Give it to me straight, folks

[NuggetBrain]

So we're just recently starting to take a hard look at our finances and start getting ourselves in order. My husband and I are both 30 with no kids and none planned, in good health and pretty stable jobs.

Total debts:

$5,700 student loans (2.something percent interest rate, payoff date is 3 years)
$5,700 motorcycle loan (8.something percent interest rate, payoff date is 5 years)

Total income:

$89,000 gross annual
$4,784 take home pay (after taxes, retirement, full medical, vision & dental)
My husband gets an annual bonus of about $5-7 grand after taxes every January; we've already earmarked the one coming up this January to pay off the motorcycle loan completely.

Retirement/savings:

My husband and I both get the equivalent of 12% of our previous year's pay deposited into our 401ks each year by our employers. My husband also contribues 3% with his employer matching 50 cents to each dollar contributed up to 6%. I don't contribue to my 401k and it has no matching. We also right now have little savings (about $170 bucks) as we just cleaned it out to pay off the last of our credit cards. But we have auto-deposit of $250 a paycheck.

Our new budget:

Rent: $1,139
Car/renters insurance: $180
Life insurance ($200k each) - $44
Electric: $90
Student Loan: $130
Motorcycle Loan: $114
Gym: $43
Netflix & Hulu Plus: $24
Internet: $68
Cell Phones: $150
Savings: $1,000
My hair: $50-$100 (depending if I get a relaxer or not)
Gas: $280
Groceries: $300
Dining Out: $250
Pocket Money (personal entertainment i.e. casino, Kindle books, liquor store, etc): $400
REMAINING: $472

So, here's the question - how are we doing? My husband is going to bump his retirement up to 6 percent to take advantage of the full match, and I'm going to start contributing to a Roth IRA (we're planning to take his bonus each January and put it in, and then make up any difference between that and the 5k max over the year). We're planning on getting a 6 month EF (which would be about 17k) and then start dividing our savings into short-term (vacations, new car, etc) and longer term (another Roth IRA for him, maybe some CDs). Other than that, we have an extra $472 every paycheck that we're not sure where to put. I'm leaning towards throwing it into savings until it's built up to a decent EF, while he wants to throw it towards his student loan to get rid of it ASAP.

[riverwed070707]

I'm confused about why, if you have an extra $1500/mo (savings and remaining), you are waiting until he gets a bonus to knock out that motorcycle loan. I'd put $1k in savings and then snowball that motorcycle with everything that's leftover until its paid off. Then use the bonus to fund your EF futher.

My other question is, is this really what you're spending or is this where you'd like to be? I only ask because it seems like you have a pretty well in check budget so I can't help but wonder why you had so much CC debt to begin with. I see areas where you can cut back but if you're really keeping up with this as written then you are already in a good spot to make progress toward your financial goals pretty quickly.

[snafu]

What are your long term goals? Do you see yourselves staying in your current community? Do you plan to buy a condo/house? Do you own car(s) outright? Do you want to travel/cruise/visit exotic places? Any dreams of self employment/entrepreneurial spirit? What positions do you and DH anticipate holding in 5 yrs? 10 yrs?

I'm a risk taker, with stable employment I'd take advantage of the current investment chaos and Dollar Cost Average [DCA} in a Dividend Exchange Traded Fund [ETF] to fund future plans.

[riverwed070707]

Other things you haven't accounted for that might be a good use of your remaining money once the motorcycle is paid off -- gifts, house DP if you plan to buy in the future, vacation/travel. Do you drive? You should start planning to save up to replace a car now even if it may be years before you need to buy.

[NuggetBrain]

Last year was a little tough for us - I got laid off 3 months before our wedding in February, and couldn't find another job until July (and that was only a temp but they hired me on fulltime in October). We also had to move to a new apartment. So there were some credit cards that had built up, and we're just finished off paying for them. But this is definately our current budget starting this month - the only thing that's changed is that we upped our savings from $600 to $1000 a month, and got rid of cable. We are just spenders, so even though we had a lot of money left over each month we'd end up blowing it on random stuff. I want to get out of the habit of that while our financial house is still in relatively good order (my mom is the same way and at 60 years old, she only has about 60k in home equity, 140k in her 401k and no other savings plus 18k in credit card bills. I don't want to be in that position at 60.)

