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Old 12-28-2013, 07:36 PM   #1
Confused about dryer sheets
 
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Just entered the "real" world

Hi everyone,

I have been lurking on the site for the past year while I was in school, and kept dreaming about finally being able to start saving for retirement. That time has come!

A little background about myself:
I am 23 years old and just graduated from college. I am engaged and getting married in July. Currently I am debt free, but my fiance is finishing up her masters in April and will come out with about 22k in student loans. We both plan on paying them off as fast as we can and don't plan on having any other debt besides a house loan. I am currently living with my parents and saving money but still am paying for the apartment that I split with the fiance when I was in school (Fiance still lives there and the lease ends in April).


Now about my job:
I graduated on 12/13 and started my job on 12/16. My starting salary is 55k a year plus up to an 8% bonus depending on how well the company does. The also match 3.5% of my 6% for retirement and have another program that adds an addition 2% (total of 5.5% for the 6% I put in).


Onto the questions:
I wouldn't mind renting an apartment and try to save up more money for a down payment but I have browsed some apartments and the rent is $900+ for a 1br. I have 10k in the bank right now and would rather buy a house on a 15 year fixed if the rent is going to be that much. My parents said they would loan me any additional money I would need for the 20% down payment. What are your recommendations on this?

For the retirement savings, I am thinking about putting all of the 11.5% plus any extra I can in a Roth 401k since my company offers that option. The thought behind this idea is that it will grow faster in one account rather than having half in a Traditional 401k and the other in a Roth IRA. Am I missing anything or should I rethink this plan? Also, is there any advantage to putting some in a Roth IRA rather than the Roth 401k? (I know that the contribution maximums are different, but I see the Roth 401k as an advantage due to the higher max contribution limit)

Lastly, the car situation: I have always been against leasing cars in general but my company offers a leasing program that has made me debate to myself on what to do. The program offers 1 year leases on basically any car for $200-$250 a month depending on the options. That also includes all the oil changes as well. So for around $3000 a year, I could be driving a brand new car every year. (I have a hard time thinking about paying a perpetual $500 a month for cars for me and my fiance though) When I did the analysis on it including time value of money I would come out ahead to lease than if I were to buy the car brand new (can someone double check me on that? I assumed a 10 year lifespan on a $25,000 new car with minimal maintenance and repairs) But the thing is, that is on a brand new car rather than a nice used car. Please let me know what you guys think about this?


Hopefully you made it through all of that and I look forward to reading the advice!

-C-man23
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Old 12-28-2013, 08:47 PM   #2
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Quote:
Originally Posted by C-man23 View Post
Onto the questions:
I wouldn't mind renting an apartment and try to save up more money for a down payment but I have browsed some apartments and the rent is $900+ for a 1br. I have 10k in the bank right now and would rather buy a house on a 15 year fixed if the rent is going to be that much. My parents said they would loan me any additional money I would need for the 20% down payment. What are your recommendations on this?
Personally, because the mortgage interest rate can play a significant factor in the monthly payment, I would be seriously looking at places with the fiance now and try to buy a place if you find a good deal with a house that you like. However, I'd go for a 30 year mortgage with the lower monthly payment (since you're a first time homebuyer, and it's always a learning experience when buying a first home, regarding unexpected expenses, etc.)

Quote:
Originally Posted by C-man23 View Post
For the retirement savings, I am thinking about putting all of the 11.5% plus any extra I can in a Roth 401k since my company offers that option. The thought behind this idea is that it will grow faster in one account rather than having half in a Traditional 401k and the other in a Roth IRA. Am I missing anything or should I rethink this plan? Also, is there any advantage to putting some in a Roth IRA rather than the Roth 401k? (I know that the contribution maximums are different, but I see the Roth 401k as an advantage due to the higher max contribution limit)
***IF*** you know you are not going to max out $17,500 in the 401k as well as max out the Roth IRA, THEN I would max out the ROTH IRA first before putting into the Roth 401k, for the simple reason that your personal ROTH IRA will be almost guaranteed to have better investment options than your 401k (unless you work for the gov't and have the TSP options available).

Also, I'm a strong believer in diversification in taxes as well as investments. For this reason, given your tax rate, I would put some in a ROTH account (either IRA or 401k) and some into a traditional....UNLESS you know that your married filing jointly future tax rate will be either very high or very low. (IF very high, it makes sense to put in a traditional 401k to reduce your taxable income now....if very low, then it makes sense to favor the ROTH option)

Quote:
Originally Posted by C-man23 View Post
Lastly, the car situation: I have always been against leasing cars in general but my company offers a leasing program that has made me debate to myself on what to do. The program offers 1 year leases on basically any car for $200-$250 a month depending on the options. That also includes all the oil changes as well. So for around $3000 a year, I could be driving a brand new car every year. (I have a hard time thinking about paying a perpetual $500 a month for cars for me and my fiance though) When I did the analysis on it including time value of money I would come out ahead to lease than if I were to buy the car brand new (can someone double check me on that? I assumed a 10 year lifespan on a $25,000 new car with minimal maintenance and repairs) But the thing is, that is on a brand new car rather than a nice used car. Please let me know what you guys think about this?
Hmmmm..interesting choice!

