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 Post subject: Evaluating the financing picture
PostPosted: Sat Dec 15, 2012 9:00 am 

Joined: Mon Mar 16, 2009 7:45 pm
Posts: 38
Hello,

I am hoping to get some thoughts and feedback on my financial situation and plan for the next few years.

A few basic details:

Age: 29
Married, one child under 1 (no more coming, I am certain of this)

I am in sales, my wife is a PhD candidate, ~ 2 more years of dissertation left. She's a full time student / full time stay at home mom right now.

I won't disclose salary, but I am the sole bread winner right now. After all expenses, we have about $50k - $60k in free cash annually (I also max out my 401k).

Debts:
Credit Cards: $0 balance (gets paid in full every month)
Car loans: $0 (we have two cars, 2006 and 2007, both are paid for and should get another 3-4 years of use each)
Student loans (wife): $99k (This is from undergrad mainly, around $10k from masters, nothing from PhD), $36k is at 3.5%, $65k is at 6.8%
Mortgage: $156k outstanding (3.25% 15 year loan, just re-fied in May 2012)
Total: $255k

Assets:
Cash Savings: $50k (earning around 1%)
Retirement Savings: $14k (just started contributing to 401k earlier this year)
Other liquid assets: $12k
Private company stock: $100k (details on this later)
Home value: $180k (based on purchase price in 2009, near bottom of market)
Total: $356

This puts us at ~$100k postive net worth.

I will have an opportunity shortly to sell at least 60% of my private company stock holidngs, generating around $60k in long term gains (yes, held 1 year, 2 years after initial grant date). Depending on a few factors, I may be able to sell all of it, but $60k pre-tax is guranteed. After taxes, we are looking at just about $50k.

My initial plan was to add those proceeds to cash savings (I like the security of knowing that I wouldn't have to work for a few years if things went really bad). $100k would last ~2.5 years based on our minimum monthly expenses.
As stated earlier, we generate at least $50k per year in free funds (after payroll deductions, paying the minimums on mortgage, student loans, my wife's tuition, and other living expenses).
My current goal is to be completely debt free within 4 years by using the $50k in free funds to pay down the various debts (starting by bringing the mortgage below a 80% LTV to kill PMI, then focusing on the student loans with the 6.8% interest, then all remaining loans).

Longer term goals include a $1 Million Net Worth (primary residence included) by age 35 and a $1 Million Net Worth (primary residence excluded) by age 40. We will eventually look to buy a bigger home (right now, we live in a 2/2 bed/bath condo). My wife, once she finishes her degree, can expect to earn between $60 - $100k teaching in her field (she'll likely teach part time though, so she can raise our son and eventually do some home schooling as well). My career prospects are fairly good, I earn well into six figures today and have a very desirable skill set. Unemployment is something I do worry more about than I probably should, but it's a worry I do have.

I guess what I am looking for is some feedback from the GRS community. I've thought about investing some of that $50k (soon do be $100k) in savings into something that yields more. I have a LendingClub account and have been dabbling there with a few thousand dollars. I also have a few thousand invested in some dividend paying stocks, between those two, I've been earning around 10% every year, but both are somewhat risky investments for the returns they generate.
My other thought was to use some of this money to pay of part of the student loans or mortgage, but based on the yearly free cash flow, and the fairly low interest on most of those loans, it seems like a bad choice.

Any feedback is appreciated.

Thanks & Happy Holidays


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 Post subject: Re: Evaluating the financing picture
PostPosted: Sat Dec 15, 2012 1:55 pm 

Joined: Tue Jun 30, 2009 9:44 pm
Posts: 326
Location: Atlanta, Georgia
Hi treousa, I'm only going to address a couple things here, and I'm sure others will chime in with their opinions, too.

1) Why didn't you get the LTV ratio on your morgage down to 80% when you refinanced earlier this year? With $50k cash (maybe this was lower earlier in the year?), I certainly would have done what I could to eliminate PMI. Also, I'm curious why you are valuing your home based on the 2009 appraisal rather than the 2012 one done in connection with the refinance.

2) I would not consider a 6.8% interest rate on $65k of the student loans to be "low" interest, though it's obviously significantly better than personal loan or standard credit card rates. If I were you, I would tackle this 6.8% debt first. Once that's gone, I would agree that the rest of your debt is low interest and so begin more investing (besides 401k) at that time. Personally, I began non-retirement investing in earnest (dabbled a bit before) around the time that the last of my student loans left and small car loan were below 3% interest. But I remained mostly aggressive on the student/car loans until they were gone. Psychologically, I just don't like debt, whether it's low interest or not. For many, having the low interest accounts open doesn't bother them, especially when better returns on investing are out there. I just liked having my account list all cleaned up.

