Author Topic: Finding the most effective place to put some money  (Read 3501 times)

skunkfunk

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Finding the most effective place to put some money
« on: April 28, 2015, 04:15:44 PM »
I've come quite a ways in the 14 months since this case study. Wife and I cut expenses largely by getting rid of many categories (television, phone, beer, restaurants, etc. etc.) and rolling that into our $200/month we each get to allocate as desired, which eliminated much non-essential spending. A sizable amount of "play" money but it serves our needs given that most any luxury we can't agree on has to come out of it. Anyway, I've knocked out the $17.5K family loan, kept some of the low interest debt, and invested the difference in what seems to be mostly doctors bills regarding my first son's birth!

Anyway, our net worth went from $32K to $77K in our first 14 months in the cult on an $81K gross income. Now that all of the doctors bills are paid and the emergency fund replenished, I need to decide where to put our remaining ~$1350 monthly after-tax surplus.

Options - 401K. Plan kinda sucks and I'm already maxing the match. Meh.

IRA - We have ~11K in a Roth that I plan to leave there since the contribution can be accessed without penalty if the worst happens. I'd like to fund a traditional IRA instead, with both the wife and myself that's $1050/month.

Mortgage - We're paying PMI. Owe $139675. Monthly payment is $1508 ($402 in escrow, insurance around here is horrible) 3.75% interest. PMI is $65.87. Need the balance to get to $128000 or so and then we don't pay the PMI anymore. My wife would like to pay this down until we no longer pay PMI.

Auto - Owe $9500 on the car @ 2.2%. We average about 38.5 MPG, so it isn't horrible except for the full coverage and ridiculous rate of depreciation. One option is to pay this off and drop the full coverage. We could get rid of the car which I think I could get $13.5k or so for, but the only car my wife would be interested in that is on the "Frugal" list would be a 5-speed Vibe, and I can't really find one around here. I did find one at a dealer, but they wanted $14k for a 70K mile 6 year old car, so fuck them.

Student loans - currently at 0.8% interest. I don't particularly feel like paying that off, and it's only a balance of about $5200.

It looks to me like I can save $1600 on taxes by maxing the IRAs, but would save on PMI now and for many months to come by paying that off. I think the math favors IRA, but I'd like some thoughts on this.

MDM

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Re: Finding the most effective place to put some money
« Reply #1 on: April 28, 2015, 09:28:31 PM »
I've come quite a ways in the 14 months since this case study. Wife and I cut expenses largely by getting rid of many categories (television, phone, beer, restaurants, etc. etc.) and rolling that into our $200/month we each get to allocate as desired, which eliminated much non-essential spending. A sizable amount of "play" money but it serves our needs given that most any luxury we can't agree on has to come out of it. Anyway, I've knocked out the $17.5K family loan, kept some of the low interest debt, and invested the difference in what seems to be mostly doctors bills regarding my first son's birth!
Congratulations on all the above!

Quote
Options - 401K. Plan kinda sucks and I'm already maxing the match. Meh.
I'd like to fund a traditional IRA instead, with both the wife and myself that's $1050/month.

It looks to me like I can save $1600 on taxes by maxing the IRAs, but would save on PMI now and for many months to come by paying that off. I think the math favors IRA, but I'd like some thoughts on this.
Not sure what your irreducible annual expenses are, but have you considered contributing enough to the 401k and tIRAs so your AGI would be $36,000 or less, giving you the full $2,000 Saver's Credit (although you won't be able to use it all) and thus get the full $1K Child Credit sent to you without having to pay any federal income tax at all?

skunkfunk

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Re: Finding the most effective place to put some money
« Reply #2 on: April 28, 2015, 09:32:38 PM »
I've come quite a ways in the 14 months since this case study. Wife and I cut expenses largely by getting rid of many categories (television, phone, beer, restaurants, etc. etc.) and rolling that into our $200/month we each get to allocate as desired, which eliminated much non-essential spending. A sizable amount of "play" money but it serves our needs given that most any luxury we can't agree on has to come out of it. Anyway, I've knocked out the $17.5K family loan, kept some of the low interest debt, and invested the difference in what seems to be mostly doctors bills regarding my first son's birth!
Congratulations on all the above!

Quote
Options - 401K. Plan kinda sucks and I'm already maxing the match. Meh.
I'd like to fund a traditional IRA instead, with both the wife and myself that's $1050/month.

