Case Study: Wild Card Situation

[chris316]

My name is Chris, I just turned 29 and started reading through this website and it feels as if I’ve been in a coma for the last 10 years and I’m just now waking up.

My goal is to FIRE at 60 years old at the latest.

I just want to get some second opinions about how my status is doing and if there is anything I'm missing that I could better in.

I live in Minnesota and rent the upper half of a duplex (1000ft2 2bed 2bath) with my girlfriend (Wild Card, more on this later) and one other friend. I work full time for a private utilities company and am a volunteer/paid-on-call firefighter part time. I have no children.

Estimate numbers with some explanations-

Net Worth: $49.9k

Banking: wells fargo
Checking: $1k
Savings: $300

Ally savings account: $35k

Investments:
Simple IRA: $7.9k (John Hancock JCLAX 3% employer contribution, 2.11 expense ratio {working on it, company is looking into restructuring retirement benefits 1-2018})
Roth IRA: $3.2k (Vanguard VTSMX)
Traditional IRA: $2.4k (vanguard VFIFXl)
Fire relief pension: 60% vested ($6500/year, 100% at 20years or service, can’t collect till 50)
Total: $13.9k

Liabilities: $0

Spending: per month
Rent: $358 (includes water, garbage, and internet)
Electric: $20
Renters insurance: $15
Car insurance: $25 (company provides a car because all work is on site so I share a car with my girlfriend. 4cyld Chevy cobalt)
Health: $94 (includes dental and vision, we have an HSA available)
Phone: $70 T-Mobile unlimited (work provides $50 reimbursement)
Grocery: $200 give or take…
Entertainment/guilty pleasures: $200
=$1000… give or take

Gross salary: year
Full time job: $54k
Part time: $4.2k

AGI: $55.7k (student loans and TIRA contribution)

It winds up to be about $3.25k a month net…. 

I’ve been saving up for a house which is why I have so much liquid (35k for down payment and about 3.5k in emergency funds)and am starting to put more into my IRA’s…
My girlfriend has a comparable job As I and a very similar situation but the Wild Card is her student Loans are $39k !!! I know I’ve heard of much worse and she is starting $700/month payments for 5 years at about 3.4% which will be good. But we want to be more independent and move into our own home. I just qualified for a $240k home loan (but do not plan on maximizing that) would it be silly of us to move? And also is there anything I can do to improve my situation? I know trying to get my AGI lower and also investing better in my IRA’s are on this year’s list to improve. I’m thinking I need to max out my Simple IRA and Roth for the next 30 years?? I might just need a little push in the right direction. We do go on occasional camping and backpacking trips, do crafts, art, and other such things to break everyday rut cycle and kick back.

If you would like and additional questions please let me know

Thanks

[marty998]

You've got a long way to go to change your mindset.

Lets say your FIRE date is age 60. You alone are projected to earn over $1.8m over the next 30 years, not including your girlfriend's earnings, and you're worried about $39k in student loans?

What job does she have? Surely $8,500 a year in payments can be covered by her income?

[chris316]

You've got a long way to go to change your mindset.

what exactly do you mean by this?

understand I have time but want to set my self up well right now.

she does have enough and we are both planning on eliminating our student debts completely in 5 years.
I'm not overly worried about eliminating our student debt, I'm just worried if we buy a home we will then have extra expenses to accumulate... average listing price in the area we want to buy is 260k, house prices went up almost 13% in the last year and are projected to go up another 4.3% this year... interest rates are about 4.25% 30yr fixed but may go up to 5% or more by the end of this year... that with the low inventory makes the housing investment market for first time home buyers like me very frustrating and difficult...
we both function mostly financially independent
but marriage is in the outlook too... but Im unaware of benefits of that as well...

[SwordGuy]

but marriage is in the outlook too... but Im unaware of benefits of that as well...

Well, then your expenses for children are likely to remain low...  :)

[chris316]

but marriage is in the outlook too... but Im unaware of benefits of that as well...

