Author Topic: Reader Case Study - What should we do with our extra money?  (Read 3156 times)

WannabeMustache

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Reader Case Study - What should we do with our extra money?
« on: March 29, 2014, 06:53:36 PM »
Hello!

After reading a lot of MMM posts, forum threads, bogleheads wiki and various other sources I was hoping to get some help with prioritizing financial goals! Everyone seems so nice and helpful on this forum that I was hoping some people would have some advice about our situation and what to do. For a little background my wife and I are both 26 and recently got married last fall. We want kids down the line in a few years but not right away.

 She has more debt than me because she went back to school for her teacher's license and is 6 credits shy of getting her Master's Degree in teaching. She is waiting until she gets tenure to finish the degree because school districts do not like to hire a teacher they have to pay more (go figure). My workplace does have a 401k match dollar for dollar up to 6% but I won't qualify until I've been working there a year. They also have discretionary profit sharing of 0-4% after 1 year as well. My wife will have a pension that she is required to contribute. I am currently maxing the HSA but otherwise am not currently contributing to any "retirement accounts". I will probably want to contribute $2,000 if we qualify for the saver's credit for a free $200 from uncle sam.

My question/conundrum is as follows:

We have three different goals we would like to work towards:

-Buy a house
-Pay off our student loans
-Save for retirement

Our current hope is that if she gets a fulltime teaching position at roughly $40,000 a year gross that we could get a house near her work and take advantage of these ridiculous interest rates on mortgages before they go up significantly in the next 6-12 months. Full time teaching jobs are typically available between mid March through mid September. There are down payment assistance options that could probably help us bridge the difference in affording a mortgage and also a tax credit where we would get the first 35% of interest back as a credit if we buy this year. The money for that tax credit is limited and goes through December 2014 or when it runs out. The CFP I spoke with today said it would be a good idea to save up as if for purchasing a loan and then if we can get it, great! If not, we can just put that money into our student loans or invest for retirement. So here is what my question boils down to:

Is it financially better to save to Buy a house and redirect the money to either student loans or saving for retirement if that falls through or just focus on the student loans or investments and get a house after we've paid back more/most/all loans or invested to a certain point. If you want, you can order the three options based on what we should do from first to last. Please explain the financial reasoning or numbers for your recommendation.

Thank you so much for reading and any advice you have!!!

 
Income:

My full time job:

 ~$850 every two weeks after taxes, health, dental, and vision insurance plus maxing HSA contribution.
$0 to $3,000 gross, maxes out at roughly 2400 after tax for a monthly bonus based on performance, no idea how/if this is taxed


My wife's two jobs:

~450 a month tutoring part time after school
~650 a month from substitute teaching

Total income: ~2800 + any bonus

Expenses:


769 a month for rent through September 2014
~380 a month student loan minimum payment (this will go up by ~$295 a month in 6 months when grace period is over)
~200 a month groceries
~175 a month on gas for two cars
~150 a month eating out
~150 a month misc expenses (this covers everything from toiletries and clothes to birthday gifts for family and other random expenses)
88.67 a month for wife's cell phone (I can't wait until her contract expires!)
54.37 a month on cable/internet combo
48.49 a month car insurance for two cars
~40 a month energy bill

Total monthly expenses = 2055.53 feel free to round up to 2100 in case I missed something and go to 2400 when other loans go into repayment

Assets:

6,750 in check/savings after substracting for April rent
3,000 in a Roth IRA I helped my wife open

Total Assets: 9,750

Liabilities:

My debts:

$1,000 5.35% student loan
$9,500 6.55% in four student loans

Wife's debts:

$5,544 5.35% student loan
$5,547 5.75% student loan
$7,200 6.55% student loan

Still in grace:

$12,500 6.8% in two subsidized student loans
$13,500 6.8% unsubsidized student loan

The student loan debt is tax deductible up to 2,500, we are in the 15% tax bracket so you can adjust interest rates accordingly after tax. The 6.8% loans will go down to 6.55% like most of the rest while in repayment due to 0.25% reduction from autodebit.

