Saving, debt paydown, and investing: next steps?

[Zoot Allures]

Greetings, all. I'm a new arrival here and am enjoying the high quality of the dialogue and the distinctive lexicon. I thought I might summarize my current situation (for the first time in public! MMM exclusive!) and see what kind of advice people might have in terms of my plan for the next several years. I'd probably place myself somewhere in the middle of the mustachian spectrum--definitely frugal, disciplined, and interested in FI, but looking at retirement in about 15 years if I play my cards right rather than 5 or 10. I'm currently single and am allowing for the possibility that I may have to adjust my mustachian aspirations to suit future relationships, reproduction plans, etc.

My 20s were a financial disaster and my 30s were stable but uninspired. Now, in my early 40s, I'm finally making a little more money, have paid down a lot of debt, and am thinking about what to do next. It's definitely a work in progress.

Assets:
$50k equity in house
$40k in 403(b) (currently contributing 10% of pretax income; employer contributes an additional 5%)
$5k in emergency fund and other savings
$10k in stuff: car (older Honda), musical equipment, mustache wax

Debts:
$19k student loans—half at zero interest, the other half under 5% (payment: $500/month)
$3k line of credit at about 6% (payment: $500/month)
$3k car loan at about 4% (payment: $300/month)

I make about $80k/year. I have some money left over each month after expenses, and I'm putting that into an online savings account for now. I'm planning to open a Roth IRA this year and max it out (and do the same every year going forward).

So, the main thing I'm pondering, in addition to how to generally become more mustachian in my daily life, is how to optimally use the cash that will soon become available when these debts are paid down. The line of credit and the car loan will both be at zero by the end of this year, freeing up $800/month. My three student loans, at the pace I'm paying, will be paid off between 2 and 4 years from now, freeing up an additional $500/month.

My big question: should I throw everything into saving for a down payment on another house? I'm thinking of buying a duplex, living in one half, and renting out the other. The market is so good right now that I feel a bit of urgency around this. I have tenants in my current house and am living in an apartment close to work. I like the idea of owning one more property and having the income be part of my diversified long-term plan. If I decided to focus my savings on a down payment, should I consider going a step further and cutting back my 403(b) contribution for a while in favor of putting more toward a down? (My employer will contribute 5% regardless of what I do.)

That's the real estate option. The other option is to invest in the market instead, starting with increasing my 403(b) contribution from 10% to 20%, which would nearly max it out. And I could look into opening an additional investment account, separate from my employer-associated one. I'd say I have an average tolerance for risk.

The middle ground would be stay the course on my 403(b) at my current 10% contribution, open the Roth IRA as planned, and just put everything else toward saving for a down payment and patiently wait until it's enough. I feel that the Roth IRA supports either option because I can either let it grow or withdraw my contributions to use toward a down payment.

So, based on these details, my age, and my middling level of mustachianism, any thoughts? Any good options I may not be considering yet? Thanks!

[AJ]

What are you hoping your income will be in FI? As a singleton with $80k income you are probably paying a good amount in taxes. If you expect to be in a lower bracket in FI you may consider forgoing the Roth in favor of upping your 401k contribution or contributing to a traditional IRA for the tax deduction.

Also, how much do you think you will need to save for the down payment?

[Zoot Allures]

What are you hoping your income will be in FI? As a singleton with $80k income you are probably paying a good amount in taxes. If you expect to be in a lower bracket in FI you may consider forgoing the Roth in favor of upping your 401k contribution or contributing to a traditional IRA for the tax deduction.

Thanks, AJ. Honestly, I haven't gotten that far in my thinking (or in my understanding of how I'll be situated, taxwise, when I retire). Much to learn. I've heard so much praise for the Roth IRA that I was convinced it would be a good balance to the tax-deferred portion of my portfolio.

Also, how much do you think you will need to save for the down payment?