It looks to me like I can save $1600 on taxes by maxing the IRAs, but would save on PMI now and for many months to come by paying that off. I think the math favors IRA, but I'd like some thoughts on this.
Not sure what your irreducible annual expenses are, but have you considered contributing enough to the 401k and tIRAs so your AGI would be $36,000 or less, giving you the full $2,000 Saver's Credit (although you won't be able to use it all) and thus get the full $1K Child Credit sent to you without having to pay any federal income tax at all?

How does that work? Would I get the standard deduction before calculating that? I can do a 401k and two iras along with a few thousand in an hsa. I don't think that gets me anywhere close.

MDM

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Re: Finding the most effective place to put some money
« Reply #3 on: April 28, 2015, 10:15:50 PM »
How does that work? Would I get the standard deduction before calculating that? I can do a 401k and two iras along with a few thousand in an hsa. I don't think that gets me anywhere close.
You could use the spreadsheet available from the case study sticky for a first pass, and/or do detailed calculations by hand or with one of the usual (TaxAct, TurboTax, etc.) software packages.

The short and somewhat complete answer is that the AGI at the bottom of form 1040 (that is before the std. deduct.) needs to be less than $36,000 to get the maximum Saver's Credit, but some is available at higher AGIs.

If you have only one 401k, probably not getting the max.  With two it could be doable.

velocistar237

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Re: where to put some money
« Reply #4 on: April 29, 2015, 07:46:38 AM »
The effective interest rate on PMI can be pretty high, so I'd say tackle that. PMI depends on LTV. Do you know whether your house would appraise for more than the purchase price?

What are your 401k fees like? Can you make in-service distributions and roll it over into a Vanguard tIRA while you're still employed?

Keep an eye out for new car listings, something might show up.

thd7t

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Re: where to put some money
« Reply #5 on: April 29, 2015, 07:56:05 AM »
The effective interest rate on PMI can be pretty high, so I'd say tackle that. PMI depends on LTV. Do you know whether your house would appraise for more than the purchase price?

What are your 401k fees like? Can you make in-service distributions and roll it over into a Vanguard tIRA while you're still employed?

Keep an eye out for new car listings, something might show up.
Currently, your PMI is an equivalent of 6.75% interest on the $13,675 you owe before it goes away.  In addition to that, you're paying another 3.75% on that money, so the effective rate for your PMI is 10.5%.  However, as that amortizes, the PMI doesn't go down, so the interest effectively increases (probably more like 15% averaged over the life of that portion of the loan).  I don't know how much of your $1100 P+I payment goes to principal, but if it's a low number, it's going to make the effective interest rate of your PMI much higher.  This means that PMI is the equivalent of high interest consumer debt.  In addition, you're in the 15% tax bracket.  You probably win by killing the PMI.

Murse

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Re: where to put some money
« Reply #6 on: April 29, 2015, 08:08:22 AM »
The effective interest rate on PMI can be pretty high, so I'd say tackle that. PMI depends on LTV. Do you know whether your house would appraise for more than the purchase price?

What are your 401k fees like? Can you make in-service distributions and roll it over into a Vanguard tIRA while you're still employed?

Keep an eye out for new car listings, something might show up.
I agree, tackle the mortgage to get rid of pmi is the solid first step. Next is Tira's because you can choose your own investments, and third if there is still money leftover I would then do the 401k last.

skunkfunk

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Re: where to put some money
« Reply #7 on: April 29, 2015, 08:09:54 AM »
The effective interest rate on PMI can be pretty high, so I'd say tackle that. PMI depends on LTV. Do you know whether your house would appraise for more than the purchase price?

What are your 401k fees like? Can you make in-service distributions and roll it over into a Vanguard tIRA while you're still employed?

Keep an eye out for new car listings, something might show up.
I agree, tackle the mortgage to get rid of pmi is the solid first step. Next is Tira's because you can choose your own investments, and third if there is still money leftover I would then do the 401k last.

Does putting 401K money into a traditional IRA prevent me from using the Roth conversion ladder when I FIRE?

velocistar237

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Re: where to put some money
« Reply #8 on: April 29, 2015, 08:36:08 AM »
Does putting 401K money into a traditional IRA prevent me from using the Roth conversion ladder when I FIRE?

