Roth IRA vs Aggressive Down Payment Savings

[monstermonster]

I'm in a situation where I just got a substantial raise at work and am now refactoring my savings/retirement and charity in my budget. I'm struggling with the choice of maxing out my Roth IRA this year vs saving more aggressively for a down payment for my first home and would love opinions in general and based on my situation.

28 yo single female
Income: $39K gross
Debt: none
monthly 6% to 401K: $170
Average Monthly Living Expenses including rent & fun money: $1250


That leaves ~$830 to budget towards my Roth IRA, savings, and charity after uncle sam and medical insurance are paid for.
My current savings/charity/retirement allocations are: $160/month to charity (I work in nonprofit fundraising so this is a priority for me)
$360/month savings to down payment (An additional $300/month is put into an IDA account I can use for this down payment each month. The total amount I will have in that extra account will be $6000, I can first access it on February of 2016)
$70/month in my "rainy day" account
$50/month to my Roth IRA


Now that I've got a bigger income, I want to significantly increase my retirement savings but I'm also saving to buy my first house in the next 12-18 months. Ideally, I should be maxing out my Roth IRA every year at $450/month which would put me at 18% retirement savings instead of 7.5%. (Some day I might get to 50%...)

Thoughts: given the wonders of compound interest and the fact that I am already 28 years old, should I prioritize the Roth IRA or wait to start doing that and get my down payment stash bigger? I'm aiming to have $18K available for a down payment/closing costs when I buy, I currently have $3400 saved. If I give the max to the Roth IRA, I will either be pushing out my timeline to buy by 6-12 months, reducing my charitable giving (which I really don't want). But I lose out on all that compound interest on my Roth IRA if I don't give.
Other notes: in the long-term, owning a home will save me costs living in the tightest rental market in the country but once I buy a home, my monthly costs will jump up about $400 (including savings for repair.)

[JLee]

How'd you determine that you will be saving money while buying if your monthly expenses will increase by $400 (not to mention the $18k down payment/closing costs)?

[Ghzbani]

Not sure if it helps -- in fact it probably just complicates matters -- but you can put the money into a Roth and pull out principal at any time (though that won't really help since your interest on 18k will basically be negligible)

So at least at this point, until you decide for sure if you want a house asap or you want to wait, I'd be putting everything into my Roth.

[monstermonster]

I won't put it in the Roth because my Roth is allocated pretty aggressively right now, and I could actually take losses on the principal in such a short period of time (12-18 months).

I'll end up saving money because my local rental market is completely insane - lowest vacancy rate in the country with little to no tenant protection- rents are increasing 14% or so a year. The rent vs buy calculator (even calculating with a insanely aggressive return on opportunity cost investment and only 7 years in the house before selling) puts me ahead in 5 years with buying.

I should also mention, I have to buy a house by January 2017 or I lose out on the $6000 match on my down payment (it's a special savings program with a sunset timeline.)

[Runrooster]

But you can change your allocation for future deposits on the Roth.  It sounds like you're going to be on a very tight budget and the Roth could be used as a shelter for emergencies, but only if you keep the allocation more conservative.  Will the housing be larger than current rent, so that you could take on a tenant?

One of the ways I think about charity giving is that I can give more when I can get the tax deduction.  Right now, you're not giving enough to make it worth itemizing, but once you have housing you will be over that threshold.  Why not build the emergency fund for yourself first, and commit to giving more later?  Is it something your management notices and cares about?  Bundling 3 years worth of charity in one year would allow you to give more, wouldn't it?

[monstermonster]

Oh! I didn't know that I could change my allocation for future deposits on a Roth. I'll have to look into that with my bank, I haven't noticed that option... Seems like I could get better interest with my high-interest savings though for that short a period of time than having it in bonds.

The housing cost will be larger than my current rent because I'm paying EXTREME under market right now and there's no guarantee that will continue (no rent control or anything here) and my housing is pretty shitty at the moment (great roommate and neighborhood, but moldy 1972 smoky apartment building.) I'd love to take on a tenant, but all the multi-bedroom places are outside my price range. I will be able to rent it out on airbnb given that I travel for 35-50 days/year which isn't an option in my rental at the moment, so the higher monthly cost will be offset by income from airbnb.

