Which area of savings to sacrifice?

Saving & investing, frugality & simple living. They're all part of the wealth equation.
Here's the place to discuss getting (and keeping!) your money.

Moderator: lvergon

User avatar
Covert7
Posts: 29
Joined: Thu Jun 07, 2007 8:53 am
Contact:

Which area of savings to sacrifice?

Postby Covert7 » Thu Jun 14, 2007 9:18 am

Hi folks, I've got another hypothetical for you and would love some feedback.

Let's say you are trying to save for a few different goals, but you have a very limited amount of monthly money ($1000) available for this. First, you're trying to save up for a down payment on a house (price of house: $250k). Second, you're saving up for a car (car price: $18k). And third, you want to fund a Roth IRA ($4k). You are going to need acquire both the car and house in 3 years. The Roth would be available now of course.

A few other assumptions: you have no other debt; you have an adequate emergency fund; your living expenses (both discretionary & mandatory) have been pared down as much as possible; in 3 years your current house would have $12k of equity.

Ideally, you could save 20% down for the house, pay cash straight up for the car, and fully fund the Roth. Obviously with the 3 year time frame, and the limited funds available you can't do that.

So, what area of savings would you sacrifice? What would you put the most funds toward and why?

My thoughts go like this: Starting the Roth pays off best in the long term. Paying cash out for the car allows you to avoid a somewhat high interest rate. Having 20% down for the house avoids PMI and builds in a large amount of equity right off the bat.

Thanks for any advice and opinions from everyone! I really appreciate the patience and time everyone shares in helping us learners out. It's very much appreciated!

User avatar
pf101
Posts: 859
Joined: Wed May 30, 2007 11:23 am
Location: Portland, OR
Contact:

Re: Which area of savings to sacrifice?

Postby pf101 » Thu Jun 14, 2007 9:28 am

Covert7 wrote:Hi folks, I've got another hypothetical for you and would love some feedback.

Let's say you are trying to save for a few different goals, but you have a very limited amount of monthly money ($1000) available for this. First, you're trying to save up for a down payment on a house (price of house: $250k). Second, you're saving up for a car (car price: $18k). And third, you want to fund a Roth IRA ($4k). You are going to need acquire both the car and house in 3 years. The Roth would be available now of course.

A few other assumptions: you have no other debt; you have an adequate emergency fund; your living expenses (both discretionary & mandatory) have been pared down as much as possible; in 3 years your current house would have $12k of equity.

Ideally, you could save 20% down for the house, pay cash straight up for the car, and fully fund the Roth. Obviously with the 3 year time frame, and the limited funds available you can't do that.

So, what area of savings would you sacrifice? What would you put the most funds toward and why?

My thoughts go like this: Starting the Roth pays off best in the long term. Paying cash out for the car allows you to avoid a somewhat high interest rate. Having 20% down for the house avoids PMI and builds in a large amount of equity right off the bat.

Thanks for any advice and opinions from everyone! I really appreciate the patience and time everyone shares in helping us learners out. It's very much appreciated!


Ok, my thoughts:

1 - do you have a goal plan in place where you've outlined your goals and put on paper step-by-step how you plan to achieve them? If not, you should. There may be other, shorter-term goals that you're forgetting about.

2 - Do you REALLY need a new car in 3 years and does it REALLY have to cost $18k? You can get a perfectly nice used car for $10k or under. Can you push out your timeline?

3 - How do you know how much equity your current house will have in 3 years? I'd be very careful about counting on that money until you sell, particularly with the current housing market. Regarding 20% down, it's a great goal - may or may not work. But there are other ways to avoid PMI such as 80/10/10 or 80/15/5.

Personally, I'd focus on the Roths first (because worst case you can dip into those if you HAVE to). Then I'd split between the car and the house maybe 70/30 with the most going towards the house.

Obviously I don't know everything about your situation or where you're moving but make sure you actually need the car before you get one. If you're moving to a large city, more and more alternatives are being developed.

User avatar
Covert7
Posts: 29
Joined: Thu Jun 07, 2007 8:53 am
Contact:

Postby Covert7 » Thu Jun 14, 2007 9:44 am

Let's see what I can clarify:

1)Not sure I really understand this one. We have gone through our monthly income/expenses and planned out how our money will go towards each. To the best of our ability we believe these 3 things are our only immediate goals.

2)Well the $18k was considering a nice used car. We have 2 cars both over 100k miles. One of them is probably going to bite it in the next 3 years. Of course I'm going to do everything I can to prevent that, but our little car has had a lot of major trouble lately. It's still safe to drive and that's the only reason I haven't blow it up yet. :P We were thinking the next car (whenever that is) would be a used small SUV like a Honda CRV or something similar. (Growing family, yay!)

3)We paid $123,500 for our current place. We now owe about $117 on it and accoring to my mortgage papers we're paying roughly $150 per month in principal. Take that out 3 years and that's were I got the $12k equity. Of course the sale price and appreciation will change this, but I'm just playing with rough conservative numbers.

I also agree about the Roth. I feel pretty strongly about funding that asap. As for the move, it will be to another neighborhood in a nearby suburb. Closer to family and a good school district. So unfortunately, we'll still need 2 cars. :(

Thanks again Mandy for stepping up with your advice. You're a great resource on these boards!!

nickel
Moderator
Posts: 283
Joined: Fri Mar 30, 2007 5:39 pm
Contact:

Postby nickel » Thu Jun 14, 2007 9:50 am

FWIW, I bought a brand new CR-V 18 months ago for not much more than $18k (and I love it).

