It's been over a year...update and feedback time

**riverwed070707** · 08-05-2014, 09:09 AM

So let me get this straight... your income has increased, you paid off $10k in student loans but you took on an additional $22,000 in debt, you're still paying for your car that's too big for your income, you're underfunding retirement and now you want feedback on buying a house with too little of a down payment while considering a credit card to pay for new furniture?

Don't mean to point at the giant elephant in the room but it sounds to me like you've gone backwards, not forwards. The key to getting ahead is to continue spending below your means while building wealth, not possessions. Looking side by side with your budget you posted last February, I don't see how you're saving money by buying a condo and it looks like your spending has gone up in nearly every other category. I'd seriously reconsider purchasing until you've got a bit more wiggle room in your budget. Why not wait to buy until all that debt is gone?

**riverwed070707** · 08-05-2014, 09:13 AM

Two other things... when you talk about the tax benefits of a cash income, does that mean you aren't paying income tax? That's not a tax benefit, that's tax evasion and its illegal. Secondly, who on earth would give a mortgage loan to someone with $44,000 in debt on a $57k income?? Are your parents signing the mortgage with you?

**Vpxggmr17** · 08-05-2014, 09:26 AM

Unfortunately, my February expenses are not entirely reflective of my "current" expenses. Situation changed greatly. My rent increased because I no longer have a roommate, which means my rent more than doubled.

Yes the car has always been a problem, but I'm 3 years into it, and it's going to get paid off in full and used until it dies. That to me is a better option than selling it, driving a beater that costs me 6 months of my current payment, and then repairs, etc, that is going to last me half (maybe) the time my current, well maintained, one owner vehicle will.

I had $17k cash/retirement and $31k debt this time last year. Now I have $31k cash and $26k debt. Sorry, I don't count the personal loan as debt. It's money that is part of the makeup of the purchase price of the home. I guess the question really is, is $17k upfront, paid in installments interest free, or $17k three years from now at 1-2% higher mortgage rates and 2 years of additional renting and no tax benefit a better deal.

Lastly, on the retirement front, I don't think you saw that my take home from job #1 is AFTER 401k contributions. I do right between 13-15% of my income on an annual basis to retirement. Also, less than 3 years from now, I will be debt free and will not have spent $65,000 on renting. My expenses will have dropped by over $1,200 a month which, when added to my current savings rate, will put me at 41%.

So yes, is my picture pretty at the moment, not really. But it's a consistent work in progress with short and long term end goals in sight. Idk, I'm not trying come off defensive but it just seems that all of the points I made may have been overlooked. I could stand corrected.

**Vpxggmr17** · 08-05-2014, 09:31 AM

Originally posted by riverwed070707 View Post

Two other things... when you talk about the tax benefits of a cash income, does that mean you aren't paying income tax? That's not a tax benefit, that's tax evasion and its illegal. Secondly, who on earth would give a mortgage loan to someone with $44,000 in debt on a $57k income?? Are your parents signing the mortgage with you?

Okay I really think you should go re-read my original post because you clearly missed a few things.

1st off, interest on a mortgage is tax deductible to a certain percentage equivalent. That equals more money that I get to keep rather than giving to the government. That's a tax benefit to incentivize home ownership in this country.

Second, I don't have $44k in debt, I have $26k between my car and my two 0% interest cards that will never see an interest charge ever. The $17k is not a "debt", it's a gift that I'm paying back.

Third, my FIRST job pays $57k. I have a SECOND job that pays roughly $30k+ a year, mostly cash which again, circling back, is another reason why homeownership tax benefits will be of so much use.

No, I am the sole individual purchasing this property, I have 10 years of credit history, with no late payments, a fair DTI ratio and a credit score close to 800.

**riverwed070707** · 08-05-2014, 10:51 AM

Originally posted by Vpxggmr17 View Post

Okay I really think you should go re-read my original post because you clearly missed a few things.

