Author Topic: Order of Operations  (Read 13110 times)

truboyblue

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Order of Operations
« on: February 14, 2012, 09:19:13 AM »
Thanks for this forum - great idea.  Just got plugged into this blog a month ago and have read almost 3/4s of the content, finding it all very helpful and encouraging.  My question is about the order in which to accomplish certain financial goals.  Obviously there's no one right answer - I'm really hoping for several perspectives here. 

My wife and I (age 32) have been paying off debt at an amateur speed (moderate to fast compared to society at large; much slower compared to the mustachioed bunch here) the last few years.  I just finished grad school (an MFA) which we paid for out of pocket so as to not go in debt; so that slowed us down for the last 2 years.  Our remaining debt is currently $15K in student loans left for my wife (consolidated - $3k is unsubsidized @ 5%; the other $12K is subsidized @3.5%) and our mortgage (which we refi-d in '09 @4.75% to reduce mo payment; currently the balance on that is about $138K).  She's about to roll her $34K 401k from the job she just left into a Vanguard IRA; I'm just getting started with retirement savings and am going to start contributing ~7% of my salary to my 401k, 1/2 of which will be matched out the gate by my employer.  We have $1K in emergency savings (which we're hoping to build up to around $10-$12K in the not-too-distant future) and typically generate a monthly surplus of about $1K.  I've also been completely transformed by the knowledge of the index fund, and would like to get into a Vanguard index fund asap.  I'm a complete newbie to investing, and am still finding my way around the terminology; mostly with blogs like this and books like Malkiel's Random Walk.  I know nothing, so my learning curve is steep at the moment.

Currently we have about $10K in savings built up from the last several months, but Murphy is conspiring against us, primarily in the following two ways:
1. our tub starting leaking into the living room (we're using the basement bathroom in the meantime while I re-caulk, which could buy us another year or two [tub was installed wrong originally])
2. multiple repairs on our high mileage civic, with a head gasket problem looming (mechanic is recommending we get a new car within the year)

I'm not naturally gifted with my hands.  I'm trying to become more of a basic Mr. Fixit (will be installing a new dishwasher for the first time to save the $100 install cost - another case of Murphy striking this month - in the next week), but I'm generally clumsy and get frustrated by the time/effort it takes me to do anything beyond basic.   And since I work full-time and really enjoy spending time with my wife, child and friends, I generally trade the $ for a pro for the quality time I get out of it - tho i'm learning to be more selective about what services I can do on my own (ie dishwasher) and what needs a pro.

So, given all that financial spillage above - what course of action do all you whisker-wise prognosticators suggest I take to make the most out of my financial situation?  Specifically, when should I initiate what, and what should I do simultaneously and/or what should I avoid doing simultaneously?  For example, do we pay off the student debt before building up a 3-6 mo savings?  We're seriously thinking of moving in the next 5 years, so how much does it make sense to pay down extra on the house; if so, how much, and when?  Should I wait to open an index fund until the other stuff is rolling?  What say ye?

Thanks in advance for any consideration and advice - much appreciated.  And esp thanks to Mr and Mrs MM for being so generous with their experience/knowledge, and providing this smart forum.

James

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Re: Order of Operations
« Reply #1 on: February 14, 2012, 09:40:17 AM »
Regarding the 3-6 month emmergency fund, MMM doesn't really recommend that sort of fluff.  I used to think that was necessary also, but then realized part of the badassity inherent in mustachism was to make due with less, not save up so spending can continue.  I would start by considering what real options you have for short term money issues.  If you lost your job, could you use a LOC on your house for the short term needs?  How much could you cut from spending?  I do still keep a cushion in savings, but not nearly as much as I did before meeting MMM.

I also am hacking away at student loans, which I consider a bigger priority than my mortgage.  The student loans are unsecured debt, so I would hammer at that with everything you've got until it's gone.  I would stick with the 10,000 savings and point every other penny at the student loan.

Regarding the high mileage civic, unless it's dangerously unreliable you probably can't improve your situation by upgrading.  Obviously it's always a balance between reliability, comfort, and saving money, but it's really rare to upgrade a vehicle and save money.

