Good income. Lots of debt. Looking for your 2 cents.

[Openmind10]

I'm hoping to gain some insight on my current financial plan.  Kindve a "yay" or "nay" with some comments, if you will. 

I'm not a newcomer to this forum or MMM.  However, since some details of my finances will be in this post, and I use the same username across many forums, I wanted to be anonymous and created a new screenname. 

As a background, Mustachian-ism began for me last year - when my school loans were coming due and I realized the deep hole I was in. I've since incorporated all sorts of behavioral changes - moving much closer to work, biking, switching phone companies, even using deodorant stones.

Besides behavioral changes though - I really feel I could use some insight on my finances. 

Here's my situation:

Income: $254,400 approx

$240k/year (1099 income) + $14,400 (rental income)

Debt: $266 approx

School loans: 150k.  These are a few different loans ($90k, 40k, and 20k, respectively) with interest rates of 6 - 8%.  9 years remaining. 

Mortgage on rental home: $116k @ 5.25%.  27 years remaining. 

Investments:

Personal:

 Individual, Roth, 403b from prior employ:

$8600*, $29k, $14500, respectively. 

Spouse

Traditional IRA, Roth IRA:

$7k and $51k, respectively. 

- Stocks/Bonds mix is 90%. 
- *not apart of retirement mix - A conservative Vanguard Lifestrategy fund - will be used towards new home

Other assets:
140k est. worth of rental home, located in MD  (purchased @ 170k). 
I usually keep about $5k ish in the bank account for expenses, bills, health care costs, etc. 

Other useful information:
- 30 yrs old, I live in NM, currently rent, looking to purchase a home in about a year. 
- No kids, looking to adopt a child in next 1-2 years, perhaps have one of our own.
- Spouse brings in minimal income, multiple health issues. 
- The last year has been focused on debt reduction - I've brought down my school loan and mortgage debt significantly. 


Here's my plan:

In the next 9 months, pay off another loan (the $20k educational loan) and save another $30k or so for down payment on a  family home.

Afterwards, continue to focus (intensely) on school debt reduction. 

Contribute the max in IRA accts. (Roth and Trad.). 

Once School and Rental mortgage debt is gone (5 years?) - focus will become two - pronged

1) Paying the mortgage from the home I'll live in at that point. 
2) Building up retirement funds with a Single 401k or SEP-IRA, along with Trad. and Roth IRAs, along with some 529s


So... Yay or Nay?  Missing anything major? Insights?  Comments?

[snuggler]

I would expect you to have more to save/pay down debt than you do, given your income. I say this because I have a lower income, by a significant amount, and I live in a high-tax state, yet repaid a lot more student debt than you have at a faster pace than you expect to do.

Can you post your expenses?

Can your spouse do something to bring in extra income? Even if it's just helping the household reduce expenses and freeing up your time, so you can bring more in? For example, he/she could learn to make Wordpress websites and do that for businesses and bloggers to bring in a little money every month. Or he/she could pack your lunches so you have more time to work overtime and/or earn a bonus.

Also, have you extended your repayment plan to 25 years? If not, consider doing so. I say this to help reduce your overall interest paid, NOT to actually extend the loans. I extended my term to 25 years, which lowered my minimums on all my loans. Then, I continued to pay over my minimums (much more than even my minimums on my 10 year plan), but, I only paid the minimums on everything but my highest-interest loan. I threw everything else I had at the high-interest loan, and since the low-interest loans had lower minimum payment, this helped me focus on the worst loans first, and helped me save the overall interest I paid.

Personally, I'd probably also sell the rental house to give me a down payment and to pay off a significant chunk of student loan debt. That is because I don't believe in investing in anything outside of retirement until I'm debt-free or have minimal, low-interest debt. This one is more of a toss-up, though, since you otherwise will be debt-free pretty quickly and because it seems to be performing pretty well as an investment property.

[feelingroovy]

Is that rental income gross or profit?  I'm guessing it's gross.

Not knowing your rental expenses, it looks like you're cash flow negative on that rental. If I'm wrong, and you're even breaking even, I would not put any more to the rental debt until the student loans are gone.  Let the tenants pay that mortgage down--that's good debt, not a debt emergency.

If you are, consider 1) selling, and if that's not possible, 2) can you refinance to get the payments lower now that you've paid off part of the balance?

