WWYD in my financial situation?

[vicky]

One thing to consider- Do you have gap insurance on your car? You might want to add extra payments to the car until you owe less than it's worth.

After that, definitely add to the 401k.

[phil5185]

You put your annual food/diapers/dog food category at $13,620, that represents over $18,000 of your gross salary. I'm having trouble wrapping my mind around that - where does one store $13,620 worth of groceries? (I'm thinking that we feed ourselves and our horses for less than half of that.)

[gardenvenus]

Am I missing something somewhere? I do not see "health insurance" anywhere on your expenses, unless that is taken out of your salary before taxes and even then, is coverage for your wife and child before taxes? Medical $20/mo is seemingly way to low...
Good advice so far: make minimum payments on SL; double your car payments (or at least add 2-300/mo) = 5.5% interest on that extra money; build up Emergency Fund; build up your easily accessible cash reserves to cover your living expenses for 1 year; put the 10% into retirement for the match.

[jkscott]

Health insurance is taken out of salary and it covers my family. The 20/month for medical is considered copays.

No need for gap insurance IMO because the car is worth a few hundred dollars less than what I owe.

Phil, we spend more like $10,000/year on food/baby needs. December was a high expense month in that category due to a birthday party. Im either going to start an envelope system and only spend $600/mo on food or I will do one of the grocery challenges.

Its the last day of the year! I just got a 2k retirement bonus from my company. At the end of every year they deposit a bonus into my retirement account! Now sitting at $9,500.

[cronewitch]

Jkscott the problem I see is you are leaking money in dribs and drabs. The envelope system is good if you can't handle credit cards and checks responsibly. If you and your wife want to grow your net worth you need to start at the top with your budget. If I were you and have self control I would stay broke so you need to squeeze a little.

Start at the top and budget annually instead of monthly so you don't react to bonus months differently.
So like this"
Income-wages $70,000
Taxes SS & medicare 5.95% - 4,200
Income tax - 5,000
Medical or other deductions - 5,000

Take home pay 56,800

401K - 7,000
ROTH -10,000
Debt payments - 5,000
Total -22,000

Net spendable money 36,000

Spending
Rent 12,000
Utilities =heat light power 2,400
Life insurance 1,200
Renters insurance 200
Gas for car 200
Car repairs, oil changes, wash 1,000
Car insurance 1,000
Diapers,clothing, food, toys 3,000
Phones 500
Vacations and recreation 1,000
Cable tv and internet 1,800
Replacement electronics 1,000
Food 5,000
Household replacements 500
Supplies, paper,plastics cleaning 500
Shoes and clothing for adults 1,200
Entertainment & gifts 500
Copays 240
Babysitters 1,800
latte factors 200
Total it up on a spread sheet and sort by amount to get the big things in first.

Deduct from the amount available then adjust categories to suit yourself. If you save money clipping coupons or arraigning your wife to work when you can be with the baby so you don't need a sitter you can put that in another area of the budget. If you choose to eat less expensive food you get a nicer vacation so there is a pay off for penny pinching. If you can't resist the cute baby things you will have to do without something else.

[Small Biz Owner]

Just curious about what kind of car and how long is the note for? $620 just seems like a lot of money.

[jimb]

Since you're not in dire straits, and do have some understanding of money, Dave Ramsey’s advice for debtaholics and spendaholics does not apply to you.

It looks like you’re costing yourself a small fortune out of your future retirement income by paying off your debts too fast. You’re literally throwing money away by not getting all available matching payments. And you are paying money in taxes that you could be investing for yourself.

IMO you should max your 401(k) contributions; build a bigger emergency fund; perhaps contribute a substantial amount to a Roth or Roths; then pay down your car loan with money that you have left.

Don’t know your salary and how much more you can contribute to a 401(k), but just to give you an idea how much it’s probably costing you, consider this:

If you were to NOT contribute an extra $500.00 per month to your 401(k), and your combined state and fed marginal tax brackets are a total of 21% then you will have to pay an extra $105.00 per month in taxes and will have $395.00 left to pay down the debt.That $105 tax is money that will not buy stuff, pay bills, earn compound interest until retirement, or pay down debts either.

If your debt were $22,900 at 5.5% you could pay it off in 41 months with a payment of $620.00. The total interest would be $2,247. Adding the after-tax $395 per month will pay off the loan in 23.9 months with $1,328 in interest. So you save $919 in interest and 16.7 months time on the debt.

