Author Topic: How would you start your savings in our situation?  (Read 7567 times)

CheckEngineLight

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How would you start your savings in our situation?
« on: July 10, 2013, 07:35:55 AM »
We are a couple thatís getting married later this summer, I am 30, she is 28.  We currently own a home with a ~400k mortgage at 2.15% variable interest (~600k market value) in a high cost of living area.  We are going to be joining our banking later in the month and just have separate retirement/investment accounts to max out on tax deductions/eligibility/etc.

Other information, she still has an outstanding student loan of 15k, other than that we donít have any debt aside from our mortgage. We donít have car payments either, our biggest expense is the renovation of our home, which I am doing myself.

Our combined household income is ~$180k gross.  Take home is about $10k/month.  Of that about 4k/month is mostly on *fixed* costs (mortgage/interest/property tax/utilities/food/gas/car insurance/house insurance/etc/house maintenance/renovations).  There are the misc expenses that pop up like weddings we have to attend, presents, entertainment, etc.

In addition her retirement plan from work is solid, one of the best in the country, mine on the other hand is nothing to write home about and I will need to contribute in addition to whatever my employer matches/provides.

Having said all that we will have at least $4k/month (probably more, I am being conservative) for savings between both of us.  Interest rates are set to increase as we are at an all time low, equity market is a bit uncertain, so I am not sure how to make the most of our left over cash.  Once her loan is paid off in a few months Iíd like to explore all my options and come up with a plan.  Should I put more towards our mortgage (we are currently on a 25 year amortization, 23 years left at the current rate, Iíd love to cut this to 15).  I need to top up my retirement contribution with a couch potato portfolio (currently what I am doing), then Iíd like to take on more riskier investments as well with a portion of what we can contribute.  I also would like to buy an income property in the next 5 years, business case permitting, so the importance of having a portion of our investments as liquid as possible is also important.

Any ideas on how to derive a strategy for us?

Thanks.
« Last Edit: July 10, 2013, 07:46:33 AM by CheckEngineLight »

Khan

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Re: How would you start your savings in our situation?
« Reply #1 on: July 10, 2013, 07:52:05 AM »
Variable interest rate? If it were me I'd get that locked down. It's most likely currently subsidized by the bank right now(first handful of years are, right?) and the interest rates are slowly rising, and I don't like ???'s in my calculations.

Other than that it looks like you're off to a great start with large saving rates and large incomes. I'll leave it to someone else to try and dig into that more. I would suggest more information is necessary for us to comment on, and also even if your 401k isn't the best, at your income levels maxing that is probably still your best choice for asset allocation.

Err, I guess I'll take on one more thing: "I also would like to buy an income property in the next 5 years, business case permitting, so the importance of having a portion of our investments as liquid as possible is also important." It sounds like you're a handyman, and that's wonderful, but I would advise against overleveraging yourself. Build up a little bit of a nest egg before leveraging yourself further, or at least think really hard about your comfort levels.

velocistar237

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Re: How would you start your savings in our situation?
« Reply #2 on: July 10, 2013, 08:04:36 AM »
Overall, it looks pretty good percentagewise. Unless you're in NYC or similar, your house and housing-related costs are high. Lowering this one category would probably boost your savings more than all other actions combined. Are you renovating to sell or to keep?

Tell us more about your other "fixed" costs: car(s), utilities, telecom plans, groceries, etc. What is the interest rate on the $15K of student loans?

With that income, getting to 60%+ savings rate is quite doable.

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #3 on: July 10, 2013, 08:06:08 AM »
Thanks for the response.

As far as the variable rate, there is no chance I'd lock that in.  It's currently prime -.85%, that's what 5 year variable mortgages were here 2 years ago when I bought, fixed at the time was 3% for a 5 year mortgage.  This has been paying off in spades for us.  Not sure what you mean it was subsidized by the bank?  Never heard of that, it was what was available from lenders in 2011.

As far as the income property, it's too early right now and the current prices to rent income would leave you in a negative cashflow position.  I think 5 years of saving/investing would give me a good buffer to be able to buy a second home.

