Redbird Case Study

[redbird44]

Hi All,

I'm a long time reader, but first time poster. I'm a 33 year old single female, and recently finished paying off $90k plus in undergrad and graduate school debt.  Now that I've conquered that, I'm not sure where to best put my extra cash.  I have roughly $2500 per month leftover once expenses are paid.  My company does not offer a 401k (though is currently looking into it), and the $2500 is what's left after maxing out my IRA.  At some point I would like to buy a rental property.  Case study details below.  General advice and facepunches welcome.  Thanks in advance for your thoughts.

Monthly Summary:   
"Gross" income   $9,025.00
Income taxes   $2,180
After-tax income   $6,845
   
Roth IRA contribution   $458
Living expenses   $3,669
Non-mortgage loans   $51
   
After-tax investable   $2,667

Specific Monthly Breakdown Below:

Paycheck income before tax   $7,500
   
Rental income   $1,525 (I rent out the mother in law apartment in my basement and a room in my house.  Ideally would like to get rid of the roommate who pays $550 which would bring the rental income to $975).

Total Income   $9,025.00
   
Federal tax   $1,606
State/City tax   $0
Soc. Sec.   $465.00
Medicare   $108.75
Self-employment Tax   $0
Total income taxes   $2,180
   
Income before other expenses     $6,845.02

Monthly Average Expenses:   
Mortgage   $1,266
Property Tax   $160
Mortgage Insurance   $0
Home/Rent Insurance   $160
Beauty/Hair   $30
Car Insurance   $50
Car Maintenance, Registration, etc.   $110
Christmas/Holidays   $15
Clothing/Shoes   $100
Dining (Lunch/Dinner/Etc.)   $150
Gifts (not charitable contributions)   $20
Dry Cleaning   $15
Electricity   $45
Entertainment   $100
Fuel/Public Transport   $120
Gas/Oil for heating   $60
Groceries   $200 
Household; Maintenance   $150
Internet/Cable   $100
Landscaping/Yard work   $25 
Medical Insurance (if not paid pre-tax)   $316
Pets   $30
Recycling/Trash   $23
Sports/Recreation   $200
Travel/Vacation   $200
Water/Sewer   $24
Non-mortgage total   $2,403
   
Loans:   
Student Loan   $51/month.  $7900 left at 2.25%
   
   
Other tax-advantaged investments:   
Roth IRA   $458.00 contributed per month

   
Total Expense   $4,178
   
Total to invest   $2,667

Current Assets:
House is worth roughly $420,000 and I have $268,000 left on the mortgage at a 3.2% interest rate
Savings     $21,000
401k   $20,000
Roth IRA + HSA   $7,200

[mozar]

Do you have a goal to retire early? You spend so much money! Cable, landscaping, sports, beauty, clothes? Gee whiz. Are you going to replace the roommate?

[redbird44]

Thanks for the response Mozar.  If I'm lucky enough to keep my job with the same level of job satisfaction I currently have, I can't imagine that I would actually retire early.  That said, I presume at some point circumstances are bound to change so I'd like to be prepared if that happens.  I had a very concrete goal in paying off my student loans, and now that they're gone (minus the roughly $8000 at 2.25%) I'm not sure what to focus on.  Would love thoughts on that.

As for cable, I plan on getting rid of that ASAP--I have zero desire to have it.  The renter in my MIL apartment wanted it and pays extra in rent for it.  Hopefully once he is gone I'll cut the cable and be able to keep the rent the same.  Landscaping is a huge overestimate on my part at this point.  I redid my yard this past summer and spent about $1200.  I'll update the number to reflect my plans going forward (just a simple flower & veggie garden, I keep up on all maintenance myself).  Sports, beauty and clothes are all fairly accurate.  I can definitely work on trimming the clothes budget. If I get rid of the roommate who pays $550 in rent I'm unlikely to replace them since we share actual living space and my only reason to stop renting to her would be to have personal space back.  Currently trying to decide what's a higher priority--privacy or the extra income.  Thanks again for the response!

[Trifle]

Hi Redbird
I think Mozar is right.  I think you should take a step back and decide first on a goal.  The concrete student loan repayment goal powered you to (near) completion on that. Well done!   
Even if you love your job, you could aim for FI-- without the RE component.  You will never, ever regret having done that.  You are young, and we don't know what life is going to throw at us.  As a high earner you have boatloads of opportunity to reach FI quickly.  But only you can say for certain what the goal should be. 
Agree that there is some "fat" in your spending that could be trimmed, which would shorten your time to whatever goal you set.   I'll let others chime in on your question regarding buying rental property, as I have no knowledge there.
Good luck!

[Trifle]

Redbird -- suggest you add a tagline to the title of your case study summarizing who you are and what you are asking.  Might get some more replies? Something like "Just crushed my student loans.  What do I do next?" 
Or a specific question about being a landlord?

[Sibley]

Realistically, save all that extra cash. Max anything tax advantaged that you can, and then pour money into taxable accounts. you'll be nicely positioned for whatever you want to do once you have a goal :)

[Bruizer]

Suggest you pay off your other student loan over the next three months, and then start putting the extra funds in a taxable account in Vanguard.

[marty998]

I think it's ok to keep paying for sports if that is what keeps you fit/happy/motivated.

You have a net worth of over $200k and have around $30,000 surplus funds to invest or throw at the mortgage each year.

I am usually part of the "kill the mortgage" brigade, but given your interest rate is so low I'm willing to suggest $6k per year extra at the mortgage ($500 per month) and $24-$25k put towards shares investments.

[MDM]

I had a very concrete goal in paying off my student loans, and now that they're gone (minus the roughly $8000 at 2.25%) I'm not sure what to focus on.  Would love thoughts on that.

For general "what to do in what order?" see Investment Order.

In your case, using a traditional IRA instead of a Roth seems better: you would save at least 28% on some and 25% on the rest (plus state).  See Traditional versus Roth - Bogleheads.

Helping your employer establish a good 401k so you could put $18K instead of $5.5K into traditional accounts would be worthwhile.  See How to campaign for a better 401(k) plan - Bogleheads.