Author Topic: Reader Case Study - Beginning FI - Debt payoff vs Investing  (Read 5156 times)

Fiscal_Hawk

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Reader Case Study - Beginning FI - Debt payoff vs Investing
« on: November 20, 2016, 10:24:12 AM »
Life Situation:
My wife and I have been married for a couple years (just made it into our 30's!) and are planning on having kids soon so we have been taking a harder look at our finances. Overall, we have been doing good, but wanted to do a better job removing debt and eventually being FI, so here we are! We live in Iowa so luckily the COL is fairly low. We own a home which we bought a year ago (1960's ranch). Our big issue is putting our "retained" money into retirements/ investing or paying down our student loans and mortgage. More details below, but we owe 48k on student loans.

Gross wages: We currently have a combined household income of 90k. That went up about 15k (from 75k) this year as we moved back to Iowa to be close to family and my wife got a promotion in doing so.

Pre-Tax Deductions: Currently, we both contribute to our 401k's at the company match. Mine is 3%. My wife's is 5%. We also have our health insurance - no HSA. Also have life insurance, disabillity insurance etc.

AGI: 80k after pre-tax deductions

Taxes: This is our first year at this income level so federal taxes are about 16k. State and local taxes add up to about 5k. This is an estimate. If anyone has more info here, it would be appreciated.

Take home is about 5k per month

Current Expenses:
Mortgage $970 per month (140k at 4% also includes property taxes)
-P&I is around $670 and T&I around $300
Utilities: Around $250 per month on average
Cell phone: $140 per month
Directv and Internet: $100 per month
Car loan: $190 per month
Car Insurance: $63 per month (paid bi-annually)
Gas: $120 per month
Groceries: $250 per month
Dining Out: $200 per month (based on 2015 average)
Gym: $25 per month
Dog Expenses: $30 per month 2338
Monthly prescriptions: $25 per month
Student Loans: $550 per month
Misc/Entertainment: $100-200 per month

Monthly expenses: Around $3100 per month

Assets: Our only retirement assets are in 401k's, Roth IRA's, and mutual funds: Total is about 55k currently.
We do have 22k cash in our savings and checking combined. After reading MMM for the last couple weeks, I realize that is too much. How do we properly utilize that?

We have two vehicles; one is paid off. One has a loan (see below):

Liabilities: Our house - 140k mortgage, which we owe about 130k left. 30 year loan @ 4%
One car (Ford Escape) - 9k loan at 4 years @ 2.4% (considering paying this off with cash in savings) Just bought this a couple months ago.

Student Loans- My wife owes 22k@5%. I owe 26k @ 6.5%. Monthly payments are $550. I went back to school late and graduated May of 2015. My wife graduated from grad school two years ago. As of right now, my student loans will end in 2025. My wife will be done in 2022. Obviously, we would like to accelerate that.

Questions:
1) With about $1900 per month "leftover" should we throw that at the student loans? Invest more in retirement/investments? A little bit of both? Toss it at the mortgage? This is our main area of uncertainty and confusion. We want to be FI and kick back in our 50's teaching part time at a college or some other optional employment. That gives us 20 years or less to work on this. At the same time, we want to raise a small family.

2) Are there any suggestions for improvement in expenses? We are open to cutting back and being a bit more frugal.

3) We plan to start our family very soon, and I was curious how to financially plan for this? Is that a thing? I have estimated daycare costs and other baby expenses as well. I estimated around 1k per month. We are both fine with working, but of course would be open to exploring reduced or single income if possible.




doneby35

  • Bristles
  • ***
  • Posts: 280
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #1 on: November 20, 2016, 10:41:49 AM »
I would say your first priority would be to pay the student loans and then contribute more the pre-tax retirement accounts.

As far as your expenses go, $140 for cellphone is too much, you can cut that down to $40 if you use a service like Republic Wireless. $100 for DirecTV and internet, if you can live without DirecTV, then you can get rid of that too and cut your expense in half.
If you can limit dining out to $100 instead of $200 or even better get rid of it completely, that would help too. Me and my spouse do not even go out to eat, we cook everything and if you don't have much time to cook on a daily basis, what we do is cook everything on a sunday and store them in containers in the fridge and then just grab and go.

bridget

  • Pencil Stache
  • ****
  • Posts: 597
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #2 on: November 20, 2016, 12:34:05 PM »

...

We do have 22k cash in our savings and checking combined. After reading MMM for the last couple weeks, I realize that is too much. How do we properly utilize that?

