Expenses have increased, can't do everything anymore

**disneysteve** · 12-26-2007, 02:28 PM

Welcome to the site. I think you'll find lots of good advice and support here.

You aren't charging your girlfriend rent. I can understand that to a point. Is she working currently? If so, how, if at all, is she contributing to the expenses of running the household? Not charging rent isn't such a big deal if she buys the groceries or pays some utilties or something else. If, however, she is living with you totally free, I would suggest rethinking that arrangement. Just my opinion but I see no reason why she should get a free ride.

Normally, I don't support prepaying the mortgage. One exception, though, is when PMI is involved. As you point out, getting your equity up to where you can drop PMI would save you $90/month. That's worth doing.

However, either first or simultaneously, you've got to build up that emergency fund. I'd say at least 3 months' expenses and preferrably closer to 6.

**boog** · 12-26-2007, 03:29 PM

Yeah, you need to put the emergency fund on the front burner.

2nd, drop that PMI. Go to your insurance agent and get a life insurance policy for at least the amount of the mortgage. Depending on your health, you ought to be able to get coverage for less than half what the bank charges. Talk to the bank first and make sure they will drop the PMI if you will get coverage on your own.

3rd. Make sure you have adequate insurance on the townhome and you new contents.

4th. I like the roth IRA's and 401k's for younger folks.

5th. I'd make sure your girlfriend is helping out with expenses.

6th. Any extra money left over can be put into investments or savings.

**buzz** · 12-26-2007, 03:49 PM

You have plenty of time to save for retirement. My first priority would definitely be building the emergency fund.

The 401k is your best investment, so obviously you want to make a substantial contribution to it. The rub is that the money becomes rather inaccessible, so you want to have other investments. I would leave it at 6% until you have a comfortable amount of liquidity.

You have until 4/15/08 to max your '07 Roth, so build up a money market or similar. When April rolls around, you can transfer $5k to the Roth. One of the nice things about a Roth is that you can withdraw contributions without penalty, so it can function as a sort of emergency fund booster.

You don't say how much is required to reach the PMI cutoff point, I can't figure a timetable. My first hunch is that the company match and tax deferral of the 401k would provide a better return than prepaying your mortgage to avoid PMI. ($5k company match vs. $1080 insurance savings?)

So, in short:
1. Boost the EF
2. Feed the 401k
3. Once you have adequate liquidity, increase the 401k and decide whether to put the excess toward the Roth or the mortgage.

Make sense?

**sounderella** · 12-26-2007, 07:12 PM

Welcome! I understand how it is not to have any money. I would def build up your emergency fund (that's what I'm learning to do now)....because things can always be worse.

Also, I would probably ask your gf to contribute to bills depending on her income. Maybe she could do the shopping or pay some type of bill (i.e. power, water) or maybe even give you some to help you out with the house payment. Then you would have that extra to build your emergency fund.

**filifefc** · 12-27-2007, 06:36 AM

Originally posted by illinigamer View Post

I just found this site today and am very impressed with a lot of the posters so I thought I would ask for some advice.

I have been out of college for 3 years. I spent the first year paying down cc debt I built up while in school and had what I considered a very good saving regiment the next two, which included maxing my 401k, roth IRA and still having ~1500 a month which I was saving towards a down payment.

A couple months ago I purchased a townhouse; between the 10% downpayment and furnishing it (previously I had a roommate who owned most the furniture), I have gone through all but about 4000 of my savings. In addition, I do not have a roommate (except my girlfriend, who I do not charge rent) and have gone from 600/month rent to 1800 in mortgage/taxes/association fees. Finally, my company has started offering a Roth 401k option which I would like to take advantage of because I am still in the 25% tax bracket.

Currently, I have reduced my 401k contributions to 6% (minimum to get a full company match). This puts me in a similar situation as before with $1500 take home after expenses each month (but contributing significantly less to retirement accounts). 5000 of this is earmarked for Roth IRA. I was wondering what the best option for the rest is?

1. Roth 401k: I can contribute ~10k more to this per year to get the max
2. Paying down principle on mortgage: I currently pay 90/month PMI
3. Building up a larger emergency fund: Currently have < 2 months, however my job has good security
4. Other?

Thanks in advance.

I have going through a similar situation right now, but I do find it impressive that you can save $1500 a month

**illinigamer** · 12-27-2007, 06:37 AM

Thanks for all the responses.

It sounds like the consensus is to build up the emergency fund ASAP. Along those lines, what are your opinions regarding using a Roth IRA as an emergency fund? I have 12k in contributions over the past 3 years which I obviously would not want to remove, but could be used in a worst case scenario.

The main reason I am not charging my girlfriend rent is that she just started her career 3 months ago and only makes about 1/3 of what I do. She helps pay for food and gas, however.

