Author Topic: Is it really this simple?  (Read 15223 times)

Ralphus27

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Is it really this simple?
« on: August 07, 2014, 09:01:34 AM »
Hello, As you can tell by my post count, I am new to the forums.  I stumbled across MMM via reddit and have read several of the blog entries on MMM in addition to browsing the forums.  At first, the thought of saving 50%+ of my income seemed nearly impossible, but then it hit me, between my car payment, student loan payments, and 401k contributions, I am saving/paying close to 50% of my take home.

Currently, I take home ~$3200 a month after 9% 401k contributions (employer has a very generous match), health, and dental.  I also have the benefit of residing in one of the lowest cost of living areas in the US. 

I currently budget $960/mo to my student loans, which is well above the minimum payments.  At the current rate of payment, I will be done with this debt in a little under 4 years. 

Unfortunately, I do have ~$11,200 left on a car loan at 2.9%.  Current resale value is $13,500.I plan on keeping the car for as long as it reliably operates, hopefully at least ten years.  The vehicle gets upwards of 40 mpg on the highway, so it is pretty frugal in that regard.  I do have the loan paid six months in advance.  I did this by paying extra on the loan the first year of ownership. 

I have no other debts.  I have about $10,000 in an emergency fund in addition to having the car paid six months in advance.  In my current budget, I am sending approximately $1,700/mo to my 401k, car payment, and student loans.  When my two existing loans are paid off, I could divert almost all of that money to investments and be very close to putting back 50% (I added my 401k contribution back into my take home for purposes of this calculation).  I know I can't count on saving the full $342/mo on car payments due increased maintenance as my vehicle ages.

Am I missing anything here?  I live a really comfortable life on the money I currently spend outside of the three categories I have already discussed.  I know that life throws a lot of curveballs that I can't account for, so I know that easy street isn't a guaranteed part of my future.  I could lose my job, get sick/severely injured, or have other unexpected events occur.  But, assuming no catastrophes, I see a lot of wasteful areas of my current budget that I could cut back in to increase my savings rate even further. 

The math on this seems almost too good to be true.

Astromarine

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Re: Is it really this simple?
« Reply #1 on: August 07, 2014, 09:23:16 AM »
nope, that's pretty much it. And if you're willing to make yourself stop being "pretty comfortable" until you facepunch your debt emergency to DEATH, you can a) start earlier and b) hopefully find a standard of living / lifestyle changes that you BECOME comfortable with, allowing you to save OVER 50% pretty easy. Then you're golden

JGB

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Re: Is it really this simple?
« Reply #2 on: August 07, 2014, 09:26:45 AM »
Aren't you glad you didn't take the blue pill?

Dezrah

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Re: Is it really this simple?
« Reply #3 on: August 07, 2014, 01:40:51 PM »
Don't forget you'll need to save for your next car as well.  Once your current car is paid off, put roughly that same car payment into a saving account to buy the next one with cash.  Some people see this as "saving" but I personally see it as "money that is already spent".

Ralphus27

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Re: Is it really this simple?
« Reply #4 on: August 07, 2014, 10:08:21 PM »
Don't forget you'll need to save for your next car as well.  Once your current car is paid off, put roughly that same car payment into a saving account to buy the next one with cash.  Some people see this as "saving" but I personally see it as "money that is already spent".

Thanks for the advice in this area.  It is a bit difficult to calculate how much to save for the next car because I plan on keeping my current vehicle for at least eight more years.  After that, I don't expect to buy a new car again. 


Cheddar Stacker

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Re: Is it really this simple?
« Reply #5 on: August 07, 2014, 10:32:43 PM »
The saving part and it's effect on your road to retirement is that simple.

The details are where it gets complicated. For instance:

Why do you have $10k in an EF? That seems unnecessary.

What is the interest rate on your student loans?

Can that $10k be utilized better by either paying down the SL or investing it?

If your car lasts another 10 years, at that savings rate you will be rich by then. No need to save for another car IMO. You can just sell some stock to buy one.

Welcome to the forum!

JoyBlogette

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Re: Is it really this simple?
« Reply #6 on: August 07, 2014, 11:18:59 PM »
Welcome!

I agree with Cheddar.  That Emergency Fund may be better served elsewhere especially if your loan rate is high.

If you want to get really aggressive with paying off that loan, you may want to give this a read: http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

Ralphus27

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Re: Is it really this simple?
« Reply #7 on: August 07, 2014, 11:24:06 PM »
The saving part and it's effect on your road to retirement is that simple.

The details are where it gets complicated. For instance:

Why do you have $10k in an EF? That seems unnecessary.

What is the interest rate on your student loans?