Well, then your expenses for children are likely to remain low...  :)

ha, only if we decide to not have children... or life happens... :)

You've got a long way to go to change your mindset.

Lets say your FIRE date is age 60. You alone are projected to earn over $1.8m over the next 30 years, not including your girlfriend's earnings, and you're worried about $39k in student loans?

on this, how do you calculate my projections?... I've done it a few different times a few different ways and it always seems wonky. what's a good source on accurately projecting retirement goals?... I've figured 2.5 mil by 2048 when accounting for inflation I can live off 4% interest... ???   I think I have more research and learning to do here...

[farfromfire]

on this, how do you calculate my projections?... I've done it a few different times a few different ways and it always seems wonky. what's a good source on accurately projecting retirement goals?... I've figured 2.5 mil by 2048 when accounting for inflation I can live off 4% interest... ???   I think I have more research and learning to do here...

4% of 2.5MM is 100K, why do you need so much spending money when you currently spend 17K a year?

[RWD]

I think I have more research and learning to do here...

Start by reading this, probably: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

[chris316]

I think I have more research and learning to do here...

Start by reading this, probably: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

thank you, after reading this I feel much better

on this, how do you calculate my projections?... I've done it a few different times a few different ways and it always seems wonky. what's a good source on accurately projecting retirement goals?... I've figured 2.5 mil by 2048 when accounting for inflation I can live off 4% interest... ???   I think I have more research and learning to do here...

4% of 2.5MM is 100K, why do you need so much spending money when you currently spend 17K a year?

I came up with 100k because with inflation in 30 yrs. it would be 85% of earnings or so.... I didn't calculate for spending instead, oops! however I do plan on investing in a home which will include a higher spending rate for 30 yrs. or hopefully less...

I guess a few main questions are... I have 50k sitting in savings (40k for down payment, 10k for emergency), what to do? 
put it in an ally account?
pay all or part of my student loans off?
put a portion towards pre-taxed savings?(simple or trdIRA)

I don't want to sit on it too much longer cause I feel like im losing to much to inflation(I've been adding to this for 4 or 5 years)
after reading the "investment order" post It said to pay off all debts around 5% or more above the 10yr treasury note yield after emergency fund and company match (which im doing). the 10 yr. TNY looks like about 2.4% so does that really mean "pay off any debts above 7.4%" ??? im a little confused about that.

With the housing interest rates expecting to rise and be close or more than 5% by the end of the year and such low inventory I feel like I might not find the right house for me soon.

I have 6 student loans as follows...

3,847 - 3.15%
4,034 - 6.55%
3,168 - 4.25%
500    - 5.35%
448    - 5.35%
1,622 - 5.75%

close to 13,600


Also the issue I'm having with contributing to my Simple IRA through my employer is the option of funds are wack. Nothing available below a 1% expense ratio... my employer is looking to change in January of 2018 to hopefully get out of it.
Ive been told I my employer can only contribute to the C class...
right now im in the JCLAX fund in class C here-
http://www.jhinvestments.com/Fund/PriceTable.aspx
and I don't know what to do

simply put, im scared to contribute more than the match in fear that the expense ratio will eat too much of my earning up...

I do have a traditional IRA open with vanguard but don't know what to invest in through that... ?

[former player]

I think you could do with unpacking the statement "we want to be more independent and move into our own home".  In fact, renting is probably as "independent" as you will ever get.  As soon as you buy a home -

1) You are tied to a large debt, and to making mortgage payments every month on the same day for the next 15 to 30 years.  That is no-one's definition of "independent".

2.  You are tied to the person you buy the home with.  If the relationship goes south, the home goes south too, with complicated financial arrangements to add to the complicated emotional issues.

Neither of those are killers, of course: lots of people pair up and set up home by buying property together, and for a significant proportion of them it works out well.  But you need to be aware that what you will be doing has nothing to do with "independence".

