Hello, Mustachians! I've been mostly lurking around here, but I finally signed up and now I'm hoping to get some of that delicious MMM advice that gets doled out so often. And accept facepunches, of course (what is life without facepunches?).
My fiance and I are cutting down our expenses and we've made a lot of progress. I've gotten him to concede a few things and I'm hopeful he'll concede a few more as we move along :)
The issue, though, is that we need a plan for what to do with the money we're not spending. Fiance is a self-proclaimed lover of spending, and I'm worried he'll lose motivation if we don't have a specified goal. Right now it's just going in a savings account, but I can already see him wavering; "spend less money" isn't enough for him, he needs to be able to think "put this money toward X instead of Mountain Dew".
SO. We have the three Big Ones that so many others do:
- Student loans
- Desire to buy a house
- Desire to save/invest for retirement
My gut feeling is to pay off the loans with all possible speed, then split between saving a down payment and retirement investing. But there are a few complications, so let's throw it down and see what the Mustachians think!
Student loans:
$24,474 at 4.75% (Federal consolidated)
$28,161 at 4.5% (Private unconsolidated)
We can easily pay these off in under 2 years, then save a 20% downpayment in about another 2 years (this assuming the status quo, i.e. no job changes, job loss, raises, significant health expenses, etc., but we are pretty securely employed at the moment, fiance gets regular raises, fiance has HSA and we have emergency funds set aside, so this is a reasonable estimate).
Where I'm getting stuck is that I'm afraid if we wait 3-4 years to buy a house, we'll be left behind by the growing housing market in our area (Lakewood, CO). Fiance's parents are also convinced that we need to buy in the next 18 months or we'll get screwed on prices and interest rates and waste money on rent, and they do have a point--rents are high and if we had 20% right now, it would definitely make more sense to buy than continue to rent. I personally don't consider rent money 'wasted' or 'throwing your money away', because it's purchasing shelter etc., but with prices and rents where they are right now, we could definitely be using the money more efficiently.
But Fiance's parents are so desperate for us to buy a house that they say we don't need 20%, and they've even gone so far as to inform us of 3% down loans (FHA, maybe?) and suggest we take out 401k loans to cover a down payment (we literally laughed out loud when they told us this).
We have no assets, essentially:
~$3,000 combined in our 401ks
a car that we owe ~$12,000 on (1.9%, Edmonds says private party sale it's worth $19,000)
~$10,000 across checking and savings accounts
That's it. I feel like it's astoundingly foolish to borrow six figures when our net worth is around negative $60,000, but I don't know how to communicate this to either fiance or his parents (his parents I don't care that much about convincing, it's obviously Fiance that matters). His parents are gifting us $10,000 for our upcoming nuptials (which will cost less than $5,000 and be paid for using funds we've already saved), and it's very clear they think that takes care of half a down payment. I don't think they know exactly how much I owe on my student loans, though.
A note about the car: it's a 2012 Subaru Forester that Fiance will not even consider getting rid of right now. I recognize that it's an obvious piece of fat that could easily be trimmed from our budget, but after several rounds of fighting over it I've decided to back off for the time being. If Fiance saw us as being in true financial straits, i.e. it's the car vs. continuing to pay a mortgage or something like that, he'd get rid of it; he regularly checks its resale value, keeps up on the maintenance, and tries to keep the milage in check to stem depreciation. At this point in time, the car is off-limits, so while I'd appreciate any suggestions to help convince him otherwise, telling me that it's a drain on our finances is something I already know and can do little about, so not a lot of help :)
I guess my questions are:
1) How much would house prices and interest rates have to rise in the next four years to make waiting to buy turn out to be foolish?
2) How do I do the math on this to convince Fiance if I'm right and we should wait?
3) Are the interest rates on my loans low enough that I'd be better served going for the house and/or investing? We're 30 and have basically no investments, and I worry that waiting will hurt us.
4) To complicate the matter further, because of my age and various health reasons that I'd rather not go into right now, we're verging on "now or never" when it comes to having children. So there's the possibility of adding a kid or two (twins run in my family) right around the time we'd be paying off the loans (if we choose to focus there), meaning we'd take even longer to save the down payment (whether I keep working or stay home is only slightly relevant; either we'll have daycare expenses and my take-home drops 50% or more or I stay home and my take-home drops 100%. either way, the down payment will take longer.).
Scenario #1:
Put $10,00 from Fiance's parents into loans, pay off loans in ~18 months, then start splitting between down payment and increasing 401k contributions.
If we have a child at this point, I can stay home and if we make more changes like finding a lower-rent place and continuing to cut down expenses, I can feasibly see still saving for a down payment, paying extra toward the car loan, and saving for retirement (if I quit my job I would roll my 401k into Vanguard and could continue adding at intervals when possible). Everything would be slower, but not having the student loan payments would help.
If I keep working, we can do it faster. But if we have twins, based on average childcare costs here (Colorado, 4th-highest in the nation), we'd be paying more than I'd earn if you account for disposable diapers and formula (if I stay home I can cloth diaper and breastfeed, but it's my understanding that while you can usually find a daycare provider that accepts pumped breastmilk, finding one willing to cloth diaper would be a lot harder). I'm not assuming I'll have twins, but there's a greater-than-normal chance of it, so I want to consider it a possibility.
Regardless of whether or not I stay home, having those loans gone would give us more of a cushion, and Fiance is freaked out about the cost of having kids anyway (I'm not; my parents raised 7 on 1 income that never hit six figures. I know it can be done frugally.).
Scenario #2
Continue paying minimum payment on loans plus a little extra, save for down payment, put $10,000 gift into house fund. In 18 months, buy a house.
If we have a child at this point, we would now have that child to care for, so add in all the considerations from scenario #1, plus the $480 minimum payment for the student loans, plus a mortgage, plus if we go with less than 20% like Fiance's parents are pushing for, PMI.
This scenario terrifies me, frankly. We'd be locking ourselves into a level of spending I really don't like. But am I just being a complainypants? Again, if we end up with twins, we would be paying for me to continue working, so if we go with Scenario #2, we're essentially banking on only having 1 child, which, again, is the most likely but not only scenario for my reproductive parts.
Looking at my scenarios, I feel I may have answered my own question; opting to wipe out the loans will put us on steadier ground and give us a better baseline for future savings and investments.
But I guess it comes down to the first question, how much would interest rates and house prices have to rise to make us regret going with Scenario #1? Are we already too late? Can we even get a favorable mortgage with a net worth of -$60,000, even with my excellent credit score (800s)? And is 4.75% low enough that I'm foolish to not choose a Vanguard index fund or increased 401k contributions (we're currently only at employer match)? Am I making this too complicated (probably)? Do you need more numbers?
