Where should I put this money?

[mrigney]

Wife and I recently bought a car ('10 Prius w/37k miles). We paid $15k. On the high side for mustachianism, I know. We wanted something that we'd get at least 10-15 years + something that could handle 2 car seats and a dog + got good mpg. Maybe you agree w/the purchase, maybe not...so facepunch if needed, but that's not what my question is about:-)

We're now in the process of selling our other car that the Prius is replacing (a 4-door sedan that wasn't going to handle the carseats and dog). Looks like we're going to get around $8500-9000 for the car. My original plan was to take that $8.5k, the $3.5k coming on our tax return, and put it toward the car, then just pay off the difference w/savings.

However, as I got to thinking about it, I thought maybe there is a better way to use the money. The car loan is @ 2.49%. We own a house worth about $160k (+/- 3k depending on the appraiser) and owe $149k on it. Thus, we are paying $108/month in PMI. We expect to be in the house for another 2-4 years and then use it as a rental after we move out. To get rid of PMI we'd need to get the balance on our loan to about $128k-130k). Instead of putting the $12k in cash I'm about to have from car sale and tax return toward the car loan @ 2.49%, should I instead put it all on the mortgage to get closer to getting rid of PMI? That could get me down to a balance of about $137k leaving me about $7-10k to go to get rid of PMI.

Also, would you then reduce 401k contributions to help get rid of PMI? Currently contributing 10% to 401k (+ 3% company match). I'm also going to become eligible next month for an employe stock program (up to $185/month of company stock + 25% company match). My plan was to go all in on that to get the 25% match. But, would it be better to bring 401k contributions down to 3% (to get the match), then take the extra $4k from that and put it toward the mortgage?

The numbers could look like this:
   Principle paydown to get rid of PMI:              ~$20,000
-  Car sale:                                                       $9,000
-  Tax return:                                                   $3,400
______________________________________________
Amount left to get rid of PMI:                           ~$7,600
- Normal Principal paydown:                                $2,585
- redirected 401k contributions (rest of 2014):     $3,338
______________________________________________
Amount left to get rid of PMI:                           ~$1,677

So that'd leave me with about $150/month I'd need to put extra on the mortgage.

Thoughts? What would you do?

[mrigney]

Sorry to bump this and self-promote, but are there really no opinions on this? haha.

[Another Reader]

I would likely put the cash toward the PMI pay down, unless I had not funded IRA's yet.  You have not given a lot of detail about your income and expenses, however, so it's difficult to give a complete answer about what I would do in your shoes.  It looks like you are taking on a lot of debt to make purchases and I would want to look at my income and expenses to see where I could make improvements before making a final decision.

[SunshineGirl]

I think I would take the money from the sale of the car and put it toward the house, although I might not pay it until I had the whole chunk to wipe the PMI in one fell swoop. This gives you a little flexibility.

As far as not taking advantage of the stock purchase program, can you give more details on it? They can be fantastic ways to make money if they're set up well, and if so, should be taken full advantage of. Tell us more about that program, and I'll give you a strong opinion one way or the other. :)

[mrigney]

Whoo...work finally is letting me breathe long enough to reply to this post. I'm hoping 12 hour days are the path to a promoting which is the path to earlier FIRE:-)

@Another Reader - I'm not sure why you say I'm taking on a lot of debt? I bought the car with a loan so that I didn't have to go carless (well, so that my wife didn't have to go carless). The plan was to pay off ~80% of the car loan w/the sale of our current car + tax return, then make the decision on whether to pay off the rest of the car in one lump sum or just make the payments (since interest is so low). Other than that, a mortgatge + < $10k in student loans at 1.99% is it. Maybe I should've gotten a cheaper car...but that's a discussion for another day at this point. Bottom line w/this was that my wife felt comfortable and safe w/the car we got, and over a 10 year time horizon, was/is going to save us money over the current car. I'll post income/expenses below.

@SunshineGirl Good point about waiting to pay off in one big chunk. Can let the money work for me for a little bit that way, I suppose. So here's the info on the stock program.
- It's an ESPP, not an ESOP. It's done through payroll deductions with a 25% company match.
- Can contribute up to $184 per payroll period (bi-weekly) on an after-tax basis
- As far as I can tell from the paperwork I have, there are certain blackout periods when you can't sell stock, but generally no limitations on how long you have to hold a share before selling. Supposedly selling shares (through Fidelity) is $39.95/trade + $0.02/share.

Some notes about past performance of the stock, if that makes a difference (S&P performance in parenthesis):
YTD: +0.16% (-4%)
1-year: +29.58% (18%)
5-year: +212% (113%)
10-year: +376% (55%)
since 1999: 776% (25%)

Any other questions?

-------------Income/expenses--------------------
Gross Income: $5241.58
401k Contribution: $577 (11%) + $157.26 employer match (3%)

Net Income: $3503 (e.g. what I actually see each month)

Expenses (I don't have my spreadsheet handy, so I'll go as best I can from memory on the major ones):
Mortgage (everything included): $973
Food (groceries + restaurants + coffee): $535
Internet + cable (just dropped the cable, so it'll come off after this month): $101
Phone: $70
Electricity (average): ~$110
Water: ~$37
Personal Goods (hygiene, toiletries, etc): $20-30 (new category for us, so I'm not sure on this)
Car Payment (if we keep the loan): $350
Student Loans: $106
Misc: $25
His/her spending money: $30
Date Money: $15
HOA Dues: $15
Netflix: $8
Medical (for this year at least...baby #2 to arrive shortly): $150 (expected)
Xmas Savings: $40
Gifts (wedding, birthday, etc): $15
Pets: $80 (would love this to be lower...it's just what we've found to be the historical average for food + vet bills...going to try to do heartworm meds w/cow dewormer this year to cut costs)
Fitness: $15
Gas: $195
Insurance: $60

That should come out to about $28-2900/month
We also then pout aside some money w/designated tags: ~$100/month for travel to see family and vacations, $50/month for car repairs, etc.

[SunshineGirl]

The stock purchase plan looks good to me. The one I used to have didn't have a match, but we got a 15% discount off the lowest price of the stock at the start or end of the six-month period (whichever was lower), so if it was $100 a share at the start of the period and $150 at the end, we got our shares at $85. Clearly, a no-brainer to participate in, with a guaranteed return of at least 15% and possibly quite a bit more. Often, I doubled my money.

It's not clear if you're actually purchasing shares with each paycheck or at the end of the six-month period, but I would definitely max it out in either case.

What you'll have to decide and think hard on is how and when to sell the shares. You could:

1. Sell immediately and lock in the 25% discount/return, and invest in an index fund or something else. I'd say it's the conservative choice.

2. Hold for the long haul. It can be extremely profitable, as evidenced by the returns you noted. However, it's also the riskiest because you have so much of your money in one stock/company (as well as your paycheck).

3. Once you have the stock, set a limit order to sell if it goes below a certain price that you're comfortable with. This way, you can ride the stock up and keep changing/re-setting the limit order, so you have all upside and no downside. 

On the surface, #3 looks like the best play, although you could sell immediately and do the same thing with any other stock or mutual fund, and that way, you're diversified better.

I guess a fourth option would be to keep some and sell some.

And, I forget what the tax implications are of selling right away vs. holding. Is it taxed as income or capital gains?

Anyway, I recommend you do it, and figure out your strategy, which can change. I did #1-3 at various times.