Open suggestions on financial situation

**disneysteve** · 06-24-2010, 09:20 AM

Originally posted by cypher1 View Post

monthly net income 3400. My only debt (for now) is a mortgage of $218k

I think your biggest problem is that you bought too much house for your income. Your monthly payment is 45% of your income. A net of $3,400/month works out to a gross of around 55K/year. Is that about right. Rule of thumb #1 is to not spend more than 3 times income on a house. That would take you to about 160K. Rule of thumb #2 is for your monthly payment to not exceed 28% of income which would be $900-1,000 for you. You don't fit anywhere close to either of those.

Unless your income rises significantly, you are going to continue to struggle with that much of your income going to housing. It is going to impact your ability to save for retirement and other savings and financial needs.

**cypher1** · 06-24-2010, 11:28 AM

No argument on the 45% of my net income for house payments. My gross income is 65k/year, so 3*65k=195k, which still breaks Rule of Thumb #1. A big relief for me was having 16-20k for EF in case of/or when a job loss occurrs. I realize this is short term thinking, given my lifestyle, I'm comfortable with the expenses and still being able to save a certain %. But at the same time I also realize i'm limiting myself long term, for more options of investing and paying myself first. Anything unexpected, jobloss, major expense on house or auto I still take into consideration, since a surprise is usually right around the corner when you least expect it(knock on wood). Just another reason to keep that additional rent $ as a separate fund.

**jpg7n16** · 06-24-2010, 11:36 AM

My #1 thought is almost word for word what DS said. (with the $400/month in rent, you're still over what you should be, but just not as much) Re-read his last sentence and remember that.

#2 thought is that your priorities are out of whack. How do you have all these extras in life fixed on payment, but then food is "??" ? Food and other necessities should come 1st. Budget for food before other things.

#3, your EF is too large. Max should be 6 months. You should move the extra into either retirement accounts, or into some sort of bond fund to increase current income. I like the retirement account idea much more though. But if you're really concerned with the liquidity of those funds, an intermediate term bond fund would be better for you.

**swanson719** · 06-24-2010, 11:50 AM

I agree with DisneySteve and JPG. You should add full coverage on the car - always worth it. As far as the house goes, if you're not upside down, have you considered selling it? Is there a reason you're putting so much of your income into something that does nothing for you financially?

**maat55** · 06-24-2010, 08:17 PM

Originally posted by cypher1 View Post

No argument on the 45% of my net income for house payments. My gross income is 65k/year, so 3*65k=195k, which still breaks Rule of Thumb #1. A big relief for me was having 16-20k for EF in case of/or when a job loss occurrs. I realize this is short term thinking, given my lifestyle, I'm comfortable with the expenses and still being able to save a certain %. But at the same time I also realize i'm limiting myself long term, for more options of investing and paying myself first. Anything unexpected, jobloss, major expense on house or auto I still take into consideration, since a surprise is usually right around the corner when you least expect it(knock on wood). Just another reason to keep that additional rent $ as a separate fund.

I would not wait until a disaster to rectify the imbalance in your house to income. On the surface your situation seems managable, but it is still extreme and a disaster waiting to happen.

**Cassius King** · 06-25-2010, 06:44 AM

Since you have a significant EF sitting there. I would take the $400 rent that you're receiving from your roommate and apply it to the mortgage. At least until you clear the PMI threshold. That's wasted money.

**cypher1** · 06-25-2010, 02:51 PM

I appreciate all the concern and suggestions for my house, which i fully understand the situation I'm in with that purchase. You can call me stupid, out of wack, or just plain stubborn, but bottom line is I love my home, and selling/moving is not an option to me. I know i'm not the first one on this forum to have bought more than house than needed (i chose need over afford), accrued some excess amount of consumer debt versus my income, or purchased any other type of investment (i'm not referring to a house)that may have taken a loss.

In terms of increasing income, if I really needed to, I could get another roommate (since its a 4bedroom), as friends keep asking to move in. Or I could I go off topic about one my main hobby/side investment but I keep that a seperate budget/fund. Maybe I'll post another topic on it later in the future.

With the suggestions of jpg7n16, cutting EF to 6 months, bonds direction, those ideas i'm more interested in. Let's take a step back and "pretend" my mortgage was $1160, thus hypothetically leaving another 400 available + what i originally stated. I'm open to other options for investing.

