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One of the things I love about reader cases is finding badass people. Those brave, gritty badasses who refuse to let their circumstances define them and find a way out without whining or wallowing. Yes, empathy is important and yes I agree, sometimes we do need our feelings acknowledged. But really at the end of the day, after you’re done feeling shitty and crying, you still have to pick yourself up and DO something about it. Wallowing accomplishes nothing. And that’s why I love this reader case (note: email has been edited for brevity):
“Hi there,
I know y’all are extremely busy given the huge status of your badass blog but I would LOVE it if you guys could make sure I am steering my boat in a good direction.
About me:
Became debt free from my massive student loans (over $100k) at 29.
Had a second job as a waitress for the last 10 years, just quit it 3 months ago once my emergency savings was completed.
I am now 30 years old.
Single female.
Live in Nashville, TN in a room I rent from my friend who owns the house. It is the homeowner, her smelly dog, myself, and one other girl who lives there.
My goals (Other than finding a husband, of course):
1. Make sure I have enough to retire around the age of 55-60.
2. Be able to pay at least half in cash (approximately $6k) for a 4 year old used sedan in the next year.
3. Have some free money to travel every now and then as well as afford the occasional dinner out, and small shopping endeavors without worrying I am hurting my net worth.
4. Possibly one day buy into the housing market a few years down the road without having to pay PMI and putting at least 20-30% down. I know, I know, a house is not an asset and is a liability, but I will not want to rent a room and live with 2 other roommates when I am 35-40 years old. And rent is kinda outrageous here in Nashville.
Your gross/net annual family income:
Gross 2016 Income: $52,110.08
Net 2016 Income: $37,375.78
Your monthly family spending:
Expenses: Approximately $1,650 per month
Savings: Approximately $1,300 per month
Monthly Roth IRA Contribution: $450 per month
For any debts you have, please include:
I am completely debt-free
Any fixed assets you have (house, car, etc.):
I own a 14 year old Honda SUV (valued at $2,300)
And investments or savings you have (cash, bonds, stocks, etc.):
Emergency Fund (in a money market account): $10,200
Individual IRA (from a rolled over 401k): $7,400
Roth IRA (in a Target Retirement Fund at Vanguard): $1,450 (Just started this in April of this year after I funded my emergency fund)
Old employee stock at ETrade: $1,900
Current 401K (in a Target Fund): $5,500
Current Savings: $2,000
I have refused in the last few years to follow the crowd, aka my friends, when it comes to buying and LEASING (what?!) brand new huge impractical SUVs, houses they have no business buying (including the one I live in) where they weren’t able to put any money down, nail and hair salons on the regular, extreme shopping, and nights out with huge dinner and drink tabs. I want the things they have, but I want to be able to afford it all first and not live paycheck to paycheck in order to have those things. The majority of these said friends make more money than I do, and some have husbands so they definitely make more money than myself, but my net worth (although it is small for my age) is more than the majority of theirs thanks to their debt.
My plan is to keep contributing $450 per month to my Roth and max it out every year, bulk up my current savings to buy a used vehicle AND start investing money (for non-retirement purposes) to be able to use in 10(ish) years for a possible house down payment. I plan to invest the approximate $1,300 per month I can save into an Ameritrade account just like your investment workshop says to do: BND, VTI, VEU.
If you were debt-free, making a low-median income, renting a bedroom in someone else’s house with roommates, driving an old ass car, single, and 30 with a net worth of only $30k, what would you do?! Is investing in a non-retirement index funded taxable brokerage account wise?
Thank you times a million!”
–Nashville Badass
Well, NB, first of all, give yourself a massive pat on the back for paying off $100K in student loans by the age of 29! And even MORE impressive is how you got a second job as a waitress for 10 years to help you pay off that debt. No wallowing, no whining about how other people had it easier, no handouts. You simply went out, got a second job and murdered the hell out of that debt. I love that “get shit done” attitude! Kudos!
