Author Topic: Reader Case Study - Help Needed to Overcome Decision Paralysis  (Read 5585 times)

bludreamin

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Reader Case Study - Help Needed to Overcome Decision Paralysis
« on: February 21, 2015, 03:38:43 PM »
I recently found MMM (came for the YNAB code, stayed for the sheer awesomeness). I’m working my way through the archives and it’s got me thinking and thinking....and thinking. To the point of Decision Paralysis when it comes to the extra money I have to “save” thanks to paying off my student loans (BS &MS - also paid off 1 month ahead of my goal time of 5 yrs) and a recent promotion with pay raise.  Before MMM, I was planning on putting towards my safety net (aka emergency fund), increasing charitable contributions, and  paying off my mortgage early. after MMM, FI sounds like the way to go so I have more time/freedom and now I don’t  know how to proceed - to many options!!!  so for the details:

Family: Just me (oh and a few fur kids)

Income*:   
Gross pay: $5,300/month (for being a cube monkey [in engineering])
 Take Home Pay:  $3,600/month (difference from taxes [$1300], health insurance [$90], HSA [$20], 401k to get maximum employer match [$260]; stock purchase [$30]) 

Current Monthly Budgeted** Expenses*: $2,600 (breakdown below)
  • Mortgage - $950 (includes $560 principal and interest [mostly interest - yuck], $240 taxes, $80 mortgage insurance, $70 homeowners insurance) - interest is 4.625% and opened 6/2011
  • Utilities - $130
  • Car Insurance/Maintenance/Fuel - $120
  • Cell Phone - $80
  • Internet - $20
  • Home Maintenance - $50
  • Food - $240
  • Pets - $100
  • Gym - $140
  • Charity - $40
  • All Other Spending - $330
  • New Car Savings - $70 (after reading MMM thinking this could/should go away)
  • Extra Mortgage Payment - $80
  • Roth Funding - $50
  • Travel - $200
“Extra” $$$ (Take Home - Budgeted Expenses):  $1,000

Assets*: $148K (breakdown below)
  • Checking - $7.6K
  • Safety Net - $3.4K(about half in CapitalOne savings and other half in Betterment [30% stock/70% bonds])
  • 401(k) - $34k
  • Roth - $12K
  • HSA - $1.5K
  • Company Stock - $1.5K
  • House (Zillow Estimate) - $88K
Liabilities*: $102K [/size](breakdown below)
  • Mortgage:  $101K
  • Reward CC (paid in full monthly): $1K
Specific Question(s):  Where do I put the “extra” $$$ (E$)?
  • Safety Net (this is where most is going now - but MMM is making me question this)
  • Mortgage
  • 401(k)
  • Roth
  • FI/FU Money
  • Other ???
My current thoughts (if no more to safety net contributions):
  • 100% of E$ to mortgage until can get rid of mortgage insurance gone
  • Once mortgage insurance gone:
  • 20% of E$ to mortgage
  • 50% to retirement accounts (max roth then increase 401k)
  • 30% to FI/FU money

Now I’m looking to MMM-forum dwellers for your insight, wisdom, and (if needed) face punches.

I just did a search of the forums and see similar topics/questions asked but I’m still posting because it may be seen by those that will give me just the shove/face punch I need.


* Rounded for conservatism - income/assets down, expenses/liabilities up
** I hate the word budget since it has a negative connotation of telling you what to do with your money... In reality I treat it as me (as boss) telling my green employees what to do.... and “green employee work plan” isn’t something I’ve ever heard used and may be a bit wordy for use here.

//
Edit 1 (2015-02-22) - Formatting, added mortgage interest details, other clarifications based on replies
« Last Edit: February 22, 2015, 09:12:07 AM by bludreamin »

Another Reader

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #1 on: February 21, 2015, 03:54:24 PM »
If you maxed out your 401(k), what would your taxes be?  In your shoes, that's the first place where my "extra money" would be going.