**jIM_Ohio** · 06-28-2010, 09:43 AM

Originally posted by cypher1 View Post

I appreciate all the concern and suggestions for my house, which i fully understand the situation I'm in with that purchase. You can call me stupid, out of wack, or just plain stubborn, but bottom line is I love my home, and selling/moving is not an option to me. I know i'm not the first one on this forum to have bought more than house than needed (i chose need over afford), accrued some excess amount of consumer debt versus my income, or purchased any other type of investment (i'm not referring to a house)that may have taken a loss.

In terms of increasing income, if I really needed to, I could get another roommate (since its a 4bedroom), as friends keep asking to move in. Or I could I go off topic about one my main hobby/side investment but I keep that a seperate budget/fund. Maybe I'll post another topic on it later in the future.

With the suggestions of jpg7n16, cutting EF to 6 months, bonds direction, those ideas i'm more interested in. Let's take a step back and "pretend" my mortgage was $1160, thus hypothetically leaving another 400 available + what i originally stated. I'm open to other options for investing.

Its OK to have lots of house if you are young. Roomates create problems while also offering money solutions.

I would do the following

1) keep the current high cash (emergency) position you have. With such a high payment, you need the cushion IMO
2) Focus on getting PMI removed- any new money should be paid on mortgage until you are well over 20% equity. Do you know when $4800/year removed PMI?
3) Keep doing the 401k to capture the minimum match
4) keep hobby expenses low until PMI is removed (do not remove expenses, just minimize them)
5) if you can turn hobby into a home based business, you have some tax writeoffs waiting to happen.

**jpg7n16** · 06-28-2010, 10:44 AM

Originally posted by cypher1 View Post

I appreciate all the concern and suggestions for my house, which i fully understand the situation I'm in with that purchase. You can call me stupid, out of wack, or just plain stubborn, but bottom line is I love my home, and selling/moving is not an option to me. I know i'm not the first one on this forum to have bought more than house than needed (i chose need over afford), accrued some excess amount of consumer debt versus my income, or purchased any other type of investment (i'm not referring to a house)that may have taken a loss.

If you chose to get tons of CC debt, you wouldn't be the 1st, but that has no impact on whether it is a good decision for your situation.

Just because others have bought too much house in the past should have no impact on whether it is right for you to do the same.

but I see a solution for you...

In terms of increasing income, if I really needed to, I could get another roommate (since its a 4bedroom), as friends keep asking to move in. Or I could I go off topic about one my main hobby/side investment but I keep that a seperate budget/fund. Maybe I'll post another topic on it later in the future.

I really like the extra roommate(s) idea. Say you gave a friend or 2 the same deal you have with your current roommate: then your living costs associated with the rent would be subsidized by your roommates, and your housing would fall to well within a healthy range (under 28%).

2 new roommates averaging $400 in rent drops your housing expense to about $360. (slightly over 10% of income)

1 more roommate drops expense to $760 (22% which is under the 28% guideline)

Add roommates who need a place to stay, keep the house you love, and be in a better financial position. Win/win.

With the suggestions of jpg7n16, cutting EF to 6 months, bonds direction, those ideas i'm more interested in. Let's take a step back and "pretend" my mortgage was $1160, thus hypothetically leaving another 400 available + what i originally stated. I'm open to other options for investing.

"Pretending" isn't necessary. If you get $400 in rent directly associated with the house, then it reduces your net cost of ownership from 1560 to 1160. No imagination necessary. But the 1160 is still too high. (1160/3400 = 34.12%)

What I mean by EF is cash. Literal cash in a money market or savings account. You should have 3-6 months in it. It is perfectly acceptable to have over 6 months living expenses in other non-retirement, accessible accounts, but you should max the cash portion at 6 months.

You could find a bond index like: FBIDX Fidelity US Bond Index, mutual funds, quote, price - Morningstar
or: VBIIX Vanguard Interm-Term Bond Index, mutual funds, quote, price - Morningstar

You should be aware that all income from any bond funds will be taxable, since it's not in a retirement account. But it would satisfy your need for relative liquidity, and would somewhat increase income. $10,000 would generate around $400 in income for the year. ($33 a month)

Originally posted by jIM_Ohio View Post

Its OK to have lots of house if you are young.

I would say that while you're young and are building the foundation of your retirement is one of the worst times to have too much house - as it puts too much money towards debt on a home which could have been directed to a retirement account.

Perfect example is this thread. 1 extra roommate would lower the housing to an appropriate level and would free up $4800 this year. That's almost a fully funded Roth right there.

