Author Topic: Reader Case Study: Trimming fat and house purchase  (Read 3149 times)

Donovan

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Reader Case Study: Trimming fat and house purchase
« on: July 17, 2014, 10:07:22 AM »
Hello all. I'm just out of college (finally) in January, and my wife and I have recently gotten married. We are starting our life on what I consider to be good footing.  However, considering that we both have student loan debt, I don't want to get complacent, and I reeeeeally want that debt gone in the quickest time-frame possible (~3 years hopefully). Help me pick places to trim the budget!

My wife is getting her Masters right now, but that ends in exactly 1 year, after which she will be working as well.  After that, we can throw her entire salary (probably ~30K starting) into loans, but I want to make progress until then as well.

Income: $3400/month take-home, $71,000/year salary

Assets:
401K: $3550 (new job)
Emergency Fund: $1000 (recently depleted by car purchase)
House Fund: $10,000 (we are trying to buy one within 2 months)
Cars: 2005 Ford Focus and 1999 Pontiac Grand Prix

Liabilities:
My SL: ~$30,000 @ 6.8%,
Her SL: >$60,000, in deferment (don't have the exact details, but I know it's much larger than mine thanks to private uni)

Savings/Payments:
401K: $590 (10% for full employer match)
Replenish Savings: $500 (Want to get it back to $4000 minimum, then this goes to loans again)
Student Loans: $600 ($400 min right now, extra to principal)
HSA: $100
Total: $1100
($690 is pre-tax, and doesn't come out of take-home budget)

Fixed expenses:
Rent: $705
Internet: $30 (smallest internet available >.< 5Mbs)
Netflix: $8
Pandora: $3
Phones: $20
Car Insurance: $30
Health Insurance: $155 (hopefully down to ~$100 when a credit from work kicks in)
Total: $921

Variable Required Expenses:
Gas: $200 (Reduces by ~half if we buy a house)
Groceries: $300 (Goal: $200. Includes pet food + litter)
Electricity: $70 (all electric appliances, ~15Kwh / day)
School: $100 (books for wife's grad school)
Car Other: $50 (Pontiac has occasional issues these days, + maintenance/oil)
Animal Care: $30 (1 dog, 2 cats, 1 lizard. For vet/flea+tick, not food)
Total: $570

Luxuries:
Eating Out: $50 (1 nice meal a month)
Clothing: $50 (wife wants to have some work clothes over next 3 months. Hopefully thrift shops will keep this lower)
Total: $100

Recap:
Income: $3400/month
Current Expenses: $2691/month
Extra goes to either savings or loans depending on current state of affairs.


Obviously, we have some fat in the budget (Food, gas, and all luxuries). I'm currently trying to take control of the food issues (I'm the cook, but she's the picky eater :p)

One specific question that I have is about the house purchase.  We are currently renting within walking distance to my wife's grad school, which leaves me with a 20 mile commute.  This was done on purpose last year, since it meant we were fine with 1 car and minimized driving as much as we could. However, now my wife has started a practicum on the same side of town as me, and car/gas expenses have gone up accordingly. Considering she only has actual classes 3-4 days a week, but we will work a combined 8-9 days a week, we are trying to move up to work when the lease is up to reduce gas (I can finally bike to work again!). We are looking at ~$100K homes near our workplaces, and have found/begun inquiring about a few. We only have ~10% down, so we will be stuck with PMI for about a year, but I hope that reduced car expenses will help make up for that. PITI on the house looks like it would be ~$50 more a month than current rent with PMI, then less after a year.  However, with the older houses that we are looking at I expect to be putting $100-$200 a month into upkeep/repairs for about a year. In all, I think it's a financial wash, or slight increase, that manages to reduce car use in the long run, but let me know what you think. Oh, and I finally get a yard again :)

For reference, I have looked at buy vs. rent in our area, and we come out ahead after about 2-3 years.  We plan on staying at this house for ~7 years while we eliminate SL debt, increase savings, and have a kid or two. After which we may move to a better school district (the one near the home/work area is literally rated... 1/10 according to most reviews. Just 20 minutes north? 9/10)

I am also currently struggling to convince my wife to reduce AC usage (a large portion of our electric bill right now.) She wants to keep it set to 72f at all times, even when the weather outside is nice. She's so against natural cooling that she hasn't even wanted to let the recent cold snap (~60f outside at night for the last 3 days) cool the apartment for us at night. I want to try and change her mind on this, as the houses we are looking at are a bit bigger than our apartment and so would require more cooling, but she's very set in her ways (her parents keep the house cold enough in summer that I bring a jacket over there with me).
« Last Edit: July 17, 2014, 05:06:49 PM by Donovan »

MrsPete

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Re: Reader Case Study: Trimming fat and house purchase
« Reply #1 on: July 17, 2014, 10:19:11 AM »
The big question I see concerning buying a house is, Your wife isn't yet employed.  How realistic is it that she'll be employed in a spot that's convenient for the house you'll buy.  I'd say buy as soon as she's employed and you KNOW where you're each working.

rmendpara

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Re: Reader Case Study: Trimming fat and house purchase
« Reply #2 on: July 17, 2014, 10:50:27 AM »
I think you can buy a house, but that doesn't mean you should buy one soon.