Rebecca Stapler

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Re: How would you start your savings in our situation?
« Reply #4 on: July 10, 2013, 08:12:40 AM »
You are definitely reaping the benefits of that low mortgage rate now, but what is your plan for when it adjusts? What is the rate on the SLs?

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #5 on: July 10, 2013, 08:13:54 AM »
Overall, it looks pretty good percentagewise. Unless you're in NYC or similar, your house and housing-related costs are high. Lowering this one category would probably boost your savings more than all other actions combined. Are you renovating to sell or to keep?

Tell us more about your other "fixed" costs: car(s), utilities, telecom plans, groceries, etc. What is the interest rate on the $15K of student loans?

With that income, getting to 60%+ savings rate is quite doable.

We are renovating to keep.  It was a scenario of buying the oldest/crappiest house in a nice neighbourhood, only way we could afford it (and even that was a stretch).  We have a lot of family around us as well within walking distance so that's always nice.  Moving really isn't an option, if we were to sell we'd have to rent as we can't afford a home at the current prices (detached home sare 700k+) unless we downsized to a small condo for 300k, which I don't want to do as I've done that life and cannot stand it.


Off the top of my head these are the *fixed* costs, I am sure I am forgetting some and then there is also the *misc spending*

Mortage    1600
Prop tax   300
Car insurance (2 cars, 1 summer car)   250
Utilities (gas/water/sewer/hydro)   250
Maintenance    150
House insurance   65
Cell phones   120
Food   500
Internet   32
Gym   35
Gasoline   250
Car maintenance   100
Entertainment   300

~4k

velocistar237

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Re: How would you start your savings in our situation?
« Reply #6 on: July 10, 2013, 08:14:57 AM »
As far as the variable rate, there is no chance I'd lock that in.  It's currently prime -.85%, that's what 5 year variable mortgages were here 2 years ago when I bought, fixed at the time was 3% for a 5 year mortgage.  This has been paying off in spades for us.  Not sure what you mean it was subsidized by the bank?  Never heard of that, it was what was available from lenders in 2011.

I agree with you here. People got scared of ARMs after the bubble, but it's just a tool. For example, rich people who buy expensive houses benefit from an ARM. If the rate goes up too much, they just pay off the loan, and if the rate goes down, refinance fees are a smaller percentage than for a cheaper property.

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #7 on: July 10, 2013, 08:15:31 AM »
You are definitely reaping the benefits of that low mortgage rate now, but what is your plan for when it adjusts? What is the rate on the SLs?

Rate on SLs?  Not sure what you mean.

And yes I am getting the benefit now and I am not saying it will be like this forever, but averaged out over the 5 year term I am positive I will come out way ahead than had I locked in at 3 points from the beginning...especially since this is the beginning of the mortgage when the interest is front loaded.

velocistar237

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Re: How would you start your savings in our situation?
« Reply #8 on: July 10, 2013, 08:21:32 AM »
What could you do to bring down utilities, cell phones, food, and gas?

What does entertainment include?

Is the gym membership worth the subscription?

Could you sell a car? Three cars for 2 people is a little ridiculous. Even if the reduction in car maintenance and insurance is small, I still encourage it. Car insurance seems high. Could you shop around? Will this go down when you are on the same policy as your SO? How expensive are these cars? How much is parking?

Rebecca Stapler

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Re: How would you start your savings in our situation?
« Reply #9 on: July 10, 2013, 08:24:48 AM »
You are definitely reaping the benefits of that low mortgage rate now, but what is your plan for when it adjusts? What is the rate on the SLs?

Rate on SLs?  Not sure what you mean.

And yes I am getting the benefit now and I am not saying it will be like this forever, but averaged out over the 5 year term I am positive I will come out way ahead than had I locked in at 3 points from the beginning...especially since this is the beginning of the mortgage when the interest is front loaded.

What's the rate on the student loans?

An adjustable rate is fine as long as you have a sustainable plan for what you'll do when the payments go up in 3 years. It sounds like you'll be able to absorb the increase by decreasing your savings / investments, instead of trying to sell when the rate gets too high (which was the plan of many of my friends during the housing bubble. They were very disappointed). But take that into account when you plan for owning a rental property in 5 years. You may not have as much $$ left over each month to invest. Although, it looks like your budget has enough fluff to cover the increased mortgage payments if you decide to cut your spending.