Can that $10k be utilized better by either paying down the SL or investing it?

If your car lasts another 10 years, at that savings rate you will be rich by then. No need to save for another car IMO. You can just sell some stock to buy one.

Welcome to the forum!

Thanks for the questions.  I have a $10k emergency fund for a couple of reasons.  I am a bit overly cautious in general.  I am also considering a career change about a year from now.  I think I can maintain a similar income, but want to make sure I am well equipped for moving expenses, costs related to a career change, and the potential that my income related to a career change takes a dip.

My student loan balances currently have a sum of $45.5k at an average of 5.2%.  Approximately $21.5k at 6.55%, $7.5k at 4.5%, and $16.5k at 3.8%.

MikeBear

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Re: Is it really this simple?
« Reply #8 on: August 08, 2014, 01:43:49 AM »
Use your $10K emergency fund to pay down your loans, why keep it in a bank that's giving you .21% when you have loans?

Then keep a credit card stashed with a $10k reserve in case of the emergency (which very likely may NEVER occur)

That's what I ended up doing with mine, after finding MMM some months back. I ended up paying off all my loans by using the emergency fund, selling stuff on Ebay and Craigslist, working OT, and wiped out $25k~ of loans in 2.5 months. If I had just continued paying them every month, it would have taken me another 4 years to get rid of them.

Now, I'm just pouring money into my stashes to get free of working for somebody else.
« Last Edit: August 08, 2014, 01:45:49 AM by MikeBear »

taekvideo

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Re: Is it really this simple?
« Reply #9 on: August 08, 2014, 02:03:54 AM »
Yeah most emergencies can be floated with a CC (and should be for the cashback!) so you don't really need an emergency fund as long as you have good job security.
I still have a 3k emergency fund (more of a peace of mind fund though, I didn't even use it in the last emergency), though I at least put it in a 1% ("high yield") online savings account.

Cheddar Stacker

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Re: Is it really this simple?
« Reply #10 on: August 08, 2014, 05:52:42 AM »
Read the post JoyBloggette linked if you haven't already. A 6.55% debt is more of an emergency than all your what ifs. When you get 1-2 months from quitting stash cash.  For now keep $1k if you have to, get a good credit card, and cut the expenses you referred to in the first psot to put more funds towards that 6.55% debt. It will be gone in no time.

boarder42

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Re: Is it really this simple?
« Reply #11 on: August 08, 2014, 06:12:32 AM »
I'd back off 401k to whatever match is until the 6.55% loan is paid off also that 10k needs to be in that loan too. I'd stop living a "comfortable life". You have way too many student loans.  I'd sell that car and buy a cheaper one until those loans are paid off. Being a " cautious" person as you say you sure have a lot of hair on fire debt IMO.  I'm a risky person and would be very uncomfortable with that amount of debt

Ralphus27

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Re: Is it really this simple?
« Reply #12 on: August 08, 2014, 06:43:42 AM »
I'd back off 401k to whatever match is until the 6.55% loan is paid off also that 10k needs to be in that loan too. I'd stop living a "comfortable life". You have way too many student loans.  I'd sell that car and buy a cheaper one until those loans are paid off. Being a " cautious" person as you say you sure have a lot of hair on fire debt IMO.  I'm a risky person and would be very uncomfortable with that amount of debt

9% is what I have to put in to get full match. 

JoyBlogette

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Re: Is it really this simple?
« Reply #13 on: August 08, 2014, 07:46:47 AM »
Use your $10K emergency fund to pay down your loans, why keep it in a bank that's giving you .21% when you have loans?

MikeBear is right.  If you put that $10k on your 6.55% loan you would save almost $1k in interest with your 4-year payback schedule.  It's like earning a GUARANTEED 6.55% return on the $10k.  That return would be hard to beat even in the stock market.

Astromarine

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Re: Is it really this simple?
« Reply #14 on: August 08, 2014, 08:01:25 AM »
Ralph, you'd probably find it useful to read this guy's story: http://nomoreharvarddebt.com/

he's a guy that blogged about going into emergency mode to pay back his entire student debt in 10 months, and what he gained from it.

Cheddar Stacker

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Re: Is it really this simple?
« Reply #15 on: August 08, 2014, 08:16:55 AM »
9% is what I have to put in to get full match.

Awesome match, keep that shit up.

I'll leave you with one more comment Ralphus27.

6.55% is too high so attack that first. After that though, read this thread. Good discussion about investing vs. paying down debts. I like to carry low interest debts, but the majority here doesn't. Have fun optimizing.

Ralphus27

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Re: Is it really this simple?
« Reply #16 on: August 08, 2014, 08:20:51 AM »
9% is what I have to put in to get full match.

