Author Topic: Reader Case Study– Financial Plan of Attack (Beginning from a negative position)  (Read 2939 times)

wtrfre

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Starting from the very beginning trying to plan a financial future, as a 30-something with two early elementary age kids.  A recent move and new job leave specific income & expenses up in the air a bit.

Income: Best guess net $4,200/mo.

Current expenses:
$1,100 Rent
$700+ Childcare, this is a base month cost, goes up from here depending on school and work schedules.
 $180 Student Loan
$120 Gas
$400? Groceries (need to track this to get a better number)
$215 Insurance (car, renters, life, health)
$300? Utilities (guessing based on other places I’ve lived, hoping this is high)
$45 Internet
$80 Phones
$17 Netflix
Misc. clothes, field trips, holidays, ect.

$3,150 on basics, then add extra childcare and misc.
I plan to work on getting better inflow and outflow numbers in the near future.  I know there are choices and things I can do better on in this respect, but that is not my main purpose right now.  This information is more as a reference for my starting point.

Assets:
Car – KBB $3,000
Savings - $13,000

Liabilities:
Student Loan – $12,270 balance, $180/mo.
One loan payment for all loans
$7,280 @ 3.15%
3,570 @ 4.25%
1,400 @ 5.35%
      
Specific Question(s):
I want to own a house, and am trying to plan the best way to get there.  What I’m trying to do right now is plan in what order to address financial issues.

Financial Issues to be addressed on the way to a goal of home ownership/down payment savings:
•   Student loan payment- do I pay this off fully first?
•   Car- current car is old with 6 digit mileage, it’s not imminent but another car is in the future within a few years.  How do I plan to pay for this?  Dedicated savings for this?  In what order relative to other goals?
•   Retirement savings- I have no retirement savings vehicles yet. Is it ever a good idea to postpone this? Do I start this now or prioritize other goals for a bit?  No employer match/401k available at this time.
•   Emergency fund- mostly just trying to decide how much to save liquid vs. putting toward other goals? My real comfort level is a fairly high number and I don’t know if I will put some number in there then move on to other goals, coming back to fill to comfort later.

I don’t know at what point in this process it would be reasonable to put the focus on saving for a down payment.
Or maybe I just do all at the same time splitting the discretionary money equally?  This option is not as attractive to me.
I am trying to figure out which goals to prioritize in which order.

thedayisbrave

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I get that you want a house, but I think there's some work to be done before that happens.  Also there is a lot of "guessing" - once you keep more detailed track of incoming/outcoming optimization will get better and better. 

Assuming that your expenses are $3,500/month (rounding up to be on the conservative side), you need a $21K EF for 6 months.  Depending on the stability of your job/industry, you can tweak that # to be a little higher or a little lower, but with two kids I'd be more inclined to err on the side of "having too much."  So yours is on the low side, but what with paying down debt, I wouldn't be too worried about this number currently (again unless you feel your job could be in danger).

I would accelerate the SL payments as much as possible.  Is there any way to separate them so that you can tackle the highest interest rate first? You have ~$700 extra/mo to  work with.  I'd put $500 toward paying down the student loans (in addition to the $180 payment per month).  Yes, aggressive, but the sooner you knock those out, the sooner this money can go toward your house :)

The other ~$200 I'd put toward the car fund.  You want to pay cash for a car, and personally I don't list a car under my assets (since it's a depreciating asset).

I know you say your "choices are not your main purpose right now" but I think they need to be.  The more you can cut down on unnecessary expenditures, the more money can go toward your short-term goals and then your longer term goal: a house.  Are you single or married? You don't mention it but you list "phones" plural - how many phones and what kind? If you have a cell and a landline, cut the landline immediately - and switch your cell to something like Republic Wireless which runs about ~$30/mo for the "luxury" plan.  That's an extra $50/mo that can go toward your goals.  Same in other areas... if you can get groceries down to $300/mo by buying in bulk, lots of grains/beans and veggies, etc. that's another $100 right there.  Utilities seem high, hopefully with more tracking you'll get a better grasp of the number.  ETC. ETC.  That extra can go toward paying down debt or toward retirement - a Roth IRA in your case may make sense.  It's never a good idea to postpone tax-advantaged investments because that is space you'll never get back when the time has passed... which is why I advocate cutting some more expenses to free up some extra cash to start building your nest egg as well.

That's just what I would do personally. 

Hotstreak

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Specific Question(s):
I want to own a house, and am trying to plan the best way to get there.  What I’m trying to do right now is plan in what order to address financial issues.

Financial Issues to be addressed on the way to a goal of home ownership/down payment savings:
•   Student loan payment- do I pay this off fully first?
•   Car- current car is old with 6 digit mileage, it’s not imminent but another car is in the future within a few years.  How do I plan to pay for this?  Dedicated savings for this?  In what order relative to other goals?
•   Retirement savings- I have no retirement savings vehicles yet. Is it ever a good idea to postpone this? Do I start this now or prioritize other goals for a bit?  No employer match/401k available at this time.
•   Emergency fund- mostly just trying to decide how much to save liquid vs. putting toward other goals? My real comfort level is a fairly high number and I don’t know if I will put some number in there then move on to other goals, coming back to fill to comfort later.

