Newbie here--budget advice (help me save/invest more wisely)

[sweetZ4me]

Newbie here, have been lurking and enjoying all of the great wisdom/advice that has been shared. I would like to show my budget and get some feedback on areas in which we can better utilize our "leftover" money each month.

Ages: 32 and 30

$4900 is our combined monthly take home after taxes, 403b contributions (which is matched by employer), health care plan and optional life insurance

Monthly bills
Mortgage $1300 (this includes insurance and taxes and also reflects the extra $200 per month that we put toward our principal).
Savings $500 (this goes into an ING account which has a current balance of 7K)
Daycare $480
529 plan for DS college $200 (we do put in lump sum amounts that are received to him as gifts)
Roth IRA $150
Car payment $330 (Yikes! We just got a new car. Put 40% down, financed other 1/2 at 5% for 36 mos. We owe 11k)
Gas for home $120 (this is an average based on yearly total. Less/more depending on month)
Electric $50 (average based on yearly total)
Internet, phone, and cell phone bundle $110
Dish network $60
water/sewer $45
Groceries $200 (yes, we are able to stick to $200 for 3 people)
Church $200 (we are trying to find a new church home. We may up this once we find it)
Eating out & entertainment $150 (honestly, we don't ever reach $150)
Gas for 2 vehicles $150 (we carpool to the same work so this is accurate)
Our blow money $200 (haircuts, clothes, lessons for son, gifts, etc)


TOTAL: $4245
LEFTOVER: $ 655

I have a pension plan and also contribute to a 403b (only do enough to get the match) and a Roth as shown above. My husband decided to forego the pension plan and did an optional retirement plan offered by our state employer where they contribute 10% and he has it in mutual funds. He also does the 403b (a little bit over the amount needed to get the match).

How can we best utilize the leftover funds? The options I see are:
pay down that new car loan in hopes of paying off earlier than 3 years (at 5%, total interest paid is not all that much)put more into the Roth to max it out
have my husband open a Roth and contribute.[/list]
put more into the ING and build us up beyond the 7K. I would forsee a new roof in the next 4-5 years and some other misc. expenses. Plus, it scary to see it cut down so much from the car down payment we just made.

Edited to add: we did not trade in our old vehicle. We are selling it for $2500 and will therefore have those funds to either add to savings or put toward principal of loan.

[LuxLiving]

I would do some increased amount of savings/hedging on the employment front if you are both with the same employer. How secure do you feel that situation is?

I see no trash service on your list of bills? no car insurance?

You put 40% down on the car and now owe 1/2? What happened to the other 10%? I'd probably pay that car sale income down on the car note.

Sounds as if you have a nice income. Do either one of you have student loans that aren't in this list?

[disneysteve]

Welcome!

I'd want to see you build up your EF to at least $12,000, which would represent about 3 months of expenses. Realistically, $10,000 would be 3 months since there are things on your list you could easily cut out if it became necessary, but 12K would be a good healthy EF.

What is the interest rate and type of mortgage? If it is a reasonable rate and fixed, I would stop paying that extra $200/month and instead use that toward maxing your Roths.

I wouldn't be inclined to prepay the auto loan. 5% is pretty reasonable. I'd rather see the money going into the Roths and the EF.

I'd also look into trimming back the TV bill. Around here, I think we can get Dish for $29 or less.

By the way, where is that "leftover" $655 going currently?

[disneysteve]

Originally Posted by LuxLiving

I see no trash service on your list of bills?

We don't pay a seperate bill for trash. It is included in our property taxes. OP might be the same way.

[sweetZ4me]

Thanks for some feedback. Wanted to answer your questions to provide more info.

I would do some increased amount of savings/hedging on the employment front if you are both with the same employer. How secure do you feel that situation is? We both work for a state university. Feel secure in terms of my pension and as with any type of mutual fund (since husband did instead of pension, it has its risks). Overall, though, job security is good.

I see no trash service on your list of bills? no car insurance? Trash is with water and sewer. Car insurance paid twice a year but we just use the monthly leftover $ to do that.

You put 40% down on the car and now owe 1/2? What happened to the other 10%? I'd probably pay that car sale income down on the car note. Nothing happened to the 10%. I should have said we still owe more than half! At 5%, our ammoritization table shows $800ish total paid interest. In my heart, I want this car paid off first. In my mind, I wonder if I would earn more sticking extra money elsewhere where it can grow interest? Don't know...

Sounds as if you have a nice income. Do either one of you have student loans that aren't in this list? No student loans or cc debt. Income may sound good, but given that we have graduate degrees, pay is not great compared to private industry.

Edited to answer: By the way, where is that "leftover" $655 going currently? We usually put about $300 of it into ING. I do like to have some $ sitting in my checking for safety.

