Author Topic: What should we do with savings moving forward?  (Read 2866 times)

GhostDog

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What should we do with savings moving forward?
« on: October 15, 2017, 11:34:59 AM »
I am a recent convert to Mustachianism. I am female, married, 39 years old, with one 7 year old son. My DH and I have been making financial changes over the past two months to try to take control of our financial lives, and are at a point where we are saving 35-40% of our income. We have quite a lot of debt, too, however.
Right now, we are maxing out the Simple IRA we get through work, which totals $25,000/year between us. I believe that we can save an additional $2,500/month or so (we do fee-for-service work, so are not salaried, and thus our income does vary somewhat month by month).
For now, I want to put that additional savings into an emergency fund. As DH and I work at the same agency, it concerns me that if anything were to ever happen to our place of work, wed be in trouble. So Id like at least a 4 month emergency fund saved (we have 1 month already saved).
My question is, once that is funded, do we put those monthly savings into paying down our debts, or invest them?
Heres some relevant information:
Combined gross salary: $200,000 (this does vary but is what we made 2016)
Assets: $53,000 in various retirement funds (old 403b, IRAs)
   Home valued at $470,000
   $18,000 cash
Liabilities: Loan on home $340,000 (4% interest)
Combined student loans $200,000 (yes, I know this is really bad) most at 3.75%, $21K is at 4.75%
Loan on Toyota Prius $8,500 at 0% interest
CC debt- none, thank goodness!

Id really love to be rid of the student loans, because they are a terrible weight on my shoulders, but DH points out that it makes more financial sense to invest given the low interest rates. Id really like some advice from MMMers, as I am really new to all of this. TIA!
P.S. We are not willing to move, as we love our home, our community, and the schools for our son with special needs. Id be happy to sell the Prius and buy something cheap, especially as we live close to work, but DH isnt on board with that (yet, Im working on it!).

Linea_Norway

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Re: What should we do with savings moving forward?
« Reply #1 on: October 15, 2017, 11:46:38 AM »
I think you should pay off the 4,75 loan as fast as possible.

Your home costs 4%, which is also the average percentage the stock market (index funds) makes over time of your withdraw inflation. So in theory it shouldn't matter whether you invest in index fund or pay iff your mortgage. Paying down your mortgage is a very safe investment, independent in the stock market swinging.

In general, Mustachian style, you pay off debt in order of highest interest rate. And you consider not paying back your mortgage if you pay a low interest on it. I think 4% is not so very low, but that is just my opinion, as in Norway we are down at 2,5% or so.

sokoloff

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Re: What should we do with savings moving forward?
« Reply #2 on: October 15, 2017, 12:14:41 PM »
It looks like you have closer to 2 months emergency fund in that $18K of cash rather than 1.

I'd pay off the high rate student loan first, possibly taking your savings beyond the tax advantaged savings vehicles you're using and applying half of it to the 4.75 student loan and half to the emergency fund build up. I'd then retire the lower rate student loans next, using a similar plan. (I don't like doing nothing extra on the loans while you build up the 4 month emergency fund, assuming you have about 2 months already, which it seems the math supports. I do think it's sensible to have a longer emergency fund due to the concentration of employment with a single employer.)

I wouldn't be in any hurry to pay off your mortgage, but I'd consider a refi for rate. If you don't refi, leave that to run nearly the normal full length. Once you retire your student loans (and by then, you will have the 4 month emergency fund built up), you could consider refinancing to a 15 year note and then pay that off by the normal term of the loan (no real need to pre-pay, IMO). At that point, turn the excess investing/savings towards VTSAX. You could also consider switching to a 7/1 or 10/1 ARM or a 15-year fixed and paying them off on a 15-year amortization schedule, even before paying off the student loans. That should get you a better rate, and if you pay the ARM on the 15 year schedule, you'll reduce your risk for the ARM. I don't know how you'd feel about that, nor what your credit is to know if you would save a substantial amount over the 4% fixed you have now.  (I'm seeing 3.25% on 15-year fixed conforming and 3% on 7/1 conforming ARMs. Both would be a pretty good savings over the 4% you're paying now.)

Bracken_Joy

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Re: What should we do with savings moving forward?
« Reply #3 on: October 15, 2017, 12:20:05 PM »
I introduce you to: The Investing Order. https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Quote
Current 10-year Treasury note yield is ~2%.  See           
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y         
           
WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.           
           
WHY           
0. Give yourself at least enough buffer to avoid worries about bouncing checks           
1. Company match rates are likely the highest percent return you can get on your money           
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 25%; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.     
6. Applicability depends on the rules for the specific 401k           
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.
8. Because any earnings, even if taxed, will help your FI journey.

