Author Topic: HELP - what do we do with all the extra money?  (Read 6461 times)

frugalfranny

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HELP - what do we do with all the extra money?
« on: July 23, 2014, 11:50:12 PM »
Hey there mustachians -

Now that we have put ourselves in a position to save some money, what do we do with it??

Basic info: 2 salaries - $38,000 and $45,000. Counselor and teacher. We have 3 kids - 8, 11, 13.

We figure we can save $2000/month, and hope that will increase by at least $500, maybe $1000, once we have a garage apartment either rented out or airbnb'd.

Debts:
HELOC (2% for 2 years) $111,000 -  expected to go up to $130,000 to finish garage apartment. We plan to fix rate when rates start to climb, so then it will be a $130,000 mortgage.

Savings:
$1500

Investments:
the house, now worth at least $250,000+, Roth IRA $6500.

I know that I could list all our expenses and you could help us figure out how to save more, but really, the more we save at this point, the more we have to figure out what do to with!  As it is, we might even end up having to pay taxes for the first time in 16 years of marriage!

Do I pay down the HELOC until we are ready to fix the rate so that our mortgage is lower, and then just keep feeding all the $ into mortgage?
Or do I figure that a $130,000 mortgage that the renters pay for is just fine, and invest some other way?

I'm so very glad to be having this problem, but HELP!


neo von retorch

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Re: HELP - what do we do with all the extra money?
« Reply #1 on: July 24, 2014, 05:24:57 AM »
Do either of you have the option to contribute to a 401(k) and get an employer match? (If so, start contributing up to the match.)

If you think your income is going to be taxed, and you are not eligible for a 401(k), contribute to a Traditional IRA. (Did you fund the Roth IRA this year or in the past?)

Once those are done, then you can start putting money into a broad stock market index fund. (Once you have a little more money, you can start to diversify beyond national stocks.)

EricL

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Re: HELP - what do we do with all the extra money?
« Reply #2 on: July 24, 2014, 05:47:47 AM »
Here are some options:

1. Pay off your debts.  They don't sound horrible but they're always good to put behind you.

2. Invest.  There's lots of advice here and most of it informed.

3. Charity.  Surely you've got some charity you'd like to support.

4. Insurance.  Not merely numerous liability types but emergency food, water, medical supplies, etc.

5. Education.  This can be fun, another form of insurance, or both.  Just don't get into debt getting it.

6. Me.  I could always use more cheddar. 😃

Iron Mike Sharpe

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Re: HELP - what do we do with all the extra money?
« Reply #3 on: July 24, 2014, 08:13:48 AM »
Max out whatever tax-advantaged retirement accounts your jobs provide.

Exflyboy

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Re: HELP - what do we do with all the extra money?
« Reply #4 on: July 24, 2014, 08:21:38 AM »
Do either of you have the option to contribute to a 401(k) and get an employer match? (If so, start contributing up to the match.)

If you think your income is going to be taxed, and you are not eligible for a 401(k), contribute to a Traditional IRA. (Did you fund the Roth IRA this year or in the past?)

Once those are done, then you can start putting money into a broad stock market index fund. (Once you have a little more money, you can start to diversify beyond national stocks.)

Having a 401k does not prevent you from contributing to a traditional IRA.. if you are under the threashold ($96k) assuming you have a retirement plan at work.

This means you can contribute $5500 each.. and reduce your adjusted gross income by $11,000.

Thus you will be paying less (maybe zero) taxes again.

See here.. http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014--IRA-Contribution-and-Deduction-Limits---Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work

So do that and invest your $11,000 in a Vanguard or Fidelity Stock ETF.

Frank

frugaliknowit

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Re: HELP - what do we do with all the extra money?
« Reply #5 on: July 24, 2014, 08:40:48 AM »
You are in a very risky position, particularly with 3 children.  $1500 in savings, are you kidding me?  Your home is financed with a Heloc, is that correct (variable rate)?  You think you are going to fix the rate "when rates start rising"...?  If you are that good at predicting rates, you do not need to work, you can earn a living trading bond futures....

Before you can begin investing, you need a foundation:  A fixed rate mortgage, a reasonable amount of liquid savings, and term life insurance if you do not already have it.  Building a garage apartment to rent out is an investment.  You are not yet in a position to do this.  So, what I would do is:

1.  Refinance the heloc into a 15 year fixed (10 year if you can afford it) right away.
2.  Get any 401K match.
3.  Build up your liquid savings to a reasonable level.  Then and only then, go to #4
4.  Explore the garage apt. rental investment.  Look at your cash on cash return after investment (profit each year/investment in garage.  Pay for it with cash.

neo von retorch

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Re: HELP - what do we do with all the extra money?
« Reply #6 on: July 24, 2014, 09:11:52 AM »
If you think your income is going to be taxed, and you are not eligible for a 401(k), contribute to a Traditional IRA.
Having a 401k does not prevent you from contributing to a traditional IRA.. if you are under the threashold ($96k) assuming you have a retirement plan at work.