You could probably reduce your spending (what's that $330 of "all other spending"?) significantly to make up the difference in available take home pay.  You are going to get a lot of ideas on that in response to this post.  I would also max out the Roth and the HSA.  Your future self will be thanking your present self profusely for the unfettered compound growth in these accounts.

bludreamin

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #2 on: February 21, 2015, 04:15:14 PM »
If you maxed out your 401(k), what would your taxes be?  In your shoes, that's the first place where my "extra money" would be going.

Great question - I'll have to look into the tax implications.. my only fear with that approach is I'm putting my money somewhere that I can't reach it for 20+ years. yes it'll be working for me during that time but wouldn't it be better to create an investment income I can use now?

As for $330 "all other spending" that's my "budgeted" amount I use for clothing (mostly thrift store), salon visits, hiking/outdoor gear, happy hours, entertainment (hulu, redbox for movies the library doesn't have), home goods (again mostly thrift stores/flea markets), etc.  Is there fluff here - yes but these are things that bring me enjoyment... I'm trying not to say I deserve them (because that would require a facepunch) but I consider them a conscious spending choice (and if they are still facepunch-worthy then by all means facepunch away).

sandandsun

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #3 on: February 21, 2015, 04:30:39 PM »
Absolutely max out every pre-tax retirement option you have (401k, etc.) before deciding how to invest any extra...

Another Reader

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #4 on: February 21, 2015, 04:34:31 PM »
There are many ways to access that tax deferred and Roth money before age 59 1/2.  Lots of threads on that subject here.  Read up on the Roth pipeline as one example.

How did you end up with an $88k house with a $101k mortgage?  That makes getting out of the MI more difficult.

You have the right mindset and a good start.  Some re-evaluation and fine tuning will turbo charge your FI progress.

bludreamin

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #5 on: February 21, 2015, 05:07:18 PM »
so 2 votes max pre-tax retirement options (thanks for your reply sandandsun).


How did you end up with an $88k house with a $101k mortgage?  That makes getting out of the MI more difficult.

How?Rationalizing - "well renting a crappy apartment further from work is only $750 per month, a decent apartment comparable distance to work is $900/month, this website says a mortgage and taxes would be about $900/month so maybe I should just buy a house", and getting emotionally involved/listening to my real estate agent (bought for $5K more than I wanted but $10K less than what I was pre-approved for and what my agent was trying to get me to look/buy at).

Also - the house appraised for $116K at the time, I bought at $115K with 5% down (FHA loan). I took another look and the $88k was the zillow estimate -- right before I bought it the zillow estimate was $89k...

SaintM

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #6 on: February 21, 2015, 05:09:58 PM »
Suggested actions:

- Ting for phone.  $6 plus actual usage.
- $140 for a gym membership seems like a lot.  Is there a YMCA nearby that is cheaper?
- $200 for travel every month ($2400/year)?  Heck of a line item for a single person.
- Extra mortgage payment should to Roth.  Find ways to max that sucker.  After the Roth account has been open for 5 years, it can be your E$.
- Switch Betterment ratio to 70% stock, or more.
- $7,600 is a lot of idle money in a checking account.

$330/month for other is 6% of your income.  I won't fault you for spending that much to enjoy life.

SaintM

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #7 on: February 21, 2015, 05:11:35 PM »
Zillow estimates are worth the cost of going to the website.

FIreDrill

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #8 on: February 21, 2015, 06:29:11 PM »
I would trust the actually appraisal of the house much more than the zillow estimate.  Zillow estimates are often way off in either direction.

Another Reader

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #9 on: February 21, 2015, 06:36:00 PM »
Yep, looking at Zillow is not helpful in this situation.  The comparable sales they use could be in another neighborhood or another school district and therefore not relevant.  The agent that helped you buy the house should be able to provide you with current comparable sales and a much more accurate estimate of the value.  How long ago did you buy?  What is your interest rate?  What are the rules for getting rid of MI for your FHA loan?  Could you refinance into a better loan if the true value were higher?  A house can be a good tool, if used properly.  For example, finding a rental with fur kids is difficult.