About $50k to hit the 20% mark, I think. I could consider a smaller down but have been advised to avoid PMI at all costs. But maybe sometimes it makes sense if it means buying faster? I know you can get rid of PMI once equity increases enough.

[AJ]

What are you hoping your income will be in FI? As a singleton with $80k income you are probably paying a good amount in taxes. If you expect to be in a lower bracket in FI you may consider forgoing the Roth in favor of upping your 401k contribution or contributing to a traditional IRA for the tax deduction.

Thanks, AJ. Honestly, I haven't gotten that far in my thinking (or in my understanding of how I'll be situated, taxwise, when I retire). Much to learn. I've heard so much praise for the Roth IRA that I was convinced it would be a good balance to the tax-deferred portion of my portfolio.

If you're not sure what bracket you'll be in then I agree, it is a good idea to have some money in different pots. Personally, DH and I have a high income now and expect it to be much lower in FI, so we are maxing out our 401ks. But not everybody wants to live cheaply in perpetuity, so it will really depend on what you ultimately decide.

I could consider a smaller down but have been advised to avoid PMI at all costs. But maybe sometimes it makes sense if it means buying faster? I know you can get rid of PMI once equity increases enough.

I don't think buying quickly is a good enough reason to take on PMI. It would have to be a very unique opportunity to warrant that. Also, I don't know if all lenders do this, but mine requires that you keep paying PMI until the loan was scheduled to hit 80% (not when it actually does) or pay for an appraisal to prove it is worth enough to justify removing PMI. I thought I could just pay the loan down to 78% and it would drop off automatically, but that isn't the case. YMMV.

[KittyWrestler]

I don't understand why it will take that long to pay down your debt. Should it be debt first, saving next, then investing?
Even if your rates are between 4-6%, the interests are not worth paying unless you can for sure beat that rate in market.. One hand is sure bet, the other hand takes risk...

Personally, with 80K living alone, I would knock down all the debt in 12 months, eat rice and tofu for a year, bare minimum expenses, live in someone's basement to knock out the debt first. $25K is not a huge debt comparing to your earning..

[Zoot Allures]

Personally, with 80K living alone, I would knock down all the debt in 12 months, eat rice and tofu for a year, bare minimum expenses, live in someone's basement to knock out the debt first. $25K is not a huge debt comparing to your earning..

Yes, this is another option I've considered but forgot to mention! Cut back all investments and other savings and throw everything at my loans for the fastest possible freedom from debt. With the interest rates being pretty low, and the student loan interest being deductible, I figured this was pretty cheap debt to carry so I put my payments on auto-pilot and focused elsewhere. But I would certainly consider putting everything else on hold until all the debts were out of the way. It would certainly be a psychological boost if nothing else. Has anyone else chosen this route?

And btw, the $80K income ($73k in salary plus freelance work and amazon/ebay fun) is a new thing for me. A few years ago I was at $55k and thought that was great. I'm grateful and intent on making the most of it.

[warped]

So - what are your goals?

One goal is to work until 65, retire, play golf, maybe travel, etc.

Another plan is to save so much and spend so little that you no longer have to work. You may still work, but no longer have to.

This leads to the question: why are you saving so much for a down payment on a house?

A larger house will cost more up front, and then often leads to lifestyle inflation (gotta have better furniture/car).

Not that that is bad per se, but people around here often value freedom more than large houses.

You could probably get your spending down to $25k/year easily, and under that if you take more measures.

Making 80 and spending 20 or 25, you would have enough to do it all.

[smedleyb]

I say throw everything into paying off your student loans -- especially after you retire your non-mortgage debt.  And I mean everything.  Get radical.

2013 is the year you pay everyone off, save the house.

2014-2016 you invest heavily in stocks and make a killing over the next 20 years.

[Zoot Allures]

So - what are your goals?

Freedom! I want a cabin in the woods and the freedom to work when and where I want to.

This leads to the question: why are you saving so much for a down payment on a house?