Notice that during that 23.9 months you've forfeited $2,506 in taxes and $5,967 in matching payments for a total of $8,474 that you could have invested, in order to save that $919 in interest.

If your employer matched $0.50 per dollar for your contributions on up to 10% of your salary, that would be another $250.00 per month income for you to invest. If you did not delay your contributions, the $750.00 per month earning 8% would grow to $2,408,975 by retirement time 39. years from now.

If you delay it for 23.9 months while paying down the debt, it will grow to only $2,039,160 in the remaining 444.1 months. That's a loss of $369,815 at retirement in exchange for saving $919 in interest on the debt.

But that's only the tip of the iceberg. Many people seem to overlook that because of compounding, you will usually earn more interest after retirement than you did during your years of contributions.

If you were to earn a conservative 5% after retirement, that $369,815 could have paid you an extra $1540.89 per month without even touching the principal. ( At 4% inflation for 39 years, that would be equivalent to an extra $334/mo. in income today.)

So if you lived another 30 years, you would have lost the $369,815 that you won't have at retirement, plus the $554,722 of interest it won't earn after retirement, for a total loss of $924,536 in the long term in exchange for saving $919 in interest on the short-term debt. That's a cost of $1,006 out of your future retirement income for every dollar you saved on the debt, or $55,397 for every month you cut from the debt.

If you could earn more nearly the 10% or more that the stock market has averaged for decades prior to the crash of 2001 and 2008, or if you could earn the 12% that Dave Ramsey still says that "anybody can earn in any good mutual fund", the amount you'd lose would boggle the mind.

jimb

[motherto2]

To change the subject just a tad, I didn't see an expense for life insurance (maybe I just overlooked it?). At your stage of life, you need to make sure you and your wife have enough insurance to take care of things if something should happen to one or both of you - which also brings up another question - do you both have wills? Please don't leave these important pieces out of your long term plans. Congrats on the debt payoff!

[jkscott]

Happy New Year!

Jimb - Great point! You can consider my mind changed. I upped my retirement contributions to 10% and plan on opening a Roth soon.

Motherof2 - I have about $150,000 in life insurance. I should buy more...consider it on my list.

[Peace77]

Good move to increase your 401(k) to the company match.

The rule of thumb for life insurance is 10x your annual income.

I'm encouraging you to split your extra funds between increasing your EF and paying extra on the car loan.
If you have an emergency, you can put the student loan on forbearance. If you become disabled and cannot work, you do not have to pay the student loan. The car loan has no such provisions.

[jkscott]

Thanks! My 401k just hit $10,000 so im super psyched! Next stop: $25,000!

[Deleted]

My two cents

Pay off a little extra on car every month...but invest the difference

The car is a depreciating asset....it will never go up in value

Every extra nickel you put into it is eventually gone....think of it as a hole that you keep pouring money into....

I would rather see six months emergency savings....and then investing the difference into different funds depending on your risk threshold...let your money work for you

[Peace77]

Six months emergency savings is a great idea.
Focus your extra funds into savings until you have 6 months worth of expenses.

If you want to continue to pay down debt, pay an extra $10 or $20 on the car loan monthly.

After you have 6 months worth of an emergency fund, split the extra funds between savings and car loan. Continue to add to your emergency fund until you have 9-12 months worth of expenses.

It's true that the car is a depreciating asset. That's why it's a good idea to pay for it in cash (no loan) if possible. If that's not possible, then pay it off before it falls apart and you need to buy another one.

The ideal situation is to pay off the car and then continue to make car payments to your savings account. When it's time to buy a new car, you can simply write a check and take advantage of the cash back rebates that the dealers offer.

[ca]

The Car Loan, as others have said, is a bit of a worry but it is at a great rate (5.5%) and the amount is not too crazy. I think you really need to start working on your retirment savings and at least get the match.
Only go for the minimum on the student loans for sure. Dave Ramsey has his place (people with massive debt problems), but you have outgrown his lessons now. And please, whatever you do, don't listen to him when it comes to investing!!

[runewell]

Think you're doing OK. Agree with the comments of diverting money to the car. At 5.5% I would probably pay the car off a little faster than minimum payments but I wouldn't stress over it. I would definitely start tackling the reitrement savings with some of your admittedly high food budget.