Financial Advice

[gallan]

About two weeks ago I posted my budget here to get some help and got some great opinions from everyone! I took a lot of the advice and reworked my budget. I realized that I really needed to get rid of my car payment (or at least pay down my car enough to break even and buy something cheap). To that end, I cut out all non-essentials. I cancelled my cable and reduced my cell phone package as far as I could. I had my power company come do a free energy use audit that should help me cut my power bill in half. I've been riding my bike to work every day to save on gas, and I cut $100 off of my grocery budget by shopping around and making lists of healthy foods that I can get for cheap. The biggest gain came from changing my tax withholdings. Total savings for the last half of this month is $185. Total anticipated savings for next month is...$645! Whether I can stick to the budget remains to be seen, but it feels good to have identified so much wasted money.

So my next question is, what do I do now? Let's assume I can save $600 each month. I'll get a $100 raise in August (after taxes) and I've got a student loan payment of $200 that starts in December. My car loan has a very low 1.0% interest rate. Do I make double or triple payments to that loan to pay it down quickly? Should I just keep it in the bank to build savings?

I work for the government so I've got a pension plan that I can't pay into. However, there's a 457b available that I'm not contributing to. There's no matching at all, but there's also no early withdrawal penalty. So should I contribute to that or get an IRA?

Obviously the final decision for all of this is up to me, and I'm reading a lot about financial health and getting stable. But any advice would be greatly appreciated!

[Hector]

Do you have enough money in emergency savings?
What is interest rate on your student loan going to be?

[gallan]

I have about $1000 in savings. I'm not sure about the interest rate on my student loans, but it's going to be around 5-6%.

[Hector]

If I were you, I would build up my emergency savings for 6-8 months first and would continue paying minimum towards car.

[disneysteve]

Total savings for the last half of this month is $185. Total anticipated savings for next month is...$645! Whether I can stick to the budget remains to be seen, but it feels good to have identified so much wasted money.

That's fantastic. You really took the bull by the horns and got busy with this. Great job!

Can you stick to the new budget? It will probably be easier than you think once you get used to it and see the benefit of healthier finances. That said, it is possible to cut too much and start feeling deprived. If that happens, spend more. You expect to save $645/month with the cuts. Certainly if you decide to only save $600/month or $550/month and leave a little more fun money, you'd still be in far better shape than you were when you started.

What should you do now? I agree with fully funding an EF with at least 6 months worth of expenses. I would not prepay a 1% car loan, especially with a 5 or 6% student loan in the picture. Once the EF is funded, I'd start sending in extra money to the student loan as long as you are also still saving a minimum of 20% of income - 15% to retirement and 5% to other savings needs.

As for the 457b or Roth, it partly depends on your tax situation. 457b saves you taxes now. Roth saves you taxes in retirement. Roth also gives you nearly unlimited investment options and much greater control. The 457b limits you to the choices the plan offers. Without any more info, I'd probably pick the Roth.

[jpg7n16]

I'd combine the ideas above.

1st Build up 3-6 months expenses as a cash buffer against life. (start with 3)

Then if I remember correctly, you make about $43k and have a kid. Your taxes right now will probably be one of the lowest of your lifetime. ROTH pays tax now and saves from (likely) higher taxes in the future. That makes Steve's idea sound pretty good.

[jIM_Ohio]

Most of finances is a gray area, and there is more than one correct solution.

Spend less than you earn is black and white. You are doing this if you save $600/mo.

Once you get a cash cushion built up, my suggestion would be a broad approach. $600/mo is about 16% of your gross income. You want to approach saving 20% of gross as a decent guideline.

With the savings, you need to fund all of the following

1) retirement
2) mortgage/house savings (not sure if you have a house, but if you were going to save for one, or pay EXTRA on the mortgage, that money is part of savings)
3) debt prepayments (like car or student loans)- this is only the EXTRA payments you make, not the payments you are required to make
4) vacations
5) kids college
6) any other financial goal which costs lots of money

In general, it is best when cash flow is positive to fund "all of the above". than to isolate on one goal. If you isolate on one goal at a time, you will miss funding long term items like retirement and kids college.

My suggestion would be to send 15% of gross pay to retirement. 401k+Roth IRA is a good way to go.
With remaining 5% look to pay down your mortgage. pay down other debts and find ways to improve your life (vacations, house improvements).

I also suggest that before you save for kids college that your retirement and financial picture be in tip top shape- make sure mortgage is close to paid off, make sure retirement is fully funded and on track, then consider using some of savings for kids college.

[maat55]

There are different levels of commitment to a good financial plan. The auto's and house are the most likely drains to building wealth.

First, you have to decide how much of your income you will sacrifice to these elements and how you will fund them.

IMO, the best way to buy a car is with cash, making a lowball offer. This can only occur when you save ahead instead of always playing catch up. This is why you will be advised in many cases to sell an existing car accepting its loss and buy cheaper. This gets you to saving ahead faster.

If you are able to pay the car off in 2 years, I would keep it. Hopefully, you can save the payment funds towards another car in the future.

[DavidKimball]

You are on the right track and from the things you have done already, are committed. However, do not make it over complicated. Do not spend your waking moments going over every penny. Develop your plan and then simply follow it.

As a financial coach, the hardest part of helping people is their obtaining a mindset of no debt and frugal living, however that plays out. Once you have a 3-6 months emergency fund, every penny goes to getting out of debt. Nothing else, no 401K, no new video games, no fancy cell phone.

Be careful though and do budget money for some fun. If not, you will get so frustrated you will just want to quit.

Again, take all the advice and tips you have been given, create a plan, and get some accountability to help you stick to it. There is no reason why you cannot be debt free (and still have a life) within the next 36 months.

David