Author Topic: Need help prioritizing goals and setting some targets  (Read 2019 times)

Valetta

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Need help prioritizing goals and setting some targets
« on: July 06, 2015, 03:05:02 PM »
I'm looking for advice on which of our goals to accomplish first from a financial standpoint and if our targets are appropriate. I'm trying to give enough detail without being overwhelming. Happy to edit my post with more detail as necessary.

I'm not doing a full case study because we're both pretty comfortable with where our spending is at and we track it carefully. Normal monthly spending is $2,500 not including debt payments. Either one of our incomes wold be enough to cover living expenses and debt payments without touching savings.

Married couple - me - 33, husband - 32, no kids yet but trying. Combined income - $195,000 gross. Includes each of our jobs ($108k and $87k) and the net income from our rental property ($9k).
After taxes, insurance, maxing out both 401ks and Roth IRAs, we are at $101,000 net. We live in a high tax state.

In all of our taxable accounts we have $127k + $10,000 in an HSA. (We no longer have the type of insurance that allows us to put new money in the HSA. At this point we treat it like an extra retirement account/emergency fund, haven't touched it in years).
Net worth with property is $493k. We have our primary residence and one rental property.

We have 3 debts:
Rental property mortgage: 4.85% interest - $71,000 total left - monthly payments $545
Our home mortgage: 4% interest - $182,000 total left - monthly payments $1500 (this includes a bit extra)
Student loans - 3.1% interest - $53,000 left - monthly payments - $600 total, we only pay $300 - My parents pay the other half.

We use a credit card for all our expenses and pay it off every month. Neither of us have ever had any credit card debt.

Obviously given our incomes we still have money left after maxing out our taxable accounts and making debt payments. Both properties are worth much more than the mortgages.

Here are some of the things we are working toward financially on the way to FI:
1. A little bit will come off the top of savings for my husband to get a car. His car is 14 years old, pretty smashed up (but still legally driveable), with 200,000 miles. We've agreed that the next time it needs major repairs we're just going to scrap it and get something else for him, no point in continuing to pour cash into it. Obviously we'll pay cash and it clearly won't make a huge dent in our over all savings. He is able to bike to work sometimes but some days needs a car to drive customers/guests around.

2. Obviously we need to keep a bit aside for emergencies. Given the fact that we have 2 incomes plus rental income and very low expenses, we would feel comfortable with $15,000 in emergency savings as cash plus the $10,000 in the HSA. Other savings could be in investments that we could sell if we had exhausted all other resources in a dire emergency. That cash would cover 6 months of expenses if necessary. I'd prefer a larger cushion but I'm trying to be unemotional about it. Is this enough emergency savings as cash?

3. We put $250 into one of our savings accounts every month to pay for major house repairs and appliances someday. There is $13,000 in that account right now but we're probably going to cap it at $15,000. That's more than enough for a new roof when it comes up. This is a strategy we read about a long time ago and it makes logical sense to us - to have money set aside for expenses you know are coming at some point. However, I'm not married to this particular strategy or savings rate. Do people have thoughts on the strategy or amount?

4. While I don't like having the student loan debt, the interest rate is very low and we only pay $300 per month toward it. If we did, we'd be giving up the "free" money from my parents making half the payments. They are perfectly willing to keep making the payments but don't have any interest in putting a lump sum forward for half. Does it make any sense to pay this off?

5. Does it make sense to take savings and pay off either of the mortgages? So far our thoughts have been that our annualized rate of return on our investments is much higher than our interest rates on debt. Also, given our high incomes we could really use the tax benefit of the mortgages.

6. We'd like to purchase another rental property and are looking at duplexes+. We think we would need around $30k - $40k for a down payment.

Should we prioritize paying off any/all of the debts or buying another rental property?

I'm interested to hear what everyone has to say. We've talked about all of the above pretty extensively and can see pros/cons to every option.
« Last Edit: July 06, 2015, 03:29:44 PM by NoelMcC »

Gin1984

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Re: Need help prioritizing goals and setting some targets
« Reply #1 on: July 06, 2015, 03:22:30 PM »
Can I ask a couple questions, what is the normal monthly spending, is it $2500?  Then if either of you lost your job you would still be able to pay monthly expenses without dipping into savings right?
If I am reading this right, you have both $15,000 EF, and $13,000 in a replacement fund is this correct?
Personally, if I was interested in a duplex, I'd have a bit more cash savings but that is up to you.  I'd not pre-pay any of your expenses at this time.  One idea you might consider is actually more debt.  Do you have a HELOC you could apply for that would cost less than a rental mortgage?  I'd personally like more cash and more assets before I paid down any debt.

Valetta

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Re: Need help prioritizing goals and setting some targets
« Reply #2 on: July 06, 2015, 03:35:10 PM »
Can I ask a couple questions, what is the normal monthly spending, is it $2500?  Then if either of you lost your job you would still be able to pay monthly expenses without dipping into savings right?

Edited the above with this information but your assumptions are correct.

If I am reading this right, you have both $15,000 EF, and $13,000 in a replacement fund is this correct?