However, the cost for a condo, including PITI + repair + HOA is still ~$400-$500 less than the cost of a comparable rental in the neighborhood. Things are crazy here in the rental market.

Edit: Also I have an emergency fund I didn't mention, equal to 3 months living expenses. So I don't need to build that up much.

[monstermonster]

Oh! Regarding charity - there's no "management" at work - I direct fundraising for a small non-profit, so I'm the boss. But as someone who has worked in the field for a long time and values nonprofits, I value monthly giving to small nonprofits over large lump sums - it helps nonprofits smooth the ups-and-downs of other types of funding. It's extremely important to me and is non-negotiable. I've never owned a car, but I've always given 10% of my income - even when I was in Americorps making $800/month and a social worker making a $100/month stipend.

[forummm]

Oh! I didn't know that I could change my allocation for future deposits on a Roth. I'll have to look into that with my bank, I haven't noticed that option... Seems like I could get better interest with my high-interest savings though for that short a period of time than having it in bonds.

With many Roths you can change your allocation at any time. Generally Vanguard is the best place to have your account. They have the best funds and lowest fees.

Usually you can get the seller to pay your closing costs. They also pay the real estate agent commissions too. So you might not need to save up as much money as you thought. But when you sell be prepared to have all that come out of your pocket too.

[Runrooster]

Okay, i don't understand about the charity issue but I accept it as non negotiable.  (Three years in one doesn't have to be a lump sum but obviously it isn't as smooth as giving all years).  I don't know what MMM says for emergency savings, but for me I would like to have 6 months when renting and much more when buying.  How much more?  I'd probably go with 1-2 years plus enough for a major repair like roof/boiler.  I guess a lot depends on what kind of other safety nets you have(family, credit card), but in my profession I would allow at least a year for getting a new job in the same city, and 2 for getting back to same level of income.  Let's try not to think about the last housing crash and how many people were locked into homes they couldn't afford to sell and jobs only available elsewhere.  Of course it sounds like you're in heaven for rentals, should you need to relocate. As far as the Roth, i don't see why you have to put it in bonds.  I made my 2015 contribution a few weeks ago and haven't invested it so its earning interest like my checking account.  I agree that interest bearing cash account is the best place for emergency funds.

Edit: in your first post you said buying will make costs go up $400 and later said they will drop.  Obviously I have misread something, but which is it?

[monstermonster]

I don't know what MMM says for emergency savings, but for me I would like to have 6 months when renting and much more when buying.  How much more?  I'd probably go with 1-2 years plus enough for a major repair like roof/boiler.  I guess a lot depends on what kind of other safety nets you have(family, credit card), but in my profession I would allow at least a year for getting a new job in the same city, and 2 for getting back to same level of income.  Let's try not to think about the last housing crash and how many people were locked into homes they couldn't afford to sell and jobs only available elsewhere.  Of course it sounds like you're in heaven for rentals, should you need to relocate.

Edit: in your first post you said buying will make costs go up $400 and later said they will drop.  Obviously I have misread something, but which is it?

Thanks for all your feedback! I'm really enjoying this input and appreciate your time reading about my situation :-)

I don't need to worry about major repairs as much because I'll be buying a condo rather than a SFH so there's no roof/boiler/exterior things to be concerned about (though I've included $120/month in my calculations for home repair savings + the average HOA I can expect to pay)- there's simply not single-family homes available in my price range in this town. But I'd prefer a condo anyway, as I work 80+ hours a week and don't have time for a yard, etc.

Re: housing getting more expensive vs less: I'll be paying *less* in the long-term given the rental market in my city but *more* on a monthly basis than I am paying at the moment. Why? Because my current sub-par housing is very undermarket for rent for the city.
That increase in monthly expenses includes projected repair, HOA, insurance & property taxes (though I qualify for property tax abatement based on my income; can't guarantee it.)

Additionally, if you factor in being able to get income off of airbnb rentals when I am out of town, it will more than make up the difference. Not guaranteeing that, of course, but it should smooth the curves.