1st off, interest on a mortgage is tax deductible to a certain percentage equivalent. That equals more money that I get to keep rather than giving to the government. That's a tax benefit to incentivize home ownership in this country.

Second, I don't have $44k in debt, I have $26k between my car and my two 0% interest cards that will never see an interest charge ever. The $17k is not a "debt", it's a gift that I'm paying back.

Third, my FIRST job pays $57k. I have a SECOND job that pays roughly $30k+ a year, mostly cash which again, circling back, is another reason why homeownership tax benefits will be of so much use.

No, I am the sole individual purchasing this property, I have 10 years of credit history, with no late payments, a fair DTI ratio and a credit score close to 800.

Putting aside all the things that are wrong with your last post, I'm stuck on this... you said: "Lastly, since my second income is cash based, the tax benefits alone will keep more money in my pocket for retirement and savings purposes." What does that mean? Because I interpret it to mean you have no intention of paying income taxes on that $30k which means 1) the bank isn't counting it to approve your for your loan so the numbers I stated are correct and 2) you are committing fraud. Also, a gift you are repaying is a debt. If the bank knows you received this either a) dad is paying gift taxes on it or b) it is a loan and it will be reflected in your debt to income ratio. If the bank doesn't know this came from dad, then again, you are committing fraud. Sign #1 you aren't ready to buy=you have to borrow money from your parents for your downpayment. Sorry for not sugar coating but I think you're going to regret this decision.

Maybe i'm misinterpreting what this second income is and how its being accounted for?

**BuckyBadger** · 08-05-2014, 11:12 AM

I agree with Riverwed on pretty much all fronts.

Your "cash-based" second job sounds super shady.

Why is it relevant that it's cash unless it's under the table and you're not paying taxes on it?

Ditto the personal loan. If you didn't claim that it was a loan but you used it to qualify for your mortgage, that's fraud.

**autoxer** · 08-05-2014, 11:14 AM

Originally posted by Vpxggmr17 View Post

1st off, interest on a mortgage is tax deductible to a certain percentage equivalent. That equals more money that I get to keep rather than giving to the government. That's a tax benefit to incentivize home ownership in this country.

Do you know how much your tax benefit actually is? It isn't as simple as multiplying your tax rate by how much interest you pay. If you don't have enough deductions to itemize, then there is no benefit. Run the math on that with your tax return, before you assume you are better off paying interest over tax.

Originally posted by Vpxggmr17 View Post

Second, I don't have $44k in debt, I have $26k between my car and my two 0% interest cards that will never see an interest charge ever. The $17k is not a "debt", it's a gift that I'm paying back.

If you have to pay it back, then it is a debt... maybe a low interest debt, but still a debt.

**JulieAlbright** · 08-05-2014, 11:20 AM

I think it might help everybody if you would try to more clearly separate the issues.

You seem to have a couple of things going on.

1. A second job (paid in cash which doesn't really matter, the IRS taxes everything whether you get it in cash, check, or plug nickels). Being paid in Cash doesn't make your tax deductions better or worse. It might mean that you need to be careful about your quarterly tax payments.

2. Purchasing a Condo partially with a mortgage, partially with a down payment, and then a "gift loan" at 0% from a family member or close friend? The mortgage payment (PITI plus Condo fees) is about equal to what your rent was going to be so you feel it is a better situation for you to be building ownership equity.

3. The mortgage interest from the above mortgage will increase your income tax deductions and save you an amount on federal income taxes. I have to tell you in my experience people get far more excited about this in theory than really matters in the numbers. But mortgage rates are rock bottom and if the Condo is a good buy in an area you are sure you will be located at for years, then yes it probably is a good move.

4. I do get what you mean by the 0% loan for the mortgage payment is a gift, because hey -- free money! right? But if you have to pay it back then it is a loan. And it likely is a loan to somebody you care much more about than say �. Bank of America. So don't minimize the importance of that liability when you are totaling up your balance sheet numbers.

