Recently hit stride in our careers. Help us get serious.

[401hey]

Over the last year my wife and I have both hit a good stride in our careers.

It's time to start getting more aggressive with our extra cash. The default up until this point has been to keep it around in a checking/savings account. Not optimal.

Advice? Mainly, pay off mortgage or invest or save up a down payment?

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The Stats:

Both age 26. Married. 

$75k wife + good benefits (401k match, bonus, etc.) Raise soon (10-20%).
$80k husband + no benefits.
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~$160k/year

After bills, 401k deduction, etc., we are left with ~$5,000 cash each month. Around 50% savings? Higher percentage if you include the 401k and IRA.

Last year, bought an apartment for $205k with 20% down.

Student loans are paid off (~$12k total from good state school). No other debt besides mortgage.

1994 car bought for $800 ~10 years ago, 25-30 MPG. Use on weekends. Walk and free bus to work :)

In general we live fairly frugally. Cook real food at home most nights. Buy and enjoy searching for used and high quality goods. No cable.

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The Stash:

$50k+ in cash.

$22k Roth IRA (2013 + 2014) in ETF.
401k (wife) ~$15k 2013 + being maxed for 2014.

$205k apartment bought last year. 20% down.
~$160k remaining. 5% interest rate on 30 year loan. Currently paying extra each month, which brings it to around 15 years.

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The 1BR apartment is a lovely old building in the middle of the city. Lease is somewhat stringent on rentals (live 3 years, rent 2 years). Would love to keep it forever as a "pied-à-terre", limited rental, closer bed for the grandparents, etc. Maybe this is stupid?

Would love to buy a house (garage + yard!) in 3-5 years. Price for area is likely $400k minimum to $700k+, which means a $80-140k down payment.

Kid(s) in 3-5 years as well.

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My question is mainly what to do with the cash.

Do we pay down the apartment mortgage? 5% interest rate on ~160k.

Buy ETFs from a brokerage account? I feel stupid for not doing this already, but it is just something I have never done. Getting the Roth IRAs set up last year was a big step.

Save cash for downpayment on a home? This is what we are doing by default, but I want to move away from this ASAP.

Whatever we choose, we're planning on immediately putting down a large chunk of our cash + setting up automatic monthly deductions going forward.

Any other thoughts are much appreciated! Thanks.

[The Happy Philosopher]

Sounds like you are in a great spot financially. My view has been evolving to the don't pay down your mortgage camp. The reason for this is liquidity. Once you pay money to the mortgage there is no sure fire way to get it back without selling. I would much rather have 50k in a taxable account earning around 5%/yr and a 50k higher mortgage at 5%. It just gives you way more flexibility in an emergency or in your case saving for a down payment. At 5% I would keep the mortgage and invest the rest making sure to max out iras (traditional given your tax bracket). If you are saving for a down payment I would keep that amount invested more conservatively.

Also I would make the mortgage an all or none payoff. If you pay 50k into it you have effectively eliminated your emergency fund and you still will have a monthly mortgage. In my view thus is just adding risk to your life for no real purpose.

Good luck!

[Thegoblinchief]

Why aren't you using a 401(k)? If self-employed, do a solo 401(k) or SEP IRA. You want to be as tax-efficient as possible. I don't know much in the way of details about these, but others can chime in.

I wouldn't hold so much in plain cash. Get at least some growth, with laddered CDs, bonds, etc. That's for the house down payment, if you truly want to sink that much money in property.

[401hey]

The company that I work for does not offer a 401k, and I'm not self employed (except for a small bit of side income).

[mozar]

My advice is wait until your kids are entering elementary school to move to a house with a yard. Kids in 5 years plus 7 years until oldest needs to go to a good school. That gives you 12 years. At 5000 invested (in index funds) a month in 12 years you will have almost a million dollars and you can retire.

[401hey]

My advice is wait until your kids are entering elementary school to move to a house with a yard. Kids in 5 years plus 7 years until oldest needs to go to a good school. That gives you 12 years. At 5000 invested (in index funds) a month in 12 years you will have almost a million dollars and you can retire.

Yeah, this is an option. The 1 bedroom apartment is a bit small for kids, but a crib in the main room (or etc.) would push the "need" for a bigger place further into the future.

[mxt0133]

I highly recommend keeping the 1 bedroom as long as possible even with kids.  There are 4 of us in a 1 bed room 650sf apartment in a very walkable neighborhood.  The limited space alone keeps our utilities low and possession at a minimum.  Even though I still feel we have too much stuff.

Things to consider when you have kids, will one parent stay home or will they be going to day care?  Either way your savings rate will be affected if your incomes don't significantly change.

You have a great opportunity right now to really grow your savings and accelerate your retirement, even if that's not your goal you will have more options available when you really need to move.

[plantingourpennies]

I know you just bought your place last year, but can you refi into a lower rate?  If you want to keep the place forever, it may still make a difference if you can snag a 15-year at 3.5% or even 4% even if you end up paying closing costs.  You can cover any extra out of pocket with your monthly excess and save a bundle in interest over the long term. 

Is there anything else you can max out that's tax advantaged?  Do you have a high deductible health plan with HSA?  If so, max out your HSA. 

We're to the point where we're maxing everything tax advantaged out and throwing the rest, ~$4-$5K/month into a taxable brokerage account at Vanguard.  We kept the mortgage on our primary residence, but got rid of all other investment debt first since the interest rates were higher.  5% would be borderline wanting to get rid of it for us, but YMMV. 

[401hey]

I know you just bought your place last year, but can you refi into a lower rate?  If you want to keep the place forever, it may still make a difference if you can snag a 15-year at 3.5% or even 4% even if you end up paying closing costs.  You can cover any extra out of pocket with your monthly excess and save a bundle in interest over the long term.

The building is a co-op, which unfortunately doesn't give you the same rates as buying a house/condo. Not as many lenders. I do regret not taking the 15 year for 4.5% (4.75%? can't remember) though. Not a huge deal, but yeah.

[401hey]

5% would be borderline wanting to get rid of it for us, but YMMV.

That is kind of what I am thinking as well. Maybe something like $20k now towards the apartment, and $20k towards investment/downpayment.