I need your advice financial gurus!

[04svtsnke]

There's an idea that me and the wife have been talking about recently that I'd like to ask you guys about to see if you'd do anything differently.

We've been slowly paying off big debt and currently only have a few left to pay. In a nutshell, the plan is to pay off those few debts this year and use her salary to put directly on the mortgage starting next year. We would use my salary for other bills and family ventures. We both have base salaries right at 60k( her's being a little more since she's been with our company longer). I won't include overtime as it fluctuates. We do have a soon-to-be 2 year old. We owe around 110k. The plan is to sacrifice for a couple of years and get the house paid off and have all that extra money to use on another property( preferably something near the beach) and/or invest. Any advice? If I left out any details, my apologies.

 

[TheCPE]

My financial advice is pretty much boiler plate:

First, do you have 6-12 months of emergency funds? That should be priority number one.

Second, paying off debt early is great, obviously by highest interest rate first.

Third, while paying off debt is great make sure that you aren't sacrificing participating in any employer savings programs. If a 401k is offered make sure to contribute what it takes to get the maximum matching.

Having a plan is already probably putting you ahead of the game when it comes to finances; most people don't think that far ahead!

 

[ElscottHavoc]

What is your interest rate and term left on your mortgage?

There is of course an implied value in living debt free, but if the interest on that debt is low enough, it could actually be more beneficial to invest excess funds into an investment that has higher returns rather than paying off debt.

Going on a slight tangent, the often preached financial advice is to get a 15 year mortgage to save money, but in the current economy where even 30 year rates hover in the neighborhood of 4% or less, you're actual better off taking a 30 year term and investing the difference in some cases into a mutual fund for instance that yields 8% or so on average annually. Perhaps not specific to your case, but its an example of how you need to assess your comfortable investment risks and how the bigger picture might include NOT simply paying off all your debt ASAP because doing so could actually cost you money - the key being the mindset to invest excess cash religiously and a lot of people can't. Most people take a 30 year term and then use the difference in lower monthly payments for other parts of their budget instead of investing it, so instead the objective should be buying a home you can have a 15 year note on and instead take the 30 and invest the monthly difference.

Again, not specific to your case perhaps, but on the big scheme of things I'm just trying to point at there are (at times) better financial opportunities for success then paying all debt down. In a society that abuses debt though, its hard to argue against the peace of mind of knowing you don't owe anyone anything.

I guess the easy answer is this. Take a look at how much "extra" cash you have available each month and then determine if that cash is more valuable paying off interest or earning interest in investments.


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[04svtsnke]

My financial advice is pretty much boiler plate:

First, do you have 6-12 months of emergency funds? That should be priority number one.

Second, paying off debt early is great, obviously by highest interest rate first.

Third, while paying off debt is great make sure that you aren't sacrificing participating in any employer savings programs. If a 401k is offered make sure to contribute what it takes to get the maximum matching.

Having a plan is already probably putting you ahead of the game when it comes to finances; most people don't think that far ahead!

We do have an emergency fund that has close to 15k in it. We both put 10% towards our tsp/401k( agency matches 6%). I don't know about her but my biggest goal is wanting a 2017/18 shelby so if our finances look fantastic and it's easily affordable, I won't have any complaints from her and I can really enjoy m new baby!

 

[ElscottHavoc]

Also, a notation about emergency funds and this might be debateable so take it as you will.

Many people in the US have credit card debt that exceeds the amount of money they need per financial guidelines in an emergency fund. Let's assume, for the sake of an example an individual has $10,000 on a Credit Card (costing 10% APR) and $10,000 in an emergency fund (earning 1% APY). Many financial advisors would say the emergency fund is first of importance, but I would argue here its more important to get rid of the credit card debt.

Sure it would wipe the emergency fund out, but its also saving you a lot of interest that will quickly help to replenish that fund, which isn't even guaranteed to be necessary. Assuming for instance, an emergency does arise, then you can always use the credit card as necessary and essentially be in the same boat or better than if you had just kept the emergency fund and also kept the credit card debt. Say you lose a job, I'd much rather have $10,000 available on a credit card with no savings than $10,000 in an emergency savings account while still trying to manage $10,000 credit card balance, because interest on the card is going to eat away at that savings quickly.

