Where to put my extra cash?

[ChrisH]

Age 30
Married (dual salary income)
Saving $400/mo for emergency fund
Investing $100/mo in Roth IRA (just started 2 years ago)
Paying extra $70/mo on mortgage as extra yearly mortgage payment.

Mortgage - $158k @ 5%)
Student Loan - $11k @ 3.2%
No credit card debt
No car loan

Currently I am in the process of putting together a 3 month emergency fund, but I am already looking ahead. As soon as the emergency fund is complete $416/mo will be going to my Roth IRA to max the contribution each year.

When the emergency fund is complete I will have a little extra money to put towards something. Would I be better off paying extra on the mortgage, student loan, or something entirely different?!

Thanks for the advice guys.

[krantcents]

If you itemize your deductions on your tax return, the IRS is subsidizing your mortgage. Are you saving for your retirement in a 401K? You want to increase your contribution, since this too is tax deferred.

[ChrisH]

Originally Posted by krantcents

If you itemize your deductions on your tax return, the IRS is subsidizing your mortgage. Are you saving for your retirement in a 401K? You want to increase your contribution, since this too is tax deferred.

I am sorry, but can you give more details about subsidizing our mortgage? I am not exactly sure what you are referring too. We do itemize our deductions, but I am only aware of getting to make interest payments tax deductible.

I have not 401k yet, mainly because my company does not do any 401k matching. That is why I opted for a Roth IRA>

[kork13]

You should open a second Roth IRA for your wife, and if possible, max that one out as well. It sounds like your retirement savings are still in the initial stages, so you probably have some catching up to do.

By contrast, you have no consumer debt, a (relatively) small student loan, and what appears to be an affordable mortgage. Both of these have good interest rates, and the interest payments are normally tax-deductible. This tax-deductible status is probably what krantcents meant by "subsidizing"--by deducting your interest payments, your effective interest rate after taxes is 3.75% for the mortgage, and 2.4% for the student loans.

So my recommendation would be to utilize the Roth IRAs to the max extent possible, taking advantage of the higher (than 3.75%), tax-free returns you can get there.

[jpg7n16]

Originally Posted by ChrisH

I am sorry, but can you give more details about subsidizing our mortgage? I am not exactly sure what you are referring too. We do itemize our deductions, but I am only aware of getting to make interest payments tax deductible.

I have not 401k yet, mainly because my company does not do any 401k matching. That is why I opted for a Roth IRA>

It was a figure of speech. (Or an alternate viewpoint, however you want to look at it)

In his view, if the Gov allows you to deduct it from your income, you are given a tax 'bonus' from your mortgage interest, and he could argue that they are thus 'subsidizing' your mortgage.

It's an interesting way to look at it, but it's semantics if you're looking at reality. They don't technically subsidize your mortgage, they allow a deduction for mortgage interest. (This would just lead to a debate over semantics)

[artwest]

I would temporarily stop funding the ROTH IRA.

Use the $100 for the ROTH plus $400 for the Emergency Fund to build your Emergency Fund to about $2,000-$3,000.

I would then take the $500 and pay off the student loan.

Then take that $500 to build up the Emergency Fund to 3-6 months of expense.

In about a year you would be debt free except for the house and have a fully funded Emergency Fund. Then start throwing the $500 into ROTH IRA's.

[PatMil]

At age 30 and "looking ahead" I'd be much more concerned about the long term, big picture. How will these schemes change over the long term? Can I rely on rules that exist today existing for the next 30 years? Considering also that, after expenses, many investment schemes show very poor long term returns.

Therefore how do I reduce my risk and maximize my returns? Some options of diversification include owning a business (brick and mortar or online), renting domestic, commercial or industrial properties, investing offshore or owning precious metals.

One needs to be to be in a position to respond to a rapidly changing world.

[bjl584]

Originally Posted by ChrisH

Age 30
Married (dual salary income)
Saving $400/mo for emergency fund
Investing $100/mo in Roth IRA (just started 2 years ago)
Paying extra $70/mo on mortgage as extra yearly mortgage payment.

Mortgage - $158k @ 5%)
Student Loan - $11k @ 3.2%
No credit card debt
No car loan

Currently I am in the process of putting together a 3 month emergency fund, but I am already looking ahead. As soon as the emergency fund is complete $416/mo will be going to my Roth IRA to max the contribution each year.

When the emergency fund is complete I will have a little extra money to put towards something. Would I be better off paying extra on the mortgage, student loan, or something entirely different?!

Thanks for the advice guys.

Instead of paying extra on the mortgage you could refinance it. If you have a 30 year note, you could refinance to a 20 or a 15 year. You may save more that way.

[ez1]

Your mortgage and student loans are very low interest rates, but honestly, there are not many guaranteed investments out there that do better than they do. I would pay them down with your extra cash.

Before anyone disagrees and says that the stock market would return 8% or whatever, realize that there are very sophisticated analyses out there that tell us the expected real return (after inflation) of the S&P500 over the next 10-15-20 years is about zero. Unless you can beat the market (which most don't), you're better off paying down debt and of course contributing to a 401-k if there's a match.