Why I Will Be Borrowing From My 401K to Pay For My First Home

It wasn’t easy deciding to go against popular advice of not borrowing from my 401K now that I’m condo hunting. When it came to saving for the down payment and closing costs I weighed three saving strategies:

  1. Saving aggressively in liquid savings accounts, only contributing the minimum to my 401K to receive my employer match.
  2. Continuing to max out my 401K and then borrow from it
  3. Saving the notoriously recommended 15% of my income in my 401K and the rest in liquid savings.

I did a comparison of the three strategies and quickly realized borrowing from my 401K is most advantageous.
Strategy 2

Strategy 1 Strategy 2
(1) Time to save 1.5 years 0 years
(2) Amount to Save* $27,500 $25,000
(3) Time to repay self 0 years 5-10 years**
(4) Foregone 401K contributions $21,000 $0
(5) Lost interest income× $140,000 $30,000××
* – Strategy 1 requires more savings due to anticipated increases in housing prices
 ** – 10 years is the worst case scenario. I actually anticipate less than 5 years due to salary increases
 ×- this is an extremely crude estimate that assumes a 7% market return and no market fluctuations over 30 years
 ××- For every additional $1,000 saved towards a condo outside of my (maxed out) 401k, I’ll save ~$2,200 in potential interest

The main risk associated with Strategy 2 would be the need to repay the 401K loan if I were to lose or change jobs else I’ll have considerable taxes and fines. I do not anticipate either but I have emergency funds in place otherwise.

Strategy 3 would obviously have pros and cons that fall somewhere between the first two strategies.

After being on the housing market for about a month I’ve learned it’s brutal out there! I may not find a place for a while since those with cash or sizable down payments scoop up places 1-2 days after listing. I’ve placed one offer on a condo and bid equally to an all cash offer so mine was not accepted.

Net Worth Update – August 2017

I’m continuing my condo hunt but am also still aiming to max out my retirement accounts this year. I’ll only be placing an offer on the perfect place.  I do want to increase my cash on hand though. So, in August, I contributed less to my Roth and 401k than in previous months and plan to do the same in September. I’ll increase my contributions eventually and slowly tighten my monthly spend.

Here is where my accounts stand at the end of August:

Liquid Assets Jul-17 Aug-17 Change
Cash & Checking $1,000 $1,158  +$158
Brokerage #1 $0 $150  +$150
Emergency Fund $3,380 $3,385  +$5
Short Term Savings $1,125 $2,000  +$875
Vanguard Fund  $500 $500 +$0
Illiquid Assets Jul-17 Aug-17 Change
Brokerage $460  $466 +$6
Savings Bonds $2,060 $2,085  +$25
Retirement Jul-17 Aug-17 Change
Roth IRA $17,367 $17,657  +$290
Traditional 401K $26,171  $27,423 +$1,252
Net Worth $52,063 $54,824 +$2,761
% Change 5.3%

I’m surprised my net worth increased as much as it did. I usually aim for an increase of $2,500 which I exceeded even though a lot less of my money was placed in my pre-tax 401K account. I even opened a brokerage account with some extra income I received this month.

I’m now a little behind on my goals for 2017 since I’ve decided to adjust the timeline, but I’ll get there unless I buy a condo, I have fully funded my next vacation though:

Fund/Goal Contrib. Total  Goal Progress
401K $886 $11,552 $18,000 64.2%
Roth IRA $160 $4,160 $5,500 75.6%
Emergency Fund $30 $5,470 $5,500 99.5%
Vanguard
Fund
$0 $500 $3,000 16.7%
Vacation* $—- $1,125 $1,000 112.5%

 

August Budget

You saw the play by play of my August spending. I was pleased with my spending habits. I had an emergency towards the end which required me to buy last minute plane tickets in order to attend a funeral halfway across the country. Luckily I have a travel credit card with plenty of reward points so the ticket purchase wasn’t that expensive.  I didn’t have to dip into my emergency fund and it didn’t throw off my budget.

Category Budgeted Actual Remaining
Rent $1,650 $1,652 $2 over
Fixed Expenses $100 $91 $9 under
Medical $- $74
Food $200 $91 $109 under
Everything Else $250 $265 $15 over
Total  $2,200  $2,099 $101 under

Not included in the above is reimbursed (business) food spending. I had a business trip early in the month which explains the low food expenditure.

