2014 Financial checkup

[ua_guy]

You all have been a great resource before. I've followed some advice, and disregarded other advice...here I am in 2014, here is our current position, please feel free to comment on goals or areas where you think need substantial improvement.

Summary: We are a 36y/32y unmarried couple (legally marrying soon, reception maybe 2015 if we do one at all) and are trying to achieve a balance of enjoying life while health and beauty are still on our side, and also planning for an adequate retirement without sacrificing future comfort OR all of our current resources. Unobtanium, right? Some days it feels like it. We have no kids, aren't planning for any. Assets are jointly owned and expenses are generally split according to income. We've been flying this way for 11 years together.

Income:
$236k combined annual income before bonus (approx $17,000)

Assets:
$235k retirement savings (85k/150k split, oldest has highest balance).
$40k cash savings
$620k house (that is the tax-assessed value as of 2014 IIRC)

Liabilities:
$510k mortgage (3.500% 30y fixed, 29y remaining)
$47k vehicle debt across 3 vehicles (!)


Current actions:

1. We currently maximize 401k/403b contributions to the federal ($17,5 limit?) and take advantage of all employer matching. We have not yet contributed to any supplemental IRA's (I believe the limit is $5k/year). We will look at that when we mock up our 2014 taxes as we've both increased our incomes this year, and we will mock up our taxes again as our filing status will change (married).

Our retirement picture has us paying off our home well before retirement and selling the home upon retirement, and moving to a much more rural area with cheaper housing, which is a shared dream for my partner and I.

2. We save to our emergency fund and generally stop when we reach 6 months expenses. We both feel we have excellent job stability with portable skills. We receive a sizeable tax return every year based on our mortgage interest deduction, and that is earmarked as savings, and has been reliably in the past. This last year has been a roller coaster of unexpected and ad-hoc expenditures living in a new home, but that is starting to plane out and become predictable again, significantly freeing cash flow.

3. We have already made a supplemental mortgage payment of $5k in year 1 and would like to ramp up our monthly payment to begin paying down our mortgage at an accelerated rate of at least 1,000 extra principal monthly.


Other clarifying information:

No other debts. We each contribute monthly to HSA plans. The money is portable should we change jobs, etc.

Vehicles - We drive 60k miles annually across 2 vehicles. The third vehicle is a modified jeep that is a hobby and is used primarly for our vacations/ expedition and overland travel.

Vehicle 1: Jeep - 0%/36 $580/month $6970 and 12 months remaining. 20k miles. Nada trade value: $24k
Vehicle 2: 1.99%/60 $560/month and 36 months remaining. $20k outstanding. 40k miles. Nada trade value: $34k
Vehicle 3: 1.99%/48 $509/month and 43 months remaining. $20k outstanding. 7k miles. Nada trade Value: $21k

We completed a home purchase/sale in 2013 and spent a considerable amount ($35k- rough estimate) of our savings doing that. We continue to be elated with our decision--a very good move for us in terms of health and happiness.


Goals:

A. Pay down mortgage at least $1,000 additional/month starting 2015.
B. Pay off vehicle #1 with cash savings to free up $580 monthly cash flow.
C. Pay off at least 50% of vehicle #2 with some cash from bonus and free cash flow as 401k and Social Security federal max has been met for the year.
D. 2014 tax return and remainder of bonus into EF/savings.


Looming expenses, next 5 years, that we will continue to save for:

A. Vehicle repair or replacement
B. Roof (approx $25,000)
C. Small wedding reception ($5k)
D. Furnace (quoted at $3500)

Criticism, recommendations for improvement, questions, are welcome. Our monthly expenses leave us with available cash and we are continually cleaning that up. Our two biggest expenses are the vehicles and our house. Everything else it feels like we keep it pretty tight and have a frugal mindset overall with regards to everyday purchases and expenses. Vehicles, aside, of course. That seems to be our achilles heel.

[snafu]

In the financial check-up process, I'd try to assess my/DH risk tolerance and compare that to asset allocation for retirement and non retirement portfolios. I suggest including the KBB value of vehicles even after they're paid off. Would you find it helpful to create a Net Worth statement at least once a year to monitor progress? In the current environment, I find $ 40K cash high particularly since you both have stable employment. Would you consider a ROTH for part of your EF?

What are your goals in 5 years? Position? Income? Home Value? Each Allocation of Retirement Values? Weight?

I wonder if either of you have lived in a rural environment or spent a year in a small town, at least 4 hours from a major city. The culture and access to services we take for granted in urban centres is very different in rural environments and must be experienced for several months to understand how fast you can adjust to change. I'd recommend renting before you sell up and move...sometime in the distant future.

I'm disappointed that you aren't interested in being parents. We've found it such a joyful experience. I'd liken it to riding the ferris wheel. Sometimes it's downright scary, there are times you close your eyes and hope for the best, but overall you're glad you did it!

you asked for opinons

[Goldy]

If it were me I would attack the car loan before the house. Assuming you are not worried about losing your jobs in the next year I would toss 13k of the bonus at loan #2 and by the time you get another bonus next year both loans 1 and 2 will be paid off freeing up over a grand a month.

