Advice for overall finacial plan

[jIM_Ohio]

one other way to keep EF low is to keep debt low... meaning if you are self employed, and 24 months expenses appears high to keep in low yield investments... reduce your debt footprint, lowers EF need, and also raises liquidity of any given cash flow.

[doxie]

So much good discussion, and many things to think about. One thing to mention after reading some of these posts, I guess I save a little more than I gave myself credit for. I have 2 other savings accounts in addition to my EF. They are both funded by direct deposit from every paycheck. One is mostly for my property tax, home insurance, and car insurance. It does have some extra padding in it for things like vet bills, car repairs, etc.

The other is for expenses outside of my regular monthly spending. It's used for things like vacations, furniture, a new bicycle, stuff like that. I didn't count it before because it doesn't seem to grow much, because we have been travelling quite a bit. But it is larger than it was last year, and if there was an emergency there is money there, I would just have to cancel some of the trips we have planned. So I guess I truly have another $7K more saved than I was counting.

Why are the car loan and 2nd mortgage so special to you?

Why do you want them gone more than your other debt?

There are a couple of reasons. One is that the payments on my student loans are pretty low. I don't feel that as much as I do the car payment. As for the 2nd mortgage, we are upside down on our house right now by over $100K, ouch. The payments I make on the 1st and 2nd combined are way more than we could get in rental income.

In order to advance my career, I will have the opportunity to accept a promotion in another part of the country within a few years. If I pay off the 2nd, then we could get enough in rent to cover the 1st, or close to it. So I really want to get the 2nd wiped out, so that I can at least feel like I have the freedom and ability to accept another position, whether or not I decide to.

With all that said, I have talked to my partner and this is what we have decided to do. I'm going to pay off the car loan in July, and we are going to take the payments we were making and direct them to the 2nd mortgage. This way we will pay that off in 3 years instead of 5 years.

I should only have to pull about $3K from the EF, and I will try to redirect some of the other savings to the EF until I at least get it back up to $30K.

I appreciate the input from everyone. I'm hearing the message that my EF is a little on the low side. I feel ok taking that risk for right now. I'm fortunate to be in a stable employment sector. I know that anything can happen though, and when I get this mortgage paid off I will focus on building the EF to a larger level.

[jpg7n16]

I didn't count it before because it doesn't seem to grow much, because we have been travelling quite a bit. But it is larger than it was last year, and if there was an emergency there is money there, I would just have to cancel some of the trips we have planned. So I guess I truly have another $7K more saved than I was counting.

I wouldn't count it as "Emergency Fund" because it is not cash set aside specifically in cash of an emergency. That account is just good old fashioned budget planning ("I know I'll need to spend $4000 on a vacation in X months, so I'll save towards that in this account").

I only ever think the EF itself should be between 3-6 months. The 24 month idea is overkill (if he means keep it all in liquid money market accounts). I see a very good purpose of having access to 24 months of expenses not tied up in retirement accounts, but it shouldn't all be kept in cash. As the textbooks would say, that would be "overexposure to inflation risk."

But around 5 months in cash and 20 months in a brokerage account (not retirement account)- that makes sense for the self employed.

There are a couple of reasons. One is that the payments on my student loans are pretty low. I don't feel that as much as I do the car payment. As for the 2nd mortgage, we are upside down on our house right now by over $100K, ouch. The payments I make on the 1st and 2nd combined are way more than we could get in rental income.

In order to advance my career, I will have the opportunity to accept a promotion in another part of the country within a few years. If I pay off the 2nd, then we could get enough in rent to cover the 1st, or close to it. So I really want to get the 2nd wiped out, so that I can at least feel like I have the freedom and ability to accept another position, whether or not I decide to.

With all that said, I have talked to my partner and this is what we have decided to do. I'm going to pay off the car loan in July, and we are going to take the payments we were making and direct them to the 2nd mortgage. This way we will pay that off in 3 years instead of 5 years.

I should only have to pull about $3K from the EF, and I will try to redirect some of the other savings to the EF until I at least get it back up to $30K.