GhostDog

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Re: What should we do with savings moving forward?
« Reply #4 on: October 15, 2017, 05:21:46 PM »
Ok, it looks like paying off debts makes the most sense. I will definitely plan to attack the higher interest student loans first. I like the idea of refinancing to a 15 year mortgage (if I can get DH on board with that). That would up our payment and the rest of the money we have leftover could go to the other student loans. So we'd basically be putting half our savings into the IRA, and throwing the other half or so at debt. Seems like a good plan.

As I read that chart above, I don't understand all the terminology. I have some reading and research to do!

Thanks!

Hotstreak

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Re: What should we do with savings moving forward?
« Reply #5 on: October 15, 2017, 08:03:08 PM »
Don't pay off your debt.  4.75% is low enough that the stock market should outpace your loans.  Line 7 in Bracken's quote 10year treasury + 3% = 5.28% right now, and all of yours are below that.  Linda's suggestion that long term market gains after inflation is 4% is misleading, since after inflation returns is not the correct thing to compare your interest rates to.  All of the calculations behind this are available on this site and forums, check it out!  Lots to read.  You are just 2 months in and doing great, learn all you can and adjust as you figure it out.

Gone_Hiking

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Re: What should we do with savings moving forward?
« Reply #6 on: October 15, 2017, 09:28:18 PM »
While the mathematics - how much had the stock market gained this year, again? - favors investing over paying off the student loans, it is only applicable to those who favor investment gains over worrying about debt.  I get a sense form what you wrote that you do worry about debt, and sleeping better at night is generally advantageous IMHO.   With both you and DH in the same field, your emergency savings seem less than sufficient.   With all this, I would follow your nose and add more to emergency savings while attacking the 4.75% loan first, and then roll to 3.75% loan next. Your mortgage interest is tax deductible and, after the tax deduction, you are actually paying 3% or less on it, so leave the payment as it until you other debts are paid, or refinance.  15-year at 3% would be a great - it would add about $700 to your monthly payment, but it would eliminate close to $200K in interest over the term of the loan.


CanuckExpat

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Re: What should we do with savings moving forward?
« Reply #7 on: October 15, 2017, 09:58:49 PM »
Do you have any pre-tax room still to invest in? From your post it sounds like you might. At $200,000 annually, you are probably in at least a 25% federal tax bracket, maybe more including state taxes? So if all of that is correct, for any extra money you put into pre-tax accounts, you get an instant 25% (or more) return even if you just hold it in cash. You aren't going to beat that with paying down debt or investing. (Though I'll grant I hate the mental load of debt, and might be tempted to at least pay off the smaller $21k loan). Also, can you consolidate and refinance your student loans?

What is your monthly cash flow like? At your salary, you should have very high inflows. How much is left after paying your liabilities? When you have enough money coming in each month, you don't really "need" an emergency fund, if you can just float it with cash or springy credit as needed.

Finally, you mentioned living close to work. You walk or bike right??

GhostDog

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Re: What should we do with savings moving forward?
« Reply #8 on: October 16, 2017, 04:32:55 AM »
Hmm, I'm a little more confused now.

We worked at a small private practice (we're psychologists) that only offers a simple IRA (no match). The max is $12,500/yr regardless of income, so we're both putting in the max.

By close to work, I mean we are 7 miles away, so a short drive (*shame face*). Biking doesn't work for us, for a number of reasons, especially picking up and dropping off our son at school.

I actually just consolidated the $21K student loans- they were at 6.8%, now down to the 4.57%. I couldn't beat 3.75% at any consolidation place, so left the rest alone.

I really despise having debt so my instinct is to get rid of it; however, my husband disagrees and feels that it financially makes more sense to invest.

What about this as a plan, which sort of splits the difference?
Continue to max out IRA ongoing. Then, fully fund the e-fund (4-6 months). Then pay off higher interest student loans. Then, refinance to 15 yr mortgage with lower interest rate, and whatever savings is left over throw at the other student loans. Overall, about half our monthly savings would go to the IRA, and half to debts.

Playing with Fire UK

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Re: What should we do with savings moving forward?
« Reply #9 on: October 16, 2017, 04:56:28 AM »
I really despise having debt so my instinct is to get rid of it; however, my husband disagrees and feels that it financially makes more sense to invest.

This is the crux of the issue.

At these interest rates, there is no single "correct" financial answer. If you were an individual, my advice would be to do exactly what your gut tells you (starting with the highest interest rate if paying down debt). If you feel that investing is right for you, you probably have the right temperament for it so should dive in. If you feel paying down the debt is better for you, you will sleep better and have the joy of not worrying which will enrich your life more than the on-average gain you'll get from the market. If you lean 70% towards investing, invest 70%.

