Accelerate mortgage drastically?

[jIM_Ohio]

Lots of food for thought. I appreciate all the time you obviously spent evaluating my post and responding in a long detailed post. Thank you.



Thanks for the input. It will certainly help foster any discussions, DH and I have about the future.

I think we have tentatively decided to add $1000 to the mortgage for the next 6 months (or less or more) WHILE we make some longer term decisions. Once we come up with a longer term plan, we will re-allocated the funds if necessary.

What is your goal? Good question and we will need to put some more thoughts into this.
a) retire as soon as possible
b) have the highest net worth as soon as possible
c) be debt free as soon as possible I think that this may be DH's priority. He has never had any debt which he learned from his parents. I think even their house in NJ was owned outright. I, on the other hand, can appreciate good leverage. So, this is where we differ but I am willing to compromise to what he feels comfortable with.
d) generate as much passive income as possible
e) be financially independant as soon as possible
f) have X amount of money in the bank as soon as possible I admit that I am a cash hoarder. I prefer to have the money in the bank and not see it go down, just up. I am comfortable with what we have liquid now. However, hoping that the balances will go up slowly and steadily and NOT go down, if possible. To me, it is all about cash flow!
g) pay as little interest or fees as possible I think that this is probably where DH & I ARE in agreement.
h) make money work as efficiently as possible

While all the options are important, I think based on what I know about our habits and preferences, the 3 I highlighted are the most important to US. One we both agree on. We are divided on the other 2. Than after these 3, we will have to discuss what is most important to the both of us.

In general, you want one of these to be priority 1. It helps many other decisions fall into place after it. If the goal is to allow husband to not work (because of stress, mentioned below the text I quoted), you need to analyze many things...

more on what to analyze coming...

Of the 24 months expenses, put about 6 mos in cash, and about 18 months invested where you can beat a 4.875% return. A 20-80 mutual fund (20% stocks 80% bonds) should do it.

Will look into your advice. But to be honest, again, I like cold hard cash. I do a lot of CD laddering but of course, the interest is laughable right now. MF, stks & bonds are for investments that I would be willing to take a hit on. We do have them in our retirement funds and for money will will never have to see until retirement.

Would you rather see money go in a straight line up, or see money go up over a 5-10 year timeframe?

If you have lots of cash, consider a bond ladder and not a CD ladder. Bonds pay better. Look up treasury direct.gov or pay down the mortgage as opposed to stockpiling money in CDs and money markets.

So I would do something similar to the following:

1) pay $500 extra to mortgage-this was original plan and there is a reason both you and DH agree on this at some point- you have a similar goal in mind (not sure what the goal is, but if you agreed/ discussed it, then this makes sense)
2) send $6000/year ($500/mo) to a cash account which is mortgage backup. Every year you are banking 3 mortgage payments.
3) after you have $12,000 set aside (6 months mortgage payments), open an investing account and contribute $500/mo to that account until it has $36,000 in it ($36,000 is 18 morgage payments.
4) once you have 2 and 3 completed, (3 years down the line?) rethink how to apply the $500/mo.


Is the $36,000 on TOP of the $88,000, we have already set aside for this?

It was not clear to me on my original post how much cash you had (still not clear to me). In your OP you stated a specific problem, by probing and suggesting things, I can see a bigger picture of your situation.

More on this in the analysis later...

... The analysis which might help you decide where to put money and how much to put there...

Summary
You clearly have the cash flow to solve the financial problems you choose to tackle (like paying off mortgage or saving for retirement or going on lots of vacations). The issue is making choices for what your goals are, and making choices based on the risks you are comfortable with.

The analysis I would do is to put your combined life with DH on a timeline.

time starts today, and ends when you die or stop spending in retirement (think too old to travel or do anything other than eat and go to doctor's office).

On that timeline, you have some key milestones
paid off mortgage
retirement date
"dream vacation"
and any other goal you have which will consume money (like getting a summer home, a house renovation you mentioned in thread somewhere, not working stressful job). Put a YEAR on each milestone.

Each of those goals costs money. Might be real money, or an opportunity cost. Put a date on when you think you will want to retire (and make sure DH gives his information and is honest).

You will not know the answers until you put dates on things.

Then once you have a date, you need to make lots of spreadsheets. LOTS and LOTS... this is financial planning in detail.

For example, if your spouse told me he wanted mortgage paid off in 8 years (I want a date rounded to nearest year), I would put a 350k 4.875% mortgage into an ammortization schedule spreadsheet and tell you your current payment is $1852.23 and to pay it off in 8 years from the date it was taken, takes an extra $2600 per month to payoff in 96 payments (8 years, 12 payments is 96 payments).

I would then analyze that $2600 in various other choices

$2600/mo in cash accounts earning 2% on average is $267,000 at end of 8 years.

$2600/mo in a moderate risk investment (PRPFX or RPSIX would be the two I would look at) earning 5% on average would be $297,000.

Then ask yourself what risks are you taking to not have the $30,000 more, or to not have the $267,000 more cash based on paying down mortgage.