...

One car (Ford Escape) - 9k loan at 4 years @ 2.4% (considering paying this off with cash in savings) Just bought this a couple months ago.

Student Loans- My wife owes 22k@5%. I owe 26k @ 6.5%. Monthly payments are $550. I went back to school late and graduated May of 2015. My wife graduated from grad school two years ago. As of right now, my student loans will end in 2025. My wife will be done in 2022. Obviously, we would like to accelerate that.

Questions:
1) With about $1900 per month "leftover" should we throw that at the student loans? Invest more in retirement/investments? A little bit of both? Toss it at the mortgage?

...


I don't think you should use your savings to kill the car loan. I understand that this is the Dave Ramsey theory of "snowballing" - killing your smallest debt first for the psychological boost of seeing it go away. But the better way is to ask the more mathematically savvy question, which is - how can you make your spare dollars work the hardest for you? Throwing $ at the car loan is going to buy you 2.4% annually on $9k. That is not a lot of purchasing power. The tax savings of maxing out a 401(k) + a lifetime of growth or 6.5% savings on $22k are way better buys for that same amount of money.

If it were me, I would do the following:

1) figure out how much cash I *really* need hanging out in checking. For me, I keep about 2/3 of a month's worth of expenses in there. It's enough to always keep me a paycheck ahead on regular expenses. When unexpected expenses come my way, I use my "springy debt" of my credit card (always paid in full) to buy me ~45 days, which is about 3 paychecks. This gives me the time I need to move money around to cover the unexpected expense (for example, by turning off my automatic direct deposit to my brokerage account for a paycheck or two). If it's a really big expense, it gives you a few weeks to line up a home equity loan or something similar, with a much lower interest rate than the credit card.

So, let's say you find you decide you only really need $2k in your checking account - that gives you $20k to work for you, as well as $1900/mo (without adjusting your lifestyle at all, which I'll let other people focus on).

2a) Send that $20k immediately to your 6.5% student loan. This will mean that your monthly student loan payment should drop significantly pretty soon - then you'll have even more than $1900/mo lying around for you to put to work for you.

2b) Increase your contributions to your 401(k)s by a lot - like, $1500/mo or so or unless you hit the maximum contributions.

3) with the extra $400 lying around each month, + whatever you save in loan payments after your loan is dead, start making extra payments toward your wife's 5% student loan.

4) after both student loans are dead, send all extra $ each month to a taxable brokerage account (ideally via direct deposit, so you never see it or take it into your budget).

5) continue paying the house and car according to the normal payment schedule. The interest rates are low enough that I think it's to your advantage to leverage that debt to free up investments. Note that for the mortgage, you are JUST on the edge where a lot of reasonable people disagree about whether you should make extra payments or not - under 4% it seems like you should definitely pay on schedule, and over 4% it starts making more sense to pay ahead. So, that portion of it should be according to your own comfort level. For the car, keep capitalizing on the 2.4% interest rate and send your money to more useful places.

cincystache

  • Stubble
  • **
  • Posts: 204
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #3 on: November 20, 2016, 01:57:10 PM »
Are you both maxing out a Roth IRA? If not, I would take 11,000 of that cash and max out your 2016 Roth IRAs for both you and your spouse.

Then proceed to the other stuff people listed.

Roth IRA's are nice compromises between "Should I pay off debt or invest" because if you ever had to/wanted to, you can tap into contributions at any time without penalty to pay off your debt or cover a job loss etc.

That being said, tapping a Roth account would be my absolute last resort in an emergency.

Fiscal_Hawk

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #4 on: November 20, 2016, 02:16:35 PM »
Are you both maxing out a Roth IRA? If not, I would take 11,000 of that cash and max out your 2016 Roth IRAs for both you and your spouse.


No, we are not currently doing that. It is something we will be taking advantage of in the future. We just weren't sure if we should throw all the "extra" income at the student loans first or invest some of it as we are tackling the debt. Thanks for the input!

Fiscal_Hawk

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #5 on: November 20, 2016, 02:48:35 PM »

...

We do have 22k cash in our savings and checking combined. After reading MMM for the last couple weeks, I realize that is too much. How do we properly utilize that?

...

One car (Ford Escape) - 9k loan at 4 years @ 2.4% (considering paying this off with cash in savings) Just bought this a couple months ago.

