Author Topic: Mid 20s, Out of Debt, Now What?  (Read 3201 times)

coolistdude

  • Stubble
  • **
  • Posts: 204
  • Age: 29
    • Retirement Tree (Same One I Use):
Mid 20s, Out of Debt, Now What?
« on: February 01, 2016, 11:14:00 PM »
Hello MMMs,

I (mid 20s) recently paid off my student debt so my wife and I have no debt now. Yay! Next month with the tax return (I will reduce money withheld to lower the return) and the emergency fund will be complete. I make $50k/yr (DW is a homemaker) and we have a two year old daughter. So, my question is what should our next steps be?
  • I live very close to work and bike. We have one motor vehicle.
  • Our budget is well trimmed...I'll switch to Republic Wireless soon and continue to make minor tweaks to lower our expenditures. We spend $2500+- on non-savings (rent is $1k/month. Pretty decent for here).
  • The company just got a raise (will add to $50k/yr), I will hopefully get a promotion in April/May and then a raise in July.
  • DW and I would like to save for a house, but currently have no down. I'd like a 20% down to avoid PMI which will take about a $36-$40k down unless I want HOA.
  • My work has a $300/month health benefit plan with a very low deductible/out of pocket. I pay $300, they pay $1600. If I forgo the insurance, they pay me about $120 a month, so the plan really costs about $420 a month when that is factored in. It is a great plan, but I wish they offered a cheaper option.
  • My work offers a 403(b) and 457(b), and a mandatory 6% pension plan. I'm waiting to hear if there is a match on the first two. The tax benefits alone make me want to begin investing. Vanguard is one of the approved companies, although it does not list the plans they offer.
  • My wife has an inactive traditional IRA with about $4k earning 0.03%/yr (yes...I know. What a deal!).
I'd like to set a FI date, change whatever the IRA is invested in, begin investing from work earnings, and save for our primary residence. I'm just not sure how much to put to each since the investing/saving side is new to me. Help?

Urchina

  • Stubble
  • **
  • Posts: 198
Re: Mid 20s, Out of Debt, Now What?
« Reply #1 on: February 02, 2016, 12:02:54 AM »
Welcome to the forum!

I think the traditional advice for someone in your position is usually something like:
1. Invest in deferred comp enough to get any match your employer offers
2. Figure out what's next on your list and go from there (for most people this is pay off debt, but you've tackled that, so bravo!)

The great thing about compound interest is that it works better the longer your horizon. Since you're in your 20's and relatively young, investing-wise, you have huge compound interest potential. This means that every dollar you put into a long-term investing plan (I like Vanguard index funds, personally) has years and years to compound and will work harder and longer for you than money you put in later in life. This means that diverting money from your investments at this stage is more expensive for you than doing so later.

This doesn't mean you shouldn't save for a house (which should not be in the stock market if you plan to use it within 5 years or so -- too much volatility). It does mean, though, that you should keep investing in the stock market while you are saving for a down payment on a house.



I'd invest enough to get the match from your employer in BOTH the 457 and the 403b; keep investing in your IRAs (even just $100 a month, for both you and your spouse, and you can probably get Roths); and save the rest for a down payment.

Once you have the down payment on the house, you can redirect savings towards maxing out your deferred comp / IRAs. Assuming you have money leftover after the mortgage for that.

Hopefully other Mustachians will be along later to give additional ideas. Good luck!

ooeei

  • Handlebar Stache
  • *****
  • Posts: 1143
Re: Mid 20s, Out of Debt, Now What?
« Reply #2 on: February 02, 2016, 08:00:37 AM »
One option if you're not maxing out your IRA, is to put your house savings in a Roth IRA in a money market or similar low risk account.  This way if plans change and you don't need the money for a house, the money is already in your IRA and you don't miss out on the contributions for the next few years, and you can put it into index funds at that point.  If you do need the money for a house, contributions can be pulled out of Roth IRAs at any time, so you just pull the money back out and use it the same as you would from a savings account.  Hopefully that makes sense.

eyePod

  • Pencil Stache
  • ****
  • Posts: 966
    • Flipping A Dollar
Re: Mid 20s, Out of Debt, Now What?
« Reply #3 on: February 02, 2016, 08:52:04 AM »
Just a note on the house, we decided for PMI and had 10% down instead of saving for another year due to a relocation bonus from a job switch. It cost us 1200 in total and we paid off the PMI in just over a year. It was a calculated lost and I think it was well worth it to get into thet neighborhood we wanted (great school, awesome construction of townhomes, low HOA which covers multiple parks and the pool and walking path).