What's the assessed value of the house - you may be paying too much in property taxes at $2,880 per year.  You might want to look into challenging the assessed value if it is inaccurate.

I don't necessarily disagree with the Betterment safety net idea.  It's probably ok for money you need in 3 to 5 years.  For an emergency fund, cash savings is my approach.  When things go south, the bank with the FDIC insurance is your friend.  You can do better on interest rate than Capital One, but not by much.  Check out www.depositaccounts.com as an unbiased and current source for interest rates on various savings products.

Generally you have made good decisions without a lot of guidance or input.  Start paying close attention to your money, max out your savings and investment opportunities, and you will be in great shape.

Chrissy

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #10 on: February 21, 2015, 08:10:35 PM »
Everything to the mortgage until the PMI is done, then all to the 401k.

You're overpaying for your phone.  You can get that down to $30ish easily, and even further if you search around on this forum for some unconventional solutions. 

MDM

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #11 on: February 21, 2015, 09:15:15 PM »
If you maxed out your 401(k), what would your taxes be?  In your shoes, that's the first place where my "extra money" would be going.
Great question - I'll have to look into the tax implications.
Try either the reader case study spreadsheet (see this post) or http://www.paycheckcity.com/calculator/salary/
« Last Edit: February 23, 2015, 10:27:05 AM by MDM »

CanuckExpat

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #12 on: February 21, 2015, 11:52:03 PM »
Hi Bluedreaming,

As others said, do need a little more information in order to answer your questions: specifically what is your current interest rate?
Are you maxing out your employer match on the 401k? I would say max out all your tax advantaged space first if possible, 401k, HSA and IRA. Is there a reason you chose to contribute to a ROTH and not a traditional IRA?
You might be interested in these posts:
http://www.gocurrycracker.com/roth-sucks/
http://www.madfientist.com/retire-even-earlier/

A couple of other things that aren't a big deal for the small amounts of money you have:
Your betterment account.. don't hold bonds in a taxable account. See here: http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement
Why do you have employer stock? Is it part of a stock purchase plan where you get free money and then you sell as soon as possible? If any other reason, I'd be hesitant to hold it.

JetsettingWelfareMom

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #13 on: February 22, 2015, 12:40:54 AM »
You're underwater on your mortgage. If you like the house and location, chop the mortgage down ASAP...can you prepay? Head over to the MMM singles forum and start building up!

bludreamin

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #14 on: February 22, 2015, 09:04:44 AM »
Thanks everyone for the additional input. definitely some good resources I'll dig into as I get the time...more and more to think about for sure.

I'm getting that Zillow is not the best way to track the value of my house but it's what Mint uses and I use Mint for tracking my net worth over time since that seams to be the simplest way.

so more on the mortgage/house - the interest rate is 4.625% (no prepayment penalty) and I bought the house in June 2011. to get rid of MI it has to paid for min 5 years and I have a LTV less than 78%. The catch being that FHA won't use any current appraisal just the last known value of the house (i.e., from when the loan was issued).  As for refi - I hadn't given that much thought but maybe I should look into - the hosing market is fairly stable so I'm not sure how much growth there would be in the value of the house.   As for taxes, property taxes (county/school) are "good" for the area I live in since I'm in the city and not the surrounding villages (my house/property would easily be taxed double out of the city) - a "joy" of living in the New York State.

more on the investments - yes I maximize 401k to get maximum employer match. Roth vs traditional IRA - based on the information I had at the time (can't remember which financial "guru" was giving it) it made sense to me to diversify not knowing what tax rates will do in the future and to let the earnings be used tax free.  my 2014 effective tax bracket was 10% (marginal was 25%). Since I have the pre-tax 401k through work I figured I'm covered either way for changes in tax (one will be better than the other).  Employer stock is bought at discount (75-85% of full price*) - as of yet I haven't tried selling any of it and I can't remember what the time frame is for being vested.

