What to do with $120K in cash???

[brig2221]

I found this forum a few days ago and thought that this would be a good place to pose the following scenario and question:

My wife and I are both 31 years old, both turning 32 soon this year. We both work and have no children. Between both my wife and I, we have about $195K in our 401k accounts. My wife puts away 16% of her salary towards her 401k, and I am kicking mine up from my matching 6% to 16% as well this year. So, you can see that we will be "investing" at least 15% of our salaries into the stock market going forward.

We also try to save up as much cash as we can as well. We currently have around $95K in cash, $80K of which we just setup in a 6 month CD with Citibank at 5.25% interest. The remaining cash is sitting in a Citibank E-Savings account at 5% interest. As we continue to save money from each paycheck, I just transfer it from my regular Bank of American account into the Citibank E-Savings account.

We have a home we bought three years ago and put $30K down on it, and financed the rest at a 30 year fixed rate of 5.875%. We currently owe around $117K on it, and it's worth $175K. We don't have any credit card debt, student loans, or car payments. That said, my wife will be losing her company car at the end of the year as they are going to a Runzheimer program, so we will be purchasing a car at the end of the year.

I am forecasting that we will have around $120K or more saved in cash by the end of this year (2007), if not a little sooner. My ultimate goal is to pay off our house ($117K). I know with that money, we could pay off our house, but would only have $3K left over, which isn't NEARLY enough of a cash savings for me. So, I figure I want at least another $30K of cash savings before I pay off the house, which would mean my goal would now be to have $150K in cash savings, which leads me to my dilemna and question:

Do I continue to just save as much as I can and put my savings into CD's and high interest savings until I get to my goal, or should I try investing at least half of the money into some good diversified mutual funds, hoping to get a much greater return on my investment than a CD or high interest savings account would?

I've got to tell you, the stock market scares the hell out of me. It doesn't as far as our 401k's are concerned as I never see that money anyway, and I know I won't even be in a position to use any of it for another 30 years. My hard earned and saved cash, that is another story all together.

Any and all advice would be greatly appreciated. Thanks!!!

[pearlieq]

If you're planning on using the cash to pay off the mortgage in the next year or two, I personally wouldn't bother with moving it out of the CD's/high yield savings account. To me it would just seem like too much of a hassle, plus you'd have to worry about fees, tax consequences, and the fact that just about anything can happen in the market in the short term.

If you were planning to keep it longer, I would move it. It's really a matter of personal opinion.

[scfr]

Since every mortgage is different and there are so many types out there, the first thing I personally would recommend is to review your loan papers first, especially to see if there is a prepayment penalty ....

Then, assuming there's nothing prohibiting this in your loan papers, there is no reason why you can't start prepaying your mortgage now, a little at a time. No need to wait until you have enough to pay the whole thing off. For example, you could start with paying it down by $5K or $10K or $20K and see how that feels.

***Very important note: If you send in an extra payment, make sure you write "For Principal Only" on the check and it's also a good idea to send a letter explaing that you want that entire payment applied to your Principal Only. Otherwise, the mortgage company may apply it to interest first and you won't get nearly as much bang for your buck.***

My husband & I paid off the mortgage on our previous house, but we did not do it all at once. Whenever we had some extra cash saved up (after making sure we had plenty in our emergency fund and plenty to keep our businesses flowing) we applied it to our mortgage. With the mortgage we had, we were able to check on-line and see how much of our monthly payment was applied to principal and how much was applied to interest. It was so exciting to see the percentage going to principal growing rapidly after making an extra pay-down payment. The first time principal paid was greater than interest paid, we did a little dance of joy. The whole process kept gathering more and more steam and before we knew it the entire mortgage was paid off!

Then, we turned around and sold the house, but that's a whole other story!!!

[pretty cheap jewelry]

My opinion is to shelter as much from income tax. Increase in retirement savings as these are the largest earnings years of your life. Can you add an IRA?

Run to a trusted investment advisor! I have a great one and have a really nice IRA portfolio (see post in 'Investments' I made last week).

Not enough time to think about it more, gotta run,

[pearlieq]

I guess there is the option of using a good chunk of it to pay off the mortgage now, but I coudn't think of a really good reason to do it early.

The interest on the mortgage is 5.875% and it's deductable, but the interest on the savings is a little over 5%, but it's taxable. So I don't think either scenario provides a huge advantage over the other.

Might as well keep the money as liquid as possible. You can always pay off the mortgage, but it's much harder and more costly to get the money back out of the house if you were to need it.

[pearlieq]

Originally Posted by pretty cheap jewelry

My opinion is to shelter as much from income tax. Increase in retirement savings as these are the largest earnings years of your life. Can you add an IRA?

That's not a bad idea either if you're willing to part with some of it. You can put aside 16k ($4000 for 2006, and $4000 for 2007 for each of you) until April 15th. If your combined income is under 150k you can put it directly into a Roth and let it grow tax free.