Do you think you are saving enough for retirement? I honestly don't know the answer to that question but the 35k a year might not be enough given that you take home ~250k a year. Its probably OK but I would feel more comfortable myself closer to 20% then 14%.

[bjl584]

I would focus on paying off the cars before going after the mortgage. That's the one thing that jumps out at me. Other than that, it looks like you are doing a great job.

[MonkeyMama]

There's a lot more to debt than just the interest rate. I agree with accelerating 0% loan payoff to free up cash flow (and to knock out higher interest debt). Makes sense to me.

Given your love for the cars, do you think it is wise to pay them off? When you do, will you just be more likely to upgrade?

I would personally make retirement a higher priority. Your current savings seems weak given your income. Maybe some catching up to do there? I know you probably haven't had such a high income for a long time, but the car payments are obviously the problem here. That's a lot of potential wealth and retirement comfort getting sucked into car payments. That just really stands out to me. (Even if you paid cash for cars, still the same problem. Just a lot of money overall spent on cars, payments or not).

[autoxer]

• You make an excellent income, but make sure you are paying yourself first! I think you should put more emphasis on saving for retirement, especially if you can reduce your tax burden. With your income, you are probably not able to deduct a traditional IRA, but you may be able to fund a backdoor Roth IRA. The taxes on that conversion are simpler if you don't have any other traditional ira accounts. And when the 'retirement' accounts are maxed out, you can also fund a taxable brokerage account to save more for retirement. You don't have to stop saving once you hit the maximum that can be tax deferred.
  
• If you can forecast your actual tax burden, then lower your withholding, so you can keep more of your money now, instead of waiting for the tax refund.
  
• I see you are saving for a vehicle replacement. In the future are you planning to buy a car without a loan? Not having any car payments is a good feeling.
  
• There are two things that I started doing that gave me an incredible amount of control over my finances. I started tracking my net worth and my cash flow. Once a month, I add it all up and can better evaluate if my spending/saving is in line with my values. Saving for retirement is not glamorous, but seeing the balance sheet grow is quite satisfying.

Summary: We are a 36y/32y unmarried couple (legally marrying soon, reception maybe 2015 if we do one at all) and are trying to achieve a balance of enjoying life while health and beauty are still on our side, and also planning for an adequate retirement without sacrificing future comfort OR all of our current resources. Unobtanium, right? Some days it feels like it.

And just a comment on the balance... I've recently shifted some of my resources away from my hobbies and towards long term savings. It doesn't feel like a sacrifice, because my values are shifting away from spending for fun on the weekends, towards becoming financially independent. I'm not depriving myself of fun, just realizing you can have fun without throwing down so much cash.

[ua_guy]

I appreciate the responses, feedback, and opinions so far. A couple of notes...

-Snafu- if you're disappointed, imagine my parents' disappointment. That's been tough to work through, but on the upside, at least my partner and I share the same views on children.

-I think a yearly net worth calculation will be helpful for comparison year over year. Two years ago I would have said "who cares" but that seems like a meaningful way to measure personal financial growth.

-We are generally new to this level of income and also this level of saving. We spent a lot of time pouring money into our old house to fix it up. The hemmorhaging stopped in 2013 when we were finally able to break free by selling it. We had a bad mortgage on a bad house, and we hated it. But, the market gods gave us a small break and we were able to sell it for a decent amount more than we owed, enough to cover some of the remodel expenses, the transaction costs, and it gave us a little money to put towards the new place.

-I will look into Roth IRA as a means of holding some additional savings. I think the gist there is it goes in post-tax and there is no penalty for withdrawal, right? That way, our EF or part of our EF can be doing something.

-EF probably needs to be bolstered given some of our upcoming expenses. Saving just EF monies has been hard, but as expenses become more predictable and as cash flow frees up while we pay off vehicles, saving additional EF should be easy.

-Vehicles will always be an achilles heel. If not from the enthusiast aspect, then from the annual mileage we put on because of our jobs. We'll always need two newer, reliable vehicles because of how much we drive. I wish working closer to home was an option, but that's the tradeoff-- We live in a beautiful area where the cost of living is still pretty low and housing is a good value. Our skillsets are hired for in the city, so we bridge the gap by commuting.

[autoxer]

-I think a yearly net worth calculation will be helpful for comparison year over year. Two years ago I would have said "who cares" but that seems like a meaningful way to measure personal financial growth.

Net Worth is a good snapshot of your situation, but the cash flow statement is just as important, because it shows which direction you are headed. I'm not capable of making a budget, but it is easy (with help from mint.com) to look back at where you spent your money. Try figuring out your cash flow for a month and you can learn a lot about your spending and find lots of different ways to cut back. I'll take a guess.

Income - 20,000
taxes - (6,500)
two 401k's (2,917)
Mortgage (3,000)
Utilities (500)
Cable/internet (150)
Car payments (1,650)
gasoline (600)
car insurance (200)
food (1,000)
entertainment (1,000)
cell phones (200)
other (2,283)

-Vehicles will always be an achilles heel. If not from the enthusiast aspect, then from the annual mileage we put on because of our jobs. We'll always need two newer, reliable vehicles because of how much we drive. I wish working closer to home was an option, but that's the tradeoff-- We live in a beautiful area where the cost of living is still pretty low and housing is a good value. Our skillsets are hired for in the city, so we bridge the gap by commuting.

