Author Topic: My dilemma....  (Read 5394 times)

Zee

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My dilemma....
« on: February 27, 2013, 11:46:41 AM »
I am constantly wrestling with several financial moves in the hope of ultimately achieving the Mustachian lifestyle we all seek.  Hoping for some insightful suggestions to lead me through the fog that is path to financial independence….

I wrestle with:
1)  advanced monthly payments on residential mortgage (along with potential year-end bonuses) in an effort to repay in 4-5 years to be debt free,
2)  investing excess funds in a taxable Vanguard account in ETFs, or
3)  accumulating excess funds for a potential investor real estate property (i.e. thinking about going in on a condo with sister in Chicago, sister would be tenant).

While we currently have the means (and remain employed), the crux of my indecisiveness is deciphering which is the most sensible option when considering the benefits of long-term compounding and growth in an investment account albeit in a volatile market environment; the additional funds that would be available to juice up investments when P&I is no longer required; passive income from real estate and current depressed real estate prices. 

Relevant details of my situation:
•   Age 34, wife 32.  Live in suburbs of Chicago.  No kids with hopes to start family in next year or two.
•   Residential mortgage: current balance $174k.  Refinanced $213k in Jan 2012 to a 15-year at 3.25%.  Monthly P&I of $1,496.68.  Property value approximately $250k.  No plans to move for the foreseeable future. 
•   Vanguard brokerage account balance approximately $11k invested in four ETFs.  Vanguard Div Appreciation (VIG), Vanguard Mega Cap Index (MGC), Vanguard Mid Cap Value (VOE), Vanguard Total Stock Market (VTI). 
•   I fully fund annual contributions to 401k and Roth IRAs.  Wife contributes 11% or approximately $5k to her 401k.  Approximate balances of $350k between me and my wife. 
•   Approximately 8 months of expenses in saving account based upon current income/expense levels.

Excess of approximately $2k per month after monthly expense/spending requirements and P&I on residential mortgage.  Year-end bonuses may provide additional funds to invest/pay-down mortgage but my conservative nature is to not rely upon this (last year $38K after tax). 

I appreciate any feedback and all feedback that you are willing to provide.  Help knock some sense into me!


marty998

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Re: My dilemma....
« Reply #1 on: February 27, 2013, 02:07:59 PM »
Seem to be doing everything right.Easiest thing to do would be to split the $2000 3 ways and put equal amounts into the mortgage, vanguard and condo deposit.

Can you change your monthly mortgage payment of $1500 to $750 fortnightly? Thats a quick and easy way to save a little bit more in interest and pay it down a bit faster.

icefr

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Re: My dilemma....
« Reply #2 on: February 27, 2013, 02:14:18 PM »
I'm in a similar financial situation, somewhat, in choosing to pay down my mortgage or invest excess funds in a taxable Vanguard account. I've found that no one can really give you the answer because there isn't One Right Answer here. I personally chose to throw my ~$2k/month excess at my mortgage. I realize that mine is only 2.5% debt, which is pretty cheap. Some days though, I wonder if I would prefer to invest that money in index funds.

As for the rental property idea, that's a life choice as well as a financial choice. Do you want to be a landlord now? What would you do if your sister no longer wants to rent the condo? What would you do if she damages it? Would you want to be a landlord when you have kids?

But, you guys are hoping to start a family in the next year or two and I'm an unmarried 24 year old. How much excess would you have monthly if your wife wasn't working? Does your wife plan to stay home with the kid(s)? Will she have paid maternity leave? Will you take any paternity leave? Will it be paid? How much does childcare cost in your area? That could eat into your $2k/month excess since I hear in some urban areas it can cost $700-1,400/month/kid, especially in the early years.

Since you are 4-5 years away from paying off the house and you want to have kids in 1-2 years, I would consider investing instead of paying down the mortgage. It's already at 3.25%. You can always pay off the mortgage later with your investments if you so choose and it would provide a bit of flexibility to have monetary assets versus more equity in your home.

What some people do is they invest with their monthly paychecks and then pay down the mortgage with bonuses. That could be a hybrid answer here and something I've contemplated myself as well. Or marty998's solution of splitting the $2k two ways is a good one too. I'm not sure that you can do biweekly payments - I would check with your lender that they even have that option.

Use it up, wear it out...

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Re: My dilemma....
« Reply #3 on: February 27, 2013, 03:20:12 PM »
[bad grammar joke]
No dilemma here, as a 'dilemma' is a choice between two options...
[/bad grammar joke]

Zee

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Re: My dilemma....
« Reply #4 on: February 28, 2013, 09:01:40 AM »
I appreciate the insightful suggestions.  At times I think I can become so consumed by this and am unable to determine the best course(s) of action.  I might be gung ho one day to repay the mortgage and then turn a 180 and decide investing is the best long term solution.  It's trying to reconcile the theoretical- and behavioral-finance voices in my head...