Now let’s look your situation and see how we can get you to your goals. So without further ado, let’s MATH THIS SHIT UP!
| Summary | |
|---|---|
| Net Income: | $37,375.78 /year |
| Spending: | $1,650 *12 = $19,800/year |
| Debt: | 0 (it used to be $100K! Wow! Fantastic job murdering that debt!) |
| Investable Assets: | $10,200 + $7,400 + $1,450 + $1,900 + $5500 + $2000 = $28,450 |
Okay, so looking at your high level numbers, you’re actually doing pretty well! With a savings rate of 53%, if you wanted to retire early, you’d only be 15 -18 years away!
But is it well enough to meet your goals? Let’s find out.
GOAL 1: Retire by the age of 55-60
Based on your current spending of $19,800/year, you’ll need $495,000 by the 4% rule. You are currently putting away $17,575.78 /year + $450/month * 12 (Roth IRA) = $22,975.78/year.
And since you’re starting with $28,450 of investible assets, your time to retirement looks like this:
| Year | Starting Balance | Savings | Return | Total |
|---|---|---|---|---|
| 1 | $28,450.00 | $22,975.78 | $2,276.00 | $53,701.78 |
| 2 | $53,701.78 | $22,975.78 | $4,296.14 | $80,973.70 |
| 3 | $80,973.70 | $22,975.78 | $6,477.90 | $110,427.38 |
| 4 | $110,427.38 | $22,975.78 | $8,834.19 | $142,237.35 |
| 5 | $142,237.35 | $22,975.78 | $11,378.99 | $176,592.12 |
| 6 | $176,592.12 | $22,975.78 | $14,127.37 | $213,695.27 |
| 7 | $213,695.27 | $22,975.78 | $17,095.62 | $253,766.67 |
| 8 | $253,766.67 | $22,975.78 | $20,301.33 | $297,043.78 |
| 9 | $297,043.78 | $22,975.78 | $23,763.50 | $343,783.06 |
| 10 | $343,783.06 | $22,975.78 | $27,502.65 | $394,261.49 |
| 11 | $394,261.49 | $22,975.78 | $31,540.92 | $448,778.19 |
| 12 | $448,778.19 | $22,975.78 | $35,902.25 | $507,656.22 |
So you will reach your $495K portfolio number in a little over 12 years, assuming a conservative average 6% return.
Since you’re 30 years old now, that means you’ll be able to retire at the age of 43! A full 12 ahead of your goal of 55! Boo-yah!
And this is assuming your salary is only increasing at the rate of inflation to offset inflation costs. If you get any promotions or raises (which is very likely, considering your amazing hustle), you’ll get there even faster!
Another thing that could help you retire faster is contributing to your 401K. You mention that you have some money in your 401K but you don’t mention contributing to it on a monthly basis. If you did, you’d able to decrease your tax burden and add money towards your retirement fund faster because of saved taxes and employer contributions (and no, you don’t have to wait until 59.5 to withdraw it. Read this article about the Roth IRA conversion ladder on how to get it out).
So in terms of goal 1, you can easily blow past it continuing at your current savings rate if you invest appropriately. (If you just leave it in a saving account the money will get eaten up by inflation and your portfolio will shrink, year over year).
GOAL 2: Buy car with at least 50% cash in the next year
Given that your current numbers gives you a 12-year tail wind, if you were purchase a 12 year old Honda Fit (best used car, as chosen by Mr. Money Mustache: http://www.mrmoneymustache.com/2012/03/19/top-10-cars-for-smart-people/) for $12-15K, that wouldn’t break the bank. And if you could sell your existing car and put the $2300 toward the “new used car”, you’d be out of pocket $9700, which would take you only 7 months to save up for it if you pay in cash. I would not advocate getting a car loan, considering the rising interest rate environment, and how you just managed to dig yourself out of the 100K debt hole. That debt monster is dead. Do. Not. Resuscitate.
So if you bought a $12K car with cash, you’d only be setting your retirement back 7 months, which isn’t a big issue since you’d still be 11.5 years ahead of your goal.