Are they at least fuel efficient? If you travel 60k miles a year, switching from a vehicle that gets 35mpg to one that gets 45mpg could save $100/month. With that high mileage, a diesel or a hybrid could be valuable.

[ua_guy]

Net Worth is a good snapshot of your situation, but the cash flow statement is just as important, because it shows which direction you are headed. I'm not capable of making a budget, but it is easy (with help from mint.com) to look back at where you spent your money. Try figuring out your cash flow for a month and you can learn a lot about your spending and find lots of different ways to cut back. I'll take a guess.

Income - 20,000
taxes - (6,500)
two 401k's (2,917)
Mortgage (3,000)
Utilities (500)
Cable/internet (150)
Car payments (1,650)
gasoline (600)
car insurance (200)
food (1,000)
entertainment (1,000)
cell phones (200)
other (2,283)


Are they at least fuel efficient? If you travel 60k miles a year, switching from a vehicle that gets 35mpg to one that gets 45mpg could save $100/month. With that high mileage, a diesel or a hybrid could be valuable.

You're close on the budget. A bit more for the mortgage, less on the entertainment, more for fuel for the cars, and utilities are probably a little high, but not by much given our heating costs (propane) in the winter. Not that we couldn't use to do a bit of cleanup or additional expense tracking on the budget overall.

Fuel economy--18mpg and 27mpg.

[autoxer]

Fuel economy--18mpg and 27mpg.

Well, if you ever feel like you are paying too much for gas, there is room for improvement there.

[JoeP]

I've brought this up before, but it would be a good idea for you to both examine your life insurance situation to make sure that you'll be in good financial shape if "something happens" (code for You Die).

Also, take a look at your current car and auto insurance. It is common for people nowadays to get free quotes and get a more competitive/lower premium.

Finally, I hate car payments, so I would consider paying them off within the next year. Then keep making those imaginary payments into a dedicated account (direct deposit from your employers works great) so that your next car can be bought with cash. Keep up that pattern and you'll never have another car payment.

[parafly]

In my opinion, an extra $1000 toward the mortgage every month is far too aggressive. When you take into account your low 3.5% interest rate as well as your annual tax savings due to the mortgage interest deduction, you will be better off in the long run by allocating those extra funds into retirement and/or other investments.

Personally, I would shoot for setting your extra mortgage payments to equal 1 or 2 times your regular monthly mortgage payment per year.

[autoxer]

In my opinion, an extra $1000 toward the mortgage every month is far too aggressive. When you take into account your low 3.5% interest rate as well as your annual tax savings due to the mortgage interest deduction, you will be better off in the long run by allocating those extra funds into retirement and/or other investments.

Personally, I would shoot for setting your extra mortgage payments to equal 1 or 2 times your regular monthly mortgage payment per year.

I agree that investing is likely a better return than paying down a 3.5% loan, but I got the impression that the OP isn't really comfortable investing in equities. If that discomfort causes them to sell at an inopportune time, then it could ruin their chances of getting ahead with that strategy.

The OP's strategy of an extra $1k/month could knock 11 or 12 years off of their 30 year mortgage, while your proposed strategy of ~$400/month might knock off 6 or 7 years. I wouldn't say that refinancing to a 15 year mortgage is too aggressive, so it's tough to say their strategy is too aggressive.

[LivingAlmostLarge]

Are you sure about kids? No accidents? I personally think since you are relocating you are better off stashing cash and investing it then relocating and letting the mortgage debt be resolved by the appreciation of the home.

[ua_guy]

In my opinion, an extra $1000 toward the mortgage every month is far too aggressive. When you take into account your low 3.5% interest rate as well as your annual tax savings due to the mortgage interest deduction, you will be better off in the long run by allocating those extra funds into retirement and/or other investments.

Personally, I would shoot for setting your extra mortgage payments to equal 1 or 2 times your regular monthly mortgage payment per year.

It might seem aggressive, but I'm more inline with what autoxer says below:

I agree that investing is likely a better return than paying down a 3.5% loan, but I got the impression that the OP isn't really comfortable investing in equities. If that discomfort causes them to sell at an inopportune time, then it could ruin their chances of getting ahead with that strategy.

The OP's strategy of an extra $1k/month could knock 11 or 12 years off of their 30 year mortgage, while your proposed strategy of ~$400/month might knock off 6 or 7 years. I wouldn't say that refinancing to a 15 year mortgage is too aggressive, so it's tough to say their strategy is too aggressive.

I'm okay with investing in equities, but it's a long term gamble, and my mortgage is costing me money right now.

The goal is to get in a habit of paying down our 30y fixed like it's a 15year term.

Are you sure about kids? No accidents? I personally think since you are relocating you are better off stashing cash and investing it then relocating and letting the mortgage debt be resolved by the appreciation of the home.

Pretty darn sure about kids...and accidental kids are impossible for us.

Relocating though...not sure about that? Maybe you misread?