iwannaretire too

[iwannaretire]

I've been reading this forum for the past year and really enjoy it. Our situation right now is a lot different than most of yours, but we're making good headway.

Age: 31, wife in twenties
No kids . . . yet
Combined income: $110,000
Hope to retire in 50’s

Savings/investments
401(k): $12,167
Savings: $2,595

Debt
New condo: 1st $282,445 @ 6.50%
2nd $52,964 @ 8.55%
Car 1: $23,624 @ 5.89%
Car 2: $19,048 @ 6.50%
Student loan: $7,062 @ 4.75%

Actions taken this past year:
* Paid off credit card debt
* Began $15,400 total annual contribution to 401(k)
* Opened EmigrantDirect Savings Account (planned saving $7,500/year)
* Got 2 cash back credit card for monthly bills (paid off monthly)
* We're working on selling one of the cars for a cheaper vehicle
* Read many investment books

Questions:
1) We plan to pay off the student loan by 2008 just to get it off of the list of debts. Does anyone feel the same way about eliminating smaller debts even if they are at better rates? My thought is that if there were a financial emergency, it would be one less bill to worry about.

2) We wanted to max out 401(k) contributions before moving on to Roth IRA’s. We will add Roth IRA’s to our investments next year. Is this a bad move?

Thank you all for making this forum such an inspiration for us.

 

[MooreBonds]

Debt
New condo: 1st $282,445 @ 6.50%
2nd $52,964 @ 8.55%
Car 1: $23,624 @ 5.89%
Car 2: $19,048 @ 6.50%
Student loan: $7,062 @ 4.75%

Actions taken this past year:
* Began $15,400 total annual contribution to 401(k)
* Opened EmigrantDirect Savings Account (planned saving $7,500/year)

Questions:
1) We plan to pay off the student loan by 2008 just to get it off of the list of debts. Does anyone feel the same way about eliminating smaller debts even if they are at better rates? My thought is that if there were a financial emergency, it would be one less bill to worry about.

2) We wanted to max out 401(k) contributions before moving on to Roth IRA’s. We will add Roth IRA’s to our investments next year. Is this a bad move?

1) Because the student loan is just 4.75%, I'd focus on maxing out 401(k)s first ($15k/year/person, assuming both of you have 401(k)s at work), and just paying the regular monthly payment on the student loan.

2) It's good that you're building up a stash in your savings account - I presume that this is your emergency fund? If so, I'd work your way up to a $5k balance, then start diverting some of that Savings Account funding to a ROTH and a sliver to paying off the 2nd note on your condo.

 

[macdaddy]

Hello, welcome to the board! By being here at your age, you are already ahead of the game.

I wanted to make a purely lifestyle comment, which is that if you're serious about saving a lot to retire early, get rid of those cars! You have $43,000 in outstanding car debt - which means you probably paid even more total - at 6 something %. The last car I bought was a really nice 4 year old Jeep with 40k miles on it. Since I really wanted black I had to pay $11k. If I had been more flexible on the color I could have paid $9k or possibly even 8k (for a green one - ew). It's a solid car so it depreciates at maybe $1k per year...

If it takes you 3 years to pay off that car debt, you will have paid a total of $52k...

If you bought two nice used cars for $10k each, you will have paid $24k total...

You would have an extra 30k+ in your savings, double the amount you will have otherwise.

IMO this is probably the easiest sacrifice to make to get started on the FIRE path.

P.S. I just re-read your post and saw that you are planning to sell one car for a cheaper one... oops... but think about selling both of them. You can also buy a very nice, used, dependable car for around 5k-6k, but your chances of it being green go up the lower the price falls.

ALSO - if your incomes are likely to go up, then you should be maxing the Roth IRA first, and the 401k second. Is your SO planning on staying home full time when you have kids? If so, it's a tougher call, because your incomes will be harder to predict.

 

[W2R]

Hi, and welcome to the board!

It's really important to contribute to your 401Ks, since you can't make up missed contributions in later years.

There is an old saying, that there are "a lot of ways to skin a cat" (meaning that there are a lot of ways to attain a goal). Maybe paying off the student loan wouldn't be the best choice from a purely objective point of view, but do you think you'd be more likely to stick with it (as opposed to some other path to your goal) right now? That's a factor, too. For example, I recently paid off my house bit by bit out of my paycheck in only four years (after only paying 20% down), because I was very motivated to do so. Even though most people wouldn't think that paying off a low interest mortgage should be a high priority, I don't think I would have squeezed that much money out of my budget just to buy mutual funds.

So, a lot depends on you. You can get great advice on this board, and you have from Moorebonds and macdaddy. But in the final analysis, it all comes down to what you really want to do. As long as you continue to make progress, with your 20+ year time horizon, I think you'll probably get to your goal.

