| My situation, my plan, and my questions (advice appreciated) |
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zulu113
Member
Cash: $ 2.15
Posts: 10
Joined: 04 Dec 2006
Location: San Diego, CA
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| My situation, my plan, and my questions (advice appreciated) |
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Hello all. I’ve been lurking in the background the last few months, and finally think I’ve learned enough to ask a few questions without completely embarrassing myself. The advice I’ve seen here before seems for the most part well-rounded and explained, and is much appreciated.
Before I get into the financials, a bit of background about myself that may help. I’m a 30 year old engineer who has always made a fairly decent salary since entering the workforce. Unfortunately, this has until recently meant I ignored the bigger picture of my financial situation as I have always been able to live more than comfortably. However, within the last year I got married, and with this came a bit of a wake-up call. As we plan on moving from a two income couple to a one income family, I can no longer blissfully waltz through life without considering the longterm financial picture. As such, I’ve been getting ‘smart’ the last few months. I wish I’d done this sooner, but then again it could have come much later and my situation is not exactly awful by any means. My wife and I have made a mutual commitment to controlling our spending, eliminating our debt, and preparing for the short-term and long-term future. Once we consider our situation ‘stable’, we plan on buying a new home, hopefully not in the San Diego area where we are currently renting our home.
Our income: I make approx $80k/year, my wife makes about $35k/year. However, we both expect her to quit working late 2007 to concentrate on tricycle motor maintenance.
Our assets: My 401(k) has about $40k in it (approx. 35% bonds, 55% growth mutual funds, 10% company stock per matching guidelines). My wife has a TSP with about $7k, mutual funds of about $2.5k and a Roth with about $5k. We also have a joint savings account of about $2k, mainly for emergencies.
Our debt situation is as follows: Both vehicles are paid off, and we’re gonna ride them into the ground. $2200 credit card debt (down from $15k 6 months ago – 2/3 came with the marriage, the other 1/3 was mine). $5k left on a wedding loan at 6.5%.
I am currently contributing 15% of my salary towards my 401(k), of which my company matches the first 5%. I’ve also been putting 5% towards a new employee stock purchase plan, the first purchase of which will be 31 Dec (at 85% of price that day). My wife contributes 3% towards her 401(k), however she receives no matching incentives. She also puts about $300/month into her Roth (I am Roth ‘dumb’ at the moment – more on that later).
In light of what I’ve learned in the last few months, I’ve done the following:
- Changed my 401(k) funds allocation, to approximately 10% company stock, 10% bonds, and the other 80% in growth stock funds as I feel comfortable being at higher risk being so far out from retirement.
- Sequentially wiped out our credit card debt (minus the outstanding $2.2k, highest APR cards to lowest).
- Established the following goals in this order: eliminate all credit card debt, eliminate wedding loan, move emergency fund from vanilla savings account to something with a higher yield, even if slightly less liquid, build our emergency fund to $10k.
My questions:
- Should I deplete our savings/mutual fund to pay off the last of the credit card debt?
- Is the 15% too much in the 401(k), considering I am only being matched up 5%? I understand it may be better to ‘meet the match’ then place the balance in something else like a Roth IRA.
- Is our goal of paying off our wedding loan ($5k at 6.5%) early a smart one? I initially thought yes, however I’m leaning more and more towards carrying the debt and putting that money into my wife’s mutual fund.
- Even at 85% of cost, is the money towards my ESPP better spent elsewhere? I have no intention of selling the stock, and would prefer to keep it long-term.
- I’ve changed my future 401(k) contributions to be much more aggressive. Should I change the allocation of the existing money to match the new contribution percentages or simply let it equalize over time?
- Any other suggestions on how I can optimize our situation?
I’m finding that the more I learn, the more I’m beginning to enjoy this stuff. Thanks in advance for any advice, and apologies for the length of the preceding novella. if I can provide more info, please let me know.
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Mon Dec 04, 2006 10:32 pm |
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oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
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Looks like you have some good plans - and your recent shift toward more growth stock funds is a good one - 90/10 or 80/20 is good for another 25 years. Good plan on the cars - depreciating assets do a lot of harm to family finances.
I wouldn't be in a hurry to prepay the $5000 at 6.5%, I like to borrow my investing money below 6%, but I would 'hold' on 6.5%.
