Updated - Case Study: Out of debt, now what?

[thegradwife]

Life Situation:

Married
1 kid (2) and hoping for another soon
Husband in a PhD program 2 years in 3 to go

Gross Salary/Wages: $34,000 (stipend)
I pick up odd jobs - last year I earned $11,000. This year I'm on track for about $12,000. They are not stable and I can't count on them.

Pre-tax deductions: None last year

Other Ordinary Income: None

Adjusted Gross Income: $45,000

Taxes: We paid just under $3,000 since I had to pay self-employment taxes

Current expenses:
Rent: $1,560
Utilities: $88
Life insurance: $32 (for both)
Car insurance: $120
Renters: $6
Church tithe: $350 (Not optional in our book)
Monthly subscriptions: $18
Food: $400 a month
Gas: $130

Assets: 10 year old car
$2,500 in a Roth
$9,000 in saving account

Liabilities: None

Short term goals: 2 more kids(5 years) and a house (5-7 years)

Specific Question(s): We were not planning on saving any money during graduate school. We started 2 years ago with $11,000 in debt and we were hoping just to break even. I have been able to keep pretty steady employment though and we have been doing much better than we expected. Our health insurance is free through the university by the way, if anyone is wondering. My questions are...

1) Should we just leave money in a saving account since we are hoping to buy a house or have another kid in the next 5 years?
2) Should our main focus be saving for retirement or a home?

Any other advice is welcomed too.

[MDM]

thegradwife, welcome to the forum.

Appears the two of you are on a good track - congratulations!

You don't have a lot of flexibility for tax advantaged savings now, especially if that stipend is not "earned income", but I'll ask: could you put $11K total into Roth IRAs this year?

It's likely your tax rate will only go up from here, so Roth seems appropriate for you.

[thegradwife]

Thanks!

For the Roth, we just stuck the $2,500 this month, and we are debating how much more to put in.

My husband is thinking we need to keep $10,000 in our bank account before sticking any more into a Roth. To be honest we aren't set on it that though, since most of our expenses are pretty set and we know his stipend will continue for the next 3 years. We feel that we might not need that much of a cushion. (Maybe more like $7,000) Then we would have another $2000 free.

We are planning on trying to stick another $3,000 in this year, but our families told us since we had so many big expenses in the next 5 years that we should just save most of our money in a savings account.

Basically, since we are both 25, we really aren't sure what we are doing and are confused by all the mixed info.

[MDM]

Things favoring the Roth:
  1) You can withdraw up to the amount you contributed at any time without penalty.
  2) Assuming you invest reasonably, over time you are likely to earn much more than what you will get in a savings account.
  3) Your gains are tax free.  You pay tax on the interest in a savings account.

Thing favoring the savings account (for the amounts you are describing):
  1) The amount available will never decrease, unlike the Roth investments that could have temporary losses.

Not trying to cause a family rift, but I think your instincts are better than what your families are telling you.... ;)

[I'm a red panda]

Have you been making debt payments up until now? If so, I would take whatever you were making payments and put that right into a retirement account. Not having that money to spend helps avoid lifestyle creep.

[thegradwife]

Not trying to cause a family rift, but I think your instincts are better than what your families are telling you.... ;)

My instincts told me to bring it to the experts. ;)

Have you been making debt payments up until now? If so, I would take whatever you were making payments and put that right into a retirement account. Not having that money to spend helps avoid lifestyle creep.

No, we paid all of our debts last year. At this point, we just have x amount that goes into our savings each month.

[justajane]

Hedge your bets and put half your excess in retirement and half in the down payment fund that also functions as a emergency fund. What is his expected income once he graduates? If it's going to be high, I would wait until he is making more and then save aggressively for a down payment. For now, build your retirement accounts where you will get a higher long term return than in a savings account. For the money in cash, are you at least using Ally or an online account with a (relatively) higher interest rate?

Your rent seems high relative to your income. Any way to get that lower?

Edited to ask about health insurance. How much are those two new babies going to cost you on your husband's student health insurance? Mine as a Ph.D. student was crap. I would have paid a fortune to have a baby on it.

[thegradwife]

Hedge your bets and put half your excess in retirement and half in the down payment fund that also functions as a emergency fund. What is his expected income once he graduates? If it's going to be high, I would wait until he is making more and then save aggressively for a down payment. For now, build your retirement accounts where you will get a higher long term return than in a savings account. For the money in cash, are you at least using Ally or an online account with a (relatively) higher interest rate?

He is in science field at a top school. We are projecting $70,000 after grad school, and I haven't heard of Ally. We're using USAA right now.

As for another kid, we are planning on $3,000. Our neighbor just had an emergency c-section and that's what her cost. We're hoping since the first kid came with no problems that the 2nd will too and it will be lower.

Our rent is on campus housing for a 600 sq ft 2 bedroom apartment.  We did the math and for it us to find something cheaper we would have to buy another car. Right now we can bike almost everywhere most of the year.

[MDM]

You don't have a lot of flexibility for tax advantaged savings now, especially if that stipend is not "earned income", but I'll ask: could you put $11K total into Roth IRAs this year?

It's likely your tax rate will only go up from here, so Roth seems appropriate for you.

Or...would enough traditional IRA contributions let you get the saver's credit and be even better?

If you are interested, see the attached.  It's a newer version (e.g., some self-employment income and tax calculations have been added) of the case study sticky spreadsheet, populated with numbers from your OP.

One note: DH's student status precludes him from taking his saver's credit, so for the IRS the value in cell G18 of the spreadsheet would be $1K, not $2K.  Because your tax at that point is only $955, and the saver's credit is non-refundable, $1K is the same as $2K for your situation.

Do the SE calculations seem correct to you?

Thoughts about the tIRA/saver's credit strategy?