Case Study: Where to Stash our Cash?

[hoyahoyasaxa]

My wife and I are currently saving about $2500 per month and we're wondering what we should be doing with it as we seem to have some competing priorities and I wanted to see what some Mustachians felt about where the $ should be going.  Below is our situation:

I'm 28 and she's 27.  I'm a Director of Operations for a University department and make $60k per year ($3500 take home per month).  My wife manages the collection for a museum and takes home $36k per year ($2000 take home per month).  I've been in the workforce for nearly six years while she's been in it for just two.  We live in a one-bedroom apartment in Queens, NY but would like to move to my wife's hometown in Rockland County, NY (she has a large family who live close to one another and we want to raise our kids in that environment) in the next couple years and plan to start having kids in the next year or two.

Monthly Income: $5500 take home per month combined
Monthly Expenses: $3000 per month including $1550 for rent.

Current assets:

$4200 in a joint checking account
$42,000 in a joint savings account
$31,000 in CD's (Maturity date: 10/24/2016) at 2.0%.
$27,000 in my Roth IRA (65% stock index, 25% bond index, 10% REIT)
$5,500 in my wife's Roth IRA (2040 Target Date fund)
$1,800 in my wife's 403b (2050 Target Date fund)
$5,500 in my Lending Club account
$3,175 in savings bonds (these are my wife's)
~$5,000 2001 Jeep Cherokee Sport

Current liabilities:

$37,000 left on my wife's student loan at 0% (my wife's parents bought this out and we have been paying them back at $400 per month - they are in their early 50's, financially independent and have made it clear that we can take 20 years to pay them back if we want, but of course we'd like to get it done much sooner than that :-)

Questions:

- The low end of the houses we're looking at right now (3br/2ba, 2000 sq. ft.) are about $350k which would be about a $70k down payment with a monthly payment around $1700 or so.  Should we be piling up as much cash as we can right now to save for this down payment, beefing up our retirement funds, or upping our monthly payments to my wife's parents on the loan?  Basically, we don't know what the right balance is of what we should be putting our monthly savings towards.

- We had put $30,000 in CD's 2 years ago thinking that we might be in a house right now and wanted to place it in a secure short-term place that would get us some interest, as well.  Were we right in doing this?  Should we be cashing these out (the withdrawal penalty with Ally is very small) and putting it somewhere else instead?

- At some point, I'd like to buy a rental property for some passive income but I'm just starting out reading some books and the BiggerPockets forums and feel like given the other priorities (home, kids, more $ in the retirement funds, paying off the loan) that this should be put on the back-burner because we don't have the cash for it right now.  Am I wrong?

- Any other thoughts on our situation and what we should be doing with our $?

[Mr Mark]

Great situation. But way too much cash IMHO.

What about buying a cheaper place now?

[sheepstache]

I wouldn't cash out the CDs myself but that's a  totally personal thing.  2% is nice to have locked in, however I would be more aggressive in some other area to make up for it. 

Do you actually have a plan for moving?  If you moved to Rockland County,  how would that affect your jobs?  Your cost of living including commuting?

What if you bought a place in Queens to live now and then kept that as the rental property?

Again a personal thing, but I would be maxing out your Roths if you aren't already.

[SunshineGirl]

Do you want to move there before you have kids? (It would make sense if your purpose is to be closer to family, because when the babies are small, all help is appreciated!)

If so, then it looks to me like you already have $70K in safe, liquid accounts -- but just barely -- and I would NOT invest in anything else. A five percent loss would mean you don't have enough to buy the house. I would keep it liquid if you plan to move/buy in the next 1-2 years. Sure, the upside has better potential for appreciation, but even a five percent loss, which is entirely possible, represents money you need for the downpayment.

Also, as best as possible, try to figure out your expenses after moving.

[Mr Mark]

...
If so, then it looks to me like you already have $70K in safe, liquid accounts -- but just barely -- and I would NOT invest in anything else. A five percent loss would mean you don't have enough to buy the house. I would keep it liquid if you plan to move/buy in the next 1-2 years. Sure, the upside has better potential for appreciation, but even a five percent loss, which is entirely possible, represents money you need for the downpayment.
...

I disagree. This is market timing. This is just next to 'keep it in your mattress'.  Meanwhile, house price inflation could leave them further behind.

If the bull market continues, 70k over a couple of years could be over 90k++.  Vanguard mutual funds are pretty damn liquid.

[Fletch]

RE: future rental

If it is possible to get up to $70k for the down payment outside of the CD, which seems reasonable over a 2 year time frame, I wouldn't touch the CD for that. I would save that for a) any nasty surprises like a new roof in the new house or, god forbid, medical complications with pregnancy/birth in your first year, and b) if nothing happens in a year or so you are well on your way towards buying/fixing up a rental.

 But that is personal preference, it just seems like home ownership, a new family, and moving is a lot of life changes all at once and I would sleep better at night knowing I had enough money somewhere risk-free to handle any problems that came up while I was figuring all that out.

