Saving, housing, debt? Budgeting questions

**jd68** · 12-21-2011, 12:55 PM

How much of my income should be left after expenses, or how much should I be saving? I've heard 10% is a good number. Is that 10% of gross or net? Should I be saving more? Is less acceptable? How much should I be spending on housing?

I'm considering buying my first house. I've heard 29%-41% of gross is a good range for mortgage+taxes+insurance. That seems very high to me. If I do this now I'd be looking at approx 20% of gross or 29% of net. I would likely have a roommate covering about 35%-40% of those costs and splitting utilities. I haven't figured this in my numbers, it's a bonus not a necessity and I will budget accordingly as I can't control other people's circumstances.

I have some large student loans, broken into several loans. Payments on these are 23% of gross or 34% of net. I want to pay the high interest ones off sooner and maybe roll that money into paying the lower interest loans quicker as well. I have no other debt.

In my projected budget I am looking at 37% of gross left or 8.8% of net left. If I up my 401k contributions to get the max match after a change to our plan, I'd be looking at 4.6% of net left. I could cut my eating out budget and save 3% net. Factoring in a roommate I'd be looking at approx 20%+ of net left after expenses which makes things a lot more comfortable. Also I'm estimating a $1400 tax refund this year, with a home it would likely be closer to $3000. After refund this year I will adjust withholding. Things have changed every year recently so I've been careful to not end up stuck with a large tax bill as I have in the past.

So what are your thoughts on these costs, saving, etc.? Should I be looking to spend less on a home? Should I be saving more? Should I be cutting other expenses (there's not much frivolous or play money in my budget)? Other thoughts or input?

**krbshappy71** · 12-21-2011, 01:23 PM

If you posted a budget it would be helpful. i.e. Income, list of your expenses, end result.

My two cents, sometimes its a matter of where you are, not just a flat number.

We were told to have 20% down for a house downpayment, but then we looked into VA loan and only had to have 3%. Then made an offer and they are allowing us to have 0% down. So I'd look at your overall picture, it might help with your planning. Roadmap for the Road Trip!

**MaryCarney** · 12-21-2011, 02:02 PM

A couple of thoughts - if you cannot afford a house without a roommate, you cannot afford a house.
Also, you really ought to knock those student loans out BEFORE you consider home ownership. Rent a cheap apartment, get a second job and JUST DO IT.
I'd put a smallish ($3K) emergency fund in place, then stop savings and 401K until the debt is gone. No sense saving at 1-2% interest when you are being eaten alive by debt. You'll have so much more breathing room - and then can hit savings and retirement HARD.

**Telephus44** · 12-21-2011, 02:29 PM

First, consider why you want to buy a house. I'm not saying don't buy one, just be honest with yourself. Is it just for the tax break or because that's what everyone your age is doing? Then skip it. If it's something you want and can see yourself there for a while, ok.

Bear in mind that most lenders will consider not only the mortgage payment but your total debt payments when approving a loan. If your student loans are taking up that large a percentage of your pay, then you will have a very difficult if not impossible time qualifying for a mortgage.

**jd68** · 12-21-2011, 04:57 PM

krbshappy71, I could do 10% down, and probably scrape up 20% if I had to. I'm figuring on doing 3.5% down since the interest I would pay on the mortgage is far lower than student loans.

Income is $63k + $3k-$4k in bonuses and up to a couple thousand in overtime. I figure all my numbers on $63k.

MaryCarney, I was not factoring any money from a roommate into these numbers. Do you think I cannot afford a house? If that is the case I need to consider that may be fact and this is simply an unrealistic dream.

You mentioned stopping 401k contributions entirely, at least until I get some of the higher interest loans paid off. I currently pay 3% to get an additional 6% from my employer. The plan has changed so I would have to contribute 6% to get a 5% match. You are saying I should halt all contributions and put that 3% I'm currently contributing into loans until all student loan debt is gone? I'm looking for maximum long term gain with that 401k money. Will I be money ahead in 40 years to forgo the 5% employer match and not make any contributions for the next 5-10 years it takes to pay these off?

On a similar note I had considered taking a 401k loan to pay off a large chunk of principle on highest interest loan, and then making the payments back to myself at 4.5% interest vs paying 13.38% on that portion of principle on the load. That loan is $30k and I could knock a bit over half of it with the 401k loan and other money left after buying a house, though would be paying $112/mo to repay the 401k loan. If I wait to get a house I could knock more out in one shot but not the whole amount. Once the highest interest student loan is paid off that would free up $400/mo.

Telephus44, with interest so low and houses fairly cheap I don't want to miss a good opportunity and would rather be paying for my own home than lining a landlord's pockets. I'm currently stuck living with family and it's a bad arrangement for all involved. It has saved a lot of money while it lasted, but needs to end soon. It certainly cannot continue for another 6-10 years to pay off these loans.

