Author Topic: Housing and Savings/Debt Dilemmas  (Read 2842 times)

DanBrewMan

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Housing and Savings/Debt Dilemmas
« on: July 30, 2013, 12:40:54 PM »
My current lease will be ending soon and I am looking for a new residence as close to my new workplace as possible.  I currently split rent, but will no longer be splitting when I move (unless I find a roommate in the next month, but assuming that I won't for the time being).  My dilemma is that any worthwhile place to rent will be more expensive (some are $200-$300 more per month) that what I'm paying now.  But, if I suck it up and pay the increase in rent, I could bike 1-1.5 miles to work every day rather than commute 25 miles each way by car.

I'm 27 and have been working for 2 years.  Discovered MMM early this year and have been working to alter my life and expenses to maximize savings.  With my new job (and raise), I will be able to max my 401(k) contributions (up from 5% of salary at my current job) while taking home roughly the same amount of pay.

Here are my current monthly living expenses plus assumed $1,100 for rent in the new location.  I'm in the Houston area.

Take-home pay         $4,200.00

Rent                  $1,100.00
Electric               $75.00
Water                $40.00
Verizon Phone            $- (company-paid phone)
Car Insurance            $100.00
Renter's Insurance         $29.50
Internet                $44.00
Car Min Payment          $175.00
Student Loan Min Payment   $240.76
Health Insurance          $34.00
   
Food                   $350.00
Fuel                  $50.00 (because I'll be biking! Yay!)
Pets                $50.00

Left-over               $2,336.74

And my debts:

Private Loan:         $4,000 @ 0%
Student Loans:      $17,500 @ 6.5%
Car Loan:            $4,500 @ 3.9% (although paying early does not affect interest paid)

Investments:

401(k):            $12,500 (Fidelity Spartan 500 Index Fund)
IRA:               $3,300 (Vanguard 500 Index Fund)


So question 1:  Should I worry about dumping $1,100 per month to live in a nice, safe place 1 mile from work?  There are others in the area, but no where near as nice and will cost $900-$1,000.  The apartments for $1,100 seem to provide the best value and bang-for-the-buck.  There are also a few homes for rent in the area that run about $1,200-$1,400.  They are obviously much bigger and would require the additional costs associated with renting a house rather than an apartment.  My thought was to nail down one of these and search for a roommate.  It may take me a few months to find one, but it could also save me money in the long run once someone starts splitting all of the expenses.

And question 2: Should I be maxing my 401(k) at this point, or just putting enough in for the company matching and attack my debt with the rest?

etselec

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Re: Housing and Savings/Debt Dilemmas
« Reply #1 on: July 30, 2013, 01:06:44 PM »
Question 1: Depending on the housing stock near your work, how about a 2- or 3-bedroom apartment? Cheaper than a house, less maintenance, and you can still find a roommate or two to split costs.

Question 2: I'm not sure if the take-home pay you listed is with or without the 401(k) maxed. In any case, you can easily knock out the student loans in a small amount of time, and 6.5% is a good guaranteed return. And I'm curious about the private loan - is that from family? Will the interest rate go up in the future? It will only take you a few months to pay that off entirely.

DanBrewMan

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Re: Housing and Savings/Debt Dilemmas
« Reply #2 on: July 30, 2013, 01:09:54 PM »
Getting a 2BR apartment is not something I considered until now.  Thanks for the suggestion; seems better than a house.

Also, yes the $4k loan is from family so there will be no increase in interest in the future.  I'd like to pay it back before the end of next year, though.  If they need it ASAP they will tell me and it's relatively small that I could knock it out quickly if needed.

Anyone know a good place to search for roommates other than CL?

nawhite

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Re: Housing and Savings/Debt Dilemmas
« Reply #3 on: July 30, 2013, 01:14:31 PM »
Question 1: My math on the move: 50 miles/work day * $0.50/mile * 20 work days /month = $500/month you would be saving on commuting before you pay yourself for the time or think about the health benefits of biking vs driving.

Sounds like a no-brainer, you should move.

Question 2: I've done the math on this a number of times on my own situation and the bottom line is that the numbers are all fairly even, or at least very dependent on market returns and inflation between now and your retirement. There are 3 places for the rest of your money to go (4 if you don't like tax advantaged accounts):

With Option 1 you max out your 401k. You end up saving your marginal tax rate now and paying your effective rate on taxes later while getting long term average returns. So if you plan on having much less income in retirement than now (most people on this site fall into this bucket), then you are not paying 25% in taxes now and (assuming tax brackets stay the same) ~8% later for a 1 time bonus of ~17% with average market returns from now until you need it (~5-6% after inflation but highly variable)

Option 2, You max out a Roth IRA first. You'll pay 25% in taxes on that money and never pay capital gains tax on them (this option is almost always better than going right to a taxable investment account). You'll get average market returns (5-6% after inflation) on that money.

Option 3, you put all the rest towards your Student loans. You pay 0% in taxes on the first $2500 in interest and 25% on the rest of your payments. You get a garaunteed return of 6.5% + inflation which is pretty nice if inflation goes up.

Which option you choose depends on your actual numbers, your risk aversion, and your expectations for market returns and inflation. Right now with your situation I'd be on the fence between max 401k and student loans but probably leaning towards 401k. That being said, they are all good options.

DanBrewMan

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Re: Housing and Savings/Debt Dilemmas
« Reply #4 on: July 30, 2013, 01:27:04 PM »
Question 1: My math on the move: 50 miles/work day * $0.50/mile * 20 work days /month = $500/month you would be saving on commuting before you pay yourself for the time or think about the health benefits of biking vs driving.

Sounds like a no-brainer, you should move.

Question 2: I've done the math on this a number of times on my own situation and the bottom line is that the numbers are all fairly even, or at least very dependent on market returns and inflation between now and your retirement. There are 3 places for the rest of your money to go (4 if you don't like tax advantaged accounts):

With Option 1 you max out your 401k. You end up saving your marginal tax rate now and paying your effective rate on taxes later while getting long term average returns. So if you plan on having much less income in retirement than now (most people on this site fall into this bucket), then you are not paying 25% in taxes now and (assuming tax brackets stay the same) ~8% later for a 1 time bonus of ~17% with average market returns from now until you need it (~5-6% after inflation but highly variable)

Option 2, You max out a Roth IRA first. You'll pay 25% in taxes on that money and never pay capital gains tax on them (this option is almost always better than going right to a taxable investment account). You'll get average market returns (5-6% after inflation) on that money.

Option 3, you put all the rest towards your Student loans. You pay 0% in taxes on the first $2500 in interest and 25% on the rest of your payments. You get a garaunteed return of 6.5% + inflation which is pretty nice if inflation goes up.

Which option you choose depends on your actual numbers, your risk aversion, and your expectations for market returns and inflation. Right now with your situation I'd be on the fence between max 401k and student loans but probably leaning towards 401k. That being said, they are all good options.

This is great information and thanks for taking the time to go through my post.  I feel the same way about the student loans vs. 401(k) situation; I think either would work.  I'm thinking that the best of both worlds could be to put 5% into 401(k) (to get the maximum amount of matching) and then pay down debt until it's gone.  Then ramp up savings in 401(k), roth, etc.