Single parent case study: Need your input!

[MoneyPennyUK]

Greetings:  I am a 33, a single parent with a 1 year old child.  I've recently found this forum and starting doing a lot of reading.  The time has come to ask for the community's input!  I'm a little late to the game...

Income: 70k/year: very stable job with minimal raises.

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take home: $3800/month after deductions (tax, 401k, etc)

Child support and child care costs:

$1700/month (youch!) (child care costs will continue for the next 4 years)

Debt (Student loans):

17k @ 3.6%
4k @ 3%

$315/month

Other Monthly costs (housing, insurance, gas, food, utilities):
$1700

Monthly net income ($3800) - expenses ($3700)=
 
net $100 positive monthly


Other information:

Cash on hand:

28k

Retirement accounts (401k):  50k at vanguard.  I'm currently contributing a good % of my salary to get a good match (8% match).  I'm contributing more than I need to to get the match.


I do not own a house currently, so I'm a renter.  Good school district where I live.  Decent homes are 200k in my area.

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Free cash Q:

Q1:  Should I pay off my student loans in total this month (This would leave me with 6k for and emergency fund) ?  This would free up some monthly breathing room cash ($315/month).  However, the interest rates are quite low on my loans as well so I'm torn.  Perhaps contribute enough to get the 401k, and save the rest?   

Q2:  To offset some housing costs, in the future I'm looking at buying a duplex to owner occupy on one side for added income and tax benefits.  Would you recommend this in my situation?  Mortgages are around 4.25%, so I'm wondering if I should keep my student loans as I will be taking out a potentially larger interest rate mortgage (4.25% average right now)   

Other questions:

Q3:  Any suggestions for how to forge ahead towards FI in my current situation? 


I'm open to any advice!  Even if it is brutal, don't hold back!

[Catbert]

The only reason to pay-off those low student loans is for cash flow.  You're right it generally makes no sense to pay off 3% loans if you have a better alternative.  I'd probably pay-off the 4K loan strictly for cash flow reasons.  Your budget has suspiciously round numbers so I'm guessing that it's a SWAG rather than actual expenses.  $100 wiggle room in a monthly budget when you're a single parent isn't a lot.  There will always be something so I think you need to maintain a sizeable emergency fund.

Regarding the duplex, well, it depends.  Is housing cheap in your area?  Could you get one so your housing costs would really be lower than now?  Are you handy to do maintenance yourself?  Good dealing with people in terms of screening prospective tenants and deal with problem ones?

If you don't already, I'd suggest tracking all your spending for a while.  Then if you post more details of your spending we might have more suggestions of what to cut.

[frugaliknowit]

The downside of paying off your loans now is it will take you more than 4 years to replace your cash.  Don't you think that is a bit risky, especially considering you are a parent?  What if you paid off the loans, lost your job, then your son/daughter had an expensive medical emergency with big deductibles?

As for the duplex, start researching, but it does not sound like you are financially ready.  Maybe when your loans are paid off with an emergency fund plus 20% down, plus closing costs.

[MoneyPennyUK]

The only reason to pay-off those low student loans is for cash flow.  You're right it generally makes no sense to pay off 3% loans if you have a better alternative.  I'd probably pay-off the 4K loan strictly for cash flow reasons.  Your budget has suspiciously round numbers so I'm guessing that it's a SWAG rather than actual expenses.  $100 wiggle room in a monthly budget when you're a single parent isn't a lot.  There will always be something so I think you need to maintain a sizeable emergency fund.

Regarding the duplex, well, it depends.  Is housing cheap in your area?  Could you get one so your housing costs would really be lower than now?  Are you handy to do maintenance yourself?  Good dealing with people in terms of screening prospective tenants and deal with problem ones?

If you don't already, I'd suggest tracking all your spending for a while.  Then if you post more details of your spending we might have more suggestions of what to cut.

