Need a lot of advice

[lukem]

Please chime in to any or all of these questions below if you are so inclined. I appreciate any comments, ideas, or suggestions.

1.) I'm not sure if it makes sense to pay extra on my mortgage, refinance, both, or neither. I have about 9 years left, 4.6%, and $27K in principal.

2.) I have 12 months of expenses in my emergency fund sitting in an online savings account getting 0.5%. There has to be a better return that is still pretty liquid. I have only added to this fund in the past several years...I generally have enough free cash flow month-to-month to cover any hiccups without digging into it. This is more of a go-to-h#!! fund if I decide I want to leave my current position / get asked to leave, or if something really disastrous happens.

3.) My wife is pretty hands-off on the finances. A couple times a year we sit down and talk about things we want to do (vacations, home improvement, vehicles, grown-up toys) and make a plan. She always says something along the lines of “its up to you, you know how we are doing with money better than I do”. For a lot of people that would be great, but I want to help her better understand. After some thought, I’m not completely sure if we are doing the right things. So here’s a recap:

Age – 31, wife, 5 kids
Salary -87K
Mortgage – (27K)
Non-Mortgage Debt – 0
Cash – 41K
Retirement – 113K
Retirement Contributions – 12% into 401k w/50% match on first 6%, max 2 Roth IRAs
College Savings – 7K, maxing out 529 (just started this last year)
Health Savings - $2k (just started this last year)
Cars are both newish (40K miles)
We tithe 10%
Expenses are about $1,500/month (not including health/life insurance)

All-in-all I think we're doing good compared to most our age. Just not sure if we can do better and how.

[bjl584]

I would continue saving for retirement and not pay extra on the mortgage. You need to build up the retirement savings more than you need to pay your house off. I may look into a refi if the numbers make sense but that's about as far as I would go.

[disneysteve]

I would continue saving for retirement and not pay extra on the mortgage. You need to build up the retirement savings more than you need to pay your house off. I may look into a refi if the numbers make sense but that's about as far as I would go.

What about taking some of that 12-month EF and paying down the house? Better to "earn" 4.6% instead of 0.5%.

OP is putting 12% into the 401k plus 10K into Roths for another 11.5% so 23.5% going to retirement already.

[bjl584]

What about taking some of that 12-month EF and paying down the house? Better to "earn" 4.6% instead of 0.5%.

OP is putting 12% into the 401k plus 10K into Roths for another 11.5% so 23.5% going to retirement already.

Maybe. If he has a steady job, then use say 6 months of it. If self employed, then I'd keep the 12 months in the EF.

Even better may be to cut back the Ef to 6 months, then take the remaining money and invest it. But, that depends on OP's tolerance for risk and their feelings about carrying debt.

[Petunia 100]

Re-financing isn't free. Since you only owe 27k, you aren't going to save a whole lot by reducing your interest rate, which is already pretty low at 4.6%. I wouldn't bother.

Instead, look at that 41k emergency fund. If you pulled out 27k and paid your mortgage in full, you would have 14k left. If you had no mortgage, how many months of expenses is that? If you are comfortable with the answer, then just pay the thing off. If you aren't comfortable with the answer, continue making monthly mortgage payments and adding to EF. In a few months, calculate the answer again.

[MonkeyMama]

I'd pay extra on the mortgage. I would not refinance, but would make it a top priority to pay off. Refinancing doesn't make sense with that kind of balance. I am assuming you can pay off in the next few years? You could even back off a bit on the retirement to get this knocked out.

Other points:

**Yes, you can get closer to 1% (on cash) at places like Ally Bank or Alliant Credit Union (I mention these two because they have had higher rates for a long period of time. Some banks will offer more but are usually just short promos). I'd also consider CDs. I'd think about putting *some* of this money to the mortgage (thought not most of it).

**Some thoughts on tax efficiency:

Your tax rate is likely very low in current situation. Which makes 529 plans and HSAs rather useless. These kind of accounts tend to have high fees and little flexibility. Just something to think about. There could be other reasons to have these type accounts. I don't know if these are "well thought out/really understands own tax situation" kind of things, or just what you read you *should do.*

I would instead make your 401k plan the priority. You can put $17,000 per year into 401k plan. The exception would be if your plan was particularly expensive or limited in investment choices.

