Author Topic: Reader Case Study: Small kids, one income: What next?  (Read 10816 times)

charis

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Reader Case Study: Small kids, one income: What next?
« on: August 20, 2014, 10:07:50 AM »
Income wife: $83,468 gross
Income husband: TBD gross
Monthly take home wife:  $3868 (after HSA and IRA deductions - both set to max this summer)
Monthly take home husband: temporarily ~ $2600     
     
Average Monthly expenses:
Mortgage (principle, interest, taxes, insurance): $1073 $1044 $984
Federal student loan wife: $354
Federal student loan husband: TBD
Cell phone: $60 (two smart phones w/ data plan thru Airvoice)
Internet: $23
Netflix: $8
Gas: $250 $145
Car insurance: $75.40 $64
Utilities: $180
Food+dining: $480 600 (having trouble keeping this down, but now I know what doesn't work)
Other kid-related costs: $350 460 (childcare mostly, but will go down july/aug)
Home-related cost (repairs, etc): $200
Misc spending/shopping/hobbies: $300 (working on this)
Clothes: $50
Gifts: $40

total:

Assets:
House: $140,000
Pension: $14,880
IRAs: $13,349 $16,007
Cash: $6,700
CD: $8,300
HSA: $9,122
2007 Jetta: $6,500
2009 Corolla: $9,000
Total assets: $210,509

Liabilities:
Mortgage: $ 97,050  @ 4% 20-year fixed
My Federal student loan: $66,091 @ 5.9% on 30-yr fixed (on track for forgiveness in 5.75 yrs)
Husband's Federal student loan: $32,424 (5.8% in grace until 8/2015, $17K on 5-yr forgiveness track)
Total debt: $195,565

Total net worth:

We are mid 30s, family of 4 with two small children and having been living on one income.  My husband is a newly certified in his field and just started a temporary position (hopefully permanent in fall).  We have done some good work on convenience spending, and I've learned that making moderate weekly grocery purchases keeps monthly costs down better than any huge shopping trips.  But food is our largest spending area after the mortgage.  We can't walk or bike to work until the children are school aged and don't need drop/pick ups.

The question is where to go from here.  Build up the emergency savings? Or the IRA(s)?  Aggressively pay down mortgage? In the short term, I would like to have 12 months of expenses saved (pretty conservative, but as the current sole breadwinner, I want a big cushion), maxed out IRAs, and be saving for a some much-needed kitchen renovations.  In the longer term we would like to save for retirement more aggressively, pay off the mortgage, and find a rental property to invest in.  I feel like I can't really think about FIRE until H is employed FT, but I don't want to lose ground either.

We will be keeping the min mortgage payment and the emergency savings as is for now (15K), at while we max our tIRAs and HSA, which will be done in few months (if not sooner with his added income).  We will then start a 457 account for H, followed by a 403(b), into which we will divert most of H's income. 

Our current thinking is, after we've set the HSA, IRAs, 457 and 403b to max out, we will save up any excess income for a down payment on a rental property, which we hope to buy within the next five years and self-manage.  I think we will put off rehabing our kitchen until after buying a rental to reap the tax advantages (as an aside to rental income) as soon as possible.

Does that sound like a decent plan?  I will probably turn this into a journal soon, now that we are officially seeking FI.  RE is less on the radar, mainly because H is starting his career pretty late, but we'll see.
« Last Edit: June 03, 2015, 01:45:09 PM by jezebel »

Cheddar Stacker

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #1 on: August 20, 2014, 10:29:01 AM »
Welcome to the forum.

I'm sure a few people will nit-pick your expenses a bit, but I think they're awesome at $3K for a family of 4. I would suggest 2 things for you:

1) Invest some of the cash/CD funds. I think you need an emergency fund, but not $20K which is over 50% of your annual expenses. In addition, based on the numbers presented it appears you have about $2K/month in excess cash which suggests ability to quickly adapt to any emergency that might come up.

2) Can you refinance that mortgage? Do you pay any PMI? Can you afford another $120/month in mortgage payments? With only one income and your total debt load including student loans some banks might not give you their best rates or even work with you. However, if you can find a good 15 year mortgage rate (3.25%) your monthly P&I on the mortgage would go from ~$575 to ~$695. This would cut 10 years off the payments, drastically reduce interest from ~$4,900/year to ~$3,100/year, and give you $4K/year in additional Home Equity in the first year alone.

