Maybe a much cheaper house is a better idea...

[ScrimpAndSave]

Jim,

You certainly gave me a lot to think about. Thank you. The reason why I am focused on just a few parts of my future is because I am really not sure of HOW to see the whole picture yet...when it comes down to it, I am a newbie in the area. I just know enough to squirrel as much as I can away and to stay out of debt.

As far are retirement goes, I have about $4,000 in a annuity that I had with a previous job...I am not contributing to it. I have around $400 in a ROTH IRA, but I am not contributing to that either. My pension takes 7.5% of my salary each year (this is year 4), but I am not sure what the total is in there.

I figured that after I buy the house, my fiance and I can max out our ROTHs and he can max out his 401k as well (he doesn't start this job till Nov. 2009).

You mentioned a budget...well, my budget is only my pay at the moment since my fiance is living (frugally) off of student loans and doesn't have an income.

My monthly take home after taxes, union dues, insurance and pension contributions is about 2600.

Take home pay: $2600
ING Savings : $2000 (this goes towards the home downpayment)
Rent : $ 400 (this includes my cell and car insurance - thanks Daddy)
The rest goes to groceries and other miscellaneous things. It's a tight budget...but it isn't forever...



...oh...and for reference...we absolutely, 100%, do not want kids.

That's all.

[disneysteve]

I have around $400 in a ROTH IRA, but I am not contributing to that either. My pension takes 7.5% of my salary each year

ING Savings : $2000 (this goes towards the home downpayment)

I'm not sure if this came up before in a previous thread. I think you should reconsider your single-track focus on a home downpayment. One thing that you can never get back is time. By not contributing to your Roth, especially now when you are younger and the market is at a low point, you are sacrificing a big chunk of your financial future. While it is great that 7.5% of your pay is going into your pension, that isn't a high enough savings rate for retirement. It would take $416.67/mo. to max your Roth. If you don't want to do that much, even a couple hundred per month would make a big difference in the long run.

I think Jim raised a good point about not seeing the forest for the trees. By only looking at the "house" tree, you may be missing the "long-term financial security" forest.

[ScrimpAndSave]

::sigh:: I guess you are right. I mean, I could absolutely start contributing $416.67 a month beginning in January and max out my roth...I guess I just hate to see so much of that come out of my house fund. I will be 28 at the end of this month...I'm not a spring chick, but I know that time is still on my side.

That is be being selfish though...I would ideally like to save up $80,000 to buy my dad's house. That would be $60,000 down (20%), leaving a $15,000 emergency fund and $5,000 to repaint and change some fixtures (we probably would not use all of this budgeted money immediately...it would become a repair/renovation account).

[ScrimpAndSave]

Also, can I save the $5,000 on my own and contribute it once a year? Or is it better to contribute the $416.67 monthly?

Thank you.

[disneysteve]

While I don't advise doing so, keep in mind that Roth contributions can be withdrawn at any time for any reason. If some dire emergency arose, you could always pull some money out of the Roth.

[disneysteve]

Also, can I save the $5,000 on my own and contribute it once a year? Or is it better to contribute the $416.67 monthly?

You could save it on your own and do a lump sum investment but it is better not to.

1. Money IN your Roth grows tax-free. Money WAITING to go into your Roth is generating taxable growth. So if you park that money in ING all year, you have to pay tax on the interest earned. If, instead, you put the money into the Roth, even in a money market fund, there would be no tax.

2. Dollar-cost-averaging: By feeding the money into the Roth gradually over time, you take advantage of price fluctuations in the investments, buying more shares when prices are lower and fewer shares when prices are higher, generally resulting in a lower average cost basis over time. If you do 5K as a lump sum, you risk buying at a high and raising your cost basis.

[LivingAlmostLarge]

Technically the best is depositing $5k on 1/2/09 if you qulify for a Roth IRA. That gives it 12 months to grow over someone who is saving monthly. And it dollar costs averages annually.

SS you should definitely be saving for retirement. I wish I had saved more when I was younger. I only did a Roth IRA which is all I qualified for. And my DH being on a visa didn't have any opportunities so we bought a house instead.

But if given an opportunity I can't say we would have bought otherwise.

[Joan.of.the.Arch]

I've no comment on the house....

Perhaps this is not true in your school district, but in general, many (most?) people who start off teaching change careers. What happens to that 7.5% if you do not retire from teaching? Will you get it all back, lump sum, in exactly the dollar numbers you contributed with no appreciation, no adjustment for inflation? Do you only get it all back if you have contributed for a certain number of years? Do you absolutely trust the financial stability of the state and of the pension management company? Who guarantees the pension fund?--AIG whom the whole country has had to bail out? What if, statewide, schools have to tighten belts and let go of teachers of the arts before you reach pension age?...I recommend not putting all your retirement eggs in one basket.

