Help a newb set goals for 2017!

[newlymarried]

Hi All--

Here's all the facts:
-We are both 27
-My husband and I recently bought a house. We put 25% down and our interest rate is 3.75%. We have 260,000 left on our mortgage (yes...I know that's a lot...)
-We recently put 25k into into index fund (about 76% Large-cap, 23% Mid-cap; and it's now up to 26k)
-We have 35K in a savings account (synchrony bank so we do get better interest than a traditional bank)
-We have recently decided to have all of my income (47k gross) go into index funds and live off of my husbands salary (70k); the excess of my husbands salary will go into savings
-We have about 50k in Traditional IRAs/401k and contribute 10% each to account
-We want to have kids in a few years...

Should we be investing differently? Should we be working towards paying off our mortgage faster or investing more into index funds? Is this too conservative/risky? Should I invest more in international equity? I am a newb so go easy on me...

[aceyou]

Welcome.  Pretty great financial situation for a "newb"!

What are your goals?
  1.  Do you want to FIRE before having kids?
  2.  If not, do you want to alter your working/living situations when you have kids?  If so, how would this affect your income/ability to save? 
  3.  What is more appealing to you, becoming FI or being debt free?  If FI sounds more appealing, just keep making payments on house and keep cranking all the rest into the index funds (this is what I personally do).  If being debt free sounds more appealing, then crank extra cash towards mortgage (just know that in doing this you are likely buying peace of mind at the cost of a slightly lower net worth and longer path to FI). 

No, you don't need more international equity.  Owning US index funds gives you exposer to international markets since so many companies are multinationals now.  Jim Collins writes a lot about this in his book The Simple Path to Wealth, which I highly recommend.  Or you can just go to jlcollinsnh.com, his blog and read his stock series. 

Good luck. 

[newlymarried]

Thank you so much!

1. Not necessarily because I don't think it's realistic to become FIRE before having kids...I think if we were SUPER dedicated to it, it would take 8 years.
2. I would like to work part time when we have kids...so our income would significantly go down : /
3. I think FI...I'm just worried that index funds are more of a gamble than paying off the house.

Thanks for the recommendations/advice! Do you think we are on a good track to FI?

[frugaldrummer]

You guys are doing a great job for as young as you are.  My only comment is about having kids.  Yes they will slow down your path to RE.  But please be realistic too about the physical reality of age and fertility.  Too many people seem to think they can wait until 35 and then just pop out perfect kids on demand.  The reality is that fertility declines, and the rate of chromosomal abnormalities like Down syndrome increases, with age.  http://www.ds-health.com/risk.htm

So just take that into account, from a strictly medical point of view it would be optimal to start your family now, from a financial point of view, not so much.  I just worry that people here can get so focused on RE and postpone childbearing for financial reasons, and may come to regret it later.  (BTW, I had 3 kids between 30 and 35, delayed childbearing due to not marrying until 27 and being in a very demanding training program - but also experienced some fertility issues and miscarriages between 30 and 35.)  So if you REALLY want to have kids, you're in a good financial position and I wouldn't delay more than a couple of years.

(BTW - there's nothing magic about that number of age 35 to have amniocentesis for Down syndrome - it's just the point at which the risk of losing a fetus from the procedure equals the likelihood of discovering a Down syndrome fetus.)

[aceyou]

Thank you so much!

1. Not necessarily because I don't think it's realistic to become FIRE before having kids...I think if we were SUPER dedicated to it, it would take 8 years.
2. I would like to work part time when we have kids...so our income would significantly go down : /
3. I think FI...I'm just worried that index funds are more of a gamble than paying off the house.

Thanks for the recommendations/advice! Do you think we are on a good track to FI?

1.  I don't blame you.  My wife and I have have a 4 and 1 year old and are working towards FI along the way. 
2.  Good for you.  Having a part time parent would be helpful for sure.  Lots of value that goes beyond dollars and cents. 
3.  I understand the worry about index funds vs the security of owning a home, but if you say you lean towards FI, then index funds get you there sooner. 

The risk in stocks is short term ups and downs right(short term meaning years)?  So, the longer you own them the less risky they become right?  So, doesn't waiting to invest in stocks out of feelings of fear actually increase your risk since you'll own them for fewer years?  Owning stocks for a long time = more expected return and reduced risk.  Owning for a short time period = increased risk and reduced expectation.

