Case study: update. We've paid off debt. Now what?

[chestnut24]

Hi MMM folks. Here's my original post:

https://forum.mrmoneymustache.com/case-studies/we-made-some-mistakes-we're-trying-to-fix-them-need-help!

Since then, we have made some changes.

We have a car note that I will be paying off soon (currently at 11,500) and otherwise no additional debt beyond our mortgage (373k). Everything else is paid off, including my student loans.

I quit my job (!) and am working for myself as a writer.

So:

IRS filing status: Married, filing jointly. I am 33; spouse is 35. We live in the Midwest near a major city.

Gross Salary/Wages: Before any deductions: Husband makes about 50k/yr. I am guessing I will be making about 50k/yr part-time, but I just quit my job and my YTD wages are about 90k.

Individual amounts of each Pre-tax deductions: My husband has a special retirement program where he forfeits 5% of his salary to the retirement plan and receives a 10% match; he has about 20k in it (started late). I have 17,000 (soon to be in an IRA, this is the current vested balance of my 401k).

Rental income: $3000/mo

Adjusted Gross Income: 50k husband, mine will probably be around 50k/yr part-time.

Assets: 3-flat building worth $550k with $373k of debt on it. We live in one unit and rent out the others. Renting out the other units means our mortgage, taxes, insurance, and (some) maintenance are covered.

Husband's take home pay after taxes, 403b: 2670/mo
My take-home pay will be variable but right now is probably 2-3k/mo now and more later
Savings/cash: will put 18k in an account by the end of the month. Have not yet cashed the check. Curious about how big I should make our e-fund because I am itching to buy index funds. We are not entirely sure of our real savings rate yet as we just got everything rented/going for the apartments. We'd like to have some reserves b/c our building is old and stuff breaks.

Liabilities:

Property has a $373,000 note on it; PITI is 2939/mo (taxes are super high here), interest rate is 4.69%
Groceries: about $300 a month including eating out
Phones $45/mo for two phones on Republic Wireless
Utilities: ~$150/mo at most
Gas - $120/mo at most
YMCA - $100/mo
Pharmacy- $2-300/mo (have medications that are not covered entirely by our insurance)
Non-food household items $50
Car note - $433/mo right now; will drop to $200/mo soon should we refi or may just pay off early. Interest rate is 4.99%; car is a 2012, so that seemed dumb but here we are. Current debt is 11,500. Car is probably worth the same.
Netflix - $10.99/mo
Hulu - $10
Dates (this is stuff like arts and events tickets, dance/theatre/etc): - $100/mo


Not sure what else to add but hopefully this gives something of a picture. What do we do next?

[former player]

I looked back at your old post from a year ago.  At that time you had a mortgage of $277k and other debts of $134.5k, for a total of $411.5k.  You had earned income of $177.5k and rental income of $0, with a hope of rental income up to $42k.

Now you have a mortgage of $373k and other debt of $11.5k, for a total of $384.5k.  So on that massive income you've paid off a total of $27k in debt in a year. Not very impressive, frankly, unless something has been going on that you are not telling us about.  Plus, you've just reduced your income massively.

Why do you have a cheque for $18k that you haven't cashed?  What on earth is the point of not cashing it?  Hint: a cheque is essentially worthless until it's cashed, because you have no control over whether or not it will be honoured.  FFS, go to the bank immediately.


Now, emergency fund.  You have two needs for an emergency fund: one personal, one business (the rental building). Your personal emergency fund should cover 1) a basic replacement car in case yours gets totalled and you need to get to work/hospital the next day, 2) emergency plane tickets if you need to see family in their emergencies, and 3) up to 6 months of living expenses so that you have time to find jobs if your current incomes go away.   Your business emergency fund should consist of enough money that you can fund any essential repairs while waiting for insurance money/extra loans to come in.


If there is any cash left over, you should be looking at tax-advantaged index funds

[chestnut24]

I haven't received the check yet. It'll show up later this month, in the next week or so.

Re: income and debt payoff: we had some additional problems with our building that resulted in us decreasing the price of the rental and having to pay out of pocket for additional fixes. So that's why we're there now.

Re: decrease in income, that's not a huge deal to me. I'm writing a book (and yes, getting paid for it) and I value my time more than my former company did.