Can you change your monthly mortgage payment of $1500 to $750 fortnightly? Thats a quick and easy way to save a little bit more in interest and pay it down a bit faster.

There is a weekly and semi-monthly option; however, the money collected at that time is not immediately applied to the balance.  The lender holds principal until sufficient to meet the required full monthly payment.  These options only get you an extra payment over the course of the year. 

As for the rental property idea, that's a life choice as well as a financial choice. Do you want to be a landlord now? What would you do if your sister no longer wants to rent the condo? What would you do if she damages it? Would you want to be a landlord when you have kids?

But, you guys are hoping to start a family in the next year or two and I'm an unmarried 24 year old. How much excess would you have monthly if your wife wasn't working? Does your wife plan to stay home with the kid(s)? Will she have paid maternity leave? Will you take any paternity leave? Will it be paid? How much does childcare cost in your area? That could eat into your $2k/month excess since I hear in some urban areas it can cost $700-1,400/month/kid, especially in the early years.

Since you are 4-5 years away from paying off the house and you want to have kids in 1-2 years, I would consider investing instead of paying down the mortgage. It's already at 3.25%. You can always pay off the mortgage later with your investments if you so choose and it would provide a bit of flexibility to have monetary assets versus more equity in your home.

@ icefr, I truly appreciate the additional questions to consider.  It is easy to lose sight of potential changes in one's family or financial situation that may be around the corner.  I think (for now) that the liquidity and flexibility from investing monthly trumps the desire to completely exterminate the mortgage debt in the shortest possible time frame. 

I like your idea of using potential year-end bonus money to accelerate the repayment of the mortgage debt. 
Speaking of a hybrid approach, I have read on other threads continuing to amortize the mortgage debt while building up a cash balance to direct towards the mortgage balance.  As the mortgage is repaid and the cash balance builds, apply the cash to the mortgage when both are equal.  Sure, there will be a cash drag by maintaining higher cash balances and some additional interest expense on said mortgage.  But the trade off is the liquidity and flexibility one would have, especially with an uncertain future.

[bad grammar joke]
No dilemma here, as a 'dilemma' is a choice between two options...
[/bad grammar joke]

I guess we have different dictionaries.  According to Merriam-Webster, one definition of a "dilemma" is:
an argument presenting two or more equally conclusive alternatives against an opponent

http://www.merriam-webster.com/dictionary/dilemma

arebelspy

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Re: My dilemma....
« Reply #5 on: February 28, 2013, 09:13:35 AM »
It's a Trilemma!



Don't we all feel good about learning something useless new?   :D
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Another Reader

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Re: My dilemma....
« Reply #6 on: February 28, 2013, 09:20:26 AM »
I would consider refinancing the mortgage if you could get a no cost or very low cost 15 year mortgage in the 2.75 percent range.  With that balance, I would probably just pay at the regular payment and interest rate until everything else becomes clear.  You may decide to move if you have kids.

I would not become involved in the real estate deal with my sister.  You don't have any experience and this is a great way to destroy a family relationship.

I would save and invest that $2,000 a month to afford the family the most options when the kids arrive.  What about upping the wife's 401k contribution for now?  Then take the excess and put it into taxable investment accounts and additional savings for kid costs.  Spend some time studying real estate investing and make friends with some folks that are successfully investing in real estate.  That way, a lot of options will be available to you over the next few years.


Zee

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Re: My dilemma....
« Reply #7 on: March 01, 2013, 07:41:24 AM »
It's a Trilemma!



Don't we all feel good about learning something useless new?   :D

Nice!  I'm relatively new to the forum and already learning much more than expected! 


I would consider refinancing the mortgage if you could get a no cost or very low cost 15 year mortgage in the 2.75 percent range.  With that balance, I would probably just pay at the regular payment and interest rate until everything else becomes clear.  You may decide to move if you have kids.

I would not become involved in the real estate deal with my sister.  You don't have any experience and this is a great way to destroy a family relationship.

I would save and invest that $2,000 a month to afford the family the most options when the kids arrive.  What about upping the wife's 401k contribution for now?  Then take the excess and put it into taxable investment accounts and additional savings for kid costs.  Spend some time studying real estate investing and make friends with some folks that are successfully investing in real estate.  That way, a lot of options will be available to you over the next few years.

Maintaining a liquid portfolio seems to make the most sense in the near term when prioritizing goals.  As much as I hate debt, I have to stop myself and take a holistic perspective. 

Dabbling in real estate propabably isn't the best bet at this time (at least for me), especially if not fully informed and prepared.  I'd hate to miss the bottom of the real estate market but I would think profitable deals would still exist down the road.

Thanks to all for the valuable suggestions!