Hey there - I recently stumbled across Mr. Money Mustache and the more I read the more I find myself getting sucked into the world of financial independence. I'm fortunate enough to be in a pretty good starting place, but this blog has prompted a few questions. Most importantly, should I be maxing out my 401(k) right off the bat, or does it make sense for me to continue saving cash for a down payment for a house?
For some background: I am currently 23 and graduated about a year ago with no debt of any kind. I started a new job in January and my base salary is $60,000, though 28% is deducted every month for federal, state, social security and medicare taxes. Currently, I have 6% of my paycheck (or $3,600 annually) going into my 401(k) with a 6% employer match. Another 10% (the maximum amount) goes into my company's stock purchase program, which allows me to purchase shares at a 15% discount. After all these deductions (and healthcare), I am left with $2,734 each month. Of this money, $900 goes to rent and $400 covers all other expenses (I don't own a car and my company pays for a monthly public transportation pass). This means that I'm saving roughly $1,400/month in cash. At this point I already have ~$30,000 in cash with another ~$7,500 in stock in a standard brokerage account. Based on my calculations, within a year I should have $60,000+ in cash, which I hope will be sufficient for a down payment (reaching this number does require selling my stock bought through the company's purchase plan, which I am free to do at any point). I keep an extra $2,000 as a safety net and am also eligible for a decent yearly bonus from my company. I keep these excluded from my calculations so I'll have some money to fall back on if necessary. I also expect I'll receive a decent tax refund based on TurboTax's calculator.
Cost of living: In my city, housing costs are unfortunately high. The $900 I am paying for rent is definitely on the low end. I have already compromised by living in a not-so-great part of town and having multiple roommates, but am unwilling to go lower by sharing my individual room. As you can imagine, homes sell for high prices in the city too. From some preliminary research, it seems possible to land SOMETHING for around $300,000, though it would likely be a crappy condo. My only real requirements would be that it has access to public transportation and that it has 2 (or ideally 3) bedrooms.
My rationale: Looking at my total expenses, rent makes up nearly 70 percent. Since cutting spending is so fundamentally critical to preparing for early retirement, housing costs seem like the logical area for me to attack. With a multi-bedroom home, the goal is to have either one or two roommates who would pay me rent. Based on some preliminary calculations, mortgage + HOA fee for condo + insurance would probably run me somewhere around $2,000/month. If I had two roommates each paying $900 or $1,000, then boom! My housing costs are covered and I'm actually building equity instead of just throwing my money at a landlord.
My dilemma: Is this a feasible goal, and does my math check out? I know I haven't shown all my calculations though I think I've included enough info to explain how I reached my conclusions. Alternately, would I be better off to simply continue renting for a while, enabling me to max out my 401(k) and contribute to an IRA? As I keep reading up, I'm learning to appreciate the power of tax-advantaged accounts. My current thought is that it's worth postponing my investment 'stash for a year in order to significantly reduce housing costs and to start building equity. The potential savings increase seems like it would be huge. In a year, I will only be 24, so time will still be on my side. However, I understand that the earlier I can get my investments working for me, the better. I'd love to hear your thoughts - am I on the right track? Do you see any significant errors in my math or thought process? Are there ways that I could further streamline my strategies? Let me know if there's any other info I can provide to clarify my situation.