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 Post subject: From E to O: What's the next step in savings/investing?
PostPosted: Tue Dec 04, 2012 11:38 pm 

Joined: Sun Dec 02, 2012 9:04 am
Posts: 5
Hi there! I am 29 yo active duty AF (E-5) and my husband just enlisted in AF reserves. We have been married for 5 years and have a 3 year old daughter. Our dream is to be able to retire in mid-50s but I am not sure if we are on track. I feel like we have been making small steps towards ER except for one major mistake of buying a house in 2008 (VA loan, 0% down) on our first duty station in Northern CA. The good news is we were able to refinance at the beginning of this year (30 yr fixed @ 3.25% - $1758/mo) and renting out the house at $1795/mo. No plans of short sale as we intend to keep the house as it could possibly be our retirement home. We now live on base and intend to do so on our future assignments.

Our current financial status
ROTH IRA - Vanguard 2045/2050 ($50000)
TSP/401K - Lifecycle 2040 ($20000)
Emergency Fund ($2000)

Loans
Car 1 ($18000 at 1.99%)
Car 2 ($5000 at 2.49%)

Except for his once a month weekend drills, my husband has mostly been a SAHD to our daughter for the past year and a half and this has set us back in terms of not being able to contribute to TSP as much this year and dipping into our EF when both of our cars broke down. We are still able to max out our ROTH.

Here is my question: I am almost 9 yrs into enlistment, but I am also in military PA school full-time as an officer trainee, so in a few months I will be earning O-2E wage, roughly $2500 net increase to what I'm being paid now. My plan is to max out the ROTH IRA and TSP, but I'm not sure where to put the rest (bonuses, potential husband's earnings if he gets a job part time, etc). Establish the EF (but up to how much?) Should I pay off the car loans? Refinance into a 15 yr mortgage? College funds?

Thanks for reading and looking forward to your advice!


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 Post subject: Re: From E to O: What's the next step in savings/investing?
PostPosted: Wed Dec 05, 2012 8:28 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
IMNSHO, your ship is close to sinking. You have $23k in car loans and both your cars broke down?! You make a whopping $37/mo on the rental, which won't even cover a routine trip to Home Depot. So, I think the question you need to ask yourself is, How do you handle your rental when a pipe bursts? How do you handle your rental if it is vacant for a month or two? And then you go on and on about how nice your rental is for the price, how it won't happen to you, blah, blah, blah. You may not see it as that way, and that's fine by me, as I won't be making the calls to relatives begging for money.

You shouldn't be worrying about the next step, as you're still on step 1.

Here is what I would do if I were you:

1) Increase emergency fund to 6 months expenses + $10k or so for the rental.
2) Detail every penny spent in your regular budget.
3) Develop goals for you and your husband and translate into a savings/investing plan.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: From E to O: What's the next step in savings/investing?
PostPosted: Wed Dec 05, 2012 12:38 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5398
I'd increase the EF to cover at least a full year of expenses on the rental depending on what kind of tenant lease you have.

I don't think you are quite in as bad a shape as Bichon says because you probably have a military retirement available to you in just a few years if needed. He says your ship is sinking. I'd say you are definitely taking on water and better take some action soon or it will be sinking.

You have three clear risks: car breakdown, rental vacancy, and major maintenance problems at your rental. I'd take the following steps:

0. Discontinue all voluntary retirement plan contributions
1. Immediately build that EF to at least 6 months to cover a problem at the rental.
2. Pay off the $500 car loan to improve your cash flow/reduce your obligations.
3. Continue building the EF until you have 1 year expenses including the rental mortgage.
4. Restart your TSP contributions.

The bottom line is that, while you have a stable job and several things going for you, you are also just one "bad event" from being in serious trouble. You need to build a better moat.