3) Keep up the good work with ensuring the 401k is maxed every year! I'm not sold on LendingClub yet, though more and more personal finance folks are joining in, so maybe it's becoming a viable endeavor. Otherwise, I like buying index funds through Vanguard.

Wishing you and your wife all the best!


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 Post subject: Re: Evaluating the financing picture
PostPosted: Sat Dec 15, 2012 2:40 pm 

Joined: Mon Mar 16, 2009 7:45 pm
Posts: 38
Thanks for your reply!

To answer your questions.

There was no new appraisal done when I re-fi earlier this year. It was through the same credit union that I had the original loan with, and they are the ones that suggested a non-appraisal refi (obviously saved on costs there).
When I did the refi, we only had around $30k in the bank and the private company stock valuation had not materialized yet. Otherwise, yes, I would have paid it down then, but it would have not gotten me a better rate at the time even if I had paid it down.

My thoughts are to use the majority of the free funds from 2013 to pay off the 6.8% loan, so that's already been on my radar. Unfortunately, income is high enough that we don't get the student loan interest deductions anymore.


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 Post subject: Re: Evaluating the financing picture
PostPosted: Sat Dec 15, 2012 9:57 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 867
Have you actually done the math for this? I have, and assuming you take your $100k NW now, save $60k for the next 2 years and $110k for the remaining 4 years until you are 35, using your 10% return number, you're at $900k. So, with your windfall, you may be able to make your $1 mil number by 35 (not sure if this means before you reach 35 or anytime while you're 35).

OF course, there is a lot of life to live between now and then. And a lot can happen. Some of your numbers probably aren't sustainable, like the 10% average return (which probably gets hammered in taxes). Also, your stock options need to come to fruition without the stock price collapsing (And we never fathom that happening, until it happens, just ask the folks who worked at Enron).

I think your goals are attainable, probably a bit on the "lofty" end of things. But, if the stars align, you have a shot. But, my advice would be, don't get your heart too set on the goal, as living life is much more important.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Evaluating the financing picture
PostPosted: Tue Dec 18, 2012 2:15 pm 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1633
Location: Seattle, WA
In your position I would work on maxing out as many tax-advantaged accounts as you can. When your spouse is a teacher she may have access to additional accounts.

What do you plan on doing once you hit $1 million? Is it just a number? Extrapolating from $100k today to $1 million in 6 years is arguably bold. What will you do if you don't hit that number? If your question is, what do I need to do on a yearly basis to have a decent chance to hit that number in 6 years, then you can make assumptions. But if you are counting on getting to $1m no matter what, you can't rely on assumptions of future returns over a short time period. I have experienced this myself. Especially in that last year when you are assuming $800k (or whanot) will turn into $1m, half of that is from your additional savings (which is itself based on assumptions) but half is assuming the stock market happens to go up 10% that year. I have seen this myself, but luckily I only hope to hit "a number" for amusement value and have no plans to retire for a while yet.


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 Post subject: Re: Evaluating the financing picture
PostPosted: Tue Dec 18, 2012 2:36 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 867
Or pretend it is 2006-2007 and the OP is writing the same thing. If you're obsessed with a number, you'll go crazy when 2008-2009 hits.

That's why investing plans are much better than "number" goals.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Evaluating the financing picture
PostPosted: Wed Dec 19, 2012 5:52 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1795
Location: Ottawa, Canada
Take that spare cash and throw it at the student loans. It's foolish to sit on such a huge pile of cash earning nothing when you're paying so much on debt.

Quote:
I like the security of knowing that I wouldn't have to work for a few years if things went really bad


If you're earning a 6-figure income today, but you're worried you could potentially face "a few years" of unemployment, then you're horribly overpaid today, and eventually someone is going to notice and cut you loose.

If you really are worth 6-figures, then you bring value to the table and will not have to worry about being unemployed for a months-long stint, let alone years. Thus, you will not have to live off your pile of cash for an extended period, so put it to good use today and pay off that debt as quickly as possible.


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 Post subject: Re: Evaluating the financing picture
PostPosted: Thu Dec 20, 2012 3:12 pm 

Joined: Fri Jun 25, 2010 3:06 pm
Posts: 81
kombat wrote:
If you're earning a 6-figure income today, but you're worried you could potentially face "a few years" of unemployment, then you're horribly overpaid today, and eventually someone is going to notice and cut you loose.
Of course paying off debt is the right choice but nobody can know the future. At the beginning of 1929 nobody knew that the next decade would be so bad.


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