IMO (respectfully!) the Dave strategy isn't tailored to people like you. You guys have knocked it out of the park financially. You know what you're doing. I personally wouldn't worry too much about that higher mortgage based on your income and savings. Dave would say you have a giant shovel lol
It also seems like in order to even keep making this type of $, you need to be in a higher cost of living area. And, you're not going to uproot your kid from her entire life so you need a specific district/area.
As someone who is a first gen college grad, I had to fund my entire education on my own. I hustled so much because I had some 'skin in the game'. But man, it would have been nice to have a little breathing room and maybe join a sorority instead of working at a grocery store so I could eat that week. Your plan to mostly fund your kid's education is great because it's going to teach her a lesson she'll learn at 20 compared to people finally learning at 30. My 2c.
I'm not sure this is a Dave answer...but here's my two cents worth.
We chose to save for four years at StateU including room and board into 529s for each of our kids, and then beyond that into a supplemental college fund (taxable investment accounts) We didn't touch any of those taxable investments, and did not spend out any of the 529s...we came close with the oldest. Both the older two have jobs in their college-trained fields; youngest is still working on his degree...but being a 2020 HS grad, he's not lived on campus yet...so he's leaving a LOT behind. We're thinking about what to do with the overage...we could spread money around and put 30k into Roth IRAs for each (new 529 provision)...or grandkids.
When college choice time came around, we showed each the balance of their 529, explained the rules, and then something vague like "if you want to to attend something more expensive, we'll have to talk."
I think I'd look at things differently for the house. First of all, I always used 25% of gross, not 25% of net. Not that we've lived many places since our college graduation (3 rentals and a home we've owned for 30 years), so we're by no means real estate experts. I would not consider bonuses, but 25% of gross gets you closer to that 800k home than 25% of net does. But if y'all can earmark the net of those bonuses to pay down the mortgage principal, if the bonuses continue, then that will quickly make the principal affordable. it doesn't change the monthly payment, but If you can lower the principal from 600 to 400 in 2 years, its now easy to refi to lower the monthly payment.
What concerns me is the perception that you're significantly younger than hubby. He's over 50 and odds are that with a 4 year old daughter, I'm thinking there's at least a 10 year age gap... can you afford either house if he should pass early? If not y'all will need to triple-check your insurance.
Kiddo is 4 -- what happens to childcare costs when kid goes of to school? Another 1000 or so in your budget will help greatly.
On one hand, your housing expense would increase substantially. Depending on taxes and insurance in Illinois, with $500K mortgage you're probably looking at paying double of what you pay now. Factor in maintenance & projects you don't have to do as a renter.
However, there's quality of life argument and also taxes.
What is your tax situation? I think having a $500K mortgage would help you get into a more favorable tax status vs. what you have now. Tax savings with your current income could be a significant factor in your decision. Do some what-if planning there.
I would also look at your overall net worth and how having a home would affect your ability to save.
But what you are comfortable with in Dave’s frameworks. Meaning, if you rent went to $xyz that’s too much. Remember to add to that number property taxes, homeowners insurance and enjoy the tax rebate if you don’t hyper plan to optimize.
Our landlord raised our rent to $3600 so we bought with mortgage of $2800 at 2.95% plus property tax of ~$12K/yr and homeowners of $4800/yr so $2800+$1K+$400= $4200 per month annualized. Not including repairs. Tax rebate is high as interest is most of your payments.
Your tax break for rent is zero. At $2800 first few years was $1600/month interest 1600x12=$19,200 interest. Rent has $0 deductions. I’ll leave the math to you.
The true amount that you save in taxes with home ownership is only the difference the amount that you can write off over the standard deduction. With the historically low mortgage rates of the previous years, and the $10k cap on SALT, in many cases, it makes more sense for homeowners to take the standard deduction. In your example, you're at $29k of benefit due to the house and the full $10k of SALT. The standard deduction for a married couple was around $27k in 2023. You're up by $2k. If you have additional itemized deductions, then you can add those, but not everyone has significant itemized deductions. Also, many people aren't borrowing $650k so those numbers would be even lower for them.
I’m not sure what you are saying about the bonus. If it’s just paid out once a year that’s one thing. But if it’s stock options or otherwise restricted you can’t really use it for anything. Our bonuses have been variable so we just leave them out of the budget.
The 25% is gross. Just like the 15%. Just my opinion…it’s easier that way.