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[TheCPE]

We do have an emergency fund that has close to 15k in it. We both put 10% towards our tsp/401k( agency matches 6%). I don't know about her but my biggest goal is wanting a 2017/18 shelby so if our finances look fantastic and it's easily affordable, I won't have any complaints from her and I can really enjoy m new baby!

I don’t know your monthly expenses but 15k seems low for emergency funds, might be worth beefing that up to 25-30k as you work on the debt at the same time.

Good to take advantage of the TSP matching money, are you doing the lifecycle funds in the TSP?

I didn’t know the Shelby name was going to be on a mustang anymore but the other rule I live by is for toys I don’t finance. And don’t rob your emergency funds to pay for a toy.

Toys are nice, but financial independence is better, IMO.

 

[Huddleston]

check out dave ramsey - I don't agree with everything he promotes but many of his ideas are solid. I'd get your emergency fund built up first and then start knocking out the items with the smallest balances. everyone has their own way of doing it - I just hope you stick to it.

 

[TheCPE]

Many people in the US have credit card debt that exceeds the amount of money they need per financial guidelines in an emergency fund. Let's assume, for the sake of an example an individual has $10,000 on a Credit Card (costing 10% APR) and $10,000 in an emergency fund (earning 1% APY). Many financial advisors would say the emergency fund is first of importance, but I would argue here its more important to get rid of the credit card debt.

I can agree with this, large credit card debt at a very high rate might trump emergency savings. I wouldn’t let mortgage, car or student loan debt trump emergency savings though.

Of course in a perfect world you wouldn’t have compiled the CC debt to begin with ;-)

 

[TheCPE]

I just hope you stick to it.

That is probably the key, make a plan and stick to the plan. An ok plan that you stick too is much better than an optimal plan you don't stick with.

 

[04svtsnke]

What is your interest rate and term left on your mortgage?

There is of course an implied value in living debt free, but if the interest on that debt is low enough, it could actually be more beneficial to invest excess funds into an investment that has higher returns rather than paying off debt.

Going on a slight tangent, the often preached financial advice is to get a 15 year mortgage to save money, but in the current economy where even 30 year rates hover in the neighborhood of 4% or less, you're actual better off taking a 30 year term and investing the difference in some cases into a mutual fund for instance that yields 8% or so on average annually. Perhaps not specific to your case, but its an example of how you need to assess your comfortable investment risks and how the bigger picture might include NOT simply paying off all your debt ASAP because doing so could actually cost you money - the key being the mindset to invest excess cash religiously and a lot of people can't. Most people take a 30 year term and then use the difference in lower monthly payments for other parts of their budget instead of investing it, so instead the objective should be buying a home you can have a 15 year note on and instead take the 30 and invest the monthly difference.

Again, not specific to your case perhaps, but on the big scheme of things I'm just trying to point at there are (at times) better financial opportunities for success then paying all debt down. In a society that abuses debt though, its hard to argue against the peace of mind of knowing you don't owe anyone anything.

I guess the easy answer is this. Take a look at how much "extra" cash you have available each month and then determine if that cash is more valuable paying off interest or earning interest in investments.


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Well said! This is something we will take into consideration when we redo our budget for next year. Excellent points!

 

[04svtsnke]

Also, a notation about emergency funds and this might be debateable so take it as you will.

Many people in the US have credit card debt that exceeds the amount of money they need per financial guidelines in an emergency fund. Let's assume, for the sake of an example an individual has $10,000 on a Credit Card (costing 10% APR) and $10,000 in an emergency fund (earning 1% APY). Many financial advisors would say the emergency fund is first of importance, but I would argue here its more important to get rid of the credit card debt.

Sure it would wipe the emergency fund out, but its also saving you a lot of interest that will quickly help to replenish that fund, which isn't even guaranteed to be necessary. Assuming for instance, an emergency does arise, then you can always use the credit card as necessary and essentially be in the same boat or better than if you had just kept the emergency fund and also kept the credit card debt. Say you lose a job, I'd much rather have $10,000 available on a credit card with no savings than $10,000 in an emergency savings account while still trying to manage $10,000 credit card balance, because interest on the card is going to eat away at that savings quickly.

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That's one of our main goals for this year. We have about 5k in CC debt combined. As you said we would probably use those for emergency use only starting next year when we start this. We have 2k in small loans we have to pay off as well. My cobra will be sold in February and my srt4 by the end of the year. She has no car loans and only owes a loan on her tsp which she used to put down on the house.

