Author Topic: Please Critique Our Budget (Paying off Student Loans While Saving for House)  (Read 2679 times)

ReadySetMillionaire

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Background
I have been dating my girlfriend for about a year and a half now and we are planning to spend the rest of our lives together. We are 27 but at different stages of our careers--I am an attorney that just started (making $47,500 per year) and she is a Speech Language Pathologist making about $67,000 per year (three years into her career). We have dabbled in sharing personal finance books and have reviewed our budget on about a quarterly basis, but I just recently revealed to her that my ultimate goal is to retire somewhere between 45 and 50.

However, because we have massive student loan debt (see below) and also would like to buy a modest but nice home sooner rather than later, working towards retirement is going to take a while. And that's perfectly okay with us, because neither of us want to retire as quickly as possible.

We would appreciate your critique of our budget and financial strategies.

Goals Ranked in Order of Importance
(1) Get out of student loan debt by the time we are 33-34 (6-7 years from now)
(2) Purchase a home in the near future, probably by age 30 (very important to us)
(3) Pay off mortgage by 38-40
(4) I want to retire somewhere between 47-48, whereas she wants to work a bit longer because she loves her job and being active.

Monthly Income
Gross Annual: $114,500
Monthly Take-Home: $5942 (assuming two paychecks)

Income/Benefits Breakdown
Me: $2642/month; contributing $0 to 401k because company puts in 3% regardless of whether I contribute and doesn't match over 3% (this money is better spent to go towards student loans). Also contributing slight amount to HSA (100% up to employer match).
I'm paid biweekly, so I have a couple bonus paychecks in July and October. First year working so I'm not sure about a bonus. There is slight upward mobility for me at my current firm, but joining a larger firm in nearby Pittsburgh or Cleveland would more than double my income.

Her: $3300/month; contributing 10% to 401k with 6% match.
She is also paid biweekly and thus also has a couple bonus paychecks, although because she is paid in the weeks opposite me, I'm not sure which months she gets three paychecks. Her upward mobility is limited only because of the constraints of medicare, and she doesn't see herself going corporate just to chase a paycheck.

Student Debt
Me: I had to pay my way through undergrad and law school and came out with $148,000 in debt at about 6.75% interest. I am enrolled in PAYE and targeting the highest interest rate loans. In just five months I have knocked my debt down to $142,000 and should have it down to $132,000 by the end of the year (side income, bonus, tax return).

Her: Graduated with about $65,000 in debt and has it down to $42,000. Some of her loans are private, some are federal. She pays $790/month (the 10 year payment).

Side Note: I've posted about my loans before on here and been repeatedly criticized, so please don't bash us for our loans. We both know we could have made different life decisions, but it does no good to dwell on that. We are both making positive steps to rid ourselves of this debt and have great earning potential because of our degrees.

Average Monthly Bills
Rent: $450 (renting from a family friend, but moving within a year or two, so won't be able to enjoy this forever)
Groceries: $680*
Her Car Payment: $371**
Combined Auto Insurance: $165
Gasoline: $225***
Phones: $120
Utilities: $115
DirecTV: $60
Netflix: $4.50 (split with a friend)
Her Student Loan Payment: $790
My Student Loan Payment: $293, but I pay up to $1000/month
Her Roth Contribution: $100 per month
House Savings: $400 each, so $800 (she puts a little extra in quite often).

*I know this is high for two people, but we just started juicing. Our health, and especially mine, have improved dramatically (I've lost 12 pounds in about six weeks). We are moving to more veggies instead of fruits, and that should dramatically reduce costs eventually.

**She loves her Toyota Rav4 more than a child and made this purchase almost a year before we met. I figure it's okay because it's a great car and mine is paid off, so our auto expenses aren't too bad. More importantly, she is going to keep this car for a long, long time.

***We live in a rural area with very low COL (Youngstown, OH) and thus limited incomes; thus, our apartment is smack dab in between both our jobs, which are both probably the highest paying jobs we can get in our area.

Consumer Spending
Eating Out/Social/Misc. (e.g., drycleaning, weddings, etc.): $200
Clothing/Other Misc.: $100

Total Monthly Expenses
Approximately $5180, leaving $762 left over.

