Author Topic: Reader Case Study: Student Debt + Buying House + SAHM?  (Read 4141 times)

MichiganLady

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Reader Case Study: Student Debt + Buying House + SAHM?
« on: August 11, 2014, 06:51:44 PM »
First off, neither me nor my husband are Mustachian, so weíll probably get a few face punches for our choices thus far. I just finished my Masters degree at a private school, which I pursued assuming I would want to work full time. The (financial) problem is, now that we're ready to conceive itís become clear to me that Iím not comfortable working full time with young kids. Iíd love to find a part time job in my field (HR), but canít assume that Iíll find one. If my options are full-time work (40+ since Iím salaried) or staying home, Iíd rather stay home and try to keep my hand in my career through volunteering/freelancing. My husband and I are 39 and 34, respectively, so delaying having kids is no longer a safe option fertility-wise.

Meanwhile, we are putting in an offer on our first home. I think this is a good decision since mortgage/taxes will be less than rent for a comparable home, which would be nearly impossible to find for rent in this area anyway. We are eligible for a VA loan which means thereís no PMI and we donít have to provide a down payment, but we plan to put at least 20% down (34k) anyway to lower our monthly payments. The house is 2.5 miles from my job and 6 miles from his.

Meanwhile, we have some assets. My parents gave us 30K for a house down payment. We also have an additional 40.5k in savings, to be split between the house down payment, an emergency fund, paying down loans, improving the house (we want to put a privacy fence and refinish the hardwood floors), and/or investing.

We are also adding around 1k to our savings each month, and would be able to do more if we budgeted and cut some luxuries. We're hardly the worst offenders out there, but still eat out once or twice per week and tend to drive everywhere. Budgeting is definitely part of the plan, though I admit that the prospect is so overwhelming that Iíve put off starting this process. Mea culpa. Iím not including the details here because it will only result in face punches and I know that we can do better.

For now, my main question is where will our cash do us the most good? Do we attack the student debt? Invest it? Add to the down payment since mortgages donít have income-based repayment plans like student debt does? Plus, how much of an emergency fund would we need, and where do we keep it?

Traditional school of thought tells us to stretch out our debt repayment so we have low monthly payments, while Mustachianism says pay off all debt as quickly as possible. I donít want to attack the debt so aggressively that weíll be sunk if we have an emergency, but recognize that our hair is on fire.

Here are some details:

Income:
Me - 52k
Husband - 43.5k, though heís currently underpaid for what he does and is looking for a job that will pay 50-55k

Assets:
Down payment - 30k cash
Additional savings - 40.5k cash
Paid off 2007 Hyandai Elantra Ė 5k
My 403b Ė 25k
Husbandís 403b Ė 15k

Liabilities:
52k student loan debt - averages to 6.33%, mostly unsubsidized
Husband will graduate with his BA in 2017 with another 15k in student debt
7.5k loan on husbandís 2010 Mazda 6 at 3.5%
Most likely will buy a 170k home with 34k down payment, resulting in 136K loan at 4.25%

firelight

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Re: Reader Case Study: Student Debt + Buying House + SAHM?
« Reply #1 on: August 11, 2014, 07:40:27 PM »
Mustachian newbie here, I'd suggest keeping a healthy emergency fund since you plan to stop working soon (within a year, I presume?) so you can weather any storms till your husband gets a better job.

Then, I'd suggest paying off your student loans especially since they are 6%+. Paying them off gives a guaranteed return of 6% compared to other investments. It would also reduce your total student debt so that when your husband graduates, you don't have a huge amount of student debt. Also, is there any way to consolidate them to a lower rate?

If you are less risk tolerant, prepay part of your mortgage and then attack the student loans.

On the other hand, as you said, now is a great time to start flexing your frugality muscles. You'll be surprised how much more money you can come up with to make a sizable dent in either your student loans or mortgage.

theonethatgotaway

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Re: Reader Case Study: Student Debt + Buying House + SAHM?
« Reply #2 on: August 11, 2014, 08:45:14 PM »
With your schooling and experience it seems like you both are vastly underpaid?

If you are grossing 95k right now (about 6k per month after tax) where is this going? You don't have much savings so a further expense breakdown would be helpful. How much house are you looking to buy, what are you currently renting? When do you plan to stop working? How much more will your husband earn once he finishes his degree?


theonethatgotaway

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Re: Reader Case Study: Student Debt + Buying House + SAHM?
« Reply #3 on: August 11, 2014, 08:50:05 PM »
30k is not enough for your house payment as you mentioned that is what your parents are giving AND you will be using some savings, how much is the 20% dp total?

This will give an idea at the price of house plus monthly payments.

