Case Study: Newlyweds trying to piss off the Jones's

[jrh53]

Long time listener first time poster

Reader Case Study – Are we missing anything?

Newly Married 26 and 27 College town, Indiana, USA

Combined Monthly Gross: $4485
This should be increasing very soon. By end of year we should be pulling in closer to $5,800

Both have 6% 403b deduction and a 3% company Match. Currently putting $430/person into T-IRA.

403b + match: $493
Life Insurance: $55
Flex: $58
T-IRA total: $860

Other Income: I usually make about $3,000 a year from officiating youth soccer. This comes in two chunks Spring and fall.

Adjusted Gross Monthly Income:  $3940

Taxes: $768.37

Current expenses:
Rent $635.00
Auto Insurance $133.30
Auto Payment   $466.00 (this is killing us)
Phones   $33.00
Groceries $255.00
Utilities   $45.00
Gas and Fuel $50.00
Internet $35.00
Service and Parts $50.00
Vision   $5.73
Golf $150
Pharmacy $28
Hair $15
Costco membership $5
Apple music $15
Fun Money: $206 (this is our eating out, drinks, clothes ect.)

Total Monthly Expense: $2027

Charitable giving: $327

Assets:
Investments (403b, IRA ect): $28,647
Cash: $1020
Cars: 2008 Ford Escape (value ~$3,000) and 2009 Ford F-150 (value~ $10,000) See update below

Most recent calculation of NW: ~$34,000

Liabilities: If you weren’t already pissed about our cars you will be now
F-150: $9795 at 3.79% Paying $300
Escape: <$1,000 at 0% Paying $~166

This is our only debt and we are sick of it. We have vowed to never buy stupid cars again (bought right after college for both of us). Just got the truck loan down to under its valuation so I am no longer upside down. The last few months being upside down has been paralyzing I don’t drive it but still pay for it. Literally almost throw up every time I walk my bike out to the road and pass it. And I had no idea what to do about it. Working on selling it ASAP but still a little scared because of the lein so any help or encouragement would be nice.

We hope to be able to sell the truck and then pay off the escape loan. Then we will be debt free and work our butts off to stay that way. We plan on being a one car family as soon as the truck is gone. We live close to work and bike or ride the bus.

Total Debt: ~$10,795

UPDATE: WE SOLD THE TRUCK!!! Had to take an L and went back home with our tails between our legs but a great reminder to never do that again.

New Total Debt: ~$1,000 (this should go quick now we are out of the truck payment)



Adjusted Gross Monthly Income:  $3940
Total Monthly Expense: $2027
Savings rate: ~40%
NW: $34,000

Questions:

Besides the cars do you see any glaring holes? Anything we can improve on? We both work for a non-profit and love our jobs. Our goal is to live debt free and be work optional (possibly be able to both be part time when we have kids ect)

What would y’alls thoughts on pursing home ownership. We live in a small college town and would love to have the space to entertain ect. Right now we are in a 1 bedroom apt. What would be the best course of action for us getting a house? Median house around us: ~$130,000

[Sailor Sam]

First off, you're not doing too badly. Rent is very reasonable, and you're killing it on the phone. There is some low hanging fruit here, though.

1. Sell the F-150. If it's making you feel bad, then you don't actually need it. Sell, sell, sell. And if you can't sell it for the full lien amount, pay it off and take the loss as a very valuable lesson.

2. Meanwhile, quit the golf. At the very least, suspend your membership until you've dug out from under the truck.

3. Cut your fun money by $20 every month, until you find the misery point. Stay at the misery point for 3 months. If you're still miserable, add back $20. If you're no longer miserable, cut by $20 a month until you find the new misery point. How low can you go? NOTE: you and your spouse might have different misery points. It doesn't have to be an equal split, it just has to be fair.

4. Your auto insurance seems pretty high. Have you checked around lately? If not, might be worth some comparison.

5. Every raise you get, put it into your 403b's until your maxing out.

6. You'll get opposing viewpoints on the charity. I'll suggest making your own mind up about donations, instead of relying on the MMM gestalt.

