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Case Study - 1st year out of the military, learned a lot the hard way.
wirednuke83:
Hi all,
Life Situation:
I was in the military, and originally my retirement plans consisted of staying in for 20 years and reaping the benefits of the pension. For various reasons, that journey ended at my 13 year point, and alas I do not have access to said pension. I did end up getting a disability rating, which supplies a small stipend of income every month.
So here I was at 33 with no 401k or retirement fund to speak of. I did see some of the writing on the wall, and my wife and I managed to pay off all our consumer debt and save a little money on the way out the door.
We have made some mistakes along the way, and my wife is not yet 100% onboard with the lifestyle changes, but she's making progress! She really doesn't want to get rid of the nicer cars.
1 year later:
Me - 34
Wife - 33
2 Kids, 7 and 4
Married filing Jointly
Great Lakes major metropolitan suburban area
Income:
Biweekly: 3175, - 21% raise coming after training is complete (any day now)
Monthly: 1039 dollars from VA disability (Tax Free)
Annual: 20% Bonus, Usually about 16,000 before taxes/401k
Deductions:
401k: 8%, 254$ a paycheck - Will raise this much higher after I get my raise, and 15% from bonuses.
HSA: 29$ a paycheck (750$ enough to cover family deductible of 500 )
Medical/Dental/Life Insurance Etc: 161$ a paycheck
Total Take Home: 2200/2 weeks, + 1039/monthly Approx: 5805/mo
Expenses: We use an envelope (Good Budget app) system, these are budgeted numbers. If we have extra we sweep to savings/principal payments
Needs:
$1218.53 Morgage P&I
$355.32 Tax & Ins & HOA (No PMI, VA Loan)
$700 Groceries
$440 Utilities (Gas, electric, internet, water) Water is high right now from grass watering
$1040 Transportation (Gas, insurance, payments) Here comes some face punches
$120 Tutoring for special needs daughter
$300 Clothes/Shoes/Kid Stuff for school/birthdays etc
$80 Phone
Wants:
$50 Entertainment (Computer game, netflix, hulu, prime etc)
$300 Family Fun (Date Nights, family activities)
$110 Xmas Fund
$1000 Principal payments on auto/house.
Total: $5713
Assets:
Primary Residence (3 br/2.5 bath, 1870 sq): 278,000
2018 Chevy Malibu Hybrid: 25,000
2017 Chevy Equinox: Lease is up 12/18
401k: $16,830.05 (Just started this year, have 8% match)
Roth IRA: $5,642.07 (Just started last month, maxed for year)
529: $4,006 (This is the kids B-day money and gifts from family)
Brokerage: $1,006
Emergency: $15,254 (Discover 1.75% HYS)
Cash on Hand: $17,500
Total: $374,072.69
Liabilities:
Primary Residence: $269,000 at 3.25% (23 years to go at our current rate)
Car Loan: 26,500 at 0.9% (72 mo loan, but about 26 months at my current rate)
Total: $295,500
Net worth: 78,572.69
Questions:
1) I'm torn on the car situation. I know my car note is high, but I have been able to pay more than 1000$/mo on it. The interest rate is low, and I would rather have the cash invested/on hand. Selling it is always an option as well, but I would be losing money obviously. I drive 25,000 miles a year (Hence the huge transportation number), I do spend a lot of time in the car. Should I unload it and get something cheaper?
2) If I don't pay the car off, what should I do with the 17k I have on hand? I'm thinking of the vanguard index funds, the only thing we really wanted to buy was a patio for the back yard.(right now its all grass/dirt)
Lastly, I know we have a long way to go, it would be good to hear from people that have been in my shoes, and made it to Financial Independence.
Other than that, thanks for your time... bring on the brutal honesty!
mudstache:
I think the "Investment Order" sticky in the Investor Alley section could help a lot. I'm usually just a Case Study lurker, but I have found the order to be *super* helpful and prescriptive, which takes the guessing and emotion out of decisions that should really just be math! :)
https://forum.mrmoneymustache.com/investor-alley/investment-order/
WHAT
0. Establish an emergency fund to your satisfaction You have $15k, so this is done if you feel good with 3 months saved
1. Contribute to your 401k up to any company match I feel like you're doing at least 8% now to have the balance you have?
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield. You don't have any of these, hooray! On to the next!
3. Max HSA You have room to add here. HSA savings are super awesome - they are tax-free to save, tax-free to use, and grow tax-free. To really benefit from this, you save it up year after year, to be used later (like in early retirement). That means budgeting for actual medical/dental expenses with non-HSA money.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level You've got this. I'm not super good at the IRAs, but I think you may also be able to fund one for your wife. Someone more knowledgeable can help here.
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5) I think you're on this step, after you up your HSA contributions.
6. Fund a mega backdoor Roth if applicable.
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. Again, you don't have any of these. It feels counterintuitive, but with such a low car loan (assuming you're keeping it), you shouldn't be tossing extra money at your loan every month. Overpaying your car only gives you a 0.9% return on that money, where it could be better spent maxing your HSA, maxing your 401(k), or funding your Vanguard account (VTSAX yielded 11.8% over the past 12 months). Sure, it feels good mentally to not have outstanding debts, but if the interest rates are that low, your money can work much harder elsewhere.
8. Invest in a taxable account and/or fund a 529 with any extra. I'd put your extra cash into Vanguard, and then use leftover money from the investment order (and any facepunches/tips on your spending) to watch your money pile grow every month!
I'll let other people comment on your spending, but I think you have some good opportunity to adjust where your money is currently going. Good luck!
wirednuke83:
Thanks for the quick reply!
In response to the above comments by number:
0. I am comfortable with 3 months because I am in the energy industry, I feel pretty secure because I have a niche skill set and electricity will always be in demand!
1. I'm contributing up to the 8% match my employer is providing until I get my raise after training is done.
3. My healthcare has been provided my whole adult life via the military. We are still trying to figure out what our healthcare expenses are. The 750$ I added this year was not enough though!
7. I still have some soul searching to do on this!
Thanks for your advice!
nkt0:
Re: Health insurance/health care. As a veteran don't you have access to the VA? Also with a $500 deductible, can you even use an HSA? My understanding was that those are only available to high deductible plans…
diapasoun:
--- Quote from: lisa_mustache on July 12, 2018, 12:39:42 PM ---
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. Again, you don't have any of these. It feels counterintuitive, but with such a low car loan (assuming you're keeping it), you shouldn't be tossing extra money at your loan every month. Overpaying your car only gives you a 0.9% return on that money, where it could be better spent maxing your HSA, maxing your 401(k), or funding your Vanguard account (VTSAX yielded 11.8% over the past 12 months). Sure, it feels good mentally to not have outstanding debts, but if the interest rates are that low, your money can work much harder elsewhere.
--- End quote ---
Will come back later when I have more time to go into spending details, but one thing I want to note: Paying off a car early can be very, very worth it if it allows you to change your insurance. Although the guaranteed return on the loan may be relatively small, you can often halve your insurance -- or maybe even more -- if you drop from the type of full comprehensive insurance typically required by banks to liability + self insurance for repairs/replacement. I did this for my much older car just recently, and it's going to save me more than $1500 in insurance over the next two and a half years. That's much more than I would likely have made investing with that money.
Since your car is very new and shiny and expensive, and you don't have a big net worth or cash reserves, self insurance for replacement may not be ideal for you (unless you're willing to significantly downsize on your next vehicle). It worked for me because I could buy a comparable replacement outright with cash -- it would suck, but I could do it. It's an option worth looking into, however.
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