Author Topic: US, one income family; if not in a house, where to put cash?  (Read 2678 times)

alphie

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US, one income family; if not in a house, where to put cash?
« on: August 13, 2015, 02:41:33 AM »
Hi All,

I'm in that situation of feeling like I get paid well, feeling like I at least have moustachian tendencies, but disappointed at how little we're saving.  I don't think my wife could earn enough to justify childcare costs for our preschool twins, so we've been working on the assumption that it doesn't make sense for her to work.  We are renting and one big decision is whether to buy.  Basic calculators I've used online seem to indicate that it's not worth buying unless I'm sure I want to keep the property for at least 7 years.

Current rent to house price ratio is about 20.  The most extreme realistic downsizing would be around 30% cheaper to buy with a ratio of about 15.

Earning and Spending
Gross$182k
Income taxes$29k
Rent$26k
Shares$23k
401k$18k
Groceries$16k
Cars$10k
Cash$7k
Shopping$6k
Dining out$6
Medical$7k
Utilities$4k
Entertainment/Vacation$5k
Home$3k
Other$9k
(Pie chart of this attached).

Surplus is projected and actually came as a surprise!  The gross income includes absolutely everything for which I have a number.  Health insurance is not included.  It comes out at about 22% savings.  I presume this should be higher even at this expensive time in our lives.   I'd welcome input on which of these numbers I should be focussed on most.  I'm happy to break down any categories which catch your attention.

Assets
Cars$15k
Pension (EU/US tracker fund)$80k
401k (Vanguard)$20k
Shares$15k
Instant access savings$85k

I've been keeping the $85k around while I decide whether or not to buy.  If you think it makes sense to keep renting, suggestions of alternative investments would helpful.  If you think I should consider buying, does it make sense to divert some of the other assets?
« Last Edit: August 15, 2015, 01:52:01 AM by alphie »

Able was I ERE

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Re: US, one income family, rent or buy?
« Reply #1 on: August 13, 2015, 12:19:39 PM »
According to Mr. Money Mustache, If You Have to Ask, You Should Probably Rent.   However, being Mustachian, you probably want to figure things out for yourself.  Have you see the excellent NY Times Buy/Rent Calculator?

From your post, it sounds to me like you should rent, given the uncertainty of staying in the area.  Almost by definition, you're unlikely to find a house that is both 1) better to buy now, and 2) lucrative to rent out if you move away.  Run the numbers for a potential rental to see whether it makes sense in your area.

alphie

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Re: US, one income family; if not in a house, where to put cash?
« Reply #2 on: August 15, 2015, 02:32:03 AM »
Thanks for the feedback and the reminder of that post.  I tend to agree that renting looks like the winner although it may be on the marginal side.  A lot of the neighborhoods we'd like to live in tend to be very light on rental properties, which is probably the reason we're still entertaining it.

To focus on the other part of my question (I changed the title a little), what would you recommend doing with the money in the savings account while we rent, given the situation above?

Able was I ERE

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Re: US, one income family; if not in a house, where to put cash?
« Reply #3 on: August 17, 2015, 01:45:34 AM »
To focus on the other part of my question (I changed the title a little), what would you recommend doing with the money in the savings account while we rent, given the situation above?

If you plan to continue to rent, then I'd suggest investing the money for the long term.  Personally, I'd put it all into an index fund (have you maxed out both your IRAs this year?).  If you feel you you want to be diversified into real estate---buy an REIT or possibly an investment property (some location where the numbers make more sense).

Side question: what are "Shares"?  If that's savings, along with "401k" and "Surplus", then you are saving 29.1% of your income!

If you're looking for help on reducing costs, post a full case study with a more detailed breakdown and others will have much more detailed input.  At first glance almost everything looks high to me, but especially your food costs of $1833 / month (Groceries + Dining Out) and $1833 / mo Misc (Shopping + Cash + Other).   Also, if you rent, what is $3k / year for "Home"?

Scarter

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Re: US, one income family; if not in a house, where to put cash?
« Reply #4 on: August 17, 2015, 04:41:45 AM »
Buying a home has two components:  First is an emotional purchase, a stable roof over your family's head (hard to put a value on it).  Second is the business aspect, investing in a home can be expensive at times with a potential long term reward.  It doesn't sound as though your family has decided that this it the spot your family will be settling down.  If that is the case, rent until you decide to plant roots (less than 5 yrs my suggestion).  If you decide to live at this current location for more than 5 years, then I would buy.  As an RE agent for 16 yrs, I get this question a lot. 