[ScrimpAndSave]

I don't plan on teaching forever...especially since I have my Masters in Educational Administration and Principal's Certificate. I am currently looking at teaching for another 1.5 - 2 years and then switching to an assistant principal job...but if I cannot find one, I will stay in my district.

I definitely, absolutely, do not plan on putting all of my retirement eggs in one basket. After reading Suze Orman's "Young, Fabulous and Broke", she mentioned to hold off on ROTH and 401K contributions while saving up for a house...so I figured that my first animal to deal with will be the house downpayment fund...and then I can contribute the maximum after we figure out our budget that includes our mortgage and other housing costs. This would mean that I miss out on two years of maxiumum ROTH contributions (we are planning on buying two years from now...$10,000 saved...$70,000 more to go).

But, I could start contributing in 2009...it's not like it would take away that much from my current savings plan...it would just mean that we save for a few months more. I like the idea of putting 20% down and having a good cushion of an emergency fund.

[amarowsky]

Right now you do have the benefit of young age. I think I'd would have to support Jim's decision about lesser down payment in response to starting an additional retirement plan.

I'm fortunate enough to be 21 and probably have my career I will be working for most if not all of my life, and I also get a really good pension from the Rail Road.

I also am trying to save up for a home now, but I am currently putting 10% of my gross away from each check (despite how bad the economy is and I could probably use the money) especially because of the Rare market price that we are experiencing. With the market hovering around 8k and being nearly 5k more than that (dow) a year ago, this could be one of the few great opportunities you have to jump into the market low, and catapult your savings for the future.

If you are sucessfully saving so much money, I would not suggest always relying on a ING account just to save the cash, Consider some treasury bonds like a I-bond or possibly even a certificate to make like double what ING savings give (2.75% i believe because I use ING as well).

Also if you are considering making some more risky returns(that your willing to wait a 1-3 yrs for), you could possibly research some stocks and take advantage of the high dividends they are all offering right now, GE is offering 8% div. on common stock, I believe their preferred stock is offering and even better rate. Holding onto that for a few years would be more efficient than just in a savings, Not to mention GE is at an amazing price right now.

GE as a stock is just an example though, you could go through many different well established large dividend paying companies intc, dte, nsc, bn, anything really.

[amarowsky]

One benefit I have though is I live in Metro-detroit. Homes here are easily available for 50-80k for a 1300sq. ft. 3be/1ba home.

A friend of mine just bought a home for $61,000.00 His payments are actually lower than his apartment payments(including mortgage, taxes, and escrow). And I believe he pay little or no money down. 3 of my friends just recently bought homes ranging from 120-130k and none of them payed any money down.

If there is one good thing about Michigan right now, It is if you are lucky enough to be one the few employed 1st time buyers, your really in a good situation to buy a home at an insignificant fraction of what the price once was.

[ScrimpAndSave]

Wow I wish I could get a house that cheap...the cheapest ones around here are:

MLS Client Detail Report(294)


And they are DEFINITELY starter homes.

[GrimJack]

I once saw a tree and then another tree and then another
but I never saw the forest.

You are seeing the trees (the debt, the house, the income) but do not see the forest which is a sound financial plan.

Your father is right- waiting is not going to kill you.
Of course we have been through this many times- why put 20% down? You will find you may want the tax deduction earlier with such a high income.
Moving has around a 6-10% cost associated with it.
{snip}
The medium ground is we save 20% for retirement, another 5% for short term savings (vacations) which will also pay down the mortgage 9 years early. Kids will go to private school through elementary school, then we decide for HS what is best (financially and for kids needs at that time).

Good advice jIM - my only question here is how to account for the mortgage insurance (PMI?) required for downpayments less than 20% - how does that affect the overall cost/benefit analysis?

[ScrimpAndSave]

Grimjack..PMI is the reason why I figured I would just buckle down and save 20%. I know it can be several thousand dollars a year...

[jIM_Ohio]

I don't plan on teaching forever...especially since I have my Masters in Educational Administration and Principal's Certificate. I am currently looking at teaching for another 1.5 - 2 years and then switching to an assistant principal job...but if I cannot find one, I will stay in my district.