Decent homes are around 200k in a good school districts, good duplexes around 250k.  I am handy and could do the work, handle tenants, etc as I have some past experience with property management.

I just starting using YNAB, so I'll report back.

[MoneyPennyUK]

The downside of paying off your loans now is it will take you more than 4 years to replace your cash.  Don't you think that is a bit risky, especially considering you are a parent?  What if you paid off the loans, lost your job, then your son/daughter had an expensive medical emergency with big deductibles?

As for the duplex, start researching, but it does not sound like you are financially ready.  Maybe when your loans are paid off with an emergency fund plus 20% down, plus closing costs.

Great point on cash replacement taking 4 years.  I have really good insurance through my job and my annual cap is $2500 out of pocket for all family medical expenses (including deductible).

I am researching duplexes, but I am nowhere near actually purchasing one financially as I don't have 20% down yet.   

[caseyzee]

May I ask what you are doing for childcare?  $1700 a month is $20400 a year - that's aupair level, at least.  Which, of course, might be required depending on your job and situation.  But there are definitely cheaper choices out there.

I agree with previous posters, a lot more detail is needed about spending to make any recommendations.  It seems to me that $100 net positive a month could really go either way, depending on what happens during the month.  You have a great emergency fund, and while it may seem high, if you are the sole provider for a child, I would keep it in place until the little one gets to elementary school.

[Chranstronaut]

...I just starting using YNAB, so I'll report back.

When you report back after tracking your spending, please break down your expenses as specifically as possible.  It will be a lot easier for folks to help you find any additional wiggle room in your spending when we see line items like, "Rent = $XX, Car Insurance = $XX, Groceries = $XX, Clothing = $XX" without lumping categories together.

To answer your third question, keep tracking every expense and do it every month.  Make sure every dollar has a job.  Don't spend a little money here and a little money there on "inconsequential" things; even $5 purchases over time can turn out to be a lot of money slipping through your fingers.  You may find that by simply using something like YNAB and keeping an eye on expenses you can find a little more wiggle room by eliminating those "little things".  That's a good first step and the forums can help take a look at your monthly spending when you report back with details.

Keep reading the blog and forum and good job so far!  With good savings and making your 401k contributions a priority, you are off to a good start.  I didn't see any credit card or car debt in your case study, so make sure you don't take any on now.

[MoneyPennyUK]

May I ask what you are doing for childcare?  $1700 a month is $20400 a year - that's aupair level, at least.  Which, of course, might be required depending on your job and situation.  But there are definitely cheaper choices out there.

I agree with previous posters, a lot more detail is needed about spending to make any recommendations.  It seems to me that $100 net positive a month could really go either way, depending on what happens during the month.  You have a great emergency fund, and while it may seem high, if you are the sole provider for a child, I would keep it in place until the little one gets to elementary school.

The monthly child support costs break down to:  child care is $800/month and child support is $900/month. 

[MoneyPennyUK]

...I just starting using YNAB, so I'll report back.

When you report back after tracking your spending, please break down your expenses as specifically as possible.  It will be a lot easier for folks to help you find any additional wiggle room in your spending when we see line items like, "Rent = $XX, Car Insurance = $XX, Groceries = $XX, Clothing = $XX" without lumping categories together.

To answer your third question, keep tracking every expense and do it every month.  Make sure every dollar has a job.  Don't spend a little money here and a little money there on "inconsequential" things; even $5 purchases over time can turn out to be a lot of money slipping through your fingers.  You may find that by simply using something like YNAB and keeping an eye on expenses you can find a little more wiggle room by eliminating those "little things".  That's a good first step and the forums can help take a look at your monthly spending when you report back with details.

Keep reading the blog and forum and good job so far!  With good savings and making your 401k contributions a priority, you are off to a good start.  I didn't see any credit card or car debt in your case study, so make sure you don't take any on now.

Thanks for the advice!  I'm tracking my spending this month using YNAB and cutting spending where I can!  I'll report back with solid numbers.