I'm sure others will come along with their thoughts as well...

lazydragon

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Re: Order of Operations
« Reply #2 on: February 14, 2012, 09:47:00 AM »
I'm definitely not the most mustachio'd person here, but I have been concerned about finance and retiring early for many years now.  Your mortgage balance appears laughably low to me as I live in a larger city where 300k buys you a condo at best :-)  In the past I've had to balance different financial priorities often and after reading your story I'd suggest that you consider:

- using a line of credit for a cash cushion instead of keeping 'cash' around (you talk about building up a 3-6 month cushion, which I don't see as being necessary if you both have jobs, you both can use a credit line for emergencies)
- spend a lot of time calculating your likely after-tax return for paying off your debts vs. investing before making any choices w/ your money
- If/when you invest, stagger your investments in terms of liquidity and risk
- ditching your car entirely instead of repairing it
- **make sure your partner agrees with your financial plan/choices and you're not just browbeating her into it**

With regards to paying off debt vs. investing, that's a big topic, and I know I personally have made mistakes in this area before.  The big thing to be aware of is that taxes play a huge part.  Paying off your 5% debt is actually equivalent to a risk-free investment returning 5%+your marginal tax rate.  For me personally my combined marginal income tax rate is 43.41% (yay Canada) so that'd be like having an investment that "returned" 8.8% per-tax.  Risk-free.  That's a pretty crazy good investment to me.

Also, put in the time to learn to do some handy-man stuff yourself - like you mention in your post, start w/ installing that dishwasher and branch out from there.  Even though from a purely economics point of view it can make sense to hire an expert (e.g., if your job earns more per hour than a plumber), by the time you do something a few times, you'll be as good as, and have the tools for, the job the expert would do.  People underestimate how fast they can learn something.  If you have the intellect to graduate from a grad school (even if it was in arts /tease ... sorry I'm a science guy...), you definitely have the capacity to learn faster than people would have you believe.  Like MMM says, building up your repair-guy muscles and investing in your own skills will pay dividends down the road.

Good luck



gestalt162

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Re: Order of Operations
« Reply #3 on: February 14, 2012, 10:57:51 AM »
You're definitely in a great situation, and are firmly positioned for early retirement. My thoughts:

1. I agree with the other posters regarding your emergency fund, and using springy debt like a HELOC instead. $1K is a good amount to have laying around in a low or no interest account, but $10K is quite a bit, and would be better off invested into a Roth/Traditional IRA.

2. You're investing a pretty solid amount into your 401(k), and getting a healthy match from your employer. This is good. Since you don't have any super high-interest debt, invest more if you can, up to the IRS maximum. Remember you can always cut your contributions if you run into financial trouble.

3. If you want to plow some money into your student loans instead of your 401(k), I'd say go for it. Although investing in an index fund in your 401(k) will give you (on average) 8% returns with pre-tax money, that 8% is hardly guaranteed, and can't match the peace of mind that comes with having less debt.

4. Certainly some of your savings will be used to fix up your house. As for the rest, I think you should consider parting ways with your car. When you start running into engine problems, your car is generally on its last legs, and will soon become a money pit. Sell it for as much as you can, and if you still need a car, buy a good used one for $5-7K on Craigslist.

5. Keep working on those handyman skills, they will save you hundreds, if not thousands of dollars.


truboyblue

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Re: Order of Operations
« Reply #4 on: February 14, 2012, 11:01:47 AM »
thanks all for the great advice. 

I meant to actually broach the subject of HELOCs.  I've read MMM's springy debt post, but I don't quite understand how they are beneficial in place of savings - given that, from what I've read, interest is accruing on them and so if you have to pull out money for an emergency (ie job loss, major life event) you now are in the hole for that money plus the interest after just a month.  You'll have an extra interest accruing payment after just one month in addition to your mortgage, and if you lose a job or are in a situation where you can't pare back expenses, this seems like a debt trap, if a modest one (it seems the interest rates are really low).

Maybe I'm just stupid, but try as I might I can't quite connect to the logic on this; but I know I must be missing something given this communities ardent backing of HELOCs. 