[reeshau]

Questions:

Besides the cars do you see any glaring holes? Anything we can improve on? We both work for a non-profit and love our jobs. Our goal is to live debt free and be work optional (possibly be able to both be part time when we have kids ect)

What would y’alls thoughts on pursing home ownership. We live in a small college town and would love to have the space to entertain ect. Right now we are in a 1 bedroom apt. What would be the best course of action for us getting a house? Median house around us: ~$130,000

My comment is that you are looking for the house for the right reasons.  Given the current median value, and the fact it's a small town, it's not going to appreciate as an investment.  You could get a 30 year mortgage at 4% (presuming rate increases, since you have to save up a down payment) for about the same you are paying for rent.  A 15 year will be around $950 for P+I.  You will save a ton of money over your lifetime if you can swing a 15 year mortgage, but you have to budget for this:  saving enough for a 20% down payment, and then affording the mortgage payment once that's done.  20% would be $26k, but as a something secondary to your car loans, it is some time off.  Is there an opportunity for a starter home / something less than median?

If you can save enough to build up a down payment in short order, you'll be able to afford the mortgage.  (assuming you aren't cutting to the bone)  The hard part will probably be waiting for it to happen--counting the months as the balance builds up.

[Lucky Girl]

You're in a great spot with savings rate of about 40%.  Is there a reason you aren't maxing out the 403(b)?  That would be my first recommendation.  Save all of your extra $$$ in the 403(b), until both you and spouse are maxing them out.  Then, start putting money in IRAs.

Once you are maxing both of those tax advantaged accounts, I think you can reasonable start saving additional funds in a taxable account, which may end up going to a home down payment.  You are both pretty young, and a lot can change in the next five years.  Careers may shift, you may get a great job offer in another town and decide to move, or you may stay where you are.  Establish the habit of paying for your retirement first, and then paying for extras like a potential house.  Yourself 10 years from now will thank you!

[jrh53]

@Lucky Girl:

Right now its because our employer plan offers very little flexibility. Thank the Lord that they use vanguard but only fund options are the target retirement funds. So we view Traditional IRA as on the same level but with the ability to have more control and less expense ratio

@reeshau:

Yes plenty of opportunity for starter homes. We have also seen quite a few old rental properties go up for dirt cheap. We both think it would be fun to have some house projects to work on as well so very easily could find something for under $100,000.

[zolotiyeruki]

Love the thread title :)

It sounds like you guys are already off to a great start!  Here are a few thoughts:
--Yeah, dump the truck.  That extra $300/mo (plus gas, plus insurance, plus maintenance!) will feel super sweet
--Yes, your car insurance seems a bit high.  Shop that around, and go with liability only.
--You've got almost $2k/month left over.  That's freakin' awesome.  Once you ditch your truck and redo your car insurance, that'll be even higher.  I highly recommend this Investment Order post as a guide (skip down to the "WHAT" section) to pick where to put your money.
--If you're still looking for places to cut back, take a look at your Entertainment expenses.  For example, DW and I have recently started at-home date nights, where we'll send the kids upstairs to watch a movie, and prepare a romantic meal for just the two of us, rather than going out to eat.  We save both the cost of the food and the cost of a babysitter.
--What's the story with the golf?  That's the only other thing that stands out from your budget.
--The rest of your spending seems very reasonable.  You guys are killing it!

It seems like every HGTV show harps on people's ability to host guests and entertain, and it's the only reason you mention for wanting a house.  How often do you actually entertain, though?  Also, while the mortgage would be about the same as your rent, you'll need to also consider insurance, maintenance/repair, property taxes, and increased utility costs for living in a single family home.  Are the benefits of the home (space, privacy, ability to make it your own, etc) worth the extra several hundred dollars per month it would cost you?  That's a question you'll have to answer.

[delturcious]

Yes plenty of opportunity for starter homes. We have also seen quite a few old rental properties go up for dirt cheap. We both think it would be fun to have some house projects to work on as well so very easily could find something for under $100,000.

This may help a bit on the financial aspects of the buy vs rent analysis:
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

For me, there was no question--I spend my free time in my workshop, live in a low-cost area, and wanted to completely remove the housing cost from my post-FI calculations. Others may see home ownership as an anchor and money pit, but it's something only you and the Mrs. can determine after you figure out what's most important to you.

