Reader case study - what to pay off first?

[sveta1985]

Hello,

Thanks in advance for reading and for your input. I'll do my best to outline details per the guidelines I found here.

I recently sold my primary residence and I'm not sure what to do with the proceeds.

Assets:

• $22,000 in savings (emergency fund)
• $98,000 in cash from the sale of my house last month
• Annual income $135,000 in California
• No retirement accounts, or 401k or anything like that
• 9000 shares of the company I work for; company is public and stock trades just above $12 right now
• 2013 bmw, paid off, worth about $29,000

Liabilities:

• I owe $41,000 on a condo. The property is an investment and a tenant lives in it. He pays me $1,000 in rent. Mortgage, taxes and HOA total is $633. Interest rate on the loan is 5.67%. The condo is worth about $140,000 in today's market.
• I owe $193,000 on a second condo. The property is NOT an investment. My mother lives in it and she will live there for theforeseeable future. Mortgage, taxes and HOA is $1,800. Interest is 4.6% and the property is valued at $300,000.

I put away (into savings) about $5,000 per quarter ($20,000 annually).

My question is as follows: I have no idea how to set myself up for long term success and retirement. I would like your input on where to start. I am thinking about paying off the first condo (where I owe $41,000) but I don't know whether this is the right thing to do. I don't know where to invest the rest. It's very likely I will buy a house with my fiance in the next 2 years and will probably need about $50,000 in cash at that point. I've always kept my money in savings and have never invested, opened a 401k or invested in any vanguard type accounts (in fact I don't really understand what those are beyond reading through these forums). Long term: we would like to retire in the next 20 years with an annual recurring income around $6,000/month.

Thanks in advance for your help.

[MDM]

sveta1985, welcome.

You should start contributing $17,500/yr to your 401k tomorrow.  No reason to wait.  Call your HR department if you need help signing up.

Then go to https://personal.vanguard.com/us/JSP/RegLogOn/Regis/RegActivityContent.jsf and register for a Vanguard account.  After that is established, see https://personal.vanguard.com/us/help/guide-to-your-account.jsp and "Link a bank account to your Vanguard accounts for the easiest way to move money between accounts."  This will take a few days, but you've waited this long....  After you have linked your checking account to Vanguard, set up a Roth IRA (the Vanguard site will help you) and invest $5500 into whatever you want (https://personal.vanguard.com/us/funds/snapshot?FundId=1691&FundIntExt=INT is one defensible choice).

You could argue "paying off the first condo" either way.  For a 5.67% return (ignoring taxes), I'd say "pay it off".  You can do that while waiting for your Vanguard account to link to your checking account.

If you get that far, you'll have learned a few things along the way and the folks here can help with "round 2".  And if any of the above doesn't make sense, just ask.

[Thedudeabides]

You'll need to contribute at least $8k this year to get your AGI down to the $127k limit for ROTH contribution. I would personally do whatever I could to max out that contribution this year for the full amount.

You may want to consider selling some of your employers stock so you can diversify. This is significant amount of your NW in one portfolio. Getting more diversification would be a good thing IMHO. Are these RSUs? ESPP? ISO?

[Chrissy]

You're on the right track!  $41,000 to the condo.  $51,500 into bank CDs for the house down payment.  Get as much as you possibly can into the company 401k for 2014--$17,500 is the max allowed in a year.  This will put your income under the limit to contribute to a ROTH, but probably too much to contribute the maximum.  I'd have the max ready to go just in case --$5,500--though it'll probably be closer to $3,000-$3,500.

http://www.rothira.com/roth-ira-limits

Every year from here on out should be $17,500 in the 401k, as much as you're allowed in the ROTH, and any additional to a regular investment account.  Don't put any extra toward your mother's condo, because the interest rate on the mortgage is low enough, you'll get a better return putting anything extra in stocks.

Do some research on this site and others about specific funds to purchase.  If you want your stash to generate $6,000/mo in retirement, saving $20,000/yr is just about right (I'd suggest a couple thousand more if you can) you just need to get it invested.

It seems like an HSA might also be helpful to you, but since I don't have access to one myself, I'll let someone else chime in about them.

[WiseGuy]

Hello,

Thanks in advance for reading and for your input. I'll do my best to outline details per the guidelines I found here.

I recently sold my primary residence and I'm not sure what to do with the proceeds.

Assets:

• $22,000 in savings (emergency fund)
• $98,000 in cash from the sale of my house last month
• Annual income $135,000 in California
• No retirement accounts, or 401k or anything like that
• 9000 shares of the company I work for; company is public and stock trades just above $12 right now
• 2013 bmw, paid off, worth about $29,000

Liabilities:

• I owe $41,000 on a condo. The property is an investment and a tenant lives in it. He pays me $1,000 in rent. Mortgage, taxes and HOA total is $633. Interest rate on the loan is 5.67%. The condo is worth about $140,000 in today's market.
• I owe $193,000 on a second condo. The property is NOT an investment. My mother lives in it and she will live there for theforeseeable future. Mortgage, taxes and HOA is $1,800. Interest is 4.6% and the property is valued at $300,000.

I put away (into savings) about $5,000 per quarter ($20,000 annually).

My question is as follows: I have no idea how to set myself up for long term success and retirement. I would like your input on where to start. I am thinking about paying off the first condo (where I owe $41,000) but I don't know whether this is the right thing to do. I don't know where to invest the rest. It's very likely I will buy a house with my fiance in the next 2 years and will probably need about $50,000 in cash at that point. I've always kept my money in savings and have never invested, opened a 401k or invested in any vanguard type accounts (in fact I don't really understand what those are beyond reading through these forums). Long term: we would like to retire in the next 20 years with an annual recurring income around $6,000/month.

Thanks in advance for your help.

First, I'd consider your condo (first one) as an asset rather than a liability because first you have equity in it and second it's a cash-flowing property (income generating).  If the condo is in a good area with potential for rising incomes (which will affect rents positively), then it might be a good asset to hold... Also if you don't mind managing it.

Second, it looks like you've got about $100k from the sale of your house to invest.  Most here would suggest putting it into an index fund at Vanguard.  Or a mix of a stock index fund and a bond index fund, depending on your age and risk tolerance.  I personally have my investments spread out in real estate, a few individual stocks, and my business... but that's my personal choice since I have background in business/investing.