Student Loans- My wife owes 22k@5%. I owe 26k @ 6.5%. Monthly payments are $550. I went back to school late and graduated May of 2015. My wife graduated from grad school two years ago. As of right now, my student loans will end in 2025. My wife will be done in 2022. Obviously, we would like to accelerate that.

Questions:
1) With about $1900 per month "leftover" should we throw that at the student loans? Invest more in retirement/investments? A little bit of both? Toss it at the mortgage?

...


I don't think you should use your savings to kill the car loan. I understand that this is the Dave Ramsey theory of "snowballing" - killing your smallest debt first for the psychological boost of seeing it go away. But the better way is to ask the more mathematically savvy question, which is - how can you make your spare dollars work the hardest for you? Throwing $ at the car loan is going to buy you 2.4% annually on $9k. That is not a lot of purchasing power. The tax savings of maxing out a 401(k) + a lifetime of growth or 6.5% savings on $22k are way better buys for that same amount of money.

If it were me, I would do the following:

1) figure out how much cash I *really* need hanging out in checking. For me, I keep about 2/3 of a month's worth of expenses in there. It's enough to always keep me a paycheck ahead on regular expenses. When unexpected expenses come my way, I use my "springy debt" of my credit card (always paid in full) to buy me ~45 days, which is about 3 paychecks. This gives me the time I need to move money around to cover the unexpected expense (for example, by turning off my automatic direct deposit to my brokerage account for a paycheck or two). If it's a really big expense, it gives you a few weeks to line up a home equity loan or something similar, with a much lower interest rate than the credit card.

So, let's say you find you decide you only really need $2k in your checking account - that gives you $20k to work for you, as well as $1900/mo (without adjusting your lifestyle at all, which I'll let other people focus on).

2a) Send that $20k immediately to your 6.5% student loan. This will mean that your monthly student loan payment should drop significantly pretty soon - then you'll have even more than $1900/mo lying around for you to put to work for you.

2b) Increase your contributions to your 401(k)s by a lot - like, $1500/mo or so or unless you hit the maximum contributions.

3) with the extra $400 lying around each month, + whatever you save in loan payments after your loan is dead, start making extra payments toward your wife's 5% student loan.

4) after both student loans are dead, send all extra $ each month to a taxable brokerage account (ideally via direct deposit, so you never see it or take it into your budget).

5) continue paying the house and car according to the normal payment schedule. The interest rates are low enough that I think it's to your advantage to leverage that debt to free up investments. Note that for the mortgage, you are JUST on the edge where a lot of reasonable people disagree about whether you should make extra payments or not - under 4% it seems like you should definitely pay on schedule, and over 4% it starts making more sense to pay ahead. So, that portion of it should be according to your own comfort level. For the car, keep capitalizing on the 2.4% interest rate and send your money to more useful places.

Thanks a bunch for the well thought out response. I like the idea of forgoing my idea to pay off the car and instead apply that to the student loans with the highest interest rate.

I like your strategy towards tackling the debt but also throwing a lot more into the retirement account.

Eco_eco

  • 5 O'Clock Shadow
  • *
  • Posts: 21
  • Location: Wellington, New Zealand
    • Nineteen-Six.com
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #6 on: November 20, 2016, 07:23:45 PM »
Just to add another thought - if you uncomfortable with allocating funds to long term investments rather than debt payments remember that debts always drop as make the minimum payments, while investment never grow if you don't start them.

An idea that worked for me was to create a spreadsheet that forecast out a few years of our financial future. I projected out my investment balances and growth, my debt balances and their reduction, my likely income growth and some options about how we could keep our lifestyle investments at more or less where they are today. This led me to only make minimum debt payments for a few years while I got our investments underway, before then starting to pay down debt. This led us to constrain our lifestyle in way we probably wouldn't if we had cleared out the debt.

It felt constraining while we carried the large debt in our early 20s but it was great to see our investments grow and our debt fall way in our 30s.

handsnhearts

  • Bristles
  • ***
  • Posts: 273
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #7 on: November 21, 2016, 08:28:16 AM »
Just to add another thought - if you uncomfortable with allocating funds to long term investments rather than debt payments remember that debts always drop as make the minimum payments, while investment never grow if you don't start them.

An idea that worked for me was to create a spreadsheet that forecast out a few years of our financial future. I projected out my investment balances and growth, my debt balances and their reduction, my likely income growth and some options about how we could keep our lifestyle investments at more or less where they are today. This led me to only make minimum debt payments for a few years while I got our investments underway, before then starting to pay down debt. This led us to constrain our lifestyle in way we probably wouldn't if we had cleared out the debt.