Awesome match, keep that shit up.

I'll leave you with one more comment Ralphus27.

6.55% is too high so attack that first. After that though, read this thread. Good discussion about investing vs. paying down debts. I like to carry low interest debts, but the majority here doesn't. Have fun optimizing.

Thanks for the advice, I will check out that thread shortly.

Rebecca Stapler

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Re: Is it really this simple?
« Reply #17 on: August 08, 2014, 08:43:58 AM »
Use your $10K emergency fund to pay down your loans, why keep it in a bank that's giving you .21% when you have loans?

MikeBear is right.  If you put that $10k on your 6.55% loan you would save almost $1k in interest with your 4-year payback schedule.  It's like earning a GUARANTEED 6.55% return on the $10k.  That return would be hard to beat even in the stock market.

Although you will save on the interest in the long run, your monthly payments won't reduce. That's fine, but if you're looking for more security in exchange for giving up your E Fun, then I recommend paying off the entire balance on your $7.5k loan first. This will get rid of your monthly payment for that loan, which will make you more financially secure because you have fewer bills you *have to* pay each month. Then put the amount of your monthly payment towards the next loan and slay that thing.

I discuss prioritizing student loan paybacks in this post: http://staplerconfessions.com/index.php/paying-off-200000-in-student-loans/. So, there are other things to consider but at first blush, that's how I would attack it.

Cheddar Stacker

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Re: Is it really this simple?
« Reply #18 on: August 08, 2014, 08:52:32 AM »
Use your $10K emergency fund to pay down your loans, why keep it in a bank that's giving you .21% when you have loans?

MikeBear is right.  If you put that $10k on your 6.55% loan you would save almost $1k in interest with your 4-year payback schedule.  It's like earning a GUARANTEED 6.55% return on the $10k.  That return would be hard to beat even in the stock market.

Although you will save on the interest in the long run, your monthly payments won't reduce. That's fine, but if you're looking for more security in exchange for giving up your E Fun, then I recommend paying off the entire balance on your $7.5k loan first. This will get rid of your monthly payment for that loan, which will make you more financially secure because you have fewer bills you *have to* pay each month. Then put the amount of your monthly payment towards the next loan and slay that thing.

I discuss prioritizing student loan paybacks in this post: http://staplerconfessions.com/index.php/paying-off-200000-in-student-loans/. So, there are other things to consider but at first blush, that's how I would attack it.

For Ralphus27 I don't think this makes sense. He already stated his $9xx/month SL payment is well above the minimum payment. He also stated he has plenty of fat to trim in his expenses. He also contributes a large chunk of his paycheck to a 401k which could be temporarily reduced in an emergency.

For beginner personal finance and/or extremely, extremely risk-averse people this strategy makes some sense. For a more advanced analysis and likely better outcome, paying less interest makes the most sense.

Ralphus27

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Re: Is it really this simple?
« Reply #19 on: August 08, 2014, 08:53:06 AM »
My student loans are actually divided up into about 8 or 9 different individual loans.  I have four different loans at 6.55%, so I could incorporate both of your ideas into my debt reduction.  I am currently enrolled in IBR, pay the minimum on all of my individual loans except one 6.55% loan and throw the excess of my payments at it.  I am planning on attacking the debt in this manner until my student debt is no more.  Next week, I will actually have one of my four 6.55% loans completely paid off.

MikeBear

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Re: Is it really this simple?
« Reply #20 on: August 08, 2014, 05:07:05 PM »
I personally like to use the "Snowball Effect" when I paid off loans, and it works very well.

That means paying minimums on the higher balance loans, and putting all the money you can towards the smallest balance loan FIRST,  regardless of the interest rate. Once that loan is paid off, that payment is eliminated. You then snowball your payment money from that paid-off loan and anymore you can gather up to the next smallest balance loan while still paying minimums on the higher balance ones.

It sure seems to pay them all off faster, doesn't really cost you all that much more in interest using this method, yet is mentally and emotionally very satisfying to get each one paid off quickly in turn.

okashira

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Re: Is it really this simple?
« Reply #21 on: August 08, 2014, 05:24:18 PM »
Hello, As you can tell by my post count, I am new to the forums.  I stumbled across MMM via reddit and have read several of the blog entries on MMM in addition to browsing the forums.  At first, the thought of saving 50%+ of my income seemed nearly impossible, but then it hit me, between my car payment, student loan payments, and 401k contributions, I am saving/paying close to 50% of my take home.

Currently, I take home ~$3200 a month after 9% 401k contributions (employer has a very generous match), health, and dental.  I also have the benefit of residing in one of the lowest cost of living areas in the US. 