If you can do those 2 things, then when your husband begins his career you can very aggressively save towards retirement. I'm not suggesting you shouldn't do that now if possible, but I think the mortgage refinance will give you a bigger return right now so it should be your priority. I would not suggest paying it off aggressively as this will leave you vulnerable until the very last payment. Pay the minimum, invest the difference, it's the safer play.

DoNorth

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #2 on: August 20, 2014, 10:35:08 AM »
Between the $18,000 you have in savings/a CD you should be ok long enough to cover any lapses of employment, should they occur, until your husband begins his career.  Since your mortgage is only about 70% of the loan, you could probably open a HELOC for the remaining 10%; rates are hovering around 4%.  The rest of what you do depends largely on tax optimization and paying off your remaining debt.  Do you have a 401K; if not a regular IRA will give you a tax break up to $5500/piece.  you can do the spousal contribution for your husband until he's working.  Many early retirees will be in really low tax brackets living off dividends (taxed @15%) and so forth so while Roths are great for tax free withdrawals after you're 59 1/2, regular IRAs can give you a nice upfront tax break to help you build up savings early and create more wealth with compounding.  You could consider doing a re-finance to the high 3's or low 4's on your mortgage since it's at 5% or pay it down.  The current rate on your student loan isn't listed so this also plays a factor into your decision making.  Just some considerations to begin with.

yddeyma

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #3 on: August 20, 2014, 11:22:07 AM »
One of the things I wish I had done is started out in a smaller house and not moved until it was paid off.  Not sure if you're on the upper or lower end of your housing market, but let's say you're average....you should be able to find an older, well maintained home that's livable (but with no "upgrades") for a lot cheaper than you are now (that's if you're in an "average" home of course).  In my area I can find houses like these in the $50-$60k price range.  You could significantly reduce your cash flow by going this route, and also the amount of total debt. 

It may SEEM like you can't focus on FIRE right now, but you can set yourself up to be able to execute your plan once DH is employed.  So make a plan.  What needs to get paid off and what order does it make sense to do that?  Do you have any major expenses in your future that will impact your savings?  Where do you plan to put all the savings?  And, what's your "number" you need to retire? 

One of the main things that has tripped me up is access to my savings.  The bulk of my money is tied up in my 401k, and I can't get to it until I completely quit and roll it over to an IRA.  If it were me, I'd probably try to max out Roth's and then invest or save the rest until you have a better defined plan.

You don't say whether you intend to pay off the student loan or just let it be forgiven.  If its the latter, realize that if you're on hardship deferment that your DH's employment may affect that, so be sure to read the fine print.

BooksAreNerdy

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #4 on: August 20, 2014, 02:25:49 PM »
Even though your husband is not working, you can contribute $5500 to an IRA for yourself and 5500 to one for him. So lots of low hanging fruit there, if you have extra cash!

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #5 on: August 20, 2014, 02:42:37 PM »
All great points!

Starting from the most recent, we got our house for a steal in a great neighborhood, the average home on our block is in the 160k-180k range.  We live in upstate NY, so homes in the 50K-60K range isn't realistic even in a rundown area.

I am hoping to have the loan forgiven.  No deferments as of yet.  The only major expense that would be a hit to our savings is home improvements.  The roof will probably need work in the next 5-10 years.  The kitchen hasn't been updated since the 70s and we have very little counter or cabinet space.  It definitely more of a want than a need, but it's a quality of life thing for me.  My husband is very handy, but doesn't have the time or expertise to do a whole kitchen.

I have gone back and forth about refinancing the mortgage. We are paying PMI (unfortunately).  I am no financial whiz, but after getting some estimates, closing costs are 3-4K.  Wouldn't it be better to put that cash toward my current mortgage rather than lose it during the refinance?

I may take the advice to max out roth IRAs with some of cash we currently have instead of sitting on it in a savings account.  I am a little scared of investing since my old 403(b) was decimated in 2008.  But it's probably the wisest thing to do.