**cypher1** · 06-28-2010, 01:24 PM

Originally posted by jIM_Ohio View Post

4) keep hobby expenses low until PMI is removed (do not remove expenses, just minimize them)
5) if you can turn hobby into a home based business, you have some tax writeoffs waiting to happen.

This is more of an added note on additional income I try to keep outside my reg budget since it fluctuates. I should really save this for a seperate thread, but I might as well bring it up. One of my hobbies is buying cars and fixing/selling (no body work on my end). I don't like car payments (always pay cash), and I get bored with different cars over time. Originally I used to just fix, drive for awhile, eventually sell, hoping to at least break even, in my early 20s. Its more a hobby/interest first, and side business 2nd, and more of an expensive education for myself. I learned quickly to stick with what I know, focusing on Honda/Acura 4cyl fuel efficient vehicles, easier maintenance, reputable name, and parts readily available. I calculate/estimate in my head the time/labor I invest + additional cost. I also target my market of lower income areas/college kids where I originally grew up for buyers. Plus with the market right now, more people are paying more to repair/keep older vehicles running, than buy new.

So I buy a car for 1000-2000 (just an avg), add 200-500 for cost of parts (depending on what needs to be done). Drive it for awhile, until another potential deal comes up, and sell, hoping to earn another 500+1000 on top of what i've put in. Now selling a car can be difficult (God bless Craiglist), location, cost, level of urgency to get rid of. But I've always justified in my head, I'm investing in $2000 for a car for 6-12 months, hoping to make another 1000+ on top of it. If i break even, I break even. Some people (who don't know car industry) think I'm wasting my time, even though I explain its a hobby first, and yes, I can and have lost money, broke even, etc. Its not like i'm rebuilding a motor/tranny, gutting the car, or repainting.

Sorry for all this rambling of what I "invest" in, but it is an interest of mine, but I don't consider it so much of a business in terms of tax savings, and it can be inconsistent. In some ways it could be looked upon as "flipping" a house, but with less overhead. I think in the last 3-4 years, I've only accrued 8k profit over that time frame, but thats pure profit, not including the cost of tools I've bought, insurance on vehicles, title transfer, plus the original capital (2-3k) to start with. Those other costs I just mentioned, were more of add on costs from my reg budget.

**jIM_Ohio** · 06-28-2010, 01:48 PM

Originally posted by jpg7n16 View Post

I would say that while you're young and are building the foundation of your retirement is one of the worst times to have too much house - as it puts too much money towards debt on a home which could have been directed to a retirement account.

Perfect example is this thread. 1 extra roommate would lower the housing to an appropriate level and would free up $4800 this year. That's almost a fully funded Roth right there.

The issue with youth and house is this...

if you get a 218k house at age of 29, its highly probable you will have no mortgage by age 59. That in and of itself is a good move. Second, age 29 is one of lowest salaries any of us earn in our life (my salary at age 29 vs 37 is about a 75% raise). So he gets the house based on his current income, which I do agree is a tough sell on being a good move, however his income will rise, and his mortgage will not. So overall his financial outlook improves and he won't have to move as a 4 BR house should be big enough to keep until he decides to retire.

Selling a house incurs high expense, so suggest removing that from the best options, especially if 5-10 years later OP needs a 3 or 4 BR house again.

I agree the money would grow more being invested, but if you consider the costs to sell, buy, sell then buy again (basically downgrade now, and upgrade in 5-10 years), its a better deal to stay in current house unless the downsize is significant.

**jIM_Ohio** · 06-28-2010, 01:53 PM

Originally posted by cypher1 View Post

This is more of an added note on additional income I try to keep outside my reg budget since it fluctuates. I should really save this for a seperate thread, but I might as well bring it up. One of my hobbies is buying cars and fixing/selling (no body work on my end). I don't like car payments (always pay cash), and I get bored with different cars over time. Originally I used to just fix, drive for awhile, eventually sell, hoping to at least break even, in my early 20s. Its more a hobby/interest first, and side business 2nd, and more of an expensive education for myself. I learned quickly to stick with what I know, focusing on Honda/Acura 4cyl fuel efficient vehicles, easier maintenance, reputable name, and parts readily available. I calculate/estimate in my head the time/labor I invest + additional cost. I also target my market of lower income areas/college kids where I originally grew up for buyers. Plus with the market right now, more people are paying more to repair/keep older vehicles running, than buy new.