Can anyone clarify/enlighten? Thanks!

palvar

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Re: Order of Operations
« Reply #5 on: February 14, 2012, 11:32:21 AM »
You'll have an extra interest accruing payment after just one month in addition to your mortgage, and if you lose a job or are in a situation where you can't pare back expenses, this seems like a debt trap, if a modest one (it seems the interest rates are really low).

That is true, you will be paying for the debt.  However, you'll be losing out on any return with the money you have sitting in your checking account.  So, would you rather give up 5% on your emergency fund all of the time, or 5% on the HELOC only when you need it.

Nerode

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Re: Order of Operations
« Reply #6 on: February 14, 2012, 11:33:23 AM »
To add to the comments on handyman skills, may I express my point of view on the 'economics of hiring an expert'?

I do earn a good wage, but given that (i) skilled craftsmen are expensive ($75/hour and up where I live), and (ii) you're paying for that out of after-tax income,  I look at some of these tasks and see the equivalent of $125 to $300 per hour income.  For instance, I recently replaced the rear rotors/pads on my Mazda 3, saving over $300 (after-tax) for a couple of hours work.

Shortly, I'm undertaking a slightly bigger project - encapsulating my mud-floor crawlspace to prevent damp/rot/etc.  I had a very professional company quote me for this...their 'Rolls Royce' solution came in above $11,000!  I will do it to a very acceptable level (Honda Civic?), with a couple of unnecessary frills removed, for less than a week's work and $1,300 in materials.  I make that equivalent to an annualised salary of close to three-quarters of a million....and I'll have a fun time doing this project with my boys as a bonus.  In effect, I'm being paid much more than my salary to take time off work!

Put simply, you probably need to be earning at least a third more than the professional - and probably more - to make that approach economically preferable.  You may have other valid reasons for that approach, and I respect that. Safety trumps all, and people are more important than money.  You'll think of others, no doubt.

Guitarist

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Re: Order of Operations
« Reply #7 on: February 14, 2012, 11:35:38 AM »
From what I understand, the emergency fund is literally for something you need right now, as in, you don't have time to pull your money from your investments to get it out in time to pay for the emergency.
After using the credit, you take whatever you need out of your investment savings and pay off the balance by the end of the first month (as in, before interest is accrued). Usually it takes a few days to get the money to you which is why you need the credit.

If my line of thought is wrong, someone please correct it.

truboyblue

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Re: Order of Operations
« Reply #8 on: February 14, 2012, 11:48:17 AM »

After using the credit, you take whatever you need out of your investment savings and pay off the balance by the end of the first month (as in, before interest is accrued). Usually it takes a few days to get the money to you which is why you need the credit.


Ah I see.  So if I started investing in an index fund with $5K, and then a few months later had a $3K emergency, I'd just yank the $3k from my investment acct (btw - there aren't generally any penalties for withdrawals beyond what you may have lost over that period, correct?) and then start re-building my investment again.  It's really as easy as that?

Mike Key

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Re: Order of Operations
« Reply #9 on: February 14, 2012, 11:51:01 AM »
Am I the only one who thinks credit lines for emergencies is a stupid idea?


$1,000 is fine for your emergency fund. And while most everyone out there starting with Mr. Ramsey repeat the emergency fund, I don't think I've ever heard anyone state what is an emergency. Other than losing your primary source of income. In reality, the need for money can be negated by simply having emergency plans in place in the event XYZ scenario occurs. If you get cancer $10,000 isn't going to last very long. I do agree with everyone here that most of that can be solved by dropping expenses. Drop the cell phone and get a prepaid, ditch the TV if you haven't already, etc, etc. Know what you could sell. Blah Blah Blah. Planning goes a long way.


I don't however understand why anyone would think that putting $3,000 on a card is better than having $3,000 laying around. On a credit card interest is working against you. In the bank it's working for you. Even if the savings is horrible as is the case with most US banks. (Foreign banks give rates as high as 13.4% FYI)


If anyone wants to clarify this argument for me, I will keep an open mind.


As for your car, that can be a tough spot. I was in a similar situation where I had a beater that was paid for. It served us well for awhile, but started to become a greater and greater headache/money pit. That is going to require some math to figure out your best option. But if you rely on that transportation, and can't use alternatives, I'd start right there.