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #10 on: July 10, 2013, 08:29:01 AM »
What could you do to bring down utilities, cell phones, food, and gas?

What does entertainment include?

Is the gym membership worth the subscription?

Could you sell a car? Three cars for 2 people is a little ridiculous. Even if the reduction in car maintenance and insurance is small, I still encourage it. Car insurance seems high. Could you shop around? Will this go down when you are on the same policy as your SO? How expensive are these cars? How much is parking?

Utilities, don't think much can be done.  We are already pretty frugal with all those.  Hydro/gas should go down as I've added more attic insulation recently and I've noticed the A/C running a bit less, furnance should be lower in the winter too.

Entertainment includes buying beer/wine/etc.  A case of Coors Lights is $38 here...not expensive beer either.  Also buying food/snacks to entertain family/friends also can add up.

Gym membership probably isn't worth the subscription, I don't go enough, but I've been busy lately.  Not an excuse, I probably won't renew it next year.

The cars while they may seem ridiculous, they aren't.  All of them were paid for cash, two are VERY fuel efficient, and the one that I drive once in a while isn't, but it sees 5k/year tops and it's insured for 6 months of the year (80/month).  I can't sell it, this is my hobby.  I also maintain the cars myself, they never see a mechanic, all work is done in my home garage.

Insurance rates are already low, we live in an expensive area and insurance is also expensive, we pay about $100/month per car for liability insurance only.

THere are no parking fees.  My commute is 8miles each way, hers is 2 miles each way.

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #11 on: July 10, 2013, 08:31:23 AM »
You are definitely reaping the benefits of that low mortgage rate now, but what is your plan for when it adjusts? What is the rate on the SLs?

Rate on SLs?  Not sure what you mean.

And yes I am getting the benefit now and I am not saying it will be like this forever, but averaged out over the 5 year term I am positive I will come out way ahead than had I locked in at 3 points from the beginning...especially since this is the beginning of the mortgage when the interest is front loaded.

What's the rate on the student loans?

An adjustable rate is fine as long as you have a sustainable plan for what you'll do when the payments go up in 3 years. It sounds like you'll be able to absorb the increase by decreasing your savings / investments, instead of trying to sell when the rate gets too high (which was the plan of many of my friends during the housing bubble. They were very disappointed). But take that into account when you plan for owning a rental property in 5 years. You may not have as much $$ left over each month to invest. Although, it looks like your budget has enough fluff to cover the increased mortgage payments if you decide to cut your spending.

Loan is at 9% interest.  Once finances are combined, we are dumping all excess cash into that first, it should be paid off by October/November.

MrsPete

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Re: How would you start your savings in our situation?
« Reply #12 on: July 10, 2013, 09:02:50 AM »
You're making excuses.  Beer is expensive here.  We're already pretty frugal.  The cars are a hobby.  Yet you're looking for advice, so clearly you're not entirely satisfied with your current financial picture.  You can't make changes and excuses.  Sure, some things are going to be un-alterable, but the only thing you've said you could change is your gym membership.  $35/month isn't going to suddenly allow you to buy that rental property that could make a real difference in your financial picture.

You're earning a very good salary between you, and you're expecting to begin saving a good bit -- that's good, but why aren't you doing at least some of that that now?  I understand that the wedding is a temporary expense at the moment, but what are you putting aside now?  You're bringing home 10K/month, yet you don't mention any savings thusfar? 

You're overspending on cars.  Adding up the several categories, $600 is going to cars.  You're commuting 8 miles, she's commuting 2 miles, yet you're spending $250/month on gas for two fuel-efficient cars and one rarely driven fun car?  That doesn't add up.  You're young, and it's time to build wealth -- it's not time to splurge.  Looking at your numbers, this is not a hobby you can afford. 

Your insurance seems very high.  I just this morning paid my insurance for the year, and it was $3095.33.  That's for the house, three cars, and four drivers (two of whom are teens).  You're spending about $500 more . . . for half as many people.  Look into raising your deductibles; in 30 years of driving and 23 years of home ownership, I've never once filed a claim . . . but I've paid much lower premiums because I take the risk of the higher deductible. 