[farfromfire]

on this, how do you calculate my projections?... I've done it a few different times a few different ways and it always seems wonky. what's a good source on accurately projecting retirement goals?... I've figured 2.5 mil by 2048 when accounting for inflation I can live off 4% interest... ???   I think I have more research and learning to do here...

4% of 2.5MM is 100K, why do you need so much spending money when you currently spend 17K a year?

I came up with 100k because with inflation in 30 yrs. it would be 85% of earnings or so.... I didn't calculate for spending instead, oops! however I do plan on investing in a home which will include a higher spending rate for 30 yrs. or hopefully less...

I see, I misunderstood you. Let's talk only about today's dollars, for simplicity (that is, account for inflation in any portfolio projections), and assume you pay off your student debt today.
Seems like without cutting your expenses (and without buying a house) you can invest 20K a year, whether in pre- or post-tax accounts, plus 50K you already have.

If you do this for 30 years, and use whatever extra income and raises to pay for a better apartment etc., you can have 1.75MM-4.5MM just by investing in the total stock market*, which would give you a 4% income of 68K-180K, excluding taxes and expense ratios. Again, this is all in today's dollars, and excludes any spousal income or benefits.

* https://portfoliocharts.com/portfolio/portfolio-growth/

[Easye418]

Hello Chris and fellow Millennial,

1.  I wouldn't buy a house until you are married.
2.  If you are marrying her, then just accept the $39k SL as yours.  I married my wife and took on her $40k as well.
3.  After yall get married, buy the house because I am guessing it is important to you.  After I got married at 25, I bought my house. 
4.  Clean up your high interest student loan debts.
5.  Focus on investing.

[NeverLost]

I would be a bit nervous to buy a home in your situation.   If you really look at it, it will likely take you a few months to find something you love if the market is that hot, so you could be paying 17% more than that house was worth just 12-18 months prior.  I personally like to make purchases when things are on sale, not at a premium!  Because you aren't in a position where you HAVE to buy, I would certainly be looking to wait until the housing market takes a step back, then look for a gem. 

This is just me, speaking from the experience of jumping into my first house purchase in 2006 when I should have waited 2 years!

[NeverLost]

Another thought I had was have you considered purchasing a duplex or triplex?  This might help you be able to ease into home ownership while getting some or all of your mortgage paid for by renters.  You and your girlfriend would have more privacy, be invested in real estate and be doing it the mustachian way!

[SwordGuy]

Ditto on buying a house when they are on sale, not when they are expensive!

Do some reading about how to buy real estate for investment (REI) purposes.   If you are at all handy with tools (or willing to learn, which is all it really takes), you should be able to save a lot on your house cost by using REI techniques (and waiting to find a good deal).

[chris316]

Hello Chris and fellow Millennial,

1.  I wouldn't buy a house until you are married.
2.  If you are marrying her, then just accept the $39k SL as yours.  I married my wife and took on her $40k as well.
3.  After yall get married, buy the house because I am guessing it is important to you.  After I got married at 25, I bought my house. 
4.  Clean up your high interest student loan debts.
5.  Focus on investing.

Thank you guys, good advice.
what would you consider high interest? Also, I think I could better my situation If I took care of #4 first... ?

Does anyone else have any advice on taking on extra debt and marriage or stuff like that?

Ditto on buying a house when they are on sale, not when they are expensive!

Do some reading about how to buy real estate for investment (REI) purposes.   If you are at all handy with tools (or willing to learn, which is all it really takes), you should be able to save a lot on your house cost by using REI techniques (and waiting to find a good deal).

Cool, thanks for the advice, TealBlue too!  Im gonna look into REI stuff here soon

[Easye418]

High interest to me is everything above 4%... it differs between who you talk to.  Definitely anything above 6%.

[chris316]

High interest to me is everything above 4%... it differs between who you talk to.  Definitely anything above 6%.

Right on, I kind of figured that... looks like my Student loans just moved up the ladder...

