Author Topic: Reader case study: Discovering mustaches a few days too late  (Read 2235 times)

raillyn

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Reader case study: Discovering mustaches a few days too late
« on: March 31, 2016, 10:13:14 PM »
Hello, fellow budding mustachios.
I'm new to the site and looking for where to begin on my path to a full and definitely attractive mustache. I'm married, living in Charlotte, N.C., with no kids and no plans to have them.
We're early in this journey and still battling the everyday struggles of consumerism. But I talked my husband into taking his lunch to work 4/5 days this week, I shopped at Aldi this week instead of Harris Teeter, and we've cancelled several subscriptions and other monthly expenses over the last couple of weeks, so there's visible progress. I'm looking for the best place to start taking bigger steps, with one big car problem.
Let me start by saying that I found this site and philosophy about 5 days too late. I recently had engine failure in my old car, and when it came time to buy a new one, I went for what I will now call the stupid option: a 2013 Chevy Equinox, with a $2,000 down payment and a $17,000 bank loan. The semi-bright side? My credit union lent me the money at 1.99%.
I know now that I should have looked at something half that cost or less that didn't require a loan. But the payment was $50 less than my former car payment, so at the time, I thought I was going in the right direction.
Since the deal is done and I'll have to come up with at least another $4,000 based on KBB value (to account for the immediate depreciation if I sold it back), plus the additional taxes and fees for another car and the lost $2,000 down payment, I'm not sure that's not an option. But maybe I'm wrong about the cost vs. savings?

Here's our stats:

Income and assets
My take-home monthly pay: $3,000
Husband's take-home pay: $1,800 after 401K contribution to get company match.
Mutual fund: ~$16,000
Husband's 401k: $15,000
My IRA: $7,500
Cash in checking/savings: $9,500
2006 Toyota Corolla, paid off

Expenses
Mortgage: We owe ~$101,000, worth ~$119,000. Monthly payments of $815, 3.25% rate. Mortgage insurance included for two more years.
Car loan on 2013 Equinox: $301/month for 60 months, 1.99% interest rate. $17175 to pay off today.
Car insurance: $80
Utilities: $240
Cell phones: $34
Internet: $50
Netflix and SlingTV: $29
Groceries: $400 avg. over last three months (Working on this one; headed to Costco this weekend)
Restaurants and fast food: $400 avg. over last three months (working on this one, too.)
Gas: $110 avg. over last three months

We do both need our cars, since we each work about 30 minutes from home in opposite directions. I'm a newspaper editor, and try to work at home when possible.
Husband's car was recently paid off, and he's been putting the extra $300/month into our savings account to build up a "six-month emergency fund."


So my questions:
1) Instead of saving that $300/month from husband's car payoff, should we be using that to instead pay off the new car loan in half the time? I calculate that to be a savings of about $450. Based on the incredibly scientific method of plugging numbers into an internet investment calculator, it seems like it might be better to take that $300 and put it in an index fund, which would gain $4,150 at 7% over the 5-year life of the car loan. But I might be missing something here?

2) We pay about $150 extra in principal on the mortgage each month with the goal of getting the equity up above 21% by March 2018, when we can have the mortgage insurance removed and save about $115 month. Would it be better for us to be putting that money in an index fund for now, and pull it out to pay down the loan balance after March 2018 to remove the insurance?

3) We've been trying to build up our emergency fund based on the generic personal finance idea that "you should have 6 months' worth of expenses saved up." But it seems like those dollars aren't working for us if they're sitting in a basically zero-interest savings or checking account. Is it safe enough to have all of that money invested if we suddenly had a big, unexpected expense? Is there a safe number that's less than "6 months' expenses?"

4) To add another layer of dope-ery, I still have the old car. I owe about $2,800 on it. My goal when it was paid off in 8 months was to give it to my soon-to-be-16-year-old brother, so my mom's making the payments now. It needs a new engine, which is looking like it'll cost us a good $2,000-$3,000, plus the remaining loan payments. Does that sound unreasonable? It seems if we still have to pay $2,800 on the loan, we might as well get whatever we can out of it by replacing with a junkyard engine. But maybe we'd be better off selling for scrap and buying him another cheap-o car?

Thanks for your guidance!

