Finally got the numbers from DF... mostly...

[Firebird]

Here is the budget we'll be working with for awhile, along with our plan for how to handle spending and our goals, long term and short term (it's a long post; my apologies in advance). We're 25 and 28.

Income Statement:

Take Home Income: $6,100

Monthly Expenses:
Rent: $1,470
My Car: 350 (0%, $7,845 balance)
His Car: 370 (~5%, ~$10,000 balance)
My SL: 200 (6.8%, $14,890 balance)
Insurance: 400 (both cars, plus renter's)
Utilities: 150 (gas and electric)
Phone: 90
Gas: 300 (includes driving commute for him)
Tolls: 70
Entertainment: 500
Groceries: 200

Total: $4,100

The remaining $2,000 is up for grabs.

Balance Sheet:

Assets:
ROTH IRA: ~$14,000 (mine; maxed out)
401k: ~6,500 (mine; currently contribute 10%)
ING Account: ~2,300 (ours)

Total: $22,800

Liabilities:
My Car: ($7,900) (0% interest)
His Car: (~10,000) (~5% interest)
Student Loan: (~15,000) (6.8% interest)

Total: ($32,900)

Total Net Worth: (~$10,000)

We've got our work cut out for us, that much is clear. Here are the immediate household goals (as decided by both of us):

1) Wedding (budget ~$10k, date of October 2nd)
2) EF of $10k
3) Pay off my student loan.
4) Pay off his car note.

In the long term, we have the following goals in mind:

1) 20% of total gross going to retirement savings (at the moment that would be about $22k, so we're not there yet - we're more than halfway there, though, probably around $15k).

2) No outstanding debt (which will clear nearly $1,000 from our budget, although of course I'm not planning to rush my car note - by the time we get the other two debts paid off, that one will pretty much be gone anyway).

3) House fund - we want to put down the standard 20% cash and using the standard 2.5x income rule, we can afford around $275k, so this will be at least $55k independent of our EF. I think I would prefer it be more like $70k though, for cushion and because the move itself will be pricey.

We don't like to fuss with a lot of different accounts, so we're going to stick with two - his and mine. We've agreed that I'll handle the money, so what we're going to do is set up auto-transfers from his account every payday, in the amounts I need to cover his share of the committed expenses (including savings) and leave him enough for commuting and discretionary costs.

Over the next six months, we'll be coming into $10,000 (a wedding gift from my parents) plus we should be able to save an additional $10-12k on our own. There may also be year-end bonuses to work with, so I think we can make some good progress on our goals in 2011, and hit the ground running in 2012.

Thoughts on any and all of this?

[Firebird]

Oh yes, I forgot to mention that DF has a 401k also. I didn't include it because I don't know how much is in it or how much he contributes. He promised he would find out and tell me (he set it up almost a year ago and hasn't thought about it since, but it does exist).

[Savoir Faire-Demogague in NJ]

How old are you guys?

My first knee jerk reaction is your monthly auto loans are killing you. But closer examination shows one with a 0% interest rate, and the other a 5%. I'd just pay those off one month at a time.

You are very light in all categories of savings, and you do not seem to have much non-retirement savings at your disposal.

I think the key here is how old you two are. If you both are mid-20s, I would not have anything to arm-wrestle about.

[Firebird]

I'm 25 and he is 28.

I'm not too pleased about the auto loans either, but there's not a lot we can do about it at the present time. DF can't drive my car, and while he IS the one with the lengthy commute, it doesn't make sense to get rid of the vehicle that is costing us LESS money. I could technically get along without my car, but I don't want to and don't see that it's necessary right now.

We're pretty light in savings at the moment but we're back on track to save quite a lot. A huge chunk of my short-term savings went to fund my 2010 ROTH contribution fairly recently and at the moment my ING account has almost $7k in it - I just don't count $5k of that because next week it's getting transferred to my ROTH IRA for my 2011 contribution. I like to do it all at once at the beginning of the year so that I don't have to worry about it, but that didn't work out last year and I had to do it closer to the end of the window after I got my bonus.

Just throwing that in there because it appears on the surface that I haven't been saving anything recently, and that's not actually the case.

[Savoir Faire-Demogague in NJ]

Yeah, you kids are young... you seem to be on the right track.

The $2000 burning a hole in your pockets could be put into a broad market index fund, say one that encompasses the entire global market.