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 Post subject: Re: From E to O: What's the next step in savings/investing?
PostPosted: Wed Dec 05, 2012 8:09 pm 

Joined: Sun Dec 02, 2012 9:04 am
Posts: 5
Thank you for the responses. Re the cars, I should have clarified that the car loans are nused cars we purchased about year ago when our old 1992 Lexus and 1994 Corolla broke down & eventually died (within a month of each other, yes, how dramatic). We did put a significant down payment on Car #2 hence the low EF but it should be paid off within the next year. We intend to take good care/keep these cars for the next 15+ yrs just like we did on the previous ones.

I do agree about taking care of the EF first just like Bichon mentioned, as any major repairs in the house could be potentially disastrous to our finances. Not so much worried about not being able to rent it out; our tenant just renewed their lease too. To be honest, it was a real concern when we first got our orders to PCS (what if it becomes vacant in x months?) but we quickly realized that our neighborhood is very desirable to renters (established, lots of retirees & young military families). So far there has been no gaps between leases, but I also realize that maybe we've just been getting lucky all these years lol. So yes I'm not so much opposed to the idea that a year's worth of expenses in the EF will make me sleep better at night.


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 Post subject: Re: From E to O: What's the next step in savings/investing?
PostPosted: Fri Dec 07, 2012 10:52 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5398
adeline wrote:
... we quickly realized that our neighborhood is very desirable to renters (established, lots of retirees & young military families). So far there has been no gaps between leases, but I also realize that maybe we've just been getting lucky all these years lol. So yes I'm not so much opposed to the idea that a year's worth of expenses in the EF will make me sleep better at night.


I don't want to rain on your parade but rather to make you aware of a couple of economic "threats" to your plan that you should at least think about:

Renting right now is very popular both because a lot of people got slammed when real estate prices fell so they are afraid to buy and banks are stingy with loans now so many people can't get loans to buy. If interest rates go up or home prices start rising, the pool of renters could fall.

Rentals near military bases, universities, and so forth are usually safer. But there is a good chance we're going to see a major drawdown in US forces over the next few years. We are closing out two wars and defense budgets are being cut because of the debt/deficit issues. There are plenty of defense hawks that will fight this but I think it is inevitable over the 5-10 year time frame regardless of who is in power. This could lead to fewer renters for you or even a base closing that could be disastrous to your plan.

Just make sure you think about those things and recognize how they could impact you.


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 Post subject: Re: From E to O: What's the next step in savings/investing?
PostPosted: Fri Dec 07, 2012 7:49 pm 

Joined: Sun Dec 02, 2012 9:04 am
Posts: 5
I understand what you're saying and we are aware of all those things you mentioned. It might seem that we don't know what we're doing, but one of the reasons we bought the house is because we know that our previous base has a low likelihood to be affected by BRAC - it's one of the top 3 largest/busiest AF base in the country and just recently established a new multimillion dollar Heart, Lung & Vascular Center that caters to DoD/VA beneficiaries. We are only renting our house temporarily but planning to move back within the next 7-10 years, hopefully for my last PCS move.


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 Post subject: Re: From E to O: What's the next step in savings/investing?
PostPosted: Sat Dec 08, 2012 8:20 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5398
adeline wrote:
I understand what you're saying and we are aware of all those things you mentioned. It might seem that we don't know what we're doing, but one of the reasons we bought the house is because we know that our previous base has a low likelihood to be affected by BRAC - it's one of the top 3 largest/busiest AF base in the country and just recently established a new multimillion dollar Heart, Lung & Vascular Center that caters to DoD/VA beneficiaries. We are only renting our house temporarily but planning to move back within the next 7-10 years, hopefully for my last PCS move.


Then it sounds like you are in good shape. I'm just trying to help you think through the risks objectively and it sounds like you have.


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 Post subject: Re: From E to O: What's the next step in savings/investing?
PostPosted: Sat Dec 08, 2012 7:30 pm 

Joined: Sun Dec 02, 2012 9:04 am
Posts: 5
Yes, and thank you for the suggestions you provided above. Our main goal is to reestablish our emergency fund. I admit I was in denial for months and keep telling myself that we're in OK shape, but when I sat down and listed our income/expenses, I'm more determined to start now before we get into further trouble.


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