I don’t know at what point in this process it would be reasonable to put the focus on saving for a down payment.
Or maybe I just do all at the same time splitting the discretionary money equally?  This option is not as attractive to me.
I am trying to figure out which goals to prioritize in which order.

-  You don't need to pay down all your student loans before buying a house, but you should probably focus on paying down at least the highest interest rate loan.

-  Assuming your car is likely to break down, and you're not just going to replace it because of high mileage, put aside money each month specifically for this purchase.  You can put it in a separate account if that makes it easier.  If you need a new car in 3 years, $200/month is a good place to start.

-  Without a match, you're not walking away from "free money" by not using your 401k.  I think most people on here would say you should be putting some in, though.  You'll never retire early if you don't start saving, and missing out on a few years worth of compounding can be substantial.  I would take the $250 you'll save from lowered utilities, at a minimum, and put that in to a retirement account.

-  Your emergency fund looks okay (about 4 months of expenses).  How much you keep in there depends on a whole lot of things, like how much you would be on the hook for medical, how much you'd spend on a new vehicle if yours died this afternoon, how secure you are in your jobs, etc.  You will want to increase your e-fund before you get a house to deal with unexpected expenses like broken appliances, structural damage, etc.


Whether/how much you should put towards retirement, vs. down payment, depends on a lot.  What is the cost to rent vs. own in your area, for similar accommodations?  Look at the NYT Rent vs Buy calculator, what is your payback period?  Also, how much, in $$'s, would it take to fund a 20% down payment, loan costs, moving expenses, etc.?

It's really REALLY hard to take a look at your budget, because there's no amount listed for Misc.  However, it looks like you're able to save about $1,000 per month.  If you're saving a few hundred per month for a new car, that leaves $800/m for a house downpayment, or about $10,000/yr.  In addition to information on your local housing market, can you provide more information about your spending?  Even an estimate of how much extra childcare will be, and what you expect other misc. to be would help a lot.

Last comment, are you a two income household?  I sort of assumed you are because you list "phones", and obviously nobody is at home all day because you have childcare expenses.  I'd be interested to see the income breakdown between you, if that is the case.

GardenFun

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Re: Reader Case Study– Financial Plan of Attack
« Reply #3 on: September 28, 2014, 12:44:00 PM »
Cash flow issues can be the death of any budget.  Here's an example of your current cash flow (regardless if you had a job):

Payment #1 - Rent $1100
Payment #2 - Utilities $300
Payment #3 - Groceries $400
Payment #4 - Student Loans $180
Payment #5 - Insurance $215
TOTAL = $2,195 (You have roughly 6 months of living expenses saved at present - good start!)

Here's an example of additional payments with a different car and home ownership:
Payment #6 - Car $150
Payment #7 - House PMI - $100
Payment #8 - Property Taxes - $200
Payment #9 - House Repairs - $100
NEW TOTAL = $2,745

These second numbers are guesstimates.  Use values more indicative of your situation. 

At the end of the day, you have  a potential for 9 payments per month.  That's a lot of cash.  So to go along with other people's comments:

- Pay off the student loans using all available cash on top of the $13K you already have.
- After student loans are gone, use the new cash flow to save enough to replace your current car.  There is great info on this website regarding cars for less than $5K so that's roughly 5-7 months of savings.
- Get a better understanding of your utilities.  Are you in a house or apartment?  The values seem closer to house values. 
- Depending on home prices, try to save 20% down to get the best rates and avoid PMI.
- Finally, look at Roth IRA's after the previous steps are accomplished.  You don't have a 401k match so you aren't missing out on free money.

Catbert

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Re: Reader Case Study– Financial Plan of Attack
« Reply #4 on: September 28, 2014, 02:59:11 PM »
I would take a different approach than other posters.  Admittedly mine sub-optimal in terms of saving interest payments, but it might make you more comfortable.

Basically I would stockpile cash initially.  Think of it as a combined emergency fund, car fund and student loan pay-off.  Once you have $1400 above whatever the smallest amount you feel comfortable having as an emergency fund, pay off your 5% student loan.  Part of this is because I've heard others complain that it is difficult/impossible for some borrowers to get SL servicers to properly credit extra payments that they want toward one loan, but gets paid against all.  It also gives you a slightly larger emergency fund while you are saving that $1400.  Repeat again on the 4% loan. (Primarily for cash flow purposes.  Personally I have live with 4% interest.)  I'd pay the 3% one off as slowly as possible.

While this is going on determine how much you really want in an E fund.  Could it double for awhile as a car fund also?  Then start contributing to you 401k/IRA/house down payment.

Thegoblinchief

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I would prioritize filling a Roth account for this year before prepaying any debt or increasing your cash savings for a future down payment. Tax free gains in perpetuity is huge compared to prepaying even a 5% interest loan.

Focus on tracking the grey areas in your spending so you can more accurately plan. Until then, keep yourself rather liquid.

Your phone bill could be lower. Other than that your budget seems fine.