I currently budget $960/mo to my student loans, which is well above the minimum payments.  At the current rate of payment, I will be done with this debt in a little under 4 years. 

Unfortunately, I do have ~$11,200 left on a car loan at 2.9%.  Current resale value is $13,500.I plan on keeping the car for as long as it reliably operates, hopefully at least ten years.  The vehicle gets upwards of 40 mpg on the highway, so it is pretty frugal in that regard.  I do have the loan paid six months in advance.  I did this by paying extra on the loan the first year of ownership. 

I have no other debts.  I have about $10,000 in an emergency fund in addition to having the car paid six months in advance.  In my current budget, I am sending approximately $1,700/mo to my 401k, car payment, and student loans.  When my two existing loans are paid off, I could divert almost all of that money to investments and be very close to putting back 50% (I added my 401k contribution back into my take home for purposes of this calculation).  I know I can't count on saving the full $342/mo on car payments due increased maintenance as my vehicle ages.

Am I missing anything here?  I live a really comfortable life on the money I currently spend outside of the three categories I have already discussed.  I know that life throws a lot of curveballs that I can't account for, so I know that easy street isn't a guaranteed part of my future.  I could lose my job, get sick/severely injured, or have other unexpected events occur.  But, assuming no catastrophes, I see a lot of wasteful areas of my current budget that I could cut back in to increase my savings rate even further. 

The math on this seems almost too good to be true.

Whoa, hold your horses there, OP.
You are cheating a bit on your savings rate calculations. You can't do it based on take home pay, when your take home is after 401k and a company match and your take home is after the 401k and matches.
EDIT: I see you did add the 401k to the take home, thats good. Did you also add the match? Anyway, I still recommend the below calculations.

First, company match counts as income. Second, go ahead and do gross income, since you have 9% going to 401k. Also, your gross income is GROSS + BONUSES + 401k MATCH!!

What is your savings ratio?
x = Savings(401k, loan principle, savings account, IRA, etc)/ Spending(interest, food, gas, insurance, etc)

If you get a 1.0, that's equivalent to a real 50% savings rate.
Those of us who REALLY want to FIRE with good income can get 3.0 or higher.

Calculate this and you can do 25/x and you got your years to FIRE. And there's no cheating with this metric.


That said, you are doing pretty well, and congrats on seeing the light. Take a closer look at your numbers and see what you can improve.
« Last Edit: August 08, 2014, 05:30:00 PM by okashira »

Ralphus27

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Re: Is it really this simple?
« Reply #22 on: August 08, 2014, 10:37:52 PM »
I personally like to use the "Snowball Effect" when I paid off loans, and it works very well.

It sure seems to pay them all off faster, doesn't really cost you all that much more in interest using this method,yet is mentally and emotionally very satisfying to get each one paid off quickly in turn.

I don't mean to be rude, but aren't both of these statements factually incorrect? 

Stache In Training

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Re: Is it really this simple?
« Reply #23 on: August 08, 2014, 10:54:41 PM »
So it's as simple as saving that much, and investing the rest.  I was always very frugal before, but didn't know about the investment side of things.  So I'd say since you have the saving part down, start looking at investing, above and beyond the tax-sheltered accounts (IRA, 401K, ETC.) 

That was my biggest change when coming to MMM (the investing side) and had a similar feeling as you:  "Really, just by saving almost what I already do, I can retire early? it's so simple."  But you have to do investing too.

MikeBear

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Re: Is it really this simple?
« Reply #24 on: August 08, 2014, 10:56:45 PM »
I personally like to use the "Snowball Effect" when I paid off loans, and it works very well.

It sure seems to pay them all off faster, doesn't really cost you all that much more in interest using this method,yet is mentally and emotionally very satisfying to get each one paid off quickly in turn.

I don't mean to be rude, but aren't both of these statements factually incorrect?

It's probably more of a psychological mind-trick by using this method, but it's very effective. Translation if you didn't understand due to maybe my poor phrasing: The "snowball effect method" seems to pay loans off FASTER than paying off the highest interest loan first. That's because you are targeting the smallest balance loans FIRST,  which makes it easier to pay off quicker. Since you pay them off faster due to snowballing the amount of money from KILLING the first loan, you limit the difference the interest rate might make between various loans and paying them off using the "highest interest rate payoff FIRST" method.
« Last Edit: August 08, 2014, 10:59:06 PM by MikeBear »

Ralphus27

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Re: Is it really this simple?
« Reply #25 on: August 08, 2014, 11:03:44 PM »
Hello, As you can tell by my post count, I am new to the forums.  I stumbled across MMM via reddit and have read several of the blog entries on MMM in addition to browsing the forums.  At first, the thought of saving 50%+ of my income seemed nearly impossible, but then it hit me, between my car payment, student loan payments, and 401k contributions, I am saving/paying close to 50% of my take home.

