Critique this novice!

[azc9397]

Hi,

i have been following WCI for 2 years now , on/off. How I wish I knew about this website when I was resident ! But , I guess it's never too late. I need your suggestions and advice please regarding how to increase my net worth as well as investment strategies.

a little bit about our situation

age 39, married with 1 toddler , spouse currently unemployed

salary  170k

investment (wealth front ) 37k

vanguard money market savings 50k

403b,401k  70k

other (checking,savings,) 33k

misc short term funds 5 k

 

our liabilities

student loan 90k( I have been aggressive in reducing it in the last 3 years)

Multiple loans with variable interest rates 3.75 - 4.75% schedule payoff 2032

Monthly rent 1400

car 200/month lease

creditcard average 3500/month paid in full each month

 

questions are

1. Should I just pay the complete student loan off right away , or do it in the next few years

2 should I rather buy a house to build some asset with appreciation, rather than throwing money in rent

I have rented for the last 5 years since we have moved twice.

We are not sure if we are going to stay here for more than 2 years or not , in that case should I consider other investment strategies ?

 

3. I have been maxing out my 401k for the last 2 years, is it a good idea to start a college fund for my daughter ( she is 3 now)

4 is there any strategies for me to reduce my tax burden and invest more into tax deductible options ?

thanks

 

 

 

 

 

[The White Coat Investor]

azc9397 wrote:

Hi,

i have been following WCI for 2 years now , on/off. How I wish I knew about this website when I was resident ! But , I guess it’s never too late. I need your suggestions and advice please regarding how to increase my net worth as well as investment strategies.

a little bit about our situation

age 39, married with 1 toddler , spouse currently unemployed

salary  170k

investment (wealth front ) 37k

vanguard money market savings 50k

403b,401k  70k

other (checking,savings,) 33k

misc short term funds 5 k

 

our liabilities

student loan 90k( I have been aggressive in reducing it in the last 3 years)

Multiple loans with variable interest rates 3.75 – 4.75% schedule payoff 2032

Monthly rent 1400

car 200/month lease

creditcard average 3500/month paid in full each month

 

questions are

1. Should I just pay the complete student loan off right away , or do it in the next few years

2 should I rather buy a house to build some asset with appreciation, rather than throwing money in rent

I have rented for the last 5 years since we have moved twice.

We are not sure if we are going to stay here for more than 2 years or not , in that case should I consider other investment strategies ?

 

3. I have been maxing out my 401k for the last 2 years, is it a good idea to start a college fund for my daughter ( she is 3 now)

4 is there any strategies for me to reduce my tax burden and invest more into tax deductible options ?

thanks

 

 

 

 

 

Click to expand...

1. I don't think you have quite enough to pay them off in one big chunk, but yea, I think being done with student loans by the time you turn 40 would be a great thing to do.

2. When your work and social situation are stable (i.e. it looks like you'll probably be there 5+ years) then buy. But 2 years? No way. I'd keep renting. Chances of you coming out ahead after just 2 years are pretty low, especially when you add in the hassle factor.

3. Yes, it's a good idea. But you probably ought to pay off your education before you pay off hers. As a general rule, your education, then your retirement, then your kids' educations, then your kids' retirements.

4. Not unless your employer offers it (457, defined benefit plan etc) or you get some self-employed income (solo 401(k)). That's fine. You've got plenty to do with your money at this point. If you can't get 20% of gross into your 401(k) + Backdoor Roth IRAs, then you'll have to do some saving in taxable.

 

[Hatton]

Agree with WCI pay off the school loans and keep renting.  Quit leasing cars.

[hightower]

I also agree you should continue to rent for the time being.  Buying a house means your housing costs would likely go up quite a bit.  Right now your rent is the max you will need to spend each month on housing.  If you buy, the mortgage will be the minimum you spend each month.

Get rid of those loans asap.  Continue to contribute to 401k and open a backdoor Roth.

[TheAbacus]

The White Coat Investor wrote:

1. I don’t think you have quite enough to pay them off in one big chunk, but yea, I think being done with student loans by the time you turn 40 would be a great thing to do.

