Author Topic: Where do I send the monthly surplus?  (Read 2894 times)

Philociraptor

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Where do I send the monthly surplus?
« on: March 13, 2015, 08:26:56 AM »
We have money leftover each month and I'm not sure how to allocate it. Here's our debts and investments:

Surplus: $2.4k/mo, based on typical spending

Debts:
  • Mortgage: $102k @ 4.125% fixed + PMI (see notes)
  • His Student Loan: $68.5k @ 3.9% variable
  • Her Student Loan: $3.2k @ 4.3% fixed (see notes)
  • Her Car Loan: $14.5k @ 1.9% fixed
Investments:
  • His 401(k): Sending $1.5k/month (to max in December)
  • His 2015 Roth IRA: Full
  • Her 401(k): Sending $0/paycheck (see notes)
  • Her 2015 Roth IRA: Full

Notes: We've been in the house almost 3 years, unless we refinance to a conventional loan with a different company we have to pay PMI for 5 years minimum. We haven't refinanced because we're not sure how long we're going to keep the house and thus can't be sure we'll recover any closing/appraisal costs. Wife wants to pay off her student loans with her bonus she gets this month, so that is out of the picture going forward. Her current 401(k) has pretty mediocre fund options with ER's @ .5+ and no match, so we haven't utilized it so far. They are switching to a new provider in May so we could start maxing it then, sucking up around $1k/paycheck, so $2k/month. I'm not sure if that's the best option though, what would y'all do?
« Last Edit: March 13, 2015, 08:33:19 AM by Philociraptor »

thd7t

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Re: Where do I send the monthly surplus?
« Reply #1 on: March 13, 2015, 08:50:57 AM »
Here's a pretty interesting way to look at debt to investment and allocation of surplus.  I haven't implemented it (found it yesterday), but it's an interesting way to determine your allocation.
http://www.financialsamurai.com/pay-down-debt-or-invest-implement-fs-dair/

Also, starting the refinance process, you can figure out the payback period before you spend a dime.
Even with a .5% Expense Ratio, if there are index funds, you can probably reduce your tax burden substantially if you fund her 401k.  Not knowing your expenses/earnings, but seeing your savings, you'd probably do better with a Traditional IRA and maxing out both 401k's.  The 48k cut in your taxable income would have a minimum of a 12k/year payoff, right away.  There are a ton of articles showing how low taxes are in ER (if you're trying to do that). 

EDIT: changed one case of ER to expense ratio.  Other case is Early Retirement.
« Last Edit: March 13, 2015, 08:56:18 AM by thd7t »

MDM

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Re: Where do I send the monthly surplus?
« Reply #2 on: March 13, 2015, 10:50:29 AM »
Surplus: $2.4k/mo, based on typical spending
Mortgage: $102k @ 4.125% fixed + PMI (see notes)
Her 401(k): Sending $0/paycheck (see notes)

Her current 401(k) has pretty mediocre fund options with ER's @ .5+ and no match, so we haven't utilized it so far. They are switching to a new provider in May so we could start maxing it then, sucking up around $1k/paycheck, so $2k/month. I'm not sure if that's the best option though, what would y'all do?
Pretty much a choice between pre-paying the mortgage vs. the 401k.  Is your PMI a fixed amount/mo or is it calculated as a percentage of remaining principal?

As thd7t noted, the tax advantage of the 401k is substantial.  Spend a few minutes with Excel and compare the two options - what do you find?

Philociraptor

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Re: Where do I send the monthly surplus?
« Reply #3 on: March 13, 2015, 10:56:36 AM »
Surplus: $2.4k/mo, based on typical spending
Mortgage: $102k @ 4.125% fixed + PMI (see notes)
Her 401(k): Sending $0/paycheck (see notes)

Her current 401(k) has pretty mediocre fund options with ER's @ .5+ and no match, so we haven't utilized it so far. They are switching to a new provider in May so we could start maxing it then, sucking up around $1k/paycheck, so $2k/month. I'm not sure if that's the best option though, what would y'all do?
Pretty much a choice between pre-paying the mortgage vs. the 401k.  Is your PMI a fixed amount/mo or is it calculated as a percentage of remaining principal?

As thd7t noted, the tax advantage of the 401k is substantial.  Spend a few minutes with Excel and compare the two options - what do you find?
PMI is fixed, drops off after a minimum 60 payments AND 78% LTV maximum (purchased value, new appraisals don't count). After we max the other 401(k), the remainder of the surplus should go towards the mortgage then?

thd7t

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Re: Where do I send the monthly surplus?
« Reply #4 on: March 13, 2015, 12:32:41 PM »
Surplus: $2.4k/mo, based on typical spending
Mortgage: $102k @ 4.125% fixed + PMI (see notes)
Her 401(k): Sending $0/paycheck (see notes)

Her current 401(k) has pretty mediocre fund options with ER's @ .5+ and no match, so we haven't utilized it so far. They are switching to a new provider in May so we could start maxing it then, sucking up around $1k/paycheck, so $2k/month. I'm not sure if that's the best option though, what would y'all do?
Pretty much a choice between pre-paying the mortgage vs. the 401k.  Is your PMI a fixed amount/mo or is it calculated as a percentage of remaining principal?

As thd7t noted, the tax advantage of the 401k is substantial.  Spend a few minutes with Excel and compare the two options - what do you find?
PMI is fixed, drops off after a minimum 60 payments AND 78% LTV maximum (purchased value, new appraisals don't count). After we max the other 401(k), the remainder of the surplus should go towards the mortgage then?
You should do everything you can to eliminate your Mortgage Insurance the first day that it's possible.  I can find a post documenting the effective interest rate of it, but you can guarantee that it's the equivalent of a hair on fire emergency.

MDM

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Re: Where do I send the monthly surplus?
« Reply #5 on: March 13, 2015, 01:47:29 PM »
PMI is fixed, drops off after a minimum 60 payments AND 78% LTV maximum (purchased value, new appraisals don't count). After we max the other 401(k), the remainder of the surplus should go towards the mortgage then?
With a fixed PMI, prepaying saves "only" the 4.125%.  That puts you in the gray area of "Should I pay off my X% interest rate mortgage?"

The choice is yours....

thd7t

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Re: Where do I send the monthly surplus?
« Reply #6 on: March 13, 2015, 02:05:16 PM »
PMI is fixed, drops off after a minimum 60 payments AND 78% LTV maximum (purchased value, new appraisals don't count). After we max the other 401(k), the remainder of the surplus should go towards the mortgage then?
With a fixed PMI, prepaying saves "only" the 4.125%.  That puts you in the gray area of "Should I pay off my X% interest rate mortgage?"

The choice is yours....
I think that it's an FHA loan, based on OP mentioning refinancing to conventional and the 60 month minimum term for MIP.  In this case, it's not fixed in the sense of a flat number.  I'm going to suggest putting 40% of the surplus to debt paydown (4% is a nice safe return, while not astronomical) and 60% to investment (It's a nice chunk of money).  People will suggest going all into index funds or other investments, but debt paydown is a good form of diversification.