Assets
Cash (Excluding House Savings Account): probably somewhere around $10,000
My Roth IRA: $1,050
Her Roth IRA: $5,600
Her 401k: approximately $27,000
My Car: 2008 Ford Focus, good condition, valued between $4,500-5,000
My HSA: $1,200
My 401k: haven't received contributions yet
House Savings Account: $6800 after just five months of saving

Total Assets: $46,650

Debts
Her Car: $22,660 @ 0% interest, $371/month payment
My Student Loans: $142,000 at an average of 6.75% interest
Her Student Loans: $42,000 at an average of 6.5% interest

No other debt. Credit card balance paid in full every month and we use American Express rewards to travel a little bit for free.

Financial Strategy and Goal Summary
First, we are going to reduce our expenses a bit. I am definitely going to reduce grocery spending and try to reduce other bills. I have also advised my girlfriend to reduce her 401k contribution to the 6% match and stop contributing to her Roth until she has paid off her debt (which is at a 6-7% interest rate). Where else can we cut?

Moving to the big picture, I have discussed with numerous attorney-posters on here and have already decided that I am going to move to a bigger firm in Cleveland or Pittsburgh within 2-3 years (the most marketable time as an attorney, as you now have both the education and knowledge how to practice). This will increase my income to $120,000 (gross) per year, maybe more. My girlfriend has an incredibly high demand job and could therefore get a job anywhere. When we move, however, we are going to maintain our standard of living--no new cars unless necessary, modest house, stay as frugal as possible.

I know, you read "modest house" and are probably thinking, "You can't buy a house right now with those loans." I understand that is mathematically the correct answer and that every extra penny should go towards paying off our loans. But personal finance is personal, and owning a house is a huge life goal that we want to achieve sooner rather than later (especially since we are likely going to start a family soon after buying a home). We are going to buy a modest home in 2-3 years (and by modest, I mean something between $150,000-$210,000), put down 20%, take out a 30 year mortgage, make the minimum payments, and then use the rest of the money to pay towards our student loans.

To illustrate, right now we are paying approximately $1,300 towards housing ($450 rent + $850 or so in savings). A 30 year mortgage in the price range we plan to buy will have a payment of $700-825. Thus, once we are done renting and saving, that will free up an additional $500 per month to pay off our student loans.

To pay off our student loans, we are making the minimum payments and targeting the highest interest rate loans. So long as I do land a big firm job, or even a mid-size firm job in a higher paying market, then we can pay off our loans by the time we are 33-34.

Once that is accomplished, then we will avalanche the money previously used to pay off our student loans to pay off the mortgage. Again, I know you can get better money from investments, but we just want to get out of debt.

By the time we pay off the mortgage--which should only take 2-3 years--we will likely have $125-150k in assets (plus a paid off home), likely more. Our cost of living will be very low without mortgage or car payments. We will then avalanche what was used towards paying off the mortgage as our savings rate, and that will hopefully be around 70%, which will allow us to retire relatively quickly.



So, with all that said, I really hope you guys can give us an honest critique. Thoughts and feedback are welcomed and appreciated, and I promise, you won't hurt our feelings.
« Last Edit: May 29, 2015, 09:19:09 AM by ReadySetMillionaire »

JessEsq

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In your estimated $700-$825 for housing expenses (after purchase), are you considering real estate taxes and home owner's insurance? Here in an expensive county (summit county, OH), real estate taxes run us near $400/month for a house we bought at $170k.


TheThirstyStag

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You have obviously put a lot of thought into your finances and seem to be making some good decisions.  I like the plan to aggressively pay down your loans, and I don't share the aggression against having them since it helped land the jobs you want.

A few comments regarding your budget:

- I think you can get that grocery bill down to $500.  2 people can eat very healthy for less than that, but 500 is a good feasible goal for you right now.

- Can you trim the cell phone bills a bit?  Do you own your phones outright/are they off contract?  Check out I.P. Daley's superguide for great info.  I personally like Cricket at $35/mo per line.  You can do better.  Aim for $70/mo or lower.

- Have you factored in auto maintenance/repairs in your commute budget?  It may not be what you want to hear, but if you don't do your own maintenance, then you probably want to modify your fuel bill to the IRS' mileage rate ($0.56 per mile I think) for a better idea of the cost of your commutes.  Then again, I think the IRS rate factors in depreciation which wouldn't be a big thing if you keep your cars forever.  I would increase the "commute" budget, regardless. 

- You are saving for a down payment on a house, but not maxing out your Roth IRAs.  Consider using your Roths as a clever "storage space" for some of those down payment savings.  You can always withdraw the amount you put in to a Roth, penalty-free, and you get the bonus of the interest growing tax-free.  Further, if it's 5 years old and for a first time home purchase, you can also use the interest, tax-free, in your purchase.  Max out those Roths.

