Author Topic: savings priorities  (Read 1614 times)

lb4606

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savings priorities
« on: January 14, 2019, 06:08:28 PM »
Topic Title: Savings priorities: where should I save money and in what order?

Life Situation: Married, filing jointly, 2 little kids not yet in kindergarten, living in very HCOL area.

Gross Salary/Wages: ~$315,000 between our two salaries and our air bnb (granny flat).

Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc.: Maxing out 403(b) x 2 and a 457, 2K in FSA yearly, 5K in dependent care, no access to HSA, just starting to throw extra money into VTSAX in very not-systematic way.

Other Ordinary Income: already included.

Qualified Dividends & Long Term Capital Gains: only starting doing post-tax in the past 2 months... not much here.

Adjusted Gross Income: This is less relevant to my question, so I won't bore you with this math.

Moving on...

Current expenses: ~$140K/year, including disability insurance and student loan payments (on PSLF track).

Assets: About $70K in retirement accounts, $11K in VTSAX, owe $572K on an approximately $900K house (interest rate 3.65%).

Liabilities: LOTS of money in student loans (~$300K) but halfway through PSLF and pretty much have all our eggs in this basket (please no comments about this, let's all agree it's controversial and leave it at that, and we have confirmed that it will save us loads of money once it goes through). Currently in loan repayment programs as well and pay around $1K/month of our own money toward the loans, in addition to money we get from the federal gov't (we are in healthcare in public hospitals).
Also a $70K loan (down from $100K) at 2% left that we owe my parents that they lent us for our down payment on the house in 2016. We actually had the money, then went through infertility and used it to have a second child -- no regrets!

Specific Question(s): We have about $80K or more per year (after pre-tax accounts) that we can allocate toward loans, savings, financial goals, etc. IN WHAT ORDER OF OPERATIONS SHOULD WE PUT MONEY INTO EACH POT? These are the candidates (notice student loans are not included):
1. Pay back parents. More of an emotional decision than a financial one since the interest rate is so low. But they are not pressuring us with a due date.
2. Save for a larger house, which would be an addition/renovation (if the market is up) or move to a new place and rent out this one (if market is down). We have 2 bedrooms and we want at least 3, not to be confused with a "large" house, but our 2 children of not of the same sex (probably not of the same gender either, we shall see). We would like to move in or around 2024 unless a good opportunity came up earlier.
3. Put money into post-tax investment accounts and make the most of time/compound interest.
4. Smaller goal, but a $15-20K renovation of our kitchen would make the next 5-6 years in a 1300sqft house MUCH more pleasant, as well as increase the value of the house.
5. Allocate money to our kids' college savings (haven't decided on 529 or some other vehicle, I have a lot of reading to do). First one would hopefully enter university in 2033, the next one 2 years later.

Our goal is FI but not necessarily RE since we both have meaningful work that we can do part time as we age. Please help me make a plan!!!

SimpleCycle

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Re: savings priorities
« Reply #1 on: January 14, 2019, 08:59:47 PM »
Per my calculations, something doesn’t add up.

Saving $57k pretax
Spending $7k pretax
Spending $140k post tax
Saving $80k post tax

That leaves only $31k for taxes, which seems way too low. Turbo Tax estimates your federal taxes as $23k more than that, and that doesn’t even count FICA.

I’d suggest filling out the case study completely to get the best advice.  That said, I’m guessing you’re over 30 but just getting started saving.  I’d shovel it all into post tax investments.   The interest rate on the parent loan is low and they’re not bugging you for it.  You can always take money out of investments to buy a house.

MDM

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Re: savings priorities
« Reply #2 on: January 15, 2019, 01:04:27 AM »
Investment Order might be of interest.

lb4606

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Re: savings priorities
« Reply #3 on: January 15, 2019, 11:35:57 AM »
Thank you!

civil4life

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Re: savings priorities
« Reply #4 on: January 15, 2019, 02:54:46 PM »
Follow the investment order.

I think the only one you may not have currently is savings for a 529 plan.  After maxing that you should go to the post tax contributions.  After that it is your preference on the other 4 options.  I would say that you are probably ok saving for any of these with post tax investing and can pull it out when it is needed.  As far as the personal loan you may want to be careful about perception.  If you are putting in a new kitchen and have not paid off the loan it could create some tension.

Second PSLF...Until recently I was following that path.  I went off it for different reasons.  The only thing I want to suggest is you should fill out an Employment Certification form each year to verify your eligibility.

TexasRunner

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Re: savings priorities
« Reply #5 on: January 15, 2019, 04:04:38 PM »
I'm gonna throw something different out here:

Since you have already maxed your tax-deferred accounts listed in the investment order, I would repay your parents ASAP.  The loan they gave you at 2% is basically a gift.  Obviously we don't know the specifics of how and why you have that money, but ethically speaking I think you ought to be putting that up next after the tax-deferred accounts.


Once that is knocked out, follow investment order. 