more on the expenses -
phone - will definitely research more on the phone and the cost/benefit of the early termination fee for my current phone (have 15 months left on the plan) - I do have a smart phone and use Songza pretty heavily during the work day to drown out the office noise (some loud talkers [one also likes to use the speaker phone -hate it], loud typers, and ice chewers around me) - unfortunately Songza is blocked by IT so I can't use the office wifi. - will definitely check out Ting and also was planning on checking out Republic wireless.
gym - recently started and only place I've been that I actually look forward to going to work out - I even dragged my butt out there this morning. It's a class-based circuit style gym (sorta like Cross-Fit) that also focuses on teaching you why they put together the circuit the way its.  I've already increased my energy level, started eating better, lost fat, gained muscle and many more benefits since going so I'm very reluctant to give it up. I'm sure my future self will thank me much more for the good health this is bringing than the $.
travel - another guilty pleasure that I realize has some fat to be cut - this budget includes gas (or drivers meal) for 1-2 weekend trips per summer month to the Adirondacks (the real joy of living in NY) for backpacking trips, 1-2 weekend trips per year for exploring nearby areas (e.g., Philly, VT), a 10 day vacation (this year we're replacing Scotland with CO to reduce costs), and traveling home for Xmas (my mother lives in the middle of no where that I in the past I've purchased a plane ticket or rented a vehicle I'm more comfortable driving long distances over snowy roads).


*If I rememeber correctly its 85% of the lesser of start or end quarter price but no less than 75% of price at close/purchase date. 




Another Reader

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #15 on: February 22, 2015, 09:40:16 AM »
If property values are up since you bought, you may be able to refinance without MI or PMI, i.e. conventional, not FHA.  In your shoes, I would talk to a few lenders/brokers to see how this could be done.  Rates are up over the last couple of weeks, but still below your current rate.  That's after you get an accurate estimate of the value of the house to see if it is feasible.

In your shoes, I would max out the 401k.  Maxing out does not mean putting in enough to get the full employer match.  It means putting in the legally allowed maximum of your income, $18,000.  That means $1,500 a month, more now that two months have elapsed.  This is essential to your FIRE progress.  Your current taxes will drop and spending cuts can absorb the rest of the impact.  Do that and max the Roth IRA, and you will progress quickly.

Right now, your finances are going in a lot of different directions - the shotgun approach.  If you sit down and write out your short and long term goals, then you can create concrete plans to achieve them.  Yes, there may be some changes and sacrifices along the way, but you will achieve your goals this way.

SunshineGirl

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #16 on: February 23, 2015, 10:16:44 AM »
Your stock purchase plan might be a goldmine for you. Can you provide details on it? In many cases, it's a guaranteed 15% or better return, in which case you should max it out and sell right away. lather, rinse, repeat.

Sibley

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #17 on: February 24, 2015, 09:17:59 AM »
Maybe I missed this, but how do you currently get to work? Can you bike? If so, the gym may be unnecessary since you'd be getting exercise that way.

bludreamin

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Re: Reader Case Study - Help Needed to Overcome Decision Paralysis
« Reply #18 on: February 25, 2015, 05:52:38 PM »
Maybe I missed this, but how do you currently get to work?

I drive (2002 Toyota Corolla).

Can you bike? If so, the gym may be unnecessary since you'd be getting exercise that way.

Is this a trick question? The honest answer is I'm a Wuss.  Physically, I should be capable of riding a bike if I had one (I know, I know - it's on my list of purchases). Mentally - I'm not ready.  I have plenty of excuses I'm trying to work through (haven't ridden a bike in 15+ years, vivid memories of bike crashes [chipped tooth in half, sprained ankle], it's winter [highs in the negative numbers, biting wind, it hurts to breathe cold and snowy winters], 0 confidence biking in traffic and general distrust of NYS drivers, no "good" routes [either crossing traffic of a major highway on/off ramp and/or turning left over 4/6 lanes traffic]).

With  all that said, I am inspired to get back on the bike but starting out I want to trial it out for running weekend errands (hell even biking to the gym is completely feasible in my mind- you know if I had a bike and it wasn't so freaking cold).