Since you asked for feedback I'll tell you my first thoughts. I ran some quick and dirty numbers with your income and then debt payments and the mortgage percent and then total debt payments (if you include the personal loan payment of $500 a month) run higher than I'd personally be comfortable with carrying. That will of course improve once the credit cards are paid off so first the Student Loans and now the Credit Cards, good job. I'd recommend you forgo the Furniture debt and just find a way to pay cash as you go. I also urge you to remember that what your monthly payment is right now might or might not be what you are paying in 5 years and on. Insurance rates increase, Condo fees increase, taxes increase. Heck. It all just increases. Remember that.

But it leads me to wonder just how secure and reliable the second job is because in my personal experience those type of things seem to be a here today and maybe gone tomorrow proposition. It's nice to have as long as it lasts, but I'd hate to be carrying debt relying on an unstable source of income.

Otherwise, I really hope you have that $12,000 in video game inventory cataloged and insured. I've run into similar situations a couple of times and I can tell you that homeowner's insurance is very reluctant to reimburse that sort of loss unless there is ironclad paperwork and backup.

**Vpxggmr17** · 08-05-2014, 11:41 AM

Originally posted by riverwed070707 View Post

Putting aside all the things that are wrong with your last post, I'm stuck on this... you said: "Lastly, since my second income is cash based, the tax benefits alone will keep more money in my pocket for retirement and savings purposes." What does that mean? Because I interpret it to mean you have no intention of paying income taxes on that $30k which means 1) the bank isn't counting it to approve your for your loan so the numbers I stated are correct and 2) you are committing fraud. Also, a gift you are repaying is a debt. If the bank knows you received this either a) dad is paying gift taxes on it or b) it is a loan and it will be reflected in your debt to income ratio. If the bank doesn't know this came from dad, then again, you are committing fraud. Sign #1 you aren't ready to buy=you have to borrow money from your parents for your downpayment. Sorry for not sugar coating but I think you're going to regret this decision.

Maybe i'm misinterpreting what this second income is and how its being accounted for?

Yes I think you are misinterpreting and misunderstanding tax laws.

This second income is a employer based, in a restaurant. I pay taxes on this income of course. However, the IRS can only collect on what I'm paid at that time, meaning, my lowly $3-4/hour rate. That means, if I work 80 hours on a pay period, then that $240-320 goes entirely to taxes. However, simple math shows that on a $30k+ income, that wouldn't cover all the taxes, so in April, when they're due, I always owe due to the cash accruing owed taxes. Homeownership reduces that tax burden due to standardized deductions. That's not to say I'll still owe, but it will be less. Finally, I'd ALWAYS rather owe come April then get a return since that's just a 0% interest loan you've given the government all year, not extra cash.

So yes, both incomes are on my mortgage because both are from legitimate employers that I pay taxes on.

Second point, gift tax only applies if over the course of your entire life, your annual gift giving averages above $14,000. So as long as in your entire lifetime you "gift" less than $5.2 million, it's not taxable.

**LizfromtheBronx** · 08-05-2014, 11:42 AM

You may find it helpful to start tracking your net worth - won't seem like much at first, while you're paying back the mortgage/down payment debt, along with your car payment - but as you see those balances along with your credit cards go down, and your equity in those assets along with your savings accounts go up, it can only provide more motivation for you!

**Vpxggmr17** · 08-05-2014, 12:20 PM

Originally posted by LizfromtheBronx View Post

You may find it helpful to start tracking your net worth - won't seem like much at first, while you're paying back the mortgage/down payment debt, along with your car payment - but as you see those balances along with your credit cards go down, and your equity in those assets along with your savings accounts go up, it can only provide more motivation for you!

I do in fact track that as well. I used to use Mint but I didn't feel it did a good enough job tracking all of my accounts, so I do everything in Excel, daily on a monthly summary basis for expenses/budget and bi-weekly for net worth. Obviously I'm complicating that with a mortgage, but it will continue to be something I track dearly.