If you eventually max out both the ROTHs and the 401k, that is 31% of income to retirement (From a young age, to boot). I would personally consider the ROTH as "college savings" before moving on to other savings vehicles. 401ks are tied up until retirement, yes, but ROTHs are not.

[Christian321]

First of all, God bless you: only 31 years old, married with 5 kids, only owe 27k on your mortgage, 113k in retirement, 41k in savings, zero debt....I think you should write a book about how you managed to do this at such a young age. Awesome job if you ask me.

Keep doing what you are doing, you really don't need any advice. I'll just say keep your debt at zero, buy used cars, and never finance anything that loses value. You are on a great path, keep it up.

[lukem]

Thanks for the replies.

A couple follow-ups based on some of the questions. I have a steady job, been with the same company for about 7 years now.

Indiana has a good 529 plan and it does make sense on a state tax perspective. We have some foreseeable medical expense coming up so I'm building up the HSA...mostly because it is easier to manage bills and insurance (employer contributes as well).

The 41k in cash is about 26K EF and 15K "other". If I had no mortgage I would need 22K EF.

Sounds like refinancing isn't a no-brainer...paying down the mortgage could make more sense, but I'm getting some conflicting opinions on whether that money would be better invested elsewhere. Up until 2 years ago I didn't have a mortgage and it felt pretty good. When we moved I had to borrow some extra.

[Petunia 100]

Another thing you might consider is paying off the mortgage with a HELOC. The advantage of a HELOC is little to no closing costs. The rate is typically variable, but if you can get a low rate for a couple of years, that will be all you need. I hear PEN FED has a HELOC fixed at 1.99% for the first 5 years. You do have to join.

[sblatner]

How much is your mortgage payment each month? How many years til you pay it off just making regular payments? How old is your oldest child?

[Redraidernurse]

What are your goals for the 5 kids going to college? You have one 529 plan for all 5 of them? Or do you plan to open up more in other states so you aren't putting all your eggs in one basket?

[feh]

What are your goals for the 5 kids going to college? You have one 529 plan for all 5 of them? Or do you plan to open up more in other states so you aren't putting all your eggs in one basket?

This question crossed my mind also; depending on how much you want to help your kids w/ college, that could be an extremely large expense on the horizon.

Ignoring that issue for the moment, I'd take at least 50% of your EF and either invest it or pay down the house, depending on your risk tolerance for investments.

[lukem]

I don't intend to fully finance their college education, most likely a matching contribution...they need to have some skin in the game. The oldest is 7.

House payment is $340/month.

[dontgopoor]

1. Pay off the mortgage. You'll save on the interest expense. Plus you may find some other small benefits if you're paying escrow. Then start plowing the money that went into the mortgage somewhere else that makes sense for you - I would suggest that you consider equities - better long term returns and with a 12-month EF you can take a little more risk that is not huge if you have a long-term perspective.
2. Re: interest earnings for your EF, there is no free lunch. Returns don't go up without more risk. You could try layering some CDs but that takes time, has some interest risk if you cash in early, and the additional return may not be great. You'll need to research what's available to you but this is common challenge around the world right now. I've seen/read about some 2-year european bonds that are priced at negative interest because investors want security/capital preservation.
3. I have a document with instructions for my wife on what to do if something happens to me. I update it once a year. We talk about it at that time. I'm about to start a similar process with an adult child in case something happens to both parents.
4. With 5 kids, start preparing for making smart use of your college savings by reading books on how funding college costs. I found "Paying for College Without Going Broke" very useful, I bought an 2-yr old edition on ebay for a few dollars. Something to read when your oldest child is a HS freshman or sophomore.
5. Re: refi - you're paying 4.6% to borrow that money. You're being paid .5% to lend money. It does seem a no-brainer to pay off the mortgage because you do have a very comfortable EF.

You've done a great job so far.

[bhakta]

For number two you are losing money, like many have said get that money into a investment portfolio and save cash for a emergency fund