Author Topic: Case Study: 27 Male What do I need to do?  (Read 5783 times)

JayGatsby

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Case Study: 27 Male What do I need to do?
« on: September 09, 2014, 05:56:58 PM »
As a self check, I'd like to give you my current situation and determine whether I need a face punch, a slap, or no punishment needed.

I've just found this site recently, and am beginning to amend my ways.  Let me know what you think I need to be doing. I certainly am behind where I could, but a big portion of my potential savings went to a failed startup I had. Don't regret it, bc I learned a lot. But I'm looking to build my assets to get to FI as soon as possible.

Salary: Base is 120k. Received two quarterly bonuses of 8k ($4500 after taxes) so far this year, though they're highly variable. Not sure if they'll continue. Had some moving costs, but all bonuses going forward will be going to the brokerage account/savings. Most of what it is now is from those bonuses and other monthly savings.

House:
Purchased a house for 420k. House was appraised at 430k. My current loan value on the house is 395k at 4.125%. Put approximately 20k down. Monthly payment is $2700. Have two roommates that pay $700 each. So my payment is $1300 per month. Of which about $550 goes to equity. PMI is approx. $200 per month.

Other Assets:

46k 401k - All in Vanguard funds
12k - Brokerage account. Low cost ETF
4k checking account.

Liabilities:

Student Debt - 5k at 6% About $137 per month.

Monthly after tax take home = 6k
Monthly spend = approximately 3k (including $1200 for my portion of mortgage).

My additional $3k per month goes into the brokerage account, as I don't currently have access to a 401k at my employer. I'll be putting the max $5500 in an IRA before the year is up.

No Car. Bike to work everyday.

Have not had cable/internet for the past 8 months, but really need it for football season! Cost to me is $40 per month.

Think I might have messed up with the house purchase. With that, I'm trying to determine if the obvious answer is to sell it or keep it. To me, with the roommates, it appears it's about break even.  It costs about $1800 per month in my city to rent a one bedroom. My thought was to lock in the low rates, as I plan to live here for at least 4 more years.

Know my monthly spend (approx $1800) on top of the mortgage is fairly high. $137 of that goes to my student debt. Working on cutting that lower. Wedding season is taking a bite out of those efforts!

What am I missing? Should I be working harder to get a tax advantaged account set up (besides the IRA)? Should I consider selling the house in a few years when the roommates move out?

mxt0133

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Re: Case Study: 27 Male What do I need to do?
« Reply #1 on: September 09, 2014, 06:23:30 PM »
If a one bedroom is $1800 in your city.  Are you charging market rates for the rooms?  Is the house and rooms that small?

Chrissy

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Re: Case Study: 27 Male What do I need to do?
« Reply #2 on: September 09, 2014, 06:33:38 PM »
You're doing everything right.  A 50% savings rate is killer!

I'd do these things differently:
1) Finish off the student loan with the brokerage account money, because the 6% interest rate is eating up your gains.
2) Yes, contribute to a ROTH, but you can't put the max in the ROTH because your income is too high.  Figure out what you can contribute, and do so. http://www.rothira.com/roth-ira-limits
3) Pay into the house instead of the brokerage account until you can get rid of the PMI.  Then, go back to paying $1,300/mo + the rent income.
4) Look into an HSA or FSA.

As soon as you have access to the 401K, contribute the max, $17,500.  That gets your income down to where you can also contribute the max to the ROTH, $5,500, which you should do every year.  You'll still have plenty to put in the brokerage account, too. 

Don't sweat the house.  Your $1,300/mo mortgage payment on your 3-bed house is less than $1,800/mo rent for a one-bed apartment you wouldn't even own.  If it's possible, raise the rent a little bit each year on the roommates.  You could put that money toward the mortgage or into investments; with your low interest rate, though, I wouldn't be in a hurry to pay off the mortgage, just the PMI.
« Last Edit: September 09, 2014, 06:35:32 PM by Chrissy »

Cwadda

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Re: Case Study: 27 Male What do I need to do?
« Reply #3 on: September 09, 2014, 06:43:20 PM »
It doesn't sound like you're in bad shape at all. 50% savings rate is nothing to scoff at. When do you want to kill that debt? It's not too much. Maybe you can make it a goal to use the next bonus on that. Also make sure you have an emergency fund that you're comfortable with.