We can definately knock out the motorcycle loan sooner, I'm just uneasy having nothing in savings after going through a period of no work - we've both been working since 15 (12 for me) nonstop and my first time being out of a job for anything more than a few weeks was a shock and very nerve-wrenching for me. I didn't even want to use all our savings to knock out our credit cards but my husband is pretty debt-adverse so to him it was more important to at least be credit card free. I also said in regards to saving that I wanted to split the savings up a little - some of it going to shorter term stuff like a new car, vacations, gifts, etc and the majority of it going into a longer-term savings like a CD or something.

We are planning on buying a home - the sooner the better. So a DP is another thing that we're trying to figure out savings for - once again, my husband is leaning towards only having a 3 month EF so we can start the DP savings sooner, while I'd like a fully funded EF. But at 30 we definately want to get out of our apartment and into a home - we live in a MCOL area so houses here aren't super expensive to own.

[ActYourWage]

In this particular situation and since you have little debt, I'd attack those loans, then trim up the budget and you will be in great shape. It will take some tweaking as you go, like you are doing already.

Focus on getting an EF ($1000 or so), then attack the loan(s). You will have that gone in no time.

Once you are debt free, do the usual things:
3,6,8,12 (whatever number) month EF
aim for 15% retirement
etc...

[ActYourWage]

Originally Posted by NuggetBrain

So a DP is another thing that we're trying to figure out savings for - once again, my husband is leaning towards only having a 3 month EF so we can start the DP savings sooner, while I'd like a fully funded EF.

Security for the woman is important and respecting the man's thoughts are important to him. Find a middle ground you both can agree with.

[danieldroga]

You have to get rid of your loans dear. It would be better if the both of you would seek a legal advice about your plans on your finances. It would be helpful to have someone that can stand on the middle to avoid misunderstanding with your partner.

[Eric80]

I think your doing ok although you could possibly cut your costs on say things like groceries as this can be re-invested into some of your debts. Every dollar counts

[artwest]

If I am reading this correctly, you currently have $170 in savings and are putting another $1,000 per month into savings.

So here is my opinion. Build the savings up to around $1,500. Then take the $1,000 per month you are putting into savings plus the extra $472 you have and apply it to the motorcycle loan. You should have that paid off in about 4 months. Take the $5,000-$7,000 bonus and pay off the student loans.

I would take the $244 per month that you were paying on your loans and put it in a savings account to upgrade your car every 4 years or so.

First I would use the $1,472 to increase your savings (Emergency Fund) to the $17,000 that you want. THEN I would have your husband increase his 401k up to the 6% which is matching. I would invest the rest in Mutual Funds because this will serve a dual role. First it is a good retirement investment but it can also be used as a secondary emergency fund.

Finally the $5,000-$7,000 annual bonus I would invest in the ROTH IRA's.

You are doing pretty good but I suggest get out of debt as soon as possible.

[NuggetBrain]

Awesome, thank you guys for all the tips - you've given us both a lot to think about. I think it would be better for me to scale back on my EF wants until we at least have the motorcycle paid off.

Daniel - I'm confused as to why you think we need to get legal advice?

[bjl584]

Originally Posted by NuggetBrain

Last year was a little tough for us - I got laid off 3 months before our wedding in February, and couldn't find another job until July (and that was only a temp but they hired me on fulltime in October). We also had to move to a new apartment. So there were some credit cards that had built up, and we're just finished off paying for them. But this is definately our current budget starting this month - the only thing that's changed is that we upped our savings from $600 to $1000 a month, and got rid of cable. We are just spenders, so even though we had a lot of money left over each month we'd end up blowing it on random stuff. I want to get out of the habit of that while our financial house is still in relatively good order (my mom is the same way and at 60 years old, she only has about 60k in home equity, 140k in her 401k and no other savings plus 18k in credit card bills. I don't want to be in that position at 60.)

