# The Money Mustache Community

## Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: RiskDown on July 06, 2014, 12:58:43 PM

Title: Reader Case Study - How's my plan?
Post by: RiskDown on July 06, 2014, 12:58:43 PM
All numbers below reflect sum of my wife and I.

Monthly Net Salary:  (after taxes, insurance, etc)
Take home salary=\$5,417/month

Monthly Expenses (not secured by assets):
Cable/Internet=\$30/month
Cell phone=\$55/month
Electrical=\$220/month
Car Insurance=\$132/month
Misc=\$50/month (non-negotiable)
Food=\$600/month
Car gas/maint=\$200/month
Student loan=\$287/month (min payment)(Current bal=\$23,468, Rate=5.2%)
Total Monthly Expenses (not secured by assets):=\$1,574.00

Monthly Expenses (secured by assets):
Home=\$960/month (Market value=150K, Current bal=142K,  Rate=3.5%, PMI=\$145/mo, and can't be remove until I am 60 months into loan (currently=14 months))
Car 1=\$360/month (Market value=16K, Current bal=15.3K,Rate=.9%)
Total Monthly Expenses (secured by assets):=\$1,320.00

401k Accounts=\$44,500
Car 2=\$6,000
Savings=\$1,500
Total Assets:=\$52,000.00

2 Credit cards w/ no balance. (15k combined)

Current plan is the following:
1) Keep 1.5k in savings, put all excess money into paying off student loans  (once they are paid off)
2) Keep 1.5k in savings, calculate the additional monthly payment required to bring LTV down to 78%, so I can remove PMI right as I hit 60/months
3) Anything above the monthly payment (#2 above) goes toward ???

???Suggestions???
a) Emergency savings (ie: replacement roof, car repairs, etc) -- best financial vehicle to keep in, if this is your suggestion? Or use HELOC for these, should they arise?
b) maxing out 401k tax deferred amounts?

Question:
How does plan look? What would you do differently? FYI -- Finances car is .9% APR, but it's costing me a higher insurance, because I have to carry collision. Worth paying off and selling, to repurchase 7k car (tax hit) and rest as gain? If so where should that fit in in plan? As always, thank to everyone who takes their time to review/respond, please let me know if you need any further info.

Title: Re: Reader Case Study - How's this plan?
Post by: Calvawt on July 06, 2014, 01:10:12 PM
I don't see a student loan balance or monthly payment amount.
Title: Re: Reader Case Study - How's this plan?
Post by: Spudd on July 06, 2014, 01:16:50 PM
You surely have more expenses than you're listing, as well. I don't see anything for gas/car maintenance. Presumably you're not paying for 2 cars that you never drive.

What rate are your student loans at?
Title: Re: Reader Case Study - How's this plan?
Post by: RiskDown on July 06, 2014, 01:44:17 PM
My mistake guys, posted a little too quickly -- updated with info requested. Please let me know if I overlooked anything else
Title: Re: Reader Case Study - How's my plan?
Post by: 4alpacas on July 07, 2014, 02:36:43 PM
How much are you contributing to your retirement accounts?  Do you have a Roth IRA?

I would recommend maxing out tax-advantaged retirement accounts (Roth IRA for you and your wife \$550x2 and 401k \$17500x2).  I would also recommend saving up a cash cushion (\$22k) to refinance your mortgage before the 60 month PMI because 15% of your housing cost is PMI. After you have refinanced your mortgage, I would start tackling the student loan debt.

Overall your budget looks good.  I would look into cutting back on food.  \$400/month for 2 people is still very spendy, but a good goal.
Title: Re: Reader Case Study - How's my plan?
Post by: Chrissy on July 07, 2014, 08:10:51 PM
According to your numbers, you have \$2,523 to throw at debt every month.  Is this true?

Assuming it is, you're on the right track.  I'd do Plans #1 & #2 concurrently by dividing this money between them:

If you can't get rid of the PMI for another 46 months, then time the extra payments to get the LTV to .78 at the the end of that time frame, just as you said.  Looks to me like that's an extra ~\$720/mo toward the principal, but you'll have to do your own calculations.

Throw the remaining \$1,800/mo extra toward the student loans, and you'll have them paid off this time next year!

You're right to keep your emergency fund low.  If you run into trouble, use the credit cards, and go back to paying the minimums on the student loans until you can pay off the emergency.  Make sense?

I wouldn't worry about Car 2.
Title: Re: Reader Case Study - How's my plan?
Post by: Thedudeabides on July 07, 2014, 09:32:34 PM
Are you currently contributing to your 401k? If so, how much?
Title: Re: Reader Case Study - How's my plan?
Post by: Emg03063 on July 07, 2014, 09:59:41 PM
I'd sell the \$15k car, buy something affordable (think \$1500-\$2k range, not \$7k), pay down your mortgage to 80% LTV, and then refinance to eliminate PMI.
Title: Re: Reader Case Study - How's my plan?
Post by: RyanHesson on July 07, 2014, 10:50:28 PM
Disclaimer: I don't know what I'm talking about yet. I'm making this post so people can point out flaws in my reasoning, so I can learn from that.

Do you have health insurance? What do you pay for it?

I wouldn't recommend selling the 16K car for a 1.6K car, but I'm just a stubble kind of guy here, so take my advice as less than the other advices here. The reason I say no to that is because first, a \$1600 car has a good chance of running like crap (or not at all) and needing tons of maintenance. Second, you're losing a lot of value on that trade. If your car is truly worth 16K, you're going to have a hard time getting 16K for it actually. The 7K could make sense to knock \$100/month off the insurance, but you do actually get a service for that \$100 a month, so don't completely discount that entirely, just discount most of it.