And then I'd double down on that debt. You can find creative ways to deal with problems around the house. Or find someone to barter with who can repair the tub.


We all want to jump into investing right away because of compounding interest and potential. But I can tell you as someone who lived debt free until marriage. There is no better feeling than having no debts. Especially with unsecured debts. It frees up your decisions, especially with what to do with your money.

Mike Key

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Re: Order of Operations
« Reply #10 on: February 14, 2012, 11:52:17 AM »
Ah I see.  So if I started investing in an index fund with $5K, and then a few months later had a $3K emergency, I'd just yank the $3k from my investment acct (btw - there aren't generally any penalties for withdrawals beyond what you may have lost over that period, correct?) and then start re-building my investment again.  It's really as easy as that?

Assuming you don't loose it.

lazydragon

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Re: Order of Operations
« Reply #11 on: February 14, 2012, 11:57:04 AM »
From what I understand, the emergency fund is literally for something you need right now, as in, you don't have time to pull your money from your investments to get it out in time to pay for the emergency.
After using the credit, you take whatever you need out of your investment savings and pay off the balance by the end of the first month (as in, before interest is accrued). Usually it takes a few days to get the money to you which is why you need the credit.

If my line of thought is wrong, someone please correct it.
This is essentially how I have always used my emergency credit line in the past.  It helps to have some 'liquider' type investments around too that don't have excessive fees / lost opportunity costs from cashing them out to do this though.  You don't want to be selling a deferred sales charge mutual fund to pay for a new car! 

In response to mikekey's concern about losing your rainy-day fund, you can mitigate that by having your 'first-tier' savings/investments be in more secure vehicles based on your risk tolerance.  Personally I have some raw dividend "safe" stocks that I use for this purpose, but I could see someone taking a less risky approach like money-market funds (guaranteed principle, variable return).  Cash/savings account is also totally valid imo, as that only has the constant inflation-loss in it, but has zero risk.

It kind of depends on what your rainy-day fund is for I think.  If you're worried about cancer, you want to investigate disability insurance, not a "cash cushion".  I was thinking more along the lines of a one-time, big-bill because something broke that needs to be fixed *now*.  That's what short-term debt is for (sure it's paying interest but the key is its only short-term), to bridge you until you can pay for it more sanely. 



« Last Edit: February 14, 2012, 12:07:06 PM by lazydragon »

palvar

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Re: Order of Operations
« Reply #12 on: February 14, 2012, 12:00:28 PM »
Am I the only one who thinks credit lines for emergencies is a stupid idea?

I don't however understand why anyone would think that putting $3,000 on a card is better than having $3,000 laying around. On a credit card interest is working against you. In the bank it's working for you. Even if the savings is horrible as is the case with most US banks. (Foreign banks give rates as high as 13.4% FYI)

To your first question: no.  There is a lot of debate as to whether having an emergency fund is worthwhile.

However, to your second point.  No one here is talking about using a 22% interest rate credit card for an emergency fund.  We're talking about a 5% home equity line of credit.  Savings rates on regular, liquid bank accounts are around 1%.  If we assume index funds are making 5%, then you are paying 4% interest for the liquidity of your bank account.

In my opinion, it would be better to put your savings in an index fund and use the line of credit for a short term emergency.  The debt you are paying is balanced off by the index fund returns.

Mrs MM

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Re: Order of Operations
« Reply #13 on: February 14, 2012, 12:02:54 PM »
Just to clarify, our "emergency fund" is our Line of Credit on our House (not credit card), which amounts to plenty.  We can write a check from here anytime, just like a normal check.  We've used it in the past for paying a hefty IRS tax bill, for example, since we didn't have the cash in our bank account.  We've also used it to make investments on real estate.

Not everyone has a line of credit on their house.  If for some reason, you can't get one, then having an emergency fund might be a good idea.  At one point, when our line of credit was maxed out, MMM and I agreed to save about $5,000 in an easy to access spot (in our case this was a Vanguard money market fund) just in case.