CONS of buying- putting all your money in one basket with expenses and maintenance.  Often times, the expenses and maintenance are a monthly headache.  You are the maintenance guy!

PROS of buying - The home is all yours!  Go ahead paint it that Homedepot orange.  As you enjoy that roof over your head, you get some write offs that should offset some of that income tax.  Potentially make some equity from it and move asset to your forever home at a future time.  Hopefully you reach FI, paid the damn thing off and only have to worry about insurances, property tax and maintenance.  Even with IPM, it will be a lot less then renting, as lease continues to increase.

I would suggest running a rent vs buy analysis over 5 year time period.  Include expense and maintenance in your calculation. 

Continue to rent- that expense will increase over time and you will always remain as a cost item in your budget.

Hey kudos to you!  You have options.  Most people don't have that.  All the best!

alphie

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Re: US, one income family; if not in a house, where to put cash?
« Reply #5 on: August 21, 2015, 02:11:56 AM »
If you plan to continue to rent, then I'd suggest investing the money for the long term.  Personally, I'd put it all into an index fund (have you maxed out both your IRAs this year?).  If you feel you you want to be diversified into real estate---buy an REIT or possibly an investment property (some location where the numbers make more sense).
If I do decide to rent for the next few year at least, it seems like it would be a good idea to be building up some of my savings in a way that could eventually be used to buy a house without penalty.  For example, I would like the opportunity to take advantage of any future housing market downturn.  I guess that means I should be at least maxing out a Roth IRA each year.  I also read that I could take $10k out of a Traditional IRA for a down payment, so maybe I should put put $10k in one of these too.  Any other methods of keeping the funds accessible but sheltered?

Side question: what are "Shares"?  If that's savings, along with "401k" and "Surplus", then you are saving 29.1% of your income!
This is an amalgamation of publicly traded stock I have acquired, partly through an ESPP.  I believe the best plan for these is to sell each batch as the year expires in an attempt to redress the imbalance they create.  I decided not to count the surplus in the my savings rate because it's currently only a projection, but point taken :-)
 
At first glance almost everything looks high to me, but especially your food costs of $1833 / month (Groceries + Dining Out) and $1833 / mo Misc (Shopping + Cash + Other).
Yes, a quick search shows a the grocery cost comes out as "a liberal plan"!  That should be an area of focus, including weeding out some mis-reporting (Costco can be bad for this).  70% of 'dining out' was one particular coffee chain.  My wife is addressing that, so hopefully the projection will turn out to be wrong.  'Other' in includes my subcategories 'Children', 'Relocation', 'Life/Disability insurance' and 'charity'.

Also, if you rent, what is $3k / year for "Home"?
$1k is furnishings, the rest is renters' insurance and all the other stuff for which a landlord isn't liable - gardening, pest control, cleaning, maintenance etc.

I would suggest running a rent vs buy analysis over 5 year time period.  Include expense and maintenance in your calculation.

Also, thanks for all the advice.  I agree that there's a definite non-financial return to be considered in home ownership.  I'm coming to the conclusion that it would be a good idea to continue to rent for a while whilst trying to build up a fund which could be used for a house if the stars happen to align later on.  Maybe this is the 'middle way'.

ysette9

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Re: US, one income family; if not in a house, where to put cash?
« Reply #6 on: August 21, 2015, 09:19:33 AM »
We have agonized over this rent vs. buy decision for quite a while now. When it became clear that there are no pressing reasons to buy in the next several years, plus the rent vs. buy calculator saying we would need to stay for 8-10 years for buying to make sense, we have decided to continue renting. We took our down payment savings (a big chunk of cash!) and threw it all in VTSAX.

Our reasoning is the following:
  • If we happen to find the perfect place and the market is up, we'll put in an offer
  • If we don't find the perfect place then we are perfectly fine renting our current place for several more years, with our savings invested and growing in the meantime

I'd strongly recommend investing your money if you are ambivalent about buying or have nothing coming up in your life that will press you in that direction. If this rental doesn't work out, you can always find another rental. In the meantime you really don't want the opportunity cost of missing out on time in the market.