Then more spreadsheets for retirement- take your monthly expenses- including mortgage ($6800?? because that expenses exists right now) and multiply by 12 (annual expenses) and I am guessing you have around $82,000 of annual expenses. I realize some of them can be eliminated, but for retirement you want to maintain same level of spending, so include all of it in planning.

$82,000 in annual expenses times 25 (4% withdraw rate) is a retirement goal of just larger than $2 M. Meaning if your investments total $2 M, you can retire tomorrow, even if mortgage is not paid off (and if mortgage is paid off, your expenses decrease, so the $2 M number is more conservative or you can redo this calculation with lower expense number). The 4% is basic planning... $2 M earning 4% is 80k in income from retirement accounts. There are assumptions built into the 4%- a 60-40 allocation (60% stocks, 40% bonds and cash). If you invest more conservatively (more cash) for example, lower the % used (to 3.5% or 3%) which increases multiplier (4% is a multipler of 1/.04=25, 3% is 1/.03=33).

Then another spreadsheet with current retirement account balances and ages and some guesses at rates of return. For example if you are investing $2375/mo or $28,500 per year and get an 8% return, and already have 200k in retirement accounts, in 19 years you have the $2 M you need to retire.

Some of these calculations are independent...
some of these need to be linked together...

if the retirement calculation of $2375/mo cannot be that high until the mortgage is paid off, then you need to factor in lower initial retirement contributions... I am making some guesses based on other posts not quoted by me that you have ONE 401k and 2 IRAs maxed each year. If this is not the case, then this portion of analysis is incorrect.

If there are other financial goals between mortgage paid off and retirement (vacation home or house remodel) then those need their own analysis of "how much money needed" and "when that money is available". The timeline can drive decisions because you can see how putting another $2500/mo to mortgage speeds up or slows down another goal.

For example, you will see retirement come faster if you
a) invest the $2500 now, earning at least 5%
b) paying off mortgage once you have enough to retire

However retiring earlier is not your goal, but if you link the spreadsheets up you can play with the numbers, and you might realize you could retire in 11 years and not 19 if you invested more now, then pay off mortgage in lump sum.

Another anecdote, I originally advised to not pay down mortgage and invest... then I find out you do not like investing, but prefer to use CDs and cash...
its possible DH wants to pay down mortgage more than before because he sees your cash earning so little, and he and I both know paying down a 4.875% mortgage is better than money earning 2% in a CD. Make sure you talk objectively about this with him, he might be reacting more to a bad investment (cash) than to being debt free.

if you do not take "more risk" than a CD earning 2% with money, it is my advice that paying down mortgage aggressively makes more sense than putting money in a CD. However if you took on more risk with money (by investing in bond funds or similar), then investing will be better for most other aspects of the timeline.

If you need to find a mutual fund which is low risk, here are links to two. I own both

taxable account:
PRPFX: Summary for PERMANENT PT- Yahoo! Finance
IRAs:
RPSIX: Summary for T ROWE PRICE SPECTRUM INCOME FD- Yahoo! Finance

PRPFX is Permanent portfolio. It owns stocks, bonds, cash, gold, silver and foreign currencies. It lost 8% in 2008, so its downward risk is low relative to most other investments with stocks you might be more familiar with.
RPSIX is spectrum income. It is about 15% stocks and 85% bonds/cash (both foreign and domestic bonds). It lost 9.43% in 2008. The tax bite on this will be higher of the two, you can do this on your own by buying two funds- one for stocks and one for muni bonds.

[graceful]

Because people here are so generous with their time to post an answer to my original long-winded question, I want to give a "quick" update of what we wind up doing and if we took or disregarded their advice.

jIM, I didn't get to read your last post in detail, just skimmed, but I WILL re-read again to gleen what I can from it.

This is what we decided in the short-term:

First, today we are going to up DH's 401K to the max which works out to around 18%. Need to check to make sure by the end of the year it goes up to the full $16500 even with the smaller deductions we have been taking the last 2-3 weeks. Also, it probably won't kick in until the next, next paycheck probably. This means our net income will go down.

Second, do a quick re-work of existing budget with the new net income.

Third, start working on our taxes in figure out whether to amend 2008 or claim the $8K first time buyers credit in 2009 return. Which IRA to get for DH , I will probably get the Roth. How much additional tax refund, if any, we should be getting.

Fourth, fully fund our 2009 IRAs asap, once I finish doing the tax return dry runs.

Fifth, add $1000 to our 2/10 mortgage. (Temporary while we re-work budget, etc.)

Sixth, evaluate on how much we want to put extra each month into the mortgage based on our revised income stream, and based on the total amount we are getting back from the IRS.

I'm going to try to convince DH to do the following add $500 (or other amount) to the mortgage, add the funding of the IRA amounts to the budget, and THEN somehow allocate a percentage of all lump sum bonuses, fees, returns, etc. to paying down the mortgage, add to savings, and put in other "fund" such as travel, etc.

Seventh, check out investments such as those suggested by jIM to put some of our EF cash in.

Eighth,... haven't gotten that far in my thought process.