It felt constraining while we carried the large debt in our early 20s but it was great to see our investments grow and our debt fall way in our 30s.

Eco, can you tell me how you did this?  I know I have some higher interest dept to pay off (student loans) but I think it might motivate me more to see the scenarios play out, rather than trust someone else's math.  How did you set up this forecast?

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10455
  • Age: 61
  • Location: NorCal
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #8 on: November 21, 2016, 11:49:23 AM »
Just to add another thought - if you uncomfortable with allocating funds to long term investments rather than debt payments remember that debts always drop as make the minimum payments, while investment never grow if you don't start them.

An idea that worked for me was to create a spreadsheet that forecast out a few years of our financial future. I projected out my investment balances and growth, my debt balances and their reduction, my likely income growth and some options about how we could keep our lifestyle investments at more or less where they are today. This led me to only make minimum debt payments for a few years while I got our investments underway, before then starting to pay down debt. This led us to constrain our lifestyle in way we probably wouldn't if we had cleared out the debt.

It felt constraining while we carried the large debt in our early 20s but it was great to see our investments grow and our debt fall way in our 30s.
Eco-Eco, this is brilliant! I hope you'll start a journal so others can learn from your experience.

Fiscal_Hawk

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #9 on: November 21, 2016, 01:28:39 PM »
Just to add another thought - if you uncomfortable with allocating funds to long term investments rather than debt payments remember that debts always drop as make the minimum payments, while investment never grow if you don't start them.

An idea that worked for me was to create a spreadsheet that forecast out a few years of our financial future. I projected out my investment balances and growth, my debt balances and their reduction, my likely income growth and some options about how we could keep our lifestyle investments at more or less where they are today. This led me to only make minimum debt payments for a few years while I got our investments underway, before then starting to pay down debt. This led us to constrain our lifestyle in way we probably wouldn't if we had cleared out the debt.

It felt constraining while we carried the large debt in our early 20s but it was great to see our investments grow and our debt fall way in our 30s.
Eco-Eco, this is brilliant! I hope you'll start a journal so others can learn from your experience.

I agree on his idea.

I'm new here and a lot of posters talk about the journals. Where are these located? TIA

Eco_eco

  • 5 O'Clock Shadow
  • *
  • Posts: 21
  • Location: Wellington, New Zealand
    • Nineteen-Six.com
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #10 on: November 21, 2016, 03:00:04 PM »

Eco, can you tell me how you did this?  I know I have some higher interest dept to pay off (student loans) but I think it might motivate me more to see the scenarios play out, rather than trust someone else's math.  How did you set up this forecast?

Sure - I've typed up a post on my (new) blog about my first financial plan. Please remember is was 2001 when I first did this so there's some errors and assumptions but it gives you the idea. Here's the link:
https://www.nineteen-six.com/2016/11/22/my-first-long-term-plan-2001/

What was cool about doing this at the time was that it showed me how little of our combined income I needed to use in order to be financially independent. I hope its useful.

Fiscal_Hawk

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #11 on: November 21, 2016, 06:55:49 PM »

Eco, can you tell me how you did this?  I know I have some higher interest dept to pay off (student loans) but I think it might motivate me more to see the scenarios play out, rather than trust someone else's math.  How did you set up this forecast?

Sure - I've typed up a post on my (new) blog about my first financial plan. Please remember is was 2001 when I first did this so there's some errors and assumptions but it gives you the idea. Here's the link:
https://www.nineteen-six.com/2016/11/22/my-first-long-term-plan-2001/

What was cool about doing this at the time was that it showed me how little of our combined income I needed to use in order to be financially independent. I hope its useful.

Did you really have student loans with interest rates at 9.6%? Wow.

Do you still have those loans out, if so?


Eco_eco

  • 5 O'Clock Shadow
  • *
  • Posts: 21
  • Location: Wellington, New Zealand
    • Nineteen-Six.com
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #12 on: November 21, 2016, 07:05:11 PM »

Did you really have student loans with interest rates at 9.6%? Wow.

Do you still have those loans out, if so?

Yup - at the time the student loan policy here in New Zealand was the commercial rate of interest + a premium, making my rate 9.6%. These days there is no interest on loans.