That being said, a car depreciates in value over time, so it’s generally a shitty investment. If the option were available, I’d rather use a car sharing service to keep the costs down, as we mentioned in this Monday’s post.
GOAL 3: Money to travel and eat out occasionally
This depends on how often she wants to eat out and where she wants to travel to. However, given that her savings rate is 53%, she has $0 debt, she rents and thus has predictable expenses with no surprise maintenance costs, and is 11-12 years ahead of her retirement schedule, I would say spending a couple grand a year on vacations and eating out isn’t going to break the bank. But again, this is a number that NB would have to calculate and see how that affects her retirement date.
GOAL 4: Buy a house with at least 20% down
Given that you live in Nashville, with an average rent price of $1426/month and a median home price of $228,500, buying a home in the next 5-10 years is actually not a bone-headed idea. But given your salary, savings rate, and goals, does it make sense?
In order to put 20% down (the minimum to avoid PMI), you would need $45,700. Add to that additional costs of ownership like property taxes (2,280/year, https://smartasset.com/taxes/property-taxes#UmlukNZVtp), insurance ($1200/year), maintenance ($2,285/year) + home inspection ($400) + lawyer fees/closing costs ($500).
Using the monthly calculator, her monthly payment would be:
$377.58/month principal, $557.25/month interest = $934.83/month
Adding in the additional costs, we’re looking at $934.83 + $190 (prop tax) + $100 (insurance) + $190 = $1414.83 / month. Plus add one time closing costs of around $900 for home inspection and lawyer fees.
Of course this is an approximate cost. Maintenance varies from house to house, and since she’ll be moving from a smaller space to a bigger one, she’ll also have to account for extra furniture costs, as well as increased utility costs for an increased space. Also, we are not including interest rate increase, which will definitely affect her mortgage as well.
Of course, American readers will yell at me if I don’t include the tax deductions, so let’s see how much that actually helps.
The difference between the taxes paid with and without mortgage deduction, using this handy-dandy tax calculator, we can see her tax burden of $8936 without the mortgage deduction go down to $8897, a whopping difference of…$39.
So in this case the mortgage deduction once again…does barely anything.
If she wants to buy a house, it will take her 2 and half years to save up the down payment. Even though she has 10K in her emergency savings that she could deploy towards the downpayment, I would recommend against it, since it’s always a good idea to have at least 6 months of living expenses set aside, just in case.
So if she wants the house and the car, this would have the following effects:
- Push out your retirement by 7 months to save up cash to buy the car
- Push out your retirement by 2.5 years to save up for the downpayment
- Add $1414 a month for mortgage + home ownership costs
- Subtract what you’re paying now for rent. Because she didn’t provide her own personal rent, I’ll have to just guess this is around $700 for a shared bedroom in an apartment. Feel free to correct and rerun the math yourself.
Put all this together and this has the following effects:
- Her annual spending rises from $1650 a month to (1650 + 1414 – 700) = $2364 a month, or $28368
- Her FI number rises from $495k to $709k
- Her saving rate goes from $22,975.78 to $14,407.78
| Year | Starting Balance | Savings | Return | Total |
|---|---|---|---|---|
| 1 | $28,450.00 | $14,407.78 | $1,707.00 | $44,564.78 |
| 2 | $44,564.78 | $14,407.78 | $2,673.89 | $61,646.45 |
| 3 | $61,646.45 | $14,407.78 | $3,698.79 | $79,753.01 |
| 4 | $79,753.01 | $14,407.78 | $4,785.18 | $98,945.97 |
| 5 | $98,945.97 | $14,407.78 | $5,936.76 | $119,290.51 |
| 6 | $119,290.51 | $14,407.78 | $7,157.43 | $140,855.72 |
| 7 | $140,855.72 | $14,407.78 | $8,451.34 | $163,714.85 |
| 8 | $163,714.85 | $14,407.78 | $9,822.89 | $187,945.52 |
| 9 | $187,945.52 | $14,407.78 | $11,276.73 | $213,630.03 |
| 10 | $213,630.03 | $14,407.78 | $12,817.80 | $240,855.61 |