I guess another question to piggy back off of that is... how long should you save for a down payment on a house, or what percentage of your yearly gross income should you put forth?

I was reading on another thread that said if you save longer than 3-6 month for a car then you cant afford it. A rule of thumb is no more than 1/10 of your yearly gross income should go towards buying a car? I assume buying a house with property is much different, but is there some kind of similar "rule of thumb" guidance like that?

Any thoughts on this?

[NeverLost]

Regarding REI, check out affordanything.com.  She has some really inspiring things on there regarding rentals!

[hoping2retire35]

I think you just need to read through a lot more of the main blog. A lot of the advice on the forums is more nuanced and difficult to make generalizations from, unless of course you find a forum user who is in a similar life situation.

[chris316]

I think you could do with unpacking the statement "we want to be more independent and move into our own home".  In fact, renting is probably as "independent" as you will ever get.  As soon as you buy a home

True. Thank you.

Lots of tough decisions and know there is no one right answer.

Right now here are my thoughts....

1. I want to pay off all my students loans except the one under 4%. Is this a smart move?

2. I've talked with my SO and she is stubborn and doesn't want any help paying off her 39k of student loans...  so for now we're acting independent of each other. Because we're not married this is probably the right answer for right now.

3. I've figured you don't want to pay more than 3x your gross income on a home. Or 30% of net income monthly expense. So for me it would be a $175k home. 20%=35k... with emergency fund of $4500 that leaves $10500 to put towards my student loans(see #1)

4. I have a Roth in vtsmx so what should I invest in a traditional Ira in?

[Lews Therin]

I'm going to go through this point by point, with a lot of very simple actionable tips.

First off, you are doing very well, and you should be looking at keeping expenses not too inflationary in the future. If you are feeling pinched right now, there is no reason to decide that 100k is the amount you need in retirement, but simply make sure you are tracking what expenses you have, and there should be no reason you need to wait till 60 to retire (If you decide to wait till 60 because you want to, that's a whole different ballgame, but always nice to be able to say "I can stop whenever I feel like it")

Your student loans are not that high, but I would personally kill off every loan over 4%. You have a large savings portion that can do this easily, and you will be able to refill this stash with the amount you are clearing monthly quite rapidly.

All your expenses are very low, which is excellent, apart from your cell phone bill. Read I.P. Daley's guide to communications and find a 50$ plan (or something very close to 50) in order to remove that line from your expenses, freeing another 42$ every month. (This is a 50$ rebate from the company, or simply 50% they will cover your bill?) - If they only cover half, you should still not be paying 90$ that's ridiculously high.

-Questions for you: Have you spoken to your girlfriend about the finances of the house? Does she also have 40k to put into it, or is the burden of the cash down only on you. Would both names be on the mortgage? What happens if you break up, who gets the house?

And before all that: What is the motivation for a house. You mentioned rising house prices, but why is renting no longer the preferred option?

Also, as a renter, what type of emergency could you have that would take more than the 3.4k in your checking? Car- Work vehicle... you have renter's insurance, health insurance...

[Lews Therin]

High interest to me is everything above 4%... it differs between who you talk to.  Definitely anything above 6%.

Right on, I kind of figured that... looks like my Student loans just moved up the ladder...

I guess another question to piggy back off of that is... how long should you save for a down payment on a house, or what percentage of your yearly gross income should you put forth?

I was reading on another thread that said if you save longer than 3-6 month for a car then you cant afford it. A rule of thumb is no more than 1/10 of your yearly gross income should go towards buying a car? I assume buying a house with property is much different, but is there some kind of similar "rule of thumb" guidance like that?

Any thoughts on this?

you can use this calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

The goal is to decide whether Renting is a better financial option than renting. The rule of thumb for housing varies on the rental/house market. If you can rent at half the price of buying, why would you buy? And remember that every $ you put in the house is no longer working for you bringing back returns, the housing market is not as sure a bet as the market.