The daily budget approach seemed to be really helpful. I was $100 under budget, at the end of the month.  Things I would like to focus on in September include:

  1. Limiting online purchases to two days a week
    • I’m not sure I actively attempted to do this in August. I’m aiming for Mondays and Thursdays.
  2. Keeping track of daily expenses.
    • I’ll try to keep a manual diary from now on utilizing the daily $15/day budget. I’d like to decrease this to $10/day eventually.
  3. Limiting nonsocial eating.
    • I saw this suggestion elsewhere in the blogosphere. It essentially limits eating alone.  This means little to no starbucks, takeout, food deliveries, etc. I don’t do much of this anyways, but I would have saved $50 had I followed this rule in August.

August Spending – Week 4 & 5

Spending Overview:

I’m keeping track of my spending to hopefully break the habit of going over budget. This daily budget approach actually ended up going very well! It is definitely what I needed to get out of the monthly overspend habit. The weekly spend:

Shopping: $11
Food: $51
Travel: $33

I’ll post my monthly totals in my August net worth post, which will be coming shortly. My spending habits broken down by days:

Day 1-6

Beginning Balance: $90
Spending: $0
Ending Balance: $90

I did really well with no spending for 6 days in a row! My longest streak yet!

Day 7

Beginning Balance: $105
Spending: $33
Ending Balance: $72

I spent $33 oan very last minute plane tickets. Thank goodness for credit card reward points that allowed me to attend a funeral.

Day 8

Beginning Balance: $87
Spending: $24
Ending Balance: $63

I went out to eat ($13) and made a purchase on Target.com ($11)

Day 9

Beginning Balance: $78
Spending: $38
Ending Balance: $40

I stocked up on some snacks for my trip.

Day 10

Beginning Balance: $55
Spending: $0
Ending Balance: $55

The purchases I made on this day ended up showing up on my Credit cards as a September 1st purchase. My laptop that is in the repair shop has not been returned so the $75 was not paid out either. I was $55 under budget for the month of August!! The daily budget approach worked. I’ll try to keep this up but most likely not on my blog.

August Spending — Week 3

Spending Overview

I’m keeping track of my spending to hopefully break the habit of going over budget. This week went well. I’m no longer in the red! I was actually really sick this week so not going outdoors helped. The weekly spend:

Shopping: $46
Misc.: $1
Health: $55
Utilities:$91

I’m not counting the health and utility categories against myself (that’s why they’re greyed out). My utilities are relatively fixed and my healthcare expenses are reimbursed from my FSA. I also do not constrain my healthcare spending.

My cumulative monthly totals thus far are:

Food: $40
Shopping: $221
Misc.: $23
Health: $74
Per diem bonus: $55
Utilities:$91

The goal is to spend $15/day in the first three relevant categories. So far I’ve spent $284 over 21 days for an average of $13.52/day.

Day 1-3

Beginning Balance: $12
Spending: $0
Ending Balance: $12

No spend!

Day 4

Beginning Balance: $27
Spending: $30
Ending Balance: ($3)

I’m back in the red here because I bought stuff on Amazon: toothpaste, toothbrushes, bathroom cleaner, etc. Ahh, necessities.

Day 5

Beginning Balance: $12
Spending: $1
Ending Balance: $11

I made an in-game purchase on my phone. Yeah I’m that person.

Day 6

Beginning Balance: $26
Spending: $0
Ending Balance: $26

No spend!

Day 7

Beginning Balance: $41
Spending: $16
Ending Balance: $25

Amazon purchase.

August Spending – Week 2

Spending Overview

I’m keeping track of my spending to hopefully break the habit of going over budget. This week had fairly minimal spend:

Food: $22
Shopping: $15
Misc.: $20

Admittedly I’m not including times that I ate out which totaled $55. This is due to my business trip earlier in the month in which I received a per diem. If I don’t spend all of my per diem during a trip I allow myself to spend it in a similar fashion in my city. This way I can frequent a new or favorite restaurant without blowing my budget.

My cumulative totals are:

Food: $40
Shopping: $175
Misc.: $22
Health: $19
Per diem bonus: $55

Day 1

Beginning Balance: ($70)
Spending: $0
Ending Balance: ($70)

I did so well! $0 Spend!!! (Okay I actually ate on left over per diem).

Day 2

Beginning Balance: ($55)
Spending: $32
Ending Balance: ($83)

I bought $22 worth of groceries and took out $10 in cash. I’m getting better at eating my groceries before they spoil.

Day 3

Beginning Balance: ($68)
Spending: $15
Ending Balance: ($83)

Amazon spending! I forgot exactly what I bought but I’m sure it was important.

Day 4-5

Beginning Balance: ($53)
Spending: $0
Ending Balance: ($53)

I did well! $0 Spend!!!

Day 6

Beginning Balance: ($38)
Spending: $10
Ending Balance: ($48)

Uber! I went house hunting this day and also ate on left over per diem.