Click to expand...

Actually, he might be able to pull this off! 50K in a money market fund at Vanguard (which earns you minimal interest) and 37K at Wealthfront (which hopefully has done well for you) + 3K from the savings/checking gets you to 90K.

Whatever interest rate you are paying for your student loans becomes your "return".

 

Let me go out on a limb here. I suspect that the reason you have 50K in a money market fund in Vanguard is that you are concerned about a large market correction soon. If that happens, that would impact your 37K in Wealthfront also. Why not cash in on your profits (sell funds in Wealthfront) and use it to pay off your student loans. The savings you have on your interest rate will be 'guaranteed'. Since you have been aggressive paying these off over the last 3 years, imagine the cash flow you would have when you're not making these monthly payments. You will be ready for the market correction with a decent amount of cash within months.

[jfoxcpacfp]

• Hate to see you put all of your liquidity to student loans, but you should be able to reduce by 50% this year and the balance next.


• Does spouse intend to go to work? If so, designate that income to debt payoff, also.


• Do not buy a house until you can settle down for at least 5 years.


• Does your state have tax breaks for 529 contributions? At least contribute enough to take advantage of those as you obviously have the liquidity to do so.


• Focus on growth of wealth before saving taxes. iow, don't buy a house to (get the writeoff) even though you may need to sell it in 3 years at a loss.


• Would like to see you maxing out Roth IRAs before the 529s.


• Do you have adequate umbrella, life, and disability ins?

[The White Coat Investor]

Oh yea, didn't even catch the car lease.

[azc9397]

Thank you for all your advice

-I am gonna work on paying the loan off in the next 3-5 years. No more leasing !

- I will try to see if we can stay in KCMO for the next 5 years, and see if it's worth buying

- is it me or the back door IRA method looks very complicated, I am gonna try to look at vanguard videos again to make sense of it. I wont be in IRS audit with backdoor roth ?

- previously i was in the higher bracket so roth IRAs themselves was not possible

- If I have the option to do both Should I choose Roth IRA or Backdoor Roth ?

@TheAbacus: you are right I am in the process of moving most of my wealthfront fund to more stable ones! and yes "the Donald" has been good for the returns , so far ! but , don't want to get greedy

[jfoxcpacfp]

azc9397 wrote:

– is it me or the back door IRA method looks very complicated, I am gonna try to look at vanguard videos again to make sense of it. I wont be in IRS audit with backdoor roth ?

Click to expand...

I wrote Explaining Backdoor Roth IRAs to address the backdoor Roth step-by-step because there was so much confusion - hope it helps.

azc9397 wrote:

– If I have the option to do both Should I choose Roth IRA or Backdoor Roth ?

Click to expand...

You won't have the option to do a deductible IRA. You will have to begin with a TIRA (nondeductible Traditional Roth IRA) and then convert to a Roth IRA. This is the "backdoor Roth". See above article.

[TheAbacus]

His salary is 170K, so his MAGI is likely lower. If he is filing taxes jointly with his spouse, I think he can make direct contributions to a Roth IRA, and shouldn't have to worry about the backdoor.

[Gamma Knives]

I agree with not buying and would add that you should not think of your rent as throwing money away (unless you are renting a place that is more expensive than you need). Rent is spending money for shelter. Home ownership has many expenses that you don't get back as well (home maintenance, interest payments, and property taxes). Additionally, buying and selling a home not only take lots of your time but have very high transactional costs.

 

[jsr52]

Not to rehash an old discussion, but whats so bad about a car lease, 200/month seems quite reasonable, what is the interest on that?

[Craigy]

azc9397 wrote:

 

car 200/month lease

Click to expand...

hatton1 wrote:

Quit leasing cars.

Click to expand...

The White Coat Investor wrote:

Oh yea, didn’t even catch the car lease.

Click to expand...

$200 a month?  And y'all are seriously giving him trouble about this??  That's peanuts.  Depreciation alone probably cost more than that, not to mention maintenance and repairs as something gets old.