A decent duplex in my area would be 200k on the low end, so 50k is my ballpark figure for a down.

I say throw everything into paying off your student loans -- especially after you retire your non-mortgage debt.  And I mean everything.  Get radical.

2013 is the year you pay everyone off, save the house.

2014-2016 you invest heavily in stocks and make a killing over the next 20 years.

I do like this idea! But again, about 10k of my student loan is at 0% interest. Does it really make sense to do more than pay the minimum on that, other than the psychological effect of having it gone? You may have convinced me to pay off the other loans ASAP, though.

[astadt]

Im going to divert from some of the other advice given but I really like your duplex idea and heres why

Firstly youre already a landlord and understand the work involved. Your affinity for being landlord is likely more profitable that having medium risk/return investments. Theres lots of ways to expand your 'stach and real estate is a great way!

Youre renting now... you could have someone else pay your mortgage for you.

I personally think its a great time to get more real estate, home prices are still low (how much longer? no one knows) and rents are higher then ever.

Id recommend you go with a hybrid approach. Your interest rates are really low. I would go with the minimums for as long as i could. Once youve got your downpayment and tenant lined up, you then work your way though the higher interest first.

However, keep up with your 403b and Roth IRA, keep thinking about your tax advantages.

[grantmeaname]

2013 is the year you pay everyone off, save the house.

2014-2016 you invest heavily in stocks and make a killing over the next 20 years.

This.
If you go with the duplex you'll still want to invest heavily so your portfolio doesn't become too lopsided in favor of real estate. If you held only the other asset classes in your tax-advantaged accounts, that would help you out immensely by diversifying you across several sectors.

Imagine how you would have felt in the middle of the last decade if your portfolio was 80% in real estate...

[smedleyb]

I do like this idea! But again, about 10k of my student loan is at 0% interest. Does it really make sense to do more than pay the minimum on that, other than the psychological effect of having it gone? You may have convinced me to pay off the other loans ASAP, though.

You see, this is what I hate about low rates: it makes it seem like there is no debt at all.

No, there is more than a psychological effect that comes from paying off debt.  There is a financial effect too -- namely, thousands of debt has been paid off!

On a smaller scale, I had the chance to let $3500 in consumer debt sit in a 0% account for 14 months, but I decided to just rid myself of it rather than postpone the day of reckoning.  Did I miss out on some debt arbitrage?  It's not like it's easy to make 5% in this age of artificially low interest rates.  As far as I'm concerned the real risk free rate of return is based on the 10 year bond, which is around 2%.  Anything more than that and you're taking on more risk and potentially risk big losses. 

I look at the carnage in Europe and think to myself we're on crack if we think that their turmoil will  not rattle our economy, our stock market, but most importantly, our debt markets.  I look at the rampant denial like it's 1939, the Germans just invaded Poland, and guys in New York and Washington and telling themselves "that's a European thing; it's got nothing to do with us!" 

There is tons of risk in the world; until then pay off debt, save everything you can, and pounce when there is blood in the streets.  I think some real estate markets are ripe for action -- it's a local thing -- but other than that I don't see great opportunity in stocks, and I think bonds are an awful investment for the next 10 years.

Just my two cents.

 

[Zoot Allures]

Thanks for the feedback, folks. You've reminded me why I posted in the first place--because there are several possible paths forward, each with its own merits. Getting rid of all my student loan debt in 2013 would be a pretty awesome project, but if the real estate market starts to recover, will I wish I'd saved for a down payment instead of paying off zero-interest debt? I might end up taking the middle ground in 2013: stay the course on my 403(b), max out the Roth IRA, pay down all interest-bearing student loans by the end of the year, and save anything left over toward a down. Then my only remaining non-mortgage debt would be about $8k at 0%.

[gooki]

Sounds like a good plan to me. I only recently paid down my 0% student loan. But it was the last debt to go (house was paid off last year
)