Planning to go in debt again but here's my plan

[Leo]

As some of you may know from my previous posts, I am out of debt. I started from the bottom and had 2 major debts in 5 years. A brand new car for $25,000 and $15,000 student loan for my master's degree.

Today, My wife and I revisited our budget and our goals. Our take home is around $8,300 per month. Our expenses is around $5000. For the remaining $3,300, we will put around $900 per month in IRA, so that leaves us around $2,400 of savings. I'm also contributing around $4,500 per year in my employers 401k. We have the emergency fund taken care of as well.

Our goal is to buy a $400,000 house but put 20% downpayment when I turn 29 (3 years from now). Assuming we follow our budget and with the same income (of course there is a potential that our income will increase over the years), we can achieve that goal.

BUT we want to buy a second car for my wife (a brand new SUV). I know debt is not good and we don't need a brand new one. We don't need it right now but we probably need a second car IF and WHEN my wife gets a new job with a longer commute. She is planning to get another job primarily for career growth reasons and if I have to guess, she should find one by November.

If we decided to get the car, we can probably pay it off within 1 year. 1 year and half tops. The reason we want a brand new one is we want those new safety like automatic emergency braking, etc. and we plan to keep the car for so many years. Also since I bought a brand new 5 years ago, I don't want her to think that I am unfair, that I bought a brand new one, but she will not.

To sum it up, it will probably delay our goal by maybe 1 year. Assuming we buy that new car and everything works out, instead of 29, I can buy a house by 30 years old. Still not bad, right?

I just don't want to get into debt again but I want my wife to be happy as well. Any advice would really mean a lot to me. Thank you.

[sv2007]

Lots of 0% financing deals right now. I think I saw Toyota offering 0% for 6 years a few days ago on my local newspaper.

[GoodSteward]

The real question is how comfortable are you with obligating all that money to payments right now. I asked a similar question under debt about how aggressive should someone get about paying off debt. Basically, the Dave Ramsey plan(gazelle crazy pay off something er other) artificially puts you under "broke" just because every single dollar of available money should be going to debt repayment. There is no room for other.

I have used this method to avoid interest. We buy a few things, and then go nuts paying them off before interest kicks in. It's doable, but honestly, it sucks to always be stressed trying to cover everything. Regardless of income, obligating all funds to debt repayment is stressful, because you still can't afford to do anything or risk blowing the budget/plans.

I've been in debt up to my eyeballs with 0 cash flow forced by minimum payments and loss of income. I can attest that too aggressively attacking debt creates a similar stress and gives the same feeling of being broke all the time. That's been my experience anyway. I'm not saying you shouldn't pay off debt quickly, especially to avoid rolling debt, but I am cautious about how much new debt (even 0%) I allow myself to take on at the expense of severe cash flow loss.

Personally, I might recommend saving as much cash as you can and buy closer to when she plans to start a new job. End of the year they go crazy on car deals. Buy the same vehicle if you want, but having less to repay just makes the trip down payment lane shorter. I don't know your whole story, but this is just one area to consider. That's my .02$.

[Jluke]

Our goal is to buy a $400,000 house but put 20% downpayment when I turn 29 (3 years from now). Assuming we follow our budget and with the same income (of course there is a potential that our income will increase over the years), we can achieve that goal.

BUT we want to buy a second car for my wife (a brand new SUV).

You are off to a good start with a nice monthly take home pay. But do you live in a HCOLA? How much of the 5k expenses is your rent?

Have you asked your wife if she would prefer a new SUV or a house?

based on numbers you provided:
400k home with 320k mortgage at 3.62% for 30 years (my CU rate currently) has a monthly payment of $1460 for P&I. Factor in Property Taxes and Insurance to your monthly payment. That eats up a lot of the $2400 (ignoring that your current rent is factored into the 5k/month expenses).

There is also the added expenses of owning a home - do you expect that the $5000 for monthly expenses will go up or down?

Over 30 years, do you plan to pay cash for your future cars? The reason I ask is that will also take away from your monthly net income in the future.

You are allowed to put 18k in your 401k, why only $4500 - are you in a cash hoarding phase?

Not knowing all of your numbers, I think in the future you might find yourself cash strapped and unable to really save for retirement.

