Reader Case Study - What would you do with an extra $75k?

[mrerjr]

Hello All - My wife and I bought our first house in Boston two years ago, putting nearly every cent of ours into the down payment.  Since then, we've managed to save more than $75k in cash, despite the hefty mortgage, in part due to the inspiration and motivation from this site! 

We're considering doing one of the following with the cash:

1) Invest in Vanguard index funds
2) Purchase cash-flow rental property outside of our overheated local market
3) Pay down the mortgage principal

Option 1 makes us nervous when looking at the PE10 ratio.  Option 2 is compelling, but we're actually leaning toward risk-free, headache-free  Option 3.   

Anyone have a good Option 4?  Thanks!

 

[thedayisbrave]

I think we'll need a better picture of your overall financial situation before we can respond with what would be best for your circumstance.  For example, do you have workplace retirement plans such as a 401K or 403b? If so and you're not already making those out, do so now.  Do either of you have a Roth IRA?

Any of your listed options are good but of course depend on the individual situation.  Sounds like you are pretty risk averse, so after maxing out retirement contributions, paying down the mortgage is not a bad choice.

[Beric01]

Regarding option 1, please read this thread. The market is nearly always at a historical high. You're not going to succeed by trying to time the market.

[mrerjr]

A bit more info:  we're in our early thirties, no kids, no debt and gross a combined $150k.  We haven't been contributing much to 401ks and Roths, not because of recent nominal highs, but because of historic valuations.  If ever a time to be fearful ...

Too much Zero Hedge in my diet? :)

[lysistrata]

Well, what a good problem to have! Congrats on your savings efforts!

I would do a combination of 1. and 3. Maybe, invest $30k in an index fund (I'd probably add $2500 a month or something until it's all in there, just to dollar-cost average a bit), keep $10k for an emergency fund (if you don't have one already) and throw the rest at the house. This means you get to pay down that principal quicker, but also keep some money in the market to grow at the same time.

[pdxbator]

If this is pure savings and you don't need it for retirement max out Roth's for each in Vanguard index funds. That's $11,000 this year. Then with the rest figure out what you might want.

I've thought about investing in real estate outside my own city which is overheated as well. I hate managing from afar though so if you want to do that think of real estate funds.

[4alpacas]

A bit more info:  we're in our early thirties, no kids, no debt and gross a combined $150k. We haven't been contributing much to 401ks and Roths, not because of recent nominal highs, but because of historic valuations.  If ever a time to be fearful ...

Too much Zero Hedge in my diet? :)

While I disagree with your thoughts on investing, it's important to realize you can still put money in your 401k and IRA to limit your tax liability with less risk (cash reserves).  In your shoes, I would max out the 401ks ($35k) and IRAs ($11k). 

[mrerjr]

Thanks for all the thoughts.  Part of our thinking is that getting the house paid off, which we can do in 4-5 years if we work at it, will buy an awful lot of lifestyle freedom.  We also think that there will be much better times to be heavy in equities - who knows, someday we might sell that paid-for house and put it all on VFINX when it's paying a 7% dividend.