CASE STUDY: Need help figuring out where to put this money!

[Shawnyrivers]

I just want to start off by saying I've learned an immense amount from all of you on this forum and from Mr. Money as well and it's certainly one of the reasons why we're in the position that we're in today, so a big thank you for that! That said, I know just enough about retirement/investing to get ourselves into trouble so before I start moving money around I figured I'm due to post our business! :P

ME:37
WIFE:30

Annual combined gross income: 102.6k +4.5k bonus (before taxes)
Annual rental income: 24k
Total: 131.1K

Monthly net income including rent: $8.2k

Retirement/investment/Savings Accounts:
401k (wife's)- Currently @$21k, Actively contributing up to the 4% company match ($185/month+Plus match), 100% vested
Roth IRA (wife's) from Previous employer 401k- Currently at $2.7k sitting in a money market account. Not actively contributing at this time.
Pension (wife's) Currently at 4K, 100%vested, I'm not sure if we contribute to this but if we do it is already taken out of the above monthy net.
HSA- (mine) Currently at 8.8k (sitting in a money market), company contributes $4.5k/yr
Cash savings- 1.8k (just paid off my student loan two days ago, this was at 10k prior)
SUBTOTAL: 38K

Assets:
Townhouse- $325k
Vehicle- $20k
SUBTOTAL: $345K

Liabilities:
Mortgage- @284k (30year fixed at 3.25%)
Vehicle- 14.5k (4 year at 1.99%)
SUBTOTAL: $298.5K

Fixed Monthly Expenses:
Mortgage on rental property: $1556 (PITI) + $291(HOA) = $1847
Rent (all utilities included, water/trash/elec/cable/int) =1450
Child Support- $700 (6 years left)
Car Ins. $84
Cell Phones: $160.
Car Payment: $374 (3 years remain to payoff)
Life Ins.(me through VA): $19

Subtotal: $4634

Variable Monthly expenses:
Food: $500
Gas: $250
Household: $100
Misc. $100

Subtotal: $950.

TOTAL MONTHLY INCOME: $8200
TOTAL MONTHLY EXPENSES: $5584
REMAINING: $2600

Just a bit about ourselves and our current situation- We live in a granny flat and have for the past 1.5 years and probably will continue for another 1.5, this is a big reason for us paying off previous debts. Wife has a short commute to work and I bike 15miles a day to work. We would like to move into a house after the 1.5 years are up. (we're half way into our second year lease and will more than likely sign up for one more). After that we have our sights on buying another house where we would plan to stay for awhile. We love to eat and take great care of our health, we eat only grass fed/pastured/organic meats/eggs, local organic produce and enjoy going out to eat on occasion although the majority of our meals are prepared ourselves. We are also very active so eating clean, whole, fresh foods really support that lifestyle.

Questions I have: (Please see my thoughts below to factor into my questions)
What to do with our remaining cash?
Should we put an extra $100 towards car just to pay it off sooner? (I'm kind of anxious to have it paid but know that it's probably not the wisest to pay it off since it's so low interest)
Considering that the stock market is at record highs should we wait to move our money into stocks/mutual funds/ETF's until after a correction? The only money we currently have in the market is the 401k (target retirement fund) the rest are sitting in money markets.
We're planning on contributing the remaining of 1.5k into my HSA and a Roth IRA for me for tax year 2013, and as related to the above question is when we do this should we just put into a MM account and then move them into something more aggressive after a correction?

NOTE: My below thoughts are where I'm at with current knowledge. Before I act on this I plan on doing a bit more research and hopefully taking into consideration the advice I get from you guys.

My thoughts are to leave the 401k the way it is. Start funding my HSA up to the max which is 6k (since my employer contributes 4.5k all that we would need is 1.5K). Next would be to max out two Roth accounts, start contributing to the one she already has then to open a new one for me.  If we did all of this we would use $1041 of the 2.6k (125(hsa)+458(her roth)+458(my roth). Next would be to allocate 1k for stocks and short term savings (trips/house/other large expense items) the mix would vary depending on what we're doing. And the remaining $560 would be split between us for fun money and could also be put towards trip/large items at our discretion. We would use ROTH contributions for emergency funds. Also social security isn't even a thought to us but would be icing on the cake.

I'm also not necessarily looking for advice on reducing my expenses but I would gladly accept advice in this area as I'm always looking for ways to improve them.

We would love to retire mid 50's early 60's as a maximum but would love to retire earlier of course. BUT we would like to do some traveling while we're still young and enjoy life a bit. I guess I'm looking for some balance. I don't want to continue to be young and dumb at the expense of a nice retirement but I feel if we're putting the above away for retirement/investments we might just be able to do both. But I'm also very ready for a reality check if I'm living in la la land. :)

Hopefully I put this into a way that you can understand and that my questions are specific enough for you to provide feedback. Please let me know if I can improve something to make it more digestible. I'm a very ready to receive as many face punches as necessary and have a very open mind when it comes to changing my strategy based on learning new things. If you've made it this far I really appreciate your time and look forward to any feedback that you may be able to provide. Thank you and have a great weekend!

[Catbert]

With the low interest rate on your car loan often the advice is to leave it alone.  Since your looking to buy a house in 1.5 years I'd look to have the car paid off by then.

