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 Post subject: Extra money in Savings- Invest, save, or pay off mortgage?
PostPosted: Thu Aug 09, 2012 5:53 am 

Joined: Thu Aug 09, 2012 5:34 am
Posts: 7
This is my first post in the GRS but I have frequented this site often over the past couple of years. I am 26 years old and have owned a home for the past 4 years (with a 30 year mortgage that has been refinanced once). I am about to sell my second car which is an expensive sports car that will get me somewhere betweem $35k and $38k. I already have about $25k in a savings account.

My question is what should I do with all this extra money I will have in my savings account. Interest rates are quite low and keeping the money in my savings account (0.8 % APY) will not get me much at all. I would like to invest in a rental property ideally (a small one family house or condo) but am also considering the stock market. I have $209k remaining on my mortgage and it has a 4.625% interest rate. So, naturally paying off my current mortgage faster is also an option. I have been in the house for a while and do not intend on moving in the near future.

Here's a little more about my situation. I am not married and live alone. I make about $85k per year from my primary job and I work part time as an adjunct at local community colleges which makes me an extra 10-15k per year depending on how many classes I teach. I am in a long term relationship with a girl who I definitely envision myself settling down with in the next few years. I have no debt at all (paid off student loans, car loan, and pay credit cards in full every month) so taking on a mortgage for a second property is definitely doable, but I'd want to keep the monthly payments very low.

So what should I do with the ~60 grand or so of money that will end up in my savings after selling the car? I definitely will have options but I am not sure which route I will go. I know selling the second car I have is the right thing to do since it is a waste to keep it sitting in the garage depreciating and maintenance costs down the road would be a killer. I am open to any suggestions and I have a lot a respect for the opinions of the contributors to this great website.


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 6:26 am 
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Joined: Thu May 17, 2012 10:05 am
Posts: 1114
Welcome to the forums! Wow sounds like things are looking up! You are doing a great job with your finances. First a few questions for clarificaiton.

A. I’m unclear is your house mortgage paid off?

B. How much is in your Emergency Fund? Is the 25K in savings above and beyond the E-fund?

C. Also does the GF have any debts?

D. Regarding settling down and your cash in savings have you considered:

--- 1. How much will the engagement ring cost (or will you likely spend)? Will you have an engagement party and if so who will pay for it?

--- 2. Who will be paying for the wedding? Will it be a large wedding or a small one?

--- 3. Who will be paying for the reception? Will it be a come and go or a sit down 3-5 course meal?

--- 4. Who will be paying for the honeymoon? Where would you and your GF want to go?

--- 5. Do you and your GF want to have kids? If so how soon and how many?

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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 6:28 am 

Joined: Sat Jun 16, 2012 2:11 am
Posts: 192
I would have 6-9 months of expenses in a savings account, and if you still have cash to spare I would attack that 4,6% mortgage (and keep at it at a resonable pace). Conservative, safe - steady as she goes.

Eagle
Settling down does not have to mean marriage. Me and the mother of my kids did not and we are quite fine. The way you market it ($$$) might even put people off.


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 6:42 am 

Joined: Thu Aug 09, 2012 5:34 am
Posts: 7
Eagle, in response to your questions:

The 209k left on my mortgage is the only debt I currently have. The mortgage is not paid off and my payment is about 1100 a month right now plus taxes and insurance. It is not a heavy burden and I can definitely afford to make extra payments to pay it off sooner if I decide to go that route.

My GF does not have any debts. We have no kids but both would like to someday. Engagement and wedding stuff is definitely going to be costly but we have not decided just how big and expensive that kind of stuff would be. My guess is that we are still 2-3 years from that point though. I will definitely need to be ready for it financially even though both of our parents would probably contibute in terms of paying for a wedding IMO.

The 25K in savings IS my emergency fund. The extra funds from selling the car would be extra money going into savings that would be above and beyond the amount necessary for an emergency fund.

You do bring up good points Eagle and that is why I mentioned the GF since there will be expenses on the horizon regarding engagement/wedding if we get to that point. That is what we would both want. In addition, we would probably look to buy another house together eventually, but could live in my house initially. These things are obviously speculative but good to think about ahead of time to be prepared for them as they come.

Thus, paying off the mortgage is likely the conservative route. The investments would be the more agressive route. Either way, keeping too much in savings would be wasteful due to the low return. I get a much bigger return paying off the 4.625% interest rate on the mortgage.

I'd also like to add that it has always been a goal of mine to invest in property and rent out properties for additional income. It might be wise to hold off on it though until I have enough extra money to invest (and less debt).


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 7:10 am 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1201
Personally, I would not invest the extra money in rental property. You already have two jobs, why would you want a third?


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 8:07 am 
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Joined: Thu May 17, 2012 10:05 am
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Northern light wrote:
I would have 6-9 months of expenses in a savings account, and if you still have cash to spare I would attack that 4,6% mortgage (and keep at it at a resonable pace). Conservative, safe - steady as she goes.

Eagle
Settling down does not have to mean marriage. Me and the mother of my kids did not and we are quite fine. The way you market it ($$$) might even put people off.


I agree with NL the best thing would be to tackle the mortgage. I wouldn't spend all your E-fund on that the mortgage though. It's always good to have something stashed away for a rainy day.