Does electric need to be so high?

I listed as a goal to get food down to \$600 on my case study (from about \$850), everyone told me \$600 is still way too much, and to get it way down. I'm gonna have a hard time getting it below that I think, but I'll try and see what I can do. There's also a factor of "If I'm not eating well, why am I living?" Not sure what you think on it.

We're in roughly the same place in terms of net worth, though your income is somewhat (not hugely, not trivially) higher than mine, and when you include your asset secured expenses your expenses are MUCH higher than mine. Though part of that is increasing your net worth where as none of my expenses do that. The other thing is that your household is of 2, mine is of 1.

My plans, personally, are not to put any more than what gets matched in the 401K, and if my forex experiment works out I might put none there. I put money in my IRA for 2013 and 2014 in early 2014, and I will probably do the same for 2015 and 2016 in early 2016, but \$5500/year isn't exactly a huge sum. For the student loans, I feel like you could go either way in terms of paying the minimums or paying it off quick. At 5.2%, it's not bad for a guaranteed return. I wouldn't bother ever paying more than the minimum for the house at 3.5%.

Not hugely profitable, but one thing I'm working on is amassing several credit cards, with the goal of as much cash back as possible.

Keeping \$1500 in savings seems silly. That's for what, an emergency? You have credit cards, and you have at least 1 pay check to pay them off. You could just get rid of that \$1500 and if you needed emergency money, put it on the card, and pay it back before any interest is due. If you wanted to be safe, so you have 9K in there, that might make sense. But \$1500 is just pointless and does nothing for you. Might as well not have it.

Title: Re: Reader Case Study - How's my plan?
Post by: farmstache on July 08, 2014, 11:23:06 AM
I would totally recommend selling the 16k car, especially since it's value is higher than what you owe on it. While you'll have no money left from the sale, you'll also not have a quickly devaluing asset in your hands and will free the \$360 + higher insurance each month. Also, if your savings rate is correct, you can purchase the new-to-you car quickly with cash.

I also think electric looks very high. Do you guys run the AC a lot?
Title: Re: Reader Case Study - How's my plan?
Post by: LibrarIan on July 08, 2014, 11:56:54 AM

Monthly Expenses (not secured by assets):
Cable/Internet=\$30/month
Cell phone=\$55/month
Electrical=\$220/month
Car Insurance=\$132/month
Misc=\$50/month (non-negotiable)
Food=\$600/month
Car gas/maint=\$200/month
Student loan=\$287/month (min payment)(Current bal=\$23,468, Rate=5.2%)
Total Monthly Expenses (not secured by assets):=\$1,574.00

Monthly Expenses (secured by assets):
Home=\$960/month (Market value=150K, Current bal=142K,  Rate=3.5%, PMI=\$145/mo, and can't be remove until I am 60 months into loan (currently=14 months))
Car 1=\$360/month (Market value=16K, Current bal=15.3K,Rate=.9%)
Total Monthly Expenses (secured by assets):=\$1,320.00

I'm with farmstache on selling your primary car and buying a less expensive one. This might have the added benefit of lowering your monthly car insurance amount.

If it's just two of you, you maybe able to decrease your grocery bill. \$600 for two people seems high. Does this include eating out? If so, stop doing that. My wife and I spend about \$375 a month on groceries.

Are you able to bike to bring down your gas costs at all? I know depending on where you live it can a little impractical.

For your electric bill, try getting a Kill-a-watt device to see if you have anything running that uses large amounts of energy and reconsider those items if possible.
Title: Re: Reader Case Study - How's my plan?
Post by: RiskDown on July 09, 2014, 05:30:22 AM
--How much are you contributing to your retirement accounts?  Do you have a Roth IRA?
Right now, only \$2400 to 401k. I do not have a Roth IRA.

Yep, we've got some cutting back to do. We're pretty bad about eating out, on days when energy levels are depleted.

--Do you have health insurance? What do you pay for it?
Yes, I didn't include it because I provided net salary. It's like \$150/mo for 2 of us.

--Keeping \$1500 in savings seems silly. That's for what, an emergency?
My thought process was to keep enough to purchase a 5-6k car, in the best financial device I could access easily. I still need some advice on what the best "savings account" emergency type financial device is.

--I would totally recommend selling the 16k car

--I also think electric looks very high. Do you guys run the AC a lot?
We live in Florida... so its hitting 95-100 everyday and YES we do run the AC far too much. After reading MMM take on adapting, we've changed the setting on our AC significantly, hopeful this will lighten the bill.

Thank you all for taking the time to respond.

After reading the input, in a vacuum, I think we are probably best off selling car, purchasing 5-6k used one, refi the house to remove PMI, paying min on student loans, and maximizing our 401k contributions, since the tax avoidance savings is a metric ton more than interest.

However, I have some concerns about cash flow, with a planned new addition to the household coming within a few years, so I think I'll probably end up taking a slightly different route..selling car, purchasing 5-6k used one, refi the house to remove PMI, paying OFF student loans, and maximizing our 401k contributions.
Title: Re: Reader Case Study - How's my plan?
Post by: Thedudeabides on July 09, 2014, 08:56:58 AM
Sounds like a good plan overall.

Once you save up the \$22k for the refi, I would suggest evaluating at that time whether or not it is worth the refi. If you are able to save this amount in 8 months, then you will have about \$5510 left in PMI payments. You should check on closing costs for the refinance as well as interest rates at this time to see whether or not you would come out ahead with the refi. Get a good faith estimate from a couple lenders. It's hard to say definitely at this point which is a better option because we don't know what rates will be in 8 months. We do know however that refinancing typically has costs associated with it.