As there are two of you, you need to have a proper listen to each other and really hear what your partner's goals are. If you haven't used your words effectively to explain to your husband that you feel strongly that you should pay down the debt then try again. There is no answer in the maths that will help you if you don't deal with (what looks like) a difference in investing temperament.

boarder42

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Re: What should we do with savings moving forward?
« Reply #10 on: October 16, 2017, 06:07:45 AM »
I think you should pay off the 4,75 loan as fast as possible.

Your home costs 4%, which is also the average percentage the stock market (index funds) makes over time of your withdraw inflation. So in theory it shouldn't matter whether you invest in index fund or pay iff your mortgage. Paying down your mortgage is a very safe investment, independent in the stock market swinging.

In general, Mustachian style, you pay off debt in order of highest interest rate. And you consider not paying back your mortgage if you pay a low interest on it. I think 4% is not so very low, but that is just my opinion, as in Norway we are down at 2,5% or so.

The bolded above is very very incorrect.  Index funds minus inflation(S&P 500) avg over 7% i dont know where you got this data that 4% is what they avg.  4% is extremely low.

That being said OP just follow the investment order posted above and it should help guide you down the path to maximizing your return on your little green soldiers.

Another Reader

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Re: What should we do with savings moving forward?
« Reply #11 on: October 16, 2017, 06:39:00 AM »
How stable are your jobs?  With both of you at the same agency on contract, I would think about building up some significant reserves.  Depending on your job security, six months might be appropriate, but three months minimum.  I would also pay off the 4.75 percent loans ASAP.  Depending on how your refinanced loans are structured, I would probably start on those next.

Overall, I don't like your debt load.  You are relying on debt to buy a car and you have a substantial mortgage payment on top of those student loans.  In your shoes, I would list all the payments on the debt and ask yourself how you would handle the payments if one or both of you lost your jobs.  You might find eliminating some of the payments gives you more security than the other options.

No on the 15 year refi.  Get rid of the other debts first.  Then refinance or just pay extra on the 30 year loan.

GhostDog

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Re: What should we do with savings moving forward?
« Reply #12 on: October 16, 2017, 09:25:51 AM »
Our jobs are fairly stable. It's a successful private practice and we are an integral part of it. But I prefer to be safe, because who knows what could happen in the future. So a 4-6 month emergency fund is a must to me.

I thought 4% return seemed low based on MMM, good to hear it is low! I know little about investing and have a lot to learn.

DH and I certainly have different personalities. I am quite risk averse and naturally frugal, whereas he is not at all risk averse and is a bit of a spendthrift. He is not a converted Mustachian quite yet, though is on board with our current plan of really reducing spending (I'd like to even reduce more, but since it's only been two months, I'm working on slowly getting him more on board and not pushing him). We have been talking a lot about our financial future and our priorities, and I think we're more on the same page than we ever have been. But I think since our natural tendencies just differ, splitting the difference with investing and debt reduction may keep us both happy?

Thank you all for your input!

boarder42

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Re: What should we do with savings moving forward?
« Reply #13 on: October 16, 2017, 09:44:30 AM »
Our jobs are fairly stable. It's a successful private practice and we are an integral part of it. But I prefer to be safe, because who knows what could happen in the future. So a 4-6 month emergency fund is a must to me.

I thought 4% return seemed low based on MMM, good to hear it is low! I know little about investing and have a lot to learn.

DH and I certainly have different personalities. I am quite risk averse and naturally frugal, whereas he is not at all risk averse and is a bit of a spendthrift. He is not a converted Mustachian quite yet, though is on board with our current plan of really reducing spending (I'd like to even reduce more, but since it's only been two months, I'm working on slowly getting him more on board and not pushing him). We have been talking a lot about our financial future and our priorities, and I think we're more on the same page than we ever have been. But I think since our natural tendencies just differ, splitting the difference with investing and debt reduction may keep us both happy?

Thank you all for your input!

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Linea_Norway

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Re: What should we do with savings moving forward?
« Reply #14 on: October 16, 2017, 10:44:47 AM »
I think you should pay off the 4,75 loan as fast as possible.

Your home costs 4%, which is also the average percentage the stock market (index funds) makes over time of your withdraw inflation. So in theory it shouldn't matter whether you invest in index fund or pay iff your mortgage. Paying down your mortgage is a very safe investment, independent in the stock market swinging.