PMI isn't the worst, you just have to understand what it entails and have a plan to attack it.

zolotiyeruki

  • Magnum Stache
  • ******
  • Posts: 3047
  • Location: State: Denial
Re: Mid 20s, Out of Debt, Now What?
« Reply #4 on: February 02, 2016, 12:28:05 PM »
I like ooeei's suggestion, and I'm actually planning to do the same this year.  With your income and family situation, you're already pretty far down in the tax brackets even without any pre-tax contributions.  $50k - $12k standard deduction - $12k exemptions = $26k taxable, then $1k child tax credit.  If you can swing $6k in pre-tax contributions (and you're already doing $3k due to the mandatory pension plan, if I'm reading it right), I'd fill up a Roth next.  As you get further in your career and your pay (presumably) increases, you might want to shift toward more tax-deferred stuff (tIRA, 403b, etc), but for now, Roth is great.

coolistdude

  • Stubble
  • **
  • Posts: 204
  • Age: 29
    • Retirement Tree (Same One I Use):
Re: Mid 20s, Out of Debt, Now What?
« Reply #5 on: February 02, 2016, 05:15:47 PM »
Thanks for the input guys! I have a lot to chew and digest. HR got back to me, neither the 403(b) or 457(b) are matching. For retiring early, is there a preference between 403(b), 457(b) or IRAs?

JLee

  • Walrus Stache
  • *******
  • Posts: 5403
Re: Mid 20s, Out of Debt, Now What?
« Reply #6 on: February 02, 2016, 06:50:12 PM »
Just a note on the house, we decided for PMI and had 10% down instead of saving for another year due to a relocation bonus from a job switch. It cost us 1200 in total and we paid off the PMI in just over a year. It was a calculated lost and I think it was well worth it to get into thet neighborhood we wanted (great school, awesome construction of townhomes, low HOA which covers multiple parks and the pool and walking path).

PMI isn't the worst, you just have to understand what it entails and have a plan to attack it.

+1 on PMI being doable, though a $200k house on a $50k income is more than I'd be comfortable with.  I bought my house for $140k while I was making ~$40k and if I didn't have a roommate, it would've been really, really tight.

randymarsh

  • Handlebar Stache
  • *****
  • Posts: 1374
  • Location: Denver
Re: Mid 20s, Out of Debt, Now What?
« Reply #7 on: February 02, 2016, 10:03:41 PM »
I'm contemplating a house now as well, possibly with PMI. My lender told me that with a conventional loan you can avoid PMI by taking on a higher rate. Not necessarily the best case scenario, but it can be done. FHA loans require PMI for the entire term now. Or do conventional and aggressively pay it down to remove PMI. There are options.

I should mention I'm in an area where rent is increasing like crazy, so the incentive to fix my housing costs may be greater than yours. I also have the ability to get a roommate and collect $700+ per month to offset the mortgage.

A 457 is a great option because you can withdraw it before 59.5 without penalty. But if your employer is not a government agency, your 457 may be considered property of your employer and could be collected against if your employer defaults on debts.

zolotiyeruki

  • Magnum Stache
  • ******
  • Posts: 3047
  • Location: State: Denial
Re: Mid 20s, Out of Debt, Now What?
« Reply #8 on: February 03, 2016, 07:00:43 AM »
Thanks for the input guys! I have a lot to chew and digest. HR got back to me, neither the 403(b) or 457(b) are matching. For retiring early, is there a preference between 403(b), 457(b) or IRAs?
If you have to choose one, I'd probably opt for the IRA, since you have the most personal control over it, and choice of funds to invest in.  Again, in your situation, a Roth IRA will be perferable to a traditional IRA, since you're already in a low tax bracket.

randymarsh

  • Handlebar Stache
  • *****
  • Posts: 1374
  • Location: Denver
Re: Mid 20s, Out of Debt, Now What?
« Reply #9 on: February 03, 2016, 05:41:28 PM »
Just a note on the house, we decided for PMI and had 10% down instead of saving for another year due to a relocation bonus from a job switch. It cost us 1200 in total and we paid off the PMI in just over a year. It was a calculated lost and I think it was well worth it to get into thet neighborhood we wanted (great school, awesome construction of townhomes, low HOA which covers multiple parks and the pool and walking path).