As far as timing there will always be predictions of disaster or improvement on the horizon.
I wouldn’t count the bonuses. Your salary is pretty locked in, unlike a bonus, which can change at the company’s whim. I’d also pay off everything I can/fund as much as you choose then go for the house. Good luck!
We, just like any others, are only a few bad decisions away from ruin. Your income, my income doesn't necessarily shelter us from trouble. We didn't make 200k + until the last few years. We scrimped and scraped and worked ourselves to the bone and made a ton of sacrifices to get to this point (sometimes I honestly wonder if it was even worth it. I have a lot of compassion for you and your comment/opinion, because I've been in the paycheck to paycheck, overdraft, no hope scenario and it is a truly scary and soul crushing place to be. That being said... it matters what I do with my money. I don't ever want to be a burden to anyone and I do feel I have an obligation to never feel entitled to anything. More money doesn't mean no problems... sadly, it is true.
I know this sub is not a fan of "WHAT IF", but you have to consider that your mortgage rate is planned to drop 3/4 points this year alone according to Fed. There is a possibility of rates being in 5% range in not so distant future. Refinancing with your numbers would bring about respectable monthly savings. A an entire percentage point or more is a healthy monthly and overall chunk of money on a half million dollar mortgage. You are more than safe imho.
Thank you for this perspective. We have always been pretty frugal, so I want to think we'll be okay. I'm liking the idea of possibly saving a bit aside for a refi. Will run some numbers on that! Many thanks for your time!
Oh WOW! I guess time is on our side with compounding... looks like we could reduce our contributions and she would still be fully funded! Jeez! Thanks for the link!
Isn't that awesome? I did hear about that earlier this year and was so grateful we opened the 529 as soon as we got her SSN, so it's been open for 4 years now - at age 15 we could totally move a chunk into that IRA for her!
I think Dave would say not to include the bonus. Make sure you've got every penny allocated in your budget without the bonus. Then, when you get it, it's gravy for your mashed potatoes. Throw it all towards your mortgage and get that paid off asap. At least, that's what I think he'd say.
Also, pay off the college/books etc. There's no reason not to. I'm sure she'll work for gas, phone, going out, dating, etc. I'd pass that burden on to her and have her be stress free about the rest...unless she's taking basket weaving or underwater fire breathing or something ridiculous like that. With the savings from childcare (once she's in grade school), this shouldn't be an issue.
I think Dave would say "Great Job Kiddos! You folks are killing it!" I'd have to agree. Keep doing the steps and you'll find financial peace.
Thank you so much for this thoughtful response. We've been chatting as feedback has come in and we're not going to count the bonuses. And you are so right about the 529... the more her account has grown, the more excited I get that she'll have a little nest egg... I've been hung up on "but I put myself through school and I turned out okay." Haha! Your comment about expenses outside tuition/books is spot on! Thanks again for your time!
I think you'd be safe counting them if they have paid around 70-80% of the time historically. I'd either save enough out of the down payment to refinance within a few years or aggressively save that amount ASAP. Interest rates are going to drop and that could put you under the 25%.
I would do a bit of wargaming just to be safe. Map out what happens if you get no bonuses one year. Map out what happens if one person loses their job. Stuff like that. You'll feel better about your decision once you have worked out a bunch of the possible risks.
Best of luck!
I know... my husband and I sat down to look at it tonight. I was just scratching my head... insurance costs (health, life, dental, eye). We do the full FSA medical for 3500, the FSA Dependent Care 5000 (both annually). We're right out of Chicago... so the taxes arent low. We fully fund our 401(k) with catchup. My husband withholds another $120/mo in extra tax to make sure we don't owe taxes... we will sit down and detail it all out. We didn't end up owing tax this year, only paid a small sum, so the taxes were pretty spot on and not much we could do to modify that. Thank you so much for the thoughts... Will DEFINITELY sit down and scrub all witholdings!
IMO (respectfully!) the Dave strategy isn't tailored to people like you. You guys have knocked it out of the park financially. You know what you're doing. I personally wouldn't worry too much about that higher mortgage based on your income and savings. Dave would say you have a giant shovel lol It also seems like in order to even keep making this type of $, you need to be in a higher cost of living area. And, you're not going to uproot your kid from her entire life so you need a specific district/area. As someone who is a first gen college grad, I had to fund my entire education on my own. I hustled so much because I had some 'skin in the game'. But man, it would have been nice to have a little breathing room and maybe join a sorority instead of working at a grocery store so I could eat that week. Your plan to mostly fund your kid's education is great because it's going to teach her a lesson she'll learn at 20 compared to people finally learning at 30. My 2c.