So it seems that I should seek refinance estimates more aggressively, move some cash to IRAs, and talk to H about his energy drink addiction.  I'd like to do the kitchen sooner rather than later, but I probably won't feel comfortable about it until H is employed.

x-posting

Scandium

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #6 on: August 20, 2014, 03:01:32 PM »
Why do so many talk about paying off mortgage? I thought we found a consensus around here that in almost all cases this is suboptimal for many reasons. I'm surprised it still comes up so often. Investments are more liquidity, likely higher growth etc.

Try to refinance for a lower rate at 30 years, pay the minimum and invest any excess.


Btw; I wish my account was just decimated (i.e. lost 1/10th) in 2008. Far better than the 50% drop I saw :)
« Last Edit: August 21, 2014, 06:46:19 AM by Scandium »

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #7 on: August 20, 2014, 03:13:51 PM »
What Scandium said. But 75% of people here would rather pay down their debts as evidenced by this poll. There's also this thread that was a spinoff from the first one.

There there's the mortgage payoff club. Oh well. There are many options and I'm ok with people taking the debt paydown option, I just wish more people were open to the other side of the arguments.

jezebel, you can find lower cost refinance options. Some of those costs are likely related to escrow, which you would pay eventually anyway and your old escrow will be refunded to you. You are paying waaay too much money if you are paying PMI. You absolutely should look into refinancing, particularly since you have so much equity and the PMI will be eliminated. Run to the bank yesterday. And please consider keeping the low interest, fixed rate, tax deductible, inflation hedge for the long-term rather than paying it off quickly.

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #8 on: August 20, 2014, 04:33:01 PM »
Btw; I wish my account was just decimated (i.e. lost 1/10th) in 2008. Far better than the 50% drop I saw :)

Touche, Scandium.

Ok, ok. I don't mind keep certain kinds of debt if that makes more sense.  I DO want to get rid of the PMI.


Dee18

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #9 on: August 20, 2014, 05:33:44 PM »
What costs $350/month for two kids.  Childcare?

Cheddar Stacker

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #10 on: August 20, 2014, 05:48:10 PM »
What costs $350/month for two kids.  Childcare?

So
Many
Possibilities

Daycare, diapers, formula, preschool, camps/activities, doctor visits, toys, clothes, whatever. You have control over what you spend and kids don't have to be that expensive but it can easily happen. We were paying > $200/month for most of 2014 just for some special baby formula due to major digestion issues our baby had.

I know it was our choice, but sometimes health and sanity trump retirement savings. And she was a totally different baby on or off this stuff. We tried multiple times to reduce cost but were confronted with monster baby whenever we did.

Goldielocks

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #11 on: August 20, 2014, 05:54:58 PM »


Is $73k your salary, what you expect your husband's salary to be, or what you have made this year so far?  I am assuming that your husband is employed here, the $73k is his previous and likely future income and you aren't employed given your description....

What next? 

If you are one income, it would be to have a second (even very small) income from the other spouse.  This gives you a "toe-in" and insurance against his disability or ability to increase your earnings quickly, when you feel like going back to work more.

marblejane

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #12 on: August 20, 2014, 06:03:47 PM »


Is $73k your salary, what you expect your husband's salary to be, or what you have made this year so far?  I am assuming that your husband is employed here, the $73k is his previous and likely future income and you aren't employed given your description....

What next? 

If you are one income, it would be to have a second (even very small) income from the other spouse.  This gives you a "toe-in" and insurance against his disability or ability to increase your earnings quickly, when you feel like going back to work more.

Geez. Did you even read the original post? She states that she is the current sole breadwinner, her husband is in school, and he's going to be certified as a teacher this winter.

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #13 on: August 20, 2014, 06:28:29 PM »
What costs $350/month for two kids.  Childcare?

We are lucky enough to not have to pay for daycare (which could be 3x that for two kids in full time around here) with my husband's schedule and two doting grandmothers.  $350 is just an average, which covers diapers, wipes, preschool, summer camp, ballet lesson, clothes.  We spend very little on clothes, mostly second hand, but the cost is still there for 2 kids in 4 seasons.

73K is my salary.  H receives a small stipend from his school, which we have saved - it is temporary so I did not include it as income.
« Last Edit: August 20, 2014, 06:34:34 PM by jezebel »

Goldielocks

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #14 on: August 20, 2014, 06:34:36 PM »


Is $73k your salary, what you expect your husband's salary to be, or what you have made this year so far?  I am assuming that your husband is employed here, the $73k is his previous and likely future income and you aren't employed given your description....