This is essentially correct. We actually have about $60,000 total sitting as cash right now and $67,000 in taxable investments. I'd like to move more to investments though so I'm trying to set the threshold for what we keep as cash (the EF and the replacement fund).

Personally, if I was interested in a duplex, I'd have a bit more cash savings but that is up to you.  I'd not pre-pay any of your expenses at this time.  One idea you might consider is actually more debt.  Do you have a HELOC you could apply for that would cost less than a rental mortgage?  I'd personally like more cash and more assets before I paid down any debt.

We absolutely could apply for a HELOC if we wanted to. We have excellent credit and plenty of equity. I haven't researched this option at all though so I'll have to look into it more.

What would be your target amount of assets and cash before you began paying down debt?

Valetta

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Re: Need help prioritizing goals and setting some targets
« Reply #3 on: July 06, 2015, 03:40:07 PM »
It's in the post above but I want to be sure it's clear that we have $127k in taxable cash/investments. We have lots more in 401k and Roth since we each put the maximum in every year. We don't plan on touching those accounts for a rental property or emergencies or anything else like that I didn't think it was that germane to the discussion so I didn't emphasize it.

Gin1984

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Re: Need help prioritizing goals and setting some targets
« Reply #4 on: July 07, 2015, 03:58:41 PM »
Can I ask a couple questions, what is the normal monthly spending, is it $2500?  Then if either of you lost your job you would still be able to pay monthly expenses without dipping into savings right?

Edited the above with this information but your assumptions are correct.

If I am reading this right, you have both $15,000 EF, and $13,000 in a replacement fund is this correct?

This is essentially correct. We actually have about $60,000 total sitting as cash right now and $67,000 in taxable investments. I'd like to move more to investments though so I'm trying to set the threshold for what we keep as cash (the EF and the replacement fund).

Personally, if I was interested in a duplex, I'd have a bit more cash savings but that is up to you.  I'd not pre-pay any of your expenses at this time.  One idea you might consider is actually more debt.  Do you have a HELOC you could apply for that would cost less than a rental mortgage?  I'd personally like more cash and more assets before I paid down any debt.

We absolutely could apply for a HELOC if we wanted to. We have excellent credit and plenty of equity. I haven't researched this option at all though so I'll have to look into it more.

What would be your target amount of assets and cash before you began paying down debt?
Honestly, my target would be the total assets that would get me my minumum expenses plus insurance costs.  If I am in accumulation mode then as long as my investments are earning more than my interest rate, I don't care to pre-pay.  That said, I do want to pay the lowest interest rate, so if my HELOC costs less than a rental mortgage, I'd go with that. 
With the additional info, I'd keep the amount of cash you have except for $5000 ($40,000 for the rental, $15,000 for the EF) which I would move into investments.  Once you have bought the property you can put both the $250 and your normal savings/investing into cash to save up for the random expenses that pop up until you get back the $15,000.  The problem with keeping too much in cash is you lose to inflation, and since you have such a large difference between your spending and taxable income, you can take the hit on months that things come up on most cases.  On the other cases  there should have been enough time between when you first invest and when you need it (cars for example can last 15-20, you don't want to have the cash from the first year sitting in cash for 14 years). 

Valetta

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Re: Need help prioritizing goals and setting some targets
« Reply #5 on: July 07, 2015, 05:03:22 PM »
Honestly, my target would be the total assets that would get me my minumum expenses plus insurance costs.  If I am in accumulation mode then as long as my investments are earning more than my interest rate, I don't care to pre-pay.  That said, I do want to pay the lowest interest rate, so if my HELOC costs less than a rental mortgage, I'd go with that. 
With the additional info, I'd keep the amount of cash you have except for $5000 ($40,000 for the rental, $15,000 for the EF) which I would move into investments.  Once you have bought the property you can put both the $250 and your normal savings/investing into cash to save up for the random expenses that pop up until you get back the $15,000.  The problem with keeping too much in cash is you lose to inflation, and since you have such a large difference between your spending and taxable income, you can take the hit on months that things come up on most cases.  On the other cases  there should have been enough time between when you first invest and when you need it (cars for example can last 15-20, you don't want to have the cash from the first year sitting in cash for 14 years).

This all makes perfect sense. My husband and I chatted about the HELOC last night and we're going to look into it. Neither of us had ever thought of it before so we just need to do some research now.

What you say about keeping very little cash in investments makes perfect sense at this point in our lives. I'm going to start moving more cash into investments.

We absolutely do plan to drive our vehicles for 15-20 years (once husband gets a new one, mine is only 2 years old).

Just for some history, when we originally set up our savings methods 6 years ago, I was almost totally unemployed (making less than $5k per year doing some contract work) and my husband was making much less than now - only about $55k net and he wasn't saving even close to maxing his 401k, we didn't have Roths, etc. We had almost nothing for savings and a new mortgage. I know this is the case for many American families but it scared us to have so little cash, only one source of income and a negative net worth. So we've probably been a bit too conservative as a result, I just love the security of knowing an emergency couldn't "hurt" me financially.

Now it's time to move to the next stage I guess! Savings don't have to be in cash and we could still handle any issues that come up. Thanks so much for the help.

I'd still welcome additional feedback if anyone else has thoughts.