But, knowing your finances and your own personal situation and being prepared in advance is the best idea.  :)

Mike Key

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Re: Order of Operations
« Reply #14 on: February 14, 2012, 12:06:53 PM »
Ahh... I never ever considered using an index fund in that form before. That makes sense. We currently do not own, because we moved from one city to a cheaper city to pursue a new job for my wife. We left in such a hurry there was no time to come here and do house hunting. So for us, the liquidity is a necessity. But using your home is a great option. Thanks for clarifying that Mrs. MM.

truboyblue

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Re: Order of Operations
« Reply #15 on: February 14, 2012, 12:49:45 PM »
In my opinion, it would be better to put your savings in an index fund and use the line of credit for a short term emergency.  The debt you are paying is balanced off by the index fund returns.

So is this a practical application or a more abstract perspective?  By which I mean, do you literally withdraw $$ from your index fund to pay off your HELOC balance asap (and if so what is involved in this process, as I hope to soon enter this world of passive investment), or do you just view this as a balance of asset allocation, where the index fund gains are offsetting the HELOC loss?

palvar

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Re: Order of Operations
« Reply #16 on: February 14, 2012, 12:55:48 PM »
So is this a practical application or a more abstract perspective?  By which I mean, do you literally withdraw $$ from your index fund to pay off your HELOC balance asap (and if so what is involved in this process, as I hope to soon enter this world of passive investment), or do you just view this as a balance of asset allocation, where the index fund gains are offsetting the HELOC loss?

The latter, I see it as balancing my assets.  I've been able to pay down my HELOC with my income, so I haven't been in the situation of needing to use passive income to pay it down.

Mrs MM

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Re: Order of Operations
« Reply #17 on: February 14, 2012, 01:08:23 PM »
Ahh... I never ever considered using an index fund in that form before. That makes sense. We currently do not own, because we moved from one city to a cheaper city to pursue a new job for my wife. We left in such a hurry there was no time to come here and do house hunting. So for us, the liquidity is a necessity. But using your home is a great option. Thanks for clarifying that Mrs. MM.

Oh good - I'm glad I was able to clarify.  Both the line of credit on the house and the money market fund are liquid.  In both cases, we can write a check from the account.  We consider index funds long term investments and those are not usually touched (except in the case of the "Big Mistake" where we didn't have much choice).  :)

foodguy

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Re: Order of Operations
« Reply #18 on: February 14, 2012, 05:06:51 PM »
Am I the only one who thinks credit lines for emergencies is a stupid idea?


$1,000 is fine for your emergency fund...

I agree that credit lines aren't the best vehicle for emergency savings.  You are going to pay the cost for this emergency savings one way or another.  Either via reduced interest rates to have immediate access to the funds, or via interest payments when you tap your line of credit.

Keep in mind that when it rains, it pours. Because of this I have a very hefty emergency savings that I'm quite content earning less than 2% interest.  It is in varying forms of liquidity, with about half tied in a longer term CD (check Ally's CD terms for penalties and you'll find that they are quite favorable if you need to cash in early), half in an online savings account, and a small amount in a local bank that I can access immediately via ATM if needed.

If this emergency money came from a HELOC and it pours rain, I'd get stuck with a loan on my house on top of my mortgage that I potentially could not pay (loss of job, disability, etc).  Getting rid of the house while simultaneously reducing my equity wouldn't seem very prudent and would make me have to take less of an offer on the house, etc.  By having emergency funds in a savings account, I delay the issue of not being able to put a roof over my head should the rain come.

If this emergency money were invested in the stock market, during a recession I could lose my job AND be forced to tap this savings when the markets were down.  As anyone knows, stocks are a more risky investment and subject to long term periods of dismal growth (see the past 3 years, minus anything in 2012).

Overall, having a large sum of money in a savings account paying a paltry rate seems unexciting, isn't worth of watercooler talk at the office, and maybe even antimustachian.  However, it allows me to sleep well knowing that if Murphy shows up with a broken dishwasher, broken air conditioner, a flood, a new baby, and a broken car this week I'm ready to go.  And I won't risk my long term success because of these unforseen events.