I have a full-time job + 2 contract side jobs that I don't even count in my income (I haven't had less than 5 simultaneous jobs in years) so I'm not super-worried about emergency savings relative to problems getting reemployed. The good/bad news about my field, is it would be hard to drop in income a whole bunch if I changed jobs. Though I would definitely like a 6 month savings fund, 3 months is pretty comfortable for me at the moment. The good news is that the monthly cost of the condos I'm looking at are still affordable on $10/hr, which hopefully I will never make so little again but is still doable.

Re: renting out the condo if I have to move. The condo I may buy, off-market, has been rented out on a month-to-month basis by my friend for 3 years as he's been living in iceland & germany. He makes ~$6000/year after expenses and mortgage on the property. So conceivably, if things got tough I could rent it out easily as he has.

[forummm]

I think that trying to predict what will happen with the housing market in your area could be a risky thing to do. Just because rents have been going up at a rapid pace lately doesn't mean that they will continue to do so for the next 5 years. And it doesn't mean that buying is a great idea either. Just a note of caution. You haven't provided any other key financial details with respect to the decision to rent/buy so we can't provide any more insight there.

[monstermonster]

I'm actually willing to have feedback on the rent/buy decision so here's the financials if you're interested in this. It's a challenging decision.

30% of my gross income is $1000/month, which is the HUD affordability factor.

The places I am looking at are $130,000-$175,000, which will be ~$730-$950/month including mortgage, taxes, insurance, PMI, and HOA with a 10% downpayment at the loan rates I qualify for at the moment (of course they may go up a bit.) I am currently pre-approved for $220,000, which I wouldn't dream of spending.

I currently pay $600/month to share a 2-bedroom, but it goes up every 6 months ~$75 and is pretty sub-par housing (great roommate but moldy and 1972 everything.) There's no rent control in my state and most leases are month-to-month and you can be evicted no-cause at any time with 30 days notice even with a lease. It also can take months to find a place even if you have the means to pay. In my very mustachian neighborhood, comparable market-rate rents (with no more rent protection than I have) are ~$800-$1400 month, trending towards the higher end. Rents might not continue to do the death spiral upwards they are currently doing (particularly as they are building more housing stock finally that the recession is turning around) but even during the recession before housing was crazy undersupplied, I was paying $800/month, so what I am paying currently is less than market rate even if we had another dip in the housing market.

Here's what my monthly budget will look like if I buy a condo next summer (high end cost estimate), and my income stays the same:

$1000 PITI & HOA
$170 to 401k
$650 Expenses (I have that very broken out if you want it- I track everything and this includes monthly padding for all one-time expenses and includes my travel savings)
_________________
$160 to charity
$450 to Roth IRA
$200 to emergency & home repair fund

That would put me at 30% of income on my mortgage, 18% of income being saved for retirement, 5% of my income to charity. Not the most mustachian of savings rate, but any additional windfalls after the tax man takes his cut will go into retirement savings.

This doesn't include any prediction of windfalls from my contract jobs (unpredictable but for the past 5 years $3-11K/year), airbnb rentals, mortgage tax deduction, etc. This is only based on my full-time job income.

[Spondulix]

Okay, i don't understand about the charity issue but I accept it as non negotiable.  (Three years in one doesn't have to be a lump sum but obviously it isn't as smooth as giving all years).  I don't know what MMM says for emergency savings, but for me I would like to have 6 months when renting and much more when buying.  How much more?  I'd probably go with 1-2 years plus enough for a major repair like roof/boiler.  I guess a lot depends on what kind of other safety nets you have(family, credit card), but in my profession I would allow at least a year for getting a new job in the same city, and 2 for getting back to same level of income.  Let's try not to think about the last housing crash and how many people were locked into homes they couldn't afford to sell and jobs only available elsewhere.  Of course it sounds like you're in heaven for rentals, should you need to relocate. As far as the Roth, i don't see why you have to put it in bonds.  I made my 2015 contribution a few weeks ago and haven't invested it so its earning interest like my checking account.  I agree that interest bearing cash account is the best place for emergency funds.

Edit: in your first post you said buying will make costs go up $400 and later said they will drop.  Obviously I have misread something, but which is it?

I don't get the charity issue either... I understand (and completely respect) the priority of giving, but math-wise, we are talking about ~$1900/year. Shouldn't non-profits be budgeting knowing that giving is going to be inconsistent throughout the year? That's just smart business planning - a company that focuses on holiday products knows that summer will be slow. I'd be hesitant to donate to an organization that was so on the edge that my $100 monthly (vs quarterly or yearly) meant the difference between making ends meet or not. That doesn't mean it's not a worthy cause - but it's a red flag to other potential business issues, money waste, taking on more than they can handle, etc.