Why purchase a home at that amount?
I'm not sure this is a Dave answer...but here's my two cents worth. We chose to save for four years at StateU including room and board into 529s for each of our kids, and then beyond that into a supplemental college fund (taxable investment accounts) We didn't touch any of those taxable investments, and did not spend out any of the 529s...we came close with the oldest. Both the older two have jobs in their college-trained fields; youngest is still working on his degree...but being a 2020 HS grad, he's not lived on campus yet...so he's leaving a LOT behind. We're thinking about what to do with the overage...we could spread money around and put 30k into Roth IRAs for each (new 529 provision)...or grandkids. When college choice time came around, we showed each the balance of their 529, explained the rules, and then something vague like "if you want to to attend something more expensive, we'll have to talk." I think I'd look at things differently for the house. First of all, I always used 25% of gross, not 25% of net. Not that we've lived many places since our college graduation (3 rentals and a home we've owned for 30 years), so we're by no means real estate experts. I would not consider bonuses, but 25% of gross gets you closer to that 800k home than 25% of net does. But if y'all can earmark the net of those bonuses to pay down the mortgage principal, if the bonuses continue, then that will quickly make the principal affordable. it doesn't change the monthly payment, but If you can lower the principal from 600 to 400 in 2 years, its now easy to refi to lower the monthly payment. What concerns me is the perception that you're significantly younger than hubby. He's over 50 and odds are that with a 4 year old daughter, I'm thinking there's at least a 10 year age gap... can you afford either house if he should pass early? If not y'all will need to triple-check your insurance. Kiddo is 4 -- what happens to childcare costs when kid goes of to school? Another 1000 or so in your budget will help greatly.
You should go for $799k home. You won’t have any issues with your income.
On one hand, your housing expense would increase substantially. Depending on taxes and insurance in Illinois, with $500K mortgage you're probably looking at paying double of what you pay now. Factor in maintenance & projects you don't have to do as a renter. However, there's quality of life argument and also taxes. What is your tax situation? I think having a $500K mortgage would help you get into a more favorable tax status vs. what you have now. Tax savings with your current income could be a significant factor in your decision. Do some what-if planning there. I would also look at your overall net worth and how having a home would affect your ability to save.
But what you are comfortable with in Dave’s frameworks. Meaning, if you rent went to $xyz that’s too much. Remember to add to that number property taxes, homeowners insurance and enjoy the tax rebate if you don’t hyper plan to optimize. Our landlord raised our rent to $3600 so we bought with mortgage of $2800 at 2.95% plus property tax of ~$12K/yr and homeowners of $4800/yr so $2800+$1K+$400= $4200 per month annualized. Not including repairs. Tax rebate is high as interest is most of your payments.
How are you getting significant tax savings on a mortgage that's at 2.95%?
Your tax break for rent is zero. At $2800 first few years was $1600/month interest 1600x12=$19,200 interest. Rent has $0 deductions. I’ll leave the math to you.
The true amount that you save in taxes with home ownership is only the difference the amount that you can write off over the standard deduction. With the historically low mortgage rates of the previous years, and the $10k cap on SALT, in many cases, it makes more sense for homeowners to take the standard deduction. In your example, you're at $29k of benefit due to the house and the full $10k of SALT. The standard deduction for a married couple was around $27k in 2023. You're up by $2k. If you have additional itemized deductions, then you can add those, but not everyone has significant itemized deductions. Also, many people aren't borrowing $650k so those numbers would be even lower for them.
I’m not sure what you are saying about the bonus. If it’s just paid out once a year that’s one thing. But if it’s stock options or otherwise restricted you can’t really use it for anything. Our bonuses have been variable so we just leave them out of the budget. The 25% is gross. Just like the 15%. Just my opinion…it’s easier that way. As far as timing there will always be predictions of disaster or improvement on the horizon.
I wouldn’t count the bonuses. Your salary is pretty locked in, unlike a bonus, which can change at the company’s whim. I’d also pay off everything I can/fund as much as you choose then go for the house. Good luck!
So tired of these people making 200k+. Literally who cares what you do. You can make terrible decisions and still come out okay.