In general, Mustachian style, you pay off debt in order of highest interest rate. And you consider not paying back your mortgage if you pay a low interest on it. I think 4% is not so very low, but that is just my opinion, as in Norway we are down at 2,5% or so.

The bolded above is very very incorrect.  Index funds minus inflation(S&P 500) avg over 7% i dont know where you got this data that 4% is what they avg.  4% is extremely low.

That being said OP just follow the investment order posted above and it should help guide you down the path to maximizing your return on your little green soldiers.

This 4% is my conclusion from the 4% rule. I read it as index funds making 7% profit per year on average per 30 year period. And that we could safely take out 4% yearly, so that the stash after inflation doesn't diminish. If I have totally misunderstood the 4% rule, then please explain it so that I can understand it.

boarder42

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Re: What should we do with savings moving forward?
« Reply #15 on: October 16, 2017, 11:03:54 AM »
I think you should pay off the 4,75 loan as fast as possible.

Your home costs 4%, which is also the average percentage the stock market (index funds) makes over time of your withdraw inflation. So in theory it shouldn't matter whether you invest in index fund or pay iff your mortgage. Paying down your mortgage is a very safe investment, independent in the stock market swinging.

In general, Mustachian style, you pay off debt in order of highest interest rate. And you consider not paying back your mortgage if you pay a low interest on it. I think 4% is not so very low, but that is just my opinion, as in Norway we are down at 2,5% or so.

The bolded above is very very incorrect.  Index funds minus inflation(S&P 500) avg over 7% i dont know where you got this data that 4% is what they avg.  4% is extremely low.

That being said OP just follow the investment order posted above and it should help guide you down the path to maximizing your return on your little green soldiers.

This 4% is my conclusion from the 4% rule. I read it as index funds making 7% profit per year on average per 30 year period. And that we could safely take out 4% yearly, so that the stash after inflation doesn't diminish. If I have totally misunderstood the 4% rule, then please explain it so that I can understand it.

this is a common misconception.

FIRST the 4% rule was drafted from the trinity study - what the trinity study proposed was that during even the worst possible 30 year cycle 4% would still be safe.  index funds profit over 7% AFTER inflation on avg over 30 year periods.  the 4% SWR was a worst case scenario thats why many around here talk about how overly safe it is.  Even on longer than 30 year horizons your money is more likely to grow infinitely in FIRE using a straight 4% SWR than it is to go to 0

For the purposes of the OP's question though you should just compare nominal returns meaning 10-11% including inflation b/c the mortgage is not inflation adjusted it is fixed back in time.  same with the student loans they are locked in at a previous year's dollar amount.

i wouldnt more quickly pay down any of the loans the OP has - the rates are great and there is more money that can be made in the market over time than paying down low fixed interest debt.

boarder42

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Re: What should we do with savings moving forward?
« Reply #16 on: October 16, 2017, 11:05:55 AM »
Also OP i just saw your note about a REFI to a 15.  Likely doesnt make sense for you at this point with how rates have appreciated.  but it is a math equation and you can come out ahead on 15 year mortgages if you dont plan to stay in your house over 7 years.  if you do just stick with the 30 and don't waste your time doing the math.

Hotstreak

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Re: What should we do with savings moving forward?
« Reply #17 on: October 16, 2017, 08:28:16 PM »
Hmm, I'm a little more confused now.

We worked at a small private practice (we're psychologists) that only offers a simple IRA (no match). The max is $12,500/yr regardless of income, so we're both putting in the max.

By close to work, I mean we are 7 miles away, so a short drive (*shame face*). Biking doesn't work for us, for a number of reasons, especially picking up and dropping off our son at school.

I actually just consolidated the $21K student loans- they were at 6.8%, now down to the 4.57%. I couldn't beat 3.75% at any consolidation place, so left the rest alone.

I really despise having debt so my instinct is to get rid of it; however, my husband disagrees and feels that it financially makes more sense to invest.

What about this as a plan, which sort of splits the difference?
Continue to max out IRA ongoing. Then, fully fund the e-fund (4-6 months). Then pay off higher interest student loans. Then, refinance to 15 yr mortgage with lower interest rate, and whatever savings is left over throw at the other student loans. Overall, about half our monthly savings would go to the IRA, and half to debts.


Understandable to be confused, as you are getting a random assortment of advice.  Some folks are speaking out of turn and relaying incorrect information they don't understand, some folks are parroting something they heard once and liked but isn't backed up with evidence, etc.  This is where the sticky forum posts and links to credible, respected blogs come in handy.  I think if you read and understand all of the sticky posts here, you will understand more about the basics than a LOT of forum posters.  Keep learning and good luck, enjoy your new financial knowledge!