When stockpiling cash for the down payment there is really no great place to put it.  Just put it in the bank...maybe an online CD to eek out the best interest rate.  Don't put money you'll need in the next couple of years in stocks or bonds.  Both can go down in the meantime.  I don't know all the ends and outs of HSAs but I do know that you can't get the money out w/o penalty except for medical expenses.  Unless there is a particular reason for why you want extra in there I'd prioritize the Roth about the HSA (since your employer already puts in 4.5k.)

[Shawnyrivers]

Thanks for the feedback Mary!

As for the HSA, our strategy is to pay for medical expenses out of pocket and keep the receipts to receive distributions at a later time when needed (tax free/no penalty). We are both healthy and have little to no medical expenses so it's pretty easy to accomplish this. For the amount beyond what we collect in receipts we would use as another retirement account and receive distributions when we reach age 65, at that point we get taxed at the standard income tax rate. Since contribution is pretax and distributions are tax free (total of receipts/medical expenses) we figured it was a no brainer to max this account. Not sure if this is the best strategy but from my current understanding it seems legit. :)

[Gimesalot]

I am not sure if I am understanding your numbers correctly, but it seems like you need cash.  You plan to buy a house in 18 months but you only have $1800 in cash.  Is this correct?  Are you planning on taking equity out of the townhouse?

I would suggest that you move into the townhouse, if that is possible.  If not, I would attempt to sell it.  The mortgage is $22k a year.  Your income from the rental is $24k a year.  I am not a pro at rentals, but it seems to me, if not having the rental occupied one month a year can wipe out any profit for the year, it isn't a good choice.  Sell it a couple months before you want to move.  Use the money as a down payment. You would end up with a lower payment, and more money to spend on fun and savings.

BTW, that is my understanding of the HSA as well.

[Eric]

Since contribution is pretax and distributions are tax free (total of receipts/medical expenses) we figured it was a no brainer to max this account. Not sure if this is the best strategy but from my current understanding it seems legit. :)

The Mad Fientist would agree with you:

http://www.madfientist.com/ultimate-retirement-account/

[Shawnyrivers]

Thanks for the feedback Gimesalot!

Yeah we'll definitely need money for a down. We'll be adding 3k this month (state refund/extra cash) to our 1.8k and then will save for a couple months and this should put us in the range of the down required. We would be getting an FHA loan so only need 3.5 %. I also failed to mention that I may have some stock options to cash in from my job when our company has their IPO which will hopefully happen within our timeframe of wanting to move. I could have explained all this much better, sorry about that.

As far as the townhouse I'm no expert either but beyond the cash flow doesn't the tax deductions and principal reduction account for something? I think so but im not certain from a big picture perspective. As far as vacancy goes, I don't see us having any problem keeping it rented, Its located in a high demand area and it's only 5 years old so its in great condition so I willing to take the risk. I have thought about selling it but would prefer to keep it long term to take advantage of appreciation.

Thanks again for your comments!

[Shawnyrivers]

Thanks For the link Eric! That was a good read and I'll definitely be reading more of his content.

[MDM]

Shawnyrivers,

See table below.  As Gimesalot said, "I am not sure if I am understanding your numbers correctly."  Could you take a look and comment on some things?

• How was the $8,200 "net income including rent" calculated in the OP?  I may have misunderstood what you meant by "net"
• Monthly positive cash flow of $3,421 vs $2,600?  Probably due to different assumptions/reality on taxes?
• Anything else I misread?

Somewhat hesitant to offer opinions until I have a better understanding of the actual situation.

Category	Monthly amt.	Comments
Salary/Wages	$8,925	Per OP
Health Insur.	$0
401k	$185	Per OP
Health FSA	$0
Pretax Salary/Wages	$8,740
ESPP	$0
LTD	$0
Paycheck before taxes	$8,740
Rental Income	$2,000	Per OP
Rental real expenses	$1,147	OP=$1847, minus assumed $700 P
Rental depreciation expense	$909	$300K over 27.5 yr
Rental taxable income	($56)
Federal Adj. Gross Inc.	$8,684
Health care reimb.	$0
Federal tax	$1,064	2014 rates
State tax	$0	?
Medicare/SS tax	$671	6.2% on pretax salary, 1.45% on gross salary
Income before other expenses	$7,858	Can't get to the $8,200 in the OP:
		AGI minus Taxes plus Depreciation
Monthly Expenses:
Rental Mortgage (P only)	$700	ITI & HOA in "Rental real expense"
Flat rent & utilities	$1,450	Per OP
Child Support	$700	Per OP
Home Ins.	$0
Household	$100	Per OP
Groceries/Alcohol	$500	Per OP
Dining (Pizza, etc.)	$0
Fuel/Public Transport	$250	Per OP
Cell Phones	$160	Per OP
Car Loan	$374	Per OP
Car Insurance	$84	Per OP
Life Ins.	$19	Per OP
Miscellaneous	$100	Per OP
Roth IRAs	$0	Per OP
Total non-rental Expense	$4,437
Remainder	$3,421	vs. $2,600 in OP?
Total monthly expenses	$5,584	Agrees with OP ( = non-rental + rental)