1. Welcome any suggestions for savings/spending reductions
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In no particular order:
Current expenses:
- Cell = 100/month - You already know this is too high. Republic Wireless would be a good way to bring this down by at least half.
- Grocery = 500/month - Within reason for a family of 4, but you could get this down by trying to increase your consumption of cheap staples like rice and beans and learning how to season them well. That savings could be cancelled out by eating at home more because...
- Dining out = 300/month - You can easily cut this in half, if not more. Lots of bang for your buck here. Try to get this down to $100.
- Gas = 300/month - You take the bus to work but still manage $300/month on gas? This is shockingly high given your commuting situation. I feel like there's at least $100 of savings here
- Misc (entertainment) = 400/month - Seconded what another poster said - find cheaper forms of entertainment. This is incredibly high - at least drive this down to $100.
- Cleaning = 90/month - You mentioned this is non-negotiable, but I still need to call it out ;)
Total Savings = $650/month, or ~$200k smaller stash needed to maintain
- Honda Odyssey – 11,000
- F150 – 6,000
Cars are more expenses than they are assets. Productive assets appreciate. Vehicles depreciate. Consider ditching the van. You don't need a van for a family of 4. It's probably a good chunk of your gas expenses, not to mention massive depreciation costs.
2. Welcome any thoughts on investment/debt strategy (pay off house first, ect..)
Liabilities:
- House 190K – 3.88%
You could possibly get a low-cost or no-cost refi into a 10 or 15 year loan for lower than 3.88%. Have you considered doing so? Even better, read below my thoughts on refinancing to an ARM and paying it down quickly before the rate adjusts.
On the investing side, I would say that maxing a 401k/traditional IRAs (if you're within the range where IRAs are deductible, Roth otherwise) is a priority, especially in your income range. Any money you can move out of the 25% bracket and into future 0%, 10%, and 15% brackets is a big deal.
You're probably not eligible for traditional IRAs, based on $129k gross and the phaseout of the IRA deduction beginning at AGI of $98k for 2015 ($18k deduction from the 401k only gets you down to $111k).
Here's my thoughts on investing vs. paying off the house:
- In the current low-interest-rate, high valuation environment, 3.88% guaranteed return is fantastic, so paying off the mortgage makes a lot of sense once you've maxed your 401k (savings on taxes in the 25% bracket are amazing on their own).
- With interest rates as low as they are, normally I wouldn't yell at you about your high tax withholding. If you could be forcing savings by plowing this into the mortgage, however, this is foolish. Do some calculations and adjust your withholding appropriately.
- Once you look at what your monthly take-home would be like after spending cuts and adjusting withholding, look at how quickly you could pay off the mortgage.
- If you can repay it in close to 5-7 years, consider refinancing to a 5/1 or 3/1 ARM (preferably with low closing costs). The bank through whom I have my mortgage has a 3/1 ARM with $295 closing costs for a rate of 2.34%. If you're diligent about paying your mortgage quickly, by the time the rate increases start coming along, your balance is so low that they don't actually affect you that much. If you're not diligent about paying your mortgage quickly, you could get hammered when rates adjust. Be aware of that risk.
If you have more information on your state taxes, local taxes, itemized deductions and what kinds of insurance payroll deductions you have, I could give you a decent idea of what your income looks like in multiple scenarios.
Based on some assumptions that make calculations easier for me (max 401k, Ohio state taxes since that's where I live, no local/city income tax, max an HSA, ~$1k in payroll deductions for insurance, assuming standard deduction), I've got you looking at around $6,900/month net.
Based on your expenses of around $4k, and assuming you're able to reduce them by $650 as demonstrated above (which I think is very doable), that means you have an extra $3550 to pay towards mortgage principal. Assuming your current $1,450 mortgage payment includes about $300/month for escrowed property tax, that means you could afford a Principal + Interest payment of around $4,700 (so Principal. Interest, Taxes of $5k).
If you refi to a 3/1 ARM and DILIGENTLY pay a total of $5k/month, you'll have in those 3 years paid a total of $7,758.93 in interest, which is almost exactly the same amount you'd pay in ONE year at 3.88% paying the minimum on a 30-year mortgage. Massive, massive interest savings. And at the end of those 3 years, your balance would be down to $28,558.93, so even if your rate goes up to 4.3% (usually there are adjustment caps per year on ARMs), it's on such a small balance that it's no big deal! You'll have it paid off within the next year anyway at that point.
Once your mortgage is paid off, your expenses are drastically lowered again. You're down to $3996 - $650 (spending reduction) - $1450 (no more mortgage) + $300 (you still have property tax though) = $2,196. Then you just need a $658,800 stash to support that. At that point, dedicate your time to what you're passionate about - work on your rental business. You'll only need than $30k/year to live off of, so even if you don't make a ton of money with your rental business, it's OK. You can let your 401k sit around and grow to be your "old man" fund, or you can tap it early with a 72(t) distribution to provide a little bit of help (though it looks like it probably wouldn't be enough to fully support you). If your wife works too and you're able to pay off the mortgage even more quickly or save some in a Roth with her wages, all the better!