 

[Gumby]

Re saving:

Do you get a company match on the 401k? If so, the standard wisdom is to put enough in the 401k to get the maximum company match. Then fund your Roth IRA. If there is anything left after that, go back to the 401k.

Whether to pay down debt or further add to savings depends on what you are likely to earn on your 401k/IRA. The rate on your debts is not that extreme, so it may be best to max out the 401k. If you were paying credit cards at 18%, I would definitely pay down debt right after getting to the company match on the 401k.


Re debt payment:

From an emotionally neutral standpoint, it makes more sense to pay down the higher interest rate debt before paying down the student loan. If you are in the 25% marginal tax bracket, it is a toss up between the second mortgage and the note on Car 2. If, however, you are planning to sell that car, I would go with the second mortgage.

I agree with Macdaddy on the cars - a new car is just not worth it. We have maximized our net worth by purchasing 3 year old cars coming off lease. Someone else eats the big depreciation and we get a relatively new car. Then we drive them until the repair bills exceed the value of the car. 200,000 miles is my goal for any car. With regular maintenance, it is easily possible. I love not having a car note.

 

[Coach]

Questions:
1) We plan to pay off the student loan by 2008 just to get it off of the list of debts. Does anyone feel the same way about eliminating smaller debts even if they are at better rates? My thought is that if there were a financial emergency, it would be one less bill to worry about.

I don't think this is a bad idea at all. It's the Dave Ramsey approach. There's a big psychological boost in getting a debt paid off. You could fiddle around with a spreadsheet to see how much difference it makes in how much interest you actually pay, but I bet it won't be a very big number. Depending on how much extra you can afford to pay, of course.

It sounds like you're on the right track -- keep it up!

Coach

 

[W2R]

Then we drive them until the repair bills exceed the value of the car.

Do you mean total repair bills, or yearly repair bills?

By the way, I like your philosophy on cars. Although I bought a Camry Solara new, in cash, in 2000, I have only put 32,000 miles on it. If I could keep it running for as many miles as you do, I wouldn't need another car until the year 2040. I'd be 92 by then and not driving any more. I doubt I would go that far (actually I plan to replace it in 2010) but I definitely lean in that direction and like your attitude.

 

[Gumby]

I tend to ignore the smaller repair bills as just the cost of keeping the car. Eventually, however, we need a new transmission or something big. At that point, I compare the cost of repair to the value of the car. If the repair is more, it's time for a replacement car.

I once knew a guy who would buy old beaters for a few hundred bucks. He would put zero money into repairs or maintenance and drive them until they broke. Then he would start over. Even if he got only 3-6 months out of one, it was a good deal. However, most people would fear breaking down and being stranded, so it is not an ideal strategy for everyone.

 

[iwannaretire]

Wow! Thank you all for taking the time to respond.

I knew the consensus would be to hold off on paying down the student loan. In fact, I read other posts about paying off student loans and in my mind reply “don’t pay off the student loan if it is at a good rate”. I don’t know why my reaction is different for us. Maybe I just needed to hear it from someone else.

I am committed to selling one of the cars and picking up an affordable replacement that will allow us to contribute more to our investments - even if it has to be green. We’re upside down roughly 2k on each of the vehicles, so I haven’t been as quick to sell one as I would have liked. Once we get our tax return, we’ll be in a position to unload one of the cars. We will keep the other car because my wife’s career requires her to drive a lot and I like the idea of her having a safe, reliable vehicle.

While I love the idea of investing for our future, I am more passionate, at this point, about eliminating debt. I strangled myself with credit cards for many years and can no longer wrap my brain around the concept of “good debt”. I’m going to toy with the idea of paying down the car we keep, instead of the student loan. I know the 2nd note should be the first target to pay down, but I want the satisfaction of eliminating another debt within the next couple of years.

Unfortunately, no company match on the 401(k). Please don’t laugh, but I choose to fund the 401(k) first because the balance will “grow” faster than the Roth IRA since it tax deferred. I realize that it will be taxed later, but it just feels better to have a larger balance at the end of the year. Okay, now I’m laughing.

Our plan is to build up an emergency fund of roughly 12k, and then begin funding Roth IRAs. We’re still about 5 years from starting a family so these plans haven’t been firmed up much. We would like my wife to be able to stay home for the first couple of months after giving birth and then return to work.

 

[JohnDoe]

Unfortunately, no company match on the 401(k). Please don’t laugh, but I choose to fund the 401(k) first because the balance will “grow” faster than the Roth IRA since it tax deferred. I realize that it will be taxed later, but it just feels better to have a larger balance at the end of the year. Okay, now I’m laughing.

Do you know what your expenses are for your 401k? Are the fund choices any good?