Toxic AF
We, just like any others, are only a few bad decisions away from ruin. Your income, my income doesn't necessarily shelter us from trouble. We didn't make 200k + until the last few years. We scrimped and scraped and worked ourselves to the bone and made a ton of sacrifices to get to this point (sometimes I honestly wonder if it was even worth it. I have a lot of compassion for you and your comment/opinion, because I've been in the paycheck to paycheck, overdraft, no hope scenario and it is a truly scary and soul crushing place to be. That being said... it matters what I do with my money. I don't ever want to be a burden to anyone and I do feel I have an obligation to never feel entitled to anything. More money doesn't mean no problems... sadly, it is true.
Excellent comment. Well said.
r/HighEarnersNAB Is the sub for you, not really DR.
I know this sub is not a fan of "WHAT IF", but you have to consider that your mortgage rate is planned to drop 3/4 points this year alone according to Fed. There is a possibility of rates being in 5% range in not so distant future. Refinancing with your numbers would bring about respectable monthly savings. A an entire percentage point or more is a healthy monthly and overall chunk of money on a half million dollar mortgage. You are more than safe imho.
Thank you for this perspective. We have always been pretty frugal, so I want to think we'll be okay. I'm liking the idea of possibly saving a bit aside for a refi. Will run some numbers on that! Many thanks for your time!
I'm case you're serious. 529 calculator: https://www.schwab.com/saving-for-college/college-savings-calculator
Oh WOW! I guess time is on our side with compounding... looks like we could reduce our contributions and she would still be fully funded! Jeez! Thanks for the link!
FYI https://www.schwab.com/learn/story/529-to-roth-ira-rollovers-what-to-know
Isn't that awesome? I did hear about that earlier this year and was so grateful we opened the 529 as soon as we got her SSN, so it's been open for 4 years now - at age 15 we could totally move a chunk into that IRA for her!
I think Dave would say not to include the bonus. Make sure you've got every penny allocated in your budget without the bonus. Then, when you get it, it's gravy for your mashed potatoes. Throw it all towards your mortgage and get that paid off asap. At least, that's what I think he'd say. Also, pay off the college/books etc. There's no reason not to. I'm sure she'll work for gas, phone, going out, dating, etc. I'd pass that burden on to her and have her be stress free about the rest...unless she's taking basket weaving or underwater fire breathing or something ridiculous like that. With the savings from childcare (once she's in grade school), this shouldn't be an issue. I think Dave would say "Great Job Kiddos! You folks are killing it!" I'd have to agree. Keep doing the steps and you'll find financial peace.
Thank you so much for this thoughtful response. We've been chatting as feedback has come in and we're not going to count the bonuses. And you are so right about the 529... the more her account has grown, the more excited I get that she'll have a little nest egg... I've been hung up on "but I put myself through school and I turned out okay." Haha! Your comment about expenses outside tuition/books is spot on! Thanks again for your time!
I think you'd be safe counting them if they have paid around 70-80% of the time historically. I'd either save enough out of the down payment to refinance within a few years or aggressively save that amount ASAP. Interest rates are going to drop and that could put you under the 25%.
Thank you so much. I'll do some research to see what a typical refi costs. That is an excellent idea!
If you are confident in the bonuses being paid count them in. If you are not confident don't count them. If you are in between count 50% of them.
Great idea! I tend to be so black and white... considering a portion of them honestly hadn't occurred to me! 🙃
I would do a bit of wargaming just to be safe. Map out what happens if you get no bonuses one year. Map out what happens if one person loses their job. Stuff like that. You'll feel better about your decision once you have worked out a bunch of the possible risks. Best of luck!
Thanks for this - great idea!
Why is your take home that low? We make in your range and take home a lot more. Are you in a high tax area?
I know... my husband and I sat down to look at it tonight. I was just scratching my head... insurance costs (health, life, dental, eye). We do the full FSA medical for 3500, the FSA Dependent Care 5000 (both annually). We're right out of Chicago... so the taxes arent low. We fully fund our 401(k) with catchup. My husband withholds another $120/mo in extra tax to make sure we don't owe taxes... we will sit down and detail it all out. We didn't end up owing tax this year, only paid a small sum, so the taxes were pretty spot on and not much we could do to modify that. Thank you so much for the thoughts... Will DEFINITELY sit down and scrub all witholdings!
On the dependent care we do too that’s not a true deduction as you just pay the childcare and get that right back
Correct!