DebtFreeBy25

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Re: Reader case study: Discovering mustaches a few days too late
« Reply #1 on: March 31, 2016, 11:05:12 PM »
So my questions:
1) Instead of saving that $300/month from husband's car payoff, should we be using that to instead pay off the new car loan in half the time? I calculate that to be a savings of about $450. Based on the incredibly scientific method of plugging numbers into an internet investment calculator, it seems like it might be better to take that $300 and put it in an index fund, which would gain $4,150 at 7% over the 5-year life of the car loan. But I might be missing something here?

2) We pay about $150 extra in principal on the mortgage each month with the goal of getting the equity up above 21% by March 2018, when we can have the mortgage insurance removed and save about $115 month. Would it be better for us to be putting that money in an index fund for now, and pull it out to pay down the loan balance after March 2018 to remove the insurance?

3) We've been trying to build up our emergency fund based on the generic personal finance idea that "you should have 6 months' worth of expenses saved up." But it seems like those dollars aren't working for us if they're sitting in a basically zero-interest savings or checking account. Is it safe enough to have all of that money invested if we suddenly had a big, unexpected expense? Is there a safe number that's less than "6 months' expenses?"

4) To add another layer of dope-ery, I still have the old car. I owe about $2,800 on it. My goal when it was paid off in 8 months was to give it to my soon-to-be-16-year-old brother, so my mom's making the payments now. It needs a new engine, which is looking like it'll cost us a good $2,000-$3,000, plus the remaining loan payments. Does that sound unreasonable? It seems if we still have to pay $2,800 on the loan, we might as well get whatever we can out of it by replacing with a junkyard engine. But maybe we'd be better off selling for scrap and buying him another cheap-o car?

Thanks for your guidance!

1. The goal will be to purchase the next car for your husband in cash when the time comes. I would invest the $300/month in an index fund and plan to use it when his car dies.

2. Theoretically, yes, it makes more sense to invest if the average annual rate of return is greater than your APR on the mortgage. Obviously, your investments aren't guaranteed to gain value, and that should factor into your decision-making especially if you'll need to access the funds sooner rather than later.

3. How stable are your jobs? What would you do if one of you lost your present job or were unable to work? What types of major expenses might you encounter as homeowners? Your answers to those questions will influence how much you really need in an emergency fund. Six months of expenses is a good safety net for most people. I'd only recommend a lower amount if you have other resources you could tap in an emergency (likely not the case) or a lot of fat that could be trimmed if need be. You have some fat that can be trimmed from eating out and groceries, so you could factor the six months of expenses based on a more frugal budget.

4. What is the estimated value of the car in its current condition? How many miles are on it? What kind of maintenance has it received? What is general reliability of the particular make and model for that year? (Ie. Is it known to be high maintenance or have other costly issues?) What would a comparable used car cost in your area?

Is this car worth $5-6k? Google "loss aversion and the sunk cost fallacy". You may be in a "throwing good money after bad" situation with this car.

 

GrowingTheGreen

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Re: Reader case study: Discovering mustaches a few days too late
« Reply #2 on: April 01, 2016, 07:31:19 AM »
1) From a pure percentage standpoint, yes this makes sense. The Mustachian way to do things though would be to find a less expensive vehicle. Rerun the numbers on your car. Are your really down $4k on a used car you just bought? Used cars don't generally have the"it loses 30% when you drive it off the lot" deal that new cars do. If that's the case, then perhaps you overpaid.

2) The PP didn't mention the effect of you ditching the PMI. Yes. Pay it down faster until you can get rid of PMI. After that, invest.

3) I do 6 months. This is a personal decision that requires you to take job stability and health into account.

4) let your mother keep paying the payments if she wants to. Why not let your brother pay for the engine replacement? Nothing wrong with him learning how to save up for things like this. It's how the world works!

Sibley

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Re: Reader case study: Discovering mustaches a few days too late
« Reply #3 on: April 01, 2016, 10:23:54 AM »
Make sure you do all maintenance timely on both your cars to keep them in good condition for as long as possible. I say that because the engine died in your old car, and to me that sounds like poor maintenance. (I'm not a mechanic, but dirty oil isn't good for cars.) If poor maintenance caused your problems, then shame on you and get your act together immediately, then keep it together.

Otherwise, you're in better shape than many. With your mutual fund, that's a pretty decent emergency fund if you need it, so I'd use the $300 to pay down the new car. Keep working on your groceries and dining out (cut out fast food, your health and budget will thank you for it).

Depending on your house and habits, I'd look into if there's things you could do to cut down utilities as well. There's often simply habit changes you can do, or switch out lightbulbs, etc that will help.