In general, this is what's recommended:
1. Are you contributing the max to 401(k)? Are you hitting the $17,500 limit every year? If not, you should. Tax-deferred investing is almost always the way to go before brokerage.
2. Contribute to a Traditional IRA the max because it is tax deductible. Later in life you can use a Roth conversion ladder technique to make these funds a Roth IRA and get tax-free growth. I think this is the best option, but someone else can correct me if I'm wrong.
3. Do you have an HSA account? Do you have a qualified high-deductible health insurance plan? You're allowed to contribute $3,000 per year to something called an HSA and then allocate that to investments. You're a young, 20-something guy who doesn't have many health care costs, right? If that's the case, then take advantage of the HSA.
4. Numbers 1-3 should happen before you invest with a taxable brokerage account.

Other posters, please validate this information.

I'd personally take the money out of the brokerage account, pay off the debt, and then max the Traditional IRA, which is allowed for your income limit I think?

Edit: Never mind, I'm reading that the Traditional IRA contribution wouldn't be tax-deductible for your income/and that you're covered by a retirement plan at work.
« Last Edit: September 09, 2014, 06:47:32 PM by Cwadda »

JayGatsby

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Re: Case Study: 27 Male What do I need to do?
« Reply #4 on: September 09, 2014, 06:58:39 PM »
If a one bedroom is $1800 in your city.  Are you charging market rates for the rooms?  Is the house and rooms that small?

Well they're sharing the house with me. If it was a stand alone apt, I could charge more. But they're just friends that are renting one bedroom each. I think the deal I give them is slightly below fair value, but I don't want to be greedy. I'd rather live with friends than live have two random roommates.

JayGatsby

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Re: Case Study: 27 Male What do I need to do?
« Reply #5 on: September 09, 2014, 07:01:29 PM »
You're doing everything right.  A 50% savings rate is killer!

I'd do these things differently:
1) Finish off the student loan with the brokerage account money, because the 6% interest rate is eating up your gains.
2) Yes, contribute to a ROTH, but you can't put the max in the ROTH because your income is too high.  Figure out what you can contribute, and do so. http://www.rothira.com/roth-ira-limits
3) Pay into the house instead of the brokerage account until you can get rid of the PMI.  Then, go back to paying $1,300/mo + the rent income.
4) Look into an HSA or FSA.

As soon as you have access to the 401K, contribute the max, $17,500.  That gets your income down to where you can also contribute the max to the ROTH, $5,500, which you should do every year.  You'll still have plenty to put in the brokerage account, too. 

Don't sweat the house.  Your $1,300/mo mortgage payment on your 3-bed house is less than $1,800/mo rent for a one-bed apartment you wouldn't even own.  If it's possible, raise the rent a little bit each year on the roommates.  You could put that money toward the mortgage or into investments; with your low interest rate, though, I wouldn't be in a hurry to pay off the mortgage, just the PMI.

Wow. Thanks for the notice on the ROTH IRA. Didn't even put two and two together that by maxing out a 401k, I'd be lowering my reported income enough to be able to contribute to another tax shelter. So I guess step one is I really need to figure out the 401k setup with my employer.

Cwadda

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Re: Case Study: 27 Male What do I need to do?
« Reply #6 on: September 09, 2014, 07:08:23 PM »
You're doing everything right.  A 50% savings rate is killer!

I'd do these things differently:
1) Finish off the student loan with the brokerage account money, because the 6% interest rate is eating up your gains.
2) Yes, contribute to a ROTH, but you can't put the max in the ROTH because your income is too high.  Figure out what you can contribute, and do so. http://www.rothira.com/roth-ira-limits
3) Pay into the house instead of the brokerage account until you can get rid of the PMI.  Then, go back to paying $1,300/mo + the rent income.
4) Look into an HSA or FSA.

