Author Topic: Which option is better for my savings goal of 50%?  (Read 4275 times)

MMOorko

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Which option is better for my savings goal of 50%?
« on: July 03, 2014, 06:50:10 AM »
Hi, I've recently discovered this fantastic website and am fully on board with increasing my savings for early retirement, but had some confusion as to the best route to take. Background information:

Only debt is home loan, 15 year at 2.75%
403b: 5% personal contribution, 4% employer match
ROTH IRA: max contribution ($5500)

From what I've gathered on here, extra money paid towards home principal could be added directly into the savings goal of 50%. What would be a better option for extra money that I'm wanting to "save" to get to 50% given my financial setup listed above, paying down the principal on the home loan first, increasing my 403b contributions first, or some combination of both?

WWMMD? (What Would Mr Mustache Do?) ;)



KBecks2

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Re: Which option is better for my savings goal of 50%?
« Reply #1 on: July 03, 2014, 06:57:56 AM »
Hmmm. I should go back and read what Mr. Money mustache says about killing your mortgage. I've been listening to a lot of Dave Ramsey lately, and he talked a lot about the peace of mind when you have no debt and no payments to make anywhere, ever. For me it's a tossup. I love investing, I would like to buy real estate investments, I enjoy the stock market. And, I understand that's when I pay the money into the mortgage it's a locked up.

Perhaps the answer is a compromise, I would love to kill the mortgage earlier. We are also on a 15 year with a low interest rate. And hacking one third of the time off of the mortgage would be awesome. I would love to have it out-of-the-way at an earlier age. Then again, if I can invest and I know I can invest fairly well, I should be able to outpace the mortgage rate.

I read several articles about the various risks. There is a risk that you miss out on investments, there is a risk that your investment returns are not as good as you think they're going to be, there is the risk that you sink money into the mortgage get laid off, and then can't pay it off. (although, this doesn't really apply to us, because we could wrangle things to pay it off now, it's just not very convenient.)

Paying my mortgage every month has never been a severe worry. So I guess for me investing still makes the most sense. I like the flexibility of having cash that is liquid and easy to access and if for some reason paying off the mortgage becomes an urgent issue, we should be able to do that.

For future real estate investments, I want to be very careful with the debt levels, and hopefully be in a position where those are also easy to pay off should the need arise.

nereo

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Re: Which option is better for my savings goal of 50%?
« Reply #2 on: July 03, 2014, 07:10:27 AM »
With your mortgage rate, the economics is fairly easy

1) save enough in your 403(b) to get the full company match
2) max out your IRA (a t-IRA may be more useful to you than a ROTH, depending on your circumstances)
3) put additional savings into an HSA, maxing out your 403(b) and then into taxable accounts.

at 2.75% there's no reason to pay down your mortgage any faster.  That's barely above historical inflation. 
Glad to see someone new who's got a fire lit to reach FI quickly.
« Last Edit: July 03, 2014, 07:19:27 AM by nereo »

boarder42

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Re: Which option is better for my savings goal of 50%?
« Reply #3 on: July 03, 2014, 07:13:19 AM »
correct paying down that mortgage with a lower than typical inflation interest rate is throwing money away

Nancy

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Re: Which option is better for my savings goal of 50%?
« Reply #4 on: July 03, 2014, 07:21:51 AM »
With your mortgage rate, the economics is fairly easy

1) save enough in your 403(b) to get the full company match
2) max out your IRA (a t-IRA may be more useful to you than a ROTH, depending on your circumstances)
3) put additional savings into an HSA and taxable accounts.

at 2.75% there's no reason to pay down your mortgage any faster.  That's barely above historical inflation. 
Glad to see someone new who's got a fire lit to reach FI quickly.

I'd say:
1.) same
2.) same
3.) put additional savings into an HSA if available
4.) go back and max out 403(b)
5.) put any additional savings into taxable account

I would NOT pay extra on that mortgage with such a low fixed interest rate.

MMOorko

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Re: Which option is better for my savings goal of 50%?
« Reply #5 on: July 03, 2014, 08:07:35 AM »
Great, that's exactly what I was looking for! Thanks for the replies! Its always good to get additional insight, and I feel like I'm suffering from a bit of information overload from catching up on blog posts here and links to additional information on other sites on the topic of saving options.

arebelspy

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Re: Which option is better for my savings goal of 50%?
« Reply #6 on: July 03, 2014, 09:16:33 AM »
Hi, I've recently discovered this fantastic website and am fully on board with increasing my savings for early retirement, but had some confusion as to the best route to take. Background information:

Only debt is home loan, 15 year at 2.75%
403b: 5% personal contribution, 4% employer match
ROTH IRA: max contribution ($5500)

From what I've gathered on here, extra money paid towards home principal could be added directly into the savings goal of 50%. What would be a better option for extra money that I'm wanting to "save" to get to 50% given my financial setup listed above, paying down the principal on the home loan first, increasing my 403b contributions first, or some combination of both?

WWMMD? (What Would Mr Mustache Do?) ;)

The extra money you put towards mortgage DOES count as savings, but 2.75%?  I'd be paying that as slow as possible and investing as much as possible.  You'll pay it off soon enough anyways with the 15-year mortgage.
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4alpacas

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Re: Which option is better for my savings goal of 50%?
« Reply #7 on: July 03, 2014, 09:41:29 AM »
Hi, I've recently discovered this fantastic website and am fully on board with increasing my savings for early retirement, but had some confusion as to the best route to take. Background information:

Only debt is home loan, 15 year at 2.75%
403b: 5% personal contribution, 4% employer match
ROTH IRA: max contribution ($5500)

From what I've gathered on here, extra money paid towards home principal could be added directly into the savings goal of 50%. What would be a better option for extra money that I'm wanting to "save" to get to 50% given my financial setup listed above, paying down the principal on the home loan first, increasing my 403b contributions first, or some combination of both?

WWMMD? (What Would Mr Mustache Do?) ;)

The extra money you put towards mortgage DOES count as savings, but 2.75%?  I'd be paying that as slow as possible and investing as much as possible.  You'll pay it off soon enough anyways with the 15-year mortgage.
+1

Do you have an HSA?  If not, max out your Roth IRA and max out your 403b ($17,500).  A

fter that, you're into non-tax-advantaged accounts.  Check out http://jlcollinsnh.com/2012/01/06/index-funds/

Threshkin

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Re: Which option is better for my savings goal of 50%?
« Reply #8 on: July 03, 2014, 10:24:17 AM »
I fully understand the math keeping the 2.75% mortgage and putting all extra cash into investments.  From a purely mathematical perspective that is the best option.

But life is more complex than math.  Consider the peace of mind value on no mortgage and the corresponding reduction in fixed expenses.  For me, this was very important so I paid off a similar mortgage in just over 2 years.  If you have concerns about your income stability eliminating your mortgage may be even more important.

BUT - The first place your extra money should go is into your 403b.  Maximize the match and fully fund that account before anything else.

MMOorko

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Re: Which option is better for my savings goal of 50%?
« Reply #9 on: July 03, 2014, 11:17:52 AM »
I do have an HSA, but I set up the contributions to that before reading up on this site (its set once a year, july 1-june 30th of the following year). The house is a tough call. I agree that I would feel much better having it paid off, BUT if I fully funded the 403b then thats quite a bit less taxable income. I suppose I could toss a few hundred on the house and put the rest towards maxing out the 403b, then I could feel like at least I was doing a little bit to reduce principal.