I don’t know your monthly expenses but 15k seems low for emergency funds, might be worth beefing that up to 25-30k as you work on the debt at the same time.

Good to take advantage of the TSP matching money, are you doing the lifecycle funds in the TSP?

I didn’t know the Shelby name was going to be on a mustang anymore but the other rule I live by is for toys I don’t finance. And don’t rob your emergency funds to pay for a toy.

Toys are nice, but financial independence is better, IMO.

I'm not in the life cycle funds. Just the g fund and c fund. Should I make a switch? I'm not sure on the shelby name, but whatever too model is out is what I want. I actually planned on putting a small every paycheck into a high interest account and wouldn't touch it until the house was paid off which would be my down payment for it. With the rate of inflation and car prices, it may take me an incredible amount of time to afford one with just cash.

check out dave ramsey - I don't agree with everything he promotes but many of his ideas are solid. I'd get your emergency fund built up first and then start knocking out the items with the smallest balances. everyone has their own way of doing it - I just hope you stick to it.

Ill google him and check him out. I'm positive I've heard of the guy before but I wasn't paying attention. Our plan is to stay with it, manly for our daughter and the financial flexibility we could have later down the road. On e a few more smaller debts are paid, Im positive it'll make things a lot easier for us next year.

 

[TheCPE]

I'm not in the life cycle funds. Just the g fund and c fund. Should I make a switch?

Unless you are into investing and enjoy spending time doing the homework the lifecycle funds are the way to go. They make investing simple, they spread your investment over the other funds based upon your age and projected retirement year.

 

[wht93gted]

Unless you are into investing and enjoy spending time doing the homework the lifecycle funds are the way to go. They make investing simple, they spread your investment over the other funds based upon your age and projected retirement year.

You can do way better then the lifecycle funds, with a little research.
It depends what your company offers and the choices you have.

Just looking at my options, and picking high growth\high risk, 5 star rated funds; maybe a few days of research, I was able to turn in 32% rate of return last year. Whereas the lifecycle for my retirement year was around 14%. I'm young, so I went all high risk.

It's not a lot of work, just pay attention to things and whats happening. In 2008 I re-balanced a lot into mutual funds to protect the risk, and was able to stay positive that year, while many people went large negative.

Every scenario is different, we just bought a house and did 30yr mortgage at 4.002% APR. For me, it's more worth it to pay my student loans ahead of everything else. I don't have CC debt, but at close to 20% interest, it would be certainly at the top of my list.

 

[ElscottHavoc]

I don’t know your monthly expenses but 15k seems low for emergency funds, might be worth beefing that up to 25-30k as you work on the debt at the same time.

This is an honest curious question. Why do you recommend $25k to $30k? In my opinion, an emergency fund is a sum of money, typically a fairly significant amount, that you need access to at a moments notice in case of...well...an emergency.

Most serious car repairs, appliance replacements, or other material goods that require emergency repair would probably not exceed a couple thousand dollars or so. Assuming a person has insurance, you're looking at maybe a few thousand in out of pocket expenses on accidents or medical emergencies, fires, etc. And in basically all the cases I can think of, especially medical related, you're not going to be billed for a couple weeks.

This leaves unemployment as the biggest emergency requiring the most money over an uncertain period of time. Granted, you do of course want as much time as possible, but I would think you're not going to need 100% of that $25-30k up front, so why not move it into a stable higher yield investment such as stocks in a stable company? Even if it takes a week to withdraw, the existing $15k in immediately available savings should buffer that period - not to mention unemployment compensation, ability to cut back on spending, etc. I agree, with a combined household income of $120k, a minimum 3 months is necessary, but is it really necessary to have 100% of that cash wrapped up unused in a savings account. Why not in a mutual fund where funds can be liquified - just the fear that the funds are volatile and could lose value?Even through the volatility, those funds have proved beneficial which is why advisors push so hard for them.

Granted, many investments are not guaranteed, but it just seems to me that $15k a pretty good chunk of money up front and that you can always take $10k out of your portfolio (stocks, mutual funds, etc) for a few bucks and have the funds in a week or so.

Just curious really...

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[TheCPE]

You can do way better then the lifecycle funds, with a little research.

It depends what your company offers and the choices you have.

