UnThreaded | Threaded | Whole Thread (16) | Ignore Thread Prev Thread | Next Thread
Author: 2FoolsInLuv One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 744608  
Subject: Just starting to save Date: 5/17/2004 5:27 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 7
I hope I am not posting an OT post here, but if I am, I apologize. Thanks in advance to anyone who replies.

My wife-to-be and I are moving to Florida at the end of the month, and start new jobs in August. We've just finished graduate school, so this will be the first time we have real incomes, and we will now become a two-income household. I could use some advice on how to allocate the money she and I will have after we pay our monthly expenses. Any help would be appreciated. I'm rounding our expenses because we're not in Florida yet and they may change slightly.

About us: I'm 26, and she's 24.

My income come August: $36,000 (teacher)
Her income come August: $24,000 (athletics event director)
Cash assets come August: $28,000 (ING savings earning 2%)
No IRA or other assets at this time.

My outsanding student loans: $33,000 at 2.85%
Her oustanding student loans $10,000 at 2.65%
Our car payment: $12,000 at 3.85%

Expeted 401k contributions: $3,600 a year (this equals six percent of our salaries so we can max out employer matching as soon as it goes into effect)
Expeted IRA contributions: $583 monthly (so we can max out our limits for the year)
Monthly expenses come August: $2,300 ($27,600 for the year)(This is so low because we will be living in free faculty housing at my school. Whoo-hoo!)

After all these expenses, I estimate that we'll have between $800 and $1000 left at the end of each month. It's this amount that I'm not sure what to do with.

Our savings goals include:
* $30,000 for the downpayment on a home in 3 to 4 years,
* one full year's living expenses in cash or accessible savings
* to start saving for a car for her that we will buy in two years.
* Some sort of individual stock buy-and hold plan like a DRIP plan.
* Also, I want to plan for a best-case scenario of retiring when I am 57, or 30 years from now.


So what should I do with this $800? Should I put it directly towards the car and the down payment? Should we aggresively pay our student loans down, even with our interest rates so low? Should we pay down loans now with our cash savings, and then work to rebuild our cash? Is retirement at age 57 even conceivable at our income levels? I will add that I can probably expect an income of about $40,000 a year when I'm about 55 from other sources not mentioned, but I'd prefer not to factor those into any plans just incase those other sources go to hell.

Thanks again,

R.H.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: tmeri Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169005 of 744608
Subject: Re: Just starting to save Date: 5/17/2004 5:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
I hope I am not posting an OT post here, but if I am, I apologize. Thanks in advance to anyone who replies.


Shame on this board if you feel you have to apologize. You are right on topic--welcome!


Should I put it directly towards the car and the down payment?

You are living in free faculty housing. The very best advice I can give you, and I hope you'll take it, is not to abandon that free housing until you are forced to. Saving for a down payment is the absolute lowest priority of the things you list.

Pay off the car first, then work on those loans.


Should we aggresively pay our student loans down, even with our interest rates so low?

Maybe. The market has been crazy. If you could know that we were at a bottom, it would be time to invest heavily. There is no way to know. I'd probably split the difference and do half investing and half aggressive payment of loans.


Should we pay down loans now with our cash savings

No. Use your $800/month extra for the car payoff. Keep your cash for an emergency fund.


Is retirement at age 57 even conceivable at our income levels?

Yes, unless you stop living below your means.


Congratulations on your graduation and best wishes for your future life in Florida.

- tmeri

Print the post Back To Top
Author: 2FoolsInLuv One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169006 of 744608
Subject: Re: Just starting to save Date: 5/17/2004 5:43 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thanks for your reply, Tmeri!

You suggested we work on the car payment first. My question is: considering that principle of my student loan is $33,000, should I work on that before the car loan since the interets it accrues daily is more than the car loan? Yes it has a lower interest rate, but right now it costs me more on a daily basis.

Thanks again!

Print the post Back To Top
Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169007 of 744608
Subject: Re: Just starting to save Date: 5/17/2004 5:44 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
2FoolsInLuv asks,

After all these expenses, I estimate that we'll have between $800 and $1000 left at the end of each month. It's this amount that I'm not sure what to do with.

Our savings goals include:
* $30,000 for the downpayment on a home in 3 to 4 years,
* one full year's living expenses in cash or accessible savings
* to start saving for a car for her that we will buy in two years.
* Some sort of individual stock buy-and hold plan like a DRIP plan.
* Also, I want to plan for a best-case scenario of retiring when I am 57, or 30 years from now.

