Author Topic: Where should this newly minted mustachian sink his freshly saved stash?  (Read 2846 times)

johnny_ringo

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Hi All,

I just discovered MMM a few weeks ago via a mention on Jalopnik, and after reading several hundred blog posts, I have quickly experienced radical changes in my thinking and behavior. Iíve managed to get my wife (mostly) on board. She loves the idea of financial independence / early retirement and is willing to make some pretty drastic changes to achieve that.

Some background:
  • We are in our mid-30s with three kids under the age of four.
  • I work full-time (I love my job) and she stays home.
  • Historically, we have not been good savers. Last year we managed to spend about 6% MORE than my take-home pay, which was funded (shamefully) through an early withdrawal from my small 401K balance.
  • The good news is that my salary is $120K and our first pass at a new budget has us slated to save approx 33% of my take-home pay, or $29K.

My question is: What to do with that money?

My current plan is to pay down part of our mortgage in order to achieve 20% equity in our house, which should allow for a favorable re-fi.

Here are the current mortgage details:
$1,705 monthly payment
  • 30-year fixed rate loan
  • 4.75% APR
  • $121/mo PMI (itís an FHA loan)
  • $260K Purchase price
  • $240K principal balance
  • Addl $32K required to reach 20% equity
  • $728/yr homeowners ins
  • $2,600/yr property tax

This seems like a no-brainer in terms of where the money should go, but I wanted to see what your thoughts were.

Other debts include:
  • $0 on credit cards
  • $9,000 used car loan balance (1.85% APR)
  • $81,000 personal loan (from a family member, no interest charged)

I am currently not making any 401K contribution, but my employer contributes 3% regardless of what I do.

Iím happy to answer questions you may have that will help you give better advice.

Thanks in advance!
« Last Edit: August 04, 2015, 11:44:21 AM by johnny_ringo »

slschierer

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Re: Where should this newly minted mustachian sink his freshly saved stash?
« Reply #1 on: August 04, 2015, 11:26:02 AM »
Have you spoken to your bank about the potential to refi the mortgage after reaching the 20% equity mark?  You may want to do this before making any decisions.

I really suggest investing in the 401k regardless of the outcome with the house. Doing so will lower your taxable income and could move you into a lower tax bracket, and it's an investment into your future that history shows will outpace the appreciation on your house.  Additionally, the funds will automatically be deducted from your paycheck.  This makes it more likely that the decision will stick.

It never hurts to post a case study!  You may want to check out the sticky at the top of this forum called "How To: Write a "Case Study" Topic."
« Last Edit: August 04, 2015, 11:38:38 AM by slschierer »

johnny_ringo

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Re: Where should this newly minted mustachian sink his freshly saved stash?
« Reply #2 on: August 04, 2015, 11:42:39 AM »
Seems premature to talk to the bank since I'm 11 months out from being ready to refi and they can't predict what rates will be like at that point. There's also the possibility of going to a different bank.

As I understand it, 4.75% is pretty high compared to today's rates and the PMI is $1,500 a year completely down the drain.

Also, I'm on a 30-year fixed loan right now and I'd be able to refi to a 15-year loan, which could save $100K+ in interest over the life of the loan by refinancing.

Even if I maxed my 401K contribution ($18K I believe) I'd be surprised if the combined investment return and income tax savings would compare, but I'll look into it.

Thanks for the feedback!

Mother Fussbudget

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Re: Where should this newly minted mustachian sink his freshly saved stash?
« Reply #3 on: August 04, 2015, 11:47:28 AM »
+1 to what slschierer said!

Welcome johnny_ringo:

You will get the best RESPONSES here if you re-work your topic as a 'Case Study' - see the "How to: Write a "Case Study" Topic" sticky thread on this forum.  It will be helpful for everyone involved - mostly for you.  List out EXACTLY where your expense dollars are going, and you'll get ideas on how to save more.  Cell phone is usually a big one - many forum threads on that topic...

As for the mortgage...  save enough for the 20% LTV (loan to value) and pay the added $$ during refi. 
Lot's of good institutions for low-cost / low-hassle loans - many people here suggest PenFed Federal Credit Union (you'll need a military background, or connection with a military family member to join - I joined via my father's Naval service during WWII).

Saving pre-tax $$ is a good starting point - try adding $500/month to your 401K - adds to your retirement savings AND lowers your taxable income.  If that seems painless after a month or so, add another $500 until you max out your pre-tax contribution. 

From a mustachian who's 'over 39'<cough>, I'd recommend maxing out your 401K contribution from the very start of your career.  In 10 years, you'll thank yourself.   

Also, setup a Vanguard account where you'll keep your Roth IRA (or IRA).  Start a taxable account there as well. 
Q:  Why Vanguard?  A: Because you can buy Vanguard mutual funds in a Vanguard investing account without paying commissions.