But don't forget total cost of ownership - maintenance like new tires/brakes in addition to oil changes, insurance (who pays for it?), personal property taxes, excess mileage (a BIG thing with leases). What if you want to go on a 1,000 mile road trip over a 2 week trip and you go way over the mileage limit on the lease? Who picks up that insanely high bill? And what about the inevitable ding/chip on the leased car - who shells out for the decreased car value when you turn it in? I presume that your car will be new every year so things like new tires/brakes aren't an issue...but you might want to double check.

It sounds like you'd be saving considerable funds on absolutely no maintenance costs (tires/brakes/oil/etc.), but there are definitely some considerations on the 'other' costs to compare (personal property taxes, mileages over allowances, excessive wear and tear, you have kids and your 10 month old stains the back seat with spilled milk, etc.).

For an older car, if the new price is about $20,000, you can probably drop collision/comprehensive coverage after about 5-6 years, and just have liability coverage, since your car isn't worth that much more than the deductible. That's a considerable annual insurance savings for a car from ages 6-10 years, along with much lower personal property taxes (plus, a brand new car is always more expensive to insure, if you have to provide personal insurance coverage for when you're not driving it for work).

If the company is paying the sales taxes on the leased car (if you have that where you live), then that's not an issue, but if you're somehow responsible for that cost as well, sales tax can be another factor that makes the leased car relatively more expensive than it first looks.
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Old 12-28-2013, 09:46 PM   #3
Confused about dryer sheets
 
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Originally Posted by MooreBonds View Post
Personally, because the mortgage interest rate can play a significant factor in the monthly payment, I would be seriously looking at places with the fiance now and try to buy a place if you find a good deal with a house that you like. However, I'd go for a 30 year mortgage with the lower monthly payment (since you're a first time homebuyer, and it's always a learning experience when buying a first home, regarding unexpected expenses, etc.)
I just talked to my bank yesterday and the current rate for a 30 year fixed was 3.75%....not bad at all. 30 year might not be a bad call due to the fact that in 3 or 4 years from now a kid might be on the way and we will lose whatever income she would have had. I priced out a 30 year fixed on a couple houses I was browsing and the monthly payment was sub $900, which can easily be made.

Quote:
Originally Posted by MooreBonds View Post
***IF*** you know you are not going to max out $17,500 in the 401k as well as max out the Roth IRA, THEN I would max out the ROTH IRA first before putting into the Roth 401k, for the simple reason that your personal ROTH IRA will be almost guaranteed to have better investment options than your 401k (unless you work for the gov't and have the TSP options available).

Also, I'm a strong believer in diversification in taxes as well as investments. For this reason, given your tax rate, I would put some in a ROTH account (either IRA or 401k) and some into a traditional....UNLESS you know that your married filing jointly future tax rate will be either very high or very low. (IF very high, it makes sense to put in a traditional 401k to reduce your taxable income now....if very low, then it makes sense to favor the ROTH option)
Ah that makes sense. With a Roth IRA I get to choose what specific funds I can invest in, but with a Roth 401k I have to choose between company specified investments. With the tax diversification, I was banking on by the time I would be able to retire the tax rates would be much higher than they are now. It would make sense to invest in a Traditional 401k now while I am in the 25% tax bracket and then when she has a baby invest in the Roth since I will be in the 15% filing jointly (I think).

Quote:
Originally Posted by MooreBonds View Post
Hmmmm..interesting choice!

But don't forget total cost of ownership - maintenance like new tires/brakes in addition to oil changes, insurance (who pays for it?), personal property taxes, excess mileage (a BIG thing with leases). What if you want to go on a 1,000 mile road trip over a 2 week trip and you go way over the mileage limit on the lease? Who picks up that insanely high bill? And what about the inevitable ding/chip on the leased car - who shells out for the decreased car value when you turn it in? I presume that your car will be new every year so things like new tires/brakes aren't an issue...but you might want to double check.

It sounds like you'd be saving considerable funds on absolutely no maintenance costs (tires/brakes/oil/etc.), but there are definitely some considerations on the 'other' costs to compare (personal property taxes, mileages over allowances, excessive wear and tear, you have kids and your 10 month old stains the back seat with spilled milk, etc.).

For an older car, if the new price is about $20,000, you can probably drop collision/comprehensive coverage after about 5-6 years, and just have liability coverage, since your car isn't worth that much more than the deductible. That's a considerable annual insurance savings for a car from ages 6-10 years, along with much lower personal property taxes (plus, a brand new car is always more expensive to insure, if you have to provide personal insurance coverage for when you're not driving it for work).

