's worth $83k and you now have a $73k loan on another (rental?) house? Or are you saying you already have $83k worth of equity into the house? If neither, then the house definitely is not an asset of $83k. You have the $10k of equity in it at most.

From how I read it, they own a house worth 83k.  The owe a mortgage of 73k on it.

They have 10k equity.  Yes, it will only add 10k to their net worth, however they still should count it as an asset worth 83k, because that's what it's worth (it's just mostly offset by the liability of the 73k they owe on it).

[powersln]

Yes, we own an asset (house) worth 83K, but we have a lien of 73K on it.

Looking to get that paid down once we pay off the student loans.   We are living on about half of our income.   With the other half I plan on allocating 20% to retirement and 30% to early mortgage payoff.

[James]

I agree with those who have suggested a Roth.  As the Roth builds up you can always tap those contributions if needed, so you can keep your EF at just 1 month.


Great student loan rates, you must have got out of the school around the time I did.  Whether to pay those down faster than required is just a personal decision.  Financially it's a risk vs reward decision.  You can get better returns without a great deal of risk, but that isn't guaranteed.  Or you can get a risk free 3.75% return by paying off that loan, etc.


If it was me I'd probably try to make a challenge to the family to get those student loans paid off asap.  Tape big pieces of paper on the wall and color them in as a family as the loans are paid off.  Whenever a choice comes up keep your goal part of the conversation.  Making it a competition that you know you will win is a way to stay motivated, and is one way that I think paying off even low interest loans might be better financially.  You might not skip that dinner out in order to invest the money, but if you have a goal taped to the kitchen wall you might make all those little decisions to meet that goal.  But if you are already maxed out on the frugality, then investing is probably financially superior.


If you can stick down at mustachian spending levels those loans can be gone by the end of the year?  Living on half your income is awesome!  You are mucho mustachian!

[sowantere]

I would get the emergency fund up to 3-6 months since you have a newborn and are on one income you never know if you would be unexpectedly hurt.  I would get life insurance for the same reason, like a 500k term life 20 years or 30 as at your age it will probably be extremely cheap like 30 bucks a month.  The life insurance companies will try to sell you your base salary x whatever but you minds well just go for 500k and stop there.  Ask them but if you decide you no longer want life insurance you should be able to quit them without a penalty.  Why so large because you wouldn't want to leave your wife who doesn't work with a newborn with large medical bills.  How much you need in the EF fund varies extremely by person.  If yall come from money and she has understanding parents maybe you won't need any.  The best question to ask yourself if for whatever reason if you could no longer work or someone in the family was hurt what would you do?  Don't ask yourself what you would do if you were just laid off.  Kudos on buying a reasonably priced house.   

[powersln]

I have $200,000 in life insurance, but I might bump that up.  My wife does have her teaching license so she could go back to work if need be.  I also have long and short term disability insurance.

[powersln]

It has been almost 5 years since my first post and I have a new question. Here is my updated info:

Age: 30
Income: $100,000
Married, 2 kids, one income

Assets:
Cash: $105,000
Pre-tax retirement: $66,200.84
Post-tax retirement: $18,901.88
House: $350,000
Cars: $8000
---------------
Total: $548,102.72

Liabilities:
Mortgage: $255,163.14 @ 3.5%

NetWorth: $292,939

I just recently came into some cash so that's why my cash position is so high.   My heart is telling me to drop $75,000 on the mortgage.   I fully understand the argument that I will likely beat 3.5% in the market long term.  I paid off my first house before I upgraded homes (horrible, I know) and it was the most amazing feeling.   Getting this house under 200k gives me the psychological boost that it's possible to obtain again.  I think I've already made my decision but a little bit of me wants someone to talk me out of it.   Should I do it?

[arebelspy]

Sounds like you know what you want to do, even if it's suboptimal.

If you really want to read all the people trying to convince otherwise, read this thread:
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

If you still want to do it after reading that, you don't need any more individual replies telling you not to, just do it.  :)

Congrats on the 300k net worth at age 30, with two kids. That's impressive!  :)

[Dezrah]

It is so awesome to see an older post updated after 5 years.  You guys are awesome.

Here are my thoughts:

I personally like to use Fidelity's Rule-of-Thumb for savings milestones.  https://www.fidelity.com/viewpoints/retirement/how-much-money-do-i-need-to-retire 

I think of them as my worst case minimum goals when I ask consider the whole "spend money on X or save for retirement" question.  This is a VERY simplified way to think of things but it makes me feel secure.

By these standards you are slightly short of the x1 milestone for age 30.  As a thought experiment, consider putting $15k directly toward retirement and $60k toward the house.  You are now "at par" for retirement (though we secretly know you're still way ahead) while still making substantial progress toward your personal goal to pay off the mortgage.