Yet Another Beginner Mustachian Question... :/

[juno2007]

Aspiring 'stachians here looking for some advice! Here is where we're at. My wife (23) and me (25) have been reading MMM for a few weeks now and are excited to begin our journey towards financial independence. A couple of years back we were given the financial peace university book by Dave Ramsey, it was a great read at the time but since then we've only been "flirting" with the idea of financial independence without really taking it too seriously. But we would really like to change that. Before taxes we have a combined income of about $85k (my wife works mostly on commission averaging around $30k while I'm on salary at $55k)

$3400 - My after tax monthly income.
$1300ish - My wife's after tax monthly income.

These are our current monthly expenses:

Car Insurance: $290 (could potentially go down if I drop collision/comprehensive, just paid off car 2004 Saab this month)
Health Insurance: $250 (independent plan)
Electric: $180 (I know, must get that lowered, I've read the MMM electricity articles!)
Cell Phones: $130 for two phones.
Internet: $60
Gym: $20


Rent: $650
Wife's Student Loan: $230 (at almost 9%!!)
Credit card: $150


Groceries: $300
Gas: $300
Pet food: $75
Dining out: $100
Charity: $150

Total Monthly Expenses = $2,885
Total Monthly Income = $4,700 (assuming an average commission from my wives earnings)

This leaves us with about $1,815 worth of "free" money each month. To add to this I will be finishing a full time degree that I've been working on while employed full time and will have to begin paying on this in 6 months which will add close to another $200 per month in expenses. Given that we are both young and very committed to the idea of financial independence we are looking for any advice you veteran 'stachians can throw our way, including book suggestions on finance, investing, budgeting, etc., or anything else. We have been looking for a reasonably priced home to purchase for a few months but have recently decided against that for a couple of reasons; a.) we would have to get FHA because we don't have the required down payment. b.) we still have student loans hanging over our head accumulating interest. So the way I see it, the first step for us is to stay in our current apartment (grudgingly) and put all of our extra money towards my wife's student loan to pay it off ass aggressively as possible. I'm thinking we can do this in one year, it is currently at $19k. Then we would need to do the same for mine which would take about the same amount of time.

Is this the best plan of attack, or am I missing something? I'm assuming with my current investment knowledge, nothing is going to give me greater than a 9% return (my wife's school loan), so it would be best to get rid of that ASAP.  Also, is it best to dedicate all extra funds to this, or should some be placed in an emergency fund? Also, I'm currently not putting any money in my 401k at work (they match 25% for up to 4% of your income). And, with the interest rates as low as they are is it wise to continue paying on the second student loan for an additional year, or would a house be considered an investment with gains larger that that of the student loan debt?

Any help is greatly appreciated!

[arebelspy]

Also, I'm currently not putting any money in my 401k at work (they match 25% for up to 4% of your income).

This is Step 1. Contribute 12% of your salary (6600/yr of the 55k salary) to get the 4% from them.

That will eat 550 of your 1815/mo. free (although you'll actually have a bit more than that 1265, as you'll pay a little less in taxes - I.e. 550 deferred won't take out a full 550 from take home), but should be the first thing done, IMO.

[militaryincome]

I agree with arebelspy. You must contribute up to the maximum that they will match.  Rightn now, you are passing up a guarunteed 25% return.

There are a lot of other treads on here that discuss buying vs. renting. There are a lot of factors that need to be considered. Some of them are:

How much are houses in your area?
How much do you plan to spend?
How long do you plan to stay in the area?
Can you find something within biking distance of you and/or your wife's work?

Personally, I think I'd take the guarunteed 9% and pay off the loan first. It wouln't hurt to look around at houses in the area though.

[arebelspy]

Er, glanced back at this thread to read the latest reply, and my math is wrong above (it assumes a 1/3 match, not 25%).  Fix accordingly, advice remains the same.

Sorry about that.

[Stacey]

I agree on step 1.  To figure out step 2, can you list out your various debts (student loans, credit cards, etc.) with the total amount outstanding and the interest rate on each?  I noticed that one of your expenses is for a credit card.  Is this a partial payment or are you paying this off completely each month? 

[juno2007]

Thanks for the replies everyone. Arebelspy, would you reccomend the 401k max even if I don't plan on staying long enough to become fully vested? If I leave within the next three years (which I see as highly probable) I wouldn't be taking advantage of the 25% match and at that point I'm wondering if extra payments on the student loan would be more advantageous. Another question, I guess I don't fully understand how the employer matching works. I was under the impression that if I put 4% of my paycheck in 401k they would match 25% of that and anything above would just be tax deferred, I'm wondering where the 12% is coming from.


@militaryincome - Homes in the area vary quite a bit. We would be looking for something on the lower end of the spectrum, 120-160k and we're looking for it to eventually become a rental but we would want to stay in the place until a significant part of the mortgage was paid down. As far as biking distance, I'm not sure if we would find anything within biking distance to where we work in our price range unless we went with a condo. We're not opposed to a condo, just concerned they may not be as good for renting in the future.