PMI isn't the worst, you just have to understand what it entails and have a plan to attack it.

+1 on PMI being doable, though a $200k house on a $50k income is more than I'd be comfortable with.  I bought my house for $140k while I was making ~$40k and if I didn't have a roommate, it would've been really, really tight.

Would you do your 140K home on a 40K income, with a roommate, again? I'm in a similar situation right now or rather thinking about putting myself in that situation. In my neighborhood a roommate would pay $800+. Really takes the bite out of a $1300 mortgage! Or AirBnB it for even more.

JLee

  • Walrus Stache
  • *******
  • Posts: 5403
Re: Mid 20s, Out of Debt, Now What?
« Reply #10 on: February 03, 2016, 09:31:46 PM »
Just a note on the house, we decided for PMI and had 10% down instead of saving for another year due to a relocation bonus from a job switch. It cost us 1200 in total and we paid off the PMI in just over a year. It was a calculated lost and I think it was well worth it to get into thet neighborhood we wanted (great school, awesome construction of townhomes, low HOA which covers multiple parks and the pool and walking path).

PMI isn't the worst, you just have to understand what it entails and have a plan to attack it.

+1 on PMI being doable, though a $200k house on a $50k income is more than I'd be comfortable with.  I bought my house for $140k while I was making ~$40k and if I didn't have a roommate, it would've been really, really tight.

Would you do your 140K home on a 40K income, with a roommate, again? I'm in a similar situation right now or rather thinking about putting myself in that situation. In my neighborhood a roommate would pay $800+. Really takes the bite out of a $1300 mortgage! Or AirBnB it for even more.

If I was confident I could find a roommate and that my income would continue to scale upwards, probably.  My mortgage is currently $818/mo including PMI (~$65).  My backup plan was to rent two bedrooms in the house - I ended up doing that eventually since a close friend moved into town. Looking back, it was a lot tighter than I'd likely be comfortable with now but it was possible (albeit without even coming close to maxing retirement accounts).

If you can handle it on your own income without a roommate, then add the roommate to give you a much bigger cushion, I'd be running some numbers to figure it out.  Remember the tax advantages to offset the rental income, too - writing off a portion of utilities, property depreciation (which does impact you when you sell, though - more taxes to pay later), etc.  I had $9800 in rental income last year and took a loss on my taxes (depreciation and expenses more than offset the income).

eyePod

  • Pencil Stache
  • ****
  • Posts: 966
    • Flipping A Dollar
Re: Mid 20s, Out of Debt, Now What?
« Reply #11 on: February 04, 2016, 02:35:44 PM »
I'm contemplating a house now as well, possibly with PMI. My lender told me that with a conventional loan you can avoid PMI by taking on a higher rate. Not necessarily the best case scenario, but it can be done. FHA loans require PMI for the entire term now. Or do conventional and aggressively pay it down to remove PMI. There are options.

I should mention I'm in an area where rent is increasing like crazy, so the incentive to fix my housing costs may be greater than yours. I also have the ability to get a roommate and collect $700+ per month to offset the mortgage.

A 457 is a great option because you can withdraw it before 59.5 without penalty. But if your employer is not a government agency, your 457 may be considered property of your employer and could be collected against if your employer defaults on debts.

Higher rate is forever (or until you re-finance). If you do the PMI, you can get out of it more quickly.  You'll probably have to fight the bank a bit if you pay it off in under 2 years though. They argue that the loan isn't "seasoned" which is BS, but I had to threaten legal action to get them to understand. Crazy considering that I'll be paying them a lot of interest through negligible work on their end for a while still even though I'm making an effort to make that quicker.