Even so, the interest rate is lower on the rental mortgage than the student loans.  You should also get better tax deductions (though I know there are limits if there are losses and you don't actively manage it--I'd research that).

What is the difference in cost between renting and buying a house? I would personally rent for an extra year if that means you could pay off the student loans.  That's a big debt emergency, even with your income, and buying a house ALWAYS comes with expenses you don't imagine. 

I agree with maximizing any tax deferred retirement accounts for both you and spouse to minimize tax burden.

[mushroom]

Why aren't you contributing to a 401K? That would probably provide you the biggest return at your income level by avoiding those taxes (much more than paying off student loans early). I assume you can't contribute to a Roth at your income, unless you're talking about a backdoor Roth, but you mentioned having a traditional IRA already, which would complicate the backdoor approach.

[Openmind10]

Can you post your expenses?

Well, my expenses are a bit unusual, but i can give a percentage breakdown over the past 12 months.  I use mint.com.

23% > Student loans
17% > Housing costs (Mainly $1100/month rent, 1000/month mortgage, + furnishings, etc)
15% > Taxes (state and federal) (If you're curious, I am an LLC with an SCorp - employ myself - good tax savings this way)
11% > Medical costs (yes, its very high, my wife has SLE and a slew of other autoimmune dx - went from a Div I athelete to barely being able to get out of bed...this was the reason I incurred the student debt and became a contractor)
11% > Random costs (Disability insurance, Car, house, rental, personal belonging ins, some political donations, charity, some travel costs)
10% > Business Services - liability ins, accountant to set up SCorp and so on
8% > Food (93% of this is groceries.  Doing the math, it's also very high.  But if it has a slither of a chance to help my wife, it's a cost I accept). 
4% > Bills and Utilities.

Looking at that, I can still be more mustachian.  I'm going to reevaluate some things this week, esp. in the insurance department...I'm overpaying statefarm.  Thanks for asking. 

Can your spouse do something to bring in extra income?

She does bring in a little.  Dietitian by trade, she saw a number of online clients and now sees folks in our home.

Also, have you extended your repayment plan to 25 years? If not, consider doing so.

No, I hadn't - but that is a very good idea - thanks - I'll look into it.  I wake up every day and think about how I can get rid of that debt.  I'm constantly volunteering for more work - I probably put in 60/hrs a week. 

Personally, I'd probably also sell the rental house to give me a down payment and to pay off a significant chunk of student loan debt. That is because I don't believe in investing in anything outside of retirement until I'm debt-free or have minimal, low-interest debt. This one is more of a toss-up, though, since you otherwise will be debt-free pretty quickly and because it seems to be performing pretty well as an investment property.

You make a good point.  I would sell it - but it's 30k below what I paid - and I already lost money in a housing crisis once, and refuse to do it again!  But I empathize with the sentiment not investing outside of retirement until debt free. 

[Openmind10]

Is that rental income gross or profit?  I'm guessing it's gross.

Yup, Gross. 

Not knowing your rental expenses, it looks like you're cash flow negative on that rental. If I'm wrong, and you're even breaking even, I would not put any more to the rental debt until the student loans are gone.  Let the tenants pay that mortgage down--that's good debt, not a debt emergency.

I make a little money each year (like $500-2000) depending on expenses - but I agree with you. 

If you are, consider 1) selling, and if that's not possible, 2) can you refinance to get the payments lower now that you've paid off part of the balance?

Thought of that.  But my value:loan ratio isn't very good.  I'd have to pay it down more first, take another 15k or so off the principle.  hard to do. 

Even so, the interest rate is lower on the rental mortgage than the student loans.  You should also get better tax deductions (though I know there are limits if there are losses and you don't actively manage it--I'd research that).

Point well taken.

What is the difference in cost between renting and buying a house? I would personally rent for an extra year if that means you could pay off the student loans.  That's a big debt emergency, even with your income, and buying a house ALWAYS comes with expenses you don't imagine. 

Also another good point.

I agree with maximizing any tax deferred retirement accounts for both you and spouse to minimize tax burden.

Ironically, I realized that my understanding of Trad/Roth IRAs were wrong - didn't realize it was 5k max (5550 for 2013) for both accounts.  So yes...401k time. 

[Openmind10]

Why aren't you contributing to a 401K? That would probably provide you the biggest return at your income level by avoiding those taxes (much more than paying off student loans early). I assume you can't contribute to a Roth at your income, unless you're talking about a backdoor Roth, but you mentioned having a traditional IRA already, which would complicate the backdoor approach.

