Age 29 Status Check

[thriftyhipster]

Hi Everyone,

I'm newly married and 29 y/o. Currently living in Chicago. We rent an apartment in the city and own a rental property in our home state. The majority of our debt comes from school loans - interest rates are high, averaging 6.8%. We have a combined income of $190k and 91k net worth (including equity). I travel M-TH for work and she works in healthcare.

Cash: 8k
HSA: 1.5k
401k: 71k
Roth IRA: 65k
(DW) 401k: 2.7k
(DW) IRA: 4.8k
Total Cash and Investments: 153k

Student Loan: 16k
(DW) Student Loan: 70k
Total Debt: 86k - average 6.8%

SFH Rental Property: 24k equity (146k loan @ 3.75%, 170k value after realtor fees) - cash flows $250/mo

Net: 91k

Our plan is to pay down/off school debt in 2 years. This is possible given our income and expenses. We will more likely pay down higher-interest loans in 1.5 years and leave ~$20k in low interest loans (3.8%) for 10 year payment plan.

I've maxed my 401k for a few years and have maxed Roth since I was 18. Wife has little in retirement accounts, which I want to change - she's currently contributing 10% to her 401k. I'd like to pay down high-interest student loans over next 1.5 years and then have her start maxing her 401k (but this could change - see below). I plan to max my Roth this year and start/max a Roth for her using our cash, which should total $14k come tax time in 2015.

Right now my 401k and Roth are 100% stocks. I've had good luck with the bull market but want to diversify - I'd like to buy another rental property (multi-family). As good as I've done in the market, my friends have done much better in real estate. I should have started there.

Anyway, I want to diversify into real estate but have a hard time not maxing my 401k. RE investing requires a significant amount of cash. Jumping out of 401 maxing makes me feel weird/anxious (maxing is a habit). Also, not sure if maybe I should just stop maxing 401 and try to pay down student debt even faster? What should I do then after the student loans are paid?

Looking for general advice on any aspect of my current situation/position. Thank you!

 

[Senator]

Great job so far. Continue to max out the 401K. That is easy money to save, and not pay any taxes on it.

 

[papadad111]

Good start for 29 years old. Are you spenders or savers? Looks to me like spenders...living the DINK chicagoland dream.

Your gaps as I see them...

1. You dont save enough.... dont buy into keeping up with the jones's
2. You have inadequate cash reserves/emergency fund...6 months of income in cash for you and wife should be your target.
3. Max out your 401K ... it's only 18K/year. On your income that should be easy...same for wifey. Roth at your young age is probably better long term that traditional (be it 401K or IRA).
4. do a budget. Stick to it.

What kind of cars do you drive?

 

[papadad111]

PS. Have you considered to sell the out of state rental property and get those student loans paid off.... being debt free should be your first goal, especially given the high interest rates on those loans. Being an out of state landlord can be a real pain in the @55

 

[thriftyhipster]

I never thought of ourselves as spenders. I’ve managed to pay down a significant amount of student debt and save ~$110k in 6 years, along with getting a rental property up and rolling. She hasn’t been able to save as much but has had lower income as she worked her way through school.

Yeah, so I failed to mention that my wife just started her job about a month ago, so our higher income is relatively new. Prior to that we lived on my income for 6 months while she finished school and found a job in our new city. Our total expenses are just under $31k/yr (rent is expensive in Chicago).

My thoughts has always been that credit cards could hold us over in any immediate emergency, and then if necessary I could pull principal from Roth. I prefer to make Roth contributions at end of year so that we have an accessible cash reserve throughout the year if need be. Right now that cash reserve could hold us for 3 months.

Do you think it makes sense to max her 401 now or should we focus on paying off school loans over next two years?

We’ve got a budget of 31k/yr and have been sticking to it. We share a 1995 Toyota with 200k miles but in great mechanical condition. I’d like to drive this for at least another 2 years/25k miles. Having a nice car in Chicago isn’t smart, IMO – they’re highly susceptible to damage.

I don’t see a reason to sell the rental property given that we have the ability to pay off student debt in 2 years. I’d prefer to not take the hit on realtor fees right now. I’m able to manage the property with the help of my dad who is local. So far everything has gone very smooth. The home is located in a place well positioned for appreciation over the next 5 years… but I’m not betting on that.

Appreciate the feedback, guys.

 

[growing_older]

Contribution limits to 401k and IRA accounts are time limited. If you do not make maximum use of a limit for a year, you never get to catch up on that missing tax advantaged savings you could have made. I'd suggest you consider rearranging your budget to make maximum tax advantaged contributions in all 401k and IRA accounts for both of you with this new high income. Delaying paying back your loan for a few months (even at 6.8%) may be painful but as young as you are, the money you can shelter from taxes now will grow for a long time.

 

[NgineER]

Welcome to the board, you are off to a good start!

You get the benefit of leverage with real estate, but I'd be uncomfortable getting deeper into it and relying on credit cards to get you through an emergency.

If you have 31k in expenses, there should be room for you to pay off debt as well as maxing out 401k.

You maxing out both 401k should be able to drop you into 25% tax bracket, which would be nice...

My recommendation would be:

Make a budget, track expenses.
Allocate 6 month emergency fund in cash accounts/CDs
Pay down your debt aggressively, this is a guaranteed return of 6.8%.
I imagine you would not be eligible for direct Roth IRA anymore, but you could do back door Roth.

 

[seabourne]

Welcome to participating on the board (I see you joined 4 years ago) from another Chicago resident enjoying our balmy weather!
Congratulations on your work so far and on the both of you getting into a comfortably high income at a young age. I think that, with your wife having just started earning at a high level, that your plan is roughly right. At that combined income level, you both ought to be trying to max out your 401ks, and possibly do a regular IRA rather than a ROTH.

In particular, if you're not going to have a need for the IRA money, you can convert in into a ROTH, pay then income taxes and wait the 5 year aging period. The advantage to this in Illinois is that there is no retirement income tax - the conversion is not taxed in Illinois (currently 5%). Worth considering.

Above all, hammer that high debt - you might be able to kill all the high expense debt in a year at your new income level, and killing it as quickly as possibly should probably be your highest priority - maybe even beyond your 401k (though not when you are getting matching). A fixed 6.8% rate on your repayments, on a non-dischargable debt makes it a potential threat to your financial health. Given the positive cash flow on your rental property, I wouldn't sell it unless it becomes a headache to manage.

I think that your rough plan looks pretty good - max 401k, IRAs (T or R), and kill the debt. I would suggest getting your cash reserved up closer to 16k for an emergency fund, but if your ROTH is half of that until you kill your debt it's not the end of the world.

Congratulations, and welcome, and maybe I'll see you around.

Stay warm.