[jamiefic]

I'm new too, but thought I'd add something anyway . I think that it's wise to pay off debt - especially since you've done well to put money into savings and retirement. If you get the car paid off, then you'll have even more money to put other places (savings, retirement, etc.). Do you have any other debt besides the car and house? No credit card debt or anything? I would pay the lowest loan off first and then work your way up.

[DebbieL]

Hello, and welcome to the boards! One thing I didn't see anywhere on your list is travel/vacations. Do you go on trips? This is an item I budget for (because travel is important to me). We probably spend about $5k/year on travel. If you do go on vacations, you could try to average out what you spend for a typical trip and budget for that monthly.

[anonymous_saver]

What is your interest rate on your mortgage? If it is low, I may stop putting extra towards this for a while at least and build your emergency fund and fully fund your Roth's first.

I would say you need a plan with that $655, and keep only a month worths of expenses in your checking account at a time, no reason to lose out on missed interest.

If I were you, I would have as a priority, building your emergency fund up to 3 months worth. Then I would focus on fully funding Roth's for both of you. After this is done, I would say pay off your car loan, and then build your emergency fund up to 6-9 months or so, depending on your goals.

I have my M.A. degree and work at a public University as well. Trust me, I understand not making as much $ as the private industry!!!

[disneysteve]

Originally Posted by jamiefic

I think that it's wise to pay off debt - especially since you've done well to put money into savings and retirement. If you get the car paid off, then you'll have even more money to put other places (savings, retirement, etc.)... I would pay the lowest loan off first and then work your way up.

Welcome to you, too.

Paying off high-interest debt should always be a priority. Low-interest debt, however, is another story. I think it makes more sense to max your Roth in aggressive funds where you can expect to earn 8-10%/year rather than prepaying a car loan costing you only 5% or a mortgage that, after taxes, probably costs you even less than that.

As for which order to pay off debts, you should pay highest interest rate first and then move on to the next highest and so on. That will save you the most money and get you debt-free the fastest.

[sweetZ4me]

Thanks to all for the feedback so far! This is exactly what I was looking for. Good idea about budgeting for travel. We really don't travel that much but we do a small road trip once a year and we have discussed Disney in the future, so I will definitely take this into account.

One question for those who mention the emergency fund being at 3 months-- we currently have the 7K and you mention building it to 12K (to cover that 3 months). But, I have been looking at my emergency fund for ONLY living expenses (in other words, I took out the monthly costs for ING savings, took out/reduced blow money, took out the 529, etc b/c I figure if something big happened I probably would need to eliminate those temporarily OR probably wiser yet-- cut on things like Dish, internet, etc). So....should I really have 12K in the fund when my monthly budget's "true bills" are about half (or maybe a little more?) I really don't know and would appreciate your input abou that.

Interest rate on mortage is 6.5%. It is an interest only loan but at a fixed rate (no balloon, arm, etc). I know how most feel about this--at the time we bought our home, I was a SAHM and we purchased it knowing our income would increase but it gave us a little more buying power at the time). Therefore, it is important to us to pay on the principal each month. We did put a nice downpayment on it so we DO have equity in our home between that the $200 over. By the way, we have always done the $200 over (even when I was SAHM).

Given that information, I don't know if some of you recommend putting MORE toward the house.

[jIM_Ohio]

The $655 leftover plus the current $150 going into Roth would almost max the Roths for the year ($805*12=9660).

If you can find another $30/month you can max Roths for both spouses.

This would create a car insurance issue because the money would be spoken for each month.

You also need 3-6 months expenses in an emergency fund. I would suggest maxing the Roths NOW and temporarily allocating the $200/month extra on the mortgage to the emergency fund.

Once you have 12k in EF, I would look to either use the $200 to pay down the mortgage or use it to fund other expenses (like car insurance).

[anonymous_saver]

Would you guys consider refinancing your mortgage into a non-interest only loan? It sounds like you have decent credit, so you could probably get a better deal than you have now.

[disneysteve]

Originally Posted by sweetZ4me

One question for those who mention the emergency fund being at 3 months-- we currently have the 7K and you mention building it to 12K (to cover that 3 months). But, I have been looking at my emergency fund for ONLY living expenses

So....should I really have 12K in the fund when my monthly budget's "true bills" are about half (or maybe a little more?) I really don't know and would appreciate your input abou that.

I added up what appear to be the fixed costs and it comes to about $2,700. I included internet/cell/phone/dish because I didn't know if you are locked into a contract with those services. Add in a few hundred for miscellaneous stuff that you'd still have to pay and let's say your minimum monthly expenses are $3,000. So a 3 month EF would be $9,000.

How much of an EF you need depends on various factors like how secure your jobs are, what other savings you have, how much you could cut spending in an emergency, etc. For example, if one of you were to lose your job, would you stop the daycare and just have the unemployed partner care for the kids at home? If so, that drops your monthly expenses by nearly $500. However, what if the emergency doesn't involve a job loss. What if the car gets wrecked? What if one of you gets injured and is unable to work? Do you have adequate disability coverage?