Day 7

Beginning Balance: ($48)
Spending: $0
Ending Balance:  ($33)

House hunting wore me out. And I actually placed an offer on the second house I saw!!! Scary!! I’ve managed to make up for most of last week’s spending except my computer broke. The repair will definitely put me over budget. But since that’s beyond my control I’m going to continue the challenge of $15/day average spend minus the impending repair. I’m writing this entire post on my phone! That’s why it’s a bit late and not so detailed.

Condo Hunting

The hunt is officially on! I’m looking for a condo, albeit much earlier than anticipated.

So why the sudden change of heart?

  1. really want to live in a 1 bedroom place.
    • I hate living in a studio, especially since having a chronic illness means I spend a lot of time at home. I’m convinced that having only one room is not healthy in the long term.
    • The average 1 bedroom in this city rents for $2,100/month in my neighborhood it’s closer to $2,500. A mortgage payment plus HOA fees would lie somewhere in this range.
  2. Housing prices are rising quickly in my city.
    • They’ve risen 10% in the past year. Should this trend continue a $300,000 house would be worth almost $400,000 in 3 years. I am not sure I can afford this  sort of increase in three years.
  3. I came across the perfect mortgage through my local credit union and the interest rate is super low. I am considering other loans now too.

How will I come up with the down payment then?

I’ll be taking out a 401K loan.

I know this is generally ill advised, but I figure I’ll be ahead in the long run. I had been muling over various strategies to save for a 3-10% down payment plus closing costs over the next couple of years.   Realistically saving for a down payment would entail me halving my current 401K contributions in order to save. I plan on taking a loan out for the amount of contributions I would forgo had I decided to wait a couple years to purchase.

How will this change my monthly budget?

I’ve come up with a few scenarios.  The scenarios  are in the chart below and show my post-condo monthly disposable income at various 401k contribution levels (10%, 15% and $18,000). For privacy purposes I don’t disclose my salary so I am going call the various salary possibilities (a) , (b) and  (c), where:

  • (a) – is my current salary;
  • (b) – will be my salary in 2 months;
  • (c) – is my potential salary in 2-3 months if I am promoted; and
  • COLA – represents the  cost of living adjustment (COLA) I’ll receive in January.
  • I round all figures to the nearest $50
Monthly Disposable Income Scenarios  After Buying a Condo and Contributing
10 percent, 15 percent or the Max to my 401K
Scenario Salary Amount Disposable Income Amount
 10 percent  15 percent  Max
#1 (a) $200 $0
#2 (b) $300 $100
#3 (b) + COLA $350 $150
#4 (c) $550 $300
#5 (c) + COLA $600 $400

What do I make of the above chart?

  • If I don’t get promoted, I will likely contribute 10% of my income to my 401K.
  • If I do get promoted, I will max out my 401K.

Alright, I’m off to fantasy hunt online!

August Spending – Week 1

Spending Overview

Food: $18
Shopping: $160
Misc.: $2
Health: $19

My goal is to spend $15 a day, on average, throughoutI the month of August. I am tracking my daily expenses, week by week, for at least the month of August. Technically Day 1 was in July  (as in July 31), but I think it’s simpler to work with a 7-day week from the start. I’m certainly not off to a stellar start, hopefully I can smooth this over in subsequent weeks.

Day 1-4

Beginning Balance: $45
Spending: $0
Ending Balance: $45

I was on a business trip, so all my meals and travel expenses will eventually be reimbursed. I typically don’t include reimbursable expenses in my budget/calculations. Since I was out of town I didn’t make any purchases except for one ($19) at a pharmacy.  This falls into the “health” category.  And since I don’t constrain my medical expenses, I left this out of my budget as well.

Day 5

Beginning Balance: $60
Spending: $49
Ending Balance:  $11

I returned home this evening and did my biweekly online shopping. I don’t have a car, so this is  how things are usually purchased. My purchases included:
(1) a memory card ($10) for my phone; and
(2) home-goods ($39).

Day 6

Beginning Balance: $26
Spend: $18
Ending Balance: $8

I had a low-key day so I mostly stayed at home. I got groceries ($16) and did laundry ($2). The weather was unusually mild so I also went for a walk (as my doctor ordered). I also did some work.

Day 7

Beginning Balance: $26
Spend: $111
Ending Balance: ($85)

I spent most of the day cleaning my apartment and attempting to meet a work deadline. But I also went on an amazon shopping spree, ugh. My purchases included:
(1) a printer ($73); and
(2) more home goods ($38)
All purchases  I had been eyeballing for several months, so they weren’t impulse purchases. I got rid of my old printer because it was too heavy for me.