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Re: Order of Operations
« Reply #19 on: February 14, 2012, 05:32:12 PM »
I'm not a fan of the big emergency fund. People are worried about having to pay interest on it if they use it, but (a) that interest rate is low (b) you're only paying it if you use it (c) you're gonna pay it off as fast as you can and (d) many of us on here have other debts, like mortgages, on which we're paying interest. So in my case the choice is to pay down my 3% mortgage and pull money out of my 3.5% HELOC if (and only if) I need it, or keep my mortgage balance high and let 10K collect 1% in the bank. Obviously the first works better for me.

Foodguy, if a new baby is an "unforeseen event", it's time for the talk...

truboyblue

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Re: Order of Operations
« Reply #20 on: February 14, 2012, 05:50:17 PM »
If this emergency money were invested in the stock market, during a recession I could lose my job AND be forced to tap this savings when the markets were down.  As anyone knows, stocks are a more risky investment and subject to long term periods of dismal growth (see the past 3 years, minus anything in 2012).

I'm curious about others' opinions of this - especially those (MMM and others) who can show a case study of how their assets performed during the downturn, and how that did/didn't affect their personal finance practices.  For any potential new/naive investor in the market, this is probably the number one fear/concern - that a minor or major economic crisis will strike not long after entering the market, or that market trends will suddenly no longer adhere to historical patterns.  I don't necessarily ascribe to this fear b/c I would never immediately throw all of my necessary/emergency liquid assets into aggressively random stocks (hence the appeal of index funds and money market funds, from what I've read so far); but this feeling is visceral and real and will keep a newbie from rational scrutiny.  Since we have a great/tragic upheaval in the market in extremely recent history, I'd really like to hear any perspectives from investors about how they accommodated around this time.

teresa

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Re: Order of Operations
« Reply #21 on: February 14, 2012, 07:20:57 PM »
Am I the only one who thinks credit lines for emergencies is a stupid idea?


$1,000 is fine for your emergency fund...

I agree that credit lines aren't the best vehicle for emergency savings.  You are going to pay the cost for this emergency savings one way or another.  Either via reduced interest rates to have immediate access to the funds, or via interest payments when you tap your line of credit.

Keep in mind that when it rains, it pours. Because of this I have a very hefty emergency savings that I'm quite content earning less than 2% interest.  It is in varying forms of liquidity, with about half tied in a longer term CD (check Ally's CD terms for penalties and you'll find that they are quite favorable if you need to cash in early), half in an online savings account, and a small amount in a local bank that I can access immediately via ATM if needed.

If this emergency money came from a HELOC and it pours rain, I'd get stuck with a loan on my house on top of my mortgage that I potentially could not pay (loss of job, disability, etc).  Getting rid of the house while simultaneously reducing my equity wouldn't seem very prudent and would make me have to take less of an offer on the house, etc.  By having emergency funds in a savings account, I delay the issue of not being able to put a roof over my head should the rain come.

If this emergency money were invested in the stock market, during a recession I could lose my job AND be forced to tap this savings when the markets were down.  As anyone knows, stocks are a more risky investment and subject to long term periods of dismal growth (see the past 3 years, minus anything in 2012).

Overall, having a large sum of money in a savings account paying a paltry rate seems unexciting, isn't worth of watercooler talk at the office, and maybe even antimustachian.  However, it allows me to sleep well knowing that if Murphy shows up with a broken dishwasher, broken air conditioner, a flood, a new baby, and a broken car this week I'm ready to go.  And I won't risk my long term success because of these unforseen events.

I agree about the HELOC.  It would be my humble guess there are a lot of people facing foreclosure/bankruptcy wishing they had not used their house like an ATM machine.  I think that the Mustache family's scenario is a bit different than the average situation in that they could liquidate their long-term investments if things really hit the fan so to speak.  To me it sounds like using the HELOC is done more out of convenience than necessity as they have cash to cover the debt if absolutely necessary.

In our situation (and our situations sound strikingly similar except we have $14k in student loans and $134k mortgage debt and two 11 year old vehicles) we plan to have an emergency savings set to a predetermined rate (less than you have, but we are almost there) and then we plan to descend on the student loan like locusts on a field.  One poster said that student loan debt is unsecured, but a student loan is really like a disease you can never get rid of (short of dying) unless you pay it off.  As it stands now, student loans are not dis-chargeable in bankruptcy.