Oh yeah - I worded that wrong. Last year, I had an employer sponsored IRA and I exceeded the taxable income threshold by just enough that I could not deduct separate Traditional IRA contributions, but going forward, I will be doing both... by maxing my 401(k) at this new job, I'll reduce my taxable income below the threshold, and be able contribute most or all of the $5500 to a traditional (and the remainder to a Roth IRA*.)

* Do Roth contributions need to be done by 12/31 or 4/15?

Exflyboy

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Re: HELP - what do we do with all the extra money?
« Reply #7 on: July 24, 2014, 09:30:16 AM »
4/15

majdomo

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Re: HELP - what do we do with all the extra money?
« Reply #8 on: July 24, 2014, 09:34:21 AM »
You are in a very risky position, particularly with 3 children.  $1500 in savings, are you kidding me?  Your home is financed with a Heloc, is that correct (variable rate)?  You think you are going to fix the rate "when rates start rising"...?  If you are that good at predicting rates, you do not need to work, you can earn a living trading bond futures....

Before you can begin investing, you need a foundation:  A fixed rate mortgage, a reasonable amount of liquid savings, and term life insurance if you do not already have it.  Building a garage apartment to rent out is an investment.  You are not yet in a position to do this.  So, what I would do is:

1.  Refinance the heloc into a 15 year fixed (10 year if you can afford it) right away.
2.  Get any 401K match.
3.  Build up your liquid savings to a reasonable level.  Then and only then, go to #4
4.  Explore the garage apt. rental investment.  Look at your cash on cash return after investment (profit each year/investment in garage.  Pay for it with cash.

totally agree with all of this. your current position is too risky to be exploring anything other than how to fix your financial foundation. save the landlording and other investing until after you get right side up on your current situation.

also, where in this is saving for college? its not that far away, and you don't want to have to be cash-flowing college and a heloc AND a (potentially money-losing) real estate investment. get those 529s set up today if you haven't already!

frugalfranny

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Re: HELP - what do we do with all the extra money?
« Reply #9 on: July 24, 2014, 11:16:46 AM »
You are in a very risky position, particularly with 3 children.  $1500 in savings, are you kidding me?  Your home is financed with a Heloc, is that correct (variable rate)?  You think you are going to fix the rate "when rates start rising"...?  If you are that good at predicting rates, you do not need to work, you can earn a living trading bond futures....

Before you can begin investing, you need a foundation:  A fixed rate mortgage, a reasonable amount of liquid savings, and term life insurance if you do not already have it.  Building a garage apartment to rent out is an investment.  You are not yet in a position to do this.  So, what I would do is:

1.  Refinance the heloc into a 15 year fixed (10 year if you can afford it) right away.
2.  Get any 401K match.
3.  Build up your liquid savings to a reasonable level.  Then and only then, go to #4
4.  Explore the garage apt. rental investment.  Look at your cash on cash return after investment (profit each year/investment in garage.  Pay for it with cash.

also, where in this is saving for college? its not that far away, and you don't want to have to be cash-flowing college and a heloc AND a (potentially money-losing) real estate investment. get those 529s set up today if you haven't already!


OK - thanks so much everyone. I am a little confused about why our situation is so risky, and would love more feedback because maybe I just don't understand the math. What would "right side up" on our financial situation look like?

We have been trying to get to this point for a few years, and now that we are here, I don't want to relax if we really need to sit up and pay attention. BTW - when I wrote "all the extra money" it was tongue-in-cheek, I know that $2000 is not so much compared to many of you. But for us, it's great not to have to scrape by each month. 

1. In about two months, we will have a fixed rate mortgage on about $130,000 as our only debt. Does that sound better? We just aren't there yet. We got a HELOC instead of a fixed rate mortgage for a variety of reasons, but the biggest one was because the "garage" was falling down and we are just "fixing" it by rebuilding and turning into a garage/ studio. So in our case, it's not a separate real estate investment, it was part of buying this house, which was undervalued due to the state of the "garage". The project should be done in a few months, and we will fix our rate then. HELOCs used to scare me, but we decided if at any time during the repair, if we got worried about rates, we could just fix it (that's what I meant when I said that we would fix when rates start to rise).