Just looking at my options, and picking high growth\high risk, 5 star rated funds; maybe a few days of research, I was able to turn in 32% rate of return last year. Whereas the lifecycle for my retirement year was around 14%. I'm young, so I went all high risk.

I specifically stated that if investing isn't something you are interested in lifecycle funds are great. And they are, because they handle asset allocation for you. Further, if you want to be a little more risky you can still use lifecycle funds and pick a projected retirement date beyond the date that you actually plan to retire. As an example if you really plan to retire in 30 years, pick the 40 year lifecycle.

Also, he is specifically talking about the TSP which has only 4 funds to choose from, I, F, S, C. The G fund is basically cash. Now, if he had a vanguard account as an example where there are many many more options that might change.

The point is for the average investor lifecycle funds are a good vehicle.

BTW, one year investing/stock picking performance isn't indicative or statistically significant of continued success. Especially considering that this past year everything was basically up.

Long term only 3% of fund managers beat index funds, :shrug:.

I personally don't use lifecycle funds because I am willing and do find investing interesting enough to spend a few hours a week doing homework. A lot of people aren't that interested and that is why the lifecycle funds were created.

 

[STAMPEDE3]

Emergency fund should be roughly 6 months of take home pay.

Never deplete it to pay off a CC.

In the 10K situation mentioned.

If you lose your job you rather have 10K availible credit over 10K savings?

If that were the case you could pay off the CC right then and start using it but guess what? At the end of the first month of using it a payment is due and you have no way to pay it.



Another situation is say not a job loss but a set back. Surgery or something with medical bills, extra child care cost and 60% LT disability.

That is what your fund is for, NEVER DEPLETE IT unless it is an EMERGENCY.

I also disagree with the highest interest first. Doesn't seem right but I go with lowest balance first. Then apply that to the next lowest and so on.

Dave Ramsey does have a lot of very good info.

 

[TheCPE]

This is an honest curious question. Why do you recommend $25k to $30k? In my opinion, an emergency fund is a sum of money, typically a fairly significant amount, that you need access to at a moments notice in case of...well...an emergency.

I arrived at that number based upon the stated income of 60k for each he and his spouse and that one income they mostly used to pay off debt. Based on that, I assumed monthly expenses of about $3.5k and thus 6 months of funds would be 21k and 12 months would be 42k so 25-30k would be a good average.

This leaves unemployment as the biggest emergency requiring the most money over an uncertain period of time. Granted, you do of course want as much time as possible, but I would think you're not going to need 100% of that $25-30k up front, so why not move it into a stable higher yield investment such as stocks in a stable company? Even if it takes a week to withdraw, the existing $15k in immediately available savings should buffer that period.

I see, looks like you are curious about the location of the emergency funds. I agree, it doesn’t all need to be in cash at the local bank. I keep a portion of mine in index funds in a vanguard account which as you point out can be accessed within 2-3 business days if necessary.

Granted, many investments are not guaranteed, but it just seems to me that $15k a pretty good chunk of money up front and that you can always take $10k out of your portfolio (stocks, mutual funds, etc) for a few bucks and have the funds in a week or so.

I agree, I am pretty conservative with my emergence money and so I do keep a decent amount in a basic savings account at the local bank but I do have some in index funds as well at vanguard. I wasn’t clear early maybe but yeah 100% of the emergency money doesn’t need to be in cash.

 

[TheCPE]

I also disagree with the highest interest first. Doesn't seem right but I go with lowest balance first. Then apply that to the next lowest and so on.

I'm curious why you do it that way since interest (multiplication) is associative?

 

[jbs$]

The average life of a US mortgage is about six years. People move, change jobs, families expand or for whatever it gets refinanced. Given the current low cost of long term mortgage money vs. rising inflation, there is little incentive to embark on a "pay off the mortgage" program. The other debts are another matter. Debt, outside of a reasonable mortgage, is an anchor on your future. First, be sure that you are not replacing with new debt, credit cards, the old debt that you are paying down.
I don't think that you gave your age, so I am guessing 30esh, you have time. Most importantly, leave a few un-committed bucks in your plan for each of you. Don't nickel and dime each other, it will rune the relationship.

 

[SpectorV]

consider supplemental disability insurance (long term) and also a cancer policy/life insurance etc as if you need them they are WELL worth it (seems more people go bankrupt due to medical costs that are unseen until its to late)