Total liabilities: $54,791

golfer44

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Re: Reader Case Study - What should we do with our extra money?
« Reply #1 on: March 29, 2014, 07:03:49 PM »
Hey,

I think that you should prioritize getting rid of the debt, work on your retirement savings, and then buy a house.

My reasoning for this order is that if there's even a question of qualifying for the loan, you probably shouldn't be getting one. I know it's tempting given the low interest rates, but depending on the type of house you're interested in, it might be an expense and not an "investment".

If you're willing to live where your PITI+expenses would be lower than your current rent, I'd be more open to the idea. If not, it's just another expense. What is your budget for the house?

TomTX

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Re: Reader Case Study - What should we do with our extra money?
« Reply #2 on: March 29, 2014, 08:09:12 PM »
You have too much debt and not enough saved to be looking to buy a house anytime soon.

kkbmustang

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Re: Reader Case Study - What should we do with our extra money?
« Reply #3 on: March 29, 2014, 08:23:45 PM »
Welcome to the forum! I agree that you need to focus on debt repayment first and foremost. Houses are expensive, not just the down payment, but also maintenance, furniture, paint, insurance, etc. hold off on that as long as possible.

Your bonus is taxable just like your regular pay. It is possible the withholding might be higher on bonuses, but I don't remember what the FIT withholding rules are. (Used to, but I digress.)

Your debt load is high compared to your income/assets. Focus on reducing debt and savings. When you are eligible to participate in the 401(k), contribute up to the max for a match.  Don't leave free money on the table.

Also, wrt your expenses, your eating out budget is very high for two people. I think your grocery budget is fine. Your gas for your cars seems high. How much driving are you doing? What kind of cars?

Good luck!

prof61820

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Re: Reader Case Study - What should we do with our extra money?
« Reply #4 on: March 30, 2014, 08:08:19 AM »
If you look at student loan debt as a tax, it makes it easier to pay it off.  Mortgage debt may be good debt, but as others have pointed out here, not in all instances.  Pay off your student loans as fast as possible - this will free you up to do other things with your life.

http://abcnews.go.com/Business/avoiding-paying-debt-costing/story?id=23101519

CarDude

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Re: Reader Case Study - What should we do with our extra money?
« Reply #5 on: March 30, 2014, 08:49:23 AM »
I agree with the idea of making more progress on those loans first before thinking about houses, unless you can save up at least 20%.

WannabeMustache

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Re: Reader Case Study - What should we do with our extra money?
« Reply #6 on: March 30, 2014, 09:44:37 AM »
Thank you to everyone that has replied so far!

So far the general consensus I'm hearing is pay loans first and house might be second but will probably come third (with some exceptions).

 To answer a few questions, the gas bill is fairly high because my wife is a substitute teacher in 4 different school districts and also has her part time job she has to drive a quite a bit to go to these different locations. We both have mid to late 90's Hondas with okay MPG. My Honda has a V6 because it is pretty cold in the winter and we thought it would be good to have to help start it up in the cold (that may have been a misconception). We will definitely look into trying to lower our eating out budget. $75 a month per person is roughly $18 a week for the cost of one meal plus tax and tip at a local chain restaurant or 2 lunch specials. We would probably look into going out less to reduce that.

Also, to clarify, I have experience in the mortgage industry and know about the 36%/28% gross ratios for PITI. We would only look to purchase a home IF my wife gets a permanent job. Why would we buy a house when we don't know where she would be working? We know we can't afford it currently but basically look at it as the risk of not saving interest on student loans for 6 months for the reward of getting a house with a major discount. If we get a 35% tax credit on interest at 4.5% that's an effective interest rate under 3.0%.

My master plan if we could buy the house this year would be to pay extra to drop PMI in a year or two and reamortize the loan after getting to 20% or 22% LTV, and take the savings from dropping PMI and reamortizing towards retirement or student loans.