Planning Your and My Financial Future

[wallus]

So I have had a few days off which gave me some time to plan my path to "wealth". A little background information: 24 years old, single, teacher. I just recently just bought a house and a new car. You are probably thinking that I should not have gotten a new car and you are probably right there. Basically with a lot of successful older members here as well as a good amount of younger people, I thought it would be good to get any advice I could.

 

My plan right now is to share the rooms of my house since it is way too large for just me. I also plan on paying the house payments ahead as much as possible because the tax benefits will not help me. I really do not go on any vacations and the only money I "waste" is on my car addictions. Any other suggestions? I am hoping to retire with no worries and want to start on that path now.

[fondybrewfan]

I am young and also just bought a house. I am also trying to prepay on my mortgage as much as possible but for different reasons. I am married and we will start having kids within the next 2-3 years and the house is only big enough to hold at most 2 kids. So I want that mortgage balance as low as possible so I can have a bigger downpayment on our 2nd larger house in 5-6 years. I feel very fortunate to be in the financial place that I am now even though I am far from being considered rich. Now if I didn't have all these stinking student loans I would be feeling really good. I am also trying to save up for a new car in 1.5-2 years to accomodate a baby. My wife and I both like the Kia Sorrento. I have found several used ones with 10K miles for about $15,000, that seems like a very good price to me but I guess I don't know much about cars in general or the Sorrento. And who knows what car prices will be 1-2 years from now.

 

The only other thing I would like to add is that anyone who doesn't contribute to their 401K up to the employers match is just stupid unless your financial situation is dire. I am fortunate to have an employer match 100% up to 6% of my salary. I will be looking foward to seeing that balance well in upwards of $1,000,000 when I am nearing retirement in 14,600 days.

[wallus]

I remember that you said you got the $8000 first time tax credit, make sure you stay there 3 years so you don't pay it back.

[endaround]

Depending on how you income lines up, get an IRA, Roth or Traditional (when younger Roth tends to be better).

[wallus]

Depending on how you income lines up, get an IRA, Roth or Traditional (when younger Roth tends to be better).

How much of a salary should I be putting in? Am I wrong in assuming that puting in the max amount and having my employer match it will be enough? I have pretty much told myself that social security will not be there sadly.

[I Heart Brewers]

What rate did you get on your mortgage? Rates are so cheap right now I would not pay any extra on principle. Why not take that extra you planned on paying and at the very minimum put it in a money market (extremely safe - Treasury bills and short term investments usually comprise them) account where it can gain a point of interest? It may not seem like a lot, but it's better than giving your lender your cash for free up front so they can do the same without passing that on to you.

 

If you have the extra cash flow put it to work in something very low risk that will at least preserve captial. By prepaying your mortgage you are basically giving away free money by losing by the rate of inflation (which to be fair is very low right now) plus the amount you could get by investing it.

 

Again, that all depends on the type of loan you have and the rate.

 

I second the IRA idea. No matter what type of retirement plan you have with your employer it's a good idea to supplement it if you can with your own plan. You will have control over the choices unlike their plans and it's another tax deferred vehicle for your savings.

[wallus]

What rate did you get on your mortgage? Rates are so cheap right now I would not pay any extra on principle. Why not take that extra you planned on paying and at the very minimum put it in a money market (extremely safe - Treasury bills and short term investments usually comprise them) account where it can gain a point of interest? It may not seem like a lot, but it's better than giving your lender your cash for free up front so they can do the same without passing that on to you.

I am getting no higher than 4.75%. A friend of mine suggested not putting any money down as well. I do not understand that reasoning so maybe you can help me out. What money market is going to give me better than 4.75% interest? I get terrible interest now with what I have.

[fondybrewfan]

I was initially thinking about sticking my excess cash into some kind of safe short term account, but short term CD's rate are crazy low and money markets aren't much better. I just assumed I am better off just paying extra on my mortgage in order to eliminate some of that interest cost. My interest rate is 5.5%, I closed in February. I didn't have a whole lot of money down, so the bank increased my rate a little. By paying extra on my monthly mortgage I figure it is an easy way to start saving money for a DP on our final more expensive house. If I saved it I would be afraid I would spend it on something far less important than a house I will live the rest of my life in.

 

If I prepay my mortgage and save maybe $200 a year in interest cost, that is far more "savings" than any interest bearing account would give me.

[nate82]

I am getting no higher than 4.75%. A friend of mine suggested not putting any money down as well. I do not understand that reasoning so maybe you can help me out. What money market is going to give me better than 4.75% interest? I get terrible interest now with what I have.

Bankrate.com

 

Bankrate has the local and national rates for money market accounts.

[wallus]

I am getting no higher than 4.75%. A friend of mine suggested not putting any money down as well. I do not understand that reasoning so maybe you can help me out. What money market is going to give me better than 4.75% interest? I get terrible interest now with what I have.

Bankrate.com

 

Bankrate has the local and national rates for money market accounts.