 

Net Worth Update – July 2017

I haven’t been posting with much regularity due to poor health. Hopefully in August I’ll do more than one post. But at least July treated me well in the financial sense, which wasn’t a surprise given it was a three-paycheck month.  All of my account balances increased:

Liquid Assets Jun-17 Jul-17 Change
Cash & Checking $898 $1,000  +$102
Emergency Fund $3,154 $3,380  +$226
Short Term Savings $850 $1,125  +$275
Vanguard Fund  $300 $500 +$200
Illiquid Assets Jun-17 Jul-17 Change
Brokerage $450  $460 +$10
Savings Bonds $1,904 $2,060  +$156
Retirement Jun-17 Jul-17 Change
Roth IRA $16,117 $17,367  +$1,250
Traditional 401K $23,117  $26,171 +$3,054
Net Worth $46,181 $52,063 +$5,882
% Change 12.7%

I love the months where my net worth increases by 10 percent or more. I know as my net worth increases,  10+ percent increases will be fewer  and farther between.

I’m on track to meet my goals for 2017:

Fund/Goal Contrib. Total  Goal Progress
401K $2,214 $10,636 $18,000 59.1%
Roth IRA $810 $4,000 $5,500 72.7%
Emergency Fund $455 $5,440 $5,500 98.9%
Vanguard
Fund
$200 $500 $3,000 16.7%
Vacation* $275 $1,125 $1,000 112.5%

I’ve now fully funded my vacation fund. And I’m almost done with the goals directed towards my emergency fund and IRA. I still have a ways to go with the vanguard fund, but I don’t plan to finish that in 2017. I’ll be using the $3,000 to invest in one of vanguard’s mutual funds. I’m not sure which fund. I’m also not sure if the investment will be in my brokerage or Roth account.

It also looks like I may need to come up with additional goals.

July Budget

As far as the budget went, I could have done better. I increased the “Everything Else” category by $100 because of gift purchases.

Category Budgeted Actual Remaining
Rent $1,650 $1,650 $0 left
Fixed Expenses $100 $89 $11 under
Medical $- $65
Food $250 $201 $49 under
Everything Else $300 $453 $153 over
Total  $2,300  $2,393 $93 over

I’m consistently going over budget in the “Everything Else” category.  Online shopping continues to be a problem for me. I think a major disconnect lies in my checking account not instantaneously reflecting my credit card purchases. I have a few strategies to at least attempt to meet my budget in August:

  1. Limit online purchases to two days a week
  2. Keep track of daily expenses.
    • I’ll probably publish this “diary”
  3. Utilize a daily budget method
    • This means limiting my spending to $15/day and rolling the left over balance into subsequent days.
    • I will now be setting aside money from my checking accounts at the end of the day so that I can actually see the balance decreasing. I think the visualization should help immensely.

Net Worth Update – June 2017

Ahh June! I finally received some much needed reimbursements which made for a smooth month.

Liquid Assets May-17 Jun-17 Change
Cash & Checking $528 $898  +$370
Emergency Fund $3,065 $3,154  +$89
Short Term Savings  $750 $850  +$100
Vanguard Fund  $250 $300 +$50
Illiquid Assets May-17 Jun-17 Change
Brokerage $447  $450 +$3
Savings Bonds $1,800 $1,904  +$104
Retirement May-17 Jun-17 Change
Roth IRA $15,754 $16,117  +$363
Traditional 401K $21,136  $23,117 +$1,981
Net Worth $43,730 $46,181 +$2,451
% Change +5.6%

I  continue to push towards the finish line of several goals.

Goal Progress:

Fund/Goal Contrib. Total  Goal Progress
401K $1,476 $8,422 $18,000 46.7%
Roth IRA $330 $3,030 $5,500 55.1%
Emergency Fund $122 $4,985 $5,500 90.1%
Vanguard
Fund
$61 $300 $3,000 10.0%
Vacation* $100 $850 $1,000 85.0%

All in all I’m doing well for being halfway through 2017.  I also officially met my 2nd quarter goal of having $6,750 in assets outside of my retirement accounts. The only goal I am seemingly behind on is the “Vanguard Fund”. That’s okay. I’m not looking to complete that goal this year.