Buzz, I currently need to pay about 20k down on my mortgage to remove PMI, so this would take about 2 years if I put all the extra 10k towards it. I have no intention of reducing my 401k beyond the full company match. Also, to clarify, I made my 2007 contribution already, the 5k is for 2008. Why do you recommend waiting until April to make the contibution? Wouldn't it be better to invest it sooner to get the higher returns the market has to offer?

Boog, I do not understand what you are saying with 2. If I have a life insurance policy greater than the size of the mortgage, it is possible I can avoid PMI?

**sounderella** · 12-27-2007, 07:21 AM

I've been reading Dave Ramsey's book The Total Money Makeover. In my opinion it's actually pretty good. Anyways, his stand point on the emergency fund is to have it totally accessible in the event of an emergency where there's no fees. I think if you try to withdraw from the IRA you're gonna get the fees.

**disneysteve** · 12-27-2007, 07:37 AM

Originally posted by illinigamer View Post

what are your opinions regarding using a Roth IRA as an emergency fund?

I am 100% opposed to that. Retirement accounts should be reserved for retirement unless something catastrophic happens. You shouldn't borrow from your tomorrow to pay for your today. You can't ever replace the money that you take out from your Roth.

Originally posted by sounderella View Post

I think if you try to withdraw from the IRA you're gonna get the fees.

You can withdraw contributions to your Roth at any time for any reason without fees regardless of your age.

**lgslgs** · 12-27-2007, 07:44 AM

Originally posted by illinigamer View Post

Thanks for all the responses.

It sounds like the consensus is to build up the emergency fund ASAP. Along those lines, what are your opinions regarding using a Roth IRA as an emergency fund? I have 12k in contributions over the past 3 years which I obviously would not want to remove, but could be used in a worst case scenario.

Depends on how well you manage your money.

Roths are very nice because you can get your contribution amount back without penalty. They are also nice in that if you convert money from a regular IRA to a Roth and wait five years, that conversion amount can be withdrawn without penalty.

Of course, once you have your money in a Roth you really hate to take any out - especially if you have it in high return investments.

If you manage your daily money so that your emergency fund is truly for big disasters only, I take the view that letting it work hard in investment vehicles that are a bit less liquid is perfectly OK.

Now if you are one of the folks who has to tap the emergency fund when you need new car tires, a new water heater, a big veterinarian bill and all sorts of stuff like that - then you really don't want to be using your Roth as an emergency fund because you'll end up using it like an ATM and never getting any good out of it.

If your normal budgeting already plans for those tires, or a water heater, or a new roof, or a car accident deductible - then putting your "big whammy" emergency fund money in a Roth is a good idea. You'll probably never need to go get it out, but if you have a true big emergency you can get to it. Then think long and hard about what sort of emergencies might make you want to tap the Roth and have a few strategies ready so that you can avoid it if at all possible. There's not much that's more fun than sitting back and watching your Roth IRA grow and grow - so don't ever make it easy for yourself to tap into it. But yes, in a real pinch it will work nicely as an emergency fund.

Lynda

**Broken Arrow** · 12-27-2007, 08:22 AM

Plus, with retirement funds, it's not like you can put the money back once you withdraw it. In other words, if you withdraw 10k, at best, you can only put back 4k this year (for 2007 Roths). And that's to catch back up rather than to add the existing funds.

Retirement funds make for a terrible emergency fund.

**buzz** · 12-27-2007, 02:12 PM

Originally posted by illinigamer View Post

Buzz, I currently need to pay about 20k down on my mortgage to remove PMI, so this would take about 2 years if I put all the extra 10k towards it. I have no intention of reducing my 401k beyond the full company match. Also, to clarify, I made my 2007 contribution already, the 5k is for 2008. Why do you recommend waiting until April to make the contibution? Wouldn't it be better to invest it sooner to get the higher returns the market has to offer?

The only reason I suggested waiting until April was so you would have cash available. Once you make a Roth contribution, if you need to withdraw some, it's out for good. It depends what you are comfortable with. I keep a pretty substantial EF, probably more than most people here would recommend. But I sleep well.

I don't think the market is headed anywhere special in the near future, but that is merely my opinion.

I don't see your investments, or even your PMI as being much to worry about right now. At your age and with your income, I would recommend setting aside some cash to fall back on. Once that is squared away, you can pretty much put your finances on auto-pilot and concentrate on enjoying yourself.

**rob62521** · 12-31-2007, 10:01 AM

Don't use a Roth for your emergency fund because you will have trouble putting money back if you draw it out, plus the loss and penalities and such. But if possible, I would put a little in a Roth because as young as you are, even a small amount will start building with interest since you have just finished school and have a long way to go before retirement. You sound like a wise person! May you always strive to be financially smart!

**Landwatch** · 01-04-2008, 02:29 AM

My advice to you is that you should never buy real estate if you don't have at least a 10% to 20% to put down. If not then it means you can't afford the home and are buying before you have demonstrated the ability to save, which in all sense is a bad idea in the current market. Also, never ever borrow against your 401k plan because you will pay double taxation on the money you borrow.

Expenses have increased, can't do everything anymore