After you get rid of the truck, and especially after that income bump, saving for the down payment shouldn't be too challenging. Keep in mind though if you don't have 20% down, you're likely locked into 5 years of PMI (wasted money!!!). At the time I bought my current home, the FHA loans let you get rid of it once you hit 78% LTV on a 15-year, but that's no longer the case.

Oh and on the truck sale: people sell vehicles with liens all the time. If your lender is local, just meet there when you sell it.

[jrh53]

TRUCK IS GONE!

I guess the motivation to sell it came from posting this case study. Now on to the last bit of car loan and then we are debt free.

We had to take a bit of a loss on the truck but it was done in a matter of hours and now its gone. NW will take a minimal hit but we will recover in two months.

New Question: Any thoughts on the best place to roll this freed up money into? First we want to pay off the last part of second car loan. Secondwe want to up our emergency fund to about 1 more month of expenses to make it three total. After that? 403b? Down payment? Save for next car to pay in cash?

Thanks so much guys!

[Bracken_Joy]

A great starting point is the Investing Order:
https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Current 10-year Treasury note yield is ~2%.  See           
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y         
           
WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
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, swap #4 and #5)           
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.           
8. Invest in a taxable account with any extra.           
           
WHY           
0. Give yourself at least enough buffer to avoid worries about bouncing checks           
1. Company match rates are likely the highest percent return you can get on your money           
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 25%; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.     
6. Applicability depends on the rules for the specific 401k           
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.
8. Because any earnings, even if taxed, will help your FI journey.

[calimom]

Love the thread title :)

It sounds like you guys are already off to a great start!  Here are a few thoughts:
--Yeah, dump the truck.  That extra $300/mo (plus gas, plus insurance, plus maintenance!) will feel super sweet
--Yes, your car insurance seems a bit high.  Shop that around, and go with liability only.
--You've got almost $2k/month left over.  That's freakin' awesome.  Once you ditch your truck and redo your car insurance, that'll be even higher.  I highly recommend this Investment Order post as a guide (skip down to the "WHAT" section) to pick where to put your money.
--If you're still looking for places to cut back, take a look at your Entertainment expenses.  For example, DW and I have recently started at-home date nights, where we'll send the kids upstairs to watch a movie, and prepare a romantic meal for just the two of us, rather than going out to eat.  We save both the cost of the food and the cost of a babysitter.
--What's the story with the golf?  That's the only other thing that stands out from your budget.
--The rest of your spending seems very reasonable.  You guys are killing it!

It seems like every HGTV show harps on people's ability to host guests and entertain, and it's the only reason you mention for wanting a house.  How often do you actually entertain, though?  Also, while the mortgage would be about the same as your rent, you'll need to also consider insurance, maintenance/repair, property taxes, and increased utility costs for living in a single family home.  Are the benefits of the home (space, privacy, ability to make it your own, etc) worth the extra several hundred dollars per month it would cost you?  That's a question you'll have to answer.

Yep.

Are you pissing off the Joneses? Or trying to keep up with them?

[Sailor Sam]

TRUCK IS GONE!

I guess the motivation to sell it came from posting this case study. Now on to the last bit of car loan and then we are debt free.

We had to take a bit of a loss on the truck but it was done in a matter of hours and now its gone. NW will take a minimal hit but we will recover in two months.

New Question: Any thoughts on the best place to roll this freed up money into? First we want to pay off the last part of second car loan. Secondwe want to up our emergency fund to about 1 more month of expenses to make it three total. After that? 403b? Down payment? Save for next car to pay in cash?

Thanks so much guys!

Wow, great job! So many case studies never result in action, and you did it lickety split. I'm very impressed. Personally, I'd put the extra money into a downpayment fund, or follow the investing order Bracken Joy posted. Both will serve you well.

[kpd905]

What is the purpose of the life insurance?  Is it a term policy or whole life?