As soon as you have access to the 401K, contribute the max, $17,500.  That gets your income down to where you can also contribute the max to the ROTH, $5,500, which you should do every year.  You'll still have plenty to put in the brokerage account, too. 

Don't sweat the house.  Your $1,300/mo mortgage payment on your 3-bed house is less than $1,800/mo rent for a one-bed apartment you wouldn't even own.  If it's possible, raise the rent a little bit each year on the roommates.  You could put that money toward the mortgage or into investments; with your low interest rate, though, I wouldn't be in a hurry to pay off the mortgage, just the PMI.

Wow. Thanks for the notice on the ROTH IRA. Didn't even put two and two together that by maxing out a 401k, I'd be lowering my reported income enough to be able to contribute to another tax shelter. So I guess step one is I really need to figure out the 401k setup with my employer.

Ok, yeah. If you don't have a 401(k) plan with your employer, get one. Think Toy Story - "I don't want any toys left behind. If you don't have one, GET ONE!"

Also, if the 401(k) plan takes time to set up and you won't be on it for the year, then you CAN contribute the max to a Traditional IRA regardless of your income and have it be tax-deductible since you're not covered by a retirement plan at work. Check the details with your accountant or more folks on this forum.

JayGatsby

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Re: Case Study: 27 Male What do I need to do?
« Reply #7 on: September 09, 2014, 07:24:18 PM »
It doesn't sound like you're in bad shape at all. 50% savings rate is nothing to scoff at. When do you want to kill that debt? It's not too much. Maybe you can make it a goal to use the next bonus on that. Also make sure you have an emergency fund that you're comfortable with.

In general, this is what's recommended:
1. Are you contributing the max to 401(k)? Are you hitting the $17,500 limit every year? If not, you should. Tax-deferred investing is almost always the way to go before brokerage.
2. Contribute to a Traditional IRA the max because it is tax deductible. Later in life you can use a Roth conversion ladder technique to make these funds a Roth IRA and get tax-free growth. I think this is the best option, but someone else can correct me if I'm wrong.
3. Do you have an HSA account? Do you have a qualified high-deductible health insurance plan? You're allowed to contribute $3,000 per year to something called an HSA and then allocate that to investments. You're a young, 20-something guy who doesn't have many health care costs, right? If that's the case, then take advantage of the HSA.
4. Numbers 1-3 should happen before you invest with a taxable brokerage account.

Other posters, please validate this information.

I'd personally take the money out of the brokerage account, pay off the debt, and then max the Traditional IRA, which is allowed for your income limit I think?

Edit: Never mind, I'm reading that the Traditional IRA contribution wouldn't be tax-deductible for your income/and that you're covered by a retirement plan at work.

Ok- also good to understand that by putting 50% of my AFTER tax income away, that I'm saving the 50% mentioned on this site. I was confusing it with my full salary number and felt like I was doing a mediocre job, at best. I thought I was only putting away about 30% of my income.

That is hugely reassuring to me, so thank you for that. Get caught up trying to figure out the numbers so much sometimes, that I can drive myself crazy! ;)

not_a_trex

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Re: Case Study: 27 Male What do I need to do?
« Reply #8 on: September 09, 2014, 08:50:19 PM »
Overall you look in pretty good shape.

Quote
Salary: Base is 120k. Received two quarterly bonuses of 8k ($4500 after taxes) so far this year, though they're highly variable. Not sure if they'll continue. Had some moving costs, but all bonuses going forward will be going to the brokerage account/savings. Most of what it is now is from those bonuses and other monthly savings.

At 27 that's really impressive.

Quote
House:
Purchased a house for 420k. House was appraised at 430k. My current loan value on the house is 395k at 4.125%. Put approximately 20k down. Monthly payment is $2700. Have two roommates that pay $700 each. So my payment is $1300 per month. Of which about $550 goes to equity. PMI is approx. $200 per month.

As others have said, you may be able to raise the rent if a 1BR rents for 1800/mo.

