need help deciding next steps with our finances

**Goldy** · 03-03-2013, 08:25 AM

Welcome to the forums.

I am going to toss out a few ideas that came to mind when reading your post.

First off, have you thought about refinancing? I know your loan is fairly new but 4.15% is higher than the current going rate of 3.5% and there are many loans that can be had for no refi costs. If you havent already check out zillow.com and plug in your info into the refi calculator. I did a little research for you and came up with the following figures. If you refi right now with what you currently owe your payment on a 3.5% loan with 1$ closing fee would be aroudn 1574 per month (all of these figures exclude tax and insurance). You are currently paying ~1754 so this is a savings of 180/mo that can be reapplied to your monthly payment. However, if you could get your loan under the 20% equity mark then your payment improves to only $1,441 per month based on a loan of 321k. That is a significant savings of 315/mo that when applied to the mortgage payment reduces your loan term to only 22 years and saves you over $174,000 in interest over the life of the loan. Its something to consider.

To get that downpayment you would need to tap into your savings account which I think is fine in your situation. Assuming you refi, your monthly bills would come to something aroudn 6k/mo so your emergency fund should be 3-6 months of expenses aka, 18-36k in savings. In my mind you have some wiggle room in that savings account to help you get to 80% loan to value in order to refinance to a sweet rate.

Ok, moving on from the house. Have you conisdered increasing your 401k contributions to the max? Right now you are in a tax bracket that is probably higher than what you will be in when you retire. In that case you would be better off to take full advantage of the tax advantages now to reduce your income. The max this year is $17,500 so I would recommend you try to hit that mark with one of your salaries. My wife and I make a bit more than you guys but our taxible income is only 114k so there are benefits to be had. Another benefit to the 401k route is that it would allow you to contribute to a ROTH ira because your income would fall into the accepted range. I suppose you could always just convert your IRA to a roth but I have no experience doing that.

With all your leftover money earmarked for retirement I would suggest you check out vanguards date funds. Basically the fund is set up for people in your age group and it is supposed to have the correct balance of stocks and bonds for where you are in life. Its a pretty nice investment vehicle for someone who does not want to spend hours and hours reseraching what funds to buy.

Anyway, that got a bit long but I hope it helps.

**Goldy** · 03-03-2013, 08:57 AM

I forgot to ask, what is the interest rate for those car loans?

**Snydley** · 03-03-2013, 10:32 AM

Thanks Goldy for your thoughts.

The car loan interest rate (on the ACURA we just bought) is 1.9%. The Toyota I don't know (almost paid off).

Other info- we refinanced the house last June to move the interest rate from 4.65 to what it is now..

thanks
Jen

**Snydley** · 03-03-2013, 10:38 AM

Thanks Goldy for your thoughts.

The car loan interest rate (on the ACURA we just bought) is 1.9%. The Toyota I don't know (almost paid off).

Other info- we refinanced the house last June to move the interest rate from 4.65 to what it is now..

thanks
Jen

**Like2Plan** · 03-03-2013, 01:17 PM

The first order of business is to get some term life insurance coverage for you and your DH in force so there is no gap in insurance coverage when you cancel the whole life coverage.

The next order of business is to determine your risk tolerance and then figure out what your asset allocation should be. Here is a link to some more reading for you: Bogleheads Asset Allocation

In general, I think contributions to retirement savings should be 15-20% of gross. If you have a pension (and you feel real confident about it), you might want to cut the retirement savings rate to 10% (depending on other priorities). You can run through scenarios with retirement calculators to give yourself a better feel for your personal situation.

If your DH maxed out the 401 contribution and each of you maxed out your Roths, that would put you up to $17,500 + 11,000 or 28500 which would be close to 16% of gross--add in your DH's match, it would be around 20% of gross.

**Snydley** · 03-03-2013, 03:28 PM

"If you refi right now with what you currently owe your payment on a 3.5% loan with 1$ closing fee would be aroudn 1574 per month (all of these figures exclude tax and insurance). You are currently paying ~1754 so this is a savings of 180/mo that can be reapplied to your monthly payment. However, if you could get your loan under the 20% equity mark then your payment improves to only $1,441 per month based on a loan of 321k. That is a significant savings of 315/mo that when applied to the mortgage payment reduces your loan term to only 22 years and saves you over $174,000 in interest over the life of the loan. Its something to consider."

