Where Exactly To Put a Little Extra Cash? |
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ArntorFTL
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Where Exactly To Put a Little Extra Cash? |
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This is a great forum, I'm happy to have found it...
Here is a question that I have been wrestling with and have been unable to find any consensus on:
I am married, in my thirties, no children. I am contributing the max that my company will match against to my 401k, we each have our own Roth IRA which we contribute fixed amounts to every month although my wife has no 401k though her employer. We own our home in an area where the real estate market has tanked in the last year. We have two mortgages (an 80/20 setup), the result of purchasing with 0 down. On the smaller of the two mortgages we are paying an extra 100$ per month, on the larger of the two, we are not paying extra per month. Our long-term financial goal is to retire comfortably as soon as possible and move out of state.
The question is this, through budgeting and tightening our belts, we have found a little extra cash each month to put someplace: Should we start paying extra on the larger of our two mortgages or put more in one or both of our Roth IRAs?
What would you do if you were in my shoes?
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Fri Dec 01, 2006 9:43 pm |
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oldguy
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Location: arizona |
I would place your priorities as follows:
1. Fund the 401k to the match.
2. Max the two Roths. (Grow to about $2M tax-free in 30y)
3. Max the 401k ($15k).
4. IF/THEN:
A. If the 20% loan has either a var rate, or a rate over 8%, then prepay.
B. Or, if the 20% loan is a 'keeper', start an index fund at a no-load provider.
Your NW will be MUCH higher in the out-years if you keep your good loans and use someone else's money to fund long-term investments, ie, borrow at 6% and invest at 12% - the power of compound interest is a surprise to most folks - run thru the math for yourself. But if you have a bad loan, you have to get rid of it.
And don't worry about being upside down in the loans - this is a house (appreciating asset), not a car (depretiating asset) - simply wait a couple years until it reverts to the mean.
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Fri Dec 01, 2006 11:54 pm |
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ArntorFTL
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Thanks for the replies...
To clarify for Coaster, in addition to the aforementioned items we have:
the "emergency fund" with six months of expenses (~$10,000)
a checking account with ~$5,000
As far as the two mortgages, the 20% is at 7.5% fixed, but it balloons in 15 years so that's the primary reason we have been paying extra on it. The 80% is at 6.5% fixed.
One other issue that we will be confronting in about three years is that both of us will be finishing up school and monthly payments for about $15,000 of student loans between the both of us will become a factor. We have no consumer debt aside from two car payments.
Does any of this, more detailed, information help?
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Sat Dec 02, 2006 12:53 am |
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oldguy
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Cash: $ 751.85
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Location: arizona |
As far as the two mortgages, the 20% is at 7.5% fixed, but it balloons in 15 years so that's the primary reason we have been paying extra on it. The 80% is at 6.5% fixed.
I would keep both loans and I wouldn't prepay - that $100/m will do better elsewhere - in a Roth? Sometime in the next 5 to 10 years, watch for a time when rates are favorable and your house has appreciated 25% to 50%. Then refi both notes, get a new 'first' on 80% of the new value. Get a Fixed Rate 30-year loan that you can keep - then use your own money elsewhere. Disclosure - many years ago I had to sell my truck to make the balloon on one of my rentals, so I understand your angst.
If the $15k SL can be consolidated at a low rate, make it a 'keeper' - keep it full term (I think way too many folks consider 'debt free' as a goal - it's not - the goal is to increase NW)
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Sat Dec 02, 2006 1:55 am |
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oldguy
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Cash: $ 751.85
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Location: arizona |
quote: Originally posted by coaster what do you think about a cash-out refi of one of the mortgages to pay off the student loan?
I would go with the one with the lowest rate & the longest term. Some folks avoid converting a consumer loan to a collateralized loan because it adds risk to the house - but I don't put much stock in the argument, they both have to be paid.
I wonder if our new government will re-invent the extra-low interest SLs in 2007? I'm normally against higher taxes and subsidies - but SL interest is one place where I like to see my tax dollars go - if the students are willing to do the work and pay the principal for an education, I don't mind funding the interest on the principal.
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Sat Dec 02, 2006 4:46 am |
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btacay
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One good way of saving your money. So if I were you, I will put my extra cash into a savings account with no hidden charges and with highest interest rate.
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Sun Oct 03, 2010 10:17 pm |
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mukeshkkashyap
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I had to sell my vehicle to make the balloon on one of my rentals, so I understand your angst.
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Mon Oct 04, 2010 6:19 am |
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