Change Tax Withholdings & Retirement Fund?

[anonymous_saver]

I agree that school loan debt is "good debt". Usually anyways.

I was mainly suggesting this debt gets paid off soon because of the large monthly payment of $600.

And yes, the original poster does sound like they are doing well.

[jIM_Ohio]

Originally Posted by anonymous_saver

I agree that school loan debt is "good debt". Usually anyways.

I was mainly suggesting this debt gets paid off soon because of the large monthly payment of $600.

And yes, the original poster does sound like they are doing well.

Without trying to rain on anyone parade (we are all trying to help), paying off 100k of student loan debt is the equivalent of many of us paying off a mortgage... $600 is not a large payment, IMO, from my standpoint I paid $1000/month in student loan payments when I graduated. It is close to 25% of budget, but not a problem, IMO.

I do not think that sacraficing one goal (retirement saving for example) to pay down this debt is a good move for now. I think starting an IRA should take priority, as the IRA could probably have 100k in it well before the student loan debt is even knocked down to 50k. Compounding is an amazing thing (8th wonder of the world?) and the sooner the IRA is started, the easier all finanical goals will be.

I do think steps should be taken to send extra to student loans (to start putting a dent in them), but not at expense of other goals, IMO.

I tried finding a calculator to see where $600/mo pays off 100k of debt, but without knowing the rate and total owed, tough to figure out.

I know a 100k mortgage at 6% costs $666/mo. One extra payment per year knocks this down from 30 years to 22, I think This one payment is $50/month. Assuming student loan numbers are similar, $50 extra is enough to start with, I think OP will find out paying down the loans before saving for the house makes sense (as $600 to $800 a month going into house fund will beat $100 going into same account and $600 going to student loans.

Based on posts, OP does not appear to have more the $600 discretionary funds for funding the various goals (because OP suggested $1200/month loan payments were too high).

I am thinking
$50 to student loans
$200 to IRA
$100 to emergency fund (already has nearly 4-5 months expenses in it already- not a priority, just a goal)

Is about where the money would reach.

The next step might be to compare rent payment to payment on a condo of similar size (square footage wise). This would lower his tax bill, allowing for more take home pay. If he could afford the condo and the student loans, then the student loans get paid off faster, and the $600 gets freed up in the budget.

[adaway]

Thanks all for your time and suggestions.

AnonymousSaver:
Online Savings Calculator seems like a great tool. I plugged in some figures to try it out.

Also, suggestion of opening account with just $1 is great idea maybe that is something I will consider as a way to ease myself out of hesitancy with online banking.

The idea about opening multiple accounts to organize what I am saving is also a great suggestion. Currently, I hate to admit, I am financially disorganized in every which way and I am trying to figure out a good plan to make improvements.

I will report back on decisions for a plan...I kind of have to wait to make certain changes (eg. retirement contributions) bc it could only be done during a certain time period. But yes, I would be happy to follow up with the changes.

jimOhio:

Input on possible ways to contribute to goals is appreciated. The extra 50 for SL is something I can do and the other breakdowns sound reasonable. I am still trying to create a budget so I can more clearly see where everything is going. I will consider your suggestions.
BTW, the SL is ~114k at 4.875% and I can get .25% reduction if I sign up for automatic withdrawal from my account.

Right now, I am trying to read up on investing basics bc my 401k portfolio is a hot MESS. I just randomly picked things when I signed up for the plan although I believe I tried to do the aggressive approach. I have TIAA Cref and Vanguard as options. My portfolio is currently comprised of TIAA Cref investments. I did see posts on this site's discussion which discuss the two, so I am looking into them. Looks like more people are in favor of Vanguard so I will keep that in mind. Anyways, this is sidetracking from my original post so I think I will stop here for now.

Everyone's feedback has been helpful. thanks again.

[jIM_Ohio]

Originally Posted by adaway

Input on possible ways to contribute to goals is appreciated. The extra 50 for SL is something I can do and the other breakdowns sound reasonable. I am still trying to create a budget so I can more clearly see where everything is going. I will consider your suggestions.
BTW, the SL is ~114k at 4.875% and I can get .25% reduction if I sign up for automatic withdrawal from my account.

Right now, I am trying to read up on investing basics bc my 401k portfolio is a hot MESS. I just randomly picked things when I signed up for the plan although I believe I tried to do the aggressive approach. I have TIAA Cref and Vanguard as options. My portfolio is currently comprised of TIAA Cref investments. I did see posts on this site's discussion which discuss the two, so I am looking into them. Looks like more people are in favor of Vanguard so I will keep that in mind. Anyways, this is sidetracking from my original post so I think I will stop here for now.

