Debt Advice Before Starting a Family

**Jluke** · 04-04-2016, 09:31 AM

Congrats on planning ahead.

No mention of 401k - are both of you contributing and getting at least the employer match?

Why are you not being more aggressive with Roth savings?

Your car payments are eating up a lot of your monthly cash flow. If possible hold those cars for 10 years.

That $1000-1500 extra per month will quickly disappear if you send your child to daycare.

Solidify a budget if you haven't already.

I would try to eliminate the PMI on the mortgage. I'm guessing the rules are different with FHA loan???

Then pay about $1000/month towards your student loans (from savings) until they are paid off in 15 months or so. Or quicker if you're ok doing so with a higher payment. May want to start with eliminating the lowest balance first and then moving on to the others. Just ensure that the total paid across the loans is 1k per month

**Nutria** · 04-04-2016, 10:11 AM

Congrats on buying such a modest house, and being in such excellent financial shape at such young ages.

However... what if she wants to stay home with the children?

I'd look through your past couple of months of spending (account for everything), and see how you could live on one salary alone without eating beans and ramen. I can almost guarantee that there's a lot of fluff in your spending habits. (It would also tell you how large of an Emergency Fund that you need, Just In Case.)

How much do you currently owe on the cars? $53K, or was that the original loan balance? The rates are excellently low, but -- as already mentioned -- the total monthly payment is high.

What are the interest rates on the other student loans?

PMI should automatically stop being charged when your equity gets above 20%. Ask the lender if a simple reappraisal is enough.

**LivingAlmostLarge** · 04-04-2016, 11:28 AM

Do this today $5500 to each of your Roth IRAs for 2015 and 2016. This will take away $22k of your $44k cash cushion. I'd then focus on paying off the student loans monthly. The $22k is your EF.

Something I was wondering, can you afford to survive on $50k with your current bills if your wife isn't working after kids?

**autoxer** · 04-04-2016, 12:04 PM

Originally posted by Future101 View Post

Should we pay off my high interest student loans? Refinance the FHA to get rid of PMI? Keep saving by adding more to the Roth?

These are all good things to do and it looks like you are in a position to do all of them. For the roth, set up automatic contributions that happen on each pay day, so that it doesn't require any additional effort.

**Nutria** · 04-04-2016, 05:41 PM

Originally posted by LivingAlmostLarge View Post

I'd then focus on paying off the student loans monthly.

At only $230/mo, I'd put it behind the 4x bigger cash flow burner.

**Future101** · 04-05-2016, 01:55 AM

Not much time, but just a quick follow up on the student loans:

Direct Subsidized Stafford $4,177.25 5.350%
Direct Unsubsidized Stafford $1,759.07 6.550%
Direct Subsidized Stafford $4,177.12 4.250%
Direct Subsidized Stafford $4,177.01 3.150%
Direct Unsubsidized Stafford $1,169.75 6.550%

**autoxer** · 04-05-2016, 04:19 AM

Have you considered just paying off all of the student loans immediately from savings? You could try to refinance them and get lower rates, but you have the cash and it would be so much simpler to just get it over with.

**Jluke** · 04-05-2016, 05:17 AM

Originally posted by Future101 View Post

Not much time, but just a quick follow up on the student loans:

Direct Subsidized Stafford $4,177.25 5.350%
Direct Unsubsidized Stafford $1,759.07 6.550%
Direct Subsidized Stafford $4,177.12 4.250%
Direct Subsidized Stafford $4,177.01 3.150%
Direct Unsubsidized Stafford $1,169.75 6.550%

With 44k in the bank, why haven't you paid off the 2 in bold already? that's pocket change.

You may want to get aggressive with your car payments and pay one off sooner - that is your biggest challenge.

**snafu** · 04-05-2016, 10:09 AM

Welcome to SA. We do your best to be helpful but we all come from different backgrounds and experiences so there is a variety of suggestions.

Curiosity leads me to ask what percentage of gross goes to each of your employer's pension program?

If DW plans to return to the workforce after leave, I suggest working out the net while she is on parental/maternity leave benefits and use those figures to re-work the budget/spending April - August.

Before making choices, you need to know the figure needed, terms and conditions to remove that punishing PMI. Since there are discounts, I suggest you check with your insurance agent to determine the annual fee payout combining auto policies and house policies. If you don't use one, check rates for the same coverage with an insurance broker who sends your requirement to 'bid' for the best rates for comparison. It all has to do with how much you pay in commissions.