Currently, I take home ~$3200 a month after 9% 401k contributions (employer has a very generous match), health, and dental.  I also have the benefit of residing in one of the lowest cost of living areas in the US. 

I currently budget $960/mo to my student loans, which is well above the minimum payments.  At the current rate of payment, I will be done with this debt in a little under 4 years. 

Unfortunately, I do have ~$11,200 left on a car loan at 2.9%.  Current resale value is $13,500.I plan on keeping the car for as long as it reliably operates, hopefully at least ten years.  The vehicle gets upwards of 40 mpg on the highway, so it is pretty frugal in that regard.  I do have the loan paid six months in advance.  I did this by paying extra on the loan the first year of ownership. 

I have no other debts.  I have about $10,000 in an emergency fund in addition to having the car paid six months in advance.  In my current budget, I am sending approximately $1,700/mo to my 401k, car payment, and student loans.  When my two existing loans are paid off, I could divert almost all of that money to investments and be very close to putting back 50% (I added my 401k contribution back into my take home for purposes of this calculation).  I know I can't count on saving the full $342/mo on car payments due increased maintenance as my vehicle ages.

Am I missing anything here?  I live a really comfortable life on the money I currently spend outside of the three categories I have already discussed.  I know that life throws a lot of curveballs that I can't account for, so I know that easy street isn't a guaranteed part of my future.  I could lose my job, get sick/severely injured, or have other unexpected events occur.  But, assuming no catastrophes, I see a lot of wasteful areas of my current budget that I could cut back in to increase my savings rate even further. 

The math on this seems almost too good to be true.

Whoa, hold your horses there, OP.
You are cheating a bit on your savings rate calculations. You can't do it based on take home pay, when your take home is after 401k and a company match and your take home is after the 401k and matches.
EDIT: I see you did add the 401k to the take home, thats good. Did you also add the match? Anyway, I still recommend the below calculations.

First, company match counts as income. Second, go ahead and do gross income, since you have 9% going to 401k. Also, your gross income is GROSS + BONUSES + 401k MATCH!!

What is your savings ratio?
x = Savings(401k, loan principle, savings account, IRA, etc)/ Spending(interest, food, gas, insurance, etc)

If you get a 1.0, that's equivalent to a real 50% savings rate.
Those of us who REALLY want to FIRE with good income can get 3.0 or higher.

Calculate this and you can do 25/x and you got your years to FIRE. And there's no cheating with this metric.


That said, you are doing pretty well, and congrats on seeing the light. Take a closer look at your numbers and see what you can improve.

Thanks for the input.  I wasn't sure how to treat my car payments since a vehicle is a depreciating asset.  If I placed the entire payment on the spending side, I end up with just over a .7.  If I put the part of the payment going to principle on the savings side, I end up with a .97.  I think the more accurate number is somewhere in between the two numbers since the value of my car goes down over time. 

The good news is I can see a lot of areas where I can still cut back.  I ran the calculations running my generic budget numbers on Mint, but last month I came in a couple hundred bucks under the overall number. 

Ralphus27

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Re: Is it really this simple?
« Reply #26 on: August 08, 2014, 11:06:56 PM »
I personally like to use the "Snowball Effect" when I paid off loans, and it works very well.

It sure seems to pay them all off faster, doesn't really cost you all that much more in interest using this method,yet is mentally and emotionally very satisfying to get each one paid off quickly in turn.

I don't mean to be rude, but aren't both of these statements factually incorrect?

It's probably more of a psychological mind-trick by using this method, but it's very effective. Translation if you didn't understand due to maybe my poor phrasing: The "snowball effect method" seems to pay loans off FASTER than paying off the highest interest loan first. That's because you are targeting the smallest balance loans FIRST,  which makes it easier to pay off quicker. Since you pay them off faster due to snowballing the amount of money from KILLING the first loan, you limit the difference the interest rate might make between various loans and paying them off using the "highest interest rate payoff FIRST" method.

No, I understand snowball.  But simple math indicates you do pay more interest in the long run using this method. I'm not 100% on this, but it am also pretty sure it takes longer to totally eliminate your total debt using this method vs attacking your highest interest loans first. 

Malaysia41

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Re: Is it really this simple?
« Reply #27 on: August 08, 2014, 11:27:23 PM »

Thanks for the input.  I wasn't sure how to treat my car payments since a vehicle is a depreciating asset.  If I placed the entire payment on the spending side, I end up with just over a .7.  If I put the part of the payment going to principle on the savings side, I end up with a .97.  I think the more accurate number is somewhere in between the two numbers since the value of my car goes down over time. 