Everyone's feedback has been helpful. thanks again.

Automatic withdraw is a good idea, IMO.

114k, 5.875%, payment is $603.30 according to excel. 360 payments. Pay $103,000 in interest.

An extra $50 per month shortens repyament period to 305 months. Total interest reduced to $84,800. Cost you 305*50=$15250 and saved you interest of $18,200, and monthly payments of 55*650=$25750.

If you sent $100 to a house fund for 305 months, That would be $30,500.
If you sent that $100 to student loans (so paid down $150), the payment period would reduce to 236 months. If the $750 payment was saved from months 237 to month 305 (68 months), you would have put $51,000 into the savings instead of 30500.

Like I guessed earlier, it will be better to pay down the debt prior to saving for a house.

Run similar numbers for an IRA.

Save $50/month now for IRA (keeping the number the same as the pay down). Assume 8% growth (conservative- this is doable with a 60-40 mix of stocks and bonds, 80-20 might be 9 or 10%).

Assume $600 contributed to IRA each year, 8% annual return. In 305 months (25 years) the IRA would have $47,000 in it. This $47,000 is much higher than the $18,200 the $50 saved you on the student loans.

This is why I suggested IRA and pay down student loans before saving for a house. If you can get a condo now for what you rent, I think you will see this picture get better (it became much easier for me to pay down loans when I could deduct the interest on my condo and get more take home pay). This assumes the rent payment and condo payment are similar (my condo cost me $250 more per month, but it saved me much more come tax time).

[Seeker]

Originally Posted by Broken Arrow

150% is insane. I've never heard of that before. And to think they're willing to contribute up to 8% of that.

I'm tending to think this was a misunderstanding.

My company's 401k matches 100% of the first 3% contributed. Then 50% of the next 3% contributed. Even this is more than most company's today.

Unless s/he works for some sort of financial company with very specific investment types, I cannot see any other type of business doing this.

If indeed there's a 150% match, then take advantage of it while it exists!

[adaway]

JIMOhio

Wow, that’s helpful to look at the differences between the three over a long time frame.

So, my priorities in order are:
1. Retirement, Retirement, Retirement
2. SL
3. Savings (finish ER then house/other fund)

I worked on a prelim budget (didn’t have one before) and it looks like after changing withholdings, and contributions to workplace retire plan I will have $950 to work with for above.

I think I am comfortable for this year working with following breakdown:
650 for SL
100 for RothIRA
200 for Savings

I know this goes against my priorities as listed above, but this is what I am thinking I would feel more comfortable with doing for this year’s changes. I can tweak in the near future and especially as salary may change. If for example I get a raise more that 3%, I will contribute any additional take home towards the RothIRA. Then again, if I change something on my taxes or if in the following year a great raise comes around, I will add to the SL. How does this sound for a plan? I think this can work.

Regarding comparing rent vs. buy, I think buying would more than double what I pay for rent including utilities. So buying does not seem to be a good option now, plus I would only consider buying if I had the 20% down. But thanks for the suggestion. I will do a comparative at some point when I begin to feel like buying is more realistic in my situation.

Thanks!

[adaway]

Seeker,
It's no misunderstanding. Thanks for the interest though.
Yes, I will be going for 3 to 8% contributions leap...that's first on my list of changes to make to my financial plan!

[jIM_Ohio]

Originally Posted by adaway

JIMOhio

Wow, that’s helpful to look at the differences between the three over a long time frame.

So, my priorities in order are:
1. Retirement, Retirement, Retirement
2. SL
3. Savings (finish ER then house/other fund)

I worked on a prelim budget (didn’t have one before) and it looks like after changing withholdings, and contributions to workplace retire plan I will have $950 to work with for above.

I think I am comfortable for this year working with following breakdown:
650 for SL
100 for RothIRA
200 for Savings

I know this goes against my priorities as listed above, but this is what I am thinking I would feel more comfortable with doing for this year’s changes. I can tweak in the near future and especially as salary may change. If for example I get a raise more that 3%, I will contribute any additional take home towards the RothIRA. Then again, if I change something on my taxes or if in the following year a great raise comes around, I will add to the SL. How does this sound for a plan? I think this can work.

Regarding comparing rent vs. buy, I think buying would more than double what I pay for rent including utilities. So buying does not seem to be a good option now, plus I would only consider buying if I had the 20% down. But thanks for the suggestion. I will do a comparative at some point when I begin to feel like buying is more realistic in my situation.

Thanks!

What is $1200+401k contributions as a percent of salary? If 8% of salary plus $1200 per year is higher than 10%, I think this is a solid plan.

