The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: allcylinders on February 23, 2013, 10:45:39 PM
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Hi Mustachians!
I’ve loved reading this forum and website over the past few months, and I’m hoping you can give me some advice.
Recently, I’ve been blessed with a wonderful stroke of luck. I owned a small percentage of my dad’s company that just recent sold. I’ve now got extra money, and I don’t know what to do and am hoping you all can give me some advice. After taxes and paying off a small family loan, I’m left with about $140,000 of extra money.
Here’s some background info:
Personal:
• I’m 33 and single, no kids.
• I have a job I like but don’t love. I make around $70K per year with a 15% bonus, so I average a little more than $80K
• I own a townhouse (2/1.5) that’s worth pretty much exactly what I owe: $92K. I paid $135K.
o I want to move into a larger townhouse (3/2.5) in my same neighborhood mainly for the increased outdoor space.. It would cost about $120K. to purchase and, ideally, I’d like to do about $30K in renovations. The plan is to stay here for a long time. Prior to 2008, these townhomes sold for around $220K. It seems like a good value for the money, and I love the neighborhood.
Financial:
• No debts except my mortgage.
• Expenses: Approximately $2300/ mo. That includes a $915 mortgage payment.
• 401K: I have around $31,000 right now. I’ve been stupid in the past and haven’t contributed what I should. My full bonus in March plus my extra paycheck (I get paid three times that month) will go to my 401K. This will allow me to keep my 8% contribution rate, get the match, and hit $17,500 at the end of the year.
o Below is the allocation for the 401K. These are the only three index funds I have to choose from.
• 50% S&P 500 Large Cap
• 20% S&P 500 Mid Cap
• 30% S&P 500 Small Cap
• Roth: I have just over $16,000 in VTSAX. I just started contributing and will make this a priority to fully fund every year.
• Taxable Accounts: I’ve got about $5500 right now in Vanguard Total International Stock index fund. Any extra money each month will get funneled here. It should be between $500-$1200 per month.
I don’t know if I should keep that $140K in the bank until I determine if I can buy a three bedroom townhouse. I’d need a lot of that for a down payment and renovations. Or do I pay off my house now? I’m at 4.5% on a 15 yr so that equals about $300/mo in interest.
I apologize for the long post. I’m open to any and all suggestions. Right now, I’m just stuck on what to do. Thanks for your help!
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Personally, I would pay off the house and put the rest in the bank. That would leave you with 48k for a down payment plus renovations when you buy. In the meantime, you save 300/mo in interest that you can add to that. Selling your current home could take a while so you'd have some time to save up for future renovations.
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How often do the larger units come up for sale and how quickly do they sell? If they are rare and sell quickly, and you intend to purchase this unit and live there for many years, then I would hold on to the cash and buy the unit I wanted when it came up for sale for cash. Worry about the financing after the purchase.
If you want to pursue the 20 percent down route, can you qualify for two mortgages? Otherwise you will have to sell your current townhouse first and then choose from whatever is available at that time.
Is your plan to sell the existing townhouse and be invested only in paper assets? Have you thought about keeping it and renting it out? Would the numbers make sense? What if you refinanced it at a lower owner-occuped rate while you are still living there, and then looked at buying?
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The larger units don't come up for sale all that often. However, there may be two that come available this summer. Unfortunately, renting isn't allowed so I will need to sell my current place. I would qualify for two mortgages if needed so I don't have to buy the larger place with cash. I just feel like I'm throwing away $300 per month on interest, but I'm nervous to sink a large chunk of my cash into a place I want to sell. I've thought about refinancing, but I don't know if it's worth it given that I want to move soon.
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Personally, I'd save the money until the unit you want comes up for sale and buy it for cash. Then sell your current unit quickly, bringing a bit of cash to the table if necessary. This will have you in the place you want with no mortgage by the end of the year. Your utilities will likely go up a bit, but overall you will have a lot more to stache.
I know a lot of people would say to keep a mortgage, but I think life is a lot more flexible and free without one. We didn't have one for awhile (and it will be paid off in less than 6 months), it's very nice to not have one!
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If the units are rare and sell quickly, and you are committed to living there a long time, I would buy the unit I wanted for cash and then sell yours. You are going to have difficulty competing with other offers if you have a financing contingency. At least you will not face competition from buy and hold investors when one of these units comes up for sale.
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If your goal is to get to FI, stay where you are. If you want more outdoor space, find a nice park.
As far as your cash windfall, I would let it sit in the bank and look to invest it slowly over the next several years.
Sorry, but for someone your age with no family on that income, you need to seriously boost your investment portfolio and not worry too much about your dream condo.
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Thanks everyone for the great advice. I'm going to seriously consider staying put for a few more years. As you can see from my savings numbers, I have some ground to make up. I spent the last ten years with my head in the sand about money and it drives me crazy now to see how much I've wasted. About a year ago, I started being more deliberate with my money but was still only saving a minimal amount. It never occurred to me that I could retire before 65 until I found this blog a few months ago. What a wake up call! I'm really trying to kick it into overdrive now.
If I am going to stay in my current place, should I pay off my mortgage and save that amount each month? Or should I refinance and invest the majority of the money? Investing scares me just because I feel like I've only scratched the surface on understanding that arena. I'm not afraid of risk, I'm just afraid of putting money into things I don't understand. Right now, I don't know the best way to diversify outside of index funds. Or is putting everything in index funds ok? I have a lot to learn!
Thanks again for everyone's advice and input.
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You are 33 and single.
That situation can change faster than you might expect!
That dream condo for yourself might not be such a dream for your spouse and any kids.
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I found this very helpful for understanding investments. Read his entire series of posts - they're all linked on the left side of the page.
http://jlcollinsnh.wordpress.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/
I felt the same as you not too long ago. I didn't mind the idea of investing, but I wanted to understand it better. And because of that, I missed out on years of interest I should have been earning. A little education goes a long way, so I hope this helps.
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Allcylinders - I recommend staying put and paying off the mortgage. You will realize a sure thing in saving $300/month you'd otherwise pay in interest. Nearly anything else you'd invest your cash in that might earn more than you are paying in mortgage interest exposes your principal to risk, so why pass up the sure thing? Then take what you would have spent monthly on your mortgage and interest and slowly invest it as you learn about the investment process. Plus, I find being mortgage free gives you a great lift psychologically, and encourages you to save even more. Let us know what you decide to do. And don't beat yourself up too much about the "would've" and "could've"s -- for your age, you are doing pretty damn well.