I know that some folks are in the no-debt-at-any-costs camp, and others think a mortgage is OK and you should invest before paying off debt. I guess we could have invested the $20,000 instead of putting it into the garage repair/studio, but I am not sure the return would be as good. We have a history of successfully renting garage apartments and now we live in Hawaii in a college town, so the rentability of this place is not an issue. We would net $500-700/month if we rent it out as a rental, and  $1000+ if we do airbnb or other vacation rental. Am I missing something or could it be a money-losing investment? At $20,000ish for the "repair" it should take 2-7 years to recoup the investment.

Another benefit for us with this house is that we will have a work/trade person living for free in the basement to help with kids, garden, vacation rental turn-over, etc. If we want to drop the work/trade and just rent the basement apartment to a college student, there is that option. I have a health condition, though, and with me working, it will be much easier to have an extra adult around.

2. We have two very small 529s for the kids - $3000 for the two older, and $2000 for the younger. We were not in a position to put anything in for the past few years, but I figure that we should make sure that we are set up first, and then help them? What are folks' thoughts on this? I don't want my kids in debt, but I also think that they can learn how to go to college without taking out a ton of loans, and it is more important for us to invest so we are in a position to help when the time comes. No? We will never make a lot of money at our jobs. Our current high of $80,000 for a family of 5 doesn't put us in a situation to pay for college for 3.

3. Someone mentioned life insurance. Because we were pinching so tight before, we have term life insurance on husband, but not me. Maybe we will rethink that now that we have some income.

4. I'm not sure 401K matches are an option, but both DH (teacher with state retirement system) and I have homework of asking today. I guess I forgot to mention that DH has $50,000 in previous state retirement system and is set to get health insurance and $800 monthly when he turns 55 and 60, I think. We are mid-late-thirties.

5. As for liquid savings - how much do you guys recommend? 2-3 months of living expenses?

Thanks again. I need to get my brain back in this game!




NoraLenderbee

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Re: HELP - what do we do with all the extra money?
« Reply #10 on: July 24, 2014, 11:58:42 AM »
Congratulations on getting this far!

You absolutely need more money in liquid savings. If your car died tomorrow, how would you pay for a replacement? I consider 3 months of expenses to be the bare minimum (some people prefer different amounts).
 
Do you have debt other than the house? If you do, work on paying that off before the house.

 

scrnplyr

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Re: HELP - what do we do with all the extra money?
« Reply #11 on: July 24, 2014, 01:39:37 PM »
First, congrats on your progress gaining some financial ind.  As other posters have mentioned your savings and overall cash flow may not be at a level where many of us would be comfortable jumping into investments such as renting out a room.  Granted renting out a "garage apt" is no where as risky as renting out a house or condo - you still have potential for problems that could cost you additional money.
I don't know if there is an exact formula floating around, but I would probably want at least low 5 figures of investment and/or cash in the bank before I divert cash elsewhere.

Life throws so many unknowns at us that having the cushion of a several thousand liquid will soften the blow.

my .02

; )

Thegoblinchief

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Re: HELP - what do we do with all the extra money?
« Reply #12 on: July 25, 2014, 01:35:59 PM »
I would not pre-pay the HELOC and you should get a low enough mortgage in today's climate that the answer would be the same. Generally, any debt lower than 5% is not mathematically worth pre-paying.

You don't list any IRA or 401(k) accounts, which means you're losing out on lots of tax savings. I'd adjust your contributions so that you're closer to, say, $1,000 per month of net cashflow.

With that extra $1,000, I'd put half towards building up a small cash emergency fund (1-3 months of expenses), and invest the rest in something like Vanguard's total stock market index fund.

You don't need a huge amount of cash, because you're losing value to inflation otherwise, but having some cash keeps you from having to liquidate investments when the market is down. When the market crashes, that's when you want to plow money IN, not out.

TrulyStashin

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Re: HELP - what do we do with all the extra money?
« Reply #13 on: July 25, 2014, 01:50:24 PM »
Great work getting to where you are!!

I agree that you should build up your emergency fund to three months of living expenses.  As a teacher and counselor, your jobs are likely very secure.  Once you have three months of expenses set aside, then start maxing out the TSA/ 403b plan you employer probably offers.  You might keep adding to your emergency fund stash a little but there's no need to be aggressive once you hit 3 months worth.

I used to be a public school teacher and I invested in an employer-sponsored 403b ("TSA") plan.  It's the same concept as a 401k but that's the proper "name" for public sector or nonprofit employees.  http://www.irs.gov/publications/p571/ch01.html Hopefully, your employer offers this.  If not, then max out Traditional AND Roth IRA's with the $ invested in "exchange traded funds" (Edit: also known as "index funds").  See the Investing thread for lots of info on these.