If you combined income is over 150k (Roth eligibility phases out from 150k - 160k) you can put the money into a non-deductable traditional IRA and roll it over to a Roth in 2010.

[Ima saver]

I keep a lot of money liquid and I have mine in a money market account paying 5.25. % I plan to put $100,000 in a 6 month CD that pays 5.75% in a few weeks, keeping the rest in the money market. I would say I think you should continue doing what you are doing, but paying extra on the pricipal each month is a great idea too. I reccommend you each open a roth ira for $4000 each.

[scfr]

[quote=Ima saver] I plan to put $100,000 in a 6 month CD that pays 5.75% in a few weeks, ./QUOTE]


brig2221, I'm really sorry for changing the subject, but ...
ImaSaver: Which bank is paying 6.75% on a 6-mo jumbo CD?

[Ima saver]

No, it is only 5.75%, It is Cadence bank.

[scfr]

Originally Posted by Ima saver

No, it is only 5.75%, It is Cadence bank.

Oops ... typo! Thanks for the additional information!

[Ima saver]

I don't know if they advertise the rates, but I had a closing and the lady from Cadence was there. I told her I needed to spread the money around and asked her the cd rates. She called me back Friday and told me they were paying 5.75 for 6 months cd. I am getting 5.25 % in a money market checking with Appalachian Community Bank with a $50,000 deposit.

[MonkeyMama]

Agreed. Sounds like you make a lot of money. You know you can both put $15,500 in 401ks this year. It is a lot to put in retirment, BUT it would be tax-free and free up even more money to save. If you are in a high tax bracket, could save you at least $6k on the federal level if you are at 25% rate. Maybe a little for state too. Plus you could do the ROTHS if you like - careful with income limitations though (I didn't catch what your income was).

You know when we had a lot of cash we sank a lot into our house. I don't regret it overall, but looking back if I Could do anything different I would have maxed out our retirement instead. OR saved more cash. There are many factors to consider, but tax-wise, maxing out all your retirement options when you can is your best bet going forward. The earnings are growth on your 401ks are all tax-free until you withdraw the money. We were so focused on paying down our home we did not take the tax advantage of maxing the 401k, which would have left us more cash in the end with tax savings.


Hanging around these boards has changed my whole perspective. I still plan to pay the house off early and fast, but not until my retirement is all maxed out and I have money to spare, has just changed priority.

I also struggle as I Tend to lean towards being safe. One thing I have learned is being too adverse to risk can be detrminental to your long-term financial success. I try to balance this wisdom with not putting all my eggs in one basket. I have more in cash than recommended for my age, but most of my money in stocks/bonds. Of course the bigger percentage I save, the more I sink into cash. Feels safer, but I struggle with not being too safe.

Reminds me - if you open ROTHS are easy to invest in cash too. So if you put all your 401ks in the market and your ROTHS and savings in c.d.s you probably wouldn't do 1/2 bad. For now c.d.s are paying well enough.

One more thing that has shifted my mindset - a relative had someone trip in front of her house and is being sued big time - she is about to retire and this may delay her retirement. THat has also helped me in changing my priorities. Retirement money as stands can pretty much not be touched - by bankruptcy, by lawsuit, etc. Anything can happen and if your money is in retirement it is SAFE. I almost forgot that is a big part in my thinking of changing priorities. This is a big reason retirement is #1 for me, compounded with the tax benefits.

Of course not all employers are responsible with retirement money - so it goes on and on - you'll face some kind of risk at every turn.

[brig2221]

Thanks for all of the replies.

We had a good year this year, more specifically my wife did. Our comined income this year will be around $175K. We are both in sales and she just knocked it out of the park this year and earned about 50% more salary than her previous highest year. That said, I certainly don't "expect" another year this year like the last. If things were to return to "normal", we will be looking at about $120K in combined salary.

That all being said, we are not eligible for Roth's this year, and my wife did max out her 401K contribution this year.

I think what I am hearing from everyone is that retirement savings ought to come first before you worry about hording cash savings to pay off a house note early. With that in mind, we will both be maxing out our 401K contributions at 16% each, with both employers matching dollar for dollar at 6%.

Regarding the cash savings we have now, I plan on following one of the earlier posters advice regarding keeping the money in CD's/High Yield savings accounts since we will be "investing" in the short term. It would be my luck I would lose my a$$ trying to dabble in the market for a 1-2 year term.

On a side note, how easy and how prevalent is it to open up accounts across various banks in the United States. I know it's very common practice to do this with credit cards and balance transfers. I get the impression that among the poster here that it is also true regarding banks accounts for CD's and Money markets. I'm tied in for 6 months now, but heck, when that comes up for renewal, I want the best rate out there, regardless of who it is. That said, is this easy to do, or even advisable to do???

[TBH]

I agree that it would be a better move to max your retirement and ease up on the cash savings a little, but I know owning your home free and clear is a big psychological boost. You are in a great position.