- Can you cut out DirecTV completely?  You're in a very flat area of the country and can very likely get a strong antenna signal.  You already have Netflix.  Watch over the air TV and supplement it with Netflix. 

nereo

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I think you have a very well thought out plan and some specific goals.  A very few suggestions:

with an income of $114k I would make sure that you are contributing to and maxing out traditional IRAs.  The tax benefit you will get from this at your income level is considerable, and you absolutely should not give up the opportunity to contribute now.  a ROTH is almost certainly a poor choice in your situation.

You are anticipating needing $30k-40k for the downpayment of your home.  At your present rate it looks like you will get there in about 3 years.  If you want your down payment faster then cancel the extra payments on your debt and put that all towards your down-payment.  Personally with your debt load I would want to shed your student loans as quickly as possible, but it all comes down to priorities.

keep up the good work.

ReadySetMillionaire

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In your estimated $700-$825 for housing expenses (after purchase), are you considering real estate taxes and home owner's insurance? Here in an expensive county (summit county, OH), real estate taxes run us near $400/month for a house we bought at $170k.
Really good point and something I hadn't considered. Thanks.

You have obviously put a lot of thought into your finances and seem to be making some good decisions.  I like the plan to aggressively pay down your loans, and I don't share the aggression against having them since it helped land the jobs you want.

A few comments regarding your budget:

- I think you can get that grocery bill down to $500.  2 people can eat very healthy for less than that, but 500 is a good feasible goal for you right now.

- Can you trim the cell phone bills a bit?  Do you own your phones outright/are they off contract?  Check out I.P. Daley's superguide for great info.  I personally like Cricket at $35/mo per line.  You can do better.  Aim for $70/mo or lower.

- Have you factored in auto maintenance/repairs in your commute budget?  It may not be what you want to hear, but if you don't do your own maintenance, then you probably want to modify your fuel bill to the IRS' mileage rate ($0.56 per mile I think) for a better idea of the cost of your commutes.  Then again, I think the IRS rate factors in depreciation which wouldn't be a big thing if you keep your cars forever.  I would increase the "commute" budget, regardless. 

- You are saving for a down payment on a house, but not maxing out your Roth IRAs.  Consider using your Roths as a clever "storage space" for some of those down payment savings.  You can always withdraw the amount you put in to a Roth, penalty-free, and you get the bonus of the interest growing tax-free.  Further, if it's 5 years old and for a first time home purchase, you can also use the interest, tax-free, in your purchase.  Max out those Roths.

- Can you cut out DirecTV completely?  You're in a very flat area of the country and can very likely get a strong antenna signal.  You already have Netflix.  Watch over the air TV and supplement it with Netflix.
Grocery Bill: we're starting this weekend by going to the cheaper local grocery store. I also hope to get our budget down to about $550.

Cell Phones: I'm under contract for another 18 months and she's in need of a new phone here shortly (she has an iPhone4). We will look into alternative stuff.

Auto Repairs: I guess we take this from the emergency budget when needed and don't think of it as a "monthly" expense. We both drive like grandmas, so hopefully that reduces our repair costs.

Roth: Given that we might buy a house within 2-3 years, I don't feel comfortable having our down payment money invested. This is something she and I will have to think about more.

DirectTV: we're both huge sports fans and really haven't found a more cost effective solution. We have the medium plan and also have referred a few people, so hopefully we continue to do so and continue to receive discounts.

I think you have a very well thought out plan and some specific goals.  A very few suggestions:

with an income of $114k I would make sure that you are contributing to and maxing out traditional IRAs.  The tax benefit you will get from this at your income level is considerable, and you absolutely should not give up the opportunity to contribute now.  a ROTH is almost certainly a poor choice in your situation.

You are anticipating needing $30k-40k for the downpayment of your home.  At your present rate it looks like you will get there in about 3 years.  If you want your down payment faster then cancel the extra payments on your debt and put that all towards your down-payment.  Personally with your debt load I would want to shed your student loans as quickly as possible, but it all comes down to priorities.

keep up the good work.

The amount we are saving for a down payment and the amount we are putting towards our loans is probably the biggest area of concern for us. We know the money is better invested paying off debt, but we also want to buy a home responsibly (20% down, avoid PMI, have great credit scores, etc.).

I really hope others in this thread can comment as to how to optimize the saving for a house vs. student loan dilemma.