So I buy a car for 1000-2000 (just an avg), add 200-500 for cost of parts (depending on what needs to be done). Drive it for awhile, until another potential deal comes up, and sell, hoping to earn another 500+1000 on top of what i've put in. Now selling a car can be difficult (God bless Craiglist), location, cost, level of urgency to get rid of. But I've always justified in my head, I'm investing in $2000 for a car for 6-12 months, hoping to make another 1000+ on top of it. If i break even, I break even. Some people (who don't know car industry) think I'm wasting my time, even though I explain its a hobby first, and yes, I can and have lost money, broke even, etc. Its not like i'm rebuilding a motor/tranny, gutting the car, or repainting.

Sorry for all this rambling of what I "invest" in, but it is an interest of mine, but I don't consider it so much of a business in terms of tax savings, and it can be inconsistent. In some ways it could be looked upon as "flipping" a house, but with less overhead. I think in the last 3-4 years, I've only accrued 8k profit over that time frame, but thats pure profit, not including the cost of tools I've bought, insurance on vehicles, title transfer, plus the original capital (2-3k) to start with. Those other costs I just mentioned, were more of add on costs from my reg budget.

You can probably make lots more money on the tax side of this.

For example, purchase vehicle for a business (business expenses)
purchase parts to repair vehicles (business expenses)
drive milage for business (business expense)
deduct utilities paid (electric, heat, AC, computer usage) used in places of business (this assumes certain portions of house are used 100% for business only)
sell car (business income)

then add it all up. Profit=Income-expenses

Only the profit gets taxed, the biggest issue is you need to make money 5 of 7 years or something like that to make this a business and not a hobby. I am sure the write offs would give you a bigger tax refund which can help pay down the mortgage faster

**cypher1** · 06-28-2010, 02:35 PM

Originally posted by jIM_Ohio View Post

You can probably make lots more money on the tax side of this.

For example, purchase vehicle for a business (business expenses)
purchase parts to repair vehicles (business expenses)
drive milage for business (business expense)
deduct utilities paid (electric, heat, AC, computer usage) used in places of business (this assumes certain portions of house are used 100% for business only)
sell car (business income)

then add it all up. Profit=Income-expenses

Only the profit gets taxed, the biggest issue is you need to make money 5 of 7 years or something like that to make this a business and not a hobby. I am sure the write offs would give you a bigger tax refund which can help pay down the mortgage faster

Those suggestions my friend and I discussed in the past. Part of me would love to do that, possibly devote to full time, but the other part of me prefers to keep at smaller level, less complicated. Dealer license for car auctions aren't cheap last time I checked. I completely agree with the tax benefits/advantages overall, but I can admit it can be challenging at times just to find a deal, and sell a car. I don't really consider myself a salesman, but I've learned its mostly about timing, and of course supply/demand.

Right now I'd be happy just to invest annually $3-5k in 1-2 cars, and come out with 2000+ tax free for profit=income-expenses. Easier said than done though. I try to keep these funds separate since i end up re-investing what i make right back into what I do. Going back to the original post of paying off mortgage for removing PMI, and bond options, I may look at moving more of those profits to further investing to those options. I guess it comes back down to listing what my priorities are

**jIM_Ohio** · 06-28-2010, 02:56 PM

Originally posted by cypher1 View Post

Those suggestions my friend and I discussed in the past. Part of me would love to do that, possibly devote to full time, but the other part of me prefers to keep at smaller level, less complicated. Dealer license for car auctions aren't cheap last time I checked. I completely agree with the tax benefits/advantages overall, but I can admit it can be challenging at times just to find a deal, and sell a car. I don't really consider myself a salesman, but I've learned its mostly about timing, and of course supply/demand.

Right now I'd be happy just to invest annually $3-5k in 1-2 cars, and come out with 2000+ tax free for profit=income-expenses. Easier said than done though. I try to keep these funds separate since i end up re-investing what i make right back into what I do. Going back to the original post of paying off mortgage for removing PMI, and bond options, I may look at moving more of those profits to further investing to those options. I guess it comes back down to listing what my priorities are

selling a vehicle should not need a license (do not sell them on craigs list if you need a license to be a company to do so)- that is all in keeping liabilities low...

You want the writeoffs on the mortgage, mortgage interest, utilities and similar though.

IMO do not own bonds and carry a high mortgage balance. Paying off the mortgage is a better return than the bonds, and a mortgage is a type of bond anyway.

Open suggestions on financial situation