Wow. I did notice the rates fell since our last re-fi. DH's job isn't the most stable so I don't know if he'd be willing to draw out of the savings but those numbers are impressive. Our mortgage person is a long-time family friend so I think it's definitely worth checking in with him about re-financing again.

"Have you conisdered increasing your 401k contributions to the max? Right now you are in a tax bracket that is probably higher than what you will be in when you retire. In that case you would be better off to take full advantage of the tax advantages now to reduce your income. The max this year is $17,500 so I would recommend you try to hit that mark with one of your salaries. My wife and I make a bit more than you guys but our taxible income is only 114k so there are benefits to be had. Another benefit to the 401k route is that it would allow you to contribute to a ROTH ira because your income would fall into the accepted range."

So the $17,500 max per year does not include the what DH's company matched? So we put in $10,160 more?
If my DH puts in more into his 401K, this then lowers his MAGI therefore enabling us to put the max into a ROTH IRA? If so, that's great news.

**Goldy** · 03-03-2013, 08:38 PM

"Have you conisdered increasing your 401k contributions to the max? Right now you are in a tax bracket that is probably higher than what you will be in when you retire. In that case you would be better off to take full advantage of the tax advantages now to reduce your income. The max this year is $17,500 so I would recommend you try to hit that mark with one of your salaries. My wife and I make a bit more than you guys but our taxible income is only 114k so there are benefits to be had. Another benefit to the 401k route is that it would allow you to contribute to a ROTH ira because your income would fall into the accepted range."

So the $17,500 max per year does not include the what DH's company matched? So we put in $10,160 more?
If my DH puts in more into his 401K, this then lowers his MAGI therefore enabling us to put the max into a ROTH IRA? If so, that's great news.[/QUOTE]

Thats exactly right, the $17,500 is your maximum amount and does not include any match. The Roth starts to phase out at $178k so if your DH maxes out his 401k you guys will be able to contribute to the roth for 2013. Actually, if your MAGI was under $173k (which it probably is based on the info you gave earlier) you can still contribute to the 2012 roth until April 15th. Something to think about.

**~bs** · 03-04-2013, 12:30 AM

double post.

**~bs** · 03-04-2013, 12:33 AM

Seems like your saving rate per month is on the right track, although IMO your total outgoing of $7000 is pretty damn high. Considering your only debt is a mortgage and 2 car payments that probably amount to $2k total. That means you're spending $5k per month on other bills, food, and entertainment. Due to your age, I would work on plowing more income than 2500/month into your savings. (excluding the 14k into 401k & extra house payment) I would also consider maxing 401ks for both of you, as someone else already suggested to lower the hit on taxes yearly. Pushing money into roths instead of normal investment accounts are also a good idea, assuming you stay below phaseout (which additional money into 401ks should help).

So I'm somewhat curious why your net worth is so low when you're making $180k/year combined. Is she a doctor? If so, that would explain the relatively low savings, as I do understand doctors incur significant debt and don't really start making significant money until late 30s or early 40s. Edit: Appears you both are doctors, which would explain the low savings.

I would not touch doing a refi on the mortgage for less than 1% difference in interest rate. but that's just my opinion.

Once you get your income in the 6 figure range, you should be well off to the point where you can have no cutback in spending, and just use the extra money towards savings, and you'll have a comfortable life + nest egg. Personally, however, I am not a big fan of counting chickens before they're hatched. And life has a tendency of throwing a few curveballs when you don't expect it.

I assume there's a cash surrender value to that life insurance policy you're walking away from?

**Snydley** · 03-04-2013, 07:16 AM

"Seems like your saving rate per month is on the right track, although IMO your total outgoing of $7000 is pretty damn high. Considering your only debt is a mortgage and 2 car payments that probably amount to $2k total. That means you're spending $5k per month on other bills, food, and entertainment."

