Reader Mail: Dreams of a House, a New Car, and a Healthy Savings Account

I am officially done with grad school, and in the fall will begin life as an assistant professor in a large(ish) city in the southwest. My new goal is to buy a house, and I would like to know how I should start going about saving to do this? Salary range for new professors is $50-70k, mine is in the middle. Here are some obstacles I’m facing:

• I will have to start paying back student loans.  
• My awesome car which has lasted me through undergrad and grad school will surely die soon and I will probably have to buy another one. 
• I will have to start paying for my health insurance (right?)
• I should start putting money away for retirement (right?)
• I would like to have a healthy savings account balance.

Thanks!!

P.S. Will I have to get a roommate? I really cannot handle roommates.
P.P.S. Since I’ll be teaching at a state school, will I get to benefit from the 10 year student loan forgiveness thing for working in the public sector?

Why, hello there, professor! First off, congratulations on not living in New York. Your $60,000 salary is going to do much more for you in the southwest. That’s not to say you couldn’t make things work here. My first job in New York paid about $30,000, and I made it work. Yes, I had roommates, but I still was able to make a small dent in my student loans, put some money into savings, and send my folks a little bit of money. I am telling you this because I want you to know that you are going to be okay. You have been dealt a good hand, and not everyone is fortunate to be able to say that. But let’s talk about the thing I think you should address first: your car. 

You need a car to get to work, to get home, to get from here to wherever there may be, and this is more important now than a dream house, or savings right now (the point of having a savings account is so that you can do things like replace your car).

You can drive your car until it dies, and then you could probably get maybe $200 to have someone haul it away for you so they can sell it for parts or fix it up and resell it to someone else. You can trade in your car, but dealers can be fickle depending on what kind of car you have, or what day of the month it is, or what they already have sitting idle in their lot. You can also donate your car and get a deduction on your taxes, which actually might save you the most money. There is also Craigslist and Ebay—someone may want your car, and may offer you a reasonable amount of cash for it.

Smart money people will generally recommend that when you replace your car, you go for a good used model, rather than buying new. They will tell you not to buy a new car because cars are depreciating assets, meaning they lose value once you start driving it. But we live in a time when most Americans can’t afford to run out to buy new cars, so used cars are in demand. And where there is demand, there are price hikes. So you actually might find that some new cars are cheaper than used cars. I’d recommend using Edmunds to compare the costs of new vs. used cars in the model you want to buy. But just because you might get a good deal on a new car doesn’t mean you should buy a new car. You know what your budget is, and if you can spend less than what you intended, that’s really great.

As for your health insurance, I’m surprised the state college you’ll be working for isn’t giving you health benefits. If that’s the case, they must have a plan that they offer to campus employees with reasonable rates. You need health insurance, so this is what you should take care of next. I have had friends who, like a lot of people out there, went without health insurance because of the costs, and then they got hit by cabs while riding their bikes, or discovered lumps where there shouldn’t be lumps, and—you want to make sure you’re covered in some way.

You can save for retirement while dreaming about your new home. If the college is offering a 401(k) plan with a match, you obviously want to contribute to that plan because of the free money. But the thing you should do is start contributing to a Roth IRA, because your salary qualifies you to do that. The great thing about a Roth IRA is that after it’s been open for five years, you’re allowed to withdraw up to $10,000 without a penalty—including any interest the account has earned—to buy your first home. That is a really great thing! Do this while socking a little bit of money away into an emergency fund, and you’re going above and beyond what most of us are doing to make ourselves financially secure.

As for your student loans, I’m pretty sure your employment at a state school qualifies you for the Public Service Loan Forgiveness Program, which will forgive your Federal Direct Loans after you’ve made 120 payments on those loans. The information for that is here, and the application you should fill out is here. Remember that you’re allowed to write off up to $2,500 in qualified student loan interest during tax time, so focus on paying the minimum until these federal loans are forgiven.

I’m going to leave it up to you to figure out the roommate situation. Obviously, living with a roommate will allow you to save a lot more than if you were to rent out a place on your own. My parents lived in a guest room in my uncle’s house for a few years before cramming the kids into a one-bedroom apartment for a few more years so that they could scrape together the money to move us into a nice house when I was eight. That was the decision they chose to make to achieve their American dream of owning a house. We all choose our own routes. It might be worth it to you to spend the bit of extra money for the luxury of living by yourself. That is the decision I’m making now. I loved my roommates when I had them, but I love them even more now that I don’t have to live with them.

 

Photo: Flickr/flossyflotsam

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10 Comments / Post A Comment

highjump (#39)

This is all good advice, especially about today’s used car market. I am going to assume LW is on the tenure track (because you probably should not buy a house as an adjunct) but even given the buyer’s market don’t rush into a home purchase even if you will be at State School for 30 years. Take two or three years to figure out the neighborhoods, what hours you like being on campus, your commute, and whatever else. Good luck with public service loan forgiveness, and check whatever state you’re living in for a parallel program!

I just bought a house and am considering going roommate-less when I close next month. But that’s so scary, both financially and mentally. I think I’ll try a couple months on my own and then maybe realize that I could basically have someone pay my mortgage for me and I could pay off my other debt so I need to suck it up and get used to sharing a space.

amiralabil (#5,154)

I have a big family and have taken into consideration buying a Toyota Prius but when we went to the Toyota dealership I realized this car is too small for our family. I heard that the Nissan dealers in Hartford CT have good offers and went to check out their cars, Nissan Altima seemed the perfect choice and I bought it. Two years have passed and the car still looks like new.

whimseywisp (#220)

Can you do a post about Roth IRAs? My employer offers one, but then I got a little bogged down by the specifics. It allows the money to be invested in either a money market fund (which I don’t understand… I mean, I don’t understand how they work, exactly?) or an FDIC insured account which earns next to no interest (which pisses me off and seems to defeat the purpose). Assistance would be appreciated! Thanks :). Also, this post was pretty helpful! I like the site so far.

Mike Dang (#2)

@whimseywisp Here’s a post on IRAs that may be useful to you. But from what you’re telling me, it looks like your employer is offering you two “low-risk, low returns” options (money market funds and the FDIC insured account) for investing your money, so you can bet that your money will be safer if you invest in those accounts. For long-term retirement investing though, you’ll want to invest in mutual funds, which have higher risks, but higher returns (see more here). You should be investing more aggressively in mutual funds if you are a young investor, and then more conservatively as you age.

whimseywisp (#220)

@Mike Dang Thank you for the link! So I guess my question is, should I even bother with the Roth IRA since the options are so low return? I already have a traditional IRA, a 401(k), and mutual funds. (I’m 27/single/not making a lot of money but saving where I can.)

Mike Dang (#2)

@whimseywisp Yes! Because then you can take out $10,000 tax-free after it’s been open for five years to buy your first home (that is, if you actually want to buy a house, or aren’t a homeowner already).

whimseywisp (#220)

@Mike Dang Okay! I WILL DO IT :).

sony_b (#225)

You may not need to save as much as you think for a down payment – if you qualify for FHA they only want 3% down. I’m doing that now. Having said that, in your shoes I might consider looking for a roommate situation if I didn’t know anybody else in town. Moving to a new place is hard, and having some people to show you the basics for a year while you look for your permanent or next-10-years home may help with sanity as well as saving money. Especially if you know you can leave and get your own place if you need to.

Jull (#5,296)

I should admit I save every here and there, but still sometimes fail to have enough means to keep afloat till the next payday and use PersonalMoneyService – lending center online. I am really interested how people manage to make as little as $20000-30000 work!
Still thank you for sound and reasonable advice you have given in the article.

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