So what should I do with this $800? Should I put it directly towards the car and the down payment? Should we aggresively pay our student loans down, even with our interest rates so low? Should we pay down loans now with our cash savings, and then work to rebuild our cash? Is retirement at age 57 even conceivable at our income levels? I will add that I can probably expect an income of about $40,000 a year when I'm about 55 from other sources not mentioned, but I'd prefer not to factor those into any plans just incase those other sources go to hell.


I'd prioritize the savings this way.

1) First, build up 6 months of livings expenses as an emergency fund. ($2,300 x 6 = $13,800)

2) Then start saving for a down payment ($30,000) for a home.

3) Then I'd start investing in stocks (either low cost index funds or individual stocks if you believe that you are among the small minoroty of investors that can beat the S&P500 index.)

intercst


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: tmeri Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169010 of 744608
Subject: Re: Just starting to save Date: 5/17/2004 5:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 9
My question is: considering that principle of my student loan is $33,000, should I work on that before the car loan since the interets it accrues daily is more than the car loan? Yes it has a lower interest rate, but right now it costs me more on a daily basis.

If all the loans are fixed rate loans, then it is always better to pay off the loan with the highest interest rate first, regardless of the loan amounts. Your car loan is actually costing you the most per dollar borrowed on a daily basis.

- tmeri

Print the post Back To Top
Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169012 of 744608
Subject: Re: Just starting to save Date: 5/17/2004 5:53 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 5
My wife-to-be and I are moving to Florida at the end of the month, and start new jobs in August. We've just finished graduate school, so this will be the first time we have real incomes, and we will now become a two-income household.

Congratulations on the new jobs and on thinking about early retirement so young. If you start now then you will have a tremendous advantage over those who start later even with higher incomes.

What is the most important part of being able to retire early? It's not necessarily a high income but a low level of expenses to income. So, keep your expenses low. Since you are just graduating can you keep your costs really low? Live like grad students for another year or two and if you do want to add luxuries do it slowly and savour each one instead of instantly ramping up your spending.

Our savings goals include:
* $30,000 for the downpayment on a home in 3 to 4 years,
* one full year's living expenses in cash or accessible savings
* to start saving for a car for her that we will buy in two years.
* Some sort of individual stock buy-and hold plan like a DRIP plan.
* Also, I want to plan for a best-case scenario of retiring when I am 57, or 30 years from now.


The emergency fund is important but you already have $28K in cash so that should be fine for now. As for the house, saving for it is fine but make sure that you will want to buy it in Florida. Nothing against Florida but this is your first job - are your sure that you will still be there for at least 5 years after purchase? You want to have a good guarantee of breaking even though even then you could lose. If you truly want $30K for a house downpayment and with only $800/month then it will take you about 3 years to save that up without other savings, investments, or loan paydown.

A second car could be a really cheap beater or a used sub-compact for somewhere in the $5K range. With two cars you can put up with a little hassle in repair issues. I would check into the feasability of using only one car. My wife and I do that now and I take the bus most days to work (company pays for the bus pass). If you are in company housing is it close to work? Can you bike or walk? If you really must get the car then you could do that in two years for ~$250 / month.

How much you really want the house and how sure you will really be there for long enough is up to you to decide. With that concern I would split the remaining $550 / month (took away car savings) into house savings and 401ks to the max limit (which you won't reach). Once the car is bought redirect the savings into your 401k. If you saved it all for your house downpayment (ie. nothing extra for the 401k and $250/month for the car for 2 years) then you would have the house dowmpayment in 4 years. It's all trade offs. You can have anything that you want but you can't have everything that you want.

When will this let you retire? It depends on how much you will need for spending. Intercst has a savings calculator spreadsheet on his site. http://www.retireearlyhomepage.com/software.html

Hyperborea

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: OldOne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169071 of 744608
Subject: Re: Just starting to save Date: 5/18/2004 12:42 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Some Observations:

I would not make any extra payments on the student loans. Your interest rates are incredibly low. You can achieve a 100% safe return which is higher than the interest you are paying. For instance, I-bonds are paying 3.39% right now. The only drawback is you lose 3 months interest if you cash in before 5 years.

Many of us feel that interest rates will soon go higher, which will make putting extra money into bonds of some sort an even better deal. I-bonds are particularly interesting since they are guaranteed to keep up with inflation.

Money in your portfolio is more useful than money which has been used to pay off a loan early. Go ahead, have a financial emergency and try to get the lender to accept no payments--it can't be done, but you can draw down your emergency fund.