[Firebird]

EF first, then we'll talk about where to put the $2k a month

[qofcc]

Since your combined income puts you firmly into the 25% tax bracket and it doesn't sound like you're planning to buy the house until after your auto loans are paid off and you're not planning on having babies right away, provided your 401K plans have good loan options and you're planning on staying in your jobs, I would try to max out the 401Ks before paying extra on any debt or saving more outside of the 401Ks with the idea that you'd borrow against them for your house down payment if you needed more than you end up saving outside of the 401Ks. That 401K loan with the guaranted interest from yourself would then become the conservative portion of your portfolio.

[resolution]

Hey this budget is a lot different than the one where I was tricked into saying you should stay in the fancy apartment. =(

Are your parents giving you the $10,000 for the wedding up front or is it something they will give you on the day of the wedding? If they are giving it up front I would just plop that into the wedding fund and consider that to be the entire budget for the wedding. That would let you use the whole $2k each month to build up the emergency fund. Your number one priority right now should be to have enough in the fund to get the rent paid on time even if DF has a moment of disorganization and doesn't give you his share. You really need it to be over one month of expenses asap. Once you have enough in the EF to cover that type of miscommunication then you can start looking at which investments to split it into.

[Gardening Grandma]

Do you really spend only $200 on groceries?

[Firebird]

That 401K loan with the guaranted interest from yourself would then become the conservative portion of your portfolio.

Not sure how I feel about that but it's an interesting idea. We're not planning to buy in this state, though, so odds are when we move we'll leave our jobs.

Hey this budget is a lot different than the one where I was tricked into saying you should stay in the fancy apartment. =(

Haha, sorry about that. I did say I didn't have full numbers from DF though!

Are your parents giving you the $10,000 for the wedding up front or is it something they will give you on the day of the wedding?

I'm not sure. Need to figure that out. They'll probably give it to us on the wedding day.

Your number one priority right now should be to have enough in the fund to get the rent paid on time even if DF has a moment of disorganization and doesn't give you his share. You really need it to be over one month of expenses asap.

Well, there *is* enough in the EF to cover that kind of thing but it takes days to get it out of the ING account so it's not a reliable backup for rent. However, now that DF is going to be auto-transferring his share to me every month, I don't anticipate late rent happening again. I love the man, but let's just say we're *both* very happy to let me organize the bill-paying ;D

Do you really spend only $200 on groceries?

Pretty much. We eat out a lot (I know, bad - but we are getting better, and I'm actually not eating out at all right now). Any overspill on groceries comes out of our entertainment money.

[phil5185]

Here are the immediate household goals (as decided by both of us):

1) Wedding (budget ~$10k, date of October 2nd)
2) EF of $10k
3) Pay off my student loan.
4) Pay off his car note.

Think of your income stream as finite. Remember, paying off a loan doesn't mean that it is 'gone', it means that you moved money from somewhere else. So if you direct $15k to prepay a SL, that simply means that $15k is missing from another category - ie, your NW is unchanged.
So the task is to move the income stream to places where it will optimize your NW in 5 yrs, 10, yrs, 20 yrs.

In the long term, we have the following goals in mind:
1) 20% of total gross going to retirement savings
2) No outstanding debt
3) House fund

IMO #1 is good, but I disagree with #'s 2 & 3.

2) Debt. Yes, avoid consumer revolving debt. But hang on to your 'long low' debt - wealth is built by borrowing at <5% for 30 yrs and investing it at >10%. Eg, borrow $50k at 5% for 30 yrs = $270/m ($97,000 total). The $50k invested at 10%/yr = $875,000.

3) House. I agree with saving up a big DP ($55k or $70K) but then don't use it for a DP, get the biggest mortgage that you can while still getting the prime rate. Your $55k reserve fund cancels the foreclosure risk that people worry about (if you lose your income and have to give up the house, it doesn't matter whether your $55k is sitting in house equity or invested). And this gives you an opportunity to get a larger "long low" loan so that you can direct more income to #1.

Re your comment 'we can afford a $275k house' - that is the guideline for "maximum" - be careful not to enter the mcmansion contest of the early 2000's - if you find a nice 1200 ft, $150k house that meets your needs get it, let the Joneses struggle with their mcmansions.

Good budget, no need to scrimp or cut things, you are supposed to enjoy the fruits of your income stream. The key is to properly direct it to where it will optimize your NW. I wouldn't worry about the cars - an $8640/yr car payment seems high now, but the major cost of cars is depreciation - so if you drive them each 200,000 miles, the annual depreciation (over 12 yrs) is about $1500/yr - you are prepaying it with your $8640/yr.