The tax break of owning a home is not a reason for buying one, but can help offset repair and maintenance costs. Mortgage+taxes+insurance would be under $1100/mo, almost half of that is taxes. Rentals that are not in the ghetto will run $800-$900/mo for a 1 or 2 br 1 bath. $700-800 if you don't mind the higher crime areas within walking distance of the ghetto, less if you don't mind hearing gunshots at night or getting burgled every now and again. Occasionally you'll find a studio for cheaper in a decent area. I really hate apartment complexes though. Regardless, I wouldn't plan on moving for at least 10 years (loans paid off), unless I got a REALLY good job offer elsewhere. That's my reasoning behind looking at houses, but it may be flawed.

As for a second job... I've been looking, but am typically turned down for being overqualified, they won't hire me because they're afraid I'll quit. That or they won't work around my day job's schedule... Which lately includes a lot of overtime and longer days as well as occasional weekend work.

I do some mechanic work on the side though. Never know when I'll get it or what it is so I don't factor that into my budget. If I had an apartment, I wouldn't have my tools, land or a garage convenient to to this side work when it comes up. This makes me anywhere from a few hundred to a few thousand a year. Is it worth doing this work? I don't know, but I usually do since I wouldn't be doing anything else to make money in that time.

**mndtrp** · 12-21-2011, 07:59 PM

Originally Posted by jd68

You mentioned stopping 401k contributions entirely, at least until I get some of the higher interest loans paid off. I currently pay 3% to get an additional 6% from my employer. The plan has changed so I would have to contribute 6% to get a 5% match. You are saying I should halt all contributions and put that 3% I'm currently contributing into loans until all student loan debt is gone? I'm looking for maximum long term gain with that 401k money. Will I be money ahead in 40 years to forgo the 5% employer match and not make any contributions for the next 5-10 years it takes to pay these off?

On a similar note I had considered taking a 401k loan to pay off a large chunk of principle on highest interest loan, and then making the payments back to myself at 4.5% interest vs paying 13.38% on that portion of principle on the load. That loan is $30k and I could knock a bit over half of it with the 401k loan and other money left after buying a house, though would be paying $112/mo to repay the 401k loan. If I wait to get a house I could knock more out in one shot but not the whole amount. Once the highest interest student loan is paid off that would free up $400/mo.

No to both of these. Get at least the company match, and leave it there until retirement (or an extreme emergency). You aren't hurting for cash flow, so you would likely be screwing your future in order to pay off your past.

Renting is not wasted money. Owning a house has so many more responsibilities than the mortgage/taxes/insurance.

I rented an apartment, with a roommate, for several years. We lived in a nice area, but splitting the cost made it cheaper than a single apartment in the crappy section of town. When my roommate was getting ready to move out, my girlfriend (now wife) moved in. Costs remained the same, and I was able to pay off all of my debts, as well as save 20% for a down payment. I was "lining the landlord's pocket", but it's unlikely I would have come out in as good of a situation as I am currently in. Throughout, I was contributing to my 401k, and beefing up an emergency savings account.

First and foremost, I would not lower 401k contributions. I would then get an emergency fund in place. Put payments towards the smallest loan amounts you have, in order to free up cash each month. Save that money towards a down payment.

**tmffv** · 12-21-2011, 10:48 PM

I started writing out a lengthy post, but it really just came down to this:

First and foremost, I would not lower 401k contributions. I would then get an emergency fund in place. Put payments towards the smallest loan amounts you have, in order to free up cash each month. Save that money towards a down payment.

**Domestic Gal** · 12-22-2011, 09:14 AM

DO NOT BORROW AGAINST YOUR 401K you will be taxed on it and if you loose your job you will have to pay it all back when you leave. STUPID MISTAKE DO NOT DO THIS

**Greebo** · 12-22-2011, 09:32 AM

Originally Posted by Domestic Gal

DO NOT BORROW AGAINST YOUR 401K you will be taxed on it and if you loose your job you will have to pay it all back when you leave. STUPID MISTAKE DO NOT DO THIS

You won't be taxed on a 401k loan as long as it remains a loan.

However, if you lose your job, you WILL have to pay it all back w/in I think 60 days or you WILL be taxed on it with an added 10% penalty.

And you can't pay extra on principal to 401k loans - its regular payments or everything, no accelerated payoff.

Generally speaking, though, you never borrow from your 401k and you never cash out a 401k EXCEPT to avoid foreclosure or bankruptcy. STOPPING your 401k contributions for a short while to save up a downpayment if you're otherwise debt free, however, can be sensible.

**Telephus44** · 12-22-2011, 11:40 AM

Originally Posted by Greebo

You won't be taxed on a 401k loan as long as it remains a loan.

However, if you lose your job, you WILL have to pay it all back w/in I think 60 days or you WILL be taxed on it with an added 10% penalty.

And you can't pay extra on principal to 401k loans - its regular payments or everything, no accelerated payoff.