A good idea and a conclusion I came to yesterday over dinner.  Probably a single 401k, with the 50/51k contribution limits. 

No backdoor for me, too complicated, but I'm not sure what my AGI will be this year with the LLC/SCorp Set up. 

[Openmind10]

Just wanted to say thanks to all three of you for your replies.  You've given me ideas and I'll keep them in my mind as I begin to manage the situation and meet with a few other folks. 

Interestingly, through this process I realized that Vanguard offers a free financial planning sessions each year?  I'll be talking about setting up a 401k with them soon.  Hafta fit it in somewhere with working so da*n much.

Thanks again guys. 

[plainjane]

Can you post your expenses?

10% > Business Services - liability ins, accountant to set up SCorp and so on

Please, strongly consider keeping your business expenses and your personal expenses separate in your accounting.

[cynthia1848]

You can investigate an individual 401k, but you should also be able to do a SEP-IRA with an LLC.  My spouse has an LLC and is able to contribute 25% of income to his SEP-IRA.  It ends up being much higher than the 401k limits - last year he was able to put in 35K.

[Openmind10]

Can you post your expenses?

10% > Business Services - liability ins, accountant to set up SCorp and so on

Please, strongly consider keeping your business expenses and your personal expenses separate in your accounting.

Agreed. 

[Openmind10]

You can investigate an individual 401k, but you should also be able to do a SEP-IRA with an LLC.  My spouse has an LLC and is able to contribute 25% of income to his SEP-IRA.  It ends up being much higher than the 401k limits - last year he was able to put in 35K.

Well, with my LLC and SCorp situation - since I am the employer and the employee - I can actually go up to 51k, just like a SEP IRA. 

Here's and explanation:

http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans

[willn]

Can I call it 200K take home pay?

Around 50K to student loans?

30K to mortgage and rent?

25K medical,

Leaves what, 95K? despite the breakdown I'm not quite grasping where the rest is going.  You grouped cars into a bigger category and I'm guessing they are the majority of that. Do you have payments on them? If so figure out a way out from under that.  Other lifestyle stuff? Gifts? Cable? Ridiculous phone plans?  Any one item isn't killing you but add them all up....

10% (25K?) to get the business set up seems like a lot! That won't be a fully recurring expense presumably, and it sounds complex enough you may need an actual accountant, but I got quotes for 2012 tax returns for our personal return, an LLC, and a sole proprietorship for $800.  Even if you throw in another few grand for consulting and bookkeeping through the year and it seems like you could save some $ there.

Food does sound high, even for kick ass organic and whole foods.  I get that with your busy schedule and her health its probably tough, but I'm guessing there are some achievable cuts to be had in there that could save a grand or two.  That doesn't change your life right now, but it adds up and contributes to the principle of optimizing throughout your life.

Most importantly If I were you I would at least get rid of all the student loans and any other car or consumer debt before committing to another mortgage, especially with one underwater mortgage already.  You may want to think about the risk all that debt represents.  If you need to stop working for a month or two to help your wife that house payment will not be a welcome addition to your portfolio.

[Openmind10]

Thanks to all those who replied - I was able to re-think certain items, and of note, decided to stay in my current rental for a longer period to pay down debt. 

Thanks again - I really appreciate this forum and this site - I've picked up numerous pieces of advice over the months I've been reading.

Regards,

OM10

[happy]

I'm a bit late to the party, but this is what I think:

1. Let the rental tenants pay the mortgage on that... you're not making much, but you are not losing money.
2. Aggressively pay off your student loans.
3. Don't buy a house until you've got rid of those loans. Do the math on renting vs buying in your location. If renting comes out ahead build your stash before jumping into more debt immediately. Consider building enough stash so that the income from you stash pays  your home mortgage. With your good income you could have a big stash fast. Don't reduce the power of that by jumping into a mortgage too fast
4. I wouldn't save the 30k downpayment until I got rid of the loans, but given your wifes ill health, it could double as some sort of emergency fund.
5. Make a plan for what would you do if you lost your job/got health issues of your own/needed to look after your wife at least some of the time. You're not superman, even though you have a really good income now. On the face of it as you've presented it here you're up the creek. So use that as an incentive to get rid of those debts.

[jks1985]

Get rid of that debt! That should be priority number 1!  you have a big income.. the debt should be gone in no time if you put your mind to it