Yes, I have looked there and quite a few other places. If i could find an investment over 4.75%, (would actually have to be more since I will get taxed on that income), I would consider it.

[I Heart Brewers]

I guess the MM is a bad example currently, but if you're time horizon is longer, my point is that rates to invest will quickly (quickly being relative to how long you plan on holding on to your home) exceed that 4.75%. Compounding interest on an investment vehicle purchased now could greatly exceed that 4.75% in say 5-7 years. I know compounding interest doesn't apply to MM funds, I'm speaking more to bond funds or if your less risk averse, stocks.

 

Plus it makes you a bit more liquid - unless you're prepaying on a home equity line of credit that you can draw from.

 

I'm probably way biased though. I feel like we are at bottom and will be for a few more months and will come up stronger by the end of year. Why not buy while everything is so cheap?

 

But I can understand wanting a guaranteed return of 4.75%. I just feel like that rate can be exceeded in the coming years investing other ways.

[olliegjw]

I would assume the rate of 4.75% will be locked in for 30 years. Until you can make more than that rate by investing, you are best off putting extra money towards the mortgage. If MM rates, or CD rates, rise above 4.75% then, at that time, you can put your excess cash towards investments instead of the mortgage.

 

Also, you are right that you will get taxed on any interest income that you have on the investments. But, you must also calculate the tax savings into your mortgage rate. You will most likely be able to itemize, so the effective mortgage rate will be closer to 4%, or a little less. If you wind up just short of being able to itemize, try doubling up on your real estate taxes. That way you may at least be able to itemize every other year.

[RightFieldCoder]

I think it's great to overpay your mortgage. Just as long as everything else is paid off. If you have any auto loans, student loans, credit card balances, etc, make sure those are totally paid off before putting extra money into the mortgage.

 

Also, have an emergency fund in a safe place (MM, CDs, regular bank account). If you were fired tomorrow your should be able to survive 6 months without income. Also plan on paying an insurance deductable during that period. For example, my deductable is $1000, so i should have enough money set aside to pay off bills for 6 months plus an extra grand.

 

This is just non-professional advice that Robin19 heard from the radio.

[yount19.u]

I am getting no higher than 4.75%. A friend of mine suggested not putting any money down as well. I do not understand that reasoning so maybe you can help me out. What money market is going to give me better than 4.75% interest? I get terrible interest now with what I have.

If you don't put 20% down you will need to pay mortgage insurance. If you can put 20% or more down, do it, because paying mortgage insurance is like throwing money away. If you can't put 20% down, do the largest amount you are able to afford. The quicker you pay off 20% of the loan, the quicker you can start putting the money spent on mortgage insurance towards principal or other investments.

 

If you're able to pay a little extra towards the principal each month, that's great. Just make sure it's not at the expense of other bills like Robin19 said. Also don't forget about your 401k. You probably want to be at 10% of your salary or more (your contribution + your company's match). If your not there yet, hold off on paying extra towards your mortgage and apply that money towards your 401k contributions.

[thunderbat30]

Wallus---just suggestions as I am not a certified planner or financial advisor.

1. You should make sure you maximize your ROTH every year, especially now when you are young and single. Tomorrow is the deadline for the 2008 year, however you can set up a 2009 plan anytime if it is too late for you to do that. Compound interest is huge in the long run even if you have to stop contributing the max later if you have a family; so start ASAP.

2. Since you're an educator you no doubt can participate in a 403B. Set this up with your checks to take automatic deductions. Pick an amount that is comfortable and you can always increase it. I am sure your district will have a list of vendors you can choose from. Eventually you will not notice it being taken from your check. I would suggest starting at least $100 a check if you get paid 2x a month but you obviously need to be able to afford it and work up from there.

3. Are you paying once a month for mortgage or more? You can decrease your total payment in the long run if you pay more times a year/month. As for paying more, it hard to say without knowing more details and specifics of your situation.

I have no idea what your financial situation is now but if you are like most that are 24 you are wasting money you could easily invest. New 'toys', bar scene, electronics, dining out, etc., can really pile up fast and you really have to weigh the pros and cons if you need something. These years of investing can help you much more than say 10 years down the road when you try to recover and become more disciplined. Don't worry about the markets now as you have decades to recover any losses. Ask your co-workers for advice on who they use for vendors and advisors. If you feel comfortable you can do much of this yourself on-line. Load fees, maintenance fees and expense ratios are completely different from vendor to vendor and each has it's pros and cons.

Just a few suggestions from how I approach things. I don't claim to be an expert but I am trying to get ahead as soon as I can just as you are.

[JJHardy7]

The quicker you pay off 20% of the loan, the quicker you can start putting the money spent on mortgage insurance towards principal or other investments.

 

This isn't always the case. It's a time period or 20% on most FHA loans...whichever is longer before your PMI goes away.

[RightFieldCoder]

If the time period isn't over, but you have 20% down, you can refinance the loan. Then you aren't paying PMI. You have to be careful that you don't throw away money paying refinance fees that are more than the PMI.