I definitely, absolutely, do not plan on putting all of my retirement eggs in one basket. After reading Suze Orman's "Young, Fabulous and Broke", she mentioned to hold off on ROTH and 401K contributions while saving up for a house...so I figured that my first animal to deal with will be the house downpayment fund...and then I can contribute the maximum after we figure out our budget that includes our mortgage and other housing costs. This would mean that I miss out on two years of maxiumum ROTH contributions (we are planning on buying two years from now...$10,000 saved...$70,000 more to go).

But, I could start contributing in 2009...it's not like it would take away that much from my current savings plan...it would just mean that we save for a few months more. I like the idea of putting 20% down and having a good cushion of an emergency fund.

Terrible advice.

It is a good idea in some cases, but should not be considered the foundation for any plan you put in place.

If you focus on the 20% being set aside (which is the foundation for the plan I suggest), then marking the 20% for various purposes.

15% of gross into a retirement plan. Pension covers 7%, you need to be setting aside 8% of gross into a retirement plan. 5k for a Roth is 8% of an annual income of $62,500. Meaning if you do the pension and the Roth, and make less than 62.5k, you are meeting the retirement requirement.

Set aside another 5% of gross into short term savings or another short term goal (like paying down the debt).

I realize you have MORE than the 20% I am suggesting. In this case you want a broad approach (deal with every financial goal you have- do not miss a single tree).

For example-
assign 15% to retirement (Roth+Pension).

CHECK
assign 5% to student loan repayment (the more you wait, the more it costs you). The math you want to do is know the percent of gross income the student loan payment will be (initial guess is 15% of the 110k you mention). If you put 5% on the loans now (as an early payment), does this reduce the loan payment to around 5-10% of gross once loans are required to be repaid? Because loans are not consolidated you could even apply the payment to one loan and wipe it out, then work on next... someone somewhere is paying interest on the loan now- so the sooner you stop this, the more under control your finances will be once married and paying all the loans back.

assign 5% to house payment fund (increase this to 10%... at this time my advice would be house fund=student loan pay down- you want a broad plan, not to tackle only one tree)

CHECK (I think)
assign 5% to a honeymoon fund

assign 5% to a new car fund

you get the idea- if you have a goal, fund it with a percentage of gross pay- might be 1%, might be 50%. Do not have any goal at 0% funding- fund everything when savings rate is high. No reason to sacrafice one goal for another right now.

One other reason for the Roth NOW is that it is very possible once you marry and husband passes the bar, you will not be able to contribute (too much income). I would budget a nice round $500/month for the Roth, then not contribute in Nov and Dec. When max increases to $5500 you already have the budget for the higher contribution limit. Wife and I both send in $500/month, then the extra $2000 funds xmas each year.

When you combine incomes, you need to keep the percentages you establish now fixed. The honeymoon fund might become the annual vacation fund (for example). New car fund might get percentage reduced because 5% now gets a new car in 2 years (which lasts 10 years), so 1% after that has enough in 10 years for the new car...

What ends up happening if you state all goals (new car, honeymoon, new house) and fund them all- you begin to realize you can borrow from one fund to pay for the other when the expense comes up.

For example if you fund vacations with 5%, new house with 20% and new car with 5%. The year you need the new car you have 30% of gross saved by end of year- you then get the car, no financing, then move on. The following year that 5% new car contribution is still in budget, but funds the house purchase. Once you get the house, the 20% house contribution gets absorbed into new house payment, but the 5% vacation contribution and the 5% new car contribution still exist. Reality is you could spend most of the 10% on a vacation each year, and the year you need a new car, you cut back on the vacations and use the vacation fund to purchase the car.

You may have different needs than I listed (new car, vacations) -I used my list from my budget and added the honeymoon fund and student loan payment fund for you based on what little I know about your specific situation.

In general you want to stop deferring debt payments (student loans) and be setting aside money for the payoff of these now (or paying them off now).

In addition, know you have "liquidity risk" with anything you do. If you actually have savings, and then SPEND it, you lose the liquidity of that money. It's tough to know your risk tolerance based on posting here... but for example if you have 80k in cash, with 120k in SL debts, but then use the 80k for a house, you lose the liquidity and freedom that 80k in the bank gives you.

I mention the liquidity risk because it appears you are conservative financially. Would you rather have the money in the bank NOW or see your debt balance DROP?

One comment I read on liquidity/debt is that it is best to be 100% leveraged or 100% paid off. Anything in between has liquidity risk. You can't go from 100% leveraged to 0% leveraged in a week or month (and probably not in a year), so you need to find the balance of how much leverage is OK.

Student loans, a mortgage and car payments would all fit into the category. This might be a detail you talk to fiance about and come up with a savings plan for house and a debt repayment plan for the student loans.