| 11 | $240,855.61 | $14,407.78 | $14,451.34 | $269,714.73 |
| 12 | $269,714.73 | $14,407.78 | $16,182.88 | $300,305.39 |
| 13 | $300,305.39 | $14,407.78 | $18,018.32 | $332,731.49 |
| 14 | $332,731.49 | $14,407.78 | $19,963.89 | $367,103.16 |
| 15 | $367,103.16 | $14,407.78 | $22,026.19 | $403,537.13 |
| 16 | $403,537.13 | $14,407.78 | $24,212.23 | $442,157.14 |
| 17 | $442,157.14 | $14,407.78 | $26,529.43 | $483,094.35 |
| 18 | $483,094.35 | $14,407.78 | $28,985.66 | $526,487.79 |
| 19 | $526,487.79 | $14,407.78 | $31,589.27 | $572,484.84 |
| 20 | $572,484.84 | $14,407.78 | $34,349.09 | $621,241.71 |
| 21 | $621,241.71 | $14,407.78 | $37,274.50 | $672,923.99 |
| 22 | $672,923.99 | $14,407.78 | $40,375.44 | $727,707.21 |
And also remember that savings up the downpayment for the house and car added an additional 2.5 years onto this plan, so our retirement date jumps from 12 to about 25.
BUT keep in mind, our reader wanted to be able to retire at 55-60, so because she’s only 30 right now, that puts her right on the path to retire at 55!
So it looks like all 4 goals are very achievable when you’re a badass like NB. She proves that you don’t need to make a STEM salary to live a good life.
As for her goals to find a husband, well, judging by the traction we had on Wanderer’s “frugal hook-ups” article , I’m sure our readers can help her out with that in the comments…
*bow chica wow wow*
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Car sharing is available in Nashville with Zipcar; in Atlanta it’s $7 per month + hourly rate from under $9, with insurance and gas included. Definitely a great suggestion. Not to mention the opportunity cost of investing the money instead of buying the car…
Not owning a car will also mean she won’t need to worry about looking for a house with a garage or parking nearby, which will expand her options and probably reduce the amount she pays. However, given her home-ownership goal is at least 5 years out, who knows what interest rates will be doing by then. I’d advise her to invest as much as possible, and if/when a house crash/decline happens – and assuming she can get a good rate – she could tap into her investments to buy a home without affecting her net worth too much. I would also always advise looking for property with spare-room rental potential.
Good luck with your goals, sounds like you’re on the right track!
Wow, $7/month + <$9/hour everything included for car sharing in Atlanta. Can't beat that! You also made a great point about not needing a place with garage or parking. I think one of the biggest advantages we had back when we were renting is not needing a parking space. That opened up a whole bunch of cheap rentals. Love car sharing! Glad to know that it exists in Nashville too.
Wait wait wait… a *second job* to pay down debt. No whining? No complaining about how life isn’t fair and she can’t save 50% of her salary after a monthly visit to the salon and 5 vacations a year? She plans to buy a used car too?
Nashville Badass is actually doing quite well… because of her entirely well adjusted attitude. Her savings rate is already 53%!
I think she might actually understand how this wealth building stuff works.
I know right? And she did it for 10 whole years! I’m so impressed. millennials = whiny? HA!
I’m also a single lady in my 20’s in Nashville! Hello! Rent prices are indeed ridiculous here. We’re having a huge influx of people moving in (understandable, it’s pretty great) so landlords think they can charge outrageous prices for dumps. That being said, reasonable places aren’t impossible to find if you spend a LOT of time searching & touring — I just moved to a great apartment (biking distance from my office!) that’s saving me an extra $250/mo compared to my last place. Took a lot of work, but worth it.
The other fantastic thing about being in Nashville is there are about a million free events, shows, festivals and other things to do happening ALL the time. If you play it right, it’s a pretty sneaky place to save money while still having a hell of a good time.
Good luck with everything, and kudos for being WAY ahead of just about everyone else I know that’s our age. May the gods of beautiful Nashville men smile upon both of us!!