Generally speaking, though, you never borrow from your 401k and you never cash out a 401k EXCEPT to avoid foreclosure or bankruptcy. STOPPING your 401k contributions for a short while to save up a downpayment if you're otherwise debt free, however, can be sensible.

I think the 60 day thing Greebo is talking about depending on your 401K plan administrator and can vary, but 60 is a good average. We actually took a 401K to loan to purchase our house and did change jobs and chose to pay the balance in a lump sum rather than tax the tax penalities.

I wouldn't stop the 401K contributions no matter what - I would put in the amount need to get the maximium match (6% in your case).

What I was talking about for a mortgage is the debt to income ratios - generally speaking, for housing costs it should be 25-30% of your gross income (which you would easily meet) but your total debt payments (housing, car loans, student loans) should be 36-40% (in your case, student loans plus housing put you at 43%). It's possible that you might be able to find a bank that would give you a mortgage, but it will be difficult and not at the best terms.

And lastly - if you only want to buy a house because you don't want to line a landlord's pockets , then you need to further look into pros and cons of buying a home. Rent isn't "wasting" money. And homeownership isn't just about the math.

**Greebo** · 12-22-2011, 11:54 AM

Originally Posted by Telephus44

I think the 60 day thing Greebo is talking about depending on your 401K plan administrator and can vary, but 60 is a good average. We actually took a 401K to loan to purchase our house and did change jobs and chose to pay the balance in a lump sum rather than tax the tax penalities.

I thought it was IRS driven but you're right - it varies by the administrator.

I wouldn't stop the 401K contributions no matter what - I would put in the amount need to get the maximium match (6% in your case).

I can go either way on getting the match. I certainly understand the desire to get it.

And lastly - if you only want to buy a house because you don't want to line a landlord's pockets , then you need to further look into pros and cons of buying a home. Rent isn't "wasting" money. And homeownership isn't just about the math.

ABSOLUTELY. The idea that owning is cheaper than renting is a myth. Homeownership comes with a WHOLE BUCKET of other costs that renting doesn't.

For example - a new furnace alone will run you thousands - never mind if you also want A/C with that and your ductwork needs reconfiguring for proper air flow.

**jd68** · 12-22-2011, 12:41 PM

About the 401k, I was very leery about stopping contributions as this is contrary to just about everything I've ever been told. It seems to me like it would just be throwing away free money. I have not crunched any numbers on this (I will, just for fun) but I suspect this would leave me at a long term loss given that I'm relatively young and any gains have several decades to compound.

The 401k loan I wasn't sure on. I will have to run some numbers on that as well. I'm not making any money on my 401k currently. It lost a lot of value and I'm just trying not to lose more until things start to rebound. This is why I was considering a loan, as the economy will not be likely to make a strong rebound in the next few years that I would take that loan. 4.5% interest paid to myself vs 13.38% paid to a bank. It does make me wonder what would be the cheaper deal in the long run. I'm not about to rush out and do a 401k loan as I'd prefer not to touch any of that money, unless there was a definite long term gain.

**227melissa** · 12-22-2011, 12:49 PM

Housing 35% of net which includes morg, utilities, insurance and maintenance. 10% savings, 20% transportation which includes payment, insurance, fuel, and maint. 10% debt credit cards etc. this includes debt repayment and 25% life or everything else. This comes form Suze Orman and several other experts. Plus it works.

**Greebo** · 12-22-2011, 12:51 PM

Originally Posted by jd68

About the 401k, I was very leery about stopping contributions as this is contrary to just about everything I've ever been told. It seems to me like it would just be throwing away free money. I have not crunched any numbers on this (I will, just for fun) but I suspect this would leave me at a long term loss given that I'm relatively young and any gains have several decades to compound.

Entirely possible.

Question - do you have other debt?

The 401k loan I wasn't sure on. I will have to run some numbers on that as well.
...
as the economy will not be likely to make a strong rebound

If you lose your job because of the weak economy the numbers you run wont' matter squat - you'll be an inclined plane attached helicaly around another object's axis. (Screwed)

FORGET the 401k loan. It's a bad idea. If you're gonna borrow against the 401k you shouldn't bother contributing to it.

**jd68** · 12-22-2011, 01:31 PM

Originally Posted by Greebo

Entirely possible.

Question - do you have other debt?

If you lose your job because of the weak economy the numbers you run wont' matter squat - you'll be an inclined plane attached helicaly around another object's axis. (Screwed)

FORGET the 401k loan. It's a bad idea. If you're gonna borrow against the 401k you shouldn't bother contributing to it.

I have no other debt. No CC debt, no car loans, none of that and never will. I pay cash for everything or use my CC for the points to get cash back, but paid in full every month. Not sure how this works into the picture?

I am fairly secure at work and overall like my job, though I am somewhat underpaid and have been casually looking for something that pays better. I've had a few options but long commute and uncertainty (student loans, too risky) make the pay increase not worthwhile given the risk of something not working out and the longer commute/more fuel/more time involved.