You didn't include groceries on your list.  This is a place you have a great amount of flexibility. 

I suggest that -- at this moment -- you do nothing.  You're only weeks away from your wedding, and that should be your focus.  Yes, you need to reign in your spending and put your paycheck to work for you, but this is genuinely a once-in-a-lifetime event that is worthy of all your attention. 

After the wedding though, it's time to get to work.  #1 on your list should be setting financial goals as a couple.  What's your timetable for finishing the house?  For paying off the house?  For children?  For retirement?  Never assume that your spouse has the same goals you do. 

Ridding yourself of the student loan should be #2 on your list; you're bringing home 10K/month, and the debt is only 15K -- you can be done with this by the end of 2013, which will allow you to begin the new year free and clear of everything except your mortgage. 

And after your wedding, work on a budget that allows for aggressive saving and finishing the renovations on your house.  Personally, I'd vote for paying down the mortgage ASAP, but that's an opinion.   

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #13 on: July 10, 2013, 09:17:23 AM »
You're making excuses.  Beer is expensive here.  We're already pretty frugal.  The cars are a hobby.  Yet you're looking for advice, so clearly you're not entirely satisfied with your current financial picture.  You can't make changes and excuses.  Sure, some things are going to be un-alterable, but the only thing you've said you could change is your gym membership.  $35/month isn't going to suddenly allow you to buy that rental property that could make a real difference in your financial picture.

You're earning a very good salary between you, and you're expecting to begin saving a good bit -- that's good, but why aren't you doing at least some of that that now?  I understand that the wedding is a temporary expense at the moment, but what are you putting aside now?  You're bringing home 10K/month, yet you don't mention any savings thusfar? 

You're overspending on cars.  Adding up the several categories, $600 is going to cars.  You're commuting 8 miles, she's commuting 2 miles, yet you're spending $250/month on gas for two fuel-efficient cars and one rarely driven fun car?  That doesn't add up.  You're young, and it's time to build wealth -- it's not time to splurge.  Looking at your numbers, this is not a hobby you can afford. 

Your insurance seems very high.  I just this morning paid my insurance for the year, and it was $3095.33.  That's for the house, three cars, and four drivers (two of whom are teens).  You're spending about $500 more . . . for half as many people.  Look into raising your deductibles; in 30 years of driving and 23 years of home ownership, I've never once filed a claim . . . but I've paid much lower premiums because I take the risk of the higher deductible. 

You didn't include groceries on your list.  This is a place you have a great amount of flexibility. 

I suggest that -- at this moment -- you do nothing.  You're only weeks away from your wedding, and that should be your focus.  Yes, you need to reign in your spending and put your paycheck to work for you, but this is genuinely a once-in-a-lifetime event that is worthy of all your attention. 

After the wedding though, it's time to get to work.  #1 on your list should be setting financial goals as a couple.  What's your timetable for finishing the house?  For paying off the house?  For children?  For retirement?  Never assume that your spouse has the same goals you do. 

Ridding yourself of the student loan should be #2 on your list; you're bringing home 10K/month, and the debt is only 15K -- you can be done with this by the end of 2013, which will allow you to begin the new year free and clear of everything except your mortgage. 

And after your wedding, work on a budget that allows for aggressive saving and finishing the renovations on your house.  Personally, I'd vote for paying down the mortgage ASAP, but that's an opinion.

I appreciate the opinions, but I think this is going off track.

I didnít ask people to go through my expenses, I am asking how to invest/save 50% of my aftertax income.

Now that we are here I will address a few things.  I am not making excuses, I am simply stating that I will not sell a car thatís paid for and costs me $500/year to insure and that I enjoy driving and wrenching on.  If this delays my ďretirementĒ by a few months, then so be it.  As far as the gas, you are right on paper it makes no sense based on our commutes.  I drive to different parts of town to play soccer, I also drive to different friends' houses on the weekends, etc.  Gas is $4.83/gallon here as well.

The beer/wine/entertainment could definitely be reduced, no argument.  It will have to be a work in progress over the long term for sure.