**riverwed070707** · 08-05-2014, 12:53 PM

The explanation of your second job makes much more sense than how it was originally described. With that stated, I would suggest you put a line item in your budget for taxes on your secondary income. Also, I wouldn't count on too much of a tax break from your mortgage. As a previous poster stated, thats something most first time homeowners overestimate.

I could make several suggestions about reducing spending, paying down debt before you buy (your DTI is still way higher than I'd be comfortable carrying), etc but the biggest flag I see at the onset is that housing shouldn't account for more than 25-30% of your total budget. With this proposed budget and including your second income, housing is 47% of your take home -- not even accounting for your homeowners fees (and yes your "gifted" loan counts in this expense category)! Coupling that with your over sized car payment, I think you're setting yourself up for a hard time.

Also this: "So yes, is my picture pretty at the moment, not really. But it's a consistent work in progress with short and long term end goals in sight. Idk, I'm not trying come off defensive but it just seems that all of the points I made may have been overlooked. I could stand corrected."

Your points are simply justifications for why overspending is ok. Just as you noted in your original post, things come up. You wrote the numbers yourself -- you were excited to retire $10k in student loan debt but at the same time, you had $31k in debt last year and you have $26k now ...you've only actually paid off $5k and yet you're telling yourself you're paying off $1k+/month. You have built savings and thats great but you're still carrying a big burden. You're still justifying spending more than you can afford on a house with the idea that it will "save" you rent and taxes, and yet you want to open a card to furnish it. I think you need to ditch the idea that buying things will save you money and move forward with a plan that makes real progress toward your financial goals -- if that's owning a house, that's great but you should still follow the guidelines for getting there such as having a 20% down payment (that isn't financed), having 6 months of income in reserves, not over buying for your income, etc.

**Eagle** · 08-05-2014, 01:29 PM

Originally posted by Vpxggmr17 View Post

So I checked to see the last time I contributed and posted my financial picture here and it's been nearly a year. My most important last post was August 2013 having successfully paid off my student loans. Having read through that and my other posts, I felt I was due to put it all down on paper again and seek some continued feedback.

I am expected to be closing on a condo by the end of the month. My motivations, while accelerated, were due mainly to rapidly increasing rent (and property) prices in my area (potentially highest cost of living area in the country) and the fact that I could own for just below my current monthly housing expenses while also reducing my fuel cost. Lastly, since my second income is cash based, the tax benefits alone will keep more money in my pocket for retirement and savings purposes.

...

Obviously right at the cusp of capabilities, however, both credit cards will be off the books in 9 months or less. Then the car/personal loan are the next targets.

Curious to hear your thoughts. When compared year over year, I've made enormous progress from 2012 to 2013, and from 2013 until today.

@ Vpxggmr17

First, good job in getting your finances in order and thinking through these issues.

Second the most obvious observation to me is that you are bringing home $3420 and plan on budgeting for $5317. Not sure how that works out?

Third, how much are you spending in rent/utilities now before buying the condo? Is now a good time to buy other than the tax advantages and the low interest rates? Can you truly afford this condo? Why not get another roomate and stick it out for another couple of years?

Fourth… $670 on your car payment? Wow. That’s a house payment. Are you paying the car off early?

Fifth… When looking at your net worth your personal loan does factor in. From the numbers & data provided you have $25992k in cash, $26150 in investments/land, and $44,100.00 in debt.

cash + investment/land – debt = $8042 <--- your net worth

**Eagle** · 08-05-2014, 01:33 PM

Btw, not to put too fine a point on it but that 12k video game collection is probably not a big attraction to a potential life partner. Particularly I�d say a majority of women anyway. Bit of a red flag.

And it�s not a side business. It�s a hobby and hobbies don�t typically make money.

It's been over a year...update and feedback time