There are a lot of "what ifs" in any family. Better to be over-prepared than under-prepared. And the typical advice is 3-6 months of expenses for an EF. Three months is the minimum. So for you, I'd say $9,000 at least, though nothing wrong with $12,000.

[jIM_Ohio]

Originally Posted by anonymous_saver

Would you guys consider refinancing your mortgage into a non-interest only loan? It sounds like you have decent credit, so you could probably get a better deal than you have now.

where did we see interest only in OP?

[DebbieL]

The part about the interest only mortgage was added in a later post.

[jIM_Ohio]

Originally Posted by DebbieL

The part about the interest only mortgage was added in a later post.

Interest rate on mortage is 6.5%. It is an interest only loan but at a fixed rate (no balloon, arm, etc). I know how most feel about this--at the time we bought our home, I was a SAHM and we purchased it knowing our income would increase but it gave us a little more buying power at the time). Therefore, it is important to us to pay on the principal each month. We did put a nice downpayment on it so we DO have equity in our home between that the $200 over. By the way, we have always done the $200 over (even when I was SAHM).

I bet OP could refinance. lower payment, and get a 15 year or 30 year fixed mortgage. I would look into this.

I would keep paying $200 towards principal. I would consider taking raises and adding it to this amount. Part of this would be a calculation as to what it would take to make a 15 year payoff on the interest only loan (calculate ammortization table for 15 yr fixed mortgage). More than likely $200/month does not cover the 15 year payoff, so I would increase payment until you reached that point. For example add car payment to this in 3 years and see what $500/month does to ammortization schedule. Add a 1% raise to this each year and see what that does. I would not keep the interest only loan for a long period of time, but while you have it, you have a risk, and the way to hedge that risk is to pay it down quickly.

Does this interest only payment balloon? I use 15 years above because that should protect you from a possible balloon payment in year 20, 25 or 30. If you have a 15 year balloon payment, you might need a different strategy if you cannot refinance.

[sweetZ4me]

This feedback has been wonderful. No, the mortgage does not balloon, and the interest rate is fixed for life of the loan.

Do you all recommend that we refinance to a traditional mortgage even if we could up the principal each month on this interest only loan?I checked out an ammortization table and plugged us in at 15 years, fixed, same 6.5% and it says $1480.00 monthly for the 15 years to pay off the balance. So, if I did that and just kept the interest only but put the $480 toward principal each month, would it work out about the same? I hope what I am asking makes sense. We are 2.5 years into this mortgage, if that info matters.

[jIM_Ohio]

Originally Posted by sweetZ4me

This feedback has been wonderful. No, the mortgage does not balloon, and the interest rate is fixed for life of the loan.

Do you all recommend that we refinance to a traditional mortgage even if we could up the principal each month on this interest only loan?I checked out an ammortization table and plugged us in at 15 years, fixed, same 6.5% and it says $1480.00 monthly for the 15 years to pay off the balance. So, if I did that and just kept the interest only but put the $480 toward principal each month, would it work out about the same? I hope what I am asking makes sense. We are 2.5 years into this mortgage, if that info matters.

Do a 15 year fixed based on todays principal balance and that will give you estimated payment to pay off in 15 years. How $480/month would work would depend on many factors which I do not know and would need an ammortization schedule to plug into. The $200 payment over last 2.5 years would also have changed things- this may or may not have been high enough to pay down principal on a 15 yr fixed schedule. In addition it depends if you paid $200+principal owed or kept the payment fixed (if interest owed is $1300 and you pay $200 extra, do you send $1500 each month, or when interest goes down, do you decrease payment)?

Download an ammortization table (blank) from microsoft and plug in your numbers. It will allow you to change monthly paydown amount each month or make regular extra payments.

http://office.microsoft.com/en-us/te...dule&av=TPL000

Once you get the spreadsheet set up for 6.5% and can pay it off in 15 years, then look at refinancing. Sum the column with principal payments made (should equal cost of mortgage- this is a check to make sure you set up spreadsheet correct). Sum the column with interest payments made.

If new rate is 5.5% look at that ammortization schedule. Sum the principal payments made. Sum the column with interest paid. Compare to 6.5% schedule currently.

My guess is you would need to save .5% on interest rate to see a big enough difference to refinance (based on closing costs).

I think 15 yr fixed mortgages are running at around 6% right now, depending on credit.

[maat55]

I think you should consider establishing a financial plan that funds all your spending. I follow a plan Dave Ramsey teaches that has a prioritized order.

1. Save 1000 for EF.
2. Payoff all consumer debt. (In your case, the car)
3. Build EF to 3 to 6 months.
4. Invest 15% of income into Roth's etc.
5. invest in 529's for college.
6. Pay extra on mortgage.

In your plan you should have a fund for cars and other consumer debt so that you do not borrow to buy them. Hope this helps.