Quote
Other Assets:

46k 401k - All in Vanguard funds
12k - Brokerage account. Low cost ETF
4k checking account.

Can you break down what funds you're contributing to? It would be a shame if you have money in VTSMX when you could have it in VTSAX or VIIIX

Quote
Liabilities:

Student Debt - 5k at 6% About $137 per month.

As others have said, squash this.

Quote
Monthly after tax take home = 6k

This seems a little low given your base salary. Is 40% of your take home pay really going to taxes?

Quote
Monthly spend = approximately 3k (including $1200 for my portion of mortgage).

I think some would say this is high for a mustachian but it's probably not unreasonable if you're travelling for weddings.

Quote
My additional $3k per month goes into the brokerage account, as I don't currently have access to a 401k at my employer.
If you can get one, set one up. Given your high income I would suggest maxing out pre-tax contributions. Then look into if you can make after-tax contributions after that. Those contributions can be rolled over into a Roth IRA and grow tax free.

Quote
I'll be putting the max $5500 in an IRA before the year is up.

I'm going to guess that your base salary is also too high to make Roth contributions directly. I would suggest looking at a backdoor Roth:
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Quote
No Car. Bike to work everyday.
Cool

Quote
Have not had cable/internet for the past 8 months, but really need it for football season! Cost to me is $40 per month.

Getting internet is fine. Don't cut to the extreme if it makes you unhappy.

Quote
Think I might have messed up with the house purchase. With that, I'm trying to determine if the obvious answer is to sell it or keep it. To me, with the roommates, it appears it's about break even.  It costs about $1800 per month in my city to rent a one bedroom. My thought was to lock in the low rates, as I plan to live here for at least 4 more years.

It sounds like for the short term you're saving money by buying. One benefit of having the house is it can act as an inflation hedge. Even if we get crazy inflation you've locked in that low interest payment.

If you decide to leave one day you have the option to rent the house out. When that time comes you can come back and ask for suggestions:

http://forum.mrmoneymustache.com/real-estate-and-landlording/how-to-real-estate-case-study-sell-or-rent/


Rob

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Re: Case Study: 27 Male What do I need to do?
« Reply #9 on: September 09, 2014, 10:17:55 PM »
My contribution to this thread is that you could get NFL Gamepass (even in the US) for $110 if the NFL is why you are paying for cable. Check reddit for instructions or message me if you are interested. If you are just trying to get espn stuff for college football, maybe you have a friend/relative that will give you their login info? That's what my roommates and I have going, and it doesn't cost the other party anything.

soccerluvof4

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Re: Case Study: 27 Male What do I need to do?
« Reply #10 on: September 10, 2014, 04:22:02 AM »
As others had said, take the money out of the Brokerage account and pay off your student loan.  I dont really have a problem with the rest.  If your going to stay in the area / the house for 4 more years then I would stay there too. Not knowing the details if single rents are 1800$ then your house sounds reasonable.  Raising rents or not your saving 50% so depending on if there friends or not and for ease of mind in trusting them a discount to the market to me with what else your doing is fine.

money_bunny

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Re: Case Study: 27 Male What do I need to do?
« Reply #11 on: September 10, 2014, 05:21:27 AM »
"Take the money out of the brokerage account"

How about just take 2 paychecks and pay it off. He makes more than the 5k balance a month?

Cheddar Stacker

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Re: Case Study: 27 Male What do I need to do?
« Reply #12 on: September 10, 2014, 05:59:53 AM »
Max 401k asap when its ready. Backdoor roth. Those have been mentioned so +1 there. What I haven't read too much discussion about in this thread is you fucked up with the house purchase. The payment is 50% of your net pay.

Its temporarily ok because its 50% subsidized by 2 friends. That's your saving grace so don't fuck it up. Don't even think about raising rents if it means you would lose one of them. Make sure you take care of these guys. Cook them a nice meal once a week. Do some other random nice things to show your appreciation.