If you quit then your total income as it stands is 45 maybe 55 if he increases his pay. I don't see how that is enough income to live off of with a high monthly mortgage (over 1k per month) AND make payments on a lot of SIL. ... you will probably have to work in order to meet all the payments and not be in emergency mode with a baby.

ltt

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Re: Reader Case Study: Student Debt + Buying House + SAHM?
« Reply #4 on: August 11, 2014, 09:14:34 PM »
I haven't ran all your numbers, but a monthly mortgage payment of between $800-$1000, student loan debt of around $65,000 (by 2017), and an auto payment, combined with all the other monthly expenses of groceries, insurance, clothes, gas, utilities, etc. is a lot of cash outlay on a monthly basis given you want to start a family and be a stay-at-home mom.  I can tell you that I'm a SAHM; however, we have no mortgage payment, no auto payments, and no student loan debt, and it still takes a fairly large chunk of change to run a household.

Is there any way that you can buy a much less expensive home?? I don't know what area of the country you live in.  Can you buy a $100,000 home with the 30k from your parents, making the loan about 70K?  Or find a nice townhome for that price, and then move in four or five years into a home when you have children and they get a little older.

Honestly, your savings of $40K, it's nice to have, but how much is it paying you percentage-wise?  It might be worth knocking out that car loan and some of the student debt.   

lysistrata

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Re: Reader Case Study: Student Debt + Buying House + SAHM?
« Reply #5 on: August 11, 2014, 10:05:23 PM »
Hi MichiganLady - you're right, you're definitely not the worst culprit on here! But you could be doing a whole lot better. Here's what I'd do in your situation, which is a bit of a balanced "a little here and a little there" approach:

I would crunch the numbers and figure out what it costs to run your household now (the costs you would have as a SAHM) and then what it costs to run your household on a dramatically reduced budget if required (what you would have as a more mustachian SAHM or as an emergency if money got tight). Can your husband's income cover those? I would do everything I could to reduce expenses so that it did.

I'd keep $15-$20k aside as an emergency fund. I prefer much lower EF numbers than a lot of people, though. But a lot of people suggest 3-6 months of living expenses, some as much as 12 months. What would $15k get you in terms of the numbers you've worked out above?

Then, I'd take the rest of that money, throw half in as a downpayment, and take the other half to pay off debt. I would get rid of one debt payment - so either one of your higher SL payments if you can get rid of one, or the car. This will reduce the amount of money you need each month to get by.

Then, I would start immediately looking into freelancing opportunities. You may even be able to land a freelance job now. Yes, this might mean working on it nights and weekends right now, but you do this so that you can pay off those loans faster so that you can stay-at-home with the kids later. Then, when you leave your job, you will still have that freelance income for your 1-2 regular clients.

It's hard to make more concrete suggestions without a budget, but this is what I'd do in your case. All the best!

waltworks

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Re: Reader Case Study: Student Debt + Buying House + SAHM?
« Reply #6 on: August 11, 2014, 11:33:56 PM »
Ok, facepunch time: you have accumulated pretty minimal savings despite being 2 adults with decent (though not spectacular) jobs in your mid/late 30s. Your net worth hovers somewhere around zero. And you want to simultaneously purchase a house, have some children, and reduce your income by 50-60%?

I'm sorry, but you are going to have to give up at least one of those things, or have your DH find a MUCH more lucrative job. I agree that if you want kids, you should not wait any longer. But SAHM? Only if you can come up with a serious side gig of some kind AND become very, very frugal.

I'd start with:
-Sell the most valuable car and pay off car debt. If you can pull it off, sell both.
-Cancel your cable, swap phones to Ting/Republic.
-No more eating out. Fall back in love with your crock pot and with legumes and rice.
-Accept that you will not be living in a nice house with a picket fence. Look for 1 or 2 bedroom rentals that you could manage to deal with kid(s) in. Close to DH's work would be ideal as cars are probably not a luxury you can afford until you have money.
-Kill all your student debt or as much as possible while still keeping a rainy day fund that makes you feel secure.
-Make it clear to DH that his #1 priority should be finding a job where he is compensated better.
-Stop buying clothes. At all.
-Stop buying recreational items/electronics/crap. At all.
-Sell anything not bolted down that has value and you don't use every day.
-If your jobs are mobile, consider moving to a low COL area where you think you could raise kids.
-Consider moving in with the 'rents for a while if they will allow it.

Does this all sound horrible? Well, you want kids and you don't want to work and you have (literally) no money. Time to HTFU.

-W

MrsPete

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Re: Reader Case Study: Student Debt + Buying House + SAHM?
« Reply #7 on: August 12, 2014, 06:57:37 AM »
I'd say it's time for some hard choices.  Considering that your household is made up of two working adults and you're essentially at zero, you've been frittering away some cash over the years -- but that doesn't have to continue. 