Breadbiker, I was just wondering about the apartment option – there’s a middle ground between the current situation with two roommates (plus smelly dog!) and buying a house. Nashville Badass, have you done any serious investigation of your options for renting a small apartment by yourself? I can see that your current setup might not really be sustainable for a decade* now that you can afford something better, but you might be quite happy in a solo apartment long term. And it should be less expensive than a house, if pricier than living with roommates.
*Different strokes for different folks – I know some people are quite happy with long-term roommate situations. I have lived with roommates quite a bit, for as long as a couple of years with the same person, and it can be okay. But speaking as an introvert, I *adore* having my own space with no one else in it, and I’m willing to delay retirement a bit to never compromise on that again. I’ll still be retiring ridiculously early by normal people’s standards.
The middle ground sounds like a good option to consider. The apartment rental prices in Nashville seemed a bit pricey from a cursory search, but like breadbiker mention, there is always deals to be had if you’re willing to put the work into research. That’s how we found such a great deal with we lived in Toronto.
@FIRECracker and @breadbiker
What if… And only what if… Don’t punch me, it’s just an idea… You would have taken the time you took to search for a lower priced appartment and instead searched for a great real estate deal, bought the house or rental property and sold it later with a nice profit?
Maintenance cost? Plan for it. As long as the property take value with the repairs (ratio of 1:1 at least, way better if it’s 1:2), I call it investing.
Interest rate, city tax, school tax : That’s “fixed” cost. As long as it’s not higher then your “fixed” rent, you’re not in the red. If it is, then make sure to still make a nice profit after calculating that extra cost + its opportunity cost.
Higher utility cost : Yes. It’s like double!
Planning on traveling a lot and scared to pay for an empty house? Rent it. A friend of mine travels at least 3 months a year, backpacking around the world. Meanwhile, his house is rented and pays for itself and more. That’s kind of the secret in real estate investing ; it has to pay for itself and more.
High end furniture : you could as well have high end furniture in an appartment. That is really up to everybody to choose where to spend their money. My house doesn’t have much high end furniture. Yet again, used high end furniture might be cheaper and might last longer then new build-it-yourself-from-that-box.
Sooooo…. Yes, I said it, I have a house. To be fair, I also have some rental properties, so I love good and responsible tenants. I’m all for renting, but I just don’t think it’s a good golden rule for frugal people that are able to see their financial future 10 to 15 years ahead.
If you can plan 15 years ahead and keep track of your spending and investments, buying real estate might be a very great addition to your portfolio, rental real estate or not.
Buying a house over your budget or at the amount the bank tells you it’s ok? No.
Buying a house without having it inspected, and why not, having watched a couple episodes of Holmes on homes? No.
Paying more for a pool, a spa, that good looking granit countertop, and stuff? No.
Buying a house in an upcoming neighborhood? Yes.
Buying a house 20% to 30% under it’s market value? Yes. (Is it easy to find? No. Can it be done? Yes.)
Just my two cents! 🙂
I respect all opinions and choices. Please don’t hate me for mine. Peace and love people!
HA HA. Don’t worry my fists are firmly planted by my side. I’m with you on responsible home ownership. Hell, if I could buy a house that rents for 1% of the home value per month, I probably would consider it.
Thanks for your 2 cents!
Another middle ground option is to buy a co-op apartment. The purchase price will be cheaper than a house, and you’re only responsible for maintenance within the “4 walls” of your unit. Meaning no one’s sending you a bill if the boiler needs fixing or something. That’s what I’m looking into now, as buying a co-op is cheaper than renting a comparable apartment where I am (and don’t forget that that mortgage will eventually be paid off).
Just make sure your HOA/maintenance fees are reasonable and that they cover as much as possible. THAT’S more important than your mortgage on a month-to-month basis.
Sincerely,
ARB–Angry Retail Banker
Sounds like an awesome place! I’m going to have to check out Nashville if I’m ever in the area in the States.
amazing, Nashville badass!