No - I've paid the loans back. The point of this first plan was to work out how much of income would be needed to build up a property portfolio that would provide financial security in our middle years. Once we had that we used the surplus income to pay down the student loan and save for other purposes. The plan helped us make the decision to go ahead and buy property rather than automatically paying the loans down.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3084
  • Age: 37
  • Location: Texas
    • Years in the making, I created a journal!
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #13 on: November 22, 2016, 05:17:41 AM »
Are you both maxing out a Roth IRA? If not, I would take 11,000 of that cash and max out your 2016 Roth IRAs for both you and your spouse.


No, we are not currently doing that. It is something we will be taking advantage of in the future. We just weren't sure if we should throw all the "extra" income at the student loans first or invest some of it as we are tackling the debt. Thanks for the input!

I want to second this opinion.  At your current tax rate, the student loan interest is fully deductible and the rate isn't quite as bad as you think it is.  I would fully fund the Roth IRAs then use the $8,000/yr leftover and attack the extra debt.   You have 30+ years for the money to grow tax free in a Roth IRA.   

Fiscal_Hawk

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #14 on: November 22, 2016, 09:36:04 AM »
Are you both maxing out a Roth IRA? If not, I would take 11,000 of that cash and max out your 2016 Roth IRAs for both you and your spouse.


No, we are not currently doing that. It is something we will be taking advantage of in the future. We just weren't sure if we should throw all the "extra" income at the student loans first or invest some of it as we are tackling the debt. Thanks for the input!

I want to second this opinion.  At your current tax rate, the student loan interest is fully deductible and the rate isn't quite as bad as you think it is.  I would fully fund the Roth IRAs then use the $8,000/yr leftover and attack the extra debt.   You have 30+ years for the money to grow tax free in a Roth IRA.

Thanks for the response. Any particular reason why you recommend fully funding a Roth IRA versus increasing our 401k contributions?

bridget

  • Pencil Stache
  • ****
  • Posts: 597
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #15 on: November 22, 2016, 09:40:12 AM »
I don't want to speak for anyone else, but a Roth IRA gives you more investment options - you can open one at Vanguard and choose your funds instead of being stuck with whatever your employer offers. You can also withdraw it without penalty sooner, in case you want to use it before traditional retirement age.

BMEPhDinCO

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #16 on: November 22, 2016, 12:22:24 PM »
I want to point out that some of that $22k cash is most likely earmarked for an emergency fund, right? So I would tier that...

1-2 months in cash (around $6k, for you)
1-4 months in RothIRA (around $11k max, for you)

Then, mental math or not, I would take the $5k and dump it on the car loan. I would then take the $1900 (and if you went tight for a few months, then $2k) and pay off the car loan by the end of Dec/Jan. Why? Because it is so freeing to reduce debt - and it makes it easier to focus on other things.

Then, starting in 2017, you should have $2,100 per month extra. Put $1000 into the highest student loan. Put $800 into Roths or IRAs (your choice here, look at taxes and decide...) - that won't completely max it out, but comes close. Put $150 each into the 401ks extra. Do this for the next 2 years and you should be down to 1 student loan and the mortgage. Do it for 4 years and you'll be done with everything but the mortgage. Then you'll have the ability to max the RothIRA (or tIRA) and contribute a ton to a new baby and retirement.

If you want to start a family sooner, ignore everything after IRA and cash savings. Instead, keep the $5k for the baby's first year, your wife being at home, complications, etc. Take the $2k each month and dump it onto the student loan (75%) and the car loan (10%) and the RothIRA (15%).

bridget

  • Pencil Stache
  • ****
  • Posts: 597
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #17 on: November 22, 2016, 12:29:07 PM »
I want to point out that some of that $22k cash is most likely earmarked for an emergency fund, right?
...

I think people have widely varying opinions about whether an emergency fund is even necessary, and if so, how much. My $2-3k in checking is my emergency fund; I use springy debt for anything that can't be absorbed by that amount. http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

Lots of people aren't comfortable with that, but I'm convinced you maximize your money and investments this way. But since you mentioned the psychological freedom of killing the car loan despite the fact that it's objectively the least financially lucrative move suggests you prioritize peace of mind over optimizing savings (which I want to note is totally fine, just not my preferred way of doing things). 

Fiscal_Hawk

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #18 on: November 22, 2016, 01:09:44 PM »
I want to point out that some of that $22k cash is most likely earmarked for an emergency fund, right? So I would tier that...


