My Budget: Debt vs. Savings. vs. Retirement

glavinsoloDecember 4, 2007

Hello all of you from the finance forums.

I am a lurker who has posted in the past but I finally got a handle on my debt and I am working to pay it off.


$2500 - Amount that I have each month to be applied towards debt, savings, retirement

$9700 - Amount of CC1 that is currently at 5.9% for life of balance, no other purchases will be made to this CC

$9000 - Amount of CC2 that is currently at 3.9% for life of balance, no other purchases will be made to this CC

$0 - Amount of CC3 that is used and paid off each month that is a cash rebate card used to get money back from purchases


Don't eat out, don't have cable/satellite, have cheapest internet available, drive very little, live in an apartment, keep expenses at their minimums.

I am 25, married, looking to save for a house and here is my idea criticism welcome.


CC1 -- Pay $450 each month

CC2 -- Pay $200 each month

CC3 -- Pay off each month ~$400

MFs -- invest $500 each month -historically 8-9% ROI

Roth -- invest $400 each month

I plan to out pace the interest on the CCs by investing in the MFs. They are all .5% operating cost MFs with no load.

This totals ~2000 of my 2500/month budget

The remainder of the monthly money will go in a 3.9% savings account each month for liquid emergency cash.

Goal is to be debt free and in a house by Q2 2009


How this debt came to be: I paid for my wife's college with these cards, I transferred my student loans to these cards, I paid my college with these cards, it added up quick.

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Hi glavinsolo,

When you buy your home, do you plan to cash in your MFs in order to achieve a down payment?

You don't say what kind they are, but with expected rate of return of 8% I assume that they're equity-based. The expense rate of 0.5% makes me wonder about that, though, as few charge that low.

If you plan to liquidate within a couple of years, if the markets go down, you may be an unhappy camper when it comes time to reclaim the investment.

On the other hand, if you have the certificates issued, you can take them to a financial institution to use them as collateral for a loan ...

... which will work if your growth rate on the investment is greater than the rate you pay on your mortgage, after allowing for income tax cost and deductibility in each case.

That way, you convert that investment from being a short-term one into a longer-term one, which reduces your short-term risk.

Be aware, though, that a financial institution will be unwilling to loan you more than 50% (or at most 60%) of the value of the asset. But you carry some risk if you draw near the limit of what they'll allow, for if the value of the asset goes down and slips below double the value of the loan, the lender will want either some cash to reduce the amount of the loan, or some other assets to underwrite the support for the loan.

And they'll want it today ... tomorrow at the latest.

With regard to the cost of homes, I'm not familiar with the U.S. markets in general, let alone the ones in your area.

But some calculate that the tough times in the housing markets are far from over.

I think that it would be well for you to carry on some study of what house prices are doing in the area where you prefer to buy.

If you buy early, and house prices continue to reduce, you'll be an unhappy camper, then, as well.

Mortgage lenders get quite unhappy if the valuation of the house comes rather close to the amount of the mortgage still owing.

If the value goes too low, they'll require that you sell it ... at a loss, of course ...

... or they may choose to foreclose, in which case there'd almost surely be more costs if they sell it than if you do.

Which could well mean that they'd be notifying you that you owed them the difference between what you owed on the mortgage, plus costs of repossession and sale, less the amount that they sold it for.

Not a pleasant scenario.

But one that many who accepted those low-rate mortgages a few years ago will be facing.

My feeling is that if I wanted to buy a home in the U.S. these days, I'd be keeping my money in my genes (sorry, "jeans") for a while.

There are those who claim that I have some frugal chromosomes in my genes, as a matter of fact.

As a matter of fact, my daughter is considering buying accomodation in Arizona, these days.

Good wishes as you make your plans.

ole joyful

    Bookmark   December 4, 2007 at 11:56PM
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In your shoes, what I would do is to pay off the credit cards first. This will take about 8 months. Possibly along the way I would build up 1-2K in savings for car repairs etc. For an "emergency" you can always use your CC again. But I would pay off the cards plan to never have credit card debt again ever in your life.

Then, with $2500 per month, I would save up 20% for the house I was planning to buy. If a house costs $300K, then this is $60K, would take you 2 more years. Buying a house at 28 yrs is a good age. Along the way while you are saving for a house if you put 5% into retirement fund you will be establishing good habits.