I appreciate the input from everyone. I'm hearing the message that my EF is a little on the low side. I feel ok taking that risk for right now. I'm fortunate to be in a stable employment sector. I know that anything can happen though, and when I get this mortgage paid off I will focus on building the EF to a larger level.

I also prefer to keep the EF low during periods of debt elimination. EF should be 3-6 months, so while eliminating debt, I'd keep it closer to the 3 month side. I like the $25k idea you had earlier.

Have you considered temporarily putting some retirement savings on hold to accelerate paying off the 2nd mortgage?

You'd save a good amount of interest, you'd be free from the debt and free to advance your career, you'd eventually save the cashflow from the 2nd mortgage payment each month. I think there's value in that route. I'd personally treat the 2nd mortgage as a guaranteed tax-free risk-free investment @ 7%. (risk free in the sense of CAPM, where US treasuries are the "risk free" asset) Right now, you're investing in the market, and incurring additional market risk in order to try to get 9-12%. Which is likely, yes - but isn't guaranteed. And you want the 2nd mortgage paid off sometime soon, why not accelerate it now?

But if you move, are you for sure going to turn your current home into a rental? Are you wanting to be a landlord? Do you have a plan for managing tenants? Would you manage the property yourself, or pay a company to manage it for you? There are some questions you guys should probably address if that's the route you're going to take - if you're not interested in being a landlord, you could also just sell the home.

[doxie]

Have you considered temporarily putting some retirement savings on hold to accelerate paying off the 2nd mortgage?

The thought did cross my mind. I will have to give that some more thought. At the very least maybe I will put my pay increases toward the payoff, instead of increasing my contributions.

But if you move, are you for sure going to turn your current home into a rental? Are you wanting to be a landlord? Do you have a plan for managing tenants? Would you manage the property yourself, or pay a company to manage it for you? There are some questions you guys should probably address if that's the route you're going to take - if you're not interested in being a landlord, you could also just sell the home.

I definitely hear you, and we will for sure give it a lot of thought. We have a couple of years before having to make any decisions. The reason I lean toward renting rather than selling is that the move would most likely be temporary. I'm very fond of the house and the location, and I wouldn't want to have to start over on a new mortgage when we move back. My plan would be to pay a company to manage it, because I'll be on the other side of the country and won't be able to deal with day to day stuff.

I also realize that if we have renters we need to have enough extra cash or income to cover the mortgage for 6 months to a year in case they are deadbeats or it stays empty. I will take all that into account when the time comes.

[jIM_Ohio]

So much good discussion, and many things to think about. One thing to mention after reading some of these posts, I guess I save a little more than I gave myself credit for. I have 2 other savings accounts in addition to my EF. They are both funded by direct deposit from every paycheck. One is mostly for my property tax, home insurance, and car insurance. It does have some extra padding in it for things like vet bills, car repairs, etc.

The other is for expenses outside of my regular monthly spending. It's used for things like vacations, furniture, a new bicycle, stuff like that. I didn't count it before because it doesn't seem to grow much, because we have been travelling quite a bit. But it is larger than it was last year, and if there was an emergency there is money there, I would just have to cancel some of the trips we have planned. So I guess I truly have another $7K more saved than I was counting.

There are atleast 2 ways to deal with this "problem" and its a good problem to have.

One way is what you are doing- keep the money seperate and do what you have been doing.

The other is lump all together and use cash flow to solve problems while the savings builds.


If I can make some assumptions, just correct me in how wrong they are...

If you put $100/mo into vacation fund
and $300/mo into property tax fund
and $440/mo into EF (once car is paid off)
and also have a line item in budget for adding to emergency fund (maybe $250/mo)

add that together ($100+300+440+250) and I see $1100 of cash flow.

If you put all $1100 into one account, and when you went on vacation, its possible that month you spend all $1100, but the other 11 months you just sent all the money to one account... in another month you might get an $1800 or $3600 tax bill, so you use the $1100 budgeted for that month and tap savings for the balance... the other 10 months that savings is building.

If you use this technique, the "layered" emergency fund approach, it will be obvious how much you need to keep liquid, and how much you can use to improve returns on your "cash".

