Saturday, June 25, 2011

Life decisions!

Now that we are mostly settled, Peanut and I have started taking a new look at our priorities and finances to determine what we want to do with our money. We have a couple different options.

If you remember, since Peanut went freelance last fall, we lived off of my income and saved his in anticipation of this move. That worked very well for us, and we're now both in stable jobs again, so now we can determine what to do with the money we didn't spend moving. Here are some of our options:

Scenario 1:
Emergency Fund: $20,000
Taxes: $7,200 (estimated)
Pay off LMM's student loans IN FULL: $11,200 (mine have the higher interest rate)
Save for house: $4,500

Scenario 2:
Emergency Fund: $20,000
Taxes: $7,200 (estimated)
Pay off LMM's student loans IN FULL: $11,200
Pay towards Peanut's loans: $4,500 

Scenario 3:
Emergency Fund: $20,000
Taxes: $7,200 (estimated)
Fund two Roth IRAs for 2011: $10,000
Pay towards student loans: $6,700 

Scenario 4:
Emergency Fund: $20,000
Taxes: $7,200 (estimated)
Fund two Roth IRAs for 2011: $10,000
Save for house: $6,700

As you can see, keeping an emergency fund of at least $20,000 is non-negotiable. Likewise, paying the tax bill that's coming thanks to all the freelance work. It's what to do with the additional money that we can't decide on - and it's hard to decide in part because all of these things are priorities. We want to aggressively pay off our student loans, we want to purchase a house in the next 1-2 years with a 20%+ downpayment or $50,000, and we want to save for retirement. But it seems like only two of the three choices are really going to be achievable with the money we have in savings - otherwise we're applying such smaller amounts that we're not really going to make much of a difference.

Of course, all of this assumes that we'll continue living below our means, ideally off of the lower of our two incomes, and saving the rest to use towards one of the three goals as identified in whichever scenario we pick. 

What would you do and why?

7 comments:

  1. I would choose 3, but since you want to buy in the next 1-2 years, then maybe 4. Unless any of your student loans are above 6% or so, in which case, I'd probably do... well, I don't know.

    Personally I'd definitely put the money in a roths before saving for a home. The reason is, you can always invest in cash within the roth, and take it out for a home purchase if you change you mind. You only have so much time to contribute to a roth for 2011, and if you miss it, there's no going back.

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  2. Any way you go you're very lucky to have this choice to make. Personally, I'd go with scenario #1 or #2 but that's b/c I like the idea of being without student loan debt hanging over my head. Might be a nice pre-housewarming gift to give yourselves.

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  3. Can I offer a 5th Scenario for you to consider? I know that the $20,000 emergency fund is non-negotiable, but have you thought about keeping some of your emergency fund in a Roth? A lot of people are starting to do that now. As stackingpennies stated above, you can take out your contributions tax free at any time. If the worst case scenario happens, you can access your $10,000 contribution. If you don't need the money, it's $10,000 more towards your retirement. Plus, this scenario let's you start your house fund AND take a big bite out of your student loans.

    Scenario 5:
    Emergency Fund: $10,000 in liquid savings account AND $10,000 in two Roth IRA's for 2011

    Taxes: $7,200 (estimated)
    Save for house: $10,000
    Pay towards student loans: $6,700

    No matter which scenario you choose, I know you will make it work!
    P.S. I'm new to the PF world and I have really enjoyed following your blog!

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  4. I agree with people carly saying that funding your Roth's are important but I also know that buying right now while the market is good is important as well. It's a lot cheaper to live there then New York City and while you're probably still in that mindset of paying that much rent, you can probably trick yourself into saving it.

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  5. I vote for #1. Get those student loans paid off. How good would that feel?

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  6. Another consideration: If you are in new jobs it might be a while before you can max out your 401Ks (which you should) BUT even if you do that you might still be able to contribute to (or fully fund) a regular IRA for Peanut and drive down the tax bill from his freelance work. That said I like #1Also, following the 'buy low' strategy, because you have good credit you could buy a house through FHA. The people who bought my 300K house put down $3500. No, that's not a typo. You could save for two years and put down $9000, get a good rate and still buy low. Worth checking out anyway.

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  7. @Anonymous1, we won't consider keeping our emergency fund or any other savings account in a Roth for one major reason - if the unthinkable happens and we have to take that money out, we can't ever put it back. We'd lose out on all the compound interest we could have had for retirement. Since I believe emergencies are a matter of when not if, a Roth is not a safe place for anything other than retirement.

    @Serendipity, I wish we could pay ourselves the same amount of rent we were paying in New York, but our incomes were cut as much as our cost of living went down and (we now have the expense of a car, which we didn't have before). We're basically in the same position we were before - no worse off, but no better, either.

    @Anonymous2, we are committed to a 20% downpayment to avoid PMI. I'm not sure how FHA loans affect that, but we feel that if we can't put down 20% on a house, we can't afford it.

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Thanks for commenting!