I want to second FIRECracker’s points on investing in your 401k. Even without matching and sub-par fund choices it is STILL a better deal in most cases. Mad FIentitst has a lot of the numbers on that one.
Another thing to consider IF it is available is whether you can get an HSA through your employer (NOT a FSA, those are different and suck). Mad FIentist has a great post on why they rock so hard.
Both of those are pre-tax investments (and the HSA is usually contributed to pre other payroll taxes as well, depending on your employer’s setup, possibly making it an even sweeter deal) so the ‘extra’ you can save in taxes can keep you sending money to your Roth IRA as well.
Also, if you REALLY want to get a house later, you can use the contributions (not earnings) from your Roth IRA for your down payment. This isn’t always the best idea in the universe, but it is an option and worth running the numbers (aka even more mathing that shit up) after you get everything else set up.
Best of luck to you!
@Nashville Badass
You’re my dream girl!
@Wanderer & @FIREcracker – that FIRE based dating app would be awesome!
It looks like that’s a project that would benefit many…but alas so many fun projects to work on, so little time 🙂 And they said we’d be bored in retirement…HA!
Nashville Badass! Great work – why not buy a house – live there and rent out the rooms (basically replicate your situation except you are the landlord). I assume you could cover most of your housing cost w roommates and start building equity
I agree that finding roommate will help with the mortgage, but one of the reasons why she wants to buy a house is to NOT have to have roommates anymore. So I’m not sure switching the situation would help. You’re still sharing a space with others.
Good point to mention though. She can decide whether it’s worth the trade off.
@Nashville Badass – of course if you get married to a like-minded, employable guy, you’d get there even faster. And vice versa.
Do you have someone in mind, Gary? 😉
Nashville Badass – keep on grinding! You sure have the right attitude.
Another thought, when you’re ready to purchase your house, try to
get something with an “in-law” unit that you can rent out. If sure
will help on your mortgage payments.
Ciao!
I second that! My “in-law suite” not only pays my entire mortgage payment, it makes me $8 passive income each month;)
Nashville Badass – so so hot.
Wow. Such an incredible attitude toward money management and debt destruction. Can’t help it – you’re a dream girl. You’ll definitely meet and exceed your goals by a longshot.
If the 700$ estimate on her room cost is accurate, I would suggest buying the house immediatelyor asap, and rent out extra rooms for 700$ each. That would bring her monthly housing costs to less than 100$. If she could find a house that in addition to the three bedrooms had an inlaw suite or a forth bedroom, she could rent it out as well. May not be exactly how she envisioned home ownership, but she sounds like a girl who is willing to make sacrifices for financial independence. Would that speed up her retirement date?
My other suggestion for travel, is travel hacking, just booked my first flight this way thanks to this blog. Go to countries inexpensive to travel in for now.
Thanks for your 2 cents, Suzq400. She did mention she wants to put 20% down so she doesn’t have to pay the PMI, so buying immediately may not be the best option. She could take money from her emergency funds, but that would be risky.
But yes, I agree with using travel hacking to help save money for her trips. And now’s a good time to travel, considering how high the American dollar is!
The US tax code is pretty complicated, but you are under-reporting the tax savings in this case study. You claim that she is only saving $39/ year, which accurate if she is only deducting the mortgage interest and nothing else. The reality is that she can also deduct property tax (~$2000) & state income tax (assuming ~4%, that would also be ~$2000), plus any charitable donations and other miscellaneous items. The mortgage interest of $6684 gets her over the standard deduction of $6350, which is what allows her to deduct these other items. So her total itemized deduction will be $6684 + $2000 + $2000 = 10,684 not including other possible deductions. Her tax savings assuming a 15% marginal rate would be (10,684 – 6350) * 15% = $650 per year. Not enough to change the math too much, but way better than $39/year.
Charitable donations, misc, state income tax, none of those things are related to buying a house. You can do does things while renting as well.
The comparison is with housing tax deductions and without. Not adding a bunch of random things that have nothing to do with housing.