Correct. We had that as an e-fund as were kind of (very loosely) following the Dave Ramsey theory of 6 months expenses in savings. Then, I found this blog and well it has changed my perspective a bit.

I'm still not sure which route to go on the student loans vs. investing, but I do think the first step we will take is increasing our allocation of funds to retirement. I am going to take a look at our 401k's and then see what the options are for funds there. If they aren't good I may go the IRA route. The more I look into it, the more I am changing my tune on some things. This blog/forum has me thinking in a new way.

What are your thoughts on ROTH IRA vs Traditional? We are now into the 25% bracket.

 

BMEPhDinCO

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #19 on: November 22, 2016, 02:46:20 PM »

What are your thoughts on ROTH IRA vs Traditional? We are now into the 25% bracket.

I would still keep at least 1 month (2 if you plan on having a baby in the next year...) in cash.

As for the IRA options - I picked the tIRA this year for my family since it lowered us back into the 15% tax bracket and reduced our income to avoid AMT. The numbers for that:
$83,800 and over = AMT
$75,200 and less = 15% tax bracket
(Keep in mind, AMT doesn't include the standard deductions, so unless you put at least $6,300 into SOMETHING pre-tax, you will be hit with it.)

So if you make $90k, and put $7000 into a 401k and 11k into a tIRA, you are now in the 15% bracket.  However, if you put $18k into a 401k, you'd be in the same boat taxwise, but then any extra could go into a RothIRA. Really, you have $47k to play with in terms of tax balancing. I would say with your income though, you can easily get into the 15% bracket and should try to do so. You can even put some of your savings into it (but with a tIRA, you can't (easily) touch it again for awhile).

The other thing to keep in mind with a Roth is that you can withdraw the contributions ... there are some rules there, but it can serve as a backup EF if needed.

TheInsuranceMan

  • Bristles
  • ***
  • Posts: 389
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #20 on: November 22, 2016, 02:57:34 PM »
Life Situation:
My wife and I have been married for a couple years (just made it into our 30's!) and are planning on having kids soon so we have been taking a harder look at our finances. Overall, we have been doing good, but wanted to do a better job removing debt and eventually being FI, so here we are! We live in Iowa so luckily the COL is fairly low. We own a home which we bought a year ago (1960's ranch). Our big issue is putting our "retained" money into retirements/ investing or paying down our student loans and mortgage. More details below, but we owe 48k on student loans.

Gross wages: We currently have a combined household income of 90k. That went up about 15k (from 75k) this year as we moved back to Iowa to be close to family and my wife got a promotion in doing so.

Pre-Tax Deductions: Currently, we both contribute to our 401k's at the company match. Mine is 3%. My wife's is 5%. We also have our health insurance - no HSA. Also have life insurance, disabillity insurance etc.

AGI: 80k after pre-tax deductions

Taxes: This is our first year at this income level so federal taxes are about 16k. State and local taxes add up to about 5k. This is an estimate. If anyone has more info here, it would be appreciated.

Take home is about 5k per month

Current Expenses:
Mortgage $970 per month (140k at 4% also includes property taxes)
-P&I is around $670 and T&I around $300
Utilities: Around $250 per month on average
Cell phone: $140 per month
Directv and Internet: $100 per month
Car loan: $190 per month
Car Insurance: $63 per month (paid bi-annually)
Gas: $120 per month
Groceries: $250 per month
Dining Out: $200 per month (based on 2015 average)
Gym: $25 per month
Dog Expenses: $30 per month 2338
Monthly prescriptions: $25 per month
Student Loans: $550 per month
Misc/Entertainment: $100-200 per month

Monthly expenses: Around $3100 per month

Assets: Our only retirement assets are in 401k's, Roth IRA's, and mutual funds: Total is about 55k currently.
We do have 22k cash in our savings and checking combined. After reading MMM for the last couple weeks, I realize that is too much. How do we properly utilize that?

We have two vehicles; one is paid off. One has a loan (see below):

Liabilities: Our house - 140k mortgage, which we owe about 130k left. 30 year loan @ 4%
One car (Ford Escape) - 9k loan at 4 years @ 2.4% (considering paying this off with cash in savings) Just bought this a couple months ago.

Student Loans- My wife owes 22k@5%. I owe 26k @ 6.5%. Monthly payments are $550. I went back to school late and graduated May of 2015. My wife graduated from grad school two years ago. As of right now, my student loans will end in 2025. My wife will be done in 2022. Obviously, we would like to accelerate that.