[wallus]

If you don't put 20% down you will need to pay mortgage insurance. If you can put 20% or more down, do it, because paying mortgage insurance is like throwing money away. If you can't put 20% down, do the largest amount you are able to afford. The quicker you pay off 20% of the loan, the quicker you can start putting the money spent on mortgage insurance towards principal or other investments.

I am eligible for a FHA loan which requires no money down so luckily I do not have to pay PMI.

 

Robin, I guess I do not understand why I would pay off those other loans first. My mortgage rate is going to be smaller (4.75) vs my auto loan (5.79) and is for a much larger amount. Due to my house being really affordable, I do not see myself itemizing.

[yount19.u]

I am eligible for a FHA loan which requires no money down so luckily I do not have to pay PMI.

 

That helps. I would still try and put something down, though. The more you put down, the less interest you pay over the course of the loan. Have your bank do the numbers for you to compare how much interest you'll pay if you put no money down versus whatever amount you're thinking of paying up front. It's amazing how much of a difference it makes over 30 years. It only helps if you can afford to do it, though. There's no point in extending yourself when you don't have to put anything down.

 

I guess I do not understand why I would pay off those other loans first.

 

I know this is for Robin19, but I'll put in my two cents worth. The reason why you pay everything else off first, before worrying about extra principal payments on your mortgage, is interest. It's tax deductible on your mortgage and not on your other loans. Also, your house is considered an investment and should go up in value (except lately), while a car and most anything you buy on a credit card tends to depreciate. So you have loans on depreciating items that offer no tax breaks. Get those out of the way and then focus on paying down your mortgage.

[olliegjw]

To add on to what yount 19 said, you want to pay off the highest interest loans first. Car loans and credit cards generally have higher interest rates than mortgages. If you have 3 loans at 4, 6, and 8 percent, you would want to pay the minimum on the 4 and 6 percent loans, and pay any extra cash towards the 8% loan. Once the 8% loan is paid off, you would apply all the money you were paying on the 8% loan to the 6% loan while still paying the minimum on the 4% loan. In the long run, this will save you a ton of interest expense.

[wallus]

Yes but wouldnt more mortgage payments go towards more principal versus the other loans? Do you understand what I mean by that? Also, the tax deductions should not be something I will be able to take advantage of. ($80000 loan)

[endaround]

Yes you will, its just not a huge amount of money but its something. If you double up your property taxes in 2009 (ie you pay 2008's in 2009 and 2009's in December) you'll likely have more than the standard deduction with the mortgage interest thrown in.

 

Keep in mind that not only is interest on your home tax deductible its also at lower rate than anything else, so the saving isn't as great.

[wallus]

Yes you will, its just not a huge amount of money but its something. If you double up your property taxes in 2009 (ie you pay 2008's in 2009 and 2009's in December) you'll likely have more than the standard deduction with the mortgage interest thrown in.

 

Keep in mind that not only is interest on your home tax deductible its also at lower rate than anything else, so the saving isn't as great.

Sounds like solid advice. I guess I will have to talk to my tax person about the doubling up idea. I had never heard of doing that before.

[ajgodson]

Doubling up is a solid idea...essentially you itemize your taxes every other year. For what it's worth, given your age, you could probably stand to be a bit more aggressive with your investments. I'm not a financial planner, but given your situation (which is pretty similar to mine) I'd prioritize your extra $ like this:

 

1) Accumulate 3-6 months of "cash" (CDs, etc.) for emergencies

2) Invest the max up to the employer match

3) Invest the 5k max in aggressive stocks/mutual funds within a Roth IRA

4) If there's anything left, either contribute more to the pre-tax 401k or make the early payments on the mortgage.

 

Paying the mortgage off early isn't a terrible idea, especially if it's worth it to you in peace of mind. Mathematically, though, it's not going to be your best investment in the long term especially compared to a tax-advantaged account. Just my $.02.

[TwinsBrewersWorldSeries]

Great Thread! So i've been thinking... how many people really have a 6 month "emergency reserve". Does that include money set aside for retirement? For example, i'm a school district employee, so I am part of the Wisconsin Retirement System. I'm trying to set aside $5k/year in a Roth IRA (assuming i get a possible promotion). I'm also putting funds into a 403b (trying to bank 10% of my gross salary (403b + Roth). I figure the 10% WRS + 10% 403b/Roth gives me a really good start on retirement.

 

However, i'm stilling paying off a huge chunk of my student loans. I figure if I get aggresive with the 403b/Roth, loans/investments will end up being about 50% of my net income (at present). I don't yet own a house, have 25 payments left on a 2006 car purchase. I figure i'm doing everything right (short of having student debt), and wondering how some people with kids (i don't have any) manage to build a rainy day fund. I figure I could put all of that 50% against my student loans, but that would probably take 5-6 years to pay off my loans. I don't want to wait that long to start saving for retirement. It will be hard to start a rainy day fund until my student loans are paid off.

 

Ugh, anyways, keep the thread going. Thanks to everyone who has shared insight so far