What next? 

If you are one income, it would be to have a second (even very small) income from the other spouse.  This gives you a "toe-in" and insurance against his disability or ability to increase your earnings quickly, when you feel like going back to work more.

Geez. Did you even read the original post? She states that she is the current sole breadwinner, her husband is in school, and he's going to be certified as a teacher this winter.

Okay, I re-read it, but it did not explicitly state who was the income earner for the  $73k, nor did OP mention that she has a job doing xx..   It is possible to go to school while working, after all.   $73k is possible income for half a year for a manager type who is only recently quit (for a holiday before full time employment, say, or to finish a teaching praticum)

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #15 on: August 20, 2014, 07:55:47 PM »
I stated that I was the sole breadwinner in the first post, but I understand your confusion.

Goldielocks

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #16 on: August 20, 2014, 08:44:53 PM »
I stated that I was the sole breadwinner in the first post, but I understand your confusion.

Thanks.  Good luck.

(I still can't find where you stated that the sole income was yours, tho...  maybe I need better glasses..  stated sole income, husband will be employed as HS teacher, etc...   I think your focus on your husbands employment with no mention of your own job / role or job satisfaction threw me.)

cchrissyy

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #17 on: August 20, 2014, 11:41:04 PM »
I think it's worthwhile to really look into refi again, maybe the fees you were quoted wouldn't be that high... I don't think mine were... try a local credit union.

Scandium

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #18 on: August 21, 2014, 06:50:19 AM »
Btw; I wish my account was just decimated (i.e. lost 1/10th) in 2008. Far better than the 50% drop I saw :)

Touche, Scandium.

Ok, ok. I don't mind keep certain kinds of debt if that makes more sense.  I DO want to get rid of the PMI.

Yes, definitely. I should have said save up for 20% down, refi at better rate, then pay the minimum balance each month

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #19 on: August 21, 2014, 07:26:04 AM »
Do you mean putting down 20% of the current mortgage principle at the close of the refi? 

Scandium

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #20 on: August 21, 2014, 07:43:48 AM »
Do you mean putting down 20% of the current mortgage principle at the close of the refi?

You'd have to figure out how much the bank would require to avoid PMI, depends on the assessment of your house. But I'm a bit confused; According to your post you have 30% down on your house? Why do they still require PMI?

Anyway, I guess ask the bank how much more equity you'd need to add to avoid the PMI. Save up that number and refinance. I assume that would be the best way to do it, but maybe your bank has other options. You'll have to ask.

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #21 on: August 21, 2014, 08:07:30 AM »
It is an FHA loan, so apparently we can't get rid of the PMI until 5 years or we refi into a conventional loan even though the LTV is low enough.  We hit 5 years this winter.

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #22 on: August 21, 2014, 08:28:38 AM »
Hitting the 5 year mark is nice and eliminating PMI is nice as well. I still think you should consider a refinance. In my first reply I broke down the numbers and you would save $1,800/year in interest. That's worth a $2-4K cost in refi, but you might be able to find even lower costs than that.

SunshineGirl

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #23 on: August 21, 2014, 09:14:31 AM »
Based on your initial post, here is the route you could go:

1. It looks like you have about nine months of easily accessible (emergency) savings. Since you want a year's worth, just keep building your stash of cash until you get there, which should be in about five months.

2. Since you want to remodel your kitchen, keep saving cash after you have your fully funded emergency savings. For about $5K, you could probably make your kitchen far more user-friendly. (I support your wish to do this sooner rather than later. For every home improvement project I put off and finally did, I always wish I'd done it sooner.)

3. Once your husband gets a job -- IF paying off your mortgage is important to you -- you could send 100% or some other extremely high percentage of his paychecks to the mortgage and have it knocked out in under three years, probably. At that point as well, with two of you employed, you might feel more comfortable having less of an emergency fund, and that could also go toward either the kitchen remodel or the mortgage.

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #24 on: August 21, 2014, 02:40:53 PM »
I am actively seeking the mortgage refinance.  Thanks for the butt kick!  I have gotten three quotes today, from loan depot, my current lender, and my credit union. 

The best quote is from my current lender (which isn't even that great) - 4.25% on a 30-year fixed with ~3K in closing fees (not including escrow payment) and lower monthly payment by $141.  I have very good to excellent credit. 