Category Budgeted Actual Remaining
Rent $1,650 $1,650 $0 left
Fixed Expenses $100 $92 $8 under
Medical $- $145
Food $250 $381 $131 over
Everything Else $400 $648 $248 over
Total  $2,400  $2,771 $371 over

Usually I aim to spend $2,200 each month, but this month I added an extra $200 to my budget due to my 3 day vacation. This means my June budget was $2,400.  Interestingly, I was able to stick to exactly $200 for the 3 day excursion. Still I managed to go ~$400 over budget. Here’s where I “fell off” the wagon:

  • Gifts – $125
  • Rental Insurance – $149

A business trip and additional medical expenses (i.e. taxis) are incorporated into the above spending,  and I had these expenses reimbursed but am too lazy to go through and figure how much was spent in the corresponding category. All in all, my extra expenses were offset by earning $300 extra this month.  I didn’t even have to dip into my savings!

One thing I’d really like to work on in upcoming months is how I shop. I think I managed to do well in June. To be fair, I don’t have a car, so most of my shopping is done online for convenience and cost savings. I’m going to try to limit my shopping to one day a week.

Net Worth Update – May 2017

I started out the month of May thinking I’d run into cash flow problems because I’m still waiting on reimbursements. My checking account balance got uncomfortably low. Admittedly, the problem could be solved by moving money across accounts, but the point of being budget savvy is to avoid these types of situations. I’d also hate to lose progress  towards some of my goals.

Fortunately I had some surprise earnings this month. This made for, yet another, boringly smooth month despite going considerably over budget. I definitely was more laissez faire with my budget due to the unanticipated extra income. Don’t worry, I didn’t spend it all. My account holdings are below:

Liquid Assets Apr-17 May-17 $ Change
Cash & Checking $522 $528  +$6
Emergency Fund  $3,043  $3,065  +$22
Short Term Savings $605 $750  +$145
Vanguard Fund $165 $250 +$85
Illiquid Assets Apr-17 May-17 $ Change
Brokerage $287  $447 +$160
Savings Bonds $1,700 $1,800  +$100
Retirement Assets Apr-17 May-17 $ Change
Roth IRA $14,870 $15,754  +$884
Traditional 401K $19,163  $21,136 +$1,973
Net Worth $40,355 $43,730 +$3,375
% Change +8.4%

Everything increased! I don’t see that very often, if I’ve ever seen it at all. Yay for extra income! This means I was also able to stay on track with all my goals.
Goal Progress:

Fund/Goal Contrib. Total  Goal Progress
401K $1,476 $6,946 $18,000 38.6%
Roth IRA $542 $2,700 $5,500 49.0%
Emergency Fund $100 $4,842 $5,500 88.0%
Vanguard
Fund
$165 $250 $3,000 8.3%
Vacation* $200 $800 $1,000 80.0%

As I continue to make progress, the only notable thing here is that I decreased my vacation fund by $500 to $1,000. I do plan to slow down my Emergency Fund contributions to $25/month sometime in July or August.

I’ve already met my 2nd Quarter Goal of having $6,750 in assets outside of my retirement accounts. I have $6,840. Hopefully this accomplishment remains the case at the end of the actual quarter, which I think it should.

Monthly Income & Spending:

Category Budgeted Actual Remaining
Income $750 more
Rent $1,650 $1,650 $0 left
Fixed Expenses $100 $101 $1 over
Medical $- $140
Food $200 $337 $137 over
Everything Else $350 $598 $248 over
Total  $2,300  $2,686 $364 left

Income: While I’m still not ready to disclose exactly how much I earn, I can say I earned $750 more than usual. I really should start keeping track of what I earn over and above my base salary.

Rent: I paid the usual: a lot. I choose to live close to work.

Food: I went way over budget for food this month. I ate out a bit more than usual, which tends to happen in warmer months. I also bought more meat this month due to experimenting with various recipes (thanks pinterest). I’m not a big meat eater by nature, so buying several pounds of meat really shows in the number above.

Fixed Expenses: I went over by $1 which isn’t a huge deal but also rarely happens. This is due to some data overages from last month’s international trip.

Everything Else: I increased my Everything Else budget by $100 due to a birthday. Other than that, I expanded my jewelry collection, purchased some groupons, and added some decor to my apartment. I don’t regret it.

Medical Expenses: I don’t include medical expenses in my total monthly budget (I am reimbursed with my FSA). But similar to month’s prior I didn’t escape a month of medical expenses, which is fine. I never anticipate being in perfect health. I’d like to do a post soon on my health and where things stand, but everything is still up in the air. Things haven’t been great and I’m a getting worried about this.

Coming Soon…

I’m going on a short trip next weekend which will result in some extra expenses for the month of June. June is also the month I pay renter’s insurance whomp, whomp. I don’t think June will be particularly stellar.

In July I’ll be receiving 3 paychecks. I’m looking forward to this so I can add extra money to various accounts and reevaluate and readjust my savings strategy.