@ NL Re: Marriage - I assumed that by "settling down" the OP meant getting married. Aparently this is what he meant. But to verify I asked the questions. I didn't mean to imply that people who live together under common law aren't settled down. ;) And you are right getting married can cost a lot. It can also cost less than you might think if you are happy with simplicity and are frugal. It's just important to think about these things before investing money. And to talk to the other person involved. I invested a good portion of my E-Fund just before meeting my wife. I took a hit on the investment because I had to cash it out for wedding expenses, ring, honey moon, etc. I wish someone had asked me these questions a few years back. :?:

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~ Eagle


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 8:18 am 
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njitalian85 wrote:
Eagle, in response to your questions:

The 209k left on my mortgage is the only debt I currently have. The mortgage is not paid off and my payment is about 1100 a month right now plus taxes and insurance. It is not a heavy burden and I can definitely afford to make extra payments to pay it off sooner if I decide to go that route.

I'd also like to add that it has always been a goal of mine to invest in property and rent out properties for additional income. It might be wise to hold off on it though until I have enough extra money to invest (and less debt).


Glad to help njitalian85. Once again paying down the debt on the mortgage might be the best thing for the moment. And Tightwad made a good point having the rental properties whenever you do decide to do that would be like having a 3rd job. With an income of 100k a year and the cash from the car though you should be able to knock out the 209k pretty quick – say a couple of years? Getting married with the house paid off would be really nice.

Good to hear the GF has no debts. That is definitely a positive going forward. I think having rental properties is a great idea and a great goal.

Might be a good idea to start a “wedding/honeymoon” savings fund if that is in the horizon as you mentioned.

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~ Eagle


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 8:37 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1627
Location: Seattle, WA
Can you refinance again? You may be able to shave a full percent off your mortgage rate (if bankrate's national average is to be believed)


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 9:13 am 
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Eagle wrote:
I didn't mean to imply that people who live together under common law aren't settled down.


Who said anything about the law?


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 9:26 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5398
I have a couple of comments:

First off, I disagree about paying down the mortgage for a couple of reasons. One, because given your stated income, you are almost certainly getting a tax deduction so the actual cost of the money is about 3.25% depending on a few things. That's comparable to what you could get in a safe investment right now so there actually is no obvious financial benefit. And given the life changes you anticipate over the next few years, I believe cash is bets to have.

Second, this would be a good time to involve your partner in the decision on what to do with the money. It sounds like you may have done this already but if not, I think making her an equal partner in the decision would be good.

Finally, what does she do and what kind of income does she have. While marriage would change your legal situation, there is no reason you shouldn't plan as a committed couple starting today. If one of you will be staying home with children then you might want to start working together to put the stay-at-home parent in a position to continue to earn a living and get intellectual stimulation if that is important. Perhaps helping her get a master's degree so that she can teach as an adjunct after you have kids might be a plan. Just a though but hopefully you see where I'm going with the suggestion.

With respect to the emergency fund, your partner's situation is also key if you are committed partners. If you both work at the same company, in the same field, then you have correlated risks. That means you probably need a larger EF. If you're a telecom engineer and she is a doctor...different story. The point is, sit down together and talk about risks and what you need to be prepared for together and then decide how large an emergency fund you think you need.

The bottom line is that if you pay the money toward your house you are locking in a fairly low return for a long time and are sacrificing a great deal of flexibility at precisely the time of your life when flexibility should be of paramount importance. I'd put the money in a money market account or short term bond fund.


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Thu Aug 09, 2012 11:14 am 

Joined: Thu Aug 09, 2012 5:34 am
Posts: 7
As expected, great points from all of you.

DoingHomework, you are 100% correct about the tax deductions. I have been getting big tax breaks from my mortgage interest and if I paid my mortgage faster, my return would just be a bit over 3% which is low, but also tax free and guaranteed for the most part.

Getting a rental property at the moment would probably not be the best idea and paying off the mortgage faster is definitely a consideration. I only get 0.8% interest on my savings now, CD rates are low, and no stocks/mutual funds are sure things. Also a great point to involve my GF in these discussions. She's no big fan in discussing financial stuff but she definitely would like to know what I'm considering. We've had some general discussions but nothing too specific.

As for her, she is an 8th grade teacher and a coach in lax/field hockey. She is about a year from being tenured and plans to continue working. She makes around 50k a year right now and lives with her parents. She is working on her Masters right now as well. She does not seem to want to be the stay at home type mom but that may change. We both do have very supportive parents as well so that should factor in as well.

I already have about 25k in my EF and I'll probably bump that up to about 40k with the money I get from selling the car. The excess will be about 20-25k so I can either invest that (stocks, bonds, mutual funds, or whatever I decide), put it towards the mortgage, or keep it in savings. The idea for a wedding/honeymoon fund also was a good one and I'll consider that as well.

Thanks everyone for the good inputs. It has gotten me thinking more about factors I wasn't even considering here.


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Fri Aug 10, 2012 1:08 pm 

Joined: Mon Feb 04, 2008 7:35 am
Posts: 1148
Location: Maryland
You didn't mention anything about retirement accounts. I hope that you are saving for retirement as well as stocking your efund. 5000 in Roth, 17k in 401k (or 17.5). I forget what it is these days.


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 Post subject: Re: Extra money in Savings- Invest, save, or pay off mortgag
PostPosted: Sun Aug 12, 2012 11:56 am 

Joined: Thu Aug 09, 2012 5:34 am
Posts: 7
peachy, I contribute 5% of my paycheck and get 5% matching contirbutions for a 401k type account. I am only 26 so naturally a long way from retirement, but I have about 34k so far in that retirement account. I will eventually be upping the percentage of my contributions but my employer only matches up to 5%.

I also have a small 401k from my 2nd job but there is not much more than 1k in there. I have never opened up a personal investment account or IRA/Roth IRA yet.

Just wanted to add that in. I am putting in some money towards retirement as well and plan to put even more in starting in a couple of years.


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