We can definately knock out the motorcycle loan sooner, I'm just uneasy having nothing in savings after going through a period of no work - we've both been working since 15 (12 for me) nonstop and my first time being out of a job for anything more than a few weeks was a shock and very nerve-wrenching for me. I didn't even want to use all our savings to knock out our credit cards but my husband is pretty debt-adverse so to him it was more important to at least be credit card free. I also said in regards to saving that I wanted to split the savings up a little - some of it going to shorter term stuff like a new car, vacations, gifts, etc and the majority of it going into a longer-term savings like a CD or something.

We are planning on buying a home - the sooner the better. So a DP is another thing that we're trying to figure out savings for - once again, my husband is leaning towards only having a 3 month EF so we can start the DP savings sooner, while I'd like a fully funded EF. But at 30 we definately want to get out of our apartment and into a home - we live in a MCOL area so houses here aren't super expensive to own.

I would,

Pay off the motorcycle loan as soon as possible. Don't wait till January.

Start an EF and contribute to it until it represents 3 to 6 months expenses.

Open up a Roth IRA for you and another one for your husband and fully fund both every year. That coupled with a 6% contribution to your husbands 401K will get you around 17% going toward retirement based on 89K gross.

Start saving for your house. Don't buy until you have 20% down.

[snafu]

Money issues have the power to wreck good relationships so it's critical that you and DH get on the same page for how you save and use your net income. Would you each consider writing an outline of preferred financial plan and negotiate priorities and percentages? I'd take that information to a Certified Financial Planner [no cost at TD Waterhouse type place or fee for service Certified Planner recommended by someone whose opinion you trust].

If I read correctly, you and DH each get annual employer funded retirement benefits for 12% of gross income. DH also can get 50% match to 6%. What are your priorities? My suggestions start with paying off motorcycle due to interest rate. Decide what is sufficient for EF, and where you wull stash it? One month expenses in an easy to access saving account, 3 months in money market, further sums in ETF of choice means you can retrieve Money Market/ETF in 3 business days.

I suggest concentrating on saving 20% downpayment because the government has confirmed a 2 year window of low interest. While that's damaging for a saver when inflation is over 4% [have you seen the increase at the gas station, grocery, electric bill], a low interest rate on a mortgage is a huge gift from your fellow taxpayers. Since you are not yet a homeowner you would not understand how amortization tables work. The 1st 5 years of mortgage payments are nearly all devoted to interest, the lower the interest, the more to your advantage. you might start looking on-line at what you get for your money. I believe the rule of thumb is a house price no more than three times your annual household income, like $270,000. You will also need considerable sums for closing costs + all the costs associated with home ownership like municipal taxes, lawn/yard equipment, and the never ending repairs and maintenance

[jpg7n16]

Originally Posted by NuggetBrain

Total debts:

$5,700 student loans (2.something percent interest rate, payoff date is 3 years)
$5,700 motorcycle loan (8.something percent interest rate, payoff date is 5 years)

Total income:

$89,000 gross annual
$4,784 take home pay (after taxes, retirement, full medical, vision & dental)

Our new budget:

Rent: $1,139
Car/renters insurance: $180
Life insurance ($200k each) - $44
Electric: $90
Student Loan: $130
Motorcycle Loan: $114
Gym: $43
Netflix & Hulu Plus: $24
Internet: $68
Cell Phones: $150
Savings: $1,000
My hair: $50-$100 (depending if I get a relaxer or not)
Gas: $280
Groceries: $300
Dining Out: $250
Pocket Money (personal entertainment i.e. casino, Kindle books, liquor store, etc): $400
REMAINING: $472

...Other than that, we have an extra $472 every paycheck that we're not sure where to put. I'm leaning towards throwing it into savings until it's built up to a decent EF, while he wants to throw it towards his student loan to get rid of it ASAP.

I don't think either of you are on the right path, though you're both very close. I say that because an EF is important, but you should remove high interest rate debt first. And it's good to get out of debt, but the cheap SL debt is a low priority.

For starters, no you don't have an extra $472 each month. You have $1,472 extra. And you could have even more if you cut down on those extras.

