Author Topic: New Here - Stash Cash for a House or Invest?  (Read 387 times)

elgee

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New Here - Stash Cash for a House or Invest?
« on: November 06, 2018, 12:53:52 PM »
Hi all,

My husband and I recently found MMM and are excited to work towards FI! We are 25 and 26, recently finished paying off our student debt ($60,000) and are now in the place where we can actually do something with the extra money that was getting thrown at those loans over the last couple years.  We're currently living on about 50% of our take home pay, so I think we're moving in the right direction! 

We've saved $25K in the last 6 months, and right now that's just sitting in our savings account.  We feel comfortable doing something with $20K of that (want to keep a small emergency fund), but aren't sure what.  We want to buy a fixer upper duplex when a good deal presents itself (fix it up, rent out the other side, make $$) - my husband is a realtor so he's on top of that, but we are unsure if we should keep putting money in savings for a larger down payment/renovations, or start investing.  Loan interest rates only seem to be going up. We're renting now but aren't sure how much longer we should do that.

So really, I'm looking for specific advice on what we should do with that extra money given the current stock market/housing market.

Thanks in advance!!

leavesofgrass

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Re: New Here - Stash Cash for a House or Invest?
« Reply #1 on: November 06, 2018, 02:28:03 PM »
Good job paying off your debt!

You're asking a lot, and without knowing your full financial picture and goals, I don't think it's wise to give advice.

Buying a house is a big financial commitment, as you know. Renting allows a lot more flexibility. You are a young couple. Where do you see yourself in 5-10 years? Are you living in a HCOL city? Do you plan to stay in this city long-term? Salary? Do you have a 401k? Roth? Job outlook? Kids in the future? What if you have a kid and one parent needs to stay home for a year - could you still afford the mortgage? Do you want to be landlords? I'm just throwing out some things to consider - not looking for answers here...

I suggested this to another poster, but I would recommend asking this question over on the Bogleheads forum, where you essentially "ask a portfolio question" and present your full financial picture and pose your question. There are some incredibly smart people over there who are very active in the forum. I'd imagine you'd get some very good feedback.

fatcow240

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Re: New Here - Stash Cash for a House or Invest?
« Reply #2 on: November 06, 2018, 02:48:35 PM »
If you don't need to buy a house, I would recommend investing.  I took the approach of investing the money that I was going to use for the purchase of a house.  The big catch is that I didn't need to buy a house.  I bought one when my investments were doing fine and I found a house for a good price.

I have since sold that house and have the money invested again while I rent.  I don't plan on living here for long enough to buy.

If you need to buy a house in the next five years, and can't ride out a down swing, I would not necessarily recommend investing the cash.

MDM

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Re: New Here - Stash Cash for a House or Invest?
« Reply #3 on: November 06, 2018, 03:28:56 PM »
You might consider the suggestions in Investment Order

How much and in what order you choose to overlay a side rental business is up to you.  Some people love it and do well, others don't.

Laura33

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Re: New Here - Stash Cash for a House or Invest?
« Reply #4 on: November 07, 2018, 07:22:34 AM »
First, congrats!  You are in a great place to start.

Second, the real question here is for you:  do you envision your path to FIRE as coming through investments in the stock market, or are you planning to invest in real estate that you rent out to others.  Both paths lead to success, but it affects the decision you make now. 

If you want to be landlords, then buying a duplex is a great way to start, if you can find the right deal where the tenant effectively pays your mortgage.  You can live in it, fix it up, then when you're ready either buy another rental or rent out both sides and use the proceeds to repeat the process somewhere else.

If you don't plan to be landlords, then you need to think of "buying a house" as a consumption choice, not an "investment."  That means that you need to get your savings on track for your FIRE date before you upgrade your standard of living.  And that means maxing out your 401(k)s, IRAs, HSAs, etc., as laid out in the Investment Order sticky, before doing anything else.  Why?  Three primary reasons:

1.  These accounts are tax-deductible.  Minimizing the tax you pay now will allow you to invest more for the same hit to your budget.  Which is important because . . .
2.  The power of compounding.  The rule of 72 says that if you get about a 7% average return, every dollar you put in today will double in a decade.  So $10K now becomes $20K in 2028, $40K in 2038, and $80K in 2048.  But note that if you wait 10 years to start investing, at the end of that same 30 years, you have only half that amount -- you lose a full doubling.  So the dollar you invest today is more valuable than the dollar you invest tomorrow, and the dollar you invest tomorrow is more valuable than the dollar you invest the day after tomorrow.  And finally . . . 
3.  Those tax-deferred options are use-it-or-lose-it.  If you don't max out your 401(k) this year, you can't "make up for it" by contributing more next year. 

So in general, if you're on the "live off stock market investments" path, I would start with this post:  http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/.  Figure out where you want to be on the chart, and then figure out how to put the required amount in investments every month.  Then live on the rest.  If that leaves you extra cash to invest, by all means look into buying a house -- especially if you can get a good deal on one, have a tenant that helps with the cost, etc.  But get your savings ducks in a row before moving on to lifestyle decisions.*

*The only caveat here would be if buying a duplex actually allows you to reduce your net living expenses because the tenant pays so much rent -- if you can find that sweetheart of a deal, you could move that up on the priority list, as long as you then invest the extra savings.  But even there, I'd still recommend maxing out your HSA and 401(k) to the match first -- and when you're doing the math, don't forget the extra costs of repairs, maintenance, power/water bills, insurance, etc. etc. etc. 