[Singuy]

As some of you may know from my previous posts, I am out of debt. I started from the bottom and had 2 major debts in 5 years. A brand new car for $25,000 and $15,000 student loan for my master's degree.

Today, My wife and I revisited our budget and our goals. Our take home is around $8,300 per month. Our expenses is around $5000. For the remaining $3,300, we will put around $900 per month in IRA, so that leaves us around $2,400 of savings. I'm also contributing around $4,500 per year in my employers 401k. We have the emergency fund taken care of as well.

Our goal is to buy a $400,000 house but put 20% downpayment when I turn 29 (3 years from now). Assuming we follow our budget and with the same income (of course there is a potential that our income will increase over the years), we can achieve that goal.

BUT we want to buy a second car for my wife (a brand new SUV). I know debt is not good and we don't need a brand new one. We don't need it right now but we probably need a second car IF and WHEN my wife gets a new job with a longer commute. She is planning to get another job primarily for career growth reasons and if I have to guess, she should find one by November.

If we decided to get the car, we can probably pay it off within 1 year. 1 year and half tops. The reason we want a brand new one is we want those new safety like automatic emergency braking, etc. and we plan to keep the car for so many years. Also since I bought a brand new 5 years ago, I don't want her to think that I am unfair, that I bought a brand new one, but she will not.

To sum it up, it will probably delay our goal by maybe 1 year. Assuming we buy that new car and everything works out, instead of 29, I can buy a house by 30 years old. Still not bad, right?

I just don't want to get into debt again but I want my wife to be happy as well. Any advice would really mean a lot to me. Thank you.

With an income of 8300/month, meaning about 11000/month gross..your 401k contribution is pretty tiny. Also your 5000/month expense is without a car payment? I feel that the monthly expenses need to come down a bit. At your age without children(assuming) or a mortgage, there's no reason to spend 60k/year after taxes when the average household makes only 53k/year before taxes.

I think you need to take a harder look at your monthly budget before getting a 400k house. Good that you want to save 20% before buying the house..but I feel like you can do much better reducing the monthly expenses.

Also make sure putting most of your retirement money into an IRA is a good idea. I know for tax purposes, you may not qualify for any tax savings IF you have an employer 401k contribution account.

At your age and income level, continuing to live on a college student budget will set you up extremely nicely in your 30s when you are ready to have kids and such. I had a little less income than your household when I was 24, and before my first child at 32...I paid off a mortgage of 300k and had 150k in my 401k while living on a student budget.

[Leo]

That's my .02$.

I totally agree with you. I know if we do the gazelle crazy pay off, we can pay off a brand new car within a year but I don't want to have that same level of stress that's why I mentioned maybe we will do a year and a half.

You are off to a good start with a nice monthly take home pay. But do you live in a HCOLA? How much of the 5k expenses is your rent?

Over 30 years, do you plan to pay cash for your future cars? The reason I ask is that will also take away from your monthly net income in the future.

You are allowed to put 18k in your 401k, why only $4500 - are you in a cash hoarding phase?

We live in Los Angeles. Our monthly expenses is around $3,000. Rent is $1,500 and we just added a new column Travel for $500 because we want to travel as much as possible before starting a family.

Employee does not match. Should I still max it at 18k per year?

UPDATE: We decided to get a decent used car for around $7,500. I think we can get like a 5 year old economy car with that budget. We want to buy the house as soon as possible.

[Jluke]

we want to travel as much as possible before starting a family.

Employee does not match. Should I still max it at 18k per year?

Something to think about....

if you're going to start a family in the near future, now may be a good time to accelerate on the 401k b/c when kid(s) arrive, you'll probably want to cut back on 401k contributions to have more money each month...

You'll have to look at your whole financial picture to determine how much, if any, you want to increase the 401k.

Aside from the 20% down on the house, do you have cash set aside to furnish the house, make any necessary upgrades/repairs, etc? You'll probably want 100k cash (at least 80k down with 20k flex for additional down payment and/or for immediate and future home expenses.

[GoodSteward]

Employee does not match. Should I still max it at 18k per year?

If you have it yes. You can only invest so much of your earned income. IRA's only allow 5500 a year. Just think of the 401k as a 18k$ IRA fund. If you can afford it, max out all retirement accounts. You can't get time back, and you only have a few options for where to put earned income that is under a tax break (now or later).