Question: What do you plan to do after you pay off your house? Have kids? Start a business? Buy investment property? Just curious.

[brig2221]

TBH,

We are in the process of trying to start a family and as of yet have not been successful. We have only been trying for about 4-5 months.

One of the reasons why I am pushing for us to save as much as we have is the impending starting of a family. I would LOVE to have the house paid off by the time we have a child as it would take away so much stress I would think.

We still haven't decided if my wife is going to be a stay at home Mom or not. My wife and I have been married for almost 5 years now, the first 3 of which I was making more money than her. Unfortunately, I have had a very bumpy two years professionally and income speaking while she has continued to make more money. I would say that our income distribution has averaged about 70/30 these last two years, with my wife accounting for the 70%. That is very scary to me, not necessarily the loss of an income, but that high a percentage of total household income is what is scary. I have a good job now and hope to stay here awhile and get some much needed stability that I haven't had the past two years.

In regards to what I/we plan to do after the house is paid off, I haven't a clue. The investment property market in Dallas is saturated and homes typically don't appreciate worth a darn, not to mention all of the headaches and aggravation that go along with it. We have talked a little about opening up our own business, but don't know what we would do, and certainly don't have a business plan for one. My guess is that we continue to save and stockpile as much cash as possible as we have done.

[trainedmonkey]

Maybe I'm over simplfying things but I don't understand the desire to pay off mortgages early.

Right now I'm 43 single, maxing out my 401k, contributing the max to a Roth and socking away as much cash as possible.

I ladder my cash in several ways, Banking (to pay bills), Money Market, Short Term Bond Funds (multisector and floating rate), Municipal Bonds, and Equities.

Since I have no spouse, no kids the only tax write off I get is my mortgage (plus my 401k savings) so I want as big of a mortgage as I can affort at 6% to offset my tax liability.

Right now I'm of the opinion that I want to go to my grave with a Mortgage but that might change.

Thoughts?

[brig2221]

TrainedMonkey,

I guess everyone looks at the mortgage issue differently. On paper, you can make a compelling argument every time that paying off your mortgage early is not the best financial decision to make. Things such as tax writeoffs, low mortgage interest vs. what you can make in the market, etc, all point towards keeping your mortgage.

Me personally, I look at a few other things that most financial advisors and types never look at and are hard if not impossible to quantify. First for me by a mile would be the peace of mind I would have knowing that I own my own home outright. I will never forget how great I felt the day I paid off my Explorer a full two years early and received the title in the mail from Ford Motor Credit.

The second would be the freeing up of cash flow. My mortgage is currently about $1200/month. I will still have to pay my local taxes even after I were to pay off my mortgage, so I wouldn't be saving all of the payment, say $1000 of the $1200/month. That said, that is pretty powerful stuff to me, having an additional $1000/month to save and invest on top of what you were already saving.

So to answer your question, that is why I would want to pay off my mortgage early.

[scfr]

Originally Posted by trainedmonkey

Maybe I'm over simplfying things but I don't understand the desire to pay off mortgages early.


Thoughts?

To borrow from the Am-Ex (or is it Master Card?) commercial:
The feeling of freedom that comes with knowing you own your home free & clear = PRICELESS

It is a psychological boost.
And while you do lose the tax deduction, you can also save money because you and you alone decide how much insurance to carry on the house (you can go for a higher deductible than a mortgage company may allow) and if you pay the mortgage off you may even decide that you can cancel your life insurance policy because of it ... why? ... because some people without children carry just enough to pay off the mortgage so that a surviving spouse would not feel pressed to sell the house.

There are + and - to every financial decision, and ultimately each person has to go with what feels right to them.

On a completely different note, brigg2221, given your income you may want to give municipal bond funds a look-see as they do offer some tax savings advantages.

[Ima saver]

Well, I have owned my house free and clear for 30 years and it feels great. So you lose the tax write off, but you save more by not paying interest. I will never have a mortgage again. I have made money in mutual funds and stocks, but I have lost money too. I like having a lot of cash earning 5% or better also.

[disneysteve]

Originally Posted by trainedmonkey

I want as big of a mortgage as I can affort at 6% to offset my tax liability.

My accountant always says you should never buy a tax deduction. It isn't worth it.

For every $100 you pay in mortgage interest, you only save $25 in taxes if you are in the 25% tax bracket. You are paying $100 interest to save $25 in taxes, so you still end up behind by $75.

That said, however, I'm also in no hurry to prepay my mortgage but for a different reason. My loan is at 5.875%. After the deduction, the true rate is about 4.40%. Almost all of my investments are earning well more than that. Outside of my retirement plans, my best fund was up 28% in 2006 (in my retirement plans my best fund was up over 39%). Why would I want to pay off a loan costing me only 4.4% when I could be earning 28%? It is true that prepaying the mortgage is a guaranteed return, but I'm young and willing to take more risk than that with my money. I will keep my mortgage for now.