El Jacinto

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Re: New Here - Stash Cash for a House or Invest?
« Reply #5 on: November 07, 2018, 07:59:53 AM »
If your goal is to buy a house within the next 5 years, I would just park the extra money in something boring, like a money market account. If your timeline is any length of time longer than 5 years, I would throw it in an index mutual fund.

The chance of losing money in the stock market when invested under 5 years is high enough that I would rather not take that risk myself. A good money market will earn only 2%, but the money will be there when you decide to pull the trigger on a house.

Good job, and keep up that great savings rate!

elgee

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Re: New Here - Stash Cash for a House or Invest?
« Reply #6 on: November 09, 2018, 10:37:52 AM »
First, congrats!  You are in a great place to start.

Second, the real question here is for you:  do you envision your path to FIRE as coming through investments in the stock market, or are you planning to invest in real estate that you rent out to others.  Both paths lead to success, but it affects the decision you make now. 

If you want to be landlords, then buying a duplex is a great way to start, if you can find the right deal where the tenant effectively pays your mortgage.  You can live in it, fix it up, then when you're ready either buy another rental or rent out both sides and use the proceeds to repeat the process somewhere else.

If you don't plan to be landlords, then you need to think of "buying a house" as a consumption choice, not an "investment."  That means that you need to get your savings on track for your FIRE date before you upgrade your standard of living.  And that means maxing out your 401(k)s, IRAs, HSAs, etc., as laid out in the Investment Order sticky, before doing anything else.  Why?  Three primary reasons:

1.  These accounts are tax-deductible.  Minimizing the tax you pay now will allow you to invest more for the same hit to your budget.  Which is important because . . .
2.  The power of compounding.  The rule of 72 says that if you get about a 7% average return, every dollar you put in today will double in a decade.  So $10K now becomes $20K in 2028, $40K in 2038, and $80K in 2048.  But note that if you wait 10 years to start investing, at the end of that same 30 years, you have only half that amount -- you lose a full doubling.  So the dollar you invest today is more valuable than the dollar you invest tomorrow, and the dollar you invest tomorrow is more valuable than the dollar you invest the day after tomorrow.  And finally . . . 
3.  Those tax-deferred options are use-it-or-lose-it.  If you don't max out your 401(k) this year, you can't "make up for it" by contributing more next year. 

So in general, if you're on the "live off stock market investments" path, I would start with this post:  http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/.  Figure out where you want to be on the chart, and then figure out how to put the required amount in investments every month.  Then live on the rest.  If that leaves you extra cash to invest, by all means look into buying a house -- especially if you can get a good deal on one, have a tenant that helps with the cost, etc.  But get your savings ducks in a row before moving on to lifestyle decisions.*

*The only caveat here would be if buying a duplex actually allows you to reduce your net living expenses because the tenant pays so much rent -- if you can find that sweetheart of a deal, you could move that up on the priority list, as long as you then invest the extra savings.  But even there, I'd still recommend maxing out your HSA and 401(k) to the match first -- and when you're doing the math, don't forget the extra costs of repairs, maintenance, power/water bills, insurance, etc. etc. etc.

Thanks so much for the input!  I think we see ourselves going for a combination of investing in stocks and real estate as our path to FIRE (looking to create several streams of income for more security).  So buying the duplex would definitely be more of an "investment" to lower our net living expenses so we can increase our rate of savings (bc of tenant paying for a good chunk of the mortgage).

And as far as HSA and 401k - I feel so unconventional in these categories.  I am a Business Analyst but am halfway through a two-year contract through a staffing agency and my husband is a realtor, so we don't get any 401k matching :(.  Also my husband has one of those health sharing ministries for "healthcare" (sooo much cheaper than getting a private plan :/) and I will probably do the same when I have to go off of my parents benefits in May (definitely loving that perk of staying on their healthcare til I turn 26). So I don't think we can even have an HSA right?   Does that mean we should go straight into stocks with any extra money we're not putting into the duplex?  Or should we do an IRA of some sort?

Thanks in advance.  Some of this stuff is overwhelming to jump into, so we want to be as informed as we can as we're getting starting so we can reach FIRE asap.

elgee

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Re: New Here - Stash Cash for a House or Invest?
« Reply #7 on: November 09, 2018, 10:41:59 AM »
I should also say - we do have about $5,500 in a 401K from my husband's previous job and I have like $2,000 in a 403b - so we're not totally at ground 0 in retirement savings - but we don't know what we should do with these accounts (like roll them into IRA's) or if we should just leave them.

TomTX

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Re: New Here - Stash Cash for a House or Invest?
« Reply #8 on: November 10, 2018, 02:46:43 PM »
I should also say - we do have about $5,500 in a 401K from my husband's previous job and I have like $2,000 in a 403b - so we're not totally at ground 0 in retirement savings - but we don't know what we should do with these accounts (like roll them into IRA's) or if we should just leave them.

Compare overall costs to fund expenses at Vanguard. If Vanguard is lower, roll them over.