Author Topic: Case study - suggestions welcome!  (Read 3498 times)

unccnick

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Case study - suggestions welcome!
« on: April 27, 2015, 02:12:19 PM »
I've been reading the blog and forum for several months now, but this is my first post. I've read a lot of these case studies, but I wanted to throw out a "what would you do" in an effort to get other options for a forthcoming situation. I'll outline some stats below, but essentially my wife will be starting a new job soon, and we've learned to live off my income alone over the past several years. With this new income I wanted to get your feedback on what you would do -

All numbers are per month

Income -
$4,800 take home (not including rental income described below)

Investments -
$1,200 goes into a 401k (both my and my company's matches combined)
We do own a house that we now rent - $100k on mortgage, and rental income covers all expenses + a couple hundred/month

Debts -
No CC debt - paid in full monthly
No car loans
Student loans - combined minimum payment of $493, ~30k total outstanding: $2,200 basically interest free, 1 loan of $3k @ ~6% and everything else between 2%-3%

Total expenses -
Excluding the rental mortgage (since that is covered by income not included in the $4,800 above) our total expense are ~$3,700 (We live in downtown DC and our $1,900 rent expense is virtually inescapable in our location)

At this point I contribute just what is necessary to receive the full match to my 401k at work. And we are able to put back ~$1k/month into savings beyond that and still live very comfortably. When my wife begins working she will bring home an additional ~$2,600 each month. My question pertains to whether you think we should start paying off the student loans (interest is mostly very low at <3%) or the mortgage on our rental house (3.25%), max out both 401k plans (she will be eligible too, but with no employer match for the first year of employment) or invest in other places. Our total household salary will be ~$128k when she begins working, plus we receive an additional $14k per year from the rental, so I know our tax liability/benefits as it pertains to 401k will likely be impacted.

Thanks for any help you all can provide. If more detailed stats are necessary I can help.

I should add, that I'm not necessarily looking to retire early, but am looking into building wealth.

Sibley

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Re: Case study - suggestions welcome!
« Reply #1 on: April 27, 2015, 02:18:44 PM »
My thoughts:

100% of wife's income should be used for debt retirement/investments.

Personally, I'd wipe out the SLs, highest to lowest interest rates first.

Take the extra from the rental and put it towards that mortgage.

RexualChocolate

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Re: Case study - suggestions welcome!
« Reply #2 on: April 27, 2015, 02:31:55 PM »
Lot of 1bdrs for a lot less than 1900 a month in DC. Can lower that with no real quality of living decline easily. At <100k of income, do you really need to live in a unit that costs 24k a year? Reasonable by American standards, not by mustachian.

I'd do a good hard look at that house as an investment property. Should be getting 12% ROA a year (1% of house's value a month) or in the long run its not a good risk weighted return. Short term positive cash flow represent true economic costs of land lording, like real long term depreciation, liability, etc.

Overall you're doing very well keeping expenses low. You'll have the same large, uneasy cuts everyone does to deal with. See if you can't find some more reasonable places to stay, but without knowing what you do, your income and expenses look very good.

You need to max out your Roth IRA for the year ($5500) and start getting invested. Throw it in VTSAX (or whatever the <10k version is) and forget about it.

I'd attack the 6% SL, but would probably pay the rest as slowly as possible since theyre essentially free money.

MaggieDrsg

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Re: Case study - suggestions welcome!
« Reply #3 on: April 28, 2015, 09:11:01 AM »
I can't tell how much you're currently putting into your 401k versus what is the employer's contribution, but I would max both 401k's, pay off the 6% loan, and then once that is gone max Roth IRAs for each of you. 

nereo

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Re: Case study - suggestions welcome!
« Reply #4 on: April 28, 2015, 09:24:35 AM »
With this new income I wanted to get your feedback on what you would do -

Student loans - combined minimum payment of $493, ~30k total outstanding: $2,200 basically interest free, 1 loan of $3k @ ~6% and everything else between 2%-3%

Thanks for any help you all can provide. If more detailed stats are necessary I can help.

I should add, that I'm not necessarily looking to retire early, but am looking into building wealth.
Here's what I would do.
1) continue to live off of your paycheck and use all of your spouse's new income for paying down the 1 loan at 6% and the rest for investments.
2) Open up and max out t-IRAs for both you and your wife ($11k/year, or $916.67/month, or $211/week)
3) max out your 401(k)s.
4) save any additional income into taxable accounts.

Doing #2 and #3 will dramatically reduce your tax burden.  I see no point in paying down SL or mortgages that are less than 4% since you will have an 'extra' income, savings and manageable monthly debt payments.
Lather, rinse, repeat and in 5 years you will be shocked at how much progress you have made.

unccnick

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Re: Case study - suggestions welcome!
« Reply #5 on: April 28, 2015, 11:56:22 AM »
Thanks for the feedback. You are all suggesting what I was already thinking. It's just good to hear it from another source. I was really battling wanting to dramatically pay down the debt, but balancing that with the low interest rate conundrum, so this makes it a lot more clear.

nereo

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Re: Case study - suggestions welcome!
« Reply #6 on: April 28, 2015, 12:00:30 PM »
Is your mortgage fixed?

unccnick

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Re: Case study - suggestions welcome!
« Reply #7 on: April 28, 2015, 12:13:16 PM »
The mortgage is a fixed loan.

Jeremy E.

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Re: Case study - suggestions welcome!
« Reply #8 on: April 28, 2015, 12:29:51 PM »
The order in which I would put my money to use if I were you,
1. Pay off 6% loan
2. Make minimum payments on student loans and mortgage
3. Max out traditional 401k and traditional IRA
4. Put the rest of your money into a trade account
In some cases, it might be better for you to pay off your loans rather than putting money into a trade account.  For instance if you would randomly take the money out of your trade account on blow the money on useless things. However if you aren't looking to retire early maybe it's okay to do that. Regardless, good luck.