Next, we plan on attacking the mortgage regardless of whether we plan to stay here the rest of our lives.  A paid for home would give us flexibility and freedom and having a little bit of land to grow food and a place to hang my hat is a very comforting idea.

As for the dishwasher, I think we might just let the broken one hang out and wash dishes by hand.  I like the idea of being less dependent on machines and Paul Wheaton on the permies forums makes a pretty good case that washing dishes by hand is more eco friendly too.

Just my two cents, but it looks like you are on a great path and wish you all the best!

foodguy

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Re: Order of Operations
« Reply #22 on: February 15, 2012, 09:16:47 AM »
I don't necessarily ascribe to this fear b/c I would never immediately throw all of my necessary/emergency liquid assets into aggressively random stocks (hence the appeal of index funds and money market funds, from what I've read so far)

Index funds and money market funds are two completely different balls of wax, the former being more aggressive than the latter.  Don't think that just because you are in an "index fund" that you are abating risk.  Certainly S&P 500 index funds aren't as risky as an emerging market index or even small cap index, but stocks are stocks, and carry a significantly larger amount of risk than money markets.

In my world, none of my dollars labelled for an emergency sit anywhere near stocks.  YMMV.

StaceStache

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Re: Order of Operations
« Reply #23 on: February 15, 2012, 02:03:23 PM »
Overall, having a large sum of money in a savings account paying a paltry rate seems unexciting, isn't worth of watercooler talk at the office, and maybe even antimustachian.  However, it allows me to sleep well knowing that if Murphy shows up with a broken dishwasher, broken air conditioner, a flood, a new baby, and a broken car this week I'm ready to go.  And I won't risk my long term success because of these unforseen events.

I feel the same way. I do understand where MMM is coming from (and many other commenters on this thread) about not needing a huge emergency fund, but just for me personally I like at least having a small emergency cushion that is in cash savings. (The cash cushion I keep is 5K, nice even number!) I realize I'm foregoing a better return on my investment, but for me, that 5K mitigates the risk I'm taking in my other investment pursuits- enough for me to be worry-free in my day-to-day living!

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Re: Order of Operations
« Reply #24 on: February 15, 2012, 02:18:55 PM »
I think it depends on your situation.  For us, a HELOC works great since we can pay it back quickly, the interest rate is low, and we don't really have emergency situations arise very often.  We've always had one (even when we had a mortgage) and only used it when needed.  If you know that you'll get in trouble with a HELOC, then this might not be the best choice, but it also means that you may want to tackle your weaknesses as well.  :)

MacGyverIt

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Re: Order of Operations
« Reply #25 on: February 15, 2012, 07:27:57 PM »
Ahh... I never ever considered using an index fund in that form before.
Hey Mikekey just wanted to make sure you were clear on Mrs MM's fund type:

At one point, when our line of credit was maxed out, MMM and I agreed to save about $5,000 in an easy to access spot (in our case this was a Vanguard money market fund) just in case.

astadt

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Re: Order of Operations
« Reply #26 on: February 16, 2012, 12:08:06 AM »
This might be a really dumb question... But dont you open yourself up to Short Term Capital Gains tax issues when you utilize your investments as a way to pay for a Line of Credit loan?

arebelspy

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Re: Order of Operations
« Reply #27 on: February 16, 2012, 07:59:32 AM »
This might be a really dumb question... But dont you open yourself up to Short Term Capital Gains tax issues when you utilize your investments as a way to pay for a Line of Credit loan?

Potentially, sure.  But you could always just sell something that you've had for longer than a year for LTCG.

In any case, it's only for very rare emergencies.

I've never had an emergency that actually required tapping an emergency fund.  I have trouble picturing what that is.

But good to have a backup plan in case something does happen.
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Re: Order of Operations
« Reply #28 on: February 16, 2012, 09:13:39 PM »
Ahh... I never ever considered using an index fund in that form before.
Hey Mikekey just wanted to make sure you were clear on Mrs MM's fund type:

At one point, when our line of credit was maxed out, MMM and I agreed to save about $5,000 in an easy to access spot (in our case this was a Vanguard money market fund) just in case.

Yeah, I realized later on that I mistyped. Brain fart moment. But I did notice it was in a Money Market.