You just started working, wife is still in school, you have significant loans, old-ish cars, and very little savings (although a solid starting income).

I would feel like you may overload yourself if you're not careful. I think the small income/expense cushion would be fine if you had a larger safety net (more savings), and a house will drain that for a down payment.

Having an older car and a house means you'll need to stay liquid. You don't want to start taking on even more debt if a small repair comes up for either the house/car and find yourself drowning quickly.

It's up to you, but if it were me, I would hold off until I could afford 20% down (~$20k) AND have a 3 months of gross expenses in backup savings (~$5k). Seems like waiting until the wife graduates and finds a job may be a good time as that will add $30k to your annual income and give you a bigger buffer... just in case the location isn't exactly where you think it is.

Donovan

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Re: Reader Case Study: Trimming fat and house purchase
« Reply #3 on: July 17, 2014, 01:28:22 PM »
I'm not too worried about my wife getting a job too far from any house we would buy. This is partially because about 80% of the potential employers that she has looked at are on the same side of town we would be moving to, and partially because she does not want to bike to work so minimizing distance to an extreme level is not the current goal (it is for my workplace though).

I have been worried about our cash cushion as well. With the wedding, the car, and her schooling, this has been a very big year for expenses. However, the way that I see it the house actually goes both ways on this front. On one hand, yes we will have a house, probably a little older, that could require a repair before our savings are built back up after the purchase. However, it greatly reduces our reliance on our older, less efficient car by eliminating a car commute and bringing things like groceries into a closer proximity.  Hopefully, the house would do fine and we would have savings build back up within a few months, but you never can know.

I am willing to admit that I tend to be rather aggressive when it comes to risk like that though.  I probably need to set down my love of yards and biking for a moment a do some more exact math on what we would save vs spend on a house in the next year, with some repair costs, and see how that sways me.  And I have to admit, I hate the idea of PMI.

Cassie

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Re: Reader Case Study: Trimming fat and house purchase
« Reply #4 on: July 17, 2014, 04:26:12 PM »
I am confused on how 3400/month equals $71,000/year.  It is actually 40,800/year.  Also I think the house idea is fine provided you get a good inspection so you do not buy a money pit.

Donovan

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Re: Reader Case Study: Trimming fat and house purchase
« Reply #5 on: July 17, 2014, 04:57:16 PM »
I am confused on how 3400/month equals $71,000/year.  It is actually 40,800/year.  Also I think the house idea is fine provided you get a good inspection so you do not buy a money pit.

I state that that is my take home pay, aka the money that gets dumped into my checking account each month (less taxes and the like). Although I just realized that I made an error in above in saying that my 401K and HSA contributions come out of my take-home pay, while they obviously do not :p Oops. I'll go fix that.  The surplus between budgeted spending and income has gone somewhat unnoticed due to the fact that any surplus has been dumped unceremoniously into the house fund for that last few month to bolster it up.

Oh, speaking of taxes, has anyone ever had luck getting HR to correct tax contributions after getting married half-way through the year, which moves my tax rate into a lower bracket?  I know I would put a big tax return to good use in the spring (good byeeeee one entire loan, minimum), but I'd much rather just have the difference that's left to come this year :)

Mortgage Free Mike

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Re: Reader Case Study: Trimming fat and house purchase
« Reply #6 on: July 17, 2014, 06:49:27 PM »
Your rent seems rather low to me. If you want to get a house, you certainly can. I might wait another year (or two) until your wife is looking, so you can get a home you might want to stay in for a bit.  Once she has a job and you make progress on those loans, you may be able to get a place that will better suit your needs-- and future needs if you plan to have children or bring pets into the picture.

rmendpara

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Re: Reader Case Study: Trimming fat and house purchase
« Reply #7 on: July 17, 2014, 09:10:15 PM »
Your rent seems rather low to me. If you want to get a house, you certainly can. I might wait another year (or two) until your wife is looking, so you can get a home you might want to stay in for a bit.  Once she has a job and you make progress on those loans, you may be able to get a place that will better suit your needs-- and future needs if you plan to have children or bring pets into the picture.

I agree with this. I respect working toward buying a house and trying to meet financial goals, but remember that there's nothing magical about buying a home.

In the short-term, it's a place to live. That's it. Nothing special. In the long-run, it's a good way to force a bit of savings, and hedge against 2% rent increases year after year (think about how much this becomes after 10, 15, 30 years...).

The absolute best time to buy a house is when you can comfortably afford one. Stop trying to rush into things just because you feel like you're "supposed" to do that.

The funny thing about life is that surprises happen all the time. When you plan things with such a small margin of safety, it just creates unnecessary stress.

You mentioned that you like to be "aggressive". In that case, invest aggressively in stocks. Buying a house before you can afford it is not "aggressive", it's just foolish. Homes are not likely to appreciate in the next 5 years like they did the last 5 years. Ain't gonna happen.

Take life as it comes. Save, invest, pay down debt, and live frugally, and the details will work themselves out. I promise.

Good luck with whatever you decide.
« Last Edit: July 17, 2014, 09:12:40 PM by rmendpara »