Author Topic: How to use discretionary income  (Read 2424 times)

terratek

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How to use discretionary income
« on: October 08, 2016, 12:41:36 PM »
I'm looking for financial planning advice:

Current prognosis:

late 30's

The good(ish?)
  • $50K in 401K with combined contribution of $7600/year.
    $12K in mutual fund
    $400/month in rental property cash flow (has dedicated operations reserve fund).
    $2,000/month discretionary income after ALL expenses, bills and debt payments.  Conservative.  Some months might be closer to $2,300
    $20K expected after-tax, year-end bonus (already will be at least $16K)

The bad
  • $120K owed on primary residence (3.25%, $1100/moth total nut)
    $42K owed on truck (2%, $700/month)
    $27K owed on student loans (4.25 to 6.8%, $400/month)
    $4.5K owed on CC (15%? - will pay off in next two months)

The ugly
  • Essentially no cash reserve at the moment, but lots of available revolving credit that could be used in an emergency.

I want to buy more rental properties, but want input from others for what a good strategy would be for balancing debt payments and investments.  Also, as ridiculous as it is, I prefer to keep the truck.  Any advice is appreciated!

Bracken_Joy

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Re: How to use discretionary income
« Reply #1 on: October 08, 2016, 12:52:46 PM »
Welcome welcome! First stop, I highly recommend following a case study template and using the spreadsheet there: http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/

Second, I will share user MDM's "investing order" which is what a lot of folks around here follow:
(Note that the current 10yr treasury yield is 1.723%, so step 2 is 6.725% and step 7 is 4.725%):
Quote
WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial

Based on this, the priority is:

Credit cards need paid off YESTERDAY.
Then student loans. If you have access to a 401k and a match, that should be done as well.
« Last Edit: October 08, 2016, 12:54:29 PM by Bracken_Joy »

undercover

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Re: How to use discretionary income
« Reply #2 on: October 08, 2016, 02:15:34 PM »
I don't know what your end game is, but getting rid of the truck is most obviously the single greatest thing you can do right now to adversely affect the future you. You only have $62k in savings but owe $42k on a truck? Sell it and buy a beater (well, something $10k or less).

We're not just talking about freeing up $700/mo to invest and an additional ~$32k in cash to distribute freely as you please based on Bracken_Joy's post, but also the fact that you'll save a huge chunk on insurance/maintenance/etc.

How big is your home? Family? Can you rent a room or two out to really get things rolling?
« Last Edit: October 08, 2016, 02:26:18 PM by undercover »

Sailor Sam

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Re: How to use discretionary income
« Reply #3 on: October 08, 2016, 02:28:35 PM »
The truck, dude. That truck. I usually give people a buy on silly vehicles, since I also own a silly vehicle. MMM-ers with expensive cars unite! But $700/month is astonishing to me. What are the reasons you prefer to keep it?

If I had your debt load, I would:

1. Sell the truck, and buy something for cash
2. Pay the credit card to zero. Then shred, if you can't responsibly pay the balance each month. If you can use responsibly, then keep
3. Pay the SL

Fair warning - if you don't have a thick skin, you might just want to duck out of responding to any truck posts, including this one. You're going to catch a lot of flack for it, and were not going to believe we're wrong, and you're the one snowflake that really just needs to keep their truck, no matter how loudly or eloquently you protest.

Bracken_Joy

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Re: How to use discretionary income
« Reply #4 on: October 08, 2016, 07:23:16 PM »
Yeah somehow I missed the absolute number on the truck. I drive a truck too. A totally silly truck. But you know what? I agree that the truck is an issue. That is a TON of money to tie up in a vehicle. Buy a truck you can own outright, if you're set on owning a truck. Try for something 3-5 years old, with at least 30k miles. Under 20k is the BARE minimum for your situation. (And I will probably get face punches for suggesting that much).

It's insane to have the much debt on a depreciating asset when you have credit card debt at 15%.

MsPeacock

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Re: How to use discretionary income
« Reply #5 on: October 08, 2016, 07:39:48 PM »
+1 on the truck. It isn't just the $700 per month (which is nuts) its the 42k on a depreciating asset when you have cc debit, student loans, etc. and no emergency savings.

terratek

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Re: How to use discretionary income
« Reply #6 on: October 08, 2016, 07:51:58 PM »
Thanks for the advice on the truck,all.  I've decided to sell it and get a beater. 

Moving on from the truck - I've gotten one reply about paying off CC (which I've already stated is first priority) and then pay off student loan.  Any other people with thoughtful input to offer a out what I may do with the discretionary income?

Sailor Sam

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Re: How to use discretionary income
« Reply #7 on: October 08, 2016, 08:03:17 PM »
That's awesome about the truck!

What would you like to do with the income? MDM's hierarchy is very effective for building wealth from a purely rational standpoint. But, often times case studies are more about the emotions behind monetary decisions. I think we need to know more about your desires, before any specifically tailored advice can be dispensed.

Without that, all we can really do is point at the hierarchy. Or, humbly suggest you use the extra money to form a coalition to help native German speakers correctly pronounce squirrel.

Bracken_Joy

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Re: How to use discretionary income
« Reply #8 on: October 08, 2016, 08:13:45 PM »
That's awesome about the truck!

What would you like to do with the income? MDM's hierarchy is very effective for building wealth from a purely rational standpoint. But, often times case studies are more about the emotions behind monetary decisions. I think we need to know more about your desires, before any specifically tailored advice can be dispensed.

Without that, all we can really do is point at the hierarchy. Or, humbly suggest you use the extra money to form a coalition to help native German speakers correctly pronounce squirrel.

See, Scooter Sam, this is why we love you so very much.