Author Topic: Case Study: pay off the house or invest?  (Read 2622 times)

Cori

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Case Study: pay off the house or invest?
« on: June 08, 2015, 09:55:35 PM »


Life Situation: We are married, 33 and 34 years old, respectively, with 2 children ages 4 and 8. DH runs an electrical contracting business (one man show) and I am primarily an SAHM, but I pick up some substitute teaching work here and there.

Gross Salary/Wages: in 2013 we paid taxes on $40,000. Last year we paid taxes on $27,000. This year we demolished that in the first quarter. I'm projecting to possibly triple last years profits  by the time the year is done. What we've been doing is just taking a shareholder distribution of $2300 a month and taking a larger distribution of $6,000 at the end of the year. We leave the rest of the money in the business. I bring in only about $1200 a year subbing.


Current expenses:
Monthly:
Groceries:$400
Land Contract payment: $277
Utilities:$248
Gasoline: $130
Health insurance:370
Medical/dental expenses: about $57
Internet:49
Netflix:17
Gym:40
Toiletries, cosmetics, cleaning products, etc.:20
Entertainment, clothing, lunches out, other unnecessary bullshit:$244
School expenses averaged out:$25
Hair cuts:$20

Here are things we set an annual budget for:
Life insurance:425/yr
Auto and homeowners insurance (one bill):1864 (we have 2 cars, a 2005 Impala, which is my car, and a 1998 Ford Bronco, which we rarely drive.
Property taxes: 1400
License and Registration:225
Gifts:700
Kid activities:1000
Trash pick up:150
Optometrist:150
Vacations:900
Other:240

Assets: Amount & description - 2500 in a Roth IRA mutual fund, 1500 in another Roth IRA mutual fund, 2,000 in my husband's Fidelity account
$21,000 in a savings account for emergencies and purchases we agree on.


Liabilities:
We are in a land contract with my husband's parents. The original cost of the house was 69,000. They charge us 2.5% interest. We owe about 59,000. It has a 5 yr.balloon, so we will have to either get a real mortgage next yr or sign a new contract with them.
No other debts.

Specific Question(s): should we pay more on the house or should we invest more? We are torn, because 2.5% is so low, but it is also his parents' money. If we do invest, should we put it in retirement accounts or something else?  (Clearly we can cut our spending on silly stuff, so no need to mention that!)
Also, should we take more money in shareholder distributions or should we leave the money in the business?

Now that the business is doing better, and  I'm starting to get excited about saving, I'd love to have a plan in place so my husband isn't tempted to buy a $1200 bicycle!

stlbrah

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Re: Case Study: pay off the house or invest?
« Reply #1 on: June 08, 2015, 10:06:42 PM »
I would shoot for maxing out retirement accounts each year and then go from there.

The stock market is very high right now, but in early to mid 30s this is not something I would worry about, as it will fluctuate several times before you take it out regardless.

MDM

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Re: Case Study: pay off the house or invest?
« Reply #2 on: June 08, 2015, 10:32:56 PM »
Specific Question(s): should we pay more on the house or should we invest more? We are torn, because 2.5% is so low, but it is also his parents' money. If we do invest, should we put it in retirement accounts or something else?  (Clearly we can cut our spending on silly stuff, so no need to mention that!)
Also, should we take more money in shareholder distributions or should we leave the money in the business?
Cori, welcome to the forum.

If the parents are happy to renew the 2.5% loan, then do it and pay the monthly amount the amortization schedule calculates.  You won't get a better deal.  Of course, if the parents need the cash then thank them for the 5 years and start talking with lenders.

Your questions about "where to invest?" and "take distributions or leave money in the business?" are interrelated.  The business (potentially) adds complexity.  I.e., it appears (based on a possibly faulty reading of your OP) you have 4 choices:
  - traditional individual 401k
  - Roth individual 401k
  - taxable account
  - your own business

If you could increase your business income with good investments, then you have an extra option compared with most people so we (and, more importantly, you) need to understand more details about that option.
If by "leave money in..." you literally mean "leave uninvested cash in a business savings account" then that isn't a good option so we're back to the first three and you should be taking as much out of the business and into tax-advantaged accounts as possible.

The usual generic advice is "put money in a traditional account if your marginal rate is 25% or higher, and in a Roth if your marginal rate is 15% or lower".  But see http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-young-couple-starting-out/msg688528/#msg688528 for some comments that might apply to you also.