[hoyahoyasaxa]

Some responses to the questions posed:

Sheepstache - Our plan for moving is a bit up in the air.  We just signed a lease for one more year in our apartment that lasts through the end of August 2014.  We'd like to be in a house up there when the first child comes, but it's not vital - if we really can't afford it, we can stay and keep paying rent in Queens for a few more years and raise a baby there for a little while. 

I feel like money will be an issue once we move up to the Upper Bergen/Lower Rockland area.  I think we'd absolutely have to find jobs closer to home because the commuting costs to the city would be enormous ($283 per person per month on NJ Transit not to mention any subway/PATH train costs).  If my wife decides that she wants to stay home with the kid(s), we'll be living on just my salary ($3500 take home right now) and if she wants to keep working (in which case we'll have $5500 take home), we'll be paying out probably more than $1000 for daycare per month.

With regards to buying a place to live in Queens now, that's an option, I suppose, but is it worth it to put a sizable down payment on a place where we don't plan to live long term (and thus deprive ourselves of that down payment money for a place where we DO want to live?)

Fletch - I think you're point is well taken in terms of leaving the CD alone for any surprises - do you or others have a suggestion about where we should be putting our savings now outside of a CD to get to a $70k down payment over a two year period?  I'm fine with maxing out my Roth and that's something both my wife and I are going to do.  But the university at which I work doesn't give you a 401k until you've been there a year (I've been here a month).

[brewer12345]

I feel like money will be an issue once we move up to the Upper Bergen/Lower Rockland area.  I think we'd absolutely have to find jobs closer to home because the commuting costs to the city would be enormous ($283 per person per month on NJ Transit not to mention any subway/PATH train costs).  If my wife decides that she wants to stay home with the kid(s), we'll be living on just my salary ($3500 take home right now) and if she wants to keep working (in which case we'll have $5500 take home), we'll be paying out probably more than $1000 for daycare per month.

You are right to be concerned.  I made the move from Queens to Monmouth County in 2002 and was faced with massive (and increasing) real estate taxes, huge commute costs, etc.  If you can swing it, try to suss out a local job opportunity when you are ready to make the move and revisit the idea of your wife working at a day job once the baby is there.  Between saving dacare costs and a side gig, she might be able to equal what she would have made after tax at a job without a lot of hassle.

[hoyahoyasaxa]

I feel like I'm getting away from my point a little bit, though.  We have quite a bit sitting in cash right now.  Given that I only have a Roth IRA (because the university at which I work doesn't provide a retirement plan until you've worked for a full year) and will still have quite a bit in cash after both my wife and I fund our Roths, what else can be done with the money that is just sitting in liquid and not accumulating any interest or market value?

[matchewed]

The answer to your question depends on your time frame. You need to narrow down on your future plan. Sure be flexible but be more accurate about it when planning the details like where to stow your money.

High yield savings is the safest for short term cash. CD's are also safe but locks it up with as you said minimal penalties but when you're only earning a percentage point any fees/penalties are defeating the point. If you don't need the money for many years (long term cash) then invest it IMO.

If you're savings goal is under or around the two years then a savings account is best IMO. It all depends on your risk tolerance and your liquidity needs.

[Fletch]

Investments have (generally) 3 qualities:
-risk
-liquidity
-return

which leaves you with 2 degrees of freedom. Meaning, if you decide that low risk and high liquidity are important to you, you are stuck with low returns in a savings account or CD. If you decide that you want high returns and high risk, you probably won't have liquidity (i.e. real estate, or stocks have periods of low liquidity when they cost less than you paid and you don't want to take a loss). Etc, etc.
I would imagine you don't want to risk your principle and it is important that you be able to access the intact principle within the next two years, so savings account or CDs are probably the best options for those requirements.

[sheepstache]

Ah, I only suggested the Queens thing because I assumed you'd still be working in the city, and therefore it would be convenient to check on the property.  I am one of those terrible new yorkers who has only the vaguest of ideas of geography outside the city.

You need to honestly evaluate how much risk you want to take with the extra cash.  Obviously the Roths are giving you enough benefit (opportunity cost of not taking advantage of yearly limits plus tax advantages) that you are comfortable with taking risk there.  If you are saving up for a downpayment with the rest and so you do not want to take any risks with the money, that is okay.  That is perfectly fine.  Your being comfortable is what's important here, not what the general investing advice is.

What did you say you were looking at as a down payment, $70,000?  You have 42,000 already, so if you just keep putting your $2500 savings a month into the savings account, it will only take you a year to get there.  Maybe you will want to move as soon as your lease is up, in which case you're set.  If not, you can then switch your savings into riskier investments with no worries.  One year is not a huge sacrifice in terms of investment compounding. 

If it were me, once I was saving up to buy a rental property, at that point I would have no problem stashing that money into index funds or a vanguard life strategy fund or something because I fundamentally wouldn't be worried about losing it.