Budget and Extra Cash

[kilboy]

Hey everyone,

I am 25 and my wife is 24. We're very blessed and have great jobs. After reading this forum for over a year I've been able to use much of the sage advice offered here. I've now come to a point at which I don't know what to do with my money.

Income after taxes: 12,750
Total expenses including home: 5,010 (includes play/fun money and everything else)
Total savings on average: 7,740
Home: 310k @ 3.75% - 1,750/month (I reside in it)
Home: 140k @ 3.75% - 830/month (Renter paying it off)
No CC debt
No car loans
No loans

Retirement: 20k (total)
Cash: 90k

If I continue to horde my cash in a crappy savings account I'll have a million in about 7-8 years. I will continue to put in 5k towards each of our IRAs every year. My company contributes an automatic 10% of my salary towards my retirement. I'll probably start putting 16k into my 401k beginning this year.

All that aside, wtf do I do with 7.7k extra a month? Save for a business? Any ideas?

Is there anything else i can improve?

Thanks for the insight,
Manny

[disneysteve]

Clearly, you are doing great at living below your means.

First thing, as you mentioned, is to start funding your 401k. That will be $16,500 for you. Does your wife's job also have a 401k plan? If so, she should fund hers, too. If not, yours will take up a couple of months worth of that surplus cash.

With the rest, it really depends. Do you have, or are you planning on having, children? If so, you want to think about college savings. You could even start a 529 plan now and just change the beneficiary once the child comes along.

Your 90K in cash represents about 18 months of living expenses which is far beyond the 6-8 months that is typically recommended. I'd start investing that money for growth rather than letting it sit earning less than 1%.

Since you already own one rental property, can I assume that you are comfortable being a landlord? If so, you could pay off that property and then save up to buy a second. If you can pay cash, even better.

Congrats on doing so well at such a young age.

[Shewillbemine]

I underline everything DisneySteve said.

I'm also assuming your original post was a typo when you said your total income is $12,000.

[disneysteve]

Originally Posted by Shewillbemine

I'm also assuming your original post was a typo when you said your total income is $12,000.

That's monthly income, not annual.

[Jwilliamson22]

What do you do?

[mrpaseo]

Originally Posted by disneysteve

That's monthly income, not annual.

Funny, that's what I thought too before I read the whole post.

As for the original post... Man I would hate to be you... (Sarcasm). I am happy to read that you are doing so well. I wish there were a way to get guidance on where to invest money... Since I don't have a lot of it, none of the mutual funds want to help (They start offering help at 50,000).

There are many, many good mutual funds, I always recommend Vanguard as they have very low costs. They have two plans to provide investment help (I looked this up this past week), the first starting at $50,000. If you are willing to invest that much, they will give you 1 on 1 advice. That said, shop around, there are many good places that can offer guidance.

Best of luck,
Ray

[artwest]

Great job so far! You guys are well on your way to being multi millionaires!

In my opinion, you should throw that extra $7,700 at your house and get that paid off. Then pay off your rental. In 5 years or less you could be completely debt free and have $90k in an emergency fund. You will also have $10k per month which I would start investing in Mutual Funds.

[bjl584]

I would focus on paying off the rental house first. Then I would start to invest the money in something geared more toward growth like stocks and mutual funds.

[disneysteve]

Originally Posted by artwest

In my opinion, you should throw that extra $7,700 at your house and get that paid off. Then pay off your rental.

Originally Posted by bjl584

I would focus on paying off the rental house first.

Can each of you explain your reasoning here since you gave opposite advice.

[bjl584]

Originally Posted by disneysteve

Can each of you explain your reasoning here since you gave opposite advice.

My logic is that the rental house is not a primary residence. You can right off expenses as a business yes, but I would much rather carry debt on a primary residence rather than a rental unit, especially when OP has as much monthly cash flow as he does. And, the mortgage on the retal is smaller and can be paid off faster than the note on the primary residence. Once paid off OP will have 830 a month in pure profit from his rental minus taxes and expenses. That's nearly enough to fund 2 Roth IRA's completely each and every year.

[jpg7n16]

I wouldn't pay off either. I'd invest in stocks/mutual funds.

Why accelerate payments on 3.75% deductible debt, when you could invest and expect 7-11% long term?


If you're dead set on paying off a property though, I'd agree with BJL. Go with the rental.

Smaller balance = affects cashflow sooner. More flexibility in rent rates (no mortgage payment for your rent to cover, so you can charge whatever you want). Easier to manage vacancies.

[disneysteve]

Regarding paying off the home or the rental, what about the security of owning your own residence? If something were to happen to your finances, wouldn't it be better to own your home outright and potentially lose the rental property vs. the other way around? I realize you could always sell the paid off rental to raise money but that could take months to happen.

[bjl584]

Originally Posted by disneysteve

Regarding paying off the home or the rental, what about the security of owning your own residence? If something were to happen to your finances, wouldn't it be better to own your home outright and potentially lose the rental property vs. the other way around? I realize you could always sell the paid off rental to raise money but that could take months to happen.

I was looking at it from a snow ball debt payoff method. Interest rates are the same so I chose the debt with the smaller balance to pay off first. It just happens to be the rental.

From the perspective of OP, he has incredible monthly cash flow. Hopefully that will continue, and assuming it does, then the mortgage is manageable and the interest rate is extremely low. Without a mortgage on a rental, cash flow increases signifigantly. That extra money could be used to invest, to pay down the mortgage on the primary residence, maybe to purchase another rental, etc. And as JPG said, from a business perspective, having a paid off rental allows more flexibility in managing a rental unit.

[artwest]

I would rather have the security of owning my own home.

