Hi all,
I’m looking to get some advice on my goals. Growing up less than middle-class, I’ve always been pretty frugal (most people say “cheap,” but ‘merica is ‘merica). My wife and I are looking for an independent opinion on prioritizing our cash flow. I admit I haven't made it all the way through the MMM posts yet, so I apologize if this kind of thing has been explicitly covered. Here are our current stats:
Background/income
• 24 years old. Been working over a year now with a major U.S. retailer (above-average evaluations, steady raises, and a recent promotion – I don’t have much concern about losing my job sans a major economic incident). I make a bit over 60k per year, no bonus.
• Wife is also 24 years old. She’s a teacher, making 34k per year (lolnobonus).
Savings
• I contribute 8% to my 401k, with a 4.25% employer match. Wife has a defined benefit pension plan through the state. I also contribute 5% of my pay to an ESPP where I get a 15% discount on my company’s stock. Thinking about starting an IRA for my wife just in case the state decides to bone us on the pension.
• We currently have about 15k in cash, 6.5k in stocks (one big index fund and some dividend stocks like GE and DUK), and about 4.5k in my 401k (all target maturity/growth oriented funds).
• We currently prepay on all of my loans: about $400 (additional) on my student loans, and about $300 on my car loan. I also paid off about 5k in student loans (ones that weren’t consolidated to one servicer), and used about 4k as a down payment to replace an old, nearly dead, gas guzzling Jeep with a newer, fuel efficient car. This is why there’s not more saved after a year.
Loans/Credit Usage
• 35k in student loans, all at 6.8% interest. These are all mine, used for a double major in finance and accounting, and a master’s degree in accounting.
• 18k in a car loan, 5% interest (it was a new car, rookie mistake I know).
• Credit cards: $3,500 available credit, paid in full each month. Typical usage has been 30-40% (bills and such), but going forward we’re going to keep it <20%. I have a $3,000 limit rewards card, and my wife has a $500 secured card through our credit union. We put recurring bills (Netflix, internet (no cable), pageplus phone bill) on my wife’s card to build her credit, and use my card for gas, groceries, misc. other things. She’s also an authorized user on my card (as well as other bills).
• Our credit scores are both average. Neither of us have negative indicators on the report, but we don’t have much history either. I have a 670ish score, but my wife doesn’t have enough history to even pull through Creditkarma.com.
• My wife is also working on her master’s in education, which we are paying for outright. I’ve been thinking she could get a few student loans just to have something on her record, then we could pay it off relatively soon. Punch me in the face for thinking about this.
Housing situation
• Renting - cost is $1,200 per month. Hard to find much cheaper around here in decent areas. I do some travel for work, so I don’t want to sacrifice on the neighborhood when my wife will be here by herself some of the year.
Our long term goals are to have 2 kids, own our own home in a rural area, and retire/semi-retire by age 50ish. My request for you guys: which of the following options makes the most sense? Punch me in the face for even suggesting options 1 or 2?
• Option 1: Continue current prepayment amounts on loans, concurrently save for a 20% down payment for our home. Once we get the mortgage, we’ll go ahead and blast out the last of the student/auto loans, then funnel the rest into 401k/stocks.
o This option gives us additional average account age while concurrently improving our debt-to-income leading up to the mortgage application. At the amount of mortgage we anticipate getting our cash flow will be minimally impacted, but our equity will increase over time unlike renting. Downside is we miss some compounding gains on the 401k contributions.
• Option 2: Pay off student loans, pay off car loan, save towards a 20% down payment, then after getting the mortgage begin maxing 401k contributions.
o My concern here is that if we pay off the loans over the next 2 years, our credit scores will still reflect a shorter average account age. This could hurt us when getting rates for our mortgage, even though we’d be debt free. Would a bank weigh credit score or debt-to-income more?
• Option 3: Pay off student loans, pay off car loan, begin maxing 401k contributions, any extra goes towards a down payment.
o “Do I want to pay $1200/mo in rent for the next 8 years?” Same concerns as Option 2, and if I got a similarly priced mortgage, payment would be the same for 15/30 years, whereas rent is likely to increase over the coming years. Note I haven’t actually done the calcs to come up with 8 years, just a number I threw out there.
Any advice is greatly appreciated!!! Thank you MMM for this amazing community.