Author Topic: Decent Windfall--Help us Allocate?  (Read 3952 times)

b24tnt1

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Decent Windfall--Help us Allocate?
« on: November 14, 2013, 11:55:41 AM »
Hi, My husband and I are newer to MMM.  We have made some good changes recently and have sold our too-expensive house in order to downsize and be closer to his work (3 miles away once we move).  We made some money from the sale of the house and want to be sure we are doing the right things with it. 

Here's the situation:
1.  We made $160,000 net of commissions and costs
2.  We have one $20,000 car loan that we are considering paying off.  The interest rate is 1.9%. The other car is paid off.
3.  We are currently renting as we are building a house which will be done in April and we will have a loan on it.  10% down would be $47,000.
4.  We have no credit card debt, and paid off our student loans. (yay!)
5.  We are saving 25% a month of our post tax income and will work to save more.  We cut cable TV entirely and are decently frugal, though are working on being more Mustachian.
6.  We have a toddler and I stay at home with her.  We will have another child in next year or two.
7. We also have about $100k in 401k.
8. We are in our mid-thirties and would like to be financially free in 10 years!

Questions:
1. Should we pay off the car loan from our cash?  (if we can earn more than 1.9% investing the cash, is it still better to pay off?  On the other hand, it frees up $500 a month if it's paid off).
2. How much to put down on the new house?
3. How to invest the remaining money to make the most of it?

Thanks so much in advance. 

Bruised_Pepper

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Re: Decent Windfall--Help us Allocate?
« Reply #1 on: November 14, 2013, 12:03:48 PM »
Questions:
1. Should we pay off the car loan from our cash?  (if we can earn more than 1.9% investing the cash, is it still better to pay off?  On the other hand, it frees up $500 a month if it's paid off).

With all the cash you'll have on hand if you don't pay it off, there's not much risk to keeping that debt around while you invest.  The interest is so ridiculously low that you should have no problem out-earning that.  I would use the loan as $20k worth of investing leverage.

Freedom2016

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Re: Decent Windfall--Help us Allocate?
« Reply #2 on: November 14, 2013, 12:12:39 PM »
With a normal mortgage you're stuck with PMI unless you put 20% down so the standard advice is to put at least 20% down.

Not sure if home building loans work differently but if not, I'd increase your down payment.

chasesfish

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Re: Decent Windfall--Help us Allocate?
« Reply #3 on: November 14, 2013, 12:19:09 PM »
Just roll it all in the new house and kill the car loan.

Why in the world do you owe $20k on a car?

StarryC

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Re: Decent Windfall--Help us Allocate?
« Reply #4 on: November 14, 2013, 12:20:31 PM »
Do you already have an emergency fund you didn't mention? 

If not:
1) Three months expenses in an emergency fund.  Maybe more, especially with a kid and only one income. Let's say that's $12,000. 
2) 20% down on the new property to avoid PMI and get a better interest rate.  $94,000.
3) I would pay off the car loan, especially if you are disciplined enough to put the additional $500 into savings either by maxing the 401K/Roth or into a taxable account.  Yes, that's only 1.9% return, but it also increases your monthly savings/ flexibility and would allow you to reduce your car insurance rates from comprehensive, right?    Probably worth it, especially if it puts you in a mental zone of "No debt except the mortgage." 
4) That leaves $34,000.  I'd put that in a taxable Vanguard index fund account.  Or, a 529 college fund if college for the kids is more important to you than early retirement for you. 

huadpe

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Re: Decent Windfall--Help us Allocate?
« Reply #5 on: November 14, 2013, 12:21:47 PM »
Questions:
1. Should we pay off the car loan from our cash?  (if we can earn more than 1.9% investing the cash, is it still better to pay off?  On the other hand, it frees up $500 a month if it's paid off).
2. How much to put down on the new house?
3. How to invest the remaining money to make the most of it?

Thanks so much in advance.

1.  Yes, and then you should sell the car and buy something more economical.  Even if you can beat the APR on the car with investments, you have $15-25k tied up in a rapidly depreciating asset.  You can go out and get a -really- nice used car for $8000 and invest the difference.  If you're willing to drive something functional but less nice, you can do even better.  That will end with you investing ~$10,000 now AND $500/month forever into the future.

2. $94,000 to avoid PMI.

3. Low fee index funds.  I personally am a fan of Betterment who have a very nicely designed auto-investment system, but there are many good funds over at Vanguard as well.  E.g. VFIAX if you want a basic stock mutual fund.

b24tnt1

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Re: Decent Windfall--Help us Allocate?
« Reply #6 on: November 14, 2013, 01:43:47 PM »
Thank you!  Yes, I was thinking about a different car (we got the loan on this one before we knew about MMM).  We have $10,000 in emerg savings also.  But, seeing as my husband is the only income earner, I feel hesitant to put 20% down on a house.  I might feel better having liquidity should we need it. It seems like PMI would be $200 a month, and what we could make with the $47k (at 6%) is $235/m, but I would have the money locked into the house.  If we pay the PMI, keep the cash, and throw extra money to the house as we have it, it seems to give more options. 

