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.