[chris316]

Your student loans are not that high, but I would personally kill off every loan over 4%. You have a large savings portion that can do this easily, and you will be able to refill this stash with the amount you are clearing monthly quite rapidly.

-Questions for you: Have you spoken to your girlfriend about the finances of the house? Does she also have 40k to put into it, or is the burden of the cash down only on you. Would both names be on the mortgage? What happens if you break up, who gets the house?

And before all that: What is the motivation for a house. You mentioned rising house prices, but why is renting no longer the preferred option?

Also, as a renter, what type of emergency could you have that would take more than the 3.4k in your checking? Car- Work vehicle... you have renter's insurance, health insurance...

I might pay off everything over 4%

I would buy the house and she would act as renter.

I have some emergency cash stored away for her as well.

The motivation for moving is that we have a roomate... 3 people in a 950 square foot space.  privacy is a nice thing,  or so I've heard...

[Laissez-Faire]

I think it's worthwhile to highlight a bit more how well you're doing already.

- You're young. Time is the most valuable asset in reaching FI.
- You are already practically mustachian, with a savings rate of >50%
- You are in a position in life when lifestyle creep typically hits a whole new level. But you have discovered MMM and FIRE and have the option to stop it in it's track before it get's even started. How I wish I'd seen the light at your age.

Just make sure you don't let your expenses grow too much, invest your savings, and let compounding do it's job. You'll be FIRE at 45 or even earlier, since your income will probably keep growing also.

You are basically already set if you just keep the track you're on.

I wouldn't rush into buying a house just for privacy. Look into renting without the 3rd wheel or if you absolutely want to buy, try to find something income generating as recommended earlier in the thread.

[chris316]

I think it's worthwhile to highlight a bit more how well you're doing already.

You are basically already set if you just keep the track you're on.

I wouldn't rush into buying a house just for privacy. Look into renting without the 3rd wheel or if you absolutely want to buy, try to find something income generating as recommended earlier in the thread.

Thank You for all the advice.

Things are going well thus far and all the advice is really helping

One thing I may have left out is that I eventually want to own when I retire to a small community with a lower cost of living expense...
this is a goal I've had for a while and I'm sure a few others can relate....
There's just something about being king of your domain and controlling what's around you.

From all of this should I just pay off all of MY student loans and then start staching away a home down payment along with retirement contributions???

[Lews Therin]

If paying for a house costs less than renting something similar for two people, go for it.

Loan repayment is low enough that you can invest and get a better return, so you are welcome to either pay them off or let them slowly dwindle away.

[chris316]

UPDATE!

just paid off a huge chunk of my student loans with high interest(more than 4%)...

And just called t-mobile... knocked $25 a month off my phone bill...
I know $70 is still high... I'm still researching into it. But for my job it's essential I have the best rural coverage possible, it seems like Verizon offers the best coverage here in Minnesota but with fees may cost $10-20 more....

This is all updated in my original post.

[KungfuRabbit]

Saw your update, good for you!  There will always be a debt free vs hold low interest debt - I'm in the debt free mindset.

I'll echo a few things:

-never ever buy a house with a girlfriend. Ever. If you break up that will leave you with a financial nightmare. The * to that is if you 100% own the property and she pays rent. By rent I mean legal tenant rent with no property rights at all, anything under the table could screw you later on if she gets bitter and wants blood. You would have to accept though you'd have to afford the property alone, though of course could always rent a room to someone else.

-what specific areas are you in?  I live in MN as well and have a lot of friends house shopping right now. Just last week my friend put an offer of $25k over the list price of $200k on a house that was listed the day before and their offer was so low on the list they weren't even considered as a backup. It's a really low inventory situation driving up prices like crazy - not sure how long it'll last though.