By the way, we're considering a 15 or 20 year loan as well in order to pay off the house quicker (but also would be a much higher mortgage, making me doubly hesitant to put 20% down).  Thoughts?

_JT

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Re: Decent Windfall--Help us Allocate?
« Reply #7 on: November 14, 2013, 01:56:29 PM »
Regardless of the returns you calculate you'd get elsewhere, PMI is thrown away money. I'd do 20% down, pay off and then sell the car for something reasonable (which will also put cash in your pocket), and then the rest in a mutual fund or investment of your choice. If you're worried about being a single income family, do a 30 year mortgage and overpay it. That way, should you ever be in dire straights you can drop back to just your base payment and free up some extra money. You could also take the savings from your car note and use it to beef up your emergency fund even further, although I'm not sure whether you'd need to.


ChiStache

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Re: Decent Windfall--Help us Allocate?
« Reply #8 on: November 14, 2013, 02:05:25 PM »
So you plan to put down 10% on a house valued at 470,000? That's a lot of money to borrow for a house. What's the interest rate, term, and expected monthly payment?

abhe8

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Re: Decent Windfall--Help us Allocate?
« Reply #9 on: November 14, 2013, 02:21:30 PM »
without a doubt i'd pay off that car loan, sell the car and buy something cheaper. use the money from selling the car and the rest of your cash and put it into the house. take a 15 mortgage. with a bigger downpayment, the monthly payment on the 15 year won't be bad at all (or pretty comparable to the 30 yr with no down payment).

1. pay off car loan. sell car and buy something cheaper.
2. open 529s for the kids, max out the first years contributions
3. use the rest of the 160k to put down on the house.
4. 1-3 should free up some serious cash from the monthly budget. use that to beef up the emergency fund and max out all tax advantaged retirement accounts. if you have other extra money per month, work to pay off the house early.

i agree that pmi is just throwing money away.

dadof4

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Re: Decent Windfall--Help us Allocate?
« Reply #10 on: November 14, 2013, 04:17:00 PM »
1. Regarding the car - first decide if you want to keep it or get a cheaper car.  If you keep it, keep the loan. The mustacian thing to do is to get a cheaper car.
2. Agree with others about 20% down payment for house. No PMI is good. Look at it this way: If you're paying $200 a month for that $47000, that's 5% APR. That's in addition to the 4% APR or so you'll pay in interest. 9% APR of guaranteed loss is not something you want, or could reliably beat if it is invested.
3. Invest the rest. Vanguard funds are the popular choice.
4. It sounds like you have a comfy post-tax cushion - so max out your 401k and Roth IRA's.

bdub

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Re: Decent Windfall--Help us Allocate?
« Reply #11 on: November 14, 2013, 05:59:06 PM »
Thank you!  Yes, I was thinking about a different car (we got the loan on this one before we knew about MMM).  We have $10,000 in emerg savings also.  But, seeing as my husband is the only income earner, I feel hesitant to put 20% down on a house.  I might feel better having liquidity should we need it. It seems like PMI would be $200 a month, and what we could make with the $47k (at 6%) is $235/m, but I would have the money locked into the house.  If we pay the PMI, keep the cash, and throw extra money to the house as we have it, it seems to give more options. 

By the way, we're considering a 15 or 20 year loan as well in order to pay off the house quicker (but also would be a much higher mortgage, making me doubly hesitant to put 20% down).  Thoughts?

I am confused by your logic:  you don't want to take a GUARANTEED 5.1% post tax return on your 47K (by avoiding PMI) but instead you want to hope for a 6% pretax return subject to market volatility.   Also,  you are worried about the shorter term loan because off the size of the payment but you are willing to lock yourself into PMI which adds $200 to your payment.

20% down payment on a 30 year fixed is the way to go.
« Last Edit: November 14, 2013, 08:30:16 PM by bdub »

b24tnt1

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Re: Decent Windfall--Help us Allocate?
« Reply #12 on: November 15, 2013, 10:02:42 AM »
Just to clear up about the house: the house we are buying is within what Mr. Money Mustache recommends (no more than 3x your annual salaries combined) and we live in a more expensive part of the country.  We also have a clear plan to pay it off.

We decided we will go with a 30 yr, pay off extra, with 20% down (no PMI), and also to reduce car expense so we have two paid off cars. 

Also, if we had no mortgage, our expenses for our family run $28,800 a year, so I think that's pretty encouraging! So, after we pay off that bad boy loan, we are on our way!  Thank you everyone.