What I'm hearing is that you want a number of big things:

- You want to get rid of the debt.  Good goal.   
- You want the house.  Good goal. 
- You want to stay home once you have children, and if you're going to have a family it is better for you to do it sooner rather than later.  Again, good goal. 

Thing is, we all want a bunch of things, and they're mostly all good things!  I don't see how these things can all happen given your current numbers.  You've already made the choice to take on the student debt, so that has to be paid.  Realistically, I think you're going to have to choose between the other two goals.  That's the thing about taking on debt -- it removes future choices. 

My best suggestion:  You say you want to stay home with your children.  Start living on that budget now. I know, you don't have the children yet, so how does that make any sense?  Simple:  You start using 100% of your income to pay down the debt, and you live on your husband's income only.  If you can't do it, you have your answer about your future options. 

My second best suggestion:  Get rid of one car.  When we were first married (and we lived 30 miles from my university and my husband's work), we sold his car and lived with just one car for years.  Convenient?  No.  But was it ever a money-saver. 

One last thing concerns me:  Your husband's about to turn 40, and if you stay home with children a few years you'll also be 40-ish if you return to the work force.  I'm mid-40s now, older than most people on this board, and I'm coming to realize that the work force really is different after 50 or so.  When my father lost his job in his 40s and had difficulty finding another, I thought he was doing something wrong.  Now I'm seeing it happen to friends of mine who are a little older than me, and I'm seeing it with more mature eyes: The over 50 crowd is genuinely a whole lot less welcome in the work force than younger folks. While these are all generalizations, there's also some truth to them -- older workers typically earn more, and I am 100% certain my employer would like me to leave so he could replace me with a just-out-of-college 22 year old.  Lay-offs are a frequent occurrence at my husband's office, and there's a pattern -- the older folks go first.  Some younger workers have the idea that the 40 and 50 somethings aren't quite "up to speed" in terms of technology.  What I'm saying is that your husband is soon going to be facing a more difficult workplace, and you're talking about returning to work after a break and competing with less-expensive-to-hire people.  Earlier in my life I didn't really believe this, but -- as I said -- around 40, I began to see it with my own eyes.  My point:  You may find that your window of opportunity shrinks as you pass 50. 

« Last Edit: August 12, 2014, 07:40:03 AM by MrsPete »

MichiganLady

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Re: Reader Case Study: Student Debt + Buying House + SAHM?
« Reply #8 on: August 16, 2014, 07:44:53 AM »
Thank you all so much for sharing your thoughts. You all made great points and told me things that I didn't exactly want, but needed, to hear. As such, I needed a few days to process before responding.

To answer the question of how we got to this point with our incomes, the current incomes are relatively new. Up until January 2013 I held a series of jobs making from 33-35k. I did my undergrad part time and didn't join the full time workforce until 2006, leaving less time to save. I increased to 40k for a year, and just started my current job of 52k four months ago. My husband took his job 4 years ago and was hired in at 38k and gone up from there. We absolutely could have saved more, but did not rack up any credit card debt and actually don't spend much money on random crap. Again, I think eating/drinking out is our real Achilles heal, plus several times a year visits to our respective out-of-state families, and paying my husband's way through community college.

Also, I've known plenty of people with graduate degrees who made significantly less than me, or couldn't find a job at all. This seems like the nature of the current job market where work experience has such a high premium placed on it vs. schooling. The MA will help me in the long run, for sure, but I have to pay my dues for a few years. Meanwhile, my husband is in IT, and the BA he's working on will only secure the type of job he has now, not qualify him for a better one.

Our decisions really come down to choosing between more time with kids and the convenience/security of my continuing to work. MrsPete, I absolutely hear you on the nature of the workforce in your 40s-50s. If I was going to choose between raising kids and my current job, I would stay home, but my current job is a fantastic stepping stone to something that I will enjoy more and pays better. I don't want to miss out on time with our kids, but in the long run I don't think I'll want to miss out on that opportunity, either.

As for everyone's specific suggestions, I can definitely see tightening our belts a LOT and selling one car. Adding freelance work now doesn't seem like a good option since I have an anxiety problem and have a tendency to shut down or have panic attacks if I don't get any downtime. Buying the size house we're looking at is a lifestyle choice, not a necessity. We don't want to buy a starter home and then have to move in a few years, so we're buying a big enough house for us and two kids now. This way, we don't have to worry about selling if the market goes down, and we can invest in it and enjoy the changes that we made. A house near husband's work would be significantly more expensive (50-100k more) than our current location, and rentals in a decent neighborhood and of a decent size in this area could easily top 1k per month. Renting a house would most likely be 1.2k or more, and are difficult to find.

All this is to say that I think being a SAHM, at least at first, is not realistic given our other choices. I'm sad about that, but definitely needed to hear it. Again, thanks to everyone for the responses!
« Last Edit: August 16, 2014, 07:49:39 AM by MichiganLady »