Even if I add in the property tax deduction, that’s a difference of $8936 – $8,555 =$381. Still, not a massive amount in tax savings. Using tax write off to justifying having a mortgage is like using coupons to justify spending. At the end of the day, you’re still spending more than you are saving.
You are right that you have to pay state income tax whether you buy a house or rent. But you don’t seem to understand the concept of itemizing deductions vs taking the standard deduction. Here’s how it works:
The standard deduction for an individual in 2017 is $6635. You can take the standard deduction (subtract this from your taxable income) or you can itemize deductions instead. You don’t get both. Therefore, you would only itemize deductions if they exceeded $6350.
Take this case study for example. Suppose she rents, pays $2000 in state income tax, and donates $2000 to charity. Her total itemized deductions are $4000, which is less than the standard deduction. The federal government does not give her any tax break in this case (which discourages lower income people from donating to charity).
Now suppose she buys a house, pays $6000 in mortgage interest and $2000 in property taxes, and still pays $2000 in state taxes and $2000 in donations like when she was renting. Now her itemized deductions are $12,000, which is $5650 more than the standard deduction. At the 15% marginal tax rate, she would save $847 in federal taxes by itemizing.
The point is that buying the house allows for tax savings on all this other stuff that is not related to housing because it gets you over the standard deduction threshold. This effect is higher in higher cost of living areas. If you are not accounting for this, then you are not “mathing this shit up” properly when comparing rent vs buy. Saying that it is like using coupons is like saying that there is no difference between an IRA and a taxable account.
Taking your example as a whole, basically what you are suggesting is to buy a house, pay closing costs, assume maintenance costs, gain the privilege of paying $2000 in property tax, and donate $2000 for the benefit of a $847 tax reduction? Why not donate $4000 and get a $1147 tax reduction? I understand you are looking at getting a tax benefit from the cost of housing but the additional expenses being proposed to get that benefit seem high.
As for the standard deduction…In your rental example, with the standard deduction of $6635 and itemized of $4000, you get $2635 in additional deduction ($395.25 in refund) without having to spend or jump through hoops (buying a house) to get it. Drop the $2000 charitable deduction and it’s a $4635 deduction benefit ($695.25 in refund) without the additional spending.
My family’s situation is we are headed toward the standard deduction cause of where we are with our mortgage and a low interest rate. With your thinking, we should refinance so we can pay more mortgage interest to qualify for the itemized deduction. At our tax bracket, we would at best get 33 cents back for every dollar going out. I do not see where we come out ahead, even in our high cost of living area (Los Angeles).
Making choices solely based on getting tax deductions just seems silly. It really is using a coupon to wholly justify spending. And do not confuse this with the IRA/taxable account situation. In the IRA, you are paying yourself for a tax deduction. In the mortgage, you are paying a bank for a fraction in return.
I’m not suggesting that she buy a house. Where in my comment did I say she should buy a house? I’m just suggesting that when you do the comparison of rent vs own, you should calculate it correctly. And reading your reply Joel, it is clear that you don’t understand the math either.
In the rental example, you don’t get a tax benefit. You don’t get to add the standard deduction to the itemized deductions, you pick either / or. This is pretty basic stuff. If she rents and donates $2000 to charity, she saves $0 in taxes. You don’t get to save any taxes until your itemized deductions are higher than your standard deduction.
Right, you also seem to completely miss the fact that I assumed interest rates and property taxes would stay the same for 22 years. All it takes is one interest rate hike or raise in property taxes to blow away any minuscule savings from the tax deductions.
Funny how you never seem to notice “mathematical discrepancies” like that when it goes against the argument of buying a house.
What a petty argument. I expected better from you Firecracker. Your case study, your assumptions I guess. But the standard mortgage in the US is the 30 year fixed rate, which means the rate never goes up and the payment is the same for 30 years regardless of rate hikes. So yes, I assumed that Nashville Badass wasn’t dumb enough to get a variable rate mortgage. And the most likely reason for paying higher property taxes is that your property value increased, which is actually a good thing for the homeowner. And are you assuming rent payments will stay fixed for 22 years too?