As far as moving the EF from Savings to MM, CD, etc - the delta interest on $10k is moot (although I keep a smaller amount, I don't like to have that much non-invested). If one is 3% one is 5%, the delta is $150 after taxes, doesn't matter, it's the price of keeping the money liquid. OTOH, your investment interest is NOT moot - $30k at 6% for 30 years is $172k, at 12% it is $1,000,000, WAY more than twice as much. The power of compounding is always a surprise isn't it?
Max both the Roths, use a no-load fund company such as Vanguard or Fidelity, invest in SP500 Index, Total Index, or an ETF such as SPY. And max the 401k ($15k), that will be the biggest contributor to your NW in the out-years, way more important than house equity, paying down debt, etc.
I would minimize the ESPP, nothing more than 5% of your NW. I pesonally don't use individual stocks, too much uncompensated risk - I like index funds and ETFs.
Don't rule out a house in San Diego - expensive houses are expensive because that's where the money is - better to work for $125k and end up with a paid-for $750 k house in 30 years than work at $75k and end up with a $300k paid-for house. In any case, the sooner that you get on the real estate train, the sooner that you will be cheering for RE prices to go up, not down - and you will likely be on that side of the argument for the rest of your life. IMO, buy with a minimum down payment (keep your own cash for other investments), get a Fixed Rate (no ARM loans). I like the Interest Only (IO) loans, they give you a break for 10 years, then when your pay is higher, it transfers to a 20 year amortization. (I've used them on rental houses, it facilitates matching rent-to-payment).
Good luck with the tricycle motor !!
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Mon Dec 04, 2006 11:51 pm |
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sam1000
Full Member
Cash: $ 21.05
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Joined: 28 Jul 2005
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quote:
In any case, the sooner that you get on the real estate train, the sooner that you will be cheering for RE prices to go up, not down - and you will likely be on that side of the argument for the rest of your life. IMO, buy with a minimum down payment (keep your own cash for other investments), get a Fixed Rate (no ARM loans). I like the Interest Only (IO) loans, they give you a break for 10 years, then when your pay is higher, it transfers to a 20 year amortization. (I've used them on rental houses, it facilitates matching rent-to-payment).
I disagree with this advice. In my opinion San Diego Real Estate is extremely overvalued and due for a very severe correction, perhaps 30%+. Yes, there are most people refusing to believe such a correction can ever occur, most are naive homeowners in denial who have not experienced Real Estate downcycles in the past. Remember that prices in some places in SoCal have appreciated by as much as 200%+ so a 30-40% correction is not only possible it is probable.
An interest only (aka Suicide) loan is a very bad idea for most people. If you wanted to do Interest Only why not just rent. Renting is probably going to be way cheaper than an interest only in this market and doesn't expose you to market risk, in addition you can just give your 30 day notice, pack up and leave if you don't like the place. In addition if you're in a depressed market with higher interest rates 5 years, 7 yrs or 10 yrs from now when the IO loan converts refinancing may be difficult and options may be very limited..you may not be able to sell the home or refinance exposing you to a huge amount of risk.
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Tue Dec 05, 2006 1:10 am |
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zulu113
Member
Cash: $ 2.15
Posts: 10
Joined: 04 Dec 2006
Location: San Diego, CA
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quote:
Originally posted by oldguy
Max both the Roths, use a no-load fund company such as Vanguard or Fidelity, invest in SP500 Index, Total Index, or an ETF such as SPY. And max the 401k ($15k), that will be the biggest contributor to your NW in the out-years, way more important than house equity, paying down debt, etc.
Here's where I'm not sure the best way to proceed. The three things I'd _like_ to do first (well, after paying off that last $2.2k in credit card debt) are:
- Max my 401(k) to the pre-tax $15k limit
- Open and max a Roth IRA ($4k/year right?)
- Build a highly liquid emergency fund to $10k
The catch is, I can't do all three. I'm not comfortable not having that emergency money, so it's got to be built. The rate I build, I'm not sure, but $500/month into my as of yet undetermined mutual fund is my likely minimum.
That leaves the 401(k) and the Roth, both very longterm investments. Better to max the 401(k) at the cost of less (or none) to the Roth? Best to 'meet the match' (company matches first 5%), max the Roth, then add any leftovers to 401(k)?
$15k/year translates to $1250/month, I can handle that. $4k/year to Roth is $333.33/month. Add those to minimum $500/month for my emergency fund, and I have $2083/month. That's actually probably doable, but for the sake of argument, lets assume I've only got $1750/month to distribute. What's the ideal split?