User avatar
pf101
Posts: 859
Joined: Wed May 30, 2007 11:23 am
Location: Portland, OR
Contact:

Postby pf101 » Thu Jun 14, 2007 9:54 am

Covert7 wrote:Let's see what I can clarify:

1)Not sure I really understand this one. We have gone through our monthly income/expenses and planned out how our money will go towards each. To the best of our ability we believe these 3 things are our only immediate goals.

2)Well the $18k was considering a nice used car. We have 2 cars both over 100k miles. One of them is probably going to bite it in the next 3 years. Of course I'm going to do everything I can to prevent that, but our little car has had a lot of major trouble lately. It's still safe to drive and that's the only reason I haven't blow it up yet. :P We were thinking the next car (whenever that is) would be a used small SUV like a Honda CRV or something similar. (Growing family, yay!)

3)We paid $123,500 for our current place. We now owe about $117 on it and accoring to my mortgage papers we're paying roughly $150 per month in principal. Take that out 3 years and that's were I got the $12k equity. Of course the sale price and appreciation will change this, but I'm just playing with rough conservative numbers.

I also agree about the Roth. I feel pretty strongly about funding that asap. As for the move, it will be to another neighborhood in a nearby suburb. Closer to family and a good school district. So unfortunately, we'll still need 2 cars. :(

Thanks again Mandy for stepping up with your advice. You're a great resource on these boards!!


1) Take a gander at this: http://personalfinance101org.blogspot.com/2007/06/how-to-effectively-set-and-track-goals.html it will help you understand what I meant by a goal plan.

The rest all makes sense and I can see you've been thinking a lot about it. I'd definitely try to make your car last as long as possible...hopefully that will give you time to save up enough.

$123k for a house. Blows my mind. Coming from DC where you can get a 1 BR condo for $400k that looks so cheap to me. :-)

Finally, thanks for the kind word. I know it sounds dopey, but I love helping people and this kind of stuff is my passion. :-)

User avatar
plonkee
Posts: 458
Joined: Thu Apr 05, 2007 1:25 am
Location: England
Contact:

Postby plonkee » Fri Jun 15, 2007 1:20 am

I think I would fully fund the Roth - your old selves will be very grateful.

Then I'd save up the rest of the money in a high interest account.

Then I'd do whichever was cheaper. If a car loan would be cheaper than the PMI etc then I'd do that, for example. Personally I wouldn't get a loan secured on the car as but thats just me.

I'm sure it goes without saying that you should continue evaluate whether these goals are important to you and if so, look for ways to generate extra money / savings wherever possible.
In mathematics you don't understand things. You just get used to them. John von Neumann

uk personal finance and religion and atheist

144mph
Posts: 211
Joined: Mon Jun 11, 2007 8:13 am
Contact:

Postby 144mph » Fri Jun 15, 2007 4:14 am

I would strongly discourage you from buying a new car. I bought a new car 4 years ago and though I paid it off in 2 years with a 5 year note, I will never make this mistake again. It was a weight over my head from day 1. In fact, one of my life goals is to never buy a new car again. Ever.

I'm a bit unusual because I wouldn't bat an eye at buying a car that has nearly 200K on the clock because I know what to look for and how to fix even major issues like grenaded engines and fragg'ed transmissions. But most people seem to think that as soon as a car get's 60K it's bound to fail. Well, that's probably true if you're driving a peice of junk that was poorly chosen to begin with and never maintained. But if you keep up on repairs, there's no reason a modern car shouldn't last 200,000 miles. I work close to the engineering industry, and I can tell you that every major manufacturer builds their vehicles to at least a 200K standard life on all major components.

As far as the house savings, I'd say forget about that entirely. Nobody has been able to present me with sufficient evidence that owning a home is the right decision for most poeple, and I say that as a current home owner. I'd go so far as to say that purchasing a home was one of the worst investments I've made so far. Then again, I don't have a family to worry about, so a home may be your #1 priority regardless of what kind of investment it is. A lot of people on this site and other frugality sites seem to place a HUGE emphasis on home ownership.

I'd advocate paying your IRA, buying a car worth 3-5K and then investing the rest for long term. So basically, I agree with plonkee, sort of.

User avatar
Covert7
Posts: 29
Joined: Thu Jun 07, 2007 8:53 am
Contact:

Postby Covert7 » Fri Jun 15, 2007 7:46 am

Thanks for the input guys! Yeah, we're almost certainly going to go ahead and setup the Roth and have that fully funded. I do contribute in my company 401k up to the matching amount (4%) but we still want this Roth rolling.

As for the car, don't worry about us considering new. Like I mentioned earlier, we just want a good dependable used vehicle that will fit our growing family needs. One of our cars (a 2001 Acura sedan) will almost certainly last a long time still. It's got over 100k miles but is in great shape and I expect that to continue. Our other car (a 2000 Saturn sedan) is also over 100k but it's really been struggling lately. However, I'm determined to keep it up to snuff as long as it's safe to drive. Gonna have to sink about $1000 into it though for some repairs, but that's still way cheaper than getting a car note! And since both of them are totally paid off that's just added incentive.

So for now, it's looking like we're going to go ahead and fully fund a Roth and then just start tossing the remainder of the savings money into our MMA. Hopefully we'll get to the house purchase before we have to replace a car as I'd rather use the money for that. Man, I sure wish these things were spaced out a little bit better. But who knows? Maybe our cars will make it another 8 or 10 years. Maybe we won't be able to have another child and won't need a house upgrade. Maybe, maybe, maybe....

But we're going to at least plan for those things as they're very real possibilities and we don't want to be caught unprepared!


Return to “Personal Finance”

Who is online

Users browsing this forum: Exabot [Bot], Google [Bot]