As others have observed, keep the free housing for as long as you can, you will never see a better deal. OTOH, I think you need to consider some real estate exposure over the next few years. I am 58 and going to retire in about 18 months. My lifetime accomplishment record is that real estate has been a better investment than stocks. If you can handle managing it, consider buying a rental house when you have the down payment and the reserves to take care of emergencies. I know some people have done better in stocks than real estate, but in high-growth areas like Florida, real estate is a very good bet.

Lastly, I have found that while earmarking certain pots of money for given purposes is sometimes helpful, it is sometimes very limiting. You have a nice savings account right now. Just keep it all in one portfolio and consider what you need it for and when.

And absolutely last: Children will be much more expensive than your wildest imagination could ever estimate.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: lowstudent Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169087 of 744608
Subject: Re: Just starting to save Date: 5/18/2004 8:51 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
"And absolutely last: Children will be much more expensive than your wildest imagination could ever estimate. "


What an absolutely true statement. Children are a raging river of costs. They will drain both your bank account and everybit of free time you have.

The ROI however, is still absolutely outstanding IMO.

One move I was greatful for on this front is having my home before we had children. Another habit I would suggest fostering is creating an automated system for saving for retirement, if you never budget as if the money exists it is a lot easier to build a good fund without feeling too much like you are making sacrifices.

As far as the debt, I would pay off the car, the student loans are low enough interest that having a cash fund around is a pretty decent idea, the car loan isn't going to destroy your savings if you pay it off, further again automating a system, if you guarantee yourself you will make all the payment to your saving you will be getting what percent of interest for the next say 4 years? Probably far better than any CD you could take out.

Print the post Back To Top
Author: 2FoolsInLuv One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169088 of 744608
Subject: Re: Just starting to save Date: 5/18/2004 8:51 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I've thought alot about buying a rental house. Some members of my family have done very well in realestate.

Where can I learn more about IBonds?

Print the post Back To Top
Author: lowstudent Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169090 of 744608
Subject: Re: Just starting to save Date: 5/18/2004 9:02 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
"Where can I learn more about IBonds? "



www.treasurydirect.gov


I have been having them take money from me every month for a while, the bond just shows up and the money disapears. I think it is a great place to store some 'safety' money, and being a NY'er the state tax benefits(none) are a nice touch.

Print the post Back To Top
Author: cattleman22 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169093 of 744608
Subject: Re: Just starting to save Date: 5/18/2004 9:25 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
{{$2,300 ($27,600 for the year)(This is so low because we will be living in free faculty housing at my school. Whoo-hoo!)}}


You consider that number low even though you do not have to pay for housing? What is just as if not more important than the optimum investment is having more money to invest early in your life. Maybe posting on the LBYM board to look for ways to reduce your spending could lower teh age at which you and your wife purchase a house or retire.



c


Print the post Back To Top
Author: pekinrobin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169144 of 744608
Subject: Re: Just starting to save Date: 5/18/2004 12:27 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Having read the other posts, I really have nothing to add except, yeah, avoiding children if possible is always a massive savings and I agree with the guy who said to stay in the rent-free housing until they chase you out with a Uzi!

I am really just posting because of your user name. Now I'm going to have that song running through my head all day, "Two fools in love, mumble, mumble, standing by the beautiful highway." Ha. It would be less strange if I could think of the rest of the words right now...



Print the post Back To Top
Author: 2FoolsInLuv One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169606 of 744608
Subject: Re: Just starting to save Date: 5/21/2004 11:24 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
Thanks everyone!

We're still working on our plan, but here's what we're thinking right now:

1) $28,000 is a bit cash heavey, so I'm think I'll pay off my car in August. I will be able to walk to work because we'll live just off my campus. My car will probably just sit during the week, so I can easily get 10 years out of it.

2) We'll take the $255.63 a month I was spending on my lein and dedicate that to a fund for a new car for my fiancee. We want to get 2 more years out of the car she drives now. By putting that $255.63 aside now, that will be over $6000 towards a new car, plus what ever interest it accrues. Now we don't have to dedicate any of the extra $800 to her car.

3) The student loans aren't a HUGE drag on the finances because the rates are so low. I'd like to get the principle of mine down a bit, and then pay it off over time. The interest on the smaller loan is almost negligible. I'll probably dedicate an extra $100 a month to the larger loan.

