Reader Case Study - What to do with extra funds?

[PapaDoble]

I'm seeking advice on what to do with extra funds. Here are some relevant details:

Income: >= 4k / month take home

• 77k / year, contributing about 17k / year (22 %) of this to 401k.
• Take home pay after 401k contributions, taxes, benefits, etc.: about 4k / month.
• 10k / year typically comes in the form of a gift from a generous family member. I treat this money as a nice surprise.

Current expenses: <= 3k / month
I'm in the process of getting a good number for this, though honestly my plan is to start small with whatever I decide to do with any extra funds, and ramp it up until we hit an equilibrium, while simulatnaeously looking for areas to cut costs. The 3k / month figure I gave in the section title is, I think, conservative. Fixed expenses are:

• Mortgage: 1325 / month (190k fixed 15 year loan at 3.125%).
• Home insurance, property taxes, utilities, etc.: I just got this house***, so these numbers are not very well established at this point. A conservative estimate would be 550 / month.

*** I did not do this because I consider it a good investment. I simply weighed our options/costs versus renting in the short and long term, and decided in favor of buying.

Assets: 85k

• 37k in 401k/IRA.
• 4k in savings bonds I received as gifts over the years. Most are earning 4%.
• 26k in savings (this is post 25% down payment and closing/moving costs).
• 18k in the form of two cars (about 9k each). I'm strongly considering selling mine and biking to work since the house is < 10 miles from work.

Liabilities
No debt of any kind aside from the mortgage mentioned above.

Questions

• What would you do with extra savings each month, and any money from my family member? I know the interest rate on my mortgage is quite low, but being mortgage free with the resulting higher cash flow is extremely appealing to me. Perhaps a balanced approach would be to invest any monthly surplus of funds, and if the money from my family member comes through on a given year, throw that at the mortgage (in this scenario, the mortgage would be paid off in 8 years instead of 15)?
• For the portion that is invested, how would you invest it? Retirement (trad or roth IRA) or a non-retirement account? I am 29, by the way.
• Is our 26k + 4k (bonds) cash cushion too large / too small / just right? It seems large to me, but I suppose nailing down our expenses would help with this question. I'm married with a baby, so I'm more conservative here than I would be otherwise.
• Would you sell the second car? The savings in depreciation, insurance, and gas is quite attractive.

[LowER]

If you are a papa, especially if you're a double papa, 529 might not be a bad idea.

I'm assuming that you are maxing out all IRA possibilities, including spousal IRA.

If so, a taxable account at Vanguard might be another idea, maybe filling it with international index funds for a possible slight tax benefit.  That $10,000 gift will get you to admiral status for further savings; I think the ER is 0.05 right now.

If you hate debt, paying the mortgage off early might help you sleep but could cost you a tad in the long compared to sensible investing - though you can find many endless debates about this all over the internet with excellent arguments on both sides.

Just a few thoughts.  Many more will chime in soon.

Enjoy the extra funds!

[Exflyboy]

Well as one who remembers the HUGE relief of making that last mortgage payment less than 7 after I started (I paid at double rate) I am all for paying off the mortgage.

As said above you may make more money in the long run if you invest the extra in an Vanguard stock ETF.. But if the economy takes another downturn and you get laid off you could very easily loose your house and your ETF funds will also be in the toilet at the same time.

If you own that roof over your head you can almost gurantee you have somewhere to live and you don't have to run the heat either.

Bottom line I would save 6 months in expenses in cash then start paying the house on a monthly basis.. Any extra you get throw that in there as well.. I did this before I started making out my 401k so if it were me I pay in the minimum to get the full company match then burn down that mortgage as fast as possible.. going without food and hygene if necessary..:)

One caveat to this.. If the market takes a massive downturn.. like 30% or more on the stock market I would then revert to maxing out my 401K again using a Vanguard stock market ETF.. This assumes your job looks secure. Such a significant down turn will lead to doubling your money in a few years which is hard to ignore.

In fact a BIG reason I can afford to retire right now is because I paid the max into the 401k (plus other savings) during the down turn of 2008.

Frank

[PapaDoble]

If you are a papa, especially if you're a double papa, 529 might not be a bad idea.

I'm assuming that you are maxing out all IRA possibilities, including spousal IRA.

If so, a taxable account at Vanguard might be another idea, maybe filling it with international index funds for a possible slight tax benefit.  That $10,000 gift will get you to admiral status for further savings; I think the ER is 0.05 right now.

If you hate debt, paying the mortgage off early might help you sleep but could cost you a tad in the long compared to sensible investing - though you can find many endless debates about this all over the internet with excellent arguments on both sides.

Just a few thoughts.  Many more will chime in soon.

Enjoy the extra funds!

Yeah, I should have included 529 as an investment option. I haven't looked into these much yet but will soon.

I'm actually not contributing in any way to my IRA at the moment. The funds in my IRA are from 401k rollovers. The only contributions I'm making to investments is my 401k, which I am maxing out. I failed to mention that I get 3% from my employer, so 25% is going into my 401k right now.

I do hate debt, but I want to save myself from this tendency of mine. I have been laid off in the past, though, and while I was able to rebound fairly quickly, this experience has made minimizing required monthly expenses very desirable.

Well as one who remembers the HUGE relief of making that last mortgage payment less than 7 after I started (I paid at double rate) I am all for paying off the mortgage.

As said above you may make more money in the long run if you invest the extra in an Vanguard stock ETF.. But if the economy takes another downturn and you get laid off you could very easily loose your house and your ETF funds will also be in the toilet at the same time.

If you own that roof over your head you can almost gurantee you have somewhere to live and you don't have to run the heat either.

Bottom line I would save 6 months in expenses in cash then start paying the house on a monthly basis.. Any extra you get throw that in there as well.. I did this before I started making out my 401k so if it were me I pay in the minimum to get the full company match then burn down that mortgage as fast as possible.. going without food and hygene if necessary..:)

One caveat to this.. If the market takes a massive downturn.. like 30% or more on the stock market I would then revert to maxing out my 401K again using a Vanguard stock market ETF.. This assumes your job looks secure. Such a significant down turn will lead to doubling your money in a few years which is hard to ignore.

In fact a BIG reason I can afford to retire right now is because I paid the max into the 401k (plus other savings) during the down turn of 2008.

Frank

Yeah, as I said above, I have actually been laid off in the past, and this is one of my main motivators for aggressively paying off the mortgage. I should clarify that I still plan to keep my 401k at maximum contribution, and am simply deciding what to do with any extra funds after that. I should be able to get better returns than throwing extra money at my 3.125% mortgage, but I agree that there is real risk associated with being on the hook with a mortgage for, in my case, 15 years.