As for the savings, what is this invested in? I assume a money market account? What is the interest? I assume the increase in savings is because the house is a priority? Consider applying this to student loans instead if the house is the reason for savings over IRA. Your lowest net return is on money applied to savings (IRA>studentloans>savings). If the goal is the house, the student loans are in the way IMO), even if the 20% down criteria is being used for the house.

Who does your income taxes? If you have not filed for 2007, I might suggest buying turbo tax and teaching yourself a few things after you file. Copy your return after you file, and see what buying now gives you on a "new" return.

I have never put 20% down on either of the two properties I bought, and my cash flow improved each time because of the tax deductions.

For example $750/month rent was worse, for me, than a $950 house payment. 5 years later a $2300 payment still has good cash flow.... the $1000+ increase came when the student loans and cars were paid off.

For the tax analysis, pay attention to the following criteria

1) did you take the standard deduction? (you probably do this, I did when I was single and renting too).

2) if you itemized (now, or do this as the experimental return), and took $9000 in mortgage interest as a deduction, did the tax return improve? By how much? If you added in a $3000 property tax deduction, did the return improve? By how much?

3) then take the increase in tax return and consider where to apply it (pay down student loans? invest? If loans get paid of x months quicker, rethink cash flow from that point forward.

4) FYI, you will possibly get 15% or 25% of the $12000 interest and taxes paid back when you file. Depends how many other deductions you have, and how much standard deduction was helping you.

5) To buys a house with less than 20% down, the programs I used were

1) 5% down, paid PMI
then refinanced to
2) 80-15-5 where 80% was first mortgage, 15% was second and 5% was down. Did not pay PMI and tax return went up (the mortgage interest was deductable and PMI was not, the payments were within $75 of each other).
3) bought a bigger house 80-15-5
4) refinanced bigger house 80-15-5
5) I am planning another refinance if rates go down. We have enough in savings to go 80% pure if we chose to do that.

[adaway]

Thanks for your thoughtful response.

Retirement plan contributions:
1200/yr + 8% + match = >20%

ER fund is in local savings mm….I plan to look into online savings to take advantage of higher interest rates.

Order of priorities shifted because I felt that for this first year of changes I don’t think it will be significant that I address priority #2 (SL) to the fullest, because I would feel more comfortable getting a head start to priority #3 (House/other fund.) So for one year, paying 50/mo additional to 600/mo for SL should work for the time being and then the following year I can adjust it up while tweaking down House/other fund…just feeling that I want to finish ER fund and boost House fund ASAP and that one year of paying a little over min for SL will not have a significant negative impact on my plans.

The suggestion on taxes and home buying are great ones. I do my own taxes and I use turbotax but in the past I have more often taken the standard deduction. I will plan to work on the form as you describe to use it as a learning exercise and to see what difference it would make with a home purchase. I appreciate you sharing your experience with buying on less than 20%. That is something I will consider.

[jIM_Ohio]

Originally Posted by adaway

Thanks for your thoughtful response.

Retirement plan contributions:
1200/yr + 8% + match = >20%

ER fund is in local savings mm….I plan to look into online savings to take advantage of higher interest rates.

Order of priorities shifted because I felt that for this first year of changes I don’t think it will be significant that I address priority #2 (SL) to the fullest, because I would feel more comfortable getting a head start to priority #3 (House/other fund.) So for one year, paying 50/mo additional to 600/mo for SL should work for the time being and then the following year I can adjust it up while tweaking down House/other fund…just feeling that I want to finish ER fund and boost House fund ASAP and that one year of paying a little over min for SL will not have a significant negative impact on my plans.

The suggestion on taxes and home buying are great ones. I do my own taxes and I use turbotax but in the past I have more often taken the standard deduction. I will plan to work on the form as you describe to use it as a learning exercise and to see what difference it would make with a home purchase. I appreciate you sharing your experience with buying on less than 20%. That is something I will consider.

When looking at Turbotax, there is a specific section for owning a home. Mortgage interest, property taxes, home improvements are all tax deductable. If you have a home office and work out of it, more will become tax deductable.

You may want to price out a 1 BR condo (look at asking prices in paper for example). Then plug the amount into a mortgage calculator to see what interest rate would be, and more importantly for tax purposes, what the yearly paid interest would be. Most online mortgage calculators would give you an "ammortization table" which shows total payment, principal payment and interest payment broken down. Add up the first 12 interest payments to get interest paid for a year.

If you pay points on the mortgage, the points are also deductable the first year. Points reduce interest rate (usually pay 1% of loan amount for one point, and one point drops interest rate .125 or .25 %.