If I run into financial problems, I could sell the rental.

[jpg7n16]

The main problem is that it takes significantly longer to reach a point where the primary is paid off vs the rental. Prob 2.5x as long.

If the disaster occurs in the meantime, while it's being paid off, you can't renegotiate your payment, and may only break even by selling the rental (or close to it). By paying extra on your primary, all you've done is get a larger check when they foreclose on you.

If the rental is paid down it will clear up faster. Then you'd be getting income with no mortgage expenses while in a bind, and that income will slow down the EF attrition while the rental sells.

In a financial emergency the only way to get access to the money you pay down on one of these properties is to sell the property (as you won't qualify to take a loan). So if you needed to sell one of the properties to finance living expenses - which would you rather sell? Primary or rental? That's the one that you should pay extra on. So that if you're forced to sell it, you'll get the most money back.



But to re-emphasize my statement above, I'd rather build up investments rather than pay either off. If you run into hard times that require more than your EF, just sell a piece of your mutual fund. Guaranteed liquidity. And expectation of earning more than you'd save on interest. Just better all around.

[kilboy]

Thanks for all the responses and advice!

I'm a consultant to the DoD. If anyone wants to follow in what I do then you would have to join the military, get an intelligence job, obtain a top secret clearance, then get out after your contract expires to get a civilian job. No college is usually required so long as you have the experience. If you feel that you're too old for this then I highly suggest you inform your children because I’ve come to find that is seems to be a shortcut to big money and success w/o having to pay for an ivy league degree or having any student loans. Just my 2 cents.


I like all of the ideas. It comes down to risk I guess. Do I want to pay off my home first or possibly get much higher returns in the stock market? If I go stocks then I also must be prepared to lose it all. Since I’m 25 I do have a very high risk tolerance but the crash of 2008 is still on my mind although I didn’t lose anything.


Or I can just continue to save everything and possibly start a historically success franchise. I'd like to do something that can be owner absentee.

Any thoughts?

[MonkeyMama]

I am an accountant and thought I don't know many, I know some people in your shoes. It happens, and I understand how overwhelming it is. (Sounds nice, but it's overwhelming, especially the younger you are).

#1 - Don't live up to your means. Sounds like you have that down. Not that you can never live up to your means, but keeping expenses down is extra important if you ever want to have kids, retire young, or one of you simply loses your job. We've made a commitment to never spend our second income on anything but "one-time" type expenses. Not using it for mortgage, payments, contracts, etc. Even a paid-for luxury vehicle or second home can generate a lot of additional expenses, so just keep that in mind going forward.

Anyway, you are young, so just take your time and don't rush into anything. Kind of the same advice given when one inherits a lot of money.

#2 - Hopefully you are being tax efficient. Maxing out 401ks would be a good place to start. (Can put away $17,000 each for 2012, if you both have 401ks). For every $1000 you put in a 401k, you might be saving $400, easy in taxes. Look at HSAs as an additional savings vehicle, but only if your health plan qualifies as HDHP. (If not, you probably have a great health plan so don't worry about it). Give to charity.

#3 - pay off rental, then home. Why? Because that is absolutely what I would do. Also, because both could be paid off in a few years, or before you even turn 30. Those are obviously 15-year loans you have (seeing interest rate, higher payment) and so, heck you can maybe pay off that rental in one year, as you are already paying it down pretty rapidly with the shorter amortization and low interest rate.

Of course, don't get so caught up in all or nothing. You are getting differences of opinion. Maybe you should throw a lot at the mortgages and start investing. Maybe you should keep the mortgage and invest it all. I am wary of any "all or nothing" scenario. I think your cash position is good, and that you can throw a chunk in the mortgage while starting to invest also. Maybe you would like more real estate and should focus on saving up cash for the next property (you have that luxury).

Due to your age, I believe paying down the mortgage may simply be wiser. Start throwing $1000/month or so into the stock market and learning. For most, there will be a learning curve there. I am not sure throwing almos $100k into the stock market out the gate, annually, is really the wisest move. For reference, the stock market has done nothing for me the past decade, and I haven't been too stupid. I still believe in the stock market and certainly invest for the long run, but "put 100% of your disposable income in stocks" strikes me as foolish. On the flip side, you also don't necessarily need to take the RISK that most of us do need to in order to some day retire. IF you save $100k per year in cash, you have $1 MIL to retire on in 10 years (at AGE 35-ish??). HEck, in your shoes I would probably do just that because I am risk adverse. So you also have to figure your tolerance for risk.

#4 - Start thinking about your hopes and dreams about this money. Maybe you will want to splurge some of it on some exotic travel? Start a charitable foundation? Fund an expensive hobby? What is it that you really want out of life? The advice you are getting here is from the "financially free" type people - that's what most of us want, and more the advice you are getting with the "invest it all" replies. You might not know what you really want for a few more years, so try to be a good steward of the extra income while you take the time to figure this out. Your future self will appreciate it even if your 20-something self has no idea what he wants to do with all this money.

[fe2o3ez]

As others have said, congrats on living below your means and putting yourself in this position.

However, take it from someone who found out the hard way earlier this year, as comfortable as your steady income is, it can be taken away in an instant. Layoffs and shutdowns happen quickly, and often without prior signs. When a person is on the wrong end of that conversation it is a wake up call to say the least.

That leads me to recommend that you eliminate your debt while you can and begin life on a cash-only basis. If you have no creditors, they can't come knocking on the door (figuratively, or otherwise) if your income dips. You could have everything paid in 4-5 years and be truly free to spend money with no constraints!

(Certainly, this is after you build some tax shelters with 401Ks, etc. as others have recommended.)

Good luck and enjoy!