As for asset allocation, you'll get as many opinions here are there are contributors.   MMM recommends VTSAX -  the Vanguard Total Stock Index Fund, Admiral Shares - as the main set-it-and-forget-it investment vehicle - (FYI:  this one requires a $10,000 initial investment).  You should also consider investing in a bond fund: 
Vanguard Total Stock Index Fund, Admiral Shares (~80%)
Vanguard Total Bond Market II Index Fund Investor Shares (~10%)
Cash / Emergency Fund (6 months expenses - or whatever helps you sleep at night).

Some would say put 5%-10% in a REIT fund - but as a starting investor, your mortgage is your exposure to the real-estate market (IMHO).

Most of all - KEEP SAVING, and good luck.

catccc

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Re: Where should this newly minted mustachian sink his freshly saved stash?
« Reply #4 on: August 04, 2015, 12:11:50 PM »
Just want to say welcome to this new-to-you perspective.  It's lovely that you and your spouse are on the same page with this, it will help your collective progress immensely!

FWIW, income tax savings on $18K would be somewhere between $2,700-$4,500.  I'm guessing you are solidly in the 25% tax bracket without making 401K contributions, but the 18K would have your crossing brackets.  And that's federal savings.  On your state return (unless you are in PA or another state that weirdly taxes 401K contributions), there will likely be more savings.  PMI is $1,500/year.  Also, for former spenders, the automation of 401K contributions could be really helpful.  And those numbers ignore investment gains.  (And mortgage interest, for that matter.  trying to be fair.)

I'm sure someone else with more time can provide a much more detailed analysis of what is the better move. 

johnny_ringo

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Re: Where should this newly minted mustachian sink his freshly saved stash?
« Reply #5 on: August 04, 2015, 12:20:25 PM »
Thanks!

I may put together a full case study, but the general principals involved in reducing spending feel pretty natural to me so far (we've discovered ways to reduce our monthly spending by about $2,800).

Assuming I'm being efficient with my spending and building up some savings, I'm trying to figure out how to use it most effectively. I understand the value of the 401K contribution, mutual fund investments, etc., but in my situation it may make more sense to reduce the amount of money I'm wasting on PMI and morgtage interest each year, since a  30-year FHA loan at 4.75% is not a very Mustiachian mortage.  This year I'll be paying about $12K in interest, $1.5K in PMI and only $4K in principal.

With the right refi, I can eliminate the PMI and hopefully reverse the ratio of interest vs. principal moving forward, but I don't think I can do that refi until I achieve 20% equity (if I'm wrong in that assumption I would love to hear why).

It might be worth noting that while the house was purchased for $260K, we think the value has increased to about $280K based on comp sales in the neighborhood.

slschierer

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Re: Where should this newly minted mustachian sink his freshly saved stash?
« Reply #6 on: August 04, 2015, 12:26:48 PM »
Did you put down any money on your home purchase?  Your OP suggests no money down, which seems odd unless it was a VA loan?  I suggested speaking to your bank today in order to ensure that your credit is in good shape to refinance and, more importantly,  in order to see if there was any way you could refinance prior to hitting the 20% equity mark.  If you have a good history with your bank, it may be possible.  I have refinanced twice without having 20% equity in my home.  If you are able to refinance now into a conventional loan, you will hopefully receive a lower rate which would help you increase your savings rates today, and you will be in a mortgage that will automatically stop the PMI once you reach 78% of your  home's value.  I have attached a spreadsheet that you can use in your mortgage calculations, assuming that you do not already have a similar spreadsheet.

johnny_ringo

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Re: Where should this newly minted mustachian sink his freshly saved stash?
« Reply #7 on: August 04, 2015, 12:47:58 PM »
You may want to consider paying back the personal loan.  I think you should at least talk to the family member and figuring out a payment plan over a certain time period.  If I owed $81k to someone I knew and made $120k per year, I'd be doing whatever I could to pay him/her back.

We've been paying $1,500/mo, family member agreed to reducing to $750/mo for the next 12 months to deal with mortgage situation. Once mortgage is in better shape and car loan is paid off, we'll bump up personal loan repayment.

I'm starting to realize I should have posted the case study as you guys suggested :)

johnny_ringo

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Re: Where should this newly minted mustachian sink his freshly saved stash?
« Reply #8 on: August 04, 2015, 12:50:24 PM »
Did you put down any money on your home purchase?  Your OP suggests no money down, which seems odd unless it was a VA loan?  I suggested speaking to your bank today in order to ensure that your credit is in good shape to refinance and, more importantly,  in order to see if there was any way you could refinance prior to hitting the 20% equity mark.  If you have a good history with your bank, it may be possible.  I have refinanced twice without having 20% equity in my home.  If you are able to refinance now into a conventional loan, you will hopefully receive a lower rate which would help you increase your savings rates today, and you will be in a mortgage that will automatically stop the PMI once you reach 78% of your  home's value.  I have attached a spreadsheet that you can use in your mortgage calculations, assuming that you do not already have a similar spreadsheet.

Ah, that's good advice thanks! I believe we had 5% down initially. We're now at ~8% equity. More like 15% if you consider the market value of the home. My credit score is 805.