-are you handy or do you want move in ready?  Inside the 494/694 circle for $175k there won't be a lot of move in ready options in desireable neighborhoods. But if you're willing to remodel yourself (even if it takes 5 years) there will be a lot more options. If you want move in ready in a good neighborhood you'd probably need to up your budget a bit, depending on which part of the city.  I've lived in the western, southern, eastern, northern burbs and Minneapolis proper and St Paul proper, I have to say the east part of St. Paul (Summit area) is my favorite part in the cities, but the western suburbs have the best biking trails :)

[chris316]

Saw your update, good for you!  There will always be a debt free vs hold low interest debt - I'm in the debt free mindset.

I'll echo a few things:

-never ever buy a house with a girlfriend. Ever. If you break up that will leave you with a financial nightmare. The * to that is if you 100% own the property and she pays rent. By rent I mean legal tenant rent with no property rights at all, anything under the table could screw you later on if she gets bitter and wants blood. You would have to accept though you'd have to afford the property alone, though of course could always rent a room to someone else.

-what specific areas are you in?  I live in MN as well and have a lot of friends house shopping right now. Just last week my friend put an offer of $25k over the list price of $200k on a house that was listed the day before and their offer was so low on the list they weren't even considered as a backup. It's a really low inventory situation driving up prices like crazy - not sure how long it'll last though.

-are you handy or do you want move in ready?  Inside the 494/694 circle for $175k there won't be a lot of move in ready options in desireable neighborhoods. But if you're willing to remodel yourself (even if it takes 5 years) there will be a lot more options. If you want move in ready in a good neighborhood you'd probably need to up your budget a bit, depending on which part of the city.  I've lived in the western, southern, eastern, northern burbs and Minneapolis proper and St Paul proper, I have to say the east part of St. Paul (Summit area) is my favorite part in the cities, but the western suburbs have the best biking trails :)

Hey, thanks! im doing what I can!

were not going in on a house together

im in the northern suburbs

yea, MN housing market is rough right now....

Its a dog eat dog world here and im wearing bacon pants!

Ive even heard people not putting an inspection contingency on their offer just so it will be more likely to be accepted! crazy!
ive pretty much accepted that the housing market it too tight and were gonna focus on savings...

[Goldy]

You are doing well so keep it up.  Have you maxed your 2016 Roth contributions? If not I would toss 5500 into that right away because you can always take out your contributions penalty free in case you need the money.  If I were you I would do both 2016 and 2017 then attack the higher rates on the loans.

[chris316]

Update!!!

Just paid off all student loans!!!


For right now we have decided to rent for a little but longer, I hate holding on to so much cash but I want to be ready to buy when the housing market turns around...

Also I moved my $35k savings into A high yield savings account with Ally (1%)

Now I have 2 questions.....

1. What should I do for my retirement savings? should I invest in international vanguard funds??? should I convert my roth to my traditional? I make less than 60k and am single so I am contributing to my traditional IRA while I can right now to help with tax savings... I don't know why but I feel unorganized, uncertain, and confused on exactly how my location should be and what and where to invest...

2.....

This is the Wild Card situation...

Does anyone else have any advice on taking on extra debt and marriage and stuff like that?!?!

[albireo13]

Instead of buying a house, why not rent a better apartment for just the two of you ...  no roommate?
It will cost more than you pay today but, I bet it will still be a lot less than carrying a mortgage with property taxes.
Maybe this isn't very Moustachian but, it beats taking on a mortgage/house ball and chain just now.

Then, wait until you get married before going for a house and take your time to find a good one.

[Catbert]

Hello Chris and fellow Millennial,

1.  I wouldn't buy a house until you are married.
2.  If you are marrying her, then just accept the $39k SL as yours.  I married my wife and took on her $40k as well.
3.  After yall get married, buy the house because I am guessing it is important to you.  After I got married at 25, I bought my house. 
4.  Clean up your high interest student loan debts.
5.  Focus on investing.

I agree with this...especially the parts about not intertwining your finances until/unless you are married.  Don't buy a house together.  Don't buy a house you can't afford w/o her income.  Don't pay off her student loans.  If you aren't ready to get married, you aren't ready to have joint finances.