[qofcc]

That 401K loan with the guaranteed interest from yourself would then become the conservative portion of your portfolio.

Not sure how I feel about that but it's an interesting idea. We're not planning to buy in this state, though, so odds are when we move we'll leave our jobs.

Chances are your new jobs would have a 401K to roll into and borrow against, but if you're planning to buy a house consecutively with or shortly after moving, that might be too much of a risk. You'd also want to check your plans to see what the policy is on outstanding loans at separation of service. Most plans require repayment pretty quickly, but some allow the loan to continue. It's worth researching.

[morrisr2d2]

Being debt free is very appealing (excluding mortgage), and feels awesome once you get there. HOWEVER...

You guys seems to have good income/cash flow, and your debt isn't that bad. I would recommend maxing out retirement accounts, let the debts ride (and beat the cars into the ground), and throw as much as you can into savings. Being a young couple, having cash for the EF, buying the house, expecting kids, painting rooms, and having a cash cushion, it'll take a lot of CASH. Between 25 and 35 there are a lot of upfront expenses to get life going.

[startsmart]

if you find a nice 1200 ft, $150k house that meets your needs get it, let the Joneses struggle with their mcmansions.

THIS. yes. Exactly what I did, birdy and you've been to my place. it's good for me. 1180 sq ft which is smaller than some apartments, 3br/2ba, yard and $150k ish. Put down enough to avoid PMI if that's important to you and save. It's how I have $3k for home repairs and fixing the place up so I can rent it out in 3 years or sell. ESPECIALLY if you move out of CA you can find something that meets your needs without paying as much as you could feasibly afford.

[Firebird]

Think of your income stream as finite. Remember, paying off a loan doesn't mean that it is 'gone', it means that you moved money from somewhere else. So if you direct $15k to prepay a SL, that simply means that $15k is missing from another category - ie, your NW is unchanged.

True, but you have told me before that you think I should prepay the loan because the interest rate is above the threshold

I'll be happy if we can get rid of that student loan. I'm willing to let the two auto loans ride out after that while we focus on other goals. But as I said the last time this came up, it will only take us 8 months or so to get rid of that student loan and I think it's worth 8 months even considering the lost interest we could have earned.

After that, though, it's Dr. Phil's plan all the way ;D

3) House. I agree with saving up a big DP ($55k or $70K) but then don't use it for a DP, get the biggest mortgage that you can while still getting the prime rate. Your $55k reserve fund cancels the foreclosure risk that people worry about (if you lose your income and have to give up the house, it doesn't matter whether your $55k is sitting in house equity or invested). And this gives you an opportunity to get a larger "long low" loan so that you can direct more income to #1.

Got it. Done.

Re your comment 'we can afford a $275k house' - that is the guideline for "maximum" - be careful not to enter the mcmansion contest of the early 2000's - if you find a nice 1200 ft, $150k house that meets your needs get it, let the Joneses struggle with their mcmansions.

We'll see. I know we don't want a McMansion but we do want a nice "forever" house. It has to be big enough for the family we want and have a lot of stuff that we want. So... we'll see. I definitely won't buy more house than we can comfortably afford on the lower of our salaries. You have my word on that much.

We're willing to wait to get exactly what we want - and by the way, we're building, not buying. My aunt and uncle did this and are now sitting on a $350k property that didn't even cost them $250k to build.

[Firebird]

Being a young couple, having cash for the EF, buying the house, expecting kids, painting rooms, and having a cash cushion, it'll take a lot of CASH. Between 25 and 35 there are a lot of upfront expenses to get life going.

We're not planning on kids just yet (although you never know) but yeah, I hear you. Ideally, by the time we're ready for that we'll be debt free just by proxy.

[Firebird]

By the way, Phil, once we're ready to start the house fund where would you suggest we put it - bearing in mind that we'll be working on it for at least three years?

[qofcc]

and by the way, we're building, not buying

Building as in do-it-yourself or building as in having it built for you?

[Firebird]

Not sure yet.

[phil5185]

but you have told me before that you think I should prepay the loan because the interest rate is above the threshold

Oops, I'm starting to trip over my own advice.

My aunt and uncle did this and are now sitting on a $350k property that didn't even cost them $250k to build.

We're in a $350k property that cost us $53k to build - that just means that we're old. (we built in 1975).

once we're ready to start the house fund where would you suggest we put it

An SP500 Index fund or a Target2050. I use long term products, even for short term needs, and then I borrow wherever practical to accomplish the needs - and allow the capital to continue to compound.