@stacey - The credit card is a barclay card I used to purchase a laptop from Apple a few months ago. :( It is interest free for the first 12 months and I think the minimum payment is right around $50. I tripled the payment to get it over with quicker and to avoid any interest. As far as debts go, the barclay card and my wife's school loan are the only thing we have. The school loan is a Sallie Mae loan (awful) and it fluctuates in interest from about 9% to 13%, it has an outstanding balance of 18k.  I'm not paying on my school loan yet, but will have to start next year. The loan amount will be 19k at 6% interest FAFSA loan.

[arebelspy]

Thanks for the replies everyone. Arebelspy, would you reccomend the 401k max even if I don't plan on staying long enough to become fully vested? If I leave within the next three years (which I see as highly probable) I wouldn't be taking advantage of the 25% match and at that point I'm wondering if extra payments on the student loan would be more advantageous.

Yes, because I would never try to predict the future.  If you save it now, your worst case scenario is you have a bunch of money saved up, and you paid slightly more in interest on those student loans.  Not a big deal.  But the upside, if you still are at that job, is a 25% jump on what you saved, in free money (i.e. $6720 at 4% of 56k over the next 3 years).  With interest, you'll get about 7k free.  To calculate your expected value, you'd need a good estimate on your chances of staying vs. leaving in the next 3 years but that, to me, is worth doing those donations and starting right away.  As in, yesterday.  ;)

Another question, I guess I don't fully understand how the employer matching works. I was under the impression that if I put 4% of my paycheck in 401k they would match 25% of that and anything above would just be tax deferred, I'm wondering where the 12% is coming from.

Check with your HR department, as all are different.

That 12% should be 16, like I said above, the math was wrong as I calculated on a 1/3 match, not 1/4 (1/3 of 12% is 4%, but it should be 1/4 of 16%, is 4).

Typically though they'd match up to 4% of your salary max.  Since they're matching 25% of what you put in (or 1/4 of whatever you do), you'd need to put in 16%, and they do 1/4 of that, which is 4% (the most they will).  Or, in other words, they match 1 dollar for every 4 dollars you put in.  To get them to match the max they will (4% of your salary), you'll have to put in 4X that, or 16% of your salary.  Make sense?

[TLV]

It sounds to me like it's actually a 25% match on the first 4% he contributes, rather than on the first 16% to get 4% in total matching.

[Uncephalized]

Yeah I got the impression their maximum match was 1% of salary on a 4% employee contribution as well. Not a very good match program as they go but better than nothing.

[shadowmoss]

Start the 401(k).  The only money I have put back for retirement (I'm 56) is the money in my 401(k)'s.  I did it for the employer match at the time.  In times when I wanted stuff, it was the only money that had too high of a hassle factor to squander away.  I usually had really good excuses of why I needed to spend all the money I made.  Trust me, start the 401(k), and always contribute to one if you have the benefit offered, even without the match.  Another benefit of it for me was when it was as high as my mortgage amount, I cancelled my life insurance.  I am single with no dependents, and had a private life insurance policy not through an employer.  I didn't want my parents to feel that they needed to cover my debts if something happened to me.  Once the 401(k)'s were higher than my debts, I off'ed the insurance.  Not to say you should do that.  Also, there are instances where outside parties can't touch 401(k)'s where they can other funds. 

[arebelspy]

Yeah I got the impression their maximum match was 1% of salary on a 4% employee contribution as well. Not a very good match program as they go but better than nothing.

Ah, I read this line: "for up to 4% of your income" as 4% of your income is the max they'll contribute.  You may be right.  In which case it's even easier to contribute the minimum to get the match.  It'll only cost the OP $183/mo of the $1,815/mo he has free.

Definitely do that first, and then you can decide if you want to contribute more or pay down loans.  (Almost certainly you'll want to pay off your wife's 9% student loan with the rest of that cash flow, assuming credit cards are paid off monthly).

[Perpetual_Student]

So let's take the focus from your investing strategy for a second to take care of some smaller leaks.

There is a less expensive plan out there for your phones.  Mr. PS and I were each paying $70/mo for 500 mins, unlimited text, and unlimited data.  We bundled into a family plan and killed data (we are almost always in range of WIFI) and we now pay $70/mo TOGETHER.  Look at your actual usage and shop around for carriers.  If you use a lot of minutes, you may be best with one of the big ones.  If you aren't under contract, you can consider porting to another carrier.

Also, your internet can go down.  Just try asking for starters.  By calling your provider and saying you cannot spend more than whatever their promotional rate is, and that you'll need to take your business to another carrier for THEIR promotional rate, you can often get a much better deal.  I went from $50/mo to $25/mo, and if you can split wireless with a neighbor, EVEN BETTER.