I thought that "inconsistent giving" applied more to windfalls like the Ice Bucket Challenge that brought in $100 million unexpectedly to ALS. I have a friend who had a NFP go viral (she wasn't even a business yet when it happened) and found herself in a similar place (not in the millions but more money than she knew what to do with - or would likely get in the next few years).

Personally, I'd be investing like an endowment. Invest some of what I would donate and let it compound. Down the road, it'll be built up to take out that 4% without ever depleting the fund. It allows for giving in perpetuity - which to me is much more valuable but holds the exact same principle. But, I get it's a personal choice.

[monstermonster]

Nonprofits can and do plan for the ups-and-downs, but that doesn't mean it doesn't help to have consistent income from individual donors (I'm mostly talking about individual support vs large restricted grants- there are many sources of funding). My $100/month doesn't make or break a $2 Million dollar nonprofit, and no good Development Director takes anyone's gift for a given.

It's just my choice and priority to give. Giving even when it isn't easy is good for the soul. I have more wealth than I've ever had, and I've benefited from the generosity of shelters, social services, community health programs, in my life. It's my duty to give back now that I have wealth. Some people want to buy expensive groceries, some people like Crossfit. You do what gives you value. To me, supporting my community through philanthropy gives me value.

Additionally, it's just simple can't raise money all day and then not give my own wealth. I can't look a donor in the eye, ask them for $10,000, and be unwilling to give a financially significant gift myself.

[Spondulix]

Additionally, it's just simple can't raise money all day and then not give my own wealth. I can't look a donor in the eye, ask them for $10,000, and be unwilling to give a financially significant gift myself.

It's completely a matter of perspective. The way I see it, you are also being philanthropic by the nature of working for a NFP. Outside of a charity, you'd be earning more (maybe a LOT more) in a job with the same set of skills. It's essentially a donation - it's a sacrifice of your actual worth for the sake of a cause. I find it quite admirable when people choose to do that. So, is it you or the donors who are judging for not giving? I would think most donors appreciate the time/effort/sacrifices that goes into NFP work (vs judging you for not sacrificing even more of yourself for the cause.)

 I totally get the idea of giving back and supporting causes that you believe in... but there comes a point where it's so self-sacrificing it's affecting one's own ability to survive. "Giving back when it isn't easy" (in regards to finance) can in some circumstances be more irresponsible than it is honorable. My friend with the charity can't always pay her personal bills cause she's not drawing enough for herself (or compromising by taking other paid work). She's putting the needs of the cause above her own needs for survival, and that's risky for both herself and the charity.

To say that some people give to charity while others buy expensive groceries or cross fit isn't really relevant because I think we're talking about giving as a matter of need, not desire. From a financial standpoint, filling an emergency fund before tithing/donating is always going to be smart financial planning. But, it's a matter of priority; what's more important - basic financial security or your cause/belief? Peronally, I think there's a point where you have to be your own charity so you don't become a charity case. If it's still important to give when you're on the edge financially, you still have something to offer: time and energy.

[monstermonster]

I guess I just don't see myself as living on the edge financially like you do. I am making twice what I was a year ago, and 10 times what I was when I was a live-in social worker. I have a healthy bank balance and even more wealth in terms of security in my surroundings and friendships and physical safety. I have the privilege of a college education (paid for by the generosity of other alumni who gave to my college's scholarship fund). I have the privilege of white skin that makes it easier for me to move through the world. I have access to safe and affordable healthcare.  I have a $5,000 custom bicycle to get around on. I can buy a plane ticket anywhere in the world with the money I have in the bank.

My income puts me in the top 0.61% richest people in the world by income. The way I see it, it's just greedy to keep all of that wealth. If I can't afford to give to those less fortunate AND save for a home, then it is a higher priority to give to those less fortunate. If can only afford to either give to charity OR go to to $60/week dance classes, I'll give to charity.

[frugaliknowit]

Roth, Roth, Roth!!  A home ALWAYS costs more, is not a good financial investment and can wait.