Jon's Update to getting out of hole

[neaux2135]

Hi. Jon again. Will be 30 next month. I originally posted in the introduction section, but I thought making any update should be appropriate placed here. See below for original post.

http://www.early-retirement.org/forums/f26/jon-here-starting-from-nothing-in-the-hole-83358.html

I'm finally posting the much needed update. I welcome all criticism and advice. I've taken some pretty big moves in my life while some may view them as steps back financially. Much of 2017 was about getting established well in our careers as well as personal lives. This year will be focused on getting rid of consumer debt and starting emergency fund. I ill focus more on building investments at a later time. See key facts & figures below as well as debts/debt repayment estimate attached (conservative plan).

- Combined income = $107,500 (Due to my wife taking a 1 year "residence" position that is about 70% of actual income. Supposed to yield more income via accelerated career in Sept 2018. Raise for me next month (not sure amount).

- New Mortgage ~ 200K @ 3.25% (Mortgage and taxes equal slightly higher than would be rent).

- Total Debt = ~150K (Not including mortgage. See attached for debts and paydown estimates)

- Tax Liability = $0 (2017 taxes)

Other Information - Have not made the progress that I intended, but I am optimistic about getting over the hump. No significant savings as of yet. I used what money we had to limit additional student loans and medical bills for new child. Currently contributing 7% to 401k

Current Income/Spending

Take Home: ~$6,000/month (Contribute decent amount to HSA and FSA to minimize taxes)

Fixed expenses: ~ $3,700/month (Mortgage, Childcare, Minimum Debt repayments, Insurance, etc.)
Variable : ~ $1,400/month (Food, utilities, personal care, etc.)

Note: My budget accounts for 24 of 26 paychecks. I ignore "extra checks" (March and June 2018) and plan to put towards debt/emergency fund.

2018 Goals
-Increase income by at least $25k
-At least $5000 towards emergency fund
-Start roth IRA & Contribute $11k (wife and I). Traditional IRAs at later date when taxes are higher.
-Effective tax rate <= 7%
-Pay down debts. At least $25k. I will use tax refund and bonus to help do this.


I appreciate anyone who reads, criticizes, and/or make suggestions. Let me know if you are interested in anything else. I hope to find people in similar situations to hold each other accountable.

 

[MBAustin]

Nice update! Personally, I'd focus on paying down non-mortgage debt (FYI I didn't see an attachment) rather than contributing to a Roth, unless the interest rates are <3%. Also, you don't mention spending - tracking spending in detail can help you and your DW build that emergency fund and pay down debt faster. Good luck!

 

[neaux2135]

Nice update! Personally, I'd focus on paying down non-mortgage debt (FYI I didn't see an attachment) rather than contributing to a Roth, unless the interest rates are <3%. Also, you don't mention spending - tracking spending in detail can help you and your DW build that emergency fund and pay down debt faster. Good luck!

Thanks for commenting. Paying down non-mortgage debt is exactly what I meant by paying down consumer debt. I've attached my debt repayment plan that shows interest rates and other info.

Sorry. I felt like my post was already too long. My actual budget/tracking (mint.com) will be added to the post.

 

[NgineER]

Good goals!
I'm not sure of the motivation of pay down order of your debts in the attachment. It would make sense to me to prioritize the highest interest rate loan first and let the 0% loans ride for as long as possible. I know Dave Ramsey speaks of snowballing, paying the smallest amounts off first and seeing the positive momentum of loans being paid off, but this does not make sense financially as your highest interest loans are more expensive to hold.
Put your emergency fund into a Roth IRA account as you can withdraw the contributions for free at any time, but you should invest it conservatively in the beginning so that the money is there if you need it. Hold of on Roth contributions overall since paying down the higher interest debt should be your number one priority.

 

[exnavynuke]

Good goals!
I'm not sure of the motivation of pay down order of your debts in the attachment. It would make sense to me to prioritize the highest interest rate loan first and let the 0% loans ride for as long as possible. I know Dave Ramsey speaks of snowballing, paying the smallest amounts off first and seeing the positive momentum of loans being paid off, but this does not make sense financially as your highest interest loans are more expensive to hold.
Put your emergency fund into a Roth IRA account as you can withdraw the contributions for free at any time, but you should invest it conservatively in the beginning so that the money is there if you need it. Hold of on Roth contributions overall since paying down the higher interest debt should be your number one priority.

I agree, though the "custom" order didn't seem to follow either the "lowest balance first" snowball method that DR espouses OR the "highest interest first" method that minimizes interest paid method unless there is some information missing.

 

[neaux2135]

Good goals!
I'm not sure of the motivation of pay down order of your debts in the attachment. It would make sense to me to prioritize the highest interest rate loan first and let the 0% loans ride for as long as possible. I know Dave Ramsey speaks of snowballing, paying the smallest amounts off first and seeing the positive momentum of loans being paid off, but this does not make sense financially as your highest interest loans are more expensive to hold.
Put your emergency fund into a Roth IRA account as you can withdraw the contributions for free at any time, but you should invest it conservatively in the beginning so that the money is there if you need it. Hold of on Roth contributions overall since paying down the higher interest debt should be your number one priority.

Thanks for commenting NgineER. My repayment plan doesn't follow Dave Ramsey's snowballing. His methods ignores logic and his method is useful for taking some thinking out of becoming debt free. Under normal circumstances, it does make sense to pay 0% accounts last, however, the BOA is actually a credit card and expires by 9/2018. Carrying credit card debt is more detrimental in any scenario. BOA and Simplicity are temporary aides and will be paid off immediately. There's a method to my madness, including a combination of minimizing interest and increasing cash flow!

Using the Roth IRA account for emergency fund is something I've considered as well. I'm glad someone agrees with me. How conservative would you suggest? I was thinking a fund that mimics S&P 500. I'm not very knowledgeable when it comes to stock. I'm above average, but that's not really saying much. Any fund suggestions?

Thanks for you great input.

 

[neaux2135]

I agree, though the "custom" order didn't seem to follow either the "lowest balance first" snowball method that DR espouses OR the "highest interest first" method that minimizes interest paid method unless there is some information missing.

There is some missing info. See above.

Thanks.

 

[NgineER]

Using the Roth IRA account for emergency fund is something I've considered as well. I'm glad someone agrees with me. How conservative would you suggest? I was thinking a fund that mimics S&P 500. I'm not very knowledgeable when it comes to stock. I'm above average, but that's not really saying much. Any fund suggestions?

As an emergency fund, I'd recommend something as benign as a money market or such. If it truly is your emergency fund, you need to keep it as liquid as possible. Anything in your Roth above $5k could go into a mutual fund or ETF, but not before that.