Our monthly bills total ~$4,050, with mortgage/taxes/insurance ($2,340), two car payments ($540), my work parking ($168), cell phone ($107), internet/cable ($105), car ins ($138), electric ($103), heat ($275 avg), day care ($70), my undergrad loan ($164) car excise tax ($45). According to my husband's excel sheet we spend $1800/month on food, gas, etc. and then another $1,400/month goes on credit cards. I should mention that since July 2011 we have spent ~$17,000 on home improvements (painting, furniture, landscaping, etc) and that is all included in that credit card spending (we pay off the balance as we go). So it's not all going out the window. That said, I just discovered mint.com and I'm thinking of starting up; my husband's company matches donations to the local food bank and I'd love to cut back further and give the extra savings there. We only go out to eat ~1-2 times a month and I am definitely not a shopper by any means. We also are very careful with food purchases (little-no throwing food out) and I think that saves us a lot of cash as well.

"So I'm somewhat curious why your net worth is so low when you're making $180k/year combined. Is she a doctor? If so, that would explain the relatively low savings, as I do understand doctors incur significant debt and don't really start making significant money until late 30s or early 40s. Edit: Appears you both are doctors, which would explain the low savings."

Lucky for us, we have little college loan debt. My dad told me that I could go to any undergraduate I wanted, then I found out at graduation that I owed $25,000 (what were those papers I was signing every year??

). I had all of his bad money habits at that time but thank goodness I had enough sense to enroll in a graduate program that is funded by the government - pays full tuition and gives a stipend for living expenses. My husband did the same and he has no undergrad debt. The reason we are low in cash is the schooling/training for our careers takes a long time and pays very little, since we complete post-doctoral fellowships after receiving our Ph.Ds (similar to the residencies MDs complete). During my fellowship, we lived in San Francisco for 6 years where I made 48K, (~3,200 take home), $1,600 went to a nanny, and our rent was $2,700/month.

"I would not touch doing a refi on the mortgage for less than 1% difference in interest rate. but that's just my opinion."
Why not?

"Once you get your income in the 6 figure range, you should be well off to the point where you can have no cutback in spending, and just use the extra money towards savings, and you'll have a comfortable life + nest egg. Personally, however, I am not a big fan of counting chickens before they're hatched. And life has a tendency of throwing a few curveballs when you don't expect it."
Yes the biggest curveball coming in 2008. My husband is in biotech and has survived multiple rounds of layoffs. I'm hiring a new staff member and I received many impressive resumes from people out of work since 2011. It's scary.

"I assume there's a cash surrender value to that life insurance policy you're walking away from?" Oh yea, we'll be out ~$16,000. I just spoke with my financial planner (I should say former as I just fired him) and he kept trying to talk me out of cashing out now...says he has policies for his whole family, etc. I just can't deal with the lack of transparency with fees, etc.

-Jen

**Goldy** · 03-04-2013, 08:48 AM

"I would not touch doing a refi on the mortgage for less than 1% difference in interest rate. but that's just my opinion."
Why not?

If there were closing costs associated with the refi then I would agree with the OP but since were talking about $1 fee to reduce the rate down to 3.5% from 4.15% its a no brainer to me. Some of the monthly savings that I outlined in the original post is due to spreading out your 29yr loan back to a 30 but if you keep the payments the same you pay it off 8 years early. That also excludes any extra payment that you currently apply so it could be much less.

I doubt your mortgage friend will be able to match the deals on Zillow so you will need to decide if its worth refinancing with someone else. On paper, the $170k savings makes it a no brainer but there are a lot more implications than just figures to be considered.

**Goldy** · 03-04-2013, 08:51 AM

Mint is a great tool that has helped us identify problem areas and ways to cut back on them.

What are the rates on your student loans?

**Snydley** · 03-04-2013, 09:43 AM

Goldy-
I've attached a screenshot of an excel document where I attempted to make sense of your numbers. I'd like to run this by my husband once I have confirmation that my math is correct. I would greatly appreciate it if you (and/or anyone else) could take a quick look and let me know if there are any errors.

THANKS!!
Jen

**Snydley** · 03-04-2013, 09:49 AM

here is the attachment-

Attached Files

Screen shot 2013-03-04 at 12.41.38 PM.jpg (0, 0 views)

need help deciding next steps with our finances