As for the SD real estate market, boy is it frightening. To be honest, the only reason we're still here is my wife is in the Navy (gets out 4th quarter next year). After that, I see Albuquerque or Colorado Springs calling our names (I work for a group in the UK, spend about 40% of my time there and the rest telecommuting from a continent away). Even if we were to stay, we'd have to use some crazy financing to buy a house, of which I wouldn't be comfortable.
It's all doable, just trying to find the best path forward. I appreciate your feedback a great deal. Wish I'd gotten smart on this 10 years ago, but thats what every other post says as well 
regards,
Zulu
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Tue Dec 05, 2006 2:20 am |
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oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
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quote:
But the worst thing about interest-only loans is that it allows people to purchase more house than they're really financially capable of. They stretch themselves to the maximum dollar and then at the first rough patch they're in really deep doo-doo.
coaster, that's the worst and it's also the best. It allows me to buy extra rental houses with minimal investment (more houses) and 'keep my place in line' while the houses appreciate and the rents increase. Then the IO transitions to a 20 years amortization, no forced refi, etc. As for the argument that you must pay repair , maintenance, and taxes - you actually pay all of those when you rent, the landlord must pass them thru. BTW, note that principal repayment is a small part of your home equity, almost all of your equity growth came from appreciation. The important part of financing is Fixed Rate, no ARMs - but IOs don't have that risk - I'm always surpriseed that young folks fear IOs but they sign up for ARMs??
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Tue Dec 05, 2006 3:58 pm |
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zulu113
Member
Cash: $ 2.15
Posts: 10
Joined: 04 Dec 2006
Location: San Diego, CA
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I haven't really got a question, but I thought I'd give a quick update:
Have done the following, and feel comfortable with my situation and plan for moving forward.
- Temporarily reduced 401(k) contribution to minimum required to meet company match.
- Withdrawn from ESPP.
- Had my wife temporarily change her mutual fund contributions to savings.
- Spent the weekend with a new copy of Quicken getting everything absolutely nailed down to provide a 100% accurate 'common operational picture'.
- Got my wife on board (boy, that was fun - but she's in now) and getting her help with budgeting has been invaluable.
This frees up about $1000/month. I've been mowing down credit cards before this at a rate of about $800/month before, so this gives me about $1800/month for debt/savings. Considering our debt is about $7k and we are about $8k shy of a $10k emergency fund goal, I should be able to have debt eliminated in 4 months and emergency fund built 4-5 months after that. I suspect there may be some small amounts that may speed that up along the way courtesy of work.
I don't like reducing my 401(k), but I'm sick of seeing red ink. When there's no more debt and we've got our $10k, the 401(k) contributions go right back up to the $15k limit. Around that time, my wife gets out of the Navy and we'll lose some of our income, but we'll be in a much better situation (not to mention 9 months to figure how to adapt)
I don't know why, but I've always been a little intimidated by all of this in the past. The more I work with it, the easier I see it is. Just took some time getting my 'hands dirty' to see that.
Happy holidays folks
Zulu
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Tue Dec 12, 2006 3:54 pm |
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JCook
Full Member
Cash: $ 11.20
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Joined: 24 Jan 2006
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I like the idea of getting rid of the red as well, keep up the good work. After the debt is gone, which shouldn't be long, you can start saving like crazy. Your money and income will be working for you then.
Yes you can make money with debt and real estate but it adds a good bit of risk in my opinion. You can't go wrong staying out of debt and your risk is nil.
Keep up the good work.
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Wed Dec 13, 2006 3:08 am |
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zulu113
Member
Cash: $ 2.15
Posts: 10
Joined: 04 Dec 2006
Location: San Diego, CA
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Quick update, for anyone interested. We paid off the last of our debt yesterday. No more credit card debt, no more wedding loan, no mo' owe nobody nuttin'! Feels even better than I thought it would, especially getting it done a month ahead of schedule ($7k in 3 months instead of 4). Next: $8k more needed to reach $10k emergency fund goal.
It has really helped getting on the same page with my wife. Once she bought in, she started cutting costs left and right. Our competitive natures came out, and we started having eBay contests to see who could sell the most stuff. Don't get me wrong, we didn't liquidate our household, but like alot of couples we had alot of duplicate items from before we got married. Best advice I can give for newlyweds: make sure you and your partner both understand and agree on your financial picture and plan for the future.
regards,
Zulu
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Tue Mar 06, 2007 7:32 pm |
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