Now, if you are so adverse to the risk that is associated with stocks, than maybe you could head over to Afford Anything and check out Paula Rant's info on owning rental properties.  Lot's of people go that way to become FI.  In fact, on average it gets people there quicker and index funds, the downside being that once you are FI it's higher maintenance, so less passive. 

But I don't think that's your inclination from reading your initial post, I think you are more of an index fund leaning person, right?

Oh, and yes, I do think that you are on a good track for FI.  A great track actually!  I'm splitting hairs most likely in all the stuff I wrote above.  Whether you pay off your house first or not will likely only change your FIRE date by a year or two, which in the grand scheme of things isn't that big of a deal.  You seem to be doing awesome!

[seemsright]

We paid off our house. But it had nothing to do with if it was the right money move. It was 100% physiological. You could have told me it would have delayed FIRE by 10 years and we would have still paid off the house.

Do what makes you feel the best. You cannot really lose either way.

 

[Crazycarl]

My 2 cents...

Max out your and your husbands 401ks and ROTHs. You guys are doing great saving wise, but you could be lowering your taxes and investing even more.

18000 + 18000 + 5500 + 5500 = 47000! which is what you stated you make now anyways, but you would be paying much less tax. You seem to already have a very large emergency fund so no need for that.

Great job!

[Mother Fussbudget]

My 2 cents...

Max out your and your husbands 401ks and ROTHs. You guys are doing great saving wise, but you could be lowering your taxes and investing even more.

18000 + 18000 + 5500 + 5500 = 47000! which is what you stated you make now anyways, but you would be paying much less tax. You seem to already have a very large emergency fund so no need for that.

Great job!

+1.  Exactly this. AND... enroll in the high-deductible health plan, and max out your HSA. Invest the HSA in VTSAX or FSTVX.

[newlymarried]

My 2 cents...

Max out your and your husbands 401ks and ROTHs. You guys are doing great saving wise, but you could be lowering your taxes and investing even more.

18000 + 18000 + 5500 + 5500 = 47000! which is what you stated you make now anyways, but you would be paying much less tax. You seem to already have a very large emergency fund so no need for that.

Great job!

Sorry...I know this should be common sense...but how does paying more (maxing out our 401ks/ROTHS allow us to invest more?). Thanks for all the help! Like I said, I'm a newbie and none of this comes naturally to me!

[Bracken_Joy]

My 2 cents...

Max out your and your husbands 401ks and ROTHs. You guys are doing great saving wise, but you could be lowering your taxes and investing even more.

18000 + 18000 + 5500 + 5500 = 47000! which is what you stated you make now anyways, but you would be paying much less tax. You seem to already have a very large emergency fund so no need for that.

Great job!

Sorry...I know this should be common sense...but how does paying more (maxing out our 401ks/ROTHS allow us to invest more?). Thanks for all the help! Like I said, I'm a newbie and none of this comes naturally to me!

traditional IRAs and 401ks reduce your taxable income, so you pay less in taxes. That leaves you with more money overall, which you can then invest.

I highly recommend looking at the spreadsheet on here: http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/

Especially the "investing order" tab. Note: 10 yr treasury note yield currently 2.512%, so steps 2 and 7 are 7.5% and 5.5%, respectively.

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial

[Crazycarl]

My 2 cents...

Max out your and your husbands 401ks and ROTHs. You guys are doing great saving wise, but you could be lowering your taxes and investing even more.

18000 + 18000 + 5500 + 5500 = 47000! which is what you stated you make now anyways, but you would be paying much less tax. You seem to already have a very large emergency fund so no need for that.

Great job!

Sorry...I know this should be common sense...but how does paying more (maxing out our 401ks/ROTHS allow us to invest more?). Thanks for all the help! Like I said, I'm a newbie and none of this comes naturally to me!

The gist is basically you are paying your self first rather than paying the govmt.

Lets say you are in the 25% tax bracket. Your after tax take home is $1000 and then invest that into a normal brokerage account as you stated you are doing now.
That means you paid $250 in taxes and invested the rest.

If you invest that into the 401k, then you are investing before taxes are paid, therefore you are able to invest the full $1250. Or you can invest the $1000 and are only taxed on the remaining $250.

Maxing out the 401ks along with other deductions can then possibly change your tax bracket to pay even less taxes. 

Again these are all very simple numbers and do not take into account other taxes and such.

It takes a while to grasp all the different sides and theories into investing, saving, taxes, etc, so keep asking away!