Example- Layer 1 is a savings account- this is where all of the $1100 goes each month
Layer 2 is the emergency fund, probably 6 months expenses in a 6 month CD ladder
Layer 3- moderate risk investment 1- such as muni bonds, a mutual fund like Wellesley, Permanent Portfolio or Spectrum income with 6-18 months expenses in it
Layer 4, slightly higher risk such as real estate, REITs, or some other taxable investment
Layer 5- this can be a pseudo retirement account (taxable) with equities held in higher percentages. Maybe this is for vacation fund... meaning its possible you can "chase" higher returns for some money you plan to spend. This is because you have

a) free cash flow of $1100/mo which is probably about 1/3 of your monthly expenses
b) enough conservative and liquid investments to cover 2 years of expenses
c) the ability to not sell layer 5 at a loss (don't sell equities in a down market).


If you have high free cash flow (I assume if free cash flow is as high as $1100/mo that its about 25-33% of your expenses) a system like this will allow you to get higher returns on cash. This is because the money for vacations (for example) could be invested more aggressively, if you are comfortable using cash flow to pay for a vacation and then later on setting aside bigger chunks for bills like taxes and cars. I realize some of that cash flow is accounted for (property taxes), and you want to make sure when the bill comes, the money is available (this is liquidity risk- you need a portion of savings to be liquid at specific points in time).

I am big on cash flow and financing appreciating assets (like houses) and paying off depreciating assets quickly (like cars, student loans and credit cards). The higher free cash flow which exists, the more choices and options you have.

Examples of this would be the following:
If your EF was a $5000 CD (6 $5000 CDs laddered) you get a specific interest rate.
If that same CD was 10k, the interest rate at some banks changes- is there a sweet spot where if your money is pooled together that your return on cash would be higher? If you knew when the property tax bill was coming, and added $3600 from the property tax budget to ONE of the CDs (so a 5k CD became an $8600 CD) and then you also put some of the new car money in same CD ($1400 of the $4800 you set aside annually) into same $8600 CD, you might get a higher return on that particular CD.

Over time, as the car savings "piles up" you can try getting each of the 6 CDs to be 10k.
5k of that is EF
5k of that is car fund (It would take 6 years for all 6 CDs to have 10k in it by simple math standards)

You would then start asking questions like this
5k gives me a 1.5% rate on a 6 month CD
10k gives me a 1.75% rate on a 6 month CD

is it better to put 5k in moderate risk (like PRPFX) and grow more than that .25% gain in interest? Is it better for 30k to be earning more in PRPFX than earning me an extra $75 per year in a CD (check that math, but .25%*30k=$75). You are chasing "a lot" more risk in PRPFX than in a CD, you would hope to be compensated for that risk.

Clearly for property tax, I would hope answer is NO its not better, the extra interest you earn is less important than the liquidity risk. But for a car, if PRPFX was down that year (rarely happens, but you need to weigh that risk) could you wait to buy a car for PRPFX to break even or use cash flow to fund that goal while you wait for the investment to recover? Same with vacation- if some of money in PRPFX was designated for a vacation and the $1100/mo did not cover it, would you be willing to sell PRPFX at a loss to go on vacation, wait to take the vacation, or take a cheaper vacation?

If you have high free cash flow, you have choices. Go on the vacation, and in 1-2 years, sell a portion of PRPFX to replace the emergency fund portion which was used (for example).
If you direct all those different items to different savings accounts, you are getting "low" rates of return on all cash, instead of taking on some incremental risk and improving return with a fraction of the money.

[VooDoo Chicken]

Getting the Most out of it

My Fellow Americans...

I like so many of us, worry about the future. While i have been able to save $$$ during the "Good Times" I now am feeling the pinch as my Salary has dropped from roughly $300K to $100K with huge worries that in the near future my job will like so many others be lost.
My Question to everyone today is, with approx. $750K in savings, How can i make my savings supplement my income in the event i do lose my job? I have 4 children 1 of which is set to graduate and attend college the remaining 3 are right behind.

Any Suggestions

VooDoo