No. The conversion ladder involves rolling money from a pre-tax account (401k or tIRA) into a Roth. You won't have penalty-free access to those rollovers for 5 years, but that doesn't mean that the first 5 years of money need to be in the Roth already. It can be in a taxable account.

Axecleaver

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Re: Finding the most effective place to put some money
« Reply #9 on: April 29, 2015, 09:05:01 AM »
Your original case study says that your employer offers 100% 401k match on up to 12% of your income. Is that still true? You must take all of that money off the table first, because you get 100% return on investment immediately. You said "plan kinda sucks" which, not sure you're aware, a 12% match is completely unheard of. A typical match in private sector is 50% up to 6% of income - ie, you put in 6, we put in 3%. So a 12% match is a pretty sweet deal, even if the investment options are subpar and high expense. It's free money and you're putting away 24% of your salary every year.

I agree with the PMI analysis. That's typically extremely expensive. Canceling it is very difficult, though, the law lets banks make you keep paying PMI unless you get a new assessment from their assessor. It's often easier to refinance to dump PMI once you get under 80%. You may want to figure that into your plans and see what a refinance might cost to determine the ROI.

skunkfunk

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Re: Finding the most effective place to put some money
« Reply #10 on: April 29, 2015, 09:11:07 AM »
Your original case study says that your employer offers 100% 401k match on up to 12% of your income. Is that still true? You must take all of that money off the table first, because you get 100% return on investment immediately. You said "plan kinda sucks" which, not sure you're aware, a 12% match is completely unheard of. A typical match in private sector is 50% up to 6% of income - ie, you put in 6, we put in 3%. So a 12% match is a pretty sweet deal, even if the investment options are subpar and high expense. It's free money and you're putting away 24% of your salary every year.

I agree with the PMI analysis. That's typically extremely expensive. Canceling it is very difficult, though, the law lets banks make you keep paying PMI unless you get a new assessment from their assessor. It's often easier to refinance to dump PMI once you get under 80%. You may want to figure that into your plans and see what a refinance might cost to determine the ROI.

It's a 25% match up to 12%. So I contribute 12% and it is effectively 15%. So the match is typical, but the funds and fees suck. There are a couple of good index funds, so it is enough to get by for now.

I thought they had no choice but to cancel once I got to 80% LTV now? I think there was a change in the law a few years back.

thd7t

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Re: Finding the most effective place to put some money
« Reply #11 on: April 29, 2015, 10:03:05 AM »
Your original case study says that your employer offers 100% 401k match on up to 12% of your income. Is that still true? You must take all of that money off the table first, because you get 100% return on investment immediately. You said "plan kinda sucks" which, not sure you're aware, a 12% match is completely unheard of. A typical match in private sector is 50% up to 6% of income - ie, you put in 6, we put in 3%. So a 12% match is a pretty sweet deal, even if the investment options are subpar and high expense. It's free money and you're putting away 24% of your salary every year.

I agree with the PMI analysis. That's typically extremely expensive. Canceling it is very difficult, though, the law lets banks make you keep paying PMI unless you get a new assessment from their assessor. It's often easier to refinance to dump PMI once you get under 80%. You may want to figure that into your plans and see what a refinance might cost to determine the ROI.

It's a 25% match up to 12%. So I contribute 12% and it is effectively 15%. So the match is typical, but the funds and fees suck. There are a couple of good index funds, so it is enough to get by for now.

I thought they had no choice but to cancel once I got to 80% LTV now? I think there was a change in the law a few years back.
If it's a conventional mortgage, they have to dump PMI at 78% LTV, as long as you've held the loan for 24 months.  You will probably have to remind them, though.

velocistar237

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Re: Finding the most effective place to put some money
« Reply #12 on: April 29, 2015, 10:09:44 AM »
I thought they had no choice but to cancel once I got to 80% LTV now? I think there was a change in the law a few years back.

They won't know whether the value denominator has gone up unless you get an appraisal, so that part isn't automatic. I'm saying, for example, if your house value goes up 25%, then PMI could come right off without any more payments at all.

Ours was taken off automatically at 80%, but I remember having done the research and being surprised. I don't think that was universal at the time.

skunkfunk

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Re: Finding the most effective place to put some money
« Reply #13 on: April 30, 2015, 08:45:48 AM »
Looks like the most efficient thing to do is pay off the PMI first and then go traditional IRA. Thanks.