Morgage, Retirement, Savings, Car - where to put extra first?

[trigrl]

Hi,

My husband and I purchased our first home 2 years ago and the price has gone down by $30k already. We are not looking to move anytime soon, but this is just a starter home and we will probably have kids in the next 5 years might need to upgrade. I am looking to see what we should start paying extra on as we have a few hundred dollars we can put somewhere.

Our combined yearly income is $130k
We are 27 years old
10k in emergency savings

Monthly Payments
1st morgage (30 years at 6.2%) - $1700/mo.
2nd (15 years at 7.5%) morgage - $500/mo.
Retirement - $400/mo.
Car (5 years at 4.6%)- $360

I am worried about the price of our home going down and what I should try to do - invest, save, not pay as much interest in the long run by putting extra on the morgages.

Any advice?

[Ima saver]

You need 3-6 months of expenses in your emergency fund, so i would build that up first!

[disneysteve]

I agree with Ima. 10K is a good start but not nearly enough of a cushion with a 130K income. Especially if you plan to start a family in the near future, meaning you wouldn't be working for some period of time. And if you go back to work, you'll have daycare expenses along with all the other expenses that come with having children. Build the savings now while you have maximum earnings and minimal expenses.

[TBH]

What's the balance on that second mortgage? I agree that you need a bigger emergency fund, but if it were me I'd feel a whole lot better about having kids when I only had one mortgage. I'd say you should build up your E-fund to 3 months' worth of living expenses, then throw all available extra money at that second mortgage.

Try not to worry too much about the house value dropping. Since you don't plan to move within the next few years, just keep saving money and paying your mortgages and hope the house values recover by the time you want to sell. If you do need to sell while you still owe more than the house is worth, having a big cash cushion in your emergency account will help you do that. But I think as long as you're not planning to sell soon you should just try to put the plummeting house values out of your head and keep plugging away at your financial goals.

[Tree0164]

I would bump up the emergency fund to 18k or so.

Contribute more to your retirement-try 15% or more

Pay off the car

Then start on the second mortgage

[Like2Plan]

trigrl,
My first two prioities would be emergency fund and retirement. Here is why:

I agree with the emergency fund for 3-6 months worth of expenses.

Your retirement savings are a little low, too. I would make at least 10% contribution a priority. 10% of 130K would be $1083.00 per month. Will you have a pension when you retire? When I was your age most folks expected to get a pension and the general rule was 10% retirement savings to suppliment the pension. If you are funding your own retirement I think in general 20% is probably a more realistic target ( and it could be even higher depending on your personal circumstances). If you are currently earning 130K right now, you will most likely be making far more than that by the time you retire with pay increases and promotions. You will be looking to replace a percentage of your final salary when you retire (whatever that turns out to be--even if your income only kept up with a 2% inflation rate, a $130,000 income would be $287,045 40 years from now--and realistically your earnings potential is probably light years higher than just keeping up with inflation!). One huge advantage you have is time is on your side--you have quite a few years of compounded earnings to look forward to to help meet your savings objectives.

Here is a link to a financial planning calculator You can enter some different variables in to get an idea of target savings goals based on different incomes and different increases and saving objectives.

If you and/or your spouse have a 401K, are you making contributions so that you are maxing out the employer contributions?

Another place you can save for retirement is a Roth. ($4,000 for you and $4,000 for your spouse). In 2008, it rises to $5,000 each. I believe it is a good idea to take advantage of these contributions because they are finite--you are not allowed to make up for past years when you didn't make the maximum contribution (--except for the grace period for the previous year up to your tax deadline date) The other factor is Roths contributions start to phase out after 150K (MAGI) and completely phased out with incomes above 160K (MAGI). (Based on your current income You qualify now, but you may not for too many more years. )

If there was any money left over after the first two saving priorities, I would look at building up another savings fund which would cover the expenses involved with selling the current house and buying the larger home. Hopefully you have enough room in your current home that you could weather a market downturn and wait for a better time to sell. The savings fund would cover upkeep and repair work needed to be done on your current home to keep it in selling condition. If it turns out that you have money left over after you sell your current home and buy your new home, you could use it for decorating your new home or putting it towards the down payment or moving expenses or closing costs, et'c.... ( If you decide not to move, you could always put the accumulated funds towards the second mortgage at some point in the furture. )

[jamai]

a car will only depreciate, you should save and earn interest on that..