Author Topic: Where best to put "extra"?  (Read 3731 times)

tmspitz

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Where best to put "extra"?
« on: April 15, 2012, 06:55:31 AM »
We are about to have some extra money because of some payments ending.  I wanted to get your advice on where best to put it.  Choices are:

  • work toward paying off student loans (right now about 11k @ 2.1% interest, tax deductible
  • work toward paying down mortgage - just refinanced for 20 yr mortgage @ 4% about 118k
  • put extra into 529 (now paying 200/month, have about 10k in there.  My kids are 2 and 5)
  • put extra into 403b or other retirement.  Now have about 70k for my husband, and about 45 or 50 myself in 403b.  Also will have a pension because we are both teachers in NYS
  • save up some towards upcoming home repairs, money for car for myself in the future, etc (I have a 2005 prius with about 78K miles)

We are talking about probably about an extra $600-800/month as my son's kindergarten/child care will end, and car payments ended.   Thank you so much for your advice :)

Bethany J

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Re: Where best to put "extra"?
« Reply #1 on: April 15, 2012, 07:03:01 AM »
I would use the money to make extra principal payments every month. With the relatively low balance that you owe, you can get that mortgage knocked out in well under 10 years. When the mortgage is paid off, you will have lots of extra cash flow each month! We recently paid off our morgage and it feels great. ($200K mortgage paid off in 7 years)

Jason G.

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Re: Where best to put "extra"?
« Reply #2 on: April 15, 2012, 08:00:37 AM »
If your main goal with the extra money is to maximize your net worth, put it in a retirement account. That could be your 403b, or an IRA with another company like Vanguard if your 403b investment options are not great, or maybe a taxable investment account if you're planning on retiring before you can access the 403b. Your interest rates on the two debts are low enough (especially since both have tax deductible interest) that you can probably get a significantly higher return on your extra money by investing it in stocks and bonds.

For the 529, decide about how much you'd like to have available to give your kids for college and find some investment calculators online. You should be able to get a good idea of how much you need to put in each month to reach your goal. Once you're putting that much in, there's no need to put more in. Just check in on it every year or so and make sure it's on track to meet your goals.

However, if the idea of not having any debts is emotionally appealing to you and your husband, it's certainly not a bad idea. Financial decisions aren't all about the numbers.

My wife and I do sort of a hybrid of the two. We contribute enough to our 401k's to get the full match, then max out our Roth IRAs, and anything that's left over after that goes into the mortgage.

arebelspy

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Re: Where best to put "extra"?
« Reply #3 on: April 15, 2012, 09:57:06 AM »
If you are eligible for 403b as a teacher, check to see if you can do a 457b.  Often you can, and it has some advantages. I'd put the money there, otherwise be investing it in the 403b or some other investment vehicle. 
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smedleyb

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Re: Where best to put "extra"?
« Reply #4 on: April 15, 2012, 07:45:51 PM »
Debt repayment.  Student loans need to go ASAP.

Jason G.

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Re: Where best to put "extra"?
« Reply #5 on: April 15, 2012, 08:12:53 PM »
Debt repayment.  Student loans need to go ASAP.

Did you see the interest rate on the student loans? It's 2.1% and it's tax deductible, which means it's effectively even lower than that (around 1.6% if you're in the 25% tax bracket). That is an incredibly low rate and you could almost certainly get two or three times that return on a stock/bond investment in the long term. At the very least, you'd be better off paying down the mortgage, which has a higher interest rate.

The only reason to start with the student loans would be if it made you sleep better at night to have it paid off or if you plan on lowering your income soon (eg, one spouse is about to quit working) and you want to lower your short-term monthly obligations.

Rich M

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Re: Where best to put "extra"?
« Reply #6 on: April 15, 2012, 10:33:52 PM »
You should never being doing anything without some cash on hand for car repairs or emergencies.  But beyond that, forget all of them, if your income qualifies for a ROTH, do a Roth IRA before anything else.  Albeit five years, but you can grab the principle anytime after that if you need it.

Depending on how much you already put in the tax deferred retirement (403b), there is a maximum exclusion allowance.  So check that first before sticking more in it.