**tripods68** · 04-05-2016, 11:17 AM

Originally posted by Future101 View Post

Not much time, but just a quick follow up on the student loans:

Direct Subsidized Stafford $4,177.25 5.350%
Direct Unsubsidized Stafford $1,759.07 6.550%
Direct Subsidized Stafford $4,177.12 4.250%
Direct Subsidized Stafford $4,177.01 3.150%
Direct Unsubsidized Stafford $1,169.75 6.550%

I would cash to pay off these loans. That gives you $29K in cash remaining.

I'd tackle your car loans worth $53K depreciating assets which is over 50% of your annual income.

**disneysteve** · 04-05-2016, 11:32 AM

Originally posted by Future101 View Post

We have 2 new cars and we will keep them for at least 7 years.

Everyone else is giving good advice so let me just comment on that. Forget about 7 years. Unless you drive an unusually high amount, keep them way longer than that.

My current car is a 2006. I bought it in 2012. So it's already 10 years old and I expect to have it for at least 5 more years. I bought my last car when it was a year old and kept it for 14 years.

If you bought your cars new, they should last way, way longer than 7 years. You need to drive them til they die.

**LivingAlmostLarge** · 04-05-2016, 12:20 PM

Definitely pay off the student loans now with the cash sitting in the bank. Then work out a real budget because you have to determine what you are spending before the baby comes. If you are going to one income or not.

**Future101** · 04-05-2016, 05:53 PM

Thanks for all of the advice!

I'll have to get clarification on the IRA. I think I have one, but I definitely do also have a 401k. I'm contributing currently 1% but will increase this to at least 2.5% (for both of us) as my employer matches that. While she was not earning as much or not working I wasn't putting anything into these accounts. By this year we intended to move out of state and expected housing to cost more, or to buy a more expensive house. We changed our mind on this, at least for a few years. This is why we currently have such a large savings.

Our water pipes also froze a couple years ago and we wanted to hold onto cash in case something ended up not covered. It all worked out though!

We were saving up for a couple expensive vacations (everything is already paid for). One last year, and one big one this year for our 5 year wedding anniversary. We travel a lot because it is important to us to do while we can really enjoy it.

Now, the two bold student loans referred to earlier are loans that I want to pay off first for sure. Personally this is what my plan has been to do soon, but I didn't know if it was a good choice or not. I'm glad to hear that it seem to be! I'm just not sure if I'd rather have the cash on hand in the next coming years or have a lower payment...

As for PMI on my house - I looked into it. I'm out of luck on that until I've made 60 payments, then I can remove it, if I'm down to 78% - appraisal doesn't affect it. However, I can refinance to remove it, but there's the possibility of a higher interest rate or closing costs there.

I for sure want to keep at least one car for a LONG time, like 15+ years, but figured 7 years was a more realistic "at least" number. The other it is possible we could too, unless we expand our family by more than we expect - hopefully only 2, but she wants 3 =)

Now, the plan is that she'll work after pregnancy. If she doesn't work then we'll have to use the savings to pay for some of our monthly expenses because babies cost a lot.

Currently, if she is not working right now (no kids) I think we'd lose between $600 and $700 month-month eating the same as we are. This is estimated on take home pay and not really knowing what taxes would be like. This doesn't count the 2 extra pay weeks in a year, or any of my guaranteed bonuses (usually about 5k-8k a year, if she's working this is multiplied by two because we both get them). I would say that not counting the variable bonus, I would be short $5000/year on just covering all necessities/food/bills/gas etc if I was the only one working my current job.

I'm expecting at least a $1,400 raise this August, and she's expecting about the same in October. I have the possibility of increasing my income by $10k if I'm transferred to the position I want.

**snafu** · 04-05-2016, 07:01 PM

... at the same employer - extremely stable company with pension. s?
what are terms and conditions of pension? Do you mean 401K? You need to know what product they use and the fees being charged.

Babies are not particularly expensive until you need daycare. They don't need all the stuff the baby industry wants to sell. There are lots of ways to cut tons of costs. Babies grow so fast accepting hand-me-downs from family and friends easily garners items used only once!

I sincerely hope you'll carefully check a mortgage amotorization table to understand exactly how much of your monthly payment goes to reduce principal, sums to [front loaded] interest, taxes and insurances. It's likely in your interest to explore financial institutions offering the lowest interest rate and the possibility of negotiating away most of costs and fees all to eliminate the punishing PMI for 5 years!

Debt Advice Before Starting a Family