The good news is I can see a lot of areas where I can still cut back.  I ran the calculations running my generic budget numbers on Mint, but last month I came in a couple hundred bucks under the overall number.

IMO a car payment is 100% an expense. Principal, interest and all. Sure, this may be contrary to GAAP standards, but in this forum cars are not seen as assets (unless you are selling an overpriced one to pay down student loan debt).   

Dicey

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Re: Is it really this simple?
« Reply #28 on: August 09, 2014, 12:08:07 AM »
Going out on a limb here for you Ralphus27. Keep the car, and take good care of it so you can get another ten years. The car killers conveniently forget that you will have to pay tax/license/registration on another car, which ain't cheap. There are so many other areas in your life that you can economize in first that I'd leave the car alone for now. 40 MPG is nothing to sneeze at.

Cheddar Stacker

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Re: Is it really this simple?
« Reply #29 on: August 09, 2014, 06:43:14 AM »
I personally like to use the "Snowball Effect" when I paid off loans, and it works very well.

It sure seems to pay them all off faster, doesn't really cost you all that much more in interest using this method,yet is mentally and emotionally very satisfying to get each one paid off quickly in turn.

I don't mean to be rude, but aren't both of these statements factually incorrect?

It's probably more of a psychological mind-trick by using this method, but it's very effective. Translation if you didn't understand due to maybe my poor phrasing: The "snowball effect method" seems to pay loans off FASTER than paying off the highest interest loan first. That's because you are targeting the smallest balance loans FIRST,  which makes it easier to pay off quicker. Since you pay them off faster due to snowballing the amount of money from KILLING the first loan, you limit the difference the interest rate might make between various loans and paying them off using the "highest interest rate payoff FIRST" method.

No, I understand snowball.  But simple math indicates you do pay more interest in the long run using this method. I'm not 100% on this, but it am also pretty sure it takes longer to totally eliminate your total debt using this method vs attacking your highest interest loans first.

The key here is the use of the word seems. Replace seems with is. Now its factually incorrect. With seems its true, and this is why so many people like the method.

In the end if you use this method, all else being equal, you will end up with less of your own money.

tyler1215

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Re: Is it really this simple?
« Reply #30 on: August 09, 2014, 07:22:40 AM »
I think that as far as emergencies go (i.e. job loss) the 10k emergency fund would be better used to pay off the car today. Depending on the public transportation situation where you live, of course. But I rationalize this thinking that as a young adult, you should be highly mobile for your career. A car helps facilitate mobility to a new location.

Now continue down the worst-case scenario path. It takes you 6 months+ to find a new job. You can live in your car rent free, since it's now paid off. Student loans are easy to not pay and move on. They won't repo your degree. But you miss a couple months of car payments and they steal that thing from your drive way.

If you're going to use an emergency fund for debt and be in hair-on-fire mode, then truly think in terms of an emergency. You need to survive first, and a car is more crucial to survival than a paid for 8x10 piece of paper. But you can make a sweet sailor's hat with it.

Ralphus27

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Re: Is it really this simple?
« Reply #31 on: August 09, 2014, 09:30:55 AM »
I think that as far as emergencies go (i.e. job loss) the 10k emergency fund would be better used to pay off the car today. Depending on the public transportation situation where you live, of course. But I rationalize this thinking that as a young adult, you should be highly mobile for your career. A car helps facilitate mobility to a new location.

Now continue down the worst-case scenario path. It takes you 6 months+ to find a new job. You can live in your car rent free, since it's now paid off. Student loans are easy to not pay and move on. They won't repo your degree. But you miss a couple months of car payments and they steal that thing from your drive way.

If you're going to use an emergency fund for debt and be in hair-on-fire mode, then truly think in terms of an emergency. You need to survive first, and a car is more crucial to survival than a paid for 8x10 piece of paper. But you can make a sweet sailor's hat with it.

Thanks for the advice. I already have the car paid in advance by six months.  At 2.9%, I am not terribly worried about paying it down.  I don't foresee a scenario in which I would ever need to live in my car.  Push comes to shove, I am not above taking a low paying job to keep a roof over my head.  If something really crazy happens, like a major illness or physical disability, my family would be there to help me out. 

Rebecca Stapler

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Re: Is it really this simple?
« Reply #32 on: August 09, 2014, 09:55:00 AM »
My student loans are actually divided up into about 8 or 9 different individual loans.  I have four different loans at 6.55%, so I could incorporate both of your ideas into my debt reduction.  I am currently enrolled in IBR, pay the minimum on all of my individual loans except one 6.55% loan and throw the excess of my payments at it.  I am planning on attacking the debt in this manner until my student debt is no more.  Next week, I will actually have one of my four 6.55% loans completely paid off.