UPDATE: We decided to get a decent used car for around $7,500. I think we can get like a 5 year old economy car with that budget. We want to buy the house as soon as possible.

Excellent choice, IMO. This is the same route I ended up taking when looking for a vehicle. At the end of the day you have to decide is it more important to drive fancy, or win with money. That's how I categorize it anyway.

As for which one, I recommend trying to get a Honda or Toyota. Very reliable and I have seen many 200k mile cars going strong.

[Singuy]

Something to think about....

if you're going to start a family in the near future, now may be a good time to accelerate on the 401k b/c when kid(s) arrive, you'll probably want to cut back on 401k contributions to have more money each month...

You'll have to look at your whole financial picture to determine how much, if any, you want to increase the 401k.

Aside from the 20% down on the house, do you have cash set aside to furnish the house, make any necessary upgrades/repairs, etc? You'll probably want 100k cash (at least 80k down with 20k flex for additional down payment and/or for immediate and future home expenses.

More like 120k

80k down, 10-20k closing cost

[GoodSteward]

More like 120k

80k down, 10-20k closing cost

That's some serious closing costs. I must be another level down from you guys altogether. I only ever see around 4000-5000$ between my purchase and then a refi, and my parent's refi. If there is an escrow and you are close to owing taxes for the year, I suppose if it is a high tax area then I could see needing that kind of money, but wow. I couldn't stomach paying that much just in taxes, on top of all the other fees.

For instance, I see HOA fees as another tax and just a waste. You have to pay them so they can tell you what you can or can't do with your property. Not worth it to me. I understand there are benefits such as making sure the community stays at a higher level, but eh. That's not for me.

[frugalNH]

Any reason saving to pay cash for it is not an option? You said IF and WHEN, so it does not sound like a definite plan nor a pressing one at this moment. How about piling up cash for it just in case? It would be there if the need for a new one comes to pass, or able to be rolled towards the home if not.

[Leo]

Sorry if off topic.

I was thinking of what you guys said about 401k.

I still don't know what to do with it. Should I max it? Should I increase my contribution? Or stay as is and focus on saving for a house?

Employer doesn't match so I'm only putting 4% of my gross which is $350 per month but my wife and I started maxing out IRA (mine is ROTH, she has Traditional IRA). She does not have 401k.

My current ROTH IRA is around 10k. Wife current IRA is around 3k. We are going to put $5500 each per year starting from now. I also have a traditional IRA from a rollover from previous job which has 10k right now.

Currently we are 26. No debt. Got emergency fund. Ready to save for a house within 3 years. So that leftover per month around $2,300 will go to house downpayment savings.

Now, regarding my 401k with my current status. What would you do if I were you?

My options of course are 1. stay with 4% until I buy a house then start maxing 401k. 2. Increase it a little bit maybe around 10% which would be $875 per month. 3. Max it now with $18k a year.

[Jluke]

Currently we are 26. No debt. Got emergency fund. Ready to save for a house within 3 years. So that leftover per month around $2,300 will go to house downpayment savings.

Now, regarding my 401k with my current status. What would you do if I were you?

My options of course are 1. stay with 4% until I buy a house then start maxing 401k. 2. Increase it a little bit maybe around 10% which would be $875 per month. 3. Max it now with $18k a year.

$2300 x 36 months = $86,400. just enough for a 20% down payment, but probably not enough for closing costs, etc.

Unless you have money set aside already for the house downpayment, maybe you can't increase your 401k at all.

[GoodSteward]

If you feel confident you can maintain that income level for the foreseeable future, I would focus on the house. I might increase the 401k some if it has good options, but Maxing the 401k would require most of your money for a down payment.

It really comes down to how bad you guys want to buy a house, and how much house you want to buy. Do you plan to try to pay off the house as fast as possible?

As far as tax sheltered options you don't really have more than a 401k and IRA. Any investing you do outside of that is taxed on the contributions and growth. You can't go back and build up a 401k. You get 18k a year, and if you don't use it you can't put in more the next to make it up. I just wanted to mention this as part of why it is something to consider with putting more into the 401k. If you do the Dave Ramsey approach and just pay everything off as fast as possible, and you still have that income, you can do great with retirement but you will have no tax shelter to put it in once you max the 401k and IRA at that point.