Are we on the right track?

[gertymac]

Hello! I'm seeking a second opinion on my financial plan, just as a check to make sure my partner and I are on the right track.

We're a young couple (25 and 26). We both work full time, have decent salaries and benefits, and I am also in school part time finishing up a grad degree.

We bought our first home in July and have been making the minimum payment since September. We currently save approximately 20% of our income, plus an end of the month "checkbook sweep" into our EF. We are very close to having our EF finished (equaling about what we’d need to live off of if both of us lost our jobs for 6 months). But once that’s done, where does the money go?

Facts to consdier:
-My student loans (he doesn’t have any) aren’t in repayment until at least May 2010.
-My employer contributes the equivolant of 10% of my salary to a retirement account (Vanguard stock targeted account) regardless of my contribution, but I can add another 10% if I’d like.
-We have no other retirement savings.
-Our mortgage loan is a 2 yr ARM, but can only go up or down 1% in every two years (can go up to 5.75% in 7/2011)
-We love to travel and would like to save for several big and medium sized trips in the coming years.
-We have no other debt!

Right now our plan is to finish off our emergency fund through the end of 2009. Use our $8,000 tax credit to open and max out a Roth IRA, add some money to the “vacation fund”, and top off the EF.

So (if all goes according to plan) at the beginning of 2010 we’ll have 20% + checkbook sweep to go somewhere, a maxed out IRA, a 10% no strings attached employer contribution to my retirement acct, student loans that are not yet in repayment, a mortgage, and an itch to travel.

Should we be using the 20% we currently contribute to EF for mortgage principle in an attempt to get it down before our interest rate goes up? Or should we contribute to my retirement account? Once my student loans are due the MINIMUM payment will be about 10% of our income, so how do we allocate funds after that hits?

We're feeling a little overwhelmed with all our possible options. We've feel like we're starting off well but don't really have any good points of comparison.

Any advice or insight is greatly appreciated!

[am_vanquish]

Originally Posted by gertymac

Should we be using the 20% we currently contribute to EF for mortgage principle in an attempt to get it down before our interest rate goes up? Or should we contribute to my retirement account? Once my student loans are due the MINIMUM payment will be about 10% of our income, so how do we allocate funds after that hits?

You guys are doing great! I was reading along quite impress, but a huge red flag went up when I saw that you have a variable/adjustable mortgage rate. That's a dangerous situation ...

Also, what % of total income is yours/his? 10% of salary is a pretty generous employer-based retirement plan these days. However, that's not enough for the two of you unless your income is about 70% or more of the total household income. If that's not the case, I'd also recommend increasing the retirement savings.

[lovcom]

Keep up the good work!!!

[gertymac]

The ARM is a gamble, but I think some more details may make it look better. It's a first time homeowner's loan through a very stable credit union. We started at 4.75%, and the rate can go up or down no more than 1% every other year. It cannot raise more than 8% over the life of the loan. This loan enabled us to put less down (keeping our EF steady), avoid PMI, and have much lower closing costs than we would have with other lenders. We're looking at incresases (or decreases, if we're lucky) in 2011, 2013, 2015, etc. However, we're only planning on being in this house for 5-7 yrs so the most it can increase is 2-3%.

My income is about 55% and his is about 45% of the total. We're very serious about saving for retirement and were only considering putting it off a year because we could immediately max out an IRA for him early in the year. Is it better to calculate percentage of retirement savings based on pre or post tax salary? Or does it depend on the type of account?

[disneysteve]

Originally Posted by gertymac

Is it better to calculate percentage of retirement savings based on pre or post tax salary?

Any suggestions you read about retirement savings are using gross income. So when an article says you should save 15% of income, they mean 15% before taxes.

[gertymac]

Originally Posted by disneysteve

Any suggestions you read about retirement savings are using gross income. So when an article says you should save 15% of income, they mean 15% before taxes.

Thanks for the tip. In an attempt to simplify our budgeting, we use all post-tax numbers. Not thinking of the money that goes to taxes (or our health insurance, or some money I send to family every month) as "ours" to begin with means we never miss it.

[KTP]

Figure out what your student loan payments will be when you have to start paying them and set aside that amount each month in a money market or some other low risk investment. Get used to living without that cash and then you are less likely to overspend when you actually do have to make those payments. Plus, you can use the money in the investment to help pay them off faster.

[LuxLiving]

That tax money is yours, until they pry it out of your hands. Why not think about how to constructively avoid as many of those taxes as the law allows?

[gertymac]

Originally Posted by KTP

Figure out what your student loan payments will be when you have to start paying them and set aside that amount each month in a money market or some other low risk investment. Get used to living without that cash and then you are less likely to overspend when you actually do have to make those payments. Plus, you can use the money in the investment to help pay them off faster.

We were thinking about doing something like this, but instead of putting the student loan minimum payment (which will be about 10% of our income) we were thinking about putting it toward the mortgage principle until the loans are due.

Thanks!

[gertymac]

Originally Posted by LuxLiving

That tax money is yours, until they pry it out of your hands. Why not think about how to constructively avoid as many of those taxes as the law allows?

Ehhhhhhhh... politically we identify as socialists, so going out of our way to avoid taxes feels rather unethical/hypocritical.

Not considering what comes out of our paychecks before it hits our bank account (taxes, insurance, family contribution), gives us a more realistic picture of what we have to spend and save each month. It works for us, but thanks for the suggestion.

[KTP]

Originally Posted by gertymac

We were thinking about doing something like this, but instead of putting the student loan minimum payment (which will be about 10% of our income) we were thinking about putting it toward the mortgage principle until the loans are due.

Thanks!

Hmmm, I dunno. The mortgage is tax deductable, the loans arn't? And won't they be at a higher interest rate than your home loan? Certainly up to you though.

[gertymac]

Originally Posted by KTP

Hmmm, I dunno. The mortgage is tax deductable, the loans arn't? And won't they be at a higher interest rate than your home loan? Certainly up to you though.

I'm actually not sure what the interest rate on the loans will end up being. Right now about 1/2 of the amount is at 3.8% (less than mortgage) and 1/2is at 6.25% (more than mortgage). Since they aren't in repayment yet, I haven't really looked at what my consolidation options may be and how that will affect the interest rate.

I hadn't factored in that the mortgage interest would be tax deductible. Thanks!

[Beccagold]

Originally Posted by gertymac

I'm actually not sure what the interest rate on the loans will end up being. Right now about 1/2 of the amount is at 3.8% (less than mortgage) and 1/2is at 6.25% (more than mortgage). Since they aren't in repayment yet, I haven't really looked at what my consolidation options may be and how that will affect the interest rate.

I hadn't factored in that the mortgage interest would be tax deductible. Thanks!

Actually, the student loan interest is tax deductible as well if you're under a certain income. I'm thinking $150k/couple.

[zetta]

Double check your mortgage loan documents. I had a loan that I believed could only go up 1% per year, but it turned out that the very first adjustment could be much bigger (and subsequent adjustments were limited to 1%).

I would suggest the following:
1. Fill up your EF
2. Increase retirement contributions until you are at 15% of total gross income. IRA and ROTH contributions count toward this 15%.
3. Save the rest in a money market fund. In May 2010, determine whether it will be better to make a big payment on the student loans, or to use the money as a downpayment in refinancing the mortgage to a fixed rate.
4. Budget your travel out of the money left after saving 20% of your income.