If either of them move out and you can't replace them quickly, its time to think about selling. In the mean time, you need to pay down about $70k to get rid of PMI. This is where your $3k/month should be going. It will take 2 years but it will be worth it in the end.

Welcome to the forum. Great savings rate, but recalculate your savings rate without that $1,400/month subsidy and it will be not so great anymore.

JayGatsby

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Re: Case Study: 27 Male What do I need to do?
« Reply #13 on: September 10, 2014, 08:40:52 AM »
Max 401k asap when its ready. Backdoor roth. Those have been mentioned so +1 there. What I haven't read too much discussion about in this thread is you fucked up with the house purchase. The payment is 50% of your net pay.

Its temporarily ok because its 50% subsidized by 2 friends. That's your saving grace so don't fuck it up. Don't even think about raising rents if it means you would lose one of them. Make sure you take care of these guys. Cook them a nice meal once a week. Do some other random nice things to show your appreciation.

If either of them move out and you can't replace them quickly, its time to think about selling. In the mean time, you need to pay down about $70k to get rid of PMI. This is where your $3k/month should be going. It will take 2 years but it will be worth it in the end.

Welcome to the forum. Great savings rate, but recalculate your savings rate without that $1,400/month subsidy and it will be not so great anymore.

Yup - that was my biggest concern. Realize that my savings rate is heavily dependent on having renters. They're both committed for at least another year, so I suppose I'll let it play out as it does.

The other question I have though from your above statement: Is it worth putting $70k into an illiquid, low return investment, to save $200 per month? A basic alternative would be having that 70k in a low cost ETF. The S&P 500 is yielding about 2.2% annually, which would provide around $128 per month (almost cancelling out the money saved), while also providing the equity growth, and flexibility from the liquidity.

Cheddar Stacker

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Re: Case Study: 27 Male What do I need to do?
« Reply #14 on: September 10, 2014, 09:09:32 AM »
Reducing PMI does a lot for you. You bought a lot of house for your income. That may be a sign of the area you live in, I don't know. If it's a high cost of living area, this may be a good deal, but it would have been more ideal to put 20% down to reduce the monthly payment. Paying down PMI could allow you to do that. In 2-3 years you could refi to eliminate it and possibly substantially reduce your payment. It might even make it worthwhile to stay in the house if the roommates move out.

Here's a link to an nice analysis that helps determine your return on investment of paying down PMI. This will help you compare it to the return you hope to achieve in the market. http://forum.mrmoneymustache.com/ask-a-mustachian/mortgage-with-pmi-vs-investments-advice-please!/msg365494/#msg365494

I used Reply #2 in that thread as a baseline for this:
420,000x80%=336,000
Paydown to eliminate PMI = ~$60,000
$60,000x4.125%=2,475
$200/Month PMI x 12 = $2,400
Annual Cost on $60,000 = $4,875
Effective Interest Rate = 8.125%

Chrissy

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Re: Case Study: 27 Male What do I need to do?
« Reply #15 on: September 10, 2014, 09:20:18 AM »
Yes, because you're not paying 3% on the $70,000, you're paying 7.5%:  4.125% via the mortgage, and another 3.4% via PMI.

Kill it.

JayGatsby

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Re: Case Study: 27 Male What do I need to do?
« Reply #16 on: September 10, 2014, 09:40:52 AM »
Makes sense. Well, that'll be my focus over the next two years. If I'm efficient and keep the roommates, I should be able to do it. Taking the amount I have in my brokerage account will be a good start. Approximately 58k to go. I'll be slightly assisted by the $550 per month going into equity through the regular payments.

Refinancing after that would then substantially lower my monthly payment, even if interest rates run up.  I'm certainly in the minority, but I do expect interest rates to remain low for the next 7 years (approx). So shouldn't be more than 1% higher in a year or two's time.

Thank you very much Chrissy/Cheddar Stacker! I knew I had a problem. I knew it was the house. I couldn't rationalize the proper solution though.

My income is assisted by my bonuses too. 16k so far this year. I'll just have to make sure I keep those coming to get rid of this PMI.