Questions:
1) With about $1900 per month "leftover" should we throw that at the student loans? Invest more in retirement/investments? A little bit of both? Toss it at the mortgage? This is our main area of uncertainty and confusion. We want to be FI and kick back in our 50's teaching part time at a college or some other optional employment. That gives us 20 years or less to work on this. At the same time, we want to raise a small family.

2) Are there any suggestions for improvement in expenses? We are open to cutting back and being a bit more frugal.

3) We plan to start our family very soon, and I was curious how to financially plan for this? Is that a thing? I have estimated daycare costs and other baby expenses as well. I estimated around 1k per month. We are both fine with working, but of course would be open to exploring reduced or single income if possible.

Curious where you are at in Iowa, as I'm another Hawk from the best state in the nation.
Daycare and baby expenses might be a bit light, but that is dependent on your location.  We paid $500 a month for our first child, paid between $800-$1000 for two kids, and we are very, very rural.  I have relatives in and around Des Moines that are close to $1,500 a month in daycare costs alone.

I'd contribute enough to your retirement to get the full contribution from your employer, and put the rest on student loans (I should practice what I preach...).  And, paying off the car loan is an awfully good idea, in my mind.  Yes, your student interest is higher than the car loan, but I'd pay the car off first. 

And, this is soooo similar to my wife and I.  Gross around 80-85k, car loan at 2.9%, student loans down to 15k from 42k (sold our last house, took the profit and put it on our loans).  Similar age as well, She turns 28 next month, I turn 29 in January.  Neat to have someone with such similar finances and ages to me, let alone in the same general LCOL area. 


**Editing to add that fully funding both IRAs would be probably the best plan with the extra cash you have, and then use the remainder (less what you want as your cushion) for debt repayment
« Last Edit: November 22, 2016, 03:01:07 PM by TheInsuranceMan »

Fiscal_Hawk

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #21 on: November 23, 2016, 08:05:36 AM »


Curious where you are at in Iowa, as I'm another Hawk from the best state in the nation.
Daycare and baby expenses might be a bit light, but that is dependent on your location.  We paid $500 a month for our first child, paid between $800-$1000 for two kids, and we are very, very rural.  I have relatives in and around Des Moines that are close to $1,500 a month in daycare costs alone.

I'd contribute enough to your retirement to get the full contribution from your employer, and put the rest on student loans (I should practice what I preach...).  And, paying off the car loan is an awfully good idea, in my mind.  Yes, your student interest is higher than the car loan, but I'd pay the car off first. 

And, this is soooo similar to my wife and I.  Gross around 80-85k, car loan at 2.9%, student loans down to 15k from 42k (sold our last house, took the profit and put it on our loans).  Similar age as well, She turns 28 next month, I turn 29 in January.  Neat to have someone with such similar finances and ages to me, let alone in the same general LCOL area. 


**Editing to add that fully funding both IRAs would be probably the best plan with the extra cash you have, and then use the remainder (less what you want as your cushion) for debt repayment

Good to see another Iowan on the boards. We are located in Northeast Iowa. Where about in the state are you?

I've priced out daycare options in our area and they range from $700-1000 generally. There are some in home daycare options that are slightly cheaper but that will probably depend on timing.

I think we are going to increase our retirement contributions to around 8-10% for each of us. That will also lower our tax burden. From there, we will attack our student loans. They have a bit higher interest rate than the car and it feels like a noose to me right now! However, I really want to invest because that train needs some power to get rolling. We want to implement our plan January 1 and so this site has really helped us look at things from a different perspective.

It's really cool to see someone in a very similar situation so I appreciate your advice. You mentioned how you sold your house. Did you buy a new one or are you renting now? Also, if I may ask, how are you handling retirement and investment?

norabird

  • Walrus Stache
  • *******
  • Posts: 7948
  • Location: Brooklyn NY
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #22 on: November 23, 2016, 08:49:15 AM »
Your investment and payoff plan sounds good to me. Also seconding the advice to reduce your cell phone costs. Even just switching existing phones to Kitty Wireless or Straight Talk Wireless will help.

TheInsuranceMan

  • Bristles
  • ***
  • Posts: 389
Re: Reader Case Study - Beginning FI - Debt payoff vs Investing
« Reply #23 on: November 23, 2016, 10:38:56 AM »
We are in north central Iowa, about an hour away from the nearest decent sized city, which is just perfect for me :)