If you're worried about your finances, you probably shouldn't blow your money on gambling and alcohol (and various other expenses you don't track). If you're okay where you're going financially, and have budgeted the expense, I have no issues with what you do with your own money.

What would I do in your shoes: (in order, step by step)
#1 - up the 401k to the match
#2 - get 1-3k in cash (checking + savings)
#3 - pay the $1472/month towards the motorcycle until gone
#4 - pay the $1472/month towards the EF until you have $15-18k cash (your 17k number is just fine)
#5 - start working towards 15% going to retirement (not including employer portion) through 401k and Roth IRAs

And yes, I would pay the SL's off slowly over time. That interest rate is very low, and payments are not a huge drain on your cashflow. Your cashflow would be better used to up your retirement savings.

Given the timeframe for these steps, you'd likely add the bonus to the EF to help get it funded faster.

[NuggetBrain]

JPG - the pocket money also includes our entertainment money for the month and clothes money. That's why it's such a high number. So going to movies, a concert, Valleyfair, a new shirt or shoes, etc is all taken out of the pocket money.

[riverwed070707]

Originally Posted by NuggetBrain

JPG - the pocket money also includes our entertainment money for the month and clothes money. That's why it's such a high number. So going to movies, a concert, Valleyfair, a new shirt or shoes, etc is all taken out of the pocket money.

I don't think that was in question, and I don't think your amount is unreasonable once all other financial goals are being met but I do think it would be worthwhile to scale back until your debt is paid, your efund is in place and your basic retirement goals are being met, especially when you have a separate $250 to spend on dining out each month. Your budget is not frugal by any means and I think his suggestion to prioritize was a good one.

[snshijuptr]

Since your budget is brand new, I will warn you that you need to have line items for things that come up once a year or every few months. For example car maintenance (tires, oil change), gifts and major holidays, memberships (AAA, professional society, magazines, club dues), family stuff (holidays, reunions, weddings), insurance premiums (sometimes saves you money to pay these up front), new phones, new cars, etc. These things will ruin your month or your budget when they occur if you haven't set aside money. Personally I put away $250 a month just for these Budget Breakers. You will find it much easier to stick to your budget if you take these into account. Go back through credit card and bank statements and make a list of expenses then set aside money month after month for these items.

Otherwise follow everyone's great advice.

[BMEPhDinCO]

Originally Posted by snshijuptr

Since your budget is brand new, I will warn you that you need to have line items for things that come up once a year or every few months. For example car maintenance (tires, oil change), gifts and major holidays, memberships (AAA, professional society, magazines, club dues), family stuff (holidays, reunions, weddings), insurance premiums (sometimes saves you money to pay these up front), new phones, new cars, etc. These things will ruin your month or your budget when they occur if you haven't set aside money. Personally I put away $250 a month just for these Budget Breakers. You will find it much easier to stick to your budget if you take these into account. Go back through credit card and bank statements and make a list of expenses then set aside money month after month for these items.

Otherwise follow everyone's great advice.

THIS!!! I thought we had a perfect budget, but I had forgotten the car, the cat's vet stuff, memberships, holidays, phones, and so forth mentioned above. When added up, it's a lot!! So I second the above, you should add up all those, add 10% for "extra" and then divide by 12 and put that amount into a "Yearly Expenses" fund...super important!

I do think that you should save up the $1,200 or so you have left (After doing the above) for the rest of the year, as that'll give you around $6,000 in your EF and then you can pay the bike loan off AND already have a good EF started for the new year.

Good luck on your venture into good money handling!

[NuggetBrain]

Riverwed - I see, that makes sense. We could trim the fat on dining out and pocket money, but because our debt is fairly low and our jobs are fairly stable (and I think we could knock out the debt and have a halfway decent EF within 6-8 months) I think the psychological effect of it would be kind of hard on my husband and I. I will try it for a month and see how it goes though, you can't knock it until you try it right?

Snsh - Those are things that we have a harder time figuring out how to save for. Luckily we just renewed our phones through our providers "New every two years" program so we're set on that for a while. But the yearly things will have to be budgeted as well.

[Eric80]

Not bad guys - keep going!