JessEsq

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Really good point and something I hadn't considered. Thanks.

***

I really hope others in this thread can comment as to how to optimize the saving for a house vs. student loan dilemma.

You're welcome!  And, correction, our taxes are about $370/mo on the house (purchase price $169k). Homeowners is another $111/mo. All of that is wrapped into our current payment.

As for saving for house vs. student loan - I think it's always a tough call for those in your (same as mine, before we bought) situation.

In the end, my husband and I did probably something not-so-smart -- we took a bonus I got from winning a large case and just bought the house. We had been looking for 18 months. We were limited geographically with where we wanted to live and the dream house opened up. We DID NOT have enough for 20% down, so we are paying PMI which is stupid. As soon as it makes sense, we will refi away from that. We got emotional about the decision (happily ever after and a dream home...!)

While we regret not putting full 20% down, we do not regret buying or prioritizing buying over paying the student loans. We love our house, we chill out around home and in the yard (no spending money that way!) and we will live here forever. When kids come, we have the space and are located where we want for schools.

Good luck!

ReadySetMillionaire

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You're welcome!  And, correction, our taxes are about $370/mo on the house (purchase price $169k). Homeowners is another $111/mo. All of that is wrapped into our current payment.

As for saving for house vs. student loan - I think it's always a tough call for those in your (same as mine, before we bought) situation.

In the end, my husband and I did probably something not-so-smart -- we took a bonus I got from winning a large case and just bought the house. We had been looking for 18 months. We were limited geographically with where we wanted to live and the dream house opened up. We DID NOT have enough for 20% down, so we are paying PMI which is stupid. As soon as it makes sense, we will refi away from that. We got emotional about the decision (happily ever after and a dream home...!)

While we regret not putting full 20% down, we do not regret buying or prioritizing buying over paying the student loans. We love our house, we chill out around home and in the yard (no spending money that way!) and we will live here forever. When kids come, we have the space and are located where we want for schools.

Good luck!

Thanks again for the reply. Seems like you and your husband are in the same boat as my girlfriend and me--we are waiting to buy a house we love and intend to live there forever.
« Last Edit: May 29, 2015, 02:30:13 PM by ReadySetMillionaire »

TheThirstyStag

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Grocery Bill: we're starting this weekend by going to the cheaper local grocery store. I also hope to get our budget down to about $550.

Cell Phones: I'm under contract for another 18 months and she's in need of a new phone here shortly (she has an iPhone4). We will look into alternative stuff.

Auto Repairs: I guess we take this from the emergency budget when needed and don't think of it as a "monthly" expense. We both drive like grandmas, so hopefully that reduces our repair costs.

Roth: Given that we might buy a house within 2-3 years, I don't feel comfortable having our down payment money invested. This is something she and I will have to think about more.

DirectTV: we're both huge sports fans and really haven't found a more cost effective solution. We have the medium plan and also have referred a few people, so hopefully we continue to do so and continue to receive discounts.


Cell: My SO has an iPhone 4 and it still functions just fine.  Works like a dream on Cricket.  Cut that cell bill now.  If she doesn't want the iPhone 4 anymore, buy an unlocked iPhone 5 or comparable ~2-3 year old phone and go prepaid with it.  When your contract is up, go prepaid with the same phone (after unlocking it).  Do not pay over $100 for 2 cell phones.

Auto repairs:  It's not really just about emergency fund repairs.  Your tires wear out regularly.  That's a planned expense.  You have to change the oil.  That's a planned expense.  You have to change filters and other various fluid in certain intervals.  That's an expense. You have to have it inspected every year.  That's an expense.   If you don't keep super tight maintenance and repair records like I do, you're probably better off using a mileage rate (like the IRS') that takes things like this into account.  I guarantee that your commute is costing you far more than just gas.  Catastrophic repairs are appropriate for an emergency fund, but you have plenty of other predictable costs here to budget.  Not a big deal, just a suggestion. 

Roth:  Fair enough.  However, you could always go heavy on bond index funds to drastically lower risk. 

DirecTV: Can't argue with that, as sports have always been difficult for cord cutters.  I'm a big sports fan and get away with mlb.tv (which I split with friends), over-the-air football, espn3 through my ISP for various NCAA men's bball games, etc.  I have to say I'm not feeling a lack of sports.  Also look into slingtv, as I hear it's making sports easier for cord cutters.  If you're committed, you can cut this part of your budget and still satisfy your sports needs. 


You're doing great overall.  Keep up the good work.