Author Topic: Just starting out (better late than never)  (Read 1422 times)

Fitzy1

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Just starting out (better late than never)
« on: August 25, 2016, 02:27:39 PM »
Hi All,

Been following MMM for a couple years now, but haven't had much cause to post.

So, without going into story mode, just shy of 30 years old, my wife and I are finally getting everything together:

Combined income of 50k *after* taxes/union dues/insurance/current minor retirement contribution
About 240k of mortgage at 3.5% - 10k equity
Expenses: 2,400/mo, 1600 of which is mortgage/property tax/insurance, PMI due to expire in 6 years
Wife has access to a 403b - but the rates are around 1.5-2% which I literally laughed out loud at (checking out to see if Aspire is offered in MA, as suggested in thread below)

We plan to have child(ren) in the next 4 years if we're able to
No debt other than mortgage - roughly 10k liquid savings

So it's my goal to accrue enough liquid to cover 6 months of expenses. That way if I were to lose my job, for whatever reason, we'd still be covered - with her salary, I currently only need to come up with $600 a month to make ends meet. I am aware that if/when we have kids, that figure will increase. Following that, my goal is tentatively to pay 40k down on the house, so that even if one of us were to become unemployed, the other spouse could cover mortgage/food/bills/etc.

If anyone can spot a flaw so far, let me know.

Following that, I'm looking for advice: pay off the remaining 200k on the house (instant 3.5% risk free savings), or invest heavily into either her 403b or my currently non existent 401k via the much beloved Vanguard index funds (there is a 3% match, but it vests over 5 years) - and carry the mortgage through the 30 year term - whichever makes more sense. Long term we'd like to live off of one of our paychecks, while saving/investing the other.

Thoughts?




(PS: While I commute 45min to work in an older hybrid (paid for in cash), we purchased the house within walking distance of her work - my long term gift to her)

Bonus if you have advice for this as well: weekend/night job that can accelerate our savings - these 40 hour weeks of doing the same thing day in and out are killing me. So far I've come up with building and selling Adirondack chairs on craigslist locally, but that's seasonal, and unpredictable. I've also researched affiliate marketing/PPC, but know that I'll lose a bit before I learn how to make it work. I know the next question would be to ask me about my skills: recruiting, food service, and most thing handman-ish. Degree in HR-Management from UMass. In general, I tend to know a fair amount about a fair amount - not an expert in anything - which keeps me humble, but capable of learning most things either on my own or with minor guidance.

Thank you all for any advice or guidance. I am highly motivated to reach FIRE, and honestly would find a way to work 16 hours a day if I didn't think it would hurt my relationship.

DavidAnnArbor

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Re: Just starting out (better late than never)
« Reply #1 on: August 25, 2016, 08:57:40 PM »
The 3% match in the 401K is free money, you shouldn't pass it up.

Full Beard

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Re: Just starting out (better late than never)
« Reply #2 on: August 26, 2016, 12:24:11 PM »
How much is your PMI?  Will paying 40K extra on the mortgage get rid of the PMI?  If you instead save or invest that 40K based on your current expenses of $2400 a month, that could cover you for about a year and a half with neither of you working.  I would focus on saving and investing and not be worried about paying off a mortgage with a 3.5% interest rate.  And definitely take that 3% match.

homestead neohio

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Re: Just starting out (better late than never)
« Reply #3 on: August 26, 2016, 01:13:35 PM »
Quote
Combined income of 50k *after* taxes/union dues/insurance/current minor retirement contribution

Don't count income after taxes, instead considering gross income and taxes as an expense you pay from that.  Aggressively seek to pay less taxes via 401k (at least get the match in case you are around long enough for any to vest) and 403b contributions.  Consider tIRA or Roth IRA max annual contributions as well. Think about union dues, insurance, etc all as line item expenses.  They can all be changed/reduced/eliminated with various employment changes (job change, employer change, career change) and should be used when considering options/offers to get a fair comparison of cost/benefit.

You sound very eager/motivated.  Use that energy productively to root out spending waste and reduce recurring expenses.  Use all that money to reduce taxes and build investments. 

I agree with paying down mortgage to get rid of PMI, then just make normal payments and invest those dollars instead, but you are a long way from no PMI.  Do you have things you don't need you can sell?  For example, go down from 2 cars to 1 based on your wife walking to work?  That could be a huge help by reducing recurring expenses and providing capital for PMI elimination and investments.

a1pharm

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Re: Just starting out (better late than never)
« Reply #4 on: August 26, 2016, 03:32:57 PM »
I'm 31, and my wife is 30.  Our stories are a bit different, but after reading yours, here's what I think you should do given my similar age experience:

1. Reduce your spending (there's always more to cut).  Specifically, look for cheaper home owner's insurance and car insurance - make sure these are as low as possible.  If you are unsure if you have "enough" coverage, ask what minimum coverages you must have before being eligible to buy an umbrella policy.

2. Take the free money in the 401k/403b - this has 3 benefits: a. You get free money, b. You avoid paying tax, c. You help your future self reach freedom.

3. This may be a bit controversial, but remember, it's not the long-term/forever plan: Only put enough money into your 401k/403b to get the match, don't put in any extra now.  Use this money to:

4.  Pay off your mortgage to the point where PMI goes away.  Here's another controversial thing to do, which may not be worth the money you save: pay your mortgage to reach 10% equity, then open a HELOC and use that 10% equity to pay into your mortgage.  This will make your PMI go away, but does force you to pay down your HELOC, in addition to the existing mortgage.  Typically, there is a yearly fee to have access to the HELOC, but it is usually less than one PMI payment.  The benefit of this strategy: it takes less time, but more effort, to get rid of your PMI.  In summary: you have 10k equity right now, and if your PMI goes away once you have 48k in equity (20%), just pay an additional 14k on your mortgage, open a HELOC for the 24k you now have in equity.  Dump that 24k on your mortgage.  PMI is slayed.  Now pay off your HELOC, and continue paying for your mortgage.  This works, I did it, and it's totally legal.

4a. Skip the emergency fund, use your HELOC as your emergency fund.

5. Evaluate if your job is worth the hassle and cost of 1.5 hours in a car per day, 7.5 hours per week, 390 hours per year, 3900 hours per 10 years.  Take a look at MMMs lists of 50k jobs.

6. As you make more and spend less, you'll have more options.  Do you pay the HELOC down first or the mortgage?  Should you invest more in your 401k/403b accounts?  Should you open a Roth IRA?  A traditional IRA?  Here's what I would do:  Don't contribute more money to your wife's 401k - fees of 1.5-2% are crap, and you should only use that account to capture free money.  Any additional money she is able to save should go into a new IRA.  You should keep all your money in your 401k as long as you have access to high quality, low cost index funds.

7. As for side gigs/extra income, you need to figure this out on your own.  Perhaps use this time to try to identify better paying jobs closer to home.  That 1.5hr/day commute time is soul crushing and stache stealing.

In summary, you're doing good, and your only debt being a mortgage is impressive.  You are in a fortunate position to make decisions about how to put your money to work.  Focus on free money (401k/403b match) and get rid of leeches (PMI, high insurance premiums) ASAP.  After you max out the free money, and peel all of the leeches off, you'll be in pretty good shape for an average person.  But you're not average, are you?  No, you're going to continue to reduce your spending and increase your income and save a huge percentage of your income and buy your freedom decades before other people your age.  I'll see you there!