Fabulous! I didn't realize that the 6.55% SL balance was from 4 different loans. Then you get the best of both worlds!

chasesfish

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Re: Is it really this simple?
« Reply #33 on: August 09, 2014, 10:05:10 AM »
Did I see $65k in student loans?!?!?  Sell the car and buy a bicycle

oldladystache

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Re: Is it really this simple?
« Reply #34 on: August 09, 2014, 10:59:55 AM »
Quote
I wasn't sure how to treat my car payments since a vehicle is a depreciating asset.  If I placed the entire payment on the spending side, I end up with just over a .7.  If I put the part of the payment going to principle on the savings side, I end up with a .97.  I think the more accurate number is somewhere in between the two numbers since the value of my car goes down over time. 

A car payment is just a loan like any other. It doesn't matter whether the loan is secured by a car, a house, or just your signature. Paying off (or down) any loan increases your net worth, so it should go in the savings column. The interest you pay would count as an expense.

Ralphus27

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Re: Is it really this simple?
« Reply #35 on: August 09, 2014, 11:16:12 AM »
Did I see $65k in student loans?!?!?  Sell the car and buy a bicycle

No, you did not.

chasesfish

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Re: Is it really this simple?
« Reply #36 on: August 09, 2014, 11:23:52 AM »
My mistake, 45k.  Do you really need a $13,000 car?

horsepoor

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Re: Is it really this simple?
« Reply #37 on: August 09, 2014, 11:35:40 AM »
I think that as far as emergencies go (i.e. job loss) the 10k emergency fund would be better used to pay off the car today. Depending on the public transportation situation where you live, of course. But I rationalize this thinking that as a young adult, you should be highly mobile for your career. A car helps facilitate mobility to a new location.

Now continue down the worst-case scenario path. It takes you 6 months+ to find a new job. You can live in your car rent free, since it's now paid off. Student loans are easy to not pay and move on. They won't repo your degree. But you miss a couple months of car payments and they steal that thing from your drive way.

If you're going to use an emergency fund for debt and be in hair-on-fire mode, then truly think in terms of an emergency. You need to survive first, and a car is more crucial to survival than a paid for 8x10 piece of paper. But you can make a sweet sailor's hat with it.

Thanks for the advice. I already have the car paid in advance by six months.  At 2.9%, I am not terribly worried about paying it down.  I don't foresee a scenario in which I would ever need to live in my car.  Push comes to shove, I am not above taking a low paying job to keep a roof over my head.  If something really crazy happens, like a major illness or physical disability, my family would be there to help me out.

I was actually going to say the opposite - if you're six months ahead on the car payment, and that REALLY means you don't need to make a payment for six months, I'd stop paying and put the money towards the high-interest student loans instead.  Once you kill those 6.xx% ones, you'll actually be in pretty good shape.  Not good enough to slack off, but your hair might just be smoking a bit, not actively burning.

Although it's probably not advisable until your career/location is more settled, something you can consider with the car loan is eventually transferring the balance to a credit card with a 0% interest rate (as long as they offer a free balance transfer along with it) when you're at the point that you can kill that debt within the introductory 0% interest time period.  I did this with the remaining $5K on my horse trailer last year and it worked perfectly.  In fact, I was able to pay less than my previous payment on the note so I could kill other debt, then do a big payment towards the end of the promo period to get it paid off, so it increased flexibility and my ability to snowball payments.

okashira

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Re: Is it really this simple?
« Reply #38 on: August 09, 2014, 12:49:15 PM »
Hello, As you can tell by my post count, I am new to the forums.  I stumbled across MMM via reddit and have read several of the blog entries on MMM in addition to browsing the forums.  At first, the thought of saving 50%+ of my income seemed nearly impossible, but then it hit me, between my car payment, student loan payments, and 401k contributions, I am saving/paying close to 50% of my take home.

Currently, I take home ~$3200 a month after 9% 401k contributions (employer has a very generous match), health, and dental.  I also have the benefit of residing in one of the lowest cost of living areas in the US. 

I currently budget $960/mo to my student loans, which is well above the minimum payments.  At the current rate of payment, I will be done with this debt in a little under 4 years. 

Unfortunately, I do have ~$11,200 left on a car loan at 2.9%.  Current resale value is $13,500.I plan on keeping the car for as long as it reliably operates, hopefully at least ten years.  The vehicle gets upwards of 40 mpg on the highway, so it is pretty frugal in that regard.  I do have the loan paid six months in advance.  I did this by paying extra on the loan the first year of ownership. 