[jrh53]

@zolotiyeruki: The golf isn't a monthly membership or anything. Right now it goes into a savings account that I'll pull from in March to use to go play, I have never been able to use all of it because it goes towards other expenses first, this allows us to play a few times a month. For me its an oasis away from work and a challenge I love taking. I also use it a lot for connecting with guys from church, family etc. My wife plays as well and so we have a few dates a year on the course. We always try to play cheap courses.

As for entertaining we hosted 3/5 nights this past week. We shoved 12 people into our 1 bedroom Tuesday. Doable but not if our family gets any bigger. This is our biggest asset to saving money on going out. We rarely eat out and have finally conditioned our friends to come over and drink/ cook out instead of going out to the bars or to eat. Having more space would help this out.

Just looked up rent prices for a 2 bedroom where we live and it starts around $1000/month houses are going for closer to $1200-$1500/month.

What is the purpose of the life insurance?  Is it a term policy or whole life?

@kpd905: It is a whole life policy that I picked up right out of college. (was pitched as a similar vehicle to an IRA) I was young and naive and thought it was a good deal. Still unsure of if it is or not. I thought of it as a safety. If something happened I would leave no burden. Same for my wife now it ensures no burden (after death expenses etc).
What is the purpose of the life insurance?  Is it a term policy or whole life?

[zolotiyeruki]

So the $180 is a one-time expense? So you'll have $180 more to allocate next month?

[jrh53]

@zolotiyeruki:

Not one time. $150/month right now its set but we are starting to have more conversations about if we want to continue or use that for something else and drop the golf to once a month or something.

[calimom]

You're not keeping up with the Joneses. You ARE the Joneses!

[blahblahblah]

Try shifting perspective around fun money (we too use this category).  I would consider golf and apple store to be fun money, bringing that category up to $371 (If I recall numbers correctly, can't see original post while typing this).  What about additional food/bev from hosting and attending socials, is that also considered fun money or groceries?  How about non essential groceries/snacks, where does that fall?

A little stream of consciousness here:
So $4452 a month, or about 1 months pay goes to fun/non essential expenses.  We dedicate a similar % to fun in our budget but any unexpected costs such as medical copays or car repairs come from this category before coming out of the emergency fund or allocated monthly savings.  We also know that reducing this from about 8% of our budget to about 3% of our budget would accelerate FIRE by 3 years.  Meh, 3 years isn't worth missing out on the fun for us over the next decade or so, but I do eagerly add any unspent fun money to retirement accounts every month rather than roll it into the next or splurge at the end of the month.

[jc4]

Current expenses:
Life Insurance - $55, I relocated this here. It's an unnecesary expense especially once you have some money put away and since your wife can work. Single income, SAH mom with kids, I'd let it pass. Do some research, and see what you're really getting here. Then decide if you should cancel it.
Rent $635.00 Very good. We're in a higher COL area. $1100/1BR inner city
Auto Insurance $133.30 Try shopping this around, now that you dropped the other car. We use esurance, liability only,
 and are at $80/mo. for 2 cars ('05/'09)
Auto Payment   $466.00 (this is killing us) congrats on the truck sale
Phones   $33.00
Groceries $255.00  Very well done. My wife and I do $200.mo. and I never see people close to that even on this forum! You inspired me to make a post about it.
Utilities   $45.00 Again, you got us beat. We run $50 elec, $40 water, and $40 gas. Not sure how you do this.
Gas and Fuel $50.00
Internet $35.00 Look for a promo. I get 6mb/mo. for $20. I just have to cancel / restart every year. Also look at using a hotspot from you cell. My wife and I have just used her cell hotspot for about 4 months now. That's 0$/mo. to comcast!
Service and Parts $50.00 Hopefully more parts than service.
Vision   $5.73 Is this insurance or glasses / contacts.
Golf $150 INCOMING FACEPUNCH: Start playing frisbee golf or ultimate, or any other free pickup sport.
Pharmacy $28 Ongoing condition or pampering? We have maybe 1 $20 hit/year. If you have a medical need, of course do what you need to!
Hair $15 FACEPUNCH AGAIN: Can you use the clippers at home? I'm at $17/6 yrs on mine. Wife does 4 $10 cuts our per year. You can do better here. If you gotta get it done out, try getting it done a bit shorter, and let it grow a bit longer, to spread them out. Also, split ends don't ruin hair. My wife is still plenty attractive.
Costco membership $5 Reevaluate. As a 2 person houshold we don't eat enough to justify the volumes here. It would only be worth it to us if we insisted on name brand foods. (We don't).
Apple music $15 Will youtube work? Can you endure the ads? Unless you're a intense music person, I'd drop this.
Fun Money: $206 (this is our eating out, drinks, clothes ect.) You can challenge anything here. My wife is $100/mo.
 I do about $30/mo. It's not about fair. It's about what's sufficient. Wife knows she's working on self-control, but peace, patience,
 and progress are worth a few $$$.