It sounds like you have a great plan.  I renovated my basement last year to allow me to rent it out and the income from that now covers 3/4 of my mortgage.  Worth every dime I put into it (about $20k).
« Last Edit: July 25, 2014, 01:53:14 PM by TrulyStashin »

catccc

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Re: HELP - what do we do with all the extra money?
« Reply #14 on: July 25, 2014, 01:58:11 PM »
I think folks are saying you are in a risky position because you have very little savings, retirement or otherwise.  I would aim for a 6 month emergency fund, and explore ways to go back to paying no taxes.  Work sponsored retirement plans should be utilized to reduce taxable income.  And for possible state tax savings and the kids, a college savings account, if you plan on providing any help with that.


kallinan

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Re: HELP - what do we do with all the extra money?
« Reply #15 on: July 25, 2014, 03:36:03 PM »
You are in a very risky position, particularly with 3 children.  $1500 in savings, are you kidding me?  Your home is financed with a Heloc, is that correct (variable rate)?  You think you are going to fix the rate "when rates start rising"...?  If you are that good at predicting rates, you do not need to work, you can earn a living trading bond futures....

Before you can begin investing, you need a foundation:  A fixed rate mortgage, a reasonable amount of liquid savings, and term life insurance if you do not already have it.  Building a garage apartment to rent out is an investment.  You are not yet in a position to do this.  So, what I would do is:

1.  Refinance the heloc into a 15 year fixed (10 year if you can afford it) right away.
2.  Get any 401K match.
3.  Build up your liquid savings to a reasonable level.  Then and only then, go to #4
4.  Explore the garage apt. rental investment.  Look at your cash on cash return after investment (profit each year/investment in garage.  Pay for it with cash.

+1

majdomo

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Re: HELP - what do we do with all the extra money?
« Reply #16 on: July 26, 2014, 08:58:14 PM »
right - the risk is in not having enough liquid savings that you can tap into in case something weird comes up. we shoot for 6 months in our hh but that's because of our particular situation.

if it was me, i'd look at it this way:
1) get a written budget (don't forget to include life insurance - relatively inexpensive and very very very important!!) and then
2) get to 3 months of living expenses saved in the bank (at least), and then
2a) refinance the house to get out of the heloc concurrent with building up the emergency fund, then
3) contribute up to the match of your retirement plan (if any) and then
4) save for the kiddos education to whatever level you feel most comfortable funding, and then finally
5) move on to the other investment options, like renting out a room, etc.
6) keep on investing, pay off house, give the man the finger, achieve FI in hawaii. now THAT doesn't suck.

throughout all of this go through your budget and find places to whack the crap out of what you're spending each month. makes a huge difference in your cash flow and mind set in achieving your goals!

thing is you probably aren't too far away from step 5 above at all. like, if i had to guess, maybe 6 months. but the difference in peace of mind between having all that in place and doing an investment of any kind that's not saving for retirement and doing the investment before having a budget, saving for retirement, etc

you should be very proud of the progress made so far to have these kinds of "problems"! you are miles and miles ahead by being proactive and looking for the best way forward. it sounds awesome to have that side income, and you'll have it soon enough, but IMO it's really important to have that belt and suspenders mentality before jumping into landlording. good luck!!

greaper007

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Re: HELP - what do we do with all the extra money?
« Reply #17 on: July 26, 2014, 08:59:28 PM »
Vegas Baby!

errr, you should probably listen to the other people on the thread  (and congratulations).

zinethstache

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Re: HELP - what do we do with all the extra money?
« Reply #18 on: July 27, 2014, 12:29:35 AM »
Everyone is making excellent recommendations. If you proceed with the rental unit, you should consider  two emergency funds, one for your family and one for the rental. There are threads in the real estate area that talk about a capital savings fund for rental emergencies. We keep our personal emergency funds separate from the rental funds. Life insurance is paramount, term, to ensure if anything happens to either of you the children are taken care of. Great work getting to where you are, isn't it an awesome feeling!

little_owl

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Re: HELP - what do we do with all the extra money?
« Reply #19 on: July 27, 2014, 05:42:33 AM »
Why in the world would you have term on your husband, but no term insurance onyourself?

What happens if something were (god forbid) to happen to you?  Your family wouldn't even skip a beat?  You are a valuable member of the family and this just makes me plain old mad.  Please get life insurance (term is great) for yourself if my hypothesis is true and your family would need additional support if you were not around.

I know many onthe forums dont like life insurance, fine.  But to get for 1 spouse andnot the other, sounds like "one is more valued than the other." not cool.

Oh, and good luck on your other objectives!  If you have a healthy emergency fund, I would prioritize investing foryour future (tax advantaged first) and then payingo ff debt.