I have retirement savings of about 30k, which isnít much, but remember Iíve lived on my own, Iíve had my own student loans to pay for as well (recently paid off) etc. 

Insurance/housing most of you will not understand, living where I do this is reality, highest insurance rates in the country and some of the most expensive real estate in North America.  This is out of my control, my insurance is significantly cheaper than all people I know and we have clean records and after our professional association discounts/multi vehicle discounts, and having our home insured with the same company as well.

As far as our financial goals as a couple, this has been talked about multiple times, together for 9 years now.  This is why I am posting here, we need to understand how to make our money work for usÖshould we focus on the mortgage, if so how much more?  We can prepay 20% right now, should we dump money in retirement funds?  I donít want to just dump money in a mortgage at the current rate just because it makes me feel good, I want to do what makes financial sense, I want to explore all alternatives and options of how to stretch every saved dollar....I also think better money management of savings/investments will go a lot further for us than worrying how to cut a couple of hundred dollars.
« Last Edit: July 10, 2013, 09:23:11 AM by CheckEngineLight »

matchewed

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Re: How would you start your savings in our situation?
« Reply #14 on: July 10, 2013, 09:34:00 AM »
Maybe be less ambiguous with your question.

What are you asking exactly? Is it what to invest in? Is it how to save more? Perhaps being a bit more clear in your question will get you a better answer to that.

velocistar237

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Re: How would you start your savings in our situation?
« Reply #15 on: July 10, 2013, 09:44:45 AM »
You asked for a strategy, and we're giving you a strategy. We like to look at the big picture, and reducing expenses goes a lot farther than investment strategy, so that's our natural focus. If you stick with MMM, you'll start to see how you can change your wants or get them for cheaper. For example, satisfy your wrenching needs by flipping cars or motorcycles.

As far as investment strategy goes, start with paying off the high-interest student loans, like you said. I say pay the mortgage on schedule. What's the worst case on the interest rate? If you want to mitigate some of that up-front, go ahead.

In your tax bracket, maxing your tax-deferred retirement options make sense.

How big will these other investments be? If you'll just need a 25% down payment on a small real estate investment, then you could probably pull that together a year or two beforehand. In that case, just put all your current leftovers into your couch potato porfolio until then, and leave them there forever. At some point, stop adding as much to your portfolio and switch to saving for a particular investment.

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #16 on: July 10, 2013, 09:52:19 AM »
Maybe be less ambiguous with your question.

What are you asking exactly? Is it what to invest in? Is it how to save more? Perhaps being a bit more clear in your question will get you a better answer to that.

Read the last paragraph of the OP, everything you need to know is there.

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #17 on: July 10, 2013, 09:55:29 AM »
You asked for a strategy, and we're giving you a strategy. We like to look at the big picture, and reducing expenses goes a lot farther than investment strategy, so that's our natural focus. If you stick with MMM, you'll start to see how you can change your wants or get them for cheaper. For example, satisfy your wrenching needs by flipping cars or motorcycles.

As far as investment strategy goes, start with paying off the high-interest student loans, like you said. I say pay the mortgage on schedule. What's the worst case on the interest rate? If you want to mitigate some of that up-front, go ahead.

In your tax bracket, maxing your tax-deferred retirement options make sense.

How big will these other investments be? If you'll just need a 25% down payment on a small real estate investment, then you could probably pull that together a year or two beforehand. In that case, just put all your current leftovers into your couch potato porfolio until then, and leave them there forever. At some point, stop adding as much to your portfolio and switch to saving for a particular investment.

This is what I am trying to figure out, with 4k-5k a month, how should I break up the "savings/investments".  Should I max out my retirement contribution room and whatever is left over should go towards mortgage.  Should I max out the mortgage now while at low rates so my principal is lower at renewal in 3 years...hence lowering my interest rate exposure when rates do go up.  Should I just save money in a bank account and wait until the end of the year to decide what to do.  Should I do half mortgage half retirement.  It's hard for me to figure out what will work best for us hence why I am reaching out for some ideas/suggestions that I can consider and do the math on.
« Last Edit: July 10, 2013, 09:58:05 AM by CheckEngineLight »

velocistar237

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Re: How would you start your savings in our situation?
« Reply #18 on: July 10, 2013, 10:08:59 AM »
Some people on this forum pay off their mortgage in a year, and some plan to refinance back to 75% LTV 25 years in. You're not going to get a clear answer on this. With the uncertainty around interest rates, your answer is even less clear.