[former player]

Thanks for the additional info, and congrats on the book contract.

Without the car payment your personal expenses will look pretty good.

Given that the triplex is an older building I would definitely keep an emergency fund of 50% annual rental income.  The interest rate on the mortgage is pretty reasonable for a rental, and rolling higher interest debt into the mortgage was a good move.  It's still a fairly high debt in total, though and payments of $42k a year are a significant burden that wipe out all your rental income not allowing for vacancies/bad tenants, etc., so I'd be looking to pay at least some of the mortgage down, especially once you are maxing out tax-free investments.

[remizidae]

Rental income: $3000/mo

Property has a $373,000 note on it; PITI is 2939/mo (taxes are super high here), interest rate is 4.69%

Not sure what else to add but hopefully this gives something of a picture. What do we do next?

I'd like to second the recommendation to have a large emergency fund. If I'm reading this correctly, 100% of your rental income is going to PITI. That means that any maintenance, repairs, legal fees, or drop in rental income will need to be covered by your savings or other income. If both tenants leave and you can't replace them, six months would wipe out the 18k.

I also see that you have only moderate income and moderate savings for your ages. Assuming you can stick to the spending numbers you gave, you have a surplus of at least $3000/month, which is pretty great, but would leave you living paycheck to paycheck if your rental income disappeared. So yes. Consider keeping more than $18k in cash, maybe as much as $36k, taking into account what you know about the strength of your local economy.
 

[chestnut24]

Good point, thanks. We plan to put about 50k in an emergency fund when everything is said and done because of the issues that keep cropping up with our building and the fact that my income is going to be irregular from now on.

[MDM]

We plan to put about 50k in an emergency fund when everything is said and done because of the issues that keep cropping up....

Might want to do that sooner rather than later.  See Investment Order for some thoughts.

[jlcnuke]

Rental income: $3000/mo


Husband's take home pay after taxes, 403b: 2670/mo
My take-home pay will be variable but right now is probably 2-3k/mo now and more later

Savings/cash: will put 18k in an account by the end of the month. Have not yet cashed the check. Curious about how big I should make our e-fund because I am itching to buy index funds. We are not entirely sure of our real savings rate yet as we just got everything rented/going for the apartments. We'd like to have some reserves b/c our building is old and stuff breaks.

Liabilities:

Property has a $373,000 note on it; PITI is 2939/mo (taxes are super high here), interest rate is 4.69%
Groceries: about $300 a month including eating out
Phones $45/mo for two phones on Republic Wireless
Utilities: ~$150/mo at most
Gas - $120/mo at most
YMCA - $100/mo
Pharmacy- $2-300/mo (have medications that are not covered entirely by our insurance)
Non-food household items $50
Car note - $433/mo right now; will drop to $200/mo soon should we refi or may just pay off early. Interest rate is 4.99%; car is a 2012, so that seemed dumb but here we are. Current debt is 11,500. Car is probably worth the same.
Netflix - $10.99/mo
Hulu - $10
Dates (this is stuff like arts and events tickets, dance/theatre/etc): - $100/mo


Not sure what else to add but hopefully this gives something of a picture. What do we do next?

Your expenses add up to ~$4600/month. Your income is apparently unknown?? Your rental income assumes your rent is paid on time and that you don't have any vacancies. You don't list any rental costs for anything other than your mortgage either which is a red flag to me, owning a rental isn't free.

You have $2670/month from your husband, you hope to get your rental income, and you can't determine what your income is/will be yet. That's a precarious situation imo, so I'd definitely go for a significant emergency fund first.

When that's done, just follow the investment priority order linked earlier by @chestnut24

[DebtFreeinPhilly]

You need a larger emergency fund for the rental property and for your personal finances. They should not be the same fund. Your income is irregular so I would build up a 6 months EF of your family personal living expenses and I would build up a separate EF for the rental property to cover the same 6 months.

Before doing all of that, I would write a check for the car  today and pay it off. Then spend the next year building up those two EFs. Having an irregular income is fine but having it when you have debt payments is not. I am more debt adverse so thats why I would do it that way.

Other than that, I don't think there is much else to do. Save like you are, keep the rental going, and get to FIRE.