Your rent sounds pretty good, as long as you like your landlord/lady, neighbors, and the area.  But you should cut your eating out.  Is that mostly meals out together, or sandwiches/coffee on the run?  Make your own sandwiches and coffee.  Eating out together is a romantic thing that Mr. PS is very, very attached to, so we go out once a month on our "monaversary" and spend as little as we can for a nice meal.  That is usually $20-30, once or twice $40-50.  If you like a little booze with your food, drink before you (WALK) out or find out where has the best drink specials.  You can bring a flask too if you're sassy.

As you know, aside from managing your big moneys you have to plug the holes for your little moneys.  Like Mrs. MM says, a treat in a rare while is more enjoyable than a treat whenever you want.  If you schedule dining out and restrict it, you'll look forward to it and enjoy it more.  Even if it's kind of a casual restaurant, you can take care to dress nicely and really enjoy the evening. 

Good for you crazy kids - best of luck.

[juno2007]

Excellent, thanks for all the advice guys. The way I understand it 4% is the max of my income they will contribute, so I think your calculation would be correct arebelsby, the contribution on my part would be $183.

@perpetual_student - I will definitely see about lowering the internet bill a month. I think there is a competing ISP in the area that may be able to offer a competitive package, or at least they can be used as leverage like you said to get a better rate with my current ISP. As far as the rent goes, I think this may be part of our problem when it comes to eating out. The rent is very inexpensive which leaves us with more money to save each month, but we're definitely not happy with the apartment or the area which leads us to eat out/go out more often because we don't enjoy spending time at home. $150 a month is our projected budget of what we can allow ourselves to go out each month, but in reality it has been closer to $300+ a month precisely because our apartment/kitchen isn't very functional (very small).  Moving is definitely a possibility and it may even make more sense from a behavioral perspective, but a similar apartment in a better neighborhood is going to put us in the $850-1100 range for rent.

[NestEggChick (formerly PFgal)]

I agree with the others that you should first contribute to your 401K, and then I'd pay off the school loan(s) and credit card right away.  Personally, I hate debt, so I wouldn't even think about buying a house until the debt is gone.  I would also be wary of buying if you can't afford a 20% down payment.  That's how a lot of people got into trouble in the recent past.

You said that you go out to eat a lot because you have extra money each month, so give that money a job and it won't be "extra."  For example, if you start contributing to the 401K and maybe a Roth, and you put 4x the amount towards your wife's school loan, and open a new bank account where you deposit money to be used for paying your upcoming school loan, and increase your savings for a down payment on a house, suddenly you won't have "extra" money around.

Small kitchens are really tough.  This site may have some helpful tips: http://www.apartmenttherapy.com/  Consider crockpots and stove-top grills as ways to spend less time cooking in the kitchen, but still having less expensive, healthy meals.

You asked for other PF resources.  I think that you're the prime audience for David Bach's The Automatic Millionaire.  Also, I recommend Your Money or Your Life.  This site has some great tips and resources: http://www.getrichslowly.org/blog/

Finally, congratulations!  You guys are in pretty good shape, and by starting so young, you're in an excellent position to FIRE really early, if that's your goal.  Please let us know how it goes.  Good luck!

[Stacey]

Like everyone else has suggested, I would fund your 401k and then dump all the rest of your money into your wife's student loan and your credit card.  If an emergency does come up, you may not be able to make such large payments on your credit card, so I would advise paying that off sooner rather than later if you don't have an emergency fund (even though I know it's interest free at the moment).  That being said, it looks as if you have sufficient cushion in your budget to weather run-of-the mill emergency expenses.  Good stuff!

As for whether or not to pay down the other student loan before saving for a house, that depends upon your feeling about debt.  Personally, I would get rid of it completely before getting a house.  House expenses add up - especially if you won't be able to put at least 20% down.  I would personlly want to have no debt and a sufficient emergency fund before buying a house - but some folks are more risk tolerant than me. 

Either way, it doesn't look like home ownership is too far off for you!  As for the small kitchen - I completly understand.  My husband and I lived in a tiny, tiny, tiny basement apartment for five years while attending grad school and getting high paying jobs out of school.  Co-workers might not have been able to understand why we continued to live there once we had jobs, but we were able to pay off our $200,000+ student loan debt in short order.  We made a vow to not buy a house or have kids until the debt was gone.  Still no house - but one happy toddler running around our (rented) home.  It's made our (what some would still consider small) kitchen now seem palatial.  For us, it was all about how to use the space most efficiently and how to use the kitcehn tools most efficiently.  It certainly prevented us from going out and buying something for the kitchen just because.  What if you cooked some big batch meals on the weekend and then took them to eat in various public places around town over the course of the week.  You could become the resident experts on the best places to picnic around town.  You wouldn't always be stuck in your apartment, but you wouldn't be paying restaurant prices. 

Best of luck!