I could also go for a 25 year loan with the same rate and still lower my monthly payment (by $90). 

Any mustachian advice on that?

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #25 on: August 21, 2014, 02:54:22 PM »
Did you get 15 year quotes, or 20 year quotes? Those are where the real saving lie since the rate will go down so much. There is a credit union where I live that has 3.25% 15 year with about $1k closing costs not counting escrow.

If you go with the 4.25% rate, I would pay it in 30 years rather than 25.

Here's a thread that might be useful/motivational: http://forum.mrmoneymustache.com/real-estate-and-landlording/mortgage-rate-rollcall/msg350871/#msg350871

Reply #25 and everything after was recent, but before that the data is over 1 year old so not really relevant.

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #26 on: August 21, 2014, 06:06:21 PM »
Does it make sense to refinance at such a small rate decrease?  I don't want to lock us into a larger monthly payment without the stability of two incomes, so I didn't look at 15 or 20 year loans.

Cheddar Stacker

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #27 on: August 21, 2014, 09:40:34 PM »
You are likely still better off doing a refi but I would keep looking for better rates and costs. Try pen fed whatever that is. I see people posting about it here regularly.

Also, many banks will do a no cost refi with a slightly higher interest rate. So at worst you pay nothing and switch from 5% to 4.375%. Definitely worth the effort.

zippyc

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #28 on: August 22, 2014, 12:49:15 AM »
I used an online bank for my last refi and that kept closing costs really low. And they had the best rate. Go to bankrate.com and then google some of the banks. I found one that sounded good, then specifically requested a lender whose name I had seen mentioned multiple times. I figured asking for her by name made it harder for her to blow me off. My friendly local credit union charged me Way more in fees and required a nonrefundable $500 application fee. Anyhow, the refi was a success.

I would also highly recommend going the 15 year route to get a lower interest rate. Before I lost my job, we were on a 15 year and it was exciting to see what a noticeable drop the principle made each month and you have such a nice small mortgage that you would barely notice the increase in payment. Our mortgage was $400K, so going from a 15 year back to a 30 saved us $1000 per month. We really miss watching our monthly statements when we had a 15 year.

Also, only refi if you plan to live there at least 5 years. If you think you would sell in a couple years and your lender drops PMI, it's probably not worth the cost.

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #29 on: August 22, 2014, 07:42:42 AM »
I don't know where people are getting no or low closing costs.  The lowest I can find anywhere, credit union, online, or current lender is $3K.  That's almost 2 years to recoup on our relatively small mortgage. 

I can't see (but I am dumb when it comes to this) how this makes sense for .75 point interest rate drop.  I am not willing to take on a 15 year mortgage until H is employed, so it will be at least a year for that.  Unfortunately, my credit has already taken a hit from these inquiries.

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #30 on: August 23, 2014, 07:34:40 AM »
Double post to say that I finally got a refinance option through my current lender that I am happy with!  It will be a 20 year fixed at 4% (down from 30 @ 5%) with about 3K in closing fees.  Our monthly p/i payment will increase by $25, but we will be able to drop the $48 PMI.  That savings will probably be cancelled out by a much needed increase to our homeowner's insurance coverage after the assessment. 

But even if we end up paying the same, we will save ~$30K over the life of the loan. Woot!

We also open another Roth IRA.

charis

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Re: Reader Case Study: Small kids, one income: What next?
« Reply #31 on: December 03, 2014, 02:51:05 PM »
I am bumping this case study with gloomy news.

We have made a lot of progress: mortgage refi, IRA and HSA contributions, lowered car insurance.

BUT, my husband has been in school for a good portion of the last 7 years (three school, three changes of major).  And in the early years, he took out a bunch of loans to pay tuition.  He had little concept of the total amount, so I finally got did some digging and tracked down all the balances.

He owes 37K.  All federal, deferred, about half accruing interest (combo of subsidized and unsubsidized loans) with interest rates ranging from 3.4% to 6.8%.  He graduates this month and they will come due after the grace period.  Ugh.  I knew they were there, but I pushed it out of my mind.

We had been planning to max retirement contributions for the foreseeable future.  Should we halt this and throw money at the loans?  He will likely get position that qualifies him for a loan forgiveness program that forgives $17K after 5 years teaching.  Does that change the equation? That still leaves $20K anyway.