Once you buy a house, hopefully your payment including taxes is less than the $2500 (which in 2 yrs is hopefully more like $3000 due to salary increases)... Then start increasing your retirement contributions, cash savings etc.

The most important thing at your age is to develop the habit of regularly saving a certain % of your income and staying out of credit card debt. I, like many others, wiped out all my cash to buy a first house and probably had a small amt of retirement savings.

While most experts recommend starting retirement contributions early, I am of the camp that you should get out of debt and develop a savings habit... This is vital to your financial future.

    Bookmark   December 5, 2007 at 8:38PM
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Don't be desperate to buy a house. In other words, since local RE markets vary, maybe yours starts recovering in 18 months and you miss buying at the lowest turning point. In the big picture, that doesn't have to be a tragedy and can even be a good thing.

It's more important to reduce your CC debt and save for retirement. In many markets, renting is cheaper than buying.

Our small cottage is worth about $550K. But counting downpayment, maintenance, higher utilities, insurance, etc., the gain (bought the house in 1989) over renting is only about $300K. That comes to a not-so-whopping total of about $1380/month.

And that's counting a market rental price. Our last apartment was rent-controlled, so we paid only about 55% of market price. Under that scenario, our gain drops substantially.

We have friends who did stay in their rental apartment, until retirement. At that point they took their considerable savings and bought into the retirement community they wanted, near their favorite fishing spot. It's a newer planned community with mobile and modular homes (both types), well-kept up and friendly. Since they are retired, they don't need to care about appreciation.

Realistically, they did as well financially by building their savings and renting, as we did on buying the home - with a lot less work and angst.

Now, my DH and I aren't disciplined savers. Having the home MADE us save. The point I am making is that having a home is not the only way to build your asset base. At your age, I would strongly recommend saving not 5%, but at least 8% of your gross. 10% would be a whole lot better, in fact.

The next step will be educating yourself about investing, and that's another whole world. It's good that you are already in the habit of saving. Keep it up!

    Bookmark   December 6, 2007 at 10:56AM
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I agree with paying off credit cards, asap. Then you need your 6 month emergency fund. After that start saving 15% of gross income for retirement. It sounds like a lot right now, but NOW is the best time to be putting away for retirement. Your retirement account will grow much more than the appreciation on a house. With left over money you can start saving for your down payment.

    Bookmark   December 25, 2007 at 9:29AM
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For all anyone knows, this could just be another "drive by" posting - no aditional input from the OP, etc.

I can't say if the original plan as stated is a good one or not; probably would be if the debt is being pared down, extra cash is being put aside for emergencies and for the future house purchase, and adequate funds are available for day to day living.

Don't know what your house dreams are - if they're grandiose you've got a lot of work to do to backlog tens of thousands of dollars in a very short time. Your debt to income ratio is a simple way of showing what percentage of your income is available for a mortgage payment after all other continuing obligations are met. The ratio is one of the many things a lender will consider.

If you can have a 20% down payment for a second quarter of 2009 house purchase saved, securing a loan from a reputable lender (there will still be plenty of scammers out there) at whatever the going interest rate will be should not be a problem. That's only the first step though - even though you can finally afford getting into a house, you've also got to make the payments, pay the routine monthly bills that having a house generates, be prepared for emergencies - new roof, furnace, water heater, appliances and anything else with a built in obsolescence factor, insurance, property taxes, as well as food, furniture, drapes, gardening and landscaping and all the costly little things that make a house a home. You may even have to consider that a move will require a commute to your workplace - hence, if public transportation isn't available there's more gas consumption, possible parking fees, and the need for a reliable vehicle.

Before inheriting the mortgage free family home, I bought and sold two houses on the East Coast. Though I have never carried credit card debt and always had at least a 20% downpayment and easily secured 30 year conventional loans, actually getting into the house seemed like financial childs play - at least, compared to the ongoing expenses connected with home ownership in the suburbs.

It's a wonderful thing being able to buy into the dream of home ownership, and I hope you achieve your dream - even if 2009 passes you by, you might be in better shape (as might be the housing market) in 2010.

    Bookmark   December 31, 2007 at 4:13PM
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