Author Topic: Lifestyle dialed in, next step is scary!  (Read 2945 times)

stevedoug

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Lifestyle dialed in, next step is scary!
« on: October 23, 2013, 12:20:20 PM »

1.Current Lifestyle and Spending
  • 30, single, no kids
  • Pretty dialed in, at around 60% savings rate. Some room for savings, but mostly there.

2. Current "debt"
  • Condo Mortgage: Variable interest rate (currently 2.125%)
  • Variable rate = 2+ index, rounded up to nearest .125%. Index = 1 year CMT
  • Mortgage is upside down due to massive value drop (60% over 4 years): owe $87k, worth 55k
  • Student loans: $7700 @ 2.1%

3. Current Cash
  • (in a 0% yield savings account) $20k

4. Question - What Next?

I think the popular answer is to get into some Vanguard index action. I've read a bit about asset allocation and can probably come up with 3 to 4 balanced indices to get into. However, many require $5 to $10k minimums. Should I get into them 1 by 1? Wait until I have more cash? skip it and pay down the mortgage? get rid of those pesky student loans?

Thank you!

gimp

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Re: Lifestyle dialed in, next step is scary!
« Reply #1 on: October 23, 2013, 12:55:51 PM »
On one hand, your loans cost less than investing would return.

On the other hand, there's always a question of loan freedom vs most money earned. Which is more important to you?

If you choose investment - I'd probably split that up into 4 sections, equally priced. 25% each into big cap, small cap, emerging markets, and bonds/notes. As long as your strategy is reasonable, and you rebalance once or twice a year, you'll be fine.

One wrinkle I see is if your variable rate mortgage jumps. Will you be able to refinance?

livetogive

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Re: Lifestyle dialed in, next step is scary!
« Reply #2 on: October 23, 2013, 01:01:34 PM »
I'd consider finishing the student loan debt first.  Even though your rate is crazy low,  it's the only thing you could never wall away from.  Worst case you can renegotiate the mortgage.

The variable rate is also a concern but it sounds like you're able to handle a spike.  How high would it have to go for you to be in trouble?

stevedoug

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Re: Lifestyle dialed in, next step is scary!
« Reply #3 on: October 23, 2013, 01:09:41 PM »
On one hand, your loans cost less than investing would return.

On the other hand, there's always a question of loan freedom vs most money earned. Which is more important to you?

If you choose investment - I'd probably split that up into 4 sections, equally priced. 25% each into big cap, small cap, emerging markets, and bonds/notes. As long as your strategy is reasonable, and you rebalance once or twice a year, you'll be fine.

One wrinkle I see is if your variable rate mortgage jumps. Will you be able to refinance?

Good points. Most money earned is most important to me! Lean freedom (aka peace of mind) is something that doesn't impact me too much. I'll usually go with a clean logical investment plan. I was thinking something a bit more conservative than what you posted, but basically same idea.

Refinance would be difficult. The bank would most likely want an appraisal, and I'm guessing I'd be underwater on an appraisal (according to zillow/local sales).

If it does jump it can jump by MAX 1 point per year (according to the index, which has been less than 1% since 2008).

stevedoug

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Re: Lifestyle dialed in, next step is scary!
« Reply #4 on: October 23, 2013, 01:12:25 PM »
I'd consider finishing the student loan debt first.  Even though your rate is crazy low,  it's the only thing you could never wall away from.  Worst case you can renegotiate the mortgage.

The variable rate is also a concern but it sounds like you're able to handle a spike.  How high would it have to go for you to be in trouble?

Good point Turbo, you cannot walk away from student loans no matter what.
the rate is based off the CMT: http://www.moneycafe.com/personal-finance/cmt-rate-1-year-constant-maturity-treasury/

It is always 2 points above the CMT, rounded up to the nearest .125%, also it can only go up (or down) by 1 points per year. When I signed for the home in 2006 it was 5.875, and has dropped each year (after original 3 year lock down) to 2.125%.

Even if that index (which has been less than 1 since 2008) spikes up 5 points in one year, it would take 3 years for my rate to get back up to 5.125%.

Am I explaining that math well? I feel like I rambled

stevedoug

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Re: Lifestyle dialed in, next step is scary!
« Reply #5 on: October 31, 2013, 12:51:55 PM »
based on what I've researched here, through MMM, and jcollins stock series my plan looks like this:

  $3000 70% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
  $3000 15% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
  $3000 15% Vanguard REIT Index Fund Investor Shares (VGSIX)

re-balanced every 6 months.

Reasonable or too risky?