I have no other debts.  I have about $10,000 in an emergency fund in addition to having the car paid six months in advance.  In my current budget, I am sending approximately $1,700/mo to my 401k, car payment, and student loans.  When my two existing loans are paid off, I could divert almost all of that money to investments and be very close to putting back 50% (I added my 401k contribution back into my take home for purposes of this calculation).  I know I can't count on saving the full $342/mo on car payments due increased maintenance as my vehicle ages.

Am I missing anything here?  I live a really comfortable life on the money I currently spend outside of the three categories I have already discussed.  I know that life throws a lot of curveballs that I can't account for, so I know that easy street isn't a guaranteed part of my future.  I could lose my job, get sick/severely injured, or have other unexpected events occur.  But, assuming no catastrophes, I see a lot of wasteful areas of my current budget that I could cut back in to increase my savings rate even further. 

The math on this seems almost too good to be true.

Whoa, hold your horses there, OP.
You are cheating a bit on your savings rate calculations. You can't do it based on take home pay, when your take home is after 401k and a company match and your take home is after the 401k and matches.
EDIT: I see you did add the 401k to the take home, thats good. Did you also add the match? Anyway, I still recommend the below calculations.

First, company match counts as income. Second, go ahead and do gross income, since you have 9% going to 401k. Also, your gross income is GROSS + BONUSES + 401k MATCH!!

What is your savings ratio?
x = Savings(401k, loan principle, savings account, IRA, etc)/ Spending(interest, food, gas, insurance, etc)

If you get a 1.0, that's equivalent to a real 50% savings rate.
Those of us who REALLY want to FIRE with good income can get 3.0 or higher.

Calculate this and you can do 25/x and you got your years to FIRE. And there's no cheating with this metric.


That said, you are doing pretty well, and congrats on seeing the light. Take a closer look at your numbers and see what you can improve.

Thanks for the input.  I wasn't sure how to treat my car payments since a vehicle is a depreciating asset.  If I placed the entire payment on the spending side, I end up with just over a .7.  If I put the part of the payment going to principle on the savings side, I end up with a .97.  I think the more accurate number is somewhere in between the two numbers since the value of my car goes down over time. 

The good news is I can see a lot of areas where I can still cut back.  I ran the calculations running my generic budget numbers on Mint, but last month I came in a couple hundred bucks under the overall number.

Your auto loan balance isn't connected with the vehicle depreciation. As long as you aren't going to go out and buy another car once the loan is paid, and plan to keep the car for 11+ years, just depreciate the car to 0 for your net worth and yes, count the loan principle payments as savings.

Dicey

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Re: Is it really this simple?
« Reply #39 on: August 09, 2014, 12:52:53 PM »
...something you can consider with the car loan is eventually transferring the balance to a credit card with a 0% interest rate (as long as they offer a free balance transfer along with it) when you're at the point that you can kill that debt within the introductory 0% interest time period. 

This is a great suggestion, horsepoor, especially the part about free balance transfer. The vast majority of these things are not "free", they carry a 2-3% fee, but it's buried in the fine print.

Ralphus27, If you can find one with no fees, use it when you get closer to paying off the car. Even if you can't find one without a fee, if it's low enough, you might consider this strategy to kill off chunks of your student debt since it's at a higher rate. If you choose to use this approach, your healthy EF could be a backstop to make sure you have enough to pay it off before the introductory period ends.

horsepoor

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Re: Is it really this simple?
« Reply #40 on: August 09, 2014, 01:40:26 PM »
...something you can consider with the car loan is eventually transferring the balance to a credit card with a 0% interest rate (as long as they offer a free balance transfer along with it) when you're at the point that you can kill that debt within the introductory 0% interest time period. 

This is a great suggestion, horsepoor, especially the part about free balance transfer. The vast majority of these things are not "free", they carry a 2-3% fee, but it's buried in the fine print.

Ralphus27, If you can find one with no fees, use it when you get closer to paying off the car. Even if you can't find one without a fee, if it's low enough, you might consider this strategy to kill off chunks of your student debt since it's at a higher rate. If you choose to use this approach, your healthy EF could be a backstop to make sure you have enough to pay it off before the introductory period ends.

I don't think you can pay student loans with credit cards.  Maybe if they're private loans it's different?

Dicey

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Re: Is it really this simple?
« Reply #41 on: August 09, 2014, 03:52:25 PM »
I don't think you can pay student loans with credit cards.  Maybe if they're private loans it's different?

I'm luckily not an expert on them either, but don't they send you a couple of checks so you can pay off your loan balances? Of course, they hope you will use the checks to buy a new Maserati, but I'm pretty sure you can do what you want with them.