If the company is paying the sales taxes on the leased car (if you have that where you live), then that's not an issue, but if you're somehow responsible for that cost as well, sales tax can be another factor that makes the leased car relatively more expensive than it first looks.
Yeah, when I crunched the numbers I added in the tires, brakes, and other misc expenses which still made the leasing option a better deal. The mileage allowance per year on the lease is 30,000...which seems very generous to me. Good point on the kid spilling milk in the back, I don't have any idea on how much they will try to charge me for little things like that. The insurance I just cancelled it out and assumed it to be the same if buying vs. leasing. If dropping it after 5-6 years like you said it could save me $600-$700 per year which is worth noting. As far as sales tax and any down payment on the lease...$0.

Thank you for the good points! Time to crunch the numbers again with your input.
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Old 12-28-2013, 10:11 PM   #4
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+1 to what MooreBonds said.

Also consider the cost to buy a house that is ready for kids versus renting something smaller for the first few(?) years. And there are sales costs when you decide to move. And of course rent pays for maintenance (and someone else to do the work), taxes, insurance, and probably some yard work. Buying gives you a tax deduction if you can itemize and are already close to the standard deduction.

Lived with your fiancÚ and then moved in with your parents? Bummer.
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Old 12-28-2013, 10:33 PM   #5
Confused about dryer sheets
 
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+1 to what MooreBonds said.

Also consider the cost to buy a house that is ready for kids versus renting something smaller for the first few(?) years. And there are sales costs when you decide to move. And of course rent pays for maintenance (and someone else to do the work), taxes, insurance, and probably some yard work. Buying gives you a tax deduction if you can itemize and are already close to the standard deduction.

Lived with your fiancÚ and then moved in with your parents? Bummer.
Yeah, we are leaning towards a house now more so than a townhouse or condo. What I was thinking at first was buying a townhouse, living in it for 6-7 years, and then renting it out when we move to a house. The more I think about it, it seems to be quite a bit of hassle and I would rather have some space from my neighbors from the start (especially after living in an apartment for several years). Any input on the buying and then renting out plan? As pointed out, I am a first time home buyer and don't know if that is a smart plan or not.

Lastly, big bummer going from fiance to parents. I moved 3.5 hours away from where I went to college so that is the reason behind that.
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Old 12-28-2013, 11:09 PM   #6
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Unless you have a real jones to be a landlord, just buy a place to live in. I have never done the landlord thing, but it is effectively a part time job. If that is what you want, there could be money to be made. Otherwise, don't bother.

If you are thinking about kids in a few years, then it is time to figure out what your spouse will do about her career. Unless she makes a good deal of money, it will be hard to pay for daycare and come out ahead. Other options include a hiatus of a few years or a transition to a more entrepreneurial path (we did the last). But think about it ahead of time and it will be a lot easier to put a plan into action. I would also suggest that the time before you have kids is a golden opportunity to build your nest egg. Save every penny you can because once the kids arrive so will the expenses.
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Old 12-29-2013, 12:12 AM   #7
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Also consider the cost to buy a house that is ready for kids versus renting something smaller for the first few(?) years. And there are sales costs when you decide to move. And of course rent pays for maintenance (and someone else to do the work), taxes, insurance, and probably some yard work. Buying gives you a tax deduction if you can itemize and are already close to the standard deduction.
+1 on the transaction costs - you lose 6% to an agent to list/sell your future place, not to mention mortgage closing costs (another 2%-4%), and likely higher interest rates when you get a new mortgage on the new place. So you're easily looking at 10% minimum that's out the window just to move. Plus moving costs, and the universal constant fun quotient of the entire moving process on you, your wife, and any other unlucky schleps you talk into helping you. Oh, plus the unavoidable damaged furniture/other stuff that will inevitably get damaged and nicked up along the way.

Plus, you'd be surprised how much condo fees can add up - when added to a condo mortgage, it very well could make your total condo monthly payment costs be higher than what your mortgage would be on a single family home that costs $50,000 more (especially true given how low interest rates are).

The big variable is the condition of a house you would look at. If it's 50 years old with original everything, compared to a brand spankin new condo, then there's certainly going to be some additional costs w/ the house if you remodel anything.

If you have the time, and happen to find a house in the next 3 months, you could even do some remodeling before you get married, so you're not remodeling the house while you're living in it (trust me-you want to avoid at all costs the hassle of living in a house under remodel! ESPECIALLY if you are a newlywed!

One other note - if your parents are helping loan you some cash to help w/ a down payment in a private loan, you'll want to deposit that cash in your own checking account well in advance of closing (like a few weeks). Mortgage companies would not typically look kindly on an undocumented loan with cash that is drawn on a person's account that isn't the mortgage borrower.


PenFed (http://www.penfed.org/) is known for having awesome mortgage rates, with very fair total closing costs, since it's a Credit Union, and exists to serve the members, not shareholders. You just pay $20 one-time to join a national military family association, and you quality to open up a savings account, and then any other products they have.
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