Newbie needing help

[DawgLove24]

Hey everyone,

I've been reading through posts for quite a while now and thought it would be time for my first post as well as asking for some help. My wife and I are 24 and we have a 2 year old daughter and a 6 month old son. I currently work 40 hrs/wk while she is a stay at home mom.

Here is our situation and if anyone can help, I'd greatly appreciate it.

I take home $4000/mo

Rent: $0/mo - We live in our father in laws house for free
Utilities: $270/mo
Car #1 - $526.19/mo ($19000 left @ 11.69%)
Car #2 - $359.12/mo ($11000 left @ 15.99%)
Personal Loan - $350/mo ($1500 left @ 8%)
Car Insurance - $160/mo
Food - $400/mo
Gas - $200/mo
Kids - $120/mo (Diapers, clothes, etc)
Spending - $80/mo

Total: $2465/mo
Left over: $1535/mo

Savings: $3000
EF: $200
401k: Maxed out at work
IRA: None


I know the car payments look bad but they came at a moment of weakness. When we found out we were having our 1st child neither of us had a car and we both decided we needed one. We've since learned from our decisions. Our father in law actually likes car #2 a lot and in January he will be taking over the payments so that payment will be erased.

The savings and EF are low but I hadn't really but any effort into it until I came across this site. Since then I've become really serious about all of our money. Since then I've been using the extra money each month to put into savings and pay down the debt.

My wife used to be a preschool teacher and plans to go back working when my son turns 2 and she can take him to work with her. So that will be added monthly income of about $2000/mo in about a year and a half.

The house we are living in is our father in laws. He told us recently that he doesn't want to be making payments on the loan anymore since he doesn't live here. He said that in 3 years he will give us the opportunity to buy the house for $300,000. It's currently appraised at $710,000 and before the housing market took a dump it was appraised at $950,000. There is probably about $30,000 worth of fixing up that would be needed.

So given everything that I've laid out, if you were me, what would you be doing with the extra money? Saving it for the house? EF? Invest? Pay down debt? I appreciate any help.

[gamecock43]

If your wife is a SAHM she needs to get on ebay. Used baby items sell real well....and if you are going to buy a house in 3 years then start saving for a down payment. You will need about $60,000 if you want to put down 20%...and with compoun interest saving 60k is not quite as bad and scary as it sounds.

[maat55]

I would do this:

Build EF to 2k
Payoff personal note
Payoff car#1
Build EF to 6 months expenses
Invest 10% in retirement investments
Rest towards car, house and other funds

[disneysteve]

Actually, I think you are in pretty good shape. You have an extra $1,535/month right now. Use that to pay off the personal note within the next month. That instantly drops your monthly expenses by $350. Then, car payment #2 goes away next month, freeing up an additional $359. So your $1,535 extra than becomes $2,244 extra and your monthly expenses are down to $1,756. A 3-month EF would be $5,268. You've already got $3,200 so in one month, you can have the EF to the 3-month level. After that, I'd continue to feed some toward the EF, some toward car #1 and some toward the house.

[jIM_Ohio]

I take home $4000/mo

Rent: $0/mo - We live in our father in laws house for free
Utilities: $270/mo
Car #1 - $526.19/mo ($19000 left @ 11.69%)
Car #2 - $359.12/mo ($11000 left @ 15.99%)
Personal Loan - $350/mo ($1500 left @ 8%)
Car Insurance - $160/mo
Food - $400/mo
Gas - $200/mo
Kids - $120/mo (Diapers, clothes, etc)
Spending - $80/mo

Total: $2465/mo
Left over: $1535/mo

Savings: $3000
EF: $200
401k: Maxed out at work
IRA: None

I agree with Steve that you are doing well. I think some more details from you would help.

How do kids only cost $120/month?
Diapers for my twins run us $120/month
Formula runs us another $120/month too.
Clothes just blow that away too.

How do you distinguish between "savings" and EF?

Gross pay is ? Guessing 70k if take home is 48k.
How much is a new house where you live? I would suggest to start house shopping now (window shop) with wife so when you have enough to put down on the house, you can move and gain the tax benefits.

I will start with make sure your $15,500 of 401k contributions is more than 15% of your gross income (if gross is less than 77k, you are saving 15% or more). If you are short a few hundred or thousand, I would open an IRA and make sure the whole savings plan has 15% going into retirement accounts. Another reason to use 15% now, is when wife goes back to work, your 15% will be from a higher number (she needs to save 15% of her 30k salary too). If you save less now (say 5 or 10%), and then wife does not save as much (maybe 5 or 10%) you will end up falling short of most retirement goals later in life (requiring you to work longer or significantly cut back expenses in retirement).

I am guessing you are in 15% tax bracket... you may want to consider shifting some of the 401k contributions (5k for you and 5k for wife) into Roth IRAs- once wife goes back to work your tax bracket will be much higher (25% or 28%), so pay low taxes (15%) on retirement funds now makes sense.

When will the cars be paid off? I have about 3 years on each payment plan using simple math.

Here is what I would do- put 15% of gross pay into retirement accounts.
Put 5% of gross pay towards car #1 (assuming gross of 70k, 5% would be $3500 or $300/month). When car is paid off contrinue putting the $300/month into a "new car fund" and pay cash for any car from this point forward. I assume both cars can run 5 years after payoff, so this account should have $18,000 in 5 years. The extra $300/month saves you 12% in interest, you would need to do the math, this probably saves between 10-15 months of payments.

Put the remainder of the $1200/month towards the personal loan and car #2 (if parent is taking over the payments, are you losing the car?). I see no reason to suggest either car costs too much money. You will have this car paid off in about 12 months.

Once the personal loan is paid off, put $350/month into new house fund.
Once car #2 is paid off, put the $360/month payment into a new house fund.
You will also have $1200/month to contribution to new house fund. Total of $1910/month to new house fund, when car #1 is paid off, this goes up to $2400/month.

$1900 starts being set aside for house in Jan of 2010. I am guessing that with car #1 not getting paid off until the end of 2010 at earliest, that the $2400 savings does not start until Jan of 2011 at earliest.

$2400/month will get you the following down payments:
$24,000 in 10 months which is a 120k house (20% down) late 2011 house purchase.
$48,000 in 20 months which is a 240k house (20% down) 2012 house purchase
$72,000 in 30 months which is a $360k house (20% down) 2013 house purchase.

You would still have the 18k being accumulated for the "new car fund" which can double as emergencies.

A 100k mortgage financed at 6% is a 30 year fixed payment of $600/month.
A 200k mortgage financed at 6% is a 30 year fixed payment of $1200/month
A 300k mortgage financed at 6% is a 30 year fixed payment of $1800/month.

All 3 situations are less than the $2400/month you are setting aside into the "house fund"- the extra $600/month ($7200/year) should account for higher utilities, property taxes and decorating the house.