Author Topic: Reader Case Study - Pay off student loans or save for downpayment?  (Read 4191 times)

chrismo2012

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Six months ago, I sat down one night and did some math.  I discovered that my wife and I had spent $1300 more that month than what we had earned.  Uh oh.  We've made some changes and are now heading in the right direction.  When you see my expense breakdown below, you will immediately see that there is still some serious work to do in cutting out wastefulness.  However, we've come a long way.  We've gone from spending 118% of our monthly income in June, to about 80% in December. 

This is what I'm trying to figure out:  My wife and I are currently living in an apartment, but desperately want to be in a house.  I know that we will be renting for at least the next three years given our financial situation.  However, should we be saving for an eventual 20% downpayment on a house, or using that money to aggressively pay off student loans?  I"m worried that even with drastic changes to our spending and very aggressive debt payment, it will take at least 6-8 years to pay off all our debt.  So if we wait until that point to start saving for a mortgage, it will be at least 8-10 years from now before we can buy a house (I'm assuming it will take 2-3 years to save for a 20% downpayment).  Does it make sense to rent for the next 8-10 years, or to save up for a downpayment and buy a house in 2-3 years? Thank you for your suggestions.

Income:  $6740 month (after taxes)

Savings:  $450/month into 401(k) (+$255/month employer match)

Expenses: 
Rent:  $1123/month
Car Payment #1 - $283/month
Car Payment #2 - $317/month (we are attempting to sell this car)
Student Loans - $464/month
Donations to church - $100/month
Gym Memberships - $187/month (my wife and I do Crossfit)
Cell Phones - $92/month
Electricity - $80/month
Water/Trash/Pest Control - $67/month
Credit Card Payment - $685/month
Prescription Medication - $250/month (I'm on some special meds not covered by insurance)
Cable/Internet - $120/month (plan on cancelling cable soon)
Gas - $185 month
Groceries - $450/month
Haircuts - $40/month
Drycleaning - $45/month
Eating Out - $50/month
Household - $100/month
Auto Costs - $80/month
Other Medical - $100/month

TOTAL MONTHLY EXPENSES -  $4698/Month

Remaining Monthly Income after Taxes and Savings -  $1592


Assets:  401(k) - $47,000
$ in checking account - $5000

Liabilities:
Credit Card #1 - $10,900 (11.9% interest rate)
Credit Card #2 - $3,700 (12.99% interest rate)
Student Loans - $73,300 (5.75%)
Car #1 - $4,500 (7%)
Car #2 - $15,100 (4%)

I know the first priority is paying off credit cards and car loans.  If we are aggressive, we can easily do this in 2-3 years.  But after that, when our only liability is student loans, is where my question arises. 

Thanks again. 
Chris

Cooperd0g

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Re: Reader Case Study - Pay off student loans or save for downpayment?
« Reply #1 on: December 22, 2013, 04:38:14 PM »
At 5.75% I would pay those student loans off first. You may find that with the extra work you put into spending reduction that the pay down will go much faster. You might consider moving to a cheaper apartment even.

Evie

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Re: Reader Case Study - Pay off student loans or save for downpayment?
« Reply #2 on: February 02, 2014, 12:28:26 PM »
Isn't student loan interest tax deductable? 

I would focus on the cc asap given that it has twice the interest rate as the student loans.  I would start with cc 2 which is at the highest rate and a small enough debt you can have the satisfaction of paying it off and feeling a victory.

Then I would focus on cc #1.  I don't see any reason to even approach the student loans since the rate is lower and the interest is tax deductable.

Even your auto loan rates are lower than the cc's.  These are what are really killing you.

Who has the student loans and are they consolidated? If not, do that it can save you money. 

Have you checked into auto loans through your credit union?  You may be able to get those rates lower.

I agree with selling the second car and getting a cheaper used vehicle. There are a number of posts here on MMM to help you do that.

Finally, a couple of other easy places to cut:

Hair cuts:  you don't need to cut your hair every 4 weeks.  You can stretch to 6 or even 8 weeks.  Better yet, learn to cut your own hair, or start going to fantastic sams or some place that is only $15 or half what you currently pay.

Cross fit:  sorry, but I think you guys need to cut back here.  See if you can get a drop in pass, and use the savings to buy some used equipment through craigslist and work out at home to supplement. Even $50 should get you some decent equipment.  You also have learned routines etc by going as long as you can, and there are workouts online.

Dry Cleaning:  How are you spending $50 a month?  Do you realize you can wash, hang dry and iron your shirts?  How many times do you wear your pants and suit jackets between dry cleaning?  If you have your things carefully, you can wear a good quality wool suit many times before it needs to be dry cleaned.  Better yet, buy some pants that can be washed and reduce your dry cleaning needs. 

Even if you have really expensive finicky fabrics like silk and cashmere these can be hand washed.  Google online for ways to reduce this clothing expense.

Cable: you have to cut this. I would cut this category and apply directly to your debt. 

Evie

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Re: Reader Case Study - Pay off student loans or save for downpayment?
« Reply #3 on: February 02, 2014, 12:34:15 PM »
Sorry, I should add that until you get that cc debt paid down, it doesn't really matter whether you save for  down payment or pay down the loans. 

That is an academic question for the future, and given that you have something like 14k in high interest cc debt, I suggest you deal with that first.

Student loan debt is generally considered "good" debt, from a credit standpoint, but when you go to buy a house the monthly payment gets counted against how much you can borrow and that can actually be a problem if it is really high.  Once you have the CC debt out of the way I would get pre qualified to see how much you would qualify for, not because you are ready to buy but as a financial check up of sorts. They will always tell you to borrow more than you need, but if you find that the total mortgage and the monthly don't jibe with your local real estate market costs and what you think you want to spend then you know you definately will need to pay that down in order to get to a place where you will qualify to actually buy something.  I think doing a pre qual check in once you get that CC debt paid off will give you a good sense of where you are at starting out under worst case scenerio (e.g. smaller down than you want, and the loan debt).  This will also motivate you to get where you need to be.

bugbaby

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Re: Reader Case Study - Pay off student loans or save for downpayment?
« Reply #4 on: February 02, 2014, 11:56:08 PM »
*Flying facepunces on like 6 levels*

 Hello? student loan vs house? How about that little matter of Hair on Fire high interest CC and car loans? Cross fit $187?

Anyway what are your overall financial goals and are you both on board?

why do you desperately need to own a home? what are the rent vs own profiles of your area? pls do not underestimate the expenses, headaches and loss of freedom/ mobility that home ownership entails.  but I agree w/above post , that's an academic question for later.