At first I thought you might not fully understand how US taxes work, but now I think you are intentionally misleading your readers to fit your “rent” brand.
I’m understanding itemized vs standard deductions fine. I agree with your point that property taxes should have also been itemized, and will do that for future case studies, but the effect is so small that it doesn’t change the overall answer.
However, you don’t seem to understand how to do a case study. Adding state income taxes and charitable donations have nothing to do with the decision to buy a house, so you don’t include them in the comparison.
Actually Tennessee does not have an income tax so there is nothing there to include in the itemized amounts you can deduct from your income: Point to FIRECracker
However your explanation of how to use itemized deductions vs. the standard deduction is pretty spot on Jedi. And it does look like the tax benefit from owning house would be more than $39: Point to Jedi
And from my reading of the comments I don’t see where Jedi recommended buying a house, simply that if you want to compare the options you want to use accurate numbers both pro and con. (And yes, while there are exceptions in the US the standard mortgage is the 30 year fixed so once you get the mortgage your payment never changes no matter what interest rates do.)
Wait, but she had to pay $6,000 in mortgage interest to save $847 in taxes?
Sincerely,
ARB–Angry Retail Banker
I would totally recommend staying the course right now. Keep saving, and living with room mates. Most importantly, keep RENTING, not because it is necessarily cheaper in a 30 year period, but because it is so much more flexible. If the subject is really looking to get married soon, I would recommend keeping her excellent financial path, while making intentional efforts to help find her husband. Maybe online dating, or getting involved in group activities that she enjoys. Keep the solid financial direction, but don’t make that your ONLY focus, because that can make Jack a dull boy 🙂 Be yourself, but also get out there and do so where someone can actually notice. An intelligent man will recognize finance savvy, regardless of whether she has a house or not. There are pretty good odds that this girl will get married in a few years, and a house will just be an expensive boat anchor that’s difficult to liquidate, and will hold the new happy couple back from whatever direction they want to go at that time. …also, not having a house will keep away the seemingly great guys that are really just bums looking for a new home 🙂
…on a side note, I agree with some of the other commentors that the initial analysis was flawed and totally biased towards renting:
1) As others mentioned, the tax benefits were not accurately calculated.
2) A hypothetical $1000 mortgage payment over 30 years will really look more like a much more trivial $500 (or some number much smaller than $1000 anyways – I didn’t ‘math’ this) expense after 30 years, as inflation happens. Rents will tend to rise with inflation though, so in 30 years, the $1000 rent will still feel like $1000
3) You can’t compare mortgage payment to rent directly because at the end of 30 years of mortgage payments (or 20 or 15 years, depending on mortgage duration), you now own a house and never have to pay rent again. This greatly reduces your FI number since housing costs are so much lower with no mortgage payment.
The traditional advice still holds: A geographically stable couple with 3 kids, looking to stay in the area for more than 7 years would most likely be so much better off buying a house than renting an equivalent house, assuming the area is not in a massive housing bubble. The personal situation is a HUGE factor in making and accurate rent vs. buy decision though, and this is frequently ignored in this blog. Not everyone lives in Toronto and is a single professional planning to (stupidly) buy a 4000 square foot house. I guarantee owning my house costs me less than renting an equivalent house for my family of 6. …but I also absolutely loved renting our 400 sq-ft in-law apartment with in ground pool and hot-tub when we were first married too! So cheap, so carefree. Rent vs. buy is all about the life stage you’re in.
Also in my 20’s, living in Nashville and suffering from friend-flation. It’s great to know there are others out there!
I also find the price of food and drinks to be incredibly inflated. There are places that charge $6 for 12oz of DRIP COFFEE. The previous “cheap outing” troupe has been turned upside down here.
But, as previously said, there are a lot of great free events! Music in the parks, Shakespeare in the parks, movies in the parks, trails for walking, festivals, etc.
I love reader cases like this! They truly show that anyone with enough discipline and persistence, regardless of income, can achieve financial independence! It’s what gives me hope for my future!
Our leading indicators of employment and labor income point to that conclusion.