Author Topic: How should we divide up our extra money?  (Read 3318 times)

LizzyBee

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How should we divide up our extra money?
« on: May 11, 2013, 11:55:49 AM »
Here is our current situation:
Savings rate 50%
$40,000 in cash savings
Maxing out Roth IRA, contributing towards pension (me), contributing up to employer match with 401K (husband)
$100/mo in a 529
Mortgage debt: $138,000 at 3.275%
Just opened an index fund at Vanguard with our tax return!
Monthly combined income of $7055 (after taxes, pension, healthcare, and 401K)

Future goals:
Pay off mortgage and use current condo as a rental to generate income within 5-8 years
Save an additional $30,000 for a down payment on a home within 5-8 years (savings account) - (“affordable” homes in our area are about $300,000)
Become FI within 10-15 years (continue maxing out IRAs and contribute towards index fund)

Question:

We have a total of $1750 per month to put towards the above financial goals. Plus and extra $9,000 per year that we make from side jobs, bonuses, etc. I want to divide that money between our mortgage, index fund, and our cash savings so that we can meet all of our financial goals, but I am not sure how to best divide that money between those goals. We already have $40,000 in our savings account earning about .5% interest so I feel silly continuing to stock money away there, but I don’t want to take a whole lot of risk with the cash needed for a down payment for the home we want to buy in 5-7 years. I’d be open to suggestions though, a CD would probably be a better choice for some of it or maybe bonds.

Our mortgage has a pretty low interest rate so I know it makes more sense to invest than pay it off, but in order to provide a bigger profit margin for when we do start renting out our condo, I would like to have it completely paid off. To me, it makes sense to completely pay it off because if you take our current mortgage payment, taxes, insurance, and HOA, then subtract it from the amount we would get renting, it only comes to $200 profit per month. If we have months without renters, maintenance, etc, we could very easily eat up that profit. With a paid off mortgage the profit jumps to $900 per month. 

I want to be strategic about where our money goes, but right now it feels like I'm ambiguously assigning amounts to each goal.


twinge

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Re: How should we divide up our extra money?
« Reply #1 on: May 11, 2013, 12:48:30 PM »
Quote
when we do start renting out our condo, I would like to have it completely paid off. To me, it makes sense to completely pay it off because if you take our current mortgage payment, taxes, insurance, and HOA, then subtract it from the amount we would get renting, it only comes to $200 profit per month.

You might want to post your plan on this to the landlording/real estate investment section of forum because this doesn't sound like the best opportunity for a rental property so you might want some advice directly from the experienced real estate investors there.  The condo you happen to already own doesn't always make the wisest use of your investment dollars and you might be better off planning on selling it when you move and investing in something else.  Or using the money you're spending to pay it off early to invest in another rental property now.

Mazzinator

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Re: How should we divide up our extra money?
« Reply #2 on: May 12, 2013, 08:49:59 AM »
Another idea, which may be a bit tooo Dave Ramsey ish.. Is to focus on one goal at a time.

Quote
Maxing out Roth IRA, contributing towards pension (me), contributing up to employer match with 401K (husband)

Keep this the same.

But then pick either payoff mortgage or savings. Once you reach that goal move over to the next. I'm not quick enough to calculate how much "extra" you have each month..but say, maybe it takes you 3 years to save up for DP, then the 3-4 yrs after you pay down your mortgage allowing the max amount of years in savings to compound...

I don't know..just throwing around an idea for ya! Good luck!!

matchewed

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Re: How should we divide up our extra money?
« Reply #3 on: May 12, 2013, 09:25:29 AM »
I wouldn't focus the extra money towards the mortgage. If the interest rate is fixed you can get a better return with investing the money than 3.275%. You're trying to view it as "if we pay it off now we get more profit in 5-7 years when we rent it out". What you should be comparing is how much money you can make now by investing vs. how much money you can make then with paying off the mortgage. Do the math and let the math decide for you IMO.

And given your current cash savings you could probably accelerate a home purchase by a significant amount. 5-7 years is a pretty conservative prediction with 40k in the bank. Pushing for this earlier can lock in a great interest rate for your 300k home.