Do you travel? Is that in fun money or not accounted for? Travel is our highest expense, behind housing.

Charitable giving: $327 Won't spoil you too much with complements, but well done! Keep it up!

My wife and I are mid-twenties with similar spending, so this was fun to take a shot at. The notes compare you guys to us. Your rent helps a lot.

What would y’alls thoughts on pursing home ownership. We live in a small college town and would love to have the space to entertain ect. Right now we are in a 1 bedroom apt. What would be the best course of action for us getting a house? Median house around us: ~$130,000

We just bought a house. 1200 sqft, 3BR, 2BATH

Step1: Make a spreadsheet! Renting can win. Home-ownership doesn't always win. Short-term the house is definitely more expensive. If you live there long, enough that's where home-ownership may be a better idea. Can you commit to 5-10 years in 1 place? If not, rent.

This is what you do with your spreadsheet:
Calculate your payback period. Ours is 30 months. That is, for the first 30 months, the house costs more. After 30 months, the house costs less than renting. Costs: Interest, taxes, HOA, Insurance, transaction (agent/closing costs 6-8% of purchase), maintenence, higher utilities. Deductions from costs: tax deductions. Consider down payment / principal payments to be a 0% return savings account. Assume home value matches inflation.

We stashed our downpayment in Betterment. Made about 3% of our downpayment over the course of 6 months while saving.

What we ignored is the opportunity cost of not having our down payment invested. You can add this as another cost if you'd like. We now have a large chunk of idle cash. Ok, that pushes our breakeven to 49 months (I just threw it in the spreadsheet). Still a winner.

We will probably stay in the house probably that 4 years, and we have other goals the house serves. We host 20-25 people for bible study a couple times / month (yes, we did that in a 1BR apartment for the last year), and we want to be christian mentors to college students who can stay in the other BRs. The new place has two 7'x10' BRs that are perfect for this. For us, it works finiancially, and fits our life goals, so we did it.

If you have other questions on the house stuff, (I left a lot of details out), let me know. I can also share my spreadsheet. 

QUESTION: If it's sharable, what's the non-profit? We're big fans of non-profit work. We don't care if it's not perfectly efficient. It does way more good than an F150 (insert laughter).

[jrh53]

@dpc

Love that! I will start doing some more digging on the insurance. Wife actually has USAA so get some great insurance rates but we will shop around still. Insurance should fall to around $50/month and even lower once we pay off the final loan and can drop to liability.

Groceries: have been hard but we are doing it well.
Utilities: we just have to pay electric (perks of a college town?)
The vision: is insurance.
Golf: yes we know and are reevaluating.
Pharmacy: was just set when we got married we haven't used it at all so this next month we are going to drop it a little.
Hair: was zero before marriage, wife never spent a lot but didn't track much too so we just guessed at this number without knowing how much a hair cut even cost in our new town. Will reevaluate after first visit in a few months.
Fun money: ours is skewed as well, our biggest expense out of this is lunches with friends from church. Haven't quite mastered the "hey pastor lets meet up, ill bring some food to your office yet" Or especially with a rando you just met

I'd love to get my eyes on that spreadsheet. I never thought about looking at it that way. Can you send it to me?

We both work for Greek InterVarsity Christian Fellowship a ministry to fraternity and sorority students on the college campus. So we love college students too!

[jc4]

I'll send the spreadsheet. Do you have a budget with buckets that money is allocated to whether or not you spend it? We're odd people that don't budget. We watch after the fact and adjust, but that's also the MMM way, so maybe not to weird.