Personal finance - strategies: Minimize tax or maximize investments

[avil_saver36]

Ahh, I see you are more comfortable with the idea of investing in real estate vs. investing in stock markets.

True. I do not like to take risks with my money. I have taken some risks in the career that have paid off. I guess everyone has their "comfort risk zones" (if such a thing exists!)

I don't have a crystal ball, but I do believe that interest rates will rise in the future. This shouldn't change your comfort level with different investment classes and it won't preclude the ability find good real estate investments. The interest rate on the loan is just one of many costs associated with a rental property, so I wouldn't single that out as a reason to move into a different asset class. If interest rates do rise a couple points, you aren't all of a sudden going to be comfortable with stock markets, you might just look for different things in a real estate investment.

The way interest works - even an increase of 1% in the interest rate can mean significantly higher costs of borrowing. How exactly that curve models mathematically will be interesting to find out. That's why the interest rate is so important to me.

To be upfront, I am more comfortable investing in stock markets and don't have much interest in real estate. I don't necessarily think that investing in real estate is bad, just not something that I'm comfortable with.

I can see then why you max out your 401Ks

I don't view my 401k money as being stuck, just set aside for the future. If I was faced with the option of taking a 401k loan, then the no brainer solution for me would be to wait and save up more. I just started saving up for a down payment on my next house and although I could liquidate my brokerage account and make the move right now, I would rather leave that money invested and save more from my cash flow until I have enough money in my savings account to put 20% down on my next house.

When I meant my money was stuck, it was overseas. In 2011-12, I moved almost $125K (our savings till then) overseas. Fortunately, I didn't cash out my 401K. Right after I did this, home country's currency crashed. I get very high interest (~10%) on my investments, so I am waiting out to make up my losses in currency devaluation.

We were not going to buy the house soon, but I decided to bite the bullet in 2013. We were paying high rent (almost 2K a month for a 2 bedroom apartment), and I was timing the market. I probably should have bought an year earlier (not possible since I was totally cash strapped), and buying in 2013 was not a bad choice in the hindsight. In the DC metro area, prices have continued to rise steadily since then.

Another reason to buy in 2013 was that 2014 was our true deadline. My daughter was going to start her kindergarten that year. I didn't want to wait until 2014 and put ourselves under pressure.

Most importantly though, we really liked the house we saw. It did have a few issues but overall, we have been very happy here and it turned out to be the right call as far as the house itself goes.

I like my new car, even though I know it wasn't a wise financial decision. If you can reduce future depreciation and/or get something more fuel efficient and be happy with the decision then consider selling them, otherwise just pay them off and keep driving them.

I have the same thinking as you. I appreciated the advice of the person who suggested it, but his goals are different - he is squarely focused on paying all debt off. I am not - I am about as reasonably sure as I can ever be that both of us are going to see our incomes rising for at least a decade and a half if not more. I want to make that money work in the best possible manner even if it means taking on debt.

You don't necessarily have to eliminate all debts before taking on another mortgage, if you are comfortable with the cash flow, but it would certainly give you more flexibility. Freeing up cash flow allows you to plan more for the future, instead of paying for past decisions. Just keep in mind that using debt strategically to leverage appreciating assets is good and depreciating assets are bad, whether they are financed or not.

I totally agree with you here. Couldn't have put it better. That's how I separate my debt - mortgage (debt on appreciating asset) versus everything else (bad debt).

[parafly]

In my opinion, you have too much debt and aren't saving enough for retirement. If I was in your shoes, this would be my plan for financial stability and success:

1) Establish a 6 month emergency fund

You currently have $24K in a savings account. This may or may not be enough to cover 6 months worth of expenses. Increase this amount until you have a full 6 months.

2) Starting saving 15% of your combined gross income for retirement

Your combined gross income is $160K, so you should be saving approximately $24K for retirement every year. Contribute to your 401K up the company match, then max out Roth IRAs for you and your wife ($11K combined per year), then increase your 401K contributions to get yourself up to the full $24K goal.

3) Eliminate all debts besides for your primary mortgage

Use the debt snowball method to pay down all of your loans (besides primary mortgage) from highest interest rate to lowest interest rate.

Once these three goals are reached, you can start to think about funding your children's education and/or buying a secondary real estate property.

Good luck.

[Goldy]

So, the general rule of thumb is to have 3x salary saved by age 40 for retirement so excluding your international assets you are quite a ways behind this goal. I'm not sure how much you have in the home country so maybe you are OK with the 3x number.

If it were me I would be much more comfortable buying a second house after paying off the cars and HELOC. I'd start with the smallest car loan and pay as much extra as I could and then just snowball that into the next debt and the next until its gone or low enough that you are comfortable to start looking for another house.

[avil_saver36]

Thanks for all the replies. Certainly getting new perspectives on the situation.

Your combined gross income is $160K, so you should be saving approximately $24K for retirement every year. Contribute to your 401K up the company match, then max out Roth IRAs for you and your wife ($11K combined per year), then increase your 401K contributions to get yourself up to the full $24K goal.

This is doable despite our debt load. It will mean however we won't be saving anything for the down payment of a new house.

Use the debt snowball method to pay down all of your loans (besides primary mortgage) from highest interest rate to lowest interest rate.

Once these three goals are reached, you can start to think about funding your children's education and/or buying a secondary real estate property.

I am actually planning on using the snowball when my debts start to retire. I have 3 loans: 2 cars and 1 HELOC. All of them are low interest loans and I put $1500 combined each month. the total amount on all 3 loans is near $70K and my excel sheet shows at $1500 a month with the current interest rates, it's 4 years away from being paid.

Should I be even more aggressive? The interest rates are 1.9%, 1.9% and 0.99% (for 12 months, then a variable interest rate with the expected APR of 3.5% at least in the near future). The interest rates are low, and I was reluctant to throw any additional cash at these loans.

So, the general rule of thumb is to have 3x salary saved by age 40 for retirement so excluding your international assets you are quite a ways behind this goal. I'm not sure how much you have in the home country so maybe you are OK with the 3x number.

Thanks! Some tangible benchmark here. However I didn't get what you consider retirement. Just to summarize my assets, the approximate breakdown is:

- International funds: $115K in today's exchange rate
- 401K: $90K
- Cash: $24K
- Brokerage accounts (mainly company's ESPP): $8K

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Comes to about $237K. My cash is increasing at $24K a year, 401K at $12K a year, and brokerage at $6K a year. I don't know my wife's pension situation yet. Even without it, I think in 3 years, I will be at $360K, which is not quite 3x.

The thing about our income is that it just started increasing rapidly. I switched my jobs twice and my wife established a foothold in her part time work and her business. Here is the approximate timeline of our household incomes starting from 2011:

2011: $90K
2012: $95K
2013: $110K
2014: $125K
2015 (first 3 months): $130K
2015 (April-July): $150K
2015 (July onwards): $160K

We just haven't spent any time at $160K income. We have averaged around $100K between 2011 to 2014. I think when we talk about 3x saving, we should do some kind of income averaging...thoughts?

If it were me I would be much more comfortable buying a second house after paying off the cars and HELOC. I'd start with the smallest car loan and pay as much extra as I could and then just snowball that into the next debt and the next until its gone or low enough that you are comfortable to start looking for another house.

That was the plan. In about 4 years, pay off the loans and around the same time, have a large cash account ready to purchase the second house. The only drawback is that I won't be maxing out the retirement accounts and that's a consistent advice I have gotten from almost everyone.

Thanks again for all the replies!