If you're interested in paying off the mortgage in 15 years, any reason you didn't refinance to a 15 year loan when 15-year rates were in the high 2's?

Max out retirement accounts. Pay off school debt. Pick a percentage. Dump that percentage into principal payments and dump the rest into Vanguard, and if you figure out something different in the future, switch to doing that with future savings.

Rebecca Stapler

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Re: How would you start your savings in our situation?
« Reply #19 on: July 10, 2013, 10:16:57 AM »
You asked for a strategy, and we're giving you a strategy. We like to look at the big picture, and reducing expenses goes a lot farther than investment strategy, so that's our natural focus. If you stick with MMM, you'll start to see how you can change your wants or get them for cheaper. For example, satisfy your wrenching needs by flipping cars or motorcycles.

As far as investment strategy goes, start with paying off the high-interest student loans, like you said. I say pay the mortgage on schedule. What's the worst case on the interest rate? If you want to mitigate some of that up-front, go ahead.

In your tax bracket, maxing your tax-deferred retirement options make sense.


+1

Given that you won't have the student loans paid off until closer to the end of the year, I think it would be a good idea to focus on the tax-deferred retirement options before the year end. Then set yourself up in 2014 for an automatic withdrawal of enough $$ to max out your tax-deferred accounts each year.

After that point, I would invest the savings in a middle-of-the-road way (I like index funds, but they might be too aggressive for a 3-year savings plan). You said that you wanted your savings to be liquid. This way, when you know what your adjusted mortgage interest rate will be, you can decide to plunk that $$ into principal because rates went up or use it as a down payment for a rental property because rates are still low.

But again, this is one opinion and YMMV.

ghatko

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Re: How would you start your savings in our situation?
« Reply #20 on: July 10, 2013, 11:32:09 AM »
As far as the variable rate, there is no chance I'd lock that in.  It's currently prime -.85%, that's what 5 year variable mortgages were here 2 years ago when I bought, fixed at the time was 3% for a 5 year mortgage.  This has been paying off in spades for us.  Not sure what you mean it was subsidized by the bank?  Never heard of that, it was what was available from lenders in 2011.

Are you in Canada? That might clear up some of the misunderstandings about locking in to a 25-30 year mortgage rate since that isn't available here (or in most of the world). That might also help clarify your investment options.

CheckEngineLight

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Re: How would you start your savings in our situation?
« Reply #21 on: September 11, 2013, 07:33:48 AM »
Just an update:

We just paid off the remaining balance of $14k on her student loan.  We are officially debt free.

I've decided since our mortgage interest is at 2.15% for the time being, we are going to save our money and put into our tax free investment accounts and grow it that way until our 5 year mortgage term is over (3 years from now).  At that point we are hoping to have saved in excess of $80k above and beyond retirement savigns, at which point we will decide if we will throw it all towards the mortgage before we renew it or continue growing it (depends on what rate we can get at that point).

In the mean time, I was also considering dumping all extra cash into our mortgage and then borrowing it back through our home euity line of credit and investing it (Smith Manoeuvre), this way we can deduct our mortgage interest at least.  Anyone in Canada doing this?
« Last Edit: September 11, 2013, 07:38:50 AM by CheckEngineLight »

Spudd

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Re: How would you start your savings in our situation?
« Reply #22 on: September 12, 2013, 01:50:37 PM »
Congrats on the student loan! You're not debt free, though, you still have the mortgage. ;)

I prefer to max out my registered accounts first (RRSP/TFSA) and then with leftover money, I pay down my mortgage. I view this as a good compromise. I'm not sure if your saving/investing money is sufficient to do both, but if so, then that'd be my recommendation.

For me personally, the Smith Maneuver is too scary/risky for the limited benefit it provides. So I don't do it.