If OP said $500/mo I think you might have more of a point but otherwise you're scolding someone for being pretty thrifty already.

[Donnie]

Craigy wrote:

azc9397 wrote:

 

car 200/month lease

Click to expand…

hatton1 wrote:

Quit leasing cars.

Click to expand…

The White Coat Investor wrote:

Oh yea, didn’t even catch the car lease.

Click to expand…

$200 a month?  And y’all are seriously giving him trouble about this??  That’s peanuts.  Depreciation alone probably cost more than that, not to mention maintenance and repairs as something gets old.

If OP said $500/mo I think you might have more of a point but otherwise you’re scolding someone for being pretty thrifty already.

Click to expand...

How much down at signing though?  Yes, if it is $200/month with nothing down, the car is likely depreciating more than what OP is putting into the car.  In that case, the dealer is losing money on the lease, which doesn't seem too likely to me.  Dealers are nice and all, but ...

Leases are bad because you are paying for the option to sell the car back to the dealer at the end of the lease term.  If you buy the car, you already have that option anyway, so why pay for it?

 

[Craigy]

Donnie wrote:

Craigy wrote:

azc9397 wrote:

 

car 200/month lease

Click to expand…

hatton1 wrote:

Quit leasing cars.

Click to expand…

The White Coat Investor wrote:

Oh yea, didn’t even catch the car lease.

Click to expand…

$200 a month?  And y’all are seriously giving him trouble about this??  That’s peanuts.  Depreciation alone probably cost more than that, not to mention maintenance and repairs as something gets old.

If OP said $500/mo I think you might have more of a point but otherwise you’re scolding someone for being pretty thrifty already.

Click to expand…

How much down at signing though?  Yes, if it is $200/month with nothing down, the car is likely depreciating more than what OP is putting into the car.  In that case, the dealer is losing money on the lease, which doesn’t seem too likely to me.  Dealers are nice and all, but …

Leases are bad because you are paying for the option to sell the car back to the dealer at the end of the lease term.  If you buy the car, you already have that option anyway, so why pay for it?

 

Click to expand...

End of a lease is not an option to sell, it's the right (and obligation) to give the car back to the dealer.  At the end, you walk away.  You don't have to get bent over negotiating your trade in value and/or be stuck with a car you're upside down on due to depreciation.

If you trade in a car every few years (as you would in a lease), unless you have the time and skill to aggressively negotiate, you're going to get: 1) hosed on the new vehicle purchase, 2) hosed by the dealer lowballing you 3, 4, 5 grand on your trade or more, 3) hosed by the dealer on document fees and tire and wheel packages, 4) hosed by the state with sales tax on the full vehicle price on the first car, and depending on the laws of your state, possibly the sales tax on the full price of the next one too.  With a lease, you're typically only paying tax on the lease payments, so you never get hit with tax on the full purchase price of the car (in my state, sales tax on a new purchase would be about $3,000 on a $30,000 car).  If I lease that same car for $300/mo for 36 mos, I would only pay about $1,000 of sales tax over the term of the lease.  And if I'm upside down on the car, or the dealer wants to lowball me on the price by a few grand, that doesn't matter since I just turn it in and don't have to negotiate anything.

$200/mo lease deals with nothing down do exist.  A typical down payment might be $1999 on a 36 month lease, so that's $255/mo, still peanuts.  OP might have put down $10k for all I know, or that could be a zero-down $200/mo lease payment with tax included.  I'd suspect OP is leasing something inexpensive like an Accord or Rav4, but again I don't know.

$200/mo isn't even the cheapest lease you can get.  https://cars.usnews.com/cars-trucks/best-car-deals/car-lease-deals  You can get a Kia for $109/mo  :lol:  Dealer isn't losing money on a $200/mo lease, manufacturers offer these sort of deals all the time.

 

edit - I don't want to derail this thread into  vices-and-virtues-of-leasing topic, so I'll let anyone else have the final word.