4) We want to be able to take advantage of savings on purchases when you pay up front. I saved a huge amount on car insurance two days ago by paying the entire six month premium (for both of us), instead of paying month to month. So now, part of the $800 will go towards a fund (on paper) to paying insurance off every six months. Not only will it bring the cost of the plan down, but it will cost even less since we'll earn interest on what we're saving before we pay for it.

5) We both have family that are out of state, and would like to visit at least each once a year. We have to fly to get there, so we're going to dedicate some of the $800 to a travel fund (on paper). Just like with the car insurance, this will help us bring down our monthly expenses too. Instead of increasing a month's budget to buy a plane ticket, the fund will be established.

6) The rest will be split between a down payment, our emergency fund and some a DRIP fund. The DRIP fund will stay small for now - probably about $100 a month. After paying off the car, we'll have about $16,000 left in cash. I want to bring that back up to $21,000. The rest will go towards a down payment. But, we'll probably try to stay in our faculty housing as long as we can. Maybe forever, who knows? But, if we have enough for a down payment, we will look to buy a rental property.

Thanks again!

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169612 of 744608
Subject: Re: Just starting to save Date: 5/21/2004 11:55 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
1) My car will probably just sit during the week, so I can easily get 10 years out of it.

2) Now we don't have to dedicate any of the extra $800 to her car.


If you can walk to work and it will sit idle then why do you need a second car? Is there any way that you can use only one?

4) We want to be able to take advantage of savings on purchases when you pay up front. I saved a huge amount on car insurance two days ago by paying the entire six month premium (for both of us), instead of paying month to month.

5) We both have family that are out of state, and would like to visit at least each once a year. We have to fly to get there, so we're going to dedicate some of the $800 to a travel fund (on paper).


Yeah, this is a very good idea. Some people call this a "freedom fund". What I've done is set up a number of accounts at ING to handle irregular expenses - house costs (insurance/taxes); car costs (insurance/repairs); vacation (XMas trips to my or my wife's family and real vacations); etc. Doing this will leave you with none of the usual scrambling that people do when the bills come in. Much more relaxed way to operate. However, does this have to come from your $800 savngs? Why? If your budget already included these budget items then you are just arranging to pay for them earlier. You might need some of the $800 for a few months to get them started but why forever?

6) The rest will be split between a down payment, our emergency fund and some a DRIP fund. The DRIP fund will stay small for now - probably about $100 a month.

If you are not maxing out your 401k accounts then as long as yours have no funky fees or extremely bad funds then this would be a better place for your money over the long run.

Hyperborea

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: 2FoolsInLuv One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169660 of 744608
Subject: Re: Just starting to save Date: 5/21/2004 3:23 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You put it best when you said it might take a little use of the $800 a month to start the "freedom fund." but it should become a regular part of the budget. That's exactly what we're planning to do. In fact, we already had 3 ING accounts between the three of us. I wasn't sure what to name that particular account, but "freedom fund" works better than anything else I thought of!

What do you know about drawing off a Traditional IRA or Roth IRA to buy real estate? Aren't you allowed a one time witdrawl of some amount without penalty if it goes towards the purchase of a house? Maybe we should put some more money there in the eventuality of buying a house?

Print the post Back To Top
Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 170268 of 744608
Subject: Re: Just starting to save Date: 5/24/2004 9:42 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
You put it best when you said it might take a little use of the $800 a month to start the "freedom fund." but it should become a regular part of the budget. That's exactly what we're planning to do. In fact, we already had 3 ING accounts between the three of us. I wasn't sure what to name that particular account, but "freedom fund" works better than anything else I thought of!

Yeah, I heard the term a number of years after I started doing it but the term fits. I currently use multiple ING accounts as it simplifies the accounting. I don't have to bother keeping track of how many dollars were earmarked for specific spending. The only limit is that since these are savings accounts by federal law you are limited to IIRC 6 transactions OUT of the accounts. That isn't in general too much of a limitation but be aware of it.

What do you know about drawing off a Traditional IRA or Roth IRA to buy real estate? Aren't you allowed a one time witdrawl of some amount without penalty if it goes towards the purchase of a house? Maybe we should put some more money there in the eventuality of buying a house?

Sorry, I can't help you there. I know vaguely that such an option exists but I haven't done it myself. There are a couple of other boards to try for advice. The Home Buying board (where you will be told how to do and that it is always a good idea and you should do it now by the RE boosters) or the Tax board should be good for answers.

Hyperborea

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
UnThreaded | Threaded | Whole Thread (16) | Ignore Thread Prev Thread | Next Thread
Advertisement