Make sure you read ridiculous amounts of info on the student loan forgiveness, and 're-apply' annually if need be.  There is another thread on here of a members who is losing out on ~7 years because they were instructed the wrong things.

Whats the rate (or rates) on the student loans?  If they are getting toward 7% or so, may consider knocking them out before investing as well- but we have to know the rates to do the math.

affordablehousing

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Re: savings priorities
« Reply #6 on: January 15, 2019, 05:35:34 PM »
Assuming you're in Brooklyn or the Bay Area, I would actually invest in your kitchen. It's cheap (just a couple months of saving for you guys), easy, and you get to enjoy it. If your parents need the money that's one thing but it sounds like they don't care. Also, assuming you both are doctors, should one of you want to switch to a private healthcare provider they usually offer special real estate loans and cover fertility if you want another kid. Just some thoughts. Otherwise, yeah, follow the order as others have said and keep saving money.


lb4606

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Re: savings priorities
« Reply #7 on: January 16, 2019, 12:31:01 PM »
Follow the investment order.

Second PSLF...Until recently I was following that path.  I went off it for different reasons.  The only thing I want to suggest is you should fill out an Employment Certification form each year to verify your eligibility.

Yes, I am expending a significant amount of energy in these employment forms. It's like you have to reinvent the wheel each time you do it! I've read a lot about the program and double-triple checked that our type of loan applies. I think direct loans were not as common when the program started, but by the time I went to school, they were the dominant loan type in my field. Fingers crossed but feel we are currently following the letter of the law, so to speak.

lb4606

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Re: savings priorities
« Reply #8 on: January 16, 2019, 12:34:07 PM »
Assuming you're in Brooklyn or the Bay Area, I would actually invest in your kitchen. It's cheap (just a couple months of saving for you guys), easy, and you get to enjoy it. If your parents need the money that's one thing but it sounds like they don't care.

Yes, something to think about. Can you explain more of your rationale? Are you saying this because in these areas it will be more likely to add to the property value? We are in Oakland, so yes, in the Bay Area. That said, the market could drop at any time! We just don't know. It would primarily be for our own enjoyment. You all gave me the idea to check in with my parents to see how they would feel. It certainly wouldn't be the end of the world to live with our kitchen for a bit longer and prioritize paying them back.

civil4life

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Re: savings priorities
« Reply #9 on: January 16, 2019, 01:09:45 PM »
Follow the investment order.

Second PSLF...Until recently I was following that path.  I went off it for different reasons.  The only thing I want to suggest is you should fill out an Employment Certification form each year to verify your eligibility.

Yes, I am expending a significant amount of energy in these employment forms. It's like you have to reinvent the wheel each time you do it! I've read a lot about the program and double-triple checked that our type of loan applies. I think direct loans were not as common when the program started, but by the time I went to school, they were the dominant loan type in my field. Fingers crossed but feel we are currently following the letter of the law, so to speak.

I double and triple checked when I went into repayment.  At the time my loans were at Great Lakes.  About two years later they were managed by FedLoan Servicing.  I filled out my employee verification form and when they finally responded to it I was told I had no qualifying payments.  Well when I went to check with them they told me the repayment plan that Great Lakes had me on was not accepted for PLSF.  I continued making payments with them for several more years and probably got about halfway through the payments.  The thing is I had very small loan compared to many people.  Additionally I had a good salary so I was not getting much discount for Income Based Repayment.  Doing the math it was going to be almost a wash out.  Plus considering the general political climate etc. I decided to refinance through SoFi halved my interest rate and payments.  I will have mine paid off in about 3.5 years now.

I totally agree with $300k you are much better off taking the risk of PLSF. 

patchyfacialhair

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Re: savings priorities
« Reply #10 on: January 16, 2019, 01:50:57 PM »
I could not stand owing money to family for anything, so I would pay that off ASAP. It's not a financial decision though. I just know that we're all human and about the time you treated yourself to a kitchen renovation while owing me tens of thousands of dollars would...be...interesting. I'm sure the parents are fine with it but it's not something I would feel comfortable owing myself.

Then after that's paid off, investment order 100%.

Evasion

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Re: savings priorities
« Reply #11 on: January 16, 2019, 02:40:17 PM »
I would repay my parents first. It's already amazing that they helped you with a massive loan for a house, especially at a interest rate under inflation. (or is it? Unsure about US inflation)
I think it's only fair yoy would repay them ASAP unless they're multi millionaire or something.

affordablehousing

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Re: savings priorities
« Reply #12 on: January 16, 2019, 03:18:09 PM »
WRT kitchen improvements, it's an easy win, cheap, you don't really need permits, and you can feel like you accomplish something. As it stands, it seems your only asset is your house, your parent debt equals your other assets. It sounds like the house you want is more like $1.3MM, so the prospect of feeling like you accomplish a goal of getting a kitchen you like in a few months, versus saving $300K for adownpayment and closing costs over several years seems to me just like an easier and more immediate payoff. And it probably isn't a money-loser like an addition would be.