My Budget: Debt vs. Savings. vs. Retirement

glavinsolo

16 years ago

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.

Info:

$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

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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.

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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

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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.

Comments (5)

joyfulguy
16 years ago
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
landmarker
16 years ago
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.
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If you pay down your CC debt you'll see a change in your score in one or two months - depending on when the cc company makes their reports. Whatever the balance is when they prepare your monthly statement is the balance reported - even if you pay that balance off in full. I would try to knock down the cc debt to 30% or less - there's nothing magic about 25% or any other percent really. 50% or less isn't too terrible, but this portion of your score accounts for about 30% of the total score overall, so the less the better. This is all very general though. Many different things are taken into account when determining your score, and many things besides your 3 scores are taken into consideration by lenders - it's not a matter of one thing being cared about more than another, it a matter of your overall financial picture. My advice to you is to wait until you've paid down your cc debt and also make sure you have an emergency fund in place - not only so that you can take care of yourself should you lose your job or become ill, but also so you can pay for the many emergencies that can befall a home. You can expect to pay an amount about equal to one monthly payment just on yearly maintenance alone - not counting any repairs or emergencies - and much more for an older home. Plus home owners insurance and taxes and possibly higher utility bills than you are paying while renting. That you cannot both save for a down payment and pay off your debt tells me that you probably aren't yet ready for home ownership. Also, debt on one cc and a car loan don't account for such a low score (I assume that's an average of the 3 scores? 700 would be like a B- or C, low-good) - have you fixed whatever caused that score? Is it simply a short credit history ? (in general, it not good to close out an account unless it's fairly new and charges an annual fee) Most of all, most important to your scores, is to never, ever make a late payment on any bill - includes phones and utilities, etc. Have you thought about getting a 2nd job clerking or waitressing or something like that? You could save a great deal in a very short time. In just 6 months you could earn that 10% down payment and still be paying down your cc debt with your regular income. My husband and I each worked a 2nd job in order to save for our first home on the schedule we wanted - it was hard, but fun and exciting, too. On the brighter side - you can request that the PMI be removed once your home equity is high enough - so if the value of your home rises then that PMI may not last longer than a couple of years. Just remember that it's not getting into the home that you should be most concerned about - it's being able to stay in the home while remaining financially solvent - you want to be able to pay yourself (emergency fund, retirement), pay your bills, save for big ticket items (like a home, newer car, furniture, vacations), have some fun, and invest.
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Thanks for all of the feedback, folks. Renting is still certainly an option, but that $8,000 tax credit keeps whispering to me. I don't need the $8,000 tax credit to make this "work", but it would certainly be nice. As far as additional expenses that come along with homeownership, I must say that if I stay in this area, I'll be paying approximately $1500/mo + utilities, along with whatever outrageous pet fees and pet rents they will add on. For what it's worth, I've got money in accounts I'd rather not touch right now, but I can access. I also have my debts covered by insurance that kicks in if I'm disabled or unemployed. I've got a sizeable amount of available credit (the balance are small, but the credit limits aren't), in case of a terrible emergency. When it comes down to it, I've got more than enough cash/cheap credit around to tackle any catastrophe worth dealing with on a $130K property. I'm an insurance freak, so I don't have any debts that won't be paid if something happens to me, and even the pets have veterinary insurance, so a veterinary emergency won't make me choose between paying my bills or paying the vet. Again, for what it's worth, I'm focusing on houses without pools (don't want the maintenance expense), I'll be working from home (no commute/minimal gas expenses), and I am also focusing on houses new enough that everything won't start to break as soon as I move in. I've wanted to buy a home for years (but lived in an absurdly high COLA area), and I really feel like I've thought this through as much as I can without making sure I'm getting a reality check from everyone. Short of saving up for years to pay cash for a home, I'm not sure I'm in such a bad position to buy a house. With that said, I don't want to be the poster who just posts to get everyone to agree with her, regardless of the facts. So, I really appreciate the feedback. In my situation, with the pets, it just seems like I'm throwing away so much money on pet deposits, pet fees (nonrefundable), and absurd rents to continue doing the "sensible" thing and renting until all the moons align and I can pay cash for a huge portion of a home. One of my biggest considerations is the fact that I could take a 50% pay cut and make out. The mortgage/utilities on these houses = still less than I've paid in rent in years (and at much lower salaries). At what point does, "I really really want a yard and a dog" come into play? I get the impression that, for some locations/situations, renting will always be the most "sensible" solution, but then why do people even bother to buy homes? So, really, when do the scales start to tip in favor of buying a home vs. renting a home? Thanks, all! I've got a lot to think about.
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jakkom
16 years ago
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!
clg7067
16 years ago
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.
duluthinbloomz4
16 years ago
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.

My Budget: Debt vs. Savings. vs. Retirement

Comments (5)

joyfulguy

landmarker

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