With no company match, I would consider funding both Roth's before contributing to 401k's.

 

[ats5g]

While I love the idea of investing for our future, I am more passionate, at this point, about eliminating debt. I strangled myself with credit cards for many years and can no longer wrap my brain around the concept of “good debt”. I’m going to toy with the idea of paying down the car we keep, instead of the student loan. I know the 2nd note should be the first target to pay down, but I want the satisfaction of eliminating another debt within the next couple of years.

That's music to my ears man. I'm 31 as well. DW [29] and I are concentrating on paying down debts, and refinancing mortgage before we start doing the big push of saving for retirement, college [two kids], etc. Having virtually no debts when we were first married sure made us less stressed and edgy. With 2 kids and debts, I know how the majority of divorces result from financial matters.

Anyhoo, I remember from one of my management classes, probably a case study or something touchy feely like that, workers got more satisfaction from completing several smaller tasks that were part of a larger task. For example, for a person that puts lugnuts on wheels on a manufacturing line, instead of having one huge bucket of lugnuts that would take a week to run through, there were several smaller buckets that would only last a few hours. [or something like that]. Hence, more sense of accomplishment.

Whatever helps you pay down the debt faster.

I wish we had saved more money before we had kids. Man, the dough just flew out the window, especially with daycare.

- Alec

 

[dumpster56]

Mortgages Ugh, 282 first and 55 on a second. ouch.

lets see 2k a month to live, what are your taxes on the condo and the homeowners fees?

 

[iwannaretire]

The fund choices in the 401(k) seem good - there are many to choose from and the funds match what I am looking for (using my limited experience). Unfortunately, the expenses are high:

Natural Resources Fund 1.51%
Real Est. Securities Fund 1.54%
Pacific Rim Fund 1.72%
Lifestyle Aggressive 1.15%

My rate of return for the past 12 months has been 17.37%, although I wasn’t contributing as much earlier on.

I really want to get a solid plan in place before we start a family. The mortgages, HOA dues ($154/month), property taxes ($302/month), and condo insurance ($38/month) represent 39.90% of our net monthly income. By way of comparison, apartment rentals in the area cost roughly 20% of our net monthly income. Moving up from a condo to a house in a few years is going to be even more of a financial shock. I just hope we can find something that we can stay in for many, many years.

ats5g – That sense of accomplishment is exactly what I was trying to describe, thanks.

 

[dumpster56]

What do you guys eat

40% of your income to your house then those cars.

Not much cash left over.

 

[GOJAGATORS]

Here's how I approached a very similar situation many moons ago when I was your age (ie mortgage, 2 car payments, student loan) I paid the required payments on everything monthly and let all the excess build up in a money market account. When the balence of the money market got to 2X the balance on the student loan, which was also my smallest balance and lowest rate loan, I paid the student loan off. I found that eliminating that monthly payment went a long way towards freeing up cash flow each month and by building up the cash cushion I was able to pay cash for every little problem that is sure to come up.

The way I looked at it was that paying the bills every month was a lot easier with each bill I eliminated.

Just my two cents worth....... Good luck

 

[SLC Tortfeasor]

Since you asked for input, I'm going to add my voice to the chorus of people telling you to downgrade your cars -- both of them. I would think really long and really hard about whether you need nice cars given your financial situation and your apparent desire to retire early. There are much higher priorities, and those car loans are serious anchors on your net worth.

I totally understand that if you're used to driving nice cars, it would be hard to downgrade. If you didn't have so much other debt, you could probably justify a nicer car. But you can get decent, reliable cars for $10k and even less.

You're young. I am too (30 yrs old), so please don't come away from this thinking I'm just some ornery old coot who can't forget the Depression. I just really believe that people our age do not need $25k cars, especially if we have to borrow money to buy them.

You should run some calculations to find out how much you could accelerate your early retirement plans by downgrading to more affordable cars.

That's just my $.02. Good luck with everything!

 

[califdreamer]

You're young. I am too (30 yrs old), so please don't come away from this thinking I'm just some ornery old coot who can't forget the Depression. I just really believe that people our age do not need $25k cars, especially if we have to borrow money to buy them.

I guess I'm a relatively old coot (47 yo) who can't forget the recession of the early 90s. I will just add to the chorus to downsize the debt load the vehicles are weighing you down with.

You're heading in the right direction with the thinking you're doing. If you follow through you'll be in great shape.

 

[iwannaretire]

The feedback is great, thank you. I’ve included our monthly expenses below. As you can see, some of the numbers are low, some are high. A good example: we spend more on monthly gym memberships that on entertainment.

I plan to reduce the student loan payment to $60/month and have put car 1 up for sale.

Monthly Expense Dollars % of Net Income
Tithe $200.00 2.96%
1st Mortgage $1,795.08 26.55%
2nd Mortgage $411.33 6.08%
Condo Taxes $302.00 4.47%
HOA $154.00 2.28%
Condo Insurance $38.00 0.56%
Internet/cable $94.00 1.39%
Gas/Electric $72.00 1.06%
Groceries $400.00 5.92%
Entertainment $80.00 1.18%
Car 1 Loan $433.00 6.40%
Car 1 Gas $150.00 2.22%
Car 1 Insurance $102.33 1.51%
Car Loan 2 $450.00 6.66%
Car 2 Gas $250.00 3.70%
Car 2 Insurance $56.00 0.83%
Cell Phone 1 $50.00 0.74%
Cell Phone 2 $35.00 0.52%
Gym Memberships $84.00 1.24%
Student Loan $150.00 2.22%
Total Expenses $5,306.74 78.49%

Total Monthly Net Income $6,760.80

Edit note: I tried to modify the table to make it more legible but was unsuccessful.

 

[macdaddy]

Here you are...



Monthly ExpenseDollars% of Net Income

Tithe $200.00 2.96%
1st Mortgage $1,795.08 26.55%
2nd Mortgage $411.33 6.08%
Condo Taxes $302.00 4.47%
HOA $154.00 2.28%
Condo Insurance $38.00 0.56%
Internet/cable $94.00 1.39%
Gas/Electric $72.00 1.06%
Groceries $400.00 5.92%
Entertainment $80.00 1.18%
Car 1 Loan $433.00 6.40%
Car 1 Gas $150.00 2.22%
Car 1 Insurance $102.33 1.51%
Car Loan 2 $450.00 6.66%
Car 2 Gas $250.00 3.70%
Car 2 Insurance $56.00 0.83%
Cell Phone 1 $50.00 0.74%
Cell Phone 2 $35.00 0.52%
Gym Memberships $84.00 1.24%
Student Loan $150.00 2.22%
Total Expenses $5,306.74 78.49%


Get rid of the car payments and you'll be in good shape.

 

[clifp]

Life is short, if having a nice dependable car for your wife, adds to your piece of mind, and her comfort level keep one. But downgrade the second. At your age I started buying new cars (or course I paid cash...) but I kept them for 7 or 8 years.

The expense ratio on all of those mutual funds is high and while your rate of return is good, judging by their names you are taking a lot of risk, I suspect that the 15.5% you would get with the Vanguard Total Stock Market would have been considerably less risky than your investments.

Given the crappy choices I would look at funding a Roth even at the cost of reducing your 401K contributions.

 

[macdaddy]

Life is short, if having a nice dependable car for your wife, adds to your piece of mind, and her comfort level keep one. But downgrade the second. At your age I started buying new cars (or course I paid cash...) but I kept them for 7 or 8 years.

This is very true, however, I would argue that you can get a nice, dependable car for less than $10k...

 

[iwannaretire]

Thanks to everyone's input, we've decided to fully fund two Roth IRA's thru Vanguard and back off on the 401(k). I just detailed the car that I put up for sale and have already received a couple of inquiries. Wish me luck.

 

[iwannaretire]

macdaddy - Thanks for cleaning up my spreadsheet numbers.

 

[genghis]

Ummm, shouldn't the "tithe", by definition, be 10% (of gross)

 

[lrak]

Here's what I would do. It may not be the right thing for you.

Looks like you have ~1500/mo to spare...

I would save at least $10k in Emigrant/ING/Eloan/igobanking for your emergency fund. Add $500 a month to savings every month.


I suspect that taxes 25 years from now will be higher than taxes today. We need to pay for this war and Medicare drug benefit somehow, and we're not paying for it today. Therefore, I'd fund two Roth IRAs with $4k each before the 25% tax bracket becomes the 30% tax bracket. $666/mo

I would ditch one car, and replace it with a reliable one that costs half as much. If I were buying used I'd look at 3-4 year old Japanese cars that are rebranded as faster depreciating American cars like the Pontiac Vibe (Toyota Matrix), Chevy Prizm (Toyota Corolla), or Ford Escape (Mazda Tribute). I would try to pay it off within a year and keep it for at least 5 years beyond that. Take the current $450 loan payment and add an additional $400/mo for a total of $850/mo. It’s painful, but it’s only for a year.

Once the car is paid off, I would take the $450 car loan amount and transfer it to paying down the 2nd mortgage. This is a guaranteed 8.55% return. That's way better than any savings account is paying and way less risky than the stock market. I'd take the additional $400/mo in extra payments and put it in my 401k.

I wouldn't consider paying more than